Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

(Mark One)

 

 

For the quarterly period ended September 30, 2008

 

or

 

 

For the transition period from              to              

 

Commission file number:  000-50574

 

 

Symbion, Inc.

(Exact name of registrant as specified in its charter)

 

 

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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

 

As of November 10, 2008, 1,000 shares of registrant’s common stock were outstanding.

 

 

Table of Contents

 

SYMBION, INC.

 

FORM 10-Q

 

November 13, 2008

 

TABLE OF CONTENTS

 

		Page Number
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	3
	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and September 30, 2007	4
	Condensed Consolidated Statements of Stockholders’ Equity at September 30, 2008	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and September 30, 2007	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
PART II — OTHER INFORMATION		48
Item 1.	Legal Proceedings	48
Item 6.	Exhibits	48
Signatures		49

 

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PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

 

SYMBION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

 

		September 30, 2008			December 31, 2007
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	37,581		$	44,656
Accounts receivable, less allowance for doubtful accounts of $16,738 and $18,202, respectively		34,636			33,958
Inventories		9,021			8,479
Prepaid expenses and other current assets		14,645			14,989
Income tax receivable		701			4,053
Current assets of discontinued operations		1,067			1,064
Total current assets		97,651			107,199
Land		2,938			3,556
Buildings and improvements		51,183			42,097
Furniture and equipment		45,799			39,157
Computers and software		1,736			1,574
		101,656			86,384
Less accumulated depreciation		(11,377		)	(4,890		)
Property and equipment, net		90,279			81,494
Intangible assets, net		19,570			—
Goodwill		541,243			548,136
Investments in and advances to affiliates		13,795			17,082
Other assets		12,116			10,804
Long-term assets of discontinued operations		2,928			4,098
Total assets		$	777,582		$	768,813
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	5,372		$	5,324
Accrued payroll and benefits		8,080			7,269
Other accrued expenses		17,306			14,683
Deferred income tax payable		—			170
Current maturities of long-term debt		12,059			8,029
Current liabilities of discontinued operations		727			1,107
Total current liabilities		43,544			36,582
Long-term debt, less current maturities		436,862			428,925
Deferred income tax payable		17,794			24,042
Other liabilities		9,941			10,930
Long-term liabilities of discontinued operations		188			146
Minority interests		39,344			34,902
Stockholders’ equity:
Common stock, 1,000 shares, $0.01 par value, authorized at September 30, 2008 and at December 31, 2007; 1,000 shares issued and outstanding at September 30, 2008 and at December 31, 2007		—			—
Additional paid-in-capital		240,491			238,701
Accumulated other comprehensive loss		(2,436		)	(2,188		)
Retained deficit		(8,146		)	(3,227		)
Total stockholders’ equity		229,909			233,286
Total liabilities and stockholders’ equity		$	777,582		$	768,813

 

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SYMBION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)

(unaudited)

 

		Three Months Ended September 30, 2008			August 24, 2007 to September 30, 2007			July 1, 2007 to August 23, 2007 (Predecessor)			Three Months Ended September 30, 2007 (Combined)
Revenues		$	83,570		$	29,299		$	43,775		$	73,074
Operating expenses:
Salaries and benefits		23,389			8,464			12,921			21,385
Supplies		16,919			6,141			8,807			14,948
Professional and medical fees		4,908			2,006			2,718			4,724
Rent and lease expense		5,573			2,071			2,896			4,967
Other operating expenses		6,750			2,564			3,545			6,109
Cost of revenues		57,539			21,246			30,887			52,133
General and administrative expense		6,175			2,368			11,311			13,679
Depreciation and amortization		3,947			1,359			1,918			3,277
Provision for doubtful accounts		1,403			219			496			715
(Income) loss on equity investments		(450		)	73			205			278
Loss on disposal of long-lived assets		675			20			74			94
Gain on sale of long-lived assets		(42		)	—			(90		)	(90		)
Merger transaction expenses		—			—			6,499			6,499
Total operating expenses		69,247			25,285			51,300			76,585
Operating income (loss)		14,323			4,014			(7,525		)	(3,511		)
Minority interests in income of consolidated subsidiaries		(5,444		)	(1,587		)	(2,903		)	(4,490		)
Interest expense, net		(11,293		)	(4,662		)	(1,302		)	(5,964		)
Loss before income taxes and discontinued operations		(2,414		)	(2,235		)	(11,730		)	(13,965		)
Benefit for income taxes		(1,053		)	(832		)	(1,646		)	(2,478		)
Loss from continuing operations		(1,361		)	(1,403		)	(10,084		)	(11,487		)
Loss from discontinued operations, net of taxes		(468		)	(106		)	(64		)	(170		)
Net loss		$	(1,829	)	$	(1,509	)	$	(10,148	)	$	(11,657	)

 

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SYMBION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)

(unaudited)

 

