Change in Effective Control Application Version 09.2016
Applicant Name of Facility:
Name of Licensee: Prospect Blackstone Valley Surgicare, LLC Name(s) of Parent Entity(ies): Prospect CharterCARE, LLC owned by Prospect Medical Holdings, LLC Blackstone Valley Surgicare Acquisition, LP d/b/a Blackstone Valley Surgicare January 3, 2017 Resubmitted on: January 20, 2017
Date of Submission
and
Table of Contents Question Number/Appendix Q1 Q2 Q3 Q4 Q5 Q6 A, B Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 Q19 Q20 A,B,C Q21 Q22 Q23 A,B,C Q24 Q25 Q26 Q27 Q28 Q29
Page Number/Tab Index 1 1 1 1 1 2 2 2 2 2 2 2 3 3/Exhibit 14 3/Exhibit 15 3 3/Exhibit 18 3/Exhibit 18 3 3-4/Exhibit 20 4 4/Exhibit 22 4-5/Exhibits 23B & C 5/Exhibit 24 5 5/Exhibits 26A-E 5 5/Exhibits 23C & 28 5
Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F Appendix G
1-4 1-2 N/A 1 N/A 1 1-12
1. Please provide an executive summary describing the nature and scope of the proposal. Additionally, please include the following: (1) identification of all parties, (2) description of the applicant and its licensure track record, (3) the type of transaction proposed including description of the transaction and relevant costs, (4) summary of all transfer documents, (5) summary of the organizational structure of the applicant and its affiliates, and (6) whether the facility will be accredited. Pursuant to the terms of the Asset Purchase Agreement (“APA”) by and among Prospect Blackstone Valley Surgicare, LLC a Rhode Island limited liability company (“Buyer”), Blackstone Valley Surgicare Acquisition, LP, a Rhode Island limited partnership (“Seller”) and Surgical Care Affiliates, LLC, a Delaware limited liability company, a copy of which is attached at Exhibit 14, Buyer will purchase from Seller certain of the assets used in connection with the licensed freestanding ambulatory surgery center known as Blackstone Valley Surgicare located at 1526 Atwood Avenue, Suite 300, Johnston, Rhode Island (the “Surgicenter”). Ann Dugan will continue as the Surgicenter’s Director of Ambulatory Services. The Buyer is a wholly owned subsidiary of Prospect CharterCARE, LLC, which owns and operates Roger Williams Medical Center, Our Lady of Fatima Hospital and St. Joseph Health Center, all of which have a proven track record of providing high quality, cost effective services. Acquisition of the Surgicenter will allow Prospect CharterCARE, LLC to provide high quality, cost effective outpatient services at a dedicated freestanding facility. As set forth in the APA, the purchase price is $1,500,000. The Surgicenter is currently accredited and that accreditation will be maintained. 2.
Name and address of the applicant:
Name: Prospect Blackstone Valley Surgicare, LLC Address: 825 Chalkstone Ave, Providence, RI 3.
Telephone: (401) 456-2000 Zip Code: 02908
Name and address of facility (if different from applicant):
Name: Blackstone Valley Surgicare Address: 1526 Atwood Ave, Ste. 300, Johnston, RI 4.
Telephone: (401) 459-3800 Zip Code: 02919
Information of the President or Chief Executive Officer of the applicant:
Name: John Holiver Address: 825 Chalkstone Ave, Providence, RI E-Mail:
[email protected] 5.
Telephone: (401) 456-2000 Zip Code: 02908 Fax:
Information for the person to contact regarding this proposal:
Name: Patricia K. Rocha, Esq. Telephone: (401) 274-7200 th Address: Adler Pollock & Sheehan, 1 Citizens Plaza, 8 Fl, Providence, RI Zip Code: 02903 E-Mail:
[email protected] Fax: (401) 751-0604
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6.
A. EXISTING ENTITY:
License category: Freestanding Ambulatory Surgery Center Name of Facility: Blackstone Valley Surgicare License #: FAS01021 Address: 1526 Atwood Ave, Ste. 300, Johnston, RI 02919 Telephone: (401) 459-3800 Type of Ownership: ___ Individual X Partnership ___ Corporation __ Limited Liability Co. Tax Status: X For Profit ___ Non-Profit B. PROPOSED ENTITY: License category: Freestanding Ambulatory Surgery Center Name of Facility: Blackstone Valley Surgicare License #: Address: 1526 Atwood Ave, Ste. 300, Johnston, RI 02919 Telephone: (401) 459-3800 Type of Ownership: ___ Individual ___ Partnership ___ Corporation X Limited Liability Co. Tax Status: X For Profit ___ Non-Profit 7.
Does this proposal involve a nursing facility? Yes __ No X •
8.
If response to Question 7 is ‘Yes’, please complete Appendix C. Will the facility be operated under management agreement with an outside party? Yes___ No X
•
If response to Question 8 is "Yes", please provide copies of that agreement.
9. Will the proposal involve the facility/ies providing healthcare services under contract with an outside party? Yes __ No X • 10.
If response to Question 9 is "Yes", please identify and describe those services to be contracted out. Estimate the date (month and year) for the proposed transfer of ownership, if approved:
February 2017 11. Please provide a concise description of the services currently offered by the licensed entity and identify any services that will be added, terminated, expanded, or reduced and state the reasons therefore: Blackstone Valley Surgicare is a freestanding, multi-specialty, ambulatory surgery center providing services in the specialty areas of gastroenterology, general surgery, lithotripsy, ophthalmology, oral surgery, orthopedic, plastic surgery, podiatry, urology and pain management. No services will be added, terminated, expanded or reduced. 12. Please identify the long-term plans of the applicant with respect to the health care programs and health care services to be provided at the facility: The Applicant intends to continue to provide high quality, cost-effective services providing the right level of quality care at the right time and place at a low cost.
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13. Does the entity seeking licensure plan to participate in Medicare or Medicaid (Titles XVIII or XIX of the Social Security Act)? MEDICARE: Yes X No___ •
MEDICAID:
Yes X No___
If response to Question 13 for either Medicare and/or Medicaid is ‘No’, please explain.
14. Please provide all appropriate signed legal transfer documents (i.e. purchase and sale agreement, affiliation agreement); NOTE: these documents must cause both parties to be legally bound. See Exhibit 14. Pursuant to the terms of the Asset Purchase Agreement, the Escrow will be formed and the $100,000 deposited in the account upon closing after Department of Health approval is received. 15. Please provide organization charts of both agencies (existing entity and the applicant) for prior to transfer and post transfer, identifying all "parent" legal entities with direct or indirect ownership in or control, all "sister" legal entities also owned or controlled by the parent(s), and all "subsidiary" legal entities. See Exhibit 15. 16. If the proposed owner, operator or director owned, operated or directed a health care facility (both within and outside Rhode Island) within the past three years, please demonstrate the record of that person(s) with respect to access of traditionally underserved populations to its health care facilities. Although the Applicant is a newly formed entity, the Rhode Island licensed health care facilities, including Roger Williams Medical Center, Our Lady of Fatima Hospital and St. Joseph Health Center, owned by Prospect CharterCARE, LLC have a demonstrated record, including robust charity care policies and participation in at-risk managed care contracts to provide high quality services to traditionally underserved populations. 17. Please identify the proposed immediate and long-term plans of the applicant to ensure adequate and appropriate access to the program and health care services to be provided by the health care facility/ies to traditionally underserved populations. Please see Exhibit 18, the Applicant’s charity care policy that assists qualifying under insured and uninsured patients to receive free or discounted services. Moreover, the Applicants participate in Medicare and Medicaid. Finally, the Applicant will be part of at-risk managed care programs with third party payors, all of which provide access to traditionally underserved populations. 18.
Please provide a copy of charity care policies and procedures and charity care application form.
See Exhibit 18. 19. After the proposed change in effective control, will the facility/ies provide medically necessary services to patients without discrimination, including the patients' ability to pay for services? Yes X No___. •
If response to Question 23 is ‘No’, please explain.
20. Please identify and describe any and all instances and the status or disposition of each of the following within the past 3 years: A. Citations, enforcement actions, violations, charges, investigations, or similar types of actions involving the applicant and/or its affiliates (including but not limited to actions brought forward by any governmental agency, accrediting agency, or similar type of an agency.);
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Attached at Exhibit 20 is a list of pending or adjudicated investigations, citations, violations or charges against Prospect CharterCARE, LLC and/or its Hospital affiliates brought by any governmental agency or accrediting agency within the past 3 years. B. Civil proceedings (whether pending or which have resulted in a disposition or settlement) in any court of law, in which the applicant and/or its affiliates and/or any officers, directors, trustees, members, managing or general partners, or other senior management of the applicant and/or its affiliates has been a party to; Other than day-to-day civil litigation, i.e., workers’ compensation, slip and falls and the like, none. C. Convictions and/or placement on probation for any criminal offences by any state, local or federal government of any officers, directors, trustees, members, managing or general partners, or other senior management of the applicant and/or its affiliates; None. 21. Please identify any planned actions of the applicant to reduce, limit, or contain health care costs and improve the efficiency with which health care services are delivered to the citizens of this state. Consistent with Prospect CharterCARE, LLC’s mission including participation in at-risk managed care contracts, the Applicant will strive to reduce, limit and contain health care costs and improve efficiencies. 22. Please provide a copy of the Quality Assurance Policies (for the services) and a detailed explanation of how quality assurance for patient services will be implemented at the facility/ies by the applicant. See Exhibit 22. As set forth in the policy, its purpose is to ensure ongoing improvement in the quality of care and services provided. The program is driven by facility leadership and aligned with the mission, vision and strategic objectives which strive to ensure risk to patients and others are minimized, and errors in the delivery of services are identified and prevented or reduced. The program allows for a systematic, coordinated and continuous approach to assessing processes, systems and patient outcomes and improving them on a priority basis by selecting quality indicators, measuring, and analyzing information related to these indicators, adverse patient events, and other aspects of performance, regularly. When identified, necessary changes are implemented and incorporated into appropriate processes, products or services and performance is tracked to assure improvements are sustained over time. Successful performance improvement in patient safety require a multidisciplinary and multifaceted approach as explained in more detail in the policy. The ultimate goals of the policy are to provide safe patient care in a cost effective manner and to achieve excellent clinical outcomes. 23. Please provide a detailed description about the amount and source of the equity and debt commitment for this transaction. (NOTE: If debt is contemplated as part of the financing, please complete Appendix E). Additionally, please demonstrate the following: A. The immediate and long-term financial feasibility of the proposed financing plan; As disclosed in Appendix A, the Applicant will use 100% equity for this transaction and there is no financing required. B. The relative availability of funds for capital and operating needs; and Prospect CharterCARE, LLC has designated $1.5 million for the purchase price. In addition, the Applicant will generate sufficient revenues to cover expenses. In the event any additional revenues are required, Prospect CharterCARE, LLC has sufficient cash to fund any additional
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operating needs. A copy of the Resolution approving the use of such funds is attached at Exhibit 23B. C. The applicant’s financial capability. The Applicant and its parent company’s financial capabilities are strong as evidenced in its successful track record in providing high quality care. Prospect East Holdings, Inc. is a holding company and does not maintain financial statements. Prospect Medical Holdings, Inc. is a privately held company with Consolidated Financial Statements for all of its 20 hospitals. Attached at Exhibit 23C are the Consolidated Financial Statements as of September 30, 2015 and 2014 for Prospect CharterCARE, LLC and Prospect Medical Holdings, Inc., respectively. 24. Please provide legally binding evidence of site control (e.g., deed, lease, option, etc.) sufficient to enable the applicant to have use and possession of the subject property, if applicable. See Exhibit 24. 25. If the facility is not-for-profit and/or affiliated with a not-for-profit, please provide written approval from the Rhode Island Department of Attorney General of the proposal. Not applicable. 26.
Please provide each of the following documents applicable to the applicant's legal status:
·Certificate and Articles of Incorporation and By-Laws (for corporations) ·Certificate of Partnership and Partnership Agreement (for partnerships) ·Certificate of Organization and Operating Agreement (for limited liability corporations) •
If any of the above documents are proposed to be revised or modified in any way as a result of the implementation of the proposed change in effective control, please provide the present documents and the proposed documents and clearly identify the revisions and modifications.
See Exhibits 26A-E. 27. If the applicant and/or one of its parent companies (or ultimate parent) is a publicly traded corporation, please provide copies of its most recent SEC 10K filing. Not applicable. 28. Please provide audited financial statements (which should include an income statement, balance sheet and cash flow statement) for the last three years for the applicant, and/or its ultimate parent, and for the existing facility. See Exhibits 23C & 28. 29.
All applicants must complete Appendix A, D, F and G.
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APPENDIX A All applicants must complete this Appendix. 1. Please indicate the financing mix for the capital cost of this proposal. NOTE: the Health Services Council’s policy requires a minimum 20 percent equity investment in CEC projects. Source Equity* Debt** Lease TOTAL
*
Amount $1.5M $ $ $1.5M
Percent Interest Rate Terms (Yrs.) 100% % % % % 100%
Equity means non-debt funds contributed towards the capital cost related to a change in owner or change in operator of a healthcare facility which funds are free and clear of any repayment or liens against the assets of the proposed owner and/or licensee and that result in a like reduction in the portion of the capital cost that is required to be financed or mortgaged.
** If debt financing is indicated, please complete Appendix E.
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2. Please identify the total number of FTEs (full time equivalents) and the associated payroll expense (with fringe benefits) for the facility. Past Three Fiscal Years
PERSONNEL (by major categories) Clinical Non Clinical
Totals
Budgeted Current Year
FY: 2013 Number of FTEs
Payroll W/Fringes
FY: 2014 Number of FTEs
Payroll W/Fringes
FY: 2015 Number of FTEs
Payroll W/Fringes
21 8
1,378,246 710,005
20 7
1,308,338 673,992
20 7
1,477,148 727,550
$2,088,251
$1,982,330
2
$2,204,698
FY: 2016 Number of FTEs 20 10
Payroll W/Fringes 1,015,095 937,012
$1,952,107
Past Three Fiscal Years
PERSONELL (by major categories) Clinical OR RN’s PACU RN’s Surgical Techs Xray tech Aide endoscopy/OR
Non Clinical Administrator Business office staff Pre assessment nurse Purchasing Totals
Budgeted Current Year
FY: 2013 Number Payroll of FTEs W/Fringes
FY: 2014 Number Payroll of FTEs W/Fringes
FY: 2015 Number Payroll of FTEs W/Fringes
FY: 2016 Number Payroll of FTEs W/Fringes
21 9 7 4.5 .25 1 21.75
20 9 7 3.5 .25 1 20.75
20 9 7 3.5 .25 1 20.75
20 8 7 4.5 .25 1 20.75
8 1 5 1 1
1,378,246
710,005
2,088,251
7 1 4 1 1
1,308,338
673,992
1,982,330
3
7 1 4 1 1
1,477,148
727,550
2,204,698
10 1 5 2 2
1,015,095
937,012
1,952,107
3.
Please complete the following table for the facility. Round all amounts to the nearest dollar. Past Three Fiscal Years
FY:2013
FY: 2014
FY: 2015
Budgeted Current Fiscal Year FY: 2016
Projected Three Fiscal Years (if approved)
5,270,108
5,204,443
5,887,572
5,403,279
6,682,860
7,245,288
7,592,816
12,126 5,282,234
1,242 5,205,685
27,424 5,914,996
-207 5,403,172
170,217 6,853,077
170,217 7,415,505
170,217 7,763,033
2,088,251 111,434 1,118,092 17,545 130,730 78,316 56,073 154,921 461,674 789,906 100,285 5,107,227
1,982,330 91,514 1,204,232 15,352 155,349 67,722 74,868 157,019 504,831 841,652 101,672 5,196,541
2,204,698 75,145 1,497,073 13,666 177,646 57,163 70,301 114,384 522,083 933,258 57,959 5,723,376
1,952,107 56,789 1,383,143 13,914 198,782 56,995 62,983 98,685 506,689 992,208 -05,322,295
2,668,929 73,206 1,907,079
2,716,463 77,778 2,168,504
2,763,083 85,281 2,391,786
64,621
65,268
65,268
550,000 1,188,950 64,174 6,516,959
550,000 1,218,673 64,174 6,860,860
550,000 1,218,673 64,174 7,138,265
$336,118
$554,645
FY: 2017
FY: 2018
FY: 2019
REVENUES Net Patient Revenue Other: (Misc. income: typically income from medical records requests & 2015 rental income for laser) Total Revenue EXPENSES Payroll w/Fringes ,Bad Debt Supplies Office Expenses Utilities Insurance Interest Depreciation/Amortization Leasehold Expenses Other: (Variable expenses) Other: (Fixed Misc.) Total Expenses OPERATING PROFIT/LOSS
$175,007
$9,144
$191,620
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$80,877
$624,768
4. Please provide utilization statistics (both as a dollar value and percentage) for the existing facility by completing the table below for the requested years. Past Three Fiscal Years (Actual) FY: 2013 $
%
FY: 2014 $
%
Budgeted Current Year
FY: 2015 $
%
FY: 2016 $
%
PAYOR SOURCE: Medicare
1,382,985
26%
1,362,818
26.5%
1,495,930
25%
1,378,843
25%
Medicaid Blue Cross
85,401 1,988,279
1% 38%
168,228 1,836,462
3.5% 35%
443,443 2,140,131
7.5% 36%
207,929 1,944,504
4% 36%
Worker’s Comp HMO's Self Pay/Atty Other/2014 State Ex TOTAL
273,396 1,402,390 132,278 5,379 $5,270,108
5% 27.5% 2% .5% 100%
349,489 1,322,504 60,603 104,339 $5,204,443
6% 26% 1% 2% 100%
343,065 1,277,489 28,528 158,986 $5,887,572
5.5% 23% .5% 2.5% 100%
340,671 1,367,996 71,827 91,509 $5,403,279
6% 26% 1.5% 1.5% 100%
Charity Care*
$268
$4,176
$0
$0
Projected First Three Operating Years (if approved) FY:2017 $ PAYOR SOURCE: Medicare Medicaid Blue Cross Workers Comp HMO's Self Pay Other: TOTAL
1,728,949 292,081 2,376,937 400,892 1,678,301 81,360 124,340 $6,682,860
Charity Care*
$20,340
% 26% 4% 36% 6% 25% 1% 2% 100%
FY:2018 $ 1,874,457 316,662 2,576,979 434,631 1,819,546 88,208 134,804 $7,245,287
FY:2019 $
% 26% 4% 36% 6% 25% 1% 2% 100%
1,964,367 331,851 2,700,587 455,479 1,906,823 92,439 141,270 $7,592,816
$22,052
% 26% 4% 36% 6% 25% 1% 2% 100%
$23,109
*Charity Care does not include bad debt, and is based on costs (not charges). For Home Nursing Care Providers the statewide community standard shall be one percent (1%) of net patient revenue earned on an annual basis.
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Appendix B Rhode Island Department of Health Center for Health Systems Policy and Regulation Compliance Report (Name of Applicant) Prospect Blackstone Valley Surgicare, LLC has applied for licensure as a healthcare facility in Rhode Island. As part of the regulatory requirements to determine the character, competence and other quality related information of the applicant, the Center for Health Systems Policy and Regulation is requesting the following information regarding the health care facilities operated by or affiliated with the applicant, as listed on the attached sheet. Please answer the following questions. 1. Are the agencies/facilities currently licensed and in substantial compliance with all applicable codes, rules and regulations?
Yes__
No__
If the answer to #1 is “NO”, please identify the facility(ies) and briefly explain the licensure status. 2.
Has there been any enforcement actions against these agencies/facilities in the past three years?
Yes__
No__
If the answer to #2 is “YES”, please identify the facility(ies) and include any information relevant to those enforcement actions (reason for action, stipulation, fine, etc.). In addition, please furnish a brief description of the outcome of the most recent survey, including any deficiencies cited. Additional pages may be attached, if needed.
Reviewer’s Name: __________________________________ Title: ______________________________ Department: _______________________________________________________ State: ______________ Telephone_________________________________________ E-mail _____________________________ Reviewer’s Signature: _______________________________________________ Date: ______________ If you have any questions, please contact Paula Pullano at (401) 222-2788 or e-mail,
[email protected] Please return the completed form within 15 days to the address below: Rhode Island Department of Health Office of Health Systems Development 3 Capitol Hill, Room 410 Providence, Rhode Island 02908 Thank you. Attachment
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Appendix B (CONT.) Applicant, please provide the following information identifying each facility to the appropriate state agency as an attachment to the letter in the table below, use additional pages if necessary. Please make sure to identify yourself in the cover letter by filling in the blank for ‘Name of Applicant’.
State CA CA CA CA CA CA TX TX RI RI NJ CT CT CT PA PA PA PA
Facility Name, Address and Contact Information Southern California Hospital at Hollywood Southern California Hospital at Culver City Southern California Hospital at Van Nuys Los Angeles Community Hospital Norwalk Community Hospital Foothill Regional Medical Center Nix Health Care System Nix Specialty Health Center Roger Williams Medical Center Our Lady of Fatima Hospital East Orange General Hospital The Manchester Memorial Hospital The Rockville General Hospital The Waterbury Hospital Crozer Chester Medical Center Springfield Hospital Taylor Hospital Delaware County Memorial Hospital
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License Number 930000066 930000066 930000066 93000039 93000039 060000178 100139 100139 HOS00133 HOS00132 10704 GH.0000073 GH.0000074 GH.0000075 037201 037201 037201 041801
Appendix D Source of Funds All applicants must complete this Appendix. I. Please provide the total expenditures necessary to implement this proposal and allocate this amount to the sources of funds categories listed below: TOTAL PROJECT COST:
$1,500,000*
SOURCE OF FUNDS
AMOUNT
a. Funded depreciation b. Other restricted funds (specify) __________ c. Unrestricted funds (specify) __________ d. Owner’s equity e. Sale of stock/other equity f. Unrestricted donations or gifts g. Restricted donations or gifts h. Government grant (specify) __________ i. Other non-debt funds (specify) __________
$ ____________ ____________ ____________ $1,500,000 ____________ ____________ ____________ ____________ ____________
j. Sub-Total Equity Funds
____________
k. Subsidized loan (e.g. FHA etc.) __________ l. Tax-exempt bonds (specify) __________ m. Conventional mortgage n. Lease or rental o. Other debt funds
____________ ____________ ____________ ____________ ____________
p. Sub-Total Debt Funds
____________
q. Total Source of Funds
$1,500,000
* should equal the response for line “q”
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Appendix F Disclosure of Ownership and Control Interest All applicants must complete this Appendix. I. Please answer the following questions by checking either ‘Yes’ or ‘No’. If any of the questions are answered ‘Yes’, please list the names and addresses of individuals or corporations. A. Will there be any individuals (or organizations) having a direct (or indirect) ownership or control interest of 5 percent or more in the applicant, that have been convicted of a criminal offense related to the involvement of such persons or organizations in any of the programs established by Titles XVIII, XIX of the Social Security Act? Yes___ No X B. Will there be any directors, officers, agents, or managers of the applicant (or facility) who have ever been convicted of a criminal offense related to their involvement in such programs established by Titles XVIII, XIX of the Social Security Act? Yes___ No X C. Are there (or will there be) any individuals employed by the applicant (or facility) in a managerial, accounting, auditing, or similar capacity who were employed by the applicant's fiscal intermediary within the past 12 months (Title XVIII providers only)? Yes___ No X D. Will there be any individuals (or organizations) having direct (or indirect) ownership interests, separately (or in combination), of 5 percent or more in the applicant (or facility)? (Indirect ownership interest is ownership in any entity higher in a pyramid than the applicant) Yes X No___ (Note, if the applicant is a subsidiary of a "parent" corporation, the response is ‘Yes’) Prospect Blackstone Valley Surgicare, LLC owned by Prospect CharterCARE, LLC owned by Prospect Medical Holdings, Inc.. E. Will there be any individuals (or organizations) having ownership interest (equal to at least 5 percent of the facility's assets) in a mortgage or other obligation secured by the facility? Yes___ No X F. Will there be any individuals (or organizations) that have an ownership or control interest of 5 percent or more in a subcontractor in which the applicant (or facility) has a direct or indirect ownership interest of 5 percent or more. (Also, please identify those subcontractors.) Yes___ No X G. Will there be any individuals (or organizations) having a direct (or indirect) ownership or control interest of 5 percent or more in the applicant (or facility), who have been direct (or indirect) owners or employees of a health care facility against which sanctions (of any kind) were imposed by any governmental agency? Yes___ No X H. Will there be any directors, officers, agents, or managing employees of the applicant (or facility) who have been direct (or indirect) owners or employees of a health care facility against which any sanctions were imposed by any governmental agency? Yes___ No X
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Appendix G Ownership Information All applicants must complete this Appendix 1. List all officers, members of the board of directors, stockholders, and trustees of the applicant and/or ultimate parent entity. For each individual, provide their home and business address, principal occupation, position with respect to the applicant and/or ultimate parent entity, and amount, if any, of the percentage of stock, share of partnership, or other equity interest that they hold. Prospect Medical Holdings, Inc. Officers: Name Samuel S. Lee
Steve Aleman
Ellen Shin
Mitchell Lew, M.D.
Address Prospect Medical Holdings, Inc. 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034 Prospect Medical Holdings, Inc. 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034 Prospect Medical Holdings, Inc. 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034, CA 90025 Prospect Medical Holdings, Inc. 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034
Phone Number 310-943-4500
Occupation Chief Executive Officer
Tenure Since August 8, 2007
310-943-4500
Chief Financial Officer
Since July 2013
310-943-4500
General Counsel, Secretary
Since 2007
310-943-4500
President
Since 2007
2
Prospect Medical Holdings, Inc. Directors: Name Samuel S. Lee
Jeereddi A. Prasad, M.D.
John M. Baumer
Michael S. Solomon
Alyse M. Wagner
Address Prospect Medical Holdings, Inc. 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034 Prospect Medical Holdings, Inc. 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034 Leonard Green & Partners, L.P. 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, CA 90025 Leonard Green & Partners, L.P. 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, CA 90025 Leonard Green & Partners, L.P. 11111 Santa Monica Boulevard, Suite 2000 Los Angeles, CA 90025
Phone Number 310-943-4500
Occupation Chairman, Board of Directors
Tenure Since August 8, 2007
310-943-4500
Board of Directors, President, ProMed Healthcare Administrators, Inc., President and Medical Director of Chaparral Medical Group, Inc. Board of Directors,
Since June 1, 2007
310-954-0444
Partner, Leonard Green & Partners, L.P.
310-954-0444
Board of Directors, Partner, Leonard Green & Partners, L.P.
310-954-0444
Board of Directors, Principal, Leonard Green & Partners, L.P.
Since December 15, 2010
Since December 15, 2010
Since December 15, 2010
Prospect CharterCARE, LLC: Officers: Name John Holiver
Address Prospect
Phone Number 310-943-4500
3
Occupation Chief Executive
Tenure Since June 20,
Addy Kane
Ellen Shin
CharterCare, LLC 825 Chalkstone Avenue, Providence, RI 02908 Prospect CharterCare, LLC 825 Chalkstone Avenue, Providence, RI 02908 Prospect Medical Holdings, Inc. 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034
Officer
2014
310-943-4500
Chief Financial Officer
Since June 20, 2014
310-943-4500
Secretary
Since June 20, 2014
Address 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034 3415 South Sepulveda Boulevard, 9th Floor Los Angeles, CA 90034
Phone Number 310-943-4500
Occupation Tenure Chairman of Board Since June 20, and CEO, Prospect 2014 Medical Holdings, Inc.
310-943-4500
President, Alta Hospital System, LLC
Since June 20, 2014
310-943-4500
President, Prospect East Holdings, Inc.
Since June 20, 2014
310-943-4500
Senior Vice President Corporate Development, Prospect Medical Holdings, Inc.
Since June 20, 2014
234 Mourning
401-225-7979
Retired Bank
Since June 20,
Prospect CharterCARE, LLC. Board Members: Name Samuel S. Lee
David Topper
Thomas Reardon
Von Crockett
Edwin Santos
4
Chairman of the Board Joseph R. DiStefano, Esq.
Elaine C. Jones, MD
Edward Quinlan
Dove Dr. Saunderstown, RI 02874 Adler Pollock & Sheehan, PC 1 Citizens Plaza, 8th Floor Providence, RI 02903 So. New England Neurology 814 Metacom Ave Bristol, RI 02809 20 River Run E. Greenwich, RI 02818
Executive
2014
401-274-7200
Attorney
Since June 20, 2014
401-392-5200
Physician
Since June 20, 2014
401-465-8867
Fmr. Executive Director of the Hospital Assoc. of RI
Since June 20, 2014
2. For each individual listed in response to Question 1 above, list all (if any) other health care facilities or entities within or outside Rhode Island in which he or she is an officer, director, trustee, shareholder, partner, or in which he or she owns any equity or otherwise controlling interest. For each individual, please identify: A) the relationship to the facility and amount of interest held, B) the type of facility license held (e.g. nursing facility, etc.), C) the address of the facility, D) the state license #, E) Medicare provider #, F) any professional accreditation (e.g. JACHO, CHAP, etc.), and G) complete Appendix B ‘Compliance Report’ and submit it to the appropriate state agency. The address, state license number, professional accreditation and Medicare provider number for each facility mentioned in this response are contained in section 5(a) below. Samuel Lee • • • • •
Alta Hospitals System, LLC – CEO and Manager Southern California Healthcare System, Inc. – President and on Board of Directors Alto Los Angeles Hospital, Inc. – President and on the Board of Directors Alta Newport Hospital, Inc. – President and on the Board of Directors Nix Hospitals System, LLC – Senior Vice President and Manager Ellen Shin
• • • • • • • •
Alta Hospitals System, LLC – General Counsel, Secretary Southern California Healthcare System, Inc. – Secretary Alta Los Angeles Hospital, Inc. – Secretary Alta Newport Hospital, Inc. – Secretary Nix Hospitals System, LLC – Secretary Prospect CharterCARE RWMC, LLC – Secretary Prospect CharterCARE SJHSRI, LLC – Secretary Prospect EOGH, Inc. – Secretary
5
• • • • •
Prospect Manchester Hospital, Inc. – Secretary Prospect Rockville Hospital, Inc. – Secretary Prospect Waterbury, Inc. – Secretary Prospect CCMC, LLC – Secretary Prospect DCMH, LLC – Secretary David Topper
• • • •
Alta Hospitals System, LLC – President Southern California Healthcare System, Inc. – CEO and on Board of Directors Alta Los Angeles Hospital, Inc. - CEO and on Board of Directors Alta Newport Hospital, Inc. – CEO and on Board of Directors (B)-(G) Prospect Medical Holdings is the parent entity with regard to twenty (20) acute care and behavioral hospitals located in California, Texas, Rhode Island, New Jersey, Pennsylvania and Connecticut. The responses to Question 2(B)-(G) are listed in the response to Question 5 below.
3. If any individual listed in response to Question 1 above, has any business relationship with the applicant, including but not limited to: supply company, mortgage company, or other lending institution, insurance or professional services, please identify each such individual and the nature of each relationship. None. 4. Have any individuals listed in response to Question 1 above been convicted of any state or federal criminal violation within the past 20 years? Yes___ No X. •
If response to Question 4 is ‘Yes’, please identify each person involved, the date and nature of each offense and the legal outcome of each incident.
5. Please list all licensed healthcare facilities (in Rhode Island or elsewhere) owned, operated or controlled by any of the entities identified in response to Question 15 of the application. For each facility, please identify: A) the entity, applicant or principal involved, B) the type of facility license held (e.g. nursing facility, etc.), C) the address of the facility, D) the state license #, E) Medicare provider #, F) any professional accreditation (e.g. JACHO, CHAP, etc.), and G) complete Appendix B ‘Compliance Report’ and submit it to the appropriate state agency. Prospect Medical Holdings, Inc.: Prospect Medical Holdings, Inc. is the parent entity with regard to the twenty (20) acute care and behavioral hospitals located in California, Texas, Rhode Island, New Jersey, Pennsylvania and Connecticut. They are as follows:
6
a. Southern California Healthcare System, Inc. (“SCHS”). SCHS owns and operates the following three (3), hospital facilities under one license, California License number 930000066. Name of Facility: Southern California Hospital at Hollywood Address: 6245 De Longpre Avenue, Hollywood Telephone: (323) 462-2271
License #: 930000066 State: CA
Zip: 90028
Provider #: 1023010113
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Accreditation: DNV- In Good Standing
Name of Facility: Southern California Hospital at Culver City
License #: 930000066
Address: 3828 Delmas Terrace, Culver City
State: CA
Telephone: (310) 836-7000
Zip: 90232
Provider #: 1023010113
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Accreditation: DNV- In Good Standing
Name of Facility: Southern California Hospital at Van Nuys
License #: 930000066
Address: 14433 Emelita Street, Van Nuys
State: CA
Telephone: (818) 787-1511
Zip: 91401
Provider #: 1023010113
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status: _×_For-profit __Non-Profit
Accreditation: DNV- In Good Standing
b. Alta Los Angeles Hospitals, Inc. (“Alta L.A.”). Alta L.A. owns and operates the following two (2), hospital facilities under one license, California License number 93000039. Name of Facility: Los Angeles Community Hospital
License #: 93000039
7
Address: 4081 E. Olympic Blvd., Los Angeles Telephone: (323) 267-0477
State: CA
Zip: 90023
Provider #: 1922001809
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Name of Facility: Norwalk Community Hospital Address: 13222 Bloomfield Avenue, Norwalk Telephone: (562) 863-4763
Accreditation: DNV- In Good Standing
License #: 93000039 State: CA
Zip: 90650
Provider #: 1922001809
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Accreditation: DNV- In Good Standing
c. Alta Newport Hospital, Inc. (“Alta Newport”). Alta Newport owns and operates the following hospital facility. Name of Facility: Foothill Regional Medical Center
License #: 060000178
Address: 14662 Newport Avenue
State: CA
Telephone: (714) 619-7700
Zip: 92780
Provider #: 1043632938 & 1689096406
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Accreditation: DNV- In Good Standing
d. Nix Hospitals System, LLC (“Nix”). Nix owns and operates the following two (2), hospital facilities under one license, Texas license number 100139. Name of Facility: Nix Health Care System
License #: 100139
Address: 414 Navarro St., San Antonio
State: TX
Telephone: (210) 271-1800
Provider #: 1255603544
8
Zip: 78205
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
Name of Facility: Nix Specialty Health Center
License #: 100139
Address: 4330 Vance Jackson, San Antonio
State: TX
Telephone: (210) 579-3800
Zip: 78205
Provider #: 1255603544
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
e. Prospect CharterCARE, LLC is the parent entity of the following two (2) facilities in Rhode Island: Prospect CharterCARE RWMC, LLC Name of Facility: Roger Williams Medical Center
License #: HOS00133
Address: 825 Chalkstone Ave
State: RI
Telephone: (401) 456-2000
Zip: 02908
Provider #: 1013332014
Type of Ownership: ___Individual ___Partnership ___Corporation ___LLC X Tax Status:
_×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
Prospect CharterCARE SJHSRI, LLC Name of Facility: Our Lady of Fatima Hospital
License #: HOS00132
Address: 200 High Service Ave
State: RI
Telephone: (401) 456-3000
Zip: 02904
Provider #: 1871918870
Type of Ownership: ___Individual ___Partnership ___Corporation ___LLC X Tax Status:
_×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
9
f. Prospect EOGH, Inc. is the parent entity of the following facility in New Jersey: Prospect EOGH, Inc. Name of Facility: East Orange General License #: 10704 Hospital Address: 300 Central Avenue Telephone: (973) 672-8400
State: NJ
Zip: 07018
Provider #: 1578932604; 1760851893; 1013386143; 1659740785; & 1578922258
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status: _×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
g. Prospect ECHN, Inc. is the parent entity of the following two (2) facilities in Connecticut: Prospect Manchester Hospital, Inc. Name of Facility: The Manchester Memorial Hospital
License #: GH.0000073
Address: 71 Haynes Street, Manchester
State: CT
Telephone: (860) 646-1222
Zip: 06040
Provider #: 1225484751 & 1316394638
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
Prospect Rockville Hospital, Inc. Name of Facility: The Rockville General Hospital
License #: GH.0000074
Address: 31 Union Street, Vernon
State: CT
Telephone: (860) 872-0501
Zip: 06066
Provider #: 1205283538
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
h. Prospect Waterbury, Inc. is the parent entity of the following facility in Connecticut:
10
Prospect Waterbury, Inc. Name of Facility: The Waterbury Hospital
License #: GH.0000075
Address: 64 Robbins Street
State: CT
Telephone: (203) 573-6000
Zip: 06708
Provider #: 1477902641
Type of Ownership: ___Individual ___Partnership _×__Corporation ___LLC Tax Status:
_×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
i. Prospect Crozer, LLC is the parent entity of the following four (4) facilities in Pennsylvania: Prospect CCMC, LLC Name of Facility: Crozer Chester Medical Center Address: One Medical Center Boulevard, Upland
Telephone: (610) 447-2000
License #: 037201 State: PA
Zip: 19013
Provider #: 1720011372; 1295750552; 1881711166; 1215197942; 1972757912; 1437411352; 1598010787; 1043565237; 1215282405; 1144576091; 1104238385; 1881008274; & 1588079867
Type of Ownership: ___Individual ___Partnership ___Corporation ___LLC X Tax Status:
_×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
Name of Facility: Springfield Hospital
License #: 037201
Address: 190 West Sprout Road
State: PA
Telephone: (610) 328-8700
Zip: 19064
Provider #: 1215398276
Type of Ownership: ___Individual ___Partnership ___Corporation ___LLC X Tax Status:
_×_For-profit __Non-Profit
Name of Facility: Taylor Hospital
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing License #: 037201
11
Address: 175 E. Chester Pike, Ridley Park Telephone: (610) 595-6000
State: PA
Zip: 19078
Provider #: 1326255027
Type of Ownership: ___Individual ___Partnership ___Corporation ___LLC X Tax Status: Profit
_×_For-profit __Non-
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
Prospect DCMH, LLC Name of Facility: Delaware County Memorial Hospital Address: 501 North Lansdowne Avenue, Drexel Hill Telephone: (610) 284-8100
License #: 041801 State: PA
Zip: 19026
Provider #: 1750354676
Type of Ownership: ___Individual ___Partnership ___Corporation ___LLC X Tax Status:
_×_For-profit __Non-Profit
Accreditation: Joint Commission (f/k/a JCAHO)- In Good Standing
6. Have any of the facilities owned, operated or managed by the applicant and/or any of the entities identified in Question 5 above during the last 5-years had bankruptcies and/or were placed in receiverships? Yes___ No X •
If response to Question 6 is ‘Yes’, please identify the facility and its current status.
12 842570.v1
Exhibit 14
DISCLOSURE SCHEDULES TO ASSET PURCHASE AGREEMENT BY AND AMONG BLACKSTONE VALLEY SURGICARE ACQUISITION, L.P., SURGICAL CARE AFFILIATES, LLC AND PROSPECT BLACKSTONE VALLEY SURGICARE, LLC DECEMBER 21, 2016 These disclosure schedules (“Disclosure Schedules”) form a part of that certain Asset Purchase Agreement, dated December 21, 2016 (the “Agreement”), by and among Prospect Blackstone Valley Surgicare, LLC, a Rhode Island limited liability company (“Buyer”), Blackstone Valley Surgicare Acquisition, L.P, a Rhode Island limited partnership, (“Seller”) and Surgical Care Affiliates, LLC, a Delaware limited liability company and affiliate of Seller (“SCA”). Capitalized terms used but not defined herein shall have the meaning ascribed thereto in the Agreement. The information and disclosures contained herein are intended to qualify the representations, warranties and covenants of the Sellers contained in the Agreement and shall not be deemed to expand in any way the scope or effect of any such representations, warranties or covenants. Any matter disclosed in one of these Disclosure Schedules shall be deemed disclosed in any other section of these Disclosure Schedules to the extent the Agreement requires such disclosure, but only if it is readily apparent on the face of the schedule that the disclosed matter should be deemed disclosed on another schedule. These Disclosure Schedules constitute an integral part of the Agreement and are hereby incorporated therein.
7/3909110.2
SCHEDULE 1.1(a) MACHINERY AND EQUIPMENT See attached.
7/3909110.2
SCHEDULE 1.1(e) ASSUMED CONTRACTS Contract Title
Service
Contracting Party 1
Contracting Party 2
Without Cause Termination
Assignment Provision
ProviderSupplier Agreement
Provision of Medical Products
Blackstone Valley Surgicare
Accumed, LLC
Terminable upon thirty (30) days’ prior written notice.
Blackstone may assign to a whollyowned subsidiary or affiliate.
Ambulance Service Agreement
Advanced life support, basic life support, and chair car transportation Advanced life support, basic life support, and chair car transportation Sedation anesthesiology services
Blackstone Valley Surgicare
Med Tech, Inc.
Silent
Blackstone Valley Surgicare
Access Ambulance Service, Inc.
Blackstone Valley Surgicare Acquisition, L.P.
Narragansett Bay Anesthesia
Terminable upon thirty (30) days’ prior written notice. Terminable upon thirty (30) days’ prior written notice. Terminable upon ninety (90) days’ prior written notice.
Ambulance Service Agreement
Anesthesia Services Agreement
Silent
Narragansett may not assign or subcontract Agreement without Blackstone’s prior consent.
Service Agreement
Chemical/ hazardous waste disposal
Blackstone Valley Surgical
BioServ, Inc.
Terminable upon sixty (60) days’ prior written notice prior to renewal date.
Silent
Product Supply Agreement
Purchasing gaseous and liquid products for use at Buyer’s location
Blackstone Valley Surgicare
Corp Brothers Holdings, LLC
Terminable upon the expiration of the basic term or any anniversary date with twelve (12) months’ prior written notice.
Consent required.
7/3909110.2
Comments/ Action Items
Order Renewal
Service of deionized water system
evoQUA Water Technologie s
Blackstone Valley Surgical
Silent
Silent
GE Healthcare Service Quotation
Equipment servicing
Blackstone Valley Surgicare
Datex-Ohmeda, Inc.
No
Assignable if assignee agrees to be bound.
End User Agreement
Laundry
Blackstone Valley Surgicare
ImageFirst Healthcare Laundry Specialists, Inc.
Terminable upon sixty (60) days’ prior written notice. (Subject to a cancellation fee.)
Agreement may be assigned.
Agreement Regarding Affiliation for Clinical Education
University provides physician assistants to the facility
Blackstone Valley Surgicare
Johnson and Wales University
Terminable upon ninety (90) days’ prior written notice.
Consent required.
Scope of Work Agreement
Janitorial and floor care
Martins Maintenance
Silent
Silent
Medical Direction Agreement
Provision of medical direction and administrative services Podiatry Residency Program
Blackstone Valley Surgicare Blackstone Valley Surgicare Acquisition, L.P. Surgical Care Affiliates, Blackstone Valley Surgicare Blackstone Valley Surgicare
Narragansett Bay Anesthesia
Terminable upon ninety (90) days’ prior written notice. Terminable upon sixty (60) days’ prior written notice.
Consent required.
New England Medgas, LLC
Silent
Agreement cannot be assigned except to an affiliate or a successor to substantially all of the assets of either party.
New England Institute of Technology
Terminable upon ninety (90) days’ prior written notice.
Silent
Memorandum of Understanding
Technical Service Agreement
Inspection and service of medical gas equipment
Affiliation Agreement
Provision of Clinical education experiences for college students
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Blackstone Valley Surgicare
Memorial Hospital of Rhode Island
Silent
Exclusive contract.
Need Master Services Agreement.
Service Agreement
Equipment servicing (HVAC)
Blackstone Valley Surgicare, Inc.
Nexgen Mechanical, Inc.
Ancillary Services Agreement
Clinical and surgical pathology services Hardware and software maintenance and repair
Blackstone Valley Surgicare, Inc. Blackstone Valley Surgicare
St. Joseph Health Services of Rhode Island Phillips Healthcare
Terminable upon sixty (60) days’ prior written notice.
Consent required.
Preventative Maintenance Agreement
Maintaining emergency generator
Power Equipment Co.
Terminable upon written notice.
Silent
Radiation Contract
Annual Fluoroscopic Calibration Report Administration of equipment maintenance management programs
Surgical Care Affiliates, Blackstone Valley Surgicare Blackstone Valley Surgicare
Radiation Consultants/ Douglas R. Shearer, PhD Remi Corporation
Terminable upon written notice.
Silent
Terminable upon thirty (30) days’ written notice. (Subject to cancellation fee.)
Consent required.
Service Agreement
Equipment Maintenance Agreement
Reprocessing Services Agreement
Memorandum of Understanding
Memorandum of Understanding
7/3909110.2
Provision of single use medical device reprocessing services Administration of Mohs fellow rotational assignments
Administration of Podiatric rotational assignments
Blackstone Valley Surgicare
Terminable at the end of the anniversary date with at least forty-five (45) days’ written notice. Nonterminable without cause.
Silent
Consent required.
Surgical Care Affiliates
Surgical Instrument Services and Savings, Inc.
Nonterminable without cause.
Agreement may be assigned.
Surgical Care Affiliates, Blackstone Valley Surgicare
Prospect Charter Care RWMC, LLC d/b/a Roger Williams Medical Center (Mohs Fellowship)
Terminable upon sixty (60) days’ advance written notice.
Agreement may be assigned by the sponsor to any entity that succeeds to substantially all of its business or assets.
Surgical Care Affiliates, Blackstone
Prospect Charter Care RWMC, LLC d/b/a Roger Williams Medical Center
Terminable upon sixty (60) days’ advance written notice.
Agreement may be assigned by the sponsor to any entity that
Extension is being negotiated.
Valley Surgicare
(Podiatric Residency Sponsor)
Inspection and diagnostics of all peripheral devices for fire alarm and detection systems Conducting portions of nursing school educational programs at the facility Medical waste pickup and Disposal along with documentation
Blackstone Valley Surgicare
SimplexGrinnell, L.P.
Silent as to Blackstone. Simplex may terminate without cause.
Consent required.
Blackstone Valley Surgicare
St. Joseph School of Nursing
Silent
Silent
Blackstone Valley Surgicare
Stericycle
Terminable upon (60) days’ prior to any renewal date. Terminable during the term, but subject to cancellation fee.
Consent required.
Vendor Agreement
Equipment maintenance and customer support
Blackstone Valley Surgicare
Steris
Silent
Agreement
Provision of emergency medical care
Blackstone Valley Surgicare
St. Joseph Health Services of Rhode Island
Terminable without cause. (Subject to cancellation fee.) Terminable upon ninety (90) days’ written notice.
Amendment One to the Supplemental Equipment Services Agreement Lithotripsy Services Agreement
Equipment services
Blackstone Valley Surgicare
Universal Hospital Services, Inc.
N/A
N/A
Provision of a mobile lithotripsy system
Blackstone Valley Surgicare Acquisition, L.P. Blackstone Valley Surgery
United Medical Systems (DE), Inc.
Nonterminable without cause.
UMS may assign this agreement.
Alcon Laboratories Inc.
Silent
Silent
Services Agreement
Clinical Education Site Agreement
Steri-Safe Service Agreement
Microscope Financing Agreement
7/3909110.2
Equipment purchase
succeeds to substantially all of its business or assets.
Silent
Services Agreement is missing.
Alcon holds a security interest in the financed
microscope. See Schedules 3.1(c) and 3.1(d)(iii). Maintenance Agreement
Copier maintenance
Blackstone Valley Surgicare
CBS
Silent
Silent
Maintenance Agreement
Copier maintenance
Blackstone Valley Surgicare
CBS
Silent
Silent
7/3909110.2
SCHEDULE 1.1(g) OTHER ASSETS None.
7/3909110.2
SCHEDULE 1.2(d) EXCLUDED CONTRACTS Contract Title Facility Services Agreement
Service Medical provider services
Contracting Party 1 Blackstone Valley Surgicare
Contracting Party 2 Aetna Health Management, LLC
Without Cause Termination Terminable upon 180 days’ prior notice after the original term.
Assignment Provision Consent required, unless assigned to any party that succeeds to Facility assets, by merger, acquisition or otherwise.
Outpatient Surgical Center Participation Agreement Ancillary Services Agreement
Outpatient surgical center services
Blackstone Valley Surgicare Acquisition, L.P.
Blue Cross & Blue Shield of Rhode Island (“BBSRI”)
Terminable upon 120 days’ prior notice.
Consent required.
Medical provider services
Blackstone Valley Surgicare
Connecticut General Life Insurance Company (“CIGNA”)
Terminable upon 120 days’ prior notice.
Consent required.
Ancillary Provider Participation Agreement Participating Ambulatory Surgery Center Agreement for Freestanding Ambulatory Surgery Centers Allied Health Services Provider Agreement
Medical provider services
Blackstone Valley Surgicare, Inc.
UnitedHealthc are of New England
Non-terminable without cause.
Consent required.
Outpatient surgery and related services
Blackstone Valley Surgicare, Acquisition, LP d/b/a Blackstone Valley Surgicare
Harvard Pilgrim Health Care, Inc.
Non-terminable without cause.
Consent required, unless assigned to a successor in interest to all or substantially all of the Plant’s assets and operations.
Medical provider services
Blackstone Valley Surgicare, Acquisition, LP
Tufts Health Plan
Non-terminable without cause.
Consent required.
Facility Provider Agreement
Medical provider services
Blackstone Valley Surgicare
Health Net Federal Services, Inc.
Consent required.
Participating Provider Agreement
Medical provider services
Blackstone Valley Surgicare
Neighborhood Health Plan of Rhode Island
Health Net may terminate after Provider undergoes a change of control (includes a 51% or more acquisition of assets). Non-terminable without cause.
7/3909110.2
Consent required.
National agreement
National agreement
Surgical Care Affiliates
Multiplan, Inc.
Management Services Agreement RBO Agreement
Management Services
Blackstone Valley Surgicare
Surgical Care Affiliates
RBO Services
Blackstone Valley Surgicare
Surgical Care Affiliates
7/3909110.2
N/A
Note: Multiplan is a SCA national agreement and would need to be renegotiated once the transaction is finalized.
SCHEDULE 1.2(m) OTHER EXCLUDED ASSETS None.
7/3909110.2
SCHEDULE 1.6 ALLOCATION OF PURCHASE PRICE One-hundred percent (100%) of the Purchase Price will be allocated to the Acquired Assets.
7/3909110.2
SCHEDULE 3.1(c) SELLER CONFLICT DISCLOSURE 1. Seller has a 60-month Microscope Financing Agreement with Alcon for $76,049.18. 2. The CEC Approval is a condition precedent to the closing of the transaction. 3. The following contracts: Contract Title
Service
Contracting Party 1
Contracting Party 2
Provider-Supplier Agreement
Provision of Medical Products
Blackstone Valley Surgicare
Accumed, LLC
Product Supply Agreement
Purchasing gaseous and liquid products for use at Buyer’s location Equipment servicing University provides physician assistants to the facility
Blackstone Valley Surgicare
Corp Brothers Holdings, LLC
Blackstone Valley Surgicare Blackstone Valley Surgicare
Datex-Ohmeda, Inc.
Provision of medical direction and administrative services
Blackstone Valley Surgicare
Narragansett Bay Anesthesia
Clinical and surgical pathology services Hardware and software maintenance and repair
Blackstone Valley Surgicare, Inc.
St. Joseph Health Services of Rhode Island
Blackstone Valley Surgicare
Phillips Healthcare
Equipment Maintenance Agreement
Administration of equipment maintenance management programs
Blackstone Valley Surgicare
Remi Corporation
Services Agreement
Inspection and diagnostics of all peripheral devices for fire alarm and detection systems Medical waste pickup and disposal
Blackstone Valley Surgicare
SimplexGrinnell, L.P.
Blackstone Valley Surgicare
Stericycle
GE Healthcare Service Quotation Agreement Regarding Affiliation for Clinical Education Medical Direction Agreement
Ancillary Services Agreement Service Agreement
Steri-Safe Service Agreement
7/3909110.2
Johnson and Wales University
SCHEDULE 3.1(d)(ii) MACHINERY AND EQUIPMENT CONDITION AND REPAIR DISCLOSURE The following equipment requires repair: •
Mini C-Arm: Currently not operable.
•
Four anesthesia machines: Working currently, but ineligible for service agreements as of 2017. No replacement parts available.
•
Sterilizer: Currently not operable.
•
EKG Machine: Needs to be updated and/or replaced.
7/3909110.2
SCHEDULE 3.1(d)(iii) GOOD AND MARKETABLE TITLE DISCLOSURE Alcon Laboratories, Inc. has a security interest on the Luxor Microscope LX3 (Serial No. 1502728605X). Alcon Laboratories, Inc. financed the microscope and accessories on August 11, 2015, for a 60-month term.
7/3909110.2
SCHEDULE 3.1(d)(iv) ASSETS NOT ON THE PREMISES None.
7/3909110.2
SCHEDULE 3.1(d)(v) SELLER’S PERSONAL PROPERTY LEASES Lessor (landlord)
Lessee (tenant)
Leased Equipment
K2 Capital Group, LLC
Surgical Care Affiliates, LLC
Equipment as described in Exhibit A to Lease Schedule No. 064
K2 Capital Group, LLC
Surgical Care Affiliates, LLC
Equipment as described in Exhibit A to Lease Schedule No. 074
K2 Capital Group, LLC
Surgical Care Affiliates, LLC
Equipment as described in Exhibit A to Lease Schedule No. 047
K2 Capital Group, LLC
Surgical Care Affiliates, LLC and Blackstone Valley Surgicare GP, LLC
Equipment as described in Exhibit A to Lease Schedule No. 235
K2 Capital Group, LLC
Surgical Care Affiliates, LLC and Blackstone Valley Surgicare GP, LLC
Equipment as described in Exhibit A to Lease Schedule No. 247
K2 Capital Group, LLC
Surgical Care Affiliates, LLC and Blackstone Valley Surgicare GP, LLC
Equipment as described in Exhibit A to Lease Schedule No. 312
K2 Capital Group, LLC
Surgical Care Affiliates, LLC and Blackstone Valley Surgicare GP, LLC
Equipment as described in Exhibit A to Lease Schedule No. 393
USBank
Blackstone Valley Surgicare
Xerox 5335PT
USBank
Blackstone Valle Surgicare GP LLC
Xerox W7855 (with fax)
7/3909110.2
SCHEDULE 3.1(e) PREMISES None.
7/3909110.2
SCHEDULE 3.1(f) CONDUCT OF THE BUSINESS None.
7/3909110.2
SCHEDULE 3.1(g) PERMITS AND LICENSES 1. Facility License (License No. FAS01021) issued by the States of Rhode Island and Providence Plantations Department of Health to Blackstone Valley Surgicare. Expires December 31, 2016. 2. Radiation Control Program License (License No. SRF0100) issued by the States of Rhode Island and Providence Plantations Department of Health to Blackstone Valley Surgicare. Expires August 31, 2017. 3. Ambulatory Surgery Center Accreditation (Org. No. 769, Re-Accreditation Renewal Code a0c47dfe769) issued by Accreditation Association for Ambulatory Health Care to Blackstone Valley Surgicare Acquisition LLP d/b/a Blackstone Valley Surgicare. Expires November 7, 2017. 4. DEA Registration (DEA No. FB5820899) issued by the Drug Enforcement Administration to Blackstone Valley Surgicare. Expires July 31, 2018. 5. Certificate of Waiver (CLIA No. 41D0907240) issued by Centers for Medicare & Medicaid Services to Blackstone Valley Surgicare. Expires October 10, 2017. 6. Medicare (Provider No. 41C0001000). 7. Medicaid (Provider No. 410100).
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SCHEDULE 3.1(h) COMPLIANCE WITH LAWS None.
7/3909110.2
SCHEDULE 3.1(i) CONTRACTS Contract Title
Service
Contracting Party 1
Contracting Party 2
Without Cause Termination
Assignment Provision
Provider-Supplier Agreement
Provision of Medical Products
Blackstone Valley Surgicare
Accumed, LLC
Terminable upon thirty (30) days’ prior written notice.
Blackstone may assign to a wholly-owned subsidiary or affiliate.
Ambulance Service Agreement
Advanced life support, basic life support, and chair car transportatio n Advanced life support, basic life support, and chair car transportatio n Sedation anesthesiolo gy services
Blackstone Valley Surgicare
Med Tech, Inc.
Terminable upon thirty (30) days’ prior written notice.
Silent
Blackstone Valley Surgicare
Access Ambulance Service, Inc.
Terminable upon thirty (30) days’ prior written notice.
Silent
Blackstone Valley Surgicare Acquisition, L.P.
Narragansett Bay Anesthesia
Terminable upon ninety (90) days’ prior written notice.
Narragansett may not assign or subcontract Agreement without Blackstone’s prior consent.
Ambulance Service Agreement
Anesthesia Services Agreement
Service Agreement
Chemical/ hazardous waste disposal
Blackstone Valley Surgical
BioServ, Inc.
Terminable upon sixty (60) days’ prior written notice prior to renewal date.
Silent
Product Supply Agreement
Purchasing gaseous and liquid products for use at Buyer’s location
Blackstone Valley Surgicare
Corp Brothers Holdings, LLC
Terminable upon the expiration of the basic term or any anniversary date with twelve (12) months’ prior written notice.
Consent required.
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Comments/ Action Items
Order Renewal
Service of deionized water system
evoQUA Water Technologies
Blackstone Valley Surgical
Silent
Silent
GE Healthcare Service Quotation
Equipment servicing
Blackstone Valley Surgicare
Datex-Ohmeda, Inc.
No
Assignable if assignee agrees to be bound.
End User Agreement
Laundry
Blackstone Valley Surgicare
ImageFirst Healthcare Laundry Specialists, Inc.
Terminable upon sixty (60) days’ prior written notice. (Subject to a cancellation fee.)
Agreement may be assigned.
Agreement Regarding Affiliation for Clinical Education
University provides physician assistants to the facility
Blackstone Valley Surgicare
Johnson and Wales University
Terminable upon ninety (90) days’ prior written notice.
Consent required.
Scope of Work Agreement
Janitorial and floor care Provision of medical direction and administrati ve services Podiatry Residency Program
Blackstone Valley Surgicare Blackstone Valley Surgicare Acquisition, L.P.
Martins Maintenance
Silent
Silent
Narragansett Bay Anesthesia
Terminable upon ninety (90) days’ prior written notice.
Consent required.
Surgical Care Affiliates, Blackstone Valley Surgicare Blackstone Valley Surgicare
Memorial Hospital of Rhode Island
Terminable upon sixty (60) days’ prior written notice.
Silent
New England Medgas, LLC
Silent
Agreement cannot be assigned except to an affiliate or a successor to substantially all of the assets of either party.
Blackstone Valley Surgicare
New England Institute of Technology
Terminable upon ninety (90) days’ prior written notice.
Silent
Blackstone Valley Surgicare, Inc.
Nexgen Mechanical, Inc.
Terminable at the end of the anniversary
Silent
Medical Direction Agreement
Memorandum of Understanding
Technical Service Agreement
Inspection and service of medical gas equipment
Affiliation Agreement
Provision of Clinical education experiences for college students Equipment servicing (HVAC)
Service Agreement
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Exclusive contract.
Need Master Services Agreement.
Extension is being negotiated.
Ancillary Services Agreement
date with at least forty-five (45) days’ written notice. Nonterminable without cause.
Clinical and surgical pathology services Hardware and software maintenance and repair
Blackstone Valley Surgicare, Inc.
St. Joseph Health Services of Rhode Island
Blackstone Valley Surgicare
Phillips Healthcare
Terminable upon sixty (60) days’ prior written notice.
Consent required.
Preventative Maintenance Agreement
Maintaining emergency generator
Power Equipment Co.
Terminable upon written notice.
Silent
Radiation Contract
Annual Fluoroscopi c Calibration Report Administrati on of equipment maintenance management programs
Surgical Care Affiliates, Blackstone Valley Surgicare Blackstone Valley Surgicare
Radiation Consultants/ Douglas R. Shearer, PhD Remi Corporation
Terminable upon written notice.
Silent
Terminable upon thirty (30) days’ written notice. (Subject to cancellation fee.)
Consent required.
Service Agreement
Equipment Maintenance Agreement
Reprocessing Services Agreement
Memorandum of Understanding
Memorandum of Understanding
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Blackstone Valley Surgicare
Consent required.
Provision of single use medical device reprocessing services Administrati on of Mohs fellow rotational assignments
Surgical Care Affiliates
Surgical Instrument Services and Savings, Inc.
Nonterminable without cause.
Agreement may be assigned.
Surgical Care Affiliates, Blackstone Valley Surgicare
Prospect Charter Care RWMC, LLC d/b/a Roger Williams Medical Center (Mohs Fellowship)
Terminable upon sixty (60) days’ advance written notice.
Agreement may be assigned by the sponsor to any entity that succeeds to substantially all of its business or assets.
Administrati on of Podiatric rotational assignments
Surgical Care Affiliates, Blackstone Valley Surgicare
Prospect Charter Care RWMC, LLC d/b/a Roger Williams Medical Center (Podiatric Residency Sponsor)
Terminable upon sixty (60) days’ advance written notice.
Agreement may be assigned by the sponsor to any entity that succeeds to substantially all of its business or assets.
Services Agreement
Clinical Education Site Agreement
Steri-Safe Service Agreement
Vendor Agreement
Agreement
Amendment One to the Supplemental Equipment Services Agreement Lithotripsy Services Agreement
Microscope Financing Agreement
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Inspection and diagnostics of all peripheral devices for fire alarm and detection systems Conducting portions of nursing school educational programs at the facility Medical waste pickup and Disposal along with documentati on
Blackstone Valley Surgicare
SimplexGrinnell, L.P.
Silent as to Blackstone. Simplex may terminate without cause.
Consent required.
Blackstone Valley Surgicare
St. Joseph School of Nursing
Silent
Silent
Blackstone Valley Surgicare
Stericycle
Terminable upon (60) days’ prior to any renewal date. Terminable during the term, but subject to cancellation fee.
Consent required.
Equipment maintenance and customer support Provision of emergency medical care
Blackstone Valley Surgicare
Steris
Silent
Blackstone Valley Surgicare
St. Joseph Health Services of Rhode Island
Terminable without cause. (Subject to cancellation fee.) Terminable upon ninety (90) days’ written notice.
Equipment services
Blackstone Valley Surgicare
Universal Hospital Services, Inc.
N/A
N/A
Provision of a mobile lithotripsy system
Blackstone Valley Surgicare Acquisition, L.P. Blackstone Valley Surgery
United Medical Systems (DE), Inc.
Nonterminable without cause.
UMS may assign this agreement.
Alcon Laboratories Inc.
Silent
Silent
Equipment purchase
Silent
Services Agreement is missing.
Alcon holds a security interest in the financed microscope. See
Schedules 3.1(c) and 3.1(d)(iii). Facility Services Agreement
Medical provider services
Blackstone Valley Surgicare
Aetna Health Management, LLC
Terminable upon 180 days’ prior notice after the original term.
Consent required, unless assigned to any party that succeeds to Facility assets, by merger, acquisition or otherwise.
Contract is not being assumed by buyer.
Outpatient Surgical Center Participation Agreement
Outpatient surgical center services
Blue Cross & Blue Shield of Rhode Island (“BBSRI”)
Terminable upon 120 days’ prior notice.
Consent required.
Contract is not being assumed by buyer.
Ancillary Services Agreement
Medical provider services
Blackstone Valley Surgicare Acquisition, L.P. Blackstone Valley Surgicare
Connecticut General Life Insurance Company (“CIGNA”)
Terminable upon 120 days’ prior notice.
Consent required.
Contract is not being assumed by buyer.
Ancillary Provider Participation Agreement Participating Ambulatory Surgery Center Agreement for Freestanding Ambulatory Surgery Centers
Medical provider services
Blackstone Valley Surgicare, Inc.
UnitedHealthcare of New England
Nonterminable without cause.
Consent required.
Contract is not being assumed by buyer.
Outpatient surgery and related services
Blackstone Valley Surgicare, Acquisition, LP d/b/a Blackstone Valley Surgicare
Harvard Pilgrim Health Care, Inc.
Nonterminable without cause.
Contract is not being assumed by buyer.
Allied Health Services Provider Agreement
Medical provider services
Tufts Health Plan
Nonterminable without cause.
Facility Provider Agreement
Medical provider services
Blackstone Valley Surgicare, Acquisition, LP Blackstone Valley Surgicare
Consent required, unless assigned to a successor in interest to all or substantially all of the Plant’s assets and operations. Consent required.
Health Net Federal Services, Inc.
Consent required.
Contract is not being assumed by buyer.
Participating Provider Agreement
Medical provider services
Blackstone Valley Surgicare
Neighborhood Health Plan of Rhode Island
Health Net may terminate after Provider undergoes a change of control (includes a 51% or more acquisition of assets). Nonterminable without cause.
Consent required.
Contract is not being assumed by buyer.
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Contract is not being assumed by buyer.
National agreement
National agreement
Surgical Care Affiliates
Multiplan, Inc.
N/A
N/A
Contract is not being assumed by buyer. Note: Multiplan is a SCA national agreement and would need to be renegotiated once the transaction is finalized.
Maintenance Agreement
Copier maintenance
Blackstone Valley Surgicare
CBS
Silent
Silent
Maintenance Agreement
Copier maintenance
Blackstone Valley Surgicare
CBS
Silent
Silent
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SCHEDULE 3.1(j) LITIGATION Coogan v. SCA, et. al.
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SCHEDULE 3.1(k) INSURANCE Type of Insurance
Carrier
Policy No.
Facility Deductible
HPL/GL
Steadfast Insurance Company (Zurich)
HPC0084310-01
$0
HPL/GL Umbrella Liability
Steadfast Insurance Company (Zurich)
HPC0084314-01
$0
HPL/GL Excess Liability
National Fire & Marine
EN008909
$0
Workers’ Compensation
Trumbull Ins. Co. (The Hartford)
84WNS50600
$0
Property
XL Insurance
US00069694PR16A
$25,000
Automobile Liability
Hartford Insurance Company
81ABS50602
$1,000
Environmental Liability
Ironshore Specialty Insurance Company
979304
$25,000
Employment Practices Liability
National Union Fire Insurance Company of Pittsburgh, PA
44061994
$25,000
Excess Employment Practices Liability
Westchester Fire Insurance Company
G27069691 002
$0
Commercial Crime Policy
National Union Fire Insurance Company of Pittsburgh, PA
04-417-73-38
$150,000
Fiduciary Liability Policy
Illinois National Insurance Company
44177334
$50,000
Directors and Officers (Private Company Policy)
Lexington Insurance Company
04-406-07-57
$25,000
Data Privacy Insurance
Beazley Syndicate at Lloyd’s
B1230FC02413A16
Various
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SCHEDULE 3.1(o) LABOR RELATIONS
SCHEDULE 3.1(r) HEALTHCARE EVENTS None.
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SCHEDULE 3.1(s) FINANCIAL STATEMENTS See attached.
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SCHEDULE 3.2(c) SCA CONFLICT DISCLOSURE None.
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SCHEDULE 3.2(d) EMPLOYEE BENEFIT PLANS •
•
• • • • • • • •
Surgical Care Affiliates, LLC Retirement Investment Plan Surgical Care Affiliates, LLC Welfare Benefit Plan o Medical & Prescription o Dental o Vision o Health Care Flexible Spending Accounts o Life and AD&D o Disability o Employee Assistance Program Dependent Care Flexible Spending Accounts Health Savings Accounts Leaves of Absence 529 College Savings Plan Accident Insurance Critical Illness Insurance Teammate Stock Purchase Plan Adoption Assistance
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SCHEDULE 5.1(j) LIENS Alcon Laboratories, Inc. has a security interest on the Luxor Microscope LX3 (Serial No. 1502728605X). Alcon Laboratories, Inc. financed the microscope and accessories on August 11, 2015, for a 60-month term.
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SCHEDULE 8.6 CONSENTS Contract Title
Service
Contracting Party 1
Contracting Party 2
Without Cause Termination
Assignment Provision
ProviderSupplier Agreement
Provision of Medical Products
Blackstone Valley Surgicare
Accumed, LLC
Terminable upon thirty (30) days’ prior written notice.
GE Healthcare Service Quotation Agreement Regarding Affiliation for Clinical Education Ancillary Services Agreement
Equipment servicing
Blackstone Valley Surgicare Blackstone Valley Surgicare
Datex-Ohmeda, Inc.
No
Blackstone may assign to a whollyowned subsidiary or affiliate. Consent required.
Johnson and Wales University
Terminable upon ninety (90) days’ prior written notice. Nonterminable without cause.
Consent required.
Service Agreement
University provides physician assistants to the facility Clinical and surgical pathology services Hardware and software maintenance and repair
Blackstone Valley Surgicare, Inc. Blackstone Valley Surgicare
St. Joseph Health Services of Rhode Island Phillips Healthcare
Terminable upon sixty (60) days’ prior written notice.
Consent required.
Terminable upon thirty (30) days’ written notice. (Subject to cancellation fee.) Silent as to Blackstone. Simplex may terminate without cause.
Consent required.
Terminable upon ninety (90) days’ prior written notice.
Consent required.
Equipment Maintenance Agreement
Administration of equipment maintenance management programs
Blackstone Valley Surgicare
Remi Corporation
Services Agreement
Inspection and diagnostics of all peripheral devices for fire alarm and detection systems Provision of medical direction and administrative services
Blackstone Valley Surgicare
SimplexGrinnell, L.P.
Blackstone Valley Surgicare Acquisition, L.P.
Narragansett Bay Anesthesia
Medical Direction Agreement
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Consent required.
Consent required.
Comments/ Action Items
Product Supply Agreement
Purchasing gaseous and liquid products for use at Buyer’s location
Blackstone Valley Surgicare
Corp Brothers Holdings, LLC
Steri-Safe Service Agreement
Medical waste pickup and Disposal along with documentation
Blackstone Valley Surgicare
Stericycle
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Terminable upon the expiration of the basic term or any anniversary date with twelve (12) months’ prior written notice. Terminable upon (60) days’ prior to any renewal date. Terminable during the term, but subject to cancellation fee.
Consent required.
Consent required.
SCHEDULE 10.9 EMPLOYMENT OF BUSINESS EMPLOYEES All employees listed on Schedule 3.1(o) shall be employed by Prospect CharterCare, LLC.
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Exhibit 15
Pre Transaction Organizational Chart
Prospect Medical Holdings, Inc. A Delaware corporation
Prospect East Hospital Advisory Services, LLC
Prospect East Holdings, Inc. A Delaware corporation
A Delaware limited liability company
85% owner
CharterCARE Community Board (fka CharterCARE Health Partners)
Prospect CharterCARE RWMC, LLC A Rhode Island limited liability company dba Roger Williams Medical Center
Prospect CharterCARE, LLC 15% owner
Prospect CharterCARE SJHSRI, LLC A Rhode Island limited liability company dba Our Lady of Fatima Hospital
A Rhode Island limited liability company
Management Agreement
Prospect CharterCARE Physicians, LLC A Rhode Island limited liability company dba CharterCARE Medical Associates
Prospect CharterCARE Ancillary Services, LLC A Rhode Island limited liability company
Pre Transaction Organizational Chart Chart
Blackstone Valley Surgicare Acquisition, L.P. Facility #50237 1526 Atwood Avenue, Suite 300, Johnston, RI 02919
Surgical Care Affiliates, Inc. 100%
Surgical Care Affiliates, LLC 10300 100%
Surgery Center Holding, LLC 10104 100%
LP-1%
Blackstone Valley Surgicare GP, Inc. 95237 GP-40% LP-59%
Blackstone Valley Surgicare Acquisition, L.P. 50237
Post Transaction Organizational Chart PROSPECT MEDICAL HOLDINGS, INC.
PROSPECT EAST HOSPITAL ADVISORY SERVICES, LLC.
PROSPECT EAST HOLDINGS, INC. FEIN #32-0424060
85% owner Prospect CharterCARE LLC
Chartercare Community Board
15% owner
Prospect CCHP RWMC LLC
Prospect CCHP SJHSRI LLC
FEIN #46-4648465
FEIN #46-4661337
FEIN #37-1747940
Management Agreement
Prospect CCHP Ancillary Services LLC
Prospect CharterCARE Physicians LLC
Prospect Blackstone Valley Surgicare LLC
FEIN #46-4812661
FEIN #46-4690219
FEIN #81-4871794
Exhibit 18
Charity Care Policy of Prospect Blackstone Valley Surgicare, LLC
Exhibit 20
CCHP CCHP ENTITY
CITING BODY
CITATION
DISPOSITION
Roger Williams Medical Center (“RWMC”)
OSHA (7/14)
Training on hazardous chemicals
Corrective Action Plan submitted and accepted. No further action required.
RWMC
DOH (5/2015)
Organization & Management 12.2 Organization Patient Care Services 34.13 Other Reporting Requirements
Corrective Action Plan Submitted Provisions and time frames for the corrective action were determined to be acceptable per DOH letter dated 6/9/2015.
RWMC
OSHA (6/14)
Stairwell not properly maintained.
Corrective Action Plan submitted and accepted. No further action required.
Elmhurst Extended Care (“EEC”)
OSHA (7/14)
Ergonomic hazard cited
Corrective Action Plan submitted and accepted. No further action required.
RWMC
DEM (12/13)
Review of pharmacy reverse distribution process.
Documents supplied, no further action required at this time.
OLF
DOH (1/29/15)
Organization & Management Patient Care Services Discharge Planning
Corrective action plan submitted and accepted. No further action required. Provisions and time frames for the corrective action were
1
determined to be acceptable per DOH letter dated 3/16/15 OLF
DOH (6/2014)
Organization & Management Patient Care Services Reportable Incident
Corrective action plan submitted and ongoing. Letter received from the DOH on 5/2/16 releases the hospital from the compliance order and ended the monitoring and requested that we continue with our oversight group for continued monitoring.
EEC
DOH (5/14)
Investigate/Report Allegations Respect of Individuality Comprehensive Assessments Services Meet Standards ADL Care Provided for Residents Prevention of Pressure Sores Free of Accident Hazards Unnecessary Drugs Medication Errors Pharmaceutical Procedures Records-Complete/Accurate/ Accessible Life Safety Code Standard Sprinkler Installation
Corrective action plans submitted and accepted. No further action required.
EEC
DOH (4/15)
No findings facility determined to be deficiency free
N/A
RWMC
DOH (2/16)
Patient Care Services Pharmaceutical Service.(Sterile compounding), Environmental &
Corrective Action submitted and accepted by the DOH on March 11, 2016.
2
Maintenance Services (Housekeeping & Maintenance) Environmental & Maintenance Services (Infection Control) OLF
DOH (2/15)
Patient Care Services – Reportable Incidents
Corrective Action submitted and accepted by the DOH on 3/17/15
OLF
DOH (10/15)
Organization & Management12.2 Organization Patient Care Services 19.3Patient Care Management Patient Care Services 28.5 Nursing Services
Plan of Action submitted to the DOH on December 4, 2015 and accepted by them on 12/7/2015
OLF
DOH (8/16)
Organizational Management
Plan of Correction submitted to the DOH on 8/11/16 and accepted by them on 9/21/16.
RWMC
DOJ (12/18/15)
Alleged discrimination in online posting for podiatry residents. This was a nationwide issue for hospitals that used a certain website for posting for podiatry residents. Over 50 hospitals were impacted.
Settlement Agreement for additional training was signed without an admission of wrongdoing.
RWMC
DEA (12/10/15)
Record keeping failures in the pharmacy
Corrective action plan submitted and accepted. No further action required.
3
OLF
DHHS/CMS (9/12/2016)
Improper proficiency testing referral by laboratory
Corrective action plan submitted, awaiting response.
EEC
DOH (2/23/16)
Patient complaint investigation
Complaints unsubstantiated.
EEC
DOH (2/23/16)
Survey
Corrective Action Plans submitted and accepted. No further action required
EEC
DOH (4/6/16)
Patient complaint investigation
Complaints unsubstantiated.
EEC
DOH (12/20/16)
Patient complaint investigation
Complaints unsubstantiated.
EEC
CMS (3/16-multiple dates)
Life Safety Code Survey
Found substantial compliance with requirements for participation and finding no Life Safety Code violations.
RWMC
RI Board of Pharmacy (12/24/15 and 2/2/16)
Complaint investigation surveys, citations related to patient care services 31.1, RI Pharmacy Regulation 19.28, Environmental & Maintenance Services 50.2, 51.1
Interim Consent Agreement entered into, no admission of wrongdoing.
4
PMH1 SOUTHERN CALIFORNIA HEALTHCARE SYSTEM, INC. – CMS VALIDATION SURVEY On March 24 through April 1, 2014, a validation survey was completed by the California Department of Public Health (“CDPH”). Several deficiencies were cited to include food storage, food temperatures and equipment concerns in dietary services; ligature concerns in the behavioral health units; nursing processes and required documentation in the medical record; patient rights; excessive LOS in emergency room; and hand hygiene compliance. Corrective actions were implemented and a plan of correction was submitted to and accepted by CMS. SOUTHERN CALIFORNIA HOSPITAL AT CULVER CITY – SKILLED NURSING FACILITY RE-CERTIFICATION SURVEY On March 14, 2014, a Skilled Nursing Facility Re-Certification survey was completed by CDPH. Deficiencies noted were inclusive of an inadequate sprinkler system on a patient care unit; overall cleanliness of the unit, no individualized care plans, inadequate food temperatures, improper disposal;, staff not donning PPE, inadequate hand hygiene practices. Corrective actions were implemented and a plan of correction was submitted to and accepted by CDPH. SOUTHERN CALIFORNIA HOSPITAL AT HOLLYWOOD – COMPLAINT VALIDATION SURVEY On July 9, 2014, a complaint validation survey was completed by CDPH. Deficiencies noted were inclusive of excessive temperatures in patient rooms. The complaint was substantiated. Corrective actions were implemented and a plan of correction was submitted to and accepted by CDPH. SOUTHERN CALIFORNIA HOSPITAL AT VAN NUYS - PHARMACY VALIDATION SURVEY On July 15, 2014, the Board of Pharmacy completed a routine validation survey of pharmacy operations. There were no deficiencies noted at the conclusion of the visit. SOUTHERN CALIFORNIA HEALTHCARE SYSTEM, INC. – CMS VALIDATION RE-SURVEY On August 21, 2014, CMS completed a validation re-survey that concluded noncompliance with conditions of participation related to 42 C.F.R (482.21, 482.28, 482.41, 482.42, 482.51). Corrective actions were implemented and a plan of correction was submitted to and accepted by CMS. 1
Descriptions are updated since CEC submission
6
SOUTHERN CALIFORNIA HOSPITAL AT CULVER CITY – COMPLAINT VALIDATION SURVEY On December 10, 2014, a complaint validation survey was completed by CDPH related to a self-reported incident of elopement. There were no concerns noted at the conclusion of the visit. SOUTHERN CALIFORNIA HOSPITAL AT CULVER CITY – COMPLAINT VALIDATION SURVEY On December 10, 2014, a complaint validation survey was completed by CDPH involving a patient discharged with IV in place. Corrective actions were implemented and follow up documentation was requested. A report of deficiency has not been issued to date. SOUTHERN CALIFORNIA HOSPITAL AT CULVER CITY – PHYSICAL ENVIRONMENT VALIDATION SURVEY On February 5, 2015, a physical environment validation survey by CDPH was completed following a fire/smoke incident that occurred in one hospital building on January 28, 2015. Deficiencies noted were inclusive of malfunctioning fire panel and air handling system. Corrective actions were implemented and a plan of correction was submitted to and CMS. Currently awaiting a resurvey of the physical environment. SOUTHERN CALIFORNIA HOSPITAL AT CULVER CITY – COMPLAINT VALIDATION SURVEY On February 23, 2015, a complaint validation survey was completed by CDPH involving the reporting of an alleged case of physical abuse case. The survey concluded deficient hospital policy in that it did not require the reporting of such cases to CDPH within 48 hours of notification. Corrective actions were implemented inclusive of a revision to hospital policy. A report of deficiency has not been issued to date. SOUTHERN CALIFORNIA HOSPITAL AT CULVER CITY – COMPLAINT VALIDATION SURVEY On February 23, 2015, a complaint validation survey was completed by CDPH involving an allegation that a patient was not allowed to go to the bathroom. The allegations were unsubstantiated at the conclusion of the visit. SOUTHERN CALIFORNIA HOSPITAL AT CULVER CITY – COMPLAINT VALIDATION SURVEY On March 12, 2015, a complaint validation survey was completed by CDPH involving the self-reporting of a healthcare acquired wound. There were no concerns noted at the conclusion of the visit.
7
LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On November 12, 2013, a complaint validation survey was completed by CDPH involving allegations of smoking in hallways and possible gang activity. These allegations were unsubstantiated at the conclusion of the visit. LOS ANGELES COMMUNITY HOSPITAL – SKILLED NURSING FACILITY RE-CERTIFICAITON SURVEY On January 12, 2014, a Skilled Nursing Facility Re-Certification survey was completed by CDPH. Several deficiencies were noted to include no consent for psychotropic medications, incomplete care plans, inadequate discharge summaries, malfunctioning smoke detectors and fire alarms. Corrective actions were implemented and a plan of correction was submitted to and accepted by CDPH. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On January 23, 2014, a complaint validation survey was completed by CDPH regarding a self-reportable incident involving a retained foreign object (sponge) in the OR. Corrective actions, inclusive of staff training, were implemented A report of deficiency has not been issued to date. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On March 6, 2014, a complaint validation survey was completed by CDPH regarding excessive room temperatures and inoperable nurse call lights. The complaint was substantiated, corrective actions were implemented and a plan of correction was submitted to and accepted by CDPH. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On March 7, 2014, a complaint validation survey was completed by CDPH involving the investigation of a self-reported incident involving the death of a patient post administration of a chemical restraint. There were no concerns noted at the conclusion of the visit. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On May 28, 2014, a complaint validation survey was completed by CDPH involving a family’s concern of needing more therapy. CDPH concluded that the MDS was not completed timely. Corrective actions, inclusive of staff training, were implemented. A report of deficiency has not been issued to date.
8
LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On June 16, 2014, a complaint validation survey was completed by CDPH involving the self-reporting of a healthcare acquired wound. There were no concerns noted at the conclusion of the visit. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On June 26, 2014, a complaint validation survey was completed by CDPH involving the self-reporting of a healthcare acquired wound. There were no concerns noted at the conclusion of the visit. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On September 24, 2014, a complaint validation survey was completed by CDPH involving the self-reporting of a healthcare acquired wound. There were no concerns noted at the conclusion of the visit. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On October 30, 2014, a complaint validation survey was completed by CDPH involving the self-reporting of alleged physical abuse by CNA to patient. The allegations were unsubstantiated at the conclusion of the visit. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On November 20, 2014, a complaint validation survey was completed by CDPH related to loss of power in the OR. Opportunities for improvement included the need for adequate temperature and humidity logs and the need to re-wire heating, ventilation, and humidity controls. Corrective actions were implemented and a plan of correction was submitted to and accepted by CDPH. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On January 28, 2015, a complaint validation survey was completed by CDPH related to a patient who expired after admission to Sub-Acute Care. There were no concerns noted at the conclusion of the visit. LOS ANGELES COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On January 28, 2015, a complaint validation survey was completed by CDPH related to alleged sexual harassment, the allegations were unsubstantiated at the conclusion of the visit.
9
LOS ANGELES COMMUNITY HOSPITAL-PHARMACY VALIDATION SURVEY On February 2, 2015, the Board of Pharmacy completed a routine validation survey of pharmacy operations. Opportunities for improvement identified with the laminar flow hood and HEPA filter and a media fill test result for staff. Corrective action plan in progress. LOS ANGELES COMMUNITY HOSPITAL-MEDICAL WASTE MANAGEMENT SURVEY On April 13, 2015, CDPH completed an annual medical waste management inspection. Opportunities for improvement included the need for additional signage for pharmaceutical waste bins. Corrective actions were implemented and corrective action plan was submitted to and accepted by CDPH. LOS ANGELES COMMUNITY HOSPITAL – ANNUAL SKILLED NURSING CERTIFICAITON SURVEY On April 24-26, 2015, a Skilled Nursing Facility Re-Certification survey was completed by CDPH. Several deficiencies were cited to include no consent for psychotropic medications and restraints, potential for unsanitary surfaces, incomplete care plans, discharge summaries not completed timely, reason for use of Foley catheters not documented, failure to change trach tube timely, minor issues in kitchen that were immediately addressed, issues with personal resident laundry process, lack of SA staff attending fire drill, no documentation of annual inspection of smoke detectors and fire alarms. Corrective actions were implemented and a plan of correction has been submitted to CDPH. NORWALK COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On February 10, 2014, a complaint validation survey was completed by CDPH involving allegations of concerns related to bathroom safety and toilets not working in one area. The allegations were unsubstantiated at the conclusion of the visit. NORWALK COMMUNITY HOSPITAL-COMPLAINT VALIDATION SURVEY On May 15, 2014, a complaint validation survey was completed by CDPH involving allegations that the heating and air conditioning systems were not functioning properly. The allegations were substantiated. Corrective actions were implemented and a plan of correction was submitted to and accepted by CDPH.
10 716380.v1
NEWPORT SPECIALTY HOSPITAL – COMPLAINT VALIDATION SURVEY On July 22, 2014, a complaint validation survey was completed by CDPH. Several deficiencies were noted inclusive of untimely administration of medication, improper storage of medications, and inaccurate transcription of medication. The complaint was substantiated. Corrective actions were implemented and a plan of correction was submitted to and accepted by CDPH. NEWPORT SPECIALITY HOSPITAL – COMPLAINT VALIDATION SURVEY (BURN INCIDENT) On April 3, 2015, a complaint validation survey was completed by CDPH to investigate a self-reported incident of skin impairment on a pediatric sub acute patient. The complaint was substantiated and subsequently resulted in the issuance of a report of deficiency with monetary penalty. Corrective actions were implemented and a plan of correction was submitted to and accepted by CDPH. CDPH conducted a follow-up survey on April 23, 2015 and subsequently cleared all citations. Administrative penalty payment has been made.
11
Exhibit 22
Exhibit 23B
UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS OF PROSPECT CHARTERCARE, LLC The undersigned, being all of the members of the Board of Directors of Prospect CharterCARE, LLC, a Rhode Island limited liability company (the “Company”) hereby consent, in writing to the adoption of and do hereby adopt the following resolutions on behalf of Company: Approval of Purchase of Blackstone Valley Surgicare by Prospect Blackstone Valley Surgicare, LLC WHEREAS, the Company’s Board of Directors (the “Board”) has been informed that Blackstone Valley Surgery Acquisition, L.P. (“BVSA”) has made an offer to sell a surgery center known as “Blackstone Valley Surgicare” (“Surgery Center”) located at 1526 Atwood Avenue, Suite 300, Johnston, Rhode Island; and WHEREAS, the Company desires to purchase the Surgery Center through its wholly owned subsidiary Prospect Blackstone Valley Surgicare, LLC (“PBVS”) (the “Sale Transaction”) and to cause PBVS to enter into a lease (the “Lease”) to operate the Surgery Center at 1526 Atwood Avenue, Suite 300, Johnston, Rhode Island (the “Lease Transaction”); and WHEREAS, the Company is the sole member and Manager of PBVS; and WHEREAS, PBVS, BVSA and its affiliate Surgical Care Affiliates, LLC entered into an Asset Purchase Agreement dated December 21, 2016 (“Purchase Agreement”) with respect to the Sale Transaction as noted above; and WHEREAS, the contents of the Purchase Agreement have been reported to, and reviewed by the Board; and WHEREAS, the contents of all agreements, certificates, instruments, and other documents contemplated to be executed and delivered under the Purchase Agreement and in connection Sale Transaction and Lease Transaction (collectively, the “Transaction Documents”), have been reported to the Board; and WHEREAS, the Board reviewed the terms of the Sale Transaction and Lease Transaction including: 1. A purchase price of One Million Five Hundred Thousand Dollars ($1,500,000); 2. A lease term of ten (10) years, starting at $38,231.61 per month, triple net and increasing by 2.5% annually. WHEREAS, the potential revenue to be realized from the Sale Transaction is financially beneficial for the Company; and
849300.v4
WHEREAS, the Board has determined that the consummation of the Sale Transaction, the Lease Transaction and other transactions contemplated by the Transaction Documents (the “Transactions”) is in the best interests of the Company. NOW, THEREFORE, BE IT RESOLVED, that the Company in its capacity as Manager cause PBVS to ratify the execution of the Purchase Agreement and to enter into the Transaction Documents; that the form, terms and provisions of, and the Transactions contemplated by, the Purchase Agreement, the Lease and any amendments thereto and the other Transaction Documents be, and they hereby are, authorized and approved in all respects and that the Chief Executive Officer and the Chief Financial Officer (the "Authorized Officers") be, and each of them acting alone hereby is, authorized, empowered and directed, in the name and on behalf of the Company as Manager of PBVS, to execute, deliver and perform the Purchase Agreement, the Lease, the other Transaction Documents and any other related agreements and documents, with such changes therein and additions or amendments thereto as such Authorized Officer may approve; and Ongoing Support RESOLVED FURTHER, that the Company furnish to PBVS from time to time on an ongoing basis such funds as PBVS may require for operating needs; and Government and Regulatory Approvals and Filings RESOLVED FURTHER, that the officers and counsel for the Company be, and each of them hereby is, authorized and directed in the name of the Company, and as Manager of PBVS, to prepare and file all such applications any and all certificates, documents, letters and other instruments with all appropriate State of Rhode Island and Federal or other governmental authority necessary or desirable for approval of the Transactions and the Transaction Documents, with full power and authority by such officers and counsel to take any and all such action as be necessary or advisable in their judgment to obtain such approvals; and General Authorization RESOLVED FURTHER, that the Authorized Officers be, and each of them acting alone hereby is, authorized, empowered and directed, in the name of and on behalf of the Company, and in its capacity as Manager of PBVS, to execute, deliver and perform any and all other agreements, certificates, instruments, closing documents, deeds, settlements statements and any other documents required to be entered into or contemplated by the foregoing resolutions, including any officers’ certificates, and to make any payments and do or cause to be done any and all further acts and things which any such Authorized Officer may deem necessary, advisable or appropriate in connection with the execution, delivery and performance of the Purchase Agreement and Transaction Documents and all other related documents and the provision of funds for any operating needs of PBVS; and RESOLVED FURTHER, that the consummation of the Transactions contemplated in the Purchase Agreement and the other Transaction Documents and the execution and delivery by an Authorized Officer of any document, agreement, certificate, instruments, closing documents, deeds, settlements statements and any other documents required or the doing by an Authorized 2 849300.v4
Officer of any act in connection with the foregoing shall conclusively establish his authority to do so on behalf of the Company and in its capacity as Manager of PBVS; and RESOLVED FURTHER, that any and all actions heretofore taken by an Authorized Officer in connection with the matters contemplated by the foregoing resolutions be, and they hereby are, approved, ratified and confirmed in all respects as fully as if such actions had been presented to the Board for its approval prior to such actions being taken. The undersigned, being all the members of the Board do hereby acknowledge that they have read the foregoing Unanimous Written Consent, and the undersigned do hereby approve, confirm, ratify, authorize and adopt this Unanimous Written Consent and do hereby instruct and empower the Secretary or any other officer of the Company to attest to and to certify to said Unanimous Written Consent and the correctness thereof. This Unanimous Written Consent may be executed in counterparts by the Board of Directors.
[Signature Page Follows]
3 849300.v4
IN WITNESS WHEREOF, the undersigned have executed this Written Consent as of January __, 2017. __________________________________ Edwin Santos
__________________________________ David Topper
__________________________________ Ed Quinlan
__________________________________ Von Crockett
__________________________________ Samuel Lee
__________________________________ Dr. Elaine Jones
__________________________________ Thomas Reardon
__________________________________ Joseph R. DiStefano
Signature Page for Blackstone Purchase Written Consent
4 849300.v4
Exhibit 23C
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3261
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3262
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3263
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3264
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3265
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3266
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3267
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3268
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3269
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3270
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3271
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3272
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3273
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3274
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3275
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3276
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3277
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3278
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3279
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3280
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3281
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3282
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3283
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3284
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3285
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3286
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3287
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3288
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3289
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3290
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3291
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3292
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3293
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3294
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3295
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3296
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3297
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3298
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3299
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3300
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3301
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3302
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3303
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3304
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3305
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3306
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3307
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3308
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3309
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3310
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3311
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3312
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3313
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3314
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3315
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3316
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3317
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3318
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3319
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3320
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3321
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3322
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3323
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3324
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3325
ECHN Proposed Asset Purchase by PMH Response to Deficiencies Dated December 11, 2015
Submitted December 24, 2015 Page 3326
Exhibit 24
Exhibit 26A
Delaware
PAGE
rst State I, JEFFREY W. BULLOCK, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED ARE TRUE AND CORRECT COPIES OF ALL DOCUMENTS FILED FROM AND INCLUDING THE RESTATED CERTIFICATE OR A MERGER WITH A RESTATED CERTIFICATE ATTACHED OF "PROSPECT MEDICAL HOLDINGS, INC. " AS RECEIVED AND FILED IN THIS OFFICE. THE FOLLOWING DOCUMENTS HAVE BEEN CERTIFIED: RESTATED CERTIFICATE, FILED THE FOURTEENTH DAY OF MAY, A.D. 1999, AT 9 O’CLOCK A.M. CERTIFICATE OF AMENDMENT, FILED THE TWENTY-FIRST DAY OF JANUARY, A.D. 2000, AT 9 O’CLOCK A.M. CERTIFICATE OF AMENDMENT, FILED THE FIFTEENTH DAY OF JANUARY, A.D. 2004, AT 1:58 O’CLOCK P.M. CERTIFICATE OF DESIGNATION, FILED THE FIFTEENTH DAY OF JANUARY, A.D. 2004, AT 1:59 O’CLOCK P.M. CERTIFICATE OF DESIGNATION, FILED THE THIRTY-FIRST DAY OF JULY, A.D. 2007, AT 9:48 O’CLOCK A.M. CERTIFICATE OF DESIGNATION, FILED THE EIGHTH DAY OF AUGUST, A.D. 2007, AT 8:43 O’CLOCK A.M. CERTIFICATE OF AMENDMENT, FILED THE TWELFTH DAY OF MARCH,
2336046 8100X 130719368 You may verify this certificate online at corp. delaware.gov/authver.shtml
DATE: 05-31-13
Delaware
PAGE 2
q~e ~rst State A.D. 2010, AT 4:14 O’CLOCK P.M. CERTIFICATE OF MERGER, FILED THE FIFTEENTH DAY OF DECEMBER, A.D. 2010, AT 1:46 O’CLOCK P.M.
2336046 8100X 130719368 You may verify this certificate online at corp. delaware.gov/authver.shtml
DATE"
05-31-13
STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 05/14/1999 991193856 - 2336046
AMENDED AND RESTATED CERTITICAT~ OF INCORPORATION PROSPECT MEDICAL HOLDINGS, INC.
The Cozperation’s.pr.ese.t came is "Prospect Mextical Holdings, Inc." The Corporation was originally incorpemted under the name ’Meal-Search. Inc." pursuant to its original certificate of iacozpomtion which wasfiled v.ith the Secretory of State of the State of Delaware on May 12, 1993. The ~tion doe~ h~e.by certify that: The name of the Corporation is
PROSPECT MEDICAL HOLDINGS,
INC.
TIiIRD: The puz~se of the Co~oration is to engage in any lawful act or acti*~ity ~or which +Corlx~ra~ion-Law ~ration may be o~ under the Oeneral of l:)¢Jawar~, A. The total number of shares of all classes of stock which ~he Corporation shall have authority ~o issue is forty-one million (41,000,000), consisting of:
Forty rrtillion (40,000,000) Shares of Common Stock, par value one cent ($.01) per sha~ (the "Common Stock"); and
(2) One milan (I,000,000) shares of Preferred Stock, par value one cent ($,01) per share (the "Prefer~ Stock’).
B. The Board of Directors is au~horized, subject to e~y limitations prc~:ribed by law, to provide for the is~ance of the shares of Preferred Stock in series, an d by filing ¢m’fifieate punam~tto ~,,e applieahle of Delaware, law of the State to establish from time to ~ime the numb~ of ~ to be included in each such series, and to fix t~ desi~natlon, po, we.rs, preference.% and rights of the shares of each such serie~ and any qualifications, limitaticas or restrictions thereon. The Board of Directors is further authoriT.ed to increase or decrea~ the number of authorized shares of Preferred Stock of any series (but not below the number of shares thereof then outstanding) withou~ a vote of the holders of the Pzeferred Stock, or of an), series thereof, unless a vote of any such hoIders is required pursuant to the certificate or certi~eates establishing the .s~ie..s of Preferred Stock. .1
FIFrH: T~¢ following provisions are inserted ~o~ the management of the business and ~h¢ conduct Of the affairs of the Co~oration, and for further definition, [imitation and re~ul~’tion of th~ powers Of the Corporation and of it~ directors a~d sr~:P.Y, hoIders:
B. The directors Of the Corporation need not be elected by-written ballot ualess d~ B,jr~ws SO provide.
Special meetings of stockholders of the Corporation may be ca.lied at any time only by the Chakman of the Board or the Pre..ddent, by the Bosrd, ot Directors pursuant ~o a resolulion adopted by a majority of the Bosrd of Directors, or by a committee of the Board of lYaect0~ authorized by ~e ]k~’d of Directors to do so. Special meetings may not be called by any other person or persons.
SIXTH: The numtx~r of directors which constitut~ the whole Board of Directors of the ~ and any prov~’on~ roiling for tho classification of the Board of Dix’~tors of the Corporation shall be as specified in th~ Bylaws of’d~ Corporation. All directors shall hold office until .their respective successors are elected, except in the case of the death, resignation, retirement, removal or disqualification of a director.
B. ’ Subject to the fights of the holders of any ~ of Preferred Stock th~:n o~~g, newly ¢a’eated direetorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, reaignation, mtiremmt, ztmoval fi, om oflit~ disqt~lificatlon or other cause may be filled only by s majority v~e of the dizect~ th~ in o/rice, though less than a quorum, .or by a soI© remtining dire, mr, and ditec.tm~ so chosen shall hold office until th©ir stmc~sor~ m’ tIected and qua.lifted. No deta’ea~ in the numtmr of dire~ta constituting tho Board of Directors shall shorten the term of any incumbent director. In the event of a vaca~tey ~ the Board of Directors, the remain directors, except ~ othtrwise provided by law, may exercise the pow~s of the full Board of" Director~ tmtil the vacancy is filled. Unle.~ otherwise allowed by statute or this Ce~ficate of Ineozporation, C. any di2ree~r, or the entire Board of Directors, may be removed from office at any time only for e.aus, and only by the all’re’native vote of the holde.rs of at leaat a majority of the voting power Ot’all of tim th¢tt outstanding sha~ of ¢apital stock ofCorporation the e.atitl,d to vota generally in the electiota of dir~tors, voting together as a single class. ~XI-I~OI01DR7.F07
SEVENTH; The Boa.,d of Directors is expres~iy empowered m adopt, ~rnend or ~ bylaws of the C~. The stockholde.~ shall also have power to a~opt, amend or repeal the Bylaws oftl~ Corporation. Any adoption; amendment or rCl>eal of Bylaws of the Corporation by the stockholders ~ require, in addition to any vote of the hold~ o~ m~y class or series of stoe.k of thisCo.,~ndlon required by law or by this Certificate of Inco.,’pora~ion, the ~firmative vo~ of the holde~ of at l~ast a majority of the voting power of all of the then outs~nding s’mms +of ~t¢ capita/stock of ~h¢ Corporation en~ifl~:l to vot~ gene.rally in the election of directors, votin~ together as a single class. EIGHTH; A director of this Corporation Shall no~ be personally liable to the C~~on or its stockholders for monetary damages for brea~h of fiduciary duty as a director, ~cept ~or ~ (i) for ~y bre~h of tl~ dh’~.tm"s duty of loyalty to th~ Corporation or i~s stockholders, ~ for sc~s or o~ nor in good fai~ or wltich involve intentional misconduct or a knowing violation ~]aw, (Ri) under Section 174 of ~he Delaw’Am 0~nm’al Corporation Law, or (iv) for any ~’ansa~rion from which the.director benefit.]~rson~ derived ~’l improl)¢r If the l~lawarc Genera/.Corporation Law is h~er amead~d to authorize the fi~nh~r e.~ninalion or limitation of the liability of a director, then the liability of a director of ~he Corpora~n shall be elimina~x~ or limit~l to the fullest extent pe.,rrr~tted by the Delaware General Corporation Law, as so amended, Any repeal or modific~on of tI~ foregoing ~ons of ~his Artic~ EIGHTH by tlm stockholders of the Corporation ShRIl no~ adversely affect any right or protection of a dir~:tor
of the Corporation eXi.’s~g at the time of such r~peal or modification. NDqT~: The Boasd of Directors when evaluatir~ any offer of another party, (a) to mRk~.a reader or exchange offer for any voting stock of the Corporation or (b) to e/Tect any merger, ~solidation, or sale of all or substantially all of the ~ssets of the Corporation, shall, in connection with tlm exercise of its judgment in de .t~’rmining what is in the best inmr~sts of the Corporation as a whole, be authorized to give due consideration to such factors as th© Board determines to be re.levant, including, without limitation: the inte.xe.,sts of the Corporation’s stockholders; (ii)
whether the proposed mmsaction might violate f~eral or state laws;
(iii) not only ~e consideration being offered in the proposed Lransacclon, in r~l~ion to thecurm~t then m~rket pri~e for c, ~e ap~tl outstanding stock of the ~.orporation, but also to the market price for lhe capital stock of the Corlmratidn over a period of years, the e~imatad price that might be a~hi©ved in a nego~iato~ sale of the Corporation as a whol~, or in
pm-t or through orderly liquidation, the Premiums over market price for the securities of other corporations in simfla.r transactions, current political, economic Rnd other factors bearing on securities pric~s and the Corporation’s end future condition prospects; financial and
(iv) the social, legld and economic effects customsrs and othe.xs hav’L%g sin’flJar relationships with ths Corporation, and the communities in which the Corporation conducts its business.
In connection with any sum evaluation, the Board of Dir~tors is authorized to conduct such investigations and to engage in such legal pzx:~e,e, of Directors dings as the Board rrmydetexmine. T~: .The Corporation shall not be governed by Se*tion 203 of the Delaware General Corporation Law.
~LEVt~NTH: ¯ Th~ Corporation ~sea’ves the right to amend or repeal any provision comained in this Certificate of Incorporation in the manner prescribed by the laws of the Stat~ of D~laware and all rightsupon conferred stockholdtcs subject grantedto this are r~servadon, provided, however, that, notwithstanding any other Frovision of this Certificat, of Incorporation or my l~rovision of law which might othezwise pcrmit.a lesse.r vote or no vote, but in addition to any vom of the holders of any cJass or series of the stock of this Corporation required by law or by this CtwtLffcat~ of Incorporation, the afFm’natlve vote of the holders of at least a majority of the voting power of all of the then outstanding shaxes of the capital stock of the Corporation entitled to vor~ gener’,dly in the e!e~tion of directors, voting together as a single class, shall be required to amend o~ repeal tMs Article ELE~, A.rdc~e F[FT’H, Article SIX’r~) Article SEVENTH, Ax’dcle EIGHTH, ,Aa’tiale NINTH or Article TENTH. T~: This’ Amended and Restarzd Certificate of Incorporation has been duIy adopted by the stockholders of r.ha Corporation in accordanc.~ with the provisions of Sections 228, 242 and 245 of the Delaware General Corporation Law and any noric~ re.~uire.d to b~ given the~und~r h~ been given. Signe~d and attested to on _1- ~. $-
.~, 1999. PROSPECT M,EDICAL HOLDINGS,
Stewart Kahn .., sccret,~y Chief Executive Officer
INC.
SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 01/21/2000 001034154 - 2336046
CERTIFICATE OF AMENDMENT
OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF PROSPECT MEDICAL HOLDINGS, INC.
The Corporation’s present name is "Prospcct Medical Holdings, Inc." The Corporation was originally incorporated under thc name "Med-Scarch, Inc." pursuant to its original cerfilicate of incorporation which was flied with the Secretary of State of the State of Delaware on May 12, 1993, The Corporation does hereby ccaify that: I. Article FOURTH of the Amendcd and Restated Certificate this Corporation is amended to read in its entirety as follows:
of
Incorporat
FOURTH:
A. The total number of" shares of all classes or" stock which the Corporation shall have authority to issue is forty-one million (41,000,000), consisting of."
(1) Forty million (40,000,000) shares of Common Stock, par valu~ one cent ($.01) per share (the "Common Stock"), consisting of two series as set forth below, subject however, to the provisions or’paragraph E. of" this Article FOURTH: (a) Thirty-eight million (38,000,000) shares of Series A Common Stock, par value ($.01) per share (the "Series A Cornrnon Stock"); mad (b) Two million (2,000,000) sharcs of Series B Common Stock, par value ($.0 I) per share (the "Series B Common Stock"); and (2) One million (1,000,000) shares of Preferred Stock, par value one cent ($.01) per share (the "Preferred Stock").
’lq~c Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pur,~uant to the applicable law or" the Stale of Delaware, to establish from time to time ihe number o1" shares to be included in each such series, ,’u~d to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictions thereon. The Board of Directors is further authorized to increase or decrease the number of authorized shares of PreferreA Stock of any series (but not below the number of shares thereof then outstanding) without a vote of the holders of’the Preferred Stock, or of any series
thereof, unlcs~ a vote of any such holders is required pursuant to the. cerlifieate or cerdficate~ establishing the series of Preferred Stock. C. Upon the ffcctivcn¢‘s, of this aaJcmkncnt, each outstanding share of Commort Stock is rocla~.,.,ified as one share of Series A Commov Stock.
D. Secieg A Common Stock and gerles B Common Stock sl,all bc identical in all r~spects and sh,qll have equal right~, preferences and privileges, except as follows: (1) JI.~y~de, nd~. llolders of Series Stock A Common and Series Co,m~on Stock shall have the same rights to dividends and distributions of Co~oration, the except that cad~ holder of outstanding shares o~S~rie~ ~ L:o~on Sto& ~o shall be entltl~ to ~ceive, on the seceded mmive~ date of the date of the filing ott~s Ce~ifica~e of Amendment wifl~ the Sc¢~ta~ of State Delaware. uf thuaState dividend of payable in 0.66 shm’e~ of Series A Common Stock for ¢ach sha~, of Series 8 Common Stock held by such holder (~uch Series A Common Stock dividend is h~caftcr referred to as the "’Mandato~ Dividend"); k~wever, dmt i~ the event of any combination or subdivision propo~ionatc combination or s~bdivision of the dividend pa~abl¢ on th, Series B Cold, on .Stock is to be made; and p~vidod ~g, ~, that in case of atxy ~,dassi~cation, capital reorganization or ofl~er change of ou~tanding shores of Co~xon or Stock Co~oratton. of the in case of any comolidation or merger of the Corporation with oc into another (other entity than a merger in which the Corporation is the continu;ng orporatio~ mtd which does I10~ result in mxy reclassification, capital reorganization or other change of outsta~ding s~arcs of Common Stock), or in ease of any sale, lcas~, or onveyance to anotl~,t of the property of the Corporation as an cntlrety, in any sud~ case prior to the second anniversar~ of the date of the filing of ~is Ccrtlflcat¢ of Am¢i~dmcnt with Slate of the State of Delaware, the Corporation shaIl, as a ¢o**didon pr¢c~cnt to such transaction, cause effective provisions m be made so that each hold¢r of Series B Co~on Sroe~ shall have the right thereafter to receive that numbs of shares of stoc~ or otlmr ~ecurities and pro~y receivable upon such rccl~sification, capital rcorga~zatton or other change, consolidation, merger, sale, legs or onveyance, by a holder of of Scrie~ A Common Stock which would have been received by a holder o~ 5~cs B Common ,Stock in payment of the Mandatory DividcM (to th¢ cxtem nut theretofor~ paid) immediately prior to such reclassification, reorganization, change, consolidation, merger, sale. lease or conveyance (assuming that such Mandatory Dividend is due and payable Mm~ediately prior sucl~ r~lagsification, r~rgan~zation, change, consolidation, merger, sale. lease or conveyance). (2) Mer~gcr,Reo..r e~i..o.n, e~c. any rcclassification, In case u( capital reorga~fization or other change of outqanding shares of Common Stock of the Corpo,’atlon, or in case of arty consolidation or merger of the Coipofativn with Ol illtO anolher entity (other than a merger in which the Corporation is the co~titluiug corporation and which does not result in ,’~ny reclassification, capital reorganization or otli¢~’ change of outstan(lin~. shores of Common Stock-) or in case of any sale, lease, or conveyance to another entity of all
or substantially all of tht: property of the Crtrpor~tion as an entirety, in an), such case prior to the second anniveisury of the (late of the fitmg of this Ccrtificate of Amendment with the Secretary of State of tile State of Delaware, each holder of Series B Common Stock d,ali be entitled to receive thereafter, and as a condition precedent to ~uch transnction the Corpotatiutt shall e~tuse effective provisions to be made *or. payment of the klnd and amount of shares or stock trod other sccuiitics and property received by any holder of Series A Common Stock ill connection with such rcclasslficatl0n, reorgm~ization, change, consolidation, merger, sale, lease or conveyance, on terms no less favorable than those offered to such holder of Series A Common Stock. The fort:going provisions nf t[li~ ~ubparagraph (2) shall similarly apl)ly to successive reclassil’t~tivt~, capital reorganizations and changes of shares of Common Stuck prior to the second amtiversary of tile dare o1" Ihe filing of this Certificate of Amendmettt with the Secretary of State of the State of Delaware. E. 0~tilt: second anniversary date of the filing of this Certificate Amendment with the SecActa~y uf State of" the State el" Delaware, each ~hare of outstanding Series A Common Stock and ~-~¢1~ outstanding share of Serie.~ a Common Stock, roapectively, wilt automatically be r~class;~ed asStock else ,hatc and a,ofof such Common date, the de.~ignalion~ of "Series A Common Stock" ~nd "Series B Cormnon Stock" shall cease to and the provision~ of paragraph D. of this Artkle FOURTH shall cease to he or" any force or effect. 2. The foregoing amendmem, o1" the Amended a~d Restated Certificate of lrt¢o~potmion have beell duly approved by the Board ol’Direetor~ of the Co~ poaation. 3. The foregoing amendments ~1’ the Amaend~d and Re,tated Ccrtl/ic~t¢ of Incorporation have been duly approved by ~tockholdea.s of the Corporation in aceordnnco ~,ith the provislon.~ of’Sections 228 a~d 242 or’tile Delaware Genera] Corporation Law and any notice required to be given thereunder ha~ beit given. Signed and attested to on January 19, 2000. PROSPECT MEDICAL HOLDINGS, INC.
12teob Y. Terror Chief Executive ATTEST:
R. Stewart Kahn. Secretary
¯ ~tate of Delaware Secretary of State Division of Corporations Delivered 01:58 PM 01/15/2004 FI£ED 01:58 PM 01/15/2004 SRV 040031573 - 2336046 FILE
CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PROSPECT MEDICAL HOLDINGS, INC.
Prospect Medical Holdings, Inc., a corporation organized and existing under and by viru.,e of the laws of the State of Delaware, hereby certifies that: i. The name of the corporation is Prospect Medical Holdings, Inc. The original Ccrtificate of Incorporation was filed with the Secretary of State of the State of Delaware on May t 2, 1993, The name of the corporation in the original Certificate of Incorporation was Meal-Search, Inc, Tlne ori gmal Certificate of incorporation, as amended, was subsequently amended and restated in its entirety by that Amended and Restated Cerlificate of Incorporation of Prospect Medical Holdings, Inc. filed with the Secretary of State on May 14, 1999, which was subsequently amended by that Certificate of Amendment of Amended and Restated Certificate of Incorporation flied with the Secretary of State on O anuary 21, 2000 (as amended, the Amended and Restated Certificate"). lI. Article FOURTH of the Amended and Restated Certificate is amended to read in its entirety as follows: FOURTH: 3-t~c total number of slaares of all classes of stock which the Coq)oration shall laave auflmrity to issue is forty-five million (45,000,000), consisting of: Forty million (40,000,000) shares of Common Stock, par value one cent ($.01) per share (the "Common Stock"): Five million (5,000,000) shares el’Preferred Stock, par value one cent ($,01) per share (the "Preferred Stock"). The Board of Directors is attthorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filhag a certificate pursaant to the applicablc law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences, and rights of the shares of each such series and any qualifications, limitations or restrictio~as thereon, The Board of Directors is further authorized to increase or decrease the ~aumber of authorized shares of Preferred Stock o[" any series (but not below the number of shares thereof then outstanding) ~, ~vithout a vote of the holders of the PreI’en’ed Stock, or of any series thereol unless a vote of any s~lch holders is required pursuant to the ecrtifieate or certificates establishing the series of Preferred Stock.
{1645/4g/OOO88052.DOC; ! }
llI. 1"he foregoing amendments of the Amended and Restated Certificate have been duly approved by the Board of Directors of the Corporation acting in accordance with the provisions of Sections 14t and 242 of’the Delaware General Corporation Law, IX/’. The foregoing amendments of tt~e Amcl~ded and Restated Certificate have been duly al~proved by stock[aoldcrs of the Corporation in accordance with the provisions of Sections 228 and 242 of the Delaware General Corporatio~a Law and any notice required to be given fi~creunder has been given. Signed and attested to on january ~.6,2004. PROSPECT MEDICAL HOLDINGS, INC.
By:
A I’TEST:
R. Stewart Kahn, Secretary
~1645,"48t00088052.DOC; I}
ob Y, hief Executive Officer
State of Delaware Secretary of State Division of Corporations Delivered 0~:5~ PM 01/15/2004 FILED 01:59 PM 01/15/2004 SRV 040031575 - 2336046 FILE
CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE p[O2FERRED STOCK OF PROSPECT MEDICAI~ HOLDINGS, INC.
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
PROSPECT MEDICAL HOLDINGS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corooration"), hereby certifies that, pursuant to (i) the authority conferred upon the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, (ii) the provisions of Section 151 of said General Corporation Law, and (iii) the resolutions unanimously adopted by the Board of Directors of the Corporation by action taken at meetings on October 1, 2003 and November 21, 2003, the Board of Directors duly adopted resolutions providing for authorization for issuance of up to 3,240,000 shares of the Corporation’s Preferred Stock, par value 5;.01 per share, designated Series A Convertible Preferred Stock ("hereinafter, "Series A Preferred Stock"), which resolutions are as follows: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation by the Amended and Restated Certificate of Incorporation, the Board of Directors does attthorize for issuance of ttp to Three Million Two Hundred Forty Thousand (3,240,000) shares of Preferred Stock, par wlue $0.01 per share, of the Corporation, to be designated "Scries A Preferred Stock" of the presently authorized shares of Preferred Stock. The ,soting powers, designations, preferences, and other rights of the Series A Preferred Stock authorized hereunder and the qualifications, limitations and restrictions of sach prei’erences and rights are as follows: t, .Rank_d~. The Series A Prefcrred Stock shall, with respect to the payment of dividends and upon liquidation, dissolution, or winding up, rank senior and prior to the Corporation’s Common Stock, $0.01 par value per share (the "Common Stock"), and all other capital stock issued by the Corporation (collectively herein called the "Junior Securities"). 2. Dividends. The holders of outstanding shares of Series A Preferred Stock shall be entitled to receive dividends out of funds legally available therefor, when, as, and if declared by the Board of Directors of the Corporation, provided that any such dividends shall be declared pro rata on the Common Stock and the Series A Preferred Stock, treating the Seric~ A Preferred Stock as the greatest whole number of shares of Common Stock then issuable upon conversion of su¢h Series A Preferred Stock pursuant to Section 5. Dividends shall be non-cumulative, and no right shall accrue to holders of Series A Preferred Stock by reason of the fact that dividends arc not declared in any period. The Corporation may deduct and withhold from dividends on Serics A Prefen’ed
Stock any amounts required to be deducted or withheld by the Corporation under applicable law.
3. Li~ion Preference. In the event o’f" any voluntary or involuntary liquidation, dissolu’fion, or winding up of the affairs of tl~e Corporation, then, before any distribution or payment shall be made to the holders of any Junior Securities, and subject to the rights of creditors, the holders of Series A Preferred Stock shall be entitled to be paid out of the assets of the Corporation in an amount in cash equal to $5.50 for each share outstanding plus any accrued but unpaid dividends thereon (which amount is hereinafter referred to as the "Liquidation Preference"). If the assets or" the Corporation are not sufficient to pay in full the Liquidation Prcfere~ce, then the holders of the Series A Prefen’ed Stock shall share ratably in such distribution of assets in accordance with the amotmt which would have been payable on such distribution if the amounts to which such holders were entitled were p~.id in full, Except as provided in this paragraph 3, holders of Series A Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution, or winding up of the affairs of the Corporation, For purposes of this Section 3, a "liquidation" shall be deemed to occur upon a sale of all or substantially all of the Corporation’s assets and upon the affim~ative vote of a majority of the outstanding shares of Series A Preferred Stock in the event of a merger, consolidation or otlacr business combination in which the Corporation is not the surviving entity. 4, ~. In all meetings of shareholders, the holders of sha.res of Series A Preferred Stock shall be entitled to that number of votes equal to the number o[’ sltares of Common Stock into which such shares of Series A Preferred Stock are convertible based on the then-applicable conversion prier, and shall be entitled to vote with the Common Stock (except wlaere a separate class vote is required by law or by terms of this instrument as one class). So long as any shares of Series A Preferred Stock remain outstanding, the Corporation shall not, without tlae approval of’ the holders of’ at least a majority of the outstanding shares of Series A Preferred Stock, voting together as a single class, authorize any other stock having rights or preferences senior to or on a parity with the Series A Preferred Stock with respect to dividends and/or rights on liquidation. 5. Conversio~. Each share of Series A Preferred Stock shall be convertible into shares of Common-~tock based upon a conversion ratio equal to $5.50 per share divided by the conversion price in effect at the time of the conversion, which conversion price shall initially be $5.50 (the "Conversion Price"), making the initial conversion ratio o~ne (1) share of Common Stock for each share of Series A Prefen’ed Stock so converted which conversion shall occur both (i) at the option of flue holder thereof at any time following issuance; (ii) automatically upon both (x) the Corporation achieving a listing of its Common Stock on a national stock exchange, tlae NASDAQ National Market or tlae NASDAQ SmallCap Market (the "Exchange Listing"); and (y) tlae effectiveness of a registration statement under the Securities Act of !933, as amended, covering all shares of Common Stock issuable upon conversion of the Series A Preferred Stock (the "Securities Act Regtstrat~o ). Tire following provisions shall apply after the Series A Preferred Stock becomes convertible:
k 1645/4g/0t1088049.DOC; 1 }
(a) In tl~c event of any election by any holder of shares of Series A P~eferrcd Stock to convc,t such shares into Common Stock, sucl-t holder el" Series A Preferred Stock shall surrender the certificate or certificates for such shares at the office of the Corporation (or at such other place as the Corporation may designate by notice to the holders of s/~ares of Series A Prel~erred Stock) during regular business hours, duly endorsed to the Corporation in blank, or accompanied by instn~ments of transfer to the Corporation in blank, in form reasonably satisf’aetory to the Corporation and shall give written notice to the Corporation at such office that such holder elects to convert such shares of Series A Preferred Stock, Such written notice shall also instruct the Corporation where to deliver the certificate or certificates representing the Common Stock issuable upon such conversion. The Corporation shall, as soon as reasonably practicable after such deposit of certificates for shares of Series A Preferred Stock, accompanied by the written notice above prescribed, issue lo the holder for whose acco~lnt such shares were surrendered, or to his nominee, a certificate or certificates representing the number of shares of Common Stock to whiel’t such t~older is entitl~d upon such conversion, and shall deliver such certificate or certificates in accordance with the instructions of the holder. Conversion sl~’~ll be deemed to have been made as of the date of surrender of certificates for the shares of Series A Preferred Stock to be converted and the delivery of written notice as l~ereinabove provided; and the person entitled to receive the Common Stock issuable upon such cow,version shall be treated for all purposes as the record holder of such Common Stock on such date. (b) tn the event of a mandatory conversion of Series A Preferred Stock into s!~ares of Common Stock as a result of an Exchange Listing and Securities Act Registration, all, and not less than all, of the outstanding shares of Series A Preferred Stock shall be converted automatically on the first date on which both an Exchange Listing and a Securities Act Registration are effective (the "Mandatory .Conversion Date") without any further action by the holders of such shares and whether or not the certificates representing outstanding shares are surrendered to the Corporation or its transfer agent, The Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock isstmble upon such conversion unless the certificates evidencing such shares of Series A Preferred Stock are either delivered to the Corporation or its transfer agent as provided below, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates, The Corporation shall cause a notice of ma~tdatory conversion to be mailed to each holder of Series A Preferred Stock, by overnight courier service or by first class mail, postage prepaid, mailed not more than ten (I 0) business days following the Mandatory Conversion Date, at such holder’s address as the same appears on the records of the Corporation (the "Mar~datox3, Conversion Notice"). Each such notice shall specify (i) the Mandatory Conversion Date, (ii) the number of shares to be converted, and (iii) the place o~: places where certificates for such shares are to be surrendered for conversion. Promptly following receipt of the Mandatory Conversion Notice, each holder of Series A Preferred Stock shall surrender the certificate or certificates for such shares at the o~ce of the Corporation (or at such other place as the Corporation may designate by notice to the holders of shares of Series A Preferred
3
Stock) during regular business hours, duly endorsed to the Corporation in blank, or accompanied by instruments of transfer to the Corporation in blank, in form reasonably satisfactory to the Corporation, Such written notice shall instruct the Corporation where to deliver the certificate or certificates representing the Common Stock issuable upon such conversion. The Corporation shall, as soon as reasor~ably practicable following the Mandatory Conversion Date and after such deposit of certificates for shares of Series A Preferred Stock, accompanied by the written notice above prescribed, issue to the holder fear whose account such shares were surrendered, or to his nominee, a certificate or certificates representing the number of shares of Common Stock to wt~ich such holder is entitled upon such conversion, and shall deliver such certificate or certificates in accordance with the instructions of the holder, Conversion shall be deemed to have been made as of the Mandatory Conversion Date irrespective of the date of surrender of certificates for the shares of Series A Preferred Stock to be converted mad the delivery of written notice as hereinabove provided; and the person entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such Common Stock effective as of the Mandatory Conversion Date. Following the Mandatory Conversion Date, all authorized shares of Series A Preferred Stock shall resume the status of attthorized but unissued shares of Preferred Stock, without designation as to series, until such shares are once more designated as part of a particular series by the Board of Dtrcctors. The Conversion Price shall be adjusted from time to time as
tbltows: (i) In case the Corporation shall (A) pay a dividend or make a distribution on its shares of Common Stock in shares of Common Stock, (B) subdivide or reclassify its outstanding Commo~a Stock in shares of Common Stock into a greater number of" shares, or (C) combine or reclassify its outstanding Common Stock into a smaller number of shares or. (D) issue by capital reorganization or reclassification of its shares o|" Common Stuck or otherwise (other than a subdivision or combination of its sl-~ares provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 5) any shares of capital stock of the Corporation, then the conversion right and the Conversion Price in effect immediately prior to such action shall be adjt~sted so that the holder of any shares of the Series A Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of capital stock of the Corporation which such holder would have owned immediately following such action had such shares of the Series A Preferred Stock been converted immediately prior thereto. An adjustment made pursuant to this subparagraph shall become effective retroactiveIy immediately after the record date in tlie case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subparagraph, the holder of" any shares of the Series A Preferred Stock ~hcrcafter surrendered for conversion shall become entitled to receive shares of two or more classes of capital stock of the Corporation, the Board of Directors shall determine in good faith the allocation of the adjusted Conversion Price between or among shares of
4
snch classes o~" capital stock, which allocation must be reasonably acceptable to the holders of a majority’ of fine shares of the Series A Preferred Stock,
(ii) In case the Corporation shall hereafter issue rights or warrant~ to all holders of its Common Stock entitling them to subscribe for or purchase shares of Conamo~x Stock (or sect~rities Convertible intoStock) aCommon price (orat having a conversion price per share) le~s than the Conversion Price on the record date mentioned below, tl~en tlae Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date mc~tioned below by a fraction, the numerator of which shall be the sum of the number o1" shares of Common Stock outstanding on the record date mex~tioned be!ow and the number of additional shares of Common which Stocktheaggregate offerix~g price of the total number o~" shares of Common Stock so offered (or the aggregate conversion price of the Convertible securities so offered) would pt~rchase at ~uch Conversion Price, and the denominator of whicla shall be the sum of the number of sharc~ of Comnaon Stock outstanding on such record date and the number o~" additional shares of Common Stock offered for subscription or purchase (or into which the Convertible securities so offered ~re Convertible). Such adjt~tment shal! be made successively whenever such rights or warrant~ are issued and shall beco~ae effective i~umediately after the record d~tte for the determination of stockholders entitled to receive such rights or warrant~; ~r~d to the extent that shares of Comrnon Stock are not delivered (or securities Convertible into Common Stock are r~ot delivered) after the expiration of such rights or wamu~ts the Co~xversiot~ Price shall be readjusted to the Conversion Price which would then be in effect lind the adjustments made upon the issuance of such rigt~ts or warra~ats been made upon the basis of delivery of oxlly the number of shares of Comn~on Stock (or securities Convertible into Common Stock) actually delivered, (iii) In ease the Corporation shall issue shares of its Conamon Stock (excluding capital stock issucd (A) in any of" the transactions described in Subsection (i) above, (B) to the Corporation’s employees, consultants, officers or d~rectors directly or purstmnt to stock option or restricted stock plans approved by lhe Corporation’s Board of Directors; (C) pursuant to currently outstanding options, warrants or other rights to acquire securities of the Corporation (including the Series A Prefened S~ock); (D) stock splits, stock dividends or like transactions; (E) upon the exercise of any convertible security as to which the Conversion Price has already been adjusted pm-suant to Subsection (iv) below; (F) to shareholders of any corporation wl~ich merges into the Corporation in proportion to their stock holdings of such corporation ~mmediately prior to such merger, upon such merger, but only i’f no adjustment is required pursuant to any other specific subsection of this Section (¢) (without regard to St~bsection (vi) below) with respect to the tra~sac.t[on giving rise to such rights; and (G) to strategic or institutional investors in the Corporation, for a consideration per share less than the Conversion Price, then on the date the Corporation fixes the offering price of such additional shares, the Conversion Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying the Conversion Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issrtance of
such additional sharesnumber and theof shares of Common Stock which the aggregate consideration received (detemfined as provided in Subsection (v) below) for the issuance of such additional shares wo~ld purchase at such Conversion Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after the issuance of such additional shams. Such adjustment slaall be madc successively whenever such an
issuance is made. (iv) In case the Corporation shall issue any securities convertible into or exclmngeable for its Common Stock (excluding securities issued (A) in any of the transactions described in Subsection (it) above, (B) to the Corporatioffs employees, consultants, officers or directors directly or pursuant to stock option or restricted stock plans approved by the Corporation’s Board of Directors, it" such shares wo~ld otherwise be included in this Subsection (iv), (C) to shareholders of any corporation whicla merges into the Corporation ~n proportion to their stock holdings of such corporation immediately prior to such merger, upon such merger, bnt only if no adjustment is required pursuant to any other specific subsection of this Section (c) (without regard to Subsection (vi) below) with respect to the transaction giving rise to such riglats, and (D) to strategic or institutional investors in the Corporation, for a consideration per share ot ~ Common Stock initially deliverable upon conversion or exchange or" such seearities (determined as provided in Subsection (v) below) less titan the Conversion Price in effect as of the date upon which the conversion or exercise price [br such securities is ~xed, then the Conversion Price shall be adjusted immediately thereaaer so that it shall equal the price determined by multiplying the Convers{on Price in effect immediately prior thereto by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding immediatdy prior to the issuance of such sect~rities and the number of shares of Common Stock which the aggregate consideration received (determined as provided in Subsection (v) below) for sud~ securities would purchase at such Conversion Price, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to such issuance and the maximum number of shares of Common Stock of the Corporation deliverable upon conversion or" or in exchange for such securities at the initial conversion or exchange price or rate. Such adjustment shall be made successively whenever such an
issuance is made. (v) For purposes of any computation respecting consideration received pursuant to Subsections (iii) and (iv) above, the following shall apply: (A) in the case of the issuance of shares of Common Stock for cash, the consideration shall be the amount of such cash, provided that in no case shall any dedaction be made for any commissions, discounts or other expenses incurred by the Corporation for any underwriting of the issue or otl~erwise in conneetlon therewith:
; L 645i4b:00088049.DOC; 1 }
6
(B) in the case of the issuance of shares of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board of Directors of the Corporation (irrespective of the accounting treatment thereof) and rcasonably acceptable to the holders of a majority Series A Preferred Stock; and (C) in the case of the issuance of securities Convertible into or exchangeable for shares of Common Stock, the aggregate consideration received therefor shall be deemed to be the consideration received by the Corporation for the issuance of such securities plus the additional minimuTn consideration, if any, to be received by the Corporation upon the conversion or exchange thereof (the consideration iu each ease to be determined in the same manner as provided in clauses (A) and (B) of this Subsection (v)). (vi) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least one cent ($0,01) in such price; provided, however, that any adjustments which by reason of this Subsection (vi) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section (c) shall be made to the nearest cent. Anythh~g in tlais Section (c) to the contrary notwithstanding, the Corporation shall be entitled, but shall not be required, to reduce the Conversion Price, in addition to those changes required by this Section (c), as it, in its sole discretion, shall determine to be advisable in order that any dividend or distribution in shares of ComTnon Stock, subdivision, reclassification or combination of Common Stock, issuance of warrants to purchase Common Stock or distribution of evidences of indebtedness or other assets (excluding cash dividends) refen-ed to bereinabove in this Section (c) hereatter made by the Corporation to the holders of its Common Stock shall not result in any tax to such holders of its Common Stock or securities convertible into Conmaou Stock. (vii) In the event that at may time, as a result of an adjustment made pursuant to Sub.~cction (i) above, the holder of Series A Preferred Stock thereafter ~hall become entitled to receive any shares of lhe Corporation, other than Common Stock, thereafter the nmnber of such other shares so receivable upot~ conversion of the Series A Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsections (i) to (v{), inclusive above. The Coq3oration may retain a llrm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Corporation) to make any computation required by Section (c), and a ccl~ificate signed by such firm shall be conclusive evidence of the correctness of sucla adjtmtme~t ab.~ent manifest error or negligence. (viii) Whenever an adjustment in the Conversion Price is required, the Corporation shall forthwith place oft file with its Secretary a statement
signed by its Secretary, Chief Financial Officer or Controller or an Assistant Secretary, stating the adjusted Conversion Price determined as provided herein. Such statement shall set forth in reasonable detail such facts as shall be necessary to show the reason mad the lvanncr of computing such adjustment. Such statement shall be made available at all reasonable times for inspection by any holder of shares of Series A Preferred Stock. Promptly after the adjustment or’the Conversion Price, the Corporation shall mail a notice and copy of such statement to each holder of shares of Series A Preferred Stock. (ix) In case of any reclassification, capital reorganization or other change of outstandi~g slaarcs of Common Slock of the Corporation, or in ease of any consolidation or merger of the Corporation with or into another entity (otl~er than a merger with a subsidiary in which merger the Corporation is the continuing corporation and which does not result irt any reclassification, capital reorga~ization or other change of outstanding shares of Common Stock of the class issuable upon conversion of the Series A Preferred Stock) or in case of any sale, lease, or conveyance to another entity of all or substantially all of the property and assets of the Corporation, the Corporation shall, as a condition precedent to such transaction, cause effective provisions to be made so tI~at the holder of each share of Series A Preferred Stock then outstanding shall have the right to convert such shares of Series A Preferred Stock into the kind and amount of sl~ares of stock or other securities and property receivable upon such reclassigcation, capital reorganization and other change, consolidation, merger, sale, lease or conveyance by a holder of the number of shares of Common Stock iuto which such shares of Series A Preferred Stock might have been converted immediately prior to such reclassification, change, consolidation, merger, sale, lease or conveyance, subject to adjustments which shall be as nearly equivalent as may be reasonably practicable to the adjustmeuts provided for hereunder, The Corporation shall not effect any such reorganization, consolidation, merger, sale or conveyance unless prior to or simultaneously with the consummation thereof the survivor or successor corporation (if other than the Corporation) rcsulting from such reorganization, consolidation or merger or the corporation purchasing such assets shalI assume by written instrument executed and se~at to each holder of Series A Preferred Stock, the obligation to deliver to such holder of Series A Preferred Stock such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder of Series A Preferred Stock may be entitled to receive, and containing the express assumption by such successor corporation of the due and punctual performance and observance of every provision herein to be performed and observed by the Corporation and of all liabilities and obligations of the Corporation i~ereunder, and the Corporation, as opposed to another party to the rcorganization~ consolidation, merger, sale or conveyance, shall be required under any circumstances t6 make a cash payment at any time to the holders of the Series A Preferred Stock. The provisions of this st~bparagraph shall similarly apply to successive reclassifications, capital reorganizations, and changes of Cornmon Stock and to successive reorganizations, consoli clarions, mergers, sales, leases or conveyances. (d) Any shares of Series A Preferred Stock which shall at any time have been converted shall resume the status of authorized but unissued shams of Preferred Stock, without designation as to series, until such shares are once more
{ 16,I5N 8/0008 £049.DOC~ I}
designated as part of a particular series by the Board of Directors. The Corporation shall reserve and kccp available out of its authorized but unissued stock, for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time bc sufficient to effect tbc conversion of all outstanding shares of the Series A Preferred Stock.
(c) The Corporation shall pay any and all issue or transfer (but not income) taxes that may be payable in respect of any issuance or delivery of shares of Common Stock on conversion of sl3ares o~’ Series A Preferred Stock pursuant hereto. (f) Bcforc taking any action that would result in the effective price the shares of Common Stock issuable upon conversion of Series A Preferred Stock being less than the then par value of the Common Stock, the Corporation shall take any corporate action which may, i~ the opinion of its counsel, be necessary iu order ttaat the Corporation may validly and legally issue fully paid and nonasse.~sable shams of Common Stock, (g) The Cocporation shall not bc required to issue any fractional shares of Common Stock npon conversion of any Series A Preferred Stock, but in lieu thereof the Corporation may pay a cash amount determined by multiplying the fraction of a share otherwise issuabte by the Fair Market Value of one share of Common Stock on the date such conversion is deemed to have been made hereu~der. The "Fair Market Value" the Common Stock ~s of a particular date shall mean’. (i) If the Common Stock is listed or admitted to the unlisted trading privileges on any national or regional securities exchange on such date, then the average of the last reported sale prices on such exchange for fl~e 30 consecutive business day period endi~ag on the last bus~ncss day prior to such date; (ii) If the Common Stock is not listed or admitte,d to unlisted trading privileges as provided in subparagraph i) and sales prices therefor in the over-thecounter market are reported by the Nasdaq National Market System on such df~te, the~a the last repo~’tcd sales price so reported on the last business day prior to such date; (iii) If the Common Siock is not listed or Mmitted to unlisted trading privileges as provided in subparagraph i) and sales p~ices therefor are not reported by the Nasdaq National Market System as provided in subparagraph ii), and bid and asked prices therefor in the over-the-counter market are reported by Nasdaq (or, if not so reported, by the National Quotation Bureau Incorporated) on such date, then the average of the closing bid and asked prices on the last business day prior to saeh date; or (iv) If the Common Stock is not listed or admitted to unlisted trading privileges as provided in subparagraph i) and sales prices or bid and asked prices therefor arc not reported by Nasdaq (or ttae National Quotation Bureau Incorpol’ated) as provided in subparagraphs ii) and iii) on such date, then the value as detennined in good t~ith by the Board,
9
6. Fractional Shares. Series A Preferred Stock may be issued in fraction, s of a share that shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting rights, receive dividends, participate in distribution~ and to have the benefit of all other rights of holders of Series A Preferred Stock. 7. _N.o.Redern_otion, The Series A Preferred Stock shall not be redeemable by the Corporation. 8. Notices To Itolders.So long as any shares of the Series A Preferred Stock shall be outstanding, (i) if the Corporation shall pay any dividend or make any distribution upon the Common Stock or (ii) if the Corporation shall offer to the holders of Common Stock for subscription or purchase by them any share of or class of its capital stock or any other rights or (iii) if any capital reorganization of the Corporation, x-eclassification of the capital stock of the Corporation, consolidation or merger of the Corporation with or into another entity, sale, lease, or transfer of all or substantially all of the property and assets of the Corporation to another entity, or voluntary or involuntary dissolution, liquidation or winding up of the Corporation shall be effected, then in any such case, the Corporation shall cause to be mailed by certified mail to all holders of the Series A Preferred Stock, at least fifteen days prior to the record date specified in (x) or (y) below, as the ease may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such di~/idend, distribution or offer of rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, transfer, sale dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall be entitled to receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, co~veyance, lease, transfer, sale, dissolution, liquidation or winding up. RESOLVED, FURTHER, that the appropriate officers of the Corporation arc hereby authorized to execute and acknowledge the Certificate of Designation setting forth these resolutions and to cause such certificate to be filed and recorded, all in accordance with the requirements of Section 151 of the Delaware General Corporation Law.
t 1645i4gi00088049~DOC; 1 }
10
IN WITNESS WHEREOF, PROSPECT MEDICAL HOLDINGS, INC., has caused this Certificate to be signed by Jacob Y. Terner, M,D., its Chief Executive Officer, and attested by R. Stewart Kahn, its Secretary, this |~ day of January 2004. PROSPECT MEDICAL HOLDINGS, INC,
tcob Y. Chief Executive Officer ATTEST:
R. Stewart Kahn Secretary
11
State of Delaware
Secretar~ of State Division of Corpora~’ons Delivered 09:48 AM 07/31/2007 FILED09:48 AM 07/31/2007 SRV 0708707742336046 FILE
CERTIFICATE OF ELIMINATION OF SERIES A CONVERTIBLE PREFERRED STOCK OF PROSPECT MEDICAL HOLDINGS, INC. (Pursuant to Section 151(g) of the Delaware General Corporation Law) Prospect Medical Holdings, Inc., a corporation organized and existing under the General Corporation Law of the Slate of Delaware (the "Corporation") does hereby certify that the following resolutions respecting the Corporation’s Series A Convertible Preferred Stock were duly adopted by the Corporation’s Board of Directors: WHEREAS, no shares of the Corporation’s Series A Convertible Preferred Stock are outstanding and no shares of Series A Convertible Preferred Stock will be issued subject to the certificate of designation previously filed with respect to the Series A Convertible Preferred Stock; NOW, THEREFORE, IT IS HEREBY RESOLVED, that the officers of the Corporation be, and each of them hereby is, authorized, empowered and directed to cause a certificate of elimination with respect to the Corporation’s Series A Convertible Preferred Stock to be executed and filed wi~h the Secretary of the State of Delaware pursuant to Section 15t(g) of the Delaware General Corporation Law in order to eliminate from the Corporation’s certificate of incorporationall matters set forth in the certificate of designation with respect to the Series A Convertible Preferred Stock. IN WITNESS WHEREOF, the Corporation has caused tiffs Certificate to be signed by its duly authorized officer this 30th day of July, 2007. PROSPECT MEDICAL HOLDINGS, INC.
