10-Q 1 a2013q3form10q.htm 10-Q 2013 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, 2013
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 8, 2013, there were 1,000 shares of the registrant’s common stock outstanding.
 



SYMBION, INC.
FORM 10-Q
TABLE OF CONTENTS

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


2


PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

SYMBION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
57,727

 
$
74,368

Accounts receivable, less allowance for doubtful accounts of $15,717 and $11,621 at September 30, 2013 and December 31, 2012, respectively
 
73,876

 
72,133

Inventories
 
16,524

 
14,564

Prepaid expenses and other current assets
 
10,497

 
10,059

Current assets of discontinued operations
 
550

 
1,971

Total current assets
 
159,174

 
173,095

Property and equipment, net
 
128,734

 
131,222

Intangible assets, net
 
23,249

 
24,551

Goodwill
 
656,059

 
656,058

Investments in and advances to affiliates
 
13,979

 
12,132

Restricted invested assets
 
177

 
5,169

Other long-term assets
 
14,465

 
14,045

Long-term assets of discontinued operations
 
—

 
931

Total assets
 
$
995,837

 
$
1,017,203

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
17,759

 
$
22,859

Accrued payroll and benefits
 
12,057

 
12,869

Other current liabilities
 
42,385

 
29,163

Current maturities of long-term debt
 
7,096

 
39,508

Current liabilities of discontinued operations
 
43

 
1,620

Total current liabilities
 
79,340

 
106,019

Long-term debt, less current maturities
 
542,623

 
534,174

Long-term deferred tax liabilities
 
73,482

 
71,781

Other long-term liabilities
 
61,348

 
62,802

Long-term liabilities of discontinued operations
 
236

 
213

 
 
 
 
 
Non-controlling interests—redeemable
 
34,210

 
33,686

 
 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding at September 30, 2013 and December 31, 2012
 
—

 
—

Additional paid-in-capital
 
244,095

 
242,597

Retained deficit
 
(108,066
)
 
(93,516
)
Total Symbion, Inc. stockholders' equity
 
136,029

 
149,081

Non-controlling interests—non-redeemable
 
68,569

 
59,447

Total equity
 
204,598

 
208,528

Total liabilities and stockholders' equity
 
$
995,837

 
$
1,017,203

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,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Revenues
 
$
128,929

 
$
123,666

 
$
399,236

 
$
361,492

Operating expenses:
 
 
 
 
 
 
 
 
Salaries and benefits
 
36,576

 
35,894

 
113,437

 
99,536

Supplies
 
34,138

 
31,842

 
106,203

 
90,200

Professional and medical fees
 
9,871

 
9,762

 
31,264

 
26,645

Lease expense
 
6,665

 
6,738

 
20,702

 
18,309

Other operating expenses
 
9,482

 
8,802

 
27,791

 
24,608

Cost of revenues
 
96,732

 
93,038

 
299,397

 
259,298

General and administrative expenses
 
5,723

 
5,684

 
16,847

 
19,970

Depreciation and amortization
 
6,030

 
5,553

 
17,659

 
16,150

Provision for doubtful accounts
 
3,066

 
2,940

 
8,290

 
7,596

Income from equity investments
 
(1,061
)
 
(1,251
)
 
(2,981
)
 
(2,929
)
(Gain) loss on disposal or impairment of long-lived assets, net
 
(1,366
)
 
66

 
5,813

 
(482
)
Electronic health records incentives
 
—

 
(603
)
 
—

 
(603
)
Litigation settlements, net
 
(32
)
 
—

 
(230
)
 
(232
)
Total operating expenses
 
109,092

 
105,427

 
344,795

 
298,768

Operating income
 
19,837

 
18,239

 
54,441

 
62,724

Interest expense, net
 
(14,484
)
 
(14,533
)
 
(43,880
)
 
(43,201
)
Income before income taxes and discontinued operations
 
5,353

 
3,706

 
10,561

 
19,523

Provision for income taxes
 
1,107

 
1,118

 
1,741

 
3,774

Income from continuing operations
 
4,246

 
2,588

 
8,820

 
15,749

Income (loss) from discontinued operations, net of taxes
 
46

 
(865
)
 
1,251

 
(1,232
)
Net income
 
4,292

 
1,723

 
10,071

 
14,517

Less: Net income attributable to non-controlling interests
 
(7,618
)
 
(7,172
)
 
(24,621
)
 
(27,768
)
Net loss attributable to Symbion, Inc.
 
$
(3,326
)
 
$
(5,449
)
 
$
(14,550
)
 
$
(13,251
)
See notes to unaudited consolidated financial statements.


4


SYMBION, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Net income
 
$
4,292

 
$
1,723

 
$
10,071

 
$
14,517

 
 
 
 
 
 
 
 
 
Comprehensive income
 
4,292

 
1,723

 
$
10,071

 
$
14,517

Less: Comprehensive income attributable to non-controlling interests
 
(7,618
)
 
(7,172
)
 
(24,621
)
 
(27,768
)
Comprehensive loss attributable to Symbion, Inc.
 
$
(3,326
)
 
$
(5,449
)
 
$
(14,550
)
 
$
(13,251
)
See notes to unaudited consolidated financial statements.



5


SYMBION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, in thousands, except shares)
 
 
Symbion, Inc.
Common Stock
 
Additional
Paid-in Capital
 
Retained Deficit
 
Non-Controlling Interests -
Non-Redeemable
 
Total
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
1,000

 
$
—

 
$
239,935

 
$
(81,806
)
 
$
45,333

 
$
203,462

Net (loss) income
 
 
 
 
 
 
 
(13,251
)
 
14,162

 
911

Stock-based compensation
 
 
 
 
 
1,944

 
 
 
 
 
1,944

Acquisition and disposal of shares of non-controlling interests, net
 
 
 
 
 
(380
)
 
 
 
16,390

 
16,010

Distributions to non-controlling interests—non-redeemable holders
 
 
 
 
 
 
 
 
 
(13,748
)
 
(13,748
)
Balance at September 30, 2012
 
1,000

 
$
—

 
$
241,499

 
$
(95,057
)
 
$
62,137

 
$
208,579

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
1,000

 
$
—

 
$
242,597

 
$
(93,516
)
 
$
59,447

 
$
208,528

Net (loss) income
 
 
 
 
 
 
 
(14,550
)
 
13,082

 
(1,468
)
Stock-based compensation
 
 
 
 
 
206

 
 
 
 
 
206

Acquisition and disposal of shares of non-controlling interests, net
 
 
 
 
 
1,292

 
 
 
8,510

 
9,802

Distributions to non-controlling interests—non-redeemable holders
 
 
 
 
 
 
 
 
 
(12,470
)
 
(12,470
)
Balance at September 30, 2013
 
1,000

 
$
—

 
$
244,095

 
$
(108,066
)
 
$
68,569

 
$
204,598

See notes to unaudited consolidated financial statements.


6


SYMBION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
Net income
 
$
10,071

 
$
14,517

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
(Income) loss from discontinued operations, net of taxes
 
(1,251
)
 
1,232

Depreciation and amortization
 
17,659

 
16,150

Amortization of debt issuance costs and discounts
 
2,995

 
2,843

Payment-in-kind interest expense
 
6,685

 
6,166

Stock-based compensation
 
206

 
1,944

Loss (gain) on disposal or impairment of long-lived assets, net
 
5,813

 
(482
)
Deferred income taxes
 
1,352

 
6,848

Income from equity investments, net of distributions received
 
(569
)
 
(1,276
)
Provision for doubtful accounts
 
8,290

 
7,596

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
 
Accounts receivable
 
(5,999
)
 
(2,831
)
Other operating assets and liabilities
 
(1,357
)
 
2,723

Net cash provided by operating activities - continuing operations
 
43,895

 
55,430

Net cash provided by operating activities - discontinued operations
 
353

 
684

Net cash provided by operating activities
 
44,248

 
56,114

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment, net
 
(11,741
)
 
(10,026
)
Proceeds from divestitures (payments for acquisitions), net of cash
 
485

 
(18,474
)
Other investing activities
 
—

 
83

Net cash used in investing activities - continuing operations
 
(11,256
)
 
(28,417
)
Net cash provided by investing activities - discontinued operations
 
3,725

 
7,164

Net cash used in investing activities
 
(7,531
)
 
(21,253
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(43,058
)
 
(6,411
)
Borrowings of long-term debt
 
8,180

 
10,257

Payments of debt issuance costs
 
(427
)
 
—

Change in restricted invested assets
 
4,992

 
—

Distributions to non-controlling interests holders
 
(23,770
)
 
(28,469
)
Proceeds from (payments related to) ownership transactions with consolidated affiliates
 
912

 
(320
)
Other financing activities
 
(62
)
 
60

Net cash used in financing activities - continuing operations
 
(53,233
)
 
(24,883
)
Net cash used in financing activities - discontinued operations
 
(125
)
 
(918
)
Net cash used in financing activities
 
(53,358
)
 
(25,801
)
Net (decrease) increase in cash and cash equivalents
 
(16,641
)
 
9,060

Cash and cash equivalents at beginning of period
 
74,368

 
62,496

Cash and cash equivalents at end of period
 
$
57,727

 
$
71,556

See notes to unaudited consolidated financial statements.

7
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)


1. Organization
Symbion, Inc. (the “Company”), through its wholly owned subsidiaries, owns interests in partnerships and limited liability companies that own and operate a national network of short stay surgical facilities in joint ownership with physicians and in some cases healthcare systems. As of September 30, 2013, the Company owned and operated 49 surgical facilities, including 43 ambulatory surgery centers ("ASCs") and six surgical hospitals. The Company also managed seven additional ambulatory surgery centers and one physician clinic in a market in which the Company operates an ASC and a surgical hospital. The Company owns a majority ownership interest in 29 of the 49 surgical facilities and consolidates 45 surgical facilities for financial reporting purposes.
The Company is a wholly owned subsidiary of Symbion Holdings Corporation (“Holdings”), which is owned by an investor group that includes affiliates of Crestview Partners, L.P. ("Crestview"), members of the Company's management and other investors.

2. Significant Accounting Policies 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 that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies. The consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary, under the provisions of Accounting Standards Codification Topic 810, Consolidation. The variable interest entities 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 service 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 losses. The consolidated balance sheets of the Company at September 30, 2013 and December 31, 2012 include assets of $17.5 million and $17.7 million, respectively, and liabilities of $3.1 million and $3.7 million, respectively, related to the variable interest entities. All significant intercompany balances and transactions are eliminated in consolidation.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2013-02, which requires additional disclosures on the effect of significant reclassifications out of accumulated other comprehensive income. The ASU requires a company that reports other comprehensive income to present (either on the face of the statement where net income is presented or in the notes to the financial statements) the effects on the line items of net income the significant amounts reclassified out of accumulated other comprehensive income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, a company is required to cross-reference to other required disclosures that provide additional details about those amounts. This ASU is effective for fiscal years beginning after December 15, 2012, and was adopted by the Company on January 1, 2013. As it only requires additional disclosure, the adoption of this ASU had no impact on the Company's consolidated financial position, results of operations or cash flows.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), or inputs other than quoted prices in active markets that are either directly or indirectly observable (Level 2), or unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions (Level 3), depending on the nature of the item being valued.

8
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values.
The carrying amount and fair value of the Company's long term debt as of September 30, 2013 and December 31, 2012 follows (in thousands):
 
 
Carrying Amount
 
Fair Value
 
 
September 30,
2013
 
December 31,
2012
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
 
 
 
 
Senior Secured Notes, net of debt issuance discount
 
$
337,883

 
$
337,132

 
$
361,738

 
$
348,088

PIK Exchangeable Notes
 
114,076

 
109,688

 
114,076

 
109,688

Toggle Notes
 
73,475

 
94,724

 
73,291

 
94,724

The fair values of the Senior Secured Notes and Toggle Notes were based on a Level 1 computation using quoted prices at September 30, 2013 and December 31, 2012, as applicable. The fair value of the PIK Exchangeable Notes 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 5.
The Company maintains a supplemental retirement savings plan (the "SERP"). The SERP provides supplemental retirement alternatives to eligible officers and key employees of the Company by allowing participants to defer portions of their compensation. As of September 30, 2013 and December 31, 2012, the fair values of the assets in the SERP were $1.7 million and $1.3 million, respectively, which were included in other long-term assets on the consolidated balance sheets. The Company had a liability of $1.7 million and $1.3 million for the SERP in other long-term liabilities as of September 30, 2013 and December 31, 2012, respectively.
Revenue Recognition and Accounts Receivable
The Company recognizes revenues in the period in which the services are performed. Patient services revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances from third-party payors, which the Company estimates based on the historical trend of its surgical facilities’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, relationships with payors and procedure statistics.
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 had third-party settlements related to the Medicaid program of $11.8 million and $10.9 million as of September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013 and December 31, 2012, $10.0 million and $7.0 million, respectively, related to the settlements were recorded in other current liabilities and $1.8 million and $3.9 million, respectively, were recorded in other long-term liabilities in the consolidated balance sheets. The Company does not require collateral for private pay patients.
The following table sets forth patient services revenues by type of payor and the approximate percentage of total patient services revenues for the Company's consolidated surgical facilities included in continuing operations for the periods indicated (dollars in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Private insurance
 
$
75,628

 
59.3
%
 
$
73,840

 
60.7
%
 
$
234,052

 
59.2
%
 
$
222,655

 
62.6
%
Government
 
43,800

 
34.3
%
 
39,170

 
32.2
%
 
133,023

 
33.6
%
 
105,163

 
29.6
%
Self-pay
 
3,521

 
2.8
%
 
3,373

 
2.8
%
 
10,991

 
2.8
%
 
10,366

 
2.9
%
Other
 
4,579

 
3.6
%
 
5,306

 
4.3
%
 
17,324

 
4.4
%
 
17,624

 
4.9
%
Total patient services revenues
 
$
127,528

 
100.0
%
 
$
121,689

 
100.0
%
 
$
395,390

 
100.0
%
 
$
355,808

 
100.0
%
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 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.