		Nine Months Ended September 30, 2008			August 24, 2007 to September 30, 2007			January 1, 2007 to August 23, 2007 (Predecessor)			Nine Months Ended September 30, 2007 (Combined)
Revenues		$	247,184		$	29,299		$	197,665		$	226,964
Operating expenses:
Salaries and benefits		67,823			8,464			54,048			62,512
Supplies		49,921			6,141			39,103			45,244
Professional and medical fees		14,049			2,006			12,120			14,126
Rent and lease expense		16,615			2,071			12,297			14,368
Other operating expenses		19,521			2,564			15,273			17,837
Cost of revenues		167,929			21,246			132,841			154,087
General and administrative expense		18,816			2,368			23,961			26,329
Depreciation and amortization		11,169			1,359			7,920			9,279
Provision for doubtful accounts		2,579			219			2,691			2,910
(Income) loss on equity investments		(1,152		)	73			5			78
Loss on disposal of long-lived assets		1,147			20			319			339
Gain on sale of long-lived assets		(710		)	—			(596		)	(596		)
Proceeds from insurance settlement, net		—			—			(161		)	(161		)
Merger transaction expenses		—			—			7,522			7,522
Total operating expenses		199,778			25,285			174,502			199,787
Operating income		47,406			4,014			23,163			27,177
Minority interests in income of consolidated subsidiaries		(18,243		)	(1,587		)	(15,656		)	(17,243		)
Interest expense, net		(32,497		)	(4,662		)	(5,228		)	(9,890		)
(Loss) income before income taxes and discontinued operations		(3,334		)	(2,235		)	2,279			44
(Benefit) provision for income taxes		(705		)	(832		)	4,016			3,184
Loss from continuing operations		(2,629		)	(1,403		)	(1,737		)	(3,140		)
Loss from discontinued operations, net of taxes		(2,290		)	(106		)	(438		)	(544		)
Net loss		$	(4,919	)	$	(1,509	)	$	(2,175	)	$	(3,684	)

 

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SYMBION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands, except per share amounts)

(unaudited)

 

		Symbion, Inc. Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Retained			Total Stockholders’
		Shares		Amount			Capital			Income			Deficit			Equity
Balance at December 31, 2007 (Audited)		1,000		$	—		$	238,701		$	(2,188	)	$	(3,227	)	$	233,286
Amortized compensation expense related to stock options		—		—			1,790			—			—			1,790
Unrealized loss on interest rate swap, net of taxes		—		—			—			(248		)	—			(248		)
Net loss, January 1, 2008 through September 30, 2008		—		—			—			—			(4,919		)	(4,919		)
Balance at September 30, 2008		1,000		$	—		$	240,491		$	(2,436	)	$	(8,146	)	$	229,909

 

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SYMBION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

		Nine Months Ended September 30, 2008			August 24, 2007 to September 30, 2007			January 1, 2007 to August 23, 2007 (Predecessor)			Nine Months Ended September 30, 2007 (Combined)
Cash flows from operating activities:
Net loss		$	(4,919	)	$	(1,509	)	$	(2,175	)	$	(3,684	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		11,169			1,359			7,920			9,279
Amortization of deferred financing costs		3,985			558			322			880
Non-cash payment-in-kind interest option		9,753			—			—			—
Non-cash stock option compensation expense		1,790			125			10,337			10,462
Non-cash gains (losses)		25			21			(305		)	(284		)
Minority interests		18,243			1,587			15,656			17,243
Deferred income taxes		(2,870		)	29			13,637			13,666
Distributions to minority partners		(16,457		)	(1,023		)	(17,185		)	(18,208		)
Equity in earnings of unconsolidated affiliates, net of distributions received		237			73			5			78
Provision for doubtful accounts		2,579			219			2,691			2,910
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable		(2,495		)	1,194			(166		)	1,028
Income tax receivable		2,216			(947		)	(10,402		)	(11,349		)
Other assets and liabilities		4,223			(619		)	(5,086		)	(5,705		)
Net cash provided by operating activities – continuing operations		27,479			1,067			15,249			16,316
Net cash provided by operating activities – discontinued operations		1,665			263			462			725
Net cash provided by operating activities		29,144			1,330			15,711			17,041
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired		(15,822		)	(3,993		)	(14,981		)	(18,974		)
Purchases of property and equipment, net		(12,372		)	(4,505		)	(7,664		)	(12,169		)
Change in other assets		349			(182		)	(9,646		)	(9,828		)
Other investing		—			(101		)	(1,497		)	(1,598		)
Net cash used in investing activities – continuing operations		(27,845		)	(8,781		)	(33,788		)	(42,569		)
Net cash used in investing activities – discontinued operations		(317		)	(14		)	(36		)	(50		)
Net cash used in investing activities		(28,162		)	(8,795		)	(33,824		)	(42,619		)
Cash flows from financing activities:
Principal payments on long-term debt		(16,476		)	(89		)	(161,555		)	(161,644		)
Proceeds from debt issuances		12,291			482			458,597			459,079
Repayment of bridge facility		(179,937		)	—			—			—
Payment of debt issuance costs		(4,739		)	—			—			—
Proceeds from issuance of toggle notes		179,937			—			—			—
Proceeds from capital contributions by minority partners		—			143			2,241			2,384
Payment of merger costs incurred by Symbion Holdings Corporation		—			—			(6,528		)	(6,528		)
Cash paid to shareholders		—			—			(490,510		)	(490,510		)
Proceeds from issuance of common stock, net of issuance costs		—			—			239,085			239,085
Proceeds from sale of units		219			—			—			—
Other financing activities		795			(823		)	250			(573		)
Net cash (used in) provided by financing activities – continuing operations		(7,910		)	(287		)	41,580			41,293
Net cash used in financing activities – discontinued operations		(147		)	(3		)	(29		)	(32		)
Net cash (used in) provided by financing activities		(8,057		)	(290		)	41,551			41,261
Net (decrease) increase in cash and cash equivalents		(7,075		)	(7,755		)	23,438			15,683
Cash and cash equivalents at beginning of period		44,656			50,347			26,909			26,909
Cash and cash equivalents at end of period		$	37,581		$	42,592		$	50,347		$	42,592

 

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SYMBION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

 

1.              Organization

 

Symbion, Inc. (the “Company”),  through its wholly owned subsidiaries, owns interests in partnerships and limited liability companies that own and operate a national network of short stay surgical facilities in joint ownership with physicians and physician groups, hospitals and hospital systems.  As of September 30, 2008, the Company owned and operated 58 surgical facilities, including 55 ambulatory surgery centers and three surgical hospitals, and managed nine additional ambulatory surgery centers and two physician networks.  The Company owns a majority ownership interest in 40 of its 58 surgical facilities and consolidates 49 of these surgical facilities for financial reporting purposes, of which 47 are included in continuing operations.