By:
682827.1/2i634,08029
Heather Chief Financial Officer
State of Delaware Secretar~ of State Division of Corpora~’ons Delivered 08:43 AM 08/08/2007 FILED 08:43 AM 08/08/2007 SRV 070900164 - 2336046 FILE
CERTIFICATE OF DESIGNATION OF SERIES B PREFERRED STOCK OF PROSPECT MEDICAL HOLDINGS, INC.
Pursuant to Section ! 51 of the General Corporation Law of the State of Delaware PROSPECT MEDICAL HOLDINGS, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies that, pursuant to (i) the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation and (ii) the provisions of Section 151 of said General Corporation Law, the Board of Directors duly adopted a resolution on July 18, 2007, which resolution is as follows: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation by the Certificate of Incorporation, the Board of Directors does authorize for issuance Two Million (2,000,000) shares of Preferred Stock, par value $.01 per share, of the Corporation, to be designated "Series B Preferred Stock" of the presently authorized shares of Preferred Stock. The voting powers, designations, preferences, and other rights of the Series B Preferred Stock authorized hereunder and the qualifications, limitations and restrictions of such preferences and rights are as follows:
1.
Dividend Provisions.
(a) The holders of shares of Series B Preferred Stock shall be entitled to
receive dividends, out of any assets legally available therefor, at a rate per share of 18% per annum of the Original Issue Price (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like) with any unpaid dividends accruing on a cumulative basis and compounding annually. Dividends shall not be paid and the dividends on the Series B Preferred Stock shall terminate and cease to accrue in the event that the Series B Preferred Stock converts into shares of the corporation’s Common Stock.
(b) No dividends (other than those payable solely in the Common Stock of
the corporation) shall be paid on any shares of Common Stock of the corporation (or any junior series of preferred stock) during any fiscal year of the corporation until dividends on the Series B Preferred Stock shall have been paid or declared and set apart during that fiscal year and any prior years in which dividends accumulated but remain unpaid. Following any such payment or declaration, the holders of any shares of Common Stock shall be entitled to receive dividends, payable out of funds legally available therefore, when, as and if declared by the Board 6f Directors. 675431,7/2 ! 634.08029
Liquidation Preference. (a) In the event of any Liquidation Event (as defined below), either voluntary or involuntary, the holders of each share of Series B Preferred Stock shall be entitled to receive, prior and in preference to any distribution of the proceeds of such Liquidation Event (the "Proceeds") to the holders of Common Stock (or any junior series of preferred stock) by reason of their ownership thereof, an amount per share equal to the sum of the applicable Original Issue Price (as defined below) for such shares of Series B Preferred Stock, plus accrued but unpaid dividends on such share. If, upon the occurrence of such event, the Proceeds thus distributed among the holders of the Series B Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire Proceeds legally available for distribution shall be distributed ratably among the holders of the Series B Preferred Stock in proportion to the lull preferential amount that each such holder is otherwise entitled to receive under this subsection (a). "Original Issue Price" shall mean $25.00 per share for each share of the Series B Preferred Stock (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like with respect to such series of Preferred Stock). (b) Upon completion of the distribution required by subsection (a) of this Section 2, all of the remaining Proceeds available for distribution to stockholders shall be distributed among the holders of Common Stock pro rata based on the number of shares of Common Stock held by each. (c) (i) For purposes of this Section 2, a "Liquidation Event" shall include a transaction or series of related transactions that result in (A) the closing of the sale, transfer or other disposition of all or substantially all of this corporation’s assets, (B)the consummation of the merger or consolidation of this corporation with or into another entity (except a merger or consolidation in which the holders of capital stock of this corporation immediately prior to such merger or consolidation continue to hold at least 50% of the voting power of the capital stock of this corporation or the surviving or acquiring entity), or (C) a liquidation, dissolution or winding up of this corporation. The treatment of any particular transaction or series of related transactions as a Liquidation Event may be waived by the vote or written consent of the holders of at least fifty-one percent (51%) of the outstanding Series B Preferred Stock.
(ii) In any Liquidation Event, if Proceeds received by this corporation or its stockholders is other than cash, its value will be deemed its fair market value. Any securities shall be valued as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability covered by (B) below:
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If traded a securities on exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the twenty (20) trading-day period ending three (3) trading days prior to the closing of the Liquidation Event; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the twenty (20) trading-day period ending three (3) trading days prior to the closing of the Liquidation Event; and (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by this corporation and the holders of at least fiftyone percent (5 I%) of the voting power of all then outstanding shares of Series B Preferred Stock. (B)
The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder’s status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in (A) (1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by this corporation and the holders of at least fifty-one percent (51%) of the voting power of all then outstanding shares of such Series B Preferred Stock.
(c)
The foregoing methods for valuing non-cash consideration to be distributed in connection with a Liquidation Event may be superceded by any determination of such value set forth in the definitive agreements governing such Liquidation Event.
(iii) This corporation shall give each holder of record of Series B Preferred Stock written notice of such impending Liquidation Event not later than twenty (20) days prior to the stockholders’ meeting called to approve such transaction, or twenty (20) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this Section 2, and this corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than twenty (20) days after this corporation has given the first notice 675431.7/21634.08029
-3-
provided for herein or sooner than ten (t 0) days after this corporation has given notice of any material changes provided for herein; provided, however, that subject to compliance with the General Corporation Law such periods may be shortened or waived upon the written consent of the holders of Series B Preferred Stock that represent at least fifty-one percent (51%) of the voting power of all then outstanding shares of such Series B Preferred Stock (voting together as a single class and not as separate series, and on an asconverted basis).
Redemption. The shares of Series B Preferred Stock shall not be redeemable. Conversion. The holders of the Series B Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of the Series B Preferred Stock shall be automatically convertible on the Stockholder Approval Date, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the applicable Original Issue Price for such series by the applicable Conversion Price for such series (the conversion rate for a series of Preferred Stock into Common Stock is referred to herein as the "Conversion Rate" for such series), determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial Conversion Price per share for each share of Series B Preferred Stock shall be $5.00; provided, however, that the Conversion Price for the Preferred Stock shall be subject to adjustment as set forth in subsection 4(c). Stockholder Approval Date means the date of approval of the conversion rights set forth herein by the holders of Common ~1ock of the c,~.rp. ~,r’,~’~,~ with applicable law and the rules and regulations of any securities exchange on whichthe Common Stock of thecorporation is then listed.
(b) Mechanics of Conversion. Before any holder of Series B Preferred Stock shall be entitled to convert the same into shares of Common Stock, he or she shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for the Series B Preferred Stock, and shall give written notice to this corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series B Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the dose of business on the date of such surrender of the shares of Series B Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. 675431.7/21634.08029
-4-
(c) Conversion Price Adiustments of Preferred Stock for Certain Splits and Combinations. The Conversion Price of the Preferred Stock shall be subject to adjustment from time to time as follows:
In the event this corporation should at any time or from time to (i) time after the date hereof fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series B Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series B Preferred Stock shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents. (ii)
If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares.
(d) Other Distributions.In the event this corporation shall declare a distribution
payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(c)(i), then, in each such case for the purpose of this subsection 4(d), the holders of the Series B Preferred Stock shall be entitled upon conversion thereof to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of this corporation into which their shares of Series B Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution.
(e)
675431.7/21634.08029
Recapitalizations. If at any time or from time to time there reeapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or in Section 2) provision shall be made so that the holders of the Series B Preferred Stock shall thereafter be entitled to receive upon conversion of the Series B Preferred Stock the number of shares of stock or other securities or property of -5-
this corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series B Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series B Preferred Stock) shall be applicable aider that event as nearly equivalently as may be practicable.
(f) No Impairment.This corporation will not by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but wil! at all times in good faith assist in the carrying out of all the provisio~ls of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment.
(g) No Fractional Shares and Certificate as to Adiustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series B Preferred Stock and the aggregate number of shares of Common Stock to be issued to particular stockholders, shall be rounded down to the nearest whole share and the corporation shall pay in cash the fair market value of any fractional shares as of the time when entitlement to receive such fractions is determined. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Series B Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series B Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjus:ment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series B Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Series B Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Series B Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of a share of Series B Preferred Stock.
(h)
Notices of Record Date.In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or
675431,7/21634,08029
-6-
other distribution, this corporation shall mail to each holder of Series B Preferred Stock, at least ten (I0) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution, and the amount and character of such dividend or distribution. This corporation shall at all (i) Reservation of Stock Issuable .Upon Conversion.
times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Preferred Stock, in addition to such other remedies as shall be available to the holder of such Series B Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to the Certificate of Incorporation. Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series B Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation.
Notwithstanding anything herein to (k) Waiver of Adiustment to Conversion Price. the contrary, any downward adjustment of the Conversion Price of any series of Series B Preferred Stock may be waived, either prospectively or retroactively and either generally or in a particular instance, by the consent or vote of the holders of at least fifty-one percent (51%) of the outstanding shares of Series B Preferred Stock. Any such waiver shall bind all future holders of shares of such of Series B Preferred Stock. o
Voting Rights.
(a) General Voting Rights.Except as required by law or as set forth herein, the holders of Series B Preferred Stock shall have no voting rights.
As long as any shares of Series B Preferred (b) V..oting for the Election of Directors. Stock are outstanding, the holders of such shares of Series B Preferred Stock shall be entitled to elect two (2) directors of this corporation at any election of directors until the next election of directors. One of the two designees must meet the requirements of "independent director" for all purposes under the rules and regulations of any securities exchange on which the Common Stock of the corporation is then listed and of the Securities Exchange Commission and obtain the approval of a majority of the remaining members of the board of directors of the corporation.
675431,7/21634.08029
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6. Protective Provisions. This corporation shall not (by amendment, merger, consolidation or otherwise and either directly or through a subsidiary) without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least fifty-one percent (51%) of the then outstanding shares of Series B Preferred Stock:
(a) consummate a Liquidation Event or otherwise initiate a voluntary liquidation dissolution, receivership, bankruptcy or other insolvency proceeding involving the corporation or any subsidiary;
(b) alter or change the rights, preferences or privileges of the shares of Series B Preferred Stock; (c) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Preferred Stock;
(d) authorize or issue, or obligate itself to issue, any equity security (including any other security convertible into or exercisable for any such equity security) having a preference over, or being on a parity with, the Series B Preferred Stock with respect to dividends, liquidation or redemption;
(e) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Common Stock (or any junior series of preferred stock); provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for this corporation or any subsidiary pursuant to agreements under which this corporation has the option to repurchase such shares upon the occurrence of certain events, such as the termination of employment or service, or pursuant to a right of first refusal;
(f) authorize the payment of dividends to holders of Common Stock or any junior series of preferred stock;
(g) amend this corporation’s Certificate of Incorporation or Bylaws; or (h) change the authorized number of directors of this corporation;
(i) engage in any sales or other dispositions of assets, properties or rights of the
corporation or any subsidiary that is of a value greater than $1,000,000 in the aggregate, in any given year;
O) engage in capital expenditures, or the acquisition of any assets, properties or rights
or the making of any investments in any other persons by the corporation, other than investments in wholly-owned subsidiaries, if such acquisition or investment requires payment by the corporation or any subsidiary in excess of $1,000,000 in the aggregate, in any given year;
(k) incur indebtedness for borrowed money, guarantees thereof, or pledges of assets
in connection therewith which would result in the corporation and its subsidiaries’ having outstanding indebtedness in excess of all amounts as may be owing, from
675431.7/21634.08029
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time to time, under the Loan Documents (as defined in the First Lien Credit Agreement between this corporation and Prospect Medical Oroup, lnc., as borrowers, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the other lenders party thereto and the Second Lien Credit Agreement, between this corporation and Prospect Medical Group, Inc., as borrowers, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto), plus such indebtedness as may be permitted to be incurred by this corporation (and/or any subsidiary thereof) pursuant to the Loan Documents without the further consent of the applicable Administrative Agent and lenders party thereto; (1) change the strategic direction or lines of business of the corporation; (m) enter into any transaction with any affiliate of the corporation, other than transactions that are on terms no less favorable to the corporation or its subsidiaries than if the corporation or such subsidiary were to have entered into such a contract or transaction with a person independent from the corporation or such subsidiary; or (n) enter into any agreement or commitment or otherwise become bound or obligated to do or perform any of the foregoing actions. 7. Status of Converted Stock. Any shares of Series B Preferred Stock which shall at any time have been converted shall resume the status of authorized but unissued shares of Preferred Stock, without designation as to series, until such shares are once more designated as part of a particular series by the Board of Directors. IN WITNESS WHEREOF, PROSPECT MEDICAL HOLDINGS, INC., has caused this Certificate to be signed by Jacob Y. Temer, M.D., its Chief Executive Officer, this g.r, August, 2007. PROSPECT MEDICAL HOLDINGS, INC.
By: Chief Executive Officer
675431.7t21634.08029
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day
State of Delaware Secretar~ of State Division of Corporations Delivered 04:35 PM 03/12/2010 FILED 04:14 PM 03/12/2010 SRV 100276380 - 2336046 FILE
CERTI3~ICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF PROSPECT MEDICAL HOLD[NGS, 15/C.
Prospect Medical Holdings, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify: FIRST: The following resolution has been adopted by the Corporation’s Board of Directors and has been approved by the holders of a majority of the Corporation’s outstanding common stock in accordance with the Delaware General Corporation Law for the purpose of amending the Corporation’s Certificate of Incorporation: RESOLVED, that the Certificate of Incorporation of the Corporation be amended by deleting in its entirety Article SIXTH thereof and by replacing it with the following: "SIXTH:
A. The number of directors which constitute the whole Board of Directors of the Corporation shall be as specified in the Bylaws of the Corporation. All directors shall. hold office until their respective successors are elected, except in the case of the death, resignation, retirement, removal or disqualification of a director. B. Commencing with the election of directors at the 201 {} annual meeting of stockholders, the directors shall be divided into three classes designated as Class I, .... =C_ l~s_~A-q.d Class III. Each class shall consist as nearly as is oossible, of.0ne-third of the number of directors constituting the entire Board of Dia’eetors. Initial cIass assignments shall be determined by the Board of Directors. At each annual meeting of stockholders, successors te the directors whose terms expired at that annual meeting shall be elected for a three-year term, except that, the director or directors elected to Class I will be subject to election for a three-year term at the auaual meeting of stockholders ha 2011 and the director or directors elected to Class II will be subject to election for a three-year term at the annual meeting of stockholders in 2012. If the number of directors changes, any increase or decrease shall be apportioned among the classes such that the number of directors in each class shall remain as nearly equal as possible, but in no ease will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold of-flee untiI the annual meeting for the year in which his.term expires and until his successor shall be eIeeted and qualified, subject, however, to such director’s prior death, resignation, retirement, disqualification or removal from office. In the event the holders of any class or series of Preferred Stock shall be entitled, by a separate ciass vote, to elect directors as may be specified pursuant to Article FOURTH, then the provisions of such class or series of stock with respect to their rights shalt apply. T~e number of directors that may be elected by the hoIders of any such class
or series of Preferred Stock shall be in addition to the number fixed pursuant to the preceding paragraph oft.his Article SIXTH. C. Subject to the fights of the holders of any one or mare series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall, unless otherwise provided by law, be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors. Any director so chosen shall hold office until the next election of the class for which such director shall have been chosen and until his successor shall be elected and qualified. No decrease in the authorized number of directors shall shorten the term of any incumbent director. In the event of a vacancy on the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board of Directors until the vacancy is filled.
D, Unless otherwise allowed by statute or this Certificate of Incorporation, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the afftrmative vote of at least a majority of the total voting power of the outstanding shares of capital stock of the Corporation entitled to vote generally in ~e election of directors, voting together as a single class." SECOND: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to th I2 be signed byits duly authorized officer, this day of March 2010. Prospect Medical Hol,dings, Inc.
Samuel S. Lee Chig~’Executive Officer
2
State of Delaware Secretar~ of State Division of Corporations Delivered 01 : 46 PM 12/15/2010 FILED 01 : 46 PM 12/15/2010 SRV 101191770 - 2336046 FILE
CERTIFICATE OF MERGER of IVY MERGER SUB CORP. with and into PROSPECT MEDICALHOLDINGS, INC. Pursuant to Section 251 of the General Corporation Law of the State of Delaware
Pursuant to Section 25 l(c) of the General Corporation Law of the State of Delaware (the "DGCL"), Prospect Medical Holdings, Inc. ("Prospect Medical"), in connection with the merger of Ivy Merger Sub Corp. ("Merger Sub") with and into Prospect Medical (the "Merg_~"), hereby certifies as follows: FIRST: The name and state of incorporation of each of the constituent corporations to the Merger are: Nanle
Prospect Medical Holdings, Inc. Ivy Merger Sub Corp.
State of Incorporation Delaware Delaware
SECOND: The Agreement and Plan of Merger, dated as of August 16, 2010, by and among Ivy Holdings Inc., a Delaware corporation, Merger Sub and Prospect Medical (the "MergerAgreement"), has been approved, adopted, executed and acknowledged by each of the constituent corporations in accordance with Section 251 of the DGCL. THIRD: In accordance with the Merger Agreement, Merger Sub will merge with and into Prospect Medical. Following the Merger, Prospect Medical will continue as the surviving corporation and the separate corporate existence of Merger Sub wilt cease. FOURTH: The name of the surviving corporation is Prospect Medical Holdings, Inc. (the "Surviving Corporation"). FIFTH: The certificate of incorporation of the Surviving Corporation shall be amended as set forth in Exhibit A hereto, and, as so amended, shall be the Amended and Restated Certificate of Incorporation of the Surviving Corporation. SIXTH: An executed copy of the Merger Agreement is on file at the office of the surviving corporation located at 10780 Santa Monica Blvd., Suite 400 Los Angeles, California. A copy of the Merger Agreement will be furnished by the surviving corporation, on request and without cost, to any stockholder of any of the constituent corporations.
NYS1700583.4
Doaeml~, 20~0,
Exhibit A AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PROSPECT MEDICAL HOLDINGS, INC. (a Delaware Corporation)
ARTICLE I Name
The name of this Corporation is Prospect Medical Holdings, Inc. (the "Corporation").
ARTICLE II Principal Office and Mailing Address The address of this Corporation’s registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.
ARTICLE IIi Business and Purposes The purpose for which this Corporation is organized is to engage in any lawful act or activity for which a Corporation may be organized under the General Corporation Law of the State of Delaware (the "DGCL"), and any amendments thereto, and in connection therewith, this Corporation shall have and may exercise any and all powers conferred from time to time by law upon corporations formed under such act.
ARTICLE IV
Capital Stock (a) The aggregate number of shares of capital stock authorized to be issued by this Corporation shall be 100 shares of Common Stock with a par value of $0.01 per share.
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(b) Each share of Common Stock shall entitle the holder thereof to one vote at every annual or special meeting of the stockholders of this Corporation.
ARTICLE V Existence of Corporation This Corporation shall have perpetual existence.
ARTICLE VI Board of Directors
The board of directors of this Corporation (the "Board of Directors"), shall consist of not less than one (1) member, the exact number of directors to be fixed from time to time by the Board of Directors or by the bylaws. The business and affairs of this Corporation shall be managed by the Board of Directors, which may exercise all such powers of this Corporation and do all such lawful acts and things as are not by law directed or required to be exercised or done only by the stockholders. Subject to the bylaws of this Corporation, meetings of the directors may be held within or without the State of Delaware. Directors need not be stockholders. The stockholders of this Corporation may remove any director from office at any time with or without cause. The directors need not be elected by written ballot unless the bylaws of the Corporation so provide.
ARTICLE VII
(a) In furtherance and not in limitation of the rights, powers, privileges and discretionary authority granted or conferred by the DGCL or other statutes or laws of the State of Delaware, the Board of Directors is expressly authorized to make, alter, amend or repeal the bylaws of the Corporation, without any action on the part of the stockholders, but the stockholders may make additional bylaws and may alter, amend or repeal any bylaw whether adopted by them or otherwise. The Corporation may in its bylaws confer powers upon its Board of Directors in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board of Directors by applicable law. (b) The bylaws of this Corporation may contain any provisions or requirements for the management or conduct of the affairs and business of this Corporation, provided the same are not inconsistent with the provisions of this certificate of incorporation, or contrary to the laws of the State of Delaware or of the United States.
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ARTICLE VIII Director’s Liability A director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of the foregoing provisions of this Article VIII by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.
ARTICLE IX Amendment of Certificate of Incorporation From time to time any of the provisions of this certificate of incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this certificate of incorporation are granted subject to the provisions of this Article IX.
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THIRD AMENDED AND RESTATED BY-LAWS OF PROSPECT MEDICAL HOLDINGS, INC.
As effective on December 15, 2010
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AMENDED AND RESTATED BY-LAWS OF
PROSPECT MEDICAL HOLDINGS, INC. (a Delaware Corporation) PREAMBLE These by-laws (the "By-Laws") are subject to, and governed by, the General Corporation Law of the State of Delaware (the "DGCL") and the certificate of incorporation of Prospect Medical Holdings, Inc., a Delaware corporation (the "Corporation") then in effect (the "Certificate of Incorporation"). In the event of a direct conflict between the provisions of these By-Laws and the mandatory provisions of the DGCL or the provisions of the Certificate of Incorporation, such provisions of the DGCL or the Certificate of Incorporation, as the case may be, will be controlling.
OFFICES The address of this Corporation’s registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. II. STOCKHOLDERS
Section 2.1. Time and Place of Meetings and Annual Meetings. All meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, within or without the State of Delaware, as shall be designated by the board of directors of the Corporation (the "Board of Directors"). In the absence of any such designation by the Board of Directors, each such meeting shall be held at the principal office of the Corporation. An annual meeting of stockholders shall be held for the purpose of electing directors, and transacting such other business as may properly be brought before the meeting. The date of the annual meeting shall be determined by the Board of Directors. Section 2.2. Time and Place of Meetings. Unless otherwise prescribed by law or by the Certificate of Incorporation, special meetings of stockholders, for any purpose or purposes, may be called either by the Board of Directors or at the request in writing of stockholders holding at least fifty percent (50%) of the common stock of the Corporation (the "Common
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Stock"), issued and outstanding and entitled to vote generally in the election of directors pursuant to the Certificate of Incorporation. Such request by stockholders shall state the purpose of the proposed meeting. All special meetings of the stockholders shall be held at such place, within or without the State of Delaware, as shall be designated by the Board of Directors. In the absence of any such designation by the Board of Directors, each such meeting shall be held at the principal office of the Corporation. Section 2.3. Notice of Meetings. Written notice of each meeting of the stockholders stating the place, date and time of the meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. The notice of any special meeting of stockholders shall state the purpose or purposes for which the meeting is called. Section 2.4. Quorum. The holders of a majority of the Common Stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by law. If a quorum is not present or represented, the chairman of the meeting or a majority of the holders of the stock present in person or represented by proxy at the meeting and entitled to vote thereat shall have power, by the affirmative vote of the holders of a majority of such stock, to adjourn the meeting to another time and/or place, without notice other than announcement at the meeting, until a quorum shall be presented or represented. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 2.5. Voting. Unless otherwise required by law, the Certificate of Incorporation or these By-Laws, any question brought before any meeting of stockholders shall be decided by a majority of the votes cast by holders of the stock represented and entitled to vote thereon, with each such holder having the number of votes per share and voting as a member of such classes of stockholders as may be provided in the Certificate of Incorporation, unless the question is one upon which, by express provision of law or of the Certificate of Incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Such votes may be cast in person or by proxy but no proxy shall be voted on or after one year from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. Section 2.6. Informal Action b’g Stockholders.Any action required to be taken at a meeting of the stockholders, or any other action which may be taken at a meeting of the stockholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by stockholders having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all stockholders having a right to vote thereon were present and voted. Prompt notice of the taking of the corporate
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action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of such meeting had been the date that written consents signed by a sufficient number of holders to take the action were duly delivered to the Corporation. Section 2.7. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten (10) days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the principle place of business of the Corporation. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 2.8. Stock Ledger.The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 2.7 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. III.
DIRECTORS Section 3.1. General Powers. The business and affairs of the Corporation shall be managed and controlled by or under the direction of a Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Section 3.2. Number and Election of Directors. The Board of Directors shall consist of at least one (1) and no more than fifteen (15) members. Except as provided in Section 3.3 of this Article, directors shall be elected by a plurality of the votes cast at annual meetings of stockholders, and each director so elected shall hold office until the next annual meeting and until his successor is duly elected and qualified, or until his earlier resignation or removal. Any director may resign at any time upon notice to the Corporation. Directors need not be stockholders. Section 3.3. Vacancies.Except as provided in the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the number of directors may be filled by a majority of the directors then in office though less than a quorum, and each director so chosen shall hold office until his successor is elected and qualified or until his earlier
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resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by law. Section 3.4. Place of Meetings.The Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware. Section 3.5. Regular Meetings. The Board of Directors shall hold a regular meeting, to be known as the annual meeting, immediately following each annual meeting of the stockholders. Other regular meetings of the Board of Directors shall be held at such time and at such place as shall from time to time be determined by the Board of Directors. Section 3.6. Notice of Meetings. Notice of any regular or special meeting of directors shall be given to each director by the Secretary or by the directors calling the meeting. The notices of all meetings shall state the place, date, hour and purpose(s) of the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone or electronic transmission or (ii) by sending a telegram or telex, or delivering written notice by hand, to his last known business or home address, in each case at least two days in advance of a regular meeting and 24 hours in advance of a special meeting. Section 3.7. Special Meetings.Special meetings of the Board of Directors may be called by any director or the President of the Corporation. Section 3.8. Quorum. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these By-Laws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.9. Organization.The Chairman of the Board, if elected, shall act as Chairman at all meetings of the Board of Directors. If a Chairman of the Board is not elected or, if elected, is not present, the President, or if the President is not present, a director chosen by a majority of the directors present, shall act as chairman at meetings of the Board of Directors. Section 3.10.Action without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Section 3.11. Attendance by Telephone. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors, or of any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. NY\1667033.8
Section 3.12. Removal. Except as otherwise provided in the Certificate of Incorporation, any one or more or all of the directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Section 3.13. Compensation of Directors. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the Corporation or any of its parent or subsidiary corporations or any of its stockholders in any other capacity and receiving compensation for such service. IV. OFFICERS
Section 4.1. Enumeration. The officers of the Corporation shall be chosen by the Board of Directors and may include a Chairman of the Board, President, a Secretary and a Treasurer. The Board of Directors may also elect one or more Vice Chairmen, one or more Senior or other Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers and such other officers and agents as it shall deem appropriate. Any number of offices may be held by the same person. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. Section 4.2. Term of Office. The officers of the Corporation shall be elected at the annual meeting of the Board of Directors and shall hold office until their successors are elected and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. Any vacancy occurring in any office of the Corporation required by this Article shall be filled by the Board of Directors, and any vacancy in any other office may be filled by the Board of Directors. Each successor shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified, or until his earlier death, resignation or removal. Section 4.3. Chairman of the Board.The Chairman of the Board if any, when elected, shall have general supervision, direction and control of the business and affairs of the Corporation, subject to the control of the Board of Directors, shall preside at meetings of stockholders and shall have such other functions, authority and duties as customarily appertain to the Chairman of the Board of a business corporation or as may be prescribed by the Board of Directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the President. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws. Section 4.4. President.The President shall, subject to the control of the Board of Directors and, if there be one, the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where
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required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these ByLaws, the Board of Directors or the President. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the President shall preside at all meetings of the stockholders and the Board of Directors. If there be no Chairman of the Board of Directors, the President shall be the Chief Executive Officer of the Corporation. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. Section 4.5. Vice President.At the request of the President or in his absence or in the event of his inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice President or the Vice Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President Section 4.6. Secretary. The Secretary shall keep a record of all proceedings of the stockholders of the Corporation and of the Board of Directors, and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice, if any, of all meetings of the stockholders and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board or the President. The Secretary shall have custody of the corporate seal of the Corporation and the Secretary, or in the absence of the Secretary any Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and when so affixed it may be attested by the signature of the Secretary or an Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest such affixing of the seal. The Secretary shall also keep a register of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder, sign with the President or Vice President certificates for shares of the Corporation, the issuance of which shall be authorized by resolution of the Board of Directors, and have general charge of the stock transfer books of the Corporation. Section 4.7. Assistant Secretary.The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of the Secretary’s inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the President or the Secretary. Section 4.8. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of
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Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board, the President and the Board of Directors, at its regular meetings or when the Board of Directors so requires, an account of all transactions as Treasurer and of the financial condition of the Corporation. The Treasurer shall perform such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board or the President. Section 4.9. Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of the Treasurer’s inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the President or the Treasurer.
Section 4.10. Other Officers.The President or Board of Directors may appoint other officers and agents for any Group, Division or Department into which this Corporation may be divided by the Board of Directors, with titles as the President or Board of Directors may from time to time deem appropriate. All such officers and agents shall receive such compensation, have such tenure and exercise such authority as the President or Board of Directors may specify. All appointments made by the President hereunder and all the terms and conditions thereof must be reported to the Board of Directors. In no case shall an officer or agent of any one Group, Division or Department have authority to bind another Group, Division or Department of the Company or to bind the Corporation except as to the business and affairs of the Group, Division or Department of which he or she is an officer or agent. Section 4.11.Salaries. The salaries of the elected officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. Section 4.12. Voting Securities Held by the Corporation.Unless otherwise provided by the Board of Directors, powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incidental to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors, may, by resolution, from time to time confer like powers upon any other person or persons.
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CERTIFICATES OF STOCK
Section 5.1. Form. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution that some or all of any or all classes or series of stock shall be uncertificated shares. Certificates of stock in the Corporation, if any, shall be signed by or in the name of the Corporation by the Chairman of the Board or the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation. Where a certificate is countersigned by a transfer agent, other than the Corporation or an employee of the Corporation, or by a registrar, the signatures of the Chairman of the Board, the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, the certificate may be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were such officer, transfer agent or registrar at the date of its issue. Section 5.2. Transfer. Except as otherwise established by rules or regulations adopted by the Board of Directors, and subject to any restriction on transfer noted conspicuously thereon, upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate of stock or uncertificated shares in place of any certificate therefor issued by the Corporation to the person entitled thereto, cancel the old certificate and record the transaction on its books; provided, however, that (1) prior to any transfer, confirmation is obtained from Moody’s Investors Service that the ratings of securities issued by the Corporation will not be reduced or withdrawn as a result of such transfer, and (2) the stock of the Corporation shall not be transferable to any U.S. Person (as defined in Regulation S of the United States Securities Act of 1933, as amended). Section 5.3.Replacement. In case of the loss, destruction or theft of a certificate for any stock of the Corporation, a new certificate of stock or uncertificated shares in place of any certificate therefor issued by the Corporation may be issued upon satisfactory proof of such loss, destruction or theft and upon such terms as the Board of Directors may prescribe. The Board of Directors may in its discretion require the owner of the lost, destroyed or stolen certificate, or his legal representative, to give the Corporation a bond, in such sum and in such form and with such surety or sureties as it may direct, to indemnify the Corporation against any claim that may be made against it with respect to a certificate alleged to have been lost, destroyed or stolen. Section 5.4. Record Date.(a) In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If the Board of Directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors determines, at the
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time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance with the foregoing provisions of this Section 5.4(a) at the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by this chapter, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in this State, its principal place of business or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by this chapter, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 5.5. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. The Corporation shall not be required to register any transfer of shares made in violation of any agreement among a
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stockholder or investor in the Corporation and the Corporation, or recognize as a holder of any such shares any transferee in such a violative transaction. VI. INDEMNIFICATION
Section 6.1. Third Party Actions. The Corporation shall indemnify and hold harmless to the fullest extent authorized by the DGCL, as the same exists and as hereafter amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said DGCL permitted the Corporation to provide prior to such amendment) any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of this Corporation or of another enterprise at the request of such predecessor corporation (collectively, "Agent") against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Such indemnification right shall be a contract right between the Agent and the Corporation. Section 6.2. Action by or in the Right of the Corporation.The Corporation shall indemnify and hold harmless to the fullest extent authorized by the DGCL, as the same exists and as hereafter amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than the DGCL permitted the Corporation to provide prior to such amendment) any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was an Agent or serving at the request of the Corporation in the manner specified in Section 6.1 of this Article VI against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that despite the adjudication of liability but in
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view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 6.3. Successful Defense; Service as a Witness. To the extent that an Agent has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 6.1 or 6.2 of this Article VI, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith. To the extent any person who is or was a director or officer of the Corporation has served or prepared to serve as a witness in any action, suit or proceeding (whether civil, criminal, administrative or investigative in nature), or in any investigation by the Corporation or the Board of Directors thereof or a committee thereof or by any securities exchange on which securities of the Corporation are or were quoted or listed, by reason of, or in connection with, such person’s services as a director or officer of the Corporation or as a director or officer of any affiliate or predecessor of the Corporation (other than in a suit commenced by such person), the Corporation shall indemnify such person against expenses (including attorneys’ fees and disbursements) and costs actually and reasonably incurred by such person in connection therewith within thirty (30) days after the receipt by the Corporation from such person of a statement requesting such indemnification, averring such service and reasonably evidencing such costs and expenses. The Corporation may indemnify any employee or agent of the Corporation to the same extent as, or to a lesser extent than, it may indemnify any director or officer of the Corporation pursuant to the foregoing sentence of this Section 6.3 of this Article VI. Section 6.4. Determination of Conduct. Any indemnification under Article VI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 6.1 or 6.2 of this Article VI. Such determination shall be made (1) by the Board of Directors by a majority vote of directors who were not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. Notwithstanding the foregoing, an Agent shall be able to contest any determination that the director or officer has not met the applicable standard of conduct, set forth in Section 6.1 or 6.2 of this Article VI, by petitioning a court of appropriate jurisdiction. Section 6.5. Payment of Expenses in Advance.Unless otherwise prohibited by applicable federal or state law or by the rules and regulations of any exchange upon which the Corporation’s securities are traded, expenses incurred in defending, settling a civil, criminal, administrative or investigative action, suit or proceeding by an individual who may be entitled to indemnification pursuant to Section 6.1 or 6.2 of this Article VI shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VI. Such expenses incurred by other employees and 11 NY\1667033.8
agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. Section 6.6. Indemnit-g Not Exclusive. The indemnification and advancement of expenses provided by, or granted pursuant to, the other subparagraphs of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 6.7. Insurance Indemnification. The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an Agent or is or was serving at the request of the Corporation as an Agent against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VI. Section 6.8. Indemnification Contracts.The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, j oint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article VI, to the extent permitted by applicable law. Section 6.9. Indemnity Fund.Upon resolution passed by the Board of Directors, the Board of Directors may establish a trust or other designated account, grant a security interest or use other means (including, without limitation, a letter of credit), to ensure the payment of any or all of its obligations arising under this Article VI and/or agreements which may be entered into between the Corporation and its directors and officers from time to time. Section 6.10.Indemnification of Other Parties. The provisions of this Article VI shall not be deemed to preclude the indemnification of any person who is not an Agent, but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL or otherwise. The Corporation may, in its sole discretion, indemnify an employee, trustee or other agent as permitted by the DGCL. The Corporation shall indemnify an employee, trustee or other agent where required by law. Section 6.11. Accrual of Claims; Successors.The indemnification provided or permitted under this Article VI shall apply in respect of any expense, cost, judgment, fine, penalty or amount paid in settlement, whether or not the claim or cause of action in respect 12 NY\1667033.8
thereof accrued or arose before or after the effective date of this Article VI. The right of any person who is or was a director or officer of the Corporation to indemnification and expense advances under this Article VI shall continue after such person shall have ceased to be a director or officer and shall inure to the benefit of the heirs, distributees, executors, administrators and other legal representatives of such person. Section 6.12. Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VI by the stockholders or the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. Section 6.13. Settlement of Claims. The Corporation shall not be liable to indemnify any director or officer under this Article VI: (i) for any amounts paid in settlement of any action or claim effected without the Corporation’s written consent, which consent shall not be unreasonably withheld or (ii) for any judicial award, if the Corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. Section 6.14.Subrogation.In the event of payment under this Article VI, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnified party who shall execute all papers required and shall do everything that may be necessary to enable the Corporation effectively to bring suit to enforce such rights. Section 6.15. No Duplication of Payments. The Corporation shall not be liable under this Article VI to make any payment in connection with any claim made against a director or officer to the extent such director or officer has otherwise actually received payment (under any insurance policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder. Section 6.16.The Corporation. For purposes of this Article VI, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents so that any person which is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation in that capacity, shall stand in the same position under the provisions of this Article VI (including, without limitation, the provisions of Section 6.4 of this Agreement) with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. Section 6.17.Employee Benefit Plans. For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any 13 NY\1667033.8
excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VI. Section 6.18.Savings Clause. If this Article VI or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Agent against expense (including attorneys’ fees), judgments, fines and amounts paid in settlement with respect to any action, suit, proceeding or investigation, whether civil, criminal or administrative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article VI that shall not have been invalidated by such court or by any other applicable law. VII.
GENERAL PROVISIONS Section 7.1. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 7.2. Corporate Seal.The corporate seal shall be in such form as may be approved from time to time by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 7.3. Notices.Whenever written notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or, subject to applicable law, by telegram, telex, cable, facsimile or other electronic transmission. Section 7.4. Waiver of Notice.Whenever any notice is required to be given under law or the provisions of the Certificate of Incorporation or these By-Laws, a waiver thereof in writing or by electronic transmission, signed or given by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Section 7.5. Resignations and Removals. Any director or any officer, whenever elected or appointed, may resign at any time either in a writing served upon, or by an electronic transmission sent to, the President or the Secretary, and such resignation shall be deemed to be 14 NY\1667033.8
effective as of the close of business on the date said writing or transmission is received by the President or Secretary. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective. Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the Corporation. Section 7.6. Disbursements.All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. VIII.
AMENDMENTS These By-Laws may be altered, amended or repealed or new By-Laws may be adopted by the Board of Directors. The fact that the power to amend, alter, repeal or adopt the By-Laws has been conferred upon the Board of Directors shall not divest the stockholders of the same powers. IX. SUBJECT TO CERTIFICATE OF INCORPORATION
These By-Laws and the provisions hereof are subject to the terms and conditions of the Certificate of Incorporation of the Corporation (including any certificates of designations filed thereunder), and in the event of any conflict between these By-Laws and the Certificate of Incorporation, the Certificate of Incorporation shall control.
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CERTIFICATE OF SECRETARY The undersigned, being the duly elected, qualified Secretary of Prospect Medical Holdings, Inc., a California professional medical corporation, hereby certifies that attached hereto is a true and correct copy of the Bylaws of said corporation. IN WITNESS WHEREOF, the undersigned has hereunto set her hand as of the 15 of December, 2010.
Ellen J. Shin, Secretary
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th
Exhibit 26B
PAGE
Erie First State I, JEFFREY W. BULLOCK, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF "PROSPECT EAST HOLDINGS, INC. ", FILED IN THIS OFFICE ON THE TWENTIETH DAY OF AUGUST, A.D. 2013, AT 6:02 O’CLOCK P.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS.
534 7541 81 O0 131008648 You may verify this certificate online at corp. delaware, gov/authver, shtml
DATE"
08-22-13
State of Delaware Secretar!~ of State Division of Corpora~’ons Delivered 06:28 PM 08/20/2013 FILED 06:02 PM 08/20/2013 SRV 131008648 - 5347541 FILE
CERTIFICATE OF INCORPORATION OF PROSPECT EAST HOLDINGS. INC.
FIRST:".~ename of this corporation (hereinafter called the "Corporation") is: Prospect least Holdings, Inc. SECOND: Its registered office in the State of Delaware is to be located at 1209 Orange Street, in the City of Wilmington, 19801, County of New Castle and its registered agent at such address is The Corporation Trust Company. THIRD: The purpose or purposes of the Corporation is to engage in any lawful act or activity for which Corporations may be organized under the General Corporation Law of DeIaware. FOURTH: The total number of shares of stock and the par value which the Corporation is authorized to issue is: 1,000 Shares of Cot~unon Stock, par value $0.0l per share.
FIFTH: The rmme and address of the inco~orator is Gary W. l-lerschman, c!o Sills Cummis & Gross P.C,, One Riverfront Plaza, New Jersey 07102. S[XTH: The Board of Directors shall have the power to adopt, amend or repeal the by-laws.
SEVENTH: No director shall be personally liable to the Corporation or its stockhotders monetary &mmges fdr any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law, (i) for breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of taw, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction tiom which the director derived an improper personal benefit. No amendment to or repeal of this Article Seventh shall apply to or have any effect or atleged on the liability liabiti of any director U of the Corporation for or with respect to any acts or omissio~s of such director occuning prior to such amendmm~t,
IN WIINES~ WHEREOF. the undersigned, bcin.g the incorporator herein beibre named. has executed signed and acknowledged this certificate of incorporation this 20 t~ day’ of Augu 2013.
is/GaD~ W. Herschman Gary W, Herschman Incorporator
2331614vl
BYLAWS OF PROSPECT EAST HOLDINGS, INC. ARTICLE I - STOCKHOLDERS Section 1.
Annual Meeting.
An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix, which date shall be within thirteen (13) months of the last annual meeting of stockholders or, if no such meeting has been held, the date of incorporation. Section 2.
Special Meetings.
Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of the meeting, may be called by the Board of Directors or the chief executive officer and shall be held at such place, on such date, and at such time as they or he or she shall fix. Section 3.
Notice of Meetings.
Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 4.
Quorum.
At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares of such class or classes present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by
proxy, may adjourn the meeting to another place, date, or time. Section 5.
Organization.
Such person as the Board of Directors may have designated or, in the absence of such a person, the chief executive officer of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints. Section 6.
Conduct of Business.
The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. Section 7.
Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefore by a stockholder entitled to vote or by his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the narne of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. The Corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, all other matters shall be determined by a majority of the votes cast affirmatively or negatively.
Section 8.
Stock List.
A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in his or her name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. Section 9.
Consent of Stockholders in Lieu of Meeting.
Any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be made by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the date the earliest dated consent is delivered to the Corporation, a written consent or consents signed by a sufficient number of holders to take action are delivered to the Corporation in the manner prescribed in the first paragraph of this Section. ARTICLE II - BOAI~ OF DIRECTORS
Section 1.
Number and Term of Office.
The number of directors who shall constitute the whole Board shall be such number as the Board of Directors shall from time to time have designated, except that in the absence of any such designation, such number shall be ~’o (2). Each director shall be elected for a term of one year and until his or her successor is elected and qualified, except as otherwise provided herein or required by law. Whenever the authorized number of directors is increased between annual meetings of the stockholders, a majority of the directors then in office shall have the power to elect such new directors for the balance of a term and until their successors are elected and qualified. Any decrease in the authorized nurnber of directors shall not become effective until the expiration of the term of the directors then in office unless, at the time of such decrease, there shall be vacancies on the board which are being eliminated by the decrease.
Section 2.
Vacancies.
If the office of any director becomes vacant by reason of death, resignation, disqualification, removal or other cause, a majority of the directors remaining in office, although less than a quorum, may elect a successor for the unexpired term and until his or her successor is elected and qualified ...................................................................................... Section 3.
Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 4.
Special Meetings.
Special meetings of the Board of Directors may be called by one-third (1/3) of the directors then in office (rounded up to the nearest whole number) or by the chief executive officer and shall be held at such place, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given each director by whom it is not waived by mailing written notice not less than five (5) days before the meeting or by telegraphing or telexing or by facsimile transmission of the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 5.
Quorum.
At any meeting of the Board of Directors, a majority of the total number of the whole Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 6.
Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 7.
Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 8.
Powers.
The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power:
(1)
To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non- negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and, (8) To adopt from time to time regulations, not inconsistent with these Bylaws, for the management of the Corporation’s business and affairs. Section 9.
Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. ARTICLE III - COMMITTEES Section 1.
Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the whole Board, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those connnittees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member.
Section 2.
Conduct of Business.
Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third (1/3) of the members shall constitute a quorum unless the committee shall consist of one (1) or two (2) members, in which event one (1) member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. ARTICLE IV - OFFICERS Section 1.
Generally.
The officers of the Corporation shall consist of a Chief Executive Officer, a Chief Financial Officer, a President one or more Vice Presidents, and such other officers as may from time to time be appointed by the Board of Directors. Officers shall be elected by the Board of Directors, which shall consider that subject at its first meeting after every annual meeting of stockholders. Each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any number of offices may be held by the same person. Section 2.
Chief Executive Officer.
The Chief Executive Officer (CEO) shall be the chief executive officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, he or she shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. He or she shall have power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all of the other officers, employees and agents of the Corporation.
Section 3.
Chief Financial Officer.
The Chief Financial Officer (CFO) shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation, including of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The CFO shall have such powers and duties as may be delegated to him or her by the Board of Directors. Section 4.
President.
The President shall perform the duties and exercise the powers of the CEO in the event of the CEO’s absence or disability. The President shall have such other powers and duties as may be delegated to him or her by the Board of Directors
Section 5.
Vice President.
Each Vice President shall have such powers and duties as may be delegated to him or her by the Board of Directors. Section 6.
Secretary,
The Secretary shall issue all authorized notices for, and shall keep minutes of, all meetings of the stockholders and the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. Section 7.
Delegation of Authori _ty.
The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 8.
Removal.
Any officer of the Corporation may be removed at any time, with or without cause, by the Board of Directors. Section 9.
Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the CEO or any officer of the Corporation authorized by the CEO shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all fights and powers which this Corporation may possess by reason of its ownership of securities in such other corporation. ARTICLE V - STOCK Section 1.
Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the CEO or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile. Section 2.
Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these Bylaws, an outstanding certificate for the number of shares involved shall be sun’endered for cancellation before a new certificate is issued therefor. Section 3.
Record Date.
In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders, nor more than sixty (60) days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stock.holders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Bom’d of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall be not more than ten (10) days after the date upon which the resolution fixing the record date is adopted. If no record date has been fixed by the Board of Directors and no prior action by the Board of Directors is required by the Delaware General Corporation Law, the record date shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation in the manner prescribed by Article I, Section 9 hereof. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the Delaware General Corporation Law with respect to the proposed action by written consent of the stockholders, the record date for determining stockholders entitled to consent to corporate action in writing shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. Section 4.
Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5.
Regulations.
The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI - NOTICES Section 1.
Notices.
Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by prepaid telegram or mailgram. Any such notice shall be addressed to such stockholder, 8
director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mails or by telegram or mailgram, shall be the time of the giving of the notice. Section 2.
Waivers.
A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII - MISCELLANEOUS Section 1.
Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 2.
Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 3.
Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of Directors. Section 4.
Time Periods.
In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included.
9
ARTICLE VIII - INDEMNIFICATION OF DI~CTORS AND OFFICERS
Section 1.
Right to Indemnification.
Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a dfi’ector, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amenchnent), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 3 of this ARTICLE VIII with respect to proceedings to enforce fights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Section 2.
Right to Advancement of Expenses.
The right to indemnification conferred in Section 1 of this ARTICLE VIII shall include the right to be paid by the Corporation the expenses (including attorney’s fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further fight to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 2 or otherwise. The fights to indemnification and to the advancement of expenses conferred in sections Section 1 and Section 2 of this ARTICLE VIII shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee’s heirs, executors and administrators. Section 3.
Right of Indemnitee to Bring Suit.
If a claim under Section Section 1 and Section 2 of this ARTICLE VIII is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be t~venty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement 10
of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this ARTICLE VIII or otherwise shall be on the Corporation. Section 4.
Non-Exclusivity of Rights.
The rights to indemnification and to the advancement of expenses conferred in this ARTICLE VIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation’s Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherw’ise. Section 5.
Insurance.
The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, parmership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 6.
Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. ARTICLE IX
- AMENDMENTS
These Bylaws may be amended or repealed by the Board of Directors at any meeting or by unanimous written consent, or by the stock&olders at any meeting or by unanimous written consent.
11
CERTIFICATE OF SECRETARY I DO HEREBY CERTIFY AS FOLLOWS THAT: I am the duly elected, qualified, and acting Secretary of PROSPECT EAST HOLDINGS, INC. The foregoing Bylaws were adopted as the Bylaws of Prospect East Holdings, Inc. on September,. 2013, by an Organizational Action Taken by the Unanimous Written Consent of the Board of Directors of the Corporation in lieu of an organizational meeting. IN WITNESS WHEREOF, I have hereunto set my hand as of September., 2013.
Ellen J. Shin, ~5ketary
12
ORGANIZATIONAL WRITTEN CONSENT OF THE INCORPORATOR OF PROSPECT EAST HOLDINGS, INC.
The undersigned Incorporator narned in the Certificate of incorporation of Prospect East Holdings, Inc., a Delaware corporation (the "Corporation"), acting pursuant to Section 108 of the General Corporation Law of Delaware does hereby adopt the following resolutions: CERTIFICATE FILED The original Certificate of Incorporation of the Corporation has been filed with the Delaware Secretary of State on August 20, 2013, and a certified copy of said Certificate of Incorporation, showing the filing date and corporate number, has been inserted in the corporate minute book. BYI,AWS
WHEREAS, a set of Bylaws for the regulation of the affairs of the Corporation has been reviewed by the undersigned Incorporator; NOW, THEREFORE, BE IT RESOLVED, that said Bylaws are hereby adopted as the Bylaws of the Corporation; and RESOLVED FURTHER, that the Secretary of the Corporation, when appointed, is hereby authorized and directed to execute a certificate of the adoption of said Bylaws, to insert said Bylaws, as so certified, in the corporate minute book and to see that a copy of said Bylaws, similarly certified, is kept at the principal office for the transaction of business of the Corporation. 1SSUANCE OF SHARES WHEREAS, the Corporation is authorized by its Certificate of Incorporation to issue one thousand (1,000) shares of common stock, none of which is presently issued and outstanding; and WHEREAS, it is deemed to be in the best interests of the Corporation at the present time to issue one hundred (100) shares of the common stock of the Corporation to Prospect Medical Holdings, Inc., a Delaware corporation; NOW, THEREFORE, BE IT RESOLVED, that an aggregate of one hundred (100) shares of the common stock of the Corporation is hereby issued to Prospect Medical Holdings, Inc.; RESOLVED FURTHER, that, when appointed, the Chief Executive Officer and Secretary of the Corporation are authorized and directed to issue and deliver to Prospect Medical Holdings, Inc., a certificate, bearing such legends as may be necessary or appropriate, representing the number of shares of the common stock of the Corporation authorized to be issued pursuant to these resolutions; and
RESOLVED FURTHER, that any officers of the Corporation be, and they hereby are, authorized, directed and empowered to execute, file and deliver any and all documents, agreements, notices and other instruments and to take such other actions as they may deem necessary or advisable in order to carry out and perform the purposes of these resolutions. ELECTION OF DIRECTORS WHEREAS, the Bylaws of the Corporation provide that the initial number of Directors is two (2); NOW, THEREFORE, BE 1T RESOLVED, that the following persons are hereby elected as the first Directors of the Corporation, to hold office until the first annual meeting of stockholders or until their successors are elected and qualified; ¯ Samuel Lee ¯ David Topper The undersigned agrees that this Written Consent shall be added to the corporate records of the Corporation and made a part thereof. DATED: September’2,0~, 2013
Gary W.
2
Incorporator
Exhibit 26C
Fiiin:£~ Number: 201327032970 Date 08121/2013 2:39PM ~ ........ ...............
State of Rhode ~siand and Providlence P~antatlons O~ce of the 8ecreta~ of Sta~e
F~e:$~5e, ee
Division Of Bus aess Services 148 W; I~ver 8~eet Providence RI 02904.2d15
ARTIOL~ The street addreSs (pos~ o~ce boxes are rmt acceptab Rhode INand
Street:450 VE~NS MEMOPdAL PARKWAY SUITE 7A City or row~: EAST PROVIDENC 8~ata: E N0: and
The name of the resident agentat such address is:
C T CO}LPO~TION SYSTEM
Under the terms of these Articles of Organizalion and any wdtien operating a~reement made or intended lo be made, ~e IimIted I aNllty company is ~n[ended te be treated for purposes e[ federN income taxation as: Check one box on~y
~ a partnership
__ a corporationdlsreQarded X as an entity separate from its member AR~IgLE iV principal office of the I~mtted liabIIRy comt3any if R is deteFm ned at the t~me or organization:
and Street: City or Town:
10780 SANTA MONtCA BLVD. LOS ANGELES
S~ate:C~A Zip:90025 CountU:LISA ARTICLE V
The limited ~Jabit]ty Company has the purpose of engaging in an}! Iawfi~l busir~essi unless a more limited purpose is setforthin ArticIe V~ of these Articles of Orgallization. The period of its dura{ion is: X Perpetual ARTJCL~ V~ Additional provisions, if any, not inconsistent with taw, which members eIect ~o have set forth in these AritCles of O~ganJzati0n~ including, but not limited io, an}’ limitation of the purposes or any other provision whlch may be included in an operating agreement:
ARTICLE W{ The limited iiabi~ty campany is Io be mana.qed by its X Members or ~he name a~d address of each manager {~f
LLO
~s m~g~d
Managers
by ~embar~,
(check one) ~0 NOT ~mp~
ARTIOLE VIII The date th~.~e. Art}cles of OrgarlJ~allo~ are {[o become effecIive, not prior to, nor more than 30 days ~fler the filing ~f {hose Arlic~es o1’ OLqarflxalion. Later EffeclNe Date:
ThL~ e[edronic signacure of the indivfduM or #Mividuais si~d~g this in,~trume~z constitutes ghe offirm~tion or ac~owledgemem of the signatory, under penaltie~ of pe~jm% ~hat ~his b~strumem ix tn~e, as of ghe date ef ike elec#’onic f!iing, in compliance with R.{ Ge~. Laws ff 7-t6.
PAMELA VILLACIS Address ef Authorized Signer: NIXON PEABODY LLP 50 ~EItlCHO OUAD1LRNGLE SUITE 300 ~ERICHO, NY 11753
RI SOS Filing Number: 201327032970 Date: 08121/20132:39 PM
State of Rhode Island and Providence Plantations
STATE OF RHODE ISL~D AND PROVIDENCE PLANTATIONS A, P,.CLPH MOLLIS, Secretary of State of the State of Rhode Istmld and Providence Plantadm~s, hereby ee~ti~ that ~his document~ duly executed in accordance wkh the provisions of Tide 7 o~ ~h~ Oenemt Laws of Rhode 1slated, as amended, has been filed {n ¢his office on this day: August 21,20t,32:39 PM
A, ~PH MOLLIS
0;3t 52÷0
DateAM .................................... ..... RISOS Filing Numberi 201327113570 ....... i08/26/201310:13 State of Rhode Island and Providence Plantations Office of the Secretary of State
Fee: $=~O.OO
Division Of Business Services 148 W. River Street Providence RI 02904-2615 (401) 222-3040
ARTICLE I The name of the limited liability company Prospect is CharterCare,
LLC
If the name is changing, state the new Prospect name: CharterCare,
LLC
ARTICLE II The Articles of Organization of the limited liability company as amended or restated to date are as follows, including, if applicable, a change made in Article I:
If the address of the principal office of the limited liability company is changing, so state: No. and Street: City or Town:
10780 SANTA MONICA BLVD. SUITE 400 LOS ANGELES
State: C__~A
If the company duration is changing, so state: ~ Perpetual
Zip: 90025 Country: USA
m
If the company purpose is changing, so state: If the management of the limited liabilty company is changing, modify the following section: Members or
X~ Managers
The name and address of each manager Title
(check one) (If LLC is managed by Members, DO NOT complete this section):
Individual Name First, Middle, Last, Suffix
MANAGER
PROSPECT EAST HOSPITAL ADVISORY SERVICES, LLC
Address Address, City or Town, State, Zip Code, Country 10780 SANTA MQNICA BLVD., SUtTE 400 LOS ANGELES, CA 90025 USA
If there are any other provisions to be amended, so state:
ARTICLE III The effective date of this Amendment, if later than the date of the filing of these Articles of Amendment (not prior to, nor more than 30 days after, the filing of these Articles of Amendment), is: Later Effective Date:
is’ that individual’s act and deed or the act and deed of the company, and that the facts stated herein are true, as of the date of the electronic filing, in compliance with R.I. Gen. Laws 59 7-16. Signed this 26 Day of August, 2013 at 10:13:41 AM by the Authorized Person. PAMELA VILLACIS Prospect CharterCare, LLC
RISOS
Filing Number: 201327113570 Date: 08/26/2013 10:13 AM
State of Rhode Island and Providence Plantations A. Ralph Mollis 5"ecreta ry of State
STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
I, A. RALPH MOLLIS, Secretary of State of the State of Rhode Island and Providence Plantations, hereby certify that this document, duly executed in accordance with the provisions of Title 7 of the General Laws of Rhode Island, as amended, has been filed in this office on this day: August 26, 2013 10:13 AM
A. RALPH MOLLIS Secretary of State
0-3732-0
Exhibit 26D
BYLAWS
CHARTERCARE [[EALTH PARTNERS SECTI©N ~ ARTICLES OF INCORPORAT[O~ ~,(}CATION~ CORPORATE SEAL AND F~SCAL YEAR 1. t
Articles of Iaco~poration. The aame and purposes oft[~e Corporation shall be as
set ~i:,rth in its Anicles o{" Incorporation. These Bylaws~ tt~c powcr~ of tl~e Corporation and of~ts Trustees and ONcers, and a~[ ma~:ters concer@r~g the conduct a:r@ regulation of the aJ~J%.~rs ~[ @c CoH2oration shall be suNect to such provisioas in regard thereto, if a~u, as are set fior(h ia Ne Articles of i~co~)oratioa as ~i’orn.e~]}ect time to time ~n Location.the principa~ ofi%e of the Corporati@~ {n the S~ate of R]aode tslm~d shNi h~it~Nly bc h~catcd at the placefbfl:h set in the Ar~.{elc ~ of I,?corporation of the Corporation. ~.3
Co~orate Seal.The Trustees may adopt and aRer the seal of the Corporation
1A
Fiscal Year The fiscal year of the Corporation shN1 e~d on September 30 in each
year~
2.1
Af{~liatcs aad the :~2sten, This Corporation, Roger Williams Medical Center
(~R~P~’), Saint Joseph Healt~ Services of Rhode ~sland, ~nc. (
5~t:~5R and the) A@51iates, as
defined i~~ Sectior~ 5.1, arc sometimes referred to hcreia as ~Char~erC,4RE the or the,S;~s’tem"
22
Mission.The mission of the ChartcrCARE System shall be to fbster ar~
environment of collgbora[ion among its pm~mcrs, mcdical staff arid employees tha support:s ligh quality, patient fbcused and accessible care that is responsive to the needs of the communities it serves. To fulfill this missior~, the C@porat~o and its ANtiates shall at all times be committed
d~e developme~t 0)! a zearuless h~tegrated delivery system dedkx~t6d to providing4 quMity hcaRh care in a cos~ e£~sctive manner to meet the needs of fl2e communities they serve, co~sisten~ the CharterCARE System’s Vision Stateme~ a.~d Valses Statement. 2~3 Not-%r-Profit Stares. The Corporation is organized a~d shatl be operated exclusively fbr charitable; scientific a~~d educational purposes within; tb~e rneani;~g Section 501P~.).og {:he [ntcrrml Revenue Code of 1986, as amended~(the uo ’ ), Nopartof its r~et earnings shall inure to fhe benefit of m~y private individuN or endty, except that reasongg~)le compensation may be paid [br services rendered to a~d fbr the Corporation and gifts may be made toothertax-exempt orga~fizatio~s to [he extent permitted by the Code a~d applicable rulings tl~erevmder. NoiwiNstanding ang*tNng herein ~o ~l~e cor~trary, d~e Corporation shM1 not engage, otherwise than as an insubstmAial part of i[s activities, in activities wMch in fl~emselves are ~?ot ir~ fh~hera~ce of one or more puposes exempt f’rom ~axatioa under the Code. 2A
Nondiscrirni~Sado~. i~s h~ potide~ oa employment m~d admh~istrafion or in
admh£stering its activities m-~d programs, tl~e Corpora[io~ sha[t no~ discrl mhaate on the basis of race, color, creed, age, religion% ~aational or ethnic odin, sex, sexual preferer~ce or other grounds prohibited by federal or state law. Code of Ethics.Trt~stees, physidans and staff members of the Corporation are dedicated to carrying out the mission of tl~e Co~>oration. The Corporation shatl cause its Trustees, physician,s and staffmembers to: Recogrfize thai: {[~e chief fnnction of the Corporation at all times is to serve co~sh[uencm, the best interests of our patier~ts m~d ~ ,’: : ,~so Acceptasperso~ml duty the respoasibil!4y {o keep up to-dale on ernergh~g issues and to conduct themseIves w~I.h IX o tess~.o~a[ co mpetence, imparfi ality, e~:t:~ cie~cy a~d efIi:ctiveness, with a pledge to respect tl>~ diversity and dif[brenees of others° Keep the corn mur~ity in%tuned about: issues a [I%ctii~8 tl°~e Corporatio~. Conduct their organizational and operat,onal dutms w~th pos~t~v leaders~fip exemplified by open cotmTmaicatlon, creativity, dedica.don a~d compassion..
~~:he law to ca~xy Exercise whatever discretionary a~l~i~;y t~ey gave m~de~ o~t the mission a~d responsibilities of tse organizstio~. Srsswe with respecL concern, courtesy arid responsiveness i~ carryi~g oat the Corpora{io~’s missio~ [)cmo~s~rato the L~ ghost stared ards of personal i~-lcg-c~[y, tr~atl~fLlness, honesty and fbrtit:~de ir~ all o~.:~r activf[ics ia order to inspire co~~fider~ce and tr}Js~ ia t[~eir
Avoid a,~y i~terest or activity tlmt is i~ conflict w~t!~ the co~/~dact of t]c~eir
official duties~ Respect and protect privileged artd confider~tial iai’ormatio~s to w!iich tEey Lave access i~~ tlse conrse of their offS~cial duties. Strive %r person{8 ;rod pro~Ssssiei~al exceiler~co and eneo~rage the pro[essi0nat and ethical deve!opme~t of otters. Observe al applicable, [L’.deral andstate laws and local ordi,~a~ces.
Tl~e Corporatio~ shall l~ave ~o members. Except as otherwise provided by the xs~t°ticles of ~corporation or tt~ese Bylaws, a~y action or -~ote pe~itted to be taken by members u~der applicable Rhode ~sland law sLall be tal
’~ ~-o~= . / who shall I-~ave and may exercise all tlae powers direction of the Board of Trustees (the of the Corporatio~t except as s~ay be speciticalty limited in laese Bylaws. For proposes of these Bylaws and ~n all other ma~ters feinting to rise Co~oration, the term Tr sstces shall have the
’ D~rector as defined in the Rbde Island Hot, profit Cmporation Act, same meaning as the term or any successor law, as such Act or law may be amended in the f~dture
Composition of Board DurinKTransitioi~ Period, Upo~ the incorporation ~)k~.¢x~e~s of the Corporation~ the members of the Board of Tn~stces shatt it~Tya~;~i~io~ be(the the i~dividnals identified as directors ia ~lae A~flctes of h~corpora~ion~ who shall serve tbra term (the ~}fTa~.~s’i~io~ P~riot~’) commencing on the da2e of inco~oration of the Corporation ’~ continuing until the ~Ef~ctive Date (the ~ 2~c~iw~ D~te;") set ~brth i~ the ~’Closing Certificate" dcscribed ~n Section 2~ 1 of that certain Healfft Care System ANlia:tion Development Agreement, among Roger Williams Hospital~ Roger Williams Medical Center, SffHSRI andthe Roman Catholic Bishop of Providence (the ~Sixf~o~’),dated as of February 2, ~ 2009, as i~ may be amended fi-om time to time (the In"eeme~F’). Ne event that any Transition Tn~stee sha~l die, resign;, or be removed fl’om once during the Transition Period, the rema[Nng Transition Trustees may appoint a successor fbr the remNnder offl,e Transition Pe~od by a seventT-five percent (75%) vote of the Board. Con-~}osition of Board Following Transition Period. Following the Transition Period, the Board ~of Tmstee~ shall consist of (i) fifteen (15) Trustees designated or etected as set fbrfla in Section 4~, and (it) the President/eiffel Executive ONcer and the Executive Vice President/Chief Operating Officer of the Co~?oration, both serving ex-r~£~icio with voting rigl~ts (the ~Jx-
"), After the Initial Term (as defined in
Section4.%9) below), by a vote of seventy-five percent (75%) of t}~e Board~ the Trustees may increase t]:~e number of Trustees:, and elect new Tr~stees to fill any new positions, or decrease the numb~;r of Trustees; p!~q~£vi(led thaL oth~r thanex-(~cio ~he’P~stees, tbs Board shall at no time be comprised of tT3wcr than eleven (11) Tru.stec~¢~ (c) Commencff~g on the ANliation Effbctive Date and coatinuir~g until the ammN meeting next fbllowing the third am~iversary of the Af~fitiaflon Ef:f~ctive Date (or special meeting in lieu thereof), (the , fhat Trustees shall serve until their respective successors have been elected lkrm"), and qualified, the Board of Trustees (the ~’~itial I~oara"’), shall consist of: (i) the eight (8) 4
fndividuals designated as Trustees by ff~e Bishop in Exhibit 2.1 (C) of the Affiliation Asreement, as amended as of the Closing (th~ ~Bfsf~
~)~ of’whom at least oi~e (I) shall be a
pl~ysician or~ the M~dlcal Staff 0f SJHSRt; (ii) tee sevsr~ (7) individuals desiderated by RfWMC in ~ Exhfbit 2.1 (C) of the A[’fillation Agreement, as amended as of the Closh~ (the ’~ ~")144; ~)~ of whom at least one (~) shall be a physicia~ on the Medical Staff" of tl.WME; a~d (iii) the two @) E:~
@[[~cfo Trustees, In t~o event that any Bishop Designee shall di~ resign,
become disqualified, or be removed from of’flee during the Initial Te~, the Bishop shat[ have the right to appoint a successor ibr the remainder of t}~e Initial Te~n. In [he event that any RWMC Designee shall die, resigr~, become disqualified, or be removed from office during the Initial Term, the remaining RWMC Designees then setrving on fhe Board shall by majority yoke have the fight to appoint a successor fbr the remainder of the Initial Term.
Board AIt{~ h~t@_l etm. At the armual meeting next (d) fbl!owing t~te third (3rd) mmiversary of the Affiliation Effective Date or special meeting i~ lieu thereog the Board (other thma E:v~Q/]ficio theTrustees) shall elect ~:heir successors ~°l;-’irs_ (the t to serve staggered S~cce:~’~),, l~ot~rd )~on ca~didates nominated by tlqe Nominating Committee te~s such that, of a total offifteen (15) Ttvstees who are elected to serve on the First Successor Board, fi~,e (5) Tmsteeg will be nominated by the Nominating Committee and elected by the Board to serve te~s which expire at each of second, third and fourth amqtaal meeti~gs of the Board, or special meetings i~a lieu thereof, following tl~e expiration, of the Initiat Term or until their successors are elected and qualified. At the expiration of" the respective terms of eadn class of Trustees on the First Successor Board (or of any subsequent Board), the remaining Trustees then in office shall elect the successors to the Trustees whose terms are then expiring, each to ser~v,e until the third (3rd) annual meeting of the Trustees f011owing such election and until such Trustee’s successor is duly elected a~?~d qualifiedo The Board shall elect Trustees, including Trustees to fill vacancies, by a vote se-~’¢nty~fi,~’e percent (75%) of the Board, fi:’om among sud~ candidates nominated by the NominNing Committee. tn fl~e event that the requisite number of Tn.~:stees is not elected from the candidates presented by the Nominating Committee, the Nominating Corrtmittee shall reconvene and prese~tt additional candidNes until the approp~qate number of Trustees shall have been elected by the Trustees then in office.
5
Vacancies.Except as Sections set forth4o2~ in and 2) above, at any special or re~Aar meeting, the Board of Tn~stees may elect Trustees to f]11 vacancies° The Board of TRustees shall have and rnay exercise all of its powers notwithstar@ing the existence of one or more vacancies in its ~mnber.
4.3 Temt of ©fflce. Each Trustee shall hold ofl]ce fbr the tem~ of the class to which he or she is elected and until his or her successor is elected and qualified, or u~til he or she sooner dies, resigms, is removed or becomes disqualified. No Trustee shall hoh~ office for more than nine (9) years, whether o~ ~ot consecutive. Any Trustee elected or appointed to fill a vacm~cy on tff~e Board shah hold office {b~ the remai~@er of the tcnn of the Trustee £or whom the vacancy was created.
Comrnitiees.The Trustees may, by vote of a m@oity of the T~.~stees then in establish committees and delegate to any such committee or committees that consist solely o~:’Trustees any of the powers of the Trustees, except those which by law~ by the ~a~icles o£ Incorporation or by these Bylaws they are prohibited t}com delegating. Except as otherwise provided in these Bylaws, the Board shN1 appoint the menfbers and the chai~ersons of standing and oFner committees f?om nominations submitted by the Nominating Committee; provided that the Nominating Committee need not be involved with respect to the appointment of me~rfbers of ~emporary ad hoc committees c@asisting only of Trustees and ~bnned for a sin~alar purpose and with oNy rec0nn~endatory authorigy. Unless the Board ott~erwise designaies, committees shall conduct their affairs as nearly as may be in the same mariner as is provided in these Byla:~rs fbr the Trustees. The members of any committee shall remain in once at the pteasure of the Trustees except fbr the Executive Committee, the Nominating Committee and the Finance, Audit and Compliance Comrnigee, ar~y standing or other co>~nittees of the Board mr~ have members who are not Trustees. The standing comrni{tees of the Co~ooration sh~ll be as f~11ows, and except as otherwise specified below, shN1 be comp@sed o~:" such individuals as are appointed by the Board: Executive Committee. The Executive Committee shall cor~sist of the Chairperson and the Vice~Chai~erson of the Board, theTrustees, two Ex~Q~cio at least one Trustee who is a physician, and the Chairpersons of the fbtlowing three (3) committees of ~ne
6
Board: Q~mlit’~ *
Oversig}~t Committee, Fi~mac% Audit and CompHanec Committee, and S~ra~egic
Pta~mmg Committ.ce. The Excc@ive Commit,tee shah have and may exercise al~ @e I~wers the Board of T~stees re condu@ fl~e b~sincss of tee Corporation between meetings og th~s Board ~f’~’rustces, excep~ iha~ the gxecu~ive Commit tee sl~a~I uot ta~ke any a @io~~ or have a~y autthol~y wNch by law, O~e Articles of ~ncorpora~ion, or these Bylaws m~y not be delcga[cd or req~~ire the act~o~ of the Nll Board of Trustees. At any meeting off,he F~ecutive Committee, tire Trustees sl?Nt cosstimtc a quorum, and lhc af~rmatis*c vote of ~imr (4) Trustees, ~sor~e are either of ~:he
Ex-Q,(/icio Trastces~ shN1 be ~-eq@red {i)r ~he ~xecutive Comrnit~ee to take any
action, Tl~c Chai~c~:sor~ and Vice ChaHpcrsort of the Boa.rd shN1 be the ChN~crsoa ~nd Vice
Ctmirperson, respectively, of the Executive Committee. ~t @nmi~tee. Qua~i~y The over.~igl Cormmttee s hall ~mv¢ general oversigl~ responsibility to ensure the pu ~v~sion of laig[~ quality services t~aro~tghou~ the Corpora1~ion. [t wil~ monitor ~lae effectiveness o t’ the A [filiates’ qnalityomo~itoring cstablish key indicators el safety, satisfac Iion and clinical per[bmaance to be measured by erda Affiliate. and shN1 advise the Board ofq’mstee.s of key issues relative to tl~e delivery of quNity hea~fla care. The chairpersons of the QualiW and Crede,atiats a~d QuNity arid Patient Care Committee~q of RWMC mad SJHSR1, respectively, shall be me~fbers of the Qnality Oversight: Committee. Nrtan Committee. Fi~aace, Audit The and Compliance Committee shNt review and monitor the IiinanciN operations of the Co~orati@L recommend operatio,ml and financial goals and objectives m~d monitor compliance wit:h the goals a~d 6>icctives, review and recommend to tl~e Board of Trustees the mmual operati~rg at~d capital budget, and review m~d make reco~ma~endatio~s to ~:he Board regarding plans fi~ancir~g major capital acquisitions. Tl~e Finar~ce, Audit and Compliance Committee shall review the scope and res@ts of the audi~ o~’t[ae books of the Corporation a~@ of each company of wlich the Co~oration is @e soIe member or stockholder and of any other Affitiate of the C@poratioa, a~.d review such results with @e a)aditors, mmaageme~t a~d those responsible ~br internal controls. The Finance, Audit a~d Complia,~.ce Committee will assure @at the ~nancing, account, i,aterna~ controls and firmncial reposing t’unctions are in keeping with accepted accou~ting standards. The Finance, Aadit a~d Compliance Committee will ammally report to
7
c>~gaged to audit the books oF the Corporation. Tl~c F~>m~ce, Audit a~d CompKanee Committee also sb, all be responsible f!o~ approvi~g compl~a~ce programs es~a3ol~sEed for ti~e Co~>oratio~, oversecit~g a~d mo~itofin> s~:~ch compliance programs, and makir~g appropriate reports m~d recommesd:-~t%ns to {he Board ofT~q~stees. ’The gmasce, Audit m~d Comptia~ce Cemmil.tee ~4m~I be comp t:>ed o f s ~ch F~’us~x>~s as shah be appM r~tcd ~:hercto by fl~e Board of Tru~:ccs: cd the Corporation st~al~ recuse ~:t-~emsdves [>om any discussion and ff~e taki~ag of any action w]fl~ respect to tI~e audit
nom]natio~~s ~o t~e Trustees of persons tbr dcctioa or redectior~ as Tr~s~’ee~ arid Of’ricers of tlm Cot?}oratios {bllowisg {I-to 1mite;1 Term, ’%e Nomi~aNi~;: Committee shall conduct a~ evaluation of ea.c,h Trustee kind O F~Scor og file (?orp~ ration a~ tl~e H mc of their reappomtmeat and shMl cor~sider the evakmtion,as pm~. of O~e nominating process. Nominations @441 be made without regard "~o any historical allegiance to f;JllgRl, the Bishop or RWMC. T>c Nor~-~iaating Committee shaft ass ~re itself thN eacl-~ ca ~didate it recommends as a Trus~.ee o~- the Officer of ~.~stee Co~oration, or as a -~oa-% member of a committee o f {:he Board, tm&srsta~’~ds []>t~s {~ac Corporation, while secular, is @~e owner a~d operator of a Cat, hollo [~ospital and t~at sucb~ cai~dida~c is able ~o s:upport the CorporatioFs mission, philosophy a,~d vaIues, and tb~e operaion of a C~:¢&olic l~ospitN as pm~ of a secular System~ This understanding shall be set [’or{.l~ in a description or stateme~.t of 4~e duties of a mer~er of the Board (or committee, in tl~e case of a ~o:~>Trustcc member), to be ackm.(~wledged by eac[~ laew member o [’ the Board. The Nomil~ating Committee sl~a[[ make recommc~datio~s to 4:~e Board of Trustees lbr Trustees fo serve o~~ the sidecar First Successor Board and to fill fI~e positior~s of Chief Execcafivc Of~[lcoriPre a~sd Executive Vice president/Chief Opcra~i~g Oft4cer. During the i~fitial Term a~sd m~tit suds time as [he -members of tl~e First Successor Board 1rove bcc~ elcetcd, the Nomi~atiag Committee sl~aK consist, of foyer (4) Trustees, two (2) of whom shah be appoi~ated by RWMC aped two (2) sha~ bc appoin[ed by the Bishop. All nominatio~as made to t:he Board by ~b,e Nomi~>~tiag Committee shdt be made with the unanimous agreement of Nt members oF the Nominating Committee (without abs~e~tior~s)- In ~l~.e event 4aat a vacancy occurs in [he Nominating Committee prior to ~[te electior~ of t~~c First Successor Board with respect ~o a member of tgc
Of w
C _,, the appointmer~t any successor to til~ such Nominating Committeo who was chosen by ~Pe:M vacancy shal~ be choses by the majority vote of the Trustees who were appoip~tcd by RWMC; and i:{ the vacancy occurs w£fl~ respect to a mc~ff}er el the Nominating Co~m{ttee w!’~o was chosen by {he Bishop, the appointmer~t a:ny successor to t~11 such vacancy shaI{ be chose~ by the majority vo~e of fl~e Trustees wgo were appointed by Bishop,
Gov
J~te.~. ’rhe Goverr~anc Committee shali be charged
with the development and recommertdatior~ o~ corporate govemm~ce guidelines consiste~fl: witb the CorporatiorCs inte~t to establish and maintain best practices fbr corporate governance of"
i[nvest
o The Investment Committee shat~ be respo~sible
for overseeing inves~:~aent of the funds of tEe Coq~oradon and its A~filiates, The tnves~me~ Committee shall approve investment policies and proce&~rea and sEN1 approve the engagement of outside organizatior~i to m~tage investmems and advise the Corporation a~d its Affiliates with t’espec~ to such investments. S~rate~c Plamff
~mi!4t;e~.The Strategic Planning Committee shall
include representatives of the Board of Trustees, the Boards of Trustees and Medical Stafi!!~ RWMC and SJHSRI, and CharterCAgE System senior managcmer~to The Strategic Planning Corr~rffttee shall examine arid make recon~endations at~d findings with respect to the pu~oses a~d goals of fhe System and the extent to which such goals have been t31et or are being met by curre~-~t programs. The Strategic Planrffng Committee sha|l develop and review annually (3) year strategic bu,qhaess and capital expenditure phms based on a Systemow~,d strategic need a~d resource assessment presented by maimgcme~o The System’s strategic plates slaall identify specific needs and o~}ecdves and set goals ~br meeting such needs arid acl~ieviag sucl~ goals. , Tt~e annual mecfing ofthe ’Frust:ees shall, be held i~-~ 4,5 Providenee~ Rhode Island in fi~e month of December, or~ >~ch date, and at such place and time, as the Trustees may deten~flne. There shailt be at least five (5) other regulan: meetings of the Trustees during the fiscal year and may be iheld at such places and at such times as the Trustees may determine
8.. Speeiai mcetir~gs o[tl~e Trustees may be held at any time a~d at any place whe~’t caked by tee d~airperson o[" t>e Board ot7 Trustees, ~h6 President/Chief
Executive O£ficeh or by three (3) o~ more o Notice of the time a~d place o t! c~,<:h meeting o £ the Trustees
Noticeo t"
shaI~ be givcrt to each ’Frustec by rnai~ at least three (3) days or by ~ectronic mai! or fi,~csimile 1cast ~7orty-e~t (dS) hours befbrc the meeti~g addressed to hh~ or her at h~s or her usual or last knows bush~css or residence address, or in person or by telephonic at ~east twc~ty-i~ur (24) hom"s botbre the meetir~g. Wt~er~eve~ notice of a meeth~S is required, such notice need not be given to any Trustee i g a written waiver o [ ~~otice, executed by the Trustee befbre o~ al%er the mccdug, filed with d:~e records of ~he meetit~g, or to m~y Trustee who attends d~c meeti~g w ithout l>rotesti~g the lack o{’ notice prior to. or at the comraeucement of, the meeting. Nei~hc~ the t~u~ 4~e waiver ofr~otk;e r~ced specify the purposes oJ’thc meeting, urdoss otherwise required by
law., the Articles o~ 1ncorporatiou or these Byh~ws. At any meetmg of the Trustees, a maiorfty o[’ the Trustees the~ in office 4.8 s[~Nl constitute a quorum, A~y meeting may be adjourned by a majority of the votes cast ~on the questiom whether or not a quorum is present., and the meeting may be held as adio[~raed witl~out f"myther notice,
4.9
ctionso Except as otherwise prowdcd m~der these
Action
Bylaws (-including this Sectioa _4,2,
Sectio~
4; ~_ [, and Sectio~ 5 hereo~, the A~icles
h~corpora don of the Co~)oraiiou, or applicable law, when a quorum is present m ar~y meetii~g, a m~o~ity of the Trustees prescott and voting sha!l decide a~:~i~’ question. The a[firmativc vote of sevcat.ydqve percent (75%) ot d~e "l’ru~tee~ ti~c~ ia offlee sl~a~l bc required fi~r the Corpo~ ation to take each of the fbllowing actior~s (*~¢/~g}~ri Actio~,d’), dr to exercise any ot:lhc Co~porutioa’s Rcsm vcd Powers s~ forth ia ~cctio~ or to4.1approve (L m~y of dte Spcci~f! Major Ac~ior~s requiril~g the ,,~te o t:
~e Class A Me~,goer as se~ fbr[hSection in1: 4. t
A~~er~dmcnts to the Corporatio~gs Articles and Bylaws~ l~!ovided ...... that i~or so long as SJHSR[ is Under Catholic Sponsorship, CharieK~ARE shall not approve any ame~dme~ that adversely af:fbcts or diminishes the requirements of Secdor~
these Bylaws.
5
Amendme@s to @e Missior~ statement, Vision St.atcmer~t ~)r Values
Appoin@~g or removir~g a member o£ tlte Board of" Trustees~ subject to the proisior~s ofSection 4;2 ol!~t:1-~ese Bylaws; Adopti~g capil:al and operating bt@gets a~d any ~mbudgeted transactio~~ or exper~ditttre in excess o [~an amount determined by tire Corporation []:om time to time; Adopting a~y strategic Approving @e incurrence or extcr~sion of a~y debt or t[~e :~ale, lease, trans[)r or mortgage ofprope~-ty in excess of a,~ e~nour~t detemi>~ed by tee Corporatior~ time to time; Appoi~ting or r~mo’,,ing ih~: Preside@/Chie[; [):xec~ati~,~e Officer Exec~Rivc Vice PresidentiC[ief Opei:ati~~g Approving raCy d~ssobation, affiliation, merger, reorganization or el:range of
Approving a~y ccrtifica~..e or’need or similar applicalion or f’i!ing; Approving any new academic at’~Siiation of t[~e Corporatio~a, any Affiliate, or tlae System as a whole, m~d tl’~e termim~tkm of a~y academic Approving all pin,is tbr addir~g, expandi~~g, rcd~cil~g and elimi~aating
Designati~Xg arx e~tity other than an Affiliate as a member of the ClxarterCAR., System. ~ ~s Except as otl?erwlse provied by Sections 4.1 , or ~ o[ articles ofincorporatlon or bylaws o~" a partic@ar Affiliate (Novided sucl~ reticles incorporation or bylaws have been approved by t~e a ~,ete of seventp.fixze percent (75%) of the Corporation’s Board and ia accordance wit[~ applicable law), tlae Corp~ration shall cause the 11
aiSicl~6s o t" orgm~izafion, bylaws or other govcmi£~z docmmmts of’ each Af[i!~ste to provide that ~ Al~itiate, the Corporation, acting as mer~goe< shareholder, or manage*" such o~ sha[t have the following rights and powers (~’
~w<~d Po>~,<<~]’) with respect to
each Aililiate:
TheCo~or~ion shall have exclusive authority to amend the articles of incorporatiota~ by~aws~ and otl~er govetoing docm~ents of an Af~51iate;
, h.......92;,~eve~_ _....A~ tha~
%r so hmg as SJHSR[ is U~der Cafl-~olic Spoasorship~ C>a~erCARE sha~[ not initiate, approve or authorize any ame~dme~t to the articles of incorporation, bylaws or other governing documents of any Af{iliate that adversdy addicts or diraiNshes the requirements of Section 5 of these Bylaws regarding the Prohibited Procedures or Ne reqairemcNs of the Catholidty Provisions set ~b~th ~a the Bytaw~ of SJHSR[ without gae written consent of the Bishop; TheCorporation shall have exclusive authority to adopt or amend ar~y visio~ s[ateme~t or valueg statement; The Corporation shut1 have c~cdusive au~&ority t:o appoii~{; or re:move the mm~abers of ~he governing board of each Affiliate; The Corpora,don shall have ¢~m power and amhority to approve capita1 and operating budgets and any ur~b~dgeted transaction or expenditure by each ANliate in e~ccss of an amo~nt determined by the Co~porNioa th>m time ~o time; The Co~orNioa shN1 have the power and au[hority to approve the stra:tegb plan of each A[~iliate; The Corporation shah have the exclusive power and auflmriW ~o approve arid amhorize the immrrence of any debt by any Affiliate in excess of a~ amou~-~t det~a~nh~ed by the CorporNioa f~om dine to dine; The Corporation shall have [he exch~sive power and aufl~ori/y to establish any System Affiliates ow~:~ed or controlled, directly or indirectly, by any other System Affiliate; The Co~poration shN1 have the exciusive power and authority to approve and authorize the sNe, base, exchange transt~r or mortgage, pledge or other disposition o [
propcr{y of any A~iliate in excess o[ an amount determi~sed by the Corporation £rom dine to
The Coq~orattOn shall have the exd usive power to appoint or remov¢ the pres~dentich~ef execu[~v officer a~(t the executive vice president/chief operath~g officer,
each AffKiate; The Corporation shall have fine exclusive power to effbct any dissoh~tio~, merger, reorganization or change of control of any Affiliate; The Co~oratioa shall have the power to approve the 15ling or subminsio~ of axy certificate of seed or similar appIicNios or filing; ~ sew academic The Corporation shal! have tl~e power to approve aO affiliat%~ of the Corporatior~, any Affiliate, or fl~e System as a whale, and the termination of any academic a.ffilistio~; a~d The Corporation shMt have the exclusive power to
adopt plans tbr adding,
expm~ding, red~cing~ relocating, elimirtatirtg or otherwise mate~1atly cha~gi,~g any services provided by any A[t51iate; provided., {hat, i~ com~ectio~, therewi% tlie Coq)oration shall also have the right to monitor the delivery and qaaliW of services by cactt Al:’filiato and to eventuate ia advance arid approve nit sucl°~ ptans, and shall have access to atl in%~matior~ and data of such Affiliate relevar~t to such services, pla~s arid actior~s by an Affiliate~ The Corporation’s Reserved Powers set l:brth in Scction 4.10 a~bove are subject to the pro~,isions of this
4,11,
For so lo~g
SJHSRt remai~s Under CathoKc sponsorship, the af~native votes of both the Corporation~ as the Class A Member of S.~HS[I [, and of the Bishop, as the Class B Member of SJHSRI, Shall be required [o act on any of the ~]:£1owh~g matters wil:h rcspcct of SJHSRI (~)2~<’£~/ hi,z:
the sale, mortgaging or leasing o£ a~y real or perso-~ml property of SJ btSRl having a value in excess of the relevant canonical threshold as the same may exist fi’om time to
t3
changes with respect to the SJHSR[ charity care policy; matters with re.spcct to pastonfl care
any amendment to the SJHSRI Articles of Incoq)oration or SJHSR~ Bfdaws relating to the Et~Ds (as defined ia Section 5.3~ ,~_._), Prohibited Procedures or other Ca@olicity req@rem®n~s at SJHSRI as set fbtth in @c SJHSRf Bylaws; and any d~ange to the Mission Statement the Vision Statement or the Values Statements as set ff}rth in the SJI[SR Articles of tncor-porafion, SJHSRI Bylaws~ m~y other governing documc,-~ts of SJHSRI. ~lication of Laws° Th<; reserved powers set fbrth in Sectim above shal! be su~~ect to provisions of R[~od~ island h~w requh%g that ~ and the action referenced @erein be recommended by tl~e Board el" Trusiees fbr ~p:provat by the
Acti__ pp~
. Any action required or pem~ff[~ed to be takcn at any meeting
of the Trustees may be taken wffhout a meeti~ig if aH of tlae Trustees consent to the action in writing and the written consents are flied wifh the records of tlae meetings of the Trt~steeso Such consents shall be treated fbr all purposes as a vote at a mee~ingo merit Unless otherwise provided by Communi ’Th law or the A~fcles of tncorporatim~, members of the Board of Trustees may participate in a meeting of such Board by means o~:a coni~rence telephone or similar communications eqt-~ipment by men ~w~ of which all persons participating in flw: meeting can hear each other a~ the same fime~ a~nd participation by such means sh£1 constitnte presence in person at a meeting~ idento To the exfent expressly aufl~oflzed by the Board o[" 4. l 5 Delegag Trustees fi-om time to time with respect to particular actiorts or pursnar~t to a general ef~ authorization of authority, the PresidentiChi Executive Office of the Corporation may act on behNf of the Co~?oration as member of in the Affiliate of w~ich the Co~oration se~’es as
14
member or stockholder by takh~g act[otis at aay regular or special meetinz of such a[filiate 0r by executing a written cot~ser~t of the Member irt lieu thereofi 4.16 Executive Ssss~o~, At the c0nOlusio~t of each meetfng of the Board at~d each meeting of a Committee, the p~t~s[dh~8 o[[~cer shall caf~ fbr Executfvc Sesslor~ ths~d~y dlsmissla~ all attendees who are ,~ot Trtgstees as well as the P~-e, sfdent m~d Chief Executive Offk:er a~td Vice Preside~t and i,5~ef Operat~ ~ Officer, Mbmtss shall be kcpf of each such Executive Sessio~, SECTION 5
5. [
Defir~[th}nso For purposes of these Bylaws, the %llowing definitions shall apply: Abortior~.~°.dbortio~,~," means the directly ini:e~tded tormhmtio~ of
preg~macy befbre viability or tl~e direc~:ly h~ended destrt~ctio~ of a viable ~:l~tus. Every procedure fl~e sole immcdiate effect of wl~icI~ is the tc~ni~aion ~:~f pregnancy b~fore viability is an abortio~:~, which ha its m~rN contexL i~cIudes ~he interval between cor~ceptlon and implm~.ation of the
A~d~at ~
means RWM , RWMC, SJHSR. and m~y other
entity as to which ~he Corporatior~, now or la ~he fl,~mre, is the sole corporate member or shareholder or which is otherwise controlled direct[y or ~directly by the Corporation. BishoE. ’~ish~" means the Roma~ Ca~:holic Bishop of Providence, a Rl~ode tstaud non, profit corporation mad a corporatioa sole.
this SecIion 5~
CharterCARE~:~temor ~2~o2stem. ~ ~°
,~ 4
~System’" ~ab.a!l have the meaning set tbrth in Section 2.1 of tliese Bylaws. Church Pla~ ’~Ch~rcf~ P~a~,~" mean~’~ a defined benefit pensior~ plm~ that is a cIiurcb plari within the meanir~g of Sect~o~ 414(e) of tile lnternat Revenue Code of 1986, as
15
amended~ a~d Section 3(33) ot:’the f~;mployec Ketirement I~~come Scc[~rity Act o [~ 1974, as amended
!~) or a~y successor to ER][SAo
Pension Plm!~ ~?~-~xio~ ?~a~a" -mea~s tlae St. Joseph Healt~~ Serv[ce, s o[
R[~ode Island Rctiremer~t Plan. ~ciar~ Assisted Suicide, Euthanasia a~teadcd by a physiclam ~°es’’ roccdureso~p~vhibited Proce&¢ mea~{ (i) A].)ortio~ (includ{ag embryo re&~ction or any like proce&~re) and researc]~ in’~,olvi~~g etabryo destrt~ction; (fi) Euthm~asia~ mtd (iii) Physicima Assi~’{ted St~icide, e~.~cl~ as defined I~ereino ’fl~e fbregoing items (i) tl~rougl~. (iii) do not i.r~clude ~°do r~ot resuscitate orders," wi![~[~oldi~g or withdra~val of life support or !i % prolonging treatment or procedm:es (inclgdi~g, l~ut r~ot limited to, nt~triti{m and artificial k~ydratio~ t)mt will serve only to prolong the dying process) ia accordance witl~ Ri~ode Is[a~d law and ap~i)licable hospital policies mad proced~tres. ~means CharterCAR and eacla Sec~ta~: Member.~°S_gctda~ Member" Af[iliate o[~the CharterCARE System that is not Under Catttotic Sponsorsl~ip U~ader C
nsorshiR. °~Under
means {:hat
botl.a of the %llowing conditions are met: (1) SJHSR[ is bei~g sponsored by the Roman Catholic Clmrch as determi~ed by the Bisliop, arid (2) SJItSRI is listed i~ tl~e Ofiicial Cat}~-~olic Directory, or if the Official Catholic Directory [~as ceased to exist, the Per~sio~ Plan continues to be a
5°2 N~ So lo~g as SJI-ISRI remain~s a~_ A[:’filiatc of tlae System a~d Under Cathoh" Sponsorsl~ip, unless otherwise permitted by tSe Bisl-~op, ClmrterCARE will ~o~ cause or permi’~, any Sec~.~lar Member to pcr~brm Prohibited Procc&~res anywhere in the System.
16
e~cours~e [he ma~tena~ce o[ Catholicity at SJHS RL Chin terCARB shall caus~ ffhe by}~ws of SJHSR[ to provide that ~udess othe~wisc a£rced by the C~ass B Mc~bcr o~ SfHSRL ot unless SJHSRt ceases to be Under Catholic Slxmsorship, SJI{SR} shall be a Catholic Hosplta~ opolTathlg b~ frill compha~ce with tl~e social a~d et~-4cM tea,ch[n~s of the Catholk) (;hutd~- h-~oluding the Eth[cal a~d R, di ~ious l)ircctives %r Cathd [c l lealth (taro Servicos as promu~£ated by the [) aited States Cont~re~co of Cad~o[ic [~[shops, as the same may be amended [%om time ~o t free (the
, The (:orporado*~ shall maintah~., at~d shall cause each Affiliate to mmntain, a separate ledger accott~t, [br all earni~gs fi
tio_.._~lo The Ofricers of the Corporatior~ shall be a Numb ° e Officer, Executive Vice Chahperso~~, Vice Chairperson, President/Chief Executiv Preside~atiChief Operating Of’ricer, a Treasurer/Chief Financial Officer, Secretary aad such other
officers, if any, as the Trustees may deem necessary. An officer may, but need not be a ’[’rustee. .Amy two (2) or more offices rnay be held by fi~e same perso:n, except the O£fices of p~x:sident and Secretary° O[ficer’,~ shah be appoin~;ed to one (1)),ear torms~ and shall be e~igible f%r re-.election or rc-appoil~tmcnt Durit~g the Transition Period~ the o@icers of’ 2 1 C) tl~e Corporation s}mI1 be the Officers designated ia Exhibit . ( of the as well as a Secretary, a Treasurer, and such other of Scers as may from time to time be selected by the Transition Trustees to serve during the Transition Period. Duri~g the I~itial "q:" Exec@ive Officer and [he EXecutive V{ce Chairperson, Vice Chalrperso~, President/Chic President/Chief Operating Officer shill be the persons designated in the Affitiation Agreement to hold such Offices, Which appointments shall be approved o~ ratified by vote of the Board efI%ctive as of the A-ffili’at~on Ett%ctive Date. At its fi~’st mcctlng on ot after the Affiliation the }~oard shall a{:poin~: a Seo~6ta~y~ Treasm’er and Chief F’h~ancial Officc~ Duri~g the fnitial Term, th~ Board shall tilt any v;~om~cy that may eccur h-~ any Of:flee.. Following the Initial Tom% the Board shah appoint all o£ficers o[the Co~poratio>. otherwise provided ]n this Sectio~ 6.2, each office~ shall serve until the next annual meeting fbllowing their appointment or until th~r successors are appointed and qualified, -t.mless a shorter period shall have been specified by ~:he ferns of such officer% appoistment;
t~at the
President/Chief Executive Officer, Executive Vice President/Chief Operating ONccr, and Chief Financial Officer shall serve at the pleasure of the Boar& Q}her_...........p, dmir~istra{ive !~psitions. The President/Civic[ gxecutive Officer may from thne to time appoint i~dividuals [o other adrninistrati~e pos-itions within the Corpora[ion, bu~ no position shall be deemed to be a~q. of]]~cer of the Corporation except upon ~:cso].utioi~ of the ]30ard of’l%:~stecs specl[}’h~g such position a.s an officer of tl~c (_.o~po~at~o~. Durir@ the Iitia[ Tet-m, all suc~~ administra@ve posithms shall be a.ppoR~ted by the ProsfdeatiChief gxecutive Officer with of said President/Chief the approval o£ th Board of Trustees and shall serve at the pk~asure Executiw: Officer, but the appoh~tmGat o[ their respectbvc successors followh~g the Initial ’[’crm
not require Board approv;d.
~8
the Trustees shall otherwise detem~[ne~ shall preside at nil meetings of the Frustee~,~ except as and shall have such other powers and duties as may be determined by the Trustees. tn the event tha~ dr@n8 the [n[tlal Term there [S a vacancy in fl~e o£fice [n the ofl]ce of Chairperson, such
................................................... 6~.s ...................................................
Vice Chahperso~ sl~ll prcsMc a
~ Cl-takpcTson and shall hav~ sud:~ other all meetings 0£ the BOard of Trustees in the absence o[ the duties as the Board o["Frust~es may determine. In the event that during the Initial Term there is a vacau-~cy in the office of Vice-Chairperson~ such vacancy shall be ii}led by the Bishop ~!~! i.N(]
[vqQfI~ The President/Chief E×ecutive Officer ,;,,,ill set
o~ recommend pdicy ~md strategy ~br the Co~poration R~r consideration and approval by the Board of" Trus~6~s. ’N/~e prefiid~~t/C:bie[ Executive Officer w~tt be principally responsible f%£
perforr~ance of the Co~poration. As an Of~ficer of a System that operates both secular and rdigfous out{ties and has an academic as well as a community health care mission~ the pr~side~t/Ch~cf Executive O[fice[ shall support the Co~poraflo~% mission~ Vision Statement and Value Statement, and the Catholicity p@nc~[tes rdating ~o t!~e operation of a Catholic hospffa[ as part o£ a secular System.
Preside@/Chief Operating Officer" shall rcpo~l to the PresidentiChie~ [~xecu tlv~ Officer and sh be responsible fbr plafming and di retting all aspects of the C@poration’s operaih:mal policies, o~ec~ivcs and initiatives, subjcct to the Corporatmn s Articles of boo,potation, ByR~w% m~d the policies and directives of the Corpora[ion as approval fi’om time to time by @o Board of T~stees. The Executive Vice President/Chief Operating enter shall bc responsible fbr @c attahm~ent of short~ and long-term finmtdd and oper@%na[ goals of tt~e System~ and direct the developmer~[ of the System to ensure fi~ture growth.
The Treasurer sh£1 be the Chief Fina~cial [i 6°8 Off Seer arid the C!~ief Accounting Officer of the Corporatiom Hc or she shall be in charge of its
Secre~aoXo The Secretary si~atl record and mah’~tai~ re, cords of" all p-rocecdl~s of ~he T~:~stecs h-~ a book or series of books kept f~x: that p~rposc~ which book or books shall be kept ~:[[ withh~ the State at the prh-~cipa~ Co~poratloa of[qc6 d~e o[ ort~ea~o [~[icc ofofits Secretary ~ o~ resident agent, Sucl~ book or books shall also c
oratio~ and Bylaws a~sd frames o[" ali
Trustees m~d the address o[ each. If t~e Secretary is absent fitom a~W ls~cetlnS o£
members o~
SECTION 7
RES[GNAT[ONS~ REN~OVAES AND VACANCIES ~ Any Trustee or Officer may reslg~)~ a~: m-ly tirade by delivering his or ~o 1 Rcsi her resig~ation ia writb~g to the Chairperso~, the Pres~denffChief Executive Ofl:icer or the Secretary or to the Corporatio~ at its p~qncipal office° Such resig~ation shall be ef[~ectivc receipt unles s speci fled to b e ettisctive at someo d~er time. 7.2 i[~..emoval__ _~o A Trustee or Officer may be removed with or without ca:use by the cpercent (75%) of tb.e Trustees tbea i~~ office; ~yide(._. ~.[~ flint: a ’ ~’r~ste~ or ,,~o~c or" Seven~Y~fiv Ofticer m~y be renaoved fbr ca:use or~[y a~er resso-~ab~c ~.otiCe ac~d oppo~lur~ity to be hea~:d before the body proposing io remove him°
Vaear~cie~__£, St~bject to fl~e provisior~s of %_g,o!:ions 4.%~.~d 4 any vaca~cy ia the vaca:r~cy resulting f~rom t~e erflargcmcr~t ~.he Board, o~ maybe " ~ s including a Board of’Frustee, ~fiveperce~t (75%) of the Trustees then in office. The ?lied by the T~dstees by vote o£ seventy
¸2O
Trustees shall have and may exercise all their powers notwffhstanding the existence of one or morew~cancies in their number.
S. 1 Volu@~ Dissol__~.______~:~fi(~no St~bject to fSectioAoA ¢:9~, hcreot:and ff~e Rhode [slated Nonprofit Corporation Act, Chapter 7-6 of ff>~e State of .pal-lode Island General Laws, a vohmta~:y dissolution of the Co~oration may be authorized at a meeting of the Board of Frustees upo the adoption o£ a resolution to dissoh, e by the vote of :seventy-five percent (75%) of t:l~e Yrustees then in ofiqlce. Upon the adoption of the resolution by the Trustees, ~he Co~]?oration shall cease shal~ to conduct its afNirs except to the extent nece~sa y ~br the winding up of its affiflrs, immediately mail a notice of the proposed dissolutior~ to each known creditor of the Co-q~oraflon, and shalI proceed to collect its assets and apply and distribute them as provided in Sect:~_._:.]oa 8.2
Subject to the terms of the Articles o£
Incorporation, these Bylaws~ and the Rhode island Nonprofit Co~oration Act, upon tl~e liquidation or dissolution of the Corporation (each, °~ a "), after payment of al liabilities of the Corporation or due provision ther@or, t~e assets of the Co@oration shall be distributed to R~JMC and SJHSR[ as follows: In the eyelet that the Dissolution or befbreoccurs the on second ~Coq}o~:ati0n amflversary o~" ll~e Affiliation Effective Date, fl~en thethe assets oi shall be distribnted to the greatest extent practicable in order to restore R2~4"MC a~~d SJHS RI (together w~th their respective af:fflhttes) to the relative positions flaey were ic~ immediately prior to fhe Afiqtiation EffeCtive Date. h*t the event that the Dissolution occurs fbttowing the seco~~d amfive~sary of the A[ff]liat~on Effective Date, then, subject to applicable Rhode Island law, the assets of the Corporation shall be distributed e~faally to RWMC and SJ HSR[ or their respeCtiVe successors. In the event that, as of the effS.sctive date of the DissolutiOn o£ the o~ Corporation (the ~Dis~’oh~i {~gt__£"), RWMC or its successor is not then in existence and
°~(~m exempt fl-om fedora1 income tax under See{ion 501(C)(3) of the Code
!
,1), its portion ~;hall be distributed as dkected by the Board of Tpdstees to o~.e or more Exempt Orgmaizatioi*ls wl~ose proposes a.nd tax exempt status are similar to those of in fh~: event fl~at, as of ft~e Dissolution D~te, SIHSR is not then in existence and an Exempt Organize@on, its p@ion shall be d:[stributed as directed by the Bishop "Osponsored " -e* Cati~oh "~ to O~e Or IflOI
Exempt Organizations.
Notwithstar@ing anything hereb~ to the contrary, in ~he event @at a Dissolution occurs fbltowing a ~{ale of SJHSRI and wifli~ five (5) years of" the withdrawal Catholic Sponsorship of SJHSRI by the Bishop, the proceeds of the sale of SJHSRI shal! be distributed as directed by the Bishop to one or-more Cathotic sponsored Exempt Organizations. Noi:withstaadb~g anything herei~ to t[~c cor~trar)’, iu the e-~’ent @at at the l;ime the Board of T~.s[ces of the Co~poration approves a Dissolution, only RWMC (or its successor), or only SJHSRI (or its successor), acting in good 1~ith, intends to coati,me ([bllowing st~ch dissotuti@~) ~o be an ~cute-.care I~ospita[ ~:hat is exempt fi:om taxation under Sectio~~ 501(@(3) of the (2ode, then all of the assets of the Corporation shall be distributed to such of~he fbrgoing entities as intends to continue to operate as an ac~te--care hespRal. Affitiate~. Not in limitation of the fbregoiag, in the event of a Dissolution, assets of the A fifiliates shall be governed under tSe terms of their rcspec[ive governing
SECT[©N 9 EXEC[iTH)N OF pAPERS Except as the "trustees may generally or i~ particular cascs authorize the execution -t~-~creofin some other mariner, all deeds, [eases, tra~sf%rs, contracts, bonds, notes, checks, drafts and o~:hcr obligations mad% accepted or endorsed by @e Corporation sl~edl be signed by Preside~tiChief Executive Officer, the Executive Vice President/Chief Opera,t[ug Officer or the Treasurer~ i~Y recordable i~strument ,pmporth~g to affect a~ interest h~ real estate, executed in the r~am.c of the Co~)oration by th~ President/Chief Executive Officcr~ Exec~@ve Vice 22
PrcsMcm]Ch~ef Opemth~8 Officer or the Treasurer or at~ A~s~stap~t Treasurer> who may bc a-~d the same person~ shal~ be hireling ~m th~ Corporatior~ in -~a~’or of a purchaser or other person rdyi~g £n good @~th o~~ such ~nstrumc~t notwith~ta~dhtg any inco~sisten~ provisio~s of the Articles of Incorporation, Bytaw% or any resoh~dot~s or votes of the Corporation.
, ~ - N , , }q
No TrUstee or Officer shaJl be personaily Iiabb to the (~orporaho~ es for breach o[’ fidudarY duty as a Trustee or Officer ~otwithsta~ding mor~etat y damns pn~,vis~o~~ of law imposing reich li~bility; ~, ~p~ Wev.. eL that @e liability oFa T~ustee or O@cer, tothe extent that such liability is imposed by applicable law, shah not be limited or ~’s Officer’s duty of loyalty to the Corporation or its eliminated (i) %r any breach of the ~pas~:ee ’ or members, (ii) fbr acts or omissiom~ -~ot i~ good ~hith or that involve intentions1 misconduct or a km>sdng violation of law, or (iii) fbr may trmasactioa t}0m which the Trustee or Officer derived an improper persorml beiaefit if the @~ode Island General I~aws are ame~aded aRer the adoption of this Sectio. _ _ r~ 10.2 to authorize corporate action %~rther elimiaati~g or lira{ring~ t~e persorm liability of Trustees or Officers, ther~ the liability of each Trustee and Officer or the Corporation shall be e~imiaated or limited to 1:he fiilest ex{er~t permitted by the Rtmde ~slaad General Laws, as soamended, ,<~ oI:’~hi Nei4~cr @e amendmei:~ nor~[g.ctkm repeal ....... I.~ ~, nor the adoption of any provision of @ese Byiaw~ oil ~he (orporat~on s A-~Udes of bmo~poration M any mam~er Sectio~. ia respect of inc@asiste~sg with this Secho~, slmll elimh~a~e or re&~ce the el}bet of {:~Js any ma~ter occuKing~ or ar~y cause of ac~iom suit bugorfbr claim @at, thb Section, would occ~r ,-.4,,e prior to
such ame~dmer< repea~ or adopdom
2¸3
11.1
. ’[’his
Secti~m [sha~l [ serve as t[~e Conflict of Interest policy o~’the
Co~poratRm. Tl~e purpose of this Section ~ [is to pr~tect @e £orporat~oa s i~~erest when it is contemplating er~teing i,~to a transa@:ion or aKangeme@. @at might benefit the private h~terest of an officcr or Trustee o[ the Corporatiom This Section 1 tis intended to s~pp!emeat but ~aog replace any applicable £ederal or state l~ws or roles governing conflicts o[ interest applicffble
,X~.~terexte~.~)~,so~¢" means any officer, Trustee, or member eta c@m-rittee with Board-delegated powers who has a direct or indirect NaanciaI tntereat (as defined bNow)~ ~f~ a person is an Interested Person wi¢~ respect to aa organization affiliated with tee Corporatiot~, he or she is ~m In[crested p@s(m wRh respect to the Corporal.ion, as well as to at! other organizations affiliated with the Corporatiom ]~Nna~r:iff I~’~’°esX" means a direct or indirect through business, h~vestmcnt or thmity: (i) owncrship or ir~vestmcnt interest in any e~tit7 with which, the Coworatlon has a traasactio~ or arrangement; (ii) compensatio~ arrangement with @e Co~?oratioa or with a~y ~xti[y or hadfvidual with which the Corporation has a transaction or arrangement; or (iii) poteut~N ow~aership or investment h~texest in, or compensation arrangeme~t w~th, any entity or individualwith whid~ the Corporation fs negotiating a transaction or arrangement Compensation iacl~des direct a,~d indirect remua<:rati@~ as well as giRs or Nvors that are substantial in nature. A Financial Interest is not necessary a corxflict el:in[crest Under
Section 11 .~3 belo
person who has a Financial interest may have a conflic~ of bxterest only if the appropriate Board or commie:tee decides t[mt a cow, filet of interest exists.
24
~ 1 ~3 Oisclosure
Determination,
In consectioa with any actual or possiblc~ conflicts of’iaterest, an Interested Person must disclose the existence of" his or her Financial ~ntc~cst a~d al~ material fhcts and mcmb~:rs ot’any committees with [:~oar&delegated powers to the oKicers,
considering the proposed transaction or arrangeme~tt ARer disclosure of the Finand al Interest, any after any discussion with the Interested Persot~, the Interested Person slmll leave the t~oard or committec meeting while the determination of a conflict of" h~terest is discussed and voted upom The remaining Board or committee members shatt decide i[ a conflict of interest exists.
11,4 In accordance with Section
~fbove, an Interested Person may make
a pres~i~.tation at the ~:~oard or comm~tt~:e meeting, but ~rffer such prese~~tatiou, hc o~: she shall leave the meeting during the discussion of~, and the yoke on, tlie transactima or arnmgemc~~t that results in the conflict of interest. The Chair of the Board or committee slmll, if appropriate, appoint a disiNerested person or committee to i~westigate alternatives to the proposed t:ransactio~ or
After exercising due diligence, ff~e Board or the committee shall determir~e v,,hether the Corporation can obtain a more advantageo~s transaction or arrangeme~t with rcasonable effbrfs from a persor~ or entity that would not give rise to a conflict of ir~teres~t. Ira motc advantageou~; transa.cthm or arrar~gernent {s not reason2t)ty attai~:ff~~e under circumstances that would not gi~,c r~se to a conflict of interest, the Board or committee shall determitte by a m@~rity vote of the disinterested Tn~stees thereon whether the transacttor~ or srrangement is h~ fl-~e Cmff~oration~s best interest and [br its own benefit and whether tI~e transaction is fhir m~d reasonable to the Corporatio~, and shall make a. decisio~ as to whether to enter into the transaction or arrangement in contbn~ity with such deten~tination.
~ £the Boa£d or committee has reasonab!e ca~Jse to believe float a member has [a~ied to disclose actua~ or possible conflicts o£ {nterest~ it sha~ hs~orm the member of the bas~s for s~.~ch belief arid af[ord the member au Oppo~amit.y ~() explain the aIleged %~u~6 to
I£ a~er h~sarh~g the response o ~" fhe member a~d makh~g s~ch [’urthcr ir~vestigafion as may be warranted h~ the dreumstances, the Board or the committee detes~ines that tlae member has in fi, ct ~Si[ed to disclose ata actual or possibte cor~fliet of into:, cst, it sha!l take appropriate disciplinary a~d corrcctio~ action. 1 t ,5 Records of P~ oceedi_ j_~g~,. The mi,mI:es of tt~.e Board a~d alJ committees with board-delegated powers slmlh co~:~tair~ the names ofdsc persons who disclosed or otherwise were fi-mnd to have a Fh~ancia[ Interest i~ co~mecti(m with a.~ actual or possible conflict of" ir~terest, the nature of the Fi~iancial l~ercst, any action take~ to detcrmhto whed~er a conflict o£ interest was present, arid the Board’s or committee’s decision as to w[?ether a coaSt{or of i~tercst ha [i~ct
co~-~tair~ ~he ~sames of the perso~ss who were prcse~?t for diseussio~ a.r~d votes relati£~g to the transaction or arrangeme~~t, the conte~:~t o[C the disc~ssion, inc~ud[ng ar~y alternatives to the proposed transactirm or arrangemeat, and a record of any votes taken in com~cctioa therewith.
11.6 Amma~ Statq~e~ts. Ead~ o[flcer, Tr~istee aand committee meruber el:" with Boardodclcgated powcr~ shal! amaual[y :~ign a statement whid~ ~dl}im:~s that ~uch person: (a) has received a copy of th~s Secti ~,,,, (b) has read and tmdcrstan{- s the conflicts off lint:crest policy contaB:~ed hereir~; (c) has agreed to comply with such policy; and (d) ~.mdcrs{ands that the Corporation is a charltable orgmsizafion a.i~d that in order to maintain its fi:dera[ tax exemption must et~gage primarily in acfi vities wlfieh accompJish o~e or more itsof
tax-exempt purposes.
i ~.7 Periodic Reviews.To erasure that the Corporat~o~ operates in a manner consistent with its charitable purposes and tl"~af it does ~aot engage in activilies that could jeopardize its stares as an organization exempt fi°0m ~deral i~come tax, pe~fodic reviews shall be conducted. 2d
The periodic reviews shall, at a min~-mum~ include the %ltowing subjects: (a) whether compe~-~sation arrangements and benefits are reasonable and are the result of arm2sdength bargaining; (b) whether transactions with other o~tities result i~ i~qurement or impermissible p-~q~vate beneiit; and (c) whether partnerships and ]eight venture arrange~-~e,~t.s confbrm to written. ts policies, a~e proper~y recorded, reflect reasonabte pa3q~en for goods and services~ ffn’ther the ibis private Corporation charitable purposes, and do not result {n h~uremcnt or impel*miss
SECTION 12
Except as otherwise provided herein, the Corporation shalt, to the extort% legatly permissible under Khode Island law (a~d only to the extent tl~a~ the status of the Co~oration as an organization exempt fl’om taxation m~der Section 50l (c)(3) of the Internal Revenue Code i~ not affected thereby9 i~adem.ni[~ each of its present and fbn~er Trustees a~
27
readffy available in[Srmation (but without special hwestization)~ a reasonabb determination made by (~) vote of a disinterested majority of’Trustees thm~ in office~ or (ii) voto of a majority a quorum o£ d~sir~tcrcsted Trustees, provided they l~avc obtained a writtet~ opinio~ of lcsaI counse[~ or (iii) s special indemnification committee of ’ " ~teiested psisons appointed by that the Covered Pcrso~ appears to have acted in good and fi~ith kt the
belief" that such person’s action Was @~e in, best anti i~terest not opposed of’the [o, Corporatim~ or, h~ the case era person who serves or has served ir~ a capacity with respect to an employee ber~efit plar~, in the best hiteresgs of the participants or beneficiaries of such plan, a~ad with respect to a criminal action or proceediag~ that the Covmed Person had no reasmmble cm.~se to bdieve fl~at hi~; or l~er c,:mduct was The Corporatim~ may reimburse a Covered Person %r expenses incm~-ed in def%nding a civil or criminal action or proceeding upon receipt of an under~aldr~g by him or her to re0ay such reimbursement i f he or she shalt be ad, bdicated to be not entiJcd to indemrflficatioa hereunder, which undertaking may be accepted regardbss of the fimmci al ability of the Covered P~rsoa to make repayment. Notwithstandi~g any other provisions of this
, in no event sha~[
Corporation h~dem~ai£Y in relation to any ma~ter as to which the person to be indemnified has bee~ adjudicated not to have acted i~ good faith in the reasonable belief that his or her action was in the bes[ interest of the Corporation 0% to tl;~e exter~t such matter relates to services at the request of the Corporation for anoff~er orga~izadon or an employee benefit plan, in ~he best interest of such ocgm-dzatioa or the participants or benefida~es of such employee benefit plan. The fbregoi~g indemnification provisions shall not be exclusive of other rights to which any Trustee, officer, agem. m ~other individual may be entitled as a matter of law.
This Section shal! ~~ot Iimi[ the power o f the Board of Trustees to authorize the purchase and maiateumtce of ins~.~rm~ce on behalf of any person who is or who has been a trustee, officer, committee member, employee or agent of the Cot oration, or is or was serving at its request: trusS;so, director, ofi~cer, emptotiee or age~t of another o:rganlzatiou ii~ which it has ar~ interest or is or was serving at its request in a~:~y capacity with respect to a~ty empk~yee ber~efit p~aa~ against any liability incurred by him in ~my st~ch capacity or arising out efhis status as such~ whether or
28
m~der this Section. SECTION 13
Subject to {:he provis~or~s of
heireo t’~ lhese Bylaws may be
a[~ered, amended or repealed by vote of ~mt less than ~eventy~t]ve members percent (75%) theof of the Board of Tvdstees flaen in office.
