10-Q 1 a2011q3form10q.htm 10-Q 2011 Q3 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 September 30, 2011
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 November 10, 2011, 1,000 shares of the registrant’s common stock were outstanding.
 



SYMBION, INC.

FORM 10-Q

TABLE OF CONTENTS

Part I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
 
 
 
Consolidated Balance Sheets (unaudited)
3

 
 
 
 
Consolidated Statements of Operations (unaudited)
4

 
 
 
 
Consolidated Statements of Stockholders' Equity (unaudited)
5

 
 
 
 
Consolidated Statements of Cash Flows (unaudited)
6

 
 
 
 
Notes to Consolidated Financial Statements (unaudited)
7

 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
24

 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
38

 
 
 
Item 4.
Controls and Procedures
38

 
 
 
Part II - OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
38

 
 
 
Item 6.
Exhibits
38

 
 
 
Signatures
 
39




Item 1.  Financial Statements
SYMBION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)
 
September 30,
2011
 
December 31, 2010
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
75,847

 
$
73,458

Accounts receivable, less allowance for doubtful accounts of $10,895 and $10,051, respectively
60,082

 
61,825

Inventories
13,178

 
10,798

Prepaid expenses and other current assets
12,971

 
8,636

Current assets of discontinued operations
166

 
1,003

Total current assets
162,244

 
155,720

Land
5,713

 
5,713

Buildings and improvements
102,999

 
102,795

Furniture and equipment
72,941

 
70,129

Computers and software
5,158

 
4,757

 
186,811

 
183,394

Less accumulated depreciation
(53,987
)
 
(42,762
)
Property and equipment, net
132,824

 
140,632

Intangible assets
23,729

 
21,817

Goodwill
629,847

 
624,737

Investments in and advances to affiliates
18,113

 
17,824

Other assets
15,478

 
9,633

Long-term assets of discontinued operations
—

 
34

Total assets
$
982,235

 
$
970,397

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
12,268

 
$
12,396

Accrued payroll and benefits
10,500

 
10,090

Other accrued expenses
30,570

 
25,814

Current maturities of long-term debt
9,311

 
29,195

Current liabilities of discontinued operations
62

 
923

Total current liabilities
62,711

 
78,418

Long-term debt, less current maturities
545,327

 
507,417

Deferred income tax payable
56,452

 
51,309

Other liabilities
71,774

 
68,950

Long-term liabilities of discontinued operations
—

 
22

 
 
 
 
Noncontrolling interests - redeemable
35,273

 
36,030

 
 
 
 
Stockholders' equity:
 
 
 
Common stock, 1,000 shares, $0.01 par value, authorized, issued and outstanding at September 30, 2011 and at December 31, 2010
—

 
—

Additional paid-in-capital
239,491

 
240,959

Accumulated other comprehensive loss
—

 
(314
)
Retained deficit
(72,680
)
 
(55,219
)
Total Symbion, Inc. stockholders' equity
166,811

 
185,426

Noncontrolling interests - non-redeemable
43,887

 
42,825

Total equity
210,698

 
228,251

Total liabilities and stockholders' equity
$
982,235

 
$
970,397

See notes to unaudited consolidated financial statements.

3


SYMBION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues
$
110,725

 
$
104,821

 
$
331,590

 
$
291,829

Operating expenses:
 
 
 
 
 
 
 
Salaries and benefits
31,460

 
29,486

 
93,023

 
82,912

Supplies
25,550

 
24,009

 
77,851

 
65,253

Professional and medical fees
8,738

 
7,791

 
25,956

 
20,420

Rent and lease expense
6,278

 
6,075

 
18,554

 
18,366

Other operating expenses
8,461

 
7,932

 
24,542

 
22,163

Cost of revenues
80,487

 
75,293

 
239,926

 
209,114

General and administrative expense
5,400

 
5,521

 
16,812

 
16,690

Depreciation and amortization
5,154

 
5,008

 
15,511

 
14,004

Provision for doubtful accounts
2,674

 
2,025

 
5,861

 
5,225

Income on equity investments
(515
)
 
(669
)
 
(1,171
)
 
(2,173
)
Gains and losses on disposal of long-lived assets, net
136

 
(403
)
 
191

 
749

Business combination remeasurement gains
—

 
(3,169
)
 
—

 
(3,169
)
Litigation settlements
—

 
—

 
—

 
(44
)
Loss on debt extinguishment
—

 
—

 
4,751

 
—

Total operating expenses
93,336

 
83,606

 
281,881

 
240,396

Operating income
17,389

 
21,215

 
49,709

 
51,433

Interest expense, net
(14,337
)
 
(12,668
)
 
(39,723
)
 
(35,610
)
Income before income taxes and discontinued operations
3,052

 
8,547

 
9,986

 
15,823

Provision for income taxes
1,922

 
1,761

 
4,892

 
3,980

Income from continuing operations
1,130

 
6,786

 
5,094

 
11,843

Loss from discontinued operations, net of taxes
(404
)
 
(310
)
 
(492
)
 
(672
)
Net income
726

 
6,476

 
4,602

 
11,171

Less: Net income attributable to noncontrolling interests
(7,095
)
 
(6,193
)
 
(22,063
)
 
(17,594
)
Net (loss) income attributable to Symbion, Inc.
$
(6,369
)
 
$
283

 
$
(17,461
)
 
$
(6,423
)

See notes to unaudited consolidated financial statements.




4


SYMBION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, in thousands)
 
Symbion, Inc. Common Stock
 
Additional
Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Retained Deficit
 
Noncontrolling Interests
Non-redeemable
 
Total
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2009
1,000

 
$
—

 
$
242,623

 
$
(2,731
)
 
$
(46,479
)
 
$
3,396

 
$
196,809

Net (loss) income
—

 
—

 
—

 
—

 
(6,423
)
 
3,282

 
(3,141
)
Amortized compensation expense related to stock options
—

 
—

 
1,002

 
—

 
—

 
—

 
1,002

Recognition of interest rate swap liability to earnings
—

 
—

 
—

 
2,478

 
—

 
—

 
2,478

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(3,848
)
 
(3,848
)
Acquisition and disposal of shares of noncontrolling interests
—

 
—

 
(2,321
)
 
—

 
—

 
37,117

 
34,796

Balance at September 30, 2010
1,000

 
$
—

 
$
241,304

 
$
(253
)
 
$
(52,902
)
 
$
39,947

 
$
228,096

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
1,000

 
$
—

 
$
240,959

 
$
(314
)
 
$
(55,219
)
 
$
42,825

 
$
228,251

Net (loss) income
—

 
—

 
—

 
—

 
(17,461
)
 
9,341

 
(8,120
)
Amortized compensation expense related to stock options
—

 
—

 
1,002

 
—

 
—

 
—

 
1,002

Unrealized loss on interest rate swap
—

 
—

 
—

 
(351
)
 
—

 
—

 
(351
)
Recognition of interest rate swap liability to earnings
—

 
—

 
—

 
665

 
—

 
—

 
665

Distributions to noncontrolling interest partners
—

 
—

 
—

 
—

 
—

 
(11,032
)
 
(11,032
)
Acquisition and disposal of shares of noncontrolling interests
—

 
—

 
(2,470
)
 
—

 
—

 
2,753

 
283

Balance at September 30, 2011
1,000

 
$
—

 
$
239,491

 
$
—

 
$
(72,680
)
 
$
43,887

 
$
210,698


See notes to unaudited consolidated financial statements.



5


SYMBION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended
September 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net income
$
4,602

 
$
11,171

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations
492

 
672

Depreciation and amortization
15,511

 
14,004

Amortization of deferred financing costs and debt issuance discount
1,902

 
1,501

Non-cash payment-in-kind interest option
17,797

 
19,264

Non-cash stock option compensation expense
1,002

 
1,002

Non-cash recognition of accumulated other comprehensive loss into earnings
665

 
2,478

Non-cash credit risk adjustment of financial instruments
—

 
189

Non-cash losses on disposal of long-lived assets
191

 
(2,420
)
Loss on debt extinguishment
4,751

 
—

Deferred income taxes
4,576

 
5,471

Equity in earnings of unconsolidated affiliates, net of distributions received
342

 
(57
)
Provision for doubtful accounts
5,861

 
5,225

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
Accounts receivable
(2,889
)
 
(4,871
)
Other assets and liabilities
5,258

 
(2,285
)
Net cash provided by operating activities - continuing operations
60,061

 
51,344

Net cash used in operating activities - discontinued operations
—

 
(98
)
Net cash provided by operating activities
60,061

 
51,246

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment, net
(5,951
)
 
(5,280
)
Payments for acquisitions, net of cash acquired
(6,753
)
 
(43,830
)
Payments from unit activity of nonconsolidated facilities
—

 
(55
)
Change in other assets
(213
)
 
(375
)
Net cash used in investing activities - continuing operations
(12,917
)
 
(49,540
)
Net cash used in investing activities - discontinued operations
—

 
(13
)
Net cash used in investing activities
(12,917
)
 
(49,553
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Principal payments on long-term debt
(354,001
)
 
(15,706
)
Proceeds from debt issuances
347,503

 
56,975

Payment of debt issuance costs
(11,929
)
 


Distributions to noncontrolling interest partners
(25,107
)
 
(17,914
)
Payments and proceeds from unit activity
(2,800
)
 
2,140

Other financing activities
1,579

 
(1,673
)
Net cash (used in) provided by financing activities - continuing operations
(44,755
)
 
23,822

Net cash provided by financing activities - discontinued operations
—

 
76

Net cash (used in) provided by financing activities
(44,755
)
 
23,898

Net increase in cash and cash equivalents
2,389

 
25,591

Cash and cash equivalents at beginning of period
73,458

 
47,920

Cash and cash equivalents at end of period
$
75,847

 
$
73,511


See notes to unaudited consolidated financial statements.

6


SYMBION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2011
(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, 2011, the Company owned and operated 55 surgical facilities, including 49 ambulatory surgery centers and six surgical hospitals. The Company also managed eight additional ambulatory surgery centers and one physician clinic. The Company owns a majority ownership interest in 33 of the 55 surgical facilities and consolidates 49 of these surgical facilities for financial reporting purposes.

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 publicly traded equity securities. The Company is a wholly owned subsidiary of Symbion Holdings Corporation (“Holdings”), which is owned by an investor group that includes affiliates of Crestview, members of the Company's management and other investors.

2. Significant Accounting Policies and Practices

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, ("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 accompanying consolidated financial statements and accompanying footnotes. 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 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 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 breaches 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 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 ("ASC") Topic 810, Consolidation. The variable interest entities are surgical facilities located in the states of Florida and New York. 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 services agreement as well as the obligation and likelihood of absorbing the majority of expected gains and losses. 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 gains and losses. The accompanying consolidated balance sheets at September 30, 2011 and December 31, 2010 include assets of $15.4 million and $15.3 million, respectively, and liabilities of $3.9 million and $4.1 million, respectively, related to the variable interest entities. All significant intercompany balances and transactions are eliminated in consolidation.

Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), or inputs other than quoted prices in active markets that are either directly or indirectly observable (Level 2), or unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions (Level 3), depending on the nature of the item being valued.
The carrying amounts reported in the accompanying consolidated balance sheets for cash, accounts receivable and accounts payable approximate fair value because of their short-term nature.

7



The carrying amount and fair value of the Company's long term debt obligations as of September 30, 2011 and December 31, 2010 were as follows (in thousands):
 
Carrying Amount
 
Fair Value
 
September 30,
2011
 
December 31, 2010
 
September 30,
2011
 
December 31, 2010
Senior Secured Notes, net of note issuance discount of $5,019
$
335,981

 
$
—

 
$
311,202

 
$
—

Tranche A Term Loan
—

 
106,062

 
—

 
101,732

Tranche B Term Loan
—

 
115,438

 
—

 
110,724

Revolving Facility
—

 
56,000

 
—

 
53,715

PIK Exchangeable Notes
97,660

 
—

 
97,660

 
—

Toggle Notes
94,724

 
232,000

 
89,988

 
198,662


The fair value of the Senior Secured Notes, the Tranche A and B Term Loans, the Toggle Notes and the Revolving Facility (as such terms are defined in Note 4) were based on Level 1 computations using quoted prices at September 30, 2011 and December 31, 2010, as applicable. The fair value of the PIK Exchangeable Notes (as defined in Note 4) was based on a Level 3 computation, using a Company-specific discounted cash flow analysis. The Company's long-term debt instruments are discussed further in Note 4.
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 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. Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. Also, the Company has amounts recorded in other liabilities for third-party settlements of $14.8 and $12.0 million as of September 30, 2011 and December 31, 2010, respectively. The Company does not require collateral for private pay patients. Accounts receivable at September 30, 2011 and December 31, 2010 were as follows (in thousands):
 
September 30,
2011
 
December 31, 2010
Surgical facilities
$
59,614

 
$
61,242

Physician networks
468

 
583

Total
$
60,082

 
$
61,825


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, 2011 and December 31, 2010:
 
September 30,
2011
 
December 31, 2010
Private insurance
51
%
 
58
%
Government
21

 
18

Self-pay
9

 
8

Other
19

 
16

Total
100
%
 
100
%

The Company's policy is to review the standard aging schedule, 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 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.