9
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Changes in the allowance for doubtful accounts receivable for the nine months ended September 30, 2013 follows (in thousands):
Balance at December 31, 2012
 
$
11,621

Provision for doubtful accounts
 
8,290

Accounts written off, net of recoveries
 
(4,194
)
Balance at September 30, 2013
 
$
15,717

Electronic Health Record Incentives
The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments beginning in calendar year 2011 for eligible hospitals and professionals that implement and achieve meaningful use of certified Electronic Health Records ("EHR") technology. Several of the Company's surgical hospitals have implemented plans to comply with the EHR meaningful use requirements of the Health Information Technology for Economic and Clinical Health Act ("HITECH") in time to qualify for the maximum available incentive payments.
Compliance with the meaningful use requirements has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing the Company's EHR solutions along with costs associated with the hardware and software components of the project. The Company currently estimates that total costs incurred to comply will be recovered through the total EHR incentive payments over the projected life cycle of this initiative. The Company incurs both capital expenditures and operating expenses in connection with the implementation of its various EHR initiatives. The amount and timing of these expenditures do not directly correlate with the timing of the Company's cash receipts or recognition of the EHR incentives as other income. During the three and nine months ended September 30, 2013, the Company spent $449,000 and $3.0 million, respectively, related to hardware, software and implementation costs, of which $352,000 and $2.5 million was capitalized. The Company spent $450,000 and $518,000 on hardware, software and implementations costs, of which $448,000 was capitalized during each of the three and nine months ended September 30, 2012, respectively. The Company expects to receive incentive payments and recognize corresponding revenue upon the completion of the EHR meaningful use requirements. During the three and nine months ended September 30, 2012, the Company received and recognized $603,000 in incentive payments.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.
Restricted Invested Assets
The Company is required to maintain $10.0 million in letters of credit as a requirement of the lease agreement related to its Idaho Falls, Idaho facility.  At December 31, 2012, these letters of credit were secured by restricted invested assets of $5.0 million, in the form of certificates of deposit. In March 2013, the Company refinanced its debt at the Idaho Falls, Idaho facility with a new lender. As a result of this refinancing, the Company is no longer required to maintain this restricted invested assets balance. The Company reclassified these investments to short-term investments and ultimately to cash and cash equivalents upon the maturity of the underlying certificates of deposit during the nine months ended September 30, 2013. There were no borrowings against the letters of credit as of September 30, 2013 and December 31, 2012. The remaining restricted invested assets balance of $177,000 at September 30, 2013 is related to a requirement under the operating lease agreement at the Company's Chesterfield, Missouri facility.
Inventories
Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.
Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets follows (in thousands):
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
Prepaid expenses
 
$
6,259

 
$
5,833

Other current assets
 
4,238

 
4,226

Total
 
$
10,497

 
$
10,059


10
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Property and Equipment
Property and equipment are stated at cost, or if obtained through acquisition at fair value determined on the date of acquisition, and depreciated on a straight-line basis over the useful lives of the assets, generally three to five years for computers and software and five to seven years for furniture and equipment.  Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are charged to expense as incurred, while expenditures that increase capacities or extend useful lives are capitalized.
A summary of property and equipment follows (in thousands):
 
 
September 30,
2013
 
December 31, 2012
 
 
 
 
 
Land
 
$
5,713

 
$
5,713

Buildings and improvements
 
105,787

 
104,069

Furniture and equipment
 
92,698

 
88,960

Computer and software
 
12,141

 
6,710

Construction in progress
 
1,440

 
4,997

Property and equipment, at cost
 
217,779

 
210,449

Less: Accumulated depreciation
 
(89,045
)
 
(79,227
)
Property and equipment, net
 
$
128,734

 
$
131,222

The Company is liable to various vendors for several equipment leases. The carrying value of the leased assets was $4.7 million and $5.3 million as of September 30, 2013 and December 31, 2012, respectively.
Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2013 follows (in thousands):
Balance at December 31, 2012
 
$
656,058

Acquisitions
 
2,203

Divestitures
 
(2,373
)
Purchase price adjustments
 
171

Balance at September 30, 2013
 
$
656,059

At September 30, 2013 and December 31, 2012, the Company had other intangible assets of $18.1 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 intangible assets related to physician guarantee agreements, non-compete agreements and a management rights agreement, which are amortized over the service lives of the agreements.
Changes in the carrying amounts of other intangible assets for the nine months ended September 30, 2013 follows (in thousands):
 
 
Physician Guarantees
 
Management Rights
 
Non-Compete Agreements
 
Certificates of Need
 
Total Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
819

 
$
2,083

 
$
3,509

 
$
18,140

 
$
24,551

Additions
 
507

 
—

 
—

 
—

 
507

Recruitment expense
 
(423
)
 
—

 
—

 
—

 
(423
)
Amortization
 
—

 
(115
)
 
(1,271
)
 
—

 
(1,386
)
Balance at September 30, 2013
 
$
903

 
$
1,968

 
$
2,238

 
$
18,140

 
$
23,249


11
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Other Current Liabilities
A summary of other current liabilities follows (in thousands):
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
Interest payable
 
$
11,507

 
$
5,265

Current taxes payable
 
2,769

 
2,238

Insurance liabilities
 
3,473

 
3,233

Third-party settlements
 
10,015

 
6,987

Accounts receivable credit balances
 
3,141

 
3,498

Other accrued expenses
 
11,480

 
7,942

Total
 
$
42,385

 
$
29,163

Other Long-Term Liabilities
A summary of other long-term liabilities follows (in thousands):
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
Facility lease obligation
 
$
48,149

 
$
48,352

Third-party settlements
 
1,772

 
3,914

Medical malpractice liability
 
4,383

 
3,765

Deferred rent
 
3,309

 
4,371

Other liabilities
 
3,735

 
2,400

Total
 
$
61,348

 
$
62,802

Total other long-term liabilities includes a facility lease obligation which was assumed in connection with the Company's acquisition of the surgical hospital located in Idaho Falls, Idaho. This obligation is payable to the hospital facility lessor for the land, building and improvements. The current portion of the lease obligation was $257,000 and $117,000 at September 30, 2013 and December 31, 2012, respectively, and was included in other current liabilities in the consolidated balance sheets. The total lease obligation was $48.4 million and $48.5 million at September 30, 2013 and December 31, 2012, respectively.
Non-Controlling Interests — Non-Redeemable
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 non-controlling interests, and their cash flow effect is classified within financing activities in the consolidated statements of cash flows.
Non-Controlling Interests — Redeemable
Each of the partnerships and limited liability companies through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement.  In certain circumstances, the partnership and operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physicians’ ownership if certain adverse regulatory events occur, such as it becoming illegal for the physicians to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility.  This redeemable non-controlling interests is reported outside of stockholders' equity.

12
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

A summary of activity of the non-controlling interests—redeemable follows (in thousands):
 
 
Non-Controlling Interests—Redeemable
 
 
 
Balance at December 31, 2011
 
$
34,134

Net income attributable to non-controlling interests—redeemable
 
13,606

Acquisition and disposal of shares of non-controlling interests—redeemable
 
(229
)
Distributions to non-controlling interests —redeemable holders
 
(14,721
)
Balance at September 30, 2012
 
$
32,790

 
 
 
Balance at December 31, 2012
 
$
33,686

Net income attributable to non-controlling interests—redeemable
 
11,539

Acquisition and disposal of shares of non-controlling interests—redeemable
 
285

Distributions to non-controlling interests —redeemable holders
 
(11,300
)
Balance at September 30, 2013
 
$
34,210

Income Taxes
    During the three and nine months ended September 30, 2013, the Company decreased its reserve for uncertain tax positions by approximately $2,000 and $5.5 million, respectively, principally as a result of the Internal Revenue Service approval of accounting method changes received by the Company in February 2013.  The changes relate to the Company's net operating loss and related interest expense deductions.  Decreases of approximately $49,000 and $274,000 affected the effective tax rate during the three and nine months ended September 30, 2013, respectively.  The reserve is included in long-term deferred tax liabilities in the consolidated balance sheets.  The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate if recognized was $509,000 as of September 30, 2013 and $634,000 as of December 31, 2012.
Reclassifications
Certain reclassifications have been made to the comparative period's financial statements to conform to the 2013 presentation. The reclassifications primarily related to the presentation of discontinued operations and non-controlling interests and had no impact on the Company's consolidated financial position, results of operations or cash flows.

3. Acquisitions and Developments
Effective January 1, 2013, the Company exercised its contractual right to hold a majority of the Governor seats on the Governing Board of its surgical hospital located in Great Falls, Montana. As the Company now controls the majority of the Governor seats on the Governing Board, it consolidates this facility for financial reporting purposes. Prior to January 1, 2013, this facility was accounted for using the equity method for financial reporting purposes.
Effective July 1, 2013, the Company acquired a 58.7% ownership interest in a surgical facility located in Irvine, California. The purchase price of the acquisition was $1.1 million. The acquisition was financed with cash from operations. The Company merged the operations of the acquired facility with an existing surgical facility in this market which is consolidated for financial reporting purposes.
Effective July 31, 2013, the Company acquired a 20.0% ownership interest in a surgical facility located in Jackson, Tennessee.  The purchase price of the acquisition was $1.3 million, which was financed with cash from operations.  This investment is accounted for using the equity method for financial reporting purposes.  The Company entered into a management agreement with this facility in April 2012 and continues to manage the facility.

4. Discontinued Operations and Divestitures
Effective February 28, 2013, the Company ceased operations at its surgical facility located in San Antonio, Texas. The Company recognized a loss of $1.0 million on the disposal. For the three and nine months ended September 30, 2013 and 2012, the results of operations related to this facility were included in discontinued operations.

13
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Effective April 8, 2013, the Company sold its interest in the surgical facility located in Havertown, Pennsylvania. The Company recorded net proceeds of $3.2 million on this transaction and recognized a gain of $930,000. For the three and nine months ended September 30, 2013 and 2012, the results of operations related to this facility were included in discontinued operations. Concurrent with the sale, a new management service company was created to provide various management services to this surgical facility. The Company acquired a 48.0% non-consolidating ownership interest in the new management service company as part of the consideration received for the sale of its interest in the surgical facility. Additionally, the Company entered into an agreement to manage the new management service company.
A summary of certain operating results impacting the statements of operations related to discontinued operations follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Revenues
 
$
—

 
$
2,653

 
$
1,893

 
$
12,987

Operating income (loss)
 
7

 
(374
)
 
161

 
(1,154
)
(Gain) loss on sale or disposal
 
(39
)
 
387

 
(602
)
 
(240
)
Provision for (benefit from) income taxes
 
—

 
104

 
(488
)
 
318

Income (loss) from discontinued operations, net of taxes
 
46

 
(865
)
 
1,251

 
(1,232
)
Effective January 29, 2013, the Company sold its ownership interest in a surgical facility located in Novi, Michigan for proceeds of approximately $310,000 and recognized a gain of $269,000. The Company previously recorded impairment of $2.9 million related to this investment during the year ended December 31, 2011. This facility was accounted for as an equity method investment.
Effective June 30, 2013, the Company completed an asset sale related to its surgical hospital located in Austin, Texas. As part of the transaction, a new entity was formed to operate the surgical hospital. The new entity acquired the equipment and inventory as well as the rights to various licensing agreements, contracts and leases associated with the operations of the surgical hospital. As part of the transaction, the Company received proceeds of $2.7 million in cash and a 25.0% non-consolidating ownership interest in the new entity. The Company will continue to provide management services to the new entity. The Company recognized a loss of $6.2 million as a result of the sale.

5. Long-Term Debt
A summary of long-term debt follows (in thousands):
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
Credit Facility
 
$
—

 
$
—

Senior Secured Notes, net of debt issuance discount of $3,117 and $3,868 at September 30, 2013 and December 31, 2012, respectively
 
337,883

 
337,132

PIK Exchangeable Notes
 
114,076

 
109,688

Toggle Notes
 
73,475

 
94,724

Notes payable and secured loans
 
19,436

 
28,247

Capital lease obligations
 
4,849

 
3,891

Total debt
 
549,719

 
573,682

Less: Current maturities
 
(7,096
)
 
(39,508
)
Total long-term debt
 
$
542,623

 
$
534,174

Credit Facility
The Company's senior secured super-priority revolving credit facility (the "Credit Facility”) matures on December 15, 2015. As of September 30, 2013, the Company had letters of credit outstanding of $1.8 million and availability of $48.2 million under the Credit Facility.
The Credit Facility contains financial covenants requiring the Company not to exceed a maximum net senior secured leverage ratio or fall below a minimum cash interest coverage ratio, in each case tested quarterly. Borrowings under the Credit Facility are subject to significant conditions, including the absence of any material adverse change. At September 30, 2013, the Company was in compliance with all material covenants contained in the Credit Facility.