517325 f
~9
Exhibit 26E
Exhibit 28
50237 - Blackstone Valley Surgicare Trailing 12-month Income Statement For Period Ending: December 31, 2016 Run Date: 01/12/17 Run Time: 10:26 PM 2016-1
2016-2
2016-3
2016-4
2016-5
2016-6
2016-7
2016-8
2016-9
2016-10
2016-11
2016-12
TTM Actual
Gross Patient Revenue OP Revenue Medicare Medicaid BCBS Managed Care and Oth Disc Plan Workers' Compensation Exchange Other Payors Other OP Revenue Gross Patient Revenue
593,784.06 237,281.73 593,900.66 378,901.78 111,111.50 77,033.50 55,003.00 2,047,016.23 2,047,016.23
575,843.50 237,037.50 484,283.24 227,057.09 74,644.00 34,630.50 91,655.00 1,725,150.83 1,725,150.83
509,640.63 369,257.78 559,243.76 304,287.39 127,617.04 42,768.00 46,560.29 1,959,374.89 1,959,374.89
593,025.13 262,092.95 556,111.73 366,495.67 40,588.00 27,737.35 138,268.25 1,984,319.08 1,984,319.08
547,761.79 278,783.50 444,352.71 423,114.26 63,059.00 59,820.00 260,137.50 2,077,028.76 2,077,028.76
586,931.50 245,229.51 555,842.50 382,455.36 72,851.34 56,692.80 129,174.70 2,029,177.71 2,029,177.71
443,248.54 342,135.20 405,957.61 327,881.15 96,723.57 36,289.97 255,796.50 1,908,032.54 1,908,032.54
660,753.89 305,606.11 484,279.52 310,358.90 120,448.97 15,875.00 222,793.00 2,120,115.39 2,120,115.39
554,679.72 424,558.64 487,872.22 240,715.25 86,536.69 36,997.00 148,980.14 1,980,339.66 1,980,339.66
646,616.02 334,623.38 433,019.77 396,173.03 101,374.10 7,298.00 3,668.00 175,670.73 2,098,443.03 2,098,443.03
595,207.63 213,233.05 507,381.03 394,030.90 119,936.30 21,628.00 95,941.99 1,947,358.90 1,947,358.90
512,214.76 272,258.69 589,397.57 610,771.34 57,626.85 62,491.42 196,170.80 2,300,931.43 2,300,931.43
6,819,707.17 3,522,098.04 6,101,642.32 4,362,242.12 1,072,517.36 479,261.54 3,668.00 1,816,151.90 24,177,288.45 24,177,288.45
Contractual Allowance OP Contractual Allowance Medicare Medicaid BCBS Managed Care and Oth Disc Plan Workers' Compensation Exchange Other Payors Other OP Contractual Allowance Contractual Allowance
449,523.04 184,039.74 400,853.84 284,324.11 81,904.84 63,272.62 44,494.73 1,508,412.92 1,508,412.92
436,120.26 188,981.23 294,390.45 160,993.24 50,073.88 20,650.51 80,231.49 1,231,441.06 1,231,441.06
368,074.32 301,096.86 375,241.38 189,747.21 82,628.43 32,925.24 90,859.52 1,440,572.96 1,440,572.96
464,975.59 207,253.15 373,119.83 266,105.91 30,808.00 19,773.35 120,523.04 1,482,558.87 1,482,558.87
419,750.96 225,193.23 298,921.40 307,887.55 47,821.80 40,287.87 235,640.87 1,575,503.68 1,575,503.68
454,187.44 196,884.11 374,797.12 268,266.06 51,888.94 41,707.14 111,560.41 1,499,291.22 1,499,291.22
342,769.58 274,914.59 264,700.53 236,551.37 70,642.34 26,661.81 233,970.24 1,450,210.46 1,450,210.46
508,414.25 243,185.47 332,548.76 219,186.56 86,830.61 11,555.17 204,386.22 1,606,107.04 1,606,107.04
430,397.97 348,139.74 338,915.98 165,586.96 64,775.23 26,430.29 135,705.54 1,509,951.71 1,509,951.71
494,173.26 267,573.56 288,637.22 285,776.23 76,719.66 4,640.81 2,904.00 154,082.26 1,574,507.00 1,574,507.00
460,723.88 174,929.03 335,528.07 283,862.35 87,046.83 15,449.51 86,578.08 1,444,117.75 1,444,117.75
392,410.97 215,411.30 372,663.08 397,214.36 27,327.23 32,877.07 196.43 309,580.16 1,747,680.60 1,747,680.60
5,221,521.52 2,827,602.01 4,050,317.66 3,065,501.91 758,467.79 336,231.39 3,100.43 1,807,612.56 18,070,355.27 18,070,355.27
538,603.31
493,709.77
518,801.93
501,760.21
501,525.08
529,886.49
457,822.08
514,008.35
470,387.95
523,936.03
503,241.15
553,250.83
6,106,933.18
538,603.31
493,709.77
518,801.93
501,760.21
501,525.08
529,886.49
457,822.08
514,008.35
470,387.95
523,936.03
503,241.15
553,250.83
6,106,933.18
18,200.00 93.66 18,293.66
428.30 428.30
33,150.00 (145.67) 33,004.33
51.83 51.83
18,200.00 25.20 18,225.20
25,350.00 (39.33) 25,310.67
20,150.00 1.11 20,151.11
13,000.00 52.68 13,052.68
14,300.00 (15.96) 14,284.04
18,850.00 (10.14) 18,839.86
11,050.00 32.77 11,082.77
19,500.00 (58.45) 19,441.55
191,750.00 416.00 192,166.00
IP Net Patient Revenue OP Net Patient Revenue Net Patient Revenue Other Income Rental income Other operating income Other Income Net Revenue
556,896.97
494,138.07
551,806.26
501,812.04
519,750.28
555,197.16
477,973.19
527,061.03
484,671.99
542,775.89
514,323.92
572,692.38
6,299,099.18
Salaries and benefits Salaries FICA FUTA SUI 401K Group Med Ins Voluntary-Supplemental Insurnc Other Benefits Work Comp Ins Salaries and benefits
169,805.38 11,698.75 733.46 2,619.46 3,407.90 15,525.74 372.30 (462.17) 1,580.67 205,281.49
153,808.90 11,018.41 299.05 2,496.49 3,415.22 8,350.13 372.30 2,338.62 1,294.35 183,393.47
172,657.85 16,379.67 91.31 2,502.42 6,730.22 9,140.56 1,172.93 (509.10) 1,437.51 209,603.37
170,049.41 11,841.50 65.75 2,076.12 3,719.54 9,140.56 644.50 (513.97) 1,437.51 198,460.92
169,320.00 12,871.14 142.05 1,712.02 3,567.92 13,582.38 1,198.78 (3,238.35) 1,437.51 200,593.45
184,080.08 12,650.09 97.84 868.22 3,312.60 9,446.59 559.76 2,712.50 1,437.51 215,165.19
167,437.22 12,996.61 60.73 681.38 3,255.87 9,446.59 765.22 1,437.51 196,081.13
173,049.53 11,478.29 37.85 470.86 3,414.48 8,845.54 720.49 1,437.51 199,454.55
198,749.71 14,105.34 54.49 605.53 4,007.90 7,971.58 1,983.23 1,437.51 228,915.29
196,981.66 13,098.53 15.65 420.62 3,850.67 10,821.50 937.42 1,437.51 227,563.56
211,722.62 13,655.43 75.43 398.27 4,036.94 10,711.97 1,003.88 1,437.51 243,042.05
184,174.59 14,644.81 48.79 371.37 4,084.78 (18,020.33) 982.61 1,437.51 187,724.13
2,151,836.95 156,438.57 1,722.40 15,222.76 46,804.04 94,962.81 10,713.42 327.53 17,250.12 2,495,278.60
Medical Supplies Med Supplies - Chargeable Med Supplies - Non Chargeable Drugs and Medicine O&P devices and implants Medical Supplies
33,942.17 50,466.20 7,774.00 57,209.38 149,391.75
34,908.21 57,121.08 9,557.24 39,219.63 140,806.16
40,189.34 74,017.63 7,483.73 49,600.60 171,291.30
30,340.43 53,823.85 8,975.66 50,986.95 144,126.89
43,220.96 60,770.77 10,330.70 35,100.93 149,423.36
41,217.80 38,856.71 11,173.92 46,864.02 138,112.45
34,087.99 51,728.18 9,774.47 46,290.96 141,881.60
34,153.65 51,285.32 8,370.31 32,005.93 125,815.21
41,375.61 46,645.89 9,974.16 34,874.78 132,870.44
40,645.33 52,514.17 15,558.59 49,581.30 158,299.39
29,653.98 52,654.35 8,366.26 52,827.64 143,502.23
47,134.00 77,007.07 19,210.43 74,332.52 217,684.02
450,869.47 666,891.22 126,549.47 568,894.64 1,813,204.80
1,095.51 23.04 1,308.64 4,720.47 3,263.87 4,110.00 15,114.57 1,127.90 5,707.18
289.84 10.56 2,101.33 4,083.75 3,614.10 1,031.60 11,636.07 732.61 2,414.41
1,022.88 12.70 1,720.91 7,531.06 3,263.87 3,292.39 23,692.58 1,041.48 8,713.84
1,133.39 1,110.23 3,982.53 2,470.23 (270.28) 14,053.61 804.78 7,781.81
1,638.35 5.59 2,665.18 4,605.54 5,678.44 1,053.53 19,666.69 749.84 3,711.08
1,393.42 (0.03) 776.08 2,764.42 4,074.32 1,023.85 29,645.45 791.87 10,200.32
187.60 22.82 1,203.81 7,184.55 4,053.80 289.18 21,153.51 836.94 4,262.84
578.56 22.08 1,398.37 5,110.51 2,488.24 1,592.85 16,906.84 594.40 2,770.41
30.43 1,163.91 1,143.62 3,265.81 2,622.90 15,944.08 837.35 9,231.12
1,773.57 21.75 444.00 2,996.38 4,137.62 (101.22) 11,720.48 675.02 241.09
1,007.76 174.54 1,514.24 10,508.76 4,258.64 2,182.73 17,472.67 795.64 7,749.85
785.93 2,212.74 4,407.58 2,987.30 4,232.82 15,318.63 670.82 5,194.49
10,937.24 293.05 17,619.44 59,039.17 43,556.24 21,060.35 212,325.18 9,658.65 67,978.44
Variable Expenses Food and Catering Interest/Late Fees Office Supplies Housekeeping and Janitorial Linens Minor Equipment Rental Equipment Storage - Including Data Repairs
Page: 1 of 10
50237 - Blackstone Valley Surgicare Trailing 12-month Income Statement For Period Ending: December 31, 2016 Run Date: 01/12/17 Run Time: 10:26 PM 2016-1
2016-2
2016-3
2016-4
2016-5
2016-6
2016-7
2016-8
2016-9
2016-10
2016-11
2016-12
TTM Actual
Maint Contracts Bank Service Charges Dues and Subscriptions Printing Postage and Delivery Telephone Utilities Education Contract Services Collection Fees Legal Fees Professional fees Medical director fees Marketing Travel and Entertainment Contributions Other Variable Expenses Variable Expenses
5,537.11 1,869.15 361.66 1,525.21 247.34 2,042.43 13,758.44 150.00 21,515.02 686.50 2,418.52 1,500.00 613.40 7,380.93 96,076.89
6,643.98 1,847.26 1,750.00 1,064.95 2,063.33 13,215.61 1,550.00 24,461.01 1,026.60 400.00 3,660.70 1,500.00 32.14 4,978.99 90,108.84
7,475.16 1,836.52 99.50 2,770.50 1,631.46 2,033.92 14,373.69 100.00 27,023.65 1,796.06 3,095.00 4,197.82 1,500.00 922.27 6,007.58 125,154.84
8,429.30 2,044.94 167.18 475.67 2,059.95 10,515.10 16,824.70 269.50 787.50 1,002.41 1,500.00 5,895.03 81,037.58
6,691.96 1,857.07 307.50 554.44 691.40 2,037.10 11,753.71 420.00 26,899.84 731.91 300.00 1,278.90 1,500.00 5,139.31 99,937.38
5,731.50 2,677.78 361.66 1,275.31 665.86 1,416.49 12,058.88 300.00 20,348.04 326.06 782.86 1,519.28 1,500.00 188.64 4,771.29 104,593.35
5,822.29 1,450.29 277.61 961.27 164.15 2,669.89 16,487.32 30,437.34 828.84 2,574.74 1,500.00 20.08 5,187.81 107,576.68
7,893.82 1,406.42 457.48 340.75 792.70 2,036.06 13,165.71 23,848.41 582.62 322.11 1,009.54 1,500.00 4,870.25 89,688.13
(1,064.04) 1,392.73 220.42 697.09 2,662.88 12,500.18 1,739.00 24,642.12 772.99 659.60 1,253.24 1,500.00 407.17 4,098.64 85,721.24
9,176.66 1,838.50 313.35 126.05 1,348.58 2,234.66 12,369.90 6.00 24,308.45 76.64 902.24 1,500.00 28.18 5,410.96 81,548.86
6,860.80 2,761.67 1,998.82 657.98 2,278.43 12,173.81 3,519.36 30,242.34 1,584.12 10,980.96 2,847.16 1,500.00 695.50 3,000.00 6,601.67 133,367.45
6,065.80 1,289.94 626.70 1,500.36 713.13 2,291.15 14,390.39 20,025.83 982.12 13,862.16 3,405.48 1,500.00 200.00 162.00 6,479.08 109,304.45
75,264.34 22,272.27 4,555.46 11,440.31 9,150.31 25,826.29 156,762.74 7,784.36 290,576.75 9,663.96 31,190.19 26,070.03 18,000.00 200.00 3,069.38 3,000.00 66,821.54 1,204,115.69
Fixed Expenses Rent Insurance Property Tax Miscellaneous Fixed Expenses
38,526.77 4,783.34 5,901.81 41.67 49,253.59
38,526.77 6,388.06 5,018.00 41.67 49,974.50
38,526.77 5,585.70 5,018.00 41.67 49,172.14
38,526.77 5,585.70 5,018.00 41.67 49,172.14
38,526.77 5,585.70 5,018.00 41.67 49,172.14
38,526.77 5,585.70 5,018.00 41.67 49,172.14
38,526.77 5,585.70 5,018.00 41.67 49,172.14
38,526.77 5,585.70 5,018.00 1,594.97 50,725.44
38,526.77 5,585.70 5,018.00 41.67 49,172.14
38,526.77 5,585.70 5,018.00 41.67 49,172.14
38,526.77 5,585.70 5,018.00 41.67 49,172.14
38,526.77 5,585.70 12,292.19 41.67 56,446.33
462,321.24 67,028.40 68,374.00 2,053.34 599,776.98
Provision for doubtful accts
12,831.03
9,733.52
(4,008.48)
12,127.90
11,052.21
(589.09)
10,348.30
12,918.26
(1,946.29)
11,764.03
11,431.52
17,504.29
103,167.20
EBITDA
44,062.22
20,121.58
593.09
16,886.61
9,571.74
48,743.12
(27,086.66)
48,459.44
(10,060.83)
14,427.91
(66,191.47)
(15,970.84)
83,555.91
16,257.65 12,432.18 28,689.83
13,940.55 (462.37) 13,478.18
20,931.78 6,290.33 27,222.11
15,996.39 6,174.52 22,170.91
14,502.82 6,596.44 21,099.26
14,809.71 6,628.72 21,438.43
14,803.59 6,985.66 21,789.25
14,709.63 7,000.29 21,709.92
14,709.63 7,010.66 21,720.29
7,024.84 7,024.84
7,270.99 7,270.99
7,761.60 7,761.60
140,661.75 80,713.86 221,375.61
541,524.58
487,494.67
578,435.28
507,096.34
531,277.80
527,892.47
526,849.10
500,311.51
516,453.11
535,372.82
587,786.38
596,424.82
6,436,918.88
Income (loss) before Mgmt Fee, I/C, Taxes, & Sale
15,372.39
6,643.40
(26,629.02)
(5,284.30)
(11,527.52)
27,304.69
(48,875.91)
26,749.52
(31,781.12)
7,403.07
(73,462.46)
(23,732.44)
(137,819.70)
Mgmt Fee, Intercompany, Taxes Intercompany Mgmt Fee Expense Mgmt Fee, Intercompany, Taxes
27,203.30 27,203.30
24,220.23 24,220.23
27,790.74 27,790.74
24,484.21 24,484.21
25,434.90 25,434.90
27,789.31 27,789.31
23,381.25 23,381.25
25,707.14 25,707.14
24,330.91 24,330.91
(222.32) (222.32)
Net Income (Loss) Before Minority Interest, Sale of Investment
(11,830.91)
(17,576.83)
(54,419.76)
(29,768.51)
(36,962.42)
(484.62)
(72,257.16)
1,042.38
(56,112.03)
7,625.39
Interest, Depreciation, Amort Depreciation Expense Interest Expense
Total Exp Before Mgmt Fee and I/C
Minority Int, Sale of Investmt Gain/Loss on Disposal of Asset Minority Int, Sale of Investmt
-
-
-
(35.00) (35.00)
-
-
-
-
-
-
(73,462.46)
-
(23,732.44)
-
230,119.67 230,119.67 (367,939.37)
(35.00) (35.00)
Net Income (Loss)
(11,830.91)
(17,576.83)
(54,419.76)
(29,733.51)
(36,962.42)
(484.62)
(72,257.16)
1,042.38
(56,112.03)
7,625.39
(73,462.46)
(23,732.44)
(367,904.37)
EBIT EBITDA EBITDAR
27,804.57 44,062.22 82,588.99
6,181.03 20,121.58 58,648.35
(20,338.69) 593.09 39,119.86
890.22 16,886.61 55,413.38
(4,931.08) 9,571.74 48,098.51
33,933.41 48,743.12 87,269.89
(41,890.25) (27,086.66) 11,440.11
33,749.81 48,459.44 86,986.21
(24,770.46) (10,060.83) 28,465.94
14,427.91 14,427.91 52,954.68
(66,191.47) (66,191.47) (27,664.70)
(15,970.84) (15,970.84) 22,555.93
(57,105.84) 83,555.91 545,877.15
373 550.35 257.58 400.51 132.05 1,451.81 1,443.98
361 508.02 249.61 390.04 138.43 1,350.40 1,367.62
368 569.57 340.09 465.47 133.62 1,571.84 1,409.79
424 468.07 191.13 339.92 115.97 1,195.98 1,183.40
424 473.10 235.70 352.41 115.97 1,253.01 1,182.84
379 567.72 275.97 364.41 129.74 1,392.86 1,398.12
387 506.67 277.98 366.62 127.06 1,361.37 1,183.00
408 488.86 219.82 308.37 124.33 1,226.25 1,259.82
386 593.04 222.08 344.22 127.39 1,337.96 1,218.62
433 525.55 188.33 365.59 113.56 1,236.43 1,210.01
376 646.39 354.70 381.65 130.78 1,563.26 1,338.41
448 419.03 243.98 485.90 126.00 1,331.31 1,234.93
4,767.00 523.45 252.59 380.37 125.82 1,350.31 1,281.09
Statistical information: Surgical cases Ttl Salary related expense per case Variable cost per case Supply cost per case Fixed cost per case Total expense per case Net patient revenue per case
Page: 2 of 10
50237 - Blackstone Valley Surgicare Trailing 12-month Income Statement For Period Ending: December 31, 2016 Run Date: 01/12/17 Run Time: 10:26 PM 2016-1
Gross revenue per case
Page: 3 of 10
5,487.98
2016-2
4,778.81
2016-3
5,324.39
2016-4
4,680.00
2016-5
4,898.65
2016-6
5,354.03
2016-7
4,930.32
2016-8
5,196.36
2016-9
5,130.41
2016-10
4,846.29
2016-11
5,179.15
2016-12
5,136.01
TTM Actual 5,071.80
D:\PSOFT\FSCM9\SFINPR91\NVISION\INSTANCE\ISM50237.xls
Center: 50237 - Blackstone Valley Surgicare Detail Income Statement For Period Ending: December 31, 2016 Report ID: IS_DETL Operator ID: GLCLOSE
Run Date: 01/12/17 Run Time: 09:02 PM
Actual Gross Patient Revenue OP Revenue Medicare Medicaid BCBS Managed Care and Oth Disc Plan Workers' Compensation Exchange Other Payors Other OP Revenue Gross Patient Revenue
512,214.76 272,258.69 589,397.57 610,771.34 57,626.85 62,491.42 196,170.80 2,300,931.43 2,300,931.43
Current Period Budget
303,959.59 13,066.39 654,250.70 502,546.14 191,503.87 9,024.85 (1,014.94) (51,705.93) 1,621,630.67 1,621,630.67
Variance
208,255.17 259,192.30 (64,853.13) 108,225.20 (133,877.02) 53,466.57 1,014.94 247,876.73 679,300.76 679,300.76
%
Actual
68.51 1,983.66 (9.91) 21.54 (69.91) 592.44 (100.00) (479.40) 41.89 41.89
595,207.63 213,233.05 507,381.03 394,030.90 119,936.30 21,628.00 95,941.99 1,947,358.90 1,947,358.90
Prior Month Variance
(82,992.87) 59,025.64 82,016.54 216,740.44 (62,309.45) 40,863.42 100,228.81 353,572.53 353,572.53
Contr % Contractual Allowance OP Contractual Allowance Medicare Medicaid BCBS Managed Care and Oth Disc Plan Workers' Compensation Exchange Other Payors Other OP Contractual Allowance Contractual Allowance IP Net Patient Revenue OP Net Patient Revenue Net Patient Revenue Other Income Rental income Other operating income Other Income
392,410.97 215,411.30 372,663.08 397,214.36 27,327.23 32,877.07 196.43 309,580.16 1,747,680.60 1,747,680.60
214,821.30 9,234.58 462,387.07 355,170.95 135,344.01 6,378.25 (717.30) (36,542.80) 1,146,076.06 1,146,076.06
(177,589.67) (206,176.72) 89,723.99 (42,043.41) 108,016.78 (26,498.82) (913.73) (346,122.96) (601,604.54) (601,604.54)
553,250.83
475,554.61
77,696.22
553,250.83
475,554.61
77,696.22
19,500.00 (58.45) 19,441.55
(17.28) (17.28)
19,500.00 (41.17) 19,458.83
(82.67) (2,232.66) 19.40 (11.84) 79.81 (415.46) 127.38 947.17 (52.49) (52.49)
76.61 79.12 63.23 65.03 47.42 52.61 #DIV/0! 157.81 75.96 75.96
1,754,038.41 820,115.12 1,529,798.37 1,400,975.27 278,937.25 91,417.42 3,668.00 467,783.52 6,346,733.36 6,346,733.36
Quarter - to - Date Budget
1,156,461.38 106,676.00 1,683,076.09 1,303,399.76 362,280.23 20,796.49 (1,014.94) 15,944.35 4,647,619.36 4,647,619.36
Variance
460,723.88 174,929.03 335,528.07 283,862.35 87,046.83 15,449.51 86,578.08 1,444,117.75 1,444,117.75
68,312.91 (40,482.27) (37,135.01) (113,352.01) 59,719.60 (17,427.56) (196.43) (223,002.08) (303,562.85) (303,562.85)
77.41 82.04 66.13 72.04 72.58 71.43 90.24 74.16 74.16
Actual
597,577.03 713,439.12 (153,277.72) 97,575.51 (83,342.98) 70,620.93 4,682.94 451,839.17 1,699,114.00 1,699,114.00
Contr %
6,819,707.17 3,522,098.04 6,101,642.32 4,362,242.12 1,072,517.36 479,261.54 3,668.00 1,816,151.90 24,177,288.45 24,177,288.45
Year - to - Date Budget
Variance
%
4,736,215.72 716,447.96 6,698,613.90 4,707,696.81 1,169,663.91 314,626.87 5,572.05 244,489.39 18,593,326.61 18,593,326.61
2,083,491.45 2,805,650.08 (596,971.58) (345,454.69) (97,146.55) 164,634.67 (1,904.05) 1,571,662.51 5,583,961.84 5,583,961.84
43.99 391.61 (8.91) (7.34) (8.31) 52.33 (34.17) 642.83 30.03 30.03
Contr %
1,347,308.11 657,913.89 996,828.37 966,852.94 191,093.72 52,967.39 3,100.43 550,240.50 4,766,305.35 4,766,305.35
796,299.33 72,994.19 1,164,220.19 900,549.42 251,739.92 14,434.69 (717.30) 9,631.62 3,209,152.06 3,209,152.06
(551,008.78) (584,919.70) 167,391.82 (66,303.52) 60,646.20 (38,532.70) (3,817.73) (540,608.88) (1,557,153.29) (1,557,153.29)
76.81 80.22 65.16 69.01 68.51 57.94 84.53 117.63 75.10 75.10
Contr %
5,221,521.52 2,827,602.01 4,050,317.66 3,065,501.91 758,467.79 336,231.39 3,100.43 1,807,612.56 18,070,355.27 18,070,355.27
3,357,373.16 508,519.20 4,753,669.78 3,339,701.10 828,993.36 224,688.01 4,001.54 173,101.49 13,190,047.64 13,190,047.64
(1,864,148.36) (2,319,082.81) 703,352.12 274,199.19 70,525.57 (111,543.38) 901.11 (1,634,511.07) (4,880,307.63) (4,880,307.63)
(55.52) (456.05) 14.80 8.21 8.51 (49.64) 22.52 (944.25) (37.00) (37.00)
503,241.15
50,009.68
1,580,428.01
1,438,467.30
141,960.71
6,106,933.18
5,403,278.97
703,654.21
16.34
503,241.15
50,009.68
1,580,428.01
1,438,467.30
141,960.71
6,106,933.18
5,403,278.97
703,654.21
13.02
100.00 238.25 -112,608.97
11,050.00 32.77 11,082.77
49,400.00 16.02 49,416.02
191,750.00 416.00 192,166.00
191,750.00 623.36 192,373.36
100.00 -300.62 -92,772.65
20.43
514,323.92
58,368.46
191,376.73
6,299,099.18
5,403,071.61
896,027.57
16.58
(25.75)
27,548.03 (989.38) 26.64 26.90 (47.84) 28,732.30 21.27 55,317.92
592,878.87 41,398.77 139.87 1,190.26 11,972.39 3,513.14 2,923.91 4,312.53 658,329.74
442,184.54 29,011.62 7,246.48 32,862.43 1,053.02 (2,488.88) 4,062.16 513,931.37
(150,694.33) (12,387.15) (139.87) (1,190.26) (4,725.91) 29,349.29 (1,870.89) (2,488.88) (250.37) (144,398.37)
2,151,836.95 156,438.57 1,722.40 15,222.76 46,804.04 94,962.81 10,713.42 327.53 17,250.12 2,495,278.60
1,658,868.68 1,645.92 112,253.91 5,600.00 14,000.00 27,994.43 116,925.05 4,412.72 (8,913.40) 19,319.41 1,952,106.72
(492,968.27) 1,645.92 (44,184.66) 3,877.60 (1,222.76) (18,809.61) 21,962.24 (6,300.70) (9,240.93) 2,069.29 (543,171.88)
(29.72) 100.00 (39.36) 69.24 (8.73) (67.19) 18.78 (142.78) 103.67 10.71 (27.82)
(17,480.02) (24,352.72) (10,844.17) (21,504.88) (74,181.79)
117,433.31 182,175.59 43,135.28 176,741.46 519,485.64
226,504.26 21,883.44 114,748.23 363,135.93
109,070.95 (182,175.59) (21,251.84) (61,993.23) (156,349.71)
450,869.47 666,891.22 126,549.47 568,894.64 1,813,204.80
862,728.86 83,351.52 437,062.90 1,383,143.28
411,859.39 (666,891.22) (43,197.95) (131,831.74) (430,061.52)
47.74 (100.00) (51.83) (30.16) (31.09)
Net Revenue
572,692.38
475,537.33
97,155.05
Salaries and benefits Salaries Wage Transfers FICA FUTA SUI 401K Group Med Ins Voluntary-Supplemental Insurnc Other Benefits Work Comp Ins Salaries and benefits
184,174.59 14,644.81 48.79 371.37 4,084.78 (18,020.33) 982.61 1,437.51 187,724.13
146,465.76 9,628.14 2,404.41 10,640.78 344.48 (653.26) 1,258.83 170,089.14
(37,708.83) (5,016.67) (48.79) (371.37) (1,680.37) 28,661.11 (638.13) (653.26) (178.68) (17,634.99)
(52.10) (100.00) (100.00) (69.89) 269.35 (185.24) 100.00 (14.19) (10.37)
211,722.62 13,655.43 75.43 398.27 4,036.94 10,711.97 1,003.88 1,437.51 243,042.05
Medical Supplies Med Supplies - Chargeable Med Supplies - Non Chargeable Drugs and Medicine O&P devices and implants Medical Supplies
47,134.00 77,007.07 19,210.43 74,332.52 217,684.02
74,722.48 7,219.22 37,854.80 119,796.50
27,588.48 (77,007.07) (11,991.21) (36,477.72) (97,887.52)
36.92 (100.00) (166.10) (96.36) (81.71)
29,653.98 52,654.35 8,366.26 52,827.64 143,502.23
Page: 4 of 10
Actual
8,450.00 (91.22) 8,358.78
49,400.00 (35.82) 49,364.18 1,629,792.19
(51.84) (51.84) 1,438,415.46
(207.36) (207.36)
76.57 80.28 66.38 70.27 70.72 70.16 84.53 99.53 74.74 74.74
D:\PSOFT\FSCM9\SFINPR91\NVISION\INSTANCE\ISM50237.xls
Center: 50237 - Blackstone Valley Surgicare Detail Income Statement For Period Ending: December 31, 2016 Report ID: IS_DETL Operator ID: GLCLOSE
Run Date: 01/12/17 Run Time: 09:02 PM Current Period Budget
Actual Variable Expenses Food and Catering Interest/Late Fees Office Supplies Housekeeping and Janitorial Linens Minor Equipment Rental Equipment Storage - Including Data Repairs Maint Contracts Bank Service Charges Dues and Subscriptions Printing Postage and Delivery Telephone Utilities Education Contract Services Collection Fees Legal Fees Professional fees Medical director fees Marketing Travel and Entertainment Contributions Other Variable Expenses Variable Expenses
Variance
Prior Month Variance
Actual
Quarter - to - Date Budget
Variance
Actual
Year - to - Date Budget
%
Actual
Variance
%
221.83 174.54 (698.50) 6,101.18 1,271.34 (2,050.09) 2,154.04 124.82 2,555.36 795.00 1,471.73 (626.70) 498.46 (55.15) (12.72) (2,216.58) 3,519.36 10,216.51 602.00 (2,881.20) (558.32) (200.00) 533.50 3,000.00 122.59 24,063.00
3,567.26 196.29 4,170.98 17,912.72 11,383.56 6,314.33 44,511.78 2,141.48 13,185.43 22,103.26 5,890.11 940.05 3,625.23 2,719.69 6,804.24 38,934.10 3,525.36 74,576.62 2,642.88 24,843.12 7,154.88 4,500.00 200.00 885.68 3,000.00 18,491.71 324,220.76
1,954.02 105.78 3,478.41 13,103.46 10,885.59 6,155.31 49,339.44 1,826.88 18,072.69 19,569.90 3,872.40 1,429.20 3,939.30 1,367.28 6,235.71 49,695.48 127.35 73,952.19 2,752.29 5,090.64 7,769.37 4,500.00 76.89 461.64 15,482.79 301,244.01
(1,613.24) (90.51) (692.57) (4,809.26) (497.97) (159.02) 4,827.66 (314.60) 4,887.26 (2,533.36) (2,017.71) 489.15 314.07 (1,352.41) (568.53) 10,761.38 (3,398.01) (624.43) 109.41 (19,752.48) 614.49 (123.11) (424.04) (3,000.00) (3,008.92) (22,976.75)
10,937.24 293.05 17,619.44 59,039.17 43,556.24 21,060.35 212,325.18 9,658.65 67,978.44 75,264.34 22,272.27 4,555.46 11,440.31 9,150.31 25,826.29 156,762.74 7,784.36 290,576.75 9,663.96 31,190.19 26,070.03 18,000.00 200.00 3,069.38 3,000.00 66,821.54 1,204,115.69
7,816.08 423.12 13,913.64 52,413.84 43,542.36 24,621.24 197,357.76 7,307.52 72,290.76 78,279.60 15,489.60 5,716.80 15,757.20 5,469.12 24,942.84 198,781.92 509.40 295,808.76 11,009.16 20,362.56 31,077.48 18,000.00 307.56 1,846.56 61,931.16 1,204,976.04
(3,121.16) 130.07 (3,705.80) (6,625.33) (13.88) 3,560.89 (14,967.42) (2,351.13) 4,312.32 3,015.26 (6,782.67) 1,161.34 4,316.89 (3,681.19) (883.45) 42,019.18 (7,274.96) 5,232.01 1,345.20 (10,827.63) 5,007.45 107.56 (1,222.82) (3,000.00) (4,890.38) 860.35
(39.93) 30.74 (26.63) (12.64) (0.03) 14.46 (7.58) (32.17) 5.97 3.85 (43.79) 20.31 27.40 (67.31) (3.54) 21.14 (1,428.14) 1.77 12.22 (53.17) 16.11 34.97 (66.22) (100.00) (7.90) 0.07
785.93 2,212.74 4,407.58 2,987.30 4,232.82 15,318.63 670.82 5,194.49 6,065.80 1,289.94 626.70 1,500.36 713.13 2,291.15 14,390.39 20,025.83 982.12 13,862.16 3,405.48 1,500.00 200.00 162.00 6,479.08 109,304.45
651.34 35.26 1,159.47 4,367.82 3,628.53 2,051.77 16,446.48 608.96 6,024.23 6,523.30 1,290.80 476.40 1,313.10 455.76 2,078.57 16,565.16 42.45 24,650.73 917.43 1,696.88 2,589.79 1,500.00 25.63 153.88 5,160.93 100,414.67
(134.59) 35.26 (1,053.27) (39.76) 641.23 (2,181.05) 1,127.85 (61.86) 829.74 457.50 0.86 (150.30) (187.26) (257.37) (212.58) 2,174.77 42.45 4,624.90 (64.69) (12,165.28) (815.69) (174.37) (8.12) (1,318.15) (8,889.78)
(20.66) 100.00 (90.84) (0.91) 17.67 (106.30) 6.86 (10.16) 13.77 7.01 0.07 (31.55) (14.26) (56.47) (10.23) 13.13 100.00 18.76 (7.05) (716.92) (31.50) (680.34) (5.28) (25.54) (8.85)
1,007.76 174.54 1,514.24 10,508.76 4,258.64 2,182.73 17,472.67 795.64 7,749.85 6,860.80 2,761.67 1,998.82 657.98 2,278.43 12,173.81 3,519.36 30,242.34 1,584.12 10,980.96 2,847.16 1,500.00 695.50 3,000.00 6,601.67 133,367.45
Fixed Expenses Rent Insurance Sales and Use Tax Property Tax Miscellaneous Fixed Expenses
38,526.77 5,585.70 12,292.19 41.67 56,446.33
37,474.50 4,749.57 0.19 6,140.00 48,364.26
(1,052.27) (836.13) 0.19 (6,152.19) (41.67) (8,082.07)
(2.81) (17.60) 100.00 (100.20) (100.00) (16.71)
38,526.77 5,585.70 5,018.00 41.67 49,172.14
(7,274.19) (7,274.19)
115,580.31 16,757.10 22,328.19 125.01 154,790.61
112,423.50 14,248.71 0.57 18,420.00 145,092.78
(3,156.81) (2,508.39) 0.57 (3,908.19) (125.01) (9,697.83)
462,321.24 67,028.40 68,374.00 2,053.34 599,776.98
449,694.00 56,994.84 2.28 73,680.00 580,371.12
(12,627.24) (10,033.56) 2.28 5,306.00 (2,053.34) (19,405.86)
(2.81) (17.60) 100.00 7.20 (100.00) (3.34)
Provision for doubtful accts
17,504.29
5,111.61
(12,392.68)
(242.44)
11,431.52
(6,072.77)
40,699.84
15,511.88
25,187.96
103,167.20
56,788.66
46,378.54
81.67
(15,970.84)
31,761.15
(47,731.99)
(66,191.47)
50,220.63
(67,734.40)
99,499.49
(167,233.89)
83,555.91
225,685.79
(142,129.88)
7,761.60 7,761.60
8,041.84 5,201.18 35.04 13,278.06
8,041.84 5,201.18 (7,726.56) 5,516.46
100.00 100.00 (22,050.68) 41.55
7,270.99 7,270.99
(490.61) (490.61)
22,057.43 22,057.43
24,446.35 15,603.54 105.12 40,155.01
24,446.35 15,603.54 (21,952.31) 18,097.58
140,661.75 80,713.86 221,375.61
98,685.39 62,414.16 568.75 161,668.30
(41,976.36) 62,414.16 (80,145.11) (59,707.31)
(42.54) 100.00 (14,091.45) (36.93)
Total Exp Before Mgmt Fee and I/C
596,424.82
457,054.24
(139,370.58)
(30.49)
587,786.38
(8,638.44)
1,719,584.02
1,379,070.98
(340,513.04)
6,436,918.88
5,339,054.12
(1,097,864.76)
(20.56)
Income (loss) before Mgmt Fee, I/C, Taxes, & Sale
(23,732.44)
18,483.09
(42,215.53)
(228.40)
(73,462.46)
49,730.02
(89,791.83)
59,344.48
(149,136.31)
(137,819.70)
64,017.49
(201,837.19)
(315.28)
23,521.29 23,521.29
23,521.29 23,521.29
100.00 100.00
(222.32) (222.32)
71,145.19 71,145.19
71,367.51 71,367.51
230,119.67 230,119.67
267,314.17 267,314.17
37,194.50 37,194.50
13.91 13.91
(5,038.20)
(18,694.24)
371.05
(11,800.71)
(77,768.80)
(367,939.37)
(203,296.68)
(164,642.69)
80.99
EBITDA Interest, Depreciation, Amort Depreciation Expense Interest Income Interest Expense
Mgmt Fee, Intercompany, Taxes Intercompany Mgmt Fee Expense Mgmt Fee, Intercompany, Taxes Net Income (Loss) Before Minority Interest, Sale of Investment
Page: 5 of 10
(23,732.44)
(73,462.46)
49,730.02
(89,569.51)
D:\PSOFT\FSCM9\SFINPR91\NVISION\INSTANCE\ISM50237.xls
Center: 50237 - Blackstone Valley Surgicare Detail Income Statement For Period Ending: December 31, 2016 Report ID: IS_DETL Operator ID: GLCLOSE
Run Date: 01/12/17 Run Time: 09:02 PM Current Period Budget
Actual
Minority Int, Sale of Investmt Gain/Loss on Disposal of Asset Minority Int, Sale of Investmt Net Income (Loss) EBIT EBITDA EBITDA – Management Fees
Statistical information: Total FTE's
-
-
Variance
%
-
(23,732.44)
(5,038.20)
(18,694.24)
(15,970.84) (15,970.84) (15,970.84)
23,719.31 31,761.15 8,239.86
(39,690.15) (47,731.99) (24,210.70)
31.8
-
Prior Month Variance
Actual
371.05
31.76
-
Inpatient Surgical cases Net patient revenue per inpatient case Outpatient Surgical cases Net patient revenue per outpatient case
Discharges
Page: 6 of 10
-
-
Variance
Year - to - Date Budget
Actual
-
(35.00) (35.00)
-
Variance
%
35.00 35.00
(73,462.46)
49,730.02
(89,569.51)
(11,800.71)
(77,768.80)
(367,904.37)
(203,296.68)
(164,607.69)
(66,191.47) (66,191.47) (66,191.47)
50,220.63 50,220.63 50,220.63
(67,734.40) (67,734.40) (67,512.08)
75,053.14 99,499.49 28,354.30
(142,787.54) (167,233.89) (95,866.38)
(57,105.84) 83,555.91 (146,563.76)
127,000.40 225,685.79 (41,628.38)
(184,106.24) (142,129.88) (104,935.38)
30.3
Equivalent Patient Day Stats Surgical cases Ttl Salary related expense per case Variable cost per case Supply cost per case Fixed cost per case Total expense per case Net patient revenue per case Gross revenue per case
Quarter - to - Date Budget
Actual
1.43
91.8
-
91.81
344.2
-
(100.00) (100.00) 80.97
344.18
448 419.03 243.98 485.90 126.00 1,331.31 1,234.93 5,136.01
330 515.86 304.55 363.33 146.68 1,386.19 1,442.30 4,918.21
-
-
-
-
-
-
118 96.83 60.56 (122.57) 20.69 54.88 (207.36) 217.80
-
35.87 18.77 19.89 -33.74 14.10 3.96 -14.38 4.43
376 646.39 354.70 381.65 130.78 1,563.26 1,338.41 5,179.15
-
-
72 227.36 (110.72) (104.25) 4.78 231.96 (103.47) (43.14)
-
1,257 523.73 257.93 413.27 123.14 1,368.01 1,257.30 5,049.11
999 514.20 301.40 363.33 145.17 1,379.80 1,439.23 4,650.08
-
-
-
-
-
-
258 (9.53) 43.47 (49.95) 22.03 11.80 (181.93) 399.03
-
4,767 523.45 252.59 380.37 125.82 1,350.31 1,281.09 5,071.80
3,807 512.79 316.53 363.33 152.45 1,402.48 1,419.35 4,884.16
-
-
-
-
-
-
960 (10.66) 63.93 (17.04) 26.64 52.17 (138.27) 187.64
-
25.22 -2.08 20.20 -4.69 17.47 3.72 -9.74 3.84
D:\PSOFT\FSCM9\SFINPR91\NVISION\INSTANCE\BS50237.xls
Center: 50237 (Blackstone Valley Surgicare) Balance Sheet For Period Ending: December 31, 2016 Run Date: 01/12/17 Run Time: 20:45
Report ID: BALSHT Operator ID: GLCLOSE
Current Assets Cash & Temp Investments Accounts receivable Contractual Allowances Bad Debt Allowances Inventories Prepaids & other current assets Total Current Assets
(1,619,716) 594,631 (9,402) (23,638) 1,596 6,634 (1,049,894)
Other Assets
Current Liabilities Accounts Payable Salaries & Wages Payable Accrued Interest & Other CL Total Current Liabilities
222,614 221,670 220,304 664,587
-
Current Deferred Income Tax Intercompany Accounts
Notes receivable Trusteed funds & other assets Total Other Assets Property, Plant & Equipment Land Buildings Leasehold improvements Furniture, fixtures & equipment Construction-in-progress Less: Accumulated Depreciation Total Property, Plant & Equipment Intangible Assets Organ, P'ship formation & Start-up Costs Bond issue costs Non-compete Agreements Goodwill Less: Accumulated Amortization
Intercompany Accounts Notes Receivable Investments in Subsidiaries
TOTAL ASSETS
-
41,747 1,725,190 8,500 1,775,437 1,334,956 440,481
-
(609,413)
-
Notes Payable
Long-Term Debt & Leases Line of Credit Payable Bonds Payable Other LTD and Leases Total Long Term Debt & Leases Deferred Taxes Deferred Revenue TOTAL LIABILITIES
Shareholders' Equity Non-Controlling Interest Common Stock Additional Paid in Capital Retained Earnings General Partners' Interest Current YTD Income
185,377 185,377 849,964
20,908 (1,112,381) (367,904) (1,459,377)
TOTAL STOCKHOLDERS' EQUITY
(1,459,377)
TOTAL LIABILITIES & SH EQUITY
(609,413)
\\SCAPTCPIFSH001\SHARED\ACCT\GENLEDGR\REPORTS\BALSHEET\1216\TTM\50237 - BS_TTM.xls
Center: 50237 (Blackstone Valley Surgicare) Balance Sheet TTM Report ID: BS_TTM Operator ID: GLCLOSE
Run Date: 01/13/17 Run Time: 00:45
Dec-2015 Current Assets 1000 Petty Cash- Nonrestricted 1010 Facility Cash- Nonrestricted 1980 I/C Due To/Due From Cash & Temp Investments 1200 A/R- Trade 1202 A/R Accrued - Automated 1220 A/R- Credit Balance 1230 Unapplied Cash 1240 Patient Refund Clearing Accounts receivable 1270 Allow C/A - Medicare O/P 1271 Allow C/A - BC O/P 1272 Allow C/A - Medicaid O/P 1273 Allow C/A - WC O/P 1274 Allow C/A - Managed Care O/P 1275 Allow C/A - Other O/P 1276 Allow C/A - Comm O/P 1277 Allow C/A - Comm/Nat'l 1278 Allow C/A - Auto 1291 Allow C/A - Exchange O/P Less: Allowance for C/A 1280 Bad Debt Allowance Less: Allowance for B/D 1400 Inventory- Controlled Subst Inventories 1504 Prepaid Other Expenses 1512 Deferred Expenses 1551 Lease Clearing Prepaids & other current assets Total Current Assets Other Assets Notes receivable Trusteed funds & other assets Total Other Assets Property, Plant & Equipment Land Buildings 1730 Leasehold Improvements Leasehold improvements 1740 Equipment- Cap Lease 1745 Surgical Instruments 1750 Equipment 1755 Medical Equipment 1790 Computer Equipment Furniture, fixtures & equipment 1699 Asset Clearing Construction-in-progress 1820 1825 1830 1835 1837 1838 1855
Acc Depr- Bldg Cap Lease Acc Depr- LHI Acc Depr- Equip Cap Lease Acc Depr- Surgical Instruments Acc Depr- Medical Equipment Acc Depr- Equipment Acc Depr- Computer Equipment Less: Accumulated Depreciation Total Property, Plant & Equipment
Intangible Assets Organ, P'ship formation & Start-up Costs Bond issue costs Non-compete Agreements Goodwill
1,000 10,753 (1,373,224) (1,361,472) 507,705 92,246 (999) (12,381) 586,571 4,839 (0) 3,033 825 (0) 0 (0) 2,911 11,608 18,227 18,227 1,317 1,317 18,207 2,476 20,683 (782,736)
-
41,747 41,747 392,177 7,669 340,767 797,652 15,072 1,553,337 86,592 86,592 1,681,676 30,370 105,588 7,669 667,679 369,240 13,746 1,194,293 487,382
-
Jan-2016 1,000 4,570 (1,326,324) (1,320,755) 525,896 89,513 (999) (8,289) 606,120 20,720 6,065 2,561 4,685 25,234 (57,613) (0) (1,051) 4,731 5,332 26,253 26,253 1,317 1,317 20,412 2,476 22,888 (722,014)
-
41,747 41,747 385,317 7,669 340,767 864,817 15,072 1,613,642 19,427 19,427 1,674,816 30,787 112,671 7,669 675,594 370,002 13,827 1,210,551 464,265
-
Feb-2016 1,000 5,624 (1,369,155) (1,362,531) 526,934 84,906 (939) (3,022) 607,879 20,128 (3,906) 1,548 7,852 20,481 (63,391) (0) (191) (1,051) 4,506 (14,023) 28,302 28,302 1,317 1,317 16,983 3,195 20,177 (747,437)
-
41,747 41,747 385,317 7,669 340,767 864,817 15,072 1,613,642 19,427 19,427 1,674,816 31,204 119,836 7,669 681,111 370,765 13,907 1,224,491 450,324
-
Mar-2016 1,000 1,164 (1,432,808) (1,430,644) 567,537 76,212 (939) (4,778) 638,032 1,825 (7,079) 1,205 0 0 0 (0) (191) (12,876) 4,514 (12,601) 21,907 21,907 3,045 3,045 17,878 631 18,509 (780,363)
-
41,747 41,747 393,552 7,669 340,767 864,817 15,072 1,621,877 44,052 44,052 1,707,676 38,381 127,392 7,669 686,485 371,509 13,987 1,245,423 462,253
-
Apr-2016 1,000 (792) (1,512,561) (1,512,353) 513,508 74,763 (675) (3,028) 584,569 (447) (6,507) 463 (296) 1,966 (1,311) (0) (191) (12,799) 4,485 (14,637) 31,122 31,122 3,045 3,045 20,353 631 20,984 (920,240)
-
10,883 10,883 393,552 7,669 340,767 908,869 15,072 1,665,929 (308) (308) 1,676,504 8,078 134,655 7,669 693,833 372,253 14,067 1,230,556 445,949
-
May-2016 1,000 (63,498) (1,508,756) (1,571,254) 574,234 74,581 (625) (6,035) 642,156 (257) 9,362 (1,365) 573 2,820 (13,534) (0) (195) (12,806) 4,497 (10,905) 34,965 34,965 3,045 3,045 17,457 631 18,088 (932,025)
-
10,883 10,883 393,552 7,669 340,767 908,561 15,072 1,665,621 1,676,504 8,639 141,917 7,669 699,688 372,998 14,147 1,245,058 431,446
-
Jun-2016 1,000 (3,474) (1,506,199) (1,508,673) 509,345 60,972 69,326 (625) (6,000) 633,018 (7,801) 3,309 3,416 6,094 1,927 (22,725) (0) (195) (12,806) 4,401 (24,379) 23,047 23,047 1,601 1,601 18,213 (2,437) 15,777 (856,945)
-
10,883 10,883 428,632 7,669 340,767 908,561 15,072 1,700,701 1,711,584 418 9,200 149,180 7,669 705,432 373,742 14,228 1,259,869 451,715
-
Jul-2016
Aug-2016
1,000 (1,217) (1,539,117) (1,539,335) 451,575 68,285 71,177 (1,414) (6,035) 583,586 (8,300) 3,183 2,069 9,709 3,558 (23,527) (0) (196) (12,806) 2,239 (24,071) 28,999 28,999 1,601 1,601 12,756 (4,984) 7,772 (951,303)
-
10,883 10,883 428,632 7,669 340,767 908,561 15,072 1,700,701 1,711,584 9,761 157,278 7,669 711,174 374,483 14,308 1,274,673 436,911
-
1,000 (9,523) (1,535,807) (1,544,329) 422,866 97,748 54,478 (625) (5,342) 569,126 (12,013) 18,412 (426) 8,154 2,498 (36,423) (0) (196) (12,806) 2,269 (30,532) 22,115 22,115 1,601 1,601 13,814 2,380 (2,437) 13,757 (951,429)
-
10,883 10,883 428,632 7,669 340,767 908,561 15,072 1,700,701 1,711,584 10,322 164,958 7,669 716,822 375,223 14,388 1,289,382 422,202
-
Sep-2016 1,000 (3,844) (1,727,920) (1,730,764) 512,355 49,936 66,409 (653) (4,810) 623,237 163 24,115 (713) 10,892 7,424 (53,229) (0) (196) (12,806) 4,113 (20,238) 10,936 10,936 1,397 1,397 10,979 (2,437) 8,542 (1,088,285)
-
45,113 45,113 428,632 7,669 340,767 908,561 15,072 1,700,701 812 812 1,746,626 45,113 172,638 7,669 722,470 375,964 14,468 1,338,322 408,304
-
Oct-2016 1,000 (6,336) (1,701,035) (1,706,371) 473,867 88,532 79,600 (653) (6,035) 635,311 3,601 15,861 3,456 11,650 13,090 (72,236) 2,904 (3,100) (12,806) 4,131 (33,449) 14,910 14,910 1,397 1,397 11,229 (3,929) 7,300 (1,043,825)
-
41,747 41,747 428,632 7,669 340,767 908,561 15,946 1,701,575 812 812 1,744,134 41,747 172,638 7,669 722,470 375,964 14,468 1,334,956 409,178
-
Nov-2016 1,000 (3,364) (1,742,943) (1,745,307) 485,930 52,853 98,380 (653) (6,035) 630,476 3,194 20,356 3,901 12,701 21,698 (83,194) 2,904 (3,100) (12,806) 4,131 (30,215) 17,050 17,050 1,397 1,397 15,037 (3,156) 11,881 (1,088,388)
-
41,747 41,747 428,632 7,669 340,767 908,561 15,946 1,701,575 5,610 5,610 1,748,932 41,747 172,638 7,669 722,470 375,964 14,468 1,334,956 413,976
-
Dec-2016 1,000 (6,250) (1,614,466) (1,619,716) 459,203 48,728 85,867 (473) 1,307 594,631 0 (0) 1,943 429 7,030 0 (0) 9,402 23,638 23,638 1,596 1,596 10,563 (3,929) 6,634 (1,049,894)
-
41,747 41,747 446,637 7,669 346,377 908,561 15,946 1,725,190 8,500 8,500 1,775,437 41,747 172,638 7,669 722,470 375,964 14,468 1,334,956 440,481
-
Less: Accumulated Amortization
Intercompany Accounts Notes Receivable Investments in Subsidiaries
TOTAL ASSETS
Current Liabilities 2005 Accounts Payable 2010 Accounts Payable- Accrued Accounts Payable 2050 Accrued Salaries- Ceridian 2051 Accrued Vacation - Ceridian 2052 Accrued Year End Bonus-Admin 2053 Accrued Payroll Bonuses 2054 Accrued Other Bonus-SSP 2057 Accrued Year-End Bonus-CLT Salaries & Wages Payable 2140 Notes Payable- S/T 2170 Capitalized Leases- S/T 2205 Accrued Interest- Notes 2225 Patient Credit Balances 2357 State Use Tax Payable 2365 Accrued Taxes - FF&E 2370 Accrued Taxes- Other 2471 Escheatment Payable Accrued Interest & Other CL Total Current Liabilities Current Deferred Income Tax Deferred Inc Tax Liab-Current Intercompany Accounts Notes Payable
Long-Term Debt & Leases Line of Credit Payable Bonds Payable 2640 Notes Payable- L/T 2670 Capitalized Leases- L/T Other LTD and Leases Total Long Term Debt & Leases Deferred Taxes Deferred Income Tax Liability Deferred Revenue Deferred Revenue TOTAL LIABILITIES Shareholders' Equity 2842 AOLP- Syndications 2843 AOLP- Repurchases 2844 AOLP- Retained Earnings Non-Controlling Interest Common Stock Additional Paid in Capital Retained Earnings 2960 SCA-GP Contributions 2961 SCA-GP Distributions 2964 SCA-GP Retained Earnings 2967 SCA-GP Pool Balance 2981 SCA-LP Distributions 2982 SCA-LP Syndications 2983 SCA-LP Repurchases 2984 SCA-LP Retained Earnings 2987 SCA-LP Pool Balance General Partners' Interest Current YTD Income
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(295,353)
(257,749)
(297,113)
(318,111)
(474,292)
(500,580)
(405,230)
(514,392)
(529,227)
(679,981)
(634,647)
(674,412)
(609,413)
41,450 77,915 119,365 62,992 75,084 45,285 500 2,875 15,071 201,807 19,119 91,783 28 92,246 1,310 30,108 500 235,093 556,265
22,552 123,680 146,232 80,339 79,763 48,791 500 3,833 16,238 229,463 18,653 86,469 26 89,513 3,555 35,126 542 233,884 609,579
26,574 107,175 133,750 78,609 82,135 52,296 500 4,791 17,404 235,737 18,182 84,810 22 84,906 3,407 40,144 583 232,054 601,541
53,569 129,192 182,762 112,202 90,458 16,167 500 2,875 5,275 227,476 17,734 86,477 21 76,212 4,044 45,162 625 230,276 640,514
22,090 106,033 128,123 39,333 93,508 19,743 500 3,833 6,442 163,358 17,242 84,823 18 74,763 3,073 50,180 (333) 229,766 521,247
37,073 89,035 126,108 47,272 96,055 23,318 500 4,791 7,608 179,545 16,748 83,157 17 74,581 4,062 55,198 (292) 233,472 539,125
54,623 119,139 173,763 70,132 93,248 26,894 500 5,750 8,775 205,298 16,264 88,548 14 69,326 3,829 60,216 250 238,447 617,508
23,069 171,765 194,834 87,134 80,972 30,470 500 6,708 10,317 216,100 15,775 86,904 12 71,177 2,974 600 292 177,733 588,666
21,278 176,132 197,410 88,980 76,067 34,045 500 7,666 11,858 219,118 15,264 85,247 10 54,478 2,979 5,618 333 163,929 580,456
28,576 122,750 151,326 41,798 75,581 30,278 500 5,750 13,054 166,961 12,903 83,578 66,409 2,051 10,636 375 175,952 494,239
21,544 135,737 157,280 52,643 80,707 33,854 500 6,708 14,596 189,009 12,964 81,901 79,600 3,254 15,654 417 (26) 193,763 540,052
36,841 105,349 142,190 74,155 87,008 37,430 500 7,666 16,138 222,896 13,051 80,927 98,380 3,843 20,672 458 217,331 582,417
42,254 180,359 222,614 78,356 97,401 27,715 500 5,750 11,949 221,670 13,056 83,904 85,867 4,013 32,964 500 220,304 664,587
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
51,112 188,742 239,854 239,854
796,120
49,633 186,344 235,976 235,976
845,555
48,220 174,007 222,227 222,227
823,768
46,284 170,393 216,676 216,676
857,190
45,209 164,286 209,495 209,495
730,742
44,131 158,161 202,292 202,292
741,417
42,784 176,959 219,743 219,743
837,251
41,500 170,181 211,680 211,680
800,346
40,633 163,379 204,012 204,012
784,469
39,032 156,556 195,587 195,587
689,827
37,776 149,707 187,484 187,484
727,536
35,980 142,835 178,815 178,815
761,233
35,887 149,489 185,377 185,377
849,964
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (37,031) (1,091,473)
462,217 (133,182) 329,035 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 (1,269,113) 22,927 (1,420,508) (11,831) (1,103,304)
462,217 (133,182) 329,035 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 (1,269,113) 22,927 (1,420,508) (29,408) (1,120,881)
462,217 (133,182) 329,035 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 (1,269,113) 22,927 (1,420,508) (83,828) (1,175,300)
462,217 (133,182) 329,035 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 (1,269,113) 22,927 (1,420,508) (113,561) (1,205,034)
462,217 (133,182) 329,035 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 (1,269,113) 22,927 (1,420,508) (150,523) (1,241,996)
462,217 (133,182) 329,035 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 (1,269,113) 22,927 (1,420,508) (151,008) (1,242,481)
462,217 (133,182) 329,035 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 (1,269,113) 22,927 (1,420,508) (223,265) (1,314,738)
462,217 (133,182) 329,035 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 (1,269,113) 22,927 (1,420,508) (222,223) (1,313,696)
462,217 (133,182) 329,035 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 (1,269,113) 22,927 (1,420,508) (278,335) (1,369,808)
462,217 (154,776) (133,182) 174,259 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 154,776 (1,269,113) 22,927 (1,265,732) (270,709) (1,362,182)
462,217 (308,127) (133,182) 20,908 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 308,127 (1,269,113) 22,927 (1,112,381) (344,172) (1,435,645)
462,217 (308,127) (133,182) 20,908 21,765 (2,975,753) (934,863) (22,927) (4,463,629) 8,201,084 308,127 (1,269,113) 22,927 (1,112,381) (367,904) (1,459,377)
TOTAL STOCKHOLDERS' EQUITY
(1,091,473)
(1,103,304)
(1,120,881)
(1,175,300)
(1,205,034)
(1,241,996)
(1,242,481)
(1,314,738)
(1,313,696)
(1,369,808)
(1,362,182)
(1,435,645)
(1,459,377)
TOTAL LIABILITIES & SH EQUITY
(295,353)
(257,749)
(297,113)
(318,111)
(474,292)
(500,580)
(405,230)
(514,392)
(529,227)
(679,981)
(634,647)
(674,412)
(609,413)
50237 - Blackstone Valley Surgicare Trailing 12-month Income Statement For Period Ending: December 31, 2015 Run Date: 01/13/16 Run Time: 10:38 PM 2015-1
2015-2
2015-3
2015-4
2015-5
2015-6
2015-7
2015-8
2015-9
2015-10
2015-11
2015-12
TTM Actual
Gross Patient Revenue OP Revenue Medicare Medicaid BCBS Managed Care and Oth Disc Plan Workers' Compensation Exchange Other Payors Other
OP Revenue Gross Patient Revenue
286,332.98 115,715.62 621,719.82 388,833.63 133,754.49 6,767.00 8,284.00
419,259.68 80,355.80 495,211.12 470,617.73 74,975.00 42,231.50 10,296.00
374,747.54 110,822.85 468,966.56 451,173.01 112,219.00 57,094.50 42,830.00
471,894.61 153,394.75 455,724.46 345,228.15 102,543.40 30,051.00 79,593.60
569,250.19 153,692.23 585,219.97 413,564.31 146,667.00 29,934.50 73,524.00
526,234.16 210,457.69 563,371.88 307,269.80 116,343.49 30,693.00 2,602.00 49,727.00
540,634.47 277,412.47 534,776.45 311,448.33 82,910.00 41,341.96 46,657.00
493,530.00 153,102.89 445,660.43 255,883.62 81,332.00 33,562.00 51,416.00
673,505.50 248,872.07 349,406.18 214,370.54 92,408.50 57,456.50 49,736.00
568,911.35 257,968.01 580,170.85 243,716.38 75,748.00 30,110.75 47,615.00
554,700.50 189,072.94 555,651.34 288,716.86 72,386.00 50,061.75 30,726.61
491,301.74 167,277.40 636,887.14 423,373.65 68,421.00 91,079.50 27,335.00
5,970,302.72 2,118,144.72 6,292,766.20 4,114,196.01 1,159,707.88 500,383.96 2,602.00 517,740.21
1,561,407.54 1,561,407.54
1,592,946.83 1,592,946.83
1,617,853.46 1,617,853.46
1,638,429.97 1,638,429.97
1,971,852.20 1,971,852.20
1,806,699.02 1,806,699.02
1,835,180.68 1,835,180.68
1,514,486.94 1,514,486.94
1,685,755.29 1,685,755.29
1,804,240.34 1,804,240.34
1,741,316.00 1,741,316.00
1,905,675.43 1,905,675.43
20,675,843.70 20,675,843.70
206,221.62 99,296.81 413,812.63 275,015.09 101,152.98 2,502.89 7,559.98
321,609.68 66,019.65 322,476.82 316,610.53 53,688.37 28,555.43 8,236.80
283,342.54 92,939.55 304,279.95 324,174.57 85,173.77 43,012.79 39,560.01
356,079.27 129,837.82 301,182.13 246,912.85 75,783.74 18,746.96 72,690.80
438,075.80 123,645.99 395,891.90 283,282.01 112,085.14 20,891.15 66,177.64
404,847.23 171,428.65 408,850.08 228,081.26 64,090.83 22,180.63 838.29 57,796.05
405,342.32 208,143.69 334,537.43 198,681.92 58,551.29 25,335.76 41,406.97
366,828.02 118,777.38 281,921.67 172,264.44 58,087.72 23,232.42 46,859.21
412,791.27 194,106.22 384,480.38 160,444.83 54,746.56 25,048.86 36,620.70
413,352.83 144,533.59 379,692.12 188,902.53 50,537.23 35,851.62 23,709.08
365,104.49 128,187.44 411,083.02 299,552.96 45,838.21 56,438.68 8.45 46,272.80
4,474,373.06 1,674,701.51 4,152,635.61 2,836,706.92 816,643.15 343,153.07 846.73 489,211.96
1,105,562.00 1,105,562.00
1,117,197.28 1,117,197.28
1,172,483.18 1,172,483.18
1,201,233.57 1,201,233.57
1,440,049.63 1,440,049.63
1,358,113.02 1,358,113.02
1,271,999.38 1,271,999.38
1,067,970.86 1,067,970.86
1,196,359.22 1,196,359.22
1,268,238.82 1,268,238.82
1,236,579.00 1,236,579.00
1,352,486.05 1,352,486.05
14,788,272.01 14,788,272.01
455,845.54
475,749.55
445,370.28
437,196.40
531,802.57
448,586.00
563,181.30
446,516.08
489,396.07
536,001.52
504,737.00
553,189.38
5,887,571.69
455,845.54
475,749.55
445,370.28
437,196.40
531,802.57
448,586.00
563,181.30
446,516.08
489,396.07
536,001.52
504,737.00
553,189.38
5,887,571.69
(31.78) (31.78)
63.60 63.60
(122.25) (122.25)
70.30 70.30
61.12 61.12
(122.85) (122.85)
(39.11) (39.11)
12.21 12.21
117.36 117.36
650.88 650.88
3,900.00 0.61 3,900.61
22,750.00 114.11 22,864.11
26,650.00 774.20 27,424.20
Contractual Allowance OP Contractual Allowance Medicare Medicaid BCBS Managed Care and Oth Disc Plan Workers' Compensation Exchange Other Payors Other
OP Contractual Allowance Contractual Allowance IP Net Patient Revenue OP Net Patient Revenue Net Patient Revenue Other Income Rental income Other operating income Other Income
500,777.99 197,784.72 214,427.48 142,783.93 56,907.31 41,355.88 (0.01) 42,321.92
Net Revenue
455,813.76
475,813.15
445,248.03
437,266.70
531,863.69
448,463.15
563,142.19
446,528.29
489,513.43
536,652.40
508,637.61
576,053.49
5,914,995.89
Salaries and benefits Salaries Wage Transfers FICA FUTA SUI 401K Group Med Ins Voluntary-Supplemental Insurnc Other Benefits Work Comp Ins Salaries and benefits
168,448.94 11,368.33 1,022.03 4,026.76 2,473.29 10,701.77 364.46 (1,129.90) 1,374.82 198,650.50
138,834.99 9,917.74 282.75 2,609.87 2,057.54 7,163.34 364.45 999.38 1,516.35 163,746.41
151,044.39 1,075.36 11,370.38 142.85 1,262.37 2,405.17 7,227.21 384.45 (873.53) 2,418.34 176,456.99
141,107.39 570.56 11,352.13 100.48 2,102.70 2,382.30 7,622.32 384.45 (794.15) 2,154.65 166,982.83
176,969.91 11,315.05 132.22 1,737.01 2,137.12 11,835.53 384.45 (1,317.95) 1,804.45 204,997.79
159,986.24 12,316.94 81.49 1,246.61 2,442.12 7,664.96 384.45 (682.95) 1,580.67 185,020.53
155,826.48 11,896.90 61.63 755.14 2,496.28 7,824.63 384.45 (921.94) 1,788.60 180,112.17
140,785.44 10,667.34 46.81 451.90 2,298.72 7,824.63 384.45 1,180.58 1,580.67 165,220.54
181,588.78 11,719.25 44.20 351.50 2,336.44 7,824.63 384.45 (868.13) 1,580.67 204,961.79
167,190.77 11,426.85 24.09 216.49 2,257.84 9,041.77 384.45 (21.10) 1,580.67 192,101.83
159,418.27 11,350.03 44.14 327.81 2,205.05 7,970.90 384.45 (747.33) 1,580.67 182,533.99
171,863.54 11,759.28 423.56 1,425.06 3,244.38 (6,021.99) 384.45 (746.53) 1,580.67 183,912.42
1,913,065.14 1,645.92 136,460.22 2,406.25 16,513.22 28,736.25 86,679.70 4,573.41 (5,923.55) 20,541.23 2,204,697.79
Medical Supplies Med Supplies - Chargeable Med Supplies - Non Chargeable Drugs and Medicine O&P devices and implants Medical Supplies
33,876.41 28,441.83 7,183.05 31,526.92 101,028.21
39,809.84 35,694.39 5,621.89 36,176.42 117,302.54
40,359.34 33,962.61 6,872.31 31,777.43 112,971.69
44,162.68 28,875.82 6,667.50 30,499.80 110,205.80
46,067.93 26,931.77 6,722.37 38,291.97 118,014.04
62,646.01 35,750.37 5,444.99 60,914.79 164,756.16
48,645.62 13,924.74 7,978.77 26,262.46 96,811.59
43,271.03 35,351.69 6,352.29 32,156.91 117,131.92
45,373.25 31,859.76 9,595.25 34,631.26 121,459.52
49,011.76 17,566.70 8,050.55 57,283.01 131,912.02
40,121.07 33,728.10 5,354.10 44,106.69 123,309.96
31,598.86 68,730.77 8,745.65 73,444.92 182,520.20
524,943.80 390,818.55 84,588.72 497,072.58 1,497,423.65
6.42 64.54 1,358.79 3,942.92 3,993.66 1,447.53 10,124.62
303.97 34.13 523.18 4,552.26 3,903.09 1,611.56 9,525.75
1,019.12 1,078.80 5,040.72 3,965.25 3,353.19 11,009.43
934.95 5.78 568.72 5,884.50 3,174.50 4,081.12 6,173.73
111.52 1,367.60 4,225.63 3,209.73 1,221.86 13,786.55
1,543.06 11.34 1,689.53 2,441.37 3,967.55 1,278.22 9,172.49
751.84 19.48 1,529.69 4,487.37 3,185.94 1,368.88 20,332.78
282.83 18.98 1,000.04 3,907.79 2,380.53 565.29 16,742.76
1,090.94 1,092.50 8,280.17 3,967.55 4,046.21 15,945.98
1,197.51 408.85 2,201.43 4,373.91 3,979.45 1,987.32 12,864.47
236.76 60.28 3,226.43 3,496.79 2,017.07 19,164.21
1,799.20 10.35 1,195.06 6,552.30 3,243.04 3,854.93 19,460.16
9,166.60 684.97 13,665.62 56,915.37 42,467.08 26,833.18 164,302.93
Variable Expenses Food and Catering Interest/Late Fees Office Supplies Housekeeping and Janitorial Linens Minor Equipment Rental Equipment
Page: 1 of 12
50237 - Blackstone Valley Surgicare Trailing 12-month Income Statement For Period Ending: December 31, 2015 Run Date: 01/13/16 Run Time: 10:38 PM 2015-1
2015-2
2015-3
2015-4
2015-5
2015-6
2015-7
2015-8
2015-9
2015-10
2015-11
2015-12
TTM Actual
Storage - Including Data Repairs Maint Contracts Bank Service Charges Dues and Subscriptions Printing Postage and Delivery Telephone Utilities Education Contract Services Collection Fees Legal Fees Professional fees Medical director fees Marketing Travel and Entertainment Other Variable Expenses Variable Expenses
370.82 8,888.40 9,317.55 2,475.97 1,828.95 885.05 (410.35) 667.74 16,742.07 27,632.87 305.60 1,387.50 1,859.68 1,500.00 162.25 4,381.32 98,933.90
441.42 3,758.63 3,908.82 955.67 1,849.98 (50.31) 3,742.68 28,424.16 19,393.98 757.83 2,623.60 3,261.58 1,500.00 4,636.43 95,658.41
938.62 2,265.92 6,719.13 873.43 385.86 1,368.40 2,018.38 25,061.55 22,410.11 1,147.01 2,055.48 1,500.00 6.86 4,687.59 96,904.85
798.04 7,657.45 7,298.29 1,354.68 525.00 905.11 245.18 2,020.39 12,415.67 25,962.77 633.40 5,024.17 1,500.00 809.55 8,021.27 95,994.27
497.54 5,012.11 9,792.88 890.10 508.58 631.00 2,012.41 7,124.96 147.15 22,558.12 419.69 247.50 1,440.20 1,500.00 6,204.02 82,909.15
615.81 7,778.57 4,333.91 854.85 319.20 2,674.60 995.85 2,046.80 10,778.98 21,139.04 861.11 6,160.50 1,284.72 3,000.00 179.44 149.55 3,445.14 86,721.63
600.44 6,808.56 4,292.51 1,630.89 661.66 1,982.55 410.53 2,041.59 15,408.70 150.00 33,458.23 2,297.37 1,459.04 3,202.73 1,500.00 4,699.65 112,280.43
473.40 6,225.08 4,377.91 1,564.59 220.53 606.47 491.83 657.19 13,330.67 300.00 20,819.08 842.34 782.04 (136.80) 1,500.00 320.91 (5,022.57) 72,250.89
651.74 6,185.91 5,497.09 1,736.64 943.13 549.76 105.93 3,433.46 13,161.59 992.82 27,671.93 160.89 500.00 1,230.03 1,500.00 282.88 3,831.21 102,858.36
692.79 6,263.29 4,337.06 814.78 300.00 1,546.62 794.71 2,036.78 12,055.88 2,803.40 34,395.42 841.73 2,035.53 (1,500.00) 4,316.56 98,747.49
780.19 4,276.83 4,426.17 1,543.89 192.39 735.41 2,059.22 11,669.95 16,086.39 923.91 313.28 968.99 1,500.00 2,350.84 4,588.95 80,617.95
722.85 5,939.90 5,536.24 2,177.91 100.00 2,991.60 1,519.45 2,100.13 11,471.55 22,900.31 551.30 544.50 1,978.40 1,500.00 4,541.39 100,690.57
7,583.66 71,060.65 69,837.56 16,873.40 4,898.47 15,078.57 6,837.63 24,836.77 177,645.73 4,393.37 294,428.25 9,742.18 14,017.96 24,204.71 16,500.00 179.44 4,082.84 48,330.96 1,124,567.90
Fixed Expenses Rent Insurance Sales and Use Tax Property Tax Miscellaneous Fixed Expenses
37,474.50 5,643.53 1.30 6,140.00 8,602.39 57,861.72
37,474.50 5,643.53 6,140.00 8,533.21 57,791.24
37,474.50 1,589.58 6,140.00 10,176.95 55,381.03
37,474.50 6,066.57 6,140.00 9,316.45 58,997.52
37,474.50 4,735.80 6,140.00 10,387.66 58,737.96
37,474.50 4,784.66 6,140.00 10,722.69 59,121.85
37,474.50 4,783.34 6,140.00 9.67 48,407.51
37,474.50 4,783.34 6,140.00 41.67 48,439.51
37,474.50 4,783.34 6,140.00 41.67 48,439.51
37,474.50 4,783.34 6,140.00 41.67 48,439.51
37,474.50 4,783.34 6,140.00 41.67 48,439.51
38,526.77 4,783.34 3,795.00 41.67 47,146.78
450,746.27 57,163.71 1.30 71,335.00 57,957.37 637,203.65
Provision for doubtful accts
10,806.88
11,875.30
(3,540.65)
10,955.68
13,042.54
(6,144.36)
12,374.35
9,766.01
12,773.78
13,276.13
12,256.33
(22,297.47)
75,144.52
EBITDA
(11,467.45)
29,439.25
7,074.12
(5,869.40)
54,162.21
(41,012.66)
113,156.14
33,719.42
(979.53)
52,175.42
61,479.87
84,080.99
375,958.38
9,138.26 6,095.27 15,233.53
9,134.98 5,397.28 14,532.26
9,175.11 5,985.96 15,161.07
9,044.94 5,726.12 14,771.06
8,535.98 5,819.64 14,355.62
8,535.98 5,658.61 14,194.59
8,805.89 5,878.06 14,683.95
8,581.67 5,904.62 14,486.29
8,581.72 5,711.51 14,293.23
8,450.52 6,027.73 14,478.25
13,176.15 5,662.85 18,839.00
13,222.58 6,433.58 19,656.16
114,383.78 70,301.23 184,685.01
Total Exp Before Mgmt Fee and I/C
482,514.74
460,906.16
453,334.98
457,907.16
492,057.10
503,670.40
464,670.00
427,295.16
504,786.19
498,955.23
465,996.74
511,628.66
5,723,722.52
Income (loss) before Mgmt Fee, I/C, Taxes, & Sale
(26,700.98)
14,906.99
(8,086.95)
(20,640.46)
39,806.59
(55,207.25)
98,472.19
19,233.13
(15,272.76)
37,697.17
42,640.87
64,424.83
191,273.37
Mgmt Fee, Intercompany, Taxes Intercompany Mgmt Fee Expense Mgmt Fee, Intercompany, Taxes
22,250.35 22,250.35
23,196.89 23,196.89
22,439.43 22,439.43
21,315.55 21,315.55
25,941.05 25,941.05
22,730.38 22,730.38
27,538.39 27,538.39
21,838.12 21,838.12
23,836.98 23,836.98
16,682.69 16,682.69
Net Income (Loss) Before Minority Interest, Sale of Investment
(48,951.33)
(8,289.90)
(30,526.38)
(41,956.01)
13,865.54
(77,937.63)
70,933.80
(2,604.99)
(39,109.74)
21,014.48
Interest, Depreciation, Amort Depreciation Expense Interest Expense
Minority Int, Sale of Investmt Gain/Loss on Disposal of Asset Minority Int, Sale of Investmt
(0.18) (0.18)
-
-
-
0.18 0.18
-
-
(0.18) (0.18)
-
-
42,640.87
-
-
227,769.83 227,769.83
64,424.83
(36,496.46)
535.00 535.00
534.82 534.82
Net Income (Loss)
(48,951.15)
(8,289.90)
(30,526.38)
(41,956.01)
13,865.36
(77,937.63)
70,933.80
(2,604.81)
(39,109.74)
21,014.48
42,640.87
63,889.83
(37,031.28)
EBIT EBITDA EBITDAR
(20,605.71) (11,467.45) 26,007.05
20,304.27 29,439.25 66,913.75
(2,100.99) 7,074.12 44,548.62
(14,914.34) (5,869.40) 31,605.10
45,626.23 54,162.21 91,636.71
(49,548.64) (41,012.66) (3,538.16)
104,350.25 113,156.14 150,630.64
25,137.75 33,719.42 71,193.92
(9,561.25) (979.53) 36,494.97
43,724.90 52,175.42 89,649.92
48,303.72 61,479.87 98,954.37
70,858.41 84,080.99 122,607.76
261,574.60 375,958.38 826,704.65
293 677.99 337.66 344.81
284 576.57 336.83 413.04
322 548.00 300.95 350.84
325 513.79 295.37 339.09
370 554.05 224.08 318.96
361 512.52 240.23 456.39
369 488.11 304.28 262.36
317 521.20 227.92 369.50
355 577.36 289.74 342.14
377 509.55 261.93 349.90
325 561.64 248.06 379.42
395 465.60 254.91 462.08
4,093.00 538.65 274.75 365.85
Statistical information: Surgical cases Ttl Salary related expense per case Variable cost per case Supply cost per case
Page: 2 of 12
50237 - Blackstone Valley Surgicare Trailing 12-month Income Statement For Period Ending: December 31, 2015 Run Date: 01/13/16 Run Time: 10:38 PM 2015-1
Fixed cost per case Total expense per case Net patient revenue per case Gross revenue per case
Page: 3 of 12
197.48 1,646.81 1,555.79 5,329.04
2015-2
203.49 1,622.91 1,675.17 5,608.97
2015-3
171.99 1,407.87 1,383.14 5,024.39
2015-4
181.53 1,408.95 1,345.22 5,041.32
2015-5
158.75 1,329.88 1,437.30 5,329.33
2015-6
163.77 1,395.21 1,242.62 5,004.71
2015-7
131.19 1,259.27 1,526.24 4,973.39
2015-8
152.81 1,347.93 1,408.57 4,777.56
2015-9
136.45 1,421.93 1,378.58 4,748.61
2015-10
128.49 1,323.49 1,421.75 4,785.78
2015-11
149.04 1,433.84 1,553.04 5,357.90
2015-12
119.36 1,295.26 1,400.48 4,824.49
TTM Actual 155.68 1,398.42 1,438.45 5,051.51
50237 - Blackstone Valley Surgicare Trailing 12-month Income Statement For Period Ending: December 31, 2014 Run Date: 01/13/15 Run Time: 08:53 PM 2014-1
2014-2
2014-3
2014-4
2014-5
2014-6
2014-7
2014-8
2014-9
2014-10
2014-11
2014-12
TTM Actual
Gross Patient Revenue OP Revenue Medicare Medicaid BCBS Managed Care and Oth Disc Plan Workers' Compensation Exchange Other Payors Other
OP Revenue Gross Patient Revenue
478,188.31 44,633.00 444,153.72 336,462.96 76,719.38 13,343.00 3,326.00 76,531.00
504,014.43 48,863.38 420,846.84 373,284.65 111,866.75 6,662.00 3,326.00 86,061.00
403,850.89 61,475.50 462,241.16 269,419.87 59,310.65 9,780.00 156,947.60
447,798.93 96,665.00 372,132.08 348,174.45 42,153.00 11,274.50 69,205.00
403,651.00 95,781.40 362,610.48 285,078.08 107,533.72 43,610.40 109,307.00
535,742.04 82,828.58 434,570.68 304,422.26 67,170.66 25,961.00 89,436.00
410,730.50 74,976.13 383,162.81 337,764.44 49,618.00 26,156.50 63,294.00
346,705.89 76,350.61 393,392.88 337,918.91 73,162.72 17,536.00 96,328.00
543,549.23 108,305.76 472,442.02 333,283.01 120,303.00 72,458.76 40,444.00
498,803.06 83,146.73 523,487.37 366,633.03 101,345.00 15,362.00 82,485.00
392,092.63 107,307.67 355,207.68 383,835.09 123,328.00 4,829.00 28,720.00
352,702.40 96,422.70 503,346.16 535,730.73 95,523.00 43,569.50 93,437.00
5,317,829.31 976,756.46 5,127,593.88 4,212,007.48 1,028,033.88 290,542.66 6,652.00 992,195.60
1,473,357.37 1,473,357.37
1,554,925.05 1,554,925.05
1,423,025.67 1,423,025.67
1,387,402.96 1,387,402.96
1,407,572.08 1,407,572.08
1,540,131.22 1,540,131.22
1,345,702.38 1,345,702.38
1,341,395.01 1,341,395.01
1,690,785.78 1,690,785.78
1,671,262.19 1,671,262.19
1,395,320.07 1,395,320.07
1,720,731.49 1,720,731.49
17,951,611.27 17,951,611.27
Contractual Allowance IP Contractual Allowance Exchange
IP Contractual Allowance OP Contractual Allowance Medicare Medicaid BCBS Managed Care and Oth Disc Plan Workers' Compensation Exchange Other Payors Other
OP Contractual Allowance Contractual Allowance IP Net Patient Revenue OP Net Patient Revenue Net Patient Revenue Other Income Rental income Other operating income Other Income Net Revenue
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
361,283.70 36,290.39 307,246.07 234,232.55 58,708.11 2,128.64 78,496.58
376,813.99 40,798.78 288,185.70 266,573.51 86,654.55 4,277.43 2,869.95 75,206.70
303,271.33 49,142.62 293,289.40 184,707.65 43,975.97 4,801.44 136,805.60
326,302.54 78,965.82 263,531.28 232,404.88 30,109.14 5,966.95 59,912.00
307,573.94 79,380.10 232,037.69 191,343.72 81,790.59 28,350.36 99,477.00
389,466.61 67,616.37 268,445.08 205,442.40 45,668.09 15,466.26 75,878.12
301,782.29 60,826.99 228,000.26 226,131.63 35,157.98 15,402.74 55,472.40
250,423.86 60,555.34 247,479.29 231,480.88 54,140.62 7,474.40 86,508.00
401,964.63 89,167.97 326,838.14 236,036.02 86,909.41 54,395.54 34,094.23
366,486.39 65,201.26 329,635.73 249,268.78 71,801.20 10,375.00 76,745.64
291,219.65 85,693.85 220,501.21 260,783.43 87,136.24 2,720.09 21,738.13
1,078,386.04 1,078,386.04
1,141,380.61 1,141,380.61
1,015,994.01 1,015,994.01
997,192.61 997,192.61
1,019,953.40 1,019,953.40
1,067,982.93 1,067,982.93
922,774.29 922,774.29
938,062.39 938,062.39
1,229,405.94 1,229,405.94
1,169,514.00 1,169,514.00
969,792.60 969,792.60
1,196,729.50 1,196,729.50
12,747,168.32 12,747,168.32
394,971.33
413,544.44
407,031.66
390,210.35
387,618.68
472,148.29
422,928.09
403,332.62
461,379.84
501,748.19
425,527.47
524,001.99
5,204,442.95
394,971.33
413,544.44
407,031.66
390,210.35
387,618.68
472,148.29
422,928.09
403,332.62
461,379.84
501,748.19
425,527.47
524,001.99
5,204,442.95
159.72 159.72
146.23 146.23
236.22 236.22
340.06 340.06
106.73 106.73
76.60 76.60
8.11 8.11
37.64 37.64
53.47 53.47
269.06 269.06
1,241.53 1,241.53
(67.34) (67.34)
(124.97) (124.97)
278,422.48 94,888.84 285,941.15 371,098.68 (3,506.94) 37,978.31 628.79 131,278.19
3,955,011.41 808,528.33 3,291,131.00 2,889,504.13 678,544.96 187,208.52 5,627.38 931,612.59
395,131.05
413,690.67
406,964.32
390,446.57
387,958.74
472,255.02
423,004.69
403,340.73
461,417.48
501,623.22
425,580.94
524,271.05
5,205,684.48
Salaries and benefits Salaries FICA FUTA SUI 401K Group Med Ins Voluntary-Supplemental Insurnc Other Benefits Work Comp Ins Salaries and benefits
139,597.45 11,053.74 493.36 3,709.51 2,061.83 8,674.21 298.42 369.96 1,538.17 167,796.65
131,510.73 9,301.93 301.13 2,522.86 1,656.08 8,963.96 276.97 (128.24) 979.50 155,384.92
113,909.43 14,294.24 112.70 2,443.86 2,928.43 9,066.19 284.62 17.77 1,258.83 144,316.07
158,925.74 9,864.23 87.48 2,211.50 2,072.56 10,787.21 343.79 (981.10) 1,258.83 184,570.24
154,496.92 10,140.18 93.53 1,737.28 2,027.38 10,787.21 354.27 (954.46) 1,258.83 179,941.14
116,540.94 10,049.53 52.22 1,096.83 2,058.20 10,787.21 354.27 (1,119.26) 1,258.83 141,078.77
143,839.97 10,463.64 28.87 649.63 2,087.68 10,787.21 354.27 (945.91) 1,368.04 168,633.40
127,833.41 9,261.94 27.14 464.04 1,841.25 10,787.21 354.27 (878.00) 1,360.54 151,051.80
145,619.54 10,578.63 44.94 467.63 2,013.61 10,787.21 354.27 (825.48) 1,258.83 170,299.18
155,806.16 10,562.44 29.94 336.42 2,056.94 11,356.43 354.27 (904.15) 1,544.50 181,142.95
143,240.39 9,176.91 34.62 313.72 1,848.03 10,217.99 354.27 (931.47) 1,258.83 165,513.29
147,368.82 11,341.70 42.21 278.35 2,289.69 10,330.85 344.48 (653.26) 1,258.83 172,601.67
1,678,689.50 126,089.11 1,348.14 16,231.63 24,941.68 123,332.89 4,028.17 (7,933.60) 15,602.56 1,982,330.08
Medical Supplies Med Supplies - Chargeable Med Supplies - Non Chargeable Drugs and Medicine O&P devices and implants Medical Supplies
10,549.69 24,873.63 6,673.97 48,139.78 90,237.07
32,274.02 25,017.59 5,347.53 24,339.72 86,978.86
22,519.65 23,001.55 5,773.90 31,599.44 82,894.54
41,054.75 20,565.88 3,463.78 12,568.22 77,652.63
38,742.85 21,211.05 6,937.25 31,975.22 98,866.37
45,106.03 25,805.66 7,695.75 37,558.16 116,165.60
31,674.19 24,120.30 4,997.07 35,295.47 96,087.03
34,419.54 22,011.58 5,222.26 45,490.87 107,144.25
41,727.73 27,984.32 5,214.81 33,615.93 108,542.79
40,864.93 25,820.01 655.04 32,831.58 100,171.56
45,485.63 29,737.13 5,972.88 24,075.11 105,270.75
51,306.91 35,677.03 6,521.82 40,714.36 134,220.12
435,725.92 305,825.73 64,476.06 398,203.86 1,204,231.57
41.01 1,615.97 1,556.15 5,745.64
582.96 693.30 12,692.92 3,573.45
607.14 2,000.64 1,935.28 2,068.49
587.73 716.40 4,301.25 3,362.45
320.91 31.96 1,000.03 6,765.93 680.47
789.26 8.49 584.17 4,793.11 3,402.35
381.10 8.94 1,259.92 5,145.27 4,082.82
240.92 1,389.70 4,618.53 2,721.88
955.59 5.17 875.90 2,535.75 3,460.35
1,181.97 67.30 1,164.10 10,661.58 3,657.95
141.00 2,578.32 5,858.03 2,176.86
2,020.46 1,474.01 5,500.54 3,044.92
7,850.05 121.86 15,352.46 66,364.34 37,977.63
Variable Expenses Food and Catering Interest/Late Fees Office Supplies Housekeeping and Janitorial Linens
Page: 4 of 12
50237 - Blackstone Valley Surgicare Trailing 12-month Income Statement For Period Ending: December 31, 2014 Run Date: 01/13/15 Run Time: 08:53 PM 2014-1
2014-2
2014-3
2014-4
2014-5
2014-6
2014-7
2014-8
2014-9
2014-10
2014-11
2014-12
TTM Actual
Uniforms Minor Equipment Rental Equipment Storage - Including Data Repairs Maint Contracts Bank Service Charges Dues and Subscriptions Printing Postage and Delivery Telephone Utilities Education Contract Services Collection Fees Legal Fees Professional fees Medical director fees Marketing Travel and Entertainment Other Variable Expenses Variable Expenses
209.00 8,739.35 412.11 5,579.63 559.90 520.95 361.66 393.94 347.47 2,071.16 14,486.98 1,440.00 22,956.55 1,195.90 4,010.00 6,722.93 1,500.00 66.98 906.07 3,729.29 85,168.64
14,620.39 470.44 2,051.60 559.90 1,423.12 590.00 1,185.58 406.43 1,342.83 17,529.12 20,265.75 835.70 7,103.83 1,500.00 3,640.15 91,067.47
495.00 703.17 6,937.25 823.71 6,515.87 559.90 721.28 1,400.00 1,034.70 1,097.13 2,830.34 19,990.64 28,103.46 929.24 (5,588.90) 358.78 4,479.95 78,003.07
1,640.73 16,075.05 510.63 6,010.37 589.11 644.00 370.00 1,068.13 979.22 2,106.87 9,092.43 22,968.41 1,549.15 993.39 (1,909.10) 3,000.00 (136.25) 4,524.48 79,044.45
435.82 10,853.41 702.38 4,840.46 3,641.33 803.77 416.88 625.67 2,109.83 10,232.58 499.00 25,950.86 172.52 653.80 748.04 1,500.00 500.00 5,178.35 78,664.00
478.71 12,219.40 426.25 5,871.36 3,927.87 902.45 568.75 618.46 439.13 2,031.11 8,630.40 1,500.00 21,142.94 634.15 5,740.00 1,593.83 1,500.00 995.50 5,913.76 84,711.45
364.10 11,171.91 647.67 3,765.37 1,703.58 1,326.44 1,386.81 1,598.82 382.43 2,060.92 13,572.35 24,130.19 1,144.67 1,296.43 1,500.00 450.35 4,233.90 81,613.99
402.20 7,086.94 528.11 7,474.13 5,307.92 1,109.88 666.17 508.07 666.41 2,234.67 13,232.89 250.00 19,052.99 2,536.57 195.00 1,002.43 1,500.00 163.73 3,765.97 76,655.11
622.48 17,191.66 570.42 10,889.85 10,811.42 854.58 22.94 520.89 395.11 2,247.65 11,792.27 30,013.25 1,615.06 1,511.04 1,095.75 1,500.00 531.20 4,125.17 104,143.50
1,428.48 14,748.22 469.87 4,451.40 3,474.98 697.82 652.72 438.59 538.93 2,106.04 11,577.52 2,602.07 23,496.60 1,231.52 2,057.83 1,500.00 283.49 4,026.30 92,515.28
1,100.88 7,075.15 945.72 3,531.81 5,086.86 877.80 (14.90) 89.28 498.74 1,955.29 9,640.48 1,675.00 21,114.41 904.33 (5,360.00) 3,340.81 1,500.00 228.47 5,486.66 70,431.00
400.59 8,580.91 170.00 6,833.63 10,274.98 967.80 265.95 71.69 1,211.00 2,131.90 15,571.06 300.00 21,538.56 260.60 2,629.44 857.06 1,500.00 220.00 180.42 4,329.93 90,335.45
495.00 7,786.16 135,299.64 6,677.31 67,815.48 46,497.75 10,849.89 6,270.10 7,945.03 7,587.67 25,228.61 155,348.72 8,266.07 280,733.97 13,009.41 10,372.67 18,320.94 18,000.00 786.98 3,961.76 53,433.91 1,012,353.41
Fixed Expenses Rent Insurance Sales and Use Tax Property Tax Miscellaneous Fixed Expenses
36,452.89 6,527.29 5,230.00 8,356.82 56,567.00
36,452.89 4,684.55 2.59 5,230.00 8,049.66 54,419.69
36,452.89 5,718.73 5,230.00 8,469.02 55,870.64
36,452.89 5,643.53 5,230.00 41.67 47,368.09
36,452.89 5,643.53 5,230.00 15,965.93 63,292.35
36,452.89 5,643.53 5,230.00 7,079.68 54,406.10
36,452.89 5,643.53 6,140.00 7,061.94 55,298.36
36,452.89 5,643.53 6,140.00 7,103.20 55,339.62
36,452.89 5,643.53 5,525.00 7,471.23 55,092.65
36,452.89 5,643.53 5,525.00 12,147.81 59,769.23
36,452.89 5,643.53 5,525.00 8,469.02 56,090.44
37,474.50 5,643.53 6,140.00 11,453.47 60,711.50
438,456.29 67,722.34 2.59 66,375.00 101,669.45 674,225.67
9,435.25
9,270.94
(2,531.54)
7,490.53
8,373.30
(2,494.27)
7,668.54
8,167.09
(2,827.01)
40,866.79
10,264.48
(2,169.90)
91,514.20
(14,073.56)
16,568.79
48,411.54
(5,679.37)
(41,178.42)
78,387.37
13,703.37
4,982.86
26,166.37
27,157.41
18,010.98
68,572.21
241,029.55
13,514.33 8,603.09 22,117.42
13,457.45 5,087.12 18,544.57
13,412.15 5,455.90 18,868.05
13,412.15 5,313.72 18,725.87
28,279.13 5,772.21 34,051.34
13,041.25 5,562.41 18,603.66
12,780.66 6,373.99 19,154.65
12,859.56 6,379.61 19,239.17
8,920.98 6,682.87 15,603.85
9,013.11 6,802.39 15,815.50
8,951.65 6,460.58 15,412.23
9,376.05 6,373.65 15,749.70
157,018.47 74,867.54 231,886.01
Total Exp Before Mgmt Fee and I/C
431,322.03
415,666.45
377,420.83
414,851.81
463,188.50
412,471.31
428,455.97
417,597.04
450,854.96
490,281.31
422,982.19
471,448.54
5,196,540.94
Income (loss) before Mgmt Fee, I/C, Taxes, & Sale
(36,190.98)
(1,975.78)
29,543.49
(24,405.24)
(75,229.76)
59,783.71
(5,451.28)
(14,256.31)
10,562.52
11,341.91
2,598.75
52,822.51
9,143.54
19,284.79 19,284.79
20,220.99 20,220.99
20,474.79 20,474.79
19,147.80 19,147.80
18,979.27 18,979.27
23,737.46 23,737.46
20,766.81 20,766.81
19,758.68 19,758.68
23,212.22 23,212.22
23,037.82 23,037.82
20,703.34 20,703.34
(2,003.13) (2,003.13)
227,320.84 227,320.84
(55,475.77)
(22,196.77)
9,068.70
(43,553.04)
(94,209.03)
36,046.25
(26,218.09)
(34,014.99)
(12,649.70)
(11,695.91)
(18,104.59)
54,825.64
(218,177.30)
Provision for doubtful accts EBITDA Interest, Depreciation, Amort Depreciation Expense Interest Expense
Mgmt Fee, Intercompany, Taxes Intercompany Mgmt Fee Expense Mgmt Fee, Intercompany, Taxes Net Income (Loss) Before Minority Interest, Sale of Investment
Minority Int, Sale of Investmt Gain/Loss on Disposal of Asset Minority Int, Sale of Investmt Net Income (Loss) EBIT EBITDA EBITDAR
-
-
-
-
-
-
-
-
-
-
1,249.64 1,249.64
-
1,249.64 1,249.64
(55,475.77)
(22,196.77)
9,068.70
(43,553.04)
(94,209.03)
36,046.25
(26,218.09)
(34,014.99)
(12,649.70)
(11,695.91)
(19,354.23)
54,825.64
(219,426.94)
(27,587.89) (14,073.56) 22,379.33
3,111.34 16,568.79 53,021.68
34,999.39 48,411.54 84,864.43
(19,091.52) (5,679.37) 30,773.52
(69,457.55) (41,178.42) (4,725.53)
65,346.12 78,387.37 114,840.26
922.71 13,703.37 50,156.26
(7,876.70) 4,982.86 41,435.75
17,245.39 26,166.37 62,619.26
18,144.30 27,157.41 63,610.30
9,059.33 18,010.98 54,463.87
59,196.16 68,572.21 106,046.71
84,011.08 241,029.55 679,485.84
333
277
318
293
332
340
307
353
3,699.00
Statistical information: Surgical cases
Page: 5 of 12
319
273
284
270
50237 - Blackstone Valley Surgicare Trailing 12-month Income Statement For Period Ending: December 31, 2014 Run Date: 01/13/15 Run Time: 08:53 PM 2014-1
Ttl Salary related expense per case Variable cost per case Supply cost per case Fixed cost per case Total expense per case Net patient revenue per case Gross revenue per case
Page: 6 of 12
526.01 266.99 282.87 177.33 1,352.11 1,238.15 4,618.68
2014-2
466.62 273.48 261.20 163.42 1,248.25 1,241.88 4,669.44
2014-3
521.00 281.60 299.26 201.70 1,362.53 1,469.43 5,137.28
2014-4
676.08 289.54 284.44 173.51 1,519.60 1,429.34 5,082.06
2014-5
633.60 276.99 348.12 222.86 1,630.95 1,364.85 4,956.24
2014-6
443.64 266.39 365.30 171.09 1,297.08 1,484.74 4,843.18
2014-7
575.54 278.55 327.94 188.73 1,462.31 1,443.44 4,592.84
2014-8
559.45 283.91 396.83 204.96 1,546.66 1,493.82 4,968.13
2014-9
512.95 313.69 326.94 165.94 1,358.00 1,389.70 5,092.73
2014-10
532.77 272.10 294.62 175.79 1,442.00 1,475.73 4,915.48
2014-11
539.13 229.42 342.90 182.71 1,377.79 1,386.08 4,545.02
2014-12
488.96 255.91 380.23 171.99 1,335.55 1,484.42 4,874.59
TTM Actual 535.91 273.68 325.56 182.27 1,404.85 1,406.99 4,853.10
\\SCAPTCPIFSH001\SHARED\ACCT\GENLEDGR\REPORTS\BALSHEET\1215\TTM\50237 - BS_TTM.xls
Center: 50237 (Blackstone Valley Surgicare) Balance Sheet TTM Report ID: BS_TTM Operator ID: GLCLOSE
Run Date: 01/14/16 Run Time: 09:12
Dec-2014 Current Assets 1000 Petty Cash- Nonrestricted 1010 Facility Cash- Nonrestricted 1021 Cash- A/P Disbursements 1980 I/C Due To/Due From Cash & Temp Investments 1200 A/R- Trade 1220 A/R- Credit Balance 1230 Unapplied Cash 1240 Patient Refund Clearing Accounts receivable 1270 Allow C/A - Medicare O/P 1271 Allow C/A - BC O/P 1272 Allow C/A - Medicaid O/P 1273 Allow C/A - WC O/P 1274 Allow C/A - Managed Care O/P 1275 Allow C/A - Other O/P 1276 Allow C/A - Comm O/P 1277 Allow C/A - Comm/Nat'l 1278 Allow C/A - Auto 1291 Allow C/A - Exchange O/P Less: Allowance for C/A 1280 Bad Debt Allowance Less: Allowance for B/D 1400 Inventory- Controlled Subst Inventories 1500 Prepaid P&C Insurance 1504 Prepaid Other Expenses 1551 Lease Clearing Prepaids & other current assets Total Current Assets Other Assets Notes receivable Trusteed funds & other assets Total Other Assets Property, Plant & Equipment Land Buildings 1730 Leasehold Improvements Leasehold improvements 1740 Equipment- Cap Lease 1745 Surgical Instruments 1750 Equipment 1755 Medical Equipment 1790 Computer Equipment Furniture, fixtures & equipment 1699 Asset Clearing Construction-in-progress 1825 1830 1835 1837 1838 1855
Acc Depr- LHI Acc Depr- Equip Cap Lease Acc Depr- Surgical Instruments Acc Depr- Medical Equipment Acc Depr- Equipment Acc Depr- Computer Equipment Less: Accumulated Depreciation Total Property, Plant & Equipment
Intangible Assets Organ, P'ship formation & Start-up Costs Bond issue costs Non-compete Agreements Goodwill Less: Accumulated Amortization
1,000 (4,875) 561 (1,441,329) (1,444,644) 525,940 51,191 112 (109) 577,134 0 (0) 0 (0) (0) 0 (0) (0) 23,129 23,129 1,593 1,593 23,746 690 24,436 (864,609)
-
41,747 41,747 158,501 92,069 774,553 775,386 15,072 1,815,582 1,857,329 25,363 64,751 92,069 609,874 793,880 12,159 1,598,096 259,233
-
Jan-2015 1,000 118 561 (1,486,200) (1,484,522) 557,021 58,261 327 (109) 615,500 1,516 3,166 (654) 2,667 780 (908) (0) (0) 0 6,568 28,315 28,315 1,593 1,593 22,491 617 23,108 (879,203)
-
41,747 41,747 158,501 7,669 340,767 775,386 15,072 1,297,396 1,339,143 25,781 67,699 7,669 614,714 360,856 12,329 1,089,048 250,095
-
Feb-2015 1,000 (2,742) 561 (1,487,615) (1,488,797) 570,336 70,349 327 (109) 640,903 5,008 (21,461) (1,593) 8,909 (8,724) (6,693) (0) 1,148 232 (23,175) 32,073 32,073 1,593 1,593 24,568 551 25,119 (830,079)
-
41,747 41,747 158,501 7,669 340,767 775,386 15,072 1,297,396 10,934 10,934 1,350,077 26,197 70,647 7,669 619,553 361,618 12,498 1,098,183 251,894
-
Mar-2015 1,000 (5,880) 561 (1,451,335) (1,455,654) 503,663 69,585 327 (109) 573,466 716 (24,877) (1,898) 12,619 (10,902) (7,453) (0) 1,148 232 (30,416) 30,416 30,416 1,074 1,074 20,589 729 21,317 (859,797)
-
41,747 41,747 158,501 7,669 340,767 786,320 15,072 1,308,330 1,350,077 26,615 73,595 7,669 624,431 362,380 12,667 1,107,358 242,719
-
Apr-2015 1,000 (7,335) 561 (1,445,442) (1,451,217) 465,988 71,725 5,436 9,910 553,059 (2,545) (29,136) (2,169) 18,414 (10,379) (9,300) (0) 1,148 289 (33,678) 33,405 33,405 1,074 1,074 21,682 729 22,411 (874,400)
-
41,747 41,747 158,501 7,669 340,767 786,320 15,072 1,308,330 1,350,077 27,032 76,543 7,669 629,179 363,142 12,837 1,116,403 233,674
-
May-2015 1,000 (6,065) 561 (1,469,323) (1,473,827) 444,186 78,105 233 4,183 526,707 696 (25,595) 63 20,178 (29,437) (8,815) (0) 1,148 (511) 235 (42,038) 40,036 40,036 1,074 1,074 18,934 729 19,663 (924,381)
-
41,747 41,747 158,501 92,069 774,553 786,320 15,072 1,826,516 1,868,263 27,449 78,982 92,069 633,927 797,691 13,006 1,643,125 225,138
-
Jun-2015 1,000 (3,636) (1,485,837) (1,488,473) 467,820 73,364 233 2,252 543,668 10,311 6,752 3,591 (0) 384 457 (0) 2,369 23,863 28,706 28,706 2,155 2,155 24,161 729 24,890 (970,330)
-
41,747 41,747 158,501 92,069 774,553 786,320 15,072 1,826,516 1,868,263 27,866 81,421 92,069 638,675 798,454 13,176 1,651,661 216,602
-
Jul-2015
Aug-2015
1,000 (5,427) (1,496,469) (1,500,896) 472,633 70,276 (556) 6,382 548,736 8,561 9,906 2,846 3,569 237 (1,293) (0) 0 2,297 26,123 39,221 39,221 2,155 2,155 30,106 10 30,116 (985,232)
-
41,747 41,747 158,501 92,069 774,553 797,652 15,072 1,837,848 1,879,595 28,283 83,861 92,069 643,693 799,216 13,345 1,660,467 219,128
-
1,000 4,286 (1,495,568) (1,490,282) 503,930 49,502 (788) 2,681 555,325 8,819 12,040 2,838 9,486 (2,898) (2,170) (0) 2,340 30,455 37,825 37,825 2,155 2,155 20,426 (709) 19,716 (981,366)
-
41,747 41,747 158,501 7,669 340,767 797,652 15,072 1,319,661 1,361,408 28,701 86,300 7,669 648,576 366,191 13,425 1,150,862 210,546
-
Sep-2015 1,000 2,994 (1,467,269) (1,463,275) 478,948 53,710 (788) (75) 531,795 1,527 (0) 6,695 (0) (0) 3,181 (0) 6,948 18,351 34,431 34,431 1,617 1,617 18,959 (1,428) 17,531 (965,114)
-
41,747 41,747 158,501 7,669 340,767 797,652 15,072 1,319,661 67,165 67,165 1,428,573 29,118 88,739 7,669 653,459 366,953 13,506 1,159,444 269,129
-
Oct-2015 1,000 4,300 (1,462,381) (1,457,081) 494,689 60,448 (788) (10,587) 543,761 (2,363) (4,784) 7,015 320 (878) (6,143) (0) 0 6,809 (25) 46,065 46,065 1,617 1,617 5,128 14,265 (2,147) 17,246 (940,497)
-
41,747 41,747 158,501 7,669 340,767 797,652 15,072 1,319,661 67,165 67,165 1,428,573 29,535 91,178 7,669 658,211 367,716 13,586 1,167,894 260,679
-
Nov-2015 1,000 3,485 (1,444,878) (1,440,393) 500,324 76,450 (788) (11,107) 564,879 (2,486) (7,649) 6,553 579 (4,804) (8,052) (0) (8) 6,245 (9,622) 50,605 50,605 1,617 1,617 19,221 (1,428) 17,793 (897,086)
-
41,747 41,747 385,317 7,669 340,767 797,652 15,072 1,546,477 86,592 86,592 1,674,816 29,952 98,342 7,669 662,962 368,478 13,666 1,181,071 493,745
-
Dec-2015 1,000 10,753 (1,373,224) (1,361,472) 507,705 92,246 (999) (12,381) 586,571 4,839 (0) 3,033 825 (0) 0 (0) 2,911 11,608 18,227 18,227 1,317 1,317 18,207 2,476 20,683 (782,736)
-
41,747 41,747 392,177 7,669 340,767 797,652 15,072 1,553,337 86,592 86,592 1,681,676 30,370 105,588 7,669 667,679 369,240 13,746 1,194,293 487,382
-
Intercompany Accounts Notes Receivable Investments in Subsidiaries
TOTAL ASSETS
Current Liabilities 2005 Accounts Payable 2010 Accounts Payable- Accrued Accounts Payable 2050 Accrued Salaries- Ceridian 2051 Accrued Vacation - Ceridian 2052 Accrued Year End Bonus-Admin 2053 Accrued Payroll Bonuses 2054 Accrued Other Bonus-SSP 2057 Accrued Year-End Bonus-CLT Salaries & Wages Payable 2140 Notes Payable- S/T 2170 Capitalized Leases- S/T 2205 Accrued Interest- Notes 2225 Patient Credit Balances 2357 State Use Tax Payable 2365 Accrued Taxes - FF&E 2370 Accrued Taxes- Other 2471 Escheatment Payable Accrued Interest & Other CL Total Current Liabilities Current Deferred Income Tax Deferred Inc Tax Liab-Current Intercompany Accounts Notes Payable
Long-Term Debt & Leases Line of Credit Payable Bonds Payable 2640 Notes Payable- L/T 2670 Capitalized Leases- L/T Other LTD and Leases Total Long Term Debt & Leases Deferred Taxes Deferred Income Tax Liability Deferred Revenue Deferred Revenue TOTAL LIABILITIES Shareholders' Equity 2842 AOLP- Syndications 2844 AOLP- Retained Earnings Non-Controlling Interest Common Stock Additional Paid in Capital Retained Earnings 2960 SCA-GP Contributions 2961 SCA-GP Distributions 2964 SCA-GP Retained Earnings 2967 SCA-GP Pool Balance 2981 SCA-LP Distributions 2982 SCA-LP Syndications 2984 SCA-LP Retained Earnings 2987 SCA-LP Pool Balance General Partners' Interest Current YTD Income
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(605,376)
(629,108)
(578,185)
(617,078)
(640,726)
(699,244)
(753,728)
(766,104)
(770,820)
(695,984)
(679,819)
(403,341)
(295,353)
49,380 106,232 155,612 32,334 74,350 0 2,875 2,691 112,250 9,942 35,324 69 51,191 2,770 17,805 500 561 118,161 386,024
39,578 90,269 129,847 71,806 72,405 3,297 3,833 3,858 155,199 9,587 35,021 68 58,261 1,645 23,945 542 561 129,628 414,674
50,883 121,206 172,089 69,377 73,559 6,595 4,791 5,025 159,346 7,624 34,717 53 70,349 927 30,085 583 561 144,899 476,335
33,626 109,553 143,179 91,334 81,871 (0) 2,875 2,261 178,340 7,651 34,415 56 69,585 803 36,225 625 561 149,920 471,440
58,278 99,199 157,477 94,136 75,709 3,506 3,833 3,427 180,611 6,391 34,113 44 71,725 786 42,365 167 561 156,151 494,240
37,864 83,877 121,742 38,221 79,571 7,011 4,791 4,594 134,189 6,418 34,343 43 78,105 1,259 48,505 208 561 169,442 425,373
49,557 80,808 130,365 49,930 80,158 13,586 2,875 4,521 151,069 6,444 34,575 40 73,364 1,612 54,645 250 170,930 452,365
23,069 68,111 91,180 64,412 75,882 17,091 3,833 5,688 166,906 6,471 31,799 39 70,276 889 1,753 292 111,519 369,605
21,284 74,298 95,582 79,587 66,807 20,597 4,791 6,855 178,637 6,498 35,044 37 49,502 560 7,893 333 99,868 374,087
37,933 59,019 96,952 96,797 71,874 33,964 2,875 11,303 216,813 20,532 35,280 33 53,710 751 14,033 375 124,715 438,480
48,356 89,737 138,093 35,693 72,686 37,469 3,833 12,470 162,151 20,074 35,519 32 60,448 1,300 20,173 417 137,963 438,207
11,353 109,546 120,899 44,265 72,347 41,511 2,875 13,815 174,813 19,592 89,752 29 76,450 170 26,313 458 212,765 508,477
41,450 77,915 119,365 62,992 75,084 45,285 500 2,875 15,071 201,807 19,119 91,783 28 92,246 1,310 30,108 500 235,093 556,265
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
6,804 56,238 63,042 63,042
6,263 53,348 59,611 59,611
6,725 50,438 57,163 57,163
6,183 47,509 53,692 53,692
4,640 44,560 49,199 49,199
4,093 41,590 45,683 45,683
3,544 38,601 42,145 42,145
2,993 38,601 41,594 41,594
2,439 32,562 35,002 35,002
55,042 29,512 84,554 84,554
53,536 26,442 79,978 79,978
-
-
-
-
-
-
-
-
-
-
-
449,066
474,285
533,498
525,132
543,439
471,056
494,510
411,199
409,088
523,034
518,185
52,492 191,052 243,544 243,544
752,021
51,112 188,742 239,854 239,854
796,120
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (219,427) (1,054,442)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (48,951) (1,103,393)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (57,241) (1,111,683)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (87,767) (1,142,209)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (129,723) (1,184,165)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (115,858) (1,170,300)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (193,796) (1,248,237)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (122,862) (1,177,304)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (125,467) (1,179,908)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (164,576) (1,219,018)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (143,562) (1,198,004)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (100,921) (1,155,363)
462,217 (130,590) 331,627 21,765 (2,975,753) (920,050) (22,927) (4,463,629) 8,201,084 (1,249,487) 22,927 (1,386,069) (37,031) (1,091,473)
TOTAL STOCKHOLDERS' EQUITY
(1,054,442)
(1,103,393)
(1,111,683)
(1,142,209)
(1,184,165)
(1,170,300)
(1,248,237)
(1,177,304)
(1,179,908)
(1,219,018)
(1,198,004)
(1,155,363)
(1,091,473)
TOTAL LIABILITIES & SH EQUITY
(605,376)
(629,108)
(578,185)
(617,078)
(640,726)
(699,244)
(753,728)
(766,104)
(770,820)
(695,984)
(679,819)
(403,341)
(295,353)
D:\PSOFT\FSCM9\SFINPR91\NVISION\INSTANCE\TREND_BS50237.xls
Center: 50237 (Blackstone Valley Surgicare) Trend Balance Sheet Report ID: BS_SCA Operator ID: GLCLOSE
Current Assets 1000 Petty Cash- Nonrestricted 1010 Facility Cash- Nonrestricted 1021 Cash- A/P Disbursements 1980 I/C Due To/Due From Cash & Temp Investments 1200 A/R- Trade 1220 A/R- Credit Balance 1230 Unapplied Cash 1240 Patient Refund Clearing Accounts receivable 1270 Allow C/A - Medicare O/P 1271 Allow C/A - BC O/P 1272 Allow C/A - Medicaid O/P 1273 Allow C/A - WC O/P 1274 Allow C/A - Managed Care O/P 1275 Allow C/A - Other O/P 1276 Allow C/A - Comm O/P 1277 Allow C/A - Comm/Nat'l 1278 Allow C/A - Auto 1291 Allow C/A - Exchange O/P Less: Allowance for C/A 1280 Bad Debt Allowance Less: Allowance for B/D 1400 Inventory- Controlled Subst Inventories 1504 Prepaid Other Expenses 1514 Prepaid Service Contracts 1551 Lease Clearing Prepaids & other current assets Total Current Assets Other Assets Notes receivable Trusteed funds & other assets Total Other Assets Property, Plant & Equipment Land Buildings 1730 Leasehold Improvements Leasehold improvements 1740 Equipment- Cap Lease 1745 Surgical Instruments 1750 Equipment 1755 Medical Equipment 1790 Computer Equipment Furniture, fixtures & equipment 1699 Asset Clearing Construction-in-progress 1825 1830 1835 1837 1838 1855
Acc Depr- LHI Acc Depr- Equip Cap Lease Acc Depr- Surgical Instruments Acc Depr- Medical Equipment Acc Depr- Equipment Acc Depr- Computer Equipment Less: Accumulated Depreciation Total Property, Plant & Equipment
Intangible Assets Organ, P'ship formation & Start-up Costs Bond issue costs Non-compete Agreements Goodwill Less: Accumulated Amortization
Run Date: 01/13/15 Run Time: 21:17
2013 December 1,000 (52) (1,291,448) (1,290,500) 572,816 19,278 (1,040) 1,227 592,281 8,440 3,760 (5,641) 10,769 9,115 (1,879) (0) 0 2,127 26,691 16,734 16,734 2,323 2,323 6,754 (746) 6,008 (733,314)
-
41,747 41,747 158,501 92,069 778,713 690,753 12,185 1,732,222 1,773,969 20,356 29,373 92,069 509,389 784,165 9,885 1,445,237 328,731
-
2014 January 1,000 7,728 (1,269,918) (1,261,190) 551,112 16,279 (1,040) 1,261 567,613 3,850 10,236 (6,989) 14,229 14,592 2,405 2,129 113 2,127 (9,191) 33,500 18,367 18,367 2,323 2,323 2,825 (15) (568) 2,242 (740,880)
-
41,747 41,747 158,501 92,069 778,713 690,753 12,185 1,732,222 60,631 60,631 1,834,599 20,773 32,321 92,069 517,752 785,683 10,153 1,458,752 375,848
-
2014 February 1,000 5,927 (1,256,632) (1,249,705) 553,422 21,131 (1,240) 68 573,381 16 23,006 (7,652) 22,490 25,047 (24,840) 4,999 (5,627) 2,127 (9,191) 30,373 19,854 19,854 2,323 2,323 12,000 690 12,690 (711,538)
-
41,747 41,747 158,501 92,069 778,713 690,753 12,185 1,732,222 60,631 60,631 1,834,599 21,191 35,270 92,069 526,115 787,202 10,364 1,472,209 362,390
-
2014 March 1,000 4,129 (1,319,050) (1,313,921) 530,602 22,615 428 553,644 363 19,014 (8,500) 28,991 26,576 (31,131) 4,999 (5,627) 2,127 (9,191) 27,620 11,588 11,588 2,323 2,323 9,364 122 9,486 (787,676)
-
41,747 41,747 158,501 92,069 778,713 690,753 12,185 1,732,222 60,631 60,631 1,834,599 21,608 38,218 92,069 534,478 788,720 10,529 1,485,621 348,978
-
2014 April 1,000 2,130 (1,404,960) (1,401,830) 567,580 15,538 1,009 584,127 (9,997) 15,070 (8,912) 41,972 24,142 (31,898) 4,999 (5,627) 2,127 (9,191) 22,683 14,458 14,458 2,323 2,323 15,191 690 15,881 (836,640)
-
41,747 41,747 158,501 92,069 778,713 690,753 12,185 1,732,222 60,631 60,631 1,834,599 22,025 41,166 92,069 542,841 790,238 10,694 1,499,033 335,566
-
2014 May 1,000 4,203 (1,433,901) (1,428,698) 504,977 29,199 (910) 533,265 (8,758) 24,156 (10,144) 45,737 28,242 (32,187) 4,999 (5,627) 2,127 (9,191) 39,352 8,069 8,069 2,323 2,323 6,557 690 7,247 (933,284)
-
41,747 41,747 158,501 92,069 778,713 751,384 13,398 1,794,066 1,835,813 22,442 44,114 92,069 566,004 791,757 10,927 1,527,313 308,500
-
2014 June 1,000 (4,779) (1,494,529) (1,498,308) 599,212 28,245 (1,331) 626,125 (10,039) 18,548 (10,428) 47,033 22,875 (43,607) 4,999 (5,627) 2,127 (9,056) 16,824 2,068 2,068 1,786 1,786 12,099 690 12,790 (876,500)
-
41,747 41,747 158,501 92,069 778,713 751,384 13,398 1,794,066 1,835,813 22,859 47,062 92,069 574,526 792,711 11,126 1,540,354 295,459
-
2014 July 1,000 (5,450) (1,595,045) (1,599,495) 635,499 37,297 (1,331) 671,465 (10,834) 10,599 (11,008) 48,445 21,153 (39,932) 4,999 (5,627) 2,127 (9,194) 10,728 4,213 4,213 1,786 1,786 21,163 690 21,853 (919,332)
-
41,747 41,747 158,501 92,069 774,553 751,384 13,398 1,789,906 532 532 1,832,184 23,277 50,010 92,069 582,864 789,506 11,249 1,548,974 283,210
-
2014 August 1,000 (5,848) (1,650,958) (1,655,806) 682,238 44,829 (109) 726,957 (13,618) 10,563 (11,934) 50,896 24,289 (37,272) 4,999 (5,627) 2,127 (9,194) 15,228 2,473 2,473 1,786 1,786 23,529 690 24,219 (920,545)
-
41,747 41,747 158,501 92,069 774,553 751,384 13,967 1,790,475 1,832,222 23,694 52,958 92,069 591,202 790,461 11,451 1,561,834 270,388
-
2014 September 1,000 (2,923) (1,700,099) (1,702,022) 772,720 57,410 3,449 833,580 (15,121) 24,237 (11,785) 55,028 12,135 (41,477) 4,999 (5,627) 2,127 (9,090) 15,425 (0) (0) 1,848 1,848 24,985 690 25,675 (856,345)
-
41,747 41,747 158,501 92,069 774,553 751,384 13,967 1,790,475 1,106 1,106 1,833,327 24,111 55,906 92,069 595,733 791,346 11,589 1,570,755 262,572
-
2014 October 1,000 (1,165) 561 (1,588,837) (1,588,441) 595,200 46,458 112 (109) 641,661 (11,653) 16,269 (10,299) 58,911 10,546 (52,460) 4,999 (5,627) 1,692 (9,225) 3,154 39,170 39,170 1,848 1,848 24,610 690 25,301 (961,955)
-
41,747 41,747 158,501 92,069 774,553 751,384 15,072 1,791,580 1,833,327 24,528 58,854 92,069 600,264 792,232 11,820 1,579,768 253,559
-
2014 November 1,000 (1,137) 561 (1,560,513) (1,560,090) 584,680 53,890 112 (109) 638,572 (11,134) 13,307 (14,289) 62,281 10,981 (52,614) 4,999 (5,627) 1,692 (9,225) 369 48,301 48,301 1,848 1,848 23,553 690 24,243 (944,096)
-
41,747 41,747 158,501 92,069 774,553 751,384 15,072 1,791,580 4,783 4,783 1,838,110 24,946 61,803 92,069 604,795 793,118 11,990 1,588,720 249,391
-
2014 December 1,000 (4,875) 561 (1,441,329) (1,444,644) 525,940 51,191 112 (109) 577,134 0 (0) 0 (0) (0) 0 (0) (0) 23,129 23,129 1,593 1,593 23,746 690 24,436 (864,609)
-
41,747 41,747 158,501 92,069 774,553 775,386 15,072 1,815,582 1,857,329 25,363 64,751 92,069 609,874 793,880 12,159 1,598,096 259,233
-
Intercompany Accounts Notes Receivable Investments in Subsidiaries
TOTAL ASSETS
Current Liabilities 2005 Accounts Payable 2010 Accounts Payable- Accrued Accounts Payable 2050 Accrued Salaries & Wages 2051 Accrued Vacation 2052 Accrued Year End Bonus-Admin 2054 Accrued Other Bonus-SSP 2057 Accrued Year-End Bonus-CLT Salaries & Wages Payable 2140 Notes Payable- S/T 2170 Capitalized Leases- S/T 2205 Accrued Interest- Notes 2225 Patient Credit Balances 2357 State Use Tax Payable 2365 Accrued Taxes - FF&E 2370 Accrued Taxes- Other 2471 Escheatment Payable Accrued Interest & Other CL Total Current Liabilities Current Deferred Income Tax Deferred Inc Tax Liab-Current Intercompany Accounts Notes Payable
Long-Term Debt & Leases Line of Credit Payable Bonds Payable 2640 Notes Payable- L/T 2670 Capitalized Leases- L/T Other LTD and Leases Total Long Term Debt & Leases Deferred Taxes Deferred Income Tax Liability Deferred Revenue Deferred Revenue TOTAL LIABILITIES Shareholders' Equity 2842 AOLP- Syndications 2844 AOLP- Retained Earnings Non-Controlling Interest Common Stock Additional Paid in Capital Retained Earnings 2960 SCA-GP Contributions 2961 SCA-GP Distributions 2964 SCA-GP Retained Earnings 2967 SCA-GP Pool Balance 2981 SCA-LP Distributions 2982 SCA-LP Syndications 2984 SCA-LP Retained Earnings 2987 SCA-LP Pool Balance General Partners' Interest Current YTD Income
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(404,583)
(365,032)
(349,147)
(438,697)
(501,074)
(624,784)
(581,041)
(636,122)
(650,157)
(593,773)
(708,396)
(694,706)
(605,376)
39,415 52,945 92,359 42,277 68,955 61,074 8,625 180,930 36,887 19,278 1,623 6,792 1,000 65,580 338,870
23,782 117,425 141,207 63,657 56,219 64,798 9,583 194,258 20,559 37,106 141 16,279 766 12,022 1,042 87,914 423,378
34,932 133,627 168,559 62,298 57,740 68,523 10,542 199,103 20,639 37,326 121 21,131 1,114 17,252 1,083 98,667 466,329
45,246 87,031 132,277 73,116 52,508 0 8,625 134,249 20,552 37,547 129 22,615 1,270 22,482 1,125 105,719 372,244
41,719 53,842 95,561 85,862 60,140 3,797 9,583 159,382 19,091 37,770 116 15,538 1,410 27,712 667 102,304 357,248
19,323 72,759 92,082 34,065 71,748 3,797 9,583 119,194 18,272 37,463 115 29,199 1,092 32,942 708 119,790 331,065
30,816 81,425 112,241 36,519 72,059 (500) (959) 107,119 17,152 37,156 104 28,245 1,163 38,172 750 122,741 342,101
58,642 54,816 113,458 52,547 63,951 4,464 958 121,920 15,352 36,849 99 37,297 2,075 (11,050) 292 80,915 316,293
44,659 77,046 121,706 69,638 59,570 3,297 1,916 2,333 136,755 13,388 36,543 92 33,998 962 (4,910) 333 80,406 338,867
43,370 109,703 153,073 86,277 63,945 0 (0) 150,221 12,591 36,238 83 57,410 636 615 375 107,948 411,243
23,952 83,513 107,465 32,489 68,109 0 (0) 100,597 11,445 35,933 79 46,458 2,584 6,140 417 561 103,617 311,679
30,960 98,701 129,661 34,436 68,065 0 958 1,250 104,709 10,297 35,628 70 53,890 1,169 11,665 458 561 113,738 348,108
49,380 106,232 155,612 32,334 74,350 0 2,875 2,691 112,250 9,942 35,324 69 51,191 2,770 17,805 500 561 118,161 386,024
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12,055 85,155 97,211 97,211
10,753 81,924 92,677 92,677
10,177 78,672 88,849 88,849
9,598 75,934 85,532 85,532
9,016 73,177 82,193 82,193
8,737 70,401 79,138 79,138
8,938 67,606 76,544 76,544
8,409 64,793 73,202 73,202
7,878 61,960 69,838 69,838
7,345 59,109 66,453 66,453
6,804 56,238 63,042 63,042
-
-
-
-
-
-
-
-
-
-
-
91,562 91,562 91,562
430,432
13,712 88,368 102,080 102,080
525,459
563,540
464,921
446,097
416,597
424,294
395,430
415,410
484,444
381,517
414,561
449,066
462,217 (110,388) 351,828 21,765 (2,975,753) (804,615) (22,927) (4,463,629) 8,201,084 (1,096,535) 22,927 (1,117,683) (69,160) (835,015)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (55,476) (890,490)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (77,673) (912,687)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (68,604) (903,619)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (112,157) (947,172)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (206,366) (1,041,381)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (170,320) (1,005,334)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (196,538) (1,031,552)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (230,553) (1,065,567)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (243,202) (1,078,217)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (254,898) (1,089,913)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (274,253) (1,109,267)
462,217 (115,230) 346,987 21,765 (2,975,753) (832,279) (22,927) (4,463,629) 8,201,084 (1,133,190) 22,927 (1,182,002) (219,427) (1,054,442)
TOTAL STOCKHOLDERS' EQUITY
(835,015)
(890,490)
(912,687)
(903,619)
(947,172)
(1,041,381)
(1,005,334)
(1,031,552)
(1,065,567)
(1,078,217)
(1,089,913)
(1,109,267)
(1,054,442)
TOTAL LIABILITIES & SH EQUITY
(404,583)
(365,032)
(349,147)
(438,697)
(501,074)
(624,784)
(581,041)
(636,122)
(650,157)
(593,773)
(708,396)
(694,706)
(605,376)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2015 Commission file number: 001-36154
SURGICAL CARE AFFILIATES, INC. (Exact name of registrant as specified in its charter)
Delaware
20-8740447
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
520 Lake Cook Road, Suite 250 Deerfield, IL
60015
(Address of principal executive offices)
(Zip Code)
(847) 236-0921 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Name of Exchange on Which Registered
Title of Each Class
Common Stock, par value $0.01 per share The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes _ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No _ 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 _ No
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes _ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _ 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
_
Accelerated filer
Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No _ The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold on June 30, 2015 was $878,920,806. Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Class of Common Stock Common stock, par value $0.01 per share
Outstanding at February 15, 2016 39,753,749 shares
DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K Portions of the definitive proxy statement for the registrant’s 2016 annual meeting of stockholders are incorporated by reference into Part III of this report to the extent described herein.
SURGICAL CARE AFFILIATES, INC. FORM 10-K INDEX General ..............................................................................................................................................................................................
2
Forward-Looking Statements ............................................................................................................................................................
2
PART I. Item 1.
Business..........................................................................................................................................................................
3
Item 1A.
Risk Factors ....................................................................................................................................................................
30
Item 1B.
Unresolved Staff Comments ..........................................................................................................................................
54
Item 2.
Properties........................................................................................................................................................................
54
Item 3.
Legal Proceedings ..........................................................................................................................................................
54
Item 4.
Mine Safety Disclosure ..................................................................................................................................................
54
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .....
55
Item 6.
Selected Financial Data ..................................................................................................................................................
56
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .........................................
57
Item 8.
Financial Statements and Supplementary Data ..............................................................................................................
85
Item 9.
Changes in and Disagreements with Accounting and Financial Disclosures .................................................................
133
Item 9A.
Controls and Procedures.................................................................................................................................................
133
Item 9B.
Other Information ...........................................................................................................................................................
134
Item 10.
Directors, Executive Officers and Corporate Governance .............................................................................................
134
Item 11.
Executive Compensation ................................................................................................................................................
135
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .......................
135
Item 13.
Certain Relationships and Related Transactions and Director Independence ................................................................
135
Item 14.
Principal Accounting Fees and Services ........................................................................................................................
135
Exhibits and Financial Statement Schedules ..................................................................................................................
136
Signatures .........................................................................................................................................................................................
161
PART II.
PART III.
Part IV. Item 15.
1
Item 6. Selected Financial Data YEAR-ENDED DECEMBER 31, 2014 2013 2012 (in millions, except facilities and per unit data in actual amounts)
2015
Net operating revenues: Net patient revenues .............................................................. Management fee revenues ..................................................... Other revenues ....................................................................... Total net operating revenues ............................................ Equity in net income of nonconsolidated affiliates ................................ Operating expenses: Salaries and benefits .............................................................. Supplies ................................................................................. Other operating expenses ........................................................ Depreciation and amortization ................................................ Occupancy costs ..................................................................... Provision for doubtful accounts .............................................. Impairment of intangible and long-lived assets ...................... Loss (gain) on disposal of assets ............................................. Total operating expenses ................................................... Operating income .................................................................................... Interest expense ...................................................................... HealthSouth option expense ................................................... Debt modification expense ..................................................... Loss on extinguishment of debt .............................................. Interest income........................................................................ (Gain) loss on sale of investments .......................................... Income from continuing operations before income taxes ....................... (Benefit) provision for income taxes ....................................................... Income from continuing operations (1) ..................................................... Loss from discontinued operations, net of income tax expense .............. Net income .............................................................................................. Less: Net income attributable to noncontrolling interests ....................... Net income (loss) attributable to Surgical Care Affiliates ...................... Basic net income (loss) per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates .......... Discontinued operations attributable to Surgical Care Affiliates ...... Net income (loss) per share attributable to Surgical Care Affiliates....................................................................................... Basic weighted average shares outstanding (in thousands) (2) ................. Distribution paid per share on September 16, 2013 ................................ Diluted net income (loss) per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates .......... Discontinued operations attributable to Surgical Care Affiliates ...... Net income (loss) per share attributable to Surgical Care Affiliates....................................................................................... Diluted weighted average shares outstanding (in thousands) (2) .............. Facilities (at period end): Consolidated facilities ............................................................................. Equity method facilities .......................................................................... Managed-only facilities........................................................................... Total facilities .................................................................................... 56
$ 971.4 61.0 19.1 1,051.5 49.9
$ 788.0 58.9 17.8 864.7 32.6
351.0 221.4 161.9 66.2 36.5 17.2 0.6 1.9 856.7 244.7 42.1 11.7 5.0 0.5 (0.4) (4.0) 189.6 (84.8) 274.4 (0.8) 273.6 (158.3) $ 115.3 $
$ $ $
$ $ $
2.95 $ (.02) $ 2.93 39,360
$
2.85 $ (.02) $ 2.83 40,734 104 68 21 193
$
$ 731.6 40.5 13.6 785.7 23.4
$ 699.0 17.8 9.6 726.4 16.8
2011
$
675.3 11.3 7.5 694.1 22.2
297.2 177.9 124.9 52.7 29.4 14.1 0.6 (0.2) 696.4 200.9 32.8 — — — (0.2) (7.6) 175.9 9.4 166.5 (9.4) 157.1 (125.2) 32.0 $
270.9 170.2 127.7 41.5 25.5 14.2 — 0.1 650.1 158.9 60.2 — — 10.3 (0.2 ) 12.3 76.2 12.3 63.9 (9.3 ) 54.6 (105.9 ) (51.3) $
234.2 164.8 112.8 40.0 25.3 12.7 0.4 (0.3) 589.9 153.2 58.6 — — — (0.3) 7.1 87.8 8.5 79.3 (4.9) 74.4 (94.4) (20.0) $
214.8 155.7 110.9 38.6 25.2 14.1 — (0.8) 558.5 157.8 55.9 — — — (0.4) (3.9) 106.2 19.9 86.3 (2.8) 83.5 (93.2) (9.7)
1.07 $ (.24) $
(1.33 ) $ (.29 ) $
(.50) $ (.16) $
(.24) (.09)
0.83 38,477
$
(1.62) $ (.66) $ (.33) 31,688 30,340 29,347 $ 2.47
1.03 $ (.23) $ 0.80 39,958 95 65 26 186
$
(1.33 ) $ (.29 ) $
(.50) $ (.16) $
(.24) (.09)
(1.62 ) $ (.66) $ (.33) 31,688 30,340 29,347 87 60 30 177
87 52 8 147
94 44 4 142
2015
Balance Sheet Data (at period end): Cash and cash equivalents ........................................... $ 79.3 Total current assets ...................................................... 314.9 Total assets (3) ............................................................... 2,007.8
2014
$
8.7 237.5 1,647.4
December 31, 2013 (in millions)
$
85.8 234.0 1,422.5
2012
$
118.6 267.4 1,412.1
2011
$
71.2 215.0 1,356.5
Current portion of long-term debt ............................... Total current liabilities ................................................ Long-term debt, net of current portion ........................ Total liabilities (3) .........................................................
32.5 258.1 858.0 1,192.1
24.7 248.5 665.1 1,065.0
22.6 197.7 648.8 984.6
14.9 175.2 774.0 1,070.4
16.0 148.9 768.7 1,030.6
Total Surgical Care Affiliates’ equity ......................... Noncontrolling interests — non-redeemable ............... Total equity .................................................................
382.3 411.5 793.7
243.3 323.6 567.0
205.7 210.3 416.0
147.5 172.5 320.0
170.3 135.4 305.7
Note: Totals above may not sum due to rounding.
(1) (2) (3)
(4)
Income (loss) from continuing operations attributable to Surgical Care Affiliates, which is income from continuing operations less net income attributable to noncontrolling interests, was $116.1 million, $41.3 million, $(42.0) million, $(15.1) million and $(6.9) million for years-ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively. Calculated based on number of shares of common stock and vested RSUs that would have been outstanding as of December 31, 2012 and 2011, assuming our conversion from a Delaware limited liability company to a Delaware corporation. Our consolidated assets as of December 31, 2015, December 31, 2014 and December 31, 2013 include total assets of a VIE of $167.8 million, $117.5 million and $49.5 million, respectively, which can only be used to settle the obligations of the VIE. Our consolidated total liabilities as of December 31, 2015, December 31, 2014 and December 31, 2013 include total liabilities of the VIE of $41.0 million, $23.8 million and $12.2 million, respectively, for which the creditors of the VIE have no recourse to us, with the exception of $4.0 million, $3.4 million and $4.0 million of debt guaranteed by us at December 31, 2015, 2014 and 2013, respectively. Year over year comparisons are impacted by acquisitions as discussed in Note 2 to the consolidated financial statements included herein.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Amounts in tables are in millions of U.S. dollars unless otherwise indicated) This report contains certain forward-looking statements (all statements other than statements with respect to historical fact) within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. Risk Factors, some of which are beyond our control. Although we believe that the assumptions underlying the forwardlooking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events. Forward-looking statements and our liquidity, financial condition and results of operations may be affected by the risks set forth in Item 1A. Risk Factors or by other unknown risks and uncertainties. OVERVIEW We are a leading national provider of solutions to physicians, health plans and health systems to optimize surgical care. We operate one of the largest networks of outpatient surgery facilities in the United States. For a minimal portion of the periods covered by our financial statements in this Annual Report on Form 10-K, we were a Delaware limited liability company that was formed with a focus on developing and operating a network of multi-specialty ASCs and surgical hospitals in the United States. However, on October 30, 2013, we converted from a Delaware limited liability company, previously named ASC Acquisition LLC, to a Delaware corporation. As of December 31, 2015, we operated in 33 states and had an interest in and/or operated 185 freestanding ASCs, seven surgical hospitals and one sleep center. 57
Our business model is focused on building strategic relationships with physicians, health plans and health systems to invest in, develop and optimize facilities in an aligned economic model that enables better access to high-quality care at lower cost. As of December 31, 2015, we owned and operated facilities in partnership with approximately 2,800 physician partners. We believe that our partnership strategy and comprehensive suite of solutions will enable continued growth by capitalizing on increasing demand for high quality, cost-effective settings of care, the increasing need for scaled partners in healthcare, the transition to a coordinated care delivery model and the trend of physician and health system consolidation. With the exception of the managed-only facilities, the entities that own our facilities are structured as general partnerships, LPs, LLPs or LLCs in which either one of our subsidiaries or a joint venture is an owner and serves as the general partner, limited partner, managing member or member. Our partners or co-members in these entities are generally licensed physicians, hospitals or health systems. EXECUTIVE SUMMARY Our growth strategy continues to include growing the profits at our existing facilities, entering into strategic relationships with physicians, health plans and health systems, and making selective acquisitions of existing surgical facilities and groups of facilities. We took several steps during 2015 to optimize our portfolio, by: x acquiring a controlling interest in sixteen ASCs and two surgical hospitals that we consolidate (three of these ASCs were previously equity method investments and did not increase our total facility count); x acquiring a noncontrolling interest in eight ASCs that we hold as equity method investments (three of these facilities were previously managed-only facilities and did not increase our total facility count); x deconsolidating one ASC (i.e., we entered into a transaction that required a change in accounting treatment of the facility from consolidated to equity method); x entering into an agreement to manage an ASC; x placing one de novo facility into operation that we accounted for as an equity method investment; and x closing six consolidated ASCs (one of which was combined with the operations of an existing facility), closing three nonconsolidated ASCs (two of which were combined with the operations of existing facilities), selling a consolidated ASC, selling a consolidated surgical hospital, selling our noncontrolling interest in one ASC that we now account for as a managedonly facility (this facility was previously an equity method investment and did not decrease our facility count) and terminating management agreements with four managed-only ASCs. Our consolidated net operating revenues increased $186.8 million, or 21.6%, for the year-ended December 31, 2015 compared to the year-ended December 31, 2014. The main factors that contributed to this increase were revenues earned from acquisitions (including the consolidation of three previously nonconsolidated facilities), increased rates paid under certain payor contracts and higher acuity case mix. Consolidated net patient revenues per case grew by 7.3% to $1,933 per case for the year-ended December 31, 2015 from $1,801 per case during the prior year, reflecting acquisitions of an interest in facilities with higher rates per case than the average of our consolidated facilities, as well as higher acuity case mix. The number of cases at our consolidated facilities increased to 502,660 cases during the year-ended December 31, 2015 from 437,654 cases during the year-ended December 31, 2014, due to acquisitions since December 31, 2014, as well as organic growth. Our number of consolidated facilities increased to 104 facilities as of December 31, 2015 from 95 facilities as of December 31, 2014. We do not consolidate 68 of the facilities affiliated with us because we do not hold a controlling interest in the entities that own those facilities. To assist management in analyzing our results of operations, including at our nonconsolidated facilities, we prepare and disclose a “systemwide” case volume statistic and certain supplemental “systemwide” growth measures, each of which treats our equity method facilities as if they were consolidated. While the revenues generated at our equity method facilities are not recorded in our consolidated financial statements, we believe that systemwide net operating revenues growth and systemwide net patient revenues per case growth are important to understanding our financial performance because they are used by management to help interpret the sources of our growth and provide management with a growth metric incorporating the revenues earned by all of our affiliated facilities, regardless of accounting treatment. “Systemwide” is a non-GAAP measure which includes the results of both our consolidated and nonconsolidated facilities (without adjustment based on our percentage of ownership). For more information, please see “Our Consolidated Results and Results of Nonconsolidated Affiliates” under “Summary Results of Operations” below. During the year-ended December 31, 2015, systemwide net operating revenues grew by 18.3% as compared to the prior year. Systemwide net patient revenues per case grew by 4.7% in 2014 compared to the prior year. These increases are due to acquisitions since the end of the prior year, increased rates earned under certain payor contracts and changes in case mix.
58
At December 31, 2015, we had 105 facilities in partnership with health systems which includes consolidated, equity method and managed only facilities. Our health system relationships include local, regional and national health systems. We typically have codevelopment arrangements with our health system partners to jointly develop a network of outpatient surgery centers in a defined geographic area. These co-development arrangements are an important source of differentiation and potential growth of our business. We expect our co-development and acquisition activity to continue, with a major focus on creating partnerships with physicians, health plans and health systems as we continue to position ourselves as a partner of choice. Our Consolidated Subsidiaries and Nonconsolidated Affiliates At facilities where we serve as an owner and day-to-day manager, we have significant influence over the operations of such facilities. When we have control of the facility, we account for our investment in the facility as a consolidated subsidiary. When this influence does not represent control of the facility, but we have the ability to exercise significant influence over operating and financial policies, we account for our investment in the facility under the equity method, and treat the facility as a nonconsolidated affiliate. Our net earnings from a facility are the same under either method, but the classification of those earnings in our consolidated statements of operations differs. For our consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses for these subsidiaries, after elimination of intercompany transactions and accounts. The net income attributable to owners of our consolidated subsidiaries, other than us, is classified within the line item Net income attributable to noncontrolling interests. For our nonconsolidated affiliates, our consolidated statements of operations reflect our earnings from such facilities in two line items: x Equity in net income of nonconsolidated affiliates, which represents our combined share of the net income of each equity method facility that is based on such equity method facility’s net income and the percentage of such equity method facility’s outstanding equity interests owned by us; and x Management fee revenues, which represents our combined income from management fees that we earn from providing management services to the facilities that we do not consolidate for financial reporting purposes. Our equity in net income of nonconsolidated affiliates is primarily a function of the performance of our nonconsolidated affiliates and our percentage of ownership interest in those affiliates. However, our net patient revenues and associated expense line items only contain the results from our consolidated facilities. As a result of this incongruity in our reported results, management uses a variety of supplemental information to analyze our results of operations, including: x the results of operations of our consolidated subsidiaries and nonconsolidated affiliates; x our ownership share in the facilities we operate; and x facility operating indicators, such as systemwide net operating revenues growth, systemwide net patient revenues per case growth, same site systemwide net operating revenues growth and same site systemwide net patient revenues per case growth. While revenues of our nonconsolidated affiliates are not recorded in our net operating revenues, we believe this information is important in understanding our financial performance because these revenues are typically the basis for calculating the line item Management fee revenues and, together with the expenses of our nonconsolidated affiliates, are the basis for deriving the line item Equity in net income of nonconsolidated affiliates. KEY MEASURES Facilities Changes in our ownership of individual facilities and related changes in how we account for such facilities drive changes in our consolidated results from period to period in several ways, including: x Deconsolidations. As a result of a deconsolidation transaction, an affiliated facility that was previously consolidated becomes a nonconsolidated facility. Any income we earn from a deconsolidated facility, based upon our ownership percentage in the facility, is reported on a net basis in the line item Equity in net income of nonconsolidated affiliates, whereas prior to a deconsolidation transaction, the affiliated facility’s results were reported as part of our consolidated net operating revenues and the associated expense line items. x Consolidations. As a result of a consolidation transaction, an affiliated facility that was previously nonconsolidated and accounted for on an equity method basis becomes a consolidated facility. After consolidation, revenues and expenses of the affiliated facility are included as part of our consolidated results.
59
x De novos. Where strategically appropriate, we invest, typically with a health system partner, in de novo facilities, which are newly developed ASCs. A de novo facility may be consolidated or nonconsolidated, depending on the circumstances. x Shifts in Ownership Percentage. Our net income is driven in part by our ownership percentage in a facility since a portion of the net income earned by the facility is attributable to any noncontrolling owners in the facility, even if we consolidate such facility. As a result of our partnerships with physicians, our percentage of ownership in a facility may shift over time, which may result in an increase or a decrease in the net income we earn from such facility. We took several steps during the year-ended December 31, 2015 to optimize our facility portfolio by acquiring, deconsolidating, selling and closing certain consolidated and nonconsolidated facilities.
60
The following table presents a breakdown of the changes in number of consolidated, nonconsolidated and managed-only facilities during the periods presented. During the YearEnded December 31, 2015
Facilities at Beginning of Period Consolidated Facilities: .............................................................................. Equity Method Facilities: ........................................................................... Managed-only Facilities: ............................................................................ Total Facilities:...................................................................................... Strategic Activities Undertaken Acquisitions Consolidated Facilities acquired: ................................................................ Noncontrolling interests acquired in facilities accounted for as equity method investments: ................................................................................ Management agreements entered into (Managed-only): ............................ De novos Consolidated de novo facilities placed into operations:.............................. De novo facilities accounted for as equity method investments placed into operations: ........................................................................................... De novo facilities accounted for as managed-only facilities placed into operations: .................................................................................................. Consolidations / Deconsolidations / Other Conversion transactions or contributions to joint ventures or other partnerships completed such that the facility is accounted for as a consolidated affiliate: ....................................................................... Conversion transactions or contributions to joint ventures or other partnerships completed such that the facility is accounted for as an equity method investment: .................................................................. Transactions completed such that consolidated or equity method facilities are accounted for as a managed-only facility: ............................................ Closures and Sales Consolidated Facilities sold: ....................................................................... Noncontrolling interests in facilities accounted for as equity method investments sold: ........................................................................................ Consolidated Facilities closed: ................................................................... Equity Method Facilities closed: ................................................................ Management agreements exited from (Managed-only): ............................. Facilities at End of Period Consolidated Facilities: .............................................................................. Equity Method Facilities: ........................................................................... Managed-only Facilities: ............................................................................ Total Facilities:...................................................................................... Average Ownership Interest Consolidated Facilities: .............................................................................. Equity Method Facilities: ...........................................................................
During the YearEnded December 31, 2014
During the YearEnded December 31, 2013
95 65 26 186
87 60 30 177
87 52 8 147
15
13
4
5 1
5 2
7 20
—
—
1
1
—
1
—
1
—
3
2
1
4
4
2
1
—
3
2
1
—
— 6 3 4
2 4 2 3
— 2 — 1
104 68 21 193
95 65 26 186
87 60 30 177
47.9% 25.1%
50.0 % 26.0 %
51.6% 25.0%
Revenues Our consolidated net operating revenues for the years-ended December 31, 2015, 2014 and 2013 were $1,051.5 million, $864.7 million and $785.7 million, respectively. Given the increase in the number of our nonconsolidated facilities, driven by the success of our health system and physician partnership growth strategy, we review nonconsolidated facility revenues and also manage our facilities utilizing certain supplemental systemwide growth metrics. 61
The following table summarizes our systemwide net operating revenues growth, systemwide net patient revenues per case growth, same site systemwide revenue growth and same site systemwide net patient revenues per case growth. YEAR-ENDED DECEMBER 31, 2014
2015
Systemwide net operating revenues growth (1) ................................................. Systemwide net patient revenues per case growth (1) ....................................... Same site systemwide net operating revenues growth (1)(2) .............................. Same site systemwide net patient revenues per case growth (1)(2) .................... (1)
(2)
18.3% 4.7% 8.1% 4.5%
2013
10.0 % 4.5 % 3.1 % 2.7 %
15.5% 9.3% 9.4% 6.1%
The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results, rather only the net income earned from such facilities is reported on a net basis in the line item “Equity in net income of nonconsolidated affiliates.” Because of this, management supplementally focuses on non-GAAP systemwide results, which measure results from all our facilities, including revenues from our consolidated facilities and our equity method facilities (without adjustment based on our percentage of ownership). We include management fee revenues from managed-only facilities in systemwide net operating revenues growth and same site net operating revenue growth, but not patient or other revenues from managed-only facilities (in which we hold no ownership interest). We do not include managed-only facilities in systemwide net patient revenues per case growth or samesite systemwide net patient revenues per case growth. Same site refers to facilities that were operational in both the current and prior periods.
Year-Ended December 31, 2015 Compared to Year-Ended December 31, 2014 Our consolidated net operating revenues increased by $186.8 million, or 21.6%, for the year-ended December 31, 2015 to $1,051.5 million from $864.7 million for the year-ended December 31, 2014. Consolidated net patient revenues per case increased by 7.3% to $1,933 per case during the year-ended December 31, 2015 from $1,801 per case during the year-ended December 31, 2014. For the year-ended December 31, 2015, systemwide net operating revenues grew by 18.3% compared to the year-ended December 31, 2014. In addition, for the year-ended December 31, 2015, systemwide net patient revenues per case grew by 4.7% compared to the prior year. The table below quantifies several significant items impacting our period-over-period net operating revenues growth and net operating revenues growth of our nonconsolidated affiliates (on a 100% basis). Year-Ended December 31, 2015 Surgical Care Affiliates Nonconsolidated as Reported Under GAAP Affiliates (in millions)
Total net operating revenues, year-ended December 31, 2014 (1) .............................. $ Add: revenue from acquired facilities ....................................................................... revenue from consolidations ................................................................................ Less: revenue of disposed facilities ........................................................................... revenue from deconsolidated facilities ................................................................ Adjusted base year total net operating revenues ....................................................... Increase from operations ........................................................................................... Total net operating revenues, year-ended December 31, 2015: ................................ $ (1)
864.7 $ 113.1 18.7 (17.6 ) (1.1 ) 977.8 73.7 1,051.5 $
665.3 69.4 (18.7) (8.0) 1.1 709.1 48.8 757.9
Additions to revenue represent revenue from the acquisition or consolidation of facilities during the 12 months after the date of acquisition or consolidation, as applicable. Deductions from revenue represent revenue from disposition or deconsolidation of facilities that were owned or consolidated in a prior period but are not owned or consolidated at the end of the current period.
Year-Ended December 31, 2014 Compared to Year-Ended December 31, 2013 Our consolidated net operating revenues increased by $79.0 million, or 10.1%, for the year-ended December 31, 2014 to $864.7 million from $785.7 million for the year-ended December 31, 2013. Consolidated net patient revenues per case increased by 5.3% to $1,801 per case during the year-ended December 31, 2014 from $1,710 per case during the year-ended December 31, 2013.
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For the year-ended December 31, 2014, systemwide net operating revenues grew by 10.0% compared to the year-ended December 31, 2013. In addition, for the year-ended December 31, 2014, systemwide net patient revenues per case grew by 4.5% compared to the prior year. The table below quantifies several significant items impacting our period-over-period net operating revenues growth and net operating revenues growth of our nonconsolidated affiliates (on a 100% basis). Year-Ended December 31, 2014 Surgical Care Affiliates Nonconsolidated as Reported Under GAAP Affiliates (in millions)
Total net operating revenues, year-ended December 31, 2013 (1)(2)........................... $ Add: revenue from acquired facilities ....................................................................... revenue from consolidations ................................................................................ Less: revenue of disposed facilities .......................................................................... revenue from deconsolidated facilities ................................................................ Adjusted base year total net operating revenues ....................................................... Increase from operations ........................................................................................... Total net operating revenues, year-ended December 31, 2014: ................................ $ (1) (2)
785.7 $ 55.0 3.0 (2.7 ) (13.8 ) 827.2 37.5 864.7 $
605.8 60.2 (3.0) (16.8) 13.8 660.0 5.3 665.3
$16.4 million in revenues have been reclassified from prior periods presented related to facilities accounted for as discontinued operations. Additions to revenue represent revenue from the acquisition or consolidation of facilities during the 12 months after the date of acquisition or consolidation, as applicable. Deductions from revenue represent revenue from disposition or deconsolidation of facilities that were owned or consolidated in a prior period but are not owned or consolidated at the end of the current period.
Summary of Key Line Items Net Operating Revenues The vast majority of our net operating revenues consist of net patient revenues from the facilities we consolidate for financial reporting purposes. Net patient revenues are derived from fees we collect from commercial health plans, Medicare, state workers’ compensation programs, Medicaid, patients and other payors in exchange for providing the facility and related services and supplies a physician requires to perform a surgical procedure. Our net operating revenues also include the line item Management fee revenues, which includes fees we earn from managing the facilities that we do not consolidate for financial reporting purposes. The line item Other revenues is composed of other ancillary services and fees received for anesthesia services. With few exceptions, the physicians who perform procedures at our facilities bill and collect from their patients and other payors directly for their professional services, and their revenues from such professional services are not included in our net operating revenues. Net Patient Revenues Net patient revenues are recorded during the period in which the healthcare services are provided, based upon the estimated amounts due from commercial health plans, patients and other government and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), state workers’ compensation programs and employers.
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The following table presents a breakdown by payor source of the percentage of net patient revenues at our consolidated facilities for the periods presented: Consolidated Facilities YEAR-ENDED DECEMBER 31, 2014
2015
Managed care and other discount plans ......................................... Medicare ........................................................................................ Workers’ compensation ................................................................. Patients and other third-party payors ............................................. Medicaid ........................................................................................ Total ...............................................................................................
65% 19 9 4 3 100%
2013
62 % 20 10 5 3 100%
61% 20 11 5 3 100%
The following table presents a breakdown by payor source of the percentage of net patient revenues at our nonconsolidated facilities for the periods presented: Nonconsolidated Facilities YEAR-ENDED DECEMBER 31, 2014
2015
Managed care and other discount plans ......................................... Medicare ........................................................................................ Workers’ compensation ................................................................. Patients and other third-party payors ............................................. Medicaid ........................................................................................ Total ...............................................................................................
72% 18 5 3 2 100%
74 % 16 5 3 2 100%
2013
75% 14 6 3 2 100%
The majority of our net patient revenues are related to patients with commercial health insurance coverage. The reimbursement rates we have been able to negotiate, on an average basis across our portfolio, have held relatively stable. Medicare accounts for 19%, 20% and 20% of our net patient revenues for the years-ended December 31, 2015, 2014 and 2013, respectively. The Medicare program is subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and funding reductions, all of which may adversely affect the level of payments to our facilities. Significant spending reductions mandated by the BCA impacting the Medicare program went into effect on March 1, 2013. Under the BCA, the percentage reduction for Medicare may not be more than 2% for a fiscal year, with a uniform percentage reduction across all providers. The impact from these spending reductions has not been material to our results. The Medicare payment update for ASCs for federal fiscal year 2016 is a net increase of 0.3%, consisting of 0.8% inflation minus a 0.5% productivity adjustment. We do not expect this update to have a material impact on our results. For the year-ended December 31, 2015, the net patient revenues from our consolidated facilities located in each of Texas, California and North Carolina represented approximately 16%, 12% and 11%, respectively, of our total net patient revenues. Additionally, the net patient revenues from our consolidated facilities located in each of Florida and Idaho represented more than 5% of our total net patient revenues for the year-ended December 31, 2015. As of December 31, 2015, 30 of our 68 nonconsolidated facilities accounted for as equity method investments were located in California, and 14 of these 68 facilities were located in Indiana. Management Fee Revenues Management fee revenues consist of management fees that we receive from providing management services to the facilities that we do not consolidate for financial reporting purposes. Management fee revenues represented 5.8%, 6.8% and 5.2% of our net operating revenues for the years-ended December 31, 2015, 2014 and 2013, respectively.