Inventories

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

Prepaid and Other Current Assets
A summary of prepaid and other current assets is as follows (in thousands):

8


 
September 30, 2011
 
December 31, 2010
Prepaid expenses
$
5,675

 
$
5,034

Other current assets
7,296

 
3,602

Total
$
12,971

 
$
8,636

Effective October 1, 2011, the Company acquired an oncology practice, which is operated within the Company's existing facility located in Idaho Falls, Idaho. The purchase price of the acquisition was $3.5 million, consisting of $2.7 million of cash from operations and approximately $800,000 in the form of equity ownership in the the entity that owns the Company's facility located in Idaho Falls, Idaho. Because the Company paid the cash consideration for this acquisition on September 30, 2011, the $2.7 million in cash paid for this acquisition is included as a deposit in the accompanying condensed consolidated balance sheet, classified as other assets at September 30, 2011.

Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill are as follows (in thousands):
Balance at December 31, 2010
 
$
624,737

Acquisitions
 
4,642

Disposals
 
(357
)
Purchase price allocations
 
825

Balance at September 30, 2011
 
$
629,847


Purchase price allocations of $825,000 for the nine month period ended September 30, 2011 reflect final purchase price adjustments to the identifiable net assets of acquired facilities.

The Company has intangible assets of $19.5 million related to the certificates of need for certain of its facilities. These indefinite-lived assets are not amortized, but are assessed for possible impairment under the Company's impairment policy. The Company also has an intangible asset related to a non-compete agreement, which is amortized over the 60-month life of the agreement. The net value of this intangible asset as of September 30, 2011 is $2.0 million.
Effective August 1, 2011, we acquired a 56.0% ownership interest in an ASC located in Great Falls, Montana. We recorded goodwill of $4.6 million related to this acquisition. We consolidate this facility for financial reporting purposes for periods subsequent to the acquisition. Effective August 1, 2011, the Company acquired a 50.0% ownership interest in a 20-bed surgical hospital located in Great Falls, Montana and acquired the right to manage the hospital. We account for this facility as an equity method investment. Additionally, effective August 1, 2011, the Company acquired the right to manage a medical clinic consisting of 45 multi-specialty physicians located in Great Falls, Montana. The aggregate consideration given for these acquisitions was $5.2 million plus the assumption of $232,000 of debt. The aforementioned management rights are recorded as intangible assets and amortized over the base terms of 15 years.
Noncontrolling Interests

The consolidated financial statements 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 unconsolidated affiliates, the Company regularly engages in the purchase and sale of equity 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 noncontrolling interest holders, and their cash flow effect is classified within financing activities.

Other Accrued Expenses

A summary of other accrued expenses is as follows (in thousands):
 
September 30,
2011
 
December 31, 2010
Interest payable
$
11,462

 
$
9,865

Current taxes payable
7,050

 
6,344

Insurance liabilities
1,842

 
1,540

Other expenses
10,216

 
8,065

Total
$
30,570

 
$
25,814



9


Other Comprehensive Loss

The Company reports other comprehensive loss as a measure of changes in stockholders' equity that results from recognized transactions. The change in other comprehensive loss of the Company from December 31, 2010 to September 30, 2011 resulted from the derecognition of the interest rate swap as a cash flow hedge as a result of the Company's debt extinguishment in the second quarter of 2011. The Company entered into an interest rate swap agreement effective December 31, 2010. Upon extinguishment of the senior secured credit facility, which was the underlying hedged instrument, the Company discontinued hedge accounting and charged the amount previously recorded to other comprehensive income to earnings. The Company's total loss, including the net loss attributable to Symbion, Inc. and the amounts recorded to other comprehensive loss for the nine months ended September 30, 2011 and the nine months ended September 30, 2010 was $17,147 and $3,945, respectively.

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,
 
2011
 
2010
 
2011
 
2010
Patient service revenues
$
107,573

 
$
101,781

 
$
323,246

 
$
282,733

Physician service revenues
1,553

 
1,489

 
4,483

 
4,346

Other service revenues
1,599

 
1,551

 
3,861

 
4,750

Total
$
110,725

 
$
104,821

 
$
331,590

 
$
291,829


The following table sets forth by type of payor the percentage of the Company's patient service revenues generated for the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Private insurance
66
%
 
67
%
 
67
%
 
68
%
Government
26

 
26

 
26

 
26

Self-pay
4

 
4

 
4

 
4

Other
4

 
3

 
3

 
2

Total
100
%
 
100
%
 
100
%
 
100
%

Reclassifications

Certain reclassifications have been made to the comparative period's financial statements to conform to the 2011 presentation. The reclassifications primarily related to the presentation of discontinued operations and noncontrolling interests and had no impact on the Company's financial position or results of operations.

3. Discontinued Operations

The Company disposed of four surgical facilities during 2010 which are classified as discontinued operations in the periods presented. The results of operations in these centers are presented net of income taxes in the accompanying consolidated financial statements as discontinued operations. In connection with one of the disposed facilities, the Company recorded an accrual of $1.7 million for future obligations under a facility operating lease. As of September 30, 2011, the lease liability was $1.1 million. The accompanying 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 loss or cash flows.

Revenues, loss on operations before taxes, income tax provision, loss on sale, net of taxes and the loss from discontinued operations, net of taxes for the three and nine months ended September 30, 2011 and 2010 related to discontinued operations were as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues
$
—

 
$
2,286

 
$
—

 
$
7,783

Loss on operations, before taxes
$
—

 
$
(308
)
 
$
—

 
$
(658
)
Income tax provision
$
—

 
$
(2
)
 
$
—

 
$
(3
)
Loss on sale, net of taxes
$
(404
)
 
$
—

 
$
(492
)
 
$
(11
)
Loss from discontinued operations, net of taxes
$
(404
)
 
$
(310
)
 
$
(492
)
 
$
(672
)


10


4. Long-Term Debt

The Company's long-term debt is summarized as follows (in thousands):
 
September 30,
2011
 
December 31, 2010
Senior Secured Credit Facility
$
—

 
$
277,500

New Credit Facility
—

 
—

Senior Secured Notes, net of debt issuance discount of $5,019
335,981

 
—

Toggle Notes
94,724

 
232,000

PIK Exchangeable Notes
97,660

 
—

Notes payable to banks
15,179

 
14,786

Secured term loans
6,195

 
7,236

Capital lease obligations
4,899

 
5,090

 
554,638

 
536,612

Less current maturities
(9,311
)
 
(29,195
)
Total
$
545,327

 
$
507,417


As described in the following sections, the Company modified its long-term debt structure during the second quarter of 2011. On June 14, 2011, the Company completed a private offering (the "Offering") of $350.0 million aggregate principal amount of 8.00% senior secured notes due 2016 (the "Senior Secured Notes"). The proceeds of the Offering were used to retire the Company's existing Senior Secured Credit Facility (defined below) and a portion of the Company's existing 11.00%/11.75% senior PIK toggle notes due 2015 (the "Toggle Notes"). In connection with the Offering, the Company entered into a new super-priority revolving credit facility ("New Credit Facility") and exchanged outstanding Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest, for $88.5 million initial aggregate principal amount of new 8.00% senior PIK exchangeable notes due 2017 (the "PIK Exchangeable Notes"). As a result of the debt restructuring, the Company recorded a loss on debt extinguishment of $4.8 million. This charge is comprised primarily of capitalized debt issuance costs written off in connection with our termination of debt instruments as part of the restructuring.

On September 9, 2011, the Company cancelled $9.0 million aggregate principal amount of outstanding senior secured notes held by certain holders, plus accrued and unpaid interest, in exchange for the issuance to such holders of $9.2 million aggregate principal amount of the Company's PIK Exchangeable Notes which resulted in no significant gain or loss.

$50.0 Million Senior Secured Super-Priority Revolving Credit Facility

Concurrent with the Offering, the Company entered into the New Credit Facility with a syndicate of financial institutions led by affiliates of the initial Senior Secured Note purchasers. The New Credit Facility includes revolving credit loans and swingline loans. Letters of credit may also be issued under the New Credit Facility. The New Credit Facility matures on December 15, 2015. The New Credit Facility is subject to a potential, although uncommitted, increase of up to $25.0 million at the Company's request at any time prior to maturity of the facility, subject to certain conditions, including compliance with a maximum net senior secured leverage ratio and a minimum cash interest coverage ratio. The increase is only available if one or more financial institutions agree to provide it.

Loans under the New Credit Facility will bear interest, at the Company's option, at the reserve adjusted LIBOR rate plus 4.50% or at the alternate base rate plus 3.50%. The Company is required to pay a commitment fee at a rate equal to 0.50% per annum on the undrawn portion of commitments in respect of the New Credit Facility. This fee is payable quarterly in arrears and on the date of termination or expiration of the commitments.

The New 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 New Credit Facility are subject to significant conditions, including the absence of any material adverse change. At September 30, 2011, the Company was in compliance with all material covenants contained in the New Credit Facility. As of September 30, 2011, $50.0 million was available under the New Credit Facility.

Senior Secured Notes

On June 14, 2011, the Company completed a private offering of $350.0 million aggregate principal amount of its Senior Secured Notes. The Senior Secured Notes were issued at a 1.51% discount, yielding proceeds of approximately $344.7 million. Interest on the Senior Secured Notes is due June 15 and December 15 of each year and will accrue at the rate of 8.00% per annum. The first interest payment on the Senior Secured Notes is due December 15, 2011. The Senior Secured Notes will mature on June 15, 2016.

The Senior Secured Notes are guaranteed by substantially all of the Company's existing and future material wholly-owned domestic restricted subsidiaries. The Senior Secured Notes and the guarantees are the Company's and the guarantors' senior secured obligations and rank equal in right of payment with any of the Company's or the guarantors' existing and future senior indebtedness and pari passu with the Company's and the guarantors' first priority liens, except to the extent that the property and assets securing the notes also secure the

11


obligations under the Company's new $50.0 million senior secured super-priority revolving credit facility, which is entitled to proceeds of the collateral prior to the Senior Secured Notes, in the event of a foreclosure or any insolvency proceedings.

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. Prior to June 15, 2014, in each of 2011, 2012 and 2013, the Company may redeem up to 10% of the original aggregate principal amount of the Senior Secured Notes at a price equal to 103% of the aggregate principal amount thereof, plus accrued and unpaid interest. The Company may also 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 notes with proceeds of certain equity offerings at any time prior to June 15, 2014.

Effective September 9, 2011, the Company cancelled $9.0 million aggregate principal amount of its Senior Secured Notes held by certain noteholders, plus accrued and unpaid interest, in exchange for our issuance to such parties of $9.2 million aggregate principal amount of our PIK Exchangeable Notes. As a result of that exchange, the Company currently has $341.0 million aggregate principal amount of Senior Secured Notes outstanding.

In connection with the closing of the sale of the Senior Secured Notes, the Company and the guarantors entered into a Registration Rights Agreement, whereby the Company agreed, under certain circumstances, to register senior secured notes with substantially identical terms to the Senior Secured Notes (the "Registered Senior Secured Notes") and commence an exchange offer to allow holders of the Senior Secured Notes to exchange their Senior Secured Notes for Registered Senior Secured Notes. The Company filed a Registration Statement to register the Registered Senior Secured Notes on October 11, 2011, which registration statement was declared effective on October 27, 2011. The Company's offer to exchange the Senior Secured Notes for Registered Senior Secured Notes commenced on October 27, 2011 and will expire on November 30, 2011, unless extended.
At September 30, 2011, the Company was in compliance with all material covenants contained in the indenture governing the Senior Secured Notes.

Scheduled amortization of the discount recorded in connection with the Senior Secured Notes is as follows (in thousands):     
 
Discount attributable to Senior Secured Notes
October 1, 2011 through December 31, 2011
$
177

January 1, 2012 through December 31, 2012
927

January 1, 2013 through December 31, 2013
1,006

January 1, 2014 through December 31, 2014
1,092

January 1, 2015 through December 31, 2015
1,186

January 1, 2016 through June 15, 2016
631

Total
$
5,019

Toggle Notes
On June 3, 2008, the Company completed a private offering of $179.9 million aggregate principal amount of its Toggle Notes.  Interest on the Toggle Notes is due February 23 and August 23 of each year.  The Toggle Notes will mature on August 23, 2015.  For any interest period through August 23, 2011, the Company was able to 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 accrues at the rate of 11.0% per annum.  PIK interest on the Toggle Notes accrues at the rate of 11.75% per annum.  The Company elects to pay cash interest or to exercise the PIK option in advance of the interest period.
Since August 23, 2008, the Company has elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for various interest periods. As a result, the principal due on the Toggle Notes has increased by $71.0 million from the issuance of the Toggle Notes to September 30, 2011. On August 23, 2011, the Company elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from August 24, 2011 to February 23, 2012. The Company has accrued $1.1 million in interest on the Toggle Notes in other accrued expenses as of September 30, 2011.

At June 14, 2011, the aggregate principal of Toggle Notes outstanding was $245.6 million, and in connection with the Offering, the Company repurchased $70.8 million aggregate principal amount of Toggle Notes, at par plus accrued and unpaid interest of $2.6 million and exchanged $85.4 million aggregate principal amount of Toggle Notes, at par plus accrued interest of $3.1 million, for $88.5 million aggregate principal amount of PIK Exchangeable Notes.
The Toggle Notes are unsecured senior obligations and rank equally with other existing and future senior indebtedness, senior to all

12


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 governing the Toggle Notes.  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. At September 30, 2011, the Company was in compliance with all material covenants contained in the indenture governing the Toggle Notes.