14
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Senior Secured Notes
The Senior Secured Notes mature on June 15, 2016. The Senior Secured Notes were issued at a 1.51% discount and interest accrues at the rate of 8.00% per annum, payable on June 15 and December 15 of each year.
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. In 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 Senior Secured Notes with proceeds of certain equity offerings at any time prior to June 15, 2014. At September 30, 2013, the Company had not redeemed any of its Senior Secured Notes.
At September 30, 2013, the Company was in compliance with all material covenants contained in the indenture governing the Senior Secured Notes.
PIK Exchangeable Notes
The PIK Exchangeable Notes mature on June 15, 2017. Interest accrues on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on June 15 and December 15 of each year. The Company pays interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest. The Company records this accrued interest in other current liabilities until the interest payment date. On June 15 and December 15 of each year, the Company reclassifies the accrued interest to long-term debt. Due to the required payment-in-kind interest, the Company increased the principal amount of the PIK Exchangeable Notes by $4.4 million during the nine months ended September 30, 2013. As of September 30, 2013, the Company had accrued interest of $2.7 million on the PIK Exchangeable Notes.
The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.
The Company may not redeem the PIK Exchangeable Notes prior to June 15, 2014. On or after June 15, 2014, the Company may redeem some or all of the PIK Exchangeable Notes for cash at a redemption price equal to a specified percentage of the accreted principal amount of the PIK Exchangeable Notes to be redeemed, plus accrued and non-capitalized interest. The specific percentage for such redemptions will be 104% for redemptions during the year commencing on June 15, 2014, 102% for redemptions during the year commencing on June 15, 2015, and 100% for redemptions during the year commencing on June 15, 2016.
At September 30, 2013, the Company was in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.
Toggle Notes
The Toggle Notes mature on August 23, 2015.  Beginning with the February 2012 interest payment, all interest under the Toggle Notes is required to be paid in cash. As of September 30, 2013, the Company had accrued interest of $0.9 million on the Toggle Notes, which was included in other current liabilities on the consolidated balance sheet.
The indenture governing the Toggle Notes includes a mandatory redemption provision. Under this provision, if the Toggle Notes would otherwise constitute applicable high yield discount obligations, within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended, the Company is required to redeem, for cash, a portion of the Toggle Notes then outstanding, equal to the mandatory principal redemption amount. Under the mandatory redemption provisions of the Toggle Notes, the Company repaid $21.2 million of the principal outstanding balance on August 23, 2013. The Company funded this payment with cash from operations.
The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit the Company's ability and the ability of the Company's subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates. At September 30, 2013, the Company was in compliance with all material covenants contained in the indenture governing the Toggle Notes.
Notes Payable to Banks
In March 2013, the Company refinanced the debt of its Idaho Falls, Idaho facility. This refinancing transaction resulted in $6.1 million of borrowings from a new lender, $7.5 million of repayments to the previous lenders and $427,000 of debt issuance cost payments. In the three months ended September 30, 2013, the Company repaid the $6.1 million of borrowings from the new lender with cash from operations.


15
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

6. Commitments and Contingencies
Lease and Debt Guarantees on Non-Consolidated Facilities
As of September 30, 2013, the Company had guaranteed $1.0 million of operating lease payments of certain non-consolidated surgical facilities. These operating leases typically have ten-year terms, with optional renewal periods. At December 31, 2012, the Company guaranteed debt at its non-consolidated surgical facility located in Novi, Michigan. In January 2013, the Company sold its ownership interest in this facility and no longer has any debt guarantees.
Professional, General and Workers' Compensation Liability Risks
The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. To cover these claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. The workers compensation insurance is on an occurrence basis. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that would have a material adverse effect on the Company's business, financial condition or results of operations. The Company expenses the costs under the self-insured retention exposure for general and professional liability and workers compensation claims which relate to (i) deductibles on claims made during the policy period, and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Reserves and provisions are based upon actuarially determined estimates. The reserves are estimated using individual case-basis valuations and actuarial analysis. Based on historical results and data currently available, management does not believe a change in one or more of the underlying assumptions will have a material impact on the Company's consolidated financial position or results of operations. Reserves for professional, general and workers' compensation claim liabilities are determined with no regard for expected insurance recoveries and are presented gross on the consolidated balance sheets. Expected insurance recoveries are presented separately.  Gross reserves of $6.1 million and $5.2 million at September 30, 2013 and December 31, 2012, respectively, are included in other current liabilities and other long-term liabilities on the consolidated balance sheets.  Expected insurance recoveries of $2.6 million and $1.5 million at September 30, 2013 and December 31, 2012, respectively, are included in other long-term assets on the consolidated balance sheets.
Laws and Regulations
Laws and regulations governing our business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how our surgical facilities conduct their operations, from licensing requirements to how and whether our facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians. It is the Company's current practice and future intent to cooperate fully with such inquiries. The Company is not aware of any such inquiry that would have a material adverse effect on the Company's business, results of operations or financial condition.
Acquired Facilities
The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.
The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other healthcare providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.
Potential Physician Investor Liability
A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since

16
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

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.

7. Related Party Transactions
On August 23, 2007, the Company entered into a ten-year advisory services and management agreement with Crestview Advisors, L.L.C.  The annual management fee is $1.0 million and is payable on August 23 of each year.  The Company has prepaid this annual management fee and, as of September 30, 2013, had an asset of $895,000 that is included in prepaid expenses and other current assets on the consolidated balance sheet.
Affiliates of Crestview and affiliates of the Northwestern Mutual Insurance Company hold the majority of the PIK Exchangeable Notes which entitle them to additional ownership in Holdings upon exchange. The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.
The PIK Exchangeable Notes mature on June 15, 2017, subject to certain redemption provisions.  The Company pays interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest. As of September 30, 2013, the Company had $114.1 million aggregate principal amount of PIK Exchangeable Notes outstanding and had accrued interest of $2.7 million on the PIK Exchangeable Notes which is included in other current liabilities on the consolidated balance sheet. See Note 5 for further discussion of the PIK Exchangeable Notes.

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

17
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Condensed Consolidating Balance Sheet as of September 30, 2013
(In thousands)

 
 
Parent Issuer
 
Guarantor Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total Consolidated
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
5,144

 
$
11,960

 
$
40,623

 
$
—

 
$
57,727

Accounts receivable, net
 
—

 
—

 
73,876

 
—

 
73,876

Inventories
 
—

 
—

 
16,524

 
—

 
16,524

Prepaid expenses and other current assets
 
2,535

 
823

 
7,139

 
—

 
10,497

Due from related parties
 
2,829

 
24,316

 
—

 
(27,145
)
 
—

Current assets of discontinued operations
 
—

 
—

 
550

 
—

 
550

Total current assets
 
10,508

 
37,099

 
138,712

 
(27,145
)
 
159,174

Property and equipment, net
 
401

 
2,100

 
126,233

 
—

 
128,734

Intangible assets, net
 
1,968

 
—

 
21,281

 
—

 
23,249

Goodwill
 
656,059

 
—

 
—

 
—

 
656,059

Investments in and advances to affiliates
 
75,542

 
36,346

 
543

 
(98,452
)
 
13,979

Restricted invested assets
 
—

 
—

 
177

 
—

 
177

Other long-term assets
 
9,885

 
—

 
4,580

 
—

 
14,465

Total assets
 
$
754,363

 
$
75,545

 
$
291,526

 
$
(125,597
)
 
$
995,837

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
145

 
$
—

 
$
17,614

 
$
—

 
$
17,759

Accrued payroll and benefits
 
1,185

 
—

 
10,872

 
—

 
12,057

Due to related parties
 
—

 
—

 
27,145

 
(27,145
)
 
—

Other current liabilities
 
15,960

 
3

 
26,422

 
—

 
42,385

Current maturities of long-term debt
 
344

 
—

 
6,752

 
—

 
7,096

Current liabilities of discontinued operations
 
—

 
—

 
43

 
—

 
43

Total current liabilities
 
17,634

 
3

 
88,848

 
(27,145
)
 
79,340

Long-term debt, less current maturities
 
525,090

 
—

 
17,533

 
—

 
542,623

Long-term deferred tax liabilities
 
73,482

 
—

 
—

 
—

 
73,482

Other long-term liabilities
 
2,128

 
—

 
59,220

 
—

 
61,348

Long-term liabilities of discontinued operations
 
—

 
—

 
236

 
—

 
236

Non-controlling interests—redeemable
 
—

 
—

 
34,210

 
—

 
34,210

Total Symbion, Inc. stockholders' equity
 
136,029

 
75,542

 
22,910

 
(98,452
)
 
136,029

Non-controlling interests—non-redeemable
 
—

 
—

 
68,569

 
—

 
68,569

Total equity
 
136,029

 
75,542

 
91,479

 
(98,452
)
 
204,598

Total liabilities and stockholders' equity
 
$
754,363

 
$
75,545

 
$
291,526

 
$
(125,597
)
 
$
995,837











18
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Condensed Consolidating Balance Sheet as of December 31, 2012
(In thousands)

 
 
Parent Issuer
 
Guarantor Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total Consolidated
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
8,505

 
$
26,174

 
$
39,689

 
$
—

 
$
74,368

Accounts receivable, net
 
—

 
—

 
72,133

 
—

 
72,133

Inventories
 
—

 
167

 
14,397

 
—

 
14,564

Prepaid expenses and other current assets
 
1,794

 
3

 
8,262

 
—

 
10,059

Due from related parties
 
1,878

 
44,895

 
—

 
(46,773
)
 
—

Current assets of discontinued operations
 
—

 
—

 
1,971

 
—

 
1,971

Total current assets
 
12,177

 
71,239

 
136,452

 
(46,773
)
 
173,095

Property and equipment, net
 
918

 
2,100

 
128,204

 
—

 
131,222

Intangible assets, net
 
2,083

 
—

 
22,468

 
—

 
24,551

Goodwill
 
656,058

 
—

 
—

 
—

 
656,058

Investments in and advances to affiliates
 
91,614

 
18,344

 
423

 
(98,249
)
 
12,132

Restricted invested assets
 
—

 
—

 
5,169

 
—

 
5,169

Other long-term assets
 
12,847

 
—

 
1,198

 
—

 
14,045

Long-term assets of discontinued operations
 
—

 
—

 
931

 
—

 
931

Total assets
 
$
775,697

 
$
91,683

 
$
294,845

 
$
(145,022
)
 
$
1,017,203

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
161

 
$
2

 
$
22,696

 
$
—

 
$
22,859

Accrued payroll and benefits
 
1,429

 
62

 
11,378

 
—

 
12,869

Due to related parties
 
—

 
—

 
46,773

 
(46,773
)
 
—

Other current liabilities
 
9,063

 
5

 
20,095

 
—

 
29,163

Current maturities of long-term debt
 
21,232

 
—

 
18,276

 
—

 
39,508

Current liabilities of discontinued operations
 
—

 
—

 
1,620

 
—

 
1,620

Total current liabilities
 
31,885

 
69

 
120,838

 
(46,773
)
 
106,019

Long-term debt, less current maturities
 
520,316

 
—

 
13,858

 
—

 
534,174

Long-term deferred tax liabilities
 
71,781

 
—

 
—

 
—

 
71,781

Other long-term liabilities
 
2,634

 
—

 
60,168

 
—

 
62,802

Long-term liabilities of discontinued operations
 
—

 
—

 
213

 
—

 
213

Non-controlling interests—redeemable
 
—

 
—

 
33,686

 
—

 
33,686

Total Symbion, Inc. stockholders' equity
 
149,081

 
91,614

 
6,635

 
(98,249
)
 
149,081

Non-controlling interests—non-redeemable
 
—

 
—

 
59,447

 
—

 
59,447

Total equity
 
149,081

 
91,614

 
66,082

 
(98,249
)
 
208,528

Total liabilities and stockholders' equity
 
$
775,697

 
$
91,683

 
$
294,845

 
$
(145,022
)
 
$
1,017,203


19
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

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

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Revenues
$
5,177

 
$
—

 
$
127,633

 
$
(3,881
)
 
$
128,929

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
—

 
36,576

 
—

 
36,576

Supplies
—

 
—

 
34,138

 
—

 
34,138

Professional and medical fees
—

 
—

 
9,871

 
—

 
9,871

Lease expense
—

 
—

 
6,665

 
—

 
6,665

Other operating expenses
—

 
—

 
9,482

 
—

 
9,482

Cost of revenues
—

 
—

 
96,732

 
—

 
96,732

General and administrative expenses
5,723

 
—

 
—

 
—

 
5,723

Depreciation and amortization
166

 
—

 
5,864

 
—

 
6,030

Provision for doubtful accounts
—

 
—

 
3,066

 
—

 
3,066

Income from equity investments
—

 
(1,015
)
 
(46
)
 
—

 
(1,061
)
Gain on disposal or impairment of long-lived assets, net
—

 
—

 
(1,366
)
 
—

 
(1,366
)
Management fees
—

 
—

 
3,881

 
(3,881
)
 
—

Equity in earnings of affiliates
(11,202
)
 
(9,830
)
 
—

 
21,032

 
—

Litigation settlements, net
—

 
—

 
(32
)
 
—

 
(32
)
Total operating expenses
(5,313
)
 
(10,845
)
 
108,099

 
17,151

 
109,092

Operating income
10,490

 
10,845

 
19,534

 
(21,032
)
 
19,837

Interest (expense) income, net
(12,806
)
 
357

 
(2,035
)
 
—

 
(14,484
)
(Loss) income before income taxes and discontinued operations
(2,316
)
 
11,202

 
17,499

 
(21,032
)
 
5,353

Provision for income taxes
1,010

 
—

 
97

 
—

 
1,107

(Loss) income from continuing operations
(3,326
)
 
11,202

 
17,402

 
(21,032
)
 