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Operating Expenses Salaries and Benefits Salaries and benefits represent the most significant cost to us and include all amounts paid to full- and part-time teammates, including all related costs of benefits provided to such teammates. Salaries and benefits expense represented 33.4%, 34.4% and 34.5% of our net operating revenues for the years-ended December 31, 2015, 2014 and 2013, respectively. Supplies Supplies expense includes all costs associated with medical supplies used while providing patient care at our consolidated facilities. Our supply costs primarily include sterile disposables, pharmaceuticals, implants and other similar items. Supplies expense represented 21.1%, 20.6% and 21.7% of our net operating revenues for the years-ended December 31, 2015, 2014 and 2013, respectively. Supplies expense is typically closely related to case volume, the timing of purchases and case mix, as an increase in the acuity of cases and the use of implants in those cases tends to drive supplies expense higher. Other Operating Expenses Other operating expenses consists primarily of expenses related to insurance premiums, contract services, legal fees, repairs and maintenance, professional and licensure dues, office supplies and miscellaneous expenses. Other operating expenses do not generally correlate with changes in net patient revenues. Occupancy Costs Occupancy costs include facility rent, utility and maintenance expense. Occupancy costs do not generally correlate with changes in net patient revenues. Provision for Doubtful Accounts We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts we estimate we will collect. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, aging of accounts receivable, payor mix or trends in Federal or state governmental healthcare coverage. HealthSouth Option Expense HealthSouth Corporation (“HealthSouth”) held an option (the “HealthSouth Option”) to purchase equity securities constituting 5% of the equity securities issued and outstanding as of the closing of our acquisition by TPG in 2007 on a fully diluted basis. The HealthSouth Option became exercisable upon certain customary liquidity events, including a public offering of shares of our common stock that results in 30% or more of our common stock being listed or traded on a national securities exchange. Once vested, the HealthSouth Option was exercisable on a net exercise basis. On April 9, 2015, HealthSouth exercised the HealthSouth Option, and we issued 326,242 new shares of common stock at a value of $11.7 million. Accordingly, $11.7 million of expense was included in HealthSouth option expense on our consolidated statement of operations for the year-ended December 31, 2015. There was no similar expense in 2014 or 2013. Debt Modification Expense In conjunction with the refinancing of our corporate debt in the first quarter of 2015, we recognized $5.0 million of debt modification expense. There was no similar expense in 2014 or 2013. Loss on Extinguishment of Debt In conjunction with the refinancing of our corporate debt in the first quarter of 2015, we recognized a $0.5 million loss on extinguishment of debt. In conjunction with the 2013 amendment to the credit agreement, we recognized $10.3 million loss on extinguishment of debt. There were no similar losses in 2014.
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(Benefit) Provision for Income Taxes Since substantially all of our facilities are organized as general partnerships, LPs, LLPs or LLCs, which are not taxed at the entity level for federal income tax purposes and are only taxed at the entity level in five states for state income tax purposes, substantially all of our tax expense is attributable to Surgical Care Affiliates. For the prior year, because we had a full valuation allowance booked against net deferred tax assets, our tax expense was based primarily on the amortization of tax goodwill and write-offs of book and tax goodwill. Thus, tax expense and the effective tax rate for the prior year did not bear a relationship to pre-tax income. For the current tax year, because we have released a significant portion of the valuation allowance, the resulting tax benefit does not directly relate to current period pre-tax income. Additionally, because tax expense is substantially attributable to Surgical Care Affiliates, and pre-tax income includes income attributable to noncontrolling interests, tax expense will not bear a logical relationship to pre-tax income. Net Income (Loss) Attributable to Surgical Care Affiliates Net loss attributable to Surgical Care Affiliates is derived by subtracting net income attributable to noncontrolling interests from net income. Net income includes certain revenues and expenses that are incurred only through our wholly-owned subsidiaries, and therefore, do not impact net income attributable to noncontrolling interests. These revenues and expenses include management fee revenues, interest expense related to Surgical Care Affiliates’ debt, losses or gains on sales of investments and provision for income taxes. In periods where net income is negatively affected by these non-shared revenues and expenses, the deduction of net income attributable to noncontrolling interests from net income can result in a net loss attributable to Surgical Care Affiliates in periods where net income is positive.
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Summary Results of Operations Year-Ended December 31, 2015 Compared to Year-Ended December 31, 2014 and December 31, 2013 Our Consolidated Results and Results of Nonconsolidated Affiliates The following tables show our results of operations and the results of operations of our nonconsolidated affiliates for the yearsended December 31, 2015, 2014 and 2013. YEAR-ENDED DECEMBER 31, 2014 2013 As NonAs Non- As NonReported consolidated Reported consolidated Reported consolidated Under GAAP Affiliates (1) Under GAAP Affiliates (1) Under GAAP Affiliates (1) (in millions, except cases and facilities in actual amounts) 2015
Net operating revenues: Net patient revenues .................................. $ 971.4 $ Management fee revenues......................... 61.0 Other revenues .......................................... 19.1 Total net operating revenues................ 1,051.5 Equity in net income of nonconsolidated affiliates (2) ..................................................... 49.9 Operating expense: Salaries and benefits ................................. 351.0 Supplies..................................................... 221.4 Other operating expenses .......................... 161.9 Depreciation and amortization .................. 66.2 Occupancy costs ....................................... 36.5 Provision for doubtful accounts ................ 17.2 Impairment of intangible and long-lived assets ......................................................... 0.6 Loss (gain) on disposal of assets ............... 1.9 Total operating expenses ................ 856.7 Operating income ........................................... 244.7 Interest expense......................................... 42.1 HealthSouth option expense ..................... 11.7 Debt modification expense ....................... 5.0 Loss on extinguishment debt .................... 0.5 Interest income .......................................... (0.4) (Gain) loss on sale of investments ............ (4.0) Income from continuing operations before income taxes ................................................... 189.6 (Benefit) provision for income taxes(3) ........... (84.8) Income from continuing operations................ 274.4 Loss from discontinued operations, net of income tax expense ........................................ (0.8) Net income ..................................................... 273.6 $ Less: Net income attributable to noncontrolling interests .................................. (158.3) Net income (loss) attributable to Surgical Care Affiliates ................................................ $ 115.3 Equity in net income of nonconsolidated affiliates (2) ....................................................... $ (4) Other Data Cases — consolidated facilities (5) ................... 502,660 Cases — equity facilities (6) ............................. 308,443 Consolidated facilities .................................... 104 Equity method facilities.................................. 68 Managed-only facilities .................................. 21 Total facilities ................................................. 193 67
749.8 $ — 8.1 757.9
788.0 $ 58.9 17.8 864.7
659.4 $ — 5.9 665.3
731.6 $ 40.5 13.6 785.7
—
32.6
—
23.4
—
161.3 133.9 113.6 28.1 31.7 18.7
297.2 177.9 124.9 52.7 29.4 14.1
140.4 111.8 98.1 21.8 26.0 16.0
270.9 170.2 127.7 41.5 25.5 14.2
128.9 99.3 89.6 17.3 22.7 10.4
— 0.2 487.5 270.3 2.5 — — — (0.1) —
0.6 (0.2) 696.4 200.9 32.8 — — — (0.2) (7.6)
— 1.8 415.9 249.4 2.3 — — — (0.1 ) —
— 0.1 650.1 158.9 60.2 — — 10.3 (0.2) 12.3
— 0.3 368.5 237.3 1.7 — — — (0.1) —
267.8 0.0 267.8
175.9 9.4 166.5
247.2 0.1 247.1
76.2 12.3 63.9
235.6 0.1 235.5
— 267.8
(9.4) 157.1 $
— 247.1
(9.3) 54.6 $
— 235.5
(125.2) $
(105.9)
32.0
49.9
$ $
437,654 276,320 95 65 26 186
600.6 — 5.2 605.8
(51.3)
32.6
$ 427,840 258,942 87 60 30 177
23.4
Note: Totals above may not sum due to rounding.
(1)
(2)
(3) (4) (5) (6)
The figures in this column, except within the line item Equity in net income of nonconsolidated affiliates, are non-GAAP presentations but management believes they provide further useful information about our equity method investments. The revenue, expense and operating income line items included in this column represent the results of our facilities that we account for as an equity method investment on a combined basis, without taking into account our percentage of ownership interest. The line item Equity in net income of nonconsolidated affiliates represents the total net income earned by us from our facilities accounted for as an equity method investment, which is computed as our percentage of ownership interest in the facility (which differs among facilities) multiplied by the net income earned by such facility, adjusted for basis differences such as amortization and other than temporary impairment charges, as described below. For the years-ended December 31, 2015, 2014 and 2013 we recorded amortization expense of $1.4 million, $23.2 million and $25.9 million, respectively, for definite-lived intangible assets attributable to equity method investments within Equity in net income of nonconsolidated affiliates. For the years-ended December 31, 2015, 2014 and 2013 we recorded other than temporary impairment charges of $9.3 million, $0.3 million and $6.1 million, respectively, within the line item Equity in net income of nonconsolidated affiliates. Provision for income tax expense for nonconsolidated affiliates was $0.037 million for the year-ended December 31, 2015. Case data is presented for the years-ended December 31, 2015, 2014 and 2013, as applicable. Facilities data is presented as of December 31, 2015, 2014 and 2013, as applicable. Represents cases performed at consolidated facilities. The number of cases performed at our facilities is a key metric utilized by us to regularly evaluate performance. Represents cases performed at equity method facilities. The number of cases performed at our facilities is a key metric utilized by us to regularly evaluate performance.
Year-Ended December 31, 2015 Compared to Year-Ended December 31, 2014 Net Operating Revenues Our consolidated net operating revenues increased $186.8 million, or 21.6%, for the year-ended December 31, 2015 compared to the year-ended December 31, 2014. The main factors that contributed to this increase were revenues earned from acquisitions (including the consolidation of three previously nonconsolidated facilities), increased rates paid under certain payor contracts and higher acuity case mix. Consolidated net patient revenues per case grew by 7.3% to $1,933 per case for the year-ended December 31, 2015 from $1,801 per case during the prior year, reflecting acquisitions of consolidated facilities with higher rates per case than the average of our consolidated facilities as well as higher acuity case mix across the consolidated portfolio. The number of cases at our consolidated facilities increased to 502,660 cases during the year-ended December 31, 2015 from 437,654 cases during the year-ended December 31, 2014, largely due to acquisitions, as well as organic growth. Our number of consolidated facilities increased to 104 facilities as of December 31, 2015 from 95 facilities as of December 31, 2014. For the year-ended December 31, 2015, systemwide net operating revenues grew by 18.3% compared to the year-ended December 31, 2014. The growth in systemwide net operating revenues was largely due to the acquisition of 15 consolidated facilities since the prior year, excluding three of which that were previously accounted for as equity method investments (see Note 3 to the consolidated financial statements included herein regarding the Kentucky JVs). The acquisition of noncontrolling interests in nine facilities accounted for as equity method investments since the prior year and increased rates earned under certain payor contracts also contributed to the growth in systemwide net operating revenues. In addition, for the year-ended December 31, 2015, systemwide net patient revenues per case grew by 4.7% compared to the year-ended December 31, 2014, due to the acquisitions described above as well as increased rates paid under certain payor contracts. Equity in Net Income of Nonconsolidated Affiliates Equity in net income of nonconsolidated affiliates increased $17.3 million, or 53.1%, to $49.9 million during the year-ended December 31, 2015 from $32.6 million during the year-ended December 31, 2014. Equity in net income of nonconsolidated affiliates increased due to a decrease in amortization expense for definite-lived intangible assets attributable to equity method investments from the prior year and the acquisition of several noncontrolling interests in facilities since December 31, 2014. This increase was partially offset by $9.3 million of equity method impairments recorded during 2015, and the consolidation of three facilities that were previously accounted for as equity method investments in 2014. Additionally, changes in our ownership amounts in equity method facilities and changes in the profitability of those equity method facilities also impacted Equity in net income of nonconsolidated affiliates.
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Salaries and Benefits Salaries and benefits expense for consolidated facilities increased $53.8 million, or 18.1%, to $351.0 million for the year-ended December 31, 2015 from $297.2 million for the year-ended December 31, 2014 due to the addition of teammates of newly acquired consolidated facilities and corporate investments primarily related to operations and development. Supplies Supplies expense for consolidated facilities increased $43.5 million, or 24.5%, to $221.4 million for the year-ended December 31, 2015 from $177.9 million for the year-ended December 31, 2014. Supplies expense per case increased by 8.4% during the year-ended December 31, 2015, as compared to the prior year, primarily due to acquisitions and changes in case mix. Other Operating Expenses Other operating expenses for consolidated facilities increased $37.0 million, or 29.6%, to $161.9 million for the year-ended December 31, 2015 from $124.9 million for the year-ended December 31, 2014. This increase is primarily attributable to the incurrence of additional costs resulting from our organizational growth through acquisitions. Depreciation and Amortization Depreciation and amortization expense for consolidated facilities increased $13.5 million, or 25.6%, to $66.2 million for the yearended December 31, 2015 from $52.7 million for the year-ended December 31, 2014, primarily due to acquisitions and the addition of new capitalized assets since December 31, 2014. Occupancy Costs Occupancy costs for consolidated facilities increased $7.1 million, or 24.2%, to $36.5 million for the year-ended December 31, 2015 from $29.4 million for the year-ended December 31, 2014, primarily due to acquisitions and organizational growth. Provision for Doubtful Accounts The provision for doubtful accounts for consolidated facilities increased $3.1 million, or 22.0%, to $17.2 million for the year-ended December 31, 2015 from $14.1 million during the year-ended December 31, 2014. However, it remained consistent as a percentage of net patient revenues at approximately 2.0% for the year-ended December 31, 2015 and 2014. Interest Expense Interest expense for consolidated facilities increased $9.3 million, or 28.4%, to $42.1 million for the year-ended December 31, 2015 from $32.8 million for the year-ended December 31, 2014, primarily due to the refinancing of our indebtedness during the first quarter of 2015. HealthSouth Option Expense HealthSouth held an option to purchase equity securities constituting 5% of the equity securities issued and outstanding as of the closing of our acquisition by TPG in 2007 on a fully diluted basis. The option was exercisable upon certain customary liquidity events, including a public offering of shares of our common stock that results in 30% or more of our common stock being listed or traded on a national securities exchange. Once vested, the option was exercisable on a net exercise basis. On April 9, 2015, HealthSouth exercised the option at a value of $11.7 million. Accordingly, $11.7 million of expense was recorded during 2015. There was no similar expense in 2014. Debt Modification Expense In conjunction with the refinancing of our corporate debt in the first quarter of 2015, we recognized $5.0 million of debt modification expense. There was no similar expense in 2014. Loss on Extinguishment of Debt In conjunction with the refinancing of our corporate debt in the first quarter of 2015, we recognized a $0.5 million loss on extinguishment of debt. There was no similar loss in 2014. 69
Gain on Sale of Investments We recognized gains on sale of investments of $4.0 million and $7.6 million for the years-ended December 31, 2015 and 2014, respectively. The gains recognized during the year-ended December 31, 2015 were primarily due to the contribution of an equity method investment to a joint venture, the sale of the right to manage a facility held as an equity method investment and the sale of a consolidated facility, partially offset by losses due to the closure of a consolidated facility. The gains for the year-ended December 31, 2014 were primarily due to a deconsolidation transaction, the syndications of nonconsolidated affiliates, the contribution of an equity method investment to a joint venture and the sale of the management rights to an equity method investment, partially offset by losses due to a deconsolidation transaction. (Benefit) Provision for Income Taxes For the year-ended December 31, 2015, we recorded an income tax benefit of $84.8 million, representing an effective tax rate of (44.7%), compared to an expense of $9.4 million, representing an effective tax rate of 5.4%, for the year-ended December 31, 2014. The $84.8 million tax benefit for the year-ended December 31, 2015 includes the release of the tax valuation allowance previously maintained against net deferred tax assets, net of $23.9 million of valuation allowance retained against capital loss carryforwards, and offset by $1.4 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $1.1 million attributable to noncontrolling interests. The $9.4 million expense for the year-ended December 31, 2014 was reflective of a full valuation allowance and included $8.6 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, as well as write-offs of book and tax goodwill, and $0.8 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.6 million attributable to noncontrolling interests. For the year-ended December 31, 2014, because we had a full valuation allowance booked against net deferred tax assets, our tax expense was based primarily on the amortization of tax goodwill and write-offs of book and tax goodwill. Thus, tax expense and the effective tax rate for such tax year did not bear a consistent relationship to pre-tax income. For the year-ended December 31, 2015, because we released a significant portion of the valuation allowance, the resulting tax benefit does not relate directly to current period pre-tax income. Additionally, because tax expense is substantially attributable to Surgical Care Affiliates, and pre-tax income includes income attributable to noncontrolling interests, tax expense will not bear a logical relationship to pre-tax income. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests increased $33.1 million, or 26.4%, to $158.3 million for the year-ended December 31, 2015 from $125.2 million for the year-ended December 31, 2014. The increase in our consolidated net operating revenues, as described above, drove an increase in consolidated facilities’ net income. Most of our consolidated facilities include noncontrolling owners. An increase in the earnings of these facilities resulted in an increase in net income attributable to noncontrolling interests. Net Income Attributable to Surgical Care Affiliates Net income attributable to Surgical Care Affiliates increased $83.3 million to $115.3 million for the year-ended December 31, 2015 from $32.0 million for the year-ended December 31, 2014. The increase was mainly attributable to the income tax benefit recorded in the third quarter of 2015 and the increase in our facilities’ revenue and operating income during the year-ended December 31, 2015. The increase in revenues and operating income was more than offset by increases in net income attributable to noncontrolling interests, interest expense, HealthSouth option expense and debt modification expense. Year-Ended December 31, 2014 Compared to Year-Ended December 31, 2013 Net Operating Revenues Our consolidated net operating revenues increased $79.0 million, or 10.1%, for the year-ended December 31, 2014 compared to the year-ended December 31, 2013. The main factors that contributed to this increase were revenues earned from acquisitions and increased rates paid under certain payor contracts. This increase was partially offset by the deconsolidation of two facilities and the disposition of two facilities since December 31, 2013. Consolidated net patient revenues per case grew by 5.3% to $1,801 per case for the year-ended December 31, 2014 from $1,710 per case during the prior year, reflecting acquisitions of consolidated facilities with higher rates per case than the average rates at our consolidated facilities. The number of cases at our consolidated facilities increased to 437,654 cases during the year-ended December 31, 2014 from 427,840 cases during the year-ended December 31, 2013, largely due to acquisitions since the prior year, partially offset by the deconsolidation of two facilities and the disposition of two facilities since December 31, 2013. Our number of consolidated facilities increased to 95 facilities as of December 31, 2014 from 87 facilities as of December 31, 2013.
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For the year-ended December 31, 2014, systemwide net operating revenues grew by 10.0% compared to the year-ended December 31, 2013. The growth in systemwide net operating revenues was largely due to the acquisition of fifteen consolidated affiliates, two of which were previously accounted for as managed-only facilities, and noncontrolling interests in seven facilities accounted for as equity method investments, two of which were previously accounted for as managed only-facilities, since the prior year, as well as increased management fee revenues from acquisitions made subsequent to the prior year, increased rates earned under certain payor contracts and changes in case mix. In addition, for the year-ended December 31, 2014, systemwide net patient revenues per case grew by 4.5% compared to the year-ended December 31, 2013 due to the acquisitions described above. Equity in Net Income of Nonconsolidated Affiliates Equity in net income of nonconsolidated affiliates increased $9.2 million, or 39.3%, to $32.6 million during the year-ended December 31, 2014 from $23.4 million during the year-ended December 31, 2013. Equity in net income of nonconsolidated affiliates increased due to a decrease in equity method impairments from the prior year and a decrease in amortization expense for definite-lived intangible assets attributable to equity method investments from the prior year. Equity method impairments of $0.3 million were recorded during 2014 as compared to $6.1 million recorded during the prior year and amortization expense for definite-lived intangible assets attributable to equity method investments of $23.2 million was recorded during 2014 as compared to $25.9 million during the prior year. Additionally, the increase was due to the acquisition of several noncontrolling interests in facilities since December 31, 2013 and the deconsolidation of two facilities since December 31, 2013 (i.e., the facilities became equity method facilities rather than consolidated facilities). After deconsolidation, the results of operations of the facility were reported net in Equity in net income of nonconsolidated affiliates, whereas prior to deconsolidation, the results were reported within the consolidated revenue and expense line items. Additionally, changes in our ownership amounts in equity method facilities and changes in the profitability of those equity method facilities also impacted Equity in net income of nonconsolidated affiliates. Salaries and Benefits Salaries and benefits expense increased $26.3 million, or 9.7%, to $297.2 million for the year-ended December 31, 2014 from $270.9 million for the year-ended December 31, 2013. Acquisitions, including the acquisition of Health Inventures, LLC in the second quarter of 2013, largely drove the increase in salaries and benefits. Corporate investments related to operations and development and annual salary increases also contributed to the increase. Supplies Supplies expense increased $7.7 million, or 4.5%, to $177.9 million for the year-ended December 31, 2014 from $170.2 million for the year-ended December 31, 2013. Supplies expense per case increased by 2.2% during the year-ended December 31, 2014, as compared to the prior year, primarily due to inflation and changes in case mix. Other Operating Expenses Other operating expenses decreased $2.8 million, or 2.2%, to $124.9 million for the year-ended December 31, 2014 from $127.7 million for the year-ended December 31, 2013. This decrease was primarily attributable to certain fees recorded in 2013 associated with our initial public offering and management fees to TPG partially offset by the incurrence of certain additional overhead costs resulting from our organizational growth and growth from acquisitions since the prior year. Depreciation and Amortization Depreciation and amortization expense increased $11.2 million, or 27.0%, to $52.7 million for the year-ended December 31, 2014 from $41.5 million for the year-ended December 31, 2013, primarily due to the addition of new capitalized assets and acquisitions since December 31, 2013, partially offset by the conversion of two consolidated facilities to equity method investments since the prior year. Occupancy Costs Occupancy costs increased $3.9 million, or 15.3%, to $29.4 million for the year-ended December 31, 2014 from $25.5 million for the year-ended December 31, 2013, primarily due to organizational growth and acquisitions after the prior year.
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Provision for Doubtful Accounts The provision for doubtful accounts remained flat at $14.1 million and $14.2 million for the years-ended December 31, 2014 and December 31, 2013, respectively. Additionally, the provision remained consistent as a percentage of net patient revenues at approximately 2.0% for the year-ended December 31, 2014 and 2013. Interest Expense Interest expense decreased $27.4 million, or 45.5%, to $32.8 million for the year-ended December 31, 2014 from $60.2 million for the year-ended December 31, 2013, primarily due to the refinancing of certain of our indebtedness in 2013, including the redemption of all of our outstanding senior notes and senior subordinated notes in the second half of 2013. (Gain) Loss on Sale of Investments We recognized gains on sale of investments of $7.6 million and losses on sale of investments of $12.3 million for the years-ended December 31, 2014 and 2013, respectively. The gains for the year-ended December 31, 2014 were primarily due to a deconsolidation transaction, the syndications of nonconsolidated affiliates, contribution of an equity method investment to a joint venture and the sale of the management rights to an equity method investment, partially offset by losses due to another deconsolidation transaction. The losses for the year-ended December 31, 2013 were primarily due to deconsolidation transactions. Benefit (Provision) for Income Taxes For the year-ended December 31, 2014, income tax expense was $9.4 million, representing an effective tax rate of 5.4%, compared to $12.3 million, representing an effective tax rate of 16.2%, for the year-ended December 31, 2013. The $9.4 million in expense for the year-ended December 31, 2014 was reflective of a full valuation allowance and included $8.6 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, as well as write-offs of book and tax goodwill, and $0.8 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.6 million attributable to noncontrolling interests. The $12.3 million in expense for the year-ended December 31, 2013 was reflective of a full valuation allowance and included $11.5 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, as well as write-offs of book and tax goodwill, $0.2 million of current federal income tax attributable to noncontrolling interests and $0.6 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.4 million attributable to noncontrolling interests. For prior tax years, because we had a full valuation allowance booked against net deferred tax assets, our tax expense was based primarily on the amortization of tax goodwill and write-offs of book and tax goodwill. Thus, tax expense and the effective tax rate for the prior tax year did not bear a consistent relationship to pre-tax income. Additionally, because tax expense is substantially attributable to Surgical Care Affiliates, and pre-tax income includes income attributable to noncontrolling interests, tax expense will not bear a logical relationship to pre-tax income. Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests increased $19.3 million, or 18.2%, to $125.2 million for the year-ended December 31, 2014 from $105.9 million for the year-ended December 31, 2013. The increase in our consolidated net operating revenues, as described above, drove an increase in consolidated facilities’ net income. Most of our consolidated facilities include noncontrolling owners. An increase in the earnings of these facilities resulted in an increase in net income attributable to noncontrolling interests. This increase was partially offset by the deconsolidation of two facilities since December 31, 2013. Net Income (Loss) Attributable to Surgical Care Affiliates Net income attributable to Surgical Care Affiliates increased $83.3 million to $32.0 million of net income for the year-ended December 31, 2014 from $51.3 million of net loss for the year-ended December 31, 2013. The increase was driven by growth in earnings from acquisitions and lower interest expense.
72
Adjusted EBITDA-NCI and Adjusted Net Income Reconciliations The following table represents the reconciliation of net income to Adjusted EBITDA-NCI and of net income (loss) attributable to Surgical Care Affiliates to Adjusted net income for the periods indicated below: 2015
Adjusted EBITDA-NCI (a): Net income ........................................................................................... Plus (minus): Interest expense, net ........................................................................ (Benefit) provision for income taxes .............................................. Depreciation and amortization ........................................................ Loss from discontinued operations, net .......................................... Equity method amortization expense (b) ........................................ (Gain) loss on sale of investments .................................................. HealthSouth option expense ........................................................... Debt modification expense ............................................................. Loss on extinguishment of debt ...................................................... Asset impairments........................................................................... Loss (gain) on disposal of assets ..................................................... IPO related expense (c) ................................................................... Stock compensation expense (d) ..................................................... Other ............................................................................................... Adjusted EBITDA .............................................................................. (Minus): Net income attributable to noncontrolling interests ........................ Adjusted EBITDA-NCI ..................................................................... Adjusted Net Income (a): Net income (loss) attributable to Surgical Care Affiliates .............. Plus (minus) ......................................................................................... (Benefit) provision for income taxes .............................................. HealthSouth option expense ........................................................... Debt modification expense ............................................................. Loss on extinguishment of debt ...................................................... Asset impairments........................................................................... Amortization expense ..................................................................... Loss from discontinued operations, net .......................................... (Gain) loss on sale of investments .................................................. Loss (gain) on disposal of assets ..................................................... Equity method amortization expense (b) ........................................ IPO related expense (c) ................................................................... Stock compensation expense (d) ..................................................... Other ............................................................................................... Adjusted Net Income .......................................................................... (a)
$
273.6
2014
$
41.7 (84.8) 66.2 0.8 1.4 (4.0) 11.7 5.0 0.5 9.9 1.9 — 8.3 1.3 333.6
$
2013
157.1
$
32.6 9.4 52.7 9.4 23.2 (7.6 ) — — — 0.7 (0.2 ) — 4.1 0.4 281.9
(158.3) 175.3 $
$
115.3
$
$
(84.8) 11.7 5.0 0.5 9.9 14.3 0.8 (4.0) 1.9 1.4 — 8.3 1.3 81.6 $
60.0 12.3 41.5 9.3 25.9 12.3 — — 10.3 6.1 0.1 9.0 7.3 — 248.7
(125.2 ) 156.7 $ 32.0
54.6
$
9.4 — — — 0.7 10.1 9.4 (7.6 ) (0.2 ) 23.2 — 4.1 0.4 81.5 $
(105.9) 142.8 (51.3) 12.3 — — 10.3 6.1 6.7 9.3 12.3 0.1 25.9 9.0 7.3 — 48.0
Note: Totals above may not sum due to rounding. Adjusted EBITDA-NCI means net income before (benefit) provision for income taxes, net interest expense, depreciation and amortization, net loss from discontinued operations, equity method amortization expense, (gain) loss on sale of investments, HealthSouth option expense, debt modification expense, loss on extinguishment of debt, asset impairments, gain (loss) on disposal of assets, IPO related expenses, stock compensation expense and other less net income attributable to noncontrolling interests. Adjusted net income means net income (loss) attributable to Surgical Care Affiliates before (benefit) provision for income taxes, Healthsouth option expense, debt modification expense, loss on extinguishment of debt, asset impairments, amortization expense, net loss from discontinued operations, (gain) loss on sale of investments, (gain) loss on disposal of assets, equity method amortization expense, IPO related expenses, stock compensation expense and other. We present Adjusted EBITDA-NCI and Adjusted net income because we believe that they are useful metrics to investors in analyzing our operating performance on the same basis as that used by our management. Our management believes that Adjusted EBITDA-NCI can be useful to facilitate comparisons of operating performance between periods because it excludes the effect of depreciation and amortization, which represents a non-cash charge to earnings, income
73
tax, interest expense and other expenses or income not related to the normal, recurring operations of our business. Our management believes that Adjusted net income can be useful to facilitate comparisons of our operating performance between periods because it excludes the effect of certain non-cash and other charges to earnings whose fluctuations from period-to-period do not necessarily correspond to the normal, recurring operations of our business. Adjusted EBITDANCI and Adjusted net income are each considered a “non-GAAP financial measure” under SEC rules and should not be considered a substitute for net income (loss) or net operating income as determined in accordance with GAAP. In addition, Adjusted EBITDA-NCI and Adjusted net income have limitations as analytical tools, including the following: • • • • •
Adjusted EBITDA-NCI and Adjusted net income do not reflect our historical capital expenditures, or future requirements for capital expenditures, or contractual commitments; Adjusted EBITDA-NCI and Adjusted net income do not reflect changes in, or cash requirements for, our working capital needs; Adjusted EBITDA-NCI does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments under our credit agreement; Adjusted EBITDA-NCI and Adjusted net income do not reflect our historical impairments recognized; and Adjusted EBITDA-NCI does not reflect income tax expense or the cash requirements to pay our taxes.
You should be aware that we may incur expenses in the future that are similar to those excluded in the calculation of Adjusted EBITDA-NCI or Adjusted net income. Further, other companies in our industry may calculate Adjusted EBITDA-NCI or Adjusted net income differently than we do, limiting their usefulness as comparative measures. Because of these limitations, neither Adjusted EBITDA-NCI nor Adjusted net income should be considered the primary measure of the operating performance of our business. We strongly encourage investors to review the GAAP financial statements included elsewhere in this Annual Report on Form 10-K, and not to rely on any single financial measure to evaluate our business. (b)
(c)
(d)
For the years-ended December 31, 2015, December 31, 2014 and December 31, 2013, we recorded $1.4 million, $23.2 million and $25.9 million, respectively, of amortization expense for definite-lived intangible assets attributable to equity method investments. These expenses are included in Equity in net income of nonconsolidated affiliates in our consolidated financial statements. IPO related expense includes an $8.0 million fee paid to TPG Capital pursuant to the Management Services Agreement (as defined herein) at the closing of our initial public offering in November 2013. After the fee was paid, the Management Services Agreement was terminated. 2015 excludes $0.2 million of employee stock purchase plan expenses. 2013 includes stock-based compensation expense comprised of $2.7 million non-cash expense and $4.6 million in a non-recurring cash bonus paid on vested equity awards in the fourth quarter of 2013.
Results of Discontinued Operations We have closed or sold certain facilities that qualify for reporting as discontinued operations. The operating results of discontinued operations were as follows:
2015
Net operating revenues ............................................................. $ Costs and expenses ................................................................... Gain (loss) on sale of investments or closures .......................... Impairments .............................................................................. Loss from discontinued operations ........................................... Income tax benefit (expense) .................................................... Net loss from discontinued operations...................................... $
YEAR-ENDED DECEMBER 31, 2014
4.0 $ (7.1) 1.9 — (1.2) 0.4 (0.8) $
15.5 $ (18.7 ) 0.3 (0.7 ) (3.6 ) (5.8 ) (9.4) $
2013
20.4 (23.3) (2.5) — (5.4) (3.9) (9.3)
Both the decline in net operating revenues and the decrease in costs and expenses from the prior year were due to the sale of one facility in the second quarter of 2015. The net loss from our discontinued operations is included in the line item Loss from discontinued operations, net of income tax expense in our consolidated statements of operations. Liquidity and Capital Resources Our primary cash requirements are paying our operating expenses, making distributions to noncontrolling interests, financing acquisitions of interests in ASCs and surgical hospitals, servicing our existing debt and making capital expenditures. These continuing 74
liquidity requirements have been and will continue to be significant. The following chart shows the cash flows provided by or used in operating, investing and financing activities of continuing and discontinued operations (in the aggregate) for the years-ended December 31, 2015, 2014 and 2013:
2015
Net cash provided by operating activities ................................. $ Net cash used in investing activities ......................................... Net cash used in financing activities......................................... Increase (decrease) in cash and cash equivalents ..................... $
YEAR-ENDED DECEMBER 31, 2014
263.2 $ (156.5) (36.2) 70.5 $
210.6 $ (188.5 ) (99.1 ) (77.1) $
2013
165.6 (76.8) (121.7) (33.0)
Cash Flows Provided by Operating Activities Cash flows provided by operating activities is primarily derived from net income before deducting non-cash charges for depreciation and amortization.
2015
Net Income ............................................................................... $ Depreciation and amortization .................................................. Distributions from nonconsolidated affiliates ........................... Equity in income of nonconsolidated affiliates ........................ Provision for doubtful accounts ................................................ Change in fair value and loss on de-designation of swap ......... HealthSouth option expense ..................................................... Loss on extinguishment of debt ................................................ Deferred income tax ................................................................. Payment of deferred interest ..................................................... Debt call premium paid ............................................................ Other operating cash flows, net ................................................ Net cash provided by operating activities ................................. $
YEAR-ENDED DECEMBER 31, 2014
273.6 $ 66.2 56.3 (49.9) 17.2 0.3 11.7 0.5 (86.2) — — (26.5) 263.2 $
157.1 $ 52.7 50.8 (32.6 ) 14.1 0.5 — — 8.6 — — (40.6 ) 210.6 $
2013
54.6 41.5 50.5 (23.4) 14.2 8.3 — 10.3 15.4 (14.8) (5.0) 14.0 165.6
During the year-ended December 31, 2015, we generated $263.2 million of cash flows provided by operating activities compared to $210.6 million during the year-ended December 31, 2014. Cash flows from operating activities increased $52.6 million, or 25.0%, from the prior year, primarily due to a $35.2 million increase in net income before depreciation and amortization and deferred income taxes. During the year-ended December 31, 2014, we generated $210.6 million of cash flows provided by operating activities, compared to $165.6 million during the year-ended December 31, 2013. Cash flows from operating activities increased $45.0 million, or 27.2%, from the prior year, primarily due to a $113.7 million increase in net income before depreciation and amortization, partially offset by a $61.4 million decrease in other operating cash flows consisting largely of changes in working capital. During the year-ended December 31, 2013, we generated $165.6 million of cash flows provided by operating activities, as compared to $171.2 million during the year-ended December 31, 2012. Cash flows from operating activities decreased $5.6 million, or 3.3%, from the prior year, primarily due to the payment of $14.8 million of interest that had been deferred as a payment-in-kind for the Senior PIK-election Notes and a debt call premium of $5.0 million, partially offset by an increase in distributions from nonconsolidated affiliates of $11.8 million. Cash Flows Used in Investing Activities During the year-ended December 31, 2015, our net cash used in investing activities was $156.5 million, consisting primarily of $112.8 million for business acquisitions, net of cash acquired, $44.8 million of capital expenditures and $35.6 million of purchases of equity interests in nonconsolidated affiliates, partially offset by $20.5 million of proceeds from the sale of equity interests of nonconsolidated affiliates, $11.0 million of net cash provided by investing activities of discontinued operations and $6.9 million of proceeds from sale of business. Cash flows used in investing activities decreased $32.0 million, or 17.0%, from the prior year, primarily due to increases in cash inflows from proceeds from sale of equity interests of nonconsolidated affiliates and cash provided by discontinued operations, partially offset by a decrease in cash outflows for business acquisitions. 75
During the year-ended December 31, 2014, our net cash used in investing activities was $188.5 million, consisting primarily of $122.2 million for business acquisitions, net of cash acquired, $37.3 million of capital expenditures and $36.0 million of purchases of equity interests in nonconsolidated affiliates, partially offset by $2.7 million of proceeds from the sale of businesses, $2.4 million of proceeds from the sale of equity interests of consolidated affiliates in deconsolidation transactions and a $1.1 million decrease in restricted cash. Cash flows used in investing activities increased $111.7 million, or 145.4%, from the prior year, primarily due to an increase in cash outflows for business acquisitions and for the purchase of equity interests in nonconsolidated affiliates. During the year-ended December 31, 2013, our net cash used in investing activities was $76.8 million, consisting primarily of $54.5 million for business acquisitions, net of cash acquired, $36.8 million of capital expenditures and $2.9 million of net settlements on interest rate swaps, partially offset by $5.9 million of proceeds from the disposal of assets, $4.6 million of proceeds from the sale of equity interests of nonconsolidated affiliates, $2.6 million of return of capital related to equity method investments and $2.1 million of proceeds from the sale of equity interests of consolidated affiliates in deconsolidation transactions. Cash Flows Used in Financing Activities Net cash used in financing activities for the year-ended December 31, 2015 was $36.2 million, consisting primarily of $614.5 million for principal payments on long-term debt and $150.5 million of distributions to noncontrolling interests, which primarily related to existing facilities, partially offset by $728.3 million in long-term debt borrowings and $6.3 million of contributions from noncontrolling interests of consolidated affiliates. Net cash used in financing activities decreased $62.9 million, or 63.5%, from the prior year, primarily due to higher net long-term debt borrowings in conjunction with our refinancing transactions completed in March 2015, partially offset by higher distributions to noncontrolling interests of consolidated affiliates. Net cash used in financing activities for the year-ended December 31, 2014 was $99.1 million, consisting primarily of $113.4 million of distributions to noncontrolling interests, which primarily related to existing facilities, and $31.1 million for principal payments on long-term debt, partially offset by $35.6 million in long-term debt borrowings and $17.5 million of contributions from noncontrolling interests of consolidated affiliates, which primarily were used to fund business acquisitions. Net cash used in financing activities decreased $22.6 million, or 18.6%, from the prior year, primarily as a result of not paying distributions to unit holders and lower net long-term debt borrowings. Net cash used in financing activities for the year-ended December 31, 2013 was $121.7 million, consisting primarily of $527.6 million for principal payments on long-term debt, $103.0 million of distributions to noncontrolling interests, $74.9 million of distributions to unit holders, and $5.7 million of payments of debt acquisition costs, partially offset by $417.7 million long-term debt borrowings and $171.9 million in proceeds from our initial public offering. Cash and cash equivalents were $79.3 million at December 31, 2015 as compared to $8.7 million at December 31, 2014. Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions (reduced by the amount of outstanding checks and drafts where the right of offset exists for such bank accounts) and short-term, highly liquid investments. We consider all highly liquid investments with original maturities of 90 days or less, such as certificates of deposit, money market funds and commercial paper, to be cash equivalents. The overall working capital position at December 31, 2015 was $56.8 million compared to a deficit of $11.0 million at December 31, 2014, an increase of $67.8 million. This increase was primarily driven by an increase in Cash and cash equivalents, partially offset by an increase in accrued expenses. Based on our current level of operations, we believe cash flow from operations and available cash, together with available borrowings under the New Revolving Credit Facility, will be adequate to meet our short-term (12 months or less) and longer-term (less than five years) liquidity needs. Debt Our primary sources of funding have been the incurrence of debt and cash flows from operations. In the future, our primary sources of liquidity are expected to be cash flows from operations and additional funds available under the New Revolving Credit Facility (as defined below). On March 17, 2015, we issued senior unsecured notes due in 2023 in the aggregate principal amount of $250 million (the “Senior Notes”) under an Indenture dated March 17, 2015 among the Company, The Bank of New York Mellon Trust Company, N.A., as trustee, and certain wholly-owned subsidiaries of the Company (the “Guarantors”) that are guaranteeing the Senior Notes (the “Indenture”). Also on March 17, 2015, we entered into a $700 million credit agreement with JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, and the other lenders party thereto (the “New Credit Agreement”). The New Credit Agreement provides for a seven-year, $450 million term loan credit facility (the “New Term Loan Facility”) and a five-year, $250 million revolving credit facility (the “New Revolving Credit Facility” and together with the New Term Loan Facility, 76
collectively, the “New Credit Facilities”). This issuance of the Senior Notes and the entry into the New Credit Facilities are collectively referred to as the “Refinancing Transactions.” We received $245.6 million in net proceeds from the sale of the Senior Notes after deducting the Initial Purchasers’ (as defined below) discount. We used all of those net proceeds, together with approximately $381 million of the $450 million borrowed under the New Term Loan Facility, to repay all of the outstanding indebtedness (including accrued interest and fees) under the Company’s previous credit facilities (the “Old Credit Facilities”). The remaining approximately $69 million of net proceeds from the Refinancing Transactions was used to pay the transaction costs associated with the Refinancing Transactions and for general corporate purposes. In connection with the settlement of existing debt upon entering into our New Credit Facilities, we incurred debt modification expense of $5.0 million. Senior Notes On March 17, 2015, we issued the Senior Notes under the Indenture. The Senior Notes were sold to Goldman, Sachs & Co. and certain other initial purchasers (the “Initial Purchasers”) in a private placement in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Senior Notes were expected to be resold by the Initial Purchasers to qualified institutional buyers pursuant to Rule 144A and/or in an offshore transaction pursuant to Regulation S under the Securities Act. The Senior Notes are general unsecured obligations of the Company and are guaranteed by the Guarantors and any subsequently acquired wholly-owned subsidiaries that guarantee certain of the Company’s indebtedness, subject to certain exceptions. The Senior Notes are pari passu in right of payment with all of the existing and future senior debt of the Company, including the Company’s indebtedness under the New Credit Facilities, and senior to all existing and future subordinated debt of the Company. Interest on the Senior Notes accrues at the rate of 6.00% per annum and is payable semi-annually in arrears on April 1 and October 1, beginning on October 1, 2015. The Senior Notes mature on April 1, 2023. The Indenture contains certain covenants that, with certain exceptions and qualifications, limit the ability of the Company and the restricted subsidiaries to, among other things, incur or guarantee additional indebtedness and issue certain types of preferred stock; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; create liens on assets; make investments; sell assets; engage in transactions with affiliates; create restrictions on the ability of the restricted subsidiaries to pay dividends; and consolidate, merge or transfer substantially all of the Company’s assets. The Indenture also provides for certain events of default which, if any of them were to occur, would permit or require the principal and accrued interest, if any, on the Senior Notes to become or be declared due and payable (subject, in some cases, to specified grace periods). We believe that we were in compliance with the covenants contained in the Indenture as of December 31, 2015. New Credit Facilities On March 17, 2015, we entered into the New Credit Agreement, which, subject to the terms and conditions set forth therein, provides for the New Term Loan Facility and the New Revolving Credit Facility. The New Credit Agreement includes an accordion feature that, subject to the satisfaction of certain conditions, will allow us to add one or more incremental term loan facilities to the New Term Loan Facility and/or increase the revolving commitments under the New Revolving Credit Facility, in each case based on leverage ratios and minimum dollar amounts, as more particularly set forth in the New Credit Agreement. The interest rate on the New Term Loan Facility was 4.25% at December 31, 2015. The New Credit Facilities replaced our Credit Agreement, dated as of June 29, 2007 (as amended and restated and further amended, the “2007 Credit Agreement”), among the Company, SCA, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the other lenders party thereto. Quarterly principal payments on the loans under the New Term Loan Facility are payable in equal installments in an amount equal to 0.25% of the aggregate initial principal amount of the loans made under the New Term Loan Facility. The loans made under the New Term Loan Facility mature and all amounts then outstanding thereunder are payable on March 17, 2022. The New Revolving Credit Facility matures, the commitments thereunder terminate, and all amounts then outstanding thereunder are payable, on March 17, 2020. Borrowings under the New Credit Agreement bear interest, at our election, either at (1) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the United States federal funds rate plus 0.50% and (c) a LIBOR rate plus 1.00% (provided that, with respect to the New Term Loan Facility, in no event will the base rate be deemed to be less than 2.00%) (the “Base Rate”) or (2) an adjusted LIBOR rate (provided that, with respect to the New Term Loan Facility, in no event will 77
the adjusted LIBOR rate be deemed to be less than 1.00%) (the “LIBOR Rate”), plus in either case an applicable margin. The applicable margin for borrowings under the New Term Loan Facility is 2.25% for Base Rate loans and 3.25% for LIBOR Rate loans. The applicable margin for any borrowings under the New Revolving Credit Facility depends on the Company’s senior secured leverage ratio and varies from 0.75% to 1.25% for Base Rate loans and from 1.75% to 2.25% for LIBOR Rate loans. Interest payments, along with the installment payments of principal, are payable at the end of each quarter. The following table outlines the applicable margin for each portion of the New Credit Facilities: Facility
Applicable Margin (per annum) Base Rate Borrowings LIBOR Borrowings
New Revolving Credit Facility.................................................
New Term Loan Facility due 2022 ...........................................
0.75% to 1.25%, depending 1.75% to 2.25%, upon the senior secured depending upon the senior leverage ratio secured leverage ratio 2.25% (with a base rate 3.25% (with a LIBOR floor of 2.00%) floor of 1.00%)
There was $15.0 million outstanding under the New Revolving Credit Facility and no outstanding balance under the revolving credit facility of the Old Credit Facilities as of December 31, 2015 and December 31, 2014, respectively. At December 31, 2015 and 2014, we had approximately $4.2 million and $2.9 million, respectively, of letters of credit outstanding under the New Revolving Credit Facility. As of December 31, 2015, the New Revolving Credit Facility had a capacity of $230.8 million. Any utilization of the New Revolving Credit Facility in excess of $15.0 million will be subject to compliance with a total leverage ratio test. At December 31, 2015, we had approximately $4.2 million in letters of credit outstanding that utilize capacity under the New Revolving Credit Facility. We pay a commitment fee of either 0.375% or 0.500% per annum, depending on our senior secured leverage ratio, on the unused portion of the New Revolving Credit Facility. The New Credit Facilities are guaranteed by SCA and certain of SCA’s direct wholly-owned domestic subsidiaries (the “Credit Agreement Guarantors”), subject to certain exceptions, and borrowings under the New Credit Facilities are secured by a first priority security interest in substantially all equity interests of SCA and of each wholly-owned domestic subsidiary directly held by SCA or a Credit Agreement Guarantor. The New Credit Agreement contains a provision that could require prepayment of a portion of our indebtedness if SCA has excess cash flow, as defined by the New Credit Agreement. No such payment was required at December 31, 2015. Additionally, the New Credit Agreement contains various restrictive covenants that, subject to certain exceptions, prohibit us from prepaying certain subordinated indebtedness. The New Credit Agreement also generally restricts the Company’s and its restricted subsidiaries’ ability to, among other things, incur indebtedness or liens, make investments or declare or pay dividends. We believe that we were in compliance with these covenants as of December 31, 2015. Contractual Obligations The table below sets forth our future maturities of debt, interest on debt, capitalized lease obligations, operating lease obligations and other contractual obligations as of December 31, 2015:
Less than Total
Debt obligations (1) ................................................................. $ Interest on debt obligations (2) ................................................ Capitalized lease obligations (3) .............................................. Operating lease obligations (4) ................................................ Other contractual obligations (5) ............................................. Total ...................................................................................... $ (1)
(2)
806.0 247.7 137.4 171.1 7.7 1,369.9
Payments due by period 1-3
1 year
$
$
23.0 40.2 15.4 30.3 3.3 112.2
years (in millions)
$
$
55.5 76.5 25.6 47.5 3.9 209.0
$
$
3-5
More than 5
years
years
35.1 72.5 18.5 34.6 0.5 161.2
$
$
692.4 58.5 77.9 58.7 — 887.5
As of December 31, 2015 and for purposes of this table, our indebtedness included (i) $446.6 million of New Term Loans, (ii) $250.0 million of the New Revolving Credit Facility capacity, (iii) $250 million aggregate principal amount of Senior Notes and (iv) $98.5 million of notes payable to banks and others. Represents (i) interest expense on the debt obligations based on an assumed interest rate of the current 3-month LIBOR rate as of December 31, 2015 plus 325 basis points with respect to the New Term Loan, an interest rate of 3.25% with a LIBOR floor of 1.00%, the interest rate of the current 1-month LIBOR as of December 31, 2015 plus 200 basis points with respect to the New Revolving Credit Facility and the interest rate of 6.00% per annum with respect to the Senior Notes, (ii) quarterly commitment fees on unused borrowing capacity under the New Revolving Credit Facility and (iii) various fixed and variable rates on notes payable to banks and others. 78
(3) (4) (5)
Capitalized lease obligations include real estate, medical equipment, computer equipment and other equipment utilized in operations (interest and principal). Operating lease obligations include land, buildings and equipment. Other contractual obligations are attributable to maintenance and service contracts.
Because their future cash outflows are uncertain, the following liabilities are excluded from the table above: deferred income taxes, professional liability reserves, workers’ compensation reserves, redeemable noncontrolling interests and our estimated liability for unsettled litigation. Deferred rent is also excluded from the table above. Repurchases of Equity from Physician Partners We are obligated under the agreements governing certain of our partnerships and LLCs to repurchase all of the physicians’ ownership interests upon the occurrence of certain regulatory events, including if it becomes illegal for physicians to own an interest in one of our facilities, refer patients to one of our facilities or receive cash distributions from a facility. The purchase price that we would be required to pay for these ownership interests is typically based on either a multiple of the applicable facility’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), or the fair market value of the ownership interests as determined by a third-party appraisal. In the event we are required to purchase all of the physicians’ ownership interests in all of our facilities, our existing capital resources would not be sufficient for us to meet this obligation. See “Risk Factors — Risks Related to Healthcare Regulation — If laws or regulations governing physician ownership of our facilities change, we may be obligated to purchase some or all of the ownership interests of our physician partners or renegotiate some of our partnership and operating agreements with our physician partners and management agreements with our surgical facilities.” Capital Expenditures Currently, we project our capital expenditures for fiscal year 2016 to be approximately $48.5 million, which we expect to finance primarily through internally generated funds and bank or manufacturer financing. Capital expenditures totaled $44.8 million and $37.3 million for the years-ended December 31, 2015 and 2014, respectively. The capital expenditures made during 2015 consisted primarily of fixture improvements made at our leased facilities and our purchase of medical and other equipment. These capital expenditures were financed primarily through internally generated funds and bank or manufacturer financing. We believe that our capital expenditure program is adequate to improve and equip our existing facilities. Capital Leases We engage in a significant number of leasing transactions, including real estate, medical equipment, computer equipment and other equipment utilized in operations. Certain leases that meet the lease capitalization criteria in accordance with authoritative guidance for leases have been recorded as an asset and liability at the net present value of the minimum lease payments at the inception of the lease. Interest rates used in computing the net present value of the lease payments generally range from 2.3% to 13.0% based on our incremental borrowing rate at the inception of the lease. Inflation For the past three years, inflation has not significantly affected our operating results or the geographic areas in which we operate. Off-Balance Sheet Transactions As a result of our strategy of partnering with physicians and health systems, we do not own controlling interests in many of our facilities. At December 31, 2015, we accounted for 68 of our 193 facilities under the equity method. Similar to our consolidated facilities, our nonconsolidated facilities have debts, including capitalized lease obligations that are generally non-recourse to us. With respect to our equity method facilities, these debts are not included in our consolidated financial statements. At December 31, 2015, the total debt on the balance sheets of our nonconsolidated affiliates was approximately $65.8 million. Our average percentage of ownership of these nonconsolidated affiliates, weighted based on the particular affiliate’s amount of debt and our ownership of such affiliate, was approximately 25% at December 31, 2015. We or one of our wholly owned subsidiaries collectively guaranteed $6.2 million of the $65.8 million in total debt of our nonconsolidated affiliates as of December 31, 2015. Our guarantees related to operating leases of nonconsolidated affiliates were $31.6 million at December 31, 2015. As described above, our nonconsolidated affiliates are structured as LPs, general partnerships, LLPs, or LLCs. None of these affiliates provide financing, liquidity, or market or credit risk support for us. They also do not engage in hedging or research and development services with us. Moreover, we do not believe that they expose us to any of their liabilities that are not otherwise reflected in our consolidated financial statements and related disclosures. Except as noted above with respect to guarantees, we are not 79
obligated to fund losses or otherwise provide additional funding to these affiliates other than as we determine to be economically required in order to successfully implement our development plans. Critical Accounting Policies General Our discussion and analysis of our financial condition, results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of consolidated financial statements under GAAP requires our management to make certain estimates and assumptions that impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. These estimates and assumptions also impact the reported amount of net earnings during any period. Estimates are based on information available as of the date financial statements are prepared. Accordingly, actual results could differ from those estimates. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and that require management’s most subjective judgments. Our critical accounting policies and estimates include our policies and estimates regarding consolidation, variable interest entities, revenue recognition, accounts receivable, noncontrolling interests in consolidated affiliates, equity-based compensation, income taxes, goodwill, impairment of long-lived assets and other intangible assets and other than temporary impairments. Principles of Consolidation Our consolidated financial statements include the accounts of us, our subsidiaries and VIEs for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. We evaluate partially owned subsidiaries and joint ventures held in partnership form using authoritative guidance, which includes a framework for evaluating whether a general partner(s) or managing member(s) controls an affiliate and therefore should consolidate it. The framework includes the presumption that general partner or managing member control would be overcome only when the limited partners or members have certain rights. Such rights include the right to dissolve or liquidate the LP, LLP or LLC or otherwise remove the general partner or managing member “without cause,” or the right to effectively participate in significant decisions made in the ordinary course of business of the LP, LLP or LLC. To the extent that any noncontrolling investor has rights that inhibit our ability to control the affiliate, including substantive veto rights, we do not consolidate the affiliate. We use the equity method to account for our investments in affiliates with respect to which we do not have control rights but have the ability to exercise significant influence over operating and financial policies. Assets, liabilities, revenues and expenses are reported in the respective detailed line items on the consolidated financial statements for our consolidated affiliates. For our equity method affiliates, assets and liabilities are reported on a net basis in the line item Investment in and advances to nonconsolidated affiliates on the consolidated balance sheets, and revenues and expenses are reported on a net basis in the line item Equity in net income of nonconsolidated affiliates on the consolidated statements of operations. Variable Interest Entities Under Accounting Standards Codification Section 810, Consolidations, we include the assets, liabilities and activities of a VIE in our financial statements if we are the primary beneficiary of such VIE and the entity has one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support; (b) as a group the holders of the equity investment at risk lack: (i) the ability to make decisions about an entity’s activities through voting or similar rights; (ii) the obligation to absorb the expected losses of the entity; or (iii) the right to receive the expected residual returns of the entity; or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that will receive a majority of the VIE’s expected losses or receive a majority of a VIE’s expected residual returns and has the power to direct the activities that most significantly impact the VIE’s economic performance. Determining the primary beneficiary of a VIE requires substantial judgment, including determining what activities most significantly impact the economic performance of the VIE and which entity or entities have control over those activities. Revenue Recognition Our revenues consist primarily of net patient revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state payors (primarily the Medicare and Medicaid programs), commercial 80
health insurance plans, workers’ compensation programs and employers. These estimates are complex and require significant judgement. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. During the year-ended December 31, 2015, approximately 65% of our net patient revenues related to patients with commercial insurance coverage. Healthcare service providers are under increasing pressure to accept reduced reimbursement for services on these contracts. Continued reductions could have a material adverse impact on our financial position, results of operations and cash flows. During the year-ended December 31, 2015, approximately 22% of our net patient revenues related to patients participating in the Medicare and Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and are routinely modified for provider reimbursement. We are unable to predict if or when we may be subject to a suspension of payments by the Medicare and/or Medicaid programs, the possible length of the suspension period or the potential cash flow impact of a payment suspension. Any such suspension would adversely impact our financial position, results of operations and cash flows. During the year-ended December 31, 2015, approximately 9% of our net patient revenues related to patients with workers’ compensation coverage. Workers’ compensation payors have typically paid surgical facilities a higher percentage of the surgical facilities’ charges than other third-party payors. However, workers’ compensation payment amounts are subject to legislative, regulatory and other payment changes over which we have no control. A reduction in workers’ compensation payment amounts could have a material adverse effect on the revenues of our facilities that perform a significant number of workers compensation cases. During the year-ended December 31, 2015, uninsured or self-pay revenues accounted for less than 5% of our net patient revenues. Our facilities primarily perform surgery that is scheduled in advance by physicians who have already seen the patient. We verify benefits, obtain insurance authorization, calculate patient financial responsibility and notify the patient of their responsibility, usually prior to surgery. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state payors (primarily the Medicare and Medicaid programs), commercial health plans, workers’ compensation programs, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payor. Accounts receivable from government payors are significant to our operations, comprising 18% of net patient service accounts receivable at December 31, 2015. We do not believe there are significant credit risks associated with these government payors. Accounts receivable related to workers’ compensation are significant to our operations, comprising 11% of net patient service accounts receivable at December 31, 2015. We do not believe there are significant credit risks associated with workers’ compensation payors and related receivables. Accounts receivable from commercial health plans were 63% of our net patient service accounts receivable at December 31, 2015. Because the category of commercial health insurance plans is composed of numerous individual payors which are geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, payor mix or trends in federal or state governmental healthcare coverage. Due to the complexity of insurance reimbursements and inherent limitations of insurance verification procedures, we expect we will continue to have write-offs of bad debt and provision for doubtful accounts. In 2015 our Provision for doubtful accounts was approximately 2% of net patient revenue. We reserve for doubtful accounts based principally upon the payor class and age of the receivable. We also write off accounts on an individual basis based on that information. We believe our policy allows us to accurately estimate our Provision for doubtful accounts.
81
Noncontrolling Interests in Consolidated Affiliates Our consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Equity-Based Compensation We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock as well as RSUs to key teammates, directors, service providers, consultants and affiliates. Additionally, prior to our IPO, we made grants of RSUs to certain non-employee directors and an executive officer that were not made under any of the Plans. Under the Plans, our key teammates, directors, service providers, consultants and affiliates are provided with what we believe to be appropriate incentives to encourage them to continue employment with us or providing service to us or any of our affiliates and to improve our growth and profitability. Option awards are generally granted with an exercise price equal to at least the fair market value of the underlying share at the date of grant. Vesting in the option awards varies based upon time, attainment of certain performance conditions, or upon the occurrence of a Liquidity Event (as defined in the applicable Plan) in which the TPG Funds and/or any of its affiliates achieves a minimum cash return on its original investment. All existing RSU awards vest over time. Income Taxes We provide for income taxes using the asset and liability method. This approach recognizes the amount of federal, state and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. A valuation allowance is required when it is more-likely-than-not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income. We file a consolidated federal income tax return. State income tax returns are filed on a separate, combined or consolidated basis in accordance with relevant state laws and regulations. LPs, LLPs, LLCs and other pass-through entities that we consolidate or account for using the equity method of accounting file separate federal and state income tax returns. We include the allocable portion of each pass-through entity’s income or loss in our federal income tax return. We allocate the remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of the taxes. Goodwill We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of October 1st of each year. We recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its implied fair value. We present a goodwill impairment charge as a separate line item within income from continuing operations in the consolidated statements of operations, unless the goodwill impairment is associated with a discontinued operation. In that case, we include the goodwill impairment charge, on a net-of-tax basis, within the results of discontinued operations. When we dispose of a facility, the relative fair value of goodwill is allocated to the gain or loss on disposition. We determine recoverability of goodwill by comparing the estimated fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit using a discounted cash flow model. Estimating the fair value of the reporting unit involves uncertainties, because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, industry economic factors and future business strategy. All assumptions are interdependent and, therefore, do not change in isolation. Accordingly, our accounting estimates may materially 82
change from period to period due to changing market factors. If we had used other assumptions and estimates or if different conditions occur in future periods, future operating results could be materially impacted. The results of the qualitative assessment performed as of October 1, 2015 indicated that the fair values of five of the six reporting units substantially exceeded their carrying values. There is one reporting unit that the estimated fair value exceeds, but does not substantially exceed, its carrying value. The goodwill attributable to this reporting unit was $237.8 million as of December 31, 2015. No events have occurred since the latest annual goodwill impairment assessment that would necessitate an interim goodwill impairment assessment. Impairment of Long-Lived Assets and Other Intangible Assets We assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with definite useful lives on an annual basis and whenever events or changes in circumstances indicate we may not be able to recover the asset’s carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected undiscounted cash flows to be generated by that asset, or, for identifiable intangibles with definite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with definite useful lives, if any, to be recognized is measured based on projected discounted future cash flows. We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. We present an impairment charge as a separate line item within income from continuing operations in our consolidated statements of operations, unless the impairment is associated with a discontinued operation. In that case, we include the impairment charge, on a net-of-tax basis, within the results of discontinued operations. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed. We report long-lived assets to be disposed of by sale as held for sale and recognize those assets in the balance sheet at the lower of carrying amount or fair value less cost to sell, and cease depreciation. Other than Temporary Impairments Management periodically assesses the recoverability of our equity method investments for impairment. We consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, as appropriate, including discounted cash flows, estimates of sales proceeds and external appraisals, as appropriate. If an equity method investment’s decline in value is other than temporary, we record an impairment in Equity in net income of nonconsolidated affiliates. Recent Revisions to Authoritative Accounting Guidance In November 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the requirement for companies to present deferred tax liabilities and assets as current and non-current on the consolidated statements of financial position. Instead, companies will be required to classify all deferred tax assets and liabilities as non-current. This guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We elected to early adopt ASU 2015-17 on December 31, 2015. ASU 2015-17 did not have a material impact on our consolidated financial position, and had no impact on our results of operations or cash flows. All prior period financial information presented herein has been adjusted to reflect the retrospective application of this ASU. In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. This standard eliminates the requirement to restate prior period financial statements for measurement period adjustments. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted and we have chosen to adopt this ASU prospectively as of September 30, 2015. This ASU did not have a material impact on our consolidated financial position, results of operations or cash flows. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This standard clarifies the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The SEC staff has announced that it would “not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement.” This ASU should be adopted concurrent with ASU 2015-03 which is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This ASU became effective for the Company on January 83
1, 2016. The provisions should be applied on a retrospective basis as a change in accounting principle. We do not believe this ASU will have a material impact on our consolidated financial position, results of operations or cash flows. In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015 and requires either a retrospective or a modified retrospective approach to adoption. This ASU became effective for the Company on January 1, 2016. We are currently evaluating the potential impact of this standard on our consolidated financial position, results of operations and cash flows. In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the criteria for determining which disposals (both consolidated investments and equity method investments) can be presented as discontinued operations and modifies related disclosure requirements. Under the new criteria, a discontinued operation is defined as a disposal of a component or group of components, which may include equity method investments, that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU became effective for the Company on January 1, 2015. This ASU did not have a material effect on our consolidated financial position, results of operations or cash flows; however, the presentation of discontinued operations was impacted. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for the Company at the beginning of its 2017 fiscal year; early adoption is not permitted. We are currently assessing the impact that this ASU will have on our consolidated financial position, results of operation and cash flows. We do not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our principal market risk is our exposure to variable interest rates. As of December 31, 2015, we had $806.0 million of indebtedness (excluding capital leases), of which $507.4 million is at variable interest rates and $298.6 million is at fixed interest rates. In seeking to reduce the risks and costs associated with such activities, we manage exposure to changes in interest rates primarily through the use of derivatives. We do not use financial instruments for trading or other speculative purposes, nor do we use leveraged financial instruments. At December 31, 2015, we held interest rate swaps hedging interest rate risk on $190.0 million of our variable rate debt through two forward starting interest rate swaps with an aggregate notional amount of $190.0 million, which we entered into during 2011. These forward starting interest rate swaps, which are swaps that are entered into at a specified trade date but do not begin until a future start date, extend the interest rate swaps that we terminated in 2012 and on September 30, 2013. These swaps are “receive floating/pay fixed” instruments, meaning we receive floating rate payments, which fluctuate based upon LIBOR, from the counterparty and provide payments to the counterparty at a fixed rate, the result of which is to convert the interest rate of a portion of our floating rate debt into fixed rate debt in order to limit the variability of interest-related payments caused by changes in LIBOR. Forward starting interest rate swaps with an aggregate notional amount of $100.0 million became effective on September 30, 2012, and the remaining forward starting interest rate swap with a notional amount of $140.0 million became effective on September 30, 2013. A forward interest rate starting swap with a notional amount of $50.0 million terminated on September 30, 2014. The remaining aggregate notional amount of $190.0 million in forward starting interest rate swaps will terminate on September 30, 2016. Assuming a 100 basis point increase in LIBOR on our un-hedged debt at December 31, 2015, our annual interest expense would increase by approximately $2.7 million. Counterparties to the interest rate swaps discussed above expose us to credit risks to the extent of their potential non-performance. The credit ratings of the counterparties, which consist of investment banks, are monitored at least quarterly. We have completed a review of the financial strength of the counterparties using publicly available information, as well as qualitative inputs, as of December 31, 2015. Based on this review, we do not believe there is a significant counterparty credit risk associated with these interest rate swaps. However, we cannot assure you that these actions will protect us against or limit our exposure to all counterparty or market risks. 84
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Surgical Care Affiliates, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows present fairly, in all material respects, the financial position of Surgical Care Affiliates, Inc. and its subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits (which was an integrated audit in 2015). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded all 2015 business combinations from its assessment of internal control over financial reporting as of December 31, 2015 because these entities were acquired by the Company in purchase business combinations during 2015. We have also excluded all 2015 business combinations from our audit of internal control over financial reporting. The acquired entities are consolidated subsidiaries of the Company whose total assets and net operating revenues represent 5.2% and 7.7%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2015. /s/ PricewaterhouseCoopers LLP Birmingham, Alabama February 22, 2016
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SURGICAL CARE AFFILIATES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except par value amount) DECEMBER 31, 2015
Assets Current assets Cash and cash equivalents ................................................................................................................. Restricted cash ................................................................................................................................... Accounts receivable, net of allowance for doubtful accounts (2015 — $17,045; 2014 — $10,448) .... Receivable from nonconsolidated affiliates ....................................................................................... Prepaids and other current assets ....................................................................................................... Current assets related to discontinued operations .............................................................................. Total current assets ...................................................................................................................... Property and equipment, net of accumulated depreciation (2015 — $99,678; 2014 — $99,111) ........... Goodwill .................................................................................................................................................. Intangible assets, net of accumulated amortization (2015 — $48,495; 2014 — $35,270) ...................... Deferred debt issue costs ......................................................................................................................... Investment in and advances to nonconsolidated affiliates ....................................................................... Other long-term assets ............................................................................................................................. Assets related to discontinued operations ................................................................................................ Assets held for sale .................................................................................................................................. Total assets (a) ........................................................................................................................ Liabilities and Equity Current liabilities Current portion of long-term debt ...................................................................................................... Accounts payable ............................................................................................................................... Accrued payroll ................................................................................................................................. Accrued interest ................................................................................................................................. Accrued distributions ......................................................................................................................... Payable to nonconsolidated affiliates................................................................................................. Other current liabilities ...................................................................................................................... Current liabilities related to discontinued operations......................................................................... Current liabilities held for sale........................................................................................................... Total current liabilities ................................................................................................................. Long-term debt, net of current portion .................................................................................................... Deferred income tax liability ................................................................................................................... Other long-term liabilities ....................................................................................................................... Liabilities related to discontinued operations .......................................................................................... Total liabilities (a) .................................................................................................................. Commitments and contingent liabilities (Note 17) .................................................................................. Noncontrolling interests — redeemable (Note 10) .................................................................................. Equity ...................................................................................................................................................... Surgical Care Affiliates’ equity ......................................................................................................... Common stock, $0.01 par value, 180,000 shares authorized, 39,690 and 38,648 shares outstanding, respectively ........................................................................................................... Additional paid in capital ............................................................................................................. Accumulated deficit ..................................................................................................................... Total Surgical Care Affiliates’ equity ................................................................................................ Noncontrolling interests — non-redeemable ..................................................................................... Total equity ............................................................................................................................ Total liabilities and equity ................................................................................................ (a)
$
$
$
DECEMBER 31, 2014
79,269 26,116 129,659 46,949 32,850 19 314,862 296,831 1,061,088 109,188 7,472 216,111 1,787 59 408 2,007,806
$
32,503 37,419 37,802 4,173 37,175 77,683 30,938 368 26 258,087 858,044 44,339 31,587 28 1,192,085
$
$
21,989
$
397 442,678 (60,814) 382,261 411,471 793,732 2,007,806 $
8,731 24,073 100,529 72,030 30,170 1,959 237,492 209,642 902,391 84,262 5,383 194,610 4,311 9,344 — 1,647,435
24,690 31,717 29,199 234 29,134 104,519 26,747 2,280 — 248,520 665,119 131,020 19,683 683 1,065,025 15,444
386 419,088 (176,135) 243,339 323,627 566,966 1,647,435
Our consolidated assets as of December 31, 2015 and December 31, 2014 include total assets of a variable interest entity (“VIE”) of $167.8 million and $117.5 million, respectively, which can only be used to settle the obligations of the VIE. Our consolidated total liabilities as of December 31, 2015 and December 31, 2014 include total liabilities of the VIE of $41.0 million and $23.8 million, respectively, for which the creditors of the VIE have no recourse to us, with the exception of $4.0 million and $3.4 million of debt guaranteed by us at December 31, 2015 and December 31, 2014, respectively. See further description in Note 4, Variable Interest Entities. See Notes to Consolidated Financial Statements.
86
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
2015
Net operating revenues: Net patient revenues .................................................................................... Management fee revenues ........................................................................... Other revenues ............................................................................................. Total net operating revenues .................................................................. Equity in net income of nonconsolidated affiliates ........................................... Operating expenses: Salaries and benefits .................................................................................... Supplies ....................................................................................................... Other operating expenses ............................................................................. Depreciation and amortization ..................................................................... Occupancy costs .......................................................................................... Provision for doubtful accounts ................................................................... Impairment of intangible and long-lived assets ........................................... Loss (gain) on disposal of assets ................................................................. Total operating expenses ........................................................................ Operating income .............................................................................................. Interest expense ........................................................................................... HealthSouth option expense ........................................................................ Debt modification expense .......................................................................... Loss on extinguishment of debt ................................................................... Interest income ............................................................................................ (Gain) loss on sale of investments ............................................................... Income from continuing operations before income tax expense ....................... (Benefit) provision for income taxes ................................................................. Income from continuing operations .................................................................. Loss from discontinued operations, net of income tax expense ........................ Net income ........................................................................................................ Less: Net income attributable to noncontrolling interests ................................. Net income (loss) attributable to Surgical Care Affiliates ................................ Basic net income (loss) per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates .............. Discontinued operations attributable to Surgical Care Affiliates ........... Net income (loss) per share attributable to Surgical Care Affiliates ..... Basic weighted average shares outstanding ...................................................... Diluted net income (loss) per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates .............. Discontinued operations attributable to Surgical Care Affiliates ........... Net income (loss) per share attributable to Surgical Care Affiliates ..... Diluted weighted average shares outstanding ...................................................
$
971,422 61,011 19,057 1,051,490 49,867
$
788,048 58,914 17,774 864,736 32,564
2013
$
731,584 40,469 13,610 785,663 23,364
351,029 221,392 161,854 66,225 36,480 17,195 625 1,886 856,686 244,671 42,111 11,702 5,032 544 (367) (3,982) 189,631 (84,778) 274,409 (784) 273,625 (158,304) 115,321 $
297,174 177,853 124,870 52,663 29,390 14,051 610 (232) 696,379 200,921 32,785 — — — (174) (7,633) 175,943 9,439 166,504 (9,355) 157,149 (125,169) 31,980 $
270,929 170,174 127,701 41,450 25,544 14,208 — 123 650,129 158,898 60,202 — — 10,333 (215) 12,330 76,248 12,320 63,928 (9,330) 54,598 (105,942) (51,344)
$ $ $
2.95 $ (.02) $ 2.93 $ 39,360
1.07 $ (.24) $ 0.83 $ 38,477
(1.33) (.29) (1.62) 31,688
$ $ $
2.85 $ (.02) $ 2.83 $ 40,734
1.03 $ (.23) $ 0.80 $ 39,958
(1.33) (.29) (1.62) 31,688
$
See Notes to Consolidated Financial Statements.
87
YEAR-ENDED DECEMBER 31, 2014
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands)
2015
Net income ........................................................................................................ $ Other comprehensive income: Unrealized income (loss) on interest rate swap ........................................... Amounts reclassified from accumulated other comprehensive loss ............ Total other comprehensive income .................................................................. Comprehensive income ..................................................................................... Comprehensive income attributable to noncontrolling interests ....................... Comprehensive income (loss) attributable to Surgical Care Affiliates ............. $
273,625
$
— — — 273,625 (158,304) 115,321 $
See Notes to Consolidated Financial Statements.
88
YEAR-ENDED DECEMBER 31, 2014
157,149
2013
$
— — — 157,149 (125,169) 31,980 $
54,598 847 7,480 8,327 62,925 (105,942) (43,017)
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In thousands) Accumulated Total Additional Other Surgical Care Noncontrolling Common Stock Paid in Contributed Comprehensive Accumulated Affiliates InterestsSharesAmount Capital
Balance at December 31, 2012............ Member distributions .......................... Net (loss) income ................................ Other comprehensive income .............. Conversion from LLC to INC (Note 1)... Issuance of stock from the initial public offering, net of offering costs ... Stock options exercised....................... Stock compensation ............................ Net change in equity related to amendments in agreements with noncontrolling interests (Note 10) .......................................... Net change in equity related to purchase of ownership interests .......... Contributions from noncontrolling interests ............................................... Change in distribution accrual ............ Distributions to noncontrolling interests ............................................... Balance at December 31, 2013............ Net income .......................................... Issuance of stock pursuant to teammate equity plans......................... Stock compensation ............................ Net change in equity related to purchase of ownership interests .......... Contributions from noncontrolling interests ............................................... Change in distribution accrual ............ Distributions to noncontrolling interests ............................................... Balance at December 31, 2014............ Net income .......................................... Issuance of stock pursuant to teammate equity plans......................... HealthSouth stock option .................... Stock compensation ............................ Net change in equity related to amendments in agreements with noncontrolling interests (Note 10) .......................................... Net change in equity related to purchase of ownership interests .......... Contributions from noncontrolling interests ............................................... Change in distribution accrual ............ Distributions to noncontrolling interests ............................................... Balance at December 31, 2015............
—$ — — — 30,286
Capital
—$ — $ 313,153 $ — — (74,900) — — — — — — 303 240,447 (240,750)
Loss
Non-redeemable
Equity
Deficit
(8,327) $ — — 8,327 —
(157,309) $ — (51,344) — —
147,517 $ (74,900 ) (51,344 ) 8,327 —
Total Equity
172,494 $ 320,011 — (74,900) 81,804 30,460 — 8,327 — —
7,857 23 —
79 — —
171,798 285 421
— — 2,303
— — —
— — —
171,877 285 2,724
— — —
171,877 285 2,724
—
—
—
—
—
—
—
1,050
1,050
—
—
468
194
—
538
1,200
32,473
33,673
— —
— —
— —
— —
— —
— —
— —
3,137 (2,363)
3,137 (2,363)
— — $ —
— — $ —
— —
— —
— —
— 38,166 $ —
— — 382 $ 413,419 $ — —
482 —
4 —
—
—
(323)
—
—
—
— —
— —
— —
— —
— —
— —
— — $ —
— — $ —
— 38,648 —
1,866 4,126
— (208,115) $ 31,980
— — 386 $ 419,088 $ — —
— (176,135) $ 115,321
— 205,686 $ 31,980 1,870 4,126
— —
1,870 4,126
(323 )
78,153
77,830
— —
22,677 (233)
22,677 (233)
— 243,339 $ 115,321
716 326 —
8 3 —
6,636 11,699 8,519
— — —
— — —
— — —
6,644 11,702 8,519
—
—
—
—
—
—
—
—
—
—
—
—
— —
— —
— —
— —
— —
— — $
— — $
— 39,690 $
(3,264) — —
— — 397 $ 442,678 $
— (60,814) $
See Notes to Consolidated Financial Statements.
89
(78,310) (78,310) 210,285 $ 415,971 102,564 134,544
(3,264 ) — — — 382,261 $
(89,819) (89,819) 323,627 $ 566,966 129,800 245,121 — — —
(504)
6,644 11,702 8,519
(504)
86,284
83,020
6,276 (8,352)
6,276 (8,352)
(125,660) (125,660) 411,471 $ 793,732
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Cash flows from operating activities Net income ............................................................................................................................. Loss from discontinued operations ........................................................................................ Adjustments to reconcile net income to net cash provided by operating activities ................ Provision for doubtful accounts ........................................................................................ Depreciation and amortization .......................................................................................... Amortization of deferred issuance costs ........................................................................... Impairment of long-lived assets........................................................................................ Realized (gain) loss on sale of investments ...................................................................... Loss (gain) on disposal of assets ...................................................................................... Equity in net income of nonconsolidated affiliates ........................................................... Distributions from nonconsolidated affiliates ................................................................... Deferred income tax ......................................................................................................... Stock compensation .......................................................................................................... Change in fair value and loss on de-designation of interest rate swap ............................. Loss on extinguishment of debt ........................................................................................ HealthSouth option expense ............................................................................................. Payment of deferred interest ............................................................................................. Debt call premium paid .................................................................................................... (Increase) decrease in assets, net of business combinations ............................................. Accounts receivable .................................................................................................... Other assets ................................................................................................................. (Decrease) increase in liabilities, net of business combinations ....................................... Accounts payable ........................................................................................................ Accrued payroll ........................................................................................................... Accrued interest .......................................................................................................... Other liabilities ............................................................................................................ Other ................................................................................................................................. Net cash used in operating activities of discontinued operations ................................ Net cash provided by operating activities ............................................................... Cash flows from investing activities Capital expenditures ......................................................................................................... Proceeds from sale of business ......................................................................................... Proceeds from disposal of assets ...................................................................................... Proceeds from sale of equity interests of nonconsolidated affiliates ................................ Proceeds from sale of equity interests of consolidated affiliates in deconsolidation transactions .................................................................................................................... Decrease in cash related to conversion of consolidated affiliates to equity interests........ Net change in restricted cash ............................................................................................ Net settlements on interest rate swap ................................................................................ Business acquisitions, net of cash acquired 2015 - $2,711; 2014 - $2,527; 2013 $6,131 ............................................................................................................................... Purchase of equity interests in nonconsolidated affiliates ................................................ Return of equity method investments in nonconsolidated affiliates ................................. Other ................................................................................................................................. Net cash provided by investing activities of discontinued operations .............................. Net cash used in investing activities .........................................................................
90
2015
YEAR-ENDED DECEMBER 31, 2014
$ 273,625 784
$ 157,149 9,355
2013
$
54,598 9,330
17,195 66,225 1,352 625 (3,982 ) 1,886 (49,867 ) 56,263 (86,185 ) 8,519 336 544 11,702 — —
14,051 52,663 2,954 610 (7,633) (232) (32,564) 50,773 8,556 4,126 485 — — — —
14,208 41,450 3,891 — 12,330 123 (23,364) 50,505 15,410 2,724 8,314 10,333 — (14,785) (5,000)
(31,066 ) 18,576
(18,692) (66,709)
(20,000) 8,230
(10,740 ) 6,476 3,939 (19,450 ) (332 ) (3,219 ) 263,206
4,709 2,404 (213) 34,261 (722) (4,750) 210,581
3,679 6,143 (13,263) 9,064 (251) (8,085) 165,584
(44,760 ) 6,884 2,303 20,512
(37,304) 2,711 1,302 2,344
(36,838) 1,276 5,880 4,587
— (37 ) (1,543 ) (1,449 )
2,375 (30) 1,062 (1,539)
2,069 (116) 1,886 (2,921)
(112,794 ) (35,642 ) 2,284 (3,224 ) 11,000 $ (156,466 )
(122,165) (36,032) 2,555 (3,791) — $ (188,512)
(54,499) (766) 2,592 — 16 $ (76,834)
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
2015
Cash flows from financing activities ................................................................................... Borrowings under line of credit arrangements and long-term debt, net of issuance costs Payment of debt acquisition costs..................................................................................... Proceeds from issuance of shares pursuant to IPO, net of offering costs ......................... Principal payments on line of credit arrangements and long-term debt............................ Principal payments under capital lease obligations .......................................................... Distributions to noncontrolling interests of consolidated affiliates .................................. Contributions from noncontrolling interests of consolidated affiliates ............................. Proceeds from sale of equity interests of consolidated affiliates ...................................... Repurchase of equity interests of consolidated affiliates .................................................. Distributions to unit holders ............................................................................................. Proceeds from teammate equity plans .............................................................................. Tax payments on options and awards ............................................................................... Other ................................................................................................................................. Net cash used in financing activities ........................................................................ Change in cash and cash equivalents.................................................................................. Cash and cash equivalents at beginning of period ............................................................ Cash and cash equivalents of discontinued operations at beginning of period............... Less: Cash and cash equivalents of discontinued operations at end of period ............... Cash and cash equivalents at end of period............................................................................ Supplemental cash flow information Cash paid during the year for interest .................................................................................... Cash paid during the year for income taxes ........................................................................... Supplemental schedule of noncash investing and financing activities Property and equipment acquired through capital leases and installment purchases ............. Goodwill attributable to sale of surgery centers ..................................................................... Net investment in consolidated affiliates that became equity method facilities ..................... Noncontrolling interest associated with conversion of consolidated affiliates to equity method affiliates .................................................................................................................. Contributions (non-cash) from noncontrolling interests of consolidated affiliates ................ Accrued capital expenditures at end of period ....................................................................... Equity interest purchase in nonconsolidated affiliates via withheld distributions.................. See Notes to Consolidated Financial Statements.
91
YEAR-ENDED DECEMBER 31, 2014
2013
$ 728,310 (3,238 ) — (614,468 ) (9,042 ) (150,529 ) 6,276 5,933 (6,124 ) — 12,054 (5,409 ) — (36,237 ) 70,503 8,731 37 (2 ) $ 79,269
$
35,646 — — (31,083) (8,225) (113,432) 17,452 5,593 (8,726) — 5,820 — (2,189) (99,144) (77,075) 85,829 14 (37) $ 8,731
$ 417,678 (5,700) 171,877 (527,634) (7,552) (102,975) 4,758 7,864 (5,612) (74,900) 453 — — (121,743) (32,993) 118,618 178 26 $ 85,829
$
$
$
37,615 1,021
31,173 753
62,167 493
18,640 2,503 164
9,722 752 1,848
21,329 10,062 5,356
1,750 — 3,976 5,259
3,886 5,225 3,457 —
747 — 2,341 —
SURGICAL CARE AFFILIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in tables are in thousands of U.S. dollars unless otherwise indicated) Unless the context otherwise indicates or requires, the terms “Surgical Care Affiliates,” “we,” “us,” “our” and “Company” refer to Surgical Care Affiliates, Inc. and its subsidiaries. NOTE 1 — DESCRIPTION OF BUSINESS Nature of Operations and Ownership of the Company Surgical Care Affiliates, Inc., a Delaware corporation, was converted from a Delaware limited liability company, previously named ASC Acquisition LLC, to a Delaware corporation on October 30, 2013. Pursuant to the conversion, every 10.25 outstanding membership units of ASC Acquisition LLC were converted into one share of common stock of Surgical Care Affiliates, and options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates at a ratio of 10.25 membership units of ASC Acquisition LLC underlying such options to each one share of common stock of Surgical Care Affiliates underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. Upon conversion, each outstanding restricted equity unit of ASC Acquisition LLC was converted into one restricted stock unit of Surgical Care Affiliates. All share and per share amounts reflect these conversion amounts throughout these financial statements. We were formed primarily to own and operate a network of multi-specialty ambulatory surgery centers (“ASCs”) and surgical hospitals in the United States of America. We do this through our direct operating subsidiary, Surgical Care Affiliates, LLC (“SCA”). For a portion of the periods covered by our financial statements, the Company was a Delaware limited liability company named ASC Acquisition LLC. As of December 31, 2015, the Company operated in 33 states and had an interest in and/or operated 185 ASCs, seven surgical hospitals and one sleep center with 11 locations, with a concentration of facilities in California, Texas, Indiana, Florida and New Jersey. Our ASCs and surgical hospitals primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. At our surgical hospitals, physicians perform a broader range of surgical procedures, and patients may stay in the hospital for several days. Business Structure Our business model is focused on building strategic relationships with physicians, health plans and health systems to acquire, develop and optimize facilities in an aligned economic model that enables better access to high-quality care at lower cost. As of December 31, 2015, we owned and operated facilities in partnership with approximately 2,800 physician partners. The facilities in which we hold an ownership interest are owned by general partnerships, limited partnerships (“LP”), limited liability partnerships (“LLP”) or limited liability companies (“LLC”) in which a subsidiary of the Company typically serves as the general partner, limited partner, managing member or member. We account for our 193 facilities as follows: AS OF DECEMBER 31, 2015
Consolidated facilities(1) ............................................................................... Equity method facilities ............................................................................... Managed-only facilities ............................................................................... Total facilities .............................................................................................. (1)
104 68 21 193
As of December 31, 2015, we consolidated sixteen facilities as Variable Interest Entities (“VIE”) (see Note 4).
Basis of Presentation The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such financial statements include the assets, liabilities, revenues and expenses of all wholly owned subsidiaries and majority-owned subsidiaries over which we exercise control and, when applicable, entities in which we have a controlling financial interest.
92
NOTE 2 — TRANSACTIONS Acquisitions of Consolidated Facilities During the year-ended December 31, 2015, we purchased a controlling interest in sixteen ASCs and two surgical hospitals for total cash consideration of $116.5 million. Three of the eighteen acquisitions were previously equity method investments, and six of the eighteen acquisitions were acquired through our VIE groups (see Note 4) for which we are the primary beneficiary. These acquisitions are described in further detail below. We accounted for these transactions under the acquisition method of accounting and reported the results of operations from the date of acquisition. The assets acquired, liabilities assumed and any noncontrolling interest in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. The fair value of identifiable intangible assets were based on valuations using the cost and income approaches. The cost approach is based on amounts that would be required to replace the asset (i.e., replacement cost). The income approach is based on management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. Factors contributing to the recognition of goodwill include the centers’ favorable reputations in their markets, their market positions, their ability to deliver quality care with high patient satisfaction consistent with the Company’s business model and synergistic benefits that are expected to be realized as a result of the acquisitions. The total amount of goodwill that is expected to be tax deductible as a result of these 2015 transactions is approximately $89.5 million. The details of the eighteen consolidated acquisitions closed during the year-ended December 31, 2015 are as follows: Cash Consideration (in millions) Facility(1) Lexington Surgery Center, Ltd.(4) ...................... Louisville S.C., Ltd.(4)..................................... Premier Surgery Center of Louisville, L.P.(4) ..... Clinton Partners, LLC ........................................ Surgery Center of Wilson, LLC ......................... Texas Health Surgery Center Preston Plaza, LLC ("Preston Plaza")(5).................................. Specialists in Urology Surgery Center, LLC ("SIU") ............................................................... Parkway Surgery Center, LLC ("Parkway") ...... Franklin Surgery Center, LLC ("Franklin") ....... Advanced Surgical Hospital, LLC(6) ("Advanced") ..................................................... Arise Transaction ............................................... Arise Healthcare System, LLC(6) ................. Cedar Park Surgery Center, LLC ................. Hays Surgery Center, LLC .......................... Stonegate Surgery Center, L.P. .................... The Outpatient Surgery Center of Hilton Head, LLC ("Hilton Head") ......................................... Surgery Center of Athens, LLC ("Athens") .......
Location Lexington, KY Louisville, KY Louisville, KY Clinton Township, MI Wilson, NC
SCA Number Transaction Effective of Equity Management Date Ownership facilities Interest(2) Agreement(3) 1/1/2015 36.0% 1 $ —$ — 1/1/2015 30.3% 1 $ —$ — 1/1/2015 25.0% 1 $ —$ — 2/1/2015 25.0% 1 $ 4.1 $ 0.7 2/1/2015 67.0% 1 $ 3.8 $ 0.2
$ $ $ $ $
Total — — — 4.8 4.0
1.2 $
8.0
Dallas, TX Naples, FL; Bonita Springs, FL; Fort Myers, FL Hagerstown, MD Basking Ridge, NJ
3/1/2015
29.9%
1 $
6.8 $
4/1/2015 5/1/2015 5/1/2015
60.0% 55.0% 55.0%
3 $ 1 $ 1 $
11.5 $ 7.7 $ 21.5 $
— $ 11.5 0.4 $ 8.1 — $ 21.5
Washington, PA
9/1/2015
51.0%
1 $
17.1 $
— $ 17.1
Austin, TX Cedar Park, TX Kyle, TX Austin, TX
10/1/2015 10/1/2015 10/1/2015 10/1/2015
52.8% 51.0% 27.3% 52.4%
1 1 1 1
11/1/2015 11/30/2015
50.0% 60.0%
Hilton Head Island, SC Athens, GA
$ $ $ $
1.0 $ 8.1 $ —$ 4.6 $
1 $ 6.7 $ 1 $ 9.1 $ 18 $ 102.0 $
5.0 2.6 1.1 1.8
$ 6.0 $ 10.7 $ 1.1 $ 6.4
0.2 $ 6.9 1.3 $ 10.4 14.5 $ 116.5
(1) All facilities are ASCs unless otherwise noted. (2) Purchase price for controlling interest acquired. (3) Purchase price for management agreement rights to manage the facility. (4) Facilities were previously included in SCA's portfolio but accounted for under the equity method of accounting. We consolidated these facilities as of January 1, 2015. A health system partner delegated certain rights to SCA. Cash consideration was not paid due to the delegation of these rights.
93
(5) We do not currently hold an equity ownership interest in this facility. Instead, we hold a promissory note that is convertible into equity. The percentage represents what our beneficial ownership percentage will be upon conversion of the promissory note. Because this promissory note provides us with the power to direct the activities that most significantly impact the economic performance of this entity, we consolidate this facility into our financial results, as it meets the requirements to be a VIE. See Note 3 “Summary of Significant Accounting Policies — Variable Interest Entities” of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion. (6) Facility is a surgical hospital.
The aggregate amounts recognized as of the acquisition date for each major class of assets and liabilities assumed in the eighteen consolidated acquisitions closed during the year-ended December 31, 2015 are as follows: Preston Plaza Current assets Cash and cash equivalents .................... Accounts receivable ...... Other current assets ....... Total current assets........ Property and equipment... Goodwill ....................... Intangible assets ............ Total assets ................. Current liabilities Accounts payable and other current liabilities .. Total current liabilities .. Other long-term liabilities ........................ Total liabilities............
SIU
Parkway Franklin Advanced
Arise
Hilton Head
Athens
Other(1) Total
$
421 $ 2 $ 276 $ 10 $ 505 $ 569 $ 447 $ 1 $ 480 $ 2,711 457 860 665 1,730 1,205 5,755 777 980 2,469 14,898 68 267 42 64 103 608 62 14 677 1,905 946 1,129 983 1,804 1,813 6,932 1,286 995 3,626 19,514 1,665 6,880 732 3,047 1,861 50,439 2,727 1,803 10,993 80,147 6,060 16,774 12,067 31,144 27,160 37,935 9,150 15,500 9,629 165,419 4,813 2,200 1,960 3,825 3,283 13,744 2,050 2,304 4,943 39,122 $ 13,484 $ 26,983 $ 15,742 $ 39,820 $ 34,117 $109,050 $15,213 $ 20,602 $ 29,191 $ 304,202
$
$
736 $ 2,456 $ 736 2,456
479 $ 479
432 $ 432
414 $ 13,743 $ 414 13,743
750 $ 750
995 $ 3,237 $ 23,242 995 3,237 23,242
212 5,188 742 948 $ 7,644 $ 1,221 $
42 474 $
120 57,974 1,018 3,129 6,910 75,335 534 $ 71,717 $ 1,768 $ 4,124 $10,147 $ 98,577
(1) Includes Lexington Surgery Center, Ltd., Louisville S.C., Ltd., Premier Surgery Center of Louisville, L.P., Clinton Partners, LLC and Surgery Center of Wilson, LLC. Intangible assets acquired in 2015, from the above acquisitions, include: Estimated Fair Value on Acquisition Date
Estimated Useful Life
Certificates of need ............................................... $ 3,990 15.0* Licenses ................................................................ $ 5,772 15.0* Management agreements ...................................... $ 17,922 15.0* Noncompete agreements ....................................... $ 11,328 4.5* Total ...................................................................... $ 39,012 12.0* *Reflects the weighted average estimated useful life of acquired intangible assets that are subject to amortization.
94
During the year-ended December 31, 2014, the Company acquired a controlling interest in fifteen ASCs for total consideration of $138.1 million. We had managed two of these ASCs without an ownership interest prior to acquiring a controlling interest. Four of the fifteen ASCs were acquired through the future Texas JV (see Note 4) and are a VIE for which we are the primary beneficiary. The aggregate amounts recognized as of the acquisition date for each major class of assets and liabilities assumed in the fifteen consolidated acquisitions closed during the year-ended December 31, 2014 are as follows: Assets Current assets Cash and cash equivalents ............................................................................... Accounts receivable ......................................................................................... Other current assets .......................................................................................... Total current assets .......................................................................................... Property and equipment ................................................................................... Goodwill .......................................................................................................... Intangible assets ............................................................................................... Total assets ................................................................................................. Liabilities Current liabilities Accounts payable and other current liabilities ................................................. Total current liabilities ..................................................................................... Other long-term liabilities ................................................................................ Total liabilities ............................................................................................
$
$
$
$
2,896 8,549 3,066 14,511 19,692 177,726 34,497 246,426
5,981 5,981 15,331 21,312
The purchase price allocations for 2015 acquisitions above are preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be adjusted to reflect new information about the facts and circumstances that existed as of the respective acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates. The preliminary amounts of these purchase price allocations relate primarily to working capital balances. Acquisitions of Noncontrolling Interests in Facilities During the year-ended December 31, 2015, we acquired a noncontrolling interest in nine ASCs for total cash consideration of $33.2 million. These acquisitions are accounted for as equity method investments. Three of these ASCs were previously managed-only facilities and one was a de novo facility placed into operation. These acquisitions are described in further detail below.
Facility(1) Multi-Specialty Surgery Center, LLC(2) ....................................... Mississippi Medical Plaza, L.C. ................................................... Seashore Surgical Institute, L.L.C. ............................................... PS Center, LLC(3) ......................................................................... Surgicare of Central Jersey, LLC ................................................. Audubon Ambulatory Surgery Center, LLC(4)............................. IU Health East Washington Ambulatory Surgery Center, LLC(5) ...
SCA Number Cash Transaction Effective of Consideration Location Date Ownership facilities (in millions) Indianapolis, IN 3/1/2015 24.8 % 1 N/A Davenport, IA 4/1/2015 27.0 % 2 $ 17.3 Brick, NJ 4/1/2015 27.0 % 1 $ 3.6 Costa Mesa, CA 4/1/2015 49.0 % 1 N/A Watchung, NJ 6/1/2015 27.0 % 1 $ 7.4 Colorado Springs, CO 7/31/2015 18.9 % 2 $ 4.6 Indianapolis, IN 12/18/2015 25.9 % 1 $ 0.3 9 $ 33.2
(1) All facilities are ASCs unless otherwise noted. (2) $5.2 million paid with withheld distributions. (3) Converted $4.2 million of debt to equity. (4) Price paid for equity in predecessor entity prior to transaction. (5) De novo facility placed into operations.
During the year-ended December 31, 2014, we acquired a noncontrolling interest in seven ASCs for total consideration of $34.2 million. These acquisitions are accounted for as equity method investments. Two of these ASCs were previously managed-only facilities. Also during the year-ended December 31, 2014, we contributed an existing equity method investment to another entity in which we have an equity method investment that is controlled by a health system partner. In conjunction with the contribution, we recognized a 95
$1.9 million gain relating to the remeasurement of a portion of the investment to fair value. This gain is included in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. Deconsolidations During the year-ended December 31, 2015, we deconsolidated one facility as a result of other parties obtaining substantive rights. We retained a noncontrolling interest in this affiliate. We recorded an immaterial loss related to this deconsolidation which was primarily related to the revaluation of our investment in this affiliate to fair value. We also wrote off approximately $4.1 million of goodwill related to the deconsolidation. During the year-ended December 31, 2014, we completed two separate deconsolidation transactions. In one transaction, we sold a controlling equity interest in an ASC and transferred certain control rights to a partner in the entity. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.4 million and recorded a pre-tax loss of approximately $3.4 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. In the other transaction, we agreed to sell our ownership interest in an ASC in Santa Monica, California at a later date. In conjunction with this transaction, the operating agreement of this affiliate was amended on October 1, 2014 to remove SCA’s control rights until the date of the sale. As a result of removing SCA’s control rights, the facility became a nonconsolidated affiliate. We recorded a pre-tax gain of approximately $2.7 million. The net loss on these transactions is recorded in (Gain) loss on sale of investments in the accompanying consolidated statement of operations. During the year-ended December 31, 2013, we completed two separate deconsolidation transactions. In one of these transactions, we sold a controlling equity interest, and transferred certain control rights, to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.1 million and recorded a pre-tax loss of approximately $1.6 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. In the other transaction, we transferred certain control rights to partners in the entity. We retained a noncontrolling interest in this affiliate. We recorded a pre-tax loss of approximately $1.5 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in Equity in net income of nonconsolidated affiliates in the accompanying consolidated statements of operations. Fair values for the retained noncontrolling interests are primarily estimated based on third-party valuations we have obtained in connection with such transactions and/or the amount of proceeds received for the controlling equity interest sold. Closures and Sales During the year-ended December 31, 2015, we closed six consolidated ASCs. One of these ASCs closed during the second quarter and was sold during the third quarter. A pre-tax gain of approximately $1.3 million related to this transaction was recorded in Gain on sale of investments in the accompanying consolidated statement of operations. We also wrote off approximately $1.5 million of goodwill related to this transaction. A pre-tax loss of approximately $1.4 million related to the closure of another one of these consolidated ASCs was recorded in Gain on sale of investments in the accompanying consolidated statements of operations. The operations of another consolidated ASC that closed during the second quarter was absorbed into an existing SCA consolidated facility. There were no material gains or losses recorded related to this closure or the other three consolidated closures. We also closed three nonconsolidated ASCs in 2015, two of which were combined into the operations of existing SCA facilities. There were no material gains or losses recorded related to these closures. During the year-ended December 31, 2014, we closed six facilities. Two consolidated facilities were closed in the first quarter of 2014, and their operations were absorbed into existing SCA consolidated facilities. We impaired $0.5 million of property and equipment and intangible assets related to these two closed facilities in the first quarter. One consolidated facility ceased operations in July 2014 and an impairment charge of $0.7 million was recorded during the year-ended December 31, 2014 for intangible and longlived assets related to this facility. These impairments are recorded in Loss from discontinued operations, net of income tax expense on the Company’s consolidated statements of operations. One consolidated facility ceased operations in December 2014. Two nonconsolidated facilities were closed in the second half of 2014, and their operations were absorbed into two existing SCA nonconsolidated facilities. The losses related to these closures were immaterial. During the year-ended December 31, 2013, we closed two consolidated facilities. We recorded a pre-tax loss of approximately $1.4 million as a result of the closures. The loss on the transactions is recorded in the Loss from discontinued operations, net of income tax in the accompanying consolidated statements of operations. During the year-ended December 31, 2015, we sold our entire ownership interest in an ASC that we held as an equity method investment for $7.6 million. We continued to provide management services to the facility for a period of time after the sale, but we no 96
longer provided those services as of December 31, 2015. During the year-ended December 31, 2015, we also sold our entire interest in a consolidated surgical hospital for $0.3 million and the real estate owned by the surgical hospital for $10.8 million. We recorded a pre-tax gain of approximately $2.1 million related to this transaction in the Loss from discontinued operations, net of income tax in the accompanying consolidated statement of operations. The surgical hospital and its real estate were placed into discontinued operations in 2014. We sold one consolidated ASC during the third quarter of 2015 and recorded a pre-tax loss of approximately $0.4 million related to this transaction in Gain (loss) on sale of investments in the accompanying consolidated statement of operations. We also wrote off approximately $1.0 million of goodwill related to this sale. Additionally, we sold the real estate of an ASC located in Wilson, North Carolina for approximately $2.0 million. During the year-ended December 31, 2014, we sold all of our interest in one consolidated ASC and two nonconsolidated ASCs. We recorded a pre-tax gain of approximately $0.4 million as a result of the sales. The gain on these transactions is recorded in (Gain) loss on sale of investments in the accompanying consolidated statement of operations. We also wrote off approximately $0.8 million of goodwill related to one of these sales. During the year-ended December 31, 2013, we sold all of our interest in two consolidated ASCs and one nonconsolidated ASC, all of which we continued to manage as managed-only facilities, for aggregate consideration of $1.3 million. We recorded a pre-tax loss of approximately $8.4 million as a result of the sale. The loss on this transaction is recorded in the Gain (loss) on sale of investments in the accompanying consolidated statement of operations. Our continuing involvement as manager of these facilities precluded classification of these transactions as discontinued operations. Unaudited Pro Forma Financial Information The following table presents the unaudited pro forma results of the Company as though all of the business combinations discussed above for 2015 had been made on January 1, 2014, and for 2014 had been made on January 1, 2013. The pro forma information is based on the Company’s consolidated results of operations for the years ended December 31, 2015, 2014 and 2013, and on other available information. These pro forma amounts include historical financial statement amounts with the following adjustments: we converted the sellers’ historical financial statements to GAAP and applied the Company’s accounting policies, and we adjusted for depreciation and amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2014 and 2013. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above, nor are they indicative of results of the future operations of the combined enterprises. YEAR-ENDED DECEMBER 31, 2015
Net operating revenues ................................ $ Income from continuing operations .............
YEAR-ENDED DECEMBER 31, 2014
1,128,903 $ 282,390
YEAR-ENDED DECEMBER 31, 2013
1,006,096 $ 171,596
923,904 75,131
Consolidated acquisitions closed during 2015 contributed Net operating revenues of $80.6 million and Income from continuing operations of $9.2 million for the year-ended December 31, 2015. Nonconsolidated acquisitions closed during 2015 contributed $2.9 million to Equity in net income of nonconsolidated affiliates for the year-ended December 31, 2015. NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company, its subsidiaries and VIEs for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. We evaluate partially owned subsidiaries and joint ventures held in partnership form using authoritative guidance, which includes a framework for evaluating whether a general partner(s) or managing member(s) controls an affiliate and therefore should consolidate it. The framework includes the presumption that general partner or managing member control would be overcome only when the limited partners or members have certain rights. Such rights include the right to dissolve or liquidate the LP, LLP or LLC or otherwise remove the general partner or managing member “without cause,” or the right to effectively participate in significant decisions made in the ordinary course of business of the LP, LLP or LLC. To the extent that any noncontrolling investor has rights that inhibit our ability to control the affiliate, including substantive veto rights, we do not consolidate the affiliate. We use the equity method to account for our investments in affiliates with respect to which we do not have control rights but have the ability to exercise significant influence over operating and financial policies. Assets, liabilities, revenues and expenses are reported in the respective detailed line items on the consolidated financial statements for our consolidated affiliates. For our equity method 97
affiliates, assets and liabilities are reported on a net basis in Investment in and advances to nonconsolidated affiliates on the consolidated balance sheets, and revenues and expenses are reported on a net basis in Equity in net income of nonconsolidated affiliates on the consolidated statements of operations. This difference in accounting treatment of equity method affiliates impacts certain financial ratios of the Company. Variable Interest Entities In order to determine if we are the primary beneficiary of a VIE for financial reporting purposes, we consider whether we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and whether we have the obligation to absorb losses or the right to receive returns that would be significant to the VIE. We consolidate a VIE when we are the primary beneficiary of the VIE. At December 31, 2015 and as further described below, we had four VIE groups: the Future Texas JV, the Kentucky JVs, the Michigan JV and the Hilton Head JV. The Company holds a promissory note payable by an entity (the “Future Texas JV”) that owns controlling interests in 11 ASCs and is wholly-owned by a health system partner. The promissory note, which eliminates upon consolidation, has a fixed interest rate plus a variable component dependent on the earnings of the Future Texas JV. The promissory note contains a conversion feature that allows us to convert the promissory note into a 49% equity interest in the Future Texas JV at our option upon the occurrence of the renegotiation of certain contractual arrangements. We are also party to management services agreements with the facilities controlled by the Future Texas JV. As a result of the financial interest in the earnings of the Future Texas JV held by us via the promissory note and the powers granted us in the promissory note and the management services agreements, we have determined that the Future Texas JV is a VIE for which we are the primary beneficiary. Accordingly, we consolidate the Future Texas JV and the underlying ASCs. In January 2015, we entered into an agreement with a health system partner whereby the health system partner delegated certain rights to SCA that result in us consolidating under the VIE model three jointly owned joint venture entities (the “Kentucky JVs”), which own controlling interests in three ASCs in the Lexington and Louisville, Kentucky markets. As a result of SCA receiving these rights, we consolidate the three Kentucky JVs and the three underlying ASCs; these entities were previously accounted for as equity method investments. In February 2015, we and a health system partner, through a joint venture entity (the “Michigan JV”), acquired a controlling interest in an ASC located in Clinton Township, Michigan. In conjunction with the acquisition, our health system partner delegated certain rights to SCA that result in us consolidating the Michigan JV under the VIE model. Accordingly, we consolidate the Michigan JV and the underlying ASC. In November 2015, we acquired a controlling interest in an ASC located in Hilton Head Island, South Carolina (the “Hilton Head JV”). As a result of the powers granted us in the management services agreement, we have determined that the Hilton Head JV is a VIE for which we are the primary beneficiary. Accordingly, we consolidate the Hilton Head JV. Secondary Offerings and HealthSouth Option In March 2015, certain existing stockholders of the Company (the "Selling Stockholders"), including certain affiliates of TPG Global, LLC and certain directors and officers of the Company, sold 8,050,000 shares of our common stock in an underwritten public offering at a price of $33.25 per share. The Company did not sell any shares of common stock in the offering and did not receive any proceeds from the sale of the shares of common stock by the Selling Stockholders. The secondary offering closed on April 1, 2015. In connection with the acquisition of our Company in 2007 by TPG, we granted HealthSouth Corporation (“HealthSouth”) an option (the “HealthSouth Option”) to purchase 5% of our outstanding equity as of the closing of the 2007 acquisition. The HealthSouth Option became exercisable upon certain customary liquidity events, including a public offering of shares of our common stock that resulted in 30% or more of our common stock being listed or traded on a national securities exchange. Once vested, the HealthSouth Option became exercisable on a net exercise basis. The HealthSouth Option vested on April 1, 2015 upon the closing of the aforementioned secondary offering. On April 9, 2015, HealthSouth exercised the HealthSouth Option and we issued 326,242 new shares of common stock at a value of $11.7 million. Accordingly, $11.7 million of expense was included in HealthSouth option expense on our consolidated statement of operations for the year-ended December 31, 2015. In August 2015, certain affiliates of TPG Global, LLC sold 4,000,000 shares of our common stock in an underwritten public offering at a price to the underwriter of $37.68 per share. The Company did not sell any shares of common stock in the offering and did not receive any proceeds from the sale of the shares of common stock by the selling stockholders. The secondary offering closed on August 11, 2015. 98
Reclassifications and Revisions Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. Such reclassifications primarily relate to facilities that we closed or sold, which qualify for reporting as discontinued operations. During the quarter ended March 31, 2014, we recorded corrections to increase Loss on sale of investments by $1.0 million related to the sale of our investment in a consolidated facility during the year ended December 31, 2013, as well as a correction to increase Equity in net income of nonconsolidated affiliates by $0.2 million in connection with the sale of equity interests in a nonconsolidated facility during the year ended December 31, 2012. During the quarter ended September 30, 2014, we recorded corrections to increase Gain on sale of investments by approximately $2.8 million related to the sale of our interest in equity method facilities during prior years. We do not believe that these corrections are material to our previously issued financial statements. The consolidated statements of operations for the year-ended December 31, 2013 include reclassifications totaling $0.7 million within Supplies and Other operating expenses to conform the December 31, 2013 presentation to the current presentation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include, but are not limited to: (1) allowance for contractual revenue adjustments; (2) allowance for doubtful accounts; (3) asset impairments, including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; (6) economic lives and fair value of leased assets; (7) provision for income taxes, including valuation allowances; (8) reserves for contingent liabilities; and (9) reserves for losses in connection with unresolved legal matters. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation as considered necessary. Actual results could differ from those estimates. Risks and Uncertainties We operate in a highly regulated industry and are required to comply with extensive and complex laws and regulations at the federal, state and local government levels. These laws and regulations relate to, among other things: y licensure, certification and accreditation; y coding and billing for services; y relationships with physicians and other referral sources, including physician self-referral and anti-kickback laws; y quality of medical care; y use and maintenance of medical supplies and equipment; y maintenance and security of medical records; y acquisition and dispensing of pharmaceuticals and controlled substances; and y disposal of medical and hazardous waste. Many of these laws and regulations are expansive, and we do not have the benefit of significant regulatory or judicial interpretation of them. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our investment structure, facilities, equipment, personnel, services, capital expenditure programs, operating procedures and contractual arrangements. If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including (1) criminal penalties, (2) civil penalties, including monetary penalties and the loss of our licenses to operate one or more of our ASCs and surgical hospitals and (3) exclusion or suspension of one or more of our ASCs and surgical hospitals from participation in Medicare, Medicaid and other federal and state healthcare programs. Historically, the United States Congress and some state legislatures have periodically proposed significant changes in regulations governing the healthcare system. Many of these changes have resulted in limitations on and, in some cases, significant reductions in 99
the levels of payments to healthcare providers for services under many government reimbursement programs. Because we receive a significant percentage of our revenues from Medicare, such proposed changes in legislation might have a material adverse effect on our business, financial position, results of operations and cash flows, if any such changes were to occur. Certain of our operating agreements have termination dates by which the agreement expires by its terms. In these situations, if we wish to continue the business, we would attempt to negotiate an amendment to the agreement and if necessary, to renegotiate material terms of the agreement, to prevent such termination. None of our operating agreements have termination dates in 2016. In addition, certain of our partnership and operating agreements contain provisions that give our partners or other members rights that include, but are not limited to, rights to purchase our interest, rights to require us to purchase the interests of our partners or other members or rights requiring the consent of our partners and other members prior to our transferring our ownership interest in a facility or prior to a change in control of us or certain of our subsidiaries. Almost all of our partnership and operating agreements contain restrictions on actions that we can take, even though we may be the general partner or the managing member, including rights of our partners and other members to approve the sale of substantially all of the assets of the entity, to dissolve the partnership or LLC, and to amend the partnership or operating agreement. Many of our agreements also restrict our ability in certain instances to compete with our existing facilities or with our partners. Where we hold only a limited partner or a non-managing member interest, the general partner or managing member may take certain actions without our consent, although we typically have certain protective rights to approve major decisions, such as the sale of substantially all of the assets of the entity, the dissolution of the partnership or LLC, and the amendment of the partnership or operating agreement. As discussed in Note 17, Commitments and Contingent Liabilities, we are a party to a number of lawsuits. We cannot predict the outcome of litigation filed against us. Substantial damages or other monetary remedies assessed against us could have a material adverse effect on our business, financial position, results of operations and cash flows. Revenue Recognition Our revenues consist primarily of net patient service revenues that are recorded based upon established billing rates, less allowances for contractual adjustments. Revenues are recorded during the period the services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state payors (primarily, the Medicare and Medicaid programs), commercial health plans, workers’ compensation programs and employers. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. During each of the years-ended December 31, 2015, 2014 and 2013, approximately 65%, 62% and 61%, respectively, of our net patient revenues related to patients with commercial insurance coverage. Healthcare services providers are under increasing pressure to accept reduced reimbursement for services provided to such patients. Continued reductions could have a material adverse impact on our business, financial position, results of operations and cash flows. During each of the years-ended December 31, 2015, 2014 and 2013, approximately 22%, 23% and 23%, respectively, of our net patient revenues related to patients participating in the Medicare and Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and routinely modified for provider reimbursement. The Centers for Medicare and Medicaid Services (“CMS”) has been granted authority to suspend payments, in whole or in part, to Medicare providers if CMS possesses reliable information that an overpayment, fraud or willful misrepresentation exists. If CMS suspects that payments are being made as the result of fraud or misrepresentation, CMS may suspend payment at any time without providing us with prior notice. The initial suspension period is limited to 180 days. However, the payment suspension period can be extended almost indefinitely if the matter is under investigation by the United States Department of Health & Human Services Office of Inspector General (“OIG”) or the Department of Justice (“DOJ”). Therefore, we are unable to predict if or when we may be subject to a suspension of payments by the Medicare and/or Medicaid programs, the possible length of the suspension period or the potential cash flow impact of a payment suspension. Any such suspension would adversely impact our business, financial position, results of operations and cash flows. During each of the years-ended December 31, 2015, 2014 and 2013, approximately 9%, 10% and 11%, respectively, of our net patient revenues related to patients with workers’ compensation coverage. Workers’ compensation payors have typically paid surgical facilities at rates that are higher than other third-party payors. However, workers’ compensation payment amounts are subject to legislative, regulatory and other payment changes over which we have no control, and in a number of states payment rates have been or could be reduced. A reduction in workers’ compensation payment amounts could have a material adverse effect on the revenues of our facilities which perform a significant number of workers compensation cases. 100
Our revenues also include Management fee revenues representing fees that we earn from providing management services to facilities that we do not consolidate for financial reporting purposes. Management fee revenues are determined in accordance with the provisions of management agreements between SCA and the facility, and the fee for our management services is generally a defined percentage of the facility’s net patient revenues. Cash and Cash Equivalents Cash and cash equivalents include all demand deposits reduced by the amount of outstanding checks and drafts where the right of offset exists for these bank accounts. As a result of the Company’s cash management system, checks issued but not presented to banks for payment may create negative book cash balances. Such negative balances are included in current liabilities as Other current liabilities of $3.4 million at December 31, 2014. There were no such balances at December 31, 2015. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has not experienced any losses on such deposits. Restricted Cash As of December 31, 2015 and 2014, we had approximately $26.1 million and $24.1 million, respectively, of restricted cash in affiliate cash accounts maintained by partnerships in which we participate where one or more external partners requested, and we agreed, that the partnership’s cash not be commingled with other Company cash and be used only to fund the operations of the partnership. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state payors (primarily the Medicare and Medicaid programs), commercial health plans, workers’ compensation programs, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payor. The concentration of net patient service accounts receivable by payor class, as a percentage of total net patient service accounts receivable, as of the end of each of the reporting periods, is as follows: AS OF DECEMBER 31, 2015
Commercial health plan payors ........................................................ Medicare........................................................................................... Workers’ compensation.................................................................... Medicaid........................................................................................... Patients and other third-party payors ................................................ Total .................................................................................................
63% 15 11 3 8 100%
2014
59% 14 14 3 10 100%
Revenues and accounts receivable from government payors are significant to our operations; however, we do not believe that there are significant credit risks associated with these government payors. Revenue and accounts receivable from commercial health plan payors are also significant to our operations. Because the category of commercial health insurance plans is composed of numerous individual payors which are geographically dispersed, our management does not believe that there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. Additions to the allowance for doubtful accounts are made by means of the Provision for doubtful accounts. We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts that we estimate we will collect. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, payor mix or trends in federal or state governmental healthcare coverage and reimbursement.
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Long-Lived Assets We report land, buildings, improvements and equipment at cost, net of asset impairment. We report assets under capital lease obligations at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. Useful lives are as follows: YEARS
Buildings............................................................................................................................ Leasehold improvements ................................................................................................... Furniture, fixtures and equipment ...................................................................................... Assets under capital lease obligations: Real estate .................................................................................................................... Equipment ....................................................................................................................
15 to 30 5 to 20 3 to 7 15 to 25 3 to 5
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset. We capitalize interest expense on major construction and development projects while in progress. No interest was capitalized during the years-ended December 31, 2015, 2014 and 2013. We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the consolidated statements of operations. However, if the sale, retirement or disposal involves a discontinued operation, the resulting net amount, less any proceeds, is included in the results of discontinued operations. For operating leases, we recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease. Goodwill We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of October 1 of each year. In 2015 and 2013, we evaluated our reporting units for goodwill impairment using a two-step process. We have six operating segments, which are aggregated into one reportable segment. Our six operating segments are generally organized geographically. The first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired, and the second step of the impairment test is not required. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by hypothetically allocating the fair value of the reporting unit to its identifiable assets and liabilities in a manner consistent with a business combination, with any excess fair value representing implied goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. In 2015, we determined recoverability of goodwill by comparing the estimated fair value of the reporting unit to which the goodwill applies to the carrying value, including goodwill, of that reporting unit using a discounted cash flow model. Estimating the fair value of the reporting unit involves uncertainties, because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, industry economic factors and future business strategy. All assumptions are interdependent and, therefore, do not change in isolation. Accordingly, our accounting estimates may materially change from period to period due to changing market factors. If we had used other assumptions and estimates or if different conditions occur in future periods, future operating results could be materially impacted. Based on the 2015 test, there is one reporting unit that the estimated fair value exceeds, but does not substantially exceed, its carrying value. The goodwill attributable to this reporting unit was $237.8 million as of December 31, 2015. No events have occurred since the latest annual goodwill impairment assessment that would necessitate an interim goodwill impairment assessment.
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For 2014, we performed a qualitative assessment because management estimated the fair value to significantly exceed the carrying value. In the qualitative assessments, we weighed the relative impact of factors that are specific to us, as well as industry and macroeconomic factors. The factors specific to us that were considered included financial performance and changes to the carrying value since the most recent impairment test. We also considered growth projections from independent sources and significant developments within our industry. We determined that the impact of macroeconomic factors on the most recent impairment tests would not significantly affect the estimated fair value. Based on this qualitative assessment, considering the aggregation of these factors, we concluded that it is not more-likely-than-not that the fair value of the operating segments exceeded the carrying amounts and, therefore, performing the two-step impairment test was unnecessary. The carrying value of each operating segment was determined by assigning assets and liabilities to those reporting units as of the measurement date. We estimated the fair values of the operating segments by considering the indicated fair values derived from an income approach, which involves discounting estimated future cash flows. We considered market factors when determining the assumptions and estimates used in our valuation models. To substantiate the fair values derived from these valuations, we reconciled the reporting unit fair values to our market capitalization. We recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its implied fair value. We present a goodwill impairment charge as a separate line item within income from continuing operations in the consolidated statements of operations, unless the goodwill impairment is associated with a discontinued operation. In that case, we include the goodwill impairment charge, on a net-of-tax basis, within the results of discontinued operations. When we dispose of a business, the relative fair value of goodwill is allocated to the carrying amount of the business disposed of in determining the gain or loss on disposition. Impairment of Long-Lived Assets and Other Intangible Assets We assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with definite useful lives on an annual basis and whenever events or changes in circumstances indicate that we may not be able to recover the asset’s carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected undiscounted cash flows to be generated by that asset, or, for identifiable intangibles with definite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with definite useful lives, if any, to be recognized is measured based on projected discounted future cash flows. We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. We present an impairment charge as a separate line item within income from continuing operations in our consolidated statements of operations, unless the impairment is associated with a discontinued operation. In that case, we include the impairment charge, on a net-of-tax basis, within the results of discontinued operations. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed. We report long-lived assets to be disposed of by sale as held for sale and recognize those assets in the balance sheet at the lower of carrying amount or fair value less cost to sell, and cease depreciation. We amortize the cost of intangible assets with definite useful lives over their respective estimated useful lives to their estimated residual value. As of December 31, 2015, none of our definite useful lived intangible assets had an estimated residual value. As of December 31, 2015, we did not have any intangible assets with indefinite useful lives. The range of estimated useful lives of our other intangible assets is as follows: Certificates of need .................................................................................. Favorable contracts .................................................................................. Favorable lease obligations ..................................................................... Licenses ................................................................................................... Management agreements ......................................................................... Noncompete agreements..........................................................................
YEARS 10 to 30 4 5 15 to 20 3 to 15 2 to 15
For the years-ended December 31, 2015, 2014 and 2013, we recorded on our consolidated statements of operations within Equity in net income of nonconsolidated affiliates amortization expense of $1.4 million, $23.2 million and $25.9 million, respectively, for definite-lived intangible assets attributable to equity method investments.
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Investment in and Advances to Nonconsolidated Affiliates Investments in entities we do not control, but for which we have the ability to exercise significant influence over the operating and financial policies, are accounted for under the equity method. Equity method investments are recorded at original cost and adjusted periodically to recognize our proportionate share of the entity’s net income or losses after the date of investment, additional contributions made and distributions received, amortization of definite-lived intangible assets attributable to equity method investments and impairment losses resulting from adjustments to the carrying value of the investment. We record equity method losses in excess of the carrying amount of an investment when we guarantee obligations or we are otherwise committed to provide further financial support to the affiliate. During 2015, we received an aggregate amount of $11.2 million of cash proceeds related to the planned sale of a portion of an equity method investment that was initially acquired on December 31, 2014. These transactions had an immaterial impact on Gain on sale of investments in our consolidated statement of operations. The proceeds from these transactions are included in Proceeds from sale of equity interests of nonconsolidated affiliates in our consolidated statement of cash flows. Other than Temporary Impairments Management periodically assesses the recoverability of our equity method investments for impairment. We consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, as appropriate, including discounted cash flows, estimates of sales proceeds and external appraisals, as appropriate. If an equity method investment’s decline in value is other than temporary, we record an impairment in Equity in net income of nonconsolidated affiliates. Financing Costs We amortize financing costs using the effective interest method over the life of the related debt. The related expense is included in Interest expense in our consolidated statements of operations. Fair Value of Financial Instruments Our financial instruments consist mainly of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, letters of credit, long-term debt and interest rate swap agreements. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments. The fair value of our letters of credit is deemed to be the amount of payment guaranteed on our behalf by third-party financial institutions. We determine the fair value of our long-term debt based on various factors, including maturity schedules, call features and current market rates. We also use quoted market prices, when available, or discounted cash flows to determine fair values of long-term debt. The fair value of our interest rate swaps is determined using information provided by a third-party financial institution and discounted cash flows. Derivative Instruments All derivative instruments are recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. As of December 31, 2015 and 2014, we held interest rate swaps to hedge the interest rate risk on a portion of our long-term debt. These swaps were historically designated as a cash flow hedge; however, in 2013, we de-designated these instruments. The dedesignation resulted in the reclassification of all amounts related to the cash flow hedges in Accumulated other comprehensive loss to be reclassified to Interest expense. Prior to de-designation, all changes in the fair value of these interest rate swaps were reported in other comprehensive income on the consolidated statement of changes in equity. Net cash settlements on our interest rate swaps are included in investing activities in our consolidated statements of cash flows. For additional information regarding these interest rate swaps, see Note 9, Long-Term Debt. Noncontrolling Interest in Consolidated Affiliates The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are 104
entitled based upon the portion of the subsidiaries that they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Also, certain of the Company’s noncontrolling interests have industry-specific redemption features, such as a change in law that would prohibit the noncontrolling interests’ current form of ownership in ASCs, which are not solely within the control of the Company. We are not aware of events that would make a redemption probable. According to authoritative guidance, classification of these noncontrolling interests outside of permanent equity is required due to the redemption features. Equity-Based Compensation We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock as well as RSUs to key teammates, directors, service providers, consultants and affiliates. We also made stand-alone grants (not under any Plan) of RSUs to an executive officer and three non-employee directors prior to our initial public offering. Under the Plans, our key teammates, directors, service providers, consultants and affiliates are provided with what we believe to be appropriate incentives to encourage them to continue employment with us or providing service to us or any of our affiliates and to improve our growth and profitability. Option awards are generally granted with an exercise price equal to at least the fair market value of the underlying share at the date of grant. Vesting in the option awards varies based upon time, attainment of certain performance conditions, or upon the occurrence of a Liquidity Event (as defined in the applicable Plan) in which the TPG Funds and/or any of its affiliates achieves a minimum cash return on its original investment. All existing RSU awards vest over time. Income Taxes We provide for income taxes using the asset and liability method. This approach recognizes the amount of federal, state and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. A valuation allowance is required when it is more-likely-than-not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income. We file a consolidated federal income tax return. State income tax returns are filed on a separate, combined or consolidated basis in accordance with relevant state laws and regulations. LPs, LLPs, LLCs and other pass-through entities that we consolidate or account for using the equity method of accounting file separate federal and state income tax returns. We include the allocable portion of each pass-through entity’s income or loss in our federal income tax return. We allocate the remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of the taxes. Discontinued Operations Components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on our operations or financial results are reported as discontinued operations. We reclassify the results of operations for current and prior periods into a single caption titled Loss from discontinued operations, net of income tax expense. In addition, assets and liabilities associated with facilities that qualify for reporting as discontinued operations are reflected in the consolidated balance sheets as Current assets related to discontinued operations, Assets related to discontinued operations, Current liabilities related to discontinued operations and Liabilities related to discontinued operations. We also classify cash flows related to discontinued operations as one line item within each category of cash flows in our consolidated statements of cash flows. Assets and Liabilities Held for Sale We classify components of entities as held for sale when management is committed to selling components of an entity within twelve months and the entity does not also qualify for reporting as discontinued operations. The applicable assets and liabilities associated with an entity are reflected in the accompanying consolidated balance sheets as of December 31, 2015 as Current assets held for sale, Assets held for sale, Current liabilities held for sale and Liabilities held for sale.
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Assessment of Loss Contingencies We have legal and other contingencies that could result in significant losses upon the ultimate resolution of such contingencies. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. A significant amount of judgment is involved in determining whether a loss is probable and reasonably estimable due to the uncertainty involved in determining the likelihood of future events and estimating the financial statement impact of such events. If further developments or resolution of a contingent matter are not consistent with our assumptions and judgments, we may need to recognize a significant charge in a future period related to an existing contingent matter. See Note 16, Commitments and Contingent Liabilities, for more information regarding these matters. Earnings Per Share (EPS) We report two earnings per share numbers, basic and diluted. These are computed by dividing net earnings by the weightedaverage common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below: YEAR-ENDED DECEMBER 31, 2015
In thousands
Weighted average shares outstanding ............................................................... Dilutive effect of equity-based compensation plans ......................................... Weighted-average shares outstanding, assuming dilution.................................
39,360 1,374 40,734
YEAR-ENDED DECEMBER 31, 2014
38,477 1,481 39,958
YEAR-ENDED DECEMBER 31, 2013
31,688 — 31,688
The shares used reflect the conversion to a Delaware corporation discussed in Note 1 for all periods. All dilutive share equivalents are reflected in our earnings per share calculations. Antidilutive share equivalents are not included in our EPS calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average shares outstanding computation are excluded. The number of excluded shares for the year-ended December 31, 2013 is 216,682. Reportable Segments We have six operating segments, which aggregate into one reportable segment. Our six operating segments are generally organized geographically. For reporting purposes, we have aggregated our operating segments into one reportable segment as the nature of the services are similar and the businesses exhibit similar economic characteristics, processes, types and classes of customers, methods of service delivery and distribution and regulatory environments. Distribution On September 16, 2013, we declared a cash distribution of approximately $0.24 per outstanding membership unit, resulting in a total distribution to our membership unit holders of $74.9 million. The distribution was payable promptly after the date on which it was declared. In addition, on September 16, 2013, the board of directors of the Company resolved to pay a cash bonus to eligible holders of vested options and restricted equity units of approximately $0.24 per vested option or restricted equity unit, as applicable, resulting in a total bonus payment of $4.6 million, and to reduce the exercise price of any such holder’s unvested options by approximately $0.24 per unvested option. The cash bonus payment was recorded as compensation expense in the third quarter of 2013. We record stock compensation expense over the remaining vesting periods related to the adjustment to unvested options. Recent Revisions to Authoritative Guidance In November 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the requirement for companies to present deferred tax liabilities and assets as current and non-current on the consolidated statements of financial position. Instead, companies will be required to classify all deferred tax assets and liabilities as non-current. This guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. We elected to early adopt ASU 2015-17 on December 31, 2015. ASU 2015-17 did not have a material impact on our consolidated financial position, and had no impact on our results of operations or cash flows. All prior period financial information presented herein has been adjusted to reflect the retrospective application of this ASU. In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. This standard eliminates the requirement to restate prior period financial statements for measurement period adjustments. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is 106
permitted and we have chosen to adopt this ASU prospectively as of September 30, 2015. This ASU did not have a material impact on our consolidated financial position, results of operations or cash flows. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. This standard clarifies the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The SEC staff has announced that it would “not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement.” This ASU should be adopted concurrent with ASU 2015-03 which is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This ASU became effective for the Company on January 1, 2016. The provisions should be applied on a retrospective basis as a change in accounting principle. We do not believe this ASU will have a material impact on our consolidated financial position, results of operations or cash flows. In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015 and requires either a retrospective or a modified retrospective approach to adoption. This ASU became effective for the Company on January 1, 2016. We are currently evaluating the potential impact of this standard on our consolidated financial position, results of operations and cash flows. In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the criteria for determining which disposals (both consolidated investments and equity method investments) can be presented as discontinued operations and modifies related disclosure requirements. Under the new criteria, a discontinued operation is defined as a disposal of a component or group of components, which may include equity method investments, that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU became effective for the Company on January 1, 2015. This ASU did not have a material effect on our consolidated financial position, results of operations or cash flows; however, the presentation of discontinued operations will be impacted. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for the Company at the beginning of its 2017 fiscal year; early adoption is not permitted. We are currently assessing the impact that this ASU will have on our consolidated financial position, results of operation and cash flows. We do not believe that any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. NOTE 4 — VARIABLE INTEREST ENTITIES Under the applicable authoritative guidance, a VIE is a legal entity that possesses any of the following characteristics: an insufficient amount of equity at risk to finance its activities, equity owners who do not have the power to direct the significant activities of the entity (or have voting rights that are disproportionate to their ownership interest) or equity owners who do not have the obligation to absorb expected losses or the right to receive the expected residual returns of the entity. Companies are required to consolidate a VIE if they are its primary beneficiary, which is the enterprise that has the power to direct the activities that most significantly affect the entity’s economic performance.
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At December 31, 2015 and December 31, 2014, we consolidated four VIE groups and one VIE group, respectively, for which we were the primary beneficiary. As of December 31, 2015, we consolidated a total of 16 facilities among the four VIE groups, the details of which are as follows:
VIE Group Future Texas JV .................. Kentucky JVs ...................... Michigan JV ........................ Hilton Head JV ....................
# of Consolidated Facilities as of December 31, 2015
# of Consolidated Facilities as of December 31, 2014 11 3 1 1
10 — — —
The carrying amounts and classifications of the assets and liabilities of the VIE groups, which are included in our December 31, 2015 and December 31, 2014 consolidated balance sheets, were as follows: DECEMBER 31, 2015
Assets Current assets Accounts receivable, net ............................................................. Other current assets .................................................................... Total current assets ..................................................................... Property and equipment, net ....................................................... Goodwill ..................................................................................... Intangible assets .......................................................................... Total assets ............................................................................ Liabilities Current liabilities Accounts payable and other current liabilities ............................ Total current liabilities................................................................ Other long-term liabilities........................................................... Total liabilities ......................................................................
$
$
$
$
DECEMBER 31, 2014
17,515 4,922 22,437 35,325 91,777 18,294 167,833
$
18,445 18,445 22,574 41,019
$
12,396 2,236 14,632 20,829 69,330 12,663 117,454
$
11,402 11,402 12,403 23,805
$
The assets of the consolidated VIE groups can only be used to settle the obligations of the VIE groups. The creditors of the VIE groups have no recourse to us, with the exception of $4.0 million and $3.4 million of debt guaranteed by us at December 31, 2015 and December 31, 2014, respectively. NOTE 5 — ACCOUNTS RECEIVABLE Accounts receivable consist of the following: AS OF DECEMBER 31, 2015 2014
Accounts receivable............................................................ $ Less: Allowance for doubtful accounts .............................. Accounts receivable, net ..................................................... $
146,704 $ (17,045) 129,659 $
110,977 (10,448 ) 100,529
The following is the activity related to our allowance for doubtful accounts: YEAR-ENDED YEAR-ENDED YEAR-ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2015 2014 2013
Balance at beginning of period.................................. $ Provision for doubtful accounts ................................ Deductions and accounts written off ......................... Balance at end of period ............................................ $
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10,448 $ 17,195 (10,598) 17,045 $
10,393 $ 14,051 (13,996 ) 10,448 $
5,698 14,208 (9,513) 10,393
NOTE 6 — PROPERTY AND EQUIPMENT Property and equipment consists of the following: AS OF DECEMBER 31, 2015 2014
Land ........................................................................................... $ Buildings .................................................................................... Leasehold improvements ........................................................... Furniture, fixtures and equipment .............................................. Less: Accumulated depreciation ................................................ Construction in progress ............................................................ Property and equipment, net ...................................................... $
15,410 $ 93,055 76,878 200,530 385,873 (99,678) 286,195 10,636 296,831 $
17,081 42,667 53,890 180,270 293,908 (99,111 ) 194,797 14,845 209,642
The amount of depreciation expense, amortization expense and accumulated amortization relating to assets under capital lease obligations, and rent expense under operating leases is as follows: YEAR-ENDED DECEMBER 31, 2015
Depreciation expense ........................................................................... $ Assets under capital lease obligations: Buildings .............................................................................................. $ Equipment ............................................................................................ Accumulated depreciation .................................................................... Assets under capital lease obligations, net ........................................... Amortization expense ........................................................................... Rent Expense: Minimum rent payments ...................................................................... Contingent and other rents ................................................................... Total rent expense ................................................................................
$ $ $ $
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
42,149 $
34,796 $
28,808
77,205 $ 42,008 119,213 (34,469) 84,744 $ 9,800 $
19,279 $ 31,898 51,177 (22,930 ) 28,247 $ 7,753 $
17,062 28,484 45,546 (16,588) 28,958 5,991
29,268 $ 13,625 42,893 $
24,419 $ 10,727 35,146 $
21,986 9,596 31,582
Leases We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates through 2034. We also lease certain buildings and equipment under capital leases expiring at various dates through 2033. Operating leases generally have 3 to 20 year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Various facility leases include provisions for rent escalation to recognize increased operating costs or require us to pay certain maintenance and utility costs. Contingent rents are included in rent expense in the year incurred. Some facilities are subleased to other parties. Rental income from subleases approximated $0.7 million, $0.5 million and $0.6 million for the years-ended December 31, 2015, 2014 and 2013, respectively. Certain leases contain annual escalation clauses based on changes in the Consumer Price Index while others have fixed escalation terms. The excess of cumulative rent expense (recognized on a straight-line basis) over cumulative rent payments made on leases with fixed escalation terms is recognized as straight-line rental accrual and is included in Other long-term liabilities in the accompanying consolidated balance sheets. Our facilities lease land, buildings and equipment, with most leases being for terms of three to ten years. On April 4, 2014, the Company entered into a new lease agreement that resulted in the relocation of our Birmingham, Alabama office to Brookwood Village Center in Birmingham, Alabama. This lease, which commenced on December 1, 2014, is for an initial term of 10.5 years. The lease for our previous Birmingham, Alabama office, which commenced on March 1, 2008, expired on March 31, 2015. We do not intend to renew this lease upon expiration.
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Future minimum lease payments at December 31, 2015 for those leases of the Company and its subsidiaries having an initial or remaining non-cancelable lease term of one year or more are as follows: OPERATING LEASES
YEAR ENDING DECEMBER 31,
2016 ......................................................................................... $ 2017 ......................................................................................... 2018 ......................................................................................... 2019 ......................................................................................... 2020 ......................................................................................... 2021 and thereafter .................................................................. $ Less: interest portion ............................................................... Obligations under capital leases ..............................................