PIK Exchangeable Notes

Concurrent with the Offering, the Company exchanged with affiliates of Crestview and certain other holders of the Company's outstanding Toggle Notes, Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest, for $88.5 million initial aggregate principal amount of the Company's PIK Exchangeable Notes. Effective September 9, 2011, the Company cancelled $9.0 million aggregate principal amount of its Senior Secured Notes held by certain holders of such notes, plus accrued and unpaid interest, in exchange for our issuance to such parties of $9.2 million aggregate principal amount of its PIK Exchangeable Notes.

The PIK Exchangeable Notes will mature on June 15, 2017. Interest will accrue on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on each June 15 and December 15 of each year, commencing on December 15, 2011. The Company will not pay interest in cash on the PIK Exchangeable Notes. Instead, the Company will pay interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest.

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 PIK Exchangeable 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. Holdings and substantially all of the Company's existing and future material wholly owned domestic subsidiaries have guaranteed the PIK Exchangeable Notes on a senior basis, as required by the indenture governing the PIK Exchangeable Notes. 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 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.
    
The Company recorded the PIK Exchangeable Notes in accordance with ASC Topic 470, Debt. In the exchange, the new PIK Exchangeable Notes were recorded at fair value. At September 30, 2011, the Company was in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.

Former Senior Secured Credit Facility

On August 23, 2007, the Company entered into a $350.0 million senior secured credit facility with a syndicate of banks (the "Senior Secured Credit Facility").  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 Tranche A Term Loan was scheduled to mature on August 23, 2013, the Tranche B Term Loan was scheduled to mature on August 23, 2014 and the Revolving Facility was scheduled to mature on August 23, 2013.  The Tranche A Term Loan required quarterly payments of $4.7 million 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 required quarterly principal payments of $312,500 through June 30, 2014 and a balloon payment of $111.1 million on August 23, 2014.

As of June 14, 2011, the Tranche A Term Loan had a principal balance of $101.4 million and accrued interest of $214,000. The Tranche B Term Loan had a principal balance of $115.1 million and accrued interest of $243,000. As of June 1, 2011, the interest rate on the borrowings under the senior secured credit facility was 5.5%.  The $100.0 million Revolving Facility included a non-use fee of 0.5% of the portion of the facility not used.  The Company paid this fee quarterly.  As of June 14, 2011, the amount outstanding under the Revolving Facility was $56.0 million with accrued interest and unused fee of $164,000. Concurrent with the Offering, the Company used proceeds of

13


the Offering to retire the Senior Secured Credit Facility.

Notes Payable to Banks

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

Capital Lease Obligations

The Company is liable to various vendors for several equipment leases. The carrying value of the assets was $5.3 million and $5.1 million as of September 30, 2011 and December 31, 2010, respectively.

5. Commitments and Contingencies

Debt and Lease Guaranty on Non-consolidated Entities

The Company has guaranteed $1.8 million of operating lease payments of certain non-consolidating surgical facilities. These operating leases typically have 10-year terms, with optional renewal periods. As of September 30, 2011, the Company has also guaranteed $1.4 million of debt of three 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 2011 and 2017.

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 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 the underlying 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 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

14


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 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.

6. Related Party Transactions
In addition to related party transactions discussed elsewhere in the notes to the accompanying consolidated financial statements, the 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.  The Company has prepaid this annual management fee and, as of September 30, 2011, had an asset of $893,000 that is included in prepaid expenses and other current assets. 

Concurrent with the Offering, the Company exchanged with affiliates of Crestview, affilates of The Northwestern Mutual Insurance Company and certain other holders of the Company's outstanding Toggle Notes, Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest of $3.1 million, for $88.5 million initial aggregate principal amount of the Company's PIK Exchangeable Notes. Effective September 9, 2011, the Company cancelled $9.0 million aggregate principal amount of its Senior Secured Notes held by affiliates of The Northwestern Mutual Insurance Company, plus accrued and unpaid interest, in exchange for the Company's issuance to such parties of $9.2 million aggregate principal amount of its PIK Exchangeable Notes. As a result of that exchange, the Company currently has $97.7 million aggregate principal amount of PIK Exchangeable Notes outstanding. As of September 30, 2011, the Company has accrued $2.1 million in interest on the PIK Exchangeable Notes in other accrued expenses. See Note 4 for further discussion of the PIK Exchangeable Notes.

As of September 30, 2011 and December 31, 2010, the Company had $633,000 and $575,000, respectively, payable to physicians at one of the Company's physician networks as a result of cash receipts in excess of expenditures for the related facilities. These amounts are included in other accrued expenses.

7. 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 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.


15


SYMBION, INC.
CONSOLIDATING BALANCE SHEET
September 30, 2011
(Unaudited, in thousands)
 
Parent Issuer
 
Guarantor Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
14,615

 
$
22,379

 
$
38,853

 
$
—

 
$
75,847

Accounts receivable, net
—

 
435

 
59,647

 
—

 
60,082

Inventories
—

 
359

 
12,819

 
—

 
13,178

Prepaid expenses and other current assets
1,544

 
12

 
11,415

 
—

 
12,971

Due from related parties
2,319

 
45,326

 
—

 
(47,645
)
 
—

Current assets of discontinued operations
—

 
—

 
166

 
—

 
166

Total current assets
18,478

 
68,511

 
122,900

 
(47,645
)
 
162,244

Property and equipment, net
632

 
2,111

 
130,081

 
—

 
132,824

Goodwill and intangible assets
653,576

 
—

 
—

 
—

 
653,576

Investments in and advances to affiliates
84,259

 
14,892

 
—

 
(81,038
)
 
18,113

Other assets
13,312

 
—

 
2,166

 
—

 
15,478

Long-term assets of discontinued operations
—

 
—

 
—

 
—

 
—

Total assets
$
770,257

 
$
85,514

 
$
255,147

 
$
(128,683
)
 
$
982,235

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
155

 
$
119

 
$
11,994

 
$
—

 
$
12,268

Accrued payroll and benefits
415

 
194

 
9,891

 
—

 
10,500

Due to related parties
—

 
—

 
47,645

 
(47,645
)
 
—

Other accrued expenses
18,081

 
320

 
12,169

 
—

 
30,570

Current maturities of long-term debt
62

 
60

 
9,189

 
—

 
9,311

Current liabilities of discontinued operations
—

 
—

 
62

 
—

 
62

Total current liabilities
18,713

 
693

 
90,950

 
(47,645
)
 
62,711

Long-term debt, less current maturities
528,379

 
71

 
16,877

 
—

 
545,327

Deferred income tax payable
56,452

 
—

 
—

 
—

 
56,452

Other liabilities
(98
)
 
491

 
71,381

 
—

 
71,774

Long-term liabilities of discontinued operations
—

 
—

 
—

 
—

 
—

Noncontrolling interests - redeemable
—

 
—

 
35,273

 
—

 
35,273

Total Symbion, Inc. stockholders' equity
166,811

 
84,259

 
(3,221
)
 
(81,038
)
 
166,811

Noncontrolling interests - non-redeemable
—

 
—

 
43,887

 
—

 
43,887

Total equity
166,811

 
84,259

 
40,666

 
(81,038
)
 
210,698

Total liabilities and stockholders' equity
$
770,257

 
$
85,514

 
$
255,147

 
$
(128,683
)
 
$
982,235



16


SYMBION, INC.
CONSOLIDATING BALANCE SHEET
December 31, 2010
(in thousands)
 
Parent Issuer
 
Guarantor Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
14,849

 
$
27,700

 
$
30,909

 
$
—

 
$
73,458

Accounts receivable, net
—

 
554

 
61,271

 
—

 
61,825

Inventories
—

 
159

 
10,639

 
—

 
10,798

Prepaid expenses and other current assets
1,203

 
78

 
7,355

 
—

 
8,636

Due from related parties
2,285

 
43,798

 
—

 
(46,083
)
 
—

Current assets of discontinued operations
—

 
—

 
1,003

 
—

 
1,003

Total current assets
18,337

 
72,289

 
111,177

 
(46,083
)
 
155,720

Property and equipment, net
1,005

 
2,329

 
137,298

 
—

 
140,632

Goodwill and intangible assets
646,554

 
—

 
—

 
—

 
646,554

Investments in and advances to affiliates
96,761

 
23,711

 
5,903

 
(108,551
)
 
17,824

Other assets
7,979

 
1

 
1,653

 
—

 
9,633

Long-term assets of discontinued operations
—

 
—

 
34

 
—

 
34

Total assets
$
770,636

 
$
98,330

 
$
256,065

 
$
(154,634
)
 
$
970,397

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
15

 
$
103

 
$
12,278

 
$
—

 
$
12,396

Accrued payroll and benefits
2,014

 
138

 
7,938

 
—

 
10,090

Due to related parties
—

 
—

 
46,083

 
(46,083
)
 
—

Other accrued expenses
15,906

 
331

 
9,577

 
—

 
25,814

Current maturities of long-term debt
21,783

 
42

 
7,370

 
—

 
29,195

Current liabilities of discontinued operations
—

 
—

 
923

 
—

 
923

Total current liabilities
39,718

 
614

 
84,169

 
(46,083
)
 
78,418

Long-term debt, less current maturities
487,994

 
84

 
19,339

 
—

 
507,417

Deferred income tax payable
51,307

 
—

 
2

 
—

 
51,309

Other liabilities
288

 
871

 
67,791

 
—

 
68,950

Long-term liabilities of discontinued operations
—

 
—

 
22

 
—

 
22

Noncontrolling interest - redeemable
—

 
—

 
36,030

 
—

 
36,030

Total Symbion, Inc. stockholders' equity
191,329

 
96,761

 
5,887

 
(108,551
)
 
185,426

Noncontrolling interests - nonredeemable
—

 
—

 
42,825

 
—

 
42,825

Total equity
191,329

 
96,761

 
48,712

 
(108,551
)
 
228,251

Total liabilities and stockholders' equity
$
770,636

 
$
98,330

 
$
256,065

 
$
(154,634
)
 
$
970,397




17


SYMBION, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2011
(Unaudited, in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Revenues
$
8,451

 
$
2,430

 
$
103,569

 
$
(3,725
)
 
$
110,725

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
1,149

 
30,311

 
—

 
31,460

Supplies
—

 
245

 
25,305

 
—

 
25,550

Professional and medical fees
—

 
229

 
8,509

 
—

 
8,738

Rent and lease expense
—

 
182

 
6,096

 
—

 
6,278

Other operating expenses
—

 
100

 
8,361

 
—

 
8,461

Cost of revenues
—

 
1,905

 
78,582

 
—

 
80,487

General and administrative expense
5,400

 
—

 
—

 
—

 
5,400

Depreciation and amortization
167

 
66

 
4,921

 
—

 
5,154

Provision for doubtful accounts
—

 
34

 
2,640

 
—

 
2,674

Income on equity investments
—

 
(515
)
 
—

 
—

 
(515
)
Gains and losses on disposal of long-lived assets and debt extinguishment, net
136

 
—

 
—

 
—

 
136

Management fees
—

 
—

 
3,725

 
(3,725
)
 
—

Equity in earnings of affiliates
(5,684
)
 
(4,744
)
 
—

 
10,428

 
—

Total operating expenses
19

 
(3,254
)
 
89,868

 
6,703

 
93,336

Operating income
8,432

 
5,684

 
13,701

 
(10,428
)
 
17,389

Interest expense, net
(12,952
)
 
—

 
(1,385
)
 
—

 
(14,337
)
(Loss) income before taxes and discontinued operations
(4,520
)
 
5,684

 
12,316

 
(10,428
)
 
3,052

Provision for income taxes
1,849

 
—

 
73

 
—

 
1,922

(Loss) income from continuing operations
(6,369
)
 
5,684

 
12,243

 
(10,428
)
 
1,130

Loss from discontinued operations,
net of taxes
—

 
—

 
(404
)
 
—

 
(404
)
Net (loss) income
(6,369
)
 
5,684

 
11,839

 
(10,428
)
 
726

Net income attributable to noncontrolling interests
—

 
—

 
(7,095
)
 
—

 
(7,095
)
Net (loss) income attributable to Symbion, Inc.
$
(6,369
)
 
$
5,684

 
$
4,744

 
$
(10,428
)
 
$
(6,369
)

18


SYMBION, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2011
(Unaudited, in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Revenues
$
25,200

 
$
4,788

 
$
312,924

 
$
(11,322
)
 
$
331,590

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
2,264

 
90,759

 
—

 
93,023

Supplies
—

 
449

 
77,402

 
—

 
77,851

Professional and medical fees
—

 
460

 
25,496

 
—

 
25,956

Rent and lease expense
—

 
378

 
18,176

 
—

 
18,554

Other operating expenses
—

 
196

 
24,346

 
—

 
24,542

Cost of revenues
—

 
3,747

 
236,179

 
—

 
239,926

General and administrative expense
16,812

 
—

 
—

 
—

 
16,812

Depreciation and amortization
510

 
127

 
14,874

 
—

 
15,511

Provision for doubtful accounts
—

 
70

 
5,791

 
—

 
5,861

Income on equity investments
—

 
(1,171
)
 
—

 
—

 
(1,171
)
Gains and losses on disposal of long-lived assets and debt extinguishment, net
4,942

 
—

 
—

 
—

 
4,942

Management fees
—

 
—

 
11,322

 
(11,322
)
 
—

Equity in earnings of affiliates
(24,056
)
 
(22,041
)
 
—

 
46,097

 
—

Total operating expenses
(1,792
)
 
(19,268
)
 
268,166

 
34,775

 
281,881

Operating income
26,992

 
24,056

 
44,758

 
(46,097
)
 
49,709

Interest expense, net
(40,058
)
 