4,246

Income from discontinued operations, net of taxes
—

 
—

 
46

 
—

 
46

Net (loss) income
(3,326
)
 
11,202

 
17,448

 
(21,032
)
 
4,292

Less: Net income attributable to non-controlling interests
—

 
—

 
(7,618
)
 
—

 
(7,618
)
Net (loss) income attributable to Symbion, Inc.
$
(3,326
)
 
$
11,202

 
$
9,830

 
$
(21,032
)
 
$
(3,326
)

20
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Condensed Consolidating Statement of Operations for the Three Months Ended September 30, 2012
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Revenues
$
5,181

*
$
452

 
$
121,876

*
$
(3,843
)
 
$
123,666

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
358

 
35,536

 
—

 
35,894

Supplies
—

 
8

 
31,834

 
—

 
31,842

Professional and medical fees
—

 
12

 
9,750

 
—

 
9,762

Lease expense
—

 
38

 
6,700

 
—

 
6,738

Other operating expenses
—

 
20

 
8,782

 
—

 
8,802

Cost of revenues
—

 
436

 
92,602

 
—

 
93,038

General and administrative expenses
5,684

 
—

 
—

 
—

 
5,684

Depreciation and amortization
160

 
—

 
5,393

 
—

 
5,553

Provision for doubtful accounts
—

 
—

 
2,940

 
—

 
2,940

Income from equity investments
—

 
(1,251
)
 
—

 
—

 
(1,251
)
Loss (gain) on disposal or impairment of long-lived assets, net
293

 
—

 
(227
)
 
—

 
66

Management fees
—

 
—

 
3,683

 
(3,683
)
 
—

Equity in earnings of affiliates
(9,465
)
*
(7,486
)
*
—

 
16,951

 
—

Electronic health records incentives
—

 
—

 
(603
)
 
—

 
(603
)
Total operating expenses
(3,328
)
 
(8,301
)
 
103,788

 
13,268

 
105,427

Operating income
8,509

 
8,753

 
18,088

 
(17,111
)
 
18,239

Interest (expense) income, net
(12,868
)
 
660

 
(2,325
)
 
—

 
(14,533
)
(Loss) income before income taxes and discontinued operations
(4,359
)
 
9,413

 
15,763

 
(17,111
)
 
3,706

Provision for income taxes
1,090

 
—

 
28

 
—

 
1,118

(Loss) income from continuing operations
(5,449
)
 
9,413

 
15,735

 
(17,111
)
 
2,588

Income (loss) from discontinued operations, net of taxes
—

 
52

 
(1,077
)
 
160

 
(865
)
Net (loss) income
(5,449
)
*
9,465

*
14,658

*
(16,951
)
 
1,723

Less: Net income attributable to non-controlling interests
—

 
—

 
(7,172
)
 
—

 
(7,172
)
Net (loss) income attributable to Symbion, Inc.
$
(5,449
)
 
$
9,465

 
$
7,486

 
$
(16,951
)
 
$
(5,449
)

*
Revenues of $3,843 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the three months ended September 30, 2012. This adjustment impacted equity in earnings of affiliates and net (loss) income on the condensed consolidating statement of operations and is deemed by the Company to be an immaterial correction of an error.

21
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

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

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Revenues
$
15,567

 
$
—

 
$
395,908

 
$
(12,239
)
 
$
399,236

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
—

 
113,437

 
—

 
113,437

Supplies
—

 
—

 
106,203

 
—

 
106,203

Professional and medical fees
—

 
—

 
31,264

 
—

 
31,264

Lease expense
—

 
—

 
20,702

 
—

 
20,702

Other operating expenses
—

 
—

 
27,791

 
—

 
27,791

Cost of revenues
—

 
—

 
299,397

 
—

 
299,397

General and administrative expense
16,847

 
—

 
—

 
—

 
16,847

Depreciation and amortization
448

 
—

 
17,211

 
—

 
17,659

Provision for doubtful accounts
—

 
—

 
8,290

 
—

 
8,290

Income from equity investments
—

 
(2,858
)
 
(123
)
 
—

 
(2,981
)
(Gain) loss on disposal or impairment of long-lived assets, net
(1,000
)
 
20,812

 
(13,999
)
 
—

 
5,813

Management fees
—

 
—

 
12,130

 
(12,130
)
 
—

Equity in earnings of affiliates
(25,911
)
 
(42,175
)
 
—

 
68,086

 
—

Litigation settlements, net
—

 
—

 
(230
)
 
—

 
(230
)
Total operating expenses
(9,616
)
 
(24,221
)
 
322,676

 
55,956

 
344,795

Operating income
25,183

 
24,221

 
73,232

 
(68,195
)
 
54,441

Interest (expense) income, net
(38,736
)
 
1,654

 
(6,798
)
 
—

 
(43,880
)
(Loss) income before income taxes and discontinued operations
(13,553
)
 
25,875

 
66,434

 
(68,195
)
 
10,561

Provision for income taxes
997

 
—

 
744

 
—

 
1,741

(Loss) income from continuing operations
(14,550
)
 
25,875

 
65,690

 
(68,195
)
 
8,820

Income from discontinued operations, net of taxes
—

 
36

 
1,106

 
109

 
1,251

Net (loss) income
(14,550
)
 
25,911

 
66,796

 
(68,086
)
 
10,071

Less: Net income attributable to non-controlling interests
—

 
—

 
(24,621
)
 
—

 
(24,621
)
Net (loss) income attributable to Symbion, Inc.
$
(14,550
)
 
$
25,911

 
$
42,175

 
$
(68,086
)
 
$
(14,550
)

22
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Condensed Consolidating Statement of Operations for the Nine Months Ended September 30, 2012
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Revenues
$
15,537

*
$
1,305

 
$
356,311

*
$
(11,661
)
 
$
361,492

Operating expenses:
 
 
 
 
 
 
 
 
 
Salaries and benefits
—

 
1,012

 
98,524

 
—

 
99,536

Supplies
—

 
23

 
90,177

 
—

 
90,200

Professional and medical fees
—

 
42

 
26,603

 
—

 
26,645

Lease expense
—

 
101

 
18,208

 
—

 
18,309

Other operating expenses
—

 
54

 
24,554

 
—

 
24,608

Cost of revenues
—

 
1,232

 
258,066

 
—

 
259,298

General and administrative expense
19,970

 
—

 
—

 
—

 
19,970

Depreciation and amortization
476

 
—

 
15,674

 
—

 
16,150

Provision for doubtful accounts
—

 
—

 
7,596

 
—

 
7,596

Income from equity investments
—

 
(2,929
)
 
—

 
—

 
(2,929
)
Gain on disposal and impairment of long-lived assets, net
(328
)
 
—

 
(154
)
 
—

 
(482
)
Management fees
—

 
—

 
11,066

 
(11,066
)
 
—

Equity in earnings of affiliates
(33,408
)
*
(28,271
)
*
—

 
61,679

 
—

Electronic health records incentives
—

 
—

 
(603
)
 
—

 
(603
)
Litigation settlements, net
(45
)
 
—

 
(187
)
 
—

 
(232
)
Total operating expenses
(13,335
)
 
(29,968
)
 
291,458

 
50,613

 
298,768

Operating income
28,872

 
31,273

 
64,853

 
(62,274
)
 
62,724

Interest (expense) income, net
(38,323
)
 
1,981

 
(6,859
)
 
—

 
(43,201
)
(Loss) income before taxes and discontinued operations
(9,451
)
 
33,254

 
57,994

 
(62,274
)
 
19,523

Provision for income taxes
3,800

 
—

 
(26
)
 
—

 
3,774

(Loss) income from continuing operations
(13,251
)
 
33,254

 
58,020

 
(62,274
)
 
15,749

Income (loss) from discontinued operations, net of taxes
—

 
154

 
(1,981
)
 
595

 
(1,232
)
Net (loss) income
(13,251
)
*
33,408

*
56,039

*
(61,679
)
 
14,517

Less: Net income attributable to non-controlling interests
—

 
—

 
(27,768
)
 
—

 
(27,768
)
Net (loss) income attributable to Symbion, Inc.
$
(13,251
)
 
$
33,408

 
$
28,271

 
$
(61,679
)
 
$
(13,251
)

*
Revenues of $11,661 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the nine months ended September 30, 2012. This adjustment impacted equity in earnings of affiliates and net (loss) income on the condensed consolidating statement of operations and is deemed by the Company to be an immaterial correction of an error.



23
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

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

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(3,326
)
 
$
11,202

 
$
17,448

 
$
(21,032
)
 
$
4,292

 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(3,326
)
 
$
11,202

 
$
17,448

 
$
(21,032
)
 
$
4,292

Less: Comprehensive income attributable to non-controlling interests
—

 
—

 
(7,618
)
 
—

 
(7,618
)
Comprehensive (loss) income attributable to Symbion, Inc.
$
(3,326
)
 
$
11,202

 
$
9,830

 
$
(21,032
)
 
$
(3,326
)










Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2012
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(5,449
)
*
$
9,465

*
$
14,658

*
$
(16,951
)
 
$
1,723

 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(5,449
)
 
$
9,465

 
$
14,658

 
$
(16,951
)
 
$
1,723

Less: Comprehensive income attributable to non-controlling interests
—

 
—

 
(7,172
)
 
—

 
(7,172
)
Comprehensive (loss) income attributable to
Symbion, Inc.
$
(5,449
)
 
$
9,465

 
$
7,486

 
$
(16,951
)
 
$
(5,449
)

*
Revenues of $3,843 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the three months ended September 30, 2012 on the condensed consolidating statement of operations. This adjustment impacted net (loss) income on the condensed consolidating statement of comprehensive income and is deemed by the Company to be an immaterial correction of an error.

24
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

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

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(14,550
)
 
$
25,911

 
$
66,796

 
$
(68,086
)
 
$
10,071

 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(14,550
)
 
$
25,911

 
$
66,796

 
$
(68,086
)
 
$
10,071

Less: Comprehensive income attributable to non-controlling interests
—

 
—

 
(24,621
)
 
—

 
(24,621
)
Comprehensive (loss) income attributable to Symbion, Inc.
$
(14,550
)
 
$
25,911

 
$
42,175

 
$
(68,086
)
 
$
(14,550
)










Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2012
(In thousands)

 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(13,251
)
*
$
33,408

*
$
56,039

*
$
(61,679
)
 
$
14,517

 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(13,251
)
 
$
33,408

 
$
56,039

 
$
(61,679
)
 
$
14,517

Less: Comprehensive income attributable to non-controlling interests
—

 
—

 
(27,768
)
 
—

 
(27,768
)
Comprehensive (loss) income attributable to Symbion, Inc.
$
(13,251
)
 
$
33,408

 
$
28,271

 
$
(61,679
)
 
$
(13,251
)

*
Revenues of $11,661 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the nine months ended September 30, 2012 on the condensed consolidating statement of operations. This adjustment impacted net (loss) income on the condensed consolidating statement of comprehensive income and is deemed by the Company to be an immaterial correction of an error.


25
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2013
(In thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(14,550
)
 
$
25,911

 
$
66,796

 
$
(68,086
)
 
$
10,071

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

 
(36
)
 
(1,106
)
 
(109
)
 
(1,251
)
Depreciation and amortization
448

 
—

 
17,211

 
—

 
17,659

Amortization of debt issuance costs and discounts
2,902

 
—

 
93

 
—

 
2,995

Payment-in-kind interest expense
6,685

 
—

 
—

 
—

 
6,685

Stock-based compensation
206

 
—

 
—

 
—

 
206

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

 
(13,999
)
 
—

 
5,813

Deferred income taxes
1,352

 
—

 
—

 
—

 
1,352

Equity in earnings of affiliates
(25,911
)
 
(42,175
)
 
—

 
68,086

 
—

Income from equity investments, net of distributions received
—

 
(446
)
 
(123
)
 
—

 
(569
)
Provision for doubtful accounts
—

 
—

 
8,290

 
—

 
8,290

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

 
—

 
(5,999
)
 
—

 
(5,999
)
Other operating assets and liabilities
27,866

 
(17,892
)
 
(11,440
)
 
109

 
(1,357
)
Net cash (used in) provided by operating activities - continuing operations
(2,002
)
 
(13,826
)
 
59,723

 
—

 
43,895

Net cash provided by operating activities - discontinued operations
—

 
—

 
353

 
—

 
353

Net cash (used in) provided by operating activities
(2,002
)
 
(13,826
)
 
60,076

 
—

 
44,248

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment, net
(1,359
)
 
—

 
(10,382
)
 
—

 
(11,741
)
(Payments for acquisitions) proceeds from divestitures, net of cash
—

 
(1,300
)
 
1,785

 
—

 
485

Net cash used in (provided by) investing activities - continuing operations
(1,359
)
 
(1,300
)
 
(8,597
)
 
—

 
(11,256
)
Net cash provided by investing activities - discontinued operations
—

 
—

 
3,725

 
—

 
3,725

Net cash used in investing activities
(1,359
)
 
(1,300
)
 
(4,872
)
 
—

 
(7,531
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
—

 
—

 
(43,058
)
 
—

 
(43,058
)
Borrowings of long-term debt
—

 
—

 
8,180

 
—

 
8,180

Payments of debt issuance costs
—

 
—

 
(427
)
 
—

 
(427
)
Change in restricted invested assets
—

 
—

 
4,992

 
—

 
4,992

Distributions to non-controlling interest holders
—

 
—

 
(23,770
)
 