CAPITAL LEASE OBLIGATIONS
30,301 $ 24,968 22,484 19,327 15,268 58,724 171,072 $
15,438 $ 13,683 11,903 9,959 8,501 77,922 137,406 $ (52,854 ) 84,552
TOTAL
45,739 38,651 34,387 29,286 23,769 136,646 308,478
Obligations Under Lease Guarantees In conjunction with the sale of certain facilities in prior years, the leases of certain properties were assigned to the purchasers and, as a condition of the lease, the Company is a guarantor on the lease. Should the purchaser fail to pay the rent due on these leases, the lessor would have contractual recourse against the Company. We have not recorded a liability for these guarantees because we do not believe it is probable that we will have to perform under these agreements. If we are required to perform under these guarantees, we could potentially have recourse against the purchaser for recovery of any amounts paid. These guarantees are not secured by any assets under the leases. As of December 31, 2015, the Company has not been required to perform under any such lease guarantees. The Company has provided guarantees related to operating leases of nonconsolidated affiliates in the amount of $31.6 million as of December 31, 2015. Impairment of Long-Lived Assets During 2015, 2014 and 2013, we examined our long-lived assets for impairment due to facility closings and facilities experiencing cash flow insufficient to recover the net book value of its long-lived assets. Based on this review, $0.6 million of impairment charges were recorded for each of the years-ended December 31, 2015 and 2014. These impairments are recorded in Impairment of intangible and long-lived assets in the Company’s consolidated statements of operations. Also, an impairment charge of $0.7 million was recorded during the year-ended December 31, 2014 for intangible and long-lived assets. This impairment is recorded in Loss from discontinued operations, net of income tax expense in the Company’s consolidated statements of operations. No material impairment charges were recorded for the year-ended December 31, 2013. For all periods presented, the fair value of the impaired long-lived assets at our facilities was determined primarily based on the assets’ estimated fair value using valuation techniques that included discounted future cash flows and the cost approach. NOTE 7 — GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. Other definite-lived intangibles consist primarily of certificates of need, licenses, noncompete agreements and management agreements. We had no accumulated impairment of goodwill for the years ended December 31, 2015 or December 31, 2014.
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The following tables show changes in the carrying amount of goodwill for the years-ended December 31, 2015 and December 31, 2014: YEAR-ENDED DECEMBER 31, 2015
Balance at beginning of period ............................................................................... Acquisitions (Note 2) ........................................................................................ Deconsolidations (Note 2) ................................................................................ Sales .................................................................................................................. Closure and other .............................................................................................. Balance at end of period .........................................................................................
$
$
YEAR-ENDED DECEMBER 31, 2014
902,391 $ 165,419 (4,148 ) (2,503 ) (71 ) 1,061,088 $
745,036 177,726 (22,018) (454) 2,101 902,391
We performed impairment reviews as of October 1, 2015, 2014 and 2013, and concluded that no goodwill impairment existed. The following table provides information regarding our other intangible assets: AS OF DECEMBER 31, 2015 2014
Certificates of need Gross carrying amount ......................................................... Accumulated amortization.................................................... Net ........................................................................................ Management agreements Gross carrying amount ......................................................... Accumulated amortization.................................................... Net ........................................................................................ Licenses Gross carrying amount ......................................................... Accumulated amortization.................................................... Net ........................................................................................ Noncompete agreements Gross carrying amount ......................................................... Accumulated amortization.................................................... Net ........................................................................................ Total other intangible assets Gross carrying amount ......................................................... Accumulated amortization.................................................... Net ........................................................................................
$ $ $ $ $ $ $ $ $ $
22,114 $ (10,455) 11,659 $
18,250 (9,237 ) 9,013
79,773 $ (23,972) 55,801 $
61,905 (19,231 ) 42,674
20,980 $ (3,472) 17,508 $
15,338 (2,091 ) 13,247
34,816 $ (10,596) 24,220 $
24,039 (4,711 ) 19,328
157,683 $ (48,495) 109,188 $
119,532 (35,270) 84,262
During 2015, 2014 and 2013, we examined our intangible assets for impairment due to facility closings and facilities experiencing cash flow insufficient to recover the net book value of their long-lived assets. In all periods presented, no impairment charge was deemed necessary for intangible assets. For the years-ended December 31, 2015, December 31, 2014 and December 31, 2013, we recorded $1.4 million, $23.2 million and $25.9 million, respectively, of amortization expense for definite-lived intangible assets attributable to equity method investments. These expenses are included in Equity in net income of nonconsolidated affiliates in our consolidated financial statements. Amortization expense for other intangible assets is as follows: YEAR-ENDED YEAR-ENDED YEAR-ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2015 2014 2013
Amortization expense ............................................................. $
111
14,276 $
10,114 $
6,651
Total estimated amortization expense for our other intangible assets for the next five years is as follows: ESTIMATED AMORTIZATION EXPENSE
YEAR ENDING DECEMBER 31,
2016............................................................................................ $ 2017............................................................................................ 2018............................................................................................ 2019............................................................................................ 2020............................................................................................
15,762 15,125 14,982 12,317 9,750
NOTE 8 — RESULTS OF OPERATIONS OF NONCONSOLIDATED AFFILIATES As of December 31, 2015, Investment in and advances to nonconsolidated affiliates represents Surgical Care Affiliates’ investment in 68 partially owned entities, most of which are general partnerships, LPs, LLPs, LLCs or joint ventures in which SCA or one of our subsidiaries is a general or limited partner, managing member, member or venturer, as applicable. We do not control these affiliates but have the ability to exercise significant influence over the operating and financial policies of certain of these affiliates. Accordingly, we account for these affiliates using the equity method. Our ownership percentage in these affiliates generally ranged from 5% to 50% as of December 31, 2015. Our investment in these affiliates is an integral part of our operations. During the year-ended December 31, 2015, we deconsolidated one facility as a result of other parties obtaining substantive rights. We retained a noncontrolling interest in this affiliate. We recorded an immaterial loss related to this deconsolidation which was primarily related to the revaluation of our investment in this affiliate to fair value. We also wrote off approximately $4.1 million of goodwill related to the deconsolidation. During the year-ended December 31, 2014, we completed two separate deconsolidation transactions. In one of these transactions, we sold a controlling equity interest in an ASC and transferred certain control rights to a partner in the entity. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.4 million and recorded a pre-tax loss of approximately $3.4 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. In the other transaction, we agreed to sell our entire interest in an ASC in Santa Monica, California at a later date. In conjunction with this transaction, the operating agreement of this affiliate was amended on October 1, 2014 to remove SCA’s control rights until the date of the sale. As a result of the removal of SCA’s control rights, the facility became a nonconsolidated affiliate. We recorded a pre-tax gain of approximately $2.7 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The net loss on these transactions is recorded in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. During the year-ended December 31, 2013, we completed two separate deconsolidation transactions. In one of these transactions, we sold a controlling equity interest and transferred certain control rights to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.1 million and recorded a pre-tax loss of approximately $1.6 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. In the other transaction, we transferred certain control rights to partners in the entity. We retained a noncontrolling interest in this affiliate. We recorded a pre-tax loss of approximately $1.5 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in Equity in net income of nonconsolidated affiliates in the accompanying consolidated statements of operations. Fair values for the retained noncontrolling interests are primarily estimated based on third-party valuations that we have obtained in connection with such transactions and/or the amount of proceeds received for the controlling interest sold. During 2015, we recorded $5.2 million of impairment to our investments in nonconsolidated affiliates due to declines in the expected future cash flows of three nonconsolidated affiliates that we determined to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates. The declines in the expected future cash flows were caused by events specific to each impacted facility, as further described below. The impairments included: y a $3.1 million impairment on our investment in PS Center, LLC related to insufficient forecasted growth at the facility; y a $1.4 million impairment on our investment in Glendale Endoscopy Center, LLC related to insufficient forecasted growth at the facility;
112
y a $0.5 million impairment on our investment in Lackawanna Physicians Ambulatory Surgery Center, LLC related to insufficient forecasted growth at the facility; and y a $0.2 million impairment on our investment in Emerald Coast Surgery Center, L.P. related to insufficient forecasted growth at the facility. Also during 2015, we recorded an impairment charge of $4.1 million due to advances previously extended to a nonconsolidated affiliate that were deemed not recoverable. This impairment is included in Equity in net income of nonconsolidated affiliates in the accompanying consolidated statement of operations. During 2014 and 2013, we recorded $0.3 million and $6.1 million, respectively, of impairment to our investments in nonconsolidated affiliates due to a decline in the expected future cash flows of nonconsolidated affiliates that we determined to be other than temporary. These impairments are included in Equity in net income of nonconsolidated affiliates. In determining whether an impairment charge is necessary on a particular investment, we consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, including discounted cash flows, estimates of sales proceeds and external appraisals, as appropriate. We account for investments in nonconsolidated affiliates primarily using the equity method of accounting. The difference between the carrying amount of the investment and the underlying equity in net assets was $59.0 million and $67.7 million at December 31, 2015 and 2014, respectively, and is primarily attributable to goodwill and other intangible assets. Our investments consist of the following: AS OF DECEMBER 31, 2015 2014
INVESTMENT IN AND ADVANCES TO NONCONSOLIDATED AFFILIATES:
Beginning balance .................................................................................................. Share of income(1) ............................................................................................. Share of distributions ........................................................................................ Acquisitions ...................................................................................................... Conversion to/from investments in nonconsolidated affiliates ......................... Sale/closure of investments in nonconsolidated affiliates ................................. Other ................................................................................................................. Total investment in and advances to nonconsolidated affiliates............................. (1)
$
$
194,610 $ 49,867 (58,547 ) 42,403 (458 ) (19,168 ) 7,404 216,111 $
168,824 32,564 (53,328) 36,021 8,238 (1,947) 4,238 194,610
Includes $9.3 million and $0.3 million of impairments at December 31, 2015 and 2014, respectively, as previously noted.
Included in the 2015 and 2014 Share of income amount above is amortization expense of $1.4 million and $23.2 million, respectively, for definite-lived intangible assets attributable to equity method investments. The following summarizes the combined assets, liabilities and equity of our nonconsolidated affiliates (on a 100% basis): DECEMBER 31, 2015
Assets Current.................................................................................................................... Noncurrent.............................................................................................................. Total assets ............................................................................................................. Liabilities ............................................................................................................... Current.................................................................................................................... Noncurrent.............................................................................................................. Total liabilities........................................................................................................ Partners’ capital and shareholders’ equity Surgical Care Affiliates .......................................................................................... Outside parties ........................................................................................................ Total partners’ capital and shareholders’ equity..................................................... Total liabilities and partners’ capital and shareholders’ equity ..............................
113
$ $ $
$
DECEMBER 31, 2014
228,103 312,500 540,603
$
67,626 64,874 132,500
$
155,802 252,301 408,103 540,603
$
$
205,917 183,311 389,228 54,863 58,800 113,663 126,425 149,140 275,565 389,228
The following summarizes the combined condensed results of operations of our nonconsolidated affiliates: YEAR-ENDED DECEMBER 31, 2015
Net operating revenues: Net patient revenues ........................................................................ $ Other revenues ................................................................................ Total net operating revenues...................................................... Operating expenses: Salaries and benefits ....................................................................... Supplies........................................................................................... Other operating expenses ................................................................ Depreciation and amortization ........................................................ Total operating expenses ........................................................... Operating income ................................................................................. Interest expense, net of interest income................................................ Loss on sale of investments .................................................................. Income from continuing operations before income tax expense .......... $ Net income ........................................................................................... $
749,780 8,078 757,858 161,333 133,885 164,240 28,087 487,545 270,313 2,474 — 267,839 267,802
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
$
$
$ $
659,367 5,884 665,251 140,365 111,833 141,872 21,765 415,835 249,416 2,254 — 247,162 247,097
$ $
600,600 5,166 605,766 128,892 99,299 123,052 17,281 368,524 237,242 1,627 22 235,593 235,522
NOTE 9 — LONG-TERM DEBT Our long-term debt outstanding consists of the following: AS OF DECEMBER 31, 2015 2014
New Credit Facilities debt payable: Advances under $250 million New Revolving Credit Facility (excluding letters of credit issued thereunder) .................................... $ New Term Loan Facility due 2022 ..................................................................... Discount of New Term Loan due 2022 ............................................................... Old Credit Facilities debt payable: Advances under $132.3 million Class B Revolving Credit Facility (excluding letters of credit issued thereunder) .................................... Class B Term Loan due 2017.............................................................................. Class C Term Loan due 2018.............................................................................. Discount of Class C Term Loan .......................................................................... 6.00% Senior Notes due 2023 .................................................................................. Discount of Senior Notes due 2023 .......................................................................... Notes payable to banks and others ........................................................................... Capital lease obligations ........................................................................................... Less: Current portion ................................................................................................ Long-term debt, net of current portion ..................................................................... $
15,000 $ 446,625 (1,372 )
— — — — 250,000 (3,965 ) 99,707 84,552 890,547 (32,503 ) 858,044 $
— — —
— 212,224 384,150 (452) — — 64,634 29,253 689,809 (24,690) 665,119
The following chart shows scheduled principal payments due on long-term debt, including capital leases, for the next five years and thereafter: Year Ending December 31,
2016............................................................................................... $ 2017............................................................................................... 2018............................................................................................... 2019............................................................................................... 2020............................................................................................... Thereafter ...................................................................................... Total .............................................................................................. $ 114
32,503 45,427 25,499 20,279 24,695 742,144 890,547
The following table provides information regarding our total Interest expense presented in our consolidated statements of operations for both continuing and discontinued operations: YEAR-ENDED DECEMBER 31, 2015
Continuing operations: Interest expense ........................................................................................... $ Amortization of bond issue costs ................................................................. Total interest expense and amortization of bond issue costs for continuing operations ........................................................................... Discontinued operations: Interest expense ........................................................................................... Total interest expense for discontinued operations ................................ Total interest expense and amortization of bond Issue costs ............................ $
40,759 1,352
YEAR-ENDED DECEMBER 31, 2014
$
29,831 2,954
YEAR-ENDED DECEMBER 31, 2013
$
56,311 3,891
42,111
32,785
60,202
159 159 42,270
280 280 33,065
414 414 60,616
$
$
Capital Lease Obligations We engage in a significant number of leasing transactions, including real estate, medical equipment, computer equipment and other equipment utilized in operations. Certain leases that meet the lease capitalization criteria have been recorded as an asset and liability at the net present value of the minimum lease payments at the inception of the lease. Interest rates used in computing the net present value of the lease payments generally range from 2.3% to 13.0% based on the incremental borrowing rate at the inception of the lease. Our leasing transactions include arrangements for equipment with major equipment finance companies and manufacturers who retain ownership of the equipment during the term of the lease and with a variety of both small and large real estate owners. First Quarter 2015 Refinancing Transactions On March 17, 2015, we issued senior unsecured notes due in 2023 in the aggregate principal amount of $250 million (the “Senior Notes”) under an Indenture dated March 17, 2015 among the Company, The Bank of New York Mellon Trust Company, N.A., as trustee, and certain wholly-owned subsidiaries of the Company (the “Guarantors”) that are guaranteeing the Senior Notes (the “Indenture”). Also on March 17, 2015, we entered into a $700 million credit agreement with JP Morgan Chase Bank, N.A., as administrative agent and collateral agent, and the other lenders party thereto (the “New Credit Agreement”). The New Credit Agreement provides for a seven-year, $450 million term loan credit facility (the “New Term Loan Facility”) and a five-year, $250 million revolving credit facility (the “New Revolving Credit Facility” and together with the New Term Loan Facility, collectively, the “New Credit Facilities”). This issuance of the Senior Notes and the entry into the New Credit Facilities are collectively referred to as the “Refinancing Transactions.” We received $245.6 million in net proceeds from the sale of the Senior Notes after deducting the Initial Purchasers’ (as defined below) discount. We used all of those net proceeds, together with approximately $381 million of the $450 million borrowed under the New Term Loan Facility, to repay all of the outstanding indebtedness (including accrued interest and fees) under the Company’s previous credit facilities (the “Old Credit Facilities”). The remaining approximately $69 million of net proceeds from the Refinancing Transactions was used to pay the transaction costs associated with the Refinancing Transactions and for general corporate purposes. In connection with the settlement of existing debt upon entering into our New Credit Facilities, we incurred debt modification expense of $5.0 million. Senior Notes On March 17, 2015, we issued the Senior Notes under the Indenture. The Senior Notes were sold to Goldman, Sachs & Co. and certain other initial purchasers (the “Initial Purchasers”) in a private placement in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The Senior Notes were expected to be resold by the Initial Purchasers to qualified institutional buyers pursuant to Rule 144A and/or in an offshore transaction pursuant to Regulation S under the Securities Act. The Senior Notes are general unsecured obligations of the Company and are guaranteed by the Guarantors and any subsequently acquired wholly-owned subsidiaries that guarantee certain of the Company’s indebtedness, subject to certain exceptions. The Senior Notes are pari passu in right of payment with all of the existing and future senior debt of the Company, including the Company’s indebtedness under the New Credit Facilities, and senior to all existing and future subordinated debt of the Company. Interest on the Senior Notes accrues at the rate of 6.00% per annum and is payable semi-annually in arrears on April 1 and October 1, beginning on October 1, 2015. The Senior Notes mature on April 1, 2023. 115
The Indenture contains certain covenants that, with certain exceptions and qualifications, limit the ability of the Company and the restricted subsidiaries to, among other things, incur or guarantee additional indebtedness and issue certain types of preferred stock; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; create liens on assets; make investments; sell assets; engage in transactions with affiliates; create restrictions on the ability of the restricted subsidiaries to pay dividends; and consolidate, merge or transfer substantially all of the Company’s assets. The Indenture also provides for certain events of default which, if any of them were to occur, would permit or require the principal and accrued interest, if any, on the Senior Notes to become or be declared due and payable (subject, in some cases, to specified grace periods). We believe that we were in compliance with the covenants contained in the Indenture as of December 31, 2015. New Credit Facilities On March 17, 2015, we entered into the New Credit Agreement, which, subject to the terms and conditions set forth therein, provides for the New Term Loan Facility and the New Revolving Credit Facility. The New Credit Agreement includes an accordion feature that, subject to the satisfaction of certain conditions, will allow us to add one or more incremental term loan facilities to the New Term Loan Facility and/or increase the revolving commitments under the New Revolving Credit Facility, in each case based on leverage ratios and minimum dollar amounts, as more particularly set forth in the New Credit Agreement. The interest rate on the New Term Loan Facility was 4.25% at December 31, 2015. The New Credit Facilities replaced our Credit Agreement, dated as of June 29, 2007 (as amended and restated and further amended, the “2007 Credit Agreement”), among the Company, SCA, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the other lenders party thereto. Quarterly principal payments on the loans under the New Term Loan Facility are payable in equal installments in an amount equal to 0.25% of the aggregate initial principal amount of the loans made under the New Term Loan Facility. The loans made under the New Term Loan Facility mature and all amounts then outstanding thereunder are payable on March 17, 2022. The New Revolving Credit Facility matures, the commitments thereunder terminate, and all amounts then outstanding thereunder are payable, on March 17, 2020. Borrowings under the New Credit Agreement bear interest, at our election, either at (1) a base rate determined by reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A., (b) the United States federal funds rate plus 0.50% and (c) a LIBOR rate plus 1.00% (provided that, with respect to the New Term Loan Facility, in no event will the base rate be deemed to be less than 2.00%) (the “Base Rate”) or (2) an adjusted LIBOR rate (provided that, with respect to the New Term Loan Facility, in no event will the adjusted LIBOR rate be deemed to be less than 1.00%) (the “LIBOR Rate”), plus in either case an applicable margin. The applicable margin for borrowings under the New Term Loan Facility is 2.25% for Base Rate loans and 3.25% for LIBOR Rate loans. The applicable margin for any borrowings under the New Revolving Credit Facility depends on the Company’s senior secured leverage ratio and varies from 0.75% to 1.25% for Base Rate loans and from 1.75% to 2.25% for LIBOR Rate loans. Interest payments, along with the installment payments of principal, are payable at the end of each quarter. The following table outlines the applicable margin for each portion of the New Credit Facilities: Facility
Applicable Margin (per annum) Base Rate Borrowings LIBOR Borrowings
New Revolving Credit Facility ........................................ 0.75% to 1.25%, depending upon the 1.75% to 2.25%, depending upon the senior secured leverage ratio senior secured leverage ratio New Term Loan Facility due 2022 .................................. 2.25% (with a base rate floor of 3.25% (with a LIBOR floor of 2.00%) 1.00%) There was $15.0 million and no outstanding balance under the New Revolving Credit Facility or the revolving credit facility of the Old Credit Facilities as of December 31, 2015 or December 31, 2014, respectively, other than $4.2 million and $2.9 million, respectively, of letters of credit. As of December 31, 2015, the New Revolving Credit Facility had a capacity of $230.8 million. Any utilization of the New Revolving Credit Facility in excess of $15.0 million will be subject to compliance with a total leverage ratio test. At December 31, 2015, we had approximately $4.2 million in letters of credit outstanding that utilize capacity under the New Revolving Credit Facility. We pay a commitment fee of either 0.375% or 0.500% per annum, depending on our senior secured leverage ratio, on the unused portion of the New Revolving Credit Facility. The New Credit Facilities are guaranteed by SCA and certain of SCA’s direct wholly-owned domestic subsidiaries (the “Credit Agreement Guarantors”), subject to certain exceptions, and borrowings under the New Credit Facilities are secured by a first priority security interest in substantially all equity interests of SCA and of each wholly-owned domestic subsidiary directly held by SCA or a 116
Credit Agreement Guarantor. The New Credit Agreement contains a provision that could require prepayment of a portion of our indebtedness if SCA has excess cash flow, as defined by the New Credit Agreement. Payment was not required as of December 31, 2015. Additionally, the New Credit Agreement contains various restrictive covenants that, subject to certain exceptions, prohibit us from prepaying certain subordinated indebtedness. The New Credit Agreement also generally restricts the Company’s and its restricted subsidiaries’ ability to, among other things, incur indebtedness or liens, make investments or declare or pay dividends. We believe that we were in compliance with these covenants as of December 31, 2015. Senior Subordinated Notes and Senior PIK-election Notes In connection with the amendment to the Company’s Senior Secured Credit Facility (the “Credit Facility”) in the second quarter of 2013, on June 14, 2013 we extinguished the Senior PIK-election Notes at par, including a payment of accrued interest through July 15, 2015. Additionally, we redeemed the Senior Subordinated Notes at a premium of 3.333% on December 4, 2013. An aggregate loss on extinguishment of debt of $10.3 million was recorded in connection with these two redemptions. Old Credit Facility With respect to the Old Credit Facility, as of December 31, 2014, we had $596.4 million outstanding under the senior secured term loan facility consisting of the following: y $212.2 million under the Class B Term Loan due December 30, 2017. The interest rate on the Class B Term Loan was 4.26% at December 31, 2014. y $384.2 million under the Class C Term Loan (as defined below) due June 30, 2018. The interest rate on the Class C Term Loan was 4.00% at December 31, 2014. We were required to repay the Class B Term Loan and the Class C Term Loan in quarterly installments equal to 0.25% of the original principal amount, with the remaining amount payable in full on the maturity date. Borrowings under each portion of the Old Credit Facility bore interest at a base rate or at the London interbank market for the interest period relevant to such borrowings (“LIBOR”), as elected by SCA, plus an applicable margin. The base rate was determined by reference to the higher of (i) the prime rate of JPMorgan Chase Bank, N.A. and (ii) the federal funds effective rate plus 0.50%. The LIBOR rate was determined by reference to the interest rate for dollar deposits in the London interbank market for the interest period relevant to such borrowings. Interest payments, along with the installment payments of principal, were required to be made at the end of each quarter. The following table outlines the applicable margin for each portion of the Old Credit Facility. Applicable Margin (per annum) Base Rate Borrowings LIBOR Borrowings
Facility
Class B Revolving Credit Facility...................................................... 2.50% 3.50% Class B Term Loan ............................................................................ 3.00% 4.00% Class C Term Loan ............................................................................ 2.00% or 2.25% (with a base rate 3.00% or 3.25% (with a LIBOR floor of 2.00%) depending upon floor of 1.00%) depending the total leverage ratio upon the total leverage ratio There was no outstanding balance under the old senior secured revolving credit facility (the “Class B Revolving Credit Facility”) as of December 31, 2014 or December 31, 2013 other than $2.9 million and $1.7 million, respectively, of letters of credit. As of December 31, 2014 the Class B Revolving Credit Facility had a capacity of $132.3 million with a maturity date of June 30, 2016. On June 29, 2013, our Class A Revolving Credit Facility was terminated in connection with our decision not to renew it. 2013 Amendment to the Old Credit Facility In the second quarter of 2013, we amended our credit agreement (the “Amended Credit Agreement”) related to the Old Credit Facility. The Amended Credit Agreement provided for a Class C Term Loan Facility (“Class C Term Loan”) of $384.2 million ($383.7 million, net of discount) as of December 31, 2014. The Class C Term Loan was scheduled to mature on June 30, 2018. We utilized the proceeds of the Class C Term Loan plus $8.7 million in cash to extinguish the Senior PIK-election Notes, the Class A Term Loan and the Incremental Term Loan. The applicable margin for borrowings under the Class C Term Loan was (i) 2.25% with respect to base rate borrowings (with a base rate floor of 2.00%) and (ii) 3.25% with respect to LIBOR borrowings (with a LIBOR floor of 1.00%). The interest rate on the Class C Term Loan was 4.00% at December 31, 2014. Quarterly amortization payments were made in an amount equal to 0.25% of the original principal amount of the Class C Term Loan.
117
We incurred a loss on extinguishment of debt of $3.8 million in connection with the settlement of existing debt due to the closing of the Class C Term Loan during 2013. The Old Credit Facility was guaranteed by the Company and certain of SCA’s direct 100% owned domestic subsidiaries (the “Guarantors”), subject to certain exceptions, and borrowings under the Old Credit Facility were secured by a first priority security interest in all equity interests of SCA and of each 100% owned domestic subsidiary directly held by SCA or a Guarantor. The Credit Facility generally restricted SCA and SCA’s restricted subsidiaries’ ability to, among other things: y incur liens; y incur or assume additional debt or guarantees or issue or sell certain types of preferred stock; y pay dividends or make redemptions and repurchases with respect to capital stock; y prepay, or make redemptions and repurchases of, subordinated debt; y make loans or investments; and y engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates. The Company believed that it and SCA were in compliance with these covenants as of December 31, 2014. The Amended Credit Agreement contained a provision that could require prepayment of a portion of our indebtedness if SCA has excess cash flow, as defined by the Amended Credit Agreement. No such prepayment was required at December 31, 2014. Interest Rate Swaps We use an interest rate risk management strategy that incorporates the use of derivative financial instruments to limit our exposure to interest rate risk. The swaps are “receive floating/pay fixed” instruments that define a fixed rate of interest on the economically hedged debt that the Company will pay, meaning we receive floating rate payments, which fluctuate based on LIBOR, from the counterparty and pay at a fixed rate to the counterparty, the result of which is to convert the interest rate of a portion of our floating rate debt into fixed rate debt, or to limit the variability of interest related payments caused by changes in LIBOR. At December 31, 2015, interest rate swaps of $190.0 million remained outstanding. The remaining aggregate notional amount of $190.0 million in interest rate swaps will terminate on September 30, 2016. All derivative instruments are recognized on the balance sheet on a gross basis at fair value. The fair value of the interest rate swaps is recorded in the Company’s consolidated balance sheets, either in Other current liabilities and Other long-term liabilities or Prepaids and other current assets and Other long-term assets, depending on the changes in the fair value of the swap and the payments or receipts expected within the next 12 months, with an offsetting adjustment reported as Interest expense in the consolidated statements of operations. At December 31, 2015 and December 31, 2014, $1.1 million and $1.4 million, respectively, was included in Other current liabilities in the consolidated balance sheets based on the fair value of the derivative instruments and the amounts expected to be settled within the next 12 months. At December 31, 2014, $0.8 million was included in Other long-term liabilities in the consolidated balance sheets based on the fair value of the derivative instruments. Although all our derivative instruments are subject to master netting arrangements, no amounts have been netted against the gross liabilities previously detailed and no collateral has been posted with counterparties. During the year-ended December 31, 2015, the liability related to the swaps decreased by $1.1 million due to $1.4 million of swap settlements and a $0.3 million increase in the change in fair value. During the year-ended December 31, 2015, the Company recorded losses of approximately $0.3 million within Interest expense due to changes in fair value of derivative instruments. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge related to foreign currency exposure. We previously designated our interest rate swaps as a cash flow hedge; however, the interest rate swaps were de-designated as hedges in the second quarter of 2013. Credit risk occurs when a counterparty to a derivative instrument fails to perform according to the terms of the agreement. Derivative instruments expose the Company to credit risk and could result in material changes from period to period. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. In addition, at least quarterly, the Company evaluates its exposure to counterparties who have experienced or may likely experience significant threats to their ability to perform according to the terms of the derivative agreements to which we are a party. We have completed this review of the financial strength of the counterparties to our interest rate swaps using publicly available information, as well as qualitative inputs, as of December 31, 2015. Based on this review, we do not believe there is a significant counterparty credit risk associated with these derivative instruments. However, no assurances can be provided regarding our potential exposure to counterparty credit risk in the future. 118
Other Debt Certain partnerships included in the Company’s consolidated financial statements have loans with financial institutions and other parties, included above in notes payable to banks and others. These loans mature at various dates through 2030 and accrue interest at fixed and variable rates typically ranging from 2.2% to 10.0%. NOTE 10 — NONCONTROLLING INTERESTS The following table shows the breakout of net loss attributable to Surgical Care Affiliates between continuing operations and discontinued operations: YEAR-ENDED DECEMBER 31, 2015
Net income (loss) from continuing operations, net of tax, attributable to Surgical Care Affiliates ................................................................................... $ Net loss from discontinued operations, net of tax, attributable to Surgical Care Affiliates ................................................................................................. Net income (loss), net of tax, attributable to Surgical Care Affiliates .............. $
116,105
YEAR-ENDED DECEMBER 31, 2014
$
(784) 115,321 $
41,335
YEAR-ENDED DECEMBER 31, 2013
$
(42,014)
(9,355) 31,980 $
(9,330) (51,344)
The following table shows the effects of changes to Surgical Care Affiliates’ ownership interest in its subsidiaries on Surgical Care Affiliates’ equity: YEAR-ENDED DECEMBER 31, 2015
Net income (loss) attributable to Surgical Care Affiliates ................................ $ (Decrease) increase in equity due to sales to noncontrolling interests ............. (Decrease) increase in equity due to purchases from noncontrolling interests .... Change from net loss attributable to Surgical Care Affiliates and transfers to/from noncontrolling interests .................................................................... $
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
115,321 $ (2,050) (1,214)
31,980 $ (1,121) 798
(51,344) 2,056 (1,394)
112,057
31,657
(50,682)
$
$
Certain of the Company’s noncontrolling interests have industry-specific redemption features whereby the Company could be obligated, under the terms of certain of its operating subsidiaries’ partnership and operating agreements, to purchase some or all of the noncontrolling interests of the consolidated subsidiaries. As a result, these noncontrolling interests are not included as part of the Company’s equity and are carried as Noncontrolling interests-redeemable on the Company’s consolidated balance sheets. The activity relating to the Company’s noncontrolling interests — redeemable is summarized below: YEAR-ENDED DECEMBER 31, 2015
Balance at beginning of period ......................................................................... $ Net income attributable to noncontrolling interests-redeemable ................. Net change in equity related to amendments in agreements with noncontrolling interests.............................................................................. Net change related to purchase of ownership interests ................................ Contributions from noncontrolling interests ................................................ Change in distribution accrual ..................................................................... Distributions to noncontrolling interests-redeemable .................................. Balance at end of period.................................................................................... $
15,444 28,504
YEAR-ENDED DECEMBER 31, 2014
$
504 2,095 — 311 (24,869) 21,989 $
21,902 22,605
YEAR-ENDED DECEMBER 31, 2013
$
— (4,150) — (1,300) (23,613) 15,444 $
21,709 24,138 (1,050) 581 1,622 (433) (24,665) 21,902
NOTE 11 — FAIR VALUE We follow the provisions of the authoritative guidance for fair value measurements, which address how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP.
119
The fair value of an asset or liability 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. As a basis for considering assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: y Level 1 — Observable inputs such as quoted prices in active markets; y Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and y Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Assets and liabilities measured at fair value are based on one or more of three valuation techniques, as follows: y Market approach — Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; y Cost approach — Amount that would be required to replace the service capacity of an asset (i.e., replacement cost); and y Income approach — Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing models and lattice models). Disclosures for Recurring Measurements Interest Rate Swaps On a recurring basis, we measure our interest rate swaps at fair value. The fair value of our interest rate swaps is a Level 2 measurement derived from models based upon well recognized financial principles and reasonable estimates about relevant future market conditions and calculations of the present value of future cash flows, discounted using market rates of interest. Further, included in the fair value is approximately $0.1 million related to non-performance risk associated with the interest rate swaps at each of December 31, 2015 and December 31, 2014. The fair values of our liabilities that are measured on a recurring basis are as follows (in millions): December 31, 2015 Fair Value Measurements Using
Level 1
Liabilities Other current liabilities ........................................................ $ Other long-term liabilities .................................................... Total liabilities ................................................................ $
Level 2
— — —
$
1.1 — 1.1
$
Total Liabilities at Fair Value
Level 3
$ $ $
— — —
$ $
December 31, 2014 Fair Value Measurements Using Level 1
Liabilities Other current liabilities ........................................................... $ Other long-term liabilities....................................................... Total liabilities .................................................................. $ (1)
Level 2
— $ — — $
1.4 $ 0.8 $ 2.2 $
Level 3
— $ — — $
Valuation Technique1
1.1 — 1.1
Total Liabilities at Fair Value
I I
Valuation Technique1
1.4 0.8 2.2
As discussed above, the authoritative guidance identifies three valuation techniques: market approach (M), cost approach (C), and income approach (I).
Disclosures for Nonrecurring Measurements Where applicable, on a nonrecurring basis, we measure property and equipment, goodwill, other intangible assets, investments in nonconsolidated affiliates and assets and liabilities of discontinued operations at fair value. The fair values of our property and equipment and other intangible assets are determined using discounted cash flows and significant unobservable inputs. The fair value of our investments in nonconsolidated affiliates is determined using discounted cash flows or earnings, or market multiples derived from a set of comparables. The fair value of our assets and liabilities of discontinued operations is determined using discounted cash flows and significant unobservable inputs unless there is an offer to purchase such assets and liabilities, which would be the basis for determining fair value. The fair value of our goodwill is determined using discounted cash flows, and, when available and as 120
I I
appropriate, we use comparative market multiples to corroborate discounted cash flow results. Goodwill is tested for impairment as of October 1 of each year, absent any interim impairment indicators. During 2015, we recorded $5.2 million of impairment to our investments in nonconsolidated affiliates due to the decline of future cash flows of such nonconsolidated affiliates that we judged to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates in our consolidated statement of operations. The investments in nonconsolidated affiliates measured at fair value on a nonrecurring basis was as follows (in millions):
December 31, 2015
Investment in nonconsolidated affiliates ........................... $
Net Carrying Value as of:
Fair Value Measurements Using Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3)
5.5
—
—
$
5.5
Total Losses
$
5.2
During 2013, we recorded $4.6 million of impairment to our investments in a nonconsolidated affiliates due to the decline of future cash flows of such nonconsolidated affiliates that we judged to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates. The investment in nonconsolidated affiliates measured at fair value on a nonrecurring basis was as follows (in millions):
December 31, 2013
Investment in nonconsolidated affiliates ........................... $
Net Carrying Value as of:
Fair Value Measurements Using Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3)
6.4
—
—
$
6.4
Total Losses Year-ended:
$
4.6
Also during 2013, we recorded an impairment charge of $1.5 million during 2013 for an investment in a nonconsolidated affiliate. In conjunction with the deconsolidation of this affiliate (as described in Note 2), we adjusted the investment to fair value. The fair value of the investment in the nonconsolidated affiliate was determined based on the estimated fair value using valuations techniques that included recent market transactions. The investment in nonconsolidated affiliate measured at fair value on a nonrecurring basis was as follows (in millions):
June 30, 2013
Investment in nonconsolidated affiliate ............................. $
Net Carrying Value as of:
Quoted Prices in Active Markets for Identical Assets (Level 1)
2.9
—
Significant Other Observable Inputs (Level 2)
—
Significant Unobservable Inputs (Level 3)
$
2.9
Total Losses Year-ended:
$
1.5
The inputs used by the Company in estimating the value of Level 3 Investment in nonconsolidated affiliates above may include the market multiple of EBITDA, weighted average cost of capital (“WACC”), revenue growth rates and exit price. Assumptions used by the Company due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s results of operations. The following table includes information regarding the significant unobservable input used in the estimation of Level 3 fair value measurement (in millions). Level 3 Assets as of December 31, 2015
Level 3 Investment in nonconsolidated affiliates
Market Approach ....................................................................................... $
5.5
Significant Unobservable Input
Multiple of EBITDA
Range of Inputs
7.0x Multiple
Level 3 Assets as of Level 3 Investment in nonconsolidated affiliates
December 31, 2013
Income Approach .......................................................................................
$
121
6.4
Significant Unobservable Inputs
Range of Inputs
WACC Revenue growth rates
11.4% - 15% 0.0% - 3.0%
Level 3 Assets as of Level 3 Investment in nonconsolidated affiliate
Market Approach ....................................................................................... $ (a)
Significant Unobservable Input
June 30, 2013
Range of Inputs
Exit price(a) $
2.9
2.9
The exit price was determined using the amount stated in a firm offer letter for the investment.
Impairment charges of $0.6 million were recorded during the years-ended December 31, 2015 and 2014 for intangible and longlived assets. These impairments are recorded in Impairment of intangible and long-lived assets in the Company’s consolidated statements of operations. Also, an impairment charge of $0.7 million was recorded during the year-ended December 31, 2014 for intangible and long-lived assets. This impairment is recorded in Loss from discontinued operations, net of income tax expense in the Company’s consolidated statements of operations. A declining trend of earnings from operations at a facility and increased local competition resulted in the impairment charge recorded in 2014, as management determined its intent to sell or close the impacted facility. No impairment charges for intangible and long-lived assets were recorded during the year-ended December 31, 2013. The fair value of the impaired long-lived assets was determined based on the assets’ estimated fair value using expected proceeds from the sale of the facility. The following table presents the carrying amounts and estimated fair values of our financial instruments that are classified as longterm liabilities in our consolidated balance sheets (in thousands). The carrying value equals fair value for our financial instruments that are classified as current in our consolidated balance sheets. The carrying amounts of a portion of our long-term debt approximate fair value due to various characteristics of those issues, including short-term maturities, call features and rates that are reflective of current market rates. As the inputs are not observable, the fair values are in level 3 of the fair value hierarchy. For our long-term debt without such characteristics, we determine the fair market value by using quoted market prices, when available, or discounted cash flows to calculate their fair values. The fair values utilize inputs other than quoted prices in active markets, although the inputs are observable either directly or indirectly; accordingly, the fair values are in level 2 of the fair value hierarchy. As of December 31, 2015 Carrying Estimated Amount Fair Value
Interest rate swap agreements (includes short-term component) ........................................................................... $ Long-term debt: New Credit Facilities debt payable: Advances under $250 million New Revolving Credit Facility (excluding letters of credit issued thereunder) ... $ New Term Loan due 2022 ................................................. Old Credit Facilities debt payable: Advances under $132.3 million Class B Revolving Credit Facility ................................................................... Class B Term Loan due 2017 ............................................. Class C Term Loan due 2018 ............................................. 6.00% Senior Notes due 2023 ................................................. Notes payable to banks and others .......................................... Financial commitments ........................................................... $
As of December 31, 2014 Carrying Estimated Amount Fair Value
1,085
$
1,085
$
2,192
$
2,192
15,000 446,625
$
14,803 440,763
$
— —
$
— —
— — — 250,000 99,707 —
$
— — — 243,125 99,707 —
$
— 212,224 384,150 — 64,634 —
$
— 206,786 371,905 — 64,634 —
NOTE 12 — EQUITY-BASED COMPENSATION We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock as well as RSUs to key teammates, directors, service providers, consultants and affiliates. We also made stand-alone grants (not under any Plan) of RSUs to an executive officer and three non-employee directors prior to our initial public offering. Option awards are generally granted with an exercise price equal to at least the fair market value of the underlying share at the date of grant. Vesting in the option awards varies based upon time, attainment of certain performance conditions, or upon the occurrence of a Liquidity Event (as defined in the applicable Plan) in which the TPG Funds and/or any of its affiliates achieves a minimum cash return on its original investment. All existing RSU awards vest over time.
122
At December 31, 2015, 3,024,751 stock-based awards were outstanding (of which 2,944,351 are awards under the Plans) and 1,006,107 shares were available for future equity grants under the Plans. In conjunction with our conversion to a Delaware corporation on October 30, 2013 (see Note 1), every 10.25 outstanding membership units of ASC Acquisition LLC were converted into one share of common stock of Surgical Care Affiliates, Inc., and options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates, Inc. at a ratio of 10.25 membership units of ASC Acquisition LLC underlying such options to each one share of common stock of Surgical Care Affiliates, Inc. underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. In addition, every 10.25 outstanding restricted equity units of ASC Acquisition LLC were converted into one restricted stock unit of Surgical Care Affiliates, Inc. All information in this footnote is presented giving effect to the conversion. On September 16, 2013, our Board of Directors accelerated the vesting of all performance-based options. This modification was a “probable-to-probable” modification under the authoritative guidance. As a result of the acceleration, the Company recognized $0.8 million of additional stock-based compensation expense in the year-ended December 31, 2013. The additional expense represents the incremental fair value as a result of the modification. As a result of the acceleration, no unvested performance-based options existed at December 31, 2013. Also on September 16, 2013, our Board of Directors resolved to pay a cash bonus of $2.46 per vested option and adjust downward the exercise price of all unvested options by approximately $2.46 per unvested option. As such, the Company recorded additional compensation expense of $4.6 million during the year-ended December 31, 2013. We have recorded stock-based compensation expense over the remaining vesting periods related to the adjustment to unvested options. This modification was a “probable-toprobable” modification under the authoritative guidance. We will record $1.5 million of additional stock-based compensation expense over remaining vesting periods of the modified options. Information pertaining to equity-based compensation was as follows (in thousands): YEAR-ENDED YEAR-ENDED YEAR-ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2015 2014 2013
Equity-based compensation expense ...................................... $ Cash received from option exercises ......................................
8,519 $ 6,652
4,126 $ 3,887
2,724 453
As of December 31, 2015, the Company had total unrecognized compensation cost of approximately $24,124 related to non-vested awards, which the Company expects to recognize through 2019 and over a weighted-average period of 2.84 years.
123
Option Awards A summary of option activity under the Plans are presented below:
UNITS
WEIGHTEDAVERAGE EXERCISE
AVERAGE REMAINING CONTRACTUAL
AGGREGATE INTRINSIC
PRICE
LIFE (YEARS)
VALUE
(IN 000’S )
Outstanding, December 31, 2012 ...................................................... Granted ........................................................................................ Exercised ..................................................................................... Forfeitures.................................................................................... Expirations ................................................................................... Outstanding, December 31, 2013 ...................................................... Granted ........................................................................................ Exercised ..................................................................................... Forfeitures.................................................................................... Expirations ................................................................................... Outstanding, December 31, 2014 ...................................................... Granted ........................................................................................ Exercised ..................................................................................... Forfeitures.................................................................................... Expirations ................................................................................... Outstanding, December 31, 2015 ...................................................... Exercisable, December 31, 2015 .......................................................
2,485 612 (41) (49) — 3,007 417 (633) (74) (2) 2,715 352 (611) (71) (2) 2,383 1,385
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
10.52 13.05 12.09 11.51 n/a 11.42 29.46 10.93 16.16 14.05 14.23 35.94 11.08 24.04 10.25 17.97 12.68
5.6 $
56,779
5.57 $
70,117
5.81 $
52,488
6.38 $ 5.02
52,226 37,689
The weighted average grant-date fair value per option of all options granted during the year-ended December 31, 2015 was $14.44. The weighted average grant-date fair value per option of all options granted during the year-ended December 31, 2014 was $11.88. The weighted average grant-date fair value per option of all options granted during the year-ended December 31, 2013 was $6.68. The fair value of each option award is estimated on the date of grant utilizing two methodologies. For time-based options, the Company estimates the fair value of the grant utilizing the Black-Scholes-Merton model that utilizes the assumptions shown in the table below. Expected volatilities are based on observed historical trends in the industry and other factors. The expected term of the options granted represents the period of time that options granted are expected to be outstanding. As historically the Company had limited activity surrounding its options, the expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. The risk-free interest rate was based on the time horizon of the expected term and is based on the U.S. Treasury yield curve in effect at the time of the grant. YEAR-ENDED
YEAR-ENDED
YEAR-ENDED
DECEMBER 31, 2015 DECEMBER 31, 2014 DECEMBER 31, 2013
Expected volatility .............................................. Risk-free interest rate.......................................... Expected term (years) ......................................... Dividend yield ....................................................
25% - 40% 1.0% -1.88% 6.25 0.00%
40% 1.0% -1.35% 6.25 0.00%
35% -40% 1.0% -1.35% 6.25 0.00%
The fair value of the performance-based options is based on the application of a Monte Carlo simulation model. Expected volatilities are based on observed historical trends in the industry and other factors. The expected term of the options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate was based on the time horizon of the expected term and is based on the U.S. Treasury yield curve in effect at the time of the grant. On September 16, 2013, our Board of Directors accelerated the vesting of all performancebased options outstanding at that time. This modification was a “probable-to-probable” modification under the authoritative guidance. As a result of the acceleration, the Company recognized $0.8 million of additional stock-based compensation expense. The additional expense represents the incremental fair value as a result of the modification. For the expected volatility assumption, an emphasis was placed on identifying comparable public companies that operate ambulatory surgery centers. The Company utilized comparable public company volatility rates to estimate the expected volatility. The Company used the exponentially weighted moving average volatility of the public companies identified, adjusted for changes in the capital structure (as described by ASC 718), for the derived expected term for the time-based options. 124
RSU Awards A summary of activity associated with RSU awards is presented below: GRANT DATE FAIR VALUE
UNITS (IN 000’S )
Nonvested and Nonsettled RSUs at December 31, 2012........................................ Granted ............................................................................................................. Vested and Released ......................................................................................... Vested and Deferred .......................................................................................... Forfeited ............................................................................................................ Nonvested and Nonsettled RSUs at December 31, 2013........................................ Granted .............................................................................................................. Vested and Released ......................................................................................... Vested and Deferred ......................................................................................... Forfeited ............................................................................................................ Nonvested and Nonsettled RSUs at December 31, 2014........................................ Granted ............................................................................................................. Vested and Released ......................................................................................... Vested and Deferred ......................................................................................... Forfeited ............................................................................................................ Nonvested and Nonsettled RSUs at December 31, 2015........................................
20 77 — (17 ) — 80 318 (17 ) (7 ) (7 ) 367 315 (86 ) (9 ) (33 ) 554
PER UNIT
$ $
$ $ $
$ $ $
$
GRANT DATE FAIR VALUE
UNITS
74 77 — — 151 318 (17 ) (7 ) 445 315 (86 ) (33 ) 641
(IN 000’S )
Total RSUs at December 31, 2012 ......................................................................... Granted ............................................................................................................. Vested and Released ......................................................................................... Forfeited ............................................................................................................ Total RSUs at December 31, 2013 ......................................................................... Granted ............................................................................................................. Vested and Released ......................................................................................... Forfeited ............................................................................................................ Total RSUs at December 31, 2014 ......................................................................... Granted ............................................................................................................. Vested and Released ......................................................................................... Forfeited ............................................................................................................ Total RSUs at December 31, 2015 .........................................................................
11.64 24.58 n/a n/a n/a 24.58 29.55 25.47 n/a 31.24 28.58 36.12 28.67 n/a 30.51 32.95
PER UNIT
$ $
$ $ $ $ $ $ $ $ $
10.63 24.58 n/a n/a 17.71 29.55 25.47 31.24 25.67 36.12 28.67 30.51 30.16
NOTE 13 — EMPLOYEE BENEFIT PLANS SCA has certain employee benefit plans, including the following: y Company sponsored healthcare plans, including coverage for medical and dental benefits; y The Retirement Investment Plan, which is a qualified 401(k) savings plan; y The Senior Management Bonus Program.; and y The Teammate Stock Purchase Plan. Substantially all teammates are eligible to enroll in the SCA’s sponsored healthcare plans, including coverage for medical and dental benefits. Our primary healthcare plans are national plans administered by third-party administrators, for which we are selfinsured. The cost associated with these plans, net of amounts paid by teammates, was approximately $21.9 million, $23.3 million and $20.5 million for the years-ended December 31, 2015, 2014 and 2013, respectively. The Retirement Investment Plan is a qualified 401(k) savings plan. The plan allows eligible teammates to contribute up to 100% of their pay on a pre-tax basis into their individual retirement account in the plan, subject to the maximum annual limits set by the IRS. 125
SCA’s employer matching contribution is 50% of the first 4% of each participant’s elective deferrals. All contributions to the plan are in the form of cash. Substantially all teammates who are at least 21 years of age are eligible to participate in the plan. Employer contributions vest over a six-year service period. Participants are immediately fully vested in their own contributions. Employer contributions made to the Retirement Investment Plan approximated $3.4 million, $2.7 million and $2.9 million during the yearsended December 31, 2015, 2014 and 2013, respectively. SCA has a Senior Management Bonus Program designed to reward senior management for performance, based on a combination of corporate, regional and individual goals. The corporate goals are based upon the Company meeting a pre-determined financial goal. Similarly, regional goals, if any, are based upon a pre-determined set of financial goals for the applicable region. Individual goals are initially proposed by each participant in consultation with his or her immediate supervisor and, with respect to our executive officers, are then approved by our Compensation Committee. We recorded expense of approximately $13.6 million, $9.0 million and $8.5 million under the Senior Management Bonus Program for the years-ended December 31, 2015, 2014 and 2013, respectively. The Company’s Teammate Stock Purchase Plan (the "TSPP") enables eligible teammates to purchase shares of the Company’s common stock through payroll deductions or other permitted means. As determined by the Company’s Compensation Committee, the purchase price for shares offered under the TSPP ranges during any particular offering period from 85% to 100% of the closing price of the Company’s common stock on the purchase date at the end of such period. The Company recognizes the fair value of the discount associated with shares purchased in Salaries and benefits expense on the consolidated statements of operations. The Company’s Board of Directors has authorized 500,000 shares of the Company’s common stock to be issued under the TSPP. During the year-ended December 31, 2015, the Company issued 38,858 shares under the TSPP and received cash totaling $1.3 million. NOTE 14 — INCOME TAXES The Company is subject to U.S. federal, state and local income taxes. The Income from continuing operations before income tax expense is as follows: YEAR-ENDED DECEMBER 31, 2015
Income from continuing operations before income taxes ................................. $
189,631
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
$
$
175,943
76,248
The significant components of the (benefit) provision for income taxes related to continuing operations are as follows: YEAR-ENDED DECEMBER 31, 2015
Current: Federal ........................................................................................................ State and local............................................................................................. Total current expense ....................................................................................... Deferred: Federal ........................................................................................................ State and local............................................................................................. Total deferred (benefit) expense ...................................................................... Total income tax (benefit) expense related to continuing operations .........
$
$
— 1,408 1,408
YEAR-ENDED DECEMBER 31, 2014
$
(67,428) (18,758) (86,186) (84,778) $
YEAR-ENDED DECEMBER 31, 2013
(6) $ 846 840 6,916 1,683 8,599 9,439
$
200 610 810 9,217 2,293 11,510 12,320
Through the period ended June 30, 2015, the Company had a full valuation allowance recorded against its net deferred tax assets, except for the portion of its deferred tax differences related to goodwill, an asset considered to be an indefinite-lived intangible. The Company’s assessment of whether a full valuation allowance is appropriate includes review of operating performance, the scheduled reversal of temporary differences and our forecast of taxable income in future periods. Based on management’s review of these factors as of the third quarter 2015, we determined that there was sufficient positive evidence to support the release of a significant portion of the valuation allowance. This conclusion was reached in the third quarter as a result of the Company achieving three year cumulative pre-tax earnings for consecutive reporting periods. Additionally, the Company maintains consistent projections which indicate that it is more likely than not that sufficient taxable income will be generated to utilize a significant portion of the Company’s deferred tax assets in future years. The $84.8 million income tax benefit for the year-ended December 31, 2015 includes the third quarter release of the valuation allowance that was recorded through the period ended June 30, 2015, net of $23.9 million of valuation allowance retained and tax expense recorded for current year earnings. The $23.9 million valuation allowance retained is attributable to deferred tax assets 126
recorded for capital loss carryforwards not anticipated to be utilized prior to expiration. We continue to closely monitor actual and forecasted earnings and, if there is a change in management’s assessment of the amount of deferred income tax assets that is realizable, adjustments to the valuation allowance will be made in future periods. The provision for income tax expense for the year-ended December 31, 2014 was reflective of a full valuation allowance. Accordingly, the majority of tax expense for that period was due to the amortization of goodwill that is not amortized for book purposes, as well as write-offs of book and tax goodwill. A reconciliation of differences between the federal income tax at statutory rates and our actual income tax expense on income from continuing operations, which include federal, state and other income taxes, is as follows: YEAR-ENDED DECEMBER 31, 2015
Tax expense at statutory rate ............................................................................ Increase (decrease) in tax rate resulting from: Federal income tax assumed by noncontrolling interests ........................... Change in valuation allowance ................................................................... State income taxes, net of federal tax benefit ............................................. Non-deductible stock issuance costs........................................................... Other, net.......................................................................................................... Effective tax rate ..............................................................................................
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
35.0%
35.0 %
35.0%
(29.2) (51.9) 1.3 — 0.1 (44.7)%
(24.9 ) (6.6 ) 1.8 — 0.1 5.4%
(48.6) 27.4 (1.5) 3.7 0.2 16.2%
The income tax expense at the statutory rate is the expected income tax expense resulting from the income from continuing operations. Income tax expense, subsequent to the removal of tax expense related to noncontrolling interest income, varies from the statutory rate for the year-ended December 31, 2015 due to the release of a significant portion of the valuation allowance recorded against net deferred tax assets. Income tax expense varies for the year-ended December 31, 2014 and 2013, due to the company recording a full valuation allowance against its net deferred tax assets, whereby tax expense was attributable to the tax amortization of goodwill, an indefinite-lived intangible, as well as write-offs of book and tax goodwill. Deferred income taxes recognize the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes and the impact of available net operating loss (“NOL”) carryforwards. The significant components of the Company’s deferred tax assets and liabilities are as follows: AS OF DECEMBER 31, 2015 2014
Deferred income tax assets: Net operating loss ......................................................................................................... Capital loss ................................................................................................................... Accrued liabilities ........................................................................................................ Goodwill....................................................................................................................... Other ............................................................................................................................ Total deferred income tax assets .................................................................................. Deferred income tax liabilities: Investment in partnerships ........................................................................................... Valuation allowance ..................................................................................................... Other ............................................................................................................................ Total deferred income tax liabilities ............................................................................. Total deferred income tax liability .......................................................................................... $
89,374 24,496 9,064 4,296 3,356 130,586
106,504 33,524 6,599 698 2,054 149,379
(148,442 ) (23,917 ) (2,566 ) (174,925 ) (44,339)
(114,438) (163,528) (2,433) (280,399) (131,020)
$
Presentation of the Company’s deferred tax items has changed subsequent to the filing of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This standard requires the presentation of deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent on a classified balance sheet. The current guidance requires entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and we have chosen to adopt this ASU as of December 31, 2015. With the early adoption of ASU 2015-17, the Company has revised its December 31, 2014 balance sheet, reflecting the $0.8 million current DTL and $130.2 million non-current DTL, as a $131.0 million non-current DTL. Also effective December 31, 2015, the Company has chosen to reflect in its disclosure of the components of deferred tax assets and liabilities, the 127
deferred tax liability related to investments in partnerships as a single line item. It is the company’s position that, subsequent to the September 30, 2015 release of the tax valuation allowance, this presentation more appropriately reflects the Company’s tax position with respect to its largest deferred tax item. For the years-ended December 31, 2015 and December 31, 2014, the net decreases in our valuation allowance were $139.6 million and $2.6 million, respectively. The decrease in our valuation allowance in 2015 relates primarily to the release of a substantial portion of the allowance, due to our assessment that there is sufficient positive evidence that we will realize our deferred tax assets in the future. The decrease in 2015 also included the impact of the expiration of capital losses as of December 31, 2015. The decrease in the valuation allowance in 2014 relates primarily to the reduction of the deferred tax asset attributable to NOLs. For the year-ended December 31, 2013, the net $14.3 million increase in the valuation relates primarily to the increase in the deferred tax asset attributable to NOLs and capital losses. The Company anticipates that the valuation allowance will decrease by approximately $4.5 million in the next 12 months due to the expiration of capital losses. Changes to the Company’s deferred tax valuation allowance are as follows: YEAR-ENDED DECEMBER 31, 2015
Balance at beginning of period ..................................................... $ Additions: Charged to costs and expenses .............................. Deductions .............................................................................. Balance at end of period ............................................................... $
YEAR-ENDED DECEMBER 31, 2014
163,528 $ — (139,611) 23,917 $
YEAR-ENDED DECEMBER 31, 2013
166,145 $ — (2,617 ) 163,528 $
151,819 14,326 — 166,145
At December 31, 2015 we had federal NOLs of $77.0 million ($223.5 million on a gross basis) and state NOLs of $12.4 million. The federal NOLs expire in various amounts at varying times beginning in 2027. During 2015, the Company released the valuation allowance previously maintained against the deferred tax asset attributable to NOLs. The release was based on the Company’s forecast of taxable income in future periods sufficient to utilize the NOLs, as well as the assessment that the limitations imposed by Internal Revenue Code Section 382 should not restrict our ability to use the federal NOLs before they expire. The deferred tax asset for the NOL carryfoward as of December 31, 2015 excludes $9.4 million for loss carryforwards resulting from excess tax benefits attributable to share-based awards, the tax benefits of which when recognized, will be accounted for as a credit to additional paid-in capital when they reduce income taxes payable. The Company had no tax liability for uncertain tax positions as of December 31, 2015 or December 31, 2014. Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. Interest recorded as part of our income tax provision during 2015, 2014, and 2013 was not material. Accrued interest income related to income taxes as of December 31, 2015 and 2014 was not material. NOTE 15 — ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS We have closed or sold certain facilities that qualify for reporting as discontinued operations. The assets and liabilities associated with these facilities are reflected in the accompanying consolidated balance sheets as of December 31, 2015 and December 31, 2014 as Current assets related to discontinued operations, Assets related to discontinued operations, Current liabilities related to discontinued operations and Liabilities related to discontinued operations. Additionally, the accompanying consolidated statements of operations and cash flows reflect the loss, net of income tax expense, and the net cash (used in) provided by operating, investing and financing activities, respectively, associated with these facilities as discontinued operations. The operating results of discontinued operations are as follows: YEAR-ENDED YEAR-ENDED YEAR-ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2015 2014 2013
Net operating revenues ........................................................ $ Costs and expenses .............................................................. Gain (loss) on sale of investments ....................................... Impairments ......................................................................... Loss from discontinued operations ...................................... Income tax benefit (expense) ............................................... Net loss from discontinued operations................................. $ 128
4,029 $ (7,143) 1,891 — (1,223) 439 (784) $
15,507 $ (18,690 ) 294 (700 ) (3,589 ) (5,766 ) (9,355) $
20,449 (23,349) (2,493) — (5,393) (3,937) (9,330)
The assets and liabilities related to discontinued operations consist of the following:
Assets Current assets Accounts receivable, net ........................................................................... Other current assets .................................................................................. Total current assets ................................................................................... Property and equipment, net ..................................................................... Other long term assets .............................................................................. Total assets .......................................................................................... Liabilities Current liabilities Accounts payable and other current liabilities .......................................... Total current liabilities.............................................................................. Other long-term liabilities......................................................................... Total liabilities ....................................................................................
DECEMBER 31, 2015
DECEMBER 31, 2014
$
— 19 19 59 — 78
$
368 368 28 396
$
$
$
$
$
$
1,788 171 1,959 9,153 191 11,303
2,280 2,280 683 2,963
We have one property that qualifies for reporting as held for sale that does not also qualify for reporting as discontinued operations. Management has committed to selling this property, and an active program to locate a buyer is underway. We expect that the sale of this property will be completed within twelve months. The assets and liabilities associated with this property are reflected in the accompanying consolidated balance sheets as of December 31, 2015 as Assets held for sale and Current liabilities held for sale. There were no assets or liabilities held for sale that were not also discontinued operations as of December 31, 2014. Assets and liabilities held for sale consisted of the following: DECEMBER 31, 2015
Assets Current assets Accounts receivable, net and other current assets........................................................... Total current assets ......................................................................................................... Property and equipment, net ........................................................................................... Other long term assets .................................................................................................... Total assets ................................................................................................................ Liabilities Current liabilities Accounts payable and other current liabilities ................................................................ Total current liabilities.................................................................................................... Other long-term liabilities............................................................................................... Total liabilities ..........................................................................................................
$
$
$
$
— — 408 — 408
26 26 — 26
NOTE 16 — RELATED PARTY TRANSACTIONS TPG Capital BD, LLC, an affiliate of TPG, served as an arranger in connection with the New Credit Agreement and was paid an arrangement fee in the amount of approximately $0.2 million during the three-months ended March 31, 2015. TPG Capital BD, LLC also served as an initial purchaser in connection with our offering of the Senior Notes, which resulted in an aggregate gross spread to TPG Capital BD, LLC of approximately $0.2 million. In addition, TPG Capital BD, LLC participated in the underwriting of the shares of our common stock that were offered and sold by the Selling Stockholders in March 2015 on the same terms as other underwriters in the offering, which resulted in an aggregate underwriting discount to TPG Capital BD, LLC of approximately $0.4 million that was paid by the Selling Stockholders. The Company paid management fees to TPG Capital Management, L.P., an affiliate of TPG Global LLC and its affiliates (“TPG”), our majority owner, of $1.5 million during the year-ended December 31, 2013. Following the completion of our initial public offering (“IPO”) (see Note 1), the Company no longer pays management fees to TPG, and the related management services agreement has been terminated. 129
In conjunction with the completion of our IPO, TPG received a fee payable under our management services agreement in an amount equal to $8.0 million. This fee was paid during the fourth quarter of 2013 and recorded in Other operating expenses in the accompanying consolidated statement of operations. Also in connection with the IPO, we entered into a registration rights agreement with the TPG Funds and certain members of our management and of our Board of Directors (the “Registration Rights Agreement”), which provides the TPG Funds with certain demand registration rights, including shelf registration rights, in respect of any shares of our common stock held by them, subject to certain conditions and limitations. The TPG Funds are entitled to an unlimited number of demand registrations, upon written notice. In connection with the entry into the Amended Credit Agreement related to the Old Credit Facilities on May 8, 2013, TPG Capital BD, LLC, an affiliate of TPG, served as an arranger for purposes of the amendment and was paid an arrangement fee in the amount of $0.5 million during the year-ended December 31, 2013. In addition, TPG Capital BD, LLC participated as an underwriter underwriting the shares of our common stock in connection with our initial public offering of common stock and was paid an underwriting discount of approximately $0.7 million by us and the selling stockholders. Certain directors of the Company have received options to purchase shares of the Company under the Directors Plan as part of their compensation for service on the Company’s Board and for consulting services provided to the Company. Total expense recognized by the Company related to these options was immaterial for the years-ended December 31, 2015, 2014 and 2013. NOTE 17 — COMMITMENTS AND CONTINGENT LIABILITIES Legal Proceedings The Company provides services in a highly regulated industry and is subject to various legal actions and regulatory and other governmental and internal audits and investigations from time to time. As a result, we expect that various lawsuits, claims and legal and regulatory proceedings may be instituted or asserted against us, including, without limitation, employment-related claims and medical negligence claims. Additionally, governmental agencies often possess a great deal of discretion to assess a wide range of monetary penalties and fines. We record accruals for contingencies to the extent that we conclude that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. The outcome of any current or future litigation or governmental or internal investigations, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. Nevertheless, it is reasonably possible that any such penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position and cash flows and may affect our reputation. Risk Insurance Risk insurance for SCA and most of our facilities is provided through SCA’s risk insurance program. We insure our professional liability, general liability and workers’ compensation risks through commercial insurance plans placed with unrelated carriers. Provisions for these risks are based upon market driven premiums and actuarially determined estimates for incurred but not reported exposure under claims made policies. Provisions for losses within the policy deductibles represent the estimated ultimate net cost of all reported and unreported losses incurred through the consolidated balance sheet dates. Those estimates are subject to the effects of trends in loss severity and frequency. While we believe that the provisions for losses are adequate, we cannot be sure that the ultimate costs will not exceed our estimates. Reserves for incurred but not reported professional and general liability risks were approximately $7.8 million and $6.4 million at December 31, 2015 and December 31, 2014, and are included in Other long-term liabilities in the consolidated balance sheets. Expenses related to professional and general liability risks were $6.0 million, $4.3 million and $4.5 million for the years-ended December 31, 2015, 2014 and 2013, respectively, and are classified in Other operating expenses in our consolidated statements of operations. Expenses associated with workers’ compensation were $2.6 million, $2.0 million and $2.1 million for the years-ended December 31, 2015, 2014 and 2013, respectively, and are classified in Salaries and benefits in our consolidated statements of operations.
130
Leases We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates through 2034. We also lease certain buildings and equipment under capital leases expiring at various dates through 2033. Operating leases generally have 3 to 20 year terms with one or more renewal options and with terms to be negotiated at the time of renewal. NOTE 18 — SUBSEQUENT EVENTS Effective January 1, 2016, an indirect wholly-owned subsidiary of SCA purchased a 60.0% controlling interest in Southwest Surgery Center, LLC, which owns and operates an ASC in Mokena, Illinois (“Mokena ASC”), for total consideration of $30.0 million. This ASC is a consolidated facility. In addition, SCA also purchased, through another indirect wholly-owned subsidiary, Mokena ASC’s real estate from Southwest Surgery Center, LLC for $17.0 million. Effective January 21, 2016, an indirect wholly-owned subsidiary of SCA purchased a 51.0% controlling interest in Winchester Endoscopy, LLC, which owns and operates an ASC in Libertyville, Illinois, for total consideration of $15.3 million. This ASC is a consolidated facility. NOTE 19 — CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY Surgical Care Affiliates has no material assets or standalone operations other than its ownership in SCA and its subsidiaries. There are significant restrictions on the Surgical Care Affiliates’ ability to obtain funds from any of its subsidiaries through dividends, loans or advances. Accordingly, these condensed financial statements have been presented on a “Parent-only” basis. Under a Parent-only presentation, the Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting. These Parent-only financial statements should be read in conjunction with the Company’s Consolidated Financial Statements. The following tables present the financial position of Surgical Care Affiliates as of December 31, 2015 and 2014 and the results of its operations and cash flows for the years-ended December 31, 2015, 2014 and 2013.
Surgical Care Affiliates, Inc. Condensed Balance Sheets (In thousands) DECEMBER 31, DECEMBER 31, 2015 2014
Assets Cash and cash equivalents ...................................................... Due from SCA ........................................................................ Investment in SCA .................................................................. Total assets ........................................................................ Liabilities Advances under $250 million New Revolving Credit Facility (excluding letters of credit issued thereunder) ........ New Term Loan Facility due 2022 ......................................... Discount of New Term Loan due 2022 ................................... 6.00% Senior Notes due 2023 ................................................. Discount of Senior Notes due 2023 ........................................ Due to SCA ............................................................................. Total liabilities .................................................................. Equity Common stock ........................................................................ Additional paid in capital ........................................................ Contributed capital .................................................................. Accumulated deficit ................................................................ Total equity....................................................................... Total liabilities and equity............................................ 131
$
$
$
$
162 $ 706,126 382,261 1,088,549 $
162 — 243,339 243,501
15,000 $ 446,625 (1,372) 250,000 (3,965) — 706,288
— — — — — 162 162
397 442,678 — (60,814) 382,261 1,088,549 $
386 419,088 — (176,135 ) 243,339 243,501
Surgical Care Affiliates, Inc. Condensed Statements of Comprehensive Income (In thousands, except per share data) YEAR-ENDED YEAR-ENDED YEAR-ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2015 2014 2013
Equity in net income (loss) of SCA ................. Stock compensation expense ........................... Other expenses ................................................. Income (loss) before income taxes ............. Provision for income taxes............................... Net income (loss) ............................................. Equity in comprehensive income of SCA ........ Comprehensive income (loss) .......................... Basic net income (loss) per share ..................... Basic average shares outstanding ..................... Diluted net income (loss) per share.................. Diluted average shares outstanding..................
$
$ $ $
123,840 $ 8,519 — 115,321 — 115,321 — 115,321 $ 2.93 $ 39,360 2.83 $ 40,734
36,137 $ 4,126 31 31,980 — 31,980 — 31,980 $ 0.83 $ 38,477 0.80 $ 39,958
(48,620 ) 2,724 — (51,344 ) — (51,344 ) 8,327 (43,017) (1.62 ) 31,688 (1.62 ) 31,688
Surgical Care Affiliates, Inc. Condensed Statements of Cash Flows (In thousands) YEAR-ENDED DECEMBER 31, 2015
Net income (loss) ................................................................................. $ Adjustment to reconcile net loss to net cash from operating activities Equity in net (income) loss of SCA ................................................ Stock compensation expense .......................................................... Net cash from operating activities ........................................................ Investing activities: Increase in due from SCA .............................................................. Investment in SCA .......................................................................... Distributions from SCA .................................................................. Net cash used in investing activities ..................................................... Financing activities: Borrowings under line of credit arrangements and long-term debt, net of issuance costs ........................................................................ Principal payments on line of credit arrangements and long-term debt ................................................................................................. Proceeds from issuance of shares pursuant to IPO ......................... Distributions to unitholders............................................................. Net cash provided by financing activities............................................. Net change in cash and cash equivalents .............................................. Cash and cash equivalents at beginning of period ................................ Cash and cash equivalents at end of period .......................................... $ Supplemental schedule of noncash investing and financing activities IPO fees paid by SCA .......................................................................... $
132
115,321
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
$
$
31,980
(51,344)
(123,840) 8,519 —
(36,137 ) 4,126 (31 )
48,620 2,724 —
(706,126) — — (706,126)
— (16,000 ) — (16,000 )
— (160,793) 74,900 (85,893)
709,500
—
(3,374) — — 706,126 — 162 162 $
—
$
—
— — — (16,031 ) 16,193 162 $
176,786 (74,900) 101,886 15,993 200 16,193
—
4,909
$
Quarterly Statement of Earnings Data (Unaudited) The following table presents certain quarterly statement of earnings data for the years ended December 31, 2015 and 2014. The quarterly statement of earnings data set forth below was derived from our unaudited financial statements and includes all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation thereof. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods. 2015 Q1
Net operating revenues............................... Income from continuing operations before income taxes ............................................. Income from continuing operations ........... Gain (loss) from discontinued operations, net of income tax ...................................... Net income ................................................. Less: Net income attributable to noncontrolling interests ............................ Net income (loss) attributable to Surgical Care Affiliates .......................................... Basic net earnings (loss) from continuing operations per common share................... Basic net income (loss) per common share .. Diluted net earnings (loss) from continuing operations per common share ... Diluted net earnings (loss) per common share .........................................................
Q2
2014 Q3
Q4 Q1 Q2 (In thousands, except per share data)
Q3
Q4
$ 234,091 $253,686 $257,787 $305,926 $192,651 $ 208,720 $216,196 $247,169 26,568 22,755
47,949 43,682
(1,470) 21,285
(172) 983 43,510 157,069
(30,451) $ (9,166) $
(38,950)
51,470 156,086
(38,430)
63,644 51,886
24,756 23,007
38,562 37,197
46,341 43,511
66,284 62,789
(125) 51,761
163 23,170
(2,716 ) 34,481
(5,052) 38,459
(1,750) 61,039
(50,473)
(22,936 )
(28,452 )
(30,627)
(43,154)
4,560 $ 118,639 $
1,288 $
234 $
6,029 $
7,832 $ 17,885
$ $
(0.20) $ (0.24) $
0.12 $ 0.12 $
2.97 $ 3.00 $
0.04 $ 0.03 $
0.00 $ 0.01 $
0.23 $ 0.16 $
0.33 $ 0.20 $
0.51 0.46
$
(0.20) $
0.11 $
2.88 $
0.03 $
0.00 $
0.22 $
0.32 $
0.49
$
(0.24) $
0.11 $
2.90 $
0.03 $
0.01 $
0.15 $
0.20 $
0.45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2015, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Annual Report on Internal Control Over Financial Reporting Management of Surgical Care Affiliates, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly 133
reflect the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of the inherent limitations in any internal control, no matter how well designed, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2015 based on the framework set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management concluded that, as of December 31, 2015, the Company’s internal control over financial reporting was effective based on the specified criteria. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2015 excluded all 2015 business combinations because these entities were acquired by the Company in purchase business combinations during 2015. The 2015 business combinations, in the aggregate, have total assets and net operating revenues representing 5.2% and 7.7%, respectively, of the related consolidated financial statement amounts of the Company as of and for the year ended December 31, 2015. The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears herein. Changes in Internal Control Over Financial Reporting During the quarter ended December 31, 2015, there were no changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Not applicable. PART III We expect to file a definitive proxy statement relating to our 2016 Annual Meeting of Stockholders (the “2016 Proxy Statement”) with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of our most recent fiscal year. Accordingly, certain information required by Part III of this Annual Report on Form 10-K has been omitted under General Instruction G(3) to Form 10-K. Only the information from the 2016 Proxy Statement that specifically addresses disclosure requirements of Items 10-14 below is incorporated by reference. Item 10. Directors, Executive Officers and Corporate Governance We have adopted a document known as the Standards of Legal and Regulatory Conduct that is applicable to all of our directors and teammates (the “Code of Business Conduct”). We have also adopted a Code of Ethical Conduct for Financial Leaders that applies to our Chief Executive Officer, Chief Financial Officer and other senior financial officers at the corporate level (the “Senior Officers Code”). Both the Code of Business Conduct and the Senior Officers Code are available on our website at www.scasurgery.com in the “Investors” section under “Corporate Governance.” Any future changes or amendments to the Code of Business Conduct or the Senior Officers Code, and any waiver of the Code of Business Conduct or the Senior Officers Code that applies to our Chief Executive Officer, Chief Financial Officer or Principal Accounting Officer will be posted to our website at the above location. Other information required by this Item 10 is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from the 2016 Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. 134
Item 11. Executive Compensation The information required by this Item 11 is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from the 2016 Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item 12 and Item 201(d) of Regulation S-K is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from the 2016 Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item 13 is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from the 2016 Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. Item 14. Principal Accounting Fees and Services The information required by this Item 14 is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from the 2016 Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.
135
PART IV Item 15. Exhibits and Financial Statement Schedules (a)(3) and (b) — Exhibits. The exhibits listed on the Exhibit Index of this Form 10-K are filed herewith or are incorporated herein by reference. (a)(1) and (c) — Financial Statements Financial Statements: The Financial Statements of Surgical Care Affiliates are included herein in Part II, Item 8. The following audited and unaudited consolidated financial statements of Beltway Holdings, LLC are presented pursuant to Rule 3-09 of Regulation S-X:
136
BSC Holdings, LLC Audited Consolidated Financial Statements December 31, 2015 INDEX Audited Consolidated Financial Statements Page(s)
Report of Independent Auditors ................................................................................................................................................ Balance Sheet ................................................................................................................................................................................. Statement of Operations ................................................................................................................................................................. Statement of Changes in Equity ..................................................................................................................................................... Statement of Cash Flows................................................................................................................................................................ Notes to Financial Statements ........................................................................................................................................................
137
138 139 140 141 142 143
Independent Auditor’s Report To the Board of Directors and Members of BSC Holdings, LLC We have audited the accompanying consolidated financial statements of BSC Holdings, LLC, which comprise the consolidated balance sheet as of December 31, 2015, and the related consolidated statements of operations, changes in equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BSC Holdings, LLC as of December 31, 2015 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. /s/ Warren Averett, LLC Birmingham, Alabama February 22, 2016
138
BSC Holdings, LLC Audited Consolidated Balance Sheet (In thousands of U.S. dollars) DECEMBER 31, 2015
Assets Current assets Cash and cash equivalents ........................................................................................................................... Accounts receivable, net of allowance for doubtful accounts ($3,900) ....................................................... Due from related party ................................................................................................................................. Prepaids and other current assets ................................................................................................................. Total current assets ...................................................................................................................... Property and equipment, net of accumulated depreciation ($11,230) ............................................................... Goodwill ........................................................................................................................................................... Intangible assets, net of accumulated amortization ($3,630) ............................................................................ Total assets ....................................................................................................................................... Liabilities and Equity Current liabilities Current portion of capital lease obligations ................................................................................................. Accounts payable ......................................................................................................................................... Accrued payroll ........................................................................................................................................... Other current liabilities ................................................................................................................................ Due to related party ..................................................................................................................................... Total current liabilities ................................................................................................................ Capital lease obligations, net of current portion................................................................................................ Total liabilities .................................................................................................................................. Commitments and contingent liabilities (Note 7) Equity ................................................................................................................................................................ Members’ equity .......................................................................................................................................... Noncontrolling interests .............................................................................................................................. Total equity ............................................................................................................................................ Total liabilities and equity ................................................................................................................
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
139
10,978 19,460 27,307 1,666 59,411 8,840 128,176 6,152 202,579
135 1,814 1,135 1,284 4,490 8,858 219 9,077
146,538 46,964 193,502 202,579
BSC Holdings, LLC Audited Consolidated Statement of Operations (In thousands of U.S. dollars) YEAR-ENDED DECEMBER 31, 2015
Net operating revenues: Net patient revenues .................................................................................................................................... Other revenues ............................................................................................................................................. Total net operating revenues .................................................................................................................. Operating expenses: Salaries and benefits .................................................................................................................................... Supplies ....................................................................................................................................................... Professional and contractual services .......................................................................................................... Other operating expenses ............................................................................................................................. Depreciation and amortization ..................................................................................................................... Occupancy costs .......................................................................................................................................... Provision for doubtful accounts ................................................................................................................... Gain on sale of property and equipment ...................................................................................................... Total operating expenses ........................................................................................................................ Operating income .............................................................................................................................................. Interest expense ........................................................................................................................................... Interest income ............................................................................................................................................ Net income ........................................................................................................................................................ Less: Net income attributable to noncontrolling interests ................................................................................. Net income attributable to BSC Holdings, LLC ...............................................................................................
$
$
The accompanying notes are an integral part of these consolidated financial statements.
140
141,310 678 141,988 18,221 17,020 629 11,460 3,448 3,873 4,973 (25) 59,599 82,389 34 (43) 82,398 (41,383) 41,015
BSC Holdings, LLC Audited Consolidated Statement of Changes in Equity (In thousands of U.S. dollars)
SCA
Balance at December 31, 2014.............................................. $ Net income ............................................................................ Distributions to members ...................................................... Contributions from members ................................................ Ownership interest issued to noncontrolling interest for business acquisition............................................................... Distributions to noncontrolling interests ............................... Balance at December 31, 2015.............................................. $
IU Health
65,709 $ 20,097 (14,195) 192 — — 71,803
Total Members Equity
$
68,391 $ 20,918 (14,774) 200 — — 74,735
$
Noncontrolling Interests
134,100 $ 41,015 (28,969 ) 392 — — 146,538
$
The accompanying notes are an integral part of these consolidated financial statements.
141
31,562 41,383 — 3,579
Total Equity
$
165,662 82,398 (28,969) 3,971
6,068 (35,628) 46,964 $
6,068 (35,628) 193,502
BSC Holdings, LLC Audited Consolidated Statement of Cash Flows (In thousands of U.S. dollars) YEAR-ENDED DECEMBER 31, 2015
Cash flows from operating activities Net income .......................................................................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities Provision for doubtful accounts ..................................................................................................................... Depreciation and amortization ....................................................................................................................... Gain on disposal of assets .............................................................................................................................. (Increase) decrease in assets, net of business combinations .......................................................................... Accounts receivable ................................................................................................................................. Other assets .............................................................................................................................................. Increase (decrease) in liabilities, net of business combinations ..................................................................... Accounts payable ..................................................................................................................................... Accrued payroll ........................................................................................................................................ Other liabilities ......................................................................................................................................... Net cash provided by operating activities....................................................................................... Cash flows from investing activities Capital expenditures ...................................................................................................................................... Proceeds from sale of PPE............................................................................................................................. Payment for business acquisitions ................................................................................................................. Changes in related party ................................................................................................................................ Net cash used in investing activities ........................................................................................... Cash flows from financing activities Principal payments under capital lease obligations ....................................................................................... Capital contributions...................................................................................................................................... Contributions from noncontrolling interests of consolidated affiliates .......................................................... Distributions to members ............................................................................................................................... Distributions to noncontrolling interests of consolidated affiliates ............................................................... Net cash used in financing activities .......................................................................................... Change in cash and cash equivalents............................................................................................................... Cash and cash equivalents at beginning of period ......................................................................................... Cash and cash equivalents at end of period......................................................................................................... Supplemental cash flow information: Cash paid during the year for interest ................................................................................................................. Supplemental schedule of noncash investing and financing activities.......................................................... Equity consideration for MSSC acquisition (Note 8) ......................................................................................... The accompanying notes are an integral part of these consolidated financial statements.
142
$
82,398 4,973 3,448 (25) (8,154) (26) 480 143 89 83,326 (955) 25 (14,877) (9,672) (25,479)
$
(197) 392 3,579 (28,969) (35,628) (60,823) (2,976) 13,954 10,978
$
34
$
6,100
BSC Holdings, LLC Notes to Audited Consolidated Financial Statements (Amounts in tables are in thousands of U. S. dollars unless otherwise indicated) 1. DESCRIPTION OF THE BUSINESS Nature of Operations BSC Holdings, LLC (“BSC” the “Company” or “we”), a Delaware limited liability company, was formed on July 11, 2011, primarily to own and operate a network of multi-specialty and GI ambulatory surgery centers (“BSC”) in the Indianapolis, Indiana, metropolitan area. BSC is a 51% owned subsidiary of IU Health. Surgery Centers – BSC Holdings, LLC, a subsidiary of Surgical Care Affiliates, Inc. (SCA), owns 49% of BSC. As of December 31, 2015, the Company had an interest in and/or operated five ASCs (Ambulatory Surgery Center) in the Indianapolis, Indiana, metropolitan area. Our ASCs primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. Basis of Presentation The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such financial statements include the assets, liabilities, revenues, and expenses of all majority-owned subsidiaries over which we exercise control and, when applicable, entities in which we have a controlling financial interest. Income Taxes The Company, with the consent of its members, has elected under the Internal Revenue Code to be a limited liability company (LLC). In lieu of corporate income taxes, the members of an LLC are taxed on their proportionate share of the Company’s taxable income. It is the practice of the Company to distribute to its members sufficient funds to pay these taxes. Therefore, no provision or liability for U.S. federal income taxes has been included in the consolidated financial statements. The Company follows the guidance issued by the Accounting Standards Codification relating to uncertainty in income taxes. This guidance requires entities to assess their tax positions for the likelihood that they would be overturned upon Internal Revenue Service (IRS) examination or upon examination by state taxing authorities. In accordance with this guidance, the Company has assessed its tax positions and determined that it does not have any positions at December 31, 2015, that it would be unable to substantiate. The Company has filed its tax returns through December 31, 2014. The tax returns for the year ended December 31, 2012, and thereafter are subject to audit by the taxing authorities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include, but are not limited to: (1) allowance for contractual revenue adjustments; (2) allowance for doubtful accounts; (3) asset impairments, including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; and (6) economic lives and fair value of leased assets. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation as considered necessary. Actual results could differ from those estimates.
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Revenue Recognition Revenues consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the healthcare services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. During the year ended December 31, 2015, approximately 82% of our net patient revenues related to patients with commercial insurance coverage. Healthcare services providers are under increasing pressure to accept reduced reimbursement for services provided to such patients. Continued reductions could have a material adverse impact on our business, financial position, results of operations and cash flows. During the year ended December 31, 2015, approximately 9% of our net patient revenues related to patients participating in the Medicare and Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and routinely modified for provider reimbursement. The Centers for Medicare and Medicaid Services (“CMS”) has been granted authority to suspend payments, in whole or in part, to Medicare providers if CMS possesses reliable information that an overpayment, fraud or willful misrepresentation exists. If CMS suspects that payments are being made as the result of fraud or misrepresentation, CMS may suspend payment at any time without providing us with prior notice. The initial suspension period is limited to 180 days. However, the payment suspension period can be extended almost indefinitely if the matter is under investigation by the United States Department of Health & Human Services Office of Inspector General (“OIG”) or the Department of Justice (“DOJ”). Therefore, we are unable to predict if or when we may be subject to a suspension of payments by the Medicare and/or Medicaid programs, the possible length of the suspension period or the potential cash flow impact of a payment suspension. Any such suspension would adversely impact our business, financial position, results of operations and cash flows. During the year ended December 31, 2015, approximately 8% of our net patient revenues related to patients with workers’ compensation coverage. Workers’ compensation payors have typically paid surgical facilities a higher percentage of the surgical facilities’ charges than other third-party payors. However, workers’ compensation payment amounts are subject to legislative, regulatory and other payment changes over which we have no control. A reduction in workers’ compensation payment amounts could have a material adverse effect on the revenues of our facilities which perform a significant number of workers compensation cases. Cash and Cash Equivalents Cash and cash equivalents include all demand deposits reduced by the amount of outstanding checks and drafts where the right of offset exists for these bank accounts. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has not experienced any losses on such deposits. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, workers’ compensation, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payors. The concentration of net patient service accounts receivable by payor class, as a percentage of total net patient service accounts receivable, as of the end of the reporting period, is as follows: AS OF DECEMBER 31, 2015
Managed care and other discount plans .............................................. Medicare ............................................................................................. Workers’ compensation ...................................................................... Patients and other third-party payors .................................................. Medicaid ............................................................................................. Total ...................................................................................................
83 % 3 11 2 1 100%
We recognize that revenues and accounts receivable from government agencies are significant to our operations; however, we do not believe there are significant credit risks associated with these government agencies. We also recognize that revenue and accounts receivable from managed care and other discount plans are significant to our operations. Because the category of managed care and other discount plans is composed of numerous individual payors which are 144
geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. Additions to the allowance for doubtful accounts are made by means of the Provision for doubtful accounts. We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts that we estimate we will collect. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, payor mix or trends in federal or state governmental healthcare coverage. Property and Equipment We report improvements and equipment at cost, net of asset impairment. We report assets under capital lease obligations at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. Useful lives are as follows: Years
Leasehold improvements ........................................................................ Furniture, fixtures, and equipment.......................................................... Assets under capital lease obligations: Equipment ..............................................................................................
5 to 20 3 to 10 3 to 5
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset. We capitalize interest expense on major construction and development projects while in progress. We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the consolidated statement of operations. For operating leases, we recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease. Goodwill Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. Fair Value of Financial Instruments Our financial instruments consist mainly of cash and cash equivalents, accounts receivable, and accounts payable. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments. Noncontrolling Interest in Consolidated Affiliates The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Newly Issued Authoritative Guidance We are currently assessing the impact of recently issued, but not yet effective, revisions to authoritative guidance, and we do not believe that any of these revisions will have a material effect on our consolidated financial position, results of operations or cash flows. 145
3. PROPERTY AND EQUIPMENT Property and equipment consists of the following: As of December 31, 2015
Leasehold improvements ...................................................................... $ Furniture, fixtures and equipment......................................................... Less: Accumulated depreciation and amortization ............................... Construction in progress ....................................................................... Property and equipment, net .................................................................
$
4,933 14,544 19,477 (11,230) 8,247 593 8,840
Depreciation expense for the year ended December 31, 2015, was approximately $2.0 million and is included in the consolidated statement of income as a component of operating expenses. The amount of amortization expense and accumulated amortization relating to assets under capital lease obligations and rent expense under operating leases is as follows: YEAR ENDED DECEMBER 31, 2015
Assets under capital lease obligations: Equipment ............................................................................................ Accumulated amortization .................................................................... Assets under capital lease obligations, net............................................ Amortization expense ........................................................................... Rent Expense: Minimum rent payments ....................................................................... Contingent and other rents .................................................................... Total rent expense.................................................................................
$ $ $ $ $
825 (491) 334 173 3,586 287 3,873
Leases Future minimum lease payments at December 31, 2015 for those leases of BSC Holdings, LLC and its subsidiaries having an initial or remaining non-cancelable lease term of one year or more are as follows: Operating Leases
Year ending December 31,
2016 ....................................................................... $ 2017 ....................................................................... 2018 ....................................................................... 2019 ....................................................................... 2020 ....................................................................... 2021 and thereafter ................................................ $
2,444 $ 1,228 338 295 295 3,881 8,481
Capital Leases
162 $ 134 82 28 — — 406 $
Total
2,606 1,362 420 323 295 3,881 8,887
4. GOODWILL AND INTANGIBLES Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We have no accumulated impairment of goodwill for the period ended December 31, 2015.
146
We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing each year. We performed impairment reviews and concluded that no goodwill impairment existed. The following table shows changes in the carrying amount of goodwill for the year ended December 31, 2015: YEAR-ENDED DECEMBER 31, 2015
Balance at beginning of period ................................................................ $ Acquisitions (Note 8) ........................................................................... Balance at end of period .......................................................................... $
110,239 17,937 128,176
The following table provides information regarding our other intangible assets: AS OF DECEMBER 31, 2015
Certificates of need Gross carrying amount .................................................. Accumulated amortization ............................................ Net ................................................................................. Management agreements Gross carrying amount .................................................. Accumulated amortization ............................................ Net .................................................................................
$
3,480 (559) 2,921
$ $
6,302 (3,071) 3,231
$
5. NONCONTROLLING INTERESTS The following table shows the effects of changes to BSC Holdings, LLC ownership interest in its subsidiaries on BSC Holdings, LLC equity: YEAR-ENDED DECEMBER 31, 2015
Net income attributable to BSC Holdings, LLC ...................................... $ Increase in equity due to sales and purchases with noncontrolling interests .................................................................................................... Change from net income attributable to BSC and transfers to/from noncontrolling interests ........................................................................... $
41,015 392 41,407
6. RELATED PARTY TRANSACTIONS The Company was involved in various transactions with affiliated companies. The surgery centers were owed $27.0 million from Surgical Care Affiliates, Inc. and related affiliates consisting of cash transferred to SCA, net of management fees incurred from SCA during the year, and such amounts are classified as due from related party in the accompanying consolidated balance sheet at December 31, 2015. The surgery centers owed Indiana University Hospital $4.5 million for inventory, payroll and other purchases during the year, and such amounts were classified as due to related party in the accompanying consolidated balance sheet. 7. COMMITMENTS AND CONTINGENT LIABILITIES Legal Proceedings The Company provides services in a highly regulated industry and is subject to various legal actions and regulatory and other governmental and internal audits and investigations from time to time. As a result, we expect that various lawsuits, claims and legal and regulatory proceedings may be instituted or asserted against us, including, without limitation, employment-related claims and medical negligence claims. Additionally, governmental agencies often possess a great deal of discretion to assess a wide range of monetary penalties and fines. We record accruals for contingencies to the extent that we conclude that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below because the 147
inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. The outcome of any current or future litigation or governmental or internal investigations, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. Nevertheless, it is reasonably possible that any such penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position and cash flows and may affect our reputation. Risk Insurance Risk insurance for BSC is provided through IUH’s risk insurance program. They insure BSC’s professional liability, general liability and workers’ compensation risks through commercial insurance plans placed with unrelated carriers. Provisions for these risks are based upon market driven premiums and actuarially determined estimates for incurred but not reported exposure under claims made policies. Provisions for losses within the policy deductibles represent the estimated ultimate net cost of all reported and unreported losses incurred through the consolidated balance sheet date. Those estimates are subject to the effects of trends in loss severity and frequency. While we believe that the provisions for losses are adequate, we cannot be sure that the ultimate costs will not exceed our estimates. 8. ACQUISITIONS In March 2015, Multi-Specialty Surgery Center, which owns and operated an ASC in Indianapolis, Indiana, contributed substantially all of its assets to the Company, in exchange for total consideration of $22.0 million. Total consideration included $14.9 million of cash ($15.9 million net of $1.0 million working capital adjustment) and a 3.8% membership interest in a subsidiary of the Company valued at $6.1 million. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Property and equipment ........................................................................ Goodwill ............................................................................................... Intangible assets.................................................................................... Total assets ...................................................................................... Liabilities Accounts payable and other current liabilities ...................................... Total current liabilities ......................................................................... Other long-term liabilities .................................................................... Total liabilities ................................................................................
$
$ $
$
819 17,937 2,585 21,341 10 10 386 396
The purchase price allocations for this acquisition are preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be retrospectively adjusted to reflect new information about the facts and circumstances that existed as of the acquisition dates that, if known, would have affected the measurement of the amounts recognized as of that date. The preliminary amounts of these purchase price allocations relate primarily to working capital balances. Intangible assets acquired in 2015, from the above acquisition, include: Estimated Fair Value on Acquisition Date
Estimated Useful Life
Licenses .................................. $ 945 15.0* Noncompete agreements......... $ 1,640 5.0* Total ....................................... $ 2,585 8.7* *Reflects the weighted average estimated useful life of acquired intangible assets that are subject to amortization. We accounted for this transaction under the acquisition method of accounting and reported the results of operations from the date of acquisition. The assets acquired, liabilities assumed and any noncontrolling interest in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. The fair value of identifiable intangible assets and the equity consideration transferred were based on valuations using the cost and income approaches. The cost approach is 148
based on amounts that would be required to replace the asset (i.e., replacement cost). The income approach is based on management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. Factors contributing to the recognition of goodwill include the center’s favorable reputations in their market, their market position, their ability to deliver quality care with high patient satisfaction consistent with the Company’s business model and synergistic benefits that are expected to be realized as a result of the acquisitions. 9. SUBSEQUENT EVENTS The Company’s management has evaluated subsequent events through February 22, 2016, the financial statement issuance date, and concluded that there were no material subsequent events.
149
BSC Holdings, LLC Unaudited Consolidated Financial Statements December 31, 2014 and 2013 INDEX Page(s)
Consolidated Financial Statements Balance Sheets ............................................................................................................................................................................... Statements of Operations ............................................................................................................................................................... Statements of Changes in Equity ................................................................................................................................................... Statements of Cash Flows .............................................................................................................................................................. Notes to Financial Statements ........................................................................................................................................................
150
151 152 153 154 155
BSC Holdings, LLC Unaudited Consolidated Balance Sheet (In thousands of U.S. dollars) DECEMBER 31, 2014
Assets Current assets Cash and cash equivalents ................................................................................................. Accounts receivable, net of allowance for doubtful accounts (2014 - $2,747; 2013 $2,647) ............................................................................................................................... Due from related party ....................................................................................................... Prepaids and other current assets ....................................................................................... Total current assets ............................................................................................ Property and equipment, net of accumulated depreciation (2014 - $9,210; 2013 - $8,131) ... Goodwill ................................................................................................................................. Intangible assets, net of accumulated amortization (2014 - $2,203; 2013 - $1,101) ............... Total assets ............................................................................................................. Liabilities and Equity Current liabilities Capital lease obligations .................................................................................................... Accounts payable ............................................................................................................... Accrued payroll ................................................................................................................. Other current liabilities ...................................................................................................... Due to related party ........................................................................................................... Total current liabilities ...................................................................................... Capital lease obligations, net of current portion...................................................................... Total liabilities ........................................................................................................ Commitments and contingent liabilities (Note 7) Equity ...................................................................................................................................... Members’ equity ................................................................................................................ Noncontrolling interests .................................................................................................... Total equity .................................................................................................................. Total liabilities and equity ......................................................................................
$
13,954
$
16,279 17,180 1,640 49,053 9,086 110,239 4,995 173,373
$
$
122 1,324 992 1,196 4,035 7,669 43 7,712
134,099 31,562 165,661 173,373
The accompanying notes are an integral part of these consolidated financial statements.
151
DECEMBER 31, 2013
$
11,458
$
17,117 20,381 1,602 50,558 8,134 110,239 6,096 175,027
$
$
123 918 743 694 4,315 6,793 166 6,959
135,068 33,000 168,068 175,027
BSC Holdings, LLC Unaudited Consolidated Statement of Operations (In thousands of U.S. dollars) YEAR-ENDED DECEMBER 31, 2014
Net operating revenues: Net patient revenues ................................................................................................................ $ Other revenues ......................................................................................................................... Total net operating revenues .............................................................................................. Operating expenses: Salaries and benefits ................................................................................................................ Supplies ................................................................................................................................... Professional and contractual services ...................................................................................... Other operating expenses ......................................................................................................... Depreciation and amortization ................................................................................................. Occupancy costs ...................................................................................................................... Provision for doubtful accounts ............................................................................................... Loss (gain) on sale of property and equipment ........................................................................ Total operating expenses .................................................................................................... Operating income .......................................................................................................................... Interest expense ....................................................................................................................... Interest income ........................................................................................................................ Net income .................................................................................................................................... Less: Net income attributable to noncontrolling interests ............................................................. Net income attributable to BSC Holdings, LLC ........................................................................... $
121,647 636 122,283 16,915 14,503 390 9,974 2,668 3,445 3,304 8 51,207 71,076 14 (34) 71,096 (35,737) 35,359
The accompanying notes are an integral part of these consolidated financial statements.
152
2013
$
$
124,428 254 124,682 17,381 14,300 467 10,711 2,767 3,340 2,207 (2) 51,171 73,511 28 (42) 73,525 (37,013) 36,512
BSC Holdings, LLC Unaudited Consolidated Statement of Changes in Equity (In thousands of U.S. dollars)
SCA
Balance at December 31, 2012.............................................. $ Net income ............................................................................ Distributions to members ...................................................... Contributions from members ................................................ Distributions to noncontrolling interests ............................... Balance at December 31, 2013.............................................. $ Net income ............................................................................ Distributions to members ...................................................... Contributions from members ................................................ Distributions to noncontrolling interests ............................... Balance at December 31, 2014.............................................. $
64,605 $ 17,891 (16,144) (168) — 66,184 $ 17,326 (17,802) 1 — 65,709 $
IU Health
67,241 $ 18,621 (16,803) (175) — 68,884 $ 18,033 (18,528) 1 — 68,390 $
Total Members Equity
Noncontrolling Interests
131,846 $ 36,512 (32,947) (343) — 135,068 $ 35,359 (36,330) 2 — 134,099 $
The accompanying notes are an integral part of these consolidated financial statements.
153
28,936 $ 37,013 — (199) (32,750) 33,000 $ 35,737 — 339 (37,514) 31,562 $
Total Equity
160,782 73,525 (32,947) (542) (32,750) 168,068 71,096 (36,330) 341 (37,514) 165,661
BSC Holdings, LLC Unaudited Consolidated Statement of Cash Flows (In thousands of U.S. dollars) YEAR-ENDED DECEMBER 31, 2014 2013
Cash flows from operating activities Net income ......................................................................................................................................... $ Adjustments to reconcile net income to net cash provided by operating activities .......................................................................................................................................... Provision for doubtful accounts .................................................................................................... Depreciation and amortization ...................................................................................................... Loss on disposal of assets ............................................................................................................. Increase in assets .......................................................................................................................... Accounts receivable ................................................................................................................ Other assets ............................................................................................................................. Increase in liabilities ..................................................................................................................... Accounts payable .................................................................................................................... Accrued payroll ....................................................................................................................... Other liabilities ........................................................................................................................ Net cash provided by operating activities...................................................................... Cash flows from investing activities ............................................................................................... Capital expenditures ..................................................................................................................... Changes in related party ............................................................................................................... Net cash provided used in investing activities ............................................................... Cash flows from financing activities Principal payments under capital lease obligations ...................................................................... Repurchase of equity interest of consolidated affiliates ............................................................... Capital contributions..................................................................................................................... Contributions from noncontrolling interests of consolidated affiliates ......................................... Distributions to members .............................................................................................................. Distributions to noncontrolling interests of consolidated affiliates .............................................. Net cash used in financing activities ............................................................................... Change in cash and cash equivalents.............................................................................................. Cash and cash equivalents at beginning of period ........................................................................ Cash and cash equivalents at end of period........................................................................................ $ Supplemental cash flow information: Cash paid during the year for interest ................................................................................................ $
71,096 $
3,304 2,668 (7)
2,207 2,767 (2)
(2,467) (38)
(5,570) 278
406 247 504 75,713
(239) (136) (269) 72,561
(2,239) 2,919 680
(1,304) (4,325) (5,629)
(394) — 2 339 (36,330) (37,514) (73,897) 2,496 11,458 13,954 $
(184) (343) — — (32,946) (32,750) (66,223) 709 10,749 11,458
The accompanying notes are an integral part of these consolidated financial statements.
154
73,525
14 $
28
BSC Holdings, LLC Notes to Consolidated Financial Statements (Amounts in tables are in thousands of U. S. dollars unless otherwise indicated) 1. DESCRIPTION OF THE BUSINESS Nature of Operations BSC Holdings, LLC (“BSC” the “Company” or “we”), a Delaware limited liability company, was formed on July 11, 2011, primarily to own and operate a network of multi-specialty and GI ambulatory surgery centers (“BSC”) in the Indianapolis, Indiana, metropolitan area. BSC is a 51% owned subsidiary of IU Health. Surgery Centers – BSC Holdings, LLC, a subsidiary of Surgical Care Affiliates, Inc. (SCA), owns 49% of BSC. As of December 31, 2014, the Company had an interest in and/or operated four ASCs (Ambulatory Surgery Center) in the Indianapolis, Indiana, metropolitan area. Our ASCs primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. Basis of Presentation The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such financial statements include the assets, liabilities, revenues, and expenses of all majority-owned subsidiaries over which we exercise control and, when applicable, entities in which we have a controlling financial interest. Income Taxes The Company, with the consent of its members, has elected under the Internal Revenue Code to be a limited liability company (LLC). In lieu of corporate income taxes, the members of an LLC are taxed on their proportionate share of the Company’s taxable income. It is the practice of the Company to distribute to its members sufficient funds to pay these taxes. Therefore, no provision or liability for U.S. federal income taxes has been included in the consolidated financial statements. The Company follows the guidance issued by the Accounting Standards Codification relating to uncertainty in income taxes. This guidance requires entities to assess their tax positions for the likelihood that they would be overturned upon Internal Revenue Service (IRS) examination or upon examination by state taxing authorities. In accordance with this guidance, the Company has assessed its tax positions and determined that it does not have any positions at December 31, 2015, that it would be unable to substantiate. The Company has filed its tax returns through December 31, 2014. The tax returns for the year ended December 31, 2012, and thereafter are subject to audit by the taxing authorities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include, but are not limited to: (1) allowance for contractual revenue adjustments; (2) allowance for doubtful accounts; (3) asset impairments, including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; and (6) economic lives and fair value of leased assets. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation as considered necessary. Actual results could differ from those estimates.
155
Revenue Recognition Revenues consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the healthcare services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. During each of the years-ended December 31, 2014 and 2013, approximately 81% and 83%, respectively, of our net patient revenues related to patients with commercial insurance coverage. Healthcare services providers are under increasing pressure to accept reduced reimbursement for services provided to such patients. Continued reductions could have a material adverse impact on our business, financial position, results of operations and cash flows. During each of the years-ended December 31, 2014 and 2013, approximately 8% and 9%, respectively, of our net patient revenues related to patients participating in the Medicare and Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and routinely modified for provider reimbursement. The Centers for Medicare and Medicaid Services (“CMS”) has been granted authority to suspend payments, in whole or in part, to Medicare providers if CMS possesses reliable information that an overpayment, fraud or willful misrepresentation exists. If CMS suspects that payments are being made as the result of fraud or misrepresentation, CMS may suspend payment at any time without providing us with prior notice. The initial suspension period is limited to 180 days. However, the payment suspension period can be extended almost indefinitely if the matter is under investigation by the United States Department of Health & Human Services Office of Inspector General (“OIG”) or the Department of Justice (“DOJ”). Therefore, we are unable to predict if or when we may be subject to a suspension of payments by the Medicare and/or Medicaid programs, the possible length of the suspension period or the potential cash flow impact of a payment suspension. Any such suspension would adversely impact our business, financial position, results of operations and cash flows. During each of the years-ended December 31, 2014 and 2013, approximately 11% and 10%, respectively, of our net patient revenues related to patients with workers’ compensation coverage. Workers’ compensation payors have typically paid surgical facilities a higher percentage of the surgical facilities’ charges than other third-party payors. However, workers’ compensation payment amounts are subject to legislative, regulatory and other payment changes over which we have no control. A reduction in workers’ compensation payment amounts could have a material adverse effect on the revenues of our facilities which perform a significant number of workers compensation cases. Cash and Cash Equivalents Cash and cash equivalents include all demand deposits reduced by the amount of outstanding checks and drafts where the right of offset exists for these bank accounts. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has not experienced any losses on such deposits. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, workers’ compensation, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payors. The concentration of net patient service accounts receivable by payor class, as a percentage of total net patient service accounts receivable, as of the end of each of the reporting periods, is as follows: AS OF DECEMBER 31, 2014
Managed care and other discount plans ..................... Medicare .................................................................... Workers’ compensation ............................................. Patients and other third-party payors ......................... Medicaid .................................................................... Total ..........................................................................
81% 4 13 2 — 100%
AS OF DECEMBER 31, 2013
84 % 4 9 2 1 100%
We recognize that revenues and accounts receivable from government agencies are significant to our operations; however, we do not believe there are significant credit risks associated with these government agencies. 156
We also recognize that revenue and accounts receivable from managed care and other discount plans are significant to our operations. Because the category of managed care and other discount plans is composed of numerous individual payors which are geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. Additions to the allowance for doubtful accounts are made by means of the Provision for doubtful accounts. We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts that we estimate we will collect. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, payor mix or trends in federal or state governmental healthcare coverage. Property and Equipment We report improvements and equipment at cost, net of asset impairment. We report assets under capital lease obligations at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. Useful lives are as follows: Years
Leasehold improvements ......................................................................... Furniture, fixtures, and equipment........................................................... Assets under capital lease obligations: Equipment ..........................................................................................
5 to 20 3 to 10 3 to 5
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset. We capitalize interest expense on major construction and development projects while in progress. We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the consolidated statements of operations. For operating leases, we recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease. Goodwill Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. Fair Value of Financial Instruments Our financial instruments consist mainly of cash and cash equivalents, accounts receivable, and accounts payable. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments. Noncontrolling Interest in Consolidated Affiliates The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance.
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Newly Issued Authoritative Guidance We are currently assessing the impact of recently issued, but not yet effective, revisions to authoritative guidance, and we do not believe that any of these revisions will have a material effect on our consolidated financial position, results of operations or cash flows. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following: AS OF AS OF DECEMBER 31, DECEMBER 31, 2014 2013
Leasehold improvements .............................................. $ Furniture, fixtures and equipment.................................
4,756 $ 13,101 17,857 (9,210) 8,647 439 9,086 $
Less: Accumulated depreciation and amortization ....... Construction in progress ............................................... Property and equipment, net ......................................... $
4,743 11,152 15,895 (8,131) 7,764 370 8,134
Depreciation expense for the years ended December 31, 2014 and 2013 was approximately $1.6 and $1.7 million and is included in the consolidated statements of income as a component of operating expenses. The amount of amortization expense and accumulated amortization relating to assets under capital lease obligations and rent expense under operating leases is as follows: YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2014 2013
Assets under capital lease obligations: Equipment ............................................................................. Accumulated amortization .................................................... Assets under capital lease obligations, net ............................ Amortization expense ........................................................... Rent Expense: Minimum rent payments ....................................................... Contingent and other rents .................................................... Total rent expense .................................................................
$ $ $ $ $
475 $ (318) 157 $ 121 $ 3,187 $ 258 3,445 $
963 (685) 278 192 3,061 278 3,339
Leases Future minimum lease payments at December 31, 2014 for those leases of BSC Holdings, LLC and its subsidiaries having an initial or remaining non-cancelable lease term of one year or more are as follows: Operating Leases
Year ending December 31,
2015 ............................................................................. $ 2016 ............................................................................. 2017 ............................................................................. 2018 ............................................................................. 2019 ............................................................................. 2020 and thereafter ...................................................... $
2,569 $ 2,444 1,228 338 295 4,176 11,050
Capital Leases
235 $ 162 134 82 28 — 641 $
Total
2,804 2,606 1,362 420 323 4,176 11,691
4. GOODWILL & INTANGIBLES Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling 158
interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We have no accumulated impairment of goodwill for the periods ended December 31, 2014 and 2013. There was no change in goodwill for the years ended December 31, 2014 and 2013. We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing each year. We have no accumulated impairment of goodwill for the year ended December 31, 2014 and December 31, 2013. The following table shows changes in the carrying amount of goodwill for the year ended December 31, 2014 and December 31, 2013: YEAR-ENDED ENDED DECEMBER 31, DECEMBER 31, 2014 2013
Balance at beginning of period ........................................ $ Acquisitions ................................................................. Balance at end of period .................................................. $
110,239 $ — 110,239 $
97,406 12,833 110,239
The following table provides information regarding our other intangible assets:
Certificates of need Gross carrying amount ........................ Accumulated amortization .................. Net ....................................................... Management agreements Gross carrying amount ........................ Accumulated amortization .................. Net .......................................................
AS OF DECEMBER 31,
AS OF DECEMBER 31,
2014
2013
$ $ $ $
2,535 $ (338) 2,197 $
2,535 (169) 2,366
4,662 $ (1,865) 2,797 $
4,662 (932) 3,730
5. NONCONTROLLING INTERESTS The following table shows the effects of changes to BSC Holdings, LLC ownership interest in its subsidiaries on BSC Holdings, LLC equity: YEAR-ENDED
YEAR-ENDED
DECEMBER 31, DECEMBER 31, 2014
Net income attributable to BSC Holdings, LLC ............ $ Increase (decrease) in equity due to sales to noncontrolling interests ................................................. Change from net income attributable to BSC and transfers to/from noncontrolling interests ...................... $
2013
35,358 $ 2 35,360 $
36,512 (343) 36,169
6. RELATED PARTY TRANSACTIONS The Company was involved in various transactions with affiliated companies. The surgery centers were owed $17.2 million and $20.4 million from Surgical Care Affiliates, Inc. and related affiliates consisting of cash transferred to SCA, net of management fees incurred from SCA during the year, and such amounts are classified as due from related party in the accompanying consolidated balance sheet. The surgery centers owed Indiana University Health $4 million and $4.3 million for inventory, payroll and other purchases during the year, and such amounts were classified as due to related party in the accompanying consolidated balance sheet.
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7. COMMITMENTS AND CONTINGENT LIABILITIES Legal Proceedings The Company provides services in a highly regulated industry and is subject to various legal actions and regulatory and other governmental and internal audits and investigations from time to time. As a result, we expect that various lawsuits, claims and legal and regulatory proceedings may be instituted or asserted against us, including, without limitation, employment-related claims and medical negligence claims. Additionally, governmental agencies often possess a great deal of discretion to assess a wide range of monetary penalties and fines. We record accruals for contingencies to the extent that we conclude that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. The outcome of any current or future litigation or governmental or internal investigations, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. Nevertheless, it is reasonably possible that any such penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position and cash flows and may affect our reputation. Risk Insurance Risk insurance for BSC is provided through IUH’s risk insurance program. They insure BSC’s professional liability, general liability and workers’ compensation risks through commercial insurance plans placed with unrelated carriers. Provisions for these risks are based upon market driven premiums and actuarially determined estimates for incurred but not reported exposure under claims made policies. Provisions for losses within the policy deductibles represent the estimated ultimate net cost of all reported and unreported losses incurred through the consolidated balance sheet dates. Those estimates are subject to the effects of trends in loss severity and frequency. While we believe that the provisions for losses are adequate, we cannot be sure that the ultimate costs will not exceed our estimates. 8. SUBSEQUENT EVENTS The Company’s management has evaluated subsequent events through February 22, 2016, the financial statement issuance date, and concluded that there were no material subsequent events.
160
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on this the 22nd day of February, 2016. SURGICAL CARE AFFILIATES, INC. By: /s/ Andrew P. Hayek Andrew P. Hayek Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Title
Name
Date
/s/ Andrew P. Hayek Andrew P. Hayek
Chairman, President, Chief Executive Officer and Director (principal executive officer)
February 22, 2016
/s/ Tom De Weerdt Tom De Weerdt
Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer)
February 22, 2016
* Thomas C. Geiser
Director
February 22, 2016
* Sharad Mansukani, M.D
Director
February 22, 2016
* Todd B. Sisitsky
Director
February 22, 2016
* Jeffrey K. Rhodes
Director
February 22, 2016
* Curtis S. Lane
Director
February 22, 2016
* Frederick A. Hessler
Director
February 22, 2016
* Lisa Skeete Tatum
Director
February 22, 2016
* Michael A. Sachs
Director
February 22, 2016
*
Richard L. Sharff, Jr., by signing his name hereto, does sign this document on behalf of each of the persons indicated above pursuant to powers of attorney executed by such persons and filed with the Securities and Exchange Commission.
By: /s/ Richard L. Sharff, Jr. Richard L. Sharff, Jr. Attorney in fact
161
EXHIBIT INDEX Exhibit Number
Description
2.1
Plan of Conversion of ASC Acquisition LLC (incorporated by reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
3.1
Certificate of Incorporation of Surgical Care Affiliates, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2013)
3.2
By-Laws of Surgical Care Affiliates, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2013)
4.1
Registration Rights Agreement dated as of November 4, 2013, by and among Surgical Care Affiliates, Inc. and certain stockholders (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2013)
4.2
Indenture dated as of March 17, 2015, among Surgical Care Affiliates, Inc., the subsidiary guarantors listed therein and The Bank of New York Mellon Trust Company, N.A, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 17, 2015)
4.3
Form of 6.00% Rule 144A Senior Note due 2023 (incorporated by reference to Exhibit A to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 17, 2015)
4.4
Form of 6.00% Regulation S Senior Note due 2023 (incorporated by reference to Exhibit A to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 17, 2015)
10.1
Amendment and Restatement Agreement dated as of June 30, 2011, among Surgical Care Affiliates, LLC, ASC Acquisition LLC, the Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, under the Credit Agreement dated as of June 29, 2007, as amended, among Surgical Care Affiliates, LLC, ASC Acquisition LLC, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.2
Incremental Amendment dated as of May 8, 2013, among ASC Acquisition LLC, Surgical Care Affiliates, LLC, the Incremental Lenders and JPMorgan Chase Bank, N.A., as administrative agent, to the Amended and Restated Credit Agreement dated as of June 29, 2007, as amended and restated (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.3
Pledge and Security Agreement dated as of June 29, 2007, among Surgical Care Affiliates LLC, ASC Acquisition LLC, certain subsidiaries of Surgical Care Affiliates, LLC identified therein and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.4
Supplement No. 1 dated as of December 16, 2010, to the Pledge and Security Agreement dated as of June 29, 2007 (incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.5
Guaranty dated as of June 29, 2007, among ASC Acquisition LLC, Surgical Care Affiliates, LLC, certain subsidiaries of Surgical Care Affiliates, LLC and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.5 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.6
Supplement No. 1 dated as of December 16, 2010, to the Guaranty dated as of June 29, 2007 (incorporated by reference to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.7
Reaffirmation Agreement dated as of June 30, 2011, among Surgical Care Affiliates, LLC, ASC Acquisition LLC, certain subsidiaries of Surgical Care Affiliates, LLC and JPMorgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer for the Lenders (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.8
Credit Agreement dated as of March 17, 2015, among Surgical Care Affiliates, Inc., the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., in its capacity as Administrative Agent for the lenders (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 17, 2015)
162
Exhibit Number
Description
10.9
Pledge and Security Agreement dated as of March 17, 2015, among Surgical Care Affiliates, Inc. certain subsidiaries of Surgical Care Affiliates, Inc. identified therein and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 17, 2015)
10.10
Guaranty dated as of March 17, 2015, among Surgical Care Affiliates, Inc., certain subsidiaries of Surgical Care Affiliates, Inc. identified therein and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on March 17, 2015)
10.11*
Conformed copy of Surgical Care Affiliates, Inc. Management Equity Incentive Plan, adopted November 16, 2007, reflecting amendments through May 6, 2013 (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.12*
Form of Time-Based Option Award Under the Management Equity Incentive Plan (incorporated by reference to Exhibit 10.9 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.13*
Amendment to Unit Option Grant Agreements under the Management Equity Incentive Plan dated as of June 1, 2015, between Surgical Care Affiliates, Inc. and Peter J. Clemens IV
10.14*
Conformed copy of Surgical Care Affiliates, Inc. Directors and Consultants Equity Incentive Plan, adopted June 24, 2008, reflecting amendments through February 8, 2011 (incorporated by reference to Exhibit 10.10 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.15*
Form of Option Award to Directors Under the Director and Consultant Equity Incentive Plan (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.16*
Restricted Equity Unit Grant Agreement dated July 24, 2008, between Surgical Care Affiliates LLC, ASC Acquisition LLC and Andrew Hayek (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.17*
Form of Director Restricted Equity Unit Grant Agreement (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.18*
Surgical Care Affiliates, Inc. 2013 Omnibus Long-Term Incentive Plan, as amended and restated
10.19*
Form of Restricted Stock Unit Award Agreement under 2013 Omnibus Long-Term Incentive Plan (2013 Directors Grants) (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
10.20*
Form of Restricted Stock Unit Award Agreement under 2013 Omnibus Long-Term Incentive Plan (2014 Directors Grants) (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2015)
10.21*
Form of Restricted Stock Unit Award Agreement under 2013 Omnibus Long-Term Incentive Plan (2015 Directors Grants)
10.22*
Form of Restricted Stock Unit Award Agreement under 2013 Omnibus Long-Term Incentive Plan (2013 and 2014 Employee Grants) (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
10.23*
Form of Amendment to Restricted Stock Unit Award Agreement under 2013 Omnibus Long-Term Incentive Plan (Hayek) (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2015)
10.24*
Form of Restricted Stock Unit Award Agreement under 2013 Omnibus Long-Term Incentive Plan (2015 Employee Grants)
10.25*
Form of Non-qualified Stock Option Agreement under 2013 Omnibus Long-Term Incentive Plan (2013 and 2014 Employee Grants) (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
10.26*
Form of Amendment to Non-qualified Stock Option Agreement under 2013 Omnibus Long-Term Incentive Plan (Hayek) (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2015) 163
Exhibit Number
Description
10.27*
Form of Non-qualified Stock Option Agreement under 2013 Omnibus Long-Term Incentive Plan (2015 Employee Grants)
10.28*
Employment Agreement, dated as of October 30, 2013, by and among Surgical Care Affiliates, Inc., Surgical Care Affiliates LLC and Andrew P. Hayek (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2013)
10.29*
Employment Agreement, dated as of October 30, 2013, by and among Surgical Care Affiliates, Inc., Surgical Care Affiliates LLC and Joseph T. Clark (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2013)
10.30*
Employment Agreement, dated as of October 30, 2013, by and among Surgical Care Affiliates, Inc., Surgical Care Affiliates LLC and Michael A. Rucker (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2013)
10.31*
Employment Agreement, dated as of October 30, 2013, by and among Surgical Care Affiliates, Inc., Surgical Care Affiliates LLC and Peter J. Clemens (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2013)
10.32*
Employment Agreement, dated as of October 30, 2013, by and among Surgical Care Affiliates, Inc., Surgical Care Affiliates LLC and Richard L. Sharff, Jr. (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2013)
10.33*
Employment Agreement, by and among Surgical Care Affiliates, Inc., Surgical Care Affiliates LLC and Tom De Weerdt dated as of April 14, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 17, 2015)
10.34*
Consulting Agreement, by and among Surgical Care Affiliates, Inc., Surgical Care Affiliates LLC and Peter J. Clemens IV dated as of April 15, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 17, 2015)
10.35
Lease Agreement, dated as of October 31, 2007, by and between Riverchase Tower, LLC and Surgical Care Affiliates, LLC (incorporated by reference to Exhibit 10.20 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.36
Lease Amendment Agreement No. 1, dated as of June 20, 2012, by and between Surgical Care Affiliates, LLC and Riverchase Office, LLC (incorporated by reference to Exhibit 10.21 to the Company’s Registration Statement on Form S1 filed with the SEC on September 5, 2013)
10.37
Standard Office Lease, dated as of May 10, 2010, by and between Long Ridge Office Portfolio, L.P. and Surgical Care Affiliates, LLC (incorporated by reference to Exhibit 10.22 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.38
First Amendment to Lease (Corporate 500 Centre), dated as of April 13, 2011, by and between Long Ridge Office Portfolio, L.P. and Surgical Care Affiliates, LLC (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013)
10.39
Office Lease Agreement (as amended) between Surgical Care Affiliates, LLC and CAPREF Brookwood Office, LLC, effective April 4, 2014 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2014)
10.40
Stockholders Agreement dated as of November 4, 2013, by and among Surgical Care Affiliates, Inc. and the stockholders party thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2013)
10.40A
First Amendment to Stockholders Agreement by and among Surgical Care Affiliates, Inc. and the stockholders party thereto, dated September 17, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on From 8-K filed with the SEC on September 22, 2014)
10.40B
Second Amendment to Stockholders Agreement by and among Surgical Care Affiliates, Inc. and the stockholders party thereto, dated August 21, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 25, 2015)
10.41*
Surgical Care Affiliates Teammate Stock Purchase Plan, as amended and restated 164
Exhibit Number
Description
10.42*
Letter Agreement between Surgical Care Affiliates, Inc. and Thomas C. Geiser, dated December 7, 2012 (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
10.42A*
Letter Agreement between Surgical Care Affiliates, Inc. and Thomas C. Geiser, dated January 23, 2014 (incorporated by reference to Exhibit 10.26A to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
10.43*
Letter Agreement between Surgical Care Affiliates, Inc. and Frederick A. Hessler, dated October 1, 2013 (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
10.44*
Letter Agreement between Surgical Care Affiliates, Inc. and Curtis S. Lane, dated December 7, 2012 (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
10.45*
Letter Agreement between Surgical Care Affiliates, Inc. and Sharad Mansukani, dated December 7, 2012 (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
10.46*
Letter Agreement between Surgical Care Affiliates, Inc. and Lisa Skeete Tatum, dated August 5, 2014
10.47*
Letter Agreement between Surgical Care Affiliates, Inc. and Michael A. Sachs, dated July 27, 2015
10.48*
Form of Surgical Care Affiliates, Inc. Indemnity Agreement (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed with the SEC on March 24, 2014)
21.1
List of subsidiaries of Surgical Care Affiliates, Inc.
23.1
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
23.2
Consent of Warren Averett, LLC, Independent Registered Public Accounting Firm
24.1
Powers of Attorney
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
Management compensation plan or arrangement
165
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2016 Annual Meeting The 2016 Annual Meeting of Stockholders will be held on Thursday, June 2, 2016, at 8:00 a.m., Central Time, at the Company’s principal executive offices located at 520 Lake Cook Road, Deerfield, Illinois 60015.
Directors and Officers Board of Directors: Andrew P. Hayek Chairman, President and Chief Executive Officer Surgical Care Affiliates, Inc.
Thomas C. Geiser Senior Advisor TPG Global, LLC
Jeffrey K. Rhodes Partner TPG Global, LLC
Sharad Mansukani, M.D. Senior Advisor TPG Global, LLC
Frederick A. Hessler Retired Managing Director Citigroup Global Markets Inc.
Michael A. Sachs Chairman TLSG, Inc.
Todd B. Sisitsky Partner TPG Global, LLC
Lisa Skeete Tatum Founder and CEO LandIt.com
Executive Officers: Tom W.F. De Weerdt Executive Vice President and Chief Financial Officer
Michael A. Rucker Executive Vice President and Chief Operating Officer
Richard L. Sharff, Jr. Executive Vice President, General Counsel and Corporate Secretary
Joseph T. Clark Executive Vice President and Chief Development Officer
Corporate Information Corporate Headquarters:
Transfer Agent:
Surgical Care Affiliates, Inc. 520 Lake Cook Road Suite 250 Deerfield, IL 60015
American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 Toll free: (800) 937-5449 Local & International: (718) 921-8124 Email:
[email protected] Website: www.amstock.com
Operations Center: Surgical Care Affiliates, Inc. 569 Brookwood Village, Suite 901 Birmingham, AL 35209
Independent Registered Public Accounting Firm: PricewaterhouseCoopersLLP 569 Brookwood Village, Suite 851 Birmingham, AL 35209 Website: www.pwc.com.us
520 Lake Cook Road Suite 250 Deerfield, IL 60015
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2014 Commission file number: 001-36154
SURGICAL CARE AFFILIATES, INC. (Exact name of registrant as specified in its charter)
Delaware
20-8740447
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
520 Lake Cook Road, Suite 250 Deerfield, IL
60015
(Address of principal executive offices)
(Zip Code)
(847) 236-0921 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
Name of Exchange on Which Registered
Common Stock, par value $0.01 per share The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No 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 No 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10K. 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
Accelerated filer
Non-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold on June 30, 2014 was $411,378,097. Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Class of Common Stock Outstanding at March 1, 2015 Common stock, par value $0.01 per share 38,671,573 shares
SURGICAL CARE AFFILIATES, INC. FORM 10-K INDEX General
2
Forward — Looking Statements
2
PART I. Item 1.
Business
3
Item 1A.
Risk Factors
31
Item 1B.
Unresolved Staff Comments
55
Item 2.
Properties
55
Item 3.
Legal Proceedings
55
Item 4.
Mine Safety Disclosure
55
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
56
Item 6.
Selected Financial Data
57
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
58
Item 8.
Financial Statements and Supplementary Data
84
Item 9.
Changes in and Disagreements with Accounting and Financial Disclosures
131
Item 9A.
Controls and Procedures
131
Item 9B.
Other Information
132
Item 10.
Directors, Executive Officers and Corporate Governance
132
Item 11.
Executive Compensation
140
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
148
Item 13.
Certain Relationships and Related Transactions and Director Independence
151
Item 14.
Principal Accounting Fees and Services
153
Exhibits and Financial Statement Schedules
155
PART II.
PART III.
Part IV. Item 15. Signatures
178
1
GENERAL Unless the context otherwise indicates or requires, references in this Annual Report on Form 10-K to “Surgical Care Affiliates,” the “Company,” “we,” “us” and “our” refer to Surgical Care Affiliates, Inc. and its consolidated affiliates after our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013 and to ASC Acquisition LLC and its consolidated subsidiaries prior to our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013. In addition, unless the context otherwise indicates or requires, the term “SCA” refers to Surgical Care Affiliates, LLC, our direct operating subsidiary. Pursuant to the conversion, every 10.25 outstanding membership units of ASC Acquisition LLC were converted into one share of common stock of Surgical Care Affiliates, Inc., and options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates, Inc. at a ratio of 10.25 membership units of ASC Acquisition LLC underlying such options to each one share of common stock of Surgical Care Affiliates, Inc. underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. In addition, every 10.25 outstanding restricted equity units of ASC Acquisition LLC were converted into one restricted stock unit (“RSU”) of Surgical Care Affiliates, Inc. All information included in this Annual Report on Form 10-K is presented giving effect to the conversion. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance, which involve substantial risks and uncertainties. Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include any statement that, without limitation, may predict, forecast, indicate or imply future results, performance or achievements instead of historical or current facts and may contain words like “anticipates,” “approximately,” “believes,” “budget,” “can,” “could,” “continues,” “contemplates,” “estimates,” “expects,” “forecast,” “intends,” “may,” “might,” “objective,” “outlook,” “predicts,” “probably,” “plans,” “potential,” “project,” “seeks,” “shall,” “should,” “target,” “will,” or the negative of these terms and other words, phrases, or expressions with similar meaning. Any forward-looking statements contained in this Annual Report on Form 10-K are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those projected in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information or otherwise. Given these uncertainties, the reader should not place undue reliance on forward-looking statements as a prediction of actual results. Factors that could cause actual results to differ materially from those projected or estimated by us include those that are discussed in “Part I, Item 1A. Risk Factors”.
2
Item 6. Selected Financial Data YEAR-ENDED DECEMBER 31, 2013 2012 2011 (in millions, except facilities and per unit data in actual amounts)
2014
Net operating revenues: Net patient revenues Management fee revenues Other revenues Total net operating revenues Equity in net income of nonconsolidated affiliates Operating expenses: Salaries and benefits Supplies Other operating expenses Depreciation and amortization Occupancy costs Provision for doubtful accounts Impairment of intangible and long-lived assets (Gain) loss on disposal of assets Total operating expenses Operating income Interest expense Loss from extinguishment of debt Interest income (Gain) loss on sale of investments Income from continuing operations before income tax expense Provision for income tax expense Income from continuing operations (1) Loss from discontinued operations, net of income tax expense Net income Less: Net income attributable to noncontrolling interests Net income (loss) attributable to Surgical Care Affiliates Basic net income (loss) per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates Discontinued operations attributable to Surgical Care Affiliates Net income (loss) per share attributable to Surgical Care Affiliates Basic weighted average shares outstanding (in thousands) (2) Distribution paid per share on September 16, 2013 Diluted net income (loss) per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates Discontinued operations attributable to Surgical Care Affiliates Net income (loss) per share attributable to Surgical Care Affiliates Diluted weighted average shares outstanding (in thousands) (2) Facilities (at period end): Consolidated facilities Equity method facilities Managed-only facilities Total facilities 57
$
788.0 58.9 17.8 864.7 32.6
$
731.6 40.5 13.6 785.7 23.4
$
699.0 17.8 9.6 726.4 16.8
$
2010
675.3 11.3 7.5 694.1 22.2
$
678.4 6.7 5.2 690.3 15.3
297.2 177.9 124.9 52.7 29.4 14.1 0.6 (0.2 ) 696.4 200.9 32.8 — (0.2 ) (7.6 ) 175.9 9.4 166.5 (9.4 ) 157.1 (125.2 ) 32.0 $
270.9 170.2 127.7 41.5 25.5 14.2 — 0.1 650.1 158.9 60.2 10.3 (0.2 ) 12.3 76.2 12.3 63.9 (9.3 ) 54.6 (105.9 ) (51.3 ) $
234.2 164.8 112.8 40.0 25.3 12.7 0.4 (0.3 ) 589.9 153.2 58.6 — (0.3 ) 7.1 87.8 8.5 79.3 (4.9 ) 74.4 (94.4 ) (20.0 ) $
214.8 155.7 110.9 38.6 25.2 14.1 — (0.8 ) 558.5 157.8 55.9 — (0.4 ) (3.9 ) 106.2 19.9 86.3 (2.8 ) 83.5 (93.2 ) (9.7 ) $
209.8 167.1 110.7 35.6 26.4 13.5 — 0.4 563.5 142.1 52.5 — (1.5 ) (2.1 ) 93.2 14.1 79.1 (9.9 ) 69.2 (84.1 ) (14.9 )
$ $ $
1.07 $ (.24 ) $ .83 $ 38,477 $
(1.33 ) $ (.29 ) $ (1.62 ) $ 31,688 2.47
(.50 ) $ (.16 ) $ (.66 ) $ 30,340
(.24 ) $ (.09 ) $ (.33 ) $ 29,347
(.18 ) (.35 ) (.53 ) 28,144
$ $ $
1.03 $ (.23 ) $ .80 $ 39,958
(1.33 ) $ (.29 ) $ (1.62 ) $ 31,688
(.50 ) $ (.16 ) $ (.66 ) $ 30,340
(.24 ) $ (.09 ) $ (.33 ) $ 29,347
(.18 ) (.35 ) (.53 ) 28,144
95 65 26 186
87 60 30 177
87 52 8 147
94 44 4 142
$
95 23 5 123
2014
Balance Sheet Data (at period end): Cash and cash equivalents Total current assets Total assets (3) Current portion of long-term debt Total current liabilities Long-term debt, net of current portion Total liabilities (3)
$
8.7 237.5 1,647.4
(3)
85.8 234.0 1,422.5
$
118.6 267.4 1,412.1
2011
$
71.2 215.0 1,356.5
2010
$
33.5 172.0 1,189.8
22.6 197.7 648.8 984.6
14.9 175.2 774.0 1,070.4
16.0 148.9 768.7 1,030.6
7.5 133.6 673.3 897.5
15.4
21.9
21.7
20.2
20.6
243.3 323.6 567.0
205.7 210.3 416.0
147.5 172.5 320.0
170.3 135.4 305.7
144.5 127.2 271.7
Total Surgical Care Affiliates’ equity Noncontrolling interests — non-redeemable Total equity
(2)
$
December 31, 2012 (in millions)
24.7 249.4 665.1 1,065.0
Noncontrolling interests — redeemable
(1)
2013
Income (loss) from continuing operations attributable to Surgical Care Affiliates, which is income from continuing operations less net income attributable to noncontrolling interests, was $41.3 million, $(42.0) million, $(15.1) million, $(6.9) million and $(5.0) million for years-ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively. Calculated based on number of shares of common stock and vested RSUs that would have been outstanding as of December 31, 2012, 2011 and 2010, assuming our conversion from a Delaware limited liability company to a Delaware corporation. Our consolidated assets as of December 31, 2014, December 31, 2013 and December 31, 2012 include total assets of a VIE of $117.5 million, $49.5 million and $28.2 million, respectively, which can only be used to settle the obligations of the VIE. Our consolidated total liabilities as of December 31, 2014, December 31, 2013 and December 31, 2012 include total liabilities of the VIE of $23.8 million, $12.2 million and $1.4 million, respectively, for which the creditors of the VIE have no recourse to us, with the exception of $3.4 million and $4.0 million of debt guaranteed by us at December 31, 2014 and December 31, 2013, respectively.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Amounts in tables are in millions of U.S. dollars unless otherwise indicated) This report contains certain forward-looking statements (all statements other than statements with respect to historical fact) within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. Risk Factors, some of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events. Forward-looking statements and our liquidity, financial condition and results of operations may be affected by the risks set forth in Item 1A. Risk Factors or by other unknown risks and uncertainties. OVERVIEW We are a leading provider of surgical solutions to health systems and payors, providing high quality, cost-effective surgical care. For a substantial portion of the periods covered by our financial statements in this Annual Report on Form 10-K, we were a Delaware limited liability company that was formed with a focus on developing and operating a network of multi-specialty ASCs and surgical hospitals in the United States. However, on October 30, 2013, we converted from a Delaware limited liability company, previously named ASC Acquisition LLC, to a Delaware corporation. As of December 31, 2014, we operated in 34 states and had an interest in and/or operated 179 freestanding ASCs, six surgical hospitals and one sleep center with 11 locations. Of these 186 facilities, we consolidated the operations of 95 affiliated facilities, had 65 nonconsolidated affiliated facilities and held no ownership in 26 affiliated facilities that contract with us to provide management services only. In addition, at December 31, 2014, we provided perioperative consulting services to 13 facilities, which are not included in the facility count. 58
With the exception of the managed-only facilities, the entities that own our facilities are structured as general partnerships, LPs, LLPs or LLCs in which either one of our subsidiaries or a joint venture is an owner and serves as the general partner, limited partner, managing member or member. Our partners or co-members in these entities are generally licensed physicians, hospitals or health systems. EXECUTIVE SUMMARY Our growth strategy continues to include growing the profits at our existing facilities, entering into strategic relationships with hospitals and health systems and making selective acquisitions of existing surgical facilities and groups of facilities. We took several steps during 2014 to optimize our portfolio by: • acquiring a controlling interest in fifteen ASCs that we consolidate (two of these facilities were previously managed-only entities); • deconsolidating two ASCs (i.e., we entered into a transaction that required a change in accounting treatment of the facilities from consolidated to equity method); • acquiring a noncontrolling interest in seven ASCs that we hold as equity method investments (two of these facilities were previously managed-only entities); • entering into agreements to manage two ASCs; • placing one de novo facility into operation that we account for as a managed-only entity; • closing two equity method facilities as a result of combining the operations of the facilities into two existing SCA equity method facilities; • closing four consolidated ASCs, selling a consolidated ASC, selling our interest in two nonconsolidated ASCs and terminating management agreements with three managed-only ASCs, in which we held no equity interests; and • adding new relationships with not-for-profit health systems. Our consolidated net operating revenues increased $79.0 million, or 10.1%, for the year-ended December 31, 2014 compared to the year-ended December 31, 2013. The main factors that contributed to this increase were revenues earned from acquisitions and increased rates paid under certain payor contracts. This increase was partially offset by the deconsolidation of two facilities and the disposition of two facilities since December 31, 2013. Consolidated net patient revenues per case grew by 5.3% to $1,801 per case for the year-ended December 31, 2014 from $1,710 per case during the prior year, reflecting acquisitions of consolidated facilities with higher rates per case than the average rates at our consolidated facilities. The number of cases at our consolidated facilities increased to 437,654 cases during the year-ended December 31, 2014 from 427,840 cases during the year-ended December 31, 2013, largely due to acquisitions since the prior year, partially offset by the deconsolidation of two facilities and the disposition of two facilities since December 31, 2013. Our number of consolidated facilities increased to 95 facilities as of December 31, 2014 from 87 facilities as of December 31, 2013. We do not consolidate 65 of the facilities affiliated with us because we do not hold a controlling equity interest in the partnerships that own those facilities. To assist management in analyzing our results of operations, including at our nonconsolidated facilities, we prepare and disclose a “systemwide” case volume statistic and certain supplemental “systemwide” growth measures, each of which treats our equity method facilities as if they were consolidated. While the revenues earned at our equity method facilities are not recorded in our consolidated financial statements, we believe systemwide net operating revenues growth and systemwide net patient revenue per case growth are important to understand our financial performance because they are used by management to help interpret the sources of our growth and provide management with a growth metric incorporating the revenues earned by all of our affiliated facilities, regardless of the accounting treatment. “Systemwide” is a non-GAAP measure which includes the results of both our consolidated and nonconsolidated facilities (without adjustment based on our percentage of ownership). For more information, please see “Our Consolidated Results and Results of Nonconsolidated Affiliates” on page 67. During the year-ended December 31, 2014, systemwide net operating revenues grew by 10.0% as compared to the prior year. Systemwide net patient revenues per case grew by 4.5% in 2014 compared to the prior year. These increases are due to acquisitions since the end of the prior year, increased management fee revenues from acquisitions made subsequent to the prior year, increased rates earned under certain payor contracts and changes in case mix. At December 31, 2014, we had 98 facilities in partnership with 42 health systems. We held ownership interests in 10 consolidated and 55 nonconsolidated facilities and managed three facilities in partnership with 31 of those health systems. We managed 20 facilities in partnership, but without owning an equity interest, with ten of those health systems. Additionally, there is one health system relationship where we consolidate ten facilities as a Variable Interest Entity (“VIE”), but do not currently hold an equity 59
ownership interest in these facilities. Our health system relationships include local, regional and national health systems. We typically have formal or informal co-development arrangements with our health system partners to jointly develop a network of outpatient surgery centers in a defined geographic area. These co-development arrangements are an important source of differentiation and potential growth of our business. We expect our co-development and acquisition activity to continue with a major focus on creating partnerships with not-for-profit health systems as we continue to position ourselves as a partner of choice to physician groups and health systems. Our Consolidated Subsidiaries and Nonconsolidated Affiliates At facilities where we serve as an owner and day-to-day manager, we have significant influence over the operations of such facilities. When we have control of the facility, we account for our investment in the facility as a consolidated subsidiary. When this influence does not represent control of the facility, but we have the ability to exercise significant influence over operating and financial policies, we account for our investment in the facility under the equity method, and treat the facility as a nonconsolidated affiliate. Our net earnings from a facility are the same under either method, but the classification of those earnings in our consolidated statements of operations differs. For our consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses for these subsidiaries, after elimination of intercompany transactions and accounts. The net income attributable to owners of our consolidated subsidiaries, other than us, is classified within the line item Net income attributable to noncontrolling interests . As of December 31, 2014, we consolidated ten facilities into our financial results where we do not currently hold an equity ownership interest in the facility. All ten facilities are majority-owned and controlled by a common parent company (the “future JV”). We hold a promissory note from the future JV that is convertible into equity of the future JV at our option upon the occurrence of the renegotiation of certain contractual arrangements. The promissory note has a fixed interest rate of 4% plus a variable component that is dependent on the earnings of the future JV. We are also party to management services agreements with the facilities controlled by the future JV. As a result of the financial interest in the earnings of the future JV held by us via the promissory note and the powers granted to us in the promissory note and the management services agreements, we have determined, under the Accounting Standards Codification Section 810, that the future JV is a VIE for which we are the primary beneficiary and as a result we consolidate these facilities into our financial results. For our nonconsolidated affiliates, our consolidated statements of operations reflect our earnings from such facilities in two line items: • Equity in net income of nonconsolidated affiliates, which represents our combined share of the net income of each equity method facility that is based on such equity method facility’s net income and the percentage of such equity method facility’s outstanding equity interests owned by us; and • Management fee revenues , which represents our combined income from management fees that we earn from managing the day-to-day operations of the facilities that we do not consolidate for financial reporting purposes. Our equity in net income of nonconsolidated affiliates is primarily a function of the performance of our nonconsolidated affiliates and our percentage of ownership interest in those affiliates. However, our net patient revenue and associated expense line items only contain the results from our consolidated facilities. As a result of this incongruity in our reported results, management uses a variety of supplemental information to analyze our results of operations, including: • the results of operations of our consolidated subsidiaries and nonconsolidated affiliates; • our ownership share in the facilities we operate; and • facility operating indicators, such as systemwide net operating revenues growth, systemwide net patient revenues per case growth, same site systemwide net operating revenues growth and same site systemwide net patient revenues per case growth. While revenues of our nonconsolidated affiliates are not recorded in our net operating revenues, we believe this information is important in understanding our financial performance because these revenues are typically the basis for calculating the line item Management fee revenues and, together with the expenses of our nonconsolidated affiliates, are the basis for deriving the line item Equity in net income of nonconsolidated affiliates . As we execute on our strategy of partnering with health systems, we expect the number of our facilities that we account for as equity method facilities will increase relative to our total number of facilities. 60
KEY MEASURES Facilities Changes in our ownership of individual facilities and related changes in how we account for such facilities drive changes in our consolidated results from period to period in several ways, including: • Deconsolidations . As a result of a deconsolidation transaction, an affiliated facility that was previously consolidated becomes a nonconsolidated facility. Any income we earn from a deconsolidated facility, based upon our ownership percentage in the facility, is reported on a net basis in the line item Equity in net income of nonconsolidated affiliates , whereas prior to a deconsolidation transaction, the affiliated facility’s results were reported as part of our consolidated net operating revenues and the associated expense line items. • Consolidations . As a result of a consolidation transaction, an affiliated facility that was previously nonconsolidated and accounted for on an equity method basis becomes a consolidated facility. After consolidation, revenues and expenses of the affiliated facility are included as part of our consolidated results. • De novos . Where strategically appropriate, we invest, typically with a health system partner, in de novo facilities, which are newly developed ASCs. A de novo facility may be consolidated or nonconsolidated, depending on the circumstances. • Shifts in Ownership Percentage . Our net income is driven in part by our ownership percentage in a facility since a portion of the net income earned by the facility is attributable to any noncontrolling owners in the facility, even if we consolidate such facility. As a result of our partnerships with physicians, our percentage of ownership in a facility may shift over time, which may result in an increase or a decrease in the net income we earn from such facility. 61
We took several steps during the year-ended December 31, 2014 to optimize our facility portfolio by acquiring, deconsolidating, selling and closing certain consolidated and nonconsolidated facilities, as well as placing one de novo facility into operation. The following table presents a breakdown of the changes in number of consolidated, nonconsolidated and managed-only facilities during the periods presented. During the YearEnded December 31, 2014
Facilities at Beginning of Period Consolidated Facilities: Equity Method Facilities: Managed-only Facilities: Total Facilities: Strategic Activities Undertaken Acquisitions Consolidated Facilities acquired: Noncontrolling interests acquired in facilities accounted for as equity method investments: Management agreements entered into (Managed-only): De novos Consolidated de novo facilities placed into operations: De novo facilities accounted for as equity method investments placed into operations: De novo facilities accounted for as managed-only facilities placed into operations: Consolidations / Deconsolidations Conversion transactions or contributions to joint ventures or other partnerships completed such that the facility is accounted for as a consolidated affiliate: Conversion transactions or contributions to joint ventures or other partnerships completed such that the facility is accounted for as an equity method investment: Changed to Managed-Only Facility Change to providing management services only: Closures and Sales Consolidated Facilities sold: Noncontrolling interests in facilities accounted for as equity method investments sold: Consolidated Facilities closed: Equity Method Facilities closed: Management agreements exited from (Managed-only): Facilities at End of Period Consolidated Facilities: Equity Method Facilities: Managed-only Facilities: Total Facilities: Average Ownership Interest Consolidated Facilities: Equity Method Facilities: Perioperative Contracts (1) Number of contracts at beginning of period: Number of contracts at end of period: 62
During the YearEnded December 31, 2013
During the YearEnded December 31, 2012
87 60 30 177
87 52 8 147
94 44 4 142
13
4
2
5 2
7 20
7 4
—
1
—
— 1
1
—
2
1
4
4
2
3
—
3
—
1
—
3
2 4 2 3
— 2 — 1
1 3 — —
95 65 26 186
87 60 30 177
87 52 8 147
50.0 % 26.0 %
51.6 % 25.0 %
54.8 % 27.7 %
14 13
6 14
2 6
(1)
Perioperative service arrangements are executed agreements between SCA and a hospital system whereby SCA manages the hospitals’ outpatient surgery departments to improve physician alignment, optimize operation effectiveness and attain key outcomes in quality, growth and financial metrics.