—

 
335

 
—

 
(39,723
)
(Loss) income before taxes and discontinued operations
(13,066
)
 
24,056

 
45,093

 
(46,097
)
 
9,986

Provision for income taxes
4,395

 
—

 
497

 
—

 
4,892

(Loss) income from continuing operations
(17,461
)
 
24,056

 
44,596

 
(46,097
)
 
5,094

Loss from discontinued operations,
net of taxes
—

 
—

 
(492
)
 
—

 
(492
)
Net (loss) income
(17,461
)
 
24,056

 
44,104

 
(46,097
)
 
4,602

Net income attributable to noncontrolling interests
—

 
—

 
(22,063
)
 
—

 
(22,063
)
Net (loss) income attributable to Symbion, Inc.
$
(17,461
)
 
$
24,056

 
$
22,041

 
$
(46,097
)
 
$
(17,461
)



19


SYMBION, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 2010
(Unaudited, in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Revenues
$
8,760

 
$
2,516

 
$
97,498

 
$
(3,953
)
 
$
104,821

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
1,117

 
28,369

 
—

 
29,486

Supplies
—

 
242

 
23,767

 
—

 
24,009

Professional and medical fees
—

 
283

 
7,508

 
—

 
7,791

Rent and lease expense
—

 
186

 
5,889

 
—

 
6,075

Other operating expenses
—

 
120

 
7,812

 
—

 
7,932

Cost of revenues
—

 
1,948

 
73,345

 
—

 
75,293

General and administrative expense
5,521

 
—

 
—

 
—

 
5,521

Depreciation and amortization
168

 
84

 
4,756

 
—

 
5,008

Provision for doubtful accounts
—

 
47

 
1,978

 
—

 
2,025

Income on equity investments
—

 
(669
)
 
—

 
—

 
(669
)
Gains and losses on disposal of long-lived assets, net
(3,572
)
 
—

 
—

 
—

 
(3,572
)
Litigation settlements, net
—

 
—

 
—

 
—

 
—

Management fees
—

 
—

 
3,953

 
(3,953
)
 
—

Equity in earnings of affiliates
(4,150
)
 
(3,044
)
 
—

 
7,194

 
—

Total operating expenses
(2,033
)
 
(1,634
)
 
84,032

 
3,241

 
83,606

Operating income
10,793

 
4,150

 
13,466

 
(7,194
)
 
21,215

Interest expense, net
(8,808
)
 
—

 
(3,860
)
 
—

 
(12,668
)
Income (loss) before taxes and discontinued operations
1,985

 
4,150

 
9,606

 
(7,194
)
 
8,547

Provision for income taxes
1,702

 
—

 
59

 
—

 
1,761

Income (loss) from continuing operations
283

 
4,150

 
9,547

 
(7,194
)
 
6,786

Loss from discontinued operations,
net of taxes
—

 
—

 
(310
)
 
—

 
(310
)
Net income (loss)
283

 
4,150

 
9,237

 
(7,194
)
 
6,476

Net income attributable to noncontrolling interests
—

 
—

 
(6,193
)
 
—

 
(6,193
)
Net income (loss) attributable to Symbion, Inc.
$
283

 
$
4,150

 
$
3,044

 
$
(7,194
)
 
$
283





20


SYMBION, INC.
CONSOLIDATING STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2010
(Unaudited, in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Revenues
$
26,032

 
$
7,486

 
$
269,851

 
$
(11,540
)
 
$
291,829

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
3,452

 
79,460

 
—

 
82,912

Supplies
—

 
608

 
64,645

 
—

 
65,253

Professional and medical fees
—

 
815

 
19,605

 
—

 
20,420

Rent and lease expense
—

 
569

 
17,797

 
—

 
18,366

Other operating expenses
—

 
318

 
21,845

 
—

 
22,163

Cost of revenues
—

 
5,762

 
203,352

 
—

 
209,114

General and administrative expense
16,690

 
—

 
—

 
—

 
16,690

Depreciation and amortization
513

 
227

 
13,264

 
—

 
14,004

Provision for doubtful accounts
—

 
139

 
5,086

 
—

 
5,225

Income on equity investments
—

 
(2,173
)
 
—

 
—

 
(2,173
)
Gain and losses on disposal of long-lived assets, net
(2,420
)
 
—

 
—

 
—

 
(2,420
)
Litigation settlements, net
(44
)
 
—

 
—

 
—

 
(44
)
Management fees
—

 
—

 
11,540

 
(11,540
)
 
—

Equity in earnings of affiliates
(16,739
)
 
(13,207
)
 
—

 
29,946

 
—

Total operating expenses
(2,000
)
 
(9,252
)
 
233,242

 
18,406

 
240,396

Operating income
28,032

 
16,738

 
36,609

 
(29,946
)
 
51,433

Interest expense, net
(30,545
)
 
1

 
(5,066
)
 
—

 
(35,610
)
(Loss) income before taxes and discontinued operations
(2,513
)
 
16,739

 
31,543

 
(29,946
)
 
15,823

Provision for income taxes
3,910

 
—

 
70

 
—

 
3,980

(Loss) income from continuing operations
(6,423
)
 
16,739

 
31,473

 
(29,946
)
 
11,843

Loss from discontinued operations,
net of taxes
—

 
—

 
(672
)
 
—

 
(672
)
Net (loss) income
(6,423
)
 
16,739

 
30,801

 
(29,946
)
 
11,171

Net income attributable to noncontrolling interests
—

 
—

 
(17,594
)
 
—

 
(17,594
)
Net (loss) income attributable to Symbion, Inc.
$
(6,423
)
 
$
16,739

 
$
13,207

 
$
(29,946
)
 
$
(6,423
)


21


SYMBION, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2011
(Unaudited, in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(17,461
)
 
$
24,056

 
$
44,104

 
$
(46,097
)
 
$
4,602

Adjustments to reconcile net (loss) income to net cash from operating activities:
 
 
 
 
 
 
 
 
 
Loss from discontinued operations
—

 
—

 
492

 
—

 
492

Depreciation and amortization
510

 
127

 
14,874

 
—

 
15,511

Amortization of deferred financing costs and debt issuance discount
1,902

 
—

 
—

 
—

 
1,902

Non-cash payment-in-kind interest option
17,797

 
—

 
—

 
—

 
17,797

Non-cash stock option compensation expense
1,002

 
—

 
—

 
—

 
1,002

Non-cash recognition of other comprehensive income into earnings
665

 
—

 
—

 
—

 
665

Non-cash losses on disposal of long-lived assets
191

 
—

 
—

 
—

 
191

Loss on debt extinguishment
4,751

 
—

 
—

 
—

 
4,751

Deferred income taxes
4,576

 
—

 
—

 
—

 
4,576

Equity in earnings of affiliates
(24,056
)
 
(22,041
)
 
—

 
46,097

 
—

Equity in earnings of affiliates, net of distributions received
—

 
342

 
—

 
—

 
342

Provision for doubtful accounts
—

 
70

 
5,791

 
—

 
5,861

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

 
—

 
(2,889
)
 
—

 
(2,889
)
Other assets and liabilities
37,611

 
(7,875
)
 
(24,478
)
 
—

 
5,258

Net cash provided by (used in) operating activities - continuing operations
27,488

 
(5,321
)
 
37,894

 
—

 
60,061

Net cash provided by (used in) operating activities
27,488

 
(5,321
)
 
37,894

 
—

 
60,061

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Payments for acquisitions, net of cash acquired
(6,753
)
 
—

 
—

 
—

 
(6,753
)
Purchases of property and equipment, net
(64
)
 
—

 
(5,887
)
 
—

 
(5,951
)
Payments from unit activity
—

 
—

 
—

 
—

 
—

Change in other assets
—

 
—

 
(213
)
 
—

 
(213
)
Net cash used in investing activities - continuing operations
(6,817
)
 
—

 
(6,100
)
 
—

 
(12,917
)
Net cash used in investing activities
(6,817
)
 
—

 
(6,100
)
 
—

 
(12,917
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
(348,702
)
 
—

 
(5,299
)
 
—

 
(354,001
)
Proceeds from debt issuances
342,526

 
—

 
4,977

 
—

 
347,503

Distributions to noncontrolling interest partners
—

 
—

 
(25,107
)
 
—

 
(25,107
)
Payments for debt issuance costs
(11,929
)
 
—

 
—

 
—

 
(11,929
)
Proceeds from unit activity
(2,800
)
 
—

 
—

 
—

 
(2,800
)
Other financing activities
—

 
—

 
1,579

 
—

 
1,579

Net cash used in financing activities - continuing operations
(20,905
)
 
—

 
(23,850
)
 
—

 
(44,755
)
Net cash used in financing activities
(20,905
)
 
—

 
(23,850
)
 
—

 
(44,755
)
Net (decrease) increase in cash and cash equivalents
(234
)
 
(5,321
)
 
7,944

 
—

 
2,389

Cash and cash equivalents at beginning of period
14,849

 
27,700

 
30,909

 
—

 
73,458

Cash and cash equivalents at end of period
$
14,615

 
$
22,379

 
$
38,853

 
$
—

 
$
75,847


22


SYMBION, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2010
(Unaudited, in thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(6,423
)
 
$
16,739

 
$
30,801

 
$
(29,946
)
 
$
11,171

Adjustments to reconcile net (loss) income to net cash from operating activities:
 
 
 
 
 
 
 
 
 
Loss from discontinued operations
—

 
—

 
672

 
—

 
672

Depreciation and amortization
513

 
227

 
13,264

 
—

 
14,004

Amortization of deferred financing costs
1,501

 
—

 
—

 
—

 
1,501

Non-cash payment-in-kind interest option
19,264

 
—

 
—

 
—

 
19,264

Non-cash stock option compensation expense
1,002

 
—

 
—

 
—

 
1,002

Non-cash recognition of other comprehensive income into earnings
2,478

 
—

 
—

 
—

 
2,478

Non-cash losses on disposal of long-lived assets
(2,420
)
 
—

 
—

 
—

 
(2,420
)
Non-cash credit risk adjustment of financial instruments
189

 
—

 
—

 
—

 
189

Deferred income taxes
5,471

 
—

 
—

 
—

 
5,471

Equity in earnings of affiliates
(16,739
)
 
(13,207
)
 
—

 
29,946

 
—

Equity in earnings of affiliates, net of distributions received
—

 
(57
)
 
—

 
—

 
(57
)
Provision for doubtful accounts
—

 
139

 
5,086

 
—

 
5,225

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

 
—

 
(4,871
)
 
—

 
(4,871
)
Other assets and liabilities
(57,226
)
 
48,993

 
5,948

 
—

 
(2,285
)
Net cash (used in) provided by operating activities - continuing operations
(52,390
)
 
52,834

 
50,900

 
—

 
51,344

Net cash used in operating activities - discontinued operations
—

 
—

 
(98
)
 
—

 
(98
)
Net cash (used in) provided by operating activities
(52,390
)
 
52,834

 
50,802

 
—

 
51,246

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Payments for acquisitions, net of cash acquired
—

 
(43,830
)
 
—

 
—

 
(43,830
)
Purchases of property and equipment, net
(139
)
 
—

 
(5,141
)
 
—

 
(5,280
)
Payments from unit activity
(55
)
 
—

 
—

 
—

 
(55
)
Change in other assets
—

 
(375
)
 
—

 
—

 
(375
)
Net cash used in investing activities - continuing operations
(194
)
 
(44,205
)
 
(5,141
)
 
—

 
(49,540
)
Net cash used in investing activities - discontinued operations
—

 
—

 
(13
)
 
—

 
(13
)
Net cash used in investing activities
(194
)
 
(44,205
)
 
(5,154
)
 
—

 
(49,553
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
(6,025
)
 
—

 
(9,681
)
 
—

 
(15,706
)
Proceeds from debt issuances
56,261

 
—

 
714

 
—

 
56,975

Distributions to noncontrolling interest partners
—

 
—

 
(17,914
)
 
—

 
(17,914
)
Proceeds from unit activity
2,140

 
—

 
—

 
—

 
2,140

Other financing activities
—

 
—

 
(1,673
)
 
—

 
(1,673
)
Net cash provided by (used in) financing activities - continuing operations
52,376

 
—

 
(28,554
)
 
—

 
23,822

Net cash provided by financing activities - discontinued operations
—

 
—

 
76

 
—

 
76

Net cash provided by (used in) financing activities
52,376

 
—

 
(28,478
)
 
—

 
23,898

Net (decrease) increase in cash and cash equivalents
(208
)
 
8,629

 
17,170

 
—

 
25,591

Cash and cash equivalents at beginning of period
11,272

 
14,992

 
21,656

 
—

 
47,920

Cash and cash equivalents at end of period
$
11,064

 
$
23,621

 
$
38,826

 
$
—

 
$
73,511


23


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements, which are based on our current expectations, estimates and assumptions about future events. All statements other than statements of current or historical fact contained in this report, including statements regarding our future financial position, business strategy, budgets, effective tax rate, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” and similar expressions are generally intended to identify forward-looking statements. These statements involve risks, uncertainties and other factors that may cause actual results to differ from the expectations expressed in the statements. Many of these factors are beyond our ability to control or predict.  These factors include, without limitation:

•
our substantial leverage and its impact on our ability to raise additional capital, react to changes in the economy and our industry and meet our obligations under our debt instruments;
•
uncertainty associated with the implementation of legislative and regulatory initiatives relating to health care reform and healthcare spending;
•
the risk that payments from third-party payors, including government health care programs, decrease or remain constant and our costs increase;
•
the status of the federal economy and its impact on the health care sector;
•
our dependence upon payments from third-party payors, including governmental health care programs and managed care organizations;
•
our ability to acquire and develop additional surgical facilities on favorable terms and to integrate their business operations successfully;
•
our ability to enter into strategic alliances with health care systems and other third-party payors that are leaders in their markets;
•
efforts to regulate the construction, acquisition or expansion of health care facilities;
•
our ability to attract and maintain good relationships with physicians who use our facilities;
•
our ability to enhance operating efficiencies at our surgical facilities and to control costs as the volume of cases performed at our facilities changes;
•
our ability to comply with applicable laws and regulations regulating the operation of our surgical facilities, including physician self-referral laws and laws relating to illegal remuneration under the Medicare, Medicaid or other governmental programs;
•
our ability to comply with applicable corporate governance and financial reporting standards;
•
legislative changes restricting physician ownership of hospitals;
•
the risk of changes to laws governing the corporate practice of medicine that may require us to restructure some of our relationships, which could result in a significant loss of revenues, require us to purchase some or all of the noncontrolling interests, and divert other resources;
•
risks related to the nature of our corporate structure, including the level of control exercised by Crestview;
•
our legal responsibility to the holders of ownership interests in the entities through which we own surgical facilities, which may conflict with the interests of our noteholders and prevent us from acting solely in our own bests interests or the interests of our noteholders;
•
our ability to obtain the capital required to operate our business and fund acquisitions and developments on favorable terms;
•
the intense competition for physicians, strategic relationships, acquisitions and managed care contracts, which may result in a decline in our revenues, profitability and market share;
•
the geographic concentration of our operations in certain states, which makes us particularly sensitive to regulatory, economic and other conditions in those states;
•
our dependence on our senior management; and
•
other risks and uncertainties described in this report or detailed from time to time in our filings with the SEC.