—

 
(23,770
)
Proceeds from ownership transactions with consolidated affiliates
—

 
912

 
—

 
—

 
912

Other financing activities
—

 
—

 
(62
)
 
—

 
(62
)
Net cash provided by (used in) financing activities - continuing operations
—

 
912

 
(54,145
)
 
—

 
(53,233
)
Net cash used in financing activities - discontinued operations
—

 
—

 
(125
)
 
—

 
(125
)
Net cash provided by (used in) financing activities
—

 
912

 
(54,270
)
 
—

 
(53,358
)
Net (decrease) increase in cash and cash equivalents
(3,361
)
 
(14,214
)
 
934

 
—

 
(16,641
)
Cash and cash equivalents at beginning of period
8,505

 
26,174

 
39,689

 
—

 
74,368

Cash and cash equivalents at end of period
$
5,144

 
$
11,960

 
$
40,623

 
$
—

 
$
57,727


26
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2012
(In thousands)
 
Parent
Issuer
 
Guarantor
Subsidiaries
 
Combined
Non-Guarantors
 
Eliminations
 
Total
Consolidated
 
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(13,251
)
*
$
33,408

*
$
56,039

*
$
(61,679
)
 
$
14,517

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

 
(154
)
 
1,981

 
(595
)
 
1,232

Depreciation and amortization
476

 
—

 
15,674

 
—

 
16,150

Amortization of debt issuance costs and discounts
2,843

 
—

 
—

 
—

 
2,843

Payment-in-kind interest expense
6,166

 
—

 
—

 
—

 
6,166

Stock-based compensation
1,944

 
—

 
—

 
—

 
1,944

(Gain) loss on disposal or impairment of long-lived assets, net
(328
)
 
—

 
(154
)
 
—

 
(482
)
Deferred income taxes
6,848

 
—

 
—

 
—

 
6,848

Equity in earnings of affiliates
(33,408
)
*
(28,271
)
*
—

 
61,679

 
—

Income from equity investments, net of distributions received
—

 
(1,276
)
 
—

 
—

 
(1,276
)
Provision for doubtful accounts
—

 
—

 
7,596

 
—

 
7,596

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

 
—

 
(2,831
)
 
—

 
(2,831
)
Other operating assets and liabilities
31,043

*
13,544

*
(42,459
)
 
595

 
2,723

Net cash (used in) provided by operating activities - continuing operations
2,333

 
17,251

 
35,846

 
—

 
55,430

Net cash provided by operating activities - discontinued operations
—

 
—

 
684

 
—

 
684

Net cash (used in) provided by operating activities
2,333

 
17,251

 
36,530

 
—

 
56,114

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property and equipment, net
(291
)
 
—

 
(9,735
)
 
—

 
(10,026
)
Payments for acquisitions, net of cash
—

 
(18,474
)
 
—

 
—

 
(18,474
)
Other investing activities
—

 
—

 
83

 
—

 
83

Net cash used in investing activities - continuing operations
(291
)
 
(18,474
)
 
(9,652
)
 
—

 
(28,417
)
Net cash provided by investing activities - discontinued operations
—

 
—

 
7,164

 
—

 
7,164

Net cash used in investing activities
(291
)
 
(18,474
)
 
(2,488
)
 
—

 
(21,253
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Principal payments on long-term debt
—

 
—

 
(6,411
)
 
—

 
(6,411
)
Borrowings of long-term debt
—

 
—

 
10,257

 
—

 
10,257

Distributions to non-controlling interest holders
—

 
—

 
(28,469
)
 
—

 
(28,469
)
Payments related to ownership transactions with consolidated affiliates
—

 
(320
)
 
—

 
—

 
(320
)
Other financing activities
—

 
—

 
60

 
—

 
60

Net cash used in financing activities - continuing operations
—

 
(320
)
 
(24,563
)
 
—

 
(24,883
)
Net cash used in financing activities - discontinued operations
—

 
—

 
(918
)
 
—

 
(918
)
Net cash used in financing activities
—

 
(320
)
 
(25,481
)
 
—

 
(25,801
)
Net increase (decrease) in cash and cash equivalents
2,042

 
(1,543
)
 
8,561

 
—

 
9,060

Cash and cash equivalents at beginning of period
5,509

 
27,617

 
29,370

 
—

 
62,496

Cash and cash equivalents at end of period
$
7,551

 
$
26,074

 
$
37,931

 
$
—

 
$
71,556


*
Revenues of $11,661 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the nine months ended September 30, 2012 on the condensed consolidating statement of operations. This adjustment impacted net (loss) income, equity in earnings of affiliates and changes in other operating assets and liabilities on the condensed consolidating statement of cash flows and is deemed by the Company to be an immaterial correction of an error.

27
SYMBION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
(Unaudited)

9. Subsequent Events
None.




28


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

29


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 24 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, cardiology, gastroenterology and ophthalmology. Some of our surgical hospitals also provide acute care 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 structure. We believe this approach aligns our interests with those of our partners.
As of November 8, 2013, we owned and operated 49 surgical facilities, including 43 ASCs and six surgical hospitals.  We also managed seven additional ASCs.  We owned a majority interest in 29 of the 49 surgical facilities and consolidated 45 facilities for financial reporting purposes.  In addition to our surgical facilities, we also manage one physician clinic in a market in which we operate an ASC and a surgical hospital.
We have benefited from both growth in overall outpatient surgery cases as well as the migration of surgical procedures from the hospital to the surgical facility setting.  Advancements in medical technology, such as lasers, arthroscopy and enhanced endoscopic techniques, have reduced the trauma of surgery and the amount of recovery time required by patients following a surgical procedure.  Improvements in anesthesia also have shortened the recovery time for many patients and have reduced post-operative side effects such as pain, nausea and drowsiness.  These medical advancements have enabled more patients to undergo surgery in a surgical facility setting.
We continue to focus on improving the performance of our same store facilities, selectively acquiring established facilities and developing new facilities. Effective January 1, 2013, we exercised our contractual right to hold a majority of the Governor seats on the Governing Board of our surgical hospital located in Great Falls, Montana. As we now control the majority of the Governor seats on the Governing Board, we consolidate this facility for financial reporting purposes. Prior to January 1, 2013, this facility was accounted for using the equity method for financial reporting purposes.
Effective July 1, 2013, we acquired a 58.7% ownership interest in a surgical facility located in Irvine, California. We merged the operations of the acquired facility with an existing surgical facility in this market which is consolidated for financial reporting purposes. The purchase price of the acquisition was $1.1 million. The acquisition was financed with cash from operations.
Effective July 31, 2013, we acquired a 20.0% ownership interest in a surgical facility located in Jackson, Tennessee.  The purchase price of the acquisition was $1.3 million, which was financed with cash from operations.  This investment is accounted for using the equity method for financial reporting purposes. We entered into a management agreement with the facility in April 2012 and continue to manage the facility.
Revenues
Our revenues consist of patient services revenues and other services revenues.  Our patient services revenues relate to fees charged for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes.  Other services revenues consist of management and administrative service fees derived from the non-consolidated facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest, and management services we provide to physician clinics for which we are not required to provide capital or additional assets.
The following table summarizes our revenues by service type as a percentage of total revenues for the periods indicated:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Patient services revenues
 
99.0
%
 
98.4
%
 
99.0
%
 
98.5
%
Other services revenues
 
1.0
%
 
1.6
%
 
1.0
%
 
1.5
%
Total revenues
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

30


Payor Mix
The following table sets forth by type of payor the percentage of our patient services revenues generated in the periods indicated:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Private insurance
 
59.3
%
 
60.7
%
 
59.2
%
 
62.6
%
Government
 
34.3
%
 
32.2
%
 
33.6
%
 
29.6
%
Self-pay
 
2.8
%
 
2.8
%
 
2.8
%
 
2.9
%
Other
 
3.6
%
 
4.3
%
 
4.4
%
 
4.9
%
Total patient services revenues
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Case Mix
We primarily operate multi-specialty facilities where physicians perform a variety of procedures in various specialties, including orthopedics, pain management, gastroenterology and ophthalmology, among others. We believe this diversification helps to protect us from adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume.
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,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Cardiology
 
2.1
%
 
2.2
%
 
2.0
%
 
0.7
%
Ear, nose and throat
 
5.1
%
 
5.3
%
 
5.8
%
 
5.9
%
Gastrointestinal
 
28.7
%
 
29.5
%
 
28.4
%
 
30.5
%
General surgery
 
3.9
%
 
3.7
%
 
3.9
%
 
3.6
%
Obstetrics/gynecology
 
3.8
%
 
3.8
%
 
3.7
%
 
3.3
%
Ophthalmology
 
17.6
%
 
16.6
%
 
16.9
%
 
16.3
%
Orthopedic
 
14.7
%
 
15.3
%
 
15.4
%
 
15.7
%
Pain management
 
13.4
%
 
13.5
%
 
13.0
%
 
13.7
%
Plastic surgery
 
2.2
%
 
2.3
%
 
2.3
%
 
2.4
%
Other
 
8.5
%
 
7.8
%
 
8.6
%
 
7.9
%
Total
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

31


Case Growth
Same Store Information
We define same store facilities as those facilities that were operating throughout both the three and nine months ended September 30, 2013 and 2012. The following same store facilities tables includes information about both consolidated surgical facilities included in continuing operations whose revenue is included in our revenue and non-consolidated surgical facilities that are not reported in our revenue, as we account for these surgical facilities using the equity method.  This same store facilities tables are presented to allow comparability to other companies in our industry for the periods indicated.
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Cases
 
57,084

 
56,774

 
164,306

 
171,032

Case growth
 
0.5
%
 
 
 
(3.9
)%
 
 
Net patient services revenue per case
 
$
2,409

 
$
2,284

 
$
2,251

 
$
2,105

Net patient services revenue per case growth
 
5.5
%
 
 
 
6.9
 %
 
 
Number of same store surgical facilities
 
47

 
 
 
45

 
 
Consolidated Information
The following tables set forth information for all surgical facilities included in continuing operations that we consolidate for financial reporting purposes for the periods indicated. Accordingly, the tables include surgical facilities that we have acquired or developed since January 1, 2012:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Cases
 
53,654

 
54,021

 
162,746

 
165,500

Case growth
 
(0.7
)%
 
 
 
(1.7
)%
 
 
Net patient services revenue per case
 
$
2,370

 
$
2,249

 
$
2,424

 
$
2,146

Net patient services revenue per case growth
 
5.4
 %
 
 
 
13.0
 %
 
 
Number of consolidated surgical facilities
 
45

 
 
 
45

 
 

Sources of Revenue and Recent Regulatory Developments
We are dependent upon private and government third-party sources of payment for the healthcare patient services we provide. The amounts that our surgical facilities receive in payment for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid, and state and federal regulations, cost containment and utilization decisions and reduced reimbursement schedules of third-party payors. The disclosures in this section are meant to supplement, and should be read in connection with, the disclosures set forth under the headings "Sources of Revenue" and "Governmental Regulation" in Item 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and the "Sources of Revenue and Recent Regulatory Developments" sections of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2013 and June 30, 2013.
Medicare Reimbursement-Ambulatory Surgery Centers
Payments under the Medicare program to ASCs are made through a system whereby the Secretary of the Department of Health and Human Services ("HHS") determines payment amounts prospectively for various categories of medical services performed in ASCs based upon the hospital outpatient prospective payment system ("OPPS"). On July 19, 2013, the Centers for Medicare and Medicaid Services ("CMS") published a proposed rule to update the Medicare program's payment policies and rates for ASCs for calendar year ("CY") 2014. Among other things, the proposed rule applies a 0.9% increase to the ASC payment rate for CY 2014 for ASCs that successfully report the quality measures for the ASC Quality Reporting (“ASCQR”) Program. The payment rate increase is based on a proposed consumer price index for all urban consumers (CPI-U) update of 1.4%, which is reduced by a multi-factor productivity adjustment of 0.5%. Those ASCs that do not successfully report quality data under the ASCQR Program will receive a payment reduction of 1.1%. The proposed rule also adds five new quality measures to the ASCQR Program that ASCs will need to report in order to be eligible to receive the full payment rate update for CY 2016 and subsequent years. CMS proposed that data collection for these five measures would begin in CY 2014.