Revenues Our consolidated net operating revenues for the years-ended December 31, 2014, 2013 and 2012 were $864.7 million, $785.7 million and $726.4 million, respectively. Given the significant increase in the number of our nonconsolidated facilities, driven by the success of our health system and physician partnership growth strategy, we review nonconsolidated facility revenues and also manage our facilities utilizing certain supplemental systemwide growth metrics. The following table summarizes our systemwide net operating revenues growth, systemwide net patient revenues per case growth, same site systemwide revenue growth and same site systemwide net patient revenues per case growth. YEAR-ENDED DECEMBER 31, 2013
2014
Systemwide net operating revenues growth (1) Systemwide net patient revenues per case growth (1) Same site systemwide net operating revenues growth (1)(2) Same site systemwide net patient revenues per case growth (1)(2) (1)
(2)
10.0 % 4.5 % 3.1 % 2.7 %
2012
15.5 % 9.3 % 9.4 % 6.1 %
17.0 % 7.8 % 9.8 % 5.7 %
The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results, rather only the net income earned from such facilities is reported on a net basis in the line item “ Equity in net income of nonconsolidated affiliates .” Because of this, management supplementally focuses on non-GAAP systemwide results, which measure results from all our facilities, including revenues from our consolidated facilities and our equity method facilities (without adjustment based on our percentage of ownership). We include management fee revenues from managed-only facilities in systemwide net operating revenues growth and same site net operating revenue growth, but not patient or other revenues from managed-only facilities (in which we hold no ownership interest). We do not include managed-only facilities in systemwide net patient revenues per case growth or samesite systemwide net patient revenues per case growth. Same site refers to facilities that were operational in both the current and prior periods.
Year-Ended December 31, 2014 Compared to Year-Ended December 31, 2013 Our consolidated net operating revenues increased by $79.0 million, or 10.1%, for the year-ended December 31, 2014 to $864.7 million from $785.7 million for the year-ended December 31, 2013. Consolidated net patient revenues per case increased by 5.3% to $1,801 per case during the year-ended December 31, 2014 from $1,710 per case during the year-ended December 31, 2013. For the year-ended December 31, 2014, systemwide net operating revenues grew by 10.0% compared to the year-ended December 31, 2013. In addition, for the year-ended December 31, 2014, systemwide net patient revenues per case grew by 4.5% compared to the prior year. The table below quantifies several significant items impacting our period-over-period net operating revenues growth and net operating revenues growth of our nonconsolidated affiliates. Year-Ended December 31, 2014 Surgical Care Affiliates as Reported Under GAAP
Nonconsolidated Affiliates
(in millions)
Total net operating revenues, year-ended December 31, 2013 (1)(2) Add: revenue from acquired facilities revenue from consolidations Less: revenue of disposed facilities revenue from deconsolidated facilities Adjusted base year total net operating revenues Increase from operations Non-facility based revenue Total net operating revenues, year-ended December 31, 2014:
$
$ 63
785.7 $ 55.0 3.0 (2.7 ) (13.8 ) 827.2 37.5 — 864.7 $
605.8 60.2 (3.0 ) (16.8 ) 13.8 660.0 5.5 (0.2 ) 665.3
(1) (2)
$16.4 million in revenues have been reclassified from prior periods presented related to facilities accounted for as discontinued operations. Additions to revenue represent revenue from the acquisition or consolidation of facilities during the 12 months after the date of acquisition or consolidation, as applicable. Deductions from revenue represent revenue from disposition or deconsolidation of facilities that were owned or consolidated in a prior period but are not owned or consolidated at the end of the current period.
Year-Ended December 31, 2013 Compared to Year-Ended December 31, 2012 Our consolidated net operating revenues increased by $59.3 million, or 8.2%, for the year-ended December 31, 2013 to $785.7 million from $726.4 million for the year-ended December 31, 2012. Consolidated net patient revenues per case increased by 6.2% to $1,710 per case during 2013 from $1,610 per case during the prior year. For the year-ended December 31, 2013, systemwide net operating revenues grew by 15.5% compared to the year-ended December 31, 2012. In addition, for the year-ended December 31, 2013, systemwide net patient revenues per case grew by 9.3% compared to the year-ended December 31, 2012. The table below quantifies several significant items impacting our period-over-period net operating revenues growth and net operating revenues growth of our nonconsolidated affiliates. Year-Ended December 31, 2013 Surgical Care Affiliates as Reported Under GAAP
Nonconsolidated Affiliates
(in millions)
Total net operating revenues, year-ended December 31, 2012 (1)(2) Add: revenue from acquired facilities revenue from consolidations Less: revenue of disposed facilities revenue from deconsolidated facilities Adjusted base year total net operating revenues Increase from operations Non-facility based revenue Total net operating revenues, year-ended December 31, 2013: (1) (2)
$
$
726.4 $ 31.4 5.2 — (26.9 ) 736.1 45.0 4.6 785.7 $
477.5 79.1 (5.2 ) (30.7 ) 26.9 547.6 56.7 1.5 605.8
$18.5 million in revenues have been reclassified from prior periods presented related to facilities accounted for as discontinued operations. Additions to revenue represent revenue from the acquisition or consolidation of facilities during the 12 months after the date of acquisition or consolidation, as applicable. Deductions from revenue represent revenue from disposition or deconsolidation of facilities that were owned or consolidated in a prior period but are not owned or consolidated at the end of the current period.
Summary of Key Line Items Net Operating Revenues The vast majority of our net operating revenues consist of net patient revenues from the facilities we consolidate for financial reporting purposes. Net patient revenues are derived from fees we collect from insurance companies, Medicare, state workers’ compensation programs, patients and other payors in exchange for providing the facility and related services and supplies a physician requires to perform a surgical procedure. Our net operating revenues also include the line item Management fee revenues, which includes fees we earn from managing the facilities that we do not consolidate for financial reporting purposes. The line item Other revenues is composed of other ancillary services and fees received for anesthesia services. The physicians who perform procedures at our facilities bill and collect from their patients and other payors directly for their professional services, and their revenues from such professional services are not included in our net operating revenues. Net Patient Revenues Net patient revenues are recorded during the period in which the healthcare services are provided, based upon the estimated amounts due from insurance companies, patients and other government and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), state workers’ compensation programs and employers. 64
The following table presents a breakdown by payor source of the percentage of net patient revenues at our consolidated facilities for the periods presented: Consolidated Facilities YEAR-ENDED DECEMBER 31, 2013
2014
Managed care and other discount plans Medicare Workers’ compensation Patients and other third-party payors Medicaid Total
62 % 20 10 5 3 100 %
2012
61 % 20 11 5 3 100 %
62 % 20 11 4 3 100 %
The following table presents a breakdown by payor source of the percentage of net patient revenues at our nonconsolidated facilities for the periods presented: Nonconsolidated Facilities YEAR-ENDED DECEMBER 31, 2013
2014
Managed care and other discount plans Medicare Workers’ compensation Patients and other third-party payors Medicaid Total
74 % 16 5 3 2 100 %
75 % 14 6 3 2 100 %
2012
75 % 12 7 3 3 100 %
The majority of our net patient revenues are related to patients with commercial health insurance coverage. The reimbursement rates we have been able to negotiate, on an average basis across our portfolio, have held relatively stable. Medicare accounts for 20% of our net patient revenues for the years-ended December 31, 2014, 2013 and 2012, respectively. The Medicare program is subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and funding reductions, all of which may adversely affect the level of payments to our facilities. Significant spending reductions mandated by the BCA impacting the Medicare program went into effect on March 1, 2013. Under the BCA, the percentage reduction for Medicare may not be more than 2% for a fiscal year, with a uniform percentage reduction across all providers. The impact from these spending reductions has not been material to our results. In October 2014, the Centers for Medicare and Medicaid Services finalized the payment update of 1.4% for ASCs for federal fiscal year 2015, consisting of 1.9% inflation minus a 0.5% productivity factor. We do not expect this update to materially affect our results. For the year-ended December 31, 2014, the net patient revenues from our consolidated facilities located in each of Texas, California and North Carolina represented approximately 14%, 14% and 13%, respectively, of our total net patient revenues. Additionally, the net patient revenues from our consolidated facilities located in each of Alabama, Connecticut, Florida and Idaho represented more than 5% of our total net patient revenues for the year-ended December 31, 2014. As of December 31, 2014, 29 of our 65 nonconsolidated facilities accounted for as equity method investments were located in California, and 13 of these 65 facilities were located in Indiana. Management Fee Revenues Management fee revenues consist of management fees that we receive from managing the day-to-day operations of the facilities that we do not consolidate for financial reporting purposes. Management fee revenues increased 45.6% for the year-ended December 31, 2014 compared to the prior year, mainly due to the acquisitions, including the acquisition of Health Inventures, LLC, a surgical and physician services company, during the second quarter of 2013.
65
Operating Expenses Salaries and Benefits Salaries and benefits represent the most significant cost to us and include all amounts paid to full and part-time teammates, including all related costs of benefits provided to such teammates. Salaries and benefits expense represented 34.4%, 34.5% and 32.2% of our net operating revenues for the years-ended December 31, 2014, 2013 and 2012, respectively. Supplies Supplies expense includes all costs associated with medical supplies used while providing patient care at our consolidated facilities. Our supply costs primarily include sterile disposables, pharmaceuticals, implants and other similar items. Supplies expense represented 20.6%, 21.7% and 22.7% of our net operating revenues for the years-ended December 31, 2014, 2013 and 2012, respectively. Supplies expense is typically closely related not only to case volume but also to case mix, as an increase in the acuity of cases and the use of implants in those cases tends to drive supplies expense higher. Other Operating Expenses Other operating expenses consists primarily of expenses related to insurance premiums, contract services, legal fees, repairs and maintenance, professional and licensure dues, office supplies and miscellaneous expenses. Other operating expenses do not generally correlate with changes in net patient revenues. Occupancy Costs Occupancy costs include facility rent, utility and maintenance expense. Occupancy costs do not generally correlate with changes in net patient revenues. Provision for Doubtful Accounts We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts we estimate we will collect. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, aging of accounts receivable, payor mix or trends in Federal or state governmental healthcare coverage. Provision for Income Tax Expense Because we have a full valuation allowance booked against our net deferred tax assets, our tax expense is generated primarily from amortization of tax goodwill and write-offs of tax goodwill resulting from the syndication of partnership interests. Our tax expense therefore bears no relationship to pre-tax income, and our effective tax rate will fluctuate from period to period, depending upon the amount of tax expense from amortization and write-offs of goodwill. Since substantially all of our facilities are organized as general partnerships, limited partnerships, limited liability partnerships or limited liability companies, which are not taxed at the entity level for federal income tax purposes and are only taxed at the entity level in five states for state income tax purposes, substantially all of our tax expense is attributable to Surgical Care Affiliates. Net Income (Loss) Attributable to Surgical Care Affiliates Net loss attributable to Surgical Care Affiliates is derived by subtracting net income attributable to noncontrolling interests from net income. Net income includes certain revenues and expenses that are incurred only through our wholly owned subsidiaries and therefore do not impact net income attributable to noncontrolling interests. These revenues and expenses include management fee revenues, interest expense related to Surgical Care Affiliates’ debt, losses or gains on sale of investments and provision for income taxes. In periods where net income is negatively affected by these non-shared revenues and expenses, the deduction of net income attributable to noncontrolling interests from net income can result in a net loss attributable to Surgical Care Affiliates in periods where net income is positive.
66
Summary Results of Operations Year-Ended December 31, 2014 Compared to Year-Ended December 31, 2013 and December 31, 2012 Our Consolidated Results and Results of Nonconsolidated Affiliates The following tables show our results of operations and the results of operations of our nonconsolidated affiliates for the years-ended December 31, 2014, 2013 and 2012. YEAR-ENDED DECEMBER 31, 2013 2012 NonAs NonAs NonReported Reported consolidated consolidated consolidated Affiliates (1) Under GAAP Affiliates (1) Under GAAP Affiliates (1) (in millions, except cases and facilities in actual amounts)
2014 As Reported Under GAAP
Net operating revenues: Net patient revenues $ 788.0 $ Management fee revenues 58.9 Other revenues 17.8 Total net operating revenues 864.7 Equity in net income of nonconsolidated affiliates (2) 32.6 Operating expense: Salaries and benefits 297.2 Supplies 177.9 Other operating expenses 124.9 Depreciation and amortization 52.7 Occupancy costs 29.4 Provision for doubtful accounts 14.1 Impairment of intangible and long-lived assets 0.6 (Gain) loss on disposal of assets (0.2 ) Total operating expenses 696.4 Operating income 200.9 Interest expense 32.8 Loss from extinguishment debt — Interest income (0.2 ) (Gain) loss on sale of investments (7.6 ) Income from continuing operations before income tax expense 175.9 Provision for income tax expense 9.4 Income from continuing operations 166.5 Loss from discontinued operations, net of income tax expense (9.4 ) Net income 157.1 $ Less: Net income attributable to noncontrolling interests (125.2 ) Net income (loss) attributable to Surgical Care Affiliates $ 32.0 Equity in net income of nonconsolidated affiliates (2) $ (3) Other Data Cases — consolidated facilities (4) 437,654 Cases — equity facilities (5) 276,320 Consolidated facilities 95 Equity method facilities 65 Managed-only facilities 26 Total facilities 186 67
659.4 $ — 5.9 665.3 —
731.6 $ 40.5 13.6 785.7 23.4
600.6 $ — 5.2 605.8 —
699.0 $ 17.8 9.6 726.4 16.8
474.4 — 3.2 477.5 —
140.4 111.8 98.1 21.8 26.0 16.0 — 1.8 415.9 249.4 2.3 — (0.1 ) —
270.9 170.2 127.7 41.5 25.5 14.2 — 0.1 650.1 158.9 60.2 10.3 (0.2 ) 12.3
128.9 99.3 89.6 17.3 22.7 10.4 — 0.3 368.5 237.3 1.7 — (0.1 ) —
234.2 164.8 112.8 40.0 25.3 12.7 0.4 (0.3 ) 589.9 153.2 58.6 — (0.3 ) 7.1
108.8 78.5 69.1 14.0 20.8 6.3 — 0.1 297.6 179.9 1.6 — (0.1 ) —
247.2 0.1 247.1
76.2 12.3 63.9
235.6 0.1 235.5
87.8 8.5 79.3
178.4 0.1 178.4
— 247.1
(9.3 ) 54.6 $
— 235.5
(4.9 ) 74.4 $
— 178.4
(105.9 ) $
(94.4 )
(51.3 )
32.6
$ $
427,840 258,942 87 60 30 177
(20.0 )
23.4
$ 434,243 226,860 87 52 8 147
16.8
(1)
(2)
(3) (4) (5)
The figures in this column, except within the line item Equity in net income of nonconsolidated affiliates, are non-GAAP presentations but management believes they provide further useful information about our equity method investments. The revenue, expense and operating income line items included in this column represent the results of our facilities that we account for as an equity method investment on a combined basis, without taking into account our percentage of ownership interest. The line item Equity in net income of nonconsolidated affiliates represents the total net income earned by us from our facilities accounted for as an equity method investment, which is computed as our percentage of ownership interest in the facility (which differs among facilities) multiplied by the net income earned by such facility, adjusted for basis differences such as amortization and other than temporary impairment charges, as described below. For the years-ended December 31, 2014, 2013 and 2012 we recorded amortization expense of $23.2 million, $25.9 million and $20.3 million, respectively, for definite-lived intangible assets attributable to equity method investments within Equity in net income of nonconsolidated affiliates. For the years-ended December 31, 2014, 2013 and 2012 we recorded other than temporary impairment charges of $0.3 million, $6.1 million and $9.2 million, respectively, within the line item Equity in net income of nonconsolidated affiliates. Case data is presented for the years-ended December 31, 2014, 2013 and 2012, as applicable. Facilities data is presented as of December 31, 2014, 2013 and 2012, as applicable. Represents cases performed at consolidated facilities. The number of cases performed at our facilities is a key metric utilized by us to regularly evaluate performance. Represents cases performed at equity method facilities. The number of cases performed at our facilities is a key metric utilized by us to regularly evaluate performance.
Year-Ended December 31, 2014 Compared to Year-Ended December 31, 2013 Net Operating Revenues Our consolidated net operating revenues increased $79.0 million, or 10.1%, for the year-ended December 31, 2014 compared to the year-ended December 31, 2013. The main factors that contributed to this increase were revenues earned from acquisitions and increased rates paid under certain payor contracts. This increase was partially offset by the deconsolidation of two facilities and the disposition of two facilities since December 31, 2013. Consolidated net patient revenues per case grew by 5.3% to $1,801 per case for the year-ended December 31, 2014 from $1,710 per case during the prior year, reflecting acquisitions of consolidated facilities with higher rates per case than the average rates at our consolidated facilities. The number of cases at our consolidated facilities increased to 437,654 cases during the year-ended December 31, 2014 from 427,840 cases during the year-ended December 31, 2013, largely due to acquisitions since the prior year, partially offset by the deconsolidation of two facilities and the disposition of two facilities since December 31, 2013. Our number of consolidated facilities increased to 95 facilities as of December 31, 2014 from 87 facilities as of December 31, 2013. For the year-ended December 31, 2014, systemwide net operating revenues grew by 10.0% compared to the year-ended December 31, 2013. The growth in systemwide net operating revenues was largely due to the acquisition of fifteen consolidated affiliates, two of which were previously accounted for as managed-only facilities, and noncontrolling interests in seven facilities accounted for as equity method investments, two of which were previously accounted for as managed only-facilities, since the prior year, as well as increased management fee revenues from acquisitions made subsequent to the prior year, increased rates earned under certain payor contracts and changes in case mix. In addition, for the year-ended December 31, 2014, systemwide net patient revenues per case grew by 4.5% compared to the year-ended December 31, 2013 due to the acquisitions described above. Equity in Net Income of Nonconsolidated Affiliates Equity in net income of nonconsolidated affiliates increased $9.2 million, or 39.3%, to $32.6 million during the year-ended December 31, 2014 from $23.4 million during the year-ended December 31, 2013. Equity in net income of nonconsolidated affiliates increased due to a decrease in equity method impairments from the prior year and a decrease in amortization expense for definite-lived intangible assets attributable to equity method investments from the prior year. Equity method impairments of $0.3 million were recorded during 2014 as compared to $6.1 million recorded during the prior year and amortization expense for definite-lived intangible assets attributable to equity method investments of $23.2 million was recorded during 2014 as compared to $25.9 million during the prior year. Additionally, the increase was due to the acquisition of several noncontrolling interests in facilities since December 31, 2013 and the deconsolidation of two facilities since December 31, 2013 (i.e., the facilities became equity method facilities rather than consolidated facilities). After deconsolidation, the results of operations of the facility were reported net in Equity in net income of nonconsolidated affiliates , whereas prior to deconsolidation, the results were reported within the consolidated revenue and expense line items. Additionally, changes in our ownership amounts in equity method facilities and changes in the profitability of those equity method facilities also impacted Equity in net income of nonconsolidated affiliates .
68
Salaries and Benefits Salaries and benefits expense increased $26.3 million, or 9.7%, to $297.2 million for the year-ended December 31, 2014 from $270.9 million for the year-ended December 31, 2013. Acquisitions, including the acquisition of Health Inventures, LLC in the second quarter of 2013, largely drove the increase in salaries and benefits. Corporate investments related to operations and development and annual salary increases also contributed to the increase. Supplies Supplies expense increased $7.7 million, or 4.5%, to $177.9 million for the year-ended December 31, 2014 from $170.2 million for the yearended December 31, 2013. Supplies expense per case increased by 2.2% during the year-ended December 31, 2014, as compared to the prior year period, primarily due to inflation and changes in case mix. Other Operating Expenses Other operating expenses decreased $2.8 million, or 2.2%, to $124.9 million for the year-ended December 31, 2014 from $127.7 million for the year-ended December 31, 2013. This decrease was primarily attributable to certain fees recorded in 2013 associated with our initial public offering and management fees to TPG partially offset by the incurrence of certain additional overhead costs resulting from our organizational growth and growth from acquisitions since the prior year. Depreciation and Amortization Depreciation and amortization expense increased $11.2 million, or 27.0%, to $52.7 million for the year-ended December 31, 2014 from $41.5 million for the year-ended December 31, 2013, primarily due to the addition of new capitalized assets and acquisitions since December 31, 2013, partially offset by the conversion of two consolidated facilities to equity method investments since the prior year. Occupancy Costs Occupancy costs increased $3.9 million, or 15.3%, to $29.4 million for the year-ended December 31, 2014 from $25.5 million for the yearended December 31, 2013, primarily due to organizational growth and acquisitions after the prior year. Provision for Doubtful Accounts The provision for doubtful accounts remained flat at $14.1 million and $14.2 million for the years-ended December 31, 2014 and December 31, 2013, respectively. Additionally, the provision remained consistent as a percentage of net patient revenues at approximately 2.0% for the year-ended December 31, 2014 and 2013. Interest Expense Interest expense decreased $27.4 million, or 45.5%, to $32.8 million for the year-ended December 31, 2014 from $60.2 million for the yearended December 31, 2013, primarily due to the refinancing of certain of our indebtedness in 2013, including the redemption of all of our outstanding senior notes and senior subordinated notes in the second half of 2013. (Gain) loss on Sale of Investments We recognized gains on sale of investments of $7.6 million and losses on sale of investments of $12.3 million for the years-ended December 31, 2014 and 2013, respectively. The gains for the year-ended December 31, 2014 were primarily due to a deconsolidation transaction, the syndications of nonconsolidated affiliates, contribution of an equity method investment to a joint venture and the sale of the management rights to an equity method investment, partially offset by losses due to another deconsolidation transaction. The losses for the year-ended December 31, 2013 were primarily due to deconsolidation transactions. 69
Provision for Income Tax Expense For the year-ended December 31, 2014, income tax expense was $9.4 million, representing an effective tax rate of 5.4%, compared to $12.3 million, representing an effective tax rate of 16.2%, for the year-ended December 31, 2013. The $9.4 million in expense for the year-ended December 31, 2014 includes $8.6 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, as well as write-offs of book and tax goodwill, and $0.8 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.6 million attributable to noncontrolling interests. The $12.3 million in expense for the year-ended December 31, 2013 included $11.5 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, as well as write-offs of book and tax goodwill, $0.2 million of current federal income tax attributable to noncontrolling interests and $0.6 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.4 million attributable to noncontrolling interests. Because we have a full valuation allowance booked against our net deferred tax assets, our tax expense is generated primarily from amortization of tax goodwill and write-offs of tax goodwill resulting from the syndication of partnership interests. Our tax expense therefore bears no relationship to pre-tax income, and our effective tax rate will fluctuate from period to period, depending upon the amount of tax expense from amortization and write-offs of goodwill. On a quarterly basis, we assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative. Our most recent operating performance, the scheduled reversal of temporary differences, and our forecast of taxable income in future periods are important considerations in our assessment. We recognize that our recent earnings is an example of positive evidence to be considered in our assessment. Management has considered all positive and negative evidence available at this time and has concluded that a full valuation allowance continues to be appropriate as of December 31, 2014. We continue to closely monitor actual and forecasted earnings and, if there are continued profitable results, we expect that reversal of all, or a portion of, the valuation allowance will be appropriate in the future. As of December 31, 2014, our valuation allowance was $163.5 million. See “Risk Factors — Risks Related to Our Business — We may not be able to fully realize the value of our net operating loss carryforwards.” Net income attributable to noncontrolling interests Net income attributable to noncontrolling interests increased $19.3 million, or 18.2%, to $125.2 million for the year-ended December 31, 2014 from $105.9 million for the year-ended December 31, 2013. The increase in our consolidated net operating revenues, as described above, drove an increase in consolidated facilities’ net income. Most of our consolidated facilities include noncontrolling owners. An increase in the earnings of these facilities resulted in an increase in net income attributable to noncontrolling interests. This increase was partially offset by the deconsolidation of two facilities since December 31, 2013. Net income (loss) attributable to Surgical Care Affiliates Net income attributable to Surgical Care Affiliates increased $83.3 million to $32.0 million of net income for the year-ended December 31, 2014 from $51.3 million of net loss for the year-ended December 31, 2013. The increase was driven by growth in earnings from acquisitions and lower interest expense. Year-Ended December 31, 2013 Compared to Year-Ended December 31, 2012 Net Operating Revenues Our consolidated net operating revenues increased $59.3 million, or 8.2%, for the year-ended December 31, 2013 to $785.7 million from $726.4 million for the year-ended December 31, 2012. The main factors that contributed to this increase were increased rates paid under certain payor contracts, revenues earned from a facility for which a consolidation transaction was completed during the second quarter of 2012, revenues earned from facilities acquired since December 31, 2012 and increases in acuity case mix. Consolidated net patient revenues per case grew by 6.2% to $1,710 per case for the year-ended December 31, 2013 from $1,610 per case during the prior year reflecting higher acuity case mix. During this same period, the number of cases at our consolidated facilities decreased to 427,840 cases during the year-ended December 31, 2013 from 434,243 cases during the year-ended December 31, 2012 and our number of consolidated facilities were 87 facilities as of December 31, 2013 and 2012. For the year-ended December 31, 2013, systemwide net operating revenues grew by 15.5% compared to the year-ended December 31, 2012. The growth in systemwide net operating revenues is largely due to the acquisition of noncontrolling interests in seven facilities accounted for as equity method investments and four consolidated affiliates since the prior year and increased rates earned under certain payor contracts. The increase is also attributable to two de novo facilities, one of which is an equity method investment and the other one is a consolidated affiliate, which were placed into operations after December 31, 2012. These factors are partially offset by the sale of our interest in a nonconsolidated facility completed in 2012. In addition, for the year-ended December 31, 2013, systemwide net patient revenues per case grew by 9.3% compared to the year-ended December 31, 2012, which is due to similar factors as described above. 70
Equity in Net Income of Nonconsolidated Affiliates Equity in net income of nonconsolidated affiliates increased $6.6 million, or 39.3%, to $23.4 million during the year-ended December 31, 2013 from $16.8 million during the year-ended December 31, 2012. This increase was primarily due to the acquisition of several noncontrolling interests in facilities since December 31, 2012 and the deconsolidation of two facilities completed during 2013 (i.e., the facilities became equity method facilities rather than consolidated facilities). After deconsolidation, the results of operations of the facilities were reported net in Equity in net income of nonconsolidated affiliates , whereas prior to deconsolidation, those results were reported within the consolidated revenue and expense line items. The increase was partially offset by $6.1 million of impairments related to five equity method facilities during 2013 and by the conversion of a facility that was previously accounted for as an equity method facility to a consolidated facility during the second quarter of 2012. After the date of conversion, the results of this facility were reported within our consolidated revenue and expense line items, whereas prior to the conversion, the results of operations at this facility were reported net in the line item Equity in net income of nonconsolidated affiliates . The $6.1 million of impairment recorded to our investments in nonconsolidated affiliates was due to a decline in the expected future cash flows of five nonconsolidated affiliates that we determined to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . Additionally, changes in our ownership amounts in equity method facilities and changes in the profitability of those equity method facilities also impacted Equity in net income of nonconsolidated affiliates . During the year-ended December 31, 2013, we recorded $25.9 million of amortization expense for definite-lived intangible assets attributable to equity method investments. This expense was included in the line item Equity in net income of nonconsolidated affiliates in our consolidated financial statements. We recorded $20.3 million of amortization expense during the year-ended December 31, 2012. Salaries and Benefits Salaries and benefits expense increased $36.7 million, or 15.7%, to $270.9 million for the year-ended December 31, 2013 from $234.2 million for the year-ended December 31, 2012. The increase in salary and benefits expense is primarily due to the addition of new teammates in connection with acquisitions as well as the payment of a cash bonus to eligible holders of vested options and restricted equity units (the “2013 Special Cash Bonus Payment”) of approximately $2.46 per vested option or restricted equity unit, as applicable, recorded during the third quarter of 2013, resulting in a total bonus payment of $4.6 million. Salaries and benefits also increased as a result of the addition of the expenses associated with existing teammates as a result of the consolidation of previously nonconsolidated affiliates. Supplies Supplies expense increased $5.4 million, or 3.3%, to $170.2 million for the year-ended December 31, 2013 from $164.8 million for the yearended December 31, 2012. This increase in supplies expense is primarily attributable to changes in our case mix, in particular an increase in the number of orthopedic and ophthalmology cases performed at our facilities, which tend to require higher cost supplies and implants. Supplies expense per case increased by 4.8% during the year-ended December 31, 2013, as compared to the prior year, which is attributable to changes in our case mix as well as inflationary increases to supply costs. Other Operating Expenses Other operating expenses increased $14.9 million, or 13.2%, to $127.7 million for the year-ended December 31, 2013 from $112.8 million for the year-ended December 31, 2012. This increase is primarily attributable to the incurrence of certain additional overhead costs resulting from our organizational growth, partially offset by our efforts to manage and decrease existing overhead operating expenses. Depreciation and Amortization Depreciation and amortization expense increased $1.5 million, or 3.8%, to $41.5 million for the year-ended December 31, 2013 from $40.0 million for the year-ended December 31, 2012, primarily due to the addition of new capitalized assets during the year, partially offset by the conversion of two consolidated facilities to equity method investments. Occupancy Costs Occupancy costs remained relatively steady at $25.5 million during the year-ended December 31, 2013 as compared to $25.3 million during the year-ended December 31, 2012. 71
Provision for Doubtful Accounts The provision for doubtful accounts increased $1.5 million, or 11.8%, to $14.2 million for the year-ended December 31, 2013 from $12.7 million during the year-ended December 31, 2012; however, it remains consistent as a percentage of net patient revenues at approximately 2.0%. Interest Expense Interest expense increased $1.6 million, or 2.7%, to $60.2 million for the year-ended December 31, 2013 as compared to $58.6 million during the year-ended December 31, 2012 due to the de-designation of interest rate swaps as cash flow hedges partially offset by interest savings from the refinancing of certain of our debt instruments in 2013, including the redemption of all of our outstanding senior notes and senior subordinated notes. Loss (Gain) on Sale of Investments We recognized a loss on sale of investments of $12.3 million for the year-ended December 31, 2013 and a loss on sale of investments of $7.1 million during the year-ended December 31, 2012. The loss during the year-ended December 31, 2013 was recorded in connection with the sale of two consolidated affiliates, a deconsolidation transaction and the consolidation of a previously nonconsolidated affiliate. The loss in 2012 was related to the divestiture of our interest in a nonconsolidated affiliate and the deconsolidation of a previously consolidated affiliate, which was partially offset by a gain from the consolidation of a previously nonconsolidated affiliate. Provision for Income Tax Expense For the year-ended December 31, 2013, income tax expense was $12.3 million, representing an effective tax rate of 16.2%, compared to an expense of $8.5 million, representing an effective tax rate of 9.7% for the year-ended December 31, 2012. The $12.3 million in expense for the year-ended December 31, 2013 included $11.5 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, as well as write-offs of book and tax goodwill, $0.2 million of current federal income tax attributable to noncontrolling interests and $0.6 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.4 million attributable to noncontrolling interests. The $8.5 million in expense for the year-ended December 31, 2012 included $8.1 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, and $0.4 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.2 million attributable to noncontrolling interests. Because we have a full valuation allowance booked against our net deferred tax assets, our tax expense is generated primarily from amortization of tax goodwill and write-offs of tax goodwill resulting from the syndication of partnership interests. Our tax expense therefore bears no relationship to pre-tax income, and our effective tax rate will fluctuate from period to period, depending upon the amount of tax expense from amortization and write-offs of goodwill. On a quarterly basis, we assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative. Our most recent operating performance, the scheduled reversal of temporary differences and our forecast of taxable income in future periods are important considerations in our assessment. Management considers all positive and negative evidence available, and concluded that a full valuation allowance was appropriate as of December 31, 2013. As of December 31, 2013, our valuation allowance was $166.1 million. See “Risk Factors — Risks Related to Our Business — We may not be able to fully realize the value of our net operating loss carryforwards.” Net income attributable to noncontrolling interests Net income attributable to noncontrolling interests increased $11.5 million, or 12.2%, to $105.9 million for the year-ended December 31, 2013 from $94.4 million for the year-ended December 31, 2012. The increase in our consolidated net operating revenues, as described above, drove an increase in consolidated facilities’ net income. Most of our consolidated facilities include noncontrolling owners. An increase in the earnings of these facilities resulted in an increase in net income attributable to noncontrolling interests. This increase was partially offset by the deconsolidation of two facilities in 2013. Net loss attributable to Surgical Care Affiliates Net loss attributable to Surgical Care Affiliates increased $31.3 million to $51.3 million for the years-ended December 31, 2013 from $20.0 million for the year-ended December 31, 2012. While our facilities’ revenue and operating income increased during the year-ended December 31, 2013, the increase in revenues and operating income was more than offset by increases in net income attributable to noncontrolling interests, loss from extinguishment of debt and increases in salaries and benefits.
72
Adjusted EBITDA-NCI and Adjusted Net Income Reconcilements The following table represents the reconciliation of net income to Adjusted EBITDA-NCI and of net loss attributable to Surgical Care Affiliates to Adjusted Net Income for the periods indicated below: 2014
Adjusted EBITDA-NCI (a): Net income Plus (minus): Interest expense, net Provision for income tax expense Depreciation and amortization Loss from discontinued operations, net Equity method amortization expense (b) (Gain) loss on sale of investments Loss on extinguishment of debt Asset impairments (Gain) loss on disposal of assets IPO related expense (c) Stock compensation expense (d) Other Adjusted EBITDA (Minus): Net income attributable to noncontrolling interests Adjusted EBITDA-NCI Adjusted Net Income (a): Net income (loss) attributable to Surgical Care Affiliates Plus (minus) Provision for income tax expense Loss on extinguishment of debt Asset impairments Amortization expense Loss from discontinued operations, net (Gain) loss on sale of investments (Gain) loss on disposal of assets Equity method amortization expense (b) IPO related expense (c) Stock compensation expense (d) Other Adjusted Net Income
$
2013
157.1
$
32.6 9.4 52.7 9.4 23.2 (7.6 ) — 0.7 (0.2 ) — 4.1 0.5 281.9
$
2012
54.6
$
60.0 12.3 41.5 9.3 25.9 12.3 10.3 6.1 0.1 9.0 7.3 — 248.7
(125.2 ) 156.7 $
$
32.0
$
$
9.4 — 0.7 10.1 9.4 (7.6 ) (0.2 ) 23.2 — 4.1 0.4 81.5 $
74.4 58.3 8.5 40.0 4.9 20.3 7.1 — 9.6 (0.3 ) — 1.7 — 224.5
(105.9 ) 142.8 $
(94.4 ) 130.1
(51.3 ) $
(20.0 )
12.3 10.3 6.1 6.7 9.3 12.3 0.1 25.9 9.0 7.3 — 48.0
$
8.5 — 9.6 4.8 4.9 7.1 (0.3 ) 20.3 — 1.7 — 36.6
(a) Adjusted EBITDA-NCI means net income before provisions for income tax expense, net interest expense, depreciation and amortization, net loss from discontinued operations, equity method amortization expense, (gain) loss on sale of investments, loss on extinguishment of debt, asset impairments, gain (loss) on disposal of assets, IPO related expenses, stock compensation expense and other less net income attributable to noncontrolling interests. Adjusted net income means net loss attributable to Surgical Care Affiliates before provisions for income tax, loss on extinguishment of debt, asset impairments, amortization expense, net loss from discontinued operations, (gain) loss on sale of investments, (gain) loss on disposal of assets, equity method amortization expense, IPO related expenses, stock compensation expense and other. We present Adjusted EBITDA-NCI and Adjusted net income because we believe that they are useful metrics to investors in analyzing our operating performance on the same basis as that used by our management. Our management believes that Adjusted EBITDA-NCI can be useful to facilitate comparisons of operating performance between periods because it excludes the effect of depreciation and amortization, which represents a non-cash charge to earnings, income tax, interest expense and other expenses or income not related to the normal, recurring operations of our business. Our management believes that Adjusted net income can be useful to facilitate comparisons of our operating performance between periods because it excludes the effect of certain non-cash and other charges to earnings whose fluctuations from period-to-period do not necessarily correspond to the normal, recurring operations of our business. Adjusted EBITDA-NCI and Adjusted net income are each considered a “non-GAAP financial measure” under SEC rules and should not be considered a substitute for net income (loss) or net operating income as determined in accordance with GAAP. In addition, Adjusted EBITDA-NCI and Adjusted net income have limitations as analytical tools, including the following: 73
• Adjusted EBITDA-NCI and Adjusted net income do not reflect our historical capital expenditures, or future requirements for capital expenditures, or contractual commitments; • Adjusted EBITDA-NCI and Adjusted net income do not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA-NCI does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments under our credit agreement; • Adjusted EBITDA-NCI and Adjusted net income do not reflect our historical impairments recognized; and • Adjusted EBITDA-NCI does not reflect income tax expense or the cash requirements to pay our taxes. You should be aware that we may incur expenses in the future that are similar to those excluded in the calculation of Adjusted EBITDA-NCI or Adjusted net income. Further, other companies in our industry may calculate Adjusted EBITDA-NCI or Adjusted net income differently than we do, limiting their usefulness as comparative measures. Because of these limitations, neither Adjusted EBITDA-NCI nor Adjusted net income should be considered the primary measure of the operating performance of our business. We strongly encourage investors to review the GAAP financial statements included elsewhere in this Annual Report on Form 10-K, and not to rely on any single financial measure to evaluate our business. (b) For the years-ended December 31, 2014, December 31, 2013 and December 31, 2012, we recorded $23.2 million, $25.9 million and $20.3 million, respectively, of amortization expense for definite-lived intangible assets attributable to equity method investments. These expenses are included in Equity in net income of nonconsolidated affiliates in our consolidated financial statements. (c) IPO related expense includes an $8.0 million fee paid to TPG Capital pursuant to the Management Services Agreement (as defined herein) at the closing of our initial public offering in November 2013. After the fee was paid, the Management Services Agreement was terminated. (d) Represents stock-based compensation expense comprised of $2.7 million non-cash expense and $4.6 million in a non-recurring cash bonus paid on vested equity awards in the fourth quarter of 2013. Results of Discontinued Operations We have closed or sold certain facilities that qualify for reporting as discontinued operations. The operating results of discontinued operations were as follows:
2014
Net operating revenues Costs and expenses Gain (loss) on sale of investments or closures Impairments Loss from discontinued operations Income tax (expense) benefit Net loss from discontinued operations
$
$
YEAR-ENDED DECEMBER 31, 2013
15.5 $ (18.7 ) 0.3 (0.7 ) (3.6 ) (5.8 ) (9.4 ) $
20.4 $ (23.3 ) (2.5 ) — (5.4 ) (3.9 ) (9.3 ) $
2012
35.3 (38.4 ) (1.8 ) (0.7 ) (5.5 ) 0.6 (4.9 )
Both the decline in net operating revenues and the decline in costs and expenses in each period were due to the timing of the sale or closure of the facilities identified as discontinued operations. Tax expense for each year is attributable to the amortization and write-offs of tax goodwill. Thus, to the extent the sale or closure of a facility triggers a write-off of goodwill, tax expense is impacted accordingly. Given that the number of facilities sold or closed varies from year to year, tax expense will vary based on the number of discontinued facilities, and the amount of tax goodwill associated with those facilities. The net loss from our discontinued operations is included in the line item Loss from discontinued operations, net of income tax expense in our consolidated financial statements. 74
Liquidity and Capital Resources Our primary cash requirements are paying our operating expenses, servicing our existing debt, capital expenditures on our existing properties, financing acquisitions of ASCs and surgical hospitals (including as both consolidated and nonconsolidated affiliates), the purchase of equity interests in nonconsolidated affiliates and distributions to noncontrolling interests. These continuing liquidity requirements have been and will continue to be significant, primarily due to financing costs relating to our indebtedness. The following chart shows the cash flows provided by or used in operating, investing and financing activities of continuing and discontinued operations (in the aggregate) for the years-ended December 31, 2014, 2013 and 2012:
2014
Net cash provided by operating activities Net cash used in investing activities Net cash used in financing activities (Decrease) increase in cash and cash equivalents
$
$
YEAR-ENDED DECEMBER 31, 2013
210.6 $ (188.5 ) (99.1 ) (77.1 ) $
165.6 $ (76.8 ) (121.7 ) (33.0 ) $
2012
171.2 (21.8 ) (102.1 ) 47.3
Cash Flows Provided by Operating Activities Cash flows provided by operating activities is primarily derived from net income before deducting non-cash charges for depreciation and amortization.
2014
Net Income Depreciation and amortization Distributions from nonconsolidated affiliates Equity in income of nonconsolidated affiliates Provision for doubtful accounts Change in fair value and loss on de-designation of swap Loss on extinguishment of debt Payment of deferred interest Debt call premium paid Other operating cash flows, net Net cash provided by operating activities
$
$
YEAR-ENDED DECEMBER 31, 2013
157.1 $ 52.7 50.8 (32.6 ) 14.1 0.5 — — — (32.0 ) 210.6 $
54.6 $ 41.5 50.5 (23.4 ) 14.2 8.3 10.3 (14.8 ) (5.0 ) 29.4 165.6 $
2012
74.4 40.0 38.7 (16.8 ) 12.7 — — — — 22.2 171.2
During the year-ended December 31, 2014, we generated $210.6 million of cash flows provided by operating activities, compared to $165.6 million during the year-ended December 31, 2013. Cash flows from operating activities increased $45.0 million, or 27.2%, from the prior year, primarily due to a $113.7 million increase in net income before depreciation and amortization, partially offset by a $61.4 million decrease in other operating cash flows consisting largely of changes in working capital. During the year-ended December 31, 2013, we generated $165.6 million of cash flows provided by operating activities, as compared to $171.2 million during the year-ended December 31, 2012. Cash flows from operating activities decreased $5.6 million, or 3.3%, from the prior year, primarily due to the payment of $14.8 million of interest that had been deferred as a payment-in-kind for the Senior PIK-election Notes (as defined herein), as discussed in the “Debt” section below, and a debt call premium of $5.0 million, partially offset by an increase in distributions from nonconsolidated affiliates of $11.8 million. During the year-ended December 31, 2012, we generated $171.2 million of cash flows provided by operating activities, as compared to $162.2 million during the year-ended December 31, 2011. Cash flows provided by operating activities increased $9.0 million, or 5.5%, from the prior year, primarily due to an $11.6 million increase in distributions from nonconsolidated affiliates, partially offset by a $5.8 million decrease in net income, excluding equity in income of nonconsolidated affiliates. Cash Flows Used in Investing Activities During the year-ended December 31, 2014, our net cash used in investing activities was $188.5 million, consisting primarily of $122.2 million for business acquisitions, net of cash acquired, $37.3 million of capital expenditures and $36.0 million of purchases of equity interests in nonconsolidated affiliates, partially offset by $2.7 million of proceeds from the sale of businesses, $2.4 million of proceeds from the sale of equity interests of consolidated affiliates in deconsolidation transactions and a $1.1 million decrease in 75
restricted cash. Cash flows used in investing activities increased $111.7 million, or 145.4%, from the prior year, primarily due to an increase in cash outflows for business acquisitions and for the purchase of equity interests in nonconsolidated affiliates. During the year-ended December 31, 2013, our net cash used in investing activities was $76.8 million, consisting primarily of $54.5 million for business acquisitions, net of cash acquired, $36.8 million of capital expenditures and $2.9 million of net settlements on interest rate swaps, partially offset by $5.9 million of proceeds from the disposal of assets, $4.6 million of proceeds from the sale of equity interests of nonconsolidated affiliates, $2.6 million of return of capital related to equity method investments and $2.1 million of proceeds from the sale of equity interests of consolidated affiliates in deconsolidation transactions. During the year-ended December 31, 2012, our net cash used in investing activities was $21.8 million, consisting primarily of $28.4 million used in capital expenditures, $6.1 million used in net settlements on interest rate swaps and $14.5 million used in purchases of equity interests in nonconsolidated affiliates, partially offset by $4.3 million of proceeds received from the sale of equity interests of consolidated affiliates in deconsolidation transactions, $10.2 million of proceeds from the sale of businesses and $15.0 million of proceeds from the sale of equity interests of nonconsolidated affiliates. Cash Flows Used in Financing Activities Net cash used in financing activities for the year-ended December 31, 2014 was $99.1 million, consisting primarily of $113.4 million of distributions to noncontrolling interests, which primarily related to existing facilities, and $31.1 million for principal payments on long-term debt, partially offset by $35.6 million in long-term debt borrowings and $17.5 million of contributions from noncontrolling interests of consolidated affiliates, which primarily were used to fund business acquisitions. Net cash used in financing activities decreased $22.6 million, or 18.6%, from the prior year, primarily due to lower distributions to unit holders and lower net long-term debt borrowings. Net cash used in financing activities for the year-ended December 31, 2013 was $121.7 million, consisting primarily of $527.6 million for principal payments on long-term debt, $103.0 million of distributions to noncontrolling interests, $74.9 million of distributions to unit holders, and $5.7 million of payments of debt acquisition costs, partially offset by $417.7 million long-term debt borrowings and $171.9 million in proceeds from our initial public offering. Net cash used in financing activities for the year-ended December 31, 2012 was $102.1 million, consisting primarily of $94.2 million in distributions to noncontrolling interests of consolidated affiliates, $8.9 million of repayments of long-term debt and $6.2 million of principal payments under capital lease obligations, partially offset by $7.6 million of proceeds from the sale of equity interests of consolidated affiliates. Cash and cash equivalents were $8.7 million at December 31, 2014 as compared to $85.8 million at December 31, 2013. Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions, reduced by the amount of outstanding checks and drafts where the right of offset exists for such bank accounts, and short-term, highly liquid investments. We consider all highly liquid investments with original maturities of 90 days or less, such as certificates of deposit, money market funds and commercial paper, to be cash equivalents. Our overall working capital position at December 31, 2014 was a deficit of $11.9 million, as compared to working capital of $36.4 million at December 31, 2013, a decrease of $48.3 million, or 132.7%. This decrease was primarily driven by cash flows used for acquisitions in 2014. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our Class B Revolving Credit Facility, will be adequate to meet our short-term (12 months or less) liquidity needs. If we choose to utilize substantial cash for acquisitions or other investments, we may require additional financing, access to which may be outside our control. Debt Our primary sources of funding have been the issuance of debt and cash flows from operations. In the future, our primary sources of liquidity are expected to be cash flows from operations and additional funds available under the Class B Revolving Credit Facility. The Credit Facility Our senior secured credit facilities consist of a $132.3 million Class B Revolving Credit Facility, which will mature on June 30, 2016 (the “Class B Revolving Credit Facility”); a $212.2 million Class B Term Loan, which will mature on December 30, 2017 (the “Class B Term Loan”); and a $384.2 million Class C Term Loan, which will mature on June 30, 2018 (the “Class C Term Loan” and, together with the Class B Revolving Credit Facility and the Class B Term Loan, the “Senior Secured Credit Facilities”).
76
The table below indicates the current maturity date for each of our credit facilities. Facility
Maturity Date
Class B Revolving Credit Facility Class B Term Loan Class C Term Loan
June 30, 2016 December 30, 2017 June 30, 2018
As of December 31, 2014, we had no outstanding balance under the Class B Revolving Credit Facility. At December 31, 2014, we had approximately $2.9 million in letters of credit outstanding under this facility. Utilization of the Class B Revolving Credit Facility is subject to compliance with a total leverage ratio test. No utilization of the Class B Revolving Credit Facility may be outstanding (other than issuances of up to an aggregate of $5.0 million of letters of credit) at the end of any fiscal quarter in which the total leverage ratio, which is the ratio of consolidated total debt to consolidated EBITDA (each as defined in our credit agreement (the “Amended Credit Agreement”)), as of the last day of such fiscal quarter, is greater than the specified ratio level. We were in compliance with the total leverage ratio test at December 31, 2014. Borrowings under each portion of the Senior Secured Credit Facilities bear interest at a base rate or at LIBOR, as elected by us, plus an applicable margin. The base rate is determined by reference to the higher of (i) the prime rate of JPMorgan Chase Bank, N.A. and (ii) the federal funds effective rate plus 0.50% (the “base rate”). The LIBOR rate is determined by reference to the interest rate for dollar deposits in the London interbank market. The table below outlines the applicable margin for each credit facility.
Facility
Class B Revolving Credit Facility Class B Term Loan Class C Term Loan
Applicable Margin (per annum) Base Rate Borrowings LIBOR Borrowings
2.50% 3.00% 2.00% or 2.25% (with a base rate floor of 2.00%), depending upon the total leverage ratio
3.50% 4.00% 3.00% or 3.25% (with a LIBOR floor of 1.00%), depending upon the total leverage ratio
At December 31, 2014, the interest rate on the Class B Term Loan was 4.26%. At December 31, 2014, the interest rate on our Class C Term Loan was 4.00%. We must repay each of the Class B Term Loan and the Class C Term Loan in quarterly installments equal to 0.25% of the original principal amount of the respective loan. The remaining amount of each of the Class B Term Loan and the Class C Term Loan is due in full at maturity. We are also required to pay a commitment fee to the lenders under our Class B Revolving Credit Facility in respect of the unutilized commitments thereunder of either 0.375% or 0.50%, depending on the senior secured leverage ratio (as defined in the Amended Credit Agreement). The Senior Secured Credit Facilities contain certain customary representations and warranties, affirmative covenants, events of default and various restrictive covenants, which are subject to certain significant exceptions. As of December 31, 2014, we believe we and SCA were in compliance with these covenants. Senior Subordinated Notes On June 29, 2007, SCA and Surgical Holdings, Inc. (the “Co-Issuer”) issued $150.0 million in aggregate principal amount of 10% senior subordinated notes due July 15, 2017 (the “Senior Subordinated Notes”). On December 4, 2013, SCA and the Co-Issuer redeemed the Senior Subordinated Notes at a premium of 3.333%. The satisfaction, discharge and redemption of the Senior Subordinated Notes was funded with proceeds from our initial public offering. In conjunction with the redemption, we recognized a loss on extinguishment of $6.5 million. Senior PIK-election Notes On June 29, 2007, SCA and the Co-Issuer issued $150.0 million in aggregate principal amount of 8.875% / 9.625% Senior PIK-election Notes due July 15, 2015 (the “Senior PIK-election Notes”). On June 14, 2013, SCA and the Co-Issuer issued a notice of redemption for all of the outstanding Senior PIK-election Notes (which totaled $164.8 million as of June 14, 2013) and deposited sufficient funds with the trustee for the Senior PIK-election Notes to satisfy and discharge all of our and the Co-Issuer’s obligations with respect to the Senior PIK-election Notes and the related indenture. The Senior PIK-election Notes were redeemed in full on July 15, 2013. This satisfaction, discharge and redemption of the Senior PIK-election Notes was funded with borrowings from the Class C Term Loan. In conjunction with the redemption, we recognized a loss on extinguishment of $3.8 million. 77
Contractual Obligations The table below sets forth our future maturities of debt, interest on debt, capitalized lease obligations, operating lease obligations and other contractual obligations as of December 31, 2014:
Less than Total
Debt obligations (1) Interest on debt obligations (2) Capitalized lease obligations (3) Operating lease obligations (4) Other contractual obligations (5) Total (1) (2)
(3) (4) (5)
$
661.0 91.7 34.6 125.5 5.4 918.2
$
Payments due by period 1-3
1 year
$
$
18.0 27.8 8.2 24.5 2.4 80.9
years (in millions)
$
$
240.7 52.3 11.6 35.6 2.7 342.9
$
$
3-5
More than 5
years
years
386.1 9.3 5.7 24.3 0.3 425.7
$
$
16.2 2.3 9.1 41.1 — 68.7
As of December 31, 2014 and for purposes of this table, our indebtedness included (i) $212.2 million of Class B Term Loans, (ii) $384.2 million of Class C Term Loans, (iii) $132.3 million of Class B Revolving Credit Facility capacity and (iv) $64.6 million of notes payable to banks and others. Represents (i) interest expense on the debt obligations based on an assumed interest rate of the current 3-month LIBOR rate as of December 31, 2014 plus 175 basis points with respect to the Class B Term Loan and Class B Revolving Credit Facility, an interest rate of 3.25% with a LIBOR floor of 1.00%, (ii) quarterly commitment fees on unused borrowing capacity under the Class B Revolving Credit Facility and (iii) various fixed and variable rates on notes payable to banks and others. Capitalized lease obligations include real estate, medical equipment, computer equipment and other equipment utilized in operations (interest and principal). Operating lease obligations include land, buildings and equipment. Other contractual obligations are attributable to maintenance and service contracts.
Because their future cash outflows are uncertain, the following liabilities are excluded from the table above: deferred income taxes, professional liability reserves, workers’ compensation reserves, redeemable noncontrolling interests and our estimated liability for unsettled litigation. Deferred rent is also excluded from the table above. Repurchases of Equity from Physician Partners We are obligated under the agreements governing certain of our partnerships and LLCs to repurchase all of the physicians’ ownership interests upon the occurrence of certain regulatory events, including if it becomes illegal for physicians to own an interest in one of our facilities, refer patients to one of our facilities or receive cash distributions from a facility. The purchase price that we would be required to pay for these ownership interests is typically based on either a multiple of the applicable facility’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), or the fair market value of the ownership interests as determined by a third-party appraisal. In the event we are required to purchase all of the physicians’ ownership interests in all of our facilities, our existing capital resources would not be sufficient for us to meet this obligation. See “Risk Factors — Risks Related to Healthcare Regulation — If laws or regulations governing physician ownership of our facilities change, we may be obligated to purchase some or all of the ownership interests of our physician partners or renegotiate some of our partnership and operating agreements with our physician partners and management agreements with our surgical facilities.” Capital Expenditures Currently, we project our capital expenditures for fiscal year 2015 to be approximately $37.0 million, which we expect to finance primarily through internally generated funds and bank or manufacturer financing. Capital expenditures totaled $37.3 million and $36.8 million for the yearsended December 31, 2014 and 2013. The capital expenditures made during 2014 consisted primarily of fixture improvements made at our leased facilities and our purchase of medical and other equipment. These capital expenditures were financed primarily through internally generated funds and bank or manufacturer financing. We believe that our capital expenditure program is adequate to improve and equip our existing facilities. Capital Leases We engage in a significant number of leasing transactions, including real estate, medical equipment, computer equipment and other equipment utilized in operations. Certain leases that meet the lease capitalization criteria in accordance with authoritative guidance for leases have been recorded as an asset and liability at the net present value of the minimum lease payments at the inception of the lease. Interest rates used in computing the net present value of the lease payments generally range from 2.2% to 12.2% based on our incremental borrowing rate at the inception of the lease. 78
Inflation For the past three years, inflation has not significantly affected our operating results or the geographic areas in which we operate. Off-Balance Sheet Transactions As a result of our strategy of partnering with physicians and health systems, we do not own controlling interests in many of our facilities. At December 31, 2014, we accounted for 65 of our 186 facilities under the equity method. Similar to our consolidated facilities, our nonconsolidated facilities have debts, including capitalized lease obligations, that are generally non-recourse to us. With respect to our equity method facilities, these debts are not included in our consolidated financial statements. At December 31, 2014, the total debt on the balance sheets of our nonconsolidated affiliates was approximately $56.4 million. Our average percentage of ownership of these nonconsolidated affiliates, weighted based on the particular affiliate’s amount of debt and our ownership of such affiliate, was approximately 32% at December 31, 2014. We or one of our wholly owned subsidiaries collectively guaranteed $2.0 million of the $56.4 million in total debt of our nonconsolidated affiliates as of December 31, 2014. Our guarantees related to operating leases of nonconsolidated affiliates were $20.1 million at December 31, 2014. As described above, our nonconsolidated affiliates are structured as LPs, general partnerships, LLPs, or LLCs. None of these affiliates provide financing, liquidity, or market or credit risk support for us. They also do not engage in hedging or research and development services with us. Moreover, we do not believe that they expose us to any of their liabilities that are not otherwise reflected in our consolidated financial statements and related disclosures. Except as noted above with respect to guarantees, we are not obligated to fund losses or otherwise provide additional funding to these affiliates other than as we determine to be economically required in order to successfully implement our development plans. Critical Accounting Policies General Our discussion and analysis of our financial condition, results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of consolidated financial statements under GAAP requires our management to make certain estimates and assumptions that impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. These estimates and assumptions also impact the reported amount of net earnings during any period. Estimates are based on information available as of the date financial statements are prepared. Accordingly, actual results could differ from those estimates. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and that require management’s most subjective judgments. Our critical accounting policies and estimates include our policies and estimates regarding consolidation, variable interest entities, revenue recognition, accounts receivable, noncontrolling interests in consolidated affiliates, equity-based compensation, valuation of our common stock, income taxes, goodwill and impairment of long-lived assets and other intangible assets. Principles of Consolidation Our consolidated financial statements include the accounts of us, our subsidiaries and VIEs for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. We evaluate partially owned subsidiaries and joint ventures held in partnership form using authoritative guidance, which includes a framework for evaluating whether a general partner(s) or managing member(s) controls an affiliate and therefore should consolidate it. The framework includes the presumption that general partner or managing member control would be overcome only when the limited partners or members have certain rights. Such rights include the right to dissolve or liquidate the LP, LLP or LLC or otherwise remove the general partner or managing member “without cause,” or the right to effectively participate in significant decisions made in the ordinary course of business of the LP, LLP or LLC. To the extent that any noncontrolling investor has rights that inhibit our ability to control the affiliate, including substantive veto rights, we do not consolidate the affiliate. We use the equity method to account for our investments in affiliates with respect to which we do not have control rights but have the ability to exercise significant influence over operating and financial policies. Assets, liabilities, revenues and expenses are reported in the respective detailed line items on the consolidated financial statements for our consolidated affiliates. For our equity method affiliates, assets and liabilities are reported on a net basis in the line item Investment in and advances to nonconsolidated affiliates on the consolidated balance sheets, and revenues and expenses are reported on a net basis in the line item Equity in net income of nonconsolidated affiliates on the consolidated statements of operations. 79
Variable Interest Entities Under Accounting Standards Codification Section 810, Consolidations, we include the assets, liabilities and activities of a VIE in our financial statements if we are the primary beneficiary of such VIE and the entity has one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity or (iii) the right to receive the expected residual returns of the entity, or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that will receive a majority of the VIE’s expected losses or receive a majority of a VIE’s expected residual returns and has the power to direct the activities that most significantly impact the VIE’s economic performance. Determining the primary beneficiary of a VIE requires substantial judgment, including determining what activities most significantly impact the economic performance of the VIE and which entity or entities have control over those activities. Revenue Recognition Our revenues consist primarily of net patient revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the services are provided, based upon the estimated amounts due from patients and thirdparty payors, including federal and state payors (primarily the Medicare and Medicaid programs), commercial health insurance companies, workers’ compensation programs and employers. These estimates are complex and require significant judgement. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. During the year-ended December 31, 2014, approximately 62% of our net patient revenues related to patients with commercial insurance coverage. Healthcare service providers are under increasing pressure to accept reduced reimbursement for services on these contracts. Continued reductions could have a material adverse impact on our financial position, results of operations and cash flows. During the year-ended December 31, 2014, approximately 23% of our net patient revenues related to patients participating in the Medicare and Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and are routinely modified for provider reimbursement. We are unable to predict if or when we may be subject to a suspension of payments by the Medicare and/or Medicaid programs, the possible length of the suspension period or the potential cash flow impact of a payment suspension. Any such suspension would adversely impact our financial position, results of operations and cash flows. During the year-ended December 31, 2014, approximately 10% of our net patient revenues related to patients with workers’ compensation coverage. Workers’ compensation payors have typically paid surgical facilities a higher percentage of the surgical facilities’ charges than other third-party payors. However, workers’ compensation payment amounts are subject to legislative, regulatory and other payment changes over which we have no control. A reduction in workers’ compensation payment amounts could have a material adverse effect on the revenues of our facilities that perform a significant number of workers compensation cases. During the year-ended December 31, 2014, uninsured or self-pay revenues accounted for less than 5% of our net patient revenues. Our facilities primarily perform surgery that is scheduled in advance by physicians who have already seen the patient. We verify benefits, obtain insurance authorization, calculate patient financial responsibility and notify the patient of their responsibility, usually prior to surgery. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state payors (primarily the Medicare and Medicaid programs), commercial health insurance companies, workers’ compensation programs, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payor. 80
Accounts receivable from government payors are significant to our operations, comprising 17% of net patient service accounts receivable at December 31, 2014. We do not believe there are significant credit risks associated with these government payors. Accounts receivable related to workers’ compensation are significant to our operations, comprising 14% of net patient service accounts receivable at December 31, 2014. We do not believe there are significant credit risks associated with workers’ compensation payors and related receivables. Accounts receivable from commercial health insurance payors were 59% of our net patient service accounts receivable at December 31, 2014. Because the category of commercial health insurance payors is composed of numerous individual payors which are geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, payor mix or trends in federal or state governmental healthcare coverage. Due to the complexity of insurance reimbursements and inherent limitations of insurance verification procedures, we expect we will continue to have write-offs of bad debt and provision for doubtful accounts. In 2014 our Provision for doubtful accounts was approximately 2% of net patient revenue. We reserve for doubtful accounts based principally upon the payor class and age of the receivable. We also write off accounts on an individual basis based on that information. We believe our policy allows us to accurately estimate our Provision for doubtful accounts . Noncontrolling Interest in Consolidated Affiliates Our consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Equity-Based Compensation We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock as well as RSUs to key teammates, directors, service providers, consultants and affiliates. Additionally, prior to our IPO, we made grants of RSUs to certain non-employee directors and an executive officer that were not made under any of the Plans. Under the Plans, our key teammates, directors, service providers, consultants and affiliates are provided with what we believe to be appropriate incentives to encourage them to continue employment with us or providing service to us or any of our affiliates and to improve our growth and profitability. Option awards are generally granted with an exercise price equal to at least the fair market value of the underlying share at the date of grant. Vesting in the option awards varies based upon time, attainment of certain performance conditions, or upon the occurrence of a Liquidity Event (as defined in the applicable Plan) in which the TPG Funds and/or any of its affiliates achieves a minimum cash return on its original investment. All existing RSU awards vest over time. Income Taxe s We provide for income taxes using the asset and liability method. This approach recognizes the amount of federal, state and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. A valuation allowance is required when it is more-likely-than-not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income. We file a consolidated federal income tax return. State income tax returns are filed on a separate, combined or consolidated basis in accordance with relevant state laws and regulations. LPs, LLPs, LLCs and other pass-through entities that we consolidate or account for using the equity method of accounting file separate federal and state income tax returns. We include the allocable portion of each pass-through entity’s income or loss in our federal income tax return. We allocate the remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of the taxes. 81
Goodwill We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of October 1 st of each year. We recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its implied fair value. We present a goodwill impairment charge as a separate line item within income from continuing operations in the consolidated statements of operations, unless the goodwill impairment is associated with a discontinued operation. In that case, we include the goodwill impairment charge, on a net-of-tax basis, within the results of discontinued operations. When we dispose of a facility, the relative fair value of goodwill is allocated to the gain or loss on disposition. The results of the qualitative assessment performed as of October 1, 2014 indicated that the fair values of all reporting units substantially exceeded their carrying values. Impairment of Long-Lived Assets and Other Intangible Assets We assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with definite useful lives whenever events or changes in circumstances indicate we may not be able to recover the asset’s carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected net future cash flows to be generated by that asset, or, for identifiable intangibles with definite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with definite useful lives, if any, to be recognized is measured based on projected discounted future cash flows. We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. We present an impairment charge as a separate line item within income from continuing operations in our consolidated statements of operations, unless the impairment is associated with a discontinued operation. In that case, we include the impairment charge, on a net-of-tax basis, within the results of discontinued operations. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed. We report long-lived assets to be disposed of by sale as held for sale and recognize those assets in the balance sheet at the lower of carrying amount or fair value less cost to sell, and cease depreciation. Recent Revisions to Authoritative Accounting Guidance In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the criteria for determining which disposals (both consolidated investments and equity method investments) can be presented as discontinued operations and modifies related disclosure requirements. Under the new criteria, a discontinued operation is defined as a disposal of a component or group of components, which may include equity method investments, that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU became effective for the Company on January 1, 2015. We do not believe that this ASU will have a material effect on our consolidated financial position, results of operations or cash flows. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for the Company at the beginning of its 2017 fiscal year; early adoption is not permitted. The Company is currently assessing the impact this ASU will have on our consolidated financial position, results of operations and cash flows. In November 2014, the FASB issued ASU No. 2014-17, Business Combination — Pushdown Accounting, which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity, as compared to current GAAP, which offers limited guidance for determining whether and at what threshold pushdown accounting should be established in an acquired entity’s separate financial statements. The ASU applies to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer obtains control of the acquired entity and became 82
effective on November 18, 2014. The ASU does not have a material impact on our consolidated financial position, results of operations or cash flows. In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis . This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on our consolidated financial position, results of operations or cash flows. We do not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. JOBS Act The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Our principal market risk is our exposure to variable interest rates. As of December 31, 2014, we had $660.6 million of indebtedness (excluding capital leases), of which $643.1 million is at variable interest rates and $17.5 million is at fixed interest rates. In seeking to reduce the risks and costs associated with such activities, we manage exposure to changes in interest rates primarily through the use of derivatives. We neither use financial instruments for trading or other speculative purposes, nor use leveraged financial instruments. At December 31, 2014, we held interest rate swaps hedging interest rate risk on $190.0 million of our variable rate debt through two forward starting interest rate swaps with an aggregate notional amount of $190.0 million, which we entered into during 2011. These forward starting interest rate swaps, which are swaps that are entered into at a specified trade date but do not begin until a future start date, extend the interest rate swaps that we terminated in 2012 and on September 30, 2013. These swaps are “receive floating/pay fixed” instruments, meaning we receive floating rate payments, which fluctuate based upon LIBOR, from the counterparty and provide payments to the counterparty at a fixed rate, the result of which is to convert the interest rate of a portion of our floating rate debt into fixed rate debt in order to limit the variability of interestrelated payments caused by changes in LIBOR. Forward starting interest rate swaps with an aggregate notional amount of $100.0 million were effective on September 30, 2012 and the remaining forward starting interest rate swap with a notional amount of $140.0 million was effective on September 30, 2013. A forward interest rate starting swap with a notional amount of $50.0 million terminated on September 30, 2014. The remaining aggregate notional amount of $190.0 million in forward starting interest rate swaps will terminate on September 30, 2016. Assuming a 100 basis point increase in LIBOR on our un-hedged debt at December 31, 2014, our annual interest expense would increase by approximately $4.1 million. Counterparties to the interest rate swaps discussed above expose us to credit risks to the extent of their potential non-performance. The credit ratings of the counterparties, which consist of investment banks, are monitored at least quarterly. We have completed a review of the financial strength of the counterparties using publicly available information, as well as qualitative inputs, as of December 31, 2014. Based on this review, we do not believe there is a significant counterparty credit risk associated with these interest rate swaps. However, we cannot assure you that these actions will protect us against or limit our exposure to all counterparty or market risks.
83
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Auditors Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Surgical Care Affiliates, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows present fairly, in all material respects, the financial position of Surgical Care Affiliates, Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Birmingham, Alabama March 10, 2015
84
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars) DECEMBER 31, DECEMBER 31, 2014 2013 Assets Current assets Cash and cash equivalents Restricted cash Accounts receivable, net of allowance for doubtful accounts (2014 — $10,448; 2013 — $10,393) Receivable from nonconsolidated affiliates Prepaids and other current assets Current assets related to discontinued operations Total current assets Property and equipment, net of accumulated depreciation (2014 — $99,111; 2013 — $68,756) Goodwill Intangible assets, net of accumulated amortization (2014 — $35,270; 2013 — $25,715) Deferred debt issue costs Investment in and advances to nonconsolidated affiliates Other long-term assets Assets related to discontinued operations Total assets (a) Liabilities and Equity Current liabilities Current portion of long-term debt Accounts payable Accrued payroll Accrued interest Accrued distributions Payable to nonconsolidated affiliates Deferred income tax liability Other current liabilities Current liabilities related to discontinued operations Total current liabilities Long-term debt, net of current portion Deferred income tax liability Other long-term liabilities Liabilities related to discontinued operations Total liabilities (a) Commitments and contingent liabilities (Note 16) Noncontrolling interests — redeemable (Note 9) Equity Surgical Care Affiliates’ equity Common stock, $0.01 par value, 180,000 shares authorized, 38,648 and 38,166 shares outstanding, respectively Additional paid in capital Accumulated deficit Total Surgical Care Affiliates’ equity Noncontrolling interests — non-redeemable (Note 9) Total equity Total liabilities and equity (a)
$
$
$
$
8,731 $ 24,073 100,529 72,030 30,170 1,959 237,492 209,642 902,391 84,262 5,383 194,610 4,311 9,344 1,647,435 $
85,829 25,031 89,137 12,331 19,393 2,295 234,016 189,959 745,036 61,644 8,321 168,824 2,141 12,565 1,422,506
24,690 $ 31,717 29,199 234 29,134 104,519 855 26,747 2,280 249,375 665,119 130,165 19,683 683 1,065,025
22,617 27,186 26,050 446 27,601 68,455 477 21,063 3,764 197,659 648,834 116,221 20,631 1,288 984,633
15,444
21,902
386 419,088 (176,135 ) 243,339 323,627 566,966 1,647,435 $
382 413,419 (208,115 ) 205,686 210,285 415,971 1,422,506
Our consolidated assets as of December 31, 2014 and December 31, 2013 include total assets of a variable interest entity (“VIE”) of $117.5 million and $49.5 million, respectively, which can only be used to settle the obligations of the VIE. Our consolidated total liabilities as of December 31, 2014 and December 31, 2013 include total liabilities of the VIE of $23.8 million and $12.2 million, respectively, for which the creditors of the VIE have no recourse to us, with the exception of $3.4 million and $4.0 million of debt guaranteed by us at December 31, 2014 and December 31, 2013, respectively. See further description in Note 3, Summary of Significant Accounting Policies .
See Notes to Consolidated Financial Statements. 85
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of U.S. dollars, except per share data)
2014
Net operating revenues: Net patient revenues Management fee revenues Other revenues Total net operating revenues Equity in net income of nonconsolidated affiliates Operating expenses: Salaries and benefits Supplies Other operating expenses Depreciation and amortization Occupancy costs Provision for doubtful accounts Impairment of intangible and long-lived assets (Gain) loss on disposal of assets Total operating expenses Operating income Interest expense Loss from extinguishment of debt Interest income (Gain) loss on sale of investments Income from continuing operations before income tax expense Provision for income tax expense Income from continuing operations Loss from discontinued operations, net of income tax expense Net income Less: Net income attributable to noncontrolling interests Net income (loss) attributable to Surgical Care Affiliates Basic net income (loss) per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates Discontinued operations attributable to Surgical Care Affiliates Net income (loss) per share attributable to Surgical Care Affiliates Basic weighted average shares outstanding (in thousands) Diluted net income (loss) per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates Discontinued operations attributable to Surgical Care Affiliates Net income (loss) per share attributable to Surgical Care Affiliates Diluted weighted average shares outstanding (in thousands)
$
$
788,048 58,914 17,774 864,736 32,564 297,174 177,853 124,870 52,663 29,390 14,051 610 (232 ) 696,379 200,921 32,785 — (174 ) (7,633 ) 175,943 9,439 166,504 (9,355 ) 157,149 (125,169 ) 31,980
$
$
731,584 40,469 13,610 785,663 23,364 270,929 170,174 127,701 41,450 25,544 14,208 — 123 650,129 158,898 60,202 10,333 (215 ) 12,330 76,248 12,320 63,928 (9,330 ) 54,598 (105,942 ) (51,344 )
2012
$
$
698,999 17,804 9,571 726,374 16,767 234,229 164,791 112,773 39,953 25,326 12,736 435 (307 ) 589,936 153,205 58,642 — (315 ) 7,100 87,778 8,518 79,260 (4,895 ) 74,365 (94,375 ) (20,010 )
$ $ $
1.07 (.24 ) .83 38,477
$ $ $
(1.33 ) (.29 ) (1.62 ) 31,688
$ $ $
(.50 ) (.16 ) (.66 ) 30,340
$ $ $
1.03 (.23 ) .80 39,958
$ $ $
(1.33 ) (.29 ) (1.62 ) 31,688
$ $ $
(.50 ) (.16 ) (.66 ) 30,340
See Notes to Consolidated Financial Statements.
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YEAR-ENDED DECEMBER 31, 2013
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands of U.S. dollars)
2014
Net income Other comprehensive income: Unrealized income (loss) on interest rate swap Amounts reclassified from accumulated other comprehensive loss Total other comprehensive income Comprehensive income Comprehensive income attributable to noncontrolling interests Comprehensive income (loss) attributable to Surgical Care Affiliates
$
157,149
$
— — — 157,149 (125,169 ) 31,980
See Notes to Consolidated Financial Statements.
87
YEAR-ENDED DECEMBER 31, 2013
$
54,598
$
847 7,480 8,327 62,925 (105,942 ) (43,017 )
2012
$
74,365
$
(5,177 ) 6,163 986 75,351 (94,375 ) (19,024 )
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In thousands of U.S. dollars)
Common Stock Shares
Balance at December 31, 2011 Net (loss) income Other comprehensive income Stock compensation Net change in equity related to purchase of ownership interests Contributions from noncontrolling interests Change in distribution accrual Distributions to noncontrolling interests Balance at December 31, 2012 Member distributions Net (loss) income Other comprehensive income Conversion from LLC to INC (Note 1) Issuance of stock from the initial public offering, net of offering costs Stock options exercised Stock compensation Net change in equity related to amendments in agreements with noncontrolling interests (Note 9) Net change in equity related to purchase of ownership interests Contributions from noncontrolling interests Change in distribution accrual Distributions to noncontrolling interests Balance at December 31, 2013 Net income Issuance of stock pursuant to teammate equity plans Stock compensation Net change in equity related to purchase of ownership interests Contributions from noncontrolling interests Change in distribution accrual Distributions to noncontrolling interests Balance at December 31, 2014
Accumulated Total Additional Other Surgical Care Noncontrolling Paid in Contributed Comprehensive Accumulated Affiliates Interests-
Amount
Capital
Capital
Loss
— $ — — —
— $ — — —
— $ 316,915 $ — — — — — 1,719
—
—
—
— —
— —
— —
— — $ — — —
— — $ — — —
— — — $ 313,153 $ — (74,900 ) — — — —
30,286
303
240,447
7,857 23 —
79 — —
171,798 285 421
—
—
— — — — 38,166 $ —
(5,481 ) — —
Equity
(9,313 ) $ (137,299 ) $ — (20,010 ) 986 — — — —
—
— —
— —
— — (8,327 ) $ (157,309 ) $ — — — (51,344 ) 8,327 —
Total Equity
170,303 $ (20,010 ) 986 1,719
135,417 69,759 — —
$ 305,720 49,749 986 1,719
(5,481 )
37,730
32,249
— — — 147,517 $ (74,900 ) (51,344 ) 8,327
22 (504 )
22 (504 )
(69,930 ) 172,494 — 81,804 —
(69,930 ) $ 320,011 (74,900 ) 30,460 8,327
—
—
—
—
— — 2,303
— — —
— — —
171,877 285 2,724
— — —
171,877 285 2,724
—
—
—
—
—
1,050
1,050
—
468
194
—
538
1,200
32,473
33,673
— —
— —
— —
— —
— —
— —
3,137 (2,363 )
3,137 (2,363 )
— — $ —
— — — $ (208,115 ) $ — 31,980
(78,310 ) 210,285 102,564
(78,310 ) $ 415,971 134,544
— —
— —
— —
482 —
4 —
—
—
(323 )
—
—
—
— —
— —
— —
— —
— —
— —
— — $
— — — $ (176,135 ) $
— 38,648 $
Non-redeemable
—
— — 382 $ 413,419 $ — — 1,866 4,126
(240,750 )
Deficit
— — 386 $ 419,088 $
See Notes to Consolidated Financial Statements.
88
— 205,686 $ 31,980 1,870 4,126
— —
1,870 4,126
(323 )
78,153
77,830
— —
22,677 (233 )
22,677 (233 )
(89,819 ) 323,627
(89,819 ) $ 566,966
— 243,339 $
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars)
2014
Cash flows from operating activities Net income Loss from discontinued operations Adjustments to reconcile net income to net cash provided by operating activities Provision for doubtful accounts Depreciation and amortization Amortization of deferred issuance costs Impairment of long-lived assets Realized (gain) loss on sale of investments (Gain) loss on disposal of assets Equity in net income of nonconsolidated affiliates Distributions from nonconsolidated affiliates Deferred income tax Stock compensation Change in fair value and loss on de-designation of interest rate swap Loss on extinguishment of debt Payment of deferred interest Debt call premium paid (Increase) decrease in assets, net of business combinations Accounts receivable Other assets (Decrease) increase in liabilities, net of business combinations Accounts payable Accrued payroll Accrued interest Other liabilities Other, net Net cash (used in) provided by operating activities of discontinued operations Net cash provided by operating activities Cash flows from investing activities Capital expenditures Proceeds from sale of business Proceeds from sale of investment Proceeds from disposal of assets Proceeds from sale of equity interests of nonconsolidated affiliates Proceeds from sale of equity interests of consolidated affiliates in deconsolidation transactions Decrease in cash related to conversion of consolidated affiliates to equity interests Net change in restricted cash Net settlements on interest rate swap Business acquisitions, net of cash acquired 2014 - $2,527; 2013 - $6,131; 2012 - $4,386 Purchase of equity interests in nonconsolidated affiliates Purchase of equity interests in deconsolidation transaction Return of equity method investments in nonconsolidated affiliates Other Net cash provided by investing activities of discontinued operations Net cash used in investing activities
89
$
$
YEAR-ENDED DECEMBER 31, 2013
157,149 $ 9,355
2012
54,598 $ 74,365 9,330 4,895
14,051 52,663 2,954 610 (7,633 ) (232 ) (32,564 ) 50,773 8,556 4,126 485 — — —
14,208 41,450 3,891 — 12,330 123 (23,364 ) 50,505 15,410 2,724 8,314 10,333 (14,785 ) (5,000 )
12,736 39,953 2,980 435 7,100 (307 ) (16,767 ) 38,652 7,385 1,719 — — — —
(18,692 ) (66,709 )
(20,000 ) 8,230
(10,048 ) (24,314 )
4,709 2,404 (213 ) 34,261 (722 ) (4,750 ) 210,581
3,679 6,143 (13,263 ) 9,064 (251 ) (8,085 ) 165,584
(810 ) (1,138 ) (560 ) 33,849 (1,767 ) 2,834 171,192
(37,304 ) 2,711 — 1,302 2,344
(36,838 ) 1,276 — 5,880 4,587
(28,445 ) 10,198 4,335 474 14,980
2,375 (30 ) 1,062 (1,539 ) (122,165 ) (36,032 ) — 2,555 (3,791 ) — (188,512 ) $
2,069 4,251 (116 ) (1,034 ) 1,886 (3,936 ) (2,921 ) (6,081 ) (54,499 ) (2,796 ) (766 ) (14,521 ) — (1,576 ) 2,592 — — — 16 2,347 (76,834 ) $ (21,804 )
SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars)
2014
Cash flows from financing activities Borrowings under line of credit arrangements and long-term debt, net of issuance costs Payment of debt acquisition costs Proceeds from issuance of shares pursuant to IPO, net of offering costs Principal payments on line of credit arrangements and long-term debt Principal payments under capital lease obligations Distributions to noncontrolling interests of consolidated affiliates Contributions from noncontrolling interests of consolidated affiliates Proceeds from sale of equity interests of consolidated affiliates Repurchase of equity interests of consolidated affiliates Distributions to unit holders Proceeds from teammate equity plans Other Net cash provided by financing activities of discontinued operations Net cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents of discontinued operations at beginning of period Less: Cash and cash equivalents of discontinued operations at end of period Cash and cash equivalents at end of period Supplemental cash flow information Cash paid during the year for interest Cash paid during the year for income taxes Supplemental schedule of noncash investing and financing activities Property and equipment acquired through capital leases and installment purchases Goodwill attributable to sale of surgery centers Net investment in consolidated affiliates that became equity method facilities Noncontrolling interest associated with conversion of consolidated affiliates to equity method affiliates Contributions (non-cash) from noncontrolling interests of consolidated affiliates Accrued capital expenditures at end of period Conversion of equity method affiliate to consolidated affiliate financed through the issuance of debt Equity interest purchase in nonconsolidated affiliates via withheld distributions Debt to equity conversion of nonconsolidated affiliate See Notes to Consolidated Financial Statements.
90
YEAR-ENDED DECEMBER 31, 2013
$
35,646 — — (31,083 ) (8,225 ) (113,432 ) 17,452 5,593 (8,726 ) — 5,820 (2,189 ) — (99,144 ) (77,075 ) 85,829 14 (37 ) $ 8,731 $
2012
$ 417,678 $ 4,010 (5,700 ) — 171,877 — (527,634 ) (8,865 ) (7,552 ) (6,189 ) (102,975 ) (94,163 ) 4,758 22 7,864 7,596 (5,612 ) (6,500 ) (74,900 ) — 453 — — — — 2,004 (121,743 ) (102,085 ) (32,993 ) 47,303 118,618 71,212 178 169 26 (66 ) $ 85,829 $ 118,618
31,173 $ 62,167 $ 56,848 753 493 475 9,722 752 1,848
21,329 10,062 5,356
7,714 9,066 712
3,886 5,225 3,457
747 — 2,341
3,019 — 2,713
— — —
— — —
7,221 10,462 5,027
SURGICAL CARE AFFILIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in tables are in thousands of U.S. dollars unless otherwise indicated) Unless the context otherwise indicates or requires, the terms “Surgical Care Affiliates,” “we,” “us,” “our” and “Company” refer to Surgical Care Affiliates, Inc. and its subsidiaries. NOTE 1 — DESCRIPTION OF BUSINESS Nature of Operations and Ownership of the Company Surgical Care Affiliates, Inc., a Delaware corporation, was converted from a Delaware limited liability company, previously named ASC Acquisition LLC, to a Delaware corporation on October 30, 2013. Pursuant to the conversion, every 10.25 outstanding membership units of ASC Acquisition LLC were converted into one share of common stock of Surgical Care Affiliates, and options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates at a ratio of 10.25 membership units of ASC Acquisition LLC underlying such options to each one share of common stock of Surgical Care Affiliates underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. Upon conversion, all outstanding restricted stock units of ASC Acquisition LLC were converted into one restricted share of Surgical Care Affiliates. All share and per share amounts reflect these conversion amounts throughout these financial statements. We were formed primarily to own and operate a network of multi-specialty ambulatory surgery centers (“ASCs”) and surgical hospitals in the United States of America. We do this through our direct operating subsidiary, Surgical Care Affiliates, LLC (“SCA”). For a portion of the periods covered by our financial statements, the Company was a Delaware limited liability company named ASC Acquisition LLC. As of December 31, 2014, the Company operated in 34 states and had an interest in and/or operated 179 ASCs, six surgical hospitals and one sleep center with 11 locations, with a concentration of facilities in California, Indiana, Texas, Florida and New Jersey. Our ASCs and surgical hospitals primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. At our surgical hospitals, physicians perform a broader range of surgical procedures, and patients may stay in the hospital for several days. Business Structure We operate our facilities through strategic relationships with approximately 2,000 physician partners and often with healthcare systems that have strong local market positions that we also believe have strong reputations for clinical excellence. The facilities in which we hold an ownership interest are owned by general partnerships, limited partnerships (“LP”), limited liability partnerships (“LLP”) or limited liability companies (“LLC”) in which the Company serves as the general partner, limited partner, managing member or member. We account for our 186 facilities as follows: AS OF DECEMBER 31, 2014
Consolidated facilities (1) Equity method facilities Managed-only facilities Total facilities (1)
95 65 26 186
As of December 31, 2014, we consolidated ten facilities as a Variable Interest Entity (“VIE”) (see Note 3).
Basis of Presentation The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such financial statements include the assets, liabilities, revenues and expenses of all wholly owned subsidiaries and majority-owned subsidiaries over which we exercise control and, when applicable, entities in which we have a controlling financial interest.
91
NOTE 2 — TRANSACTIONS, DECONSOLIDATIONS, CLOSURES AND SALES Acquisitions During the year-ended December 31, 2014, the Company acquired a controlling interest in fifteen ASCs for total consideration of $138.1 million. We had managed two of these ASCs without an ownership interest prior to acquiring a controlling interest. Four of the fifteen ASCs were acquired through the future JV (see Note 3) and are a VIE for which we are the primary beneficiary. These acquisitions are described in further detail below. We accounted for these transactions under the acquisition method of accounting and reported the results of operations from the date of acquisition. The assets acquired, liabilities assumed and any noncontrolling interest in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. The fair value of identifiable intangible assets were based on valuations using the cost and income approaches. The cost approach is based on amounts that would be required to replace the asset (i.e., replacement cost). The income approach is based on management’s estimates of future operating results and cash flows discounted using a weighted-average cost of capital that reflects market participant assumptions. The excess of the fair value of the consideration conveyed over the fair value of the net assets acquired was recorded as goodwill. Factors contributing to the recognition of goodwill include the centers’ favorable reputations in their markets, their market positions, their ability to deliver quality care with high patient satisfaction consistent with the Company’s business model and synergistic benefits that are expected to be realized as a result of the acquisitions. The total amount of goodwill that is expected to be tax deductible as a result of these 2014 transactions is approximately $102.6 million. In April 2014, the future JV (see Note 3) purchased a 51% controlling equity interest in Fort Worth Endoscopy Centers, LLC (“FWEC”), which owns and operates two ASCs in Fort Worth, Texas, for $24.8 million. In conjunction with the acquisition of such interest by the future JV, our promissory note due from the future JV was increased by $10.6 million. As with the other entities controlled by the future JV, we have determined that FWEC is a VIE for which we are the primary beneficiary. Accordingly, we consolidate FWEC. Prior to the transaction in 2014, these two ASCs were managed-only facilities. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$
$
44 779 1,488 2,311 1,954 33,807 8,902 46,974
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long-term liabilities Total liabilities
$
$ 92
1,425 1,425 85 1,510
In August 2014, an indirect wholly-owned subsidiary of SCA purchased a 59% controlling interest in, as well as the right to manage, the Surgery Center of Rockville, L.L.C., which owns and operates an ASC located in Rockville, Maryland, for $11.1 million. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$
$
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long-term liabilities Total liabilities
$
$
19 284 26 329 1,399 14,494 2,655 18,877
65 65 91 156
In September 2014, two indirect wholly-owned subsidiaries of SCA purchased a 51% controlling interest in an ASC located in Marina del Rey, California (the “Marina del Rey ASC”) for $20.4 million and a 51% controlling interest in an ASC located in Newport Beach, California (the “Newport Beach ASC”) for $6.5 million. In conjunction with the purchase of the two ASCs, SCA also purchased in September 2014 substantially all of the assets of two management entities for $5.3 million. Prior to closing, the entities provided management and billing services to the Marina del Rey ASC and the Newport Beach ASC, as well as to the two affiliated medical practices. SCA now provides management services at the two ASCs and the two affiliated medical practices. Both ASCs are consolidated facilities, and the medical practices are managed-only entities. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$
$
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long-term liabilities Total liabilities
$
$ 93
861 2,504 525 3,890 3,709 43,878 8,640 60,117
474 474 990 1,464
In December 2014, an indirect wholly-owned subsidiary of SCA purchased a 55% controlling interest in Specialty Surgical Center, LLC, which owns and operates an ASC located in Sparta Township, New Jersey, for $24.0 million. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows:
Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$
$
706 1,130 19 1,855 1,002 36,865 4,958 44,680
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long-term liabilities Total liabilities
$
$
904 904 59 963
The aggregate amounts recognized as of the acquisition date for each major class of assets and liabilities assumed in the remaining nine acquisitions closed in 2014 are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$
$
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long-term liabilities Total liabilities
$
$
1,266 3,852 1,008 6,126 11,628 48,682 9,342 75,778
3,113 3,113 14,106 17,219
Intangible assets acquired in 2014, from the above acquisitions, include: Estimated Fair Value on Acquisition Date
(in millions)
Estimated Useful Life
Licenses $ 7.1 14.6* Management agreements 13.2 14.6* Noncompete agreements 14.3 4.8* Total $ 34.5 10.6* *Reflects the weighted average estimated useful life of acquired intangible assets that are subject to amortization. 94
The purchase price allocations above are preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be retrospectively adjusted to reflect new information about the facts and circumstances that existed as of the respective acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates. The preliminary amounts of these purchase price allocations relate primarily to working capital balances. During the year-ended December 31, 2014, we acquired a noncontrolling interest in seven ASCs for a total consideration of $34.2 million. These acquisitions are accounted for as equity method investments. Two of these ASCs were previously managed-only facilities. During the year-ended December 31, 2014, we contributed an existing equity method investment to another entity in which we have an equity method investment that is controlled by a health system partner. In conjunction with the contribution, we recognized a $1.9 million gain relating to the remeasurement of a portion of the investment to fair value. This gain is included in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. Also during the year-ended December 31, 2014, a wholly-owned indirect subsidiary of SCA loaned a wholly-owned subsidiary of a health system partner (the “Counterparty”) $3.0 million in exchange for a promissory note that is convertible at the Counterparty’s option into a 49% ownership interest in the Counterparty. On April 1, 2014, the Counterparty used the proceeds of the loan and other funds to purchase 100% of the ownership interests in an ASC in Costa Mesa, California for $5.2 million. This ASC is currently a managed-only facility of SCA in which we provide management services to the facility but hold no equity interest. In June 2013, we acquired 100% of the interest in Health Inventures, LLC (“HI”), a surgical and physician services company, for total consideration of $20.4 million. $9.6 million of the consideration was paid to the sellers in cash, $8.9 million was placed into escrow as contingent consideration, and $1.9 million was payable to certain individuals. The contingent consideration has been settled for $8.8 million, as of the yearended December 31, 2014. In the transaction, we acquired HI’s ownership interests in four ASCs and one surgical hospital and management agreements with 19 affiliated facilities. During the year-ended December 31, 2013, the Company also acquired a controlling interest in five additional ASCs for total consideration of $36.0 million. Two of the five ASCs were acquired through the future JV (see Note 3) and are a VIE for which we are the primary beneficiary. One of the ASCs acquired was previously held as an equity method investment. The aggregate amounts recognized as of the acquisition date for each major class of assets and liabilities assumed in the HI acquisition and the five additional consolidated acquisitions closed during the yearended December 31, 2013 are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Investment in and advances to nonconsolidated affiliates Total assets Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long term liabilities Total liabilities
$
$
$
$
4,546 4,512 716 9,774 5,890 50,436 20,333 4,360 90,793
4,002 4,002 677 4,679
During the year-ended December 31, 2014, as a result of new information obtained about facts and circumstances that existed as of the acquisition date, the Company recorded certain measurement period adjustments to accounts receivable, accounts payable and other liabilities. These were customary adjustments that occurred during the normal course of reviewing and integrating the consolidated acquisitions. The net result of the measurement period adjustments recorded by the Company in relation to these acquisitions increased the acquisition date goodwill by approximately $0.9 million. This impact has been revised in the comparative consolidated balance sheet presented as of December 31, 2013. The Company has determined that the impact on amortization and other related amounts within the comparative interim and annual periods from that previously presented in the annual or interim 95
consolidated statements of income is immaterial. The amounts presented in the above table related to these acquisitions have been retrospectively revised for the aforementioned measurement period adjustments. Also during the year-ended December 31, 2013, we acquired a noncontrolling interest in a surgery center in Newport Beach, California, a noncontrolling interest in a surgery center in Redding, California and a management agreement with a surgery center in Fountain Valley, California for an immaterial amount of consideration. Deconsolidations During the year-ended December 31, 2014, we completed two separate deconsolidation transactions. In one transaction, we sold a controlling equity interest in an ASC and transferred certain control rights to a partner in the entity. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.4 million and recorded a pre-tax loss of approximately $3.4 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. In the other transaction, we agreed to sell our ownership interest in an ASC in Santa Monica, California at a later date, see subsequent events footnote. In conjunction with this transaction, the operating agreement of this affiliate was amended on October 1, 2014 to remove SCA’s control rights until the date of the sale. As a result of removing SCA’s control rights, the facility became a nonconsolidated affiliate. We recorded a pre-tax gain of approximately $2.7 million. The net loss on these transactions is recorded in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. During the year-ended December 31, 2013, we completed two separate deconsolidation transactions. In one of these transactions, we sold a controlling equity interest, and transferred certain control rights, to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.1 million and recorded a pre-tax loss of approximately $1.6 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. In the other transaction, we transferred certain control rights to partners in the entity. We retained a noncontrolling interest in this affiliate. We recorded a pre-tax loss of approximately $1.5 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in Equity in net income of nonconsolidated affiliates in the accompanying consolidated statements of operations. During the year-ended December 31, 2012, we completed one deconsolidation transaction. In the transaction, we sold a controlling equity interest in an ASC and transferred certain control rights to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $4.3 million and recorded a pre-tax gain of approximately $2.0 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The gain on this transaction is recorded in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. Fair values for the retained noncontrolling interests are primarily estimated based on third-party valuations we have obtained in connection with such transactions and/or the amount of proceeds received for the controlling equity interest sold. Our continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations. Closures and Sales During the year-ended December 31, 2014, we closed six facilities. Two consolidated facilities were closed in the first quarter of 2014, and their operations were absorbed into existing SCA consolidated facilities. We impaired $0.5 million of property and equipment and intangible assets related to these two closed facilities in the first quarter. One consolidated facility ceased operations in July 2014 and an impairment charge of $0.7 million was recorded during the year-ended December 31, 2014 for intangible and long-lived assets related to this facility. These impairments are recorded in Loss from discontinued operations, net of income tax expense on the Company’s consolidated statements of operations. One consolidated facility ceased operations in December 2014. Two nonconsolidated facilities were closed in the second half of 2014, and there operations were absorbed into two existing SCA nonconsolidated facilities. The losses related to these closures are immaterial. During the year-ended December 31, 2013, we closed two facilities. We recorded a pre-tax loss of approximately $1.4 million as a result of the closures. The loss on the transactions is recorded in the Loss from discontinued operations, net of income tax in the accompanying consolidated statements of operations. During the year-ended December 31, 2012, we closed two facilities. We recorded a pre-tax loss of approximately $3.2 million as a result of the closures. The loss on these transactions is recorded in the Loss from discontinued operations, net of income tax in the accompanying consolidated statements of operations. We also wrote off approximately $2.2 million of goodwill related to one closure. 96
During the year-ended December 31, 2014, we sold all of our interest in three ASCs. We recorded a pre-tax gain of approximately $0.4 million as a result of the sales. The gain on these transactions is recorded in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. We also wrote off approximately $0.8 million of goodwill related to one of these sales. During the year-ended December 31, 2013, we sold all of our interest in three ASCs, all of which we continued to manage as managed-only facilities, for aggregate consideration of $1.3 million. We recorded a pre-tax loss of approximately $8.4 million as a result of the sale. The loss on this transaction is recorded in the Gain (loss) on sale of investments in the accompanying consolidated statements of operations. Our continuing involvement as manager of these facilities precludes classification of these transactions as discontinued operations. During the year-ended December 31, 2012, we sold all of our interest in one ASC. We recorded a pre-tax gain of approximately $1.5 million as a result of the sale. The gain on this transaction is recorded in the Loss from discontinued operations, net of income tax in the accompanying consolidated statements of operations. Unaudited Pro Forma Financial Information The following table presents the unaudited pro forma results of the Company as though all of the business combinations discussed above for 2014 had been made on January 1, 2013, and for 2013 had been made on January 1, 2012. The pro forma information is based on the Company’s consolidated results of operations for the years ended December 31, 2014, 2013 and 2012, and on other available information. These pro forma amounts include historical financial statement amounts with the following adjustments: we converted the sellers’ historical financial statements to GAAP and applied the Company’s accounting policies, and we adjusted for depreciation and amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2013 and 2012. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above, nor are they indicative of results of the future operations of the combined enterprises.
In thousands
Net operating revenues Income from continuing operations
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
YEAR-ENDED DECEMBER 31, 2012
$
$
$
905,839 178,568
888,290 86,964
777,173 84,970
Consolidated acquisitions closed during 2014 contributed Net operating revenues of $31.2 million and Income from continuing operations of $13.3 million for the year-ended December 31, 2014. Nonconsolidated acquisitions closed during 2014 contributed $0.6 million to Equity in net income of nonconsolidated affiliates for the year-ended December 31, 2014.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company, its subsidiaries and VIEs for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. We evaluate partially owned subsidiaries and joint ventures held in partnership form using authoritative guidance, which includes a framework for evaluating whether a general partner(s) or managing member(s) controls an affiliate and therefore should consolidate it. The framework includes the presumption that general partner or managing member control would be overcome only when the limited partners or members have certain rights. Such rights include the right to dissolve or liquidate the LP, LLP or LLC or otherwise remove the general partner or managing member “without cause,” or the right to effectively participate in significant decisions made in the ordinary course of business of the LP, LLP or LLC. To the extent that any noncontrolling investor has rights that inhibit our ability to control the affiliate, including substantive veto rights, we do not consolidate the affiliate. We use the equity method to account for our investments in affiliates with respect to which we do not have control rights but have the ability to exercise significant influence over operating and financial policies. Assets, liabilities, revenues and expenses are reported in the respective detailed line items on the consolidated financial statements for our consolidated affiliates. For our equity method 97
affiliates, assets and liabilities are reported on a net basis in Investment in and advances to nonconsolidated affiliates on the consolidated balance sheets, and revenues and expenses are reported on a net basis in Equity in net income of nonconsolidated affiliates on the consolidated statements of operations. This difference in accounting treatment of equity method affiliates impacts certain financial ratios of the Company. Variable Interest Entities In order to determine if we are the primary beneficiary of a VIE for financial reporting purposes, we consider whether we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and whether we have the obligation to absorb losses or the right to receive returns that would be significant to the VIE. We consolidate a VIE when we are the primary beneficiary. In 2012, the Company entered into a transaction whereby we transferred our interest in two consolidated facilities and cash to an entity (the “future JV”) wholly owned by a health system in exchange for a promissory note. Concurrently, the health system transferred its interest in a facility that it controlled to the future JV. The promissory note, which eliminates upon consolidation, has a fixed interest rate plus a variable component dependent on the earnings of the future JV. The promissory note contains a conversion feature that allows us to convert the promissory note to a 49% equity interest in the future JV at our option upon the occurrence of the renegotiation of certain contractual arrangements. We also entered into management services agreements with the facilities controlled by the future JV. As a result of the financial interest in the earnings of the future JV held by us via the promissory note and the powers granted us in the promissory note and the management services agreements, we have determined that the future JV is a VIE for which we are the primary beneficiary. We consolidated the future JV as of October 1, 2012. The carrying amounts and classifications of the assets and liabilities of the future JV, which are included in our December 31, 2014 and 2013 consolidated balance sheets, were as follows: DECEMBER 31, 2014
DECEMBER 31, 2013
Assets Current assets Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$
$
12,396 2,236 14,632 20,829 69,330 12,663 117,454
$
11,402 11,402 12,403 23,805
$
$
5,362 3,423 8,785 14,674 21,154 4,931 49,544
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long-term liabilities Total liabilities
$
$
$
6,172 6,172 5,984 12,156
The assets of the consolidated VIE can only be used to settle the obligations of the VIE. The creditors of the VIE have no recourse to us, with the exception of $3.4 million and $4.0 million of debt guaranteed by us at December 31, 2014 and December 31, 2013, respectively. Reclassifications and Revisions Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. Such reclassifications primarily relate to facilities that we closed or sold, which qualify for reporting as discontinued operations. During the quarter ended March 31, 2014, we recorded corrections to increase Loss on sale of investments by $1.0 million related to the sale of our investment in a consolidated facility during the year ended December 31, 2013, as well as a correction to increase Equity in net income of nonconsolidated affiliates by $0.2 million in connection with the sale of equity interests in a nonconsolidated facility during the year ended December 31, 2012. During the quarter ended September 30, 2014, we recorded corrections to increase Gain on sale of investments by approximately $2.8 million related to the sale of our interest in equity method facilities during prior 98
years. We do not believe that these corrections are material to either our 2014 annual financial statements or our previously issued financial statements. The consolidated statements of operations for the years ended December 31, 2013 and 2012 include reclassifications totaling $0.7 million and $0.8 million, respectively, within Supplies and Other operating expenses to conform the December 31, 2013 and 2012 presentations to the December 31, 2014 presentation. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include, but are not limited to: (1) allowance for contractual revenue adjustments; (2) allowance for doubtful accounts; (3) asset impairments, including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; (6) economic lives and fair value of leased assets; (7) provision for income taxes, including valuation allowances; (8) reserves for contingent liabilities; and (9) reserves for losses in connection with unresolved legal matters. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation as considered necessary. Actual results could differ from those estimates. Risks and Uncertainties We operate in a highly regulated industry and are required to comply with extensive and complex laws and regulations at the federal, state and local government levels. These laws and regulations relate to, among other things: ● licensure, certification and accreditation; ● coding and billing for services; ● relationships with physicians and other referral sources, including physician self-referral and anti-kickback laws; ● quality of medical care; ● use and maintenance of medical supplies and equipment; ● maintenance and security of medical records; ● acquisition and dispensing of pharmaceuticals and controlled substances; and ● disposal of medical and hazardous waste. Many of these laws and regulations are expansive, and we do not have the benefit of significant regulatory or judicial interpretation of them. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our investment structure, facilities, equipment, personnel, services, capital expenditure programs, operating procedures and contractual arrangements. If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including (1) criminal penalties, (2) civil penalties, including monetary penalties and the loss of our licenses to operate one or more of our ASCs and surgical hospitals and (3) exclusion or suspension of one or more of our ASCs and surgical hospitals from participation in Medicare, Medicaid and other federal and state healthcare programs. Historically, the United States Congress and some state legislatures have periodically proposed significant changes in regulations governing the healthcare system. Many of these changes have resulted in limitations on and, in some cases, significant reductions in the levels of payments to healthcare providers for services under many government reimbursement programs. Because we receive a significant percentage of our revenues from Medicare, such proposed changes in legislation might have a material adverse effect on our business, financial position, results of operations and cash flows, if any such changes were to occur. Certain of our operating agreements have termination dates by which the agreement expires by its terms. In these situations, if we wish to continue the business, we would attempt to negotiate an amendment to the agreement and if necessary, to renegotiate material terms of the agreement, to prevent such termination. None of our operating agreements have termination dates in 2015. 99
In addition, certain of our partnership and operating agreements contain provisions that give our partners or other members rights that include, but are not limited to, rights to purchase our interest, rights to require us to purchase the interests of our partners or other members or rights requiring the consent of our partners and other members prior to our transferring our ownership interest in a facility or prior to a change in control of us or certain of our subsidiaries. Almost all of our partnership and operating agreements contain restrictions on actions that we can take, even though we may be the general partner or the managing member, including rights of our partners and other members to approve the sale of substantially all of the assets of the entity, to dissolve the partnership or LLC, and to amend the partnership or operating agreement. Many of our agreements also restrict our ability in certain instances to compete with our existing facilities or with our partners. Where we hold only a limited partner or a non-managing member interest, the general partner or managing member may take certain actions without our consent, although we typically have certain protective rights to approve major decisions, such as the sale of substantially all of the assets of the entity, the dissolution of the partnership or LLC, and the amendment of the partnership or operating agreement. As discussed in Note 16, Commitments and Contingent Liabilities , we are a party to a number of lawsuits. We cannot predict the outcome of litigation filed against us. Substantial damages or other monetary remedies assessed against us could have a material adverse effect on our business, financial position, results of operations and cash flows. Revenue Recognition Our revenues consist primarily of net patient service revenues that are recorded based upon established billing rates, less allowances for contractual adjustments. Revenues are recorded during the period the services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state payors (primarily, the Medicare and Medicaid programs), commercial health insurance companies, workers’ compensation programs and employers. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. During each of the years-ended December 31, 2014, 2013 and 2012, approximately 62%, 61% and 62%, respectively, of our net patient revenues related to patients with commercial insurance coverage. Healthcare services providers are under increasing pressure to accept reduced reimbursement for services provided to such patients. Continued reductions could have a material adverse impact on our business, financial position, results of operations and cash flows. During each of the years-ended December 31, 2014, 2013 and 2012, approximately 23%, of our net patient revenues related to patients participating in the Medicare and Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and routinely modified for provider reimbursement. The Centers for Medicare and Medicaid Services (“CMS”) has been granted authority to suspend payments, in whole or in part, to Medicare providers if CMS possesses reliable information that an overpayment, fraud or willful misrepresentation exists. If CMS suspects that payments are being made as the result of fraud or misrepresentation, CMS may suspend payment at any time without providing us with prior notice. The initial suspension period is limited to 180 days. However, the payment suspension period can be extended almost indefinitely if the matter is under investigation by the United States Department of Health & Human Services Office of Inspector General (“OIG”) or the Department of Justice (“DOJ”). Therefore, we are unable to predict if or when we may be subject to a suspension of payments by the Medicare and/or Medicaid programs, the possible length of the suspension period or the potential cash flow impact of a payment suspension. Any such suspension would adversely impact our business, financial position, results of operations and cash flows. During each of the years-ended December 31, 2014, 2013 and 2012, approximately 10%, 11% and 11%, respectively, of our net patient revenues related to patients with workers’ compensation coverage. Workers’ compensation payors have typically paid surgical facilities a higher percentage of the surgical facilities’ charges than other third-party payors. However, workers’ compensation payment amounts are subject to legislative, regulatory and other payment changes over which we have no control. A reduction in workers’ compensation payment amounts could have a material adverse effect on the revenues of our facilities which perform a significant number of workers compensation cases. Our revenues also include Management fee revenues representing fees that we earn from managing the facilities that we do not consolidate for financial reporting purposes. Management fee revenues are determined as dictated by management agreements between SCA and the facility, and the fee for management services is generally a defined percentage of the facility’s net patient revenues. 100
Cash and Cash Equivalents Cash and cash equivalents include all demand deposits reduced by the amount of outstanding checks and drafts where the right of offset exists for these bank accounts. As a result of the Company’s cash management system, checks issued but not presented to banks for payment may create negative book cash balances. Such negative balances are included in current liabilities as Other current liabilities of $3.4 million at December 31, 2014. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has not experienced any losses on such deposits. Restricted Cash As of December 31, 2014 and 2013, we had approximately $24.1 million and $25.0 million, respectively, of restricted cash in affiliate cash accounts maintained by partnerships in which we participate where one or more external partners requested, and we agreed, that the partnership’s cash not be commingled with other Company cash and be used only to fund the operations of the partnership. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state payors (primarily the Medicare and Medicaid programs), commercial health insurance companies, workers’ compensation programs, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payor. The concentration of net patient service accounts receivable by payor class, as a percentage of total net patient service accounts receivable, as of the end of each of the reporting periods, is as follows: AS OF DECEMBER 31, 2014
Commercial health insurance payors Medicare Workers’ compensation Medicaid Patients and other third-party payors Total
2013
59 % 14 14 3 10 100 %
59 % 14 13 3 11 100 %
Revenues and accounts receivable from government payors are significant to our operations; however, we do not believe that there are significant credit risks associated with these government agencies. Revenue and accounts receivable from commercial health insurance payors are also significant to our operations. Because the category of commercial health insurance payors is composed of numerous individual payors which are geographically dispersed, our management does not believe that there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. Additions to the allowance for doubtful accounts are made by means of the Provision for doubtful accounts . We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts that we estimate we will collect. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, payor mix or trends in federal or state governmental healthcare coverage. 101
Long-Lived Assets We report land, buildings, improvements and equipment at cost, net of asset impairment. We report assets under capital lease obligations at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. Useful lives are as follows: YEARS
Buildings Leasehold improvements Furniture, fixtures and equipment Assets under capital lease obligations: Real estate Equipment
15 to 30 5 to 20 3 to 7 15 to 25 3 to 5
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset. We capitalize interest expense on major construction and development projects while in progress. Interest of approximately $0.1 million was capitalized for the year-ended December 31, 2012; no interest was capitalized during the years-ended December 31, 2014 and 2013. We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the consolidated statements of operations. However, if the sale, retirement or disposal involves a discontinued operation, the resulting net amount, less any proceeds, is included in the results of discontinued operations. For operating leases, we recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease. Goodwill We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of October 1 of each year. For 2014 and 2012, we performed a qualitative assessment because management estimated the fair value to significantly exceed the carrying value. In the qualitative assessments, we weighed the relative impact of factors that are specific to us, as well as industry and macroeconomic factors. The factors specific to us that were considered included financial performance and changes to the carrying value since the most recent impairment test. We also considered growth projections from independent sources and significant developments within our industry. We determined that the impact of macroeconomic factors on the most recent impairment tests would not significantly affect the estimated fair value. Based on this qualitative assessment, considering the aggregation of these factors, we concluded that it is not more-likely-than-not that the fair value of the Company is less than its carrying amount and, therefore, performing the two-step impairment test was unnecessary. In 2013, we changed from one operating segment to six operating segments, which are aggregated into one reportable segment. Our six operating segments are generally organized geographically. As a result of this change, we ascribed goodwill to each reporting unit (same as our operating segments) using a relative fair value approach. In 2013, we evaluated our reporting units for goodwill impairment using a two-step process. The first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired, and the second step of the impairment test is not required. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by hypothetically allocating the fair value of the reporting unit to its identifiable assets and liabilities in a manner consistent with a business combination, with any excess fair value representing implied goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. 102
The carrying value of each operating segment was determined by assigning assets and liabilities to those reporting units as of the measurement date. We estimated the fair values of the operating segments by considering the indicated fair values derived from an income approach, which involves discounting estimated future cash flows. We considered market factors when determining the assumptions and estimates used in our valuation models. To substantiate the fair values derived from these valuations, we reconciled the reporting unit fair values to our market capitalization. We recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its implied fair value. We present a goodwill impairment charge as a separate line item within income from continuing operations in the consolidated statements of operations, unless the goodwill impairment is associated with a discontinued operation. In that case, we include the goodwill impairment charge, on a net-of-tax basis, within the results of discontinued operations. When we dispose of a business, the relative fair value of goodwill is allocated to the carrying amount of the business disposed of in determining the gain or loss on disposition. Impairment of Long-Lived Assets and Other Intangible Assets We assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with definite useful lives whenever events or changes in circumstances indicate that we may not be able to recover the asset’s carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected net future cash flows to be generated by that asset, or, for identifiable intangibles with definite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with definite useful lives, if any, to be recognized is measured based on projected discounted future cash flows. We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. We present an impairment charge as a separate line item within income from continuing operations in our consolidated statements of operations, unless the impairment is associated with a discontinued operation. In that case, we include the impairment charge, on a net-of-tax basis, within the results of discontinued operations. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed. We report long-lived assets to be disposed of by sale as held for sale and recognize those assets in the balance sheet at the lower of carrying amount or fair value less cost to sell, and cease depreciation. We amortize the cost of intangible assets with definite useful lives over their respective estimated useful lives to their estimated residual value. As of December 31, 2014, none of our definite useful lived intangible assets have an estimated residual value. As of December 31, 2014, we did not have any intangible assets with indefinite useful lives. The range of estimated useful lives of our other intangible assets is as follows: YEARS
Certificates of need Favorable contracts Favorable lease obligations Licenses Management agreements Noncompete agreements
10 to 30 4 5 15 to 20 3 to 15 2 to 15
For the years-ended December 31, 2014, 2013 and 2012, we recorded on our consolidated statements of operations within Equity in net income of nonconsolidated affiliates amortization expense of $23.2 million, $25.9 million and $20.3 million, respectively, for definite-lived intangible assets attributable to equity method investments. Investment in and Advances to Nonconsolidated Affiliates Investments in entities that we do not control, but in which we have the ability to exercise significant influence over the operating and financial policies of the investee, are accounted for under the equity method. Equity method investments are recorded at original cost and adjusted periodically to recognize our proportionate share of the investees’ net income or losses after the date of investment, additional contributions made and distributions received, amortization of definite-lived intangible assets attributable to equity method investments and impairment losses resulting from adjustments to the carrying value of the investment. We record equity method losses in excess of the carrying amount of an investment when we guarantee obligations or we are otherwise committed to provide further financial support to the affiliate. 103
Management periodically assesses the recoverability of our equity method investments for impairment. We consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, as appropriate, including discounted cash flows, estimates of sales proceeds and external appraisals, as appropriate. If an equity method investment’s decline in value is other than temporary, we record an impairment in Equity in net income of nonconsolidated affiliates . Financing Costs We amortize financing costs using the effective interest method over the life of the related debt. The related expense is included in Interest expense in our consolidated statements of operations. Fair Value of Financial Instruments Our financial instruments consist mainly of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, letters of credit, long-term debt and interest rate swap agreements. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments. The fair value of our letters of credit is deemed to be the amount of payment guaranteed on our behalf by third-party financial institutions. We determine the fair value of our long-term debt based on various factors, including maturity schedules, call features and current market rates. We also use quoted market prices, when available, or discounted cash flows to determine fair values of long-term debt. The fair value of our interest rate swaps is determined using information provided by a third-party financial institution and discounted cash flows. Derivative Instruments All derivative instruments are recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. As of December 31, 2014 and 2013, we held interest rate swaps to hedge the interest rate risk on a portion of our long-term debt. These swaps were historically designated as a cash flow hedge; however, in 2013, we de-designated these instruments. The de-designation resulted in the reclassification of all amounts related to the cash flow hedges in Accumulated other comprehensive loss to be reclassified to Interest expense . Prior to de-designation, all changes in the fair value of these interest rate swaps were reported in other comprehensive income on the consolidated statement of changes in equity. Net cash settlements on our interest rate swaps are included in investing activities in our consolidated statements of cash flows. For additional information regarding these interest rate swaps, see Note 8, Long-Term Debt . Noncontrolling Interest in Consolidated Affiliates The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries that they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Also, certain of the Company’s noncontrolling interests have industry-specific redemption features, such as a change in law that would prohibit the noncontrolling interests’ current form of ownership in ASCs, which are not solely within the control of the Company. We are not aware of events that would make a redemption probable. According to authoritative guidance, classification of these noncontrolling interests outside of permanent equity is required due to the redemption features. Equity-Based Compensation We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock as well as RSUs to key teammates, directors, service providers, consultants and affiliates. We also made stand-alone grants (not under any Plan) of RSUs to an executive officer and three non-employee directors prior to our initial public offering. 104
Under the Plans, our key teammates, directors, service providers, consultants and affiliates are provided with what we believe to be appropriate incentives to encourage them to continue employment with us or providing service to us or any of our affiliates and to improve our growth and profitability. Option awards are generally granted with an exercise price equal to at least the fair market value of the underlying share at the date of grant. Vesting in the option awards varies based upon time, attainment of certain performance conditions, or upon the occurrence of a Liquidity Event (as defined in the applicable Plan) in which the TPG Funds and/or any of its affiliates achieves a minimum cash return on its original investment. All existing RSU awards vest over time.
Additionally, HealthSouth Corporation (“HealthSouth”) holds an unvested option to purchase equity securities constituting 5% of the equity securities issued and outstanding as of the closing of our acquisition by TPG in 2007 on a fully diluted basis, which option becomes exercisable upon certain customary liquidity events, including a public offering of shares of our common stock that results in 30% or more of our common stock being listed or traded on a national securities exchange. Once vested, the option is exercisable on a net exercise basis. Based on a closing stock price of $33.65 per share at December 31, 2014, the option would be exercisable, on a net exercise basis, for a number of shares equal to less than 1.0% of our currently outstanding shares of common stock, subject to adjustment as provided for in the terms of the option agreement governing the exercise price of the option. Income Taxes We provide for income taxes using the asset and liability method. This approach recognizes the amount of federal, state and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. A valuation allowance is required when it is more-likely-than-not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income. We file a consolidated federal income tax return. State income tax returns are filed on a separate, combined or consolidated basis in accordance with relevant state laws and regulations. LPs, LLPs, LLCs and other pass-through entities that we consolidate or account for using the equity method of accounting file separate federal and state income tax returns. We include the allocable portion of each pass-through entity’s income or loss in our federal income tax return. We allocate the remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of the taxes. Assets and Liabilities Held for Sale and Results of Discontinued Operations Components of an entity that have been disposed of or are classified as held for sale and have operations and cash flows that can be clearly distinguished from the rest of the entity are reported as assets held for sale and discontinued operations. In the period in which a component of an entity has been disposed of or classified as held for sale, we reclassify the results of operations for current and prior periods into a single caption titled Loss from discontinued operations, net of income tax expense . In addition, assets and liabilities associated with facilities that qualify for reporting as discontinued operations are reflected in the consolidated balance sheets as Current assets related to discontinued operations, Assets related to discontinued operations, Current liabilities related to discontinued operations and Liabilities related to discontinued operations . We also classify cash flows related to discontinued operations as one line item within each category of cash flows in our consolidated statements of cash flows. Assessment of Loss Contingencies We have legal and other contingencies that could result in significant losses upon the ultimate resolution of such contingencies. We record accruals for such contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. A significant amount of judgment is involved in determining whether a loss is probable and reasonably estimable due to the uncertainty involved in determining the likelihood of future events and estimating the financial statement impact of such events. If further developments or resolution of a contingent matter are not consistent with our assumptions and judgments, we may need to recognize a significant charge in a future period related to an existing contingent matter. See Note 16, Commitments and Contingent Liabilities , for more information regarding these matters. 105
Earnings Per Share (EPS) We report two earnings per share numbers, basic and diluted. These are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below: YEAR-ENDED DECEMBER 31, 2014
In thousands
Weighted average shares outstanding Dilutive effect of equity-based compensation plans Weighted-average shares outstanding, assuming dilution
38,477 1,481 39,958
YEAR-ENDED DECEMBER 31, 2013
31,688 — 31,688
YEAR-ENDED DECEMBER 31, 2012
30,340 — 30,340
The shares used reflect the conversion to a Delaware corporation discussed in Note 1 for all periods. All dilutive share equivalents are reflected in our earnings per share calculations. Antidilutive share equivalents are not included in our EPS calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average shares outstanding computation are excluded. The excluded shares for the years-ended December 31 are as follows: 2013 — 216,682 and 2012 — 98,439. Reportable Segments We have six operating segments, which aggregate into one reportable segment. Our six operating segments are generally organized geographically. For reporting purposes, we have aggregated our operating segments into one reportable segment as the nature of the services are similar and the businesses exhibit similar economic characteristics, processes, types and classes of customers, methods of service delivery and distribution and regulatory environments. Distribution On September 16, 2013, we declared a cash distribution of approximately $0.24 per outstanding membership unit, resulting in a total distribution to our membership unit holders of $74.9 million. The distribution was payable promptly after the date on which it was declared. In addition, on September 16, 2013, the board of directors of the Company resolved to pay a cash bonus to eligible holders of vested options and restricted equity units of approximately $0.24 per vested option or restricted equity unit, as applicable, resulting in a total bonus payment of $4.6 million, and to reduce the exercise price of any such holder’s unvested options by approximately $0.24 per unvested option. The cash bonus payment was recorded as compensation expense in the third quarter of 2013. We will record stock compensation expense over the remaining vesting periods related to the adjustment to unvested options. Recent Revisions to Authoritative Guidance In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the criteria for determining which disposals (both consolidated investments and equity method investments) can be presented as discontinued operations and modifies related disclosure requirements. Under the new criteria, a discontinued operation is defined as a disposal of a component or group of components, which may include equity method investments, that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU is effective for the Company on January 1, 2015. We do not believe that this ASU will have a material effect on our consolidated financial position, results of operations or cash flows. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers , which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The ASU becomes effective for the Company at the beginning of its 2017 fiscal year; early adoption is not permitted. The Company is currently assessing the impact that this ASU will have on our consolidated financial position, results of operation or cash flows. In November 2014, the FASB issued ASU No. 2014-17, Business Combination — Pushdown Accounting, which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity as compared to current GAAP which offers limited guidance for determining 106
whether and at what threshold pushdown accounting should be established in an acquired entity’s separate financial statements. The ASU applies to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer obtains control of the acquired entity and is effective on November 18, 2014. The ASU does not have a material impact on our consolidated financial position, results of operation or cash flows. In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis . This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted. The company is currently evaluating the potential impact of this standard on our consolidated financial position, results of operation or cash flows. We do not believe that any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. NOTE 4 — ACCOUNTS RECEIVABLE Accounts receivable consist of the following: AS OF DECEMBER 31, 2014 2013
Accounts receivable Less: Allowance for doubtful accounts Accounts receivable, net
$ $
110,977 $ (10,448 ) 100,529 $
99,530 (10,393 ) 89,137
The following is the activity related to our allowance for doubtful accounts: YEAR-ENDED DECEMBER 31, 2014
Balance at beginning of period Provision for doubtful accounts Deductions and accounts written off Balance at end of period
$
$
YEAR-ENDED DECEMBER 31, 2013
10,393 $ 14,051 (13,996 ) 10,448 $
YEAR-ENDED DECEMBER 31, 2012
5,698 $ 14,208 (9,513 ) 10,393 $
9,190 12,736 (16,228 ) 5,698
NOTE 5 — PROPERTY AND EQUIPMENT Property and equipment consists of the following: AS OF DECEMBER 31, 2014 2013
Land Buildings Leasehold improvements Furniture, fixtures and equipment
$
Less: Accumulated depreciation Construction in progress Property and equipment, net
$ 107
17,081 $ 42,667 53,890 180,270 293,908 (99,111 ) 194,797 14,845 209,642 $
17,955 31,878 41,724 150,670 242,227 (68,756 ) 173,471 16,488 189,959
The amount of depreciation expense, amortization expense and accumulated amortization relating to assets under capital lease obligations, and rent expense under operating leases is as follows:
Depreciation expense Assets under capital lease obligations: Buildings Equipment
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
YEAR-ENDED DECEMBER 31, 2012
$
$
$
$
Accumulated depreciation Assets under capital lease obligations, net Amortization expense Rent Expense: Minimum rent payments Contingent and other rents Total rent expense
$ $ $ $
34,796
19,279 $ 31,898 51,177 (22,930 ) 28,247 $ 7,753 $ 24,419 10,727 35,146
$ $
28,808
17,062 $ 28,484 45,546 (16,588 ) 28,958 $ 5,991 $ 21,986 9,596 31,582
29,706 13,004 16,768 29,772 (15,498 ) 14,274 5,432
$ $
21,489 10,430 31,919
Leases We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates through 2031. We also lease certain buildings and equipment under capital leases expiring at various dates through 2026. Operating leases generally have 3 to 22 year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Various facility leases include provisions for rent escalation to recognize increased operating costs or require us to pay certain maintenance and utility costs. Contingent rents are included in rent expense in the year incurred. Some facilities are subleased to other parties. Rental income from subleases approximated $0.5 million, $0.6 million and $0.9 million for the years-ended December 31, 2014, 2013 and 2012, respectively. Certain leases contain annual escalation clauses based on changes in the Consumer Price Index while others have fixed escalation terms. The excess of cumulative rent expense (recognized on a straight-line basis) over cumulative rent payments made on leases with fixed escalation terms is recognized as straight-line rental accrual and is included in Other long-term liabilities in the accompanying consolidated balance sheets. Our facilities lease land, buildings and equipment, with most leases being for terms of three to ten years. On April 4, 2014, the Company entered into a new lease agreement that resulted in the relocation of our Birmingham, Alabama office to Brookwood Village Center in Birmingham, Alabama. This lease, which commenced on December 1, 2014, is for an initial term of 10.5 years. The lease for our previous Birmingham, Alabama office, which commenced on March 1, 2008, will expire on March 31, 2015. We do not intend to renew this lease upon expiration. Future minimum lease payments at December 31, 2014 for those leases of the Company and its subsidiaries having an initial or remaining noncancelable lease term of one year or more are as follows:
YEAR ENDING DECEMBER 31,
2015 2016 2017 2018 2019 2020 and thereafter
OPERATING LEASES
CAPITAL LEASE OBLIGATIONS
$
$
$ Less: interest portion Obligations under capital leases
24,536 20,091 15,485 13,506 10,732 41,106 125,456
$
8,226 $ 6,505 5,091 3,620 2,016 9,132 34,590 $ (5,337 ) 29,253
TOTAL
32,762 26,596 20,576 17,126 12,748 50,238 160,046
Obligations Under Lease Guarantees In conjunction with the sale of certain facilities in prior years, the leases of certain properties were assigned to the purchasers and, as a condition of the lease, the Company is a guarantor on the lease. Should the purchaser fail to pay the rent due on these leases, the 108
lessor would have contractual recourse against the Company. We have not recorded a liability for these guarantees because we do not believe it is probable that we will have to perform under these agreements. If we are required to perform under these guarantees, we could potentially have recourse against the purchaser for recovery of any amounts paid. The amount remaining on these guarantees is not material to our financial statements. These guarantees are not secured by any assets under the leases. As of December 31, 2014, the Company has not been required to perform under any such lease guarantees. The Company has provided guarantees related to operating leases of nonconsolidated affiliates in the amount of $20.1 million as of December 31, 2014. Impairment of Long-Lived Assets During 2014, 2013 and 2012, we examined our long-lived assets for impairment due to facility closings and facilities experiencing cash flow insufficient to recover the net book value of its long-lived assets. Based on this review, $0.7 million and $0.4 million of impairment charges were recorded for the years-ended December 31, 2014 and December 31, 2012, respectively. No material impairment charges were recorded for the year-ended December 31, 2013. For all periods presented, the fair value of the impaired long-lived assets at our facilities was determined primarily based on the assets’ estimated fair value using valuation techniques that included discounted future cash flows. NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. Other definite-lived intangibles consist primarily of certificates of need, licenses, noncompete agreements and management agreements. We had no accumulated impairment of goodwill for the years ended December 31, 2014 or December 31, 2013. The following tables show changes in the carrying amount of goodwill for the years-ended December 31, 2014 and December 31, 2013: YEAR-ENDED DECEMBER 31, 2014
Balance at beginning of period Acquisitions (Note 2) Deconsolidations (Note 2) Sales Closure and other VIE related (Note 3) Conversion of equity method investment to consolidated Balance at end of period
$
$
745,036 $ 177,726 (22,018 ) (454 ) 2,101 — — 902,391 $
YEAR-ENDED DECEMBER 31, 2013
706,495 49,286 (7,351 ) (10,062 ) (515 ) 4,104 3,079 745,036
We performed impairment reviews as of October 1, 2014, 2013 and 2012, and concluded that no goodwill impairment existed. 109
The following table provides information regarding our other intangible assets: AS OF DECEMBER 31, 2014 2013
Certificates of need Gross carrying amount Accumulated amortization Net Management agreements Gross carrying amount Accumulated amortization Net Licenses Gross carrying amount Accumulated amortization Net Noncompete agreements Gross carrying amount Accumulated amortization Net Total other intangible assets Gross carrying amount Accumulated amortization Net
$ $ $ $ $ $ $ $ $ $
18,250 $ (9,237 ) 9,013 $
20,097 (8,073 ) 12,024
61,905 $ (19,231 ) 42,674 $
49,879 (15,334 ) 34,545
15,338 $ (2,091 ) 13,247 $
7,429 (1,278 ) 6,151
24,039 $ (4,711 ) 19,328 $
9,954 (1,030 ) 8,924
119,532 $ (35,270 ) 84,262 $
87,359 (25,715 ) 61,644
During 2014, 2013 and 2012, we examined our intangible assets for impairment due to facility closings and facilities experiencing cash flow insufficient to recover the net book value of their long-lived assets. In all periods presented, no impairment charge was deemed necessary for intangible assets. For the years-ended December 31, 2014, December 31, 2013 and December 31, 2012, we recorded $23.2 million, $25.9 million and $20.3 million, respectively, of amortization expense for definite-lived intangible assets attributable to equity method investments. These expenses are included in Equity in net income of nonconsolidated affiliates in our consolidated financial statements. Amortization expense for other intangible assets is as follows: YEAR-ENDED YEAR-ENDED YEAR-ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2014 2013 2012
Amortization expense
$
10,114 $
6,651 $
4,815
Total estimated amortization expense for our other intangible assets for the next five years is as follows: ESTIMATED AMORTIZATION YEAR ENDING DECEMBER 31,
EXPENSE
2015 2016 2017 2018 2019
$
12,537 12,113 11,326 11,207 8,576
NOTE 7 — RESULTS OF OPERATIONS OF NONCONSOLIDATED AFFILIATES As of December 31, 2014, Investment in and advances to nonconsolidated affiliates represents Surgical Care Affiliates’ investment in 65 partially owned entities, most of which are general partnerships, LPs, LLPs, LLCs or joint ventures in which SCA or one of our subsidiaries is a general or limited partner, managing member, member or venturer, as applicable. We do not control these affiliates but have the ability to exercise significant influence over the operating and financial policies of certain of these affiliates. Accordingly, 110
we account for these affiliates using the equity method. Our ownership percentage in these affiliates generally ranged from 5% to 50% as of December 31, 2014. Our investment in these affiliates is an integral part of our operations. During the year-ended December 31, 2014, we completed two separate deconsolidation transactions. In one of these transactions, we sold a controlling equity interest in an ASC and transferred certain control rights to a partner in the entity. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.4 million and recorded a pre-tax loss of approximately $3.4 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. In the other transaction, we agreed to sell our entire interest in an ASC in Santa Monica, California at a later date, see subsequent event footnote. In conjunction with this transaction, the operating agreement of this affiliate was amended on October 1, 2014 to remove SCA’s control rights until the date of the sale. As a result of removing SCA’s control rights, the facility became a nonconsolidated affiliate. We recorded a pre-tax gain of approximately $2.7 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The net loss on these transactions is recorded in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. During the year-ended December 31, 2013, we completed two separate deconsolidation transactions. In one of these transactions, we sold a controlling equity interest and transferred certain control rights to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.1 million and recorded a pre-tax loss of approximately $1.6 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in (Gain) loss on sale of investments in the accompanying consolidated statements of operations. In the other transaction, we transferred certain control rights to partners in the entity. We retained a noncontrolling interest in this affiliate. We recorded a pre-tax loss of approximately $1.5 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in Equity in net income of nonconsolidated affiliates in the accompanying consolidated statements of operations. During the year ended December 31, 2012, we completed one deconsolidation transaction. In the transaction, we sold a controlling equity interest in an ASC and transferred certain control rights to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $4.3 million and recorded a pre-tax gain of approximately $2.0 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The gain on this transaction is recorded in (Gain) loss on sale of investments in the accompanying consolidated statement of operations. Also during 2012, the Company completed a transaction whereby we contributed our interest in two consolidated facilities (“Surgical Care Affiliates facilities”) and $1.6 million to a newly formed entity that is jointly owned by us and a California health system (the “JV”). Concurrently, the California health system contributed its controlling interest in a facility (“Health System facility”) to the JV. We also entered into management services agreements with the facilities contributed to the JV. As a result of the transaction, the operations of one of the contributed Surgical Care Affiliates facilities were merged with and into the operations of the Health System facility; the Health System facility was the surviving entity. Accordingly, two facilities remain as a result of the transaction. We have a noncontrolling interest in the surviving facilities, which are presented under the equity method of accounting. The net effect of these contributions resulted in the Company recording a loss of approximately $3.3 million related to the conversion of the two Surgical Care Affiliates facilities into an equity method investment. The loss on this transaction is recorded in (Gain) loss on sale of investments in the accompanying consolidated statement of operations. Fair values for the retained noncontrolling interests are primarily estimated based on third-party valuations that we have obtained in connection with such transactions and/or the amount of proceeds received for the controlling interest sold. Our continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations. During 2014, we recorded $0.3 million of impairment to our investments in nonconsolidated affiliates due to a decline in the expected future cash flows of one nonconsolidated affiliate that we determined to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . During 2013, we recorded $6.1 million of impairment to our investments in nonconsolidated affiliates due to declines in the expected future cash flows of five nonconsolidated affiliates that we determined to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . This decline in the expected future cash flows was caused by events specific to each impacted facility, as further described below. The impairments included: ● a $1.5 million impairment on our investment in Wausau Surgery Center, L.P. related to an offer received to purchase our interest in the facility; ● a $2.3 million impairment on our investment in Premier Surgery Center of Louisville, L.P. related to insufficient forecasted growth at the facility; 111
● a $0.9 million impairment on our investment in Kerlan-Jobe Surgery Center, LLC related to a buy-out agreement for the facility; ● a $0.8 million impairment on our investment in Surgery Center of Fort Collins, LLC related to insufficient forecasted growth at the facility; and ● a $0.6 million impairment on our investment in Surgery Center of Lexington, LLC related to insufficient forecasted growth at the facility. In determining whether an impairment charge is necessary on a particular investment, we consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, including discounted cash flows, estimates of sales proceeds and external appraisals, as appropriate. We account for investments in nonconsolidated affiliates primarily using the equity method of accounting. The difference between the carrying amount of the investment and the underlying equity in net assets was $67.7 million and $76.9 million at December 31, 2014 and 2013, respectively, and is primarily attributable to goodwill and other intangible assets. Our investments consist of the following: AS OF DECEMBER 31, 2014 2013
INVESTMENT IN AND ADVANCES TO NONCONSOLIDATED AFFILIATES:
Beginning balance Share of income (1) Share of distributions Acquisitions Conversion to/from investments in nonconsolidated affiliates Sale/closure of investments in nonconsolidated affiliates Other Total investment in and advances to nonconsolidated affiliates (1)
$
168,824 $ 32,564 (53,328 ) 36,021 8,238 (1,947 ) 4,238 194,610 $
$
194,299 23,364 (53,097 ) 5,126 186 (2,133 ) 1,079 168,824
Includes $0.3 million and $6.1 million of impairments at December 31, 2014 and 2013, respectively, as previously noted.