 

On August 23, 2007, the Company was acquired by an investment group led by an affiliate of Crestview Partners, L.P. (“Crestview”).  As a result of this merger (the “Merger”), the Company no longer has publically traded equity securities.  The Company is a wholly owned subsidiary of Symbion Holdings Corporation (“Parent”), which is owned by an investor group that includes affiliates of Crestview, members of the Company’s management and other investors.  The Company’s financial position and the results of operations prior to the merger are presented separately in the consolidated financial statements as “Predecessor” financial statements.  Due to the merger, which substantially increased the Company’s debt and interest expense, and to the revaluation of assets and liabilities as a result of purchase accounting associated with the Merger, the pre-merger financial statements are for comparison purposes only as they represent combining of a different basis of accounting.

 

2.              Significant Accounting Policies and Practices

 

Basis of Presentation and Use of Estimates

 

The Company maintains its books and records on the accrual basis of accounting, and the accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s December 31, 2007 audited consolidated financial statements.  It is management’s opinion that the accompanying condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of the results for the periods presented.  The results of operations for any interim period are not necessarily indicative of results for the full year.

 

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes.  Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  All adjustments are of a normal, recurring nature.  Actual results could differ from those estimates.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate’s business.  The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services.  The governance rights of limited partners and minority members are restricted to those that protect their financial interests.  Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy.  These protective rights do not preclude consolidation of the respective partnerships and limited liability companies.  The condensed consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary.  The variable interest entities are surgical facilities located in the states of Florida and New

 

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York.  The accompanying condensed consolidated balance sheets as of September 30, 2008 and December 31, 2007 include assets of $17.0 million and $14.1 million, respectively, and liabilities of $6.8 million and $3.9 million, respectively, related to the variable interest entities.  All significant intercompany balances and transactions are eliminated in consolidation.

 

Fair Value of Financial Instruments

 

In estimating fair value disclosures for cash, accounts receivable and accounts payable, the carrying amounts reported in the accompanying condensed consolidated balance sheets approximate fair value because of their short-term nature.  For long-term debt and capitalized leases, the carrying amounts reported in the accompanying condensed consolidated balance sheets approximate fair value based upon the borrowing rates available to the Company.

 

Accounts Receivable

 

Accounts receivable consist of receivables from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients.  The Company recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there are significant credit risks associated with these government agencies.  Concentration of credit risk with respect to other payors is limited because of the large number of such payors.  Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value.  The Company does not require collateral for private pay patients.  Accounts receivable at September 30, 2008 and December 31, 2007 were as follows (in thousands):

 

		September 30, 2008			December 31, 2007
Surgical facilities		$	33,961		$	33,083
Physician networks		675			875
Total		$	34,636		$	33,958

 

The following table sets forth by type of payor the percentage of the Company’s accounts receivable for consolidated surgical facilities as of September 30, 2008 and December 31, 2007:

 

		September 30, 2008		December 31, 2007
Private insurance		55	%	60	%
Government		18		12
Self-pay		17		19
Other		10		9
Total		100	%	100	%

 

The Company’s policy is to review the standard aging schedule, by surgical facility, to determine the appropriate provision for doubtful accounts.  This review is supported by an analysis of the actual net revenues, contractual adjustments and cash collections received.  If the Company’s internal collection efforts are unsuccessful, the Company manually reviews the patient accounts.  An account is written off only after the Company has pursued collection with legal or collection agency assistance or otherwise deemed an account to be uncollectible.

 

Goodwill and Intangible Assets

 

Changes in the carrying amount of goodwill are as follows (in thousands):

 

Balance at December 31, 2007		$	548,136
Purchase price allocations		$	12,993
Identified intangible assets		$	(19,570	)
Disposals		(316		)
Balance March 31, 2008		$	541,243

 

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The purchase price allocations of $13.0 million relate to the Company’s purchase of ownership interest in various surgical facilities during the nine months ended September 30, 2008, as well as a reduction of goodwill of $1.7 million related to the Merger, due to the adjustment of net assets acquired, based on the valuation performed as of the date of the acquisition.  Disposals of goodwill relates to the Company’s sale of its interest in one surgery center during the second quarter of 2008.

 

The Company recorded intangible assets as a result of the Merger related to the certificates of need for certain of its facilities of $19.6 million, as of the date of the Merger.  These indefinite lived assets are not amortized, but will be assessed for possible impairment as part of the Company’s annual impairment analysis in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

 

Unfavorable leasehold rights arising from the Merger are reflected in other liabilities on the accompanying consolidated balance sheet.  Amortization of $90,000 was recorded in the third quarter of 2008.  The unamortized balance at September 30, 2008 totaled $780,000. The unfavorable leasehold rights are amortized over the life of the applicable lease and reflected as a component of cost of revenues, from continuing operations.

 

Comprehensive Income

 

The Company reports other comprehensive income as a measure of changes in stockholders’ equity that result from recognized transactions.  Other comprehensive income of the Company results from adjustments due to the fluctuation of the value of the Company’s interest rate swap accounted for under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”).  The Company entered into an interest rate swap agreement on October 31, 2007.  The value of the interest rate swap was recorded as a long-term liability of $4.5 million at September 30, 2008.  The Company records the value of the interest rate swap of $2.4 million, net of tax benefit of approximately $1.6 million as accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets as of September 30, 2008.  See Note 5 for further discussion of the Company’s interest rate swap.