32


Medicare Reimbursement-Hospital Inpatient Services
Six of our surgical facilities are licensed as hospitals. Most inpatient services provided by hospitals are reimbursed by Medicare under the inpatient prospective payment system (“IPPS”). Under the IPPS, a hospital receives a fixed amount for inpatient hospital services based on each patient's final assigned Medicare-severity diagnosis related group (“MS-DRG”). Each MS-DRG is assigned a payment rate that is prospectively set using national average resources used per case for treating a patient with a particular diagnosis. This MS-DRG assignment also affects the prospectively determined capital rate paid with each MS-DRG. MS-DRG and capital payments are adjusted by a predetermined geographic adjustment factor assigned to the geographic area in which the hospital is located. The index used to adjust the MS-DRG rates, known as the “hospital market basket index,” gives consideration to the inflation experienced by hospitals in purchasing goods and services.
On August 19, 2013, CMS published the IPPS final rule for federal fiscal year (“FFY”) 2014, which began on October 1, 2013. Under the FFY 2014 final rule, rates for inpatient stays in hospitals paid under the IPPS that successfully report certain quality data under the Hospital Inpatient Quality Reporting (“IQR”) Program will be increased by 0.7%. Those hospitals that do not successfully report quality data under the IQR Program will receive a payment rate decrease of 1.3%.
Medicare Reimbursement-Hospital Outpatient Services
On July 19, 2013, CMS published its OPPS proposed rule for CY 2014. Among other things, the proposed rule provides for a payment rate increase of 1.8% for hospitals that meet the reporting requirements of the Medicare Hospital Outpatient Quality Reporting ("OQR") Program and a payment rate decrease of 0.2% for hospitals that do not meet the requirements. The proposed rate increase is based on a proposed hospital market basket increase of 2.5%, which is reduced by a multi-factor productivity adjustment of 0.4% and an additional 0.3% reduction required by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Affordable Care Act”).
Budget Control Act of 2011
On August 2, 2011, the Budget Control Act of 2011 (the “BCA”) was enacted. The BCA increased the nation's debt ceiling, while taking steps to reduce the federal deficit. The BCA requires $1.2 trillion in automatic across-the-board spending reductions for FFY 2013 through FFY 2021, split evenly between domestic and defense spending. While certain programs (including the Medicaid program) are protected from these automatic spending reductions, payments to Medicare providers may be subject to reductions of up to 2.0%. The BCA's automatic spending reductions were originally set to begin on January 2, 2013. However, the enactment of the American Taxpayer Relief Act of 2012 postponed the implementation of the automatic spending reductions required by the BCA until March 1, 2013. On March 1, 2013, President Barack Obama signed an order implementing the automatic spending reductions required by the BCA. If the BCA's automatic spending reductions become permanent, they could adversely affect our business, results of operations or financial condition.
On April 10, 2013, President Obama released his proposed budget for FFY 2014. The proposed budget would replace the automatic spending reductions required by the BCA in their entirety by replacing the $1.2 trillion in reductions with a combination of new revenue and spending cuts. Specifically, the budget proposes to cut Medicare spending by approximately $400 billion over 10 years.
We cannot predict whether President Obama's proposed budget will be implemented in its entirety or replace the BCA's automatic spending reductions. In addition, Congress could pass a different budget bill or take other legislative action that could reduce Medicare spending by a different amount or that could impose additional restrictions on Medicare programs, which could further reduce the revenue we receive from governmental payment programs.
Adoption of Electronic Health Records
The HITECH Act  includes provisions designed to increase the use of Electronic Health Records (“EHR”) by both physicians and hospitals. Beginning with FFY 2011 and extending through FFY 2016, eligible hospitals may receive incentive payments based upon successfully demonstrating meaningful use of its certified EHR technology. Beginning in FFY 2015, those hospitals that do not successfully demonstrate meaningful use of EHR technology are subject to reductions in incentives. EHR meaningful use objectives and measures that hospitals and physicians must meet in order to qualify for incentive payments will be implemented in three stages. Stage 1 has been in effect since 2011 and on August 23, 2012, HHS released final requirements for Stage 2, which will take effect starting in FFY 2014 for hospitals. We strive to comply with the EHR meaningful use requirements of the HITECH Act so as to qualify for incentive payments. Continued implementation of EHR and compliance with the HITECH Act will result in significant costs.  During the three and nine months ended September 30, 2013, we spent $449,000 and $3.0 million, respectively, related to hardware, software and implementation costs, of which $352,000 and $2.5 million was capitalized. We spent spent $450,000 and $518,000 on hardware, software and implementations costs, of which $448,000 was capitalized during each of the three and nine months ended September 30, 2012, respectively. We expect to receive incentive payments and recognize corresponding revenue upon the completion of the EHR meaningful use requirements. During the three and nine months ended September 30, 2012, we received and recognized $603,000 in incentive payments.
Healthcare Reform
The Affordable Care Act has been subject to a number of challenges to its constitutionality. However, on June 28, 2012, the United States Supreme Court upheld most of the Affordable Care Act, including the “individual mandate” provision, which generally requires all individuals to purchase healthcare insurance or pay a penalty. The only provision of the Affordable Care Act that the Supreme Court struck down as

33


unconstitutional was the provision that would have allowed the federal government to revoke all federal Medicaid funding to any state that did not expand its Medicaid program. In response to the ruling, a number of states have already indicated that they will not expand their Medicaid programs, which would result in the Affordable Care Act not providing coverage to some low-income persons in those states. In addition, several bills have been and will likely continue to be introduced in Congress to repeal or amend all or significant provisions of the Affordable Care Act, and a number of provisions of the Affordable Care Act that were supposed to become effective in CY 2014, such as the provision that requires employers with 50 or more full-time employees or full-time employee equivalents to provide affordable health insurance to those employees, have been delayed until 2015. As a result, it is difficult to predict the impact the Affordable Care Act will have on our business given the delay in implementing regulations and key provisions of the Affordable Care Act and the possible ongoing amendment or repeal of elements of the Affordable Care Act. However, depending on how the Affordable Care Act is ultimately interpreted, amended and implemented, it could have an adverse effect on our business, financial condition and results of operations.
Recovery Audit Contractors
Several years ago, CMS implemented a Recovery Audit Contractor (“RAC”) program. RACs are private contractors contracting with CMS to identify overpayments and underpayments for healthcare patient services through post-payment reviews of claims submitted by Medicare and Medicaid providers. Our facilities continue to receive letters from RAC auditors requesting repayment of alleged overpayments for services and incur expenses associated with responding to and appealing these RAC requests, as well as the costs of repaying any overpayments. Although the repayments requested to date as a result of RAC audits have not been material to our company, we are unable to quantify the financial impact of the RAC audits on our facilities given the pending appeals and uncertainty about the extent of future RAC audits.
Quality Improvement
Quality of care and value-based purchasing of healthcare services have become increasingly significant trends and competitive factors in the healthcare industry. In 2005, CMS began making available to the public performance data relating to ten quality measures that hospitals submit in connection with their Medicare reimbursement. Since that time, CMS has on several occasions increased the number of quality measures hospitals are required to report in order to receive the full IPPS and OPPS market basket updates. In addition, in 2012, CMS implemented the ASCQR Program for ASCs, which requires ASCs to report certain quality measures for services that are provided on or after October 1, 2012, in order to receive the full reimbursement rate increases for CY 2014 and subsequent years.
If the public performance data becomes a primary factor in determining where patients choose to receive care, and if competing hospitals and ASCs have better results than our facilities on those measures, we would expect that our patient volumes could decline. In addition, if our hospitals are in the top quartile for high hospital-acquired conditions ("HAC") for discharges beginning on October 1, 2014 or are unable to meet the required quality measures, the implementation of value-based purchasing and quality care programs potentially could have a negative impact on our revenues.
Value-Based Purchasing
There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities.
The Affordable Care Act requires HHS to implement a Hospital Value-Based Purchasing Program ("VBP Program"). The Affordable Care Act requires HHS to reduce inpatient hospital payments for all discharges by a percentage beginning at 1% in FFY 2013 and increasing by 0.25% each fiscal year up to 2% in FFY 2017 and subsequent years. HHS will pool the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each hospital that meets or exceeds the quality performance standards will receive from the pool of dollars created by these payment reductions. Currently, Congress has not directed HHS to implement a value-based purchasing program for ASC services.
The FFY 2014 IPPS final rule updates the required measures and financial incentives available in the Hospital VBP Program. For FFY 2014, CMS is increasing the applicable reduction percentage, the portion of Medicare payments available to fund the Hospital VBP Program's incentive payments, to 1.25%, which increases the total estimated amount available for these incentive payments. The FFY 2014 IPPS final rule also adds new quality of performance measures to the VBP Program.
Hospital-Acquired Conditions Reduction Program
The promotion of quality of care has become a significant trend in the healthcare industry. In addition to setting the standards for payment for Medicare-covered inpatient services, the FFY 2014 IPPS final rule lays out a framework for implementation of the new Hospital-Acquired Conditions Reduction Program, which begins in 2015. Under this program, hospitals that rank in the lowest-performing quartile of hospital- acquired conditions will be paid 99% of what they would otherwise be paid under the IPPS beginning in FFY 2015. In general, a hospital-acquired condition is a medical condition or complication that a patient develops during a hospital stay, which was not present at the time of admission to the hospital. To determine this quartile, CMS established quality measures and a scoring methodology as well as a process for hospitals to review and correct their data.

34


Operating Income Margin
Our operating income margin for the three months ended September 30, 2013 increased to 15.4% from 14.7% for the three months ended September 30, 2012. During the 2013 period, we recorded a gain of $1.5 million for liability settlements in connection with the asset sale related to our surgical hospital in Austin, Texas. Excluding the impact of this item from the 2013 period, our operating income margin was 14.2% in the 2013 period and 14.7% in the 2012 period.
Acquisitions and Developments
Effective January 1, 2013, we exercised our contractual right to hold a majority of the Governor seats on the Governing Board of our surgical hospital located in Great Falls, Montana. As we now control the majority of the Governor seats on the Governing Board, we consolidate this facility for financial reporting purposes. Prior to January 1, 2013, this facility was accounted for using the equity method for financial reporting purposes.
Effective July 1, 2013, we acquired a 58.7% ownership interest in a surgical facility located in Irvine, California. We merged the operations of the acquired facility with an existing surgical facility in this market which is consolidated for financial reporting purposes. The purchase price of the acquisition was $1.1 million. The acquisition was financed with cash from operations.
Effective July 31, 2013, we acquired a 20.0% ownership interest in a surgical facility located in Jackson, Tennessee.  The purchase price of the acquisition was $1.3 million, which was financed with cash from operations.  This investment is accounted for using the equity method for financial reporting purposes.  We entered into a management agreement with the facility in April 2012 and continue to manage the facility.
Discontinued Operations and Divestitures
Effective February 28, 2013, we ceased operations at our surgical facility located in San Antonio, Texas. We recognized a loss of $1.0 million on the disposal. For the three and nine months ended September 30, 2013 and 2012, the results of operations related to this facility were included in discontinued operations.
Effective April 8, 2013, we sold our interest in the surgical facility located in Havertown, Pennsylvania. We recorded net proceeds of $3.2 million on this transaction and recognized a gain of $930,000. For the three and nine months ended September 30, 2013 and 2012, the results of operations related to this facility were included in discontinued operations. Concurrent with the sale, a new management service company was created to provide various management services to this surgical facility. We acquired a 48.0% non-consolidating ownership interest in the new management service company as part of the consideration received for the sale of our interest in the surgical facility. Additionally, we entered into an agreement to manage the new management service company.
A summary of certain operating results impacting the statements of operations related to discontinued operations follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Revenues
 
$
—

 
$
2,653

 
$
1,893

 
$
12,987

Operating income (loss)
 
7

 
(374
)
 
161

 
(1,154
)
(Gain) loss on sale or disposal
 
(39
)
 
387

 
(602
)
 
(240
)
Provision for (benefit from) income taxes
 
—

 
104

 
(488
)
 
318

Income (loss) from discontinued operations, net of taxes
 
46

 
(865
)
 
1,251

 
(1,232
)
Effective January 29, 2013, we sold our ownership interest in a surgical facility located in Novi, Michigan for proceeds of approximately $310,000 and recognized a gain of $269,000. We previously recorded impairment of $2.9 million related to this investment during the year ended December 31, 2011. This facility was accounted for as an equity method investment.
Effective June 30, 2013, we completed an asset sale related to our surgical hospital located in Austin, Texas. As part of the transaction, a new entity was formed to operate the surgical hospital. The new entity acquired the equipment and inventory of the surgical hospital as well as the rights to various licensing agreements, contracts and leases associated with the operations of the surgical hospital. As part of the transaction, we received proceeds of $2.7 million in cash and a 25.0% non-consolidating ownership interest in the new entity. We will continue to provide management services to the new entity. We recognized a loss of $6.2 million as a result of the sale.

35


Results of Operations
The following tables summarize certain results from the statements of operations for the three and nine months ended September 30, 2013 and 2012. The tables also show the percentage relationship to revenues for the periods indicated (dollars in thousands):
    
 
 
Three Months Ended September 30,
 
 
2013
 
2012
 
 
Amount
 
% of Revenues
 
Amount
 
% of Revenues
 
 
 
 
 
 
 
 
 
Revenues
 
$
128,929

 
100.0
 %
 
$
123,666

 
100.0
 %
Cost of revenues
 
96,732

 
75.0
 %
 
93,038

 
75.2
 %
General and administrative expenses
 
5,723

 
4.4
 %
 
5,684

 
4.6
 %
Depreciation and amortization
 
6,030

 
4.7
 %
 
5,553

 
4.5
 %
Provision for doubtful accounts
 
3,066

 
2.4
 %
 
2,940

 
2.4
 %
Income from equity investments
 
(1,061
)
 
(0.8
)%
 
(1,251
)
 
(1.0
)%
(Gain) loss on disposal or impairment of
 long-lived assets, net
 
(1,366
)
 
(1.1
)%
 
66

 
0.1
 %
Electronic health records incentives
 
—

 
—
 %
 
(603
)
 
(0.5
)%
Litigation settlements, net
 
(32
)
 
—
 %
 
—

 
—
 %
Total operating expenses
 
109,092

 
84.6
 %
 
105,427

 
85.3
 %
Operating income
 
19,837

 
15.4
 %
 
18,239

 
14.7
 %
Interest expense, net
 
(14,484
)
 
(11.2
)%
 
(14,533
)
 
(11.8
)%
Income before income taxes and discontinued
 operations
 
5,353

 
4.2
 %
 
3,706

 
2.9
 %
Provision for income taxes
 
1,107

 
0.9
 %
 
1,118

 
0.9
 %
Income from continuing operations
 
4,246

 
3.3
 %
 
2,588

 
2.0
 %
Income (loss) from discontinued operations, net of taxes
 
46

 
—
 %
 
(865
)
 
(0.7
)%
Net income
 
4,292

 
3.3
 %
 
1,723

 
1.3
 %
Less: Net income attributable to non-controlling interests
 
(7,618
)
 
(5.9
)%
 
(7,172
)
 
(5.7
)%
Net loss attributable to Symbion, Inc.
 