Included in the 2014 and 2013 Share of income amount above is amortization expense of $23.2 million and $25.9 million, respectively, for definite-lived intangible assets attributable to equity method investments. The following summarizes the combined assets, liabilities and equity of our nonconsolidated affiliates (on a 100% basis): DECEMBER 31, 2014
Assets Current Noncurrent Total assets Liabilities Current Noncurrent Total liabilities Partners’ capital and shareholders’ equity Surgical Care Affiliates Outside parties Total partners’ capital and shareholders’ equity Total liabilities and partners’ capital and shareholders’ equity
$ $ $
$
205,917 $ 183,311 389,228 $
191,765 138,238 330,003
54,863 $ 58,800 113,663
45,523 38,665 84,188
126,425 149,140 275,565 389,228 $
91,952 153,863 245,815 330,003
The following summarizes the combined condensed results of operations of our nonconsolidated affiliates: 112
DECEMBER 31, 2013
Net operating revenues: Net patient revenues Other revenues Total net operating revenues Operating expenses: Salaries and benefits Supplies Other operating expenses Depreciation and amortization Total operating expenses Operating income Interest expense, net of interest income Loss on sale of investments Income from continuing operations before income tax expense Net income
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
YEAR-ENDED DECEMBER 31, 2012
$
$
$
$ $
659,367 5,884 665,251 140,365 111,833 141,872 21,765 415,835 249,416 2,254 — 247,162 247,097
$ $
600,600 5,166 605,766 128,892 99,299 123,052 17,281 368,524 237,242 1,627 22 235,593 235,522
$ $
474,354 3,153 477,507 108,803 78,531 96,202 14,045 297,581 179,926 1,501 — 178,425 178,365
NOTE 8 — LONG-TERM DEBT Our long-term debt outstanding consists of the following:
AS OF DECEMBER 31, 2014 2013
Credit Facility debt payable: Advances under $132.3 million Class B Revolving Credit Facility (excluding letters of credit issued thereunder) Class B Term Loan due 2017 Class C Term Loan due 2018 Discount of Class C Term Loan Notes payable to banks and others Capital lease obligations Less: Current portion Long-term debt, net of current portion
$
— $ 212,224 384,150 (452 ) 64,634 29,253 689,809 (24,690 ) 665,119 $
$
— 214,429 388,050 (784 ) 44,023 25,733 671,451 (22,617 ) 648,834
The following chart shows scheduled principal payments due on long-term debt, including capital leases, for the next five years and thereafter: Year Ending December 31,
2015 2016 2017 2018 2019 Thereafter Total
$
$ 113
24,690 22,776 227,180 382,954 7,750 24,459 689,809
The following table provides information regarding our total Interest expense presented in our consolidated statements of operations for both continuing and discontinued operations: YEAR-ENDED DECEMBER 31, 2014
Continuing operations: Interest expense Amortization of bond issue costs Total interest expense and amortization of bond issue costs for continuing operations Discontinued operations: Interest expense Total interest expense for discontinued operations Total interest expense and amortization of bond issue costs
$
$
29,831 2,954
YEAR-ENDED DECEMBER 31, 2013
$
56,311 3,891
YEAR-ENDED DECEMBER 31, 2012
$
55,662 2,980
32,785
60,202
58,642
280 280 33,065
414 414 60,616
442 442 59,084
$
$
Capital Lease Obligations We engage in a significant number of leasing transactions, including real estate, medical equipment, computer equipment and other equipment utilized in operations. Certain leases that meet the lease capitalization criteria have been recorded as an asset and liability at the net present value of the minimum lease payments at the inception of the lease. Interest rates used in computing the net present value of the lease payments generally range from 2.2% to 12.2% based on the incremental borrowing rate at the inception of the lease. Our leasing transactions include arrangements for equipment with major equipment finance companies and manufacturers who retain ownership of the equipment during the term of the lease and with a variety of both small and large real estate owners. Senior Subordinated Notes and Senior PIK-election Notes In connection with the amendment to the Company’s Senior Secured Credit Facility (the “Credit Facility”) in the second quarter of 2013, on June 14, 2013 we extinguished the Senior PIK-election Notes at par, including a payment of accrued interest through July 15, 2015. Additionally, we redeemed the Senior Subordinated Notes at a premium of 3.333% on December 4, 2013. An aggregate loss on extinguishment of debt of $10.3 million was recorded in connection with these two redemptions. Credit Facility With respect to the Credit Facility, as of December 31, 2014, we had $596.4 million outstanding under the senior secured term loan facility consisting of the following: ● $212.2 million under the Class B Term Loan due December 30, 2017. The interest rate on the Class B Term Loan was 4.26% at December 31, 2014. ● $384.2 million under the Class C Term Loan (as defined below) due June 30, 2018. The interest rate on the Class C Term Loan was 4.00% at December 31, 2014. We must repay the Class B Term Loan and the Class C Term Loan in quarterly installments equal to 0.25% of the original principal amount, with the remaining amount payable in full on the maturity date noted above. Borrowings under each portion of the Credit Facility bear interest at a base rate or at the London interbank market for the interest period relevant to such borrowings (“LIBOR”), as elected by SCA, plus an applicable margin. The base rate is determined by reference to the higher of (i) the prime rate of JPMorgan Chase Bank, N.A. and (ii) the federal funds effective rate plus 0.50%. The LIBOR rate is determined by reference to the interest rate for dollar deposits in the London interbank market for the interest period relevant to such borrowings. Interest payments, along with the installment payments of principal, are made at the end of each quarter. The following table outlines the applicable margin for each portion of the Credit Facility. Applicable Margin (per annum) Base Rate Borrowings LIBOR Borrowings
Facility
Class B Revolving Credit Facility Class B Term Loan Class C Term Loan
2.50% 3.50% 3.00% 4.00% 2.00% or 2.25% (with a base rate 3.00% or 3.25% (with a LIBOR floor of 2.00%) depending upon floor of 1.00%) depending the total leverage ratio upon the total leverage ratio 114
There was no outstanding balance under the senior secured revolving credit facility (the “Class B Revolving Credit Facility”) as of December 31, 2014 or December 31, 2013 other than $2.9 million and $1.7 million, respectively, of letters of credit. As of December 31, 2014 the Class B Revolving Credit Facility had a capacity of $132.3 million with a maturity date of June 30, 2016. On June 29, 2013, our Class A Revolving Credit Facility was terminated in connection with our decision not to renew such revolving credit facility. Any utilization of the Class B Revolving Credit Facility (other than issuances of up to an aggregate of $5.0 million of letters of credit) will be subject to compliance with a total leverage ratio test. At December 31, 2014, we had approximately $2.9 million in such letters of credit outstanding. 2013 Amendment to the Credit Facility In the second quarter of 2013, we amended our credit agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a Class C Term Loan Facility (“Class C Term Loan”) of $384.2 million ($383.7 million, net of discount) as of December 31, 2014. The Class C Term Loan will mature on June 30, 2018. We utilized the proceeds of the Class C Term Loan plus $8.7 million in cash to extinguish the Senior PIK-election Notes, the Class A Term Loan and the Incremental Term Loan. The applicable margin for borrowings under the Class C Term Loan is (i) 2.25% with respect to base rate borrowings (with a base rate floor of 2.00%) and (ii) 3.25% with respect to LIBOR borrowings (with a LIBOR floor of 1.00%). The interest rate on the Class C Term Loan was 4.00% at December 31, 2014. Until maturity, quarterly amortization payments will be made in an amount equal to 0.25% of the original principal amount of the Class C Term Loan. We incurred a loss on extinguishment of debt of $3.8 million in connection with the settlement of existing debt due to the closing of the Class C Term Loan during 2013. The Credit Facility is guaranteed by the Company and certain of SCA’s direct 100% owned domestic subsidiaries (the “Guarantors”), subject to certain exceptions, and borrowings under the Credit Facility are secured by a first priority security interest in all equity interests of SCA and of each 100% owned domestic subsidiary directly held by SCA or a Guarantor. The Credit Facility generally restricts SCA and SCA’s restricted subsidiaries’ ability to, among other things: ● incur liens; ● incur or assume additional debt or guarantees or issue or sell certain types of preferred stock; ● pay dividends or make redemptions and repurchases with respect to capital stock; ● prepay, or make redemptions and repurchases of, subordinated debt; ● make loans or investments; and ● engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates. The Company believes that it and SCA were in compliance with these covenants as of December 31, 2014. The Amended Credit Agreement contains a provision that could require prepayment of a portion of our indebtedness if SCA has excess cash flow, as defined by the Amended Credit Agreement. No such prepayment was required at December 31, 2014. Interest Rate Swaps We use an interest rate risk management strategy that incorporates the use of derivative financial instruments to limit our exposure to interest rate risk. The swaps are “receive floating/pay fixed” instruments that define a fixed rate of interest on the economically hedged debt that the Company will pay, meaning that we receive floating rate payments, which fluctuate based on LIBOR, from the counterparty and pay at a fixed rate to the counterparty, the result of which is to convert the interest rate of a portion of our floating rate debt into fixed rate debt, or to limit the variability of interest related payments caused by changes in LIBOR. At December 31, 2014, interest rate swaps of $190.0 million remained outstanding. As a result of the amendment to the Credit Facility, we de-designated the cash flow hedging instruments. The de-designation resulted in the reclassification of all amounts related to the cash flow hedges in Accumulated other comprehensive loss to be reclassified to Interest expense . All derivative instruments are recognized on the balance sheet on a gross basis at fair value. The fair value of the interest rate swaps is recorded in the Company’s consolidated balance sheets, either in Other current liabilities and Other long-term liabilities or Prepaids and other current assets and Other long-term assets , depending on the changes in the fair value of the swap and the payments or receipts expected within the next 12 months, with an offsetting adjustment reported as Interest expense in the consolidated statements of operations. At December 31, 2014, $1.4 million was included in Other current liabilities in the 115
consolidated balance sheet based on the fair value of the derivative instruments and the amounts expected to be settled within the next 12 months. At December 31, 2014 and December 31, 2013, $0.8 million and $3.1 million, respectively, were included in Other long-term liabilities in the consolidated balance sheet based on the fair value of the derivative instruments. Although all our derivative instruments are subject to master netting arrangements, no amounts have been netted against the gross liabilities previously detailed, and no collateral has been posted with counterparties. During the year-ended December 31, 2014, the liability related to the swaps decreased by $0.9 million due to $1.5 million of swap settlements and a $0.5 million change in fair value. During the year-ended December 31, 2014, the Company recorded losses of approximately $0.5 million within Interest expense due to changes in fair value of derivative instruments. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge related to foreign currency exposure. The Company previously designated its interest rate swaps as a cash flow hedge; however, as noted above, the interest rate swaps were de-designated as hedges in the second quarter of 2013. Credit risk occurs when a counterparty to a derivative instrument fails to perform according to the terms of the agreement. Derivative instruments expose us to credit risk and could result in material changes from period to period. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. In addition, at least quarterly, we evaluate our exposure to counterparties who have experienced or may likely experience significant threats to their ability to perform according to the terms of the derivative agreements to which we are a party. We have completed this review of the financial strength of the counterparty to our interest rate swaps using publicly available information, as well as qualitative inputs, as of December 31, 2014. Based on this review, we do not believe that there is a significant counterparty credit risk associated with these derivative instruments. However, no assurances can be provided regarding our potential exposure to counterparty credit risk in the future. Other Debt Certain partnerships included in the Company’s consolidated financial statements have loans with financial institutions and other parties, included above in notes payable to banks and others. These loans mature at various dates through 2030 and accrue interest at fixed and variable rates typically ranging from 2.8% to 8.5% NOTE 9 — NONCONTROLLING INTERESTS The following table shows the breakout of net loss attributable to Surgical Care Affiliates between continuing operations and discontinued operations: YEAR-ENDED DECEMBER 31, 2014
Net income (loss) from continuing operations, net of tax, attributable to Surgical Care Affiliates Net loss from discontinued operations, net of tax, attributable to Surgical Care Affiliates Net income (loss), net of tax, attributable to Surgical Care Affiliates
YEAR-ENDED DECEMBER 31, 2013
YEAR-ENDED DECEMBER 31, 2012
$
41,335
$
(42,014 )
$
(15,115 )
$
(9,355 ) 31,980
$
(9,330 ) (51,344 )
$
(4,895 ) (20,010 )
The following table shows the effects of changes to Surgical Care Affiliates’ ownership interest in its subsidiaries on Surgical Care Affiliates’ equity: YEAR-ENDED DECEMBER 31, 2014
Net income (loss) attributable to Surgical Care Affiliates (Decrease) increase in equity due to sales to noncontrolling interests Increase (decrease) in equity due to purchases from noncontrolling interests Change from net loss attributable to Surgical Care Affiliates and transfers to/from noncontrolling interests
YEAR-ENDED DECEMBER 31, 2013
YEAR-ENDED DECEMBER 31, 2012
$
31,980 (1,121 ) 798
$
(51,344 ) 2,056 (1,394 )
$
(20,010 ) (4,243 ) (1,738 )
$
31,657
$
(50,682 )
$
(25,991 )
Certain of the Company’s noncontrolling interests have industry-specific redemption features whereby the Company could be obligated, under the terms of certain of its operating subsidiaries’ partnership and operating agreements, to purchase some or all of the 116
noncontrolling interests of the consolidated subsidiaries. As a result, these noncontrolling interests are not included as part of the Company’s equity and are carried as Noncontrolling interests-redeemable on the Company’s consolidated balance sheets. The activity relating to the Company’s noncontrolling interests — redeemable is summarized below: YEAR-ENDED DECEMBER 31, 2014
Balance at beginning of period Net income attributable to noncontrolling interests-redeemable Net change in equity related to amendments in agreements with noncontrolling interests Net change related to purchase of ownership interests Contributions from noncontrolling interests Change in distribution accrual Distributions to noncontrolling interests-redeemable Balance at end of period
$
21,902 22,605 — (4,150 ) — (1,300 ) (23,613 ) 15,444
$
YEAR-ENDED DECEMBER 31, 2013
$
YEAR-ENDED DECEMBER 31, 2012
21,709 24,138
$
(1,050 ) 581 1,622 (433 ) (24,665 ) 21,902
$
$
20,215 24,616 — 1,800 — (689 ) (24,233 ) 21,709
NOTE 10 — FAIR VALUE OF FINANCIAL INSTRUMENTS We follow the provisions of the authoritative guidance for fair value measurements, which address how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. The fair value of an asset or liability 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. As a basis for considering assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: ● Level 1 — Observable inputs such as quoted prices in active markets; ● Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and ● Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Assets and liabilities measured at fair value are based on one or more of three valuation techniques, as follows: ● Market approach — Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; ● Cost approach — Amount that would be required to replace the service capacity of an asset (i.e., replacement cost); and ● Income approach — Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing models and lattice models). The fair values of our assets and liabilities that are measured on a recurring basis are as follows (in millions): December 31, 2014 Fair Value Measurements Using Total Assets/Liabilities Level 1 Level 2 Level 3 at Fair Value
Assets Other long-term assets Total assets Liabilities Other current liabilities Other long-term liabilities Total liabilities
$ $
— —
$ $
— —
$ $
— —
$ $
— —
$
— — —
$
1.4 0.8 2.2
$ $ $
— — —
$
1.4 0.8 2.2
$ 117
$
$
Valuation Technique(1)
I I
December 31, 2013 Fair Value Measurements Using Total Assets/Liabilities Level 1 Level 2 Level 3 at Fair Value
Assets Other long-term assets Total assets Liabilities Other current liabilities Other long-term liabilities Total liabilities (1)
$ $
— —
$ $
— —
$ $
0.3 0.3
$ $
0.3 0.3
$
— — —
$
— 3.1 3.1
$ $ $
— — —
$
— 3.1 3.1
$
$
$
Valuation Technique(1)
I
I
As discussed above, the authoritative guidance identifies three valuation techniques: market approach (M), cost approach (C), and income approach (I).
Disclosures for Recurring Measurements Interest Rate Swaps On a recurring basis, we measure our interest rate swaps at fair value. The fair value of our interest rate swaps is derived from models based upon well recognized financial principles and reasonable estimates about relevant future market conditions and calculations of the present value of future cash flows, discounted using market rates of interest. Further, included in the fair value is approximately $0.1 million related to nonperformance risk associated with the interest rate swaps at December 31, 2014 and December 31, 2013. Contingent Consideration As further described in Note 2, $8.9 million of the HI consideration was placed into escrow as contingent consideration. The amount payable as contingent consideration depends upon the successful continuation and/or renewal of certain management agreement contracts held by HI and, in the case of renewals, will be determined by comparing the contract revenue prior to renewal against the expected contract revenue after renewal. As of the acquisition date and December 31, 2013, approximately $8.6 million of contingent consideration was recognized. The following table provides quantitative information associated with the fair value measurement of our recurring Level 3 inputs: Level 3 Contingent Consideration
Level 3 Assets as of December 31, 2013 (in millions)
Income Approach $
0.3
Significant Unobservable Input
Probabilities of retention of management contracts (a)
Range of
Inputs
75% - 100%
Weighted Average
98 %
(a) The fair value of adjustment to the contingent consideration is based on a formula driven threshold contract value set at the time of the HI transaction. The threshold contract value is a function of revenue and probability of retention of each contract over 12 to 18 months from the transaction date. Significant increases or decreases in any of the probabilities of renewal would result in a significantly lower or higher fair value measurement, respectively. There was no contingent consideration as of December 31, 2014. The following table provides a roll-forward of the recurring fair value balance that used Level 3 inputs (in millions): Contingent Consideration
Beginning balance as of December 31, 2013 Net change Ending balance as of December 31, 2014
$ $ 118
0.3 (0.3 ) —
Nonrecurring Measurements Where applicable, on a nonrecurring basis, we measure property and equipment, goodwill, other intangible assets, investments in nonconsolidated affiliates and assets and liabilities of discontinued operations at fair value. The fair values of our property and equipment and other intangible assets are determined using discounted cash flows and significant unobservable inputs. The fair value of our investments in nonconsolidated affiliates is determined using discounted cash flows or earnings, or market multiples derived from a set of comparables. The fair value of our assets and liabilities of discontinued operations is determined using discounted cash flows and significant unobservable inputs unless there is an offer to purchase such assets and liabilities, which would be the basis for determining fair value. The fair value of our goodwill is determined using discounted cash flows, and, when available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. Goodwill is tested for impairment as of October 1 of each year, absent any interim impairment indicators. During 2014, we recorded $0.3 million of impairment to our investments in a nonconsolidated affiliates due to the decline of future cash flows of such nonconsolidated affiliates that we judged to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . An impairment charge of $1.5 million was recorded during 2013 for an investment in a nonconsolidated affiliate. In conjunction with the deconsolidation of this affiliate (as described in Note 2), we adjusted the investment to fair value. The fair value of the investment in the nonconsolidated affiliate was determined based on the estimated fair value using valuations techniques that included recent market transactions. Also, during 2013, we recorded $4.6 million of impairment to our investments in a nonconsolidated affiliates due to the decline of future cash flows of such nonconsolidated affiliates that we judged to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . The investment in nonconsolidated affiliates measured at fair value on a nonrecurring basis is as follows (in millions):
Net Carrying Value as of:
December 31, 2013
Investment in nonconsolidated affiliate
$
Investment in nonconsolidated affiliate
6.4
Net Carrying Value as of:
June 30, 2013
Fair Value Measurements Using Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3)
$
—
— Significant Other Observable Inputs (Level 2)
Quoted Prices in Active Markets for Identical Assets (Level 1)
2.9
—
—
$
6.4
Significant Unobservable Inputs (Level 3)
$
2.9
Total Losses Year-ended:
$
4.6
Total Losses Year-ended:
$
1.5
The inputs used by the Company in estimating the value of Level 3 Investment in nonconsolidated affiliate may include the weighted average cost of capital (“WACC”), revenue growth rates and exit price. Assumptions used by the Company due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s results of operations. The following table includes information regarding the significant unobservable input used in the estimation of Level 3 fair value measurement.
Level 3 Investment in nonconsolidated affiliate
Level 3 Assets as of December 31, 2013 (in millions)
Income Approach
$
Level 3 Assets as of June 30, 2013 (in millions)
Level 3 Investment in nonconsolidated affiliate
Market Approach (a)
6.4
$
The exit price was determined using the amount stated in a firm offer letter for the investment. 119
2.9
Significant Unobservable Inputs
WACC Revenue growth rates
Range of
Significant Unobservable Input Range of
Exit price (a) $
Inputs
11.4% - 15% 0.0% - 3.0%
Inputs
2.9
An impairment charge of $0.7 million was recorded during the year-ended December 31, 2014 for intangible and long-lived assets. The impairment is recorded in Loss from discontinued operations, net of income tax expense in the Company’s consolidated statements of operations. A declining trend of earnings from operations at a facility and increased local competition resulted in the impairment charge recorded in 2014, as management determined its intent to sell or close the impacted facility. No impairment charges for intangible and long-lived assets were recorded during the year-ended December 31, 2013. The fair value of the impaired long-lived assets was determined based on the assets’ estimated fair value using expected proceeds from the sale of the facility. Assets related to discontinued operations measured at fair value on a nonrecurring basis are as follows (in millions): Fair Value Measurements Using Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3)
Net Carrying Value as of:
June 30, 2014
Assets related to discontinued operations
$
—
—
—
$
Total Losses
—
$
0.7
The inputs used by the Company in estimating the value of Level 3 Assets related to discontinued operations include the expected proceeds from the sale of the facility. Assumptions used by the Company due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s results of operations. The following table includes information regarding significant unobservable inputs used in the estimation of Level 3 fair value measurement (in millions).
Level 3 Property and equipment
Income Approach
Level 3 Assets as of June 30, 2014 (in millions)
$
Significant Unobservable Input Range of
Expected proceeds from sale $
—
Inputs
—
Weighted Average
$
—
The following table presents the carrying amounts and estimated fair values of our financial instruments that are classified as long-term liabilities in our consolidated balance sheets (in thousands). The carrying value equals fair value for our financial instruments that are classified as current in our consolidated balance sheets. The carrying amounts of a portion of our long-term debt approximate fair value due to various characteristics of those issues, including short-term maturities, call features and rates that are reflective of current market rates. For our long-term debt without such characteristics, we determine the fair market value by using quoted market prices, when available, or discounted cash flows to calculate their fair values. The fair values utilize inputs other than quoted prices in active markets, although the inputs are observable either directly or indirectly; accordingly, the fair values are in level 2 of the fair value hierarchy. As of December 31, 2014 Carrying Estimated Amount
Interest rate swap agreements (includes short-term component) Long-term debt: Advances under $132.3 million Class B Revolving Credit Facility Class B Term Loan due 2017 Class C Term Loan due 2018 Notes payable to banks and others Financial commitments
As of December 31, 2013 Carrying Estimated
Fair Value
Amount
Fair Value
$
2,192
$
2,192
$
3,126
$
3,126
$
— 212,224 384,150 64,634 —
$
— 206,786 371,905 64,634 —
$
— 214,429 388,050 44,023 —
$
— 214,563 389,020 44,023 —
$
$
$
$
NOTE 11 — EQUITY-BASED COMPENSATION We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock as well as RSUs to key teammates, directors, service providers, consultants and affiliates. We also made stand-alone grants (not under any Plan) of RSUs to an executive officer and three non-employee directors prior to our initial public offering. 120
Option awards are generally granted with an exercise price equal to at least the fair market value of the underlying share at the date of grant. Vesting in the option awards varies based upon time, attainment of certain performance conditions, or upon the occurrence of a Liquidity Event (as defined in the applicable Plan) in which the TPG Funds and/or any of its affiliates achieves a minimum cash return on its original investment. All existing RSU awards vest over time. At December 31, 2014, 3,160,016 stock-based awards were outstanding (of which 3,079,616 are awards under the Plans) and 1,568,173 shares were available for future equity grants under the Plans. In conjunction with our conversion to a Delaware corporation on October 30, 2013 (see Note 1), every 10.25 outstanding membership units of ASC Acquisition LLC were converted into one share of common stock of Surgical Care Affiliates, Inc., and options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates, Inc. at a ratio of 10.25 membership units of ASC Acquisition LLC underlying such options to each one share of common stock of Surgical Care Affiliates, Inc. underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. In addition, every 10.25 outstanding restricted equity units of ASC Acquisition LLC were converted into one restricted equity share of Surgical Care Affiliates, Inc. All information in this footnote is presented giving effect to the conversion. On September 16, 2013, our Board of Directors accelerated the vesting of all performance-based options. This modification was a “probableto-probable” modification under the authoritative guidance. As a result of the acceleration, the Company recognized $0.8 million of additional stock-based compensation expense in the year-ended December 31, 2013. The additional expense represents the incremental fair value as a result of the modification. As a result of the acceleration, no unvested performance-based options existed at December 31, 2013. Also on September 16, 2013, our Board of Directors resolved to pay a cash bonus of $2.46 per vested option and adjust downward the exercise price of all unvested options by approximately $2.46 per unvested option. As such, the Company recorded additional compensation expense of $4.6 million during the year-ended December 31, 2013. We will record stock-based compensation expense over the remaining vesting periods related to the adjustment to unvested options. This modification was a “probable-to-probable” modification under the authoritative guidance. We will record $1.5 million of additional stock-based compensation expense over remaining vesting periods of the modified options. Information pertaining to equity-based compensation was as follows (in thousands): YEAR-ENDED YEAR-ENDED YEAR-ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2014 2013 2012
Equity-based compensation expense Cash received from option exercises
$
4,126 $ 3,887
2,724 $ 453
1,719 —
As of December 31, 2014, the Company had total unrecognized compensation cost of approximately $17,706 related to non-vested awards, which the Company expects to recognize through 2018 and over a weighted-average period of 3.2 years. Option Awards A summary of option activity under the Plans as of December 31, 2014, and changes during the year-ended December 31, 2014 are presented below:
UNITS (IN 000’S )
Outstanding, December 31, 2013 Granted Exercised Forfeitures Expirations Outstanding, December 31, 2014 Exercisable, December 31, 2014
3,007 417 (633 ) (74 ) (2 ) 2,715 1,624 121
$ $ $ $ $ $ $
WEIGHTEDAVERAGE EXERCISE
REMAINING CONTRACTUAL
AGGREGATE INTRINSIC
PRICE
LIFE (YEARS)
VALUE
11.42 29.46 10.93 16.16 14.05 14.23 11.26
0.6 –10.0 $ 9.72 – 9.18
0.6 –10.0 $
70,117 — — — — 52,488
The weighted average grant-date fair value per option of all options granted during the year-ended December 31, 2014, was $11.88. The weighted average grant-date fair value per option of all options granted during the year-ended December 31, 2013, was $6.68. The weighted average grant-date fair value per option of all options granted during the year-ended December 31, 2012 was $3.79. The fair value of each option award is estimated on the date of grant utilizing two methodologies. For time-based options, the Company estimates the fair value of the grant utilizing the Black-Scholes-Merton model that utilizes the assumptions shown in the table below. Expected volatilities are based on observed historical trends in the industry and other factors. The expected term of the options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate was based on the time horizon of the expected term and is based on the U.S. Treasury yield curve in effect at the time of the grant. YEAR-ENDED
YEAR-ENDED
YEAR-ENDED
DECEMBER 31, 2014 DECEMBER 31, 2013 DECEMBER 31, 2012
Expected volatility Risk-free interest rate Expected term (years) Dividend yield
40% 1.0% -1.35% 6.25 0.00%
35% -40% 1.0% -1.35% 6.25 0.00%
37% -39% 1.0% -1.35% 6.25 0.00%
The fair value of the performance-based options is based on the application of a Monte Carlo simulation model. Expected volatilities are based on observed historical trends in the industry and other factors. The expected term of the options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate was based on the time horizon of the expected term and is based on the U.S. Treasury yield curve in effect at the time of the grant. On September 16, 2013, our Board of Directors accelerated the vesting of all performance-based options. This modification was a “probable-to-probable” modification under the authoritative guidance. As a result of the acceleration, the Company recognized $0.8 million of additional stock-based compensation expense. The additional expense represents the incremental fair value as a result of the modification. For the expected volatility assumption, an emphasis was placed on identifying comparable public companies that operate ambulatory surgery centers. The Company utilized comparable public company volatility rates to estimate the expected volatility. The Company used the exponentially weighted moving average volatility of the public companies identified, adjusted for changes in the capital structure (as described by ASC 718), for the derived expected term for the time-based options. RSU Awards A summary of activity associated with RSU awards during 2014 is presented below: GRANT DATE FAIR VALUE
UNITS (IN 000’S )
Nonvested RSUs at December 31, 2013 Granted Vested Forfeited Nonvested RSUs at December 31, 2014
80 $ 318 $ (17 ) $ (14 ) 367
(IN 000’S )
151 $ 318 $ (17 ) $ (7 ) 445
NOTE 12 — EMPLOYEE BENEFIT PLANS SCA has certain employee benefit plans, including the following: ● Company sponsored healthcare plans, including coverage for medical and dental benefits; 122
24.58 29.55 29.62 n/a
GRANT DATE FAIR VALUE
UNITS
Total RSUs at December 31, 2013 Granted Vested Forfeited Total RSUs at December 31, 2014
PER UNIT
PER UNIT
17.71 29.55 29.62 n/a
● The Retirement Investment Plan, which is a qualified 401(k) savings plan; and ● The Senior Management Bonus Program. Substantially all teammates are eligible to enroll in the SCA’s sponsored healthcare plans, including coverage for medical and dental benefits. Our primary healthcare plans are national plans administered by third-party administrators, for which we are self-insured. The cost associated with these plans, net of amounts paid by teammates, was approximately $23.3 million, $20.5 million and $16.3 million for the years-ended December 31, 2014, 2013 and 2012, respectively. The Retirement Investment Plan is a qualified 401(k) savings plan. The plan allows eligible teammates to contribute up to 100% of their pay on a pre-tax basis into their individual retirement account in the plan, subject to the maximum annual limits set by the IRS. SCA’s employer matching contribution is 50% of the first 4% of each participant’s elective deferrals. All contributions to the plan are in the form of cash. Substantially all teammates who are at least 21 years of age are eligible to participate in the plan. Employer contributions vest over a six-year service period. Participants are immediately fully vested in their own contributions. Employer contributions made to the Retirement Investment Plan approximated $2.7 million, $2.9 million and $2.7 million during the years-ended December 31, 2014, 2013 and 2012, respectively. SCA has a Senior Management Bonus Program designed to reward senior management for performance, based on a combination of corporate, regional and individual goals. The corporate goals are based upon the Company meeting a pre-determined financial goal. Similarly, regional goals, if any, are based upon a pre-determined set of financial goals for the applicable region. Individual goals are initially proposed by each participant in consultation with his or her immediate supervisor and, with respect to our executive officers, are then approved by our Compensation Committee. We recorded expense of approximately $9.0 million, $8.5 million and $4.8 million under the Senior Management Bonus Program for the years-ended December 31, 2014, 2013 and 2012, respectively. The Company’s Teammate Stock Purchase Plan (the "TSPP") enables eligible employees to purchase shares of the Company’s common stock through payroll deductions or other permitted means. As determined by the Company’s Compensation Committee, the purchase price for shares offered under the TSPP ranges during any particular offering period from 85% to 100% of the closing price of the Company’s common stock on the purchase date at the end of such period. The Company recognizes the fair value of the discount associated with shares purchased in Salaries and benefits expense on the consolidated statement of operations. The Company’s Board of Directors has authorized 500,000 shares of the Company’s common stock to be issued under the TSPP. During the year-ended December 31, 2014, the Company issued 16,000 shares under the TSPP and received cash totaling $0.5 million. NOTE 13 — INCOME TAXES The Company is subject to U.S. federal, state and local income taxes. The Income from continuing operations before income tax expense is as follows: YEAR-ENDED DECEMBER 31, 2014
Income from continuing operations before income tax expense
$
175,943
YEAR-ENDED DECEMBER 31, 2013
$
76,248
YEAR-ENDED DECEMBER 31, 2012
$
87,778
The significant components of the provision for income taxes related to continuing operations are as follows: YEAR-ENDED DECEMBER 31, 2014
Current: Federal State and local Total current expense Deferred: Federal State and local Total deferred expense Total income tax expense related to continuing operations
$
$ 123
(6 ) 846 840 6,916 1,683 8,599 9,439
YEAR-ENDED DECEMBER 31, 2013
$
$
200 610 810 9,217 2,293 11,510 12,320
YEAR-ENDED DECEMBER 31, 2012
$
$
— 416 416 6,533 1,569 8,102 8,518
A reconciliation of differences between the federal income tax at statutory rates and our actual income tax expense on income from continuing operations, which include federal, state and other income taxes, is as follows: YEAR-ENDED DECEMBER 31, 2014
Tax expense at statutory rate Increase (decrease) in tax rate resulting from: Federal income tax assumed by noncontrolling interests Change in valuation allowance State income taxes, net of federal tax benefit Non-deductible stock issuance costs Other, net Income tax expense
YEAR-ENDED DECEMBER 31, 2013
YEAR-ENDED DECEMBER 31, 2012
35.0 %
35.0 %
35.0 %
(24.9 ) (6.6 ) 1.8 — 0.1 5.4 %
(48.6 ) 27.4 (1.5 ) 3.7 0.2 16.2 %
(37.6 ) 12.2 (0.1 ) — 0.2 9.7 %
The income tax expense at the statutory rate is the expected income tax expense resulting from the income from continuing operations. Income tax expense, subsequent to the removal of tax expense related to noncontrolling interest income, varies from the statutory rate for the year-ended December 31, 2014, 2013 and 2012, due to a valuation allowance and goodwill amortization related to indefinite-lived intangible assets. After consideration of all evidence, both positive and negative, management concluded that it is more-likely-than-not that the Company will not realize its net deferred tax assets. Therefore, a valuation allowance has been established on our net deferred tax assets. The deferred tax liability resulting from goodwill amortization is considered an indefinite-lived intangible and cannot be looked upon as a source of future taxable income to support the realization of deferred tax assets for purposes of establishing a valuation allowance. Deferred income taxes recognize the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes and the impact of available net operating loss (“NOL”) carryforwards. The significant components of the Company’s deferred tax assets and liabilities are as follows: AS OF DECEMBER 31, 2014 2013
Current Deferred income tax assets: Allowance for doubtful accounts Accrued liabilities Valuation allowance Deferred income tax liabilities: Prepaid expenses Net current deferred income tax liability Non-current Deferred income tax assets: Net operating loss Capital loss Investment in nonconsolidated affiliates Interest rate swaps Other Valuation allowance Deferred income tax liabilities: Goodwill and other indefinite-lived intangibles Property, net Intangible assets Net non-current deferred income tax liability Total deferred income tax liability
$
$
2,208 $ 9,154 (10,444 )
2,760 11,148 (12,824 )
(1,773 ) (855 )
(1,561 ) (477 )
106,504 33,524 18,645 849 5,201 (153,084 )
112,795 30,604 16,554 1,254 6,843 (153,321 )
(131,020 ) (6,241 ) (4,543 ) (130,165 ) (131,020 ) $
(116,698 ) (7,391 ) (6,861 ) (116,221 ) (116,698 )
We reduce our deferred income tax assets by a valuation allowance if, based on the weight of the available evidence, it is more-likely-than-not that all or a portion of a deferred tax asset will not be realized. We assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative. Our most recent operating performance, the scheduled reversal of temporary differences and our forecast of taxable income in future periods are important considerations in our assessment. We recognize our recent earnings is an example of positive evidence to be considered in our assessment. Management has considered all positive and negative evidence available at this time and has concluded that a full valuation allowance continues to be appropriate 124
as of December 31, 2014. We continue to closely monitor actual and forecasted earnings and, if there are continued profitable results, we expect that reversal of all, or a portion of, the valuation allowance will be appropriate in the future. The valuation allowance is recorded against net deferred tax assets other than the deferred tax liability resulting from goodwill amortization which is considered an indefinite-lived intangible. The valuation allowance as of December 31, 2014, 2013 and 2012 was $163.5 million, $166.1 million and $151.8 million, respectively. For the yearsended December 31, 2014, 2013 and 2012, the changes in the valuation allowance were $(2.6) million, $14.3 million and $9.4 million, respectively. The $(2.6) million decrease in the valuation allowance from December 31, 2013 to December 31, 2014, includes a $(6.4) million decrease due to reduction of Deferred Tax Assets associated with net operating loss carryforwards, a $3.0 million increase in Deferred Tax Assets associated with capital loss carryforwards and a $0.8 million increase in Deferred Tax Assets associated with temporary differences not attributable to indefinite-lived intangible assets. The $14.3 million increase in the valuation allowance from December 31, 2012 to December 31, 2013, included a $9.6 million increase in Deferred Tax Assets associated with net operating and capital loss carryforwards, an $8.0 million increase in Deferred Tax Assets associated with temporary differences not attributable to indefinite-lived intangible assets, offset by a $(3.3) million decrease in Deferred Tax Assets due to the change in reporting methodology for Other Comprehensive Income. The $9.4 million increase in the valuation allowance from December 31, 2011 to December 31, 2012, included a $14.9 million increase in Deferred Tax Assets associated with net operating and capital loss carryforwards, offset by a $5.5 million increase in Deferred Tax Liabilities associated with temporary differences not attributable to indefinite-lived intangible assets. At December 31, 2014, we had federal net operating loss carryforwards (“NOLs”) of approximately $248.3 million. Such losses expire in various amounts at varying times beginning in 2027. These NOL carryforwards are subject to a valuation allowance. At December 31, 2013, we had federal NOL carryforwards of $263.7 million. At this time, we do not believe that the limitations imposed by Internal Revenue Code Section 382 will restrict our ability to use any NOLs before they expire. However, we cannot make any assurances that this will be the case. The Company had no tax liability for uncertain tax positions as of December 31, 2014 or December 31, 2013. NOTE 14 — ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS The Company has closed or sold certain facilities that qualify for reporting as discontinued operations. The assets and liabilities associated with these facilities are reflected in the accompanying consolidated balance sheets as of December 31, 2014 and December 31, 2013 as Current assets related to discontinued operations, Assets related to discontinued operations, Current liabilities related to discontinued operations and Liabilities related to discontinued operations . Additionally, the accompanying consolidated statements of operations and cash flows reflect the loss, net of income tax expense, and the net cash (used in) provided by operating, investing and financing activities, respectively, associated with these facilities as discontinued operations. The operating results of discontinued operations are as follows: YEAR-ENDED DECEMBER 31, 2014
Net operating revenues Costs and expenses Gain (loss) on sale of investments Impairments Loss from discontinued operations Income tax (expense) benefit Net loss from discontinued operations
$
$ 125
YEAR-ENDED DECEMBER 31, 2013
15,507 $ (18,690 ) 294 (700 ) (3,589 ) (5,766 ) (9,355 ) $
YEAR-ENDED DECEMBER 31, 2012
20,449 $ (23,349 ) (2,493 ) — (5,393 ) (3,937 ) (9,330 ) $
35,327 (38,392 ) (1,773 ) (664 ) (5,502 ) 607 (4,895 )
The assets and liabilities related to discontinued operations consist of the following: DECEMBER 31, 2014
DECEMBER 31, 2013
Assets Current assets Accounts receivable, net Other current assets Total current assets Property and equipment, net Other long term assets Total assets
$
$
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long-term liabilities Total liabilities
$
$
1,788 $ 171 1,959 9,153 191 11,303 $
1,995 300 2,295 12,049 516 14,860
2,280 $ 2,280 683 2,963 $
3,764 3,764 1,288 5,052
NOTE 15 — RELATED PARTY TRANSACTIONS The Company paid management fees to TPG Capital Management, L.P., an affiliate of TPG Global LLC and its affiliates (“TPG”), our majority owner, of $1.5 million during the year-ended December 31, 2013 and $2.0 million during the year-ended December 31, 2012. Following the completion of our initial public offering (“IPO”) (see Note 1), the Company no longer pays management fees to TPG, and the related management services agreement has been terminated. In conjunction with the completion of our IPO, TPG received a fee payable under our management services agreement in an amount equal to $8.0 million. This fee was paid during the fourth quarter of 2013 and recorded in Other operating expenses in the accompanying consolidated statement of operations. Also in connection with the IPO, we entered into a registration rights agreement with the TPG Funds and certain members of our management and of our Board of Directors (the “Registration Rights Agreement”), which provides the TPG Funds with certain demand registration rights, including shelf registration rights, in respect of any shares of our common stock held by them, subject to certain conditions and limitations. The TPG Funds are entitled to an unlimited number of demand registrations, upon written notice. In connection with the entry into our Amended Credit Agreement on May 8, 2013, TPG Capital BD, LLC, an affiliate of TPG, served as an arranger for purposes of the amendment and was paid an arrangement fee in the amount of $0.5 million during the year-ended December 31, 2013. In addition, TPG Capital BD, LLC participated as an underwriter underwriting the shares of our common stock in connection with our initial public offering of common stock and was paid an underwriting discount of approximately $0.7 million by us and the selling stockholders. Certain directors of the Company have received options to purchase shares of the Company under the Directors Plan as part of their compensation for service on the Company’s Board and for consulting services provided to the Company. Total expense recognized by the Company related to these options was immaterial for the years-ended December 31, 2014, 2013 and 2012. The law firm of Bradley Arant Boult Cummings LLP provides certain legal services to us. We paid approximately $1.8 million, $1.8 million and $1.0 million to this law firm in 2014, 2013 and 2012, respectively, for such legal services. The spouse of one of our executive officers, Richard Sharff, is a partner of this law firm. NOTE 16 — COMMITMENTS AND CONTINGENT LIABILITIES Legal Proceedings The Company provides services in a highly regulated industry and is subject to various legal actions and regulatory and other governmental and internal audits and investigations from time to time. As a result, we expect that various lawsuits, claims and legal and regulatory proceedings may be instituted or asserted against us, including, without limitation, employment-related claims and medical negligence claims. Additionally, governmental agencies often possess a great deal of discretion to assess a wide range of monetary penalties and fines. We record accruals for contingencies to the extent that we conclude that it is probable that a liability has 126
been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. The outcome of any current or future litigation or governmental or internal investigations, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. Nevertheless, it is reasonably possible that any such penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position and cash flows and may affect our reputation. Litigation On May 5, 2006, Dr. Hansel DeBartolo filed a lawsuit captioned DeBartolo, et al. v. HealthSouth Corporation et al, in the United States District Court for the Northern District of Illinois, Eastern Division, against Joliet Surgery Center Limited Partnership (the “Partnership”), the general partner of that Partnership, Surgicare of Joliet, Inc., and its then-parent, HealthSouth Corporation, for a declaratory judgment and an injunction relating to the forced repurchase of his partnership interest (the “Federal Court Action”). We agreed to take responsibility from HealthSouth Corporation (our parent until SCA was purchased by ASC Acquisition LLC in 2007) regarding this matter. Dr. DeBartolo claimed that the partnership agreement’s requirement that an investor in a surgical center perform one-third of his surgical procedures at the center violates the federal Anti-Kickback Statute and its underlying federal policy, and he sought an order prohibiting the repurchase of his partnership interest. After the trial court dismissed the case by holding that no private cause of action exists under the Anti-Kickback Statute, Dr. DeBartolo appealed to the Seventh Circuit Court of Appeals, which directed the trial court to dismiss the case because the Federal courts did not have jurisdiction over the subject matter involved. On February 8, 2010, Dr. DeBartolo filed a lawsuit in the Twelfth Judicial Circuit Court, Will County, Illinois making the same claim and seeking the same relief as he sought in the Federal Court Action. On February 5, 2014, the Circuit Court entered an Order granting summary judgment in favor of the Defendants. On March 4, 2014, Plaintiff filed a Notice of Appeal in the Appellate Court of Illinois, Third District (the “Appellate Court”) seeking reversal of the Circuit Court’s Order. In June 2014, Plaintiff filed a motion to withdraw the Appeal and the Appellate Court accepted the motion and dismissed the appeal with prejudice. Risk Insurance Risk insurance for SCA and most of our facilities is provided through SCA’s risk insurance program. We insure our professional liability, general liability and workers’ compensation risks through commercial insurance plans placed with unrelated carriers. Provisions for these risks are based upon market driven premiums and actuarially determined estimates for incurred but not reported exposure under claims made policies. Provisions for losses within the policy deductibles represent the estimated ultimate net cost of all reported and unreported losses incurred through the consolidated balance sheet dates. Those estimates are subject to the effects of trends in loss severity and frequency. While we believe that the provisions for losses are adequate, we cannot be sure that the ultimate costs will not exceed our estimates. Reserves for incurred but not reported professional and general liability risks were approximately $6.4 million and $6.3 million at December 31, 2014 and December 31, 2013, and are included in Other long-term liabilities in the consolidated balance sheets. Expenses related to professional and general liability risks were $4.3 million, $4.5 million and $3.3 million for the years-ended December 31, 2014, 2013 and 2012, respectively, and are classified in Other operating expenses in our consolidated statements of operations. Expenses associated with workers’ compensation were $2.0 million, $2.1 million and $2.1 million for the years-ended December 31, 2014, 2013 and 2012, respectively, and are classified in Salaries and benefits in our consolidated statements of operations. Leases We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates through 2031. We also lease certain buildings and equipment under capital leases expiring at various dates through 2026. Operating leases generally have 3 to 22 year terms with one or more renewal options and with terms to be negotiated at the time of renewal. NOTE 17 — SUBSEQUENT EVENTS Effective January 1, 2015, we sold our entire ownership interest in an ASC in Santa Monica, California for $7.6 million. As a result of the transaction, we continue to provide management services to the facility. 127
Effective January 1, 2015, we converted two ASCs in Louisville, Kentucky and one ASC in Lexington, Kentucky to consolidated facilities. All three ASCs are jointly owned with a health system partner and were previously accounted for as equity method investments. Effective February 1, 2015, as a result of one our partners exercising their option to purchase an additional membership interest in a jointly owned surgical hospital in Phoenix, Arizona (the “Hospital”), we sold a 19.12% membership interest in the Hospital to our partner for $3.6 million. We received on March 2, 2015, a notice from our partner of their intent to exercise their second option to purchase from us an additional 19.5% membership interest in the Hospital for $3.7 million. This partner also has a final option, which expires on June 30, 2015, to purchase an additional 6.5% membership interest in the Hospital. Effective February 1, 2015, an indirect wholly-owned subsidiary of SCA purchased a 67% controlling interest in Surgery Center of Wilson, LLC, which owns and operates an ASC in Wilson, North Carolina, for $3.8 million. In addition, SCA purchased the management agreement rights of the facility for $0.2 million. This ASC is a consolidated facility. Effective February 1, 2015, a joint venture entity owned by SCA and a health system purchased a 51.0% controlling interest in Clinton Partners, LLC, which owns and operates an ASC in Clinton Township, Michigan, for total consideration of $4.1 million. In addition, SCA purchased its pro rata portion of the management agreement rights of the facility for $0.7 million. This ASC is a consolidated facility. Effective March 1, 2015, the future JV, as further described in Note 3, purchased a 61.0% controlling interest in NovaMed Surgery Center of Dallas, LP, which owns and operates an ASC in Dallas, Texas, for $6.8 million. In addition, SCA purchased its pro rata portion of the management agreement rights of the facility for $1.2 million. This ASC is a consolidated facility. Effective March 1, 2015, Multi-Specialty Surgery Center, LLC (“Multi-Specialty”), which owns and operates an ASC in Indianapolis, Indiana, contributed substantially all of its assets to Beltway Surgery Centers, L.L.C. (“Beltway”), in exchange for $15.9 million in cash and 13.75 units, or 3.8% membership interests, of Beltway valued at $6.1 million. Beltway is a nonconsolidated SCA entity, which is a joint venture among a subsidiary of SCA, physicians and a health system, and owns and operates multiple ASCs in Indiana. As a result of the transaction, the MultiSpecialty location became an additional location of Beltway and is an equity method investment for us.
NOTE 18 — CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY Surgical Care Affiliates has no material assets or standalone operations other than its ownership in SCA and its subsidiaries. There are significant restrictions on the Surgical Care Affiliates’ ability to obtain funds from any of its subsidiaries through dividends, loans or advances. Accordingly, these condensed financial statements have been presented on a “Parent-only” basis. Under a Parent-only presentation, the Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting. These Parent-only financial statements should be read in conjunction with the Company’s Consolidated Financial Statements. 128
The following tables present the financial position of Surgical Care Affiliates as of December 31, 2014 and 2013 and the results of its operations and cash flows for the years-ended December 31, 2014, 2013 and 2012.
Surgical Care Affiliates, Inc. Condensed Balance Sheets (In thousands of U.S. dollars) DECEMBER 31, 2014
Assets Cash and cash equivalents Investment in SCA Total assets Liabilities Due to SCA Total liabilities Equity Common stock Additional paid in capital Contributed capital Accumulated deficit Total equity Total liabilities and equity
$ $
162 $ 243,339 243,501 $
16,193 205,686 221,879
162 $ 162
16,193 16,193
$
$
DECEMBER 31, 2013
386 419,088 — (176,135 ) 243,339 243,501 $
382 413,419 — (208,115 ) 205,686 221,879
Surgical Care Affiliates, Inc. Condensed Statements of Comprehensive Income (In thousands of U.S. dollars, except per share data)
Equity in net income (loss) of SCA Stock compensation expense Other expenses Income (loss) before income taxes Provision for income taxes Net income (loss) Equity in comprehensive income of SCA Comprehensive income (loss) Basic net income (loss) per share Basic average shares outstanding Diluted net income (loss) per share Diluted average shares outstanding
YEAR-ENDED YEAR-ENDED DECEMBER 31, DECEMBER 31, 2014 2013
YEAR-ENDED DECEMBER 31, 2012
$
$
$ $ $
129
36,137 4,126 31 31,980 — 31,980 — 31,980 0.83 38,477 0.80 39,958
$
$ $ $
(48,620 ) 2,724 (51,344 ) — (51,344 ) 8,327 (43,017 ) (1.62 ) 31,688 (1.62 ) 31,688
$ $ $
(18,291 ) 1,719 (20,010 ) — (20,010 ) 986 (19,024 ) (0.66 ) 30,340 (0.66 ) 30,340
Surgical Care Affiliates, Inc. Condensed Statements of Cash Flows (In thousands of U.S. dollars)
Net income (loss) Adjustment to reconcile net loss to net cash from operating activities Equity in net (income) loss of SCA Stock compensation expense Net cash from operating activities Investing activities: Investment in SCA Distributions from SCA Net cash used in investing activities Financing activities: Member contributions Proceeds from issuance of shares pursuant to IPO Distributions to unitholders Net cash provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental schedule of noncash investing and financing activities IPO fees paid by SCA
YEAR-ENDED DECEMBER 31, 2014
YEAR-ENDED DECEMBER 31, 2013
$
$
$
31,980
YEAR-ENDED DECEMBER 31, 2012
(51,344 ) $
(36,137 ) 4,126 (31 )
48,620 2,724 —
(16,000 ) — (16,000 )
(160,793 ) 74,900 (85,893 )
— — — — (16,031 ) 16,193 162 $ —
(20,010 ) 18,291 1,719 — — — —
— 176,786 (74,900 ) 101,886 15,993 200 16,193 $
$
4,909
— — — — — 200 200
$
—
Quarterly Statement of Earnings Data (Unaudited) The following table presents certain quarterly statement of earnings data for the years ended December 31, 2014 and 2013. The quarterly statement of earnings data set forth below was derived from our unaudited financial statements and includes all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation thereof. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods. 2014
Net operating revenues Income from continuing operations before income taxes Income from continuing operations Gain (loss) from discontinued operations, net of income tax Net income Less: Net income attributable to noncontrolling interests Net income (loss) attributable to Surgical Care Affiliates Basic net earnings (loss) from continuing operations per common share Basic net income (loss) per common share Diluted net earnings (loss) from continuing operations per common share Diluted net earnings (loss) per common share
2013
Q1
Q2
Q3
Q4 Q1 Q2 (In thousands, except per share data)
$ 192,651
$ 208,720
$ 216,196
$ 247,169
$ 187,488
24,756 23,007
38,562 37,197
46,341 43,511
66,284 62,789
163 23,170
(2,716 ) 34,481
(5,052 ) 38,459
(22,936 )
(28,452 )
(30,627 )
$
234
$
6,029
$
7,832
$ $
0.00 0.01
$ $
0.23 0.16
$ $
$ $
0.00 0.01
$ $
0.22 0.15
$ $
130
Q3
Q4
$ 193,368
$ 190,983
$ 213,824
31,429 28,077
20,097 19,033
16,198 10,774
8,524 6,044
(1,750 ) 61,039
(1,603 ) 26,474
(2,687 ) 16,346
(1,336 ) 9,438
(3,704 ) 2,340
(43,154 )
(27,910 )
(26,109 )
(22,146 )
(29,777 )
$ 17,885
$ (1,436 ) $ (9,763 ) $ (12,708 ) $ (27,437 )
0.33 0.20
$ $
0.51 0.46
$ $
0.01 $ (0.05 ) $
(0.23 ) $ (0.32 ) $
(0.37 ) $ (0.42 ) $
(0.67 ) (0.77 )
0.32 0.20
$ $
0.49 0.45
$ $
0.01 $ (0.05 ) $
(0.23 ) $ (0.32 ) $
(0.37 ) $ (0.42 ) $
(0.67 ) (0.77 )
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Management’s Annual Report on Internal Control Over Financial Reporting Management of Surgical Care Affiliates, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of the inherent limitations in any internal control, no matter how well designed, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s system of internal control over financial reporting as of December 31, 2014 based on the framework set forth in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation, management concluded that, as of December 31, 2014, the Company’s internal control over financial reporting was effective based on the specified criteria. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2014 excluded all 2014 business combinations discussed in Note 2. The 2014 business combinations, in the aggregate, have total assets, excluding acquired intangible assets, and net operating revenue representing approximately 2.1% and 3.6%, respectively, of the related consolidated financial statement amounts of the Company as of and for the year ended December 31, 2014. This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting due to an exemption established by the JOBS Act for Emerging Growth Companies. Changes in Internal Control Over Financial Reporting During the quarter ended December 31, 2014, there were no changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 131
Item 9B. Other Information Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance Our Board of Directors Our Certificate of Incorporation provides that our Board of Directors will consist of at least five directors but no more than 11 directors, with the exact number of directors to be fixed from time to time by resolution of our Board of Directors. We currently have eight directors. The Board of Directors is divided into three classes, as follows: • • • •
Class I, which currently consists of Todd B. Sisitsky, Sharad Mansukani, M.D. and Jeffrey K. Rhodes, whose terms expire at our annual meeting of stockholders to be held in 2017; Class II, which currently consists of Thomas C. Geiser and Curtis S. Lane, whose terms expire at our 2015 annual meeting of stockholders; and Class III, which currently consists of Andrew P. Hayek, Frederick A. Hessler and Lisa Skeete Tatum, whose terms expire at our annual meeting of stockholders to be held in 2016.
Upon the expiration of the initial term of office for each class of directors, each director in such class shall be elected for a term of three years and serve until a successor is duly elected and qualified or until his or her earlier death, resignation or removal. Any additional directorships resulting from an increase in the number of directors or a vacancy may be filled by the directors then in office. In connection with the closing of our initial public offering on November 4, 2013 (the “IPO”), we entered into a stockholders’ agreement (as amended on September 17, 2014, the “Stockholders’ Agreement”) with TPG FOF V-A, L.P., TPG FOF V-B, L.P., and TPG Partners V, L.P. (collectively, the “TPG Funds”) that provides that, so long as the Stockholders’ Agreement remains in effect, the TPG Funds will have certain nomination rights to designate for nomination candidates for our Board of Directors. We are required to use our reasonable best efforts to cause our Board of Directors and the Nominating and Corporate Governance Committee to include such persons designated by the TPG Funds in the slate of nominees recommended by the Board of Directors for election by the stockholders. As set forth in the Stockholders’ Agreement, for so long as the TPG Funds collectively own at least 50% of the shares of our common stock held by them at the closing of the IPO, they are entitled to designate for nomination a majority of the seats on our Board of Directors. When the TPG Funds collectively own less than 50% of the shares of our common stock held by them as of the closing of the IPO, but collectively own at least 30% of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination three directors. When the TPG Funds collectively own less than 30% of the shares of our common stock held by them as of the closing of the IPO, but collectively own at least 10% of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination two directors. Thereafter, the TPG Funds will be entitled to designate for nomination one director so long as they own at least 3% of the shares of our common stock held by them as of the closing of the IPO. In the event that the size of our Board of Directors is increased or decreased in size at any time, the nomination rights afforded to the TPG Funds will be proportionately adjusted as well, rounded up to the nearest whole person. As our Board of Directors currently consists of eight members and the TPG Funds continue to collectively own at least 50% of the shares of our common stock held by them at the closing of the IPO, the TPG Funds have the right to increase the size of the Board to nine members and designate for nomination five directors to our Board of Directors. In accordance with the Stockholders’ Agreement, the TPG Funds have designated Thomas C. Geiser, Sharad Mansukani, M.D., Todd B. Sisitsky and Jeffrey K. Rhodes as nominees of the TPG Funds to serve on our Board of Directors. Our Certificate of Incorporation does not provide for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of common stock can elect all of the directors standing for election, and the holders of the remaining shares are not able to elect any directors, subject to our obligations under the Stockholders’ Agreement. Information about the Directors Set forth below are the biographies of each of our directors, including their names, their ages, their offices in the Company, if any, their principal occupations or employment for at least the past five years, the length of their tenure as directors, and the names of other 132
public companies in which such persons hold or have held directorships during the past five years. Additionally, information about the specific experience, qualifications, attributes or skills that led to our Board of Directors’ conclusion that each person listed below should serve as a director is set forth below. Name Age Position(s) with the Company Andrew P. Hayek 41 Director, President and Chief Executive Officer Todd B. Sisitsky(2)(3) 43 Director and Chairman of the Board of Directors Thomas C. Geiser 64 Director Frederick A. Hessler(1) 66 Director Curtis S. Lane(1) 57 Director Sharad Mansukani, M.D. 45 Director Jeffrey K. Rhodes(2)(3) 40 Director Lisa Skeete Tatum(1) 47 Director ________________ (1) Member of our Audit Committee (2) Member of our Compensation Committee (3) Member of our Nominating and Corporate Governance Committee
Andrew P. Hayek has served as our President and Chief Executive Officer since 2008. He was appointed to our Board of Directors on October 30, 2013, and he was appointed to the board of directors of SCA, our direct operating subsidiary, in 2008. Prior to joining the Company, Mr. Hayek served as the President of VillageHealth, a division of renal dialysis provider DaVita Inc. (“DaVita”), from 2007 to 2008 and as President and Chief Operating Officer of Alliance Healthcare Services Inc., a diagnostic imaging and radiation therapy provider, from 2003 to 2006. Mr. Hayek also previously worked at KKR Capstone, an affiliate of private equity firm Kohlberg Kravis Roberts & Co. and at The Boston Consulting Group, a strategy consulting firm. Mr. Hayek is a Henry Crown Fellow at the Aspen Institute and earned his bachelor’s degree summa cum laude from Yale University. We believe that Mr. Hayek’s knowledge of the healthcare industry and his leadership experience make him a valuable asset to our management and the Board of Directors. Todd B. Sisitsky was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA in 2007. Mr. Sisitsky is a Partner of TPG where he leads TPG’s investment activities in the healthcare sector globally. Mr. Sisitsky serves on the board of directors of Aptalis Pharma, Inc., formerly Axcan Pharma, IASIS Healthcare Corp., HealthScope Ltd., Immucor Inc., IMS Health Holdings, Inc. and Par Pharmaceuticals Companies, Inc. and previously served on the boards of Biomet Inc. and Fenwal Inc. He also serves on the board of the Campaign for Tobacco Free Kids, a global not-for-profit organization, and the Dartmouth Medical School Board of Overseers. Prior to joining TPG in 2003, Mr. Sisitsky worked at Forstmann Little & Company and Oak Hill Capital Partners. Mr. Sisitsky earned an M.B.A. from the Stanford Graduate School of Business, where he was an Arjay Miller Scholar, and earned his undergraduate degree from Dartmouth College, where he graduated summa cum laude . We believe that Mr. Sisitsky’s financial expertise and experience leading investments in numerous healthcare companies make him a valuable asset to the Board of Directors. Thomas C. Geiser was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA, our direct operating subsidiary, in 2007. Mr. Geiser has served as a TPG Senior Advisor since 2006 and served as the Executive Vice President and General Counsel of WellPoint Health Networks Inc. (“WellPoint”) from its inception in 1993 to 2005. Mr. Geiser was responsible for WellPoint’s legal, legislative and regulatory affairs in fifty states and served as its principal contact with state and federal regulators. Prior to joining WellPoint, Mr. Geiser worked as an attorney in private law practice, coming to WellPoint from Brobeck, Phleger & Harrison LLP in San Francisco. He currently serves on the board of directors of Novasom, Inc., IASIS Healthcare Corp., the Library Foundation of Los Angeles and Providence Saint John’s Health Center. Mr. Geiser earned his J.D. from the University of California, Hastings College of Law and earned his undergraduate degree in English from the University of Redlands. Mr. Geiser has extensive expertise and experience providing leadership in legal, legislative, regulatory and compliance affairs to both public and private companies in the healthcare industry, which we believe make him a valuable asset to the Board of Directors. Curtis S. Lane was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA in 2007. Mr. Lane is a Senior Managing Director of MTS Health Partners, L.P., a merchant banking firm focused on healthcare advisory and investment opportunities. Prior to forming MTS Health Partners, L.P. in 2000, Mr. Lane founded and managed the healthcare investment banking group at Bear, Stearns & Co. Inc. from its inception in 1986 until 1998. Mr. Lane serves on the board of directors for Alliance Healthcare Services, Celerion Holdings, Inc., Loving Care Agency and America’s Camp, which was formed to provide services to children that lost parents on September 11 th . Mr. Lane is an emeritus board member of the University of Pennsylvania Health System and serves as the Chairman of the Executive Advisory Board of the Leonard Davis Institute for Health Economics at the University of Pennsylvania. Mr. Lane earned his M.B.A. from the Wharton School of the University of Pennsylvania and also earned his bachelor’s degree from the Wharton School of the University of Pennsylvania. We believe that Mr. Lane’s financial and healthcare advisory experience and experience serving on numerous boards of directors make him a valuable asset to the Board of Directors.
133
Sharad Mansukani, M.D. was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA in 2007. Dr. Mansukani has served as a TPG Senior Advisor since 2005. He serves on the board of directors of IASIS Healthcare Corp., Immucor Inc., IMS Health Holdings, Inc. and Par Pharmaceuticals Companies, Inc. Dr. Mansukani serves as Strategic Advisor to the board of directors of CIGNA and previously served as Vice Chairman of HealthSpring Inc. Dr. Mansukani also serves on the board of directors of the Children’s Hospital of Philadelphia and on the editorial boards of the American Journal of Medical Quality , Managed Care , Biotechnology Healthcare and American Health & Drug Benefits . Dr. Mansukani was appointed to Medicare’s Payment Advisory and Oversight Committee, and he was previously Senior Advisor to Centers for Medicare and Medicaid Services (“CMS”) and a member of the Medicare Reform Executive Committee. Dr. Mansukani previously served on the faculty at the University of Pennsylvania and at Temple University School of Medicine. Dr. Mansukani completed his residency and fellowship in ophthalmology at the University of Pennsylvania School of Medicine and a fellowship in quality management and managed care at the Wharton School of the University of Pennsylvania. Dr. Mansukani has substantial experience in the healthcare industry and has a deep understanding of the medical community and the dynamic regulatory and reimbursement environment, which we believe make him a valuable asset to the Board of Directors. Jeffrey K. Rhodes was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA in 2010. Mr. Rhodes is a Partner of TPG, where he is a leader of the firm’s investment activities in the healthcare services and pharmaceutical/medical device sectors. Mr. Rhodes serves on the board of directors of Biomet Inc., EnvisionRx, IMS Health Holdings, Inc., Immucor Inc. and Par Pharmaceuticals Companies, Inc. Prior to joining TPG in 2005, Mr. Rhodes worked at McKinsey & Company and Article 27 LTD, a software company. Mr. Rhodes earned his M.B.A. from the Harvard Business School, where he was a Baker Scholar, and earned his undergraduate degree in Economics from Williams College, where he graduated summa cum laude . We believe that Mr. Rhodes’ financial expertise and experience overseeing investments in numerous healthcare companies make him a valuable asset to the Board of Directors. Frederick A. Hessler was appointed to our Board of Directors and the board of directors of SCA on October 30, 2013. Mr. Hessler is a retired Managing Director of Citigroup Global Markets Inc., where he headed the Not-for-Profit Health Care Investment Banking Group from 1990 to 2013. Prior to joining Citigroup Global Markets Inc. in 1985, Mr. Hessler was a Partner and Regional Director for healthcare at Ernst & Young LLP, where he was responsible for conducting audits and performing feasibility, corporate reorganization and strategic planning studies for healthcare clients. Mr. Hessler serves on the Operations Committee and chairs the Investment Committee for the American Hospital Association and is a board member of The Center for Health Design, LHP Hospital Group, Inc., the National Center for Healthcare Leadership and the Public Health Institute and is a member of the senior advisory board of MedAssets, Inc. Mr. Hessler also previously served as chair of the Board of Trustees of the Health Research and Education Trust and the Health Insights Foundation and was a member of The Center for Healthcare Governance’s Blue Ribbon Panel on Trustee Core Competencies and the Healthcare Executives Study Society. Mr. Hessler earned his bachelor’s degree in accounting from Wayne State University and is a Certified Public Accountant (inactive status). We believe that Mr. Hessler’s financial and accounting expertise and his substantial investment banking and advisory experience in the healthcare industry make him a valuable asset to the Board of Directors. Lisa Skeete Tatum was elected to our Board of Directors and the board of directors of SCA effective October 1, 2014. Ms. Skeete Tatum is founder and CEO of LandIt.com, a career management technology platform. Previously, Ms. Skeete Tatum was a General Partner for over a decade with Cardinal Partners, a $350 million early stage health care venture capital firm, where she focused on investments in healthcare technology. Ms. Skeete Tatum worked for Procter & Gamble in various global and functional roles including Product Development, Purchasing, and Product Supply. She also worked at GE Capital and was a Managing Director at Circle of Beauty, a health and beauty startup. In addition, she founded her own consulting practice specializing in strategic operational development for medium-sized consumer products companies. Ms. Skeete Tatum serves on the board of Pager and is on the board of trustees for Cornell University. She is also on the boards of the Princeton Healthcare System Foundation and the Princeton Area Community Foundation. She is the immediate past president of the Harvard Business School Alumni Board and a former founding board member of the Center for Venture Education. Ms. Skeete Tatum is a member of the 2012 Class of Henry Crown Fellows at the Aspen Institute and the Kauffman Fellows Class 4. She received her B.S. in chemical engineering from Cornell University and her M.B.A. from Harvard Business School. We believe that Ms. Skeete Tatum’s leadership and general corporate experience make her a valuable asset to the Board of Directors. There are no family relationships between or among any of our directors or nominees. The principal occupation and employment during the past five years of each of our directors and nominees was carried on, in each case except as specifically identified above, with a corporation or organization that is not a parent, subsidiary or other affiliate of us. Except as described above in connection with the Stockholders’ Agreement, there is no arrangement or understanding between any of our directors or nominees and any other person or persons pursuant to which he or she was or is to be selected as a director or nominee. There are no legal proceedings to which any of our directors is a party adverse to us or any of our subsidiaries or in which any such person has a material interest adverse to us or any of our subsidiaries. 134
The stock ownership with respect to each director is set forth in the table entitled “Security Ownership of Certain Beneficial Owners and Management” under Item 12 below. Executive Officers The following table sets forth certain information regarding our executive officers who are not also directors. As described under Item 11 below, we have employment agreements with each of our executive officers. Name Peter J. Clemens IV Michael A. Rucker Joseph T. Clark Richard L. Sharff, Jr.
Age 50 45 59 46
Position Executive Vice President and Chief Financial Officer Executive Vice President and Chief Operating Officer Executive Vice President and Chief Development Officer Executive Vice President, General Counsel and Corporate Secretary
Peter J. Clemens IV is our Executive Vice President and Chief Financial Officer and has served in such capacity since 2011. Prior to joining SCA, Mr. Clemens held various positions at Caremark Rx, Inc. and CVS Caremark Corporation from 1995 until 2010, including most recently as Executive Vice President and Chief Financial Officer of Caremark, the pharmacy services division of CVS Caremark Corporation. Mr. Clemens has also held various positions in corporate banking with Wachovia Bank and Regions Bank. Mr. Clemens earned his M.B.A. from The Owen School at Vanderbilt University and earned his bachelor’s degree from Samford University. On March 2, 2015, Mr. Clemens notified us that he intends to retire from his position as our Executive Vice President and Chief Financial Officer. We have engaged a leading executive search firm to assist us in recruiting a new Chief Financial Officer. Mr. Clemens intends to work with his successor to jointly design a transition plan. Michael A. Rucker is our Executive Vice President and Chief Operating Officer and has served in such capacity since 2009. Prior to joining SCA, Mr. Rucker served in a number of capacities at DaVita and its predecessor companies from 1995 to 2008, including most recently as Divisional Vice President of Operations. Mr. Rucker also served as an Associate in the healthcare group of Houlihan, Lokey, Howard & Zukin Inc. and worked in public accounting as a CPA. Mr. Rucker earned his M.B.A. from the Wharton School of the University of Pennsylvania and his bachelor’s degree from Miami University. Joseph T. Clark is our Executive Vice President and Chief Development Officer and has served in such capacity since 2007. Prior to joining SCA, Mr. Clark served as President of the Surgery Division of HealthSouth Corporation from 2005 to 2007. Mr. Clark also served as the President and Chief Executive Officer of HealthMark Partners, Inc., an owner, operator and developer of ASCs and specialty hospitals and in various senior management roles, including Chief Executive Officer of Response Oncology, Inc., a provider of cancer treatment services. Prior to this, he had senior operating roles at AMI and Humana. He earned a bachelor’s degree from Dartmouth College. Richard L. Sharff, Jr. is our Executive Vice President, General Counsel and Corporate Secretary and has served in such capacity since 2007. Prior to joining SCA, Mr. Sharff practiced law from 1994 to 2007 at Bradley Arant Rose and White LLP (now Bradley Arant Boult Cummings LLP), where he represented a variety of clients in the healthcare industry. Mr. Sharff earned his B.A. and J.D. from the University of Virginia. He is a member of the bars in Alabama and California (inactive status). There are no family relationships between or among any of our executive officers. The principal occupation and employment during the past five years of each of our executive officers was carried on, in each case except as specifically identified above, with a corporation or organization that is not a parent, subsidiary or other affiliate of us. There is no arrangement or understanding between any of our executive officers and any other person or persons pursuant to which he was or is to be selected as an executive officer. There are no legal proceedings to which any of our executive officers is a party adverse to us or any of our subsidiaries or in which any such person has a material interest adverse to us or any of our subsidiaries. The stock ownership with respect to each of our executive officers is set forth in the table entitled “Security Ownership of Certain Beneficial Owners and Management” under Item 12 below. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our directors and officers, and persons who own more than 10% of our common stock, to file reports of ownership and changes in ownership of Company common stock held by them with the SEC. Copies of these reports must also be provided to the Company. Based on our review of these reports, we believe that, during the year ended December 31, 2014, all reports required to be filed during such year were filed on a timely basis, except that a late Form 3 was filed on behalf of Ms. 135
Skeete Tatum on December 15, 2014 to report her beneficial ownership of the Company’s common stock as of the effective date of her election to the Board of Directors. Committees of the Board of Directors Standing Committees The Board of Directors has established five standing committees to assist it in carrying out its responsibilities: the Audit Committee, the Nominating and Corporate Governance Committee, the Compensation Committee, the Compliance Committee and the Acquisition Committee. Each of the committees operates under its own written charter adopted by the Board of Directors, each of which is available on the Company’s Investor Relations website at http://investor.scasurgery.com under “Corporate Governance.” In addition, special committees may be established under the direction of our Board of Directors when necessary to address specific issues. The membership and functions of each of the standing committees are described below. The number of meetings that each committee held in 2014 is also listed. Audit Committee The Audit Committee is responsible for, among other things: •
appointing the independent auditor, reviewing the quality of its work annually, monitoring its independence and replacing it as necessary, pre-approving all the audit and non-audit services, reviewing with the auditor the scope and plan of the annual audit, and reviewing with the auditor any review of the quarterly financial statements that the committee may direct the auditor to perform;
•
reviewing with the senior internal audit services executive the results of the audit work at least annually and more frequently as provided in the policy for reporting financial accounting and auditing concerns, as approved by the committee, and at least annually reviewing the experience and qualifications of the senior members of the internal audit services team;
•
discussing with management and the auditor the annual audited financial statements, the financial information to be included in our annual and quarterly reports to be filed with the SEC and the adequacy of the internal controls over financial reporting;
•
discussing with management and the auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements, including any significant changes in our selection or application of accounting principles and any significant issues (material weaknesses or significant deficiencies as such terms are defined in the Sarbanes-Oxley Act) as to the adequacy of our accounting controls;
•
reviewing the adequacy of disclosure controls and procedures with the Chief Executive Officer, the Chief Financial Officer and the General Counsel at least quarterly;
•
overseeing company policies and practices with respect to financial risk assessment and risk management;
•
reviewing related party transactions;
•
approving guidelines for the hiring of former employees of the independent auditor;
•
establishing and publishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters, referred to as “whistleblowing” procedures;
•
reviewing with management, including the General Counsel, the implementation and effectiveness of the compliance and ethics program, including the “whistleblowing” procedures;
•
meeting separately and periodically with management and the auditor; and
•
regularly reporting its activities to the Board of Directors.
136
The current members of the Audit Committee are Frederick A. Hessler (Chairman), Curtis S. Lane and Lisa Skeete Tatum. Jeffrey K. Rhodes served on the Audit Committee until October 1, 2014. Our Board of Directors has determined that (i) Mr. Hessler, Mr. Lane and Ms. Skeete Tatum are each “independent directors” under the NASDAQ listing rules, (ii) Mr. Hessler, Mr. Lane and Ms. Skeete Tatum each satisfy the heightened independence requirements of Rule 10A-3 under the Exchange Act, (iii) each of Mr. Hessler, Mr. Lane and Ms. Skeete Tatum is financially literate and (iv) Mr. Hessler qualifies as an “audit committee financial expert” under the criteria set forth in the rules and regulations of the SEC. The Audit Committee met seven times during 2014. Nominating and Corporate Governance Committee The Nominating and Corporate Governance Committee is responsible for, among other things: •
establishing the criteria for selecting new directors;
•
recommending to the Board of Directors corporate governance guidelines and reviewing such guidelines at least annually;
•
reviewing the performance of our Board of Directors;
•
making recommendations to the Board of Directors regarding the selection of candidates, qualification and competency requirements for service on the Board of Directors and the suitability of proposed nominees as directors;
•
reviewing and making recommendations to the Board of Directors regarding the charters, structure and operations of the committees of the Board of Directors, including membership of these committees; and
•
regularly reporting its activities to the Board of Directors.
The current members of the Nominating and Corporate Governance Committee are Jeffrey K. Rhodes (Chairman) and Todd B. Sisitsky. Thomas C. Geiser served on the Nominating and Corporate Governance Committee until March 1, 2015. Because we are a “controlled company” under the NASDAQ listing rules, our Nominating and Corporate Governance Committee is not required to be fully independent, although if such rules change in the future or we no longer meet the definition of a “controlled company” under the current rules, we will adjust the composition of the Nominating and Corporate Governance Committee accordingly in order to comply with such rules. The Nominating and Corporate Governance Committee met three times during 2014. Compensation Committee The Compensation Committee is responsible for, among other things: •
reviewing and approving corporate goals and objectives relevant to compensation of our executive officers, including the balance between short-term compensation and long-term incentives;
•
conducting the evaluation process for our executive officers in light of these goals and objectives;
•
determining and approving or recommending to the Board of Directors for approval the total compensation package of the executive officers;
•
making recommendations to the Board of Directors with respect to the establishment and terms of incentive-compensation and equity-based plans for our executive officers, and granting awards under and otherwise administering such plans and approving and administering any other compensation plan in which our executive officers participate;
•
periodically establishing and reviewing policies with respect to management perquisites;
•
advising the Board of Directors with respect to proposed changes in the compensation of the Board of Directors or its various committees;
•
reviewing annually any stock ownership guidelines applicable to our directors and senior management and recommending to the Board of Directors revisions to such guidelines as appropriate;
•
retaining compensation consultants and approving the compensation consultants’ fees and other terms and conditions of retention, after considering all relevant factors, including any business or personal relationship of the consultant or consultant’s employer with any of our executive officers; 137
•
reviewing and discussing with management, prior to the filing of the proxy statement, the disclosure prepared regarding executive compensation;
•
reviewing succession planning for the Chief Executive Officer and other senior executives, and making recommendations on such matters to the Board of Directors; and
•
regularly reporting its activities to the Board of Directors.
The current members of the Compensation Committee are Todd B. Sisitsky (Chairman) and Jeffrey K. Rhodes. Thomas C. Geiser and Sharad Mansukani, M.D. served on the Compensation Committee until March 1, 2015. Because we are a “controlled company” under the NASDAQ listing rules, our Compensation Committee is not required to be fully independent, although if such rules change in the future or we no longer meet the definition of a controlled company under the current rules, we will adjust the composition of the Compensation Committee accordingly in order to comply with such rules. The Compensation Committee met four times during 2014. Compliance Committee The Compliance Committee is responsible for, among other things: •
overseeing, monitoring and evaluating our compliance with our federal, state and local regulatory obligations, with the exception of obligations relating to compliance with tax and securities-related laws, rules and regulations (which are the responsibility of the Audit Committee);
•
ensuring the establishment, maintenance and oversight of an effective regulatory compliance program to prevent and detect violations of law, and reviewing and approving the annual regulatory compliance program and the implementation and effectiveness of such program;
•
establishing the qualifications, authority and responsibilities of the compliance officer, assisting with and overseeing the activities of the compliance officer, and performing an annual evaluation of the compliance officer in carrying out an effective compliance program;
•
monitoring our compliance with any corporate integrity agreement or similar undertaking, with the Office of Inspector General, the United States Department of Health and Human Services or any other government agency;
•
receiving and reviewing periodic reports from the compliance officer, including an annual report summarizing compliance-related activities undertaken by us during the year and the results of all regulatory compliance audits conducted during the year;
•
establishing and publishing appropriate mechanisms for receipt, retention and treatment of complaints regarding potential violations of our compliance policies and applicable laws and regulations, and reviewing such complaints;
•
discussing with management our major compliance risks and steps management has taken to monitor and control such risk, including any policies and procedures with respect to risk assessment and risk management;
•
recommending such actions or measures to be adopted by the Board of Directors that it deems appropriate to improve the effectiveness of the regulatory compliance program; and
•
reporting to the Board of Directors at least twice annually, or more frequently as may be necessary, on its activities and the effectiveness of the Company’s regulatory compliance program.
The members of the Compliance Committee are Thomas C. Geiser (Chairman) and Sharad Mansukani, M.D. Curtis S. Lane served on the Compliance Committee until March 1, 2015. The Compliance Committee met four times during 2014. Acquisition Committee The Acquisition Committee is responsible for, among other things: •
reviewing our acquisition strategies in connection with our management;
•
investigating acquisition candidates; 138
•
authorizing and approving acquisitions valued in an amount not to exceed $5.0 million in cash, stock or a combination thereof;
•
recommending acquisition strategies and acquisition candidates valued in an amount above $5.0 million to our Board of Directors; and
•
regularly reporting its activities to the Board of Directors.
The members of the Acquisition Committee are Thomas C. Geiser (Chairman) and Jeffrey K. Rhodes. The Acquisition Committee met four times during 2014. Meetings and Executive Sessions Under our Corporate Governance Guidelines, directors are expected to use their reasonable best efforts to attend all or substantially all Board meetings and meetings of the committees of the Board on which they serve, as well as annual meetings of stockholders. During 2014 there were four meetings of our Board of Directors, and the various committees of the Board met a total of 22 times. No director attended fewer than 75% of the aggregate of (i) the total number of meetings of the Board and (ii) the total number of meetings of committees of the Board for the period during which the director served on the Board or such committee in 2014. Executive sessions of the independent directors of the Board must be held at least two times per year and otherwise as needed. These sessions are chaired by an independent director selected by a majority of the independent directors participating in the executive session. Process for Stockholders to Recommend Director Candidates Stockholders who wish to recommend candidates for the Nominating and Corporate Governance Committee’s consideration must submit a written recommendation to the Corporate Secretary at 520 Lake Cook Road, Suite 250, Deerfield, IL 60015. Recommendations must be sent by certified or registered mail and received by November 15th for consideration at the following year’s annual meeting of stockholders. Recommendations must include the following: •
The recommending stockholder’s name, number of shares owned, length of period held and proof of ownership;
•
The candidate’s name, address, phone number, e-mail address and age;
•
A resume describing, at a minimum, the candidate’s educational background, occupation, employment history and material outside commitments (e.g., memberships on other boards and committees, charitable foundations, etc.);
•
A supporting statement which describes the stockholder’s and candidate’s reasons for nomination to the Board and documents the candidate’s ability to satisfy the director qualifications described above;
•
The candidate’s consent to a background investigation;
•
The candidate’s written consent to stand for election if nominated by the Board and to serve if elected by the stockholders; and
•
Any other information that will assist the Nominating and Corporate Governance Committee in evaluating the candidate in accordance with this procedure.
The Corporate Secretary will promptly forward these materials to the Chairman of the Nominating and Corporate Governance Committee and the Chairman of the Board. The Nominating and Corporate Governance Committee may contact recommended candidates to request additional information necessary for its evaluation or for disclosure under applicable SEC rules, including without limitation information relating to such candidate that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Exchange Act. Code of Business Conduct and Ethics We are committed to having sound corporate governance principles. Having such principles is essential to running our business efficiently and to maintaining our integrity in the marketplace. We have adopted a document known as the Standards of Legal and 139
Regulatory Conduct that is applicable to all of our directors and teammates (the “Code of Business Conduct”). We have also adopted a Code of Ethical Conduct for Financial Leaders that applies to our Chief Executive Officer, Chief Financial Officer and other senior financial officers at the corporate level (the “Senior Officers Code”). Both the Code of Business Conduct and the Senior Officers Code are available on our website at www.scasurgery.com in the “Investors” section under “Corporate Governance.” Any future changes or amendments to the Code of Business Conduct or the Senior Officers Code, and any waiver of the Code of Business Conduct or the Senior Officers Code that applies to our Chief Executive Officer, Chief Financial Officer or Principal Accounting Officer will be posted to our website at the above location. Item 11. Executive Compensation Overview The following discussion relates to the compensation of our President and Chief Executive Officer, Andrew P. Hayek, and our two most highly compensated executive officers in 2014 (other than our Chief Executive Officer), Michael A. Rucker, our Executive Vice President and Chief Operating Officer, and Joseph T. Clark, our Executive Vice President and Chief Development Officer (Messrs. Hayek, Rucker and Clark are collectively referred to herein as our “Named Executive Officers”). Our Named Executive Officers’ compensation is determined by our Compensation Committee and is generally reviewed annually. Our executive compensation program is designed to attract, motivate and retain high-quality leadership and incentivize our executive officers and other key teammates to achieve company and individual performance goals over the short- and long-term. Our pay-for-performance approach to executive compensation places an emphasis on both short- and long-term incentives, which serves to align the interests of our executive officers with those of our stockholders. On October 30, 2013, prior to the closing of the IPO, we converted from a Delaware limited liability company, ASC Acquisition LLC, to a Delaware corporation. Pursuant to the conversion, options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates at a ratio of 10.25 membership units underlying such options to each one share of common stock underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. In addition, every 10.25 outstanding restricted equity units (“REUs”) of ASC Acquisition LLC were converted into one restricted stock unit (“RSU”) of Surgical Care Affiliates. The vesting and other terms of the options and REUs generally remained the same. Elements of Executive Compensation The compensation of our Named Executive Officers consists of base salary, annual cash bonuses, equity awards and employee benefits, as described below. Our Named Executive Officers are also entitled to certain compensation and benefits upon qualifying terminations of employment pursuant to their employment agreements. Base Salaries . Base salaries for our Named Executive Officers are determined based on each officer’s responsibilities and his experience and contributions to our business. Base salaries for our Named Executive Officers are reviewed periodically by our Compensation Committee. When reviewing base salaries for potential increase, our Compensation Committee considers each officer’s experience and individual performance, our performance, and general industry conditions. For fiscal year 2014, Mr. Hayek’s base salary was increased from $582,000 to $780,000, an increase of approximately 34.0%, Mr. Rucker’s base salary was increased from $424,000 to $439,000, an increase of approximately 3.5%, and Mr. Clark’s base salary was increased from $459,000 to $469,000, an increase of approximately 2.2%. On March 4, 2015, the Compensation Committee approved an increase in Mr. Hayek’s base salary to $800,000, an increase of approximately 2.6%, an increase in Mr. Rucker’s base salary to $455,000, an increase of approximately 3.6%, and an increase in Mr. Clark’s base salary to $480,000, an increase of approximately 2.3%, with such increases to become effective March 22, 2015. Annual Cash Bonuses . Our Named Executive Officers are eligible to participate in our Senior Management Bonus Program, which was established to promote and reward the achievement of corporate, regional and individual performance goals. Corporate goals are based upon Surgical Care Affiliates meeting pre-determined financial goals. Similarly, regional goals, if any, are based upon a pre-determined set of financial goals for the applicable region. Individual goals are initially proposed by each participant in consultation with his or her immediate supervisor and are then approved by the Compensation Committee. The target and maximum amounts of any annual bonus that may be earned by an executive officer are expressed as a percentage of the executive’s annual base salary in effect with respect to the applicable year. For fiscal year 2014, Mr. Hayek had a target annual bonus of 100% of base salary, up to a maximum of 200% of base salary. Mr. Rucker had a target annual bonus of 77.5% of base salary, up to a maximum of 155% of base salary. Mr. Clark had a target annual bonus of 70% of base salary, up to a maximum of 140% of base salary. The bonuses paid to each of our Named Executive Officers for fiscal year 2014 are set forth in the Summary Compensation Table below. 140
Equity Awards . Our Named Executive Officers participate in the Management Equity Incentive Plan adopted on November 16, 2007, as amended (the “2007 Equity Plan”). See “2007 Equity Plan” for additional details about our 2007 Equity Plan. Grants under the 2007 Equity Plan, including those made to our Named Executive Officers, have consisted of option awards, which provide our executive officers with appropriate incentives to continue in our employ and to improve our growth and profitability, and which serve to align the interests of our Named Executive Officers with our stockholders. A portion of the option awards granted to each Named Executive Officer under the 2007 Equity Plan were subject to time-based vesting and a portion were subject to performance-based vesting, subject to the Named Executive Officer continuing to be employed on the applicable vesting date. Approximately 62% of Mr. Hayek’s outstanding awards under the 2007 Equity Plan are subject to time-based vesting and approximately 38% were subject to performance-based vesting. Approximately 77% of Mr. Rucker’s outstanding awards under the 2007 Equity Plan are subject to time-based vesting and approximately 23% were subject to performance-based vesting. All of Mr. Clark’s outstanding awards under the 2007 Equity Plan are subject to time-based vesting. As of September 16, 2013, all of the performance-based options were deemed to be fully vested. The vesting of the time-based option awards is generally in four or five equal annual installments of 25% or 20% per year, respectively, following the grant, and accelerates upon certain qualifying terminations, as described below. Our Named Executive Officers are also eligible to participate in the 2013 Omnibus Long-Term Incentive Plan adopted on October 29, 2013 (the “2013 Omnibus Plan”). See “2013 Omnibus Plan” beginning on page 145 below for a description of our 2013 Omnibus Plan. On September 17, 2014, the Named Executive Officers were granted time-based options and time-based RSUs, subject to the Named Executive Officer continuing to be employed on the applicable vesting date. Each of the time-based options and the time-based RSUs vests in four equal annual installments of 25% per year on the anniversary of the grant date, or September 17, 2014, and vesting accelerates upon certain qualifying terminations, as described below. On July 24, 2008, Mr. Hayek was granted 700,000 REUs (or 68,292 RSUs after giving effect to our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013), which were subject to time-based vesting over a period of five years from the date of grant and as of July 24, 2013 were fully vested. Mr. Hayek’s RSUs will be settled for shares of common stock (or, in the Board of Directors’ discretion, cash) upon the earlier of (i) the termination of Mr. Hayek’s employment or (ii) a qualifying change in control of the Company or SCA. Special Cash Bonus . In September 2013, we paid a cash distribution of $0.241279 per outstanding membership unit of ASC Acquisition LLC (or approximately $2.46 per share of our common stock after giving effect to our conversion to a corporation) (the “2013 Distribution”). In connection with the 2013 Distribution, in September 2013, SCA paid a cash bonus (the “2013 Special Cash Bonus Payment”) to holders of vested options and REUs who remained employed by SCA as of the date of payment, including our Named Executive Officers, equal to $0.241279 per vested option or REU (or $2.46 per option or RSU after giving effect to our conversion to a corporation). In connection with the 2013 Distribution and the 2013 Special Cash Bonus Payment, the Company also reduced the exercise price of unvested options by the same amount. Holders of unvested REUs did not receive a cash payment or any adjustment with respect to their unvested REUs. To the extent teammates, including our Named Executive Officers, owned membership units of ASC Acquisition LLC outright, such teammates also received a payment in respect of such membership units as part of the 2013 Distribution. Benefits and Perquisites . We provide the following benefits to our Named Executive Officers on the same basis as all other eligible executives: •
Company sponsored healthcare plans, including coverage for medical and dental benefits;
•
A qualified 401(k) savings plan with a matching contribution;
•
Payment of life insurance premiums;
•
Payment of long-term disability insurance premiums; and
•
With respect to Mr. Hayek, dues and expenses for his memberships in the Young Presidents Organization (“YPO”) and the YPO-WPO International in the amount of approximately $9,175 in 2014.
Employment Agreements . We have entered into employment agreements with each of our Named Executive Officers, which include severance and restrictive covenant provisions. We believe that reasonable severance benefits are necessary in order to attract and retain highquality, talented executive officers. Role of Executive Officers in Decisions Relating to Executive Officer and Director Compensation Our Chief Executive Officer makes recommendations to the Compensation Committee regarding base salaries, bonuses and equity compensation grants for the remainder of our executives. Our Chief Executive Officer is not present during deliberations or voting by 141
the Compensation Committee relating to his own compensation. The Compensation Committee has discretion to approve, disapprove or modify recommendations made by the Chief Executive Officer. Role of Compensation Consultant The Compensation Committee has engaged a compensation consultant, Deloitte Consulting LLP (“Deloitte”), to review, assess and provide recommendations with respect to certain aspects of our compensation program for executive officers and directors. Deloitte was previously engaged, beginning in July 2013, by the compensation committee of the board of directors of SCA to assist with executive compensation matters in connection with the possibility of either us or SCA transitioning to become a public company. In its role as compensation consultant, Deloitte has rendered services to the compensation committee of SCA, and since the IPO, to our Compensation Committee, including examining the overall pay mix for our executives, conducting a competitive assessment of our executive compensation program and making recommendations and advising on compensation design and levels. Deloitte has also provided advice on structuring annual and long-term incentive arrangements for executives. In addition, Deloitte has provided and is expected to continue to provide advice to the Compensation Committee on the compensation elements and levels for non-employee directors. In addition to the compensation consulting services provided by Deloitte to the Compensation Committee, Deloitte affiliates have provided certain services to us and SCA, at the request of management, consisting of internal audit support services and business valuation services, which additional services have been approved by the Compensation Committee. Deloitte’s fees for executive and director compensation services in 2014 were $97,569. For the additional services performed by affiliates of Deloitte, as described above, the aggregate fees in 2014 were $140,550. The Compensation Committee believes that, given the nature and scope of these projects, these additional services did not raise a conflict of interest and did not impair Deloitte’s ability to provide independent advice to the Compensation Committee concerning executive and director compensation matters. In making this determination, the Compensation Committee has considered, among other things, the following factors: (i) the types of non-compensation services provided by the affiliates of Deloitte, (ii) the amount of fees for such non-compensation services, noting in particular that such fees are negligible when considered in the context of the aggregate total revenues of Deloitte and its affiliates for the period, (iii) Deloitte’s policies and procedures concerning conflicts of interest, (iv) the fact that Deloitte representatives who advise the Compensation Committee do not provide any non-compensation related services to us or SCA, (v) the fact that there are no other business or personal relationships between our management or members of the Compensation Committee, on the one hand, and any Deloitte representatives who provide compensation services to us, on the other hand, and (vi) the fact that neither Deloitte nor any of the Deloitte representatives who provide compensation services to the Compensation Committee owns any of our common stock.
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Summary Compensation Table The table below summarizes the total compensation earned by each of the Company’s Named Executive Officers for the fiscal years ended December 31, 2014, December 31, 2013 and December 31, 2012.
Name and Principal Position Andrew P. Hayek President and Chief Executive Officer
Michael A. Rucker Executive Vice President and Chief Operating Officer Joseph T. Clark Executive Vice President and Chief Development Officer
Non-Equity Incentive Plan Compensation ($) (3)
Nonqualified Deferred Compensation Earnings All Other Compensation ($) ($)(4)
Year
Salary ($)
Bonus ($)
Stock Awards ($)(1)
Option Awards ($)(2)
2014
780,000
309,934(5)
2,924,984
1,583,409
690,066
-0-
5,974
6,294,367
2013
592,298
1,871,032(6)
-0-
1,743,524
579,898
-0-
5,460
4,792,212
2012
579,270
31,440(7)
-0-
-0-
196,211
-0-
5,500
812,421
2014
435,631
34,312(8)
780,000
422,244
290,688
-0-
5,920
1,968,795
2013
423,074
433,906(9)
-0-
887,121
315,909
-0-
5,756
2,065,766
2012
408,076
20,375(10)
-0-
369,000
110,536
-0-
5,500
913,487
2014
466,601
26,769(11)
649,990
351,874
288,231
-0-
5,947
1,789,412
2013
456,230
497,638(12)
-0-
515,588
320,991
-0-
5,430
1,795,877
2012
446,190
33,904(13)
-0-
95,000
97,883
-0-
5,500
678,477
Total ($)
__________________ (1) The amounts presented in this column represent the fair value of the time-based RSUs on the date of grant in accordance with Accounting Standards Codification (“ASC”) Topic 718 of the Financial Accounting Standards Board (“FASB”). Further detail surrounding the time-based RSUs granted, the method of valuation and the assumptions made are set forth in Note 11 to our consolidated financial statements contained in this Annual Report on Form 10-K. (2)
The amounts presented in this column represent the fair value of the options granted to purchase membership units of ASC Acquisition LLC (or, since October 30, 2013, shares of our common stock) on the date of grant in accordance with ASC Topic 718. Further detail surrounding the options awarded, the method of valuation and the assumptions made are set forth in Note 11 to our consolidated financial statements contained in this Annual Report on Form 10-K. For 2013, in addition to the grant date fair value of the option awards granted to the Named Executive Officers in fiscal year 2013, the amounts reported include (i) the incremental fair value of the performance-based options that were accelerated on September 16, 2013, computed as of the acceleration date in accordance with ASC Topic 718, or $174,635 for Mr. Hayek, $130,809 for Mr. Rucker and $52,562 for Mr. Clark and (ii) the incremental fair value recognized for the reduction on September 16, 2013 of the exercise price of previously granted options that were unvested as of such date, computed in accordance with ASC Topic 718, or $368,894 for Mr. Hayek, $276,317 for Mr. Rucker and $111,030 for Mr. Clark.
(3)
The amounts presented in this column represent the portion of the cash bonuses earned by the executive officers under our Senior Management Bonus Program for the applicable year that were attributable to the attainment of pre-established corporate and/or individual performance goals for such year. Any discretionary bonuses, whether paid under the Senior Management Bonus Program or otherwise, are reported under the “Bonus” column rather than the “Non-Equity Incentive Plan Compensation” column.
(4)
The amounts presented in this column represent 401(k) matching contributions and life insurance and long-term disability insurance premiums paid on behalf of the Named Executive Officers by the Company.
(5)
Represents the discretionary portion of the bonus paid to Mr. Hayek under our Senior Management Bonus Program for 2014.
(6)
$1,495,930 of this amount represents the amount of a one-time cash bonus paid to Mr. Hayek in September 2013 in respect of vested options and REUs, as described above under “Elements of Executive Compensation — Special Cash Bonus ,” and $375,102 represents an additional special cash bonus paid to Mr. Hayek in connection with the successful completion of the Company’s initial public offering.
(7)
Represents the discretionary portion of the bonus paid to Mr. Hayek under our Senior Management Bonus Program for 2012.
(8)
Represents the discretionary portion of the bonus paid to Mr. Rucker under our Senior Management Bonus Program for 2014.
(9)
Represents the amount of a one-time cash bonus paid to Mr. Rucker in September 2013 in respect of vested options, as described above under “Elements of Executive Compensation — Special Cash Bonus .”
( 10 ) Represents the discretionary portion of the bonus paid to Mr. Rucker under our Senior Management Bonus Program for 2012. (11) Represents the discretionary portion of the bonus paid to Mr. Clark under our Senior Management Bonus Program for 2014. ( 12 ) Represents the amount of a one-time cash bonus paid to Mr. Clark in September 2013 in respect of vested options, as described above under “Elements of Executive Compensation — Special Cash Bonus .” (1 3 ) Represents the discretionary portion of the bonus paid to Mr. Clark under our Senior Management Bonus Program for 2012.
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Outstanding Equity Awards at 2014 Fiscal Year-End The following table sets forth information regarding equity awards held by our Named Executive Officers as of December 31, 2014 and reflects our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013. Option Awards
Stock Awards
Equity Incentive Plan Awards: Number of Securities Underlying Number of Market Unexercised Shares or Value of Unearned Units of Shares Options (#) Option Option Stock That or Units of Exercise Expiration Have Not Stock That Price ($) Date Vested (#) Have Not Vested ($)
Equity Incentive Plan Awards: Number of Unearned Shares, Units, or Other Rights That Have Not Vested (#)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested ($)
Grant Date
Number of Securities Underlying Unexercised Options (#) Exercisable
Number of Securities Underlying Unexercised Options (#) Unexercisable
Andrew P. Hayek
4/21/2008 3/24/2010 3/24/2010 5/6/2013 9/17/2014 9/17/2014
360,975(1) 175,610(1) 21,951(1) 45,732(2) --(2) --
--(1) --(1) 21,951(1) 137,194(2) 135,682(2) --
-------
10.25 11.18 8.72(3) 12.41(3) 29.02 --
4/21/2018 ---3/24/2020 -3/24/2020 --5/6/2023 --9/17/2024 ---100,792(4) 3,391,651(5)
-------
-------
Michael A. Rucker
9/15/2008 7/23/2009 3/24/2010 3/24/2010 2/8/2011 2/8/2011 3/6/2012 3/6/2012 5/6/2013 9/17/2014 9/17/2014
53,500(1) 37,765(1) 32,630(1) --(1) 13,659(1) --(1) 23,696(2) 23,695(2) 18,293(2) --(2) --
--(1) --(1) --(1) 5,853(1) --(1) 3,902(1) --(2) 47,390(2) 54,877(2) 36,182(2) --
------------
12.10 12.10 11.18 8.72(3) 11.18 8.72(3) 13.94 11.48(3) 12.41(3) 29.02 --
9/15/2018 7/23/2019 3/24/2020 3/24/2020 2/8/2021 2/8/2021 3/6/2022 3/6/2022 5/6/2023 9/17/2024 --
----------26,878(4)
----------904,445(5)
------------
------------
Joseph T. Clark
3/6/2012 3/6/2012 5/6/2013 9/17/2014 9/17/2014
6,098(2) 6,097(2) 13,415(2) --(2) --
--(2) 12,195(2) 40,243(2) 30,152(2) --
------
13.94 3/6/2022 11.48(3) 3/6/2022 12.41(3) 5/6/2023 29.02 9/17/2024 ---
----22,398(4)
----753,693
------
------
Name
________________________ (1)
Half of these option awards are subject to time-based vesting, with 20% vesting on each of the first, second, third, fourth and fifth anniversaries of the date of grant, and half were subject to performance-based vesting, which half were deemed vested as of September 16, 2013.
(2)
These option awards are subject to time-based vesting, with 25% vesting on each of the first, second, third and fourth anniversaries of the date of grant.
(3)
Reflects a $2.46 per share reduction in the exercise price of these options on September 26, 2013 in connection with our IPO.
(4)
These RSUs are subject to time-based vesting, with 25% vesting on each of the first, second, third and fourth anniversaries of the date of grant.
(5)
The market value is based on the closing price of our common stock on the NASDAQ on December 31, 2014 of $33.65, the last trading day of 2014, multiplied by the number of shares or units.
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Employment Agreements On October 30, 2013, we entered into employment agreements with each of our Named Executive Officers (collectively, the “Employment Agreements”). The initial term of the Employment Agreements is three years, in each case with automatic renewals for successive one-year terms unless either party to the agreement provides notice of non-renewal at least 90 days prior to the expiration of the initial term or the applicable renewal term. The Employment Agreements establish a base salary for each of our Named Executive Officers, subject to possible annual increases as determined by the Board of Directors or the Compensation Committee. The annual base salaries currently in effect for Messrs. Hayek, Rucker and Clark are $780,000, $439,000 and $469,000, respectively. Additionally, the Employment Agreements provide that the Named Executive Officers are eligible to participate in our Senior Management Bonus Program, under which they may earn a cash bonus each year, subject to the achievement of company and individual performance objectives established by the Compensation Committee. The target and maximum amounts of any annual bonus that may be earned by an executive are expressed as a percentage of the executive’s annual base salary in effect with respect to such year. The Employment Agreements also provide that each Named Executive Officer is entitled to participate in all savings and retirement plans and welfare benefits provided by us which are generally made available to other executives. The Employment Agreements contain standard ongoing confidentiality, non-solicitation and non-competition restrictions. The non-solicitation restrictions remain in place for 18 months for Messrs. Clark and Rucker, and two years for Mr. Hayek, in each case following termination of employment and the non-competition restrictions remain in place for 18 months for Messrs. Clark, Rucker and Hayek in each case following termination of employment. Each of the Employment Agreements provides that if a Named Executive Officer is terminated for cause, or if he terminates his employment without good reason (as such terms are defined in the applicable Employment Agreement), he will be entitled to any earned and unpaid base salary through the date of his termination. If a Named Executive Officer is terminated without cause, if he terminates his employment for good reason or if the Company delivers a notice of non-renewal, in each case other than in connection with a change in control, he will be entitled to the following payments and benefits: (i) continued base salary payments for 18 months (24 months for Mr. Hayek) following the date of termination of employment, (ii) health insurance benefits for 18 months following the date of termination of employment or until he becomes re-employed with another employer and is eligible to receive health insurance benefits under another employer-provided plan, whichever comes earlier, and (iii) a pro rata portion of his annual bonus based upon the achievement of the applicable performance objectives payable in a lump sum at the same time as the annual bonuses are otherwise paid to other employees. In addition, each of the Employment Agreements provides that if a Named Executive Officer’s employment terminates as a result of his death or disability, he will be entitled to any earned and unpaid base salary through the date of his termination, as well as a pro rata portion of his annual bonus based upon the achievement of the applicable performance objectives. In the event a Named Executive Officer’s employment is terminated without cause, for good reason or if the Company delivers a notice of non-renewal, in each case within the three months prior to the consummation of, or within the twenty-four month period following, a change in control, in addition to any earned and unpaid base salary through the date of termination, he will be entitled to (i) an amount equal to 1.5 times (two times in the case of Mr. Hayek) the sum of the Named Executive Officer’s then-current base salary and his target annual bonus, payable in a lump sum within forty days following the date of such termination, (ii) health insurance benefits for 18 months following the date of termination of employment or until he becomes re-employed with another employer and is eligible to receive health insurance benefits under another employer-provided plan, whichever comes earlier, and (iii) a pro rata portion of his annual bonus based upon the achievement of the applicable performance objectives payable in a lump sum at the same time as the annual bonuses are otherwise paid to other employees. Payments of severance and other benefits are conditioned upon the Named Executive Officer executing a release of claims, and such release becoming effective, and compliance with restrictive covenants. Retirement Benefits We maintain the SCA Retirement Investment Plan, a tax-qualified 401(k) savings plan (the “401(k) Plan”), in which our Named Executives participate. The 401(k) Plan allows participants to contribute up to 100% of their pay on a pre-tax basis into individual retirement accounts, subject to the maximum annual limits set by the IRS. SCA makes a matching employer contribution in an amount equal to 50% of the first 4% of each plan participant’s elective deferrals. All contributions to the 401(k) Plan are in the form of cash. Employer contributions vest over a six-year service period. Participants are immediately fully vested in their own contributions to the 401(k) Plan.
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Potential Payments Upon Termination or a Change in Control The Employment Agreements contain severance provisions pursuant to which the Named Executive Officers are entitled to certain payments or benefits upon a termination without cause or for good reason. Please refer to the “Employment Agreements” section above for further information about such payments and benefits. In addition, the 2007 Equity Plan provides for accelerated vesting of the outstanding option awards subject to time-based vesting if the executive is terminated without cause or for good reason within the two-year period following a change in control. The award agreements pursuant to which time-based options and time-based RSUs have been granted pursuant to the 2013 Omnibus Plan also provide for accelerated vesting of the outstanding options or RSUs, as applicable, if the executive is terminated without cause within the two-year period following a change in control. If a change in control would have been consummated on or before January 1, 2015, Mr. Hayek would have had the right to receive a “grossup” for any excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any federal, state or local income tax under the terms of his Employment Agreement in the event the amount of the “parachute payments” he was entitled to receive exceeded the safe harbor limit under Section 280G of the Code by more than 10%. Any amounts below that 10% limit would have been reduced to fall within the safe harbor limit. For any change in control consummated after January 1, 2015, Mr. Hayek is not entitled to a gross-up. 2007 Equity Plan The 2007 Equity Plan, which became effective on November 16, 2007, provides for the grant of options to purchase our membership units to our and our affiliates’ key teammates, directors, service providers and consultants. The summary of the 2007 Equity Plan contained in this Proxy Statement is not a complete description of all provisions of the 2007 Equity Plan and is qualified in its entirety by reference to the 2007 Equity Plan, which has been filed with the SEC. The 2007 Equity Plan is administered by our Compensation Committee, which has authority to select award recipients and to determine the terms of all awards, including the time or times at which awards vest or become exercisable. Unless otherwise provided by our Compensation Committee in a participant’s grant agreement or other agreement, a participant’s unvested options will immediately expire on the date such participant’s employment is terminated for any reason, and vested options will remain outstanding for one year following the participant’s death or disability and for 90 days following termination of employment for any other reason (or, in each case, until the award’s expiration date, if earlier). If a participant’s employment is terminated for cause (as defined in the 2007 Equity Plan), all awards then held by the participant will be forfeited immediately, whether or not vested. Options granted after 2010 expire 10 years from the date of grant. The 2007 Equity Plan provides that if an individual’s employment is terminated within a certain period following a change in control, either by the Company without cause or by the individual for good reason, all unvested time-based options shall become fully vested. Prior to 2010, with the exception of options granted to Mr. Hayek, all options granted to participants expired seven years from the date of grant (Mr. Hayek’s options granted prior to 2010 expire 10 years from the date of grant). In 2011, we offered to cancel all of the outstanding options under the 2007 Equity Plan that had seven year terms and replace such options with a larger number of options with similar terms and with an expiration date of 10 years from the original date of grant (rather than seven years). We do not intend to make any additional grants of options under the 2007 Equity Plan. 2013 Omnibus Plan Prior to the IPO, we adopted the 2013 Omnibus Plan, which provides for the grant of options, stock appreciation rights, restricted and unrestricted stock and stock units, performance awards, cash awards, and other awards convertible into or otherwise based on shares of our stock to our and our affiliates’ key teammates, directors, service providers and consultants. All equity-based awards subsequent to the IPO have been and will be granted under the 2013 Omnibus Plan. This summary of the 2013 Omnibus Plan is not a complete description of all provisions of the 2013 Omnibus Plan and is qualified in its entirety by reference to the 2013 Omnibus Plan, which has been filed with the SEC.
146
The 2013 Omnibus Plan is administered by our Compensation Committee, which has the authority to determine eligibility for, grant and determine the terms of awards under the 2013 Omnibus Plan, including the time or times at which awards vest or become exercisable. Unless otherwise provided by our Compensation Committee in a participant’s award agreement, a participant’s unvested options will immediately expire on the date such participant’s employment is terminated for any reason, and vested options will remain outstanding for one year following the participant’s death or disability and for 90 days following termination of employment for any other reason (or, in each case, until the award’s expiration date, if earlier). Options expire 10 years from the date of grant. Similarly, unless otherwise provided by our Compensation Committee in a participant’s award agreement, a participant’s unvested RSUs will immediately be forfeited on the date such participant’s employment is terminated for any reason. The award agreements entered into pursuant to the 2013 Omnibus Plan provide that if an individual’s employment is terminated within a certain period following a change in control by the Company without cause, all unvested time-based options or time-based RSUs, as applicable, shall become fully vested. Teammate Stock Purchase Plan The Board of Directors adopted, and the stockholders of the Company approved at the 2014 annual meeting, the Surgical Care Affiliates Teammate Stock Purchase Plan (the “Teammate Stock Purchase Plan”). The Teammate Stock Purchase Plan became effective on July 1, 2014 and provides eligible teammates, including the Named Executive Officers, of the Company and its designated subsidiaries with a convenient method to purchase shares of the Company’s common stock through payroll deductions. Following each offering period, the amounts accrued on behalf of each participant are used to purchase shares of the Company’s common stock at up to a 15% discount, as determined by the Compensation Committee, from the closing price of the Company’s common stock on such purchase date. Stock Ownership Guidelines for Executive Officers The Company has always encouraged its executive officers to have a financial stake in the Company, and the executive officers have generally owned shares of our common stock, but until 2014 the Company did not have any specified level of share ownership for individual officers. On December 11, 2014, however, the Board of Directors, at the recommendation of the Compensation Committee, adopted the Surgical Care Affiliates, Inc. Executive Officer Stock Ownership Guidelines in order to implement formal stock ownership guidelines for the Company’s chief executive officer (the “CEO”) and executive vice presidents (the “EVPs”), including the Named Executive Officers. Under the guidelines, the CEO should acquire and beneficially own shares of the Company’s common stock with a value equal to at least four times his annual base salary and the EVPs should acquire and beneficially own shares of the Company’s common stock with a value equal to at least two and one-half times his annual base salary. Current executive officers have four years (until December 11, 2018) to satisfy this guideline, while any new executive officer has four years from the date he or she becomes an executive officer to satisfy this guideline. The minimum number of shares to be held by an executive officer will be calculated based on the greater of the acquisition cost or the fair market value of such shares. For purposes of meeting the ownership guidelines, the following categories of stock are counted: (i) shares owned directly or indirectly ( e.g. , by a spouse, minor children or a trust), (ii) vested RSUs and stock options subject to time-based vesting criteria and (iii) shares held in a retirement or deferred compensation account for the benefit of the executive officer. Any shares that are subject to hedging or pledging transactions are not counted toward meeting the ownership guidelines. If the number of shares that an executive officer should own is increased as a result of an increase in the amount of such officer’s annual base salary, the officer will have four years from the effective date of the increase to attain the increased level of ownership.
147
Director Compensation The following table sets forth information concerning the compensation earned by our directors during 2014.
Name (1)
Fees Earned or Paid in Cash ($)
Stock Awards ($) (2)(3)
Option Awards ($) (4)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total ($)
Thomas C. Geiser
65,000
74,986
--
--
--
--
139,986
Frederick A. Hessler
65,000
74,986
--
--
--
--
139,986
Curtis S. Lane
50,000
74,986
--
--
--
--
124,986
Sharad Mansukani, M.D.
50,000
74,986
--
--
--
--
124,986
Jeffrey K. Rhodes
--
--
--
--
--
--
--
Todd B. Sisitsky
--
--
--
--
--
--
--
12,500
74,986
--
--
--
--
87,486
Lisa Skeete Tatum(5)
___________________ (1)
Andrew P. Hayek, the Company’s President and Chief Executive Officer, is not included in this table as he is, and at all times during 2014 was, an employee of the Company and thus received no compensation for his service as director. The compensation received by Mr. Hayek as an employee of the Company is shown in the Summary Compensation Table.
(2)
The amounts presented in this column represent the fair value of the REUs granted (or, since October 30, 2013, RSUs granted) on the date of grant in accordance with FASB ASC Topic 718. Further detail surrounding the REUs and RSUs awarded, the method of valuation and the assumptions made are set forth in Note 11 to our consolidated financial statements contained in this Annual Report on Form 10-K.
(3)
At the end of fiscal year 2014, the aggregate number of RSUs outstanding for each director was as follows: (i) for Mr. Geiser, 6,372, (ii) for Mr. Hessler, 3,660, (iii) for Mr. Lane, 6,372, (iv) for Dr. Mansukani, 6,372, and (v) for Ms. Skeete Tatum, 2,336.
(4)
At the end of fiscal year 2014, the aggregate number of option awards outstanding (all of which have vested) for each director was as follows: (i) for Mr. Geiser, 146,976, (ii) for Mr. Lane, 55,331, and (iii) for Dr. Mansukani, 80,417.
(5)
Ms. Skeete Tatum was elected to the Board of Directors effective October 1, 2014.
Under our current director compensation program, certain members of our Board of Directors who are not employees of the Company are eligible to receive cash compensation for their services as a director as follows: Mr. Geiser, Mr. Hessler, Mr. Lane, Dr. Mansukani and Ms. Skeete Tatum each receive $12,500 in cash fees in arrears each quarter. Additionally, commencing January 1, 2014, Mr. Geiser receives an additional annual cash retainer of $15,000 (payable quarterly in arrears), representing two individual retainers of $7,500 each, for serving as the Chair of the Compliance Committee and the Chair of the Acquisition Committee. Additionally, commencing October 1, 2013, Mr. Hessler receives an additional annual cash retainer (payable quarterly in arrears) of $15,000 for serving as Chair of the Audit Committee. Starting in 2012, the Company elected to make annual grants of REUs pursuant to Restricted Equity Unit Grant Agreements with each of our non-employee directors in an aggregate amount equal to $30,000. Upon the conversion of the Company from a Delaware limited liability company to a Delaware corporation on October 30, 2013, the REUs became RSUs that may be settled in shares of common stock (or, in the discretion of the Board of Directors, cash). On December 11, 2014, the Board of Directors approved, at the recommendation of the Compensation Committee, an increase in the amount of RSUs granted to each non-employee director from $30,000 per year to $75,000 per year as a result of increased responsibilities following the IPO. In 2014, the Company granted 2,336 RSUs to each of Mr. Geiser, Mr. Hessler, Mr. Lane, Dr. Mansukani and Ms. Skeete Tatum under the 2013 Omnibus Plan. 50% of the RSUs granted to these directors vest on either the first June 30 or September 30, depending on the director, immediately following the date of grant and the other 50% vest on the first anniversary of such date. Vested RSUs are settled for shares of common stock or cash, at the Board’s discretion, upon the earlier of (i) the director ceasing to provide services as a director of the Company or (ii) a qualifying change in control of the Company. Any portion of the RSUs that remain unvested on the date that the director ceases to be a director for any reason will be forfeited, and the director will cease to have any rights with respect thereto. Pursuant to our Director and Consultant Equity Incentive Plan, adopted June 24, 2008, as amended September 9, 2008 (the “Director Equity Plan”), directors are eligible to receive grants of options subject to time-based vesting that become exercisable only 148
upon the occurrence of a Liquidity Event (as defined in the Director Equity Plan) in which TPG achieves a minimum cash return on its original investment. The options granted pursuant to the Director Equity Plan may also accelerate vesting but not exercisability in the event of certain qualifying terminations (as defined in the Director Equity Plan). Compensation Committee Interlocks and Insider Participation During 2014, the Compensation Committee was comprised of Todd B. Sisitsky, Thomas C. Geiser and Sharad Mansukani, M.D. Beginning March 1, 2015, the Compensation Committee was comprised of Todd B. Sisitsky and Jeffrey K. Rhodes. No member of the Compensation Committee is or has been an officer or employee of ours or an executive officer of another entity where an executive officer of such entity served on our Compensation Committee. None of our executive officers serves as a member of the board of directors or compensation committee of another entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance under Equity Compensation Plans The following table provides certain information as of December 31, 2014 about common stock that may be issued under all of the Company’s existing equity compensation plans: Number of Securities
Number of Securities to be
Plan Category Equity Compensation Plans Approved by Security Holders
Issued Upon Exercise of Outstanding Options, Warrants and Rights 3,160,016 (1)
Equity Compensation Plans Not Approved by Security Holders Total
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights $14.23 (2)
—
Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column) 1,568,173 (3)
—
3,160,016 (1)
$14.23 (2)
— 1,568,173 (3)
_________________ (1) Consists of (i) options to purchase 2,003,349 shares of common stock granted under our 2007 Equity Plan, (ii) options to purchase 282,724 shares of common stock granted under our Director Equity Plan, (iii) options to purchase 428,486 shares of common stock granted under our 2013 Omnibus Plan, (iv) RSUs for 365,057 shares of common stock granted under our 2013 Omnibus Plan and (v) RSUs for 80,400 shares of common stock which were not granted pursuant to an equity incentive plan. Excludes the option held by HealthSouth to purchase shares of our common stock. (2)
Does not take into account RSUs, which have no exercise price.
(3)
Consists of (i) 129,106 shares available under our 2007 Equity Plan, (ii) 29,906 shares available under our Director Equity Plan and (iii) 1,409,161 shares available under our 2013 Omnibus Plan. We do not intend to use the 2007 Equity Plan or the Director Equity Plan to make any future grants of equity awards.
Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 6, 2015, by: (i)
each of our directors and director nominees;
(ii)
each executive officer of the Company, including the Named Executive Officers listed in the Sum mary Compensation
(iii)
all of our current directors and executive officers as a group; and
(iv)
eac h stockholder known by us to beneficially own more than 5% of our common stock.
Table;
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Shares of common stock that may be acquired by an individual or group within 60 days of March 6 , 2015, pursuant to 149
derivative securities, such as options or restricted stock units, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Percentage of ownership is based on an aggregate of 38,671,573 shares of common stock outstanding as of March 6 , 2015. Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such stockholders. Unless otherwise indicated, the address for each director and executive officer is: c/o Surgical Care Affiliates, Inc., 520 Lake Cook Road, Suite 250, Deerfield, Illinois 60015. Number of Shares of Common Stock Beneficial Owner Five Percent Stockholders TPG Funds (1) FMR LLC (2) Directors and Executive Officers Andrew P. Hayek (3) Thomas C. Geiser (4) Frederick A. Hessler (5) Curtis S. Lane (6) Sharad Mansukani, M.D. (7) Jeffrey K. Rhodes (8) Todd B. Sisitsky (9) Lisa Skeete Tatum Joseph T. Clark (10) Peter J. Clemens IV (11) Michael A. Rucker (12) Richard L. Sharff, Jr. (13) All Current Executive Officers and Directors as a Group (14) ________________________
Beneficially Owned
Percentage of Common Stock Beneficially Owned
23,940,916 2,864,598
61.9% 7.4%
789,251 247,563 15,662 58,358 83,444 ---91,589 148,049 283,964 100,788 1,818,668
2.0% * * * * ---* * * * 4.7%
* Represents beneficial ownership of less than 1% of the shares of common stock. (1)
The “TPG Funds” refers collectively to TPG Partners V, L.P., a Delaware limited partnership (“TPG Partners V”), TPG FOF V-A, L.P., a Delaware limited partnership (“FOF V-A”), and TPG FOF V-B, L.P., a Delaware limited partnership (“FOF V-B”). The TPG Funds directly hold an aggregate of 23,940,916 shares of common stock (the “TPG Shares”), consisting of: (a) 23,828,317 shares of common stock held by TPG Partners V, (b) 62,335 shares of common stock held by FOF V-A, and (c) 50,264 shares of common stock held by FOF V-B. The general partner of each of TPG Partners V, FOF V-A and FOF V-B is TPG GenPar V, L.P., a Delaware limited partnership, whose general partner is TPG GenPar V Advisors, LLC, a Delaware limited liability company, whose sole member is TPG Holdings I, L.P., a Delaware limited partnership, whose general partner is TPG Holdings I-A, LLC, a Delaware limited liability company, whose sole member is TPG Group Holdings (SBS), L.P., a Delaware limited partnership, whose general partner is TPG Group Holdings (SBS) Advisors, Inc., a Delaware corporation (“Group Advisors”). Because of Group Advisors’ relationship to the TPG Funds, Group Advisors may be deemed to beneficially own the TPG Shares. David Bonderman and James G. Coulter are the officers and sole shareholders of Group Advisors and may therefore also be deemed to be the beneficial owners of the TPG Shares. Messrs. Bonderman and Coulter disclaim beneficial ownership of the TPG Shares except to the extent of their pecuniary interest therein. The address of each of Group Advisors and Messrs. Bonderman and Coulter is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.
(2)
FMR LLC, a parent holding company, and Edward C. Johnson 3d may be deemed the beneficial owners of 2,864,598 shares of common stock. FMR LLC has sole voting power of 232,598 shares, no shared voting power, sole investment power of 2,864,598 shares and no shared
150
investment power. No one person’s interest relates to more than 5% of the outstanding shares of common stock. The address of FMR LLC is 245 Summer Street, Boston, MA 02210. This information is based on a Schedule 13G filed by FMR LLC with the SEC on February 13, 2015, reporting beneficial ownership as of December 31, 2014. (3)
Includes 68,292 shares of common stock underlying restricted stock units that are currently vested or vest within 60 days of March 6, 2015 and 671,951 shares of common stock underlying options that are currently exercisable or become exercisable within 60 days of March 6, 2015 for shares of common stock. All of the shares of common stock, restricted stock units and options are owned by the Andrew Hayek 2008 Living Trust (of which Mr. Hayek is the sole trustee).
(4)
Includes (a) 3,027 shares of common stock underlying restricted stock units that are currently vested or vest within 60 days of March 6, 2015 and 146,976 shares of common stock underlying options that are currently exercisable or become exercisable within 60 days of March 6, 2015 for shares of common stock and (b) 97,560 shares of common stock owned by TDK Properties, L.P., which is a California limited partnership whose general partner and owner of 1% of its limited partnership interests is TDK Management Company, LLC, a California limited liability company whose sole member is The Geiser Schweers Family Trust u/a/d 6/8/98, as amended, and whose trustees are Thomas C. Geiser and Donna L. Schweers. 99% of the limited partnership interests of TDK Properties, L.P. are held by The Geiser Schweers 2006 Irrevocable Insurance Trust dated August 14, 2006, whose trustee is Kim T. Schoknecht.
(5)
Includes 662 shares of common stock underlying restricted stock units that are currently vested or vest within 60 days of March 6, 2015.
(6)
Includes 3,027 shares of common stock underlying restricted stock units that are currently vested or vest within 60 days of March 6, 2015 and 55,331 shares of common stock underlying options that are currently exercisable or become exercisable within 60 days of March 6, 2015 for shares of common stock. The address of Mr. Lane is c/o MTS Health Partners, L.P., 623 Fifth Avenue, 14th Floor, New York, NY 10022.
(7)
Includes 3,027 shares of common stock underlying restricted stock units that are currently vested or vest within 60 days of March 6, 2015 and 80,417 shares of common stock underlying options that are currently exercisable or become exercisable within 60 days of March 6, 2015 for shares of common stock.
(8)
Jeffrey K. Rhodes, who is one of our directors, is a TPG Partner. Mr. Rhodes has no voting or investment power over and disclaims beneficial ownership of the TPG Shares. The address of Mr. Rhodes is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.
(9)
Todd B. Sisitsky, who is one of our directors, is a TPG Partner. Mr. Sisitsky has no voting or investment power over and disclaims beneficial ownership of the TPG Shares. The address of Mr. Sisitsky is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.
(10)
Includes 45,122 shares of common stock underlying options that are currently exercisable or become exercisable within 60 days of March 6, 2015 for shares of common stock.
(11)
Includes 128,049 shares of common stock underlying options that are currently exercisable or become exercisable within 60 days of March 6, 2015 for shares of common stock.
(12)
Includes 253,030 shares of common stock underlying options that are currently exercisable or become exercisable within 60 days of March 6, 2015 for shares of common stock.
(13)
Includes 89,325 shares of common stock underlying options that are currently exercisable or become exercisable within 60 days of March 6, 2015 for shares of common stock.
(14)
Includes restricted stock units that are currently vested or vest within 60 days of March 6, 2015 and options that are currently exercisable or become exercisable within 60 days of March 6, 2015 for shares of common stock as described in footnotes (4)-(13).
Item 13. Certain Relationships and Related Transactions, and Director Independence Policy for the Review and Approval of Related Person Transactions Under SEC rules, a “related person” is an officer, director, nominee for director or beneficial holder of more than 5% of any class of our voting securities since the beginning of the last fiscal year or an immediate family member of any of the foregoing. Pursuant to our related party transaction written policy, directors (including director nominees), executive officers and employees are required to report any transactions or circumstances that may create or appear to create a conflict between the personal interests of the individual and our interests, regardless of the amount involved. The Audit Committee of the Board of Directors is responsible for evaluating each related party transaction and making a recommendation to the disinterested members of the Board of Directors as to whether the transaction at issue is fair, reasonable and within our policy and whether it should be ratified and approved. The Audit Committee, in making its recommendation, considers various factors, including the benefit of the transaction to us, the terms of the transaction and whether they are at arm’s-length and in the ordinary course of our business, the direct or indirect nature of the related person’s interest in the transaction, the size and expected term of the transaction and other facts and circumstances that bear on the materiality of the related party transaction under applicable law and listing standards. The Audit Committee reviews, at least annually, a summary of 151
our transactions with our directors and officers and with firms that employ our directors, as well as any other related person transactions. Related Person Transactions Entered into by the Company Other than compensation agreements and other arrangements which are described under “Executive Compensation” and the transactions described below, since January 1, 2014, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any related person had or will have a direct or indirect material interest. Management Unit Holders’ Agreement On August 22, 2007, we and certain investors that are members of our management entered into the management unit holders’ agreement (the “Management Unit Holders’ Agreement”), which contains certain arrangements among the parties including with respect to restrictions on transfer of interests in us, call rights in certain specified situations, drag-along rights and tag-along rights. In addition, all parties to the Management Unit Holders’ Agreement were subject to a contractual lock-up provision during the 180-day period following the date of our IPO in October 2013. Except for this lock-up provision, which terminated effective April 27, 2014, the Management Unit Holders’ Agreement terminated by its terms on the date of our IPO. Stockholders’ Agreement with the TPG Funds In connection with our IPO, we entered into a stockholders’ agreement with the TPG Funds, dated November 4, 2013 (as amended, the “Stockholders’ Agreement”), that provides that, so long as the Stockholders’ Agreement remains in effect, the TPG Funds will have certain rights to designate for nomination candidates for our Board of Directors. We are required to use our reasonable best efforts to cause the Board of Directors and the Nominating and Corporate Governance committee to include such persons designated by the TPG Funds in the slate of nominees recommended by the Board of Directors for election by the stockholders. As set forth in the Stockholders’ Agreement, for so long as the TPG Funds collectively own at least 50% of the shares of our common stock held by them at the closing of the IPO, they will be entitled to designate for nomination a majority of the seats on our Board of Directors. When the TPG Funds collectively own less than 50%, but at least 30%, of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination three directors. When the TPG Funds collectively own less than 30%, but at least 10%, of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination two directors. Thereafter, the TPG Funds will be entitled to designate for nomination one director so long as they own at least 3% of the shares of our common stock held by them as of the closing of the IPO. In the event that the size of our Board of Directors is increased or decreased in size at any time, the nomination rights afforded to the TPG Funds will be proportionately adjusted as well, rounded up to the nearest whole person. As our Board of Directors currently consists of eight members, in accordance with the Stockholders’ Agreement, the TPG Funds have designated Thomas C. Geiser, Sharad Mansukani, M.D., Todd B. Sisitsky and Jeffrey K. Rhodes as nominees of the TPG Funds to serve on our Board of Directors. Registration Rights Agreement In connection with the IPO, we entered into a registration rights agreement with the TPG Funds, certain members of our management and certain members of our Board of Directors (the “Registration Rights Agreement”), which provides the TPG Funds with certain demand registration rights, including shelf registration rights, in respect of any shares of our common stock held by them, subject to certain conditions and limitations. The TPG Funds are entitled to an unlimited number of demand registrations. In addition, in the event that we register additional shares of common stock for sale to the public following the completion of the IPO, we are required to give notice of such registration to the TPG Funds, certain members of management and certain members of our Board of Directors party to the Registration Rights Agreement of our intention to effect such a registration, and, subject to certain limitations, include any shares of common stock requested to be included in such registration held by them. Upon request from the TPG Funds following the one year anniversary of the IPO, we will undertake to file a shelf registration statement, and to use reasonable best efforts to have the shelf registration statement declared effective promptly and to remain effective until, subject to certain limitations, the earlier of the date on which all of the TPG Funds’ shares of common stock have been sold pursuant to a registration statement and the date no shares of common stock are held by the TPG Funds. We are required to bear the registration expenses, other than underwriting discounts and commissions and transfer taxes, associated with any registration of shares of common stock pursuant to the Registration Rights Agreement. The Registration Rights Agreement includes customary indemnification provisions in favor of the TPG Funds and the members of management and our Board of Directors who are party to the agreement, any person who is or might be deemed a control person (within the meaning of the Securities Act of 1933, as amended, or the Exchange Act) and related parties, including without limitation officers, directors and employees, against certain losses and liabilities (including reasonable costs of 152
investigation and legal expenses) resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which such selling stockholder sells shares of our common stock, unless such liability arose from the applicable selling stockholder’s misstatement or omission and the applicable selling stockholder has agreed to indemnify us against losses caused by its misstatements or omissions, subject to certain limitations. Indemnification Agreements We have entered into indemnification agreements with each of our current directors and employment agreements containing indemnification provisions with each of our current executive officers. It is anticipated that future directors and officers will enter into indemnification arrangements with us in substantially similar form. The indemnification and employment agreements generally provide, among other things, that we will indemnify and hold harmless each person subject to such agreement (each, an “indemnitee”) to the fullest extent permitted by applicable law from and against all expenses, losses, damages, judgments, fines and other specified costs that may result or arise in connection with such indemnitee serving in his or her capacity as a director or officer of ours or serving at our direction as a director, officer, employee or agent of another entity. These agreements further provide that, upon an indemnitee’s request and subject to certain conditions, we will advance expenses to the indemnitee to the fullest extent permitted by applicable law. Pursuant to the indemnification agreements, an indemnitee is presumed to be entitled to indemnification and we have the burden of proving otherwise. The indemnification agreements also require us to maintain in full force and effect directors’ liability insurance on the terms described in the indemnification agreements. The foregoing is only a brief description of the indemnification and employment agreements, does not purport to be complete and is qualified in its entirety by reference to the Company’s form of indemnification agreement, filed as Exhibit 10.30 to its Annual Report on Form 10-K for the year ended December 31, 2013, and employment agreements with its executives, filed as Exhibits 10.16 to 10.19 to such Annual Report on Form 10-K. Certain Relationships During 2014 and continuing into 2015, the law firm of Bradley Arant Boult Cummings LLP (“BABC”) has provided certain legal services to us. We paid approximately $1.8 million in 2014 to BABC for the provision of legal services. The spouse of one of our executive officers, Mr. Sharff, is a partner of BABC. Effective January 1, 2015, Mr. Sharff’s spouse will not receive any compensation credit or bonus in connection with any legal fees paid by the Company or any of its subsidiaries to BABC and will not perform any legal services for the Company or any of its subsidiaries. From time to time, we do business with other companies affiliated with TPG Global, LLC. We believe that all such arrangements have been entered into in the ordinary course of business and have been conducted on an arm’s-length basis. Director Independence NASDAQ listing standards generally require that listed companies have a majority of independent directors, that compensation committees of listed companies be comprised entirely of independent directors and that nominating committees, if any, of listed companies be comprised entirely of independent directors. Under NASDAQ rules, however, a “controlled company” (which is a listed company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company) may elect not to comply with these three independence requirements. Because the TPG Funds own a majority of our outstanding common stock, we currently are a “controlled company” under the NASDAQ rules, and we have availed ourselves of the exemption from the independence requirements described above as a result of that status. In the event that we are no longer considered a “controlled company” under the NASDAQ rules, then (i) a majority of our Board must be independent within one year of the date of our loss of “controlled company” status and (ii) at least one member of each of our Compensation Committee and our Nominating and Corporate Governance Committee must be independent as of the date of our loss of “controlled company” status, a majority of the members of each of these committees must be independent within 90 days of the date of the change in status, and all members of these committees must be independent within one year of the date of the change in status. Even as a “controlled company,” we must comply with the rules applicable to audit committees set forth in NASDAQ and SEC rules. Accordingly, each of the members of our Audit Committee satisfy the general independence standard of the NASDAQ listing standards and the heightened independence standards imposed by Rule 10A-3 under the Exchange Act. Our Board of Directors has reviewed the materiality of any relationship that each of our directors has with Surgical Care Affiliates, either directly or indirectly. Based upon this review, our Board has determined that Frederick A. Hessler, Curtis S. Lane, Jeffrey K. Rhodes, Todd B. Sisitsky and Lisa Skeete Tatum are “independent directors” within the meaning of the NASDAQ rules. Additionally, our Board has determined that Frederick A. Hessler, Curtis S. Lane and Lisa Skeete Tatum satisfy the heightened independence requirements of Rule 10A-3 under the Exchange Act for purposes of Audit Committee membership. 153
Item 14. Principal Accountant Fees and Services Fees Paid to PricewaterhouseCoopers LLP The following table presents fees for professional services rendered by PwC for the audit of the Company’s annual financial statements for the years ended December 31, 2014 and December 31, 2013, and fees billed for other services rendered by PwC during those periods. 2014 $1,773,303 $193,197 $69,688 $0 $2,036,188
Audit Fees Audit-Related Fees Tax Fees All Other Fees TOTAL
2013 $2,365,633 $350,974 $0 $0 $2,716,607
Audit Fees. Audit Fees for the last two years were for professional services rendered by the independent registered public accountants in connection with (i) the audits of the Company’s annual financial statements and (ii) the review of the Company’s quarterly financial statements. Audit fees for 2013 were also for services related to the Company’s initial public offering, acquisitions, debt refinancing transactions and consents related to the Company’s SEC filings. Audit-Related Fees. Audit-Related Fees for 2014 and 2013 were for services related to audits of significant subsidiaries (as defined under Rule 3-05 of Regulation S-X), internal controls optimization and agreed-upon procedures. All audit-related services were pre-approved by the Company’s Audit Committee. Tax Fees. Tax Fees for 2014 were for general consulting services related to tax matters. There were no such fees in 2013. All Other Fees. All Other Fees encompasses any services provided by the independent registered public accountants other than the services reported in the other above categories. There were no such fees in 2014 or 2013. Pre-Approval Policy On March 4, 2014, the Audit Committee adopted policies and procedures for the pre-approval of audit and non-audit services performed by the independent registered public accountants pursuant to which the Audit Committee generally is required to pre-approve the audit and permissible non-audit services performed by the independent registered public accountants in order to ensure that the provision of such services does not impair the registered accountants’ independence. Unless a type of service to be provided by the independent registered public accountants has received general pre-approval, the service will require specific pre-approval by the Audit Committee. Any proposed services exceeding preapproved cost levels will require specific pre-approval by the Audit Committee. On an annual basis, the Audit Committee may pre-approve specific services that are expected to be provided to the Company by the independent registered public accountants during the following twelve months. The Audit Committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated must report any pre-approval decisions to the Audit Committee at its next scheduled meeting.