 

Revenues

 

Revenues by service type consist of the following for the periods indicated (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Patient service revenues		$	79,401		$	69,373		$	234,924		$	215,616
Physician service revenues		1,626			1,378			4,851			4,023
Other service revenues		2,543			2,323			7,409			7,325
Total revenues		$	83,570		$	73,074		$	247,184		$	226,964

 

The following table sets forth by type of payor the percentage of the Company’s patient service revenues generated for the periods indicated (in thousands):

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2008		2007		2008		2007
Private Insurance		72	%	71	%	72	%	73	%
Government		22		21		22		21
Self-pay		4		5		4		4
Other		2		3		2		2
Total		100	%	100	%	100	%	100	%

 

Reclassifications

 

Certain reclassifications have been made to the comparative period’s financial statements to conform to the 2008 presentation.  The reclassifications primarily related to the presentation of discontinued operations and had no impact on the Company’s financial position or results of operations.

 

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3.  Acquisitions and Equity Method Investments

 

During the third quarter of 2008, the Company acquired an incremental ownership of 18.5% in its surgical facility located in Irvine, California for $5.1 million.  Through this acquisition, the Company obtained a controlling interest in the facility.  The acquisition was treated as a business combination and the Company began consolidating the facility for financial reporting purposes in the third quarter of 2008.

 

Effective February 21, 2008, the Company acquired ownership in five surgical facilities specializing in spine, orthopedic and pain management procedures located in Boulder, Colorado; Honolulu, Hawaii; Bristol and Nashville, Tennessee; and Seattle, Washington for an aggregate of $5.8 million plus contingent consideration of up to $3.0 million subject to earn out provisions based on EBITDA for the year ended December 31, 2008.  The Company acquired an ownership ranging from 20.0% to 50.0% in these surgical facilities.  Three of these facilities are consolidated for financial reporting purposes.

 

These acquisitions were accounted for under the purchase method of accounting, and accordingly, the results of operations of the acquired businesses are included in the accompanying consolidated financial statements from their respective dates of acquisitions.  These acquisitions placed the Company in new markets or expanded the Company’s presence in current markets.

 

The following table summarizes the allocation of the aggregate purchase price of acquisitions recorded using the purchase method of accounting for the nine months ended September 30, 2008:

 

		Nine Months Ended September 30, 2008
Fair value of assets acquired		$	10,265
Liabilities assumed		(6,341		)
Net assets acquired		$	3,924

 

Following are the unaudited pro forma results for the three and nine months ended September 30, 2008 as if the acquisitions had occurred on January 1, 2008 (in thousands):

 

		Three Months Ended September 30, 2008			Nine Months Ended September 30, 2008
Net revenues		$	84,639		$	248,253
Net loss		$	(1,758	)	$	(4,848	)

 

Effective January 1, 2008, the Company acquired an incremental ownership in three of its existing surgical facilities located in California.  The Company acquired an incremental ownership of 10.7% in two surgical facilities located in Beverly Hills, California for an aggregate of $2.5 million and a 6.4% incremental ownership in a surgical facility located in Encino, California for $2.0 million.  Prior to the acquisition, the Company owned 55.1% and 57.0% of the two Beverly Hills, California surgical facilities and 55.5% of the Encino, California surgical facility.

 

The Company also engages in investing transactions that are not business combinations.  These transactions primarily consist of acquisitions and sales of non-controlling equity interests in surgical facilities and the investment of additional cash in surgical facilities under development.  Effective May 31, 2008, the Company acquired an incremental ownership of 16.7% in its surgical facility located in Irvine, California for $3.1 million and an incremental ownership of 18.0% in our surgical facility located in Arcadia, California for $304,000.  Prior to the acquisitions, the Company owned 15.3% of the Irvine, California surgical facility and 19.2% of the Arcadia, California surgical facility.

 

The Company has investments in ten surgical facilities in which it has significant influence, but does not have control.  These facilities are accounted for using the equity method.  One of these facilities was under development as of September 30, 2008.  Summarized financial information for the Company’s equity method investees on a

 

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combined basis was as follows for the periods presented (amounts reflect 100% of the investees’ results on an aggregated basis):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Unconsolidated facilities operated at period end		10			10			10			10
Net revenues		$	15,180		$	9,287		$	40,567		$	28,202
Operating income (loss)		$	2,066		$	(163	)	$	3,789		$	(389	)
Net income (loss) from continuing operations		$	512		$	(718	)	$	(212	)	$	(2,141	)

 

4.  Discontinued Operations

 

During the first quarter of 2007, the Company committed to a plan to divest its interest in three ambulatory surgery centers.  During the second quarter of 2008, the Company sold its interest in one ambulatory surgery center located in Savannah, Georgia for net proceeds of $460,000.  The Company recognized a loss on the sale of $1.5 million during the quarter that is included in earnings from discontinued operations.  The results of operations in these centers are presented net of income taxes in the accompanying consolidated financial statements as discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  The accompanying condensed consolidated financial statements have been reclassified to conform to this presentation for all periods presented.  These required reclassifications of prior period consolidated financial statements did not impact total assets, liabilities, stockholders’ equity, net income or cash flows.  Revenues, the loss on operations before income taxes, income tax provision (benefit), and the loss from discontinued operations net of tax for the three and nine months ended September 30, 2008 and 2007 related to discontinued operations were as follows (in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
Net Revenue		$	1,752		$	2,039		$	5,695		$	7,909
Loss on operations, before tax		$	(458	)	$	(277	)	$	(1,286	)	$	(1,161	)
Income tax provision (benefit)		$	10		$	(107	)	$	(390	)	$	(361	)
(Loss) gain on sale, net of tax		$	—		$	—		$	(1,394	)	$	256
Loss from discontinued operations, net of tax		$	(468	)	$	(170	)	$	(2,290	)	$	(544	)