$
(3,326
)
 
(2.6
)%
 
$
(5,449
)
 
(4.4
)%

36


 
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
 
Amount
 
% of Revenues
 
Amount
 
% of Revenues
 
 
 
 
 
 
 
 
 
Revenues
 
$
399,236

 
100.0
 %
 
$
361,492

 
100.0
 %
Cost of revenues
 
299,397

 
75.0
 %
 
259,298

 
71.7
 %
General and administrative expenses
 
16,847

 
4.2
 %
 
19,970

 
5.5
 %
Depreciation and amortization
 
17,659

 
4.4
 %
 
16,150

 
4.4
 %
Provision for doubtful accounts
 
8,290

 
2.1
 %
 
7,596

 
2.1
 %
Income from equity investments
 
(2,981
)
 
(0.7
)%
 
(2,929
)
 
(0.8
)%
Loss (gain) on disposal or impairment of
 long-lived assets, net
 
5,813

 
1.5
 %
 
(482
)
 
(0.1
)%
Electronic health records incentives
 
—

 
—
 %
 
(603
)
 
(0.1
)%
Litigation settlements, net
 
(230
)
 
(0.1
)%
 
(232
)
 
(0.1
)%
Total operating expenses
 
344,795

 
86.4
 %
 
298,768

 
82.6
 %
Operating income
 
54,441

 
13.6
 %
 
62,724

 
17.4
 %
Interest expense, net
 
(43,880
)
 
(11.0
)%
 
(43,201
)
 
(12.0
)%
Income before income taxes and discontinued operations
 
10,561

 
2.6
 %
 
19,523

 
5.4
 %
Provision for income taxes
 
1,741

 
0.4
 %
 
3,774

 
1.0
 %
Income from continuing operations
 
8,820

 
2.2
 %
 
15,749

 
4.4
 %
Income (loss) from discontinued operations, net of taxes
 
1,251

 
0.3
 %
 
(1,232
)
 
(0.3
)%
Net income
 
10,071

 
2.5
 %
 
14,517

 
4.1
 %
Less: Net income attributable to non-controlling interests
 
(24,621
)
 
(6.1
)%
 
(27,768
)
 
(7.8
)%
Net loss attributable to Symbion, Inc.
 
$
(14,550
)
 
(3.6
)%
 
$
(13,251
)
 
(3.7
)%

Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
Overview. During the three months ended September 30, 2013, our revenues increased 4.3% to $128.9 million from $123.7 million for the three months ended September 30, 2012. We incurred a net loss attributable to Symbion, Inc. for the 2013 period of $3.3 million, compared to a net loss of $5.4 million for the 2012 period.
Our financial results for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 reflect the addition of our surgical hospital in Great Falls, Montana that we began consolidating for financial reporting purposes effective January 1, 2013 and the asset sale related to our surgical hospital in Austin, Texas on June 30, 2013.
Revenues. Revenues for the three months ended September 30, 2013 compared to the three months ended September 30, 2012 were as follows (dollars in thousands):
 
 
Three Months Ended
September 30,
 
 
 
 
 
 
2013
 
2012
 
Dollar
Variance
 
Percent
Variance
 
 
 
 
 
 
 
 
 
Patient services revenues
 
$
127,528

 
$
121,689

 
$
5,839

 
4.8
 %
Other services revenues
 
1,401

 
1,977

 
(576
)
 
(29.1
)%
Total revenues
 
$
128,929

 
$
123,666

 
$
5,263

 
4.3
 %
Patient services revenues increased 4.8% to $127.5 million for the three months ended September 30, 2013 compared to $121.7 million for the three months ended September 30, 2012 primarily attributable to the addition of new patient service lines at our surgical hospitals.
Cost of Revenues. Cost of revenues increased to $96.7 million for the three months ended September 30, 2013 compared to $93.0 million for the three months ended September 30, 2012. The increase is primarily driven by the related increase in revenues from the addition of new patient service lines at our surgical hospitals. As a percentage of revenues, cost of revenues were 75.0% in the 2013 period and 75.2% in the 2012 period.
General and Administrative Expenses. General and administrative expenses were $5.7 million for both the three months ended September 30, 2013 and 2012. As a percentage of revenues, general and administrative expenses were 4.4% for the 2013 period compared to 4.6% for the 2012 period due to our leveraging of corporate overhead costs.

37


Depreciation and Amortization. Depreciation and amortization expenses increased to $6.0 million for the three months ended September 30, 2013 compared to $5.6 million for the three months ended September 30, 2012. As a percentage of revenues, depreciation and amortization expenses were 4.7% for the 2013 period compared to 4.5% for the 2012 period.
Provision for Doubtful Accounts. The provision for doubtful accounts increased to $3.1 million for the three months ended September 30, 2013 compared to $2.9 million for the three months ended September 30, 2012. As a percentage of revenues, the provision for doubtful accounts was 2.4% for both the 2013 period and the 2012 period.
(Gain) Loss on Disposal or Impairment of Long-Lived Assets. Gain on disposal or impairment of long-lived assets was $1.4 million for the three months ended September 30, 2013 compared to a loss of $66,000 for the three months ended September 30, 2012. In the 2013 period, we had a gain of $1.5 million for liability settlements associated with the asset sale related to our surgical hospital in Austin, Texas.
Operating Income. Operating income was $19.8 million for the three months ended September 30, 2013 compared to $18.2 million for the three months ended September 30, 2012. In the three months ended September 30, 2013, we recorded a gain of $1.5 million in connection with the asset sale related to our surgical hospital located in Austin, Texas. Excluding the impact of this item from the 2013 period, our operating income margin was 14.2% in the three months ended September 30, 2013 and 14.7% in the three months ended September 30, 2012. The decrease is primarily attributable to $603,000 of income from electronic health records incentives in the 2012 period.
Interest Expense, Net. Interest expense, net, was $14.5 million for both the three months ended September 30, 2013 and 2012.
Provision for Income Taxes.  The provision for income taxes was $1.1 million for both the three months ended September 30, 2013 and 2012. Income tax expense in each period is primarily attributable to non-cash deferred income tax expense related to our partnership investments.
Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests increased to $7.6 million for the three months ended September 30, 2013 compared to $7.2 million for the three months ended September 30, 2012. This increase is primarily due to the increase in our operating income from consolidated facilities.
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
Overview. During the nine months ended September 30, 2013, our revenues increased 10.4% to $399.2 million from $361.5 million for the nine months ended September 30, 2012. We incurred a net loss attributable to Symbion, Inc. for the 2013 period of $14.6 million, compared to $13.3 million for the 2012 period.
Our financial results for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 reflect the addition of three surgical facilities that we consolidate for financial reporting purposes and the asset sale related to our surgical hospital in Austin, Texas.
Revenues. Revenues for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 were as follows (dollars in thousands):
 
 
Nine Months Ended
September 30,
 
 
 
 
 
 
2013
 
2012
 
Dollar
Variance
 
Percent
Variance
 
 
 
 
 
 
 
 
 
Patient services revenues
 
$
395,390

 
$
355,808

 
$
39,582

 
11.1
 %
Other services revenues
 
3,846

 
5,684

 
(1,838
)
 
(32.3
)%
Total revenues
 
$
399,236

 
$
361,492

 
$
37,744

 
10.4
 %
Patient services revenues increased 11.1% to $395.4 million for the nine months ended September 30, 2013 compared to $355.8 million for the nine months ended September 30, 2012. This increase is primarily attributable to surgical facilities acquired since January 1, 2012 and the addition of new patient service lines at our surgical hospitals.
Cost of Revenues. Cost of revenues increased to $299.4 million for the nine months ended September 30, 2013 compared to $259.3 million for the nine months ended September 30, 2012 primarily attributable to surgical facilities acquired since January 1, 2012. As a percentage of revenues, cost of revenues increased to 75.0% for the 2013 period compared to 71.7% for the 2012 period. This increase is primarily due to volatility in case volume in the first half of 2013, which impacted our ability to adjust certain facilities' cost structures during periods of lower volumes. In addition, we had a $1.7 million favorable lawsuit settlement at one of our surgical hospitals in the 2012 period that was recorded in cost of revenues.
General and Administrative Expenses. General and administrative expenses decreased to $16.8 million for the nine months ended September 30, 2013 compared to $20.0 million for the nine months ended September 30, 2012. We recognized a $1.6 million stock option modification charge in the 2012 period and had $1.4 million less incentive compensation expense included in the 2013 period compared to the 2012 period. Excluding the $3.0 million impact to general and administrative expenses as a result of these items, general and administrative expenses for the 2012 period were $17.0 million. As a percentage of revenues after excluding these items from the 2012 period, general and administrative expenses were 4.2% for the 2013 period compared to 4.7% for the 2012 period due to our leveraging of corporate overhead costs.

38


Depreciation and Amortization. Depreciation and amortization expenses increased to $17.7 million for the nine months ended September 30, 2013 compared to $16.2 million for the nine months ended September 30, 2012. As a percentage of revenues, depreciation and amortization expenses were 4.4% for both the 2013 period and the 2012 period.
Provision for Doubtful Accounts. The provision for doubtful accounts increased to $8.3 million for the 2013 period compared to $7.6 million for the 2012 period. As a percentage of revenues, the provision for doubtful accounts was 2.1% for both the 2013 period and the 2012 period.
Loss (Gain) on Disposal or Impairment of Long-Lived Assets. Loss on disposal or impairment of long-lived assets was $5.8 million for the 2013 period compared to a $482,000 gain on disposal or impairment of long-lived assets for the 2012 period. During the 2013 period, we recorded a $6.2 million loss on the asset sale related to our surgical hospital in Austin, Texas.
Operating Income. Our operating income was $54.4 million for the nine months ended September 30, 2013 compared to $62.7 million for the nine months ended September 30, 2012. During the 2013 period, we recorded a loss of $6.2 million in connection with the asset sale related to our surgical hospital in Austin, Texas. During the 2012 period, we recognized a $1.7 million stock modification charge and a $1.7 million favorable lawsuit settlement at one of our surgical hospitals. Excluding the impact of these items from the results of the applicable periods, our operating income margin for the 2013 period was 15.2% compared to 17.4% for the 2012 period. The decrease is primarily attributable to our surgical hospital in Lubbock, Texas. We have made significant investments in this facility to implement new patient service lines, and the financial impact of these investments as the new patient service lines continue to develop put additional pressure on our operating income margins.
Interest Expense, Net. Interest expense, net, was $43.9 million for the nine months ended September 30, 2013 compared to $43.2 million for the nine months ended September 30, 2012.
Provision for Income Taxes.  The provision for income taxes was $1.7 million for the nine months ended September 30, 2013 compared to $3.8 million for the nine months ended September 30, 2012. Income tax expense in both periods is primarily attributable to non-cash deferred income tax expense related to our partnership investments. The reduction in income tax expense for the 2013 period is primarily related to the deferred tax effect of the asset sale of our surgical hospital in Austin, Texas.
Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests decreased to $24.6 million for the nine months ended September 30, 2013 compared to $27.8 million for the nine months ended September 30, 2012. This decrease is primarily due to a decrease in our operating income at our consolidated facilities.

Liquidity and Capital Resources
Operating Activities
During the nine months ended September 30, 2013, we generated operating cash flow from continuing operations of $43.9 million compared to $55.4 million for the nine months ended September 30, 2012. We received $1.7 million of proceeds during the 2012 period related to a lawsuit settlement at one of our surgical hospitals. Additionally, cash flow from operations in the current period was impacted by the continued implementation of EHR technology. At September 30, 2013, we had working capital of $79.8 million compared to $67.1 million at December 31, 2012.
Investing Activities
Net cash used in investing activities of continuing operations during the nine months ended September 30, 2013 was $11.3 million. We paid $11.7 million related to purchases of property and equipment. We paid $2.4 million for our acquisitions in Irvine, California and Jackson, Tennessee and had proceeds of $2.7 million from the asset sale related to our surgical hospital in Austin, Texas. We had net proceeds from discontinued operations of $3.7 million, net of distributions to non-controlling interests holders, associated with the sale of our facility in Havertown, Pennsylvania. We acquired a 48.0% non-consolidating ownership interest in a new management service company that provides management services to this facility as part of the consideration for the sale and this investment is reflected in continuing operations.
Net cash used in investing activities of continuing operations during the nine months ended September 30, 2012 was $28.4 million, which included $18.5 million of payments for acquisitions, net of cash acquired of $1.9 million. We paid $10.0 million related to purchases of property and equipment. We had proceeds from discontinued operations of $7.2 million, net of distributions to non-controlling interests holders, primarily related to the sale of surgical facilities located in Fort Worth, Texas and Austin, Texas.
Financing Activities
Net cash used in financing activities of continuing operations during the nine months ended September 30, 2013 was $53.2 million. We distributed $23.8 million in cash to non-controlling interests holders during the period. Under the mandatory redemption provisions of the Toggle Notes, we repaid $21.2 million of the principal outstanding balance on August 23, 2013. We funded this payment with cash from operations. In March 2013, we refinanced the debt of our Idaho Falls, Idaho facility. This refinancing transaction resulted in $6.1 million of borrowings from a new lender, $7.5 million of repayments to the previous lenders and $427,000 of debt issuance cost payments. In the three months ended September 30, 2013, we repaid the $6.1 million of borrowings from the new lender at this facility. Additionally, we made scheduled repayments on our long-term debt during the nine months ended September 30, 2013 of $8.3 million.