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report.
These forward-looking statements speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

We own and operate a national network of short stay surgical facilities in 28 states. Our surgical facilities, which include ambulatory surgery centers ("ASCs") and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics, pain management, gastroenterology and ophthalmology.  Some of our hospitals, which include surgical and acute care hospitals also offer additional services, such as diagnostic imaging, pharmacy, laboratory, obstetrics, physical therapy and wound care.
We own our surgical facilities in partnership with physicians and, in some cases, healthcare systems in the markets and communities we serve.  We apply a market-based approach in structuring our partnerships with individual market dynamics driving the

24


structure.  We believe this approach aligns our interests with those of our partners.

As of November 10, 2011, we owned and operated 55 surgical facilities, including 49 ASCs and six surgical hospitals.  We also managed eight additional ASCs.  We owned a majority interest in 33 of the 55 surgical facilities and consolidated 49 facilities for financial reporting purposes.   In addition to our surgical facilities, we also manage one physician clinic in a market in which we operate an ASC.
 
We have benefited from both the growth in overall outpatient surgery cases as well as the migration of surgical procedures from the hospital to the surgical facility setting.  Advancements in medical technology, such as lasers, arthroscopy and enhanced endoscopic techniques, have reduced the trauma of surgery and the amount of recovery time required by patients following a surgical procedure.  Improvements in anesthesia also have shortened the recovery time for many patients and have reduced post-operative side effects such as pain, nausea and drowsiness.  These medical advancements have enabled more patients to undergo surgery in a surgical facility setting.

On June 14, 2011, we issued $350.0 million aggregate principal amount of 8.00% senior secured notes due 2016 (the "Senior Secured Notes") at a price of 98.492% (the "Offering"). We used the net proceeds from the sale of the Senior Secured Notes, together with cash on our balance sheet, to repay in full, all outstanding borrowings under our $350.0 million existing senior secured credit facilities and to repurchase $70.8 million aggregate principal amount of our 11.00%/11.75% senior PIK toggle notes due 2015 (the "Toggle Notes"), at par plus accrued and unpaid interest, from certain holders of Toggle Notes. Simultaneous with the closing of the Offering, we entered into a new $50.0 million senior secured super-priority revolving credit facility (the "New Credit Facility") and issued $88.5 million aggregate principal amount of 8.00% senior PIK exchangeable notes due 2017 (the "PIK Exchangeable Notes") to affiliates of Crestview and certain other holders of Toggle Notes in exchange for $85.4 million aggregate principal amount of our existing Toggle Notes, at par plus accrued and unpaid interest. Effective September 9, 2011, we cancelled $9.0 million aggregate principal amount of our Senior Secured Notes held by certain holders of such notes, plus accrued and unpaid interest, in exchange for our issuance to such parties of an additional $9.2 million aggregate principal amount of our PIK Exchangeable Notes.

We continue to focus on improving the performance of our same store facilities and acquiring facilities on a selective basis that we believe have favorable growth potential. Effective August 1, 2011 we acquired a 56.0% ownership interest in an ambulatory surgery center and a 50.0% ownership interest and management rights in a 20-bed surgical hospital located in Great Falls, Montana. For periods subsequent to the acquisition, we consolidate the ambulatory surgery center for financial reporting purposes and account for the surgical hospital as an equity method for financial reporting purposes. In addition, we acquired the rights to manage a medical clinic in Great Falls, Montana consisting of 45 multi-specialty physicians who are partners in the surgical facilities acquired. The aggregate purchase price was $5.2 million plus the assumption of debt of approximately $289,000.

Effective January 7, 2011, we acquired an incremental ownership interest of 3.5% at our surgical facility located in Chesterfield, Missouri for a purchase price of $1.8 million. Additionally, on July 1, 2011, we acquired an additional incremental ownership interest of 2.0% in this facility for a purchase price of $1.0 million. Both transactions were financed with cash from operating activities. As of November 11, 2011, we owned a 55.5% ownership interest in this facility.

Effective September 30, 2011, we completed a scheduled disposal of a physician network which included a surgical facility we operated. We received aggregate proceeds of $481,000. We recorded a loss on the disposal of $251,000.

Effective October 1, 2011, we acquired an oncology practice, which is operated within our existing facility located in Idaho Falls, Idaho. The purchase price of the acquisition was $3.5 million, consisting of $2.7 million of cash from operations and approximately $800,000 in the form of equity ownership in our facility located in Idaho Falls, Idaho. Because we paid the cash consideration for this acquisition on September 30, 2011, the $2.7 million in cash paid for this acquisition is included as a deposit in the accompanying condensed consolidated balance sheet, classified as other assets at September 30, 2011.

Revenues

Our revenues consist of patient service revenues, physician service revenues and other service revenues. Our patient service revenues relate to fees charged for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes. Physician service revenues are revenues from our physician network consisting of reimbursed expenses, plus participation in the excess of revenues over expenses of the physician network, as provided for in our service agreements with our physician networks. Other service revenues consist of management and administrative service fees derived from the non-consolidated facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest, and management services we provide to physician networks for which we are not required to provide capital or additional assets.


25


The following tables summarize our revenues by service type as a percentage of revenues for the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Patient service revenues
97
%
 
97
%
 
97
%
 
97
%
Physician service revenues
1

 
1

 
2

 
1

Other service revenues
2

 
2

 
1

 
2

Total
100
%
 
100
%
 
100
%
 
100
%

Payor Mix

The following table sets forth by type of payor the percentage of our patient service revenues generated in the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Private insurance
66
%
 
67
%
 
67
%
 
68
%
Government
26

 
26

 
26

 
26

Self-pay
4

 
4

 
4

 
4

Other
4

 
3

 
3

 
2

Total
100
%
 
100
%
 
100
%
 
100
%

Case Mix

We primarily operate multi-specialty facilities where physicians perform a variety of procedures in various specialties, including orthopedics, pain management, gastroenterology and ophthalmology, among others. We believe this diversification helps to protect us from any adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume.

The following table sets forth the percentage of cases in each specialty performed at surgical facilities which we consolidate for financial reporting purposes for the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Ear, nose and throat
5.2
%
 
5.2
%
 
5.8
%
 
5.6
%
Gastrointestinal
29.6

 
29.3

 
29.5

 
29.4

General surgery
4.5

 
4.2

 
4.1

 
4.1

Obstetrics/gynecology
3.0

 
2.9

 
2.9

 
2.8

Ophthalmology
15.3

 
15.7

 
15.2

 
16.1

Orthopedic
17.0

 
17.2

 
17.2

 
17.1

Pain management
14.6

 
14.7

 
14.3

 
14.0

Plastic surgery
3.3

 
3.1

 
3.4

 
3.3

Other
7.5

 
7.7

 
7.6

 
7.6

Total
100
%
 
100
%
 
100
%
 
100
%

Case Growth

Same Store Information

We define same store facilities as those facilities that were operational throughout either the applicable three or nine months ended September 30, 2011 and 2010. The following same store facility table includes both consolidated surgical facilities from continuing operations whose results are reported in our consolidated revenue and non-consolidated surgical facilities whose results are not reported in our consolidated revenue, as we account for these surgical facilities using the equity method. This same store facilities table is presented to allow comparability to other companies in our industry for the periods indicated:

26


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Cases
62,929

 
64,110

 
179,732

 
184,839

Case growth
(1.8
)%
 
N/A

 
(2.8
)%
 
N/A

Net patient service revenue per case
$
1,870

 
$
1,772

 
$
1,500

 
$
1,507

Net patient service revenue per case growth
5.5
 %
 
N/A

 
(0.5
)%
 
N/A

Number of same store surgical facilities
53

 
N/A

 
51

 
N/A


The decrease in cases was primarily driven by the scheduled termination of an agreement with a health plan to utilize one of our same store facilities for a specified period of time, in addition to continuing weak economic conditions. Our same store results for the three months ended September 30, 2011 and 2010 include the results of our surgical hospital located in Idaho Falls, Idaho.

Consolidated Information

The following table sets forth information for all surgical facilities included in continuing operations that we consolidate for financial reporting purposes for the periods indicated. Accordingly, the table includes surgical facilities that we have acquired, developed or disposed of since January 1, 2010.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Cases
59,340

 
59,426

 
177,218

 
176,367

Case growth
(0.1
)%
 
N/A

 
0.5
%
 
N/A

Net patient service revenue per case
$
1,813

 
$
1,713

 
$
1,822

 
$
1,602

Net patient service revenue per case growth
5.8
 %
 
N/A

 
13.7
%
 
N/A

Number of consolidated surgical facilities
50

 
N/A

 
50

 
—


Sources of Revenue and Recent Regulatory Developments
 
We are dependent upon private and government third-party sources of payment for the services we provide. The amounts that our surgical facilities, physician network and physician clinic receive in payment for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid, and state and federal regulations and the cost containment and utilization decisions and reduced reimbursement schedules of third-party payors. The disclosure in this section is meant to supplement, and should be read in connection with, the disclosures set forth under the headings "Sources of Revenue" and "Governmental Regulation" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2010 and "Sources of Revenue and Recent Regulatory Developments" in Item 2 of our Quarterly Reports on Form 10-Q for the three months ended June 30, 2011 and March 31, 2011, respectively.
 
Health Care Reform
 
The Patient Protection and Affordable Care Act (the “Affordable Care Act”) and the Health Care and Education Reconciliation Act of 2010 (collectively with the Affordable Care Act, the “Acts”) were signed into law on March 23, 2010 and March 30, 2010, respectively, dramatically altering the U.S. health care system. The Acts are intended to provide coverage and access to substantially all Americans, to increase the quality of care provided, and to reduce the rate of growth in healthcare expenditures. The changes include, among other things, reducing payments to Medicare Advantage plans, expanding the Medicare program's use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, reducing Medicare and Medicaid payments, including disproportionate share payments, expanding Medicare and Medicaid eligibility, and expanding access to health insurance. As part of the effort to control or reduce health care spending, the Acts also contain a number of measures intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of recovery audit contractors in the Medicaid program and limitations on the Stark (physician self-referral) law exception that allows physicians to have ownership interests in hospitals (the “Whole Hospital Exception”). Among other things, the Acts prohibit hospitals from increasing the percentages of the total value of the ownership interests held in the hospital by physicians after March 23, 2010, as well as place severe restrictions on the ability of a hospital subject to the Whole Hospital Exception to add operating rooms, procedure rooms and beds. It is difficult to predict the impact the Acts will have on the Company's operations as a majority of the measures contained in the Acts do not take effect until 2014. The Acts could have an adverse effect on our financial condition and results of operations.

Medicare Reimbursement-Ambulatory Surgery Centers
 
Payments under the Medicare program to ASCs are made under a system whereby the Secretary of the Department of Health and Human Services determines payment amounts prospectively for various categories of medical services performed in ASCs. Beginning in 2008, the Centers for Medicare and Medicaid Services ("CMS") transitioned Medicare payments to ASCs to a system based upon the hospital outpatient prospective payment system ("OPPS"). On November 1, 2011, CMS issued a final rule to update the Medicare program's payment

27


policies and rates for ASCs for calendar year ("CY") 2012. The final rule applies a 1.6% increase to the ASC payment rate. CMS has also adopted a quality reporting program for ASCs for the first time. Beginning October 1, 2012, ASCs will be required to report five quality measures in order to be eligible for the full market basket update for the CY 2014 payment determination.

Medicare Reimbursement-Hospital Outpatient Services

Most outpatient services provided by hospitals are reimbursed by Medicare under the OPPS whereby hospital outpatient services are classified into groups called ambulatory payment classifications (“APCs”). CMS establishes a payment rate for each APC by multiplying the scaled relative weight for the APC by a conversion factor. The payment rate is further adjusted to reflect geographic wage differences. APC classifications and payment rates are reviewed and adjusted on an annual basis. If CMS' annual payment recalculations result in a decrease in APC payment rates for procedures performed in our hospitals, our revenues and profitability could be materially adversely affected.