 

5.  Long-Term Debt

 

The Company’s long-term debt is summarized as follows (in thousands):

 

		September 30, 2008			December 31, 2007
Senior secured credit facility		$	236,500		$	249,375
Senior PIK toggle notes		184,635			—
Bridge facility		—			175,000
Notes payable to banks		20,133			8,817
Secured term loans		3,423			504
Capital lease obligations		4,230			3,258
		448,921			436,954
Less current maturities		(12,059		)	(8,029		)
		$	436,862		$	428,925

 

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Senior Secured Credit Facility

 

On August 23, 2007, the Company entered into a new $350.0 million senior secured credit facility with a syndicate of banks.  The senior secured credit facility extends credit in the form of two term loans of $125.0 million each (the first, the Tranche A Term Loan and the second, the Tranche B Term Loan) and a $100.0 million revolving, swingline and letter of credit facility (the “Revolving Facility”).  The swingline facility is limited to $10.0 million and the swingline loans are available on a same-day basis.  The letter of credit facility is limited to $10.0 million.  The Company is the borrower under the senior secured credit facility, and all of its wholly owned subsidiaries are guarantors.  Under the terms of the senior secured credit facility, entities that become wholly owned subsidiaries must also guarantee the debt.

 

The Tranche A Term Loan matures on August 23, 2013, the Tranche B Term Loan matures on August 23, 2014 and the Revolving Facility matures on August 23, 2013.  The Tranche A Term Loan requires quarterly principal payments of $312,500 through September 30, 2009, quarterly payments of $1.6 million from December 31, 2009 through September 30, 2010, quarterly payments of $4.7 million from December 31, 2010 through September 30, 2011, quarterly payments of $6.3 million from December 31, 2011 through September 30, 2012, quarterly payments of $18.1 million from December 31, 2012 through June 30, 2013 and a balloon payment of $12.6 million on August 23, 2013.  The Tranche B Term Loan requires quarterly principal payments of $312,500 through June 30, 2014 and a balloon payment of $111.1 million on August 23, 2014.

 

At the Company’s option, the term loans bear interest at the lender’s alternate base rate in affect on the applicable borrowing date plus an applicable alternate base rate margin, or Eurodollar rate in effect on the applicable borrowing date, plus an applicable Eurodollar rate margin.  Both the applicable alternate base rate margin and applicable Eurodollar rate margin will vary depending upon the ratio of the Company’s total indebtedness to consolidated EBITDA.

 

The senior secured credit facility permits the Company to declare and pay dividends only in additional shares of its stock except for the following exceptions.  Restricted Subsidiaries, as defined in the credit agreement, may declare and pay dividends ratably with respect to their capital stock.  The Company may declare and pay cash dividends or make other distributions to Holdings provided the proceeds are used by Holdings to (i) purchase or redeem equity interest of Holdings acquired by former or current employees, consultants or directors of Holdings, the Company or any Restricted Subsidiary or (ii) pay principal or interest on promissory notes that were issued in lieu of cash payments for the repurchase or redemption of such Equity Instruments, provided that the aggregate amount of such dividends or other distributions shall not exceed $3.0 million in any fiscal year.  Any unused amounts that are permitted to be paid under this provision are available to be carried over to subsequent fiscal years provided that certain conditions are met.  The Company may also make payments to Holdings to pay franchise taxes and other fees required to maintain its corporate existence provided such payments do not exceed $3.0 million in any calendar year and also make payments in the amount necessary to enable Holdings to pay income taxes directly attributable to the operations of the Company and to make $1.0 million in annual advisory and management agreement payments.  The Company may also make additional payments to Holdings in the aggregate amount of $5.0 million throughout the term of the senior secured credit facility.

 

As of September 30, 2008, the amount outstanding under the senior secured credit facility was $236.5 million with an interest rate on the borrowings ranging from 7.17% to 7.95%.  The $100.0 million revolving facility includes a non-use fee of 0.5% of the portion of the facility not used.  The Company pays this fee quarterly.  As of September 30, 2008, the amount available under the Revolving Facility was $100.0 million.

 

Interest Rate Swap

 

In October 2007, the Company entered into an interest rate swap agreement to protect the Company against certain interest rate fluctuations of the LIBOR rate on $150.0 million of the Company’s variable rate debt under the senior secured credit facility, with Merrill Lynch as counterparty. The effective date of the interest rate swap was October 31, 2007, and it is scheduled to expire on October 31, 2010.  The interest rate swap effectively fixes the Company’s LIBOR interest rate on the $150.0 million of variable debt at a rate of 4.7% and is being accounted for as a cash flow hedge.

 

On January 1, 2008, the Company adopted the provisions of FASB Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”), with respect to the valuation of its interest rate swap agreement. The Company did not adopt the provisions of SFAS No. 157 as it relates to nonfinancial assets pursuant to FSP FAS 157-2, “Effective Date of FASB Statement No. 157”. SFAS No. 157 clarifies how companies are required to use a fair

 

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value measure for recognition and disclosure by establishing a common definition of fair value, a framework for measuring fair value, and expanding disclosures about fair value measurements. The adoption of SFAS No. 157 did not have a material impact on the Company’s results of operations or financial position.