39


Net cash used in financing activities of continuing operations during the nine months ended September 30, 2012 was $24.9 million. We distributed $28.5 million in cash to non-controlling interests holders during the period. We made scheduled principal payments on our long-term debt totaling $6.4 million. We also incurred additional facility level borrowings of $10.3 million during the nine months ended September 30, 2012.
Long-Term Debt
A summary of long-term debt follows (in thousands):
 
 
September 30,
2013
 
December 31,
2012
 
 
 
 
 
Credit Facility
 
$
—

 
$
—

Senior Secured Notes, net of debt issuance discount of $3,117 and $3,868 at September 30, 2013 and December 31, 2012, respectively
 
337,883

 
337,132

PIK Exchangeable Notes
 
114,076

 
109,688

Toggle Notes
 
73,475

 
94,724

Notes payable and secured loans
 
19,436

 
28,247

Capital lease obligations
 
4,849

 
3,891

Total debt
 
549,719

 
573,682

Less: Current maturities
 
(7,096
)
 
(39,508
)
Total long-term debt
 
$
542,623

 
$
534,174

Credit Facility
Our Credit Facility matures on December 15, 2015. As of September 30, 2013, we had letters of credit outstanding of $1.8 million and $48.2 million of availability under the Credit Facility.
The Credit Facility contains financial covenants requiring the us not to exceed a maximum net senior secured leverage ratio or fall below a minimum cash interest coverage ratio, in each case tested quarterly. Borrowings under the Credit Facility are subject to significant conditions, including the absence of any material adverse change. At September 30, 2013, we were in compliance with all material covenants contained in the Credit Facility.
Senior Secured Notes
The Senior Secured Notes mature on June 15, 2016. The Senior Secured Notes were issued at a 1.51% discount and interest accrues at the rate of 8.00% per annum, payable on June 15 and December 15 of each year.
We may redeem all or any portion of the Senior Secured Notes on or after June 15, 2014 at the redemption price set forth in the indenture governing the Senior Secured Notes, plus accrued interest. In 2013, we 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. We 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, we may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with proceeds of certain equity offerings at any time prior to June 15, 2014. At September 30, 2013, we had not redeemed any of the Senior Secured Notes.
At September 30, 2013, we were in compliance with all material covenants contained in the indenture governing the Senior Secured Notes.
PIK Exchangeable Notes
The PIK Exchangeable Notes mature on June 15, 2017. Interest accrues on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on June 15 and December 15 of each year. We pay interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest. We record this accrued interest in other current liabilities until the interest payment date. On June 15 and December 15 of each year, we reclassify the accrued interest to long-term debt. Due to the required payment-in-kind interest, we increased the principal amount of the PIK Exchangeable Notes by $4.4 million during the nine months ended September 30, 2013. As of September 30, 2013, we had accrued interest of $2.7 million on the PIK Exchangeable Notes.
The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.

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The Company may not redeem the PIK Exchangeable Notes prior to June 15, 2014. On or after June 15, 2014, the Company may redeem some or all of the PIK Exchangeable Notes for cash at a redemption price equal to a specified percentage of the accreted principal amount of the PIK Exchangeable Notes to be redeemed, plus accrued and non-capitalized interest. The specific percentage for such redemptions will be 104% for redemptions during the year commencing on June 15, 2014, 102% for redemptions during the year commencing on June 15, 2015, and 100% for redemptions during the year commencing on June 15, 2016.
At September 30, 2013, we were in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.
Toggle Notes
The Toggle Notes mature on August 23, 2015.  Beginning with the February 2012 interest payment, all interest under the Toggle Notes is required to be paid in cash. As of September 30, 2013, we had accrued interest of $0.9 million on the Toggle Notes which is included in other current liabilities on the consolidated balance sheet.
The indenture governing the Toggle Notes includes a mandatory redemption provision. Under this provision, if the Toggle Notes would otherwise constitute applicable high yield discount obligations within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended, we are required to redeem, for cash, a portion of the Toggle Notes then outstanding, equal to the mandatory principal redemption amount. Under the mandatory redemption provisions of the Toggle Notes, we repaid $21.2 million of the principal outstanding balance on August 23, 2013. We funded this payment with cash from operations.
The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates. At September 30, 2013, we were in compliance with all material covenants contained in the indenture governing the Toggle Notes.
Notes Payable to Banks
In March 2013, we refinanced the debt of our Idaho Falls, Idaho facility. This refinancing transaction resulted in $6.1 million of borrowings from a new lender, $7.5 million of repayments to the previous lenders and $427,000 of debt issuance cost payments. In the three months ended September 30, 2013, we repaid the $6.1 million of borrowings from the new lender with cash from operations.
Inflation
Inflation and changing prices have not significantly affected our operating results or the markets in which we operate.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board issued ASU 2013-02, which requires additional disclosures on the effect of significant reclassifications out of accumulated other comprehensive income. The ASU requires a company that reports other comprehensive income to present (either on the face of the statement where net income is presented or in the notes to the financial statements) the effects on the line items of net income the significant amounts reclassified out of accumulated other comprehensive income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, a company is required to cross-reference to other required disclosures that provide additional details about those amounts. This ASU is effective for fiscal years beginning after December 15, 2012, and was adopted by us on January 1, 2013. As it only requires additional disclosure, the adoption of this ASU had no impact on our consolidated financial position, results of operations or cash flows.
EBITDA and Consolidated Adjusted EBITDA
When we use the term “EBITDA,” we are referring to net income plus (a) income (loss) from discontinued operations, net of taxes, (b) provision for income taxes, (c) interest expense, net, (d) depreciation and amortization, (e) non-cash (gains) losses, including our loss from debt extinguishment, if any, and (f) non-cash stock-based compensation expense, and less (g) net income attributable to non-controlling interests. Non-controlling interests represent the interests of third parties, such as physicians and in some cases, healthcare systems, that own an interest in surgical facilities that we consolidate for financial reporting purposes. Our operating strategy is to apply a market-based approach in structuring our partnerships, with individual market dynamics driving the structure. We believe that it is helpful to investors to present EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors our portion of EBITDA generated by our surgical facilities and other operations.
We use EBITDA as a measure of liquidity. We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures. We use "Consolidated Adjusted EBITDA" to determine compliance with some of the covenants under the Credit Facility, as well as to determine the interest rate and commitment fee payable under our Credit Facility. When we use the term "Consolidated Adjusted EBITDA", we are referring to EBITDA, as defined above, adjusted for cash payments on our Idaho Falls, Idaho facility lease, intercompany notes and pro forma acquisition and other non-cash adjustments.
EBITDA and Consolidated Adjusted EBITDA are not measurements of financial performance or liquidity under generally accepted accounting principles. They should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from EBITDA and Consolidated Adjusted EBITDA are significant components in understanding and evaluating financial performance and liquidity. Our calculation of EBITDA is not comparable to the EBITDA measure we have used in certain prior periods but our EBITDA

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measure is consistent with the measure of EBITDA less income attributable to noncontrolling interests previously reported. Our calculation of EBITDA and Consolidated Adjusted 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,
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
EBITDA
 
$
16,986

 
$
16,863

 
$
53,498

 
$
52,568

Depreciation and amortization
 
(6,030
)
 
(5,553
)
 
(17,659
)
 
(16,150
)
Gain (loss) on disposal or impairment of long-lived assets, net
 
1,366

 
(66
)
 
(5,813
)
 
482

Stock-based compensation
 
(103
)
 
(177
)
 
(206
)
 
(1,944
)
Interest expense, net
 
(14,484
)
 
(14,533
)
 
(43,880
)
 
(43,201
)
Provision for income taxes
 
(1,107
)
 
(1,118
)
 
(1,741
)
 
(3,774
)
Net income attributable to non-controlling interests
 
7,618

 
7,172

 
24,621

 
27,768

Income (loss) from discontinued operations, net of taxes
 
46

 
(865
)
 
1,251

 
(1,232
)
Net income
 
4,292

 
1,723

 
10,071

 
14,517

(Income) loss from discontinued operations, net of taxes
 
(46
)
 
865

 
(1,251
)
 
1,232

Depreciation and amortization
 
6,030

 
5,553

 
17,659

 
16,150

Amortization of debt issuance costs and discounts
 
1,067

 
954

 
2,995

 
2,843

Payment-in-kind interest expense
 
2,282

 
2,109

 
6,685

 
6,166

Stock-based compensation
 
103

 
177

 
206

 
1,944

(Gain) loss on disposal or impairment of long-lived assets, net
 
(1,366
)
 
66

 
5,813

 
(482
)
Deferred income taxes
 
1,038

 
4,298

 
1,352

 
6,848

Income from equity investments, net of distributions received
 
(228
)
 
(422
)
 
(569
)
 
(1,276
)
Provision for doubtful accounts
 
3,066

 
2,940

 
8,290

 
7,596

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
 
 
 
 
 
Accounts receivable
 
469

 
(281
)
 
(5,999
)
 
(2,831
)
Other operating assets and liabilities
 
5,138

 
4,588

 
(1,357
)
 
2,723

Net cash provided by operating activities - continuing operations
 
$
21,845

 
$
22,570

 
$
43,895

 
$
55,430

 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
Number of surgical facilities included in continuing operations as of the end of period (1)
 
56

 
57

 
56

 
57

Number of consolidated surgical facilities included in continuing operations as of the end of period
 
45

 
45

 
45

 
45

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

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The following table reconciles Consolidated Adjusted EBITDA to EBITDA and EBITDA to net cash provided by operating activities—continuing operations:
 
 
Twelve Months
Ended
September 30, 2013
 
 
(in thousands)
 
 
 
Consolidated Adjusted EBITDA (1)
 
$
77,696

Cash payment on facility lease obligation (2)
 
5,555

Intercompany notes adjustment (3)
 
(5,378
)
Pro forma transactions and other non-cash adjustments (4)
 
(3,189
)
EBITDA
 
74,684

Depreciation and amortization
 
(23,175
)
Loss on disposal or impairment of long-lived assets, net
 
(101
)
Stock-based compensation
 
(319
)
Interest expense, net
 
(58,329
)
Provision for income taxes
 
(8,942
)
Net income attributable to non-controlling interests
 
35,564

Income from discontinued operations, net of taxes
 
3,173

Net income
 
22,555

Income from discontinued operations, net of taxes
 
(3,173
)
Depreciation and amortization
 
23,175

Amortization of debt issuance costs and discounts
 
3,950

Payment-in-kind interest expense
 
8,824

Stock-based compensation
 
319

Loss on disposal or impairment of long-lived assets, net
 
101

Deferred income taxes
 
8,392

Income from equity investments, net of distributions received
 
(1,224
)
Provision for doubtful accounts
 
10,795

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
Accounts receivable
 
(9,193
)
Other operating assets and liabilities
 
(7,813
)
Net cash provided by operating activities - continuing operations
 
$
56,708

 
(1)
When we use the term Consolidated Adjusted EBITDA, we are referring to EBITDA as reported adjusted for covenant related items per our Credit Facility.
(2)
Represents the cash lease payment adjustment for our facility located in Idaho Falls, Idaho as contemplated by our Credit Facility.
(3)
Adjustments relating to outstanding balances on intercompany notes issued by our restricted subsidiaries as contemplated by our Credit Facility.
(4)
Includes the pro forma effect of transactions and other non-cash adjustments as contemplated by our Credit Facility.
Summary
We believe that existing funds, cash flows from operations and available borrowings under our Credit Facility will provide sufficient liquidity for the next 12 to 18 months. Our 2011 debt restructuring extended the maturities of our long-term debt and revised our financial covenants to make them less restrictive. However, our ability to meet our funding needs could be adversely affected if we suffer adverse results from our operations. In addition, based on our expected liquidity and capital resource needs, we may consider various alternatives to improve our capital structure, including reducing debt, extending maturities or relaxing financial covenants. These alternatives may include new equity or debt financings or exchange offers with our existing security holders (including exchanges of debt for debt or equity) and other transactions involving our outstanding securities, given their secondary market trading prices. We cannot assure you, if we pursue any of these transactions, that we will be successful in completing a transaction on attractive terms, or at all.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Historically, we have not held or issued derivative financial instruments other than the use of a variable-to-fixed interest rate swap for a portion of 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, 2013, $1.2 million of our long-term debt was subject to variable rates of interest. Additionally, future borrowings under our Credit Facility would subject us to LIBOR fluctuations. At September 30, 2013, the fair value of our total long-term debt, based on quoted market prices as of this date was approximately $573.4 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us (including our consolidated subsidiaries) in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported in a timely manner.
Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings
We are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages, that may not be covered by insurance. In the opinion of management, we are not currently a party to any proceedings that would have a material adverse effect on our business, financial condition or results of operations.

Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.


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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
101.INS
 
XBRL Instance Document (b)
101.SCH
 
XBRL Taxonomy Extension Schema Document (b)
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document (b)
101.DEF
 
XBRL Taxonomy Definition Linkbase Document (b)
101.LAB
 
XBRL Taxonomy Label Linkbase Document (b)
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document (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.

45


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 8, 2013

46


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
101.INS
 
XBRL Instance Document (b)
101.SCH
 
XBRL Taxonomy Extension Schema Document (b)
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document (b)
101.DEF
 
XBRL Taxonomy Definition Linkbase Document (b)
101.LAB
 
XBRL Taxonomy Label Linkbase Document (b)
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document (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.


47