On November 1, 2011, CMS issued the final OPPS rates for CY 2012. Under the final rule, the market basket update for CY 2012 for hospitals under the OPPS is a 1.9 % increase. Hospitals that submit quality data in accordance with the Hospital Outpatient Quality Data Reporting Program will receive the full 1.9% market basket update, while those that do not submit quality data will not receive the 1.5% market basket update and instead will be subject to a 0.1% decrease in reimbursement. As part of the final rule, CMS has decided to add three quality measures to the current list of 23 measures to be reported by hospital outpatient departments, bringing to 26 the total number of measures that are to be reported for purposes of the CY 2014 payment determination.

Accountable Care Organizations

On October 20, 2011, CMS issued a final rule relating to Accountable Care Organizations (“ACOs”). The regulations, promulgated pursuant to the Affordable Care Act, are intended to allow providers including hospitals, physicians, and other designated professionals and suppliers, to coordinate care for Medicare beneficiaries through ACOs. This shared savings program is intended to produce savings as a result of improved quality and operational efficiency. ACOs that achieve certain savings benchmarks and quality performance standards will be eligible to share in a portion of the amounts saved by the Medicare program. The final rule outlines certain key characteristics of an ACO, including the scope and length of an ACO's contract with CMS, the required governance of an ACO, the assignment of Medicare beneficiaries to an ACO, the payment models under which an ACO can share in cost savings, and the quality and other reporting requirements expected of an ACO. Under these regulations, patient and provider participation in ACOs will be voluntary. An interim final rule was also issued with respect to waivers of certain federal laws, including the Stark (physician self-referral) law, the anti-kickback statute, and certain provisions of the civil monetary penalty laws with respect to financial relationships for organizations operating as ACOs. Under these rules, we would be required to meet certain requirements in order to be eligible for such waivers. Providers may enroll in the ACO program on a rolling basis, with the first round of applications due in early 2012. An ACO may choose to have its initial participation agreement period begin on either April 1, 2012 or July 1, 2012. We do not yet know whether we will participate in ACOs and what the impact of participating or not participating in ACOs will be on our financial condition and results of operations.

Recovery Audit Contractors

Recovery Audit Contractors (“RACs”) are private companies contracting with CMS to identify overpayments and underpayments for services reimbursed by Medicare through post-payment reviews of Medicare providers and suppliers. The Affordable Care Act expanded the RAC program's scope to include Medicaid by requiring all states to establish programs to contract with RACs to audit payments to Medicaid providers. CMS had delayed implementation of this requirement for several months. However, on September 16, 2011, CMS published a final rule, requiring states to implement Medicaid RAC programs by January 1, 2012. We cannot quantify the financial impact of potential RAC Medicaid audits, but could incur expenses associated with responding to and challenging any audit, as well as costs of repayment of alleged overpayments.

Operating Margins

Our operating income margin for the three months ended September 30, 2011 decreased to 15.7% from 20.2% for the three months ended September 30, 2010. Included in our results for the 2010 period is a gain of $3.2 million resulting from our acquisition of an incremental, controlling ownership interest at our Chesterfield, Missouri facility. Excluding non-cash losses on disposals of $(136,000) for 2011 and gains of $403,000 for 2010, and the business combination remeasurement gains of $3.2 million recorded in 2010, our operating income margin decreased to 15.8% in 2011 from 16.8% in 2010. The decrease was attributable to a decrease in case volume primarily driven by volume weakness during the quarter, specifically in the month of July which was experienced across our system and throughout the industry. Our industry comparable same store case decline of 1.8% is representative of the volume weakness experienced during the quarter. Additionally, our case volume was impacted by a scheduled termination of an agreement with a health plan to utilize one of our facilities for a specified period of time. We are in the process of restructuring this facility. Our operating income margins are sensitive to volume changes due to certain fixed costs such as facility rent expense and minimum staffing requirements.

Acquisitions and Developments

Effective August 1, 2011 we acquired a 56.0% ownership interest in an ambulatory surgery center and a 50.0% ownership interest and management rights in a 20-bed surgical hospital located in Great Falls, Montana. For periods subsequent to the acquisition, we consolidate the ambulatory surgery center for financial reporting purposes and account for the surgical hospital as an equity method for

28


financial reporting purposes. In addition, we acquired the rights to manage a medical clinic in Great Falls, Montana consisting of 45 multi-specialty physicians who are partners in the surgical facilities acquired. The aggregate purchase price was $5.2 million plus the assumption of debt of approximately $289,000.
    
Effective July 1, 2011, we acquired an incremental ownership interest of 2.0% at our surgical facility located in Chesterfield, Missouri, for a purchase price of $1.0 million, financed with cash from operations. Subsequent to the acquisition, we owned 55.5% of this facility. We consolidate this surgical facility for financial reporting purposes.

Discontinued Operations and Divestitures
We disposed of four surgical facilities during 2010 which are classified as discontinued operations in the periods presented. In connection with one of our disposed facilities, we recorded an accrual of $1.7 million for future contractual obligations under a facility operating lease. As of September 30, 2011, the lease liability was $1.1 million. There were no future contractual obligations in connection with the divestiture of the other three facilities. The assets, liabilities, revenues, expenses and cash flows of the four facilities have been classified as discontinued operations for all periods presented.
Revenues, loss on operations before taxes, income tax provision, loss on sale, net of taxes and loss from discontinued operations, net of taxes, for the following periods indicated, were as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues
$
—

 
$
2,286

 
$
—

 
$
7,783

Loss on operations, before taxes
$
—

 
$
(308
)
 
$
—

 
$
(658
)
Income tax provision
$
—

 
$
(2
)
 
$
—

 
$
(3
)
Loss on sale, net of taxes
$
(404
)
 
$
—

 
$
(492
)
 
$
(11
)
Loss from discontinued operations, net of taxes
$
(404
)
 
$
(310
)
 
$
(492
)
 
$
(672
)

Results of Operations

The following table summarizes certain statements of operations items for each of the three and nine months ended September 30, 2011 and 2010. The table also shows the percentage relationship to revenues for the periods indicated:
 
Three Months Ended September 30,
 
2011
 
2010
 
Amount
 
% of Revenues
 
Amount
 
% of Revenues
 
(in thousands)
Revenues
$
110,725

 
100
 %
 
$
104,821

 
100
 %
Cost of revenues
80,487

 
72.7

 
75,293

 
71.8

General and administrative expense
5,400

 
4.9

 
5,521

 
5.3

Depreciation and amortization
5,154

 
4.7

 
5,008

 
4.8

Provision for doubtful accounts
2,674

 
2.4

 
2,025

 
1.9

Income on equity investments
(515
)
 
(0.5
)
 
(669
)
 
(0.6
)
Gains and losses on disposal of long-lived assets, net
136

 
0.1

 
(403
)
 
(0.4
)
Business combination remeasurement gains
—

 
—

 
(3,169
)
 
(3.0
)
Loss on debt extinguishment
—

 
—

 
—

 
—

   Total operating expenses
93,336

 
84.3

 
83,606

 
79.8

Operating income
17,389

 
15.7

 
21,215

 
20.2

Interest expense, net
(14,337
)
 
(12.9
)
 
(12,668
)
 
(12.0
)
Income before income taxes and discontinued operations
3,052

 
2.8

 
8,547

 
8.2

Provision for income taxes
1,922

 
1.7

 
1,761

 
1.7

Income from continuing operations
1,130

 
1.1

 
6,786

 
6.5

Loss on discontinued operations, net of taxes
(404
)
 
(0.4
)
 
(310
)
 
(0.3
)
Net income
726

 
0.7

 
6,476

 
6.2

Less: Net income attributable to noncontrolling interests
(7,095
)
 
(6.5
)
 
(6,193
)
 
(5.9
)
Net (loss) income attributable to Symbion, Inc.
$
(6,369
)
 
(5.8
)%
 
$
283

 
0.3
 %


29


 
Nine Months Ended September 30,
 
2011
 
2010
 
Amount
 
% of Revenues
 
Amount
 
% of Revenues
 
(in thousands)
Revenues
$
331,590

 
100
 %
 
$
291,829

 
100
 %
Cost of revenues
239,926

 
72.4

 
209,114

 
71.7

General and administrative expense
16,812

 
5.1

 
16,690

 
5.7

Depreciation and amortization
15,511

 
4.7

 
14,004

 
4.8

Provision for doubtful accounts
5,861

 
1.8

 
5,225

 
1.8

Income on equity investments
(1,171
)
 
(0.4
)
 
(2,173
)
 
(0.7
)
Gains and losses on disposal of long-lived assets, net
191

 
—

 
749

 
0.2

Business combination remeasurement gains
—

 
—

 
(3,169
)
 
(1.1
)
Litigation settlements, net
—

 
—

 
(44
)
 
—

Loss on debt extinguishment
4,751

 
1.4

 
—

 
—

   Total operating expenses
281,881

 
85.0

 
240,396

 
82.4

Operating income
49,709

 
15.0

 
51,433

 
17.6

Interest expense, net
(39,723
)
 
(12.0
)
 
(35,610
)
 
(12.2
)
Income before income taxes and discontinued operations
9,986

 
3.0

 
15,823

 
5.4

Provision for income taxes
4,892

 
1.5

 
3,980

 
1.4

Income from continuing operations
5,094

 
1.5

 
11,843

 
4.0

Loss on discontinued operations, net of taxes
(492
)
 
(0.1
)
 
(672
)
 
(0.2
)
Net income
4,602

 
1.4

 
11,171

 
3.8

Less: Net income attributable to noncontrolling interests
(22,063
)
 
(6.7
)
 
(17,594
)
 
(6.0
)
Net loss attributable to Symbion, Inc.
$
(17,461
)
 
(5.3
)%
 
$
(6,423
)
 
(2.2
)%

Three Months Ended September 30, 2011 Compared To Three Months Ended September 30, 2010

Overview. During the three months ended September 30, 2011, our revenues increased 5.6% to $110.7 million from $104.8 million for the three months ended September 30, 2010. We incurred a net loss attributable to Symbion, Inc. for the 2011 period of $(6.4) million compared to net income of $283,000 for the 2010 period. Our financial results for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 reflect the addition of one surgical facility which we consolidate for financial reporting purposes and one surgical facility which we account for using the equity method.

Revenues. Revenues for the three months ended September 30, 2011 compared to the three months ended September 30, 2010 were as follows (in thousands):
 
2011
 
2010
 
Dollar
Variance
 
Percent
Variance
Patient service revenues
$
107,573

 
$
101,781

 
$
5,792

 
5.7
%
Physician service revenues
1,553

 
1,489

 
64

 
4.3

Other service revenues
1,599

 
1,551

 
48

 
3.1

Total revenues
$
110,725

 
$
104,821

 
$
5,904

 
5.6
%

Patient service revenues increased 5.7% for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. This increase is attributable to surgical facilities and additional incremental, controlling ownership acquired since July 1, 2010. In addition, this increase is attributable to growth at our surgical hospitals, including an increase in net patient revenue per case of 5.8% due to an increase in higher acuity cases performed at these facilities. The increase in net patient revenue per case was offset by a 0.1% decrease in case volume primarily driven by volume weakness during the quarter, specifically in the month of July which was experienced across our system and throughout the industry. Our industry comparable same store case decline of 1.8% is representative of the volume weakness experienced during the quarter. Additionally, our case volume was impacted by a scheduled termination of an agreement with a health plan to utilize one of our facilities for a specified period of time. We are in the process of restructuring this facility.
Cost of Revenues. Cost of revenues for the three months ended September 30, 2011 was $80.5 million compared to $75.3 million for the three months ended September 30, 2010. This increase is attributable to surgical facilities and additional incremental, controlling ownership acquired since July 1, 2010. In addition, this increase is attributable to growth at our surgical hospitals. As a percentage of total revenues, cost of revenues increased to 72.7% for the 2011 period compared to 71.8% for the 2010 period. This increase in cost of revenues as a percentage of total revenues was primarily driven by volume weakness during the quarter. Our cost of revenues are sensitive to volume changes due to certain fixed costs such as facility rent expense and minimum staffing requirements.
 

30


  
General and Administrative Expense. General and administrative expense decreased to $5.4 million for the three months ended September 30, 2011 compared to $5.5 million for the three months ended September 30, 2010. As a percentage of revenues, general and administrative expense decreased to 4.9% for the 2011 period compared to 5.3% for the 2010 period. This decrease is primarily attributable to our leveraging of corporate overhead costs while continuing to increase revenue through recent acquisitions.

Depreciation and Amortization. Depreciation and amortization expense increased to $5.2 million for the three months ended September 30, 2011 compared to $5.0 million for the three months ended September 30, 2010. As a percentage of revenues, depreciation and amortization expense decreased to 4.7% for the 2011 period compared to 4.8% for the 2010 period.

Provision for Doubtful Accounts. The provision for doubtful accounts increased to $2.7 million for the three months ended September 30, 2011 compared to $2.0 million for the three months ended September 30, 2010. As a percentage of revenues, the provision for doubtful accounts increased to 2.4% for the 2011 period from 1.9% for the 2010 period. The increase related to specific accounts reserved according to our policy for recording bad debt allowances during the quarter, most of which we anticipate collecting in the fourth quarter.