 

SFAS No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Company determines the fair value of its interest rate swap based on the amount at which it could be settled, which is referred to in SFAS No. 157 as the exit price. This price is based upon observable market assumptions and appropriate valuation adjustments for credit risk. The Company has categorized its interest rate swap as Level 2 under SFAS No. 157.

 

The interest rate swap agreement exposes the Company to credit risk in the event of non-performance by Merrill Lynch. However, the Company does not anticipate non-performance by Merrill Lynch. The Company does not hold or issue derivative financial instruments for trading purposes. The fair value of the Company’s interest rate swap at September 30, 2008 and December 31, 2007 reflected a liability of approximately $4.5 million and $3.6 million, respectively, and is included in other liabilities in the accompanying condensed consolidated balance sheets. The interest rate swap reflects a liability balance as of December 31, 2007 and September 30, 2008 because of decreases in market interest rates since inception.  If the Company materially modifies its interest rate swap agreement or its senior secured credit facility, the Company could be required to record the fair value of the interest rate swap into its statement of operations.  However, at this time, the Company does not intend to materially modify its interest rate swap or senior secured credit facility.

 

The Company has designated the interest rate swap as a cash flow hedge instrument. The Company assesses the effectiveness of this cash flow hedge instrument on a quarterly basis. The Company completed its quarterly assessment of the cash flow hedge instrument at September 30, 2008, and determined the hedge to be effective in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”).

 

Bridge Facility

 

The Company entered into an interim $175.0 million bridge loan credit agreement on August 23, 2007.  The loan was to mature on August 23, 2008 and bear interest at the bank’s base rate plus a margin of 3.0% or the Eurodollar rate plus an initial margin of 4.0%.  The margin increased by 0.5% per annum at the end of the interest period ending February 23, 2008.  All of the Company’s wholly owned subsidiaries were guarantors of the bridge facility.  During the second quarter of 2008, prior to the retirement of the bridge facility, the Company elected to increase the principal amount of the bridge facility in lieu of making scheduled interest payments of $4.9 million.  As a result of this election, the interest rate increased by 75 basis points for those interest periods.  On June 3, 2008, the Company repaid the $179.9 million bridge facility with proceeds from the sale of the Toggle Notes (as defined below).

 

Senior PIK Toggle Notes

 

On June 3, 2008, the Company completed a private offering of $179.9 million aggregate principal amount of the 11.00%/11.75% Senior PIK Toggle Notes due 2015 (“Toggle Notes”). Interest on the Toggle Notes is due February 23 and August 23 of each year, beginning August 23, 2008.  The Toggle Notes will mature on August 23, 2015.  For any interest period through August 23, 2011, the Company may elect to pay interest on the Toggle Notes (i) in cash, (ii) in kind, by increasing the principal amount of the notes or issuing new notes (referred to as “PIK interest”) for the entire amount of the interest payment or (iii) by paying interest on 50% of the principal amount of the Toggle Notes in cash and 50% in PIK interest.  Cash interest on the Toggle Notes will accrue at the rate of 11.0% per annum.  PIK interest on the Toggle Notes will accrue at the rate of 11.75% per annum.  The proceeds from the issuance of the Toggle Notes were used exclusively to repay the bridge facility.  On August 23, 2008, the Company elected to exercise the PIK option by increasing the principal amount of the bridge facility in lieu of making scheduled interest payments of $4.7 million.

 

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The Toggle Notes are unsecured senior obligations and rank equally with other existing and future senior indebtedness, senior to all future subordinated indebtedness and effectively junior to all secured indebtedness to the extent of the value of the collateral securing such indebtedness.  Certain existing subsidiaries have guaranteed the Toggle Notes on a senior basis, as required by the indenture.  The indenture also requires that certain of the Company’s future subsidiaries guarantee the Toggle Notes on a senior basis.  Each guarantee is unsecured and ranks equally with senior indebtedness of the guarantor, senior to all of the guarantor’s subordinated indebtedness and effectively junior to its secured indebtedness to the extent of the value of the collateral securing such indebtedness.

 

The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of the subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates.

 

As part of the private offering, the Company entered into a registration rights agreement with the initial purchasers in the private offering in which the Company agreed, among other things, to file a registration statement within 180 days of the issuance of the outstanding notes. On September 25, 2008, the Company filed a registration statement under the Securities Act of 1933, as amended, to register $184.6 million aggregate principal amount of Toggle Notes as well as the guarantee of each wholly owned subsidiary of the Company.  On November 12, 2008, the Company filed an amendment to the registration statement to, among other things, register an additional $75.4 million aggregate principal amount of Toggle Notes issuable if we elect to make payments of additional interest in kind by increasing the principal amount of the existing notes or issuing additional notes.  Pursuant to the registration statement, the Company is offering to exchange its outstanding Toggle Notes for new 11.00%/11.75% Senior PIK Toggle Notes due 2015 with an aggregate principal amount of $184.6 million registered under the Securities Act of 1933, as amended (Registered Notes). The exchange notes will represent the same debt as the outstanding notes and the Company will issue the exchange notes under the same indenture that governs the outstanding notes.

 

At September 30, 2008, the Company was in compliance with all material covenants required by each long-term debt agreement.

 

Notes Payable to Banks

 

Certain subsidiaries of the Company have outstanding bank indebtedness of $20.1 million which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made.  The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions.

 

Capital Lease Obligations

 

The Company is liable to various vendors for several equipment leases.  The outstanding balance related to these capital leases at September 30, 2008 and December 31, 2007 was $4.2 million and $3.3 million, respectively.  The leases have interest rates ranging from 3% to 17% per annum.

 

6.  Stock Options

 

Overall Description

 

The Company follows the guidance of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, SFAS No. 123(R) in accounting for equity-based compensation.  Under SFAS No. 123(R), the fair value of equity-based compensation, such as stock options and other stock-based awards to employees and directors, is measured at the date of grant and recognized as expense over the recipient’s requisite service period.

 

The Predecessor used the modified prospective method of adoption, and the Company uses the Black-Scholes option pricing model to value any options awarded subsequent to adoption of SFAS No. 123(R).  Under the modified prospective method, compensation cost is recognized under SFAS No. 123(R) for all share-based payments granted or modified after January 1, 2006, but is based on the requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” for all unvested awards granted prior to the effective date of SFAS No. 123(R).  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.

 

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The Company is a participant in the Symbion Holdings Corporation 2007 Equity Incentive Plan (the “2007 Plan”).  In connection with the Merger, certain members of Predecessor’s management rolled over 974,396 predecessor options into the 2007 Plan.  The rollover options were exchanged for 611,799 options under the 2007 Plan.  The Company’s stock option compensation expense estimate can 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.

 

On August 31, 2007, Holdings granted 1,302,317 time-vested options and 1,606,535 performance vested options to certain employees of the Company.  The maximum contractual term of the options is ten years or earlier if the employee terminates employment before that time.  The time-vested options vest over a five-year period with 20% of the options vesting each year.  The Company’s policy is to recognize compensation expense over the straight line method.  The performance vested options shall vest and become exercisable upon a liquidity event and the obtainment of internal rate of return targets as defined in the 2007 Plan.  In accordance with SFAS No. 123(R), no expense has been recorded in the statement of operations for the performance based shares as the conditions for vesting are not probable.

 

As a result of the Merger, all of the Company’s restricted stock awards, except as otherwise agreed to by the holders and the Company, and all of its stock options were immediately vested.  Awards not vested were cancelled immediately prior to the merger.  Accordingly, the Successor’s equity-based compensation consists entirely of equity instruments granted after the merger.

 

There were no options granted during the three months ended September 30, 2008, however, 87,386 options granted as part of the August 31, 2007 grant were issued to certain employees of the Company during the first quarter of 2008.  The estimated weighted average fair value of the time-vested options issued during the first quarter of 2008 was $4.78 and those issued during the Successor period of 2007 was $4.91, determined  using the Black-Scholes option pricing model with the following assumptions: weighted average dividend yield based on historic dividend rates at the date of the grant which was deemed to be zero, weighted average volatility of 42% for the options issued during the first quarter of 2008 as well as the options valued in the Successor period of 2007, and a weighted average risk free interest rate of 4.4% for both periods based on the implied yield on the United States Treasury zero-coupon issues with an expected life of 6.5 years.  The Company used an expected forfeiture rate of approximately 4% for both the options valued during 2008 and the options issued during the Successor period of 2007.

 

The Company recognized $1.8 million and $2.5 million of non-cash stock based compensation expense in the nine months ended September 30, 2008 and 2007, respectively.  As of September 30, 2008, there was approximately $4.3 million of total unrecognized compensation expense related to unvested options granted under the option plan.  The Company used an estimated 4% forfeiture rate to arrive at this expense.  This cost is expected to be fully recognized by the end of 2012.

 

7.  Recently Issued Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”).  SFAS No. 141(R) retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting as well as requiring the expensing of acquisition-related costs as incurred.  Furthermore, SFAS No. 141(R) provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008.  Earlier adoption is prohibited.  The Company is evaluating the impact that SFAS No. 141(R) will have on its results of operations or financial position.

 

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51” (“SFAS No. 160”).  SFAS No. 160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements” (“ARB No. 51”) to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  Additionally, SFAS No. 160 changes the method by which the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest.

 

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SFAS No. 160 requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent’s owners and the interests of the non-controlling owners of a subsidiary, including a reconciliation of the beginning and ending balances of the equity attributable to the parent and the non-controlling owners and a schedule showing the effects of changes in a parent’s ownership interest in a subsidiary on the equity attributable to the parent.  SFAS No. 160 does not change ARB No. 51’s provisions related to consolidation purposes or consolidation policy, or the requirement that a parent consolidate all entities in which it has a controlling financial interest.  SFAS No. 160 does, however, amend certain of ARB No. 51’s consolidation procedures to make them consistent with the requirements of SFAS No. 141(R) as well as to provide definitions for certain terms and to clarify some terminology.  SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008.  Earlier adoption is prohibited.  SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented.  The Company is evaluating the impact that SFAS No. 160 will have on its results of operations or financial position.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities including: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged.  The Company is evaluating the impact that SFAS No. 161 will have on its results of operations or financial position.

 

In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets”, FSP 142-3 amends the factors that should be considered in determining the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”.  The intent of FSP 142-3 is to improve consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) “Business Combinations”, and other U.S. generally accepted accounting principles.  FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years.  The adoption of FSP 142-3 is not expected to have a material impact on the Company’s consolidated results of operations or financial position.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162).  SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles.  The guidance in SFAS 162 replaces that prescribed in Statement on Auditing Standards No. 69, “The Meaning of Presented Fairly in Conformity With Generally Accepted Accounting Principles”, and becomes effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”.  The adoption of the SFAS 162 will not have an impact on the Company’s consolidated results of operations or financial position.

 

8.  Commitments and Contingencies

 

Debt and Lease Guaranty on Non-consolidated Entities

 

The Company has guaranteed $2.6 million of operating lease payments of certain surgical facilities.  These operating leases typically have 10 year terms, with optional renewal periods.  As of September 30, 2008, the Company has also guaranteed $2.6 million of debt of five non-consolidating surgical facilities.  In the event that the Company meets certain financial and debt service benchmarks, the guarantees at these surgical facilities will expire between 2010 and 2012.