Operating Income. Our operating income decreased to $17.4 million for the three months ended September 30, 2011 compared to $21.2 million, or $18.0 million excluding the business combination remeasurement gains of $3.2 million, for the three months ended September 30, 2010. This decrease is primarily attributable to our decrease in case volume during the 2011 period. Our operating income is sensitive to volume changes due to certain fixed costs such as facility rent expense and minimum staffing requirements. During the 2011 period, we experienced an increase in net patient revenue per case due to an increase in higher acuity cases performed at our surgical hospitals.

Interest Expense, Net of Interest Income. Interest expense, net of interest income, increased to $14.3 million for the three months ended September 30, 2011 compared to $12.7 million for the three months ended September 30, 2010. This increase is primarily attributable to the increase in long-term debt due to our PIK elections and a higher interest rate on our Senior Secured Notes compared to our previous variable rate Senior Secured Credit Facility.

Provision for Income Taxes.  The provision for income taxes increased to $1.9 million for the three months ended September 30, 2011 compared to $1.8 million for the three months ended September 30, 2010. Tax expense in both periods is primarily due to the recording of non-cash deferred income tax expense related to our joint venture investments.

Income Attributable to Noncontrolling Interests. Income attributable to noncontrolling interests increased to $7.1 million for the three months ended September 30, 2011compared to $6.2 million for the three months ended September 30, 2010. As a percentage of revenues, income attributable to noncontrolling interests increased to 6.5% for the 2011 period compared to 5.9% for the 2010 period. This increase is attributable to a decrease in ownership at certain same store facilities.

Nine Months Ended September 30, 2011 Compared To Nine Months Ended September 30, 2010

Overview. During the nine months ended September 30, 2011, our revenues increased 13.6% to $331.6 million from $291.8 million for the nine months ended September 30, 2010. We incurred a net loss attributable to Symbion, Inc. for the 2011 period of $(17.5) million, or $(12.7) million excluding our loss on debt extinguishment, compared to a net loss of $(6.4) million, or $(9.6) million excluding our business combination remeasurement gains, for the 2010 period.

Our financial results for the 2011 period compared to the 2010 period reflect the addition of two surgical facilities that we consolidate for financial reporting purposes, one surgical facility which we account for using the equity method and a controlling interest in a surgical facility which was previously recorded as an equity method investment. We began consolidating this facility during the third quarter of 2010.

Revenues. Revenues for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 were as follows (in thousands):
 
Nine Months Ended
September 30,
 
Dollar
Variance
 
Percent
Variance
 
2011
 
2010
 
Patient service revenues
$
323,246

 
$
282,733

 
$
40,513

 
14.3
 %
Physician service revenues
4,483

 
4,346

 
137

 
3.2

Other service revenues
3,861

 
4,750

 
(889
)
 
(18.7
)
Total
$
331,590

 
$
291,829

 
$
39,761

 
13.6
 %

Patient service revenues increased 14.3% for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. This increase is attributable to surgical facilities and additional incremental, controlling ownership acquired since January 1, 2010. In addition, this increase is attributable to growth at our surgical hospitals, including an increase in net patient revenue per case due to an increase in higher acuity cases performed at these facilities. Also, during the quarter we experienced an increase in case volume of 0.5%. This increase is also attributable to surgical facilities and additional incremental, controlling ownership acquired since

31


January 1, 2010. However, we have experienced volume weakness across our system and throughout the industry during the nine month period as represented by our industry comparable same store case decline of 2.8%. Additionally, our case volume was impacted by a scheduled termination of an agreement with a health plan to utilize one of our facilities for a specified period of time. We are in the process of restructuring this facility.
Cost of Revenues. Cost of revenues for the nine months ended September 30, 2011 was $240.0 million compared to $209.1 million for the nine months ended September 30, 2010. This increase is attributable to surgical facilities and additional incremental, controlling ownership acquired since January 1, 2010. In addition, this increase is attributable to growth at our surgical hospitals. As a percentage of total revenues, cost of revenues increased to 72.4% for the 2011 period compared to 71.7% for the 2010 period. This increase in cost of revenues as a percentage of total revenues was primarily driven by volume weakness during the nine month period. Our cost of revenues are sensitive to volume changes due to certain fixed costs such as facility rent expense and minimum staffing requirements.

General and Administrative Expense. General and administrative expense increased to $16.8 million for the nine months ended September 30, 2011 compared to $16.7 million for the nine months ended September 30, 2010. As a percentage of revenues, general and administrative expense decreased to 5.1% for the 2011 period compared to 5.7% for the 2010 period. This decrease is primarily attributable to our leveraging of corporate overhead costs while continuing to increase revenue through recent acquisitions.
Depreciation and Amortization. Depreciation and amortization expense increased to $15.5 million for the nine months ended September 30, 2011 compared to $14.0 million for the nine months ended September 30, 2010. This increase is attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010. As a percentage of revenues, depreciation and amortization expense decreased to 4.7% for the 2011 period compared to 4.8% for the 2010 period.
Provision for Doubtful Accounts. The provision for doubtful accounts increased to $5.9 million for the nine months ended September 30, 2011 compared to $5.2 million for the nine months ended September 30, 2010. As a percentage of revenues, the provision for doubtful accounts was 1.8% for both the 2011 and 2010 periods.
 
Loss on Debt Extinguishment. As a result of our debt restructuring during the second quarter of 2011, we incurred a loss on debt extinguishment of $4.8 million. This charge is comprised primarily of capitalized debt issuance costs written off in connection with our termination of debt instruments as part of the restructuring.

Operating Income. Our operating income decreased to $49.7 million, or $54.5 million excluding our loss on debt extinguishment of $4.8 million, for the nine months ended September 30, 2011 compared to $51.4 million, or $48.3 million excluding our business combination remeasurement gains of $3.2 million for the nine months ended September 30, 2010. This increase is primarily attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010.
Interest Expense, Net of Interest Income. Interest expense, net of interest income, increased to $39.7 million for the nine months ended September 30, 2011 compared to $35.6 million for the nine months ended September 30, 2010. The increase is primarily attributable to the increase in long-term debt due to our PIK elections and a higher interest rate on our senior secured notes compared to our previous variable rate senior secured credit facility.
 
Provision for Income Taxes.  The provision for income taxes was $4.9 million for the nine months ended September 30, 2011 and $4.0 million for the nine months ended September 30, 2010.  Tax expense in both periods is primarily due to the recording of non-cash deferred income tax expense related to our partnership investments.
Income Attributable to Noncontrolling Interests. Income attributable to noncontrolling interests increased to $22.1 million for the nine months ended September 30, 2011 compared to $17.6 million for the nine months ended September 30, 2010. As a percentage of revenues, income attributable to noncontrolling interests increased to 6.7% for the 2011 period compared to 6.0% for the 2010 period. This increase is primarily attributable to an increase in operating income at one of our surgical hospitals which we do not hold a majority ownership but consolidate for financial reporting purposes.
 
Liquidity and Capital Resources

Operating Activities

During the nine months ended September 30, 2011, our operating cash flow from continuing operations increased 17.2% to $60.1 million compared to $51.3 million for the nine months ended September 30, 2010. This increase is primarily attributable to surgical facilities and incremental, controlling interests acquired since January 1, 2010 and changes in working capital.

At September 30, 2011, we had working capital of $99.5 million compared to $77.3 million at December 31, 2010. This increase is primarily related to the restructuring of our long-term debt which extended the maturity dates of our debt, resulting in a reduction in the current maturities of long-term debt at September 30, 2011.

Investing Activities
 
Net cash used in investing activities from continuing operations during the nine months ended September 30, 2011 was $12.9 million which included $6.8 million of payments for acquisitions, net of cash acquired. Our acquisition activity was funded with cash from continuing operations. Additionally, the 2011 period included $6.0 million related to purchases of property and equipment which

32


was funded with cash from continuing operations.
 
Net cash used in investing activities from continuing operations during the nine months ended September 30, 2010 was $49.5 million, which included $43.8 million of payments for acquisitions, net of cash acquired. Our acquisition activity was funded with cash borrowings under our Revolving Facility (as defined below). Additionally, the 2010 period included $5.3 million related to purchases of property and equipment which was funded primarily with cash from continuing operations.
Financing Activities
 
Net cash used in financing activities from continuing operations during the nine months ended September 30, 2011 was $44.8 million. Additionally, the following table summarizes our financing activities related to the issuance of our Senior Secured Notes and simultaneous extinguishment of debts during the nine months ended September 30, 2011 (in thousands)
 
Cash provided by (used in) debt issuance and extinguishment
Issuance of Senior Secured Notes (net of debt issuance discount of $5,278)
$
344,722

Debt extinguishment, plus accrued and unpaid interest:
 
        Senior Secured Credit Facility
(273,121
)
        Toggle Notes
(73,330
)
Payment of debt issuance costs
(10,130
)
Net cash used in debt issuance and extinguishment
$
(11,859
)

During the 2011 period, we made distributions to noncontrolling interest partners of $25.1 million.

Net cash provided by financing activities from continuing operations during the nine months ended September 30, 2010 was $23.8 million, which included borrowings under our Revolving Facility (as defined below) of $56.0 million to fund acquisitions. Additionally, during the nine months ended September 30, 2010, we distributed $17.9 million in cash to noncontrolling interest partners. We also made scheduled principal payments on our senior secured credit facility totaling $5.6 million.
Long-Term Debt

The Company's long-term debt is summarized as follows (in thousands):
 
September 30, 2011
 
December 31, 2010
Senior Secured Credit Facility
$
—

 
$
277,500

New Credit Facility
—

 
—

Senior Secured Notes, net of debt issuance discount of $5,019
335,981

 
—

Toggle Notes
94,724

 
232,000

PIK Exchangeable Notes
97,660

 
—

Notes payable to banks
15,179

 
14,786

Secured term loans
6,195

 
7,236

Capital lease obligations
4,899

 
5,090

 
554,638

 
536,612

Less current maturities
(9,311
)
 
(29,195
)
Total
$
545,327

 
$
507,417


The proceeds of the Offering on June 14, 2011 were used to retire our existing Senior Secured Credit Facility (as defined below) and a portion of our existing Toggle Notes. In connection with this Offering, we entered into a new super-priority revolving credit facility and exchanged outstanding Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest, for $88.5 million initial aggregate principal amount of our PIK Exchangeable Notes. These transactions are described in detail below. Also, as a result of the debt restructuring, we recorded a loss on debt extinguishment of $4.8 million. This charge is comprised primarily of capitalized debt issuance costs written off in connection with our termination of debt instruments as part of the restructuring.

$50.0 Million Senior Secured Super-Priority Revolving Credit Facility

Concurrent with the Offering, we entered into a $50.0 million senior secured super-priority revolving credit facility (the "New Credit Facility") with a syndicate of financial institutions led by affiliates of the initial Senior Secured Note purchasers. The New Credit Facility includes revolving credit loans and swingline loans. Letters of credit may also be issued under the New Credit Facility. The New Credit Facility matures December 15, 2015. The New Credit Facility is subject to a potential, although uncommitted, increase of up to $25.0 million at our request at any time prior to maturity of the facility, subject to certain conditions, including compliance with a

33


maximum net senior secured leverage ratio and a minimum cash interest coverage ratio. The increase is only available if one or more financial institutions agree to provide it.

Loans under the New Credit Facility will bear interest, at our option, at the reserve adjusted LIBOR rate plus 4.50% or at the alternate base rate plus 3.50%. We are required to pay a commitment fee at a rate equal to 0.50% per annum on the undrawn portion of commitments in respect of the New Credit Facility. This fee is payable quarterly in arrears and on the date of termination or expiration of the commitments.

The New Credit Facility contains financial covenants requiring us not to exceed a maximum net senior secured leverage ratio or fall below a minimum cash interest coverage ratio, in each case tested quarterly. Borrowings under the New Credit Facility are subject to significant conditions, including the absence of an material adverse change.

Senior Secured Notes

On June 14, 2011, we completed a private offering of $350.0 million aggregate principal amount of our Senior Secured Notes. The Senior Secured Notes were issued at a 1.51% discount, yielding proceeds of approximately $344.7 million. Interest on the Senior Secured Notes is due June 15 and December 15 of each year and will accrue at the rate of 8.00% per annum. The first interest payment on the Senior Secured Notes is due December 15, 2011. The Senior Secured Notes will mature on June 15, 2016.

The proceeds from the issuance of the Senior Secured Notes were used to retire our Senior Secured Credit Facility and to repurchase an aggregate principal amount of $70.8 million of our Toggle Notes at par plus accrued and unpaid interest, for $73.3 million.

Effective September 9, 2011, we cancelled $9.0 million aggregate principal amount of our Senior Secured Notes held by certain holders, plus accrued and unpaid interest, in exchange for our issuance to such parties of $9.2 million aggregate principal amount of our PIK Exchangeable Notes. As a result of that exchange, we currently have $341.0 million aggregate principal amount of Senior Secured Notes outstanding.

In connection with the closing of the sale of the Senior Secured Notes, we and certain of our affiliates entered into a Registration Rights Agreement, whereby we agreed, under certain circumstances, to register senior secured notes with substantially identical terms to the Senior Secured Notes (the "Registered Senior Secured Notes") and commence an exchange offer to allow holders of the Senior Secured Notes to exchange their Senior Secured Notes for Registered Senior Secured Notes. We filed a Registration Statement to register the Registered Senior Secured Notes on October 11, 2011, which registration statement was declared effective on October 27, 2011. Our offer to exchange the Senior Secured Notes for Registered Senior Secured Notes commenced on October 27, 2011 and will expire on November 30, 2011, unless extended.

Toggle Notes
On June 3, 2008, we completed a private offering of $179.9 million aggregate principal amount of our Toggle Notes.  Interest on the Toggle Notes is due February 23 and August 23 of each year.  The Toggle Notes will mature on August 23, 2015.  For any interest period through August 23, 2011, we were able to 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 accrues at the rate of 11.0% per annum.  PIK interest on the Toggle Notes accrues at the rate of 11.75% per annum.  We elect to pay cash interest or to exercise the PIK option in advance of the interest period.
Since August 23, 2008, we have elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for various interest periods. As a result, the principal due on the Toggle Notes has increased by $71.0 million from the issuance of the Toggle Notes to September 30, 2011. On August 23, 2011, the Company elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for the interest period from August 24, 2011 to February 23, 2012. The Company has accrued $1.1 million in interest on the Toggle Notes in other accrued expenses as of September 30, 2011.

In connection with the Offering, we repurchased $70.8 million aggregate principal amount of the Toggle Notes, at par plus accrued and unpaid interest of $2.6 million and exchanged $85.4 million aggregate principal amount of Toggle Notes, at par plus accrued interest of $3.1 million, for $88.5 million aggregate principal amount of PIK Exchangeable Notes.
The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates.

PIK Exchangeable Notes

Simultaneous with the closing of the Offering, we exchanged Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest, for $88.5 million initial aggregate principal amount of our PIK Exchangeable Notes. Effective September 9, 2011, we cancelled $9.0 million aggregate principal amount of our senior secured notes held by affiliates of The Northwestern Mutual Life Insurance Company, plus accrued and unpaid interest, in exchange for our issuance to such parties of $9.2 million aggregate principal amount of our PIK exchangeable notes. As a result of that exchange, we currently have $341.0 million

34


aggregate principal amount of senior secured notes outstanding.

The PIK Exchangeable Notes will mature on June 15, 2017. Interest will accrue on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on each June 15 and December 15 of each year, commencing on December 15, 2011. We will not pay interest in cash on the PIK Exchangeable Notes. Instead, we will pay interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest.
    
We recorded the PIK Exchangeable Notes in accordance with ASC Topic 470, Debt. In the exchange, the new PIK Exchangeable Notes were recorded at fair value.

Former Senior Secured Credit Facility

On August 23, 2007, we entered into a $350.0 million senior secured credit facility with a syndicate of banks (the "Senior Secured Credit Facility"). The Senior Secured Credit Facility extended 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 was limited to $10.0 million and the swingline loans are available on a same-day basis. The letter of credit facility was limited to $10.0 million.

As of June 14, 2011, the Tranche A Term Loan had a principal balance of $101.4 million and accrued interest of $214,000. The Tranche B Term Loan had a principal balance of $115.1 million and accrued interest of $243,000. As of June 1, 2011, the interest rate on the borrowings under the Senior Secured Credit Facility was 5.5%.  The $100.0 million Revolving Facility included a non-use fee of 0.5% of the portion of the facility not used.  We paid this fee quarterly.  As of June 14, 2011, the amount outstanding under the Revolving Facility was $56.0 million with accrued interest and non-used fee of $164,000. Concurrent with the Offering, we used proceeds from the Offering to retire the Senior Secured Credit Facility.
Notes Payable to Banks
Certain of our subsidiaries have outstanding bank indebtedness, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made.  The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions. 

Capital Lease Obligations

We are liable to various vendors for several equipment leases.  The outstanding balance related to these capital leases at September 30, 2011 and December 31, 2010 was $4.9 million and $5.1 million, respectively.
Inflation

Inflation and changing prices have not significantly affected our operating results or the markets in which we operate.

Earnings Before Interest, Taxes, Depreciation and Amortization and Other Adjustments

When we use the term “EBITDA,” we are referring to net income (loss) plus (a) loss from discontinued operations, net of taxes, (b) income tax expense, (c) interest expense, net, (d) depreciation and amortization, (e) non-cash (gains) losses, including our loss from debt extinguishment, and (f) non-cash stock option compensation expense, and less (g) net income attributable to noncontrolling interests. Noncontrolling interest represents the interests of third parties, such as physicians and in some cases, health care systems that own an interest in surgical facilities that we consolidate for financial reporting purposes. Our operating strategy is to apply a market-based approach in structuring our partnerships, with individual market dynamics driving the structure. We believe that it is helpful to investors to present EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors our portion of EBITDA generated by our surgical facilities and other operations.
 
EBITDA increased to $49.1 million for the nine months ended September 30, 2011 from $46.4 million for the nine months ended September 30, 2010. This increase is attributable to surgical facilities and additional incremental, controlling ownership acquired since January 1, 2010. In addition, this increase is attributable to growth at our surgical hospitals. EBITDA decreased to $16.0 million for the three months ended September 30, 2011 from $16.8 million for the three months ended September 30, 2010. This decrease is primarily attributable to volume weakness experienced during the quarter, specifically in the month of July which was experienced across our system and throughout the industry.  
We use EBITDA as a measure of liquidity. We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures. We also use EBITDA, with some variation in the calculation, to determine compliance with some of the covenants under the senior secured credit facility, as well as to determine the interest rate and commitment fee payable under the senior secured credit facility.
 
EBITDA is not a measurement of financial performance or liquidity under GAAP. It should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in

35


accordance with generally accepted accounting principles. The items excluded from EBITDA are significant components in understanding and evaluating financial performance and liquidity. Our calculation of EBITDA is not comparable to the EBITDA measure we have used in certain prior periods but is consistent with the measure of EBITDA less income attributable to noncontrolling interests previously reported. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies.
The following table reconciles EBITDA to net cash provided by operating activities - continuing operations (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
EBITDA
$
15,918

 
$
16,811

 
$
49,101

 
$
46,424

Depreciation and amortization
(5,154
)
 
(5,008
)
 
(15,511
)
 
(14,004
)
Non-cash (losses) gains
(136
)
 
3,572

 
(4,942
)
 
2,420

Non-cash stock option compensation expense
(334
)
 
(353
)
 
(1,002
)
 
(1,002
)
Interest expense, net
(14,337
)
 
(12,668
)
 
(39,723
)
 
(35,610
)
Provision for income taxes
(1,922
)
 
(1,761
)
 
(4,892
)
 
(3,980
)
Net income attributable to noncontrolling interests
7,095

 
6,193

 
22,063

 
17,594

Loss (income) on discontinued operations, net of taxes
(404
)
 
(310
)
 
(492
)
 
(672
)
Net (loss) income
726

 
6,476

 
4,602

 
11,171

Loss from discontinued operations
404

 
310

 
492

 
672

Depreciation and amortization
5,154

 
5,008

 
15,511

 
14,004

Amortization of deferred financing costs
1,041

 
501

 
1,902

 
1,501

Non-cash payment-in-kind interest option
4,431

 
6,597

 
17,797

 
19,264

Non-cash stock option compensation expense
334

 
353

 
1,002

 
1,002

Non-cash recognition of other comprehensive income into earnings
—

 
1,510

 
665

 
2,478

Non-cash credit risk adjustment of financial instruments
—

 
—

 
—

 
189

Accelerated amortization of loan costs
—

 
—

 
4,751

 
—

Non-cash losses (gains)
136

 
(3,572
)
 
191

 
(2,420
)
Deferred income taxes
1,852

 
1,138

 
4,576

 
5,471

Equity in earnings of unconsolidated affiliates, net of distributions received
(59
)
 
272

 
342

 
(57
)
Provision for doubtful accounts
2,674

 
2,025

 
5,861

 
5,225

Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
 
 
 
 
Accounts receivable
(728
)
 
(370
)
 
(2,889
)
 
(4,871
)
Other assets and liabilities
5,714

 
(2,796
)
 
5,258

 
(2,285
)
Net cash provided by operating activities - continuing operations
$
21,679

 
$
17,452

 
$
60,061

 
$
51,344

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

 
54

 
55

 
54

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


36


 
          We use Consolidated Adjusted EBITDA as a measure of liquidity.  We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures.  We also use Consolidated Adjusted EBITDA to determine compliance with some of the covenants under our new credit facility, as well as to determine the interest rate and commitment fee payable under our New Credit Facility.
 
          Consolidated Adjusted EBITDA and EBITDA are not measurements of financial performance or liquidity under GAAP.  They should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles.  The items excluded from Consolidated Adjusted EBITDA and EBITDA are significant components in understanding and evaluating financial performance and liquidity.  Our calculation of Consolidated Adjusted EBITDA and EBITDA may not be comparable to similarly titled measures reported by other companies.
 
         The following table reconciles Consolidated Adjusted EBITDA to EBITDA and EBITDA to net cash provided by operating activities—continuing operations:
 
 
 
 
 
Twelve Months Ended September 30, 2011
 
 
(dollars in thousands except for operating data)
 
Consolidated Adjusted EBITDA (1)
$
75,541

 
Cash payment on Idaho Falls lease (2)
5,265

 
Intercompany notes adjustment (3)
(9,000
)
 
Pro forma acquisition and other non-cash adjustments (4)
(3,961
)
 
EBITDA
67,845

 
Depreciation and amortization
(20,406
)
 
Non-cash (losses) gains, net of noncontrolling interests
(4,278
)
 
Non-cash stock option compensation expense
(1,336
)
 
Interest expense, net
(52,150
)
 
Provision for income taxes
(8,698
)
 
Net income attributable to noncontrolling interests
31,374

 
Loss from discontinued operations, net of taxes
(755
)
 
Net income (loss)
11,596

 
Loss (income) from discontinued operations
755

 
Depreciation and amortization
20,280

 
Amortization of deferred financing costs and debt issuance discount
2,405

 
Non-cash payment-in-kind interest option
24,612

 
Non-cash recognition of other comprehensive loss into earnings
919

 
Non-cash stock option compensation expense
1,336

 
Non-cash losses (gains)
(1,469
)
 
Loss on debt extinguishment
4,751

 
Deferred income taxes
10,084

 
Equity in earnings of unconsolidated affiliates, net of distributions received
449

 
Provision for doubtful accounts
7,229

 
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
 
 
Accounts receivable
(12,583
)
 
Other assets and liabilities
6,749

 
Net cash provided by operating activities - continuing operations
$
77,113

 
 
 
 
 
 
(1) When we use the term Consolidated Adjusted EBITDA, we are referring to EBITDA as reported adjusted for covenant related items per our new credit agreement.
 
 
 
 
(2) Represents the cash lease payment adjustment for our facility located in Idaho Falls, ID as contemplated by our new credit agreement.
 
 
 
 
(3) Adjustments related to outstanding balances on intercompany notes issued by our restricted subsidiaries as contemplated by our new credit agreement.
 
 
 
 
(4) Includes the pro forma effect of acquisitions and other non-cash adjustments as contemplated by our new credit agreement.
 


37


Summary

We believe that existing funds, cash flows from operations and available borrowings under our New Credit Facility will provide sufficient liquidity for the next 12 to 18 months. Our recent debt restructuring extends the maturities of our long-term debt and revises our financial covenants to make them less restrictive. However, our ability to meet our funding needs could be adversely affected if we suffer adverse results from our operations. In addition, based on our expected liquidity and capital resource needs, we may consider various alternatives to improve our capital structure, including reducing debt, extending maturities or relaxing financial covenants. These alternatives may include new equity or debt financings or exchange offers with our existing security holders (including exchanges of debt for debt or equity) and other transactions involving our outstanding securities, given their secondary market trading prices. We cannot assure you, if we pursue any of these transactions, that we will be successful in completing a transaction on attractive terms, or at all.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk related to changes in prevailing interest rates. Historically, we have not held or issued derivative financial instruments other than the use of a variable-to-fixed interest rate swap for a portion of our senior credit facility. We do not use derivative instruments for speculative purposes. Our outstanding debt to commercial lenders is generally based on a predetermined percentage above LIBOR or the lenders' prime rate. At September 30, 2011, none of our long-term debt was subject to variable rates of interest, however future borrowings under our New Credit Facility would subject us to LIBOR fluctuations. The fair value of our total long-term debt, based on quoted market prices or modeled estimates of value as of September 30, 2011 was approximately $525.1 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us (including our consolidated subsidiaries) in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported in a timely manner.

Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the third quarter of 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages, that may not be covered by insurance.

Item 6. Exhibits

No.
 
Description
3.1

 
Amended Certificate of Incorporation of Symbion, Inc. (a)
3.2

 
Amended and Restated Bylaws of Symbion, Inc. (a)
31.1

 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2

 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1

 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2

 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
100

 
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, (iv) Consolidated Statements of Stockholders Equity for the nine months ended September 30, 2011 and 2010, and (v) Notes to Consolidated Financial Statements. (b)
 

(a) 
Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 (Registration No. 333-153678)

(b) 
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

38


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
SYMBION, INC.
 
 
   By:

/s/ TERESA F. SPARKS
Teresa F. Sparks
Senior Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: November 10, 2011


39


EXHIBIT INDEX

No.
 
Description
3.1

 
Amended Certificate of Incorporation of Symbion, Inc. (a)
3.2

 
Amended and Restated Bylaws of Symbion, Inc. (a)
31.1

 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2

 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1

 
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2

 
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
100

 
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, (iv) Consolidated Statements of Stockholders Equity for the nine months ended September 30, 2011 and 2010, and (v) Notes to Consolidated Financial Statements. (b)
 

(a) 
Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 (Registration No. 333-153678)

(b) 
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

    


40