 

Professional, General and Workers’ Compensation Liability Risks

 

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries.  To cover these claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through a third party commercial insurance carrier in amounts that management believes is sufficient for the Company’s operations, although, potentially, some claims may exceed the scope of coverage in effect.  This insurance coverage is on a

 

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claims-made basis.  Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance.  The Company is not aware of any such proceedings that would have a material adverse effect on the Company’s business, financial condition or results of operations.  The Company expenses the costs under the self-insured retention exposure for general and professional liability claims which relate to (i) deductibles on claims made during the policy period, and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires.  Reserves and provisions for professional liability are based upon actuarially determined estimates.  The reserves are estimated using individual case-basis valuations and actuarial analysis.  Based on historical results and data currently available, management does not believe a change in one or more of these assumptions will have a material impact on the Company’s consolidated financial position or results of operations.

 

Laws and Regulations

 

Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation.  Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal health care programs.  From time to time, governmental regulatory agencies will conduct inquiries of the Company’s practices.  It is the Company’s current practice and future intent to cooperate fully with such inquiries.  The Company is not aware of any such inquiry that would have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

Acquired Facilities

 

The Company, through its wholly owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical and diagnostic facilities with prior operating histories.  Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws.  Although the Company attempts to assure itself that no such liabilities exist and obtains indemnification from prospective sellers covering such matters and institutes policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies.  There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.

 

The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other health care providers or have materially adverse effects on its business or revenues arising from such future actions.  The Company believes, however, that it will be able to adjust its operations so as to be in compliance with any regulatory or statutory provision as may be applicable.

 

Potential Physician Investor Liability

 

A majority of the physician investors in the partnerships and limited liability companies which operate the Company’s surgical facilities carry general and professional liability insurance on a claims-made basis.  Each investee may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities.  Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage, such individual may not be able to obtain coverage in amounts sufficient to cover all potential liability.  Since most insurance policies contain exclusions, the physician investor will not be insured against all possible occurrences.  In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.

 

9.  Related Party Transactions

 

In addition to related party transactions discussed elsewhere in the notes to the accompanying unaudited condensed consolidated financial statements, the unaudited condensed consolidated financial statements include the following related party transactions.  On August 23, 2007, the Company entered into a ten year advisory services and management agreement with Crestview Advisors, L.L.C.  The annual management fee is $1.0 million and is payable on August 23 of each year.  For the nine months ended September 30, 2008, expense related to this agreement totaled $750,000 and the Company has a prepaid asset of $896,000 as of September 30, 2008 that is

 

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included in prepaid expenses and other current assets.  In connection with the Merger, the Company paid Crestview a sponsor fee of $6.3 million that was recorded as a component of stockholders’ equity.

 

As of September 30, 2008 and December 31, 2007, the Company has $492,000 and $905,000, respectively payable to physicians at one of our physician networks.  These amounts are included in other accrued expenses.

 

10.  Financial Information for the Company and Its Subsidiaries

 

We conduct substantially all of our business through our subsidiaries.  Presented below is condensed consolidating financial information for us and our subsidiaries as of September 30, 2008 and December 31, 2007, and for the three and nine months ended September 30, 2008 and September 30, 2007.  The information segregates the parent company issuer, the combined wholly-owned subsidiary guarantors, the combined non-guarantors, and consolidating adjustments.  All of the subsidiary guarantees are both full and unconditional and joint and several.

 

SYMBION, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2008

 

		Parent Issuer			Guarantor Subsidiaries			Combined Non- Guarantors			Eliminations			Total Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	2,635		$	4,138		$	30,808		$	—		$	37,581
Accounts receivable, net		—			1,176			33,460			—			34,636
Inventories		—			—			9,021			—			9,021
Prepaid expenses and other current assets		8,347			104			6,194			—			14,645
Due from related parties		63,835			—			—			(63,835		)	—
Income tax receivable		701			—			—			—			701
Current assets of discontinued operations		—			—			1,067			—			1,067
Total current assets		75,518			5,418			80,550			(63,835		)	97,651
Property and equipment, net		3,579			935			85,765			—			90,279
Intangible assets, net		19,570			—			—			—			19,570
Goodwill		541,243			—			—			—			541,243
Investments in and advances to affiliates		206,157			133,654			73			(326,089		)	13,795
Other assets		11,531			114			471			—			12,116
Long-term assets of discontinued operations		—			—			2,928			—			2,928
Total assets		$	857,598		$	140,121		$	169,787		$	(389,924	)	$	777,582
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	255		$	47		$	5,070		$	—		$	5,372
Accrued payroll and benefits		1,632			248			6,200			—			8,080
Due to related parties		—			18,291			45,544			(63,835		)	—
Other accrued expenses		10,609			884			5,813			—			17,306
Current maturities of long-term debt		2,677			96			9,286			—			12,059
Current liabilities of discontinued operations		—			—			727			—			727
Total current liabilities		15,173			19,566			72,640			(63,835		)	43,544
Long-term debt, less current maturities		419,282			1			17,579			—			436,862
Deferred income tax payable		17,794			—			—			—			17,794
Other liabilities		5,256			125			4,560			—			9,941
Long-term liabilities of discontinued operations		—			—			188			—			188
Minority interests		39,344			—			—			—			39,344
Stockholders’ equity		360,749			120,429			74,820			(326,089		)	229,909
Total liabilities and stockholders’ equity		$	857,598		$	140,121		$	169,787		$	(389,924	)	$	777,582

 

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