154
PART IV Item 15. Exhibits and Financial Statement Schedules (a)(3) and (b) — Exhibits. The exhibits listed on the Exhibit Index of this Form 10-K are filed herewith or are incorporated herein by reference. (a)(1) and (c) — Financial Statements Financial Statements : The Financial Statements of Surgical Care Affiliates are included herein in Part II, Item 8. The following audited and unaudited consolidated financial statements of ASC Operators, LLC are presented pursuant to Rule 3-09 of Regulation S-X:
155
ASC Operators, LLC Unaudited Consolidated Financial Statements December 31, 2014 and 2013 INDEX Unaudited Consolidated Financial Statements Page(s)
Balance Sheet Statement of Operations Statement of Changes in Equity Statement of Cash Flows Notes to Financial Statements
157 158 159 160 161
156
ASC Operators, LLC Unaudited Consolidated Balance Sheet (In thousands of U.S. dollars) DECEMBER 31, 2014
Assets Current assets Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts (2014 - $303; 2013 - $210) Due from related party Prepaids and other current assets Total current assets Property and equipment, net of accumulated depreciation (2014 - $11,470; 2013 - $12,185) Goodwill Intangible assets, net of accumulated amortization (2014 - $812; 2013 - $643) Total assets Liabilities and Equity Current liabilities Current portion of long-term debt Accounts payable Accrued payroll Other current liabilities Due to related party Total current liabilities Long-term debt, net of current portion Other long-term liabilities Total liabilities Commitments and contingent liabilities Equity Members’ equity Noncontrolling interests Total equity Total liabilities and equity
$
$
$
$
7,057 8,088 1,201 443 16,789 14,308 26,534 1,084 58,715
$
1,510 1,150 232 959 3,155 7,006 8,518 104 15,628
$
26,796 16,291 43,087 58,715
The accompanying notes are an integral part of these unaudited consolidated financial statements.
157
DECEMBER 31, 2013
$
$
7,361 9,011 871 295 17,538 11,030 26,534 1,254 56,356
5,863 1,689 273 936 1,735 10,496 459 13 10,968
29,117 16,271 45,388 56,356
ASC Operators, LLC Unaudited Consolidated Statement of Operations (In thousands of U.S. dollars) Year-Ended December 31, 2014
Net operating revenues: Net patient revenues Other revenues Total net operating revenues Operating expenses: Salaries and benefits Supplies Professional and contractual services Other operating expenses Depreciation and amortization Occupancy costs Provision for doubtful accounts Loss on sale of property and equipment Total operating expenses Operating income Interest expense Interest income Net income Less: Net income attributable to noncontrolling interests Net income attributable to ASC Operators
$
$
59,913 $ 131 60,044
58,309 100 58,409
16,301 10,862 3,517 3,920 2,171 1,915 1,039 262 39,987 20,057 193 (5 ) 19,869 (9,586 ) 10,283 $
15,257 10,066 3,454 3,796 1,966 1,738 1,183 86 37,546 20,863 42 — 20,821 (10,232 ) 10,589
The accompanying notes are an integral part of these unaudited consolidated financial statements.
158
2013
ASC Operators, LLC Unaudited Consolidated Statement of Changes in Equity (In thousands of U.S. dollars)
SCA
Balance at December 31, 2012 Net income Distributions to members Contributions from members Distributions to noncontrolling interests Balance at December 31, 2013 Net income Distributions to members Contributions from members Distributions to noncontrolling interests Balance at December 31, 2014
$
$
$
16,367 $ 5,189 (8,883 ) 915 — 13,588 $ 5,039 (6,176 ) — 12,451 $
Sutter
18,418 $ 5,400 (9,245 ) 952 — 15,525 $ 5,244 (6,428 ) — 14,341 $
Total Members Equity
Noncontrolling Interests
34,785 $ 10,589 (18,128 ) 1,867 — 29,117 $ 10,283 (12,604 ) — 26,796 $
15,953 $ 10,232 — 621 (10,531 ) 16,271 $ 9,586 — 715 (10,281 ) 16,291 $
The accompanying notes are an integral part of these unaudited consolidated financial statements.
159
Total Equity
50,738 20,821 (18,128 ) 2,488 (10,531 ) 45,388 19,869 (12,604 ) 715 (10,281 ) 43,087
ASC Operators, LLC Unaudited Consolidated Statement of Cash Flows (In thousands of U.S. dollars) YEAR ENDED DECEMBER 31, 2014
Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Provision for doubtful accounts Depreciation and amortization Loss on disposal of assets Increase in assets Accounts receivable Other assets (Decrease) increase in liabilities Accounts payable Accrued payroll Accrued interest Other liabilities Net cash provided by operating activities Cash flows from investing activities Capital expenditures Proceeds from disposal of assets Changes in due to/from related party Net cash provided used in investing activities Cash flows from financing activities Borrowings under construction loan and long-term debt Principal payments on long-term debt Principal payments under capital lease obligations Capital contributions Contributions from noncontrolling interests of consolidated affiliates Distributions to members Distributions to noncontrolling interests of consolidated affiliates Net cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow information: Cash paid during the year for interest
$
19,869 $ 1,039 2,171 262 (116 ) (147 )
20,821 1,183 1,966 86 (2,071 ) (119 )
(914 ) (41 ) — 489 22,612
388 3 1 758 23,016
(5,540 ) — 1,090 (4,450 )
(7,935 ) 7 (1,295 ) (9,223 )
$
10,000 (6,116 ) (179 ) — 715 (12,604 ) (10,282 ) (18,466 ) (304 ) 7,361 7,057 $
6,094 (151 ) (367 ) 1,867 621 (18,128 ) (10,531 ) (20,595 ) (6,802 ) 14,163 7,361
$
244 $
$
The accompanying notes are an integral part of these unaudited consolidated financial statements.
160
YEAR ENDED DECEMBER 31, 2013
24
ASC Operators, LLC Notes to Unaudited Consolidated Financial Statements (Amounts in tables are in thousands of U. S. dollars unless otherwise indicated) 1. DESCRIPTION OF THE BUSINESS Nature of Operations ASC Operators, LLC (“ASC Operators,” the “Company” or “we”), a California limited liability company, was formed on May 2, 2007, primarily to own and operate a network of multi-specialty ambulatory surgery centers (“ASCs”) in the Sacramento, California, metropolitan area. ASC Operators is a 51% owned subsidiary of Sutter Health. Surgery Centers – West Holdings, LLC, a California limited liability company and a subsidiary of Surgical Care Affiliates, LLC (SCA), owns 49% of ASC Operators. As of December 31, 2013, the Company had an interest in and/or operated six ASCs in the Sacramento, California, metropolitan area. Our ASCs primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. Basis of Presentation The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such financial statements include the assets, liabilities, revenues, and expenses of all majority-owned subsidiaries over which we exercise control and, when applicable, entities in which we have a controlling financial interest. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include, but are not limited to: (1) allowance for contractual revenue adjustments; (2) allowance for doubtful accounts; (3) asset impairments, including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; and (6) economic lives and fair value of leased assets. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation as considered necessary. Actual results could differ from those estimates. Revenue Recognition Revenues consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the healthcare services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. 161
Cash and Cash Equivalents Cash and cash equivalents include all demand deposits reduced by the amount of outstanding checks and drafts where the right of offset exists for these bank accounts. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has not experienced any losses on such deposits.
Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, workers’ compensation, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payors. The concentration of net patient service accounts receivable by payor class, as a percentage of total net patient service accounts receivable, as of the end of each of the reporting periods, is as follows: AS OF DECEMBER 31, 2014
Managed care and other discount plans Medicare Workers’ compensation Patients and other third-party payors Medicaid Total
66 % 17 14 2 1 100 %
AS OF DECEMBER 31, 2013
53 % 40 6 1 — 100 %
We recognize that revenues and accounts receivable from government agencies are significant to our operations; however, we do not believe there are significant credit risks associated with these government agencies. We also recognize that revenue and accounts receivable from managed care and other discount plans are significant to our operations. Because the category of managed care and other discount plans is composed of numerous individual payors which are geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. Property and Equipment We report improvements and equipment at cost, net of asset impairment. We report assets under capital lease obligations at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. Useful lives are as follows: Years
Leasehold improvements Furniture, fixtures, and equipment Assets under capital lease obligations: Equipment
5 to 20 3 to 10 3 to 5
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset. We capitalize interest expense on major construction and development projects while in progress. Capitalized interest for the year ended December 31, 2014 was approximately $80,999. We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the consolidated statements of operations. For operating leases, we recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease. Goodwill Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling 162
interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing each year. We have no accumulated impairment of goodwill for the year ended December 31, 2014. Fair Value of Financial Instruments Our financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments. We determine the fair value of our long-term debt based on various factors, including maturity schedules, call features and current market rates. Noncontrolling Interest in Consolidated Affiliates The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Newly Issued Authoritative Guidance We do not believe any recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following: AS OF DECEMBER 31, 2014
Leasehold improvements Furniture, fixtures and equipment
$
Less: Accumulated depreciation and amortization Construction in progress Property and equipment, net
$
AS OF DECEMBER 31, 2013
12,920 $ 12,701 25,621 (11,470 ) 14,151 157 14,308 $
4,363 12,144 16,507 (12,185 ) 4,322 6,708 11,030
Depreciation expense for the years ended December 31, 2014 and 2013, was approximately $2.0 million and $1.7 million and is included in the consolidated statements of income as a component of operating expenses. 163
The amount of amortization expense and accumulated amortization relating to assets under capital lease obligations and rent expense under operating leases is as follows: YEAR ENDED DECEMBER 31, 2014
Assets under capital lease obligations: Equipment Accumulated amortization Assets under capital lease obligations, net Amortization expense Rent Expense: Minimum rent payments Contingent and other rents Total rent expense
$
YEAR ENDED DECEMBER 31, 2013
59 $ (49 ) 10 $ 85 $
$ $ $
1,821 $ 131 1,952 $
$
1,099 (796 ) 303 350 1,602 206 1,808
Leases Future minimum lease payments at December 31, 2013 for those leases of ASC Operators, LLC and its subsidiaries having an initial or remaining non-cancelable lease term of one year or more are as follows: Year Ending December 31
2015 2016 2017 2018 2019 2020 and thereafter
$
$
1,706 1,666 1,698 1,227 1,007 3,748 11,052
4. GOODWILL Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We have no accumulated impairment of goodwill for the periods ended December 31, 2014 and 2013. There was no change in goodwill for the years ended December 31, 2014 and 2013. We performed impairment reviews and concluded that no goodwill impairment existed. 5. LONG-TERM DEBT Our long-term debt outstanding consists of the following: AS OF DECEMBER 31, 2014 2013
Notes payable Less: Current portion Long-term debt, net of current portion
$ $
10,028 $ (1,510 ) 8,518 $
6,322 (5,863 ) 459
$9.6 million of the Notes payable balance relates to a no-interest construction loan classified in the current portion of long-term debt. We expect to refinance the construction loan after completion of the construction activity. 164
The following chart shows scheduled principal payments due on long-term debt for the next five years: Year Ending December 31,
2015 2016 2017 2018 2019 2020 and thereafter Total
$
1,510 1,518 1,488 1,461 1,482 2,569 10,028
$
6. NONCONTROLLING INTERESTS The following table shows the effects of changes to ASC Operators, LLC ownership interest in its subsidiaries on ASC Operators, LLC equity: YEAR ENDED DECEMBER 31 2014
Net income attributable to ASC Operators (Decrease) increase in equity due to sales to noncontrolling interests Decrease in equity due to purchases from noncontrolling interests Change from net income attributable to ASC Operators
$
$
YEAR ENDED DECEMBER 31 2013
10,283 $ — — 10,283 $
10,589 — — 10,589
7. RELATED PARTY TRANSACTIONS The Company was involved in various transactions with affiliated companies. The surgery centers were owed $1.2 million and $0.9 million from Surgical Care Affiliates, LLC and related affiliates for services at December 31, 2014 and 2013, and such amounts are classified as due from related party in the accompanying consolidated balance sheets. The surgery centers owed Sutter Health and related entities $3.2 million and $1.7 million for services at December 31, 2014 and 2013, and such amounts were classified as due to related party in the accompanying consolidated balance sheets. 8. SUBSEQUENT EVENTS The Company’s management has evaluated subsequent events through March 10, 2015, and concluded that there were no material subsequent events.
165
ASC Operators, LLC Audited Consolidated Financial Statements December 31, 2012 INDEX Page(s)
Report of Independent Auditors Consolidated Financial Statements Balance Sheets Statements of Operations Statements of Changes in Equity Statements of Cash Flows Notes to Financial Statements
167 168 169 170 171 172
166
Independent Auditor’s Report To Board of Directors and Members of ASC Operators, LLC: We have audited the accompanying consolidated financial statements of ASC Operators, LLC and its subsidiaries (“the Company”), which comprise the consolidated balance sheet as of December 31, 2012 and the related consolidated statement of operations, changes in equity, and cash flows for the year-ended December 31, 2012. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ASC Operators, LLC and its subsidiaries at December 31, 2012 and the results of their operations and their cash flows for the year-ended December 31, 2012 in accordance with accounting principles generally accepted in the United States of America. /s/ PricewaterhouseCoopers LLP Birmingham, AL July 22, 2013
167
ASC Operators, LLC Consolidated Balance Sheet (In thousands of U.S. dollars) DECEMBER 31, 2012
Assets Current assets Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts ($241) Due from related party Prepaids and other current assets Total current assets Property and equipment, net of accumulated depreciation ($11,852) Goodwill Intangible assets, net of accumulated amortization ($398) Total assets Liabilities and Equity Current liabilities Current portion of long-term debt Accounts payable Accrued payroll Other current liabilities Due to related party Total current liabilities Long-term debt, net of current portion Other long-term liabilities Total liabilities Commitments and contingent liabilities Equity Members’ equity Noncontrolling interests Total equity Total liabilities and equity The accompanying notes are an integral part of these consolidated financial statements.
168
$
$
$
$
14,163 8,124 882 175 23,344 4,909 26,534 1,499 56,286
460 1,302 270 167 3,041 5,240 287 21 5,548
34,785 15,953 50,738 56,286
ASC Operators, LLC Consolidated Statement of Operations (In thousands of U.S. dollars) YEAR ENDED DECEMBER 31, 2012
Net operating revenues: Net patient revenues Other revenues Total net operating revenues Operating expenses: Salaries and benefits Supplies Other operating expenses Depreciation and amortization Occupancy costs Provision for doubtful accounts Loss (gain) on disposal of assets Total operating expenses Operating income Interest expense Interest income Net income Less: Net income attributable to noncontrolling interests Net income attributable to ASC Operators
$
$
The accompanying notes are an integral part of these consolidated financial statements.
169
60,591 65 60,656 15,173 8,960 6,940 1,861 1,600 1,067 2 35,603 25,053 35 (1 ) 25,019 (11,048 ) 13,971
ASC Operators, LLC Consolidated Statement of Changes in Equity (In thousands of U.S. dollars)
SCA
Balance at December 31, 2011 Net income Distributions to members Contributions from members Net change in equity related to purchase/(sale) of ownership interests Distributions to noncontrolling interests Balance at December 31, 2012
$
$
Total Members Equity
Sutter
Noncontrolling Interests
12,669 $ 6,846 (3,148 ) —
14,569 $ 7,125 (3,276 ) —
27,238 $ 13,971 (6,424 ) —
— — 16,367
— — 18,418
— — 34,785
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
170
13,279 11,048 — —
Total Equity
$
40,517 25,019 (6,424 ) —
2,176 (10,550 ) 15,953 $
2,176 (10,550 ) 50,738
ASC Operators, LLC Consolidated Statement of Cash Flows (In thousands of U.S. dollars) YEAR ENDED DECEMBER 31, 2012
Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Provision for doubtful accounts Depreciation and amortization Loss (gain) on disposal of assets (Increase) decrease in assets, net of business combinations Accounts receivable Other assets Increase (decrease) in liabilities, net of business combinations Accounts payable Accrued payroll Other liabilities Other, net Net cash provided by operating activities Cash flows from investing activities Capital expenditures Proceeds from disposal of assets Business acquisitions, net of cash acquired of $169 Changes in due to/from related party Net cash provided by (used in) investing activities Cash flows from financing activities Principal payments on long-term debt Principal payments under capital lease obligations Distributions to members Distributions to noncontrolling interests of consolidated affiliates Repurchase of equity interests of consolidated affiliates Other Net cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow information: Cash paid during the year for interest Supplemental schedule of noncash investing and financing activities Property and equipment acquired through capital leases and installment purchases The accompanying notes are an integral part of these consolidated financial statements.
171
$
25,019 1,067 1,861 2 (2,040 ) 594 (89 ) (462 ) (824 ) (54 ) 25,074 (1,586 ) 268 (3,281 ) 7,947 3,348
$ $
(65 ) (512 ) (6,424 ) (10,550 ) — — (17,551 ) 10,871 3,292 14,163 14 202
ASC Operators, LLC Notes to Consolidated Financial Statements (Amounts in tables are in thousands of U. S. dollars unless otherwise indicated) 1. DESCRIPTION OF THE BUSINESS Nature of Operations ASC Operators, LLC (“ASC Operators,” the “Company” or “we”), a California limited liability company, was formed on May 2, 2007, primarily to own and operate a network of multi-specialty ambulatory surgery centers (“ASCs”) in the Sacramento, California, metropolitan area. ASC Operators is a 51% owned subsidiary of Sutter Health. Surgery Centers — West Holdings, LLC, a California limited liability company and a subsidiary of Surgical Care Affiliates, LLC (SCA), owns 49% of ASC Operators. As of December 31, 2012, the Company had an interest in and/or operated six ASCs in the Sacramento, California, metropolitan area. Our ASCs primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. Basis of Presentation The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such financial statements include the assets, liabilities, revenues, and expenses of all majority-owned subsidiaries over which we exercise control and, when applicable, entities in which we have a controlling financial interest. 2. ACQUISITIONS Effective May 1, 2012, we purchased a controlling interest in a multi-specialty surgery center located in Roseville, California for $3.5 million and entered into a management services agreement with the facility. The fair values of assets and liabilities assumed May 1, 2012 are as follows: Cash Accounts receivable Fixed assets Other assets Noncompete agreements Certificates of need Management agreements Goodwill Noncontrolling interests Accounts payable and other liabilities Net assets acquired
$
$
169 341 716 6 198 126 1,185 3,686 (2,176 ) (801 ) 3,450
Effective January 1, 2011, we purchased a controlling interest in a multi-specialty surgery center located in Sacramento, California for $4.1 million in cash and entered into a management services agreement with the facility. The fair values of assets and liabilities assumed January 1, 2011 are as follows: Cash Accounts receivable Fixed assets Noncompete agreements Licenses Goodwill Noncontrolling interests Accounts payable and other liabilities Net assets acquired
$
$
172
211 265 769 237 151 6,675 (3,928 ) (235 ) 4,145
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include, but are not limited to: (1) allowance for contractual revenue adjustments; (2) allowance for doubtful accounts; (3) asset impairments, including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; and (6) economic lives and fair value of leased assets. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation as considered necessary. Actual results could differ from those estimates. Revenue Recognition Revenues consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the healthcare services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. Cash and Cash Equivalents Cash and cash equivalents include all demand deposits reduced by the amount of outstanding checks and drafts where the right of offset exists for these bank accounts. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has not experienced any losses on such deposits. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, workers’ compensation, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payors. The concentration of net patient service accounts receivable by payor class, as a percentage of total net patient service accounts receivable, as of the end of the reporting period, is as follows: AS OF DECEMBER 31, 2012
Managed care and other discount plans Medicare Workers’ compensation Medicaid Patients and other third-party payors Total
52 % 16 22 5 5 100 %
We recognize that revenues and accounts receivable from government agencies are significant to our operations; however, we do not believe there are significant credit risks associated with these government agencies.
We also recognize that revenue and accounts receivable from managed care and other discount plans are significant to our operations. Because the category of managed care and other discount plans is composed of numerous individual payors which are 173
geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. Property and Equipment We report improvements and equipment at cost, net of asset impairment. We report assets under capital lease obligations at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. Useful lives are as follows: Years
Leasehold improvements Furniture, fixtures, and equipment Assets under capital lease obligations: Equipment
5 to 20 3 to 10 3 to 5
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset. We capitalize interest expense on major construction and development projects while in progress. No interest was capitalized during the year ended December 31, 2012. We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the consolidated statements of operations. For operating leases, we recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease. Goodwill Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of October 1 st of each year. We have no accumulated impairment of goodwill for the year ended December 31, 2012. Fair Value of Financial Instruments Our financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments. We determine the fair value of our long-term debt based on various factors, including maturity schedules, call features and current market rates. Noncontrolling Interest in Consolidated Affiliates The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Newly Issued Authoritative Guidance Goodwill Impairment Testing . In September 2011, the FASB issued accounting guidance related to goodwill impairment testing. The guidance allows an entity to elect to first perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further impairment testing is required. The guidance refers to several factors to consider when performing the qualitative analysis, including macroeconomic factors, industry factors and entity-specific factors. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 174
2011. Early adoption is permitted provided that the entity has not yet performed its annual impairment test for goodwill. The Company performs its annual impairment test for goodwill as of October 1 of each year. The adoption of this new accounting guidance did not have a material impact on the Company’s financial statements. We do not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following: AS OF DECEMBER 31, 2012
Leasehold improvements Furniture, fixtures and equipment
$
4,222 12,052 16,274 (11,852 ) 4,422 487 4,909
Less: Accumulated depreciation and amortization Construction in progress Property and equipment, net
$
Depreciation expense for the year ended December 31, 2012 was approximately $1.6 million, and is included in the consolidated statement of income as a component of operating expenses. The amount of amortization expense and accumulated amortization relating to assets under capital lease obligations and rent expense under operating leases is as follows: YEAR ENDED DECEMBER 31, 2012
Assets under capital lease obligations: Equipment Accumulated amortization Assets under capital lease obligations, net Amortization expense Rent Expense: Minimum rent payments Contingent and other rents Total rent expense
$
1,045 (447 ) 598 268
$ $ $
1,589 223 1,812
$
Leases Future minimum lease payments at December 31, 2012 for those leases of ASC Operators, LLC and its subsidiaries having an initial or remaining non-cancelable lease term of one year or more are as follows: Capital Lease Obligations
Operating Leases
Year ending December 31,
2013 2014 2015 2016 2017 2018 and thereafter
$
$ Less: interest portion Obligations under capital leases
955 734 508 305 35 327 2,864
$
$
175
368 $ 2 1 1 — — 372 $ (4 ) 368
Total
1,323 736 509 306 35 327 3,236
5. GOODWILL Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We have no accumulated impairment of goodwill for the year ended December 31, 2012. The following table shows changes in the carrying amount of goodwill for the year ended December 31, 2012: YEAR ENDED DECEMBER 31, 2012
Balance at beginning of period Acquisitions (Note 2) Other Balance at end of period
$
22,848 3,686 — 26,534
$
We performed impairment reviews and concluded that no goodwill impairment existed. 6. LONG-TERM DEBT Our long-term debt outstanding consists of the following: AS OF DECEMBER 31, 2012
Capital lease obligations Notes payable
$
Less: Current portion Long-term debt, net of current portion
$
368 379 747 (460 ) 287
The following chart shows scheduled principal payments due on long-term debt for the next five years and thereafter: Year Ending December 31,
2013 2014 2015 2016 2017 Thereafter Total
$
$
460 103 109 75 — — 747
7. NONCONTROLLING INTERESTS The following table shows the effects of changes to ASC Operators, LLC ownership interest in its subsidiaries on ASC Operators, LLC equity: YEAR ENDED DECEMBER 31, 2012
Net income attributable to ASC Operators (Decrease) increase in equity due to sales to noncontrolling interests Decrease in equity due to purchases from noncontrolling interests Change from net loss attributable to ASC Operators and transfers to/from noncontrolling interests
176
$
$
13,971 — — 13,971
8. RELATED PARTY TRANSACTIONS The Company was involved in various transactions with affiliated companies. The surgery centers were owed $0.9 million from Surgical Care Affiliates, LLC and related affiliates for services at December 31, 2012, and such amounts are classified as due from related party in the accompanying consolidated balance sheet. The surgery centers owed Sutter Health and related entities $3.0 million for services at December 31, 2012, and such amounts were classified as due to related party in the accompanying consolidated balance sheet. 9. SUBSEQUENT EVENTS The Company’s management has evaluated subsequent events through July 22, 2013, and concluded that there were no material subsequent events.
177
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2013 Commission file number: 001-36154
SURGICAL CARE AFFILIATES, INC. (Exact name of registrant as specified in its charter) Delaware
20-8740447
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
520 Lake Cook Road, Suite 250 Deerfield, IL
60015
(Address of principal executive offices)
(Zip Code)
(847) 236-0921 (Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
Name of Exchange on Which Registered
Common Stock, par value $0.01 per share The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes No 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 No 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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
Accelerated filer
Non-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold on March 20, 2014 was $455,520,019. The registrant has provided this information as of March 20, 2014 because its common stock was not publicly traded as of the last business day of its most recently completed second fiscal quarter. Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Class of Common Stock
Outstanding at March 20, 2014
Common stock, par value $0.01 per share
38,261,138 shares
Table of Contents SURGICAL CARE AFFILIATES, INC. FORM 10-K INDEX General
2
Forward — Looking Statements
2
PART I. Item 1.
Business
3
Item 1A.
Risk Factors
38
Item 1B.
Unresolved Staff Comments
70
Item 2.
Properties
70
Item 3.
Legal Proceedings
70
Item 4.
Mine Safety Disclosure
71
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
72
Item 6.
Selected Financial Data
73
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
75
Item 8.
Financial Statements and Supplementary Data
105
Item 9.
Changes in and Disagreements with Accounting and Financial Disclosures
157
Item 9A.
Controls and Procedures
157
Item 9B.
Other Information
157
Item 10.
Directors, Executive Officers and Corporate Governance
158
Item 11.
Executive Compensation
166
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
176
Item 13.
Certain Relationships and Related Transactions and Director Independence
179
Item 14.
Principal Accounting Fees and Services
183
Exhibits and Financial Statement Schedules
185
PART II.
PART III.
Part IV. Item 15. Signatures
210 1
Table of Contents GENERAL Unless the context otherwise indicates or requires, references in this Annual Report on Form 10-K to “Surgical Care Affiliates,” the “Company,” “we,” “us” and “our” refer to ASC Acquisition LLC and its consolidated affiliates prior to our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013 and to Surgical Care Affiliates, Inc. and its consolidated subsidiaries after our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013. In addition, unless the context otherwise indicates or requires, the term “SCA” refers to Surgical Care Affiliates, LLC, our direct operating subsidiary. Pursuant to the conversion, every 10.25 outstanding membership units of ASC Acquisition LLC were converted into one share of common stock of Surgical Care Affiliates, Inc., and options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates, Inc. at a ratio of 10.25 membership units of ASC Acquisition LLC underlying such options to each one share of common stock of Surgical Care Affiliates, Inc. underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. In addition, every 10.25 outstanding restricted equity units of ASC Acquisition LLC were converted into one restricted stock unit (“RSU”) of Surgical Care Affiliates, Inc. All information included in this Annual Report on Form 10-K is presented giving effect to the conversion. On October 29, 2013, the Company’s Registration Statement on Form S-1 (File No. 333-190998) and the Company’s Registration Statement on Form 8-A each became effective, and the Company became subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance, which involve substantial risks and uncertainties. Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act. Forward-looking statements include any statement that, without limitation, may predict, forecast, indicate or imply future results, performance or achievements instead of historical or current facts and may contain words like “anticipates,” “approximately,” “believes,” “budget,” “can,” “could,” “continues,” “contemplates,” “estimates,” “expects,” “forecast,” “intends,” “may,” “might,” “objective,” “outlook,” “predicts,” “probably,” “plans,” “potential,” “project,” “seeks,” “shall,” “should,” “target,” “will,” or the negative of these terms and other words, phrases, or expressions with similar meaning. Any forward-looking statements contained in this Annual Report on Form 10-K are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those projected in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information or otherwise. Given these uncertainties, the reader should not place undue reliance on forward-looking statements as a prediction of actual results. Factors that could cause actual results to differ materially from those projected or estimated by us include those that are discussed in “Part I, Item 1A. Risk Factors”. 2
Table of Contents Item 6.
Selected Financial Data YEAR-ENDED DECEMBER 31, 2012 2011 2010 (in millions, except facilities and per unit data in actual amounts)
2013
Net operating revenues: Net patient revenues Management fee revenues Other revenues Total net operating revenues Equity in net income of nonconsolidated affiliates Operating expenses: Salaries and benefits Supplies Other operating expenses Depreciation and amortization Occupancy costs Provision for doubtful accounts Impairment of intangible and long-lived assets Loss (gain) on disposal of assets Total operating expenses Operating income Interest expense Loss from extinguishment of debt Interest income Loss on sale of investments Income from continuing operations before income tax expense Provision for income tax expense Income from continuing operations (1) (Loss) income from discontinued operations, net of income tax expense Net income Less: Net income attributable to noncontrolling interests Net loss attributable to Surgical Care Affiliates Basic and diluted net loss per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates Discontinued operations attributable to Surgical Care Affiliates Net loss per share attributable to Surgical Care Affiliates Basic and diluted weighted average shares outstanding (in thousands) (2) Distribution paid per share on September 16, 2013 Facilities (at period end): Consolidated facilities Equity method facilities Managed-only facilities Total facilities
$
746.6 40.5 14.9 802.0 23.4
$
714.6 17.8 12.4 744.9 16.8
$
692.9 11.3 10.0 714.2 22.2
$
697.3 6.7 6.3 710.3 15.3
2009
$
678.7 4.0 3.8 686.5 10.5
277.7 175.2 131.8 42.9 27.0 15.0 — 0.1 669.8 155.6 60.4 10.3 (0.2) 12.3 72.7 12.6 60.1
241.8 170.1 118.5 41.6 26.8 13.2 1.1 (0.3) 612.7 148.9 58.8 — (0.3) 7.1 83.3 8.9 74.4
221.8 160.6 114.6 40.4 26.6 14.6 — (0.8) 577.9 158.5 56.0 — (0.4) (3.9) 106.8 20.3 86.5
216.6 172.6 112.9 37.4 27.8 13.9 — 0.4 581.5 144.1 52.6 — (1.6) (2.1) 95.2 14.5 80.7
218.4 161.6 113.0 36.6 28.0 14.4 0.1 (0.1) 572.0 125.0 53.6 — (1.3) 0.6 72.1 12.6 59.5
(7.4) 52.7 (104.0) $ (51.3)
$
(2.1) 72.3 (92.3) (20.0)
$
(3.0) 83.5 (93.2) (9.7)
$
(11.1) 69.6 (84.5) (14.9)
$
(2.4) 57.1 (82.6) (25.5)
$
(1.39)
$
(.59)
$
(.23)
$
(.14)
$
(.82)
$ $
(.23) (1.62)
$ $
(.07) (.66)
$ $
(.10) (.33)
$ $
(.39) (.53)
$ $
(.09) (.91)
$
73
31,688 2.47
30,340
29,347
28,144
28,129
87 60 30 177
87 52 8 147
94 44 4 142
95 23 5 123
105 19 1 125
Table of Contents
2013
Balance Sheet Data (at period end): Cash and cash equivalents Total current assets Total assets (3)
$
2012
December 31, 2011 (in millions)
$ 118.7 267.4 1,412.1
Current portion of long-term debt Long-term debt, net of current portion Total current liabilities Total liabilities (3)
23.2 649.7 197.6 984.5
15.2 774.5 175.2 1,070.4
16.2 769.1 148.9 1,030.6
7.5 673.4 133.6 897.5
6.7 671.4 121.9 869.0
Noncontrolling interests — redeemable
21.9
21.7
20.2
20.6
25.9
205.7 210.3 416.0
147.5 172.5 320.0
170.3 135.4 305.7
144.5 127.2 271.7
165.0 118.1 283.1
(1) (2) (3)
71.3 215.0 1,356.5
$
33.6 172.0 1,189.8
2009
85.8 234.9 1,422.4
Total Surgical Care Affiliates’ equity Noncontrolling interests — non-redeemable Total equity
$
2010
$
35.6 161.7 1,178.0
Loss from continuing operations attributable to Surgical Care Affiliates, which is income from continuing operations less net income attributable to noncontrolling interests, was $43.9 million, $17.9 million, $6.7 million, $3.8 million and $23.1 for years-ended December 31, 2013, 2012, 2011, 2010 and 2009, respectively. Calculated based on number of shares of common stock and vested RSUs that would have been outstanding as of December 31, 2012, 2011, 2010 and 2009, assuming our conversion from a Delaware limited liability company to a Delaware corporation. Our consolidated assets as of December 31, 2013 and December 31, 2012 include total assets of a VIE of $49.5 million and $28.2 million, respectively, which can only be used to settle the obligations of the VIE. Our consolidated total liabilities as of December 31, 2013 and December 31, 2012 include total liabilities of the VIE of $12.2 million and $1.4 million, respectively, for which the creditors of the VIE have no recourse to us, with the exception of $4.0 million of debt guaranteed by us at December 31, 2013. 74
Table of Contents Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Amounts in tables are in millions of U.S. dollars unless otherwise indicated)
This report contains certain forward-looking statements (all statements other than statements with respect to historical fact) within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forwardlooking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. Risk Factors, some of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events. Forward-looking statements and our liquidity, financial condition and results of operations may be affected by the risks set forth in Item 1A. Risk Factors or by other unknown risks and uncertainties. OVERVIEW We are a leading provider of surgical solutions to health systems and payors, providing high quality, cost-effective surgical care. For a substantial portion of the periods covered by our financial statements in this Annual Report on Form 10-K, we were a Delaware limited liability company that was formed with a focus on developing and operating a network of multi-specialty ASCs and surgical hospitals in the United States. However, on October 30, 2013, we converted from a Delaware limited liability company, previously named ASC Acquisition LLC, to a Delaware corporation. As of December 31, 2013, we operated in 34 states and had an interest in and/or operated 171 freestanding ASCs, five surgical hospitals and one sleep center with 11 locations. Of these 177 facilities, we consolidated the operations of 87 affiliated facilities, had 60 nonconsolidated affiliated facilities and held no ownership in 30 affiliated facilities that contract with us to provide management services only. In addition, at December 31, 2013, we provided perioperative consulting services to 14 facilities, which are not included in the facility count. With the exception of the managed-only facilities, the entities that own our facilities are structured as general partnerships, LPs, LLPs or LLCs in which either one of our subsidiaries or a joint venture is an owner and serves as the general partner, limited partner, managing member or member. Our partners or co-members in these entities are generally licensed physicians, hospitals or health systems. EXECUTIVE SUMMARY Our growth strategy continues to include growing the profits at our existing facilities, entering into strategic relationships with hospitals and health systems and making selective acquisitions of existing surgical facilities and groups of facilities. We took several steps during 2013 to optimize our portfolio by: •
acquiring a controlling interest in four ASCs, which we consolidate;
•
acquiring a noncontrolling interest in six ASCs and one surgical hospital that we hold as equity method investments;
•
entering into agreements to manage 19 ASCs and one sleep center with 11 locations;
•
placing two de novo facilities into operation, one that we consolidate and one that we hold as an equity method investment; 75
Table of Contents •
closing two non-strategic consolidated ASCs;
•
selling our interest in two consolidated ASCs and one nonconsolidated ASC;
•
terminating a management agreement with an ASC; and
•
increasing the number of relationships with not-for-profit health systems.
Our consolidated net patient revenues increased $32.0 million, or 4.5%, for the year-ended December 31, 2013 compared to the prior year. Factors which increased consolidated net patient revenues included improved rates paid under payor contracts, fee schedule increases and changes in case mix. Consolidated net patient revenues per case increased 6.1% as compared to the prior period. We do not consolidate 60 of the facilities affiliated with us because we do not hold a controlling equity interest in the partnerships that own those facilities. To assist management in analyzing our results of operations, including at our nonconsolidated facilities, we prepare and disclose a “systemwide” case volume statistic and certain supplemental “systemwide” growth measures, each of which treats our equity method facilities as if they were consolidated. While the revenues earned at our equity method facilities are not recorded in our consolidated financial statements, we believe systemwide net operating revenues growth and systemwide net patient revenue per case growth are important to understand our financial performance because they are used by management to help interpret the sources of our growth and provide management with a growth metric incorporating the revenues earned by all of our affiliated facilities, regardless of the accounting treatment. “Systemwide” is a non-GAAP measure which includes the results of both our consolidated and nonconsolidated facilities (without adjustment based on our percentage of ownership). For more information, please see “Our Consolidated Results and Results of Nonconsolidated Affiliates” on page 84. During the year-ended December 31, 2013, systemwide net operating revenues grew by 15.2% as compared to the prior year. Systemwide net patient revenues per case grew by 9.2% compared to the prior year. These increases are due to acquisitions of noncontrolling interests in ASCs since the prior period, coupled with improved rates paid under payor contracts, fee schedule increases and changes in case mix. At December 31, 2013, we held ownership interests in consolidated and nonconsolidated facilities in partnership with 30 different health systems and managed facilities with an additional 13 health systems. Our health system relationships include local health systems, regional health systems and national health systems. We typically have co-development arrangements with our health system partners to jointly develop a network of outpatient surgery centers in a defined geographic area. These co-development arrangements are an important source of differentiation and potential growth of our business. We expect our co-development and acquisition activity to continue with a major focus on creating partnerships with not-for-profit health systems as we continue to position ourselves as a partner of choice to physician groups and health systems. Our Consolidated Subsidiaries and Nonconsolidated Affiliates At facilities where we serve as an owner and day-to-day manager, we have significant influence over the operations of such facilities. When we have control of the facility, we account for our investment in the facility as a consolidated subsidiary. When this influence does not represent control of the facility, but we have the ability to exercise significant influence over operating and financial policies, we account for our investment in the facility under the equity method, and treat the facility as a nonconsolidated affiliate. Our net earnings from a facility are the same under either method, but the classification of those earnings in our consolidated statements of operations differs. For our consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses for these subsidiaries, after elimination of intercompany transactions and accounts. The net income attributable to owners of our consolidated subsidiaries, other than us, is classified within the line item Net income attributable to noncontrolling interests . 76
Table of Contents As of December 31, 2013, we consolidated six facilities into our financial results where we do not currently hold an equity ownership interest in the facility. All six facilities are majority-owned and controlled by a common parent company (the “future JV”). We hold a promissory note from the future JV that is convertible into equity of the future JV at our option upon the occurrence of the renegotiation of certain contractual arrangements. The promissory note has a fixed interest rate of 4% plus a variable component that is dependent on the earnings of the future JV. We are also party to management services agreements with the facilities controlled by the future JV. As a result of the financial interest in the earnings of the future JV held by us via the promissory note and the powers granted to us in the promissory note and the management services agreements, we have determined, under the Accounting Standards Codification Section 810, that the future JV is a VIE for which we are the primary beneficiary and as a result we consolidate these facilities into our financial results. For our nonconsolidated affiliates, our consolidated statements of operations reflect our earnings from such facilities in two line items: •
Equity in net income of nonconsolidated affiliates, which represents our combined share of the net income of each equity method facility that is based on such equity method facility’s net income and the percentage of such equity method facility’s outstanding equity interests owned by us; and
•
Management fee revenues , which represents our combined income from management fees that we earn from managing the day-today operations of the facilities that we do not consolidate for financial reporting purposes.
Our equity in net income of nonconsolidated affiliates is primarily a function of the performance of our nonconsolidated affiliates and our percentage of ownership interest in those affiliates. However, our net patient revenue and associated expense line items only contain the results from our consolidated facilities. As a result of this incongruity in our reported results, management uses a variety of supplemental information to analyze our results of operations, including: •
the results of operations of our consolidated subsidiaries and nonconsolidated affiliates;
•
our ownership share in the facilities we operate; and
•
facility operating indicators, such as systemwide net operating revenues growth, systemwide net patient revenues per case growth, same site systemwide net operating revenues growth and same site systemwide revenues per case growth.
While revenues of our nonconsolidated affiliates are not recorded in our net operating revenues, we believe this information is important in understanding our financial performance because these revenues are typically the basis for calculating the line item Management fee revenues and, together with the expenses of our nonconsolidated affiliates, are the basis for deriving the line item Equity in net income of nonconsolidated affiliates . As we execute on our strategy of partnering with health systems, we expect the number of our facilities that we account for as equity method facilities will increase relative to our total number of facilities. KEY MEASURES Facilities Changes in our ownership of individual facilities and related changes in how we account for such facilities drive changes in our consolidated results from period to period in several ways, including: •
Deconsolidations . As a result of a deconsolidation transaction, an affiliated facility that was previously consolidated becomes a nonconsolidated facility. Any income we earn, based upon our ownership percentage in the facility, is reported on a net basis in the line item Equity in net income of nonconsolidated affiliates , whereas prior to a deconsolidation transaction, the affiliated facility’s results were reported as part of our consolidated net operating revenues and the associated expense line items. 77
Table of Contents •
Consolidations . As a result of a consolidation transaction, an affiliated facility that was previously nonconsolidated and accounted for on an equity method basis becomes a consolidated facility. After consolidation, revenues and expenses of the affiliated facility are included as part of our consolidated results.
•
De novos . Where strategically appropriate, we invest, typically with a health system partner, in de novo facilities, which are newly developed ASCs. A de novo facility may be consolidated or nonconsolidated, depending on the circumstances.
•
Shifts in Ownership Percentage . Our net income is driven in part by our ownership percentage in a facility since a portion of the net income earned by the facility is attributable to any noncontrolling owners in the facility, even if we consolidate such facility. As a result of our partnerships with physicians, our percentage of ownership in a facility may shift over time, which may result in an increase or a decrease in the net income we earn from such facility.
We took several steps during 2013 to optimize our facility portfolio by acquiring, deconsolidating, placing de novo facilities into operation and closing or selling certain facilities. On June 1, 2013, we completed the acquisition of Health Inventures, LLC (“HI”) for a purchase price of $18.5 million. In the transaction, we acquired HI’s ownership interests in four ASCs and one surgical hospital and management agreements with 19 facilities that together are affiliated with 11 different health systems. The following table presents a breakdown of the changes in number of consolidated, nonconsolidated and managed-only facilities during the periods presented.
Facilities at Beginning of Period Consolidated Facilities: Equity Method Facilities: Managed-only Facilities: Total Facilities: Strategic Activities Undertaken Acquisitions Consolidated Facilities acquired: Noncontrolling interests acquired in facilities accounted for as equity method investments: Management agreements entered into (Managed-only): De novos Consolidated de novo facilities placed into operations: De novo facilities accounted for as equity method investments placed into operations: Consolidations / Deconsolidations Conversion transactions or contributions to joint ventures or other partnerships completed such that the facility is accounted for as a consolidated affiliate: Conversion transactions or contributions to joint ventures or other partnerships completed such that the facility is accounted for as an equity method investment: Changed to Managed-Only Facility Change to providing management services only: 78
During the YearEnded December 31,
During the YearEnded December 31,
During the YearEnded December 31,
2013
2012
2011
87 52 8 147
94 44 4 142
95 23 5 123
4
2
3
7 20
7 4
17 3
1
—
—
1
—
—
1
4
2
3
3
—
— 4 —
Table of Contents
Closures and Sales Consolidated Facilities sold: Noncontrolling interests in facilities accounted for as equity method investments sold: Consolidated Facilities closed: Equity Method Facilities closed: Management agreements exited from (Managed-only): Facilities at End of Period Consolidated Facilities: Equity Method Facilities: Managed-only Facilities: Total Facilities: Average Ownership Interest Consolidated Facilities: Equity Method Facilities:
During the YearEnded December 31,
During the YearEnded December 31,
During the YearEnded December 31,
2013
2012
2011
— — 2 —
3
—
1 3
— — —
— —
1
4
87 60 30 177
87 52 8 147
94 44 4 142
51.6% 25.0%
54.8% 27.7%
58.1% 29.4%
Revenues Our consolidated net operating revenues for the years-ended December 31, 2013, 2012 and 2011 were $802.0 million, $744.9 million and $714.2 million, respectively. Given the significant increase in the number of our nonconsolidated facilities, driven by the success of our health system and physician partnership growth strategy, we review nonconsolidated facility revenues and also manage our facilities utilizing certain supplemental systemwide growth metrics. The following table summarizes our systemwide net operating revenues growth, systemwide net patient revenues per case growth, same site systemwide revenue growth and same site systemwide net patient revenues per case growth.
2013
Systemwide net operating revenues growth (1) Systemwide net patient revenues per case growth (2) Same site systemwide net operating revenues growth (1)(3) Same site systemwide net patient revenues per case growth (2)(3) (1)
(2)
15.2% 9.2% 8.8% 6.0%
YEAR-ENDED DECEMBER 31, 2012
16.5% 7.5% 5.8% 4.1%
2011
17.0% 9.4% 5.5% 6.6%
The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results, rather only the net income earned from such facilities is reported on a net basis in the line item “ Equity in net income of nonconsolidated affiliates .” Because of this, management supplementally focuses on non-GAAP systemwide results, which measure results from all our facilities, including revenues from our consolidated facilities and our equity method facilities (without adjustment based on our percentage of ownership). We include management fee revenues from managed-only facilities in systemwide net operating revenues growth and same site net operating revenue growth, but not patient or other revenues from managed-only facilities (in which we hold no ownership interest). The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results; rather, only the net income earned from such facilities is reported on a net basis in the line item “ Equity in net income of nonconsolidated affiliates .” Because of this, management supplementally focuses on non-GAAP systemwide results, which measure results from all our facilities, including revenues from 79
Table of Contents
(3)
our consolidated facilities and our equity method facilities (without adjustment based on our percentage of ownership). We do not include facilities at which we hold no ownership interest and provide only management services in systemwide net patient revenues per case growth or same site systemwide net patient revenues per case growth. Same site refers to facilities that were operational in both the current and prior periods.
Year-Ended December 31, 2013 Compared to Year-Ended December 31, 2012 Our consolidated net operating revenues increased by $57.1 million, or 7.7%, for the year-ended December 31, 2013 to $802.0 million from $744.9 million for the year-ended December 31, 2012. Consolidated net patient revenues per case increased by 6.1% to $1,710 per case during the year-ended December 31, 2013 from $1,612 per case during the year-ended December 31, 2012. For the year-ended December 31, 2013, systemwide net operating revenues grew by 15.2% compared to the year-ended December 31, 2012. In addition, for the year-ended December 31, 2013, systemwide net patient revenues per case grew by 9.2% compared to the prior period. The table below quantifies several significant items impacting our period-over-period net operating revenues growth and net operating revenues growth of our nonconsolidated affiliates. Year-Ended December 31, 2013 Nonconsolidated Surgical Care Affiliates as Reported Under GAAP (in millions)
Total net operating revenues, year-ended December 31, 2012 (1)(2) Add: revenue from acquired facilities revenue from consolidations Less: revenue of disposed facilities revenue from deconsolidated facilities Adjusted base year total net operating revenues Increase from operations Non-facility based revenue Total net operating revenues, year-ended December 31, 2013: (1) (2)
$
$
744.9 31.4 5.2 — (26.9) 754.6 42.8 4.6 802.0
Affiliates
$
$
477.5 79.1 (5.2) (30.7) 26.9 547.6 56.7 1.5 605.8
$1.6 million in revenues have been reclassified from prior periods presented related to facilities accounted for as discontinued operations. Additions to revenue represent revenue from the acquisition or consolidation of facilities during the 12 months after the date of acquisition or consolidation, as applicable. Deductions from revenue represent revenue from disposition or deconsolidation of facilities that were owned or consolidated in a prior period but are not owned or consolidated at the end of the current period.
Year-Ended December 31, 2012 Compared to Year-Ended December 31, 2011 Our consolidated net operating revenues increased by $30.7 million, or 4.3%, for the year-ended December 31, 2012 to $744.9 million from $714.2 million for the year-ended December 31, 2011. Consolidated net patient revenues per case increased by 1.5% to $1,612 per case during 2012 from $1,589 per case during the prior period. For the year-ended December 31, 2012, systemwide net operating revenues grew by 16.5% compared to the year-ended December 31, 2011. In addition, for the year-ended December 31, 2012, systemwide net patient revenues per case grew by 7.5% compared to the year-ended December 31, 2011. 80
Table of Contents The table below quantifies several significant items impacting our period-over-period net operating revenues growth and net operating revenues growth of our nonconsolidated affiliates. Year-Ended December 31, 2012 Nonconsolidated Surgical Care Affiliates as Reported Under GAAP (in millions)
Total net operating revenues, year-ended December 31, 2011 (1)(2) Add: revenue from acquired facilities revenue from consolidations Less: revenue of disposed facilities revenue from deconsolidated facilities Adjusted base year total net operating revenues Increase from operations Non-facility based revenue Total net operating revenues, year-ended December 31, 2012: (1) (2)
$
$
714.2 4.5 12.6 — (22.1) 709.2 26.7 9.0 744.9
Affiliates
$
$
334.8 106.6 (12.6) — 22.1 450.9 25.9 0.7 477.5
$1.5 million in revenues have been reclassified from prior periods presented related to facilities accounted for as discontinued operations. Additions to revenue represent revenue from the acquisition or consolidation of facilities during the 12 months after the date of acquisition or consolidation, as applicable. Deductions from revenue represent revenue from disposition or deconsolidation of facilities that were owned or consolidated in a prior period but are not owned or consolidated at the end of the current period.
Summary of Key Line Items Net Operating Revenues The vast majority of our net operating revenues consist of net patient revenues from the facilities we consolidate for financial reporting purposes. Net patient revenues are derived from fees we collect from insurance companies, Medicare, state workers’ compensation programs, patients and other payors in exchange for providing the facility and related services and supplies a physician requires to perform a surgical procedure. Our net operating revenues also includes the line item “ Management fee revenues, ” which includes fees we earn from managing the facilities that we do not consolidate for financial reporting purposes. The line item “ Other revenues ” is composed of other ancillary services and fees received for anesthesia services. The physicians who perform procedures at our facilities bill and collect from their patients and other payors directly for their professional services, and their revenues from such professional services are not included in our net operating revenues. Net Patient Revenues Net patient revenues are recorded during the period in which the healthcare services are provided, based upon the estimated amounts due from insurance companies, patients and other government and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), state workers’ compensation programs and employers. 81
Table of Contents The following table presents a breakdown by payor source of the percentage of net patient revenues for the periods presented: Consolidated Facilities
2013
Managed care and other discount plans Medicare Workers’ compensation Patients and other third-party payors Medicaid Total
60% 20 11 6 3 100%
YEAR-ENDED DECEMBER 31, 2012
61% 21 10 5 3 100%
2011
62% 20 10 4 4 100%
Nonconsolidated Facilities
2013
Managed care and other discount plans Medicare Workers’ compensation Patients and other third-party payors Medicaid Total
77% 15 4 2 2 100%
YEAR-ENDED DECEMBER 31, 2012
73% 14 8 2 3 100%
2011
69% 15 10 3 3 100%
The majority of our net patient revenues are related to patients with commercial health insurance coverage. The reimbursement rates we have been able to negotiate, on an average basis across our portfolio, have held relatively stable. Medicare accounts for 20%, 21% and 20% of our net patient revenues for the years-ended December 31, 2013, 2012 and 2011, respectively. The Medicare program is subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and funding reductions, all of which may adversely affect the level of payments to our facilities. Significant spending reductions mandated by the BCA impacting the Medicare program went into effect on March 1, 2013. Under the BCA, the percentage reduction for Medicare may not be more than 2% for a fiscal year, with a uniform percentage reduction across all providers. The impact from these spending reductions has not been material to our results. For the year-ended December 31, 2013, our facilities located in North Carolina, California and Texas collectively represented approximately 14%, 14% and 12%, respectively, of our net patient revenues. Additionally, our facilities located in each of Alabama, Alaska, Connecticut, Florida and Idaho represented in excess of 5% of our net patient revenues for the year-ended December 31, 2013. Of our 60 nonconsolidated facilities accounted for as equity method investments, as of December 31, 2013, 26 of these facilities were located in California and 12 of these facilities were located in Indiana. 82
Table of Contents Operating Expenses Salaries and Benefits Salaries and benefits represent the most significant cost to us and include all amounts paid to full and part-time teammates, including all related costs of benefits provided to such teammates. Salaries and benefits expense represented 34.6%, 32.5% and 31.1% of our net operating revenues for the years-ended December 31, 2013, 2012 and 2011, respectively. Supplies Supplies expense includes all costs associated with medical supplies used while providing patient care at our consolidated facilities. Our supply costs primarily include sterile disposables, pharmaceuticals, implants and other similar items. Supplies expense represented 21.8%, 22.8% and 22.5% of our net operating revenues for the years-ended December 31, 2013, 2012 and 2011, respectively, making it important for our facilities to appropriately manage these costs. Supplies expense is typically closely related not only to case volume but also to case mix, as an increase in the acuity of cases and the use of implants in those cases tends to drive supplies expense higher. Other Operating Expenses Other operating expenses consists primarily of expenses related to insurance premiums, contract services, legal fees, repairs and maintenance, professional and licensure dues, office supplies and miscellaneous expenses. Other operating expenses do not generally correlate with changes in net patient revenues. Occupancy Costs Occupancy costs include facility rent, utility and maintenance expense. Occupancy costs do not generally correlate with changes in net patient revenues. Provision for Doubtful Accounts We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts we estimate we will collect. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, aging of accounts receivable, payor mix or trends in Federal or state governmental healthcare coverage. Provision for Income Tax Expense Because we have a full valuation allowance booked against our net deferred tax assets, our tax expense is generated primarily from amortization of tax goodwill and write-offs of tax goodwill resulting from the syndication of partnership interests. Our tax expense therefore bears no relationship to pre-tax income, and our effective tax rate will fluctuate from period to period, depending upon the amount of tax expense from amortization and write-offs of goodwill. Since substantially all of our facilities are organized as general partnerships, limited partnerships, limited liability partnerships or limited liability companies, which are not taxed at the entity level for federal income tax purposes and are only taxed at the entity level in five states for state income tax purposes, substantially all of our tax expense is attributable to Surgical Care Affiliates. Net Loss Attributable to Surgical Care Affiliates Net loss attributable to Surgical Care Affiliates is derived by subtracting net income attributable to noncontrolling interests from net income. Net income includes certain revenues and expenses that are incurred 83
Table of Contents only through our wholly owned subsidiaries and therefore do not impact net income attributable to noncontrolling interests. These revenues and expenses include management fee revenues, interest expense related to Surgical Care Affiliates’ debt, losses or gains on sale of investments and provision for income taxes. In periods where net income is negatively affected by these non-shared revenues and expenses, the deduction of net income attributable to noncontrolling interests from net income can result in a net loss attributable to Surgical Care Affiliates in periods where net income is positive. Summary Results of Operations Year-Ended December 31, 2013 Compared to Year-Ended December 31, 2012 and December 31, 2011 Our Consolidated Results and Results of Nonconsolidated Affiliates The following tables show our results of operations and the results of operations of our nonconsolidated affiliates for the years-ended December 31, 2013, 2012 and 2011.
2013 As Reported Under GAAP
Net operating revenues: Net patient revenues Management fee revenues Other revenues Total net operating revenues Equity in net income of nonconsolidated affiliates (2) Operating expense: Salaries and benefits Supplies Other operating expenses Depreciation and amortization Occupancy costs Provision for doubtful accounts Impairment of intangible and long-lived assets Loss (gain) on disposal of assets Total operating expenses Operating income Interest expense Loss from extinguishment debt Interest income (3) Loss (gain) on sale of investments Income from continuing operations before income tax expense Provision for income tax expense (4)
Income from continuing operations Loss from discontinued operations, net of income tax expense Net income
$
746.6 40.5 14.9 802.0
YEAR-ENDED DECEMBER 31, 2012 2011 NonNonNonconsolidated As consolidated As consolidated Reported Reported Under GAAP Under GAAP Affiliates (1) Affiliates (1) Affiliates (1) (in millions, except cases and facilities in actual amounts)
$
600.6 — 5.2 605.8
$
714.6 17.8 12.4 744.9
$
474.4 — 3.2 477.5
$
692.9 11.3 10.0 714.2
$
332.6 — 2.2 334.8
23.4
—
16.8
—
22.2
—
277.7 175.2 131.8 42.9 27.0 15.0
128.9 99.6 89.3 17.3 22.7 10.4
241.8 170.1 118.5 41.6 26.8 13.2
108.8 78.8 68.8 14.0 20.8 6.3
221.8 160.6 114.6 40.4 26.6 14.6
80.5 57.9 49.1 11.4 14.4 6.5
— 0.1 669.8 155.6 60.4 10.3 (0.2) 12.3
— 0.3 368.5 237.3 1.7 — (0.1) —
1.1 (0.3) 612.7 148.9 58.8 — (0.3) 7.1
— 0.1 297.6 179.9 1.6 — (0.1) —
— (0.8) 577.9 158.5 56.0 — (0.4) (3.9)
— (0.1) 219.6 115.2 1.5 — (0.1) —
72.7
235.6
83.3
178.4
106.8
113.8
12.6 60.1
0.1 235.5
8.9 74.4
0.1 178.4
20.3 86.5
0.1 113.8
— 235.5
(2.1) 72.3
— 178.4
(3.0) 83.5
(7.4) 52.7
$
84
$
$
— 113.8
Table of Contents
2013 As Reported Under GAAP
Less: Net income attributable to noncontrolling interests Net loss attributable to Surgical Care Affiliates Equity in net income of nonconsolidated affiliates (2) Other Data (5) Cases — consolidated facilities (6) Cases — equity facilities (7) Consolidated facilities Equity method facilities Managed-only facilities Total facilities (1)
(2)
(3) (4) (5) (6) (7)
YEAR-ENDED DECEMBER 31, 2012 2011 NonNonNonconsolidated As consolidated As consolidated Reported Reported Affiliates (1) Under GAAP Affiliates (1) Under GAAP Affiliates (1) (in millions, except cases and facilities in actual amounts)
(104.0) $
(92.3)
(51.3)
$ $
(20.0)
23.4
436,560 258,942 87 60 30 177
(93.2) $ $
443,361 226,860 87 52 8 147
(9.7)
16.8
$
22.2
436,207 184,860 94 44 4 142
The figures in this column, except within the line item Equity in net income of nonconsolidated affiliates, are non-GAAP presentations but management believes they provide further useful information about our equity method investments. The revenue, expense and operating income line items included in this column represent the results of our facilities that we account for as an equity method investment on a combined basis, without taking into account our percentage of ownership interest. The line item Equity in net income of nonconsolidated affiliates represents the total net income earned by us from our facilities accounted for as an equity method investment, which is computed as our percentage of ownership interest in the facility (which differs among facilities) multiplied by the net income earned by such facility, adjusted for basis differences such as amortization and other than temporary impairment charges, as described below. For the years-ended December 31, 2013, 2012 and 2011 we recorded amortization expense of $25.9 million, $20.3 million and $10.1 million, respectively, for definite-lived intangible assets attributable to equity method investments within Equity in net income of nonconsolidated affiliates. For the years-ended December 31, 2013 and 2012 we recorded other than temporary impairment charges of $6.1 million and $9.2 million, respectively, within the line item Equity in net income of nonconsolidated affiliates. There was no such impairment charge for the year-ended December 31, 2011. Interest income of nonconsolidated affiliates was $0.060 million, $0.090 million and $0.067 million for the years-ended December 31, 2013, 2012 and 2011, respectively. Provision for income tax expense for nonconsolidated affiliates was $0.071 million, $0.060 million and $0.060 million for the years-ended December 31, 2013, 2012 and 2011, respectively. Case data is presented for the years-ended December 31, 2013, 2012 and 2011, as applicable. Facilities data is presented as of December 31, 2013, 2012 and 2011, as applicable. Represents cases performed at consolidated facilities. The number of cases performed at our facilities is a key metric utilized by us to regularly evaluate performance. Represents cases performed at equity method facilities. The number of cases performed at our facilities is a key metric utilized by us to regularly evaluate performance.
Year-Ended December 31, 2013 Compared to Year-Ended December 31, 2012 Net Operating Revenues Our consolidated net operating revenues increased $57.1 million, or 7.7%, for the year-ended December 31, 2013 to $802.0 million from $744.9 million for the year-ended December 31, 2012. The main factors that contributed to this increase were increased rates paid under certain payor contracts, revenues earned from a 85
Table of Contents facility for which a consolidation transaction was completed during the second quarter of 2012, revenues earned from facilities acquired since December 31, 2012 and increases in acuity case mix. Consolidated net patient revenues per case grew by 6.1% to $1,710 per case for the yearended December 31, 2013 from $1,612 per case during the prior period reflecting higher acuity case mix. During this same period, the number of cases at our consolidated facilities decreased to 436,560 cases during the year-ended December 31, 2013 from 443,361 cases during the yearended December 31, 2012 and our number of consolidated facilities were 87 facilities as of December 31, 2013 and 2012. For the year-ended December 31, 2013, systemwide net operating revenues grew by 15.2% compared to the year-ended December 31, 2012. The growth in systemwide net operating revenues is largely due to the acquisition of noncontrolling interests in seven facilities accounted for as equity method investments and four consolidated affiliates since the prior period and increased rates earned under certain payor contracts. The increase is also attributable to two de novo facilities, one of which is an equity method investment and the other one is a consolidated affiliate, which were placed into operations since December 31, 2012. These factors are partially offset by the sale of our interest in a nonconsolidated facility completed in 2012. In addition, for the year-ended December 31, 2013, systemwide net patient revenues per case grew by 9.2% compared to the year-ended December 31, 2012, which is due to similar factors as described above. Equity in Net Income of Nonconsolidated Affiliates Equity in net income of nonconsolidated affiliates increased $6.6 million, or 39.3%, to $23.4 million during the year-ended December 31, 2013 from $16.8 million during the year-ended December 31, 2012. This increase was primarily due to the acquisition of several noncontrolling interests in facilities since December 31, 2012 and the deconsolidation of two facilities completed during 2013 (i.e., the facilities became equity method facilities rather than consolidated facilities). After deconsolidation, the results of operations of the facilities were reported net in Equity in net income of nonconsolidated affiliates , whereas prior to deconsolidation, those results were reported within the consolidated revenue and expense line items. The increase was partially offset by $6.1 million of impairments related to five equity method facilities during 2013 and by the conversion of a facility that was previously accounted for as an equity method facility to a consolidated facility during the second quarter of 2012. After the date of conversion, the results of this facility were reported within our consolidated revenue and expense line items, whereas prior to the conversion, the results of operations at this facility were reported net in the line item Equity in net income of nonconsolidated affiliates . The $6.1 million of impairment recorded to our investments in nonconsolidated affiliates was due to a decline in the expected future cash flows of five nonconsolidated affiliates that we determined to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . This decline in the expected future cash flows was caused by events specific to each impacted facility, as further described below. The impairments included: •
a $1.5 million impairment on our investment in Wausau Surgery Center, L.P. related to an offer received to purchase our interest in the facility;
•
a $2.3 million impairment on our investment in Premier Surgery Center of Louisville, L.P. related to insufficient forecasted growth at the facility;
•
a $0.9 million impairment on our investment in Kerlan-Jobe Surgery Center, LLC related to a buy-out agreement for the facility;
•
a $0.8 million impairment on our investment in Surgery Center of Fort Collins, LLC related to insufficient forecasted growth at the facility; and
•
a $0.6 million impairment on our investment in Surgery Center of Lexington, LLC related to insufficient forecasted growth at the facility.
Additionally, changes in our ownership amounts in equity method facilities and changes in the profitability of those equity method facilities also impacted Equity in net income of nonconsolidated affiliates . 86
Table of Contents During the year-ended December 31, 2013, we recorded $25.9 million of amortization expense for definite-lived intangible assets attributable to equity method investments. This expense was included in the line item Equity in net income of nonconsolidated affiliates in our consolidated financial statements. We recorded $20.3 million of amortization expense during the year-ended December 31, 2012. Salaries and Benefits Salaries and benefits expense increased $35.9 million, or 14.8%, to $277.7 million for the year-ended December 31, 2013 from $241.8 million for the year-ended December 31, 2012. The increase in salary and benefits expense is primarily due to the addition of new teammates in connection with acquisitions as well as the payment of a cash bonus to eligible holders of vested options and restricted equity units (the “2013 Special Cash Bonus Payment”) of approximately $2.46 per vested option or restricted equity unit, as applicable, recorded during the third quarter of 2013, resulting in a total bonus payment of $4.6 million. Salaries and benefits also increased as a result of the addition of the expenses associated with existing teammates as a result of the consolidation of previously nonconsolidated affiliates. Supplies Supplies expense increased $5.1 million, or 3.0%, to $175.2 million for the year-ended December 31, 2013 from $170.1 million for the year-ended December 31, 2012. This increase in supplies expense is primarily attributable to changes in our case mix, in particular an increase in the number of orthopedic and ophthalmology cases performed at our facilities, which tend to require higher cost supplies and implants. Supplies expense per case increased by 4.6% during the year-ended December 31, 2013, as compared to the prior year, which is attributable to changes in our case mix as well as inflationary increases to supply costs. Other Operating Expenses Other operating expenses increased $13.3 million, or 11.2%, to $131.8 million for the year-ended December 31, 2013 from $118.5 million for the year-ended December 31, 2012. This increase is primarily attributable to the incurrence of certain additional overhead costs resulting from our organizational growth, partially offset by our efforts to manage and decrease existing overhead operating expenses. Depreciation and Amortization Depreciation and amortization expense increased $1.3 million, or 3.1%, to $42.9 million for the year-ended December 31, 2013 from $41.6 million for the year-ended December 31, 2012, primarily due to the addition of new capitalized assets during the year, partially offset by the conversion of two consolidated facilities to equity method investments. Occupancy Costs Occupancy costs remained relatively steady at $27.0 million during the year-ended December 31, 2013 as compared to $26.8 million during the year-ended December 31, 2012. Provision for Doubtful Accounts The provision for doubtful accounts increased $1.8 million, or 13.6%, to $15.0 million for the year-ended December 31, 2013 from $13.2 million during the year-ended December 31, 2012, however it remains consistent as a percentage of net patient revenues at approximately 2.0%. Interest Expense Interest expense increased $1.6 million, or 2.7%, to $60.4 million for the year-ended December 31, 2013 as compared to $58.8 million during the year-ended December 31, 2012 due to the de-designation of interest rate 87
Table of Contents swaps as cash flow hedges partially offset by interest savings from the refinancing of certain of our debt instruments in 2013, including the redemption of all of our outstanding senior notes and senior subordinated notes. Loss (Gain) on Sale of Investments We recognized a loss on sale of investments of $12.3 million for the year-ended December 31, 2013 and a loss on sale of investments of $7.1 million during the year-ended December 31, 2012. The loss during the year-ended December 31, 2013 was recorded in connection with the sale of two consolidated affiliates, a deconsolidation transaction and the consolidation of a previously nonconsolidated affiliate. The loss in 2012 was related to the divestiture of our interest in a nonconsolidated affiliate and the deconsolidation of a previously consolidated affiliate, which was partially offset by a gain from the consolidation of a previously nonconsolidated affiliate. Provision for Income Tax Expense For the year-ended December 31, 2013, income tax expense was $12.6 million, representing an effective tax rate of 17.4%, compared to an expense of $8.9 million, representing an effective tax rate of 10.6% for the year-ended December 31, 2012. The $12.6 million in expense for the year-ended December 31, 2013 includes $11.7 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, $0.2 million of current federal income tax attributable to noncontrolling interests, and $0.7 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.4 million attributable to noncontrolling interests. The $8.9 million in expense for the yearended December 31, 2012 included $8.4 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, and $0.5 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.2 million attributable to noncontrolling interests. Because we have a full valuation allowance booked against our net deferred tax assets, our tax expense is generated primarily from amortization of tax goodwill and write-offs of tax goodwill resulting from the syndication of partnership interests. Our tax expense therefore bears no relationship to pre-tax income, and our effective tax rate will fluctuate from period to period, depending upon the amount of tax expense from amortization and write-offs of goodwill. On a quarterly basis, we assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative. Our most recent operating performance, the scheduled reversal of temporary differences and our forecast of taxable income in future periods are important considerations in our assessment. Management has considered all positive and negative evidence available at this time and has concluded that a full valuation allowance continues to be appropriate as of December 31, 2013. We continue to closely monitor actual and forecasted earnings and, if there is a change in management’s assessment of the amount of deferred income tax assets that is realizable, adjustments to the valuation allowance will be made in future periods. As of December 31, 2013, our valuation allowance was $166.1 million. See “Risk Factors — Risks Related to Our Business — We may not be able to fully realize the value of our net operating loss carryforwards.” Net income attributable to noncontrolling interests Net income attributable to noncontrolling interests increased $11.7 million, or 12.7%, to $104.0 million for the year-ended December 31, 2013 from $92.3 million for the year-ended December 31, 2012. The increase in our consolidated net operating revenues, as described above, drove an increase in consolidated facilities’ net income. Most of our consolidated facilities include noncontrolling owners. An increase in the earnings of these facilities resulted in an increase in net income attributable to noncontrolling interests. This increase was partially offset by the deconsolidation of two facilities in 2013. 88
Table of Contents Net loss attributable to Surgical Care Affiliates Net loss attributable to Surgical Care Affiliates increased $31.3 million to $51.3 million for the years-ended December 31, 2013 from $20.0 million for the year-ended December 31, 2012. While our facilities’ revenue and operating income increased during the year-ended December 31, 2013, the increase in revenues and operating income was more than offset by increases in net income attributable to noncontrolling interests, loss from extinguishment of debt and increases in salaries and benefits. Year-Ended December 31, 2012 Compared to Year-Ended December 31, 2011 Net Operating Revenues Our consolidated net operating revenues increased by $30.7 million, or 4.3%, for the year-ended December 31, 2012 to $744.9 million from $714.2 million for the year-ended December 31, 2011. The main factors that contributed to this increase were revenues earned from a facility for which a consolidation transaction was completed during the second quarter of 2012, increased rates earned under certain payor contracts and a change in case mix. These factors were partially offset by the conversion of one facility from a consolidated facility to an equity method facility during 2012 and the conversion of one facility to an equity method facility during 2011. Consolidated net patient revenues per case increased by 1.5% to $1,612 per case for the year-ended December 31, 2012 from $1,588 per case during the prior period. During this same period, the number of cases at our consolidated facilities increased to 443,361 cases during the year-ended December 31, 2012 from 436,207 cases during the year-ended December 31, 2011, while our number of consolidated facilities decreased to 87 facilities as of December 31, 2012 from 94 facilities as of December 31, 2011. Our consolidated management fee revenues increased $6.5 million, or 57.5%, for the year-ended December 31, 2012 to $17.8 million from $11.3 million in the year-ended December 31, 2011. The increase in consolidated management fee revenues results primarily from the inclusion of a full year of management fee revenue from a nonconsolidated investment that was made in July 2011, whereas in 2011 only a half year of such revenues were included in our results, and an increase in our number of managed equity method facilities as compared to the prior year. For the year-ended December 31, 2012, systemwide net operating revenues grew by 16.5% compared to the year-ended December 31, 2011. The growth in systemwide net patient revenues is due largely to the inclusion of a full year of revenue earned from acquisitions made in 2011 and from the acquisition of two consolidated facilities and noncontrolling interests in seven facilities accounted for as equity investments since the prior period, increased rates earned under certain payor contracts and changes in case mix. In addition, for the year-ended December 31, 2012, systemwide net patient revenues per case grew by 7.4% compared to the year-ended December 31, 2011, which is due to similar factors as described above. Equity in Net Income of Nonconsolidated Affiliates Equity in net income of nonconsolidated affiliates decreased by $5.4 million, or 24.3%, to $16.8 million for the year-ended December 31, 2012 from $22.2 million for the year-ended December 31, 2011. This decrease was primarily due to impairment charges totaling $9.2 million recorded during 2012 on our investments in nonconsolidated affiliates due to a decline in the expected future cash flows of five nonconsolidated affiliates that we determined to be other than temporary. This decline in the expected future cash flows was caused by events specific to each impacted facility, as further described below. We do not believe that the impairments at these facilities are indicative of any overall market trends or uncertainties in our business. The impairments included: •
a $1.1 million impairment on our investment in Pueblo Ambulatory Surgery Center LLC related to declining volumes and earnings at the facility;
•
a $3.3 million impairment on our investment in Premier Surgery Center of Louisville, L.P. related to insufficient forecasted growth at the facility;
•
a $1.7 million impairment on our investment in Endoscopy Center West, LLC related to a buy-out offer received for our interest in the facility; 89
Table of Contents •
a $0.4 million impairment on our investment in Kerlan-Jobe Surgery Center, LLC related to a buy-out agreement for the facility; and
•
a $2.7 million impairment on our investment in Surgical Center at Premier, LLC related to an estimated valuation obtained for the facility in connection with consideration of a new health system partner.
The fair value of our investments in nonconsolidated affiliates is determined using discounted cash flows or earnings, estimates or sales proceeds. No such impairment charges were recorded during the year-ended December 31, 2011. Also contributing to the decrease in equity in net income of nonconsolidated affiliates was the conversion of a facility that was previously accounted for as an equity method investment to a consolidated facility during the second quarter of 2012. After the date of conversion, the results of such facility were reported in the our consolidated revenue and expense line items, whereas prior to the conversion, the results of operations at this facility were reported on a net basis in the line item Equity in net income of nonconsolidated affiliates. These factors were partially offset by having a full year of equity income from certain large nonconsolidated affiliates acquired in 2011 and the acquisition of seven equity method facilities during 2012. Also, during the first quarter of 2012, we deconsolidated one previously consolidated facility to an equity method facility. After the deconsolidation, the results of operations for the affected facility are reported on a net basis in the line item Equity in net income of nonconsolidated affiliates , whereas prior to deconsolidation, the facility’s results were reported in our consolidated net operating revenues and the associated expense line items. Additionally, changes in our percentage of ownership in our equity method facilities and changes in the profitability of those equity method facilities also impacted Equity in net income of nonconsolidated affiliates . During the year-ended December 31, 2012, we recorded $20.3 million of amortization expense for definite-lived intangible assets attributable to equity method investments. This expense was included in the line item Equity in net income of nonconsolidated affiliates in our consolidated financial statements. We recorded $10.1 million of amortization expense during the year-ended December 31, 2011. Salaries and Benefits Salaries and benefits expense increased $20.0 million, or 9.0%, to $241.8 million for the year-ended December 31, 2012 from $221.8 million for the year-ended December 31, 2011. The increase in salary and benefits expense is primarily a result of our adding teammates to support our new health system relationships and in connection with acquisitions of new facilities. In addition, this increase is also in part driven by an increase in total facility labor costs resulting largely from increased case volumes. Supplies Supplies expense increased $9.5 million, or 5.9%, to $170.1 million for the year-ended December 31, 2012 from $160.6 million for the year-ended December 31, 2011. The increase in supplies expense is primarily attributable to pharmaceutical shortages, a shift in case mix and inflation, which was partially offset by the positive impact of our various supply chain initiatives, designed to improve our purchasing power and negotiate more favorable pricing from key vendors. Supplies expense per case increased by 4.1% during the year-ended December 31, 2012, as compared to the prior year, which was also primarily due to similar factors. Other Operating Expenses Other operating expenses increased $3.9 million, or 3.4%, to $118.5 million for the year-ended December 31, 2012 from $114.6 million for the year-ended December 31, 2011. This increase is primarily 90
Table of Contents attributable to the incurrence of certain additional overhead costs resulting from our organizational growth, partially offset by our efforts to manage and decrease existing overhead operating expenses and the release of certain litigation and general and professional liability reserves. Depreciation and Amortization Depreciation and amortization expense increased $1.2 million, or 3.0%, to $41.6 million for the year-ended December 31, 2012 from $40.4 million for the year-ended December 31, 2011, primarily due to the addition of new capitalized assets during the year, partially offset by the conversion of one consolidated facility to an equity method investment. Occupancy Costs Occupancy costs remained relatively steady at $26.8 million during the year-ended December, 31, 2012 as compared to $26.6 million during the year-ended December, 31, 2011. Provision for Doubtful Accounts The provision for doubtful accounts decreased $1.4 million, or 9.6%, to $13.2 million for the year-ended December 31, 2012, from $14.6 million for the year-ended December 31, 2011, primarily as a result of improved collection of accounts receivables. Impairment of Intangible and Long-Lived Assets During 2012 and 2011, we examined our long-lived assets for impairment due to facility closings and facilities experiencing cash flows insufficient to recover the net book value of our long-lived assets. Based upon such review, we recorded $1.1 million of impairment charges during the year-ended December 31, 2012. No material impairment charges were recorded during the year-ended December 31, 2011. Loss (Gain) on Sale of Investments We recorded a loss on sale of investments of $7.1 million during 2012, compared to a gain of $3.9 million for 2011. The loss in 2012 was related to the divestiture of our interest in a nonconsolidated affiliate and the deconsolidation of a previously consolidated affiliate, which was partially offset by a gain from the consolidation of a previously nonconsolidated affiliate. The gain in 2011 was primarily related to deconsolidation transactions. Provision for Income Tax Expense For the year-ended December 31, 2012, income tax expense was $8.9 million, representing an effective tax rate of 10.6%, compared to an expense of $20.3 million, representing an effective tax rate of 19.0%, for the year-ended December 31, 2011. The $8.9 million in expense for the year-ended December 31, 2012 includes $8.4 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, and $0.5 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.2 million attributable to noncontrolling interests. The $20.3 million in expense for the year-ended December 31, 2011 included $19.9 million attributable to the tax amortization of goodwill, an indefinite-lived intangible, and $0.4 million of state income taxes accrued by subsidiaries with separate state tax filing requirements, including $0.2 million attributable to noncontrolling interests. See “Risk Factors — Risks Related to Our Business — We may not be able to fully realize the value of our net operating loss carryforwards.” Because we have a full valuation allowance booked against our net deferred tax assets, our tax expense is generated primarily from amortization of tax goodwill and write-offs of tax goodwill resulting from the syndication of partnership interests. Our tax expense therefore bears no relationship to pre-tax income, and our effective tax rate will fluctuate from period to period, depending upon the amount of tax expense from amortization and write-offs of goodwill. 91
Table of Contents On a quarterly basis, we assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative. Our most recent operating performance, the scheduled reversal of temporary differences and our forecast of taxable income in future periods are important considerations in our assessment. Management considers all positive and negative evidence available, and concluded that a full valuation allowance was appropriate as of December 31, 2012. As of December 31, 2012, our valuation allowance was $151.8 million. See “Risk Factors — Risks Related to Our Business — We may not be able to fully realize the value of our net operating loss carryforwards.” Net income attributable to noncontrolling interests Net income attributable to noncontrolling interests decreased $0.9 million, or 1.0%, to $92.3 million for the year-ended December 31, 2012 from $93.2 million for the year-ended December 31, 2011. The increase in our consolidated net operating revenues, as described above, was more than offset by an increase in operating expenses. Most of our consolidated facilities include noncontrolling owners. A decrease in the earnings of these facilities resulted in a decrease in net income attributable to noncontrolling interests. Net loss attributable to Surgical Care Affiliates Net loss attributable to Surgical Care Affiliates increased $10.3 million, or 106.2%, to $20.0 million for the year-ended December 31, 2012 from $9.7 million for the year-ended December 31, 2011. While our facilities’ revenue increased, lower equity in net income of nonconsolidated affiliates, higher operating expenses and higher loss on sale of investments drove the increase in net loss attributable to Surgical Care Affiliates. Adjusted EBITDA-NCI and Adjusted Net Income Reconcilements The following table represents the reconciliation of net income to Adjusted EBITDA-NCI and of net loss attributable to Surgical Care Affiliates to Adjusted Net Income for the periods indicated below: 2013
2012
2011
$ 52.7
$ 72.3
$ 83.5
Adjusted EBITDA-NCI:
Net income Plus (minus): Interest expense, net Provision for income tax expense Depreciation and amortization Loss from discontinued operations, net Equity method amortization expense (a) Loss (gain) on sale of investments Loss on extinguishment of debt Asset impairments Loss (gain) on disposal of assets IPO related expense (b) Stock compensation expense (c) Adjusted EBITDA (Minus): Net income attributable to noncontrolling interests Adjusted EBITDA-NCI 92
60.2 12.6 42.9 7.4 25.9 12.3 10.3 6.1 0.1 9.1 7.3 246.9
58.5 8.9 41.6 2.1 20.3 7.1 — 10.2 (0.3) — 1.7 222.4
55.6 20.3 40.4 3.0 10.1 (3.9) — — (0.8) — 1.7 209.9
(104.0) $ 142.9
(92.3) $130.1
(93.2) $116.7
Table of Contents 2013
2012
2011
$(51.3)
$(20.0)
$ (9.7)
15.4 10.3 6.1 6.7 7.4 12.3 0.1 25.9 9.1 7.3 $ 49.3
7.4 — 10.2 4.9 2.1 7.1 (0.3) 20.3 — 1.7 $ 33.4
22.2 — — 5.5 3.0 (3.9) (0.8) 10.1 — 1.7 $28.1
Adjusted Net Income:
Net loss attributable to Surgical Care Affiliates Plus (minus) Change in deferred income tax Loss on extinguishment of debt Asset impairments Amortization expense Loss from discontinued operations, net Loss (gain) on sale of investments Loss (gain) on disposal of assets Equity method amortization expense (a) IPO related expense (b) Stock compensation expense (c) Adjusted Net Income (a) (b)
(c)
For the years-ended December 31, 2013, December 31, 2012 and December 31, 2011, we recorded $25.9 million, $20.3 million and $10.1 million, respectively, of amortization expense for definite-lived intangible assets attributable to equity method investments. These expenses are included in Equity in net income of nonconsolidated affiliates in our consolidated financial statements. IPO related expense includes an $8.0 million fee paid to TPG Capital pursuant to the Management Services Agreement (as defined herein) at the closing of our initial public offering in November 2013. After the fee was paid, the Management Services Agreement was terminated. See “Certain Relationships and Related Party Transactions — Management Services Agreement” for additional information regarding the Management Services Agreement. Represents stock-based compensation expense comprised of $2.7 million non-cash expense and $4.6 million in a non-recurring cash bonus paid on vested awards in the fourth quarter of 2013.
Results of Discontinued Operations We have closed or sold certain facilities that qualify for reporting as discontinued operations. The operating results of discontinued operations were as follows:
Net operating revenues Costs and expenses (Loss) gain on sale of investments or closures (Loss) income from discontinued operations Income tax (expense) benefit Net loss from discontinued operations
2013
YEAR-ENDED DECEMBER 31, 2012
2011
$ 4.1 (5.4) (2.5) (3.8) (3.6) $(7.4)
$ 16.6 (17.9) (1.8) (3.1) 1.0 $ (2.1)
$ 24.4 (26.6) 1.6 (0.6) (2.4) $ (3.0)
Both the decline in net operating revenues and the decline in costs and expenses in each period were due to the timing of the sale or closure of the facilities identified as discontinued operations. Tax expense for each year is attributable to the amortization and write-offs of tax goodwill. Thus, to the extent the sale or closure of a facility triggers a write-off of goodwill, tax expense is impacted accordingly. Given that the number of facilities sold or closed varies from year to year, tax expense will vary based on the number of discontinued facilities, and the amount of tax goodwill associated with those facilities. The net loss from our discontinued operations is included in the line item Loss from discontinued operations, net of income tax expense in our consolidated financial statements. 93
Table of Contents Liquidity and Capital Resources Our primary cash requirements are paying our operating expenses, servicing our existing debt, capital expenditures on our existing properties, financing acquisitions of ASCs and surgical hospitals (including as both consolidated and nonconsolidated affiliates), the purchase of equity interests in nonconsolidated affiliates and distributions to noncontrolling interests. These continuing liquidity requirements have been and will continue to be significant, primarily due to financing costs relating to our indebtedness. The following chart shows the cash flows provided by or used in operating, investing and financing activities of continuing and discontinued operations (in the aggregate) for the years-ended December 31, 2013, 2012 and 2011:
Net cash provided by operating activities Net cash used in investing activities Net cash (used in) provided by financing activities (Decrease) increase in cash and cash equivalents
2013
YEAR-ENDED DECEMBER 31, 2012
2011
$ 165.6 (76.8) (121.7) $ (32.9)
$ 171.2 (21.8) (102.1) $ 47.3
$ 162.2 (157.9) 33.3 $ 37.7
Cash Flows Provided by Operating Activities Cash flows provided by operating activities is primarily derived from net income before deducting non-cash charges for depreciation and amortization.
Net Income Depreciation and amortization Distributions from nonconsolidated affiliates Equity in income of nonconsolidated affiliates Provision for doubtful accounts Loss on de-designation and change in fair value of swap Loss on extinguishment of debt Payment of deferred interest Debt call premium paid Other operating cash flows, net Net cash provided by operating activities
2013
YEAR-ENDED DECEMBER 31, 2012
2011
$ 52.7 42.9 50.5 (23.4) 15.0 8.3 10.3 (14.8) (5.0) 29.1 $165.6
$ 72.3 41.6 38.7 (16.8) 13.2 — — — — 22.2 $171.2
$ 83.5 40.4 27.1 (22.2) 14.6 — — — — 18.8 $162.2
During the year-ended December 31, 2013, we generated $165.6 million of cash flows provided by operating activities, as compared to $171.2 million during the year-ended December 31, 2012. Cash flows from operating activities decreased $5.6 million, or 3.3%, from the prior period, primarily due to the payment of $14.8 million of interest that had been deferred as a payment-in-kind for the Senior PIK-election Notes (as defined herein), as discussed in the “Debt” section below, and a debt call premium of $5.0 million, partially offset by an increase in distributions from nonconsolidated affiliates of $11.8 million. During the year-ended December 31, 2012, we generated $171.2 million of cash flows provided by operating activities, as compared to $162.2 million during the year-ended December 31, 2011. Cash flows provided by operating activities increased $9.0 million, or 5.5%, from the prior period, primarily due to an $11.6 million increase in distributions from nonconsolidated affiliates, partially offset by a $5.8 million decrease in net income, excluding equity in income of nonconsolidated affiliates. 94
Table of Contents Cash Flows Used in Investing Activities During the year-ended December 31, 2013, our net cash used in investing activities was $76.8 million, consisting primarily of $54.5 million for business acquisitions, net of cash acquired, $36.8 million of capital expenditures and $2.9 million of net settlements on interest rate swaps, partially offset by $5.9 million of proceeds from the disposal of assets, $4.6 million of proceeds from the sale of equity interests of nonconsolidated affiliates, $2.6 million of return of capital related to equity method investments and $2.1 million of proceeds from the sale of equity interests of consolidated affiliates in deconsolidation transactions. During the year-ended December 31, 2012, our net cash used in investing activities was $21.8 million, consisting primarily of $28.4 million used in capital expenditures, $6.1 million used in net settlements on interest rate swaps and $14.5 million used in purchases of equity interests in nonconsolidated affiliates, partially offset by $4.3 million of proceeds received from the sale of equity interests of consolidated affiliates in deconsolidation transactions, $10.2 million of proceeds from the sale of businesses and $15.0 million of proceeds from the sale of equity interests of nonconsolidated affiliates. During the year-ended December 31, 2011, our net cash used in investing activities was $157.9 million, consisting primarily of $131.4 million used for business acquisitions and purchase of equity interests in nonconsolidated affiliates, including $123.1 million used in the acquisition of 49% of the membership interests of IUH Surgery, $8.5 million used in net settlements on interest rate swaps and $32.9 million used in capital expenditures, partially offset by $9.0 million from the net change in restricted cash, $3.2 million in proceeds from the sale of equity interests of consolidated affiliates in deconsolidation transactions and $2.9 million in proceeds from the disposal of assets. Cash Flows Used in Financing Activities Net cash used in financing activities for the year-ended December 31, 2013 was $121.7 million, consisting primarily of $527.6 million for principal payments on long-term debt, $103.0 million of distributions to noncontrolling interests, which primarily related to existing facilities, $74.9 million of distributions to unit holders, and $5.7 million of payments of debt acquisition costs, partially offset by $417.7 million long-term debt borrowings and $171.9 million in proceeds from our initial public offering. Net cash used in financing activities for the year-ended December 31, 2012 was $102.1 million, consisting primarily of $94.2 million in distributions to noncontrolling interests of consolidated affiliates, $8.9 million of repayments of long-term debt and $6.2 million of principal payments under capital lease obligations, partially offset by $7.6 million of proceeds from the sale of equity interests of consolidated affiliates. Net cash provided by financing activities for the year-ended December 31, 2011 was $33.3 million, driven primarily by the funding of a $100.7 million senior secured incremental term loan facility, as well as $25.2 million of member equity contributions and $15.2 million of proceeds from the sale of equity interests of consolidated affiliates, partially offset by $84.7 million of distributions to noncontrolling interests, $6.4 million of repayments of long-term debt, $4.7 million of principal payments under capital lease obligations, $6.3 million of decreases in checks issued in excess of bank balance and $6.2 million of repurchases of equity interests of consolidated affiliates. Cash and cash equivalents were $85.8 million at December 31, 2013 as compared to $118.7 million at December 31, 2012. Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions, reduced by the amount of outstanding checks and drafts where the right of offset exists for such bank accounts, and short-term, highly liquid investments. We consider all highly liquid investments with original maturities of 90 days or less, such as certificates of deposit, money market funds and commercial paper, to be cash equivalents. Our overall working capital position at December 31, 2013 was $37.3 million, as compared to $92.3 million at December 31, 2012, a decrease of $55.0 million, or 59.6%. This decrease is primarily driven by a decrease in cash due to the net cash flows from investing and financing activities referenced above and an increase in amounts payable to nonconsolidated affiliates. 95
Table of Contents Based on our current level of operations, we believe cash flow from operations and available cash, together with available borrowings under our Class B Revolving Credit Facility, will be adequate to meet our short-term (12 months or less) liquidity needs. Debt Our primary sources of funding have been the issuance of debt and cash flows from operations. In the future, our primary sources of liquidity are expected to be cash flows from operations and additional funds available under the Class B Revolving Credit Facility. The Credit Facility Our senior secured credit facilities consist of a $132.3 million Class B Revolving Credit Facility, which will mature on June 30, 2016 (the “Class B Revolving Credit Facility”); a $214.4 million Class B Term Loan, which will mature on December 30, 2017 (the “Class B Term Loan”); and a $388.1 million Class C Term Loan, which will mature on June 30, 2018 (the “Class C Term Loan” and, together with the Class B Revolving Credit Facility and the Class B Term Loan, the “Senior Secured Credit Facilities”). We used the proceeds from our Class C Term Loan to repay in full our $118.7 million Class A Term Loan and $98.3 million Class A incremental Term Loan and to redeem our $164.8 million of Senior PIK-election Notes. On June 29, 2013, our $21.5 million Class A Revolving Credit Facility was terminated after we decided not to renew the revolving credit facility because we believe we have sufficient available borrowing capacity for our operations under our Class B Revolving Credit Facility. The table below indicates the current maturity date for each of our credit facilities. Facility
Maturity Date
Class B Revolving Credit Facility Class B Term Loan Class C Term Loan
June 30, 2016 December 30, 2017 June 30, 2018
As further shown in the table above, we believe that we do not currently face a substantial refinancing risk. However, upon the occurrence of certain events, such as a change of control or a violation of certain covenants in our Senior Secured Credit Facilities, we could be required to repay or refinance our indebtedness. See “Risk Factors — Risks Related to Our Business — We have a substantial amount of indebtedness, which may adversely affect our available cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness.” As of December 31, 2013, we had no outstanding balance under the Class B Revolving Credit Facility. At December 31, 2013, we had approximately $1.7 million in letters of credit outstanding under this facility. Utilization of the Class B Revolving Credit Facility is subject to compliance with a total leverage ratio test. No utilization of the Class B Revolving Credit Facility may be outstanding (other than issuances of up to an aggregate of $5.0 million of letters of credit) at the end of any fiscal quarter in which the total leverage ratio, which is the ratio of consolidated total debt to consolidated EBITDA (each as defined in our credit agreement (the “Amended Credit Agreement”)), as of the last day of such fiscal quarter, is greater than the specified ratio level. 96
Table of Contents Borrowings under each portion of the Senior Secured Credit Facilities bear interest at a base rate or at LIBOR, as elected by us, plus an applicable margin. The base rate is determined by reference to the higher of (i) the prime rate of JPMorgan Chase Bank, N.A. and (ii) the federal funds effective rate plus 0.50% (the “base rate”). The LIBOR rate is determined by reference to the interest rate for dollar deposits in the London interbank market. The table below outlines the applicable margin for each credit facility. Applicable Margin (per annum) Facility
Class B Revolving Credit Facility Class B Term Loan Class C Term Loan
Base Rate Borrowings
2.50% 3.00% 2.00% or 2.25% (with a base rate floor of 2.00%), depending upon the total leverage ratio
LIBOR Borrowings
3.50% 4.00% 3.00% or 3.25% (with a LIBOR floor of 1.00%), depending upon the total leverage ratio
At December 31, 2013, the interest rate on the Class B Term Loan was 4.25%. At December 31, 2013, the interest rate on our Class C Term Loan was 4.25%. We must repay each of the Class B Term Loan and the Class C Term Loan in quarterly installments equal to 0.25% of the original principal amount of the respective loan. The remaining amount of each of the Class B Term Loan and the Class C Term Loan is due in full at maturity. We are also required to pay a commitment fee to the lenders under our Class B Revolving Credit Facility in respect of the unutilized commitments thereunder of either 0.375% or 0.50%, depending on the senior secured leverage ratio (as defined in the Amended Credit Agreement). The Senior Secured Credit Facilities contain certain customary representations and warranties, affirmative covenants, events of default and various restrictive covenants, which are subject to certain significant exceptions. As of December 31, 2013, we believe we and SCA were in compliance with these covenants. Senior Subordinated Notes On June 29, 2007, SCA and Surgical Holdings, Inc. (the “Co-Issuer”) issued $150.00 million in aggregate principal amount of 10% senior subordinated notes due July 15, 2017 (the “Senior Subordinated Notes”). On December 4, 2013, SCA and the Co-Issuer redeemed the Senior Subordinated Notes at a premium of 3.333%. The satisfaction, discharge and redemption of the Senior Subordinated Notes was funded with proceeds from our initial public offering. In conjunction with the redemption, we recognized a loss on extinguishment of $6.5 million. Senior PIK-election Notes On June 29, 2007, SCA and the Co-Issuer issued $150.0 million in aggregate principal amount of 8.875% / 9.625% Senior PIK-election Notes due July 15, 2015 (the “Senior PIK-election Notes”). On June 14, 2013, SCA and the Co-Issuer issued a notice of redemption for all of the outstanding Senior PIK-election Notes (which totaled $164.8 million as of June 14, 2013) and deposited sufficient funds with the trustee for the Senior PIK-election Notes to satisfy and discharge all of our and the Co-Issuer’s obligations with respect to the Senior PIK-election Notes and the related indenture. The Senior PIK-election Notes were redeemed in full on July 15, 2013. This satisfaction, discharge and redemption of the Senior PIK-election Notes was funded with borrowings from the Class C Term Loan. In conjunction with the redemption, we recognized a loss on extinguishment of $3.8 million. 97
Table of Contents Contractual Obligations The table below sets forth our future maturities of debt, interest on debt, capitalized lease obligations, operating lease obligations and other contractual obligations as of December 31, 2013: Payments due by period Less than Total
Debt obligations (1) Interest on debt obligations (2) Capitalized lease obligations (3) Operating lease obligations (4) Other contractual obligations (5) Total (1) (2)
(3) (4) (5)
$646.5 118.0 31.1 103.1 5.5 $904.2
1 year
$
$
15.7 28.1 8.5 24.3 2.9 79.5
More than 5 1-3 years (in millions)
$ 27.3 54.5 10.3 35.4 2.2 $129.7
3-5 years
$593.9 34.7 4.8 17.8 0.4 $651.6
years
$
$
9.6 0.7 7.5 25.6 — 43.4
As of December 31, 2013 and for purposes of this table, our indebtedness included (i) $214.4 million of Class B Term Loans, (ii) $388.1 million of Class C Term Loans, (iii) $132.3 million of Class B Revolving Credit Facility capacity and (iv) $44.0 million of notes payable to banks and others. Represents (i) interest expense on the debt obligations based on an assumed interest rate of the current 3-month LIBOR rate as of December 31, 2013 plus 175 basis points with respect to the Class B Term Loan and Class B Revolving Credit Facility, an interest rate of 3.25% with a LIBOR floor of 1.00%, (ii) quarterly commitment fees on unused borrowing capacity under the Class B Revolving Credit Facility and (iii) various fixed and variable rates on notes payable to banks and others. Capitalized lease obligations include real estate, medical equipment, computer equipment and other equipment utilized in operations (interest and principal). Operating lease obligations include land, buildings and equipment. Other contractual obligations are attributable to maintenance and service contracts.
Because their future cash outflows are uncertain, the following liabilities are excluded from the table above: deferred income taxes, professional liability reserves, workers’ compensation reserves, redeemable noncontrolling interests and our estimated liability for unsettled litigation. Deferred rent is also excluded from the table above. Repurchases of Equity from Physician Partners We are obligated under the agreements governing certain of our partnerships and LLCs to repurchase all of the physicians’ ownership interests upon the occurrence of certain regulatory events, including if it becomes illegal for physicians to own an interest in one of our facilities, refer patients to one of our facilities or receive cash distributions from a facility. The purchase price that we would be required to pay for these ownership interests is typically based on either a multiple of the applicable facility’s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), or the fair market value of the ownership interests as determined by a third-party appraisal. In the event we are required to purchase all of the physicians’ ownership interests in all of our facilities, our existing capital resources would not be sufficient for us to meet this obligation. See “Risk Factors — Risks Related to Healthcare Regulation — If laws or regulations governing physician ownership of our facilities change, we may be obligated to purchase some or all of the ownership interests of our physician partners or renegotiate some of our partnership and operating agreements with our physician partners and management agreements with our surgical facilities.” Capital Expenditures Currently, we project our capital expenditures for fiscal year 2014 to be approximately $48 million, which we expect to finance primarily through internally generated funds and bank or manufacturer financing. Capital 98
Table of Contents expenditures totaled $36.8 million and $28.4 million for the years-ended December 31, 2013 and 2012. The capital expenditures made during 2013 consisted primarily of fixture improvements made at our leased facilities and our purchase of medical and other equipment. These capital expenditures were financed primarily through internally generated funds and bank or manufacturer financing. We believe that our capital expenditure program is adequate to improve and equip our existing facilities. Capital Leases We engage in a significant number of leasing transactions, including real estate, medical equipment, computer equipment and other equipment utilized in operations. Certain leases that meet the lease capitalization criteria in accordance with authoritative guidance for leases have been recorded as an asset and liability at the net present value of the minimum lease payments at the inception of the lease. Interest rates used in computing the net present value of the lease payments generally range from 2.3% to 12.2% based on our incremental borrowing rate at the inception of the lease. Inflation For the past three years, inflation has not significantly affected our operating results or the geographic areas in which we operate. Off-Balance Sheet Transactions As a result of our strategy of partnering with physicians and health systems, we do not own controlling interests in many of our facilities. At December 31, 2013, we accounted for 60 of our 177 facilities under the equity method. Similar to our consolidated facilities, our nonconsolidated facilities have debts, including capitalized lease obligations, that are generally non-recourse to us. With respect to our equity method facilities, these debts are not included in our consolidated financial statements. At December 31, 2013, the total debt on the balance sheets of our nonconsolidated affiliates was approximately $40.9 million. Our average percentage of ownership of these nonconsolidated affiliates, weighted based on the particular affiliate’s amount of debt and our ownership of such affiliate, was approximately 22% at December 31, 2013. We or one of our wholly owned subsidiaries collectively guaranteed $2.5 million of the $40.9 million in total debt of our nonconsolidated affiliates as of December 31, 2013. Our guarantees related to operating leases of nonconsolidated affiliates were $4.0 million at December 31, 2013. As described above, our nonconsolidated affiliates are structured as LPs, general partnerships, LLPs, or LLCs. None of these affiliates provide financing, liquidity, or market or credit risk support for us. They also do not engage in hedging or research and development services with us. Moreover, we do not believe that they expose us to any of their liabilities that are not otherwise reflected in our consolidated financial statements and related disclosures. Except as noted above with respect to guarantees, we are not obligated to fund losses or otherwise provide additional funding to these affiliates other than as we determine to be economically required in order to successfully implement our development plans. Critical Accounting Policies General Our discussion and analysis of our financial condition, results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of consolidated financial statements under GAAP requires our management to make certain estimates and assumptions that impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. These estimates and assumptions also impact the reported amount of net earnings during any period. Estimates are based on information available as of the date financial statements are prepared. Accordingly, actual results could differ 99
Table of Contents from those estimates. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and that require management’s most subjective judgments. Our critical accounting policies and estimates include our policies and estimates regarding consolidation, variable interest entities, revenue recognition, accounts receivable, noncontrolling interests in consolidated affiliates, equity-based compensation, valuation of our common stock, income taxes, goodwill and impairment of long-lived assets and other intangible assets. Principles of Consolidation Our consolidated financial statements include the accounts of us, our subsidiaries and VIEs for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. We evaluate partially owned subsidiaries and joint ventures held in partnership form using authoritative guidance, which includes a framework for evaluating whether a general partner(s) or managing member(s) controls an affiliate and therefore should consolidate it. The framework includes the presumption that general partner or managing member control would be overcome only when the limited partners or members have certain rights. Such rights include the right to dissolve or liquidate the LP, LLP or LLC or otherwise remove the general partner or managing member “without cause,” or the right to effectively participate in significant decisions made in the ordinary course of business of the LP, LLP or LLC. To the extent that any noncontrolling investor has rights that inhibit our ability to control the affiliate, including substantive veto rights, we do not consolidate the affiliate. We use the equity method to account for our investments in affiliates with respect to which we do not have control rights but have the ability to exercise significant influence over operating and financial policies. Assets, liabilities, revenues and expenses are reported in the respective detailed line items on the consolidated financial statements for our consolidated affiliates. For our equity method affiliates, assets and liabilities are reported on a net basis in the line item Investment in and advances to nonconsolidated affiliates on the consolidated balance sheets, and revenues and expenses are reported on a net basis in the line item Equity in net income of nonconsolidated affiliates on the consolidated statements of operations. Variable Interest Entities Under Accounting Standards Codification Section 810, Consolidations, we include the assets, liabilities and activities of a VIE in our financial statements if we are the primary beneficiary of such VIE and the entity has one or more of the following characteristics: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) as a group the holders of the equity investment at risk lack (i) the ability to make decisions about an entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity or (iii) the right to receive the expected residual returns of the entity, or (c) the equity investors have voting rights that are not proportional to their economic interests and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The primary beneficiary of a VIE is generally the entity that will receive a majority of the VIE’s expected losses or receive a majority of a VIE’s expected residual returns and has the power to direct the activities that most significantly impact the VIE’s economic performance. Determining the primary beneficiary of a VIE requires substantial judgment, including determining what activities most significantly impact the economic performance of the VIE and which entity or entities have control over those activities. Revenue Recognition Our revenues consist primarily of net patient revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the services are provided, 100
Table of Contents based upon the estimated amounts due from patients and third-party payors, including federal and state payors (primarily the Medicare and Medicaid programs), commercial health insurance companies, workers’ compensation programs and employers. These estimates are complex and require significant judgement. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. During the year-ended December 31, 2013, approximately 60% of our net patient revenues related to patients with commercial insurance coverage. Healthcare service providers are under increasing pressure to accept reduced reimbursement for services on these contracts. Continued reductions could have a material adverse impact on our financial position, results of operations and cash flows. During the year-ended December 31, 2013, approximately 23% of our net patient revenues related to patients participating in the Medicare and Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and are routinely modified for provider reimbursement. We are unable to predict if or when we may be subject to a suspension of payments by the Medicare and/or Medicaid programs, the possible length of the suspension period or the potential cash flow impact of a payment suspension. Any such suspension would adversely impact our financial position, results of operations and cash flows. During the year-ended December 31, 2013, uninsured or self-pay revenues accounted for less than 6% of our net patient revenues. Our facilities primarily perform surgery that is scheduled in advance by physicians who have already seen the patient. We verify benefits, obtain insurance authorization, calculate patient financial responsibility and notify the patient of their responsibility, usually prior to surgery. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state payors (primarily the Medicare and Medicaid programs), commercial health insurance companies, workers’ compensation programs, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payor. Accounts receivable from government payors are significant to our operations, comprising 18% of net patient service accounts receivable at December 31, 2013. We do not believe there are significant credit risks associated with these government payors. Accounts receivable related to workers’ compensation are significant to our operations, comprising 14% of net patient service accounts receivable at December 31, 2013. We do not believe there are significant credit risks associated with workers’ compensation payors and related receivables. Accounts receivable from commercial health insurance payors were 63% of our net patient service accounts receivable at December 31, 2013. Because the category of commercial health insurance payors is composed of numerous individual payors which are geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, payor mix or trends in federal or state governmental healthcare coverage. Due to the complexity of insurance reimbursements and 101
Table of Contents inherent limitations of insurance verification procedures, we expect we will continue to have write-offs of bad debt and provision for doubtful accounts. In 2013 our “Provision for doubtful accounts” was approximately 2% of net operating revenue. We reserve for doubtful accounts based principally upon the payor class and age of the receivable. We also write off accounts on an individual basis based on that information. We believe our policy allows us to accurately estimate our “Provision for doubtful accounts . ” Noncontrolling Interest in Consolidated Affiliates Our consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Equity-Based Compensation We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock as well as RSUs to key teammates, directors, service providers, consultants and affiliates. Under the Plans, our key teammates, directors, service providers, consultants and affiliates are provided with what we believe to be appropriate incentives to encourage them to continue employment with us or providing service to us or any of our affiliates and to improve our growth and profitability. Option awards are generally granted with an exercise price equal to at least the fair market value of the underlying share at the date of grant. Vesting in the option awards varies based upon time, attainment of certain performance conditions, or upon the occurrence of a Liquidity Event (as defined in the applicable Plan) in which the TPG Funds and/or any of its affiliates achieves a minimum cash return on its original investment. All existing RSU awards vest over time. Income Taxe s We provide for income taxes using the asset and liability method. This approach recognizes the amount of federal, state and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. A valuation allowance is required when it is more-likely-than-not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income. We file a consolidated federal income tax return. State income tax returns are filed on a separate, combined or consolidated basis in accordance with relevant state laws and regulations. LPs, LLPs, LLCs and other pass-through entities that we consolidate or account for using the equity method of accounting file separate federal and state income tax returns. We include the allocable portion of each pass-through entity’s income or loss in our federal income tax return. We allocate the remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of the taxes. 102
Table of Contents Goodwill We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of October 1 st of each year. We recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its implied fair value. We present a goodwill impairment charge as a separate line item within income from continuing operations in the consolidated statements of operations, unless the goodwill impairment is associated with a discontinued operation. In that case, we include the goodwill impairment charge, on a net-oftax basis, within the results of discontinued operations. When we dispose of a facility, the relative fair value of goodwill is allocated to the gain or loss on disposition. The results of the first step of the annual impairment test performed as of October 1, 2013 indicated that the fair values of all operating segments substantially exceeded their carrying values. Impairment of Long-Lived Assets and Other Intangible Assets We assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with definite useful lives whenever events or changes in circumstances indicate we may not be able to recover the asset’s carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected net future cash flows to be generated by that asset, or, for identifiable intangibles with definite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with definite useful lives, if any, to be recognized is measured based on projected discounted future cash flows. We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. We present an impairment charge as a separate line item within income from continuing operations in our consolidated statements of operations, unless the impairment is associated with a discontinued operation. In that case, we include the impairment charge, on a net-of-tax basis, within the results of discontinued operations. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed. We report long-lived assets to be disposed of by sale as held for sale and recognize those assets in the balance sheet at the lower of carrying amount or fair value less cost to sell, and cease depreciation. Recent Revisions to Authoritative Accounting Guidance Reclassification of Other Comprehensive Income In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “ Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income .” This update requires companies to include reclassification adjustments for items that are reclassified from other comprehensive income to net income in a single note or on the face of the financial statements. The amendment was effective for annual and interim reporting periods beginning after December 15, 2012. The adoption of this standard did not have a material impact on our consolidated financial statements. We do not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. 103
Table of Contents JOBS Act The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Our principal market risk is our exposure to variable interest rates. As of December 31, 2013, we had $645.7 million of indebtedness (excluding capital leases), of which $635.1 million is at variable interest rates and $10.6 million is at fixed interest rates. In seeking to reduce the risks and costs associated with such activities, we manage exposure to changes in interest rates primarily through the use of derivatives. We neither use financial instruments for trading or other speculative purposes, nor use leveraged financial instruments. At December 31, 2013, we held interest rate swaps hedging interest rate risk on $240.0 million of our variable rate debt through three forward starting interest rate swaps with an aggregate notional amount of $240.0 million, which we entered into during 2011. These forward starting interest rate swaps, which are swaps that are entered into at a specified trade date but do not begin until a future start date, extend the interest rate swaps that we terminated in 2012 and on September 30, 2013. These swaps are “receive floating/pay fixed” instruments, meaning we receive floating rate payments, which fluctuate based upon LIBOR, from the counterparty and provide payments to the counterparty at a fixed rate, the result of which is to convert the interest rate of a portion of our floating rate debt into fixed rate debt in order to limit the variability of interest-related payments caused by changes in LIBOR. Forward starting interest rate swaps with an aggregate notional amount of $100.0 million were effective on September 30, 2012 and the remaining forward starting interest rate swap with a notional amount of $140.0 million was effective on September 30, 2013. A forward interest rate starting swap with a notional amount of $50.0 million will terminate on September 30, 2014. The remaining aggregate notional amount of $190.0 million in forward starting interest rate swaps will terminate on September 30, 2016. Assuming a 100 basis point increase in LIBOR on our un-hedged debt at December 31, 2013, our annual interest expense would increase by approximately $3.6 million. Counterparties to the interest rate swaps discussed above expose us to credit risks to the extent of their potential non-performance. The credit ratings of the counterparties, which consist of investment banks, are monitored at least quarterly. We have completed a review of the financial strength of the counterparties using publicly available information, as well as qualitative inputs, as of December 31, 2013. Based on this review, we do not believe there is a significant counterparty credit risk associated with these interest rate swaps. However, we cannot assure you that these actions will protect us against or limit our exposure to all counterparty or market risks. 104
Table of Contents Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Auditors Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Surgical Care Affiliates, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows present fairly, in all material respects, the financial position of Surgical Care Affiliates, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Birmingham, Alabama March 24, 2014 105
Table of Contents SURGICAL CARE AFFILIATES, INC. CONSOLIDATED BALANCE SHEETS (In thousands) DECEMBER 31,
DECEMBER 31,
2013
2012
Assets Current assets Cash and cash equivalents Restricted cash Accounts receivable, net of allowance for doubtful accounts (2013 — $11,918; 2012 — $5,928) Receivable from nonconsolidated affiliates Prepaids and other current assets Current assets related to discontinued operations Total current assets Property and equipment, net of accumulated depreciation (2013 — $84,768; 2012 — $77,316) Goodwill Intangible assets, net of accumulated amortization (2013 — $26,124; 2012 — $20,963) Deferred debt issue costs Investment in and advances to nonconsolidated affiliates Other long-term assets Assets related to discontinued operations Total assets (a) Liabilities and Equity Current liabilities Current portion of long-term debt Accounts payable Accrued payroll Accrued interest Accrued distributions Payable to nonconsolidated affiliates Deferred income tax liability Other current liabilities Current liabilities related to discontinued operations Total current liabilities Long-term debt, net of current portion Deferred income tax liability Other long-term liabilities Liabilities related to discontinued operations Total liabilities (a) Commitments and contingent liabilities (Note 16) Noncontrolling interests — redeemable (Note 9) Equity Surgical Care Affiliates’ equity Common stock, $0.01 par value, 180,000 shares authorized, 38,166 shares outstanding at December 31, 2013 Additional paid in capital Contributed capital Accumulated other comprehensive loss Accumulated deficit Total Surgical Care Affiliates’ equity Noncontrolling interests — non-redeemable (Note 9) Total equity Total liabilities and equity
$
$
$
85,816 25,031 91,783 12,331 19,609 297 234,867 199,872 744,096 61,936 8,321 168,824 2,140 2,361 1,422,417
$
23,166 27,915 26,322 446 27,601 68,455 477 23,021 167 197,570 649,722 116,221 20,651 380 984,544
$
$
21,902
$
382 413,419 — — (208,115) 205,686 210,285 415,971 1,422,417
118,725 27,630 82,192 22,883 14,402 1,578 267,410 179,863 706,495 48,091 11,131 194,299 2,268 2,556 1,412,113
15,220 23,374 18,972 13,709 24,805 58,926 580 18,972 596 175,154 774,516 100,708 19,618 397 1,070,393 21,709
$
— — 313,153 (8,327) (157,309) 147,517 172,494 320,011 1,412,113
(a) Our consolidated assets as of December 31, 2013 and December 31, 2012 include total assets of a variable interest entity (“VIE”) of $49.5 million and $28.2 million, respectively, which can only be used to settle the obligations of the VIE. Our consolidated total liabilities as of December 31, 2013 and December 31, 2012 include total liabilities of the VIE of $12.2 million and $1.4 million, respectively, for which the creditors of the VIE have no recourse to us, with the exception of $4.0 million of debt guaranteed by us at December 31, 2013. See further description in Note 3, Summary of Significant Accounting Policies .
See Notes to Consolidated Financial Statements. 106
Table of Contents SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of U. S. dollars)
Net operating revenues: Net patient revenues Management fee revenues Other revenues Total net operating revenues Equity in net income of nonconsolidated affiliates Operating expenses: Salaries and benefits Supplies Other operating expenses Depreciation and amortization Occupancy costs Provision for doubtful accounts Impairment of intangible and long-lived assets Loss (gain) on disposal of assets Total operating expenses Operating income Interest expense Loss from extinguishment of debt Interest income Loss (gain) on sale of investments Income from continuing operations before income tax expense Provision for income tax expense Income from continuing operations Loss from discontinued operations, net of income tax expense Net income Less: Net income attributable to noncontrolling interests Net loss attributable to Surgical Care Affiliates Basic and diluted net loss per share attributable to Surgical Care Affiliates: Continuing operations attributable to Surgical Care Affiliates Discontinued operations attributable to Surgical Care Affiliates Net loss per share attributable to Surgical Care Affiliates Basic and diluted weighted average shares outstanding (in thousands) See Notes to Consolidated Financial Statements. 107
2013
YEAR-ENDED DECEMBER 31, 2012
2011
$ 746,625 40,469 14,941 802,035 23,364
$714,629 17,804 12,427 744,860 16,767
$692,908 11,291 10,010 714,209 22,236
277,695 175,199 131,767 42,941 27,012 15,033 — 121 669,768 155,631 60,438 10,333 (215) 12,330 72,745 12,645 60,100 (7,392) 52,708 (104,052) $ (51,344)
241,814 170,051 118,460 41,628 26,768 13,200 1,086 (308) 612,699 148,928 58,842 — (315) 7,100 83,301 8,864 74,437 (2,090) 72,347 (92,357) $ (20,010)
221,799 160,649 114,616 40,417 26,642 14,599 — (764) 577,958 158,487 56,040 — (432) (3,878) 106,757 20,269 86,488 (2,984) 83,504 (93,181) $ (9,677)
$ $ $
$ $ $
$ $ $
(1.39) (0.23) (1.62) 31,688
(0.59) (0.07) (0.66) 30,340
(0.23) (0.10) (0.33) 29,347
Table of Contents SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands of U.S. dollars)
Net income Other comprehensive (loss) income: Unrealized income (loss) on interest rate swap Amounts reclassified from accumulated other comprehensive loss Total other comprehensive income (loss) Comprehensive income Comprehensive income attributable to noncontrolling interests Comprehensive loss attributable to Surgical Care Affiliates See Notes to Consolidated Financial Statements. 108
2013
YEAR-ENDED DECEMBER 31, 2012
2011
$ 52,708
$ 72,347
$ 83,504
847 7,480 8,327 61,035 (104,052) $ (43,017)
(5,177) 6,163 986 73,333 (92,357) $(19,024)
(4,594) 8,591 3,997 87,501 (93,181) $ (5,680)
Table of Contents SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In thousands of U. S. dollars)
Balance at December 31, 2010 Member contributions Net (loss) income Other comprehensive income Stock compensation Net change in equity related to amendments in agreements with noncontrolling interests (Note 9) Net change in equity related to purchase/(sale) of ownership interests Contributions from noncontrolling interests Change in distribution accrual Distributions to noncontrolling interests Balance at December 31, 2011 Net (loss) income Other comprehensive income Stock compensation Net change in equity related to purchase of ownership interests Contributions from noncontrolling interests Change in distribution accrual Distributions to noncontrolling interests Balance at December 31, 2012 Member distributions Net (loss) income Other comprehensive income Conversion from LLC to INC (Note 1) Issuance of stock from the initial public offering, net of offering costs Stock options exercised Stock compensation Net change in equity related to amendments in agreements with noncontrolling interests (Note 9) Net change in equity related to purchase of ownership interests Contributions from noncontrolling interests Change in distribution accrual Distributions to noncontrolling interests Balance at December 31, 2013
Common Stock Shares Amount — $ — — — — — — — — —
Additional Paid in Capital $ — — — — —
Contributed Capital $ 285,387 25,205 — — 1,680
Accumulated Other Comprehensive Loss $ (13,310) — — 3,997 —
Accumulated Deficit $ (127,622) — (9,677) — —
Total Surgical Care Affiliates Equity $ 144,455 25,205 (9,677) 3,997 1,680
Noncontrolling InterestsNon-redeemable $ 127,211 — 68,374 — —
Total Equity $271,666 25,205 58,697 3,997 1,680
491
491
—
—
—
—
—
—
—
—
—
—
4,643
—
—
4,643
2,029
6,672
— —
— —
— —
— —
— —
— —
— —
272 (1,633)
272 (1,633)
(61,327) 135,417 67,741 — —
(61,327) $305,720 47,731 986 1,719
— — — — —
$
— — — — —
$
— — — — —
$
— 316,915 — — 1,719
$
— (9,313) — 986 —
$
— (137,299) (20,010) — —
$
— 170,303 (20,010) 986 1,719
—
—
—
(5,481)
—
—
(5,481)
— —
— —
— —
— —
— —
— —
— —
— — — — —
$
— — — — —
$
— — — — —
30,286
303
240,447
7,857 23 —
79 — —
171,798 285 421
—
—
— — — — 38,166
$
$
— 313,153 (74,900) — —
$
$
— (157,309) — (51,344) —
$
— 147,517 (74,900) (51,344) 8,327
39,748
$
22 (504)
22 (504)
(69,930) 172,494 — 79,913 —
(69,930) $320,011 (74,900) 28,569 8,327
—
— — 2,303
— — —
— — —
—
—
—
—
—
1,050
1,050
—
468
194
—
538
1,200
34,364
35,564
— —
— —
— —
— —
— —
— —
3,137 (2,363)
3,137 (2,363)
(78,310) 210,285
(78,310) $415,971
— $ 413,419
$
— —
$
— —
$
— (208,115)
See Notes to Consolidated Financial Statements. 109
—
34,267
—
— 382
(240,750)
— (8,327) — — 8,327
$
—
171,877 285 2,724
$
— 205,686
— — —
$
— 171,877 285 2,724
Table of Contents SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U. S. dollars)
Cash flows from operating activities Net income Loss from discontinued operations Adjustments to reconcile net income to net cash provided by operating activities Provision for doubtful accounts Depreciation and amortization Amortization of deferred issuance costs Impairment of long-lived assets Realized loss (gain) on sale of investments Loss (gain) on disposal of assets Equity in net income of nonconsolidated affiliates Distributions from nonconsolidated affiliates Deferred income tax Stock compensation Loss on de-designation and change in fair value of interest rate swap Loss on extinguishment of debt Payment of deferred interest Debt call premium paid (Increase) decrease in assets, net of business combinations Accounts receivable Other assets (Decrease) increase in liabilities, net of business combinations Accounts payable Accrued payroll Accrued interest Other liabilities Other, net Net cash (used in) provided by operating activities of discontinued operations Net cash provided by operating activities Cash flows from investing activities Capital expenditures Proceeds from sale of business Proceeds from sale of investment Proceeds from disposal of assets Proceeds from sale of equity interests of nonconsolidated affiliates Proceeds from sale of equity interests of consolidated affiliates in deconsolidation transactions Decrease in cash related to conversion of consolidated affiliates to equity interests Net change in restricted cash Net settlements on interest rate swap Business acquisitions, net of cash acquired $6,131 Purchase of equity interests in nonconsolidated affiliates Purchase of equity interests in deconsolidation transaction Return of equity method investments in nonconsolidated affiliates Net cash provided by investing activities of discontinued operations Net cash used in investing activities See Notes to Consolidated Financial Statements. 110
2013
YEAR-ENDED DECEMBER 31, 2012
2011
$ 52,708 7,392
$ 72,347 2,090
$ 83,504 2,984
15,033 42,941 3,891 — 12,330 121 (23,364) 50,505 15,410 2,724 8,314 10,333 (14,785) (5,000)
13,200 41,628 2,980 1,086 7,100 (308) (16,767) 38,652 7,385 1,719 — — — —
14,599 40,417 2,762 — (3,878) (764) (22,236) 27,067 22,238 1,680 — — — —
(23,409) 6,719
(5,863) (24,654)
(25,138) (660)
2,986 6,107 (13,263) 12,808 (251) (4,666) 165,584
(773) (1,178) (560) 32,418 251 439 171,192
(240) 264 112 21,352 (1,751) (118) 162,194
(36,838) 1,276 — 5,883 4,587 2,069 (116) 1,886 (2,921) (54,499) (766) — 2,592 13 $ (76,834)
(28,445) 10,198 4,335 474 14,980 4,251 (1,034) (3,936) (6,081) (2,796) (14,521) (1,576) — 2,347 $ (21,804)
(32,936) — — 2,908 — 3,216 (706) 9,063 (8,533) (873) (130,506) — — 513 $(157,854)
Table of Contents SURGICAL CARE AFFILIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands of U. S. dollars)
2013
Cash flows from financing activities Checks issued in excess of bank balance Member contributions Borrowings under line of credit arrangements and long-term debt, net of issuance costs Payment of debt acquisition costs Proceeds from issuance of shares pursuant to IPO, net of offering costs Principal payments on line of credit arrangements and long-term debt Principal payments under capital lease obligations Distributions to noncontrolling interests of consolidated affiliates Contributions from noncontrolling interests of consolidated affiliates Proceeds from sale of equity interests of consolidated affiliates Repurchase of equity interests of consolidated affiliates Distributions to unit holders Proceeds from issuance of common stock upon exercise of stock options Net cash provided by financing activities of discontinued operations Net cash (used in) provided by financing activities Change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents of discontinued operations at beginning of period Less: Cash and cash equivalents of discontinued operations at end of period Cash and cash equivalents at end of period Supplemental cash flow information Cash paid during the year for interest Supplemental schedule of noncash investing and financing activities Property and equipment acquired through capital leases and installment purchases Goodwill attributable to sale of surgery centers Net investment in consolidated affiliates that became equity method facilities Noncontrolling interest associated with conversion of consolidated affiliates to equity method affiliates Contributions (non-cash) from noncontrolling interests of consolidated affiliates Conversion of equity method affiliate to consolidated affiliate financed through the issuance of debt Equity interest purchase in nonconsolidated affiliates via withheld distributions Debt to equity conversion of nonconsolidated affiliate See Notes to Consolidated Financial Statements. 111
YEAR-ENDED DECEMBER 31, 2012
2011
$
— — 417,678 (5,700) 171,877 (527,634) (7,552) (102,975) 4,758 7,864 (5,612) (74,900) 453 — (121,743) (32,993) 118,725 70 14 $ 85,816
$
— — 4,010 — — (8,865) (6,189) (94,163) 22 7,596 (6,500) — — 2,004 (102,085) 47,303 71,268 113 41 $ 118,725
$ (6,342) 25,205 100,656 — — (6,354) (4,672) (84,700) 37 15,197 (6,186) — — 485 33,326 37,666 33,596 119 (113) $ 71,268
$ 62,167
$ 56,848
$ 53,521
21,329 10,062 5,356
7,714 9,066 712
10,046 — 10,337
747 —
3,019 —
3,466 272
— — —
7,221 10,462 5,027
— — —
Table of Contents SURGICAL CARE AFFILIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in tables are in thousands of U.S. dollars unless otherwise indicated) Unless the context otherwise indicates or requires, the terms “Surgical Care Affiliates,” “we,” “us,” “our” and “Company” refer to Surgical Care Affiliates, Inc. and its subsidiaries. NOTE 1 — DESCRIPTION OF BUSINESS Nature of Operations and Ownership of the Company Surgical Care Affiliates, Inc., a Delaware corporation, was converted from a Delaware limited liability company, previously named ASC Acquisition LLC, to a Delaware corporation on October 30, 2013. Pursuant to the conversion, every 10.25 outstanding membership units of ASC Acquisition LLC were converted into one share of common stock of Surgical Care Affiliates, and options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates at a ratio of 10.25 membership units of ASC Acquisition LLC underlying such options to each one share of common stock of Surgical Care Affiliates underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. Upon conversion, all outstanding restricted stock units of ASC Acquisition LLC were converted into one restricted share of Surgical Care Affiliates. All share and per share amounts have been adjusted to reflect these conversion amounts throughout these financial statements. We were formed primarily to own and operate a network of multi-specialty ambulatory surgery centers (“ASCs”) and surgical hospitals in the United States of America. We do this through our direct operating subsidiary, Surgical Care Affiliates, LLC (“SCA”). For the majority of the periods covered by our financial statements, the Company was a Delaware limited liability company named ASC Acquisition LLC. As of December 31, 2013, the Company operated in 34 states and had an interest in and/or operated 171 ASCs, five surgical hospitals and one sleep center with 11 locations, with a concentration of facilities in California, Indiana and Texas. Our ASCs and surgical hospitals primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. At our surgical hospitals, physicians perform a broader range of surgical procedures, and patients may stay in the hospital for several days. Business Structure We operate our facilities through strategic relationships with approximately 2,000 physician partners and often with healthcare systems that have strong local market positions that we also believe have strong reputations for clinical excellence. The facilities in which we hold an ownership interest are owned by general partnerships, limited partnerships (“LP”), limited liability partnerships (“LLP”) or limited liability companies (“LLC”) in which the Company serves as the general partner, limited partner, managing member or member. We account for our 177 facilities as follows: AS OF DECEMBER 31, 2013
Consolidated facilities Equity method facilities Managed-only facilities Total facilities
87 60 30 177
Basis of Presentation The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements have been prepared in accordance with accounting principles generally 112
Table of Contents accepted in the United States of America (“U.S. GAAP”). Such financial statements include the assets, liabilities, revenues and expenses of all wholly owned subsidiaries and majority-owned subsidiaries over which we exercise control and, when applicable, entities in which we have a controlling financial interest. NOTE 2 — TRANSACTIONS, DECONSOLIDATIONS AND CLOSURES Acquisitions In April 2013, we invested in an ASC in McKinney, Texas for total consideration of $4.0 million. This ASC is consolidated (as part of the future JV, as further described in Note 3) as a VIE in which we are the primary beneficiary. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Property and equipment Goodwill Intangible assets Total assets
$2,971 679 350 $4,000 Liabilities
Total liabilities
$ —
In June 2013, we acquired 100% of the interest in Health Inventures, LLC (“HI”), a surgical and physician services company, for total consideration of $20.4 million. $9.6 million of the consideration was paid to the sellers in cash, $8.9 million was placed into escrow as contingent consideration, and $1.9 million was payable to certain individuals. The amount payable as contingent consideration depends upon the successful continuation and/or renewal of certain management agreement contracts held by HI and, in the case of renewals, will be determined by comparing the contract revenue prior to renewal against the expected contract revenue after renewal. The undiscounted range of amounts that could be paid as contingent consideration is zero to $8.9 million. As of the acquisition date and December 31, 2013, approximately $8.6 million of contingent consideration was recognized. In the transaction, we acquired HI’s ownership interests in four ASCs and one surgical hospital and management agreements with 19 affiliated facilities. The HI amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Investment in and advances to nonconsolidated affiliates Total assets Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Total liabilities 113
$ 1,179 2,130 400 3,709 584 4,203 7,605 4,360 $20,461
$ 1,742 1,742 $ 1,742
Table of Contents The HI goodwill and intangible assets are expected to be fully deductible for tax purposes. The HI purchase price allocation is preliminary and subject to adjustment. $18.8 million of Net operating revenues related to HI were included in our 2013 consolidated statement of operations. HI contributed $1.5 million to our Income from continuing operations before income taxes in the year ended December 31, 2013. In October 2013, we acquired a controlling interest consisting of approximately 58% of the equity in an ASC in Melbourne, Florida for total consideration of $1.2 million. This ASC is consolidated. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$
67 119 60 246 2,029 1,374 460 $4,109
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long term liabilities Total liabilities
$ 931 931 390 $1,321
In December 2013, we invested in an ASC in Cleburne, Texas for total consideration of $3.1 million. This ASC is consolidated (as part of the future JV, as further described in Note 3) as a VIE in which we are the primary beneficiary. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$ 130 447 206 783 1,988 4,218 788 $7,777
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long term liabilities Total liabilities
$ 883 883 286 $1,169 114
Table of Contents In December 2013, we acquired a controlling interest consisting of approximately 51% of the equity in an ASC in East Brunswick, New Jersey for total consideration of $25.4 million. This ASC is consolidated. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$
195 2,369 23 2,587 860 35,944 10,500 $49,891
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Total liabilities
$ $
185 185 185
In December 2013, we purchased all the outstanding equity of a formerly nonconsolidated ASC in Thousand Oaks, California for $2.3 million. As a result of the transaction, we recognized a loss on the previous equity method investment of $2.8 million. The amounts recognized as of the acquisition date for each major class of assets and liabilities assumed are as follows: Assets Current assets Cash and cash equivalents Accounts receivable Other current assets Total current assets Property and equipment Goodwill Intangible assets Total assets
$
4 297 27 328 429 3,079 630 $4,466
Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long term liabilities Total liabilities
$ 172 172 1 $ 173
Also during the year-ended December 31, 2013, we acquired a noncontrolling interest in a surgery center in Newport Beach, California, a noncontrolling interest in a surgery center in Redding, California and a management agreement with a surgery center in Fountain Valley, California for an immaterial amount of consideration. 115
Table of Contents The purchase price allocations attributable to Melbourne, Florida; Cleburne, Texas; East Brunswick, New Jersey; and Thousand Oaks, California are preliminary. When all relevant information is obtained, resulting changes, if any, to our provisional purchase price allocation will be retrospectively adjusted to reflect new information about the facts and circumstances that existed as of the respective acquisition dates that, if known, would have affected the measurement of the amounts recognized as of those dates. Management notes that the preliminary prices of these purchase price allocations related primarily to working capital balances. In November 2012, we purchased a controlling interest in a multi-specialty surgery center located in Southern California (“New ASC”) for $6.0 million and entered into a management services agreement with New ASC. In connection with that transaction, an existing consolidated facility (“existing ASC”) contributed substantially all assets and liabilities to New ASC and ceased operations. Because New ASC and existing ASC were both under our control at the date of the transaction, we did not recognize any gains or losses relating the cessation of operations of existing ASC. In December 2012, we completed a transaction whereby we contributed our interest in two consolidated facilities (“SCA facilities”) and $1.6 million to a newly formed entity that is jointly owned by us and a California health system (the “JV”). Concurrently, the California health system contributed its controlling interest in a facility (“Health System facility”) to the JV. We also entered into management services agreements with the facilities contributed to the JV. As a result of the transaction, the operations of one of the contributed SCA facilities were merged with and into the Health System facility; the Health System facility was the surviving entity. Accordingly, two facilities remain as a result of the transaction. We have a noncontrolling interest in the surviving facilities, which are presented under the equity method of accounting. The net effect of these contributions resulted in the Company recording a loss of approximately $3.3 million, related to the conversion of the two SCA facilities into an equity method investment. The loss on this transaction is recorded in “Loss (gain) on sale of investments” in the accompanying consolidated statement of operations. During the year-ended December 31, 2012, we acquired noncontrolling interests in seven ASCs for aggregate consideration of $24.7 million. Additionally, we acquired a noncontrolling interest in a de novo ASC for consideration of $0.8 million. Also during the year-ended December 31, 2012, we acquired a controlling interest in an ASC that was previously accounted for as an equity method investment. This acquisition was financed through the issuance of a $7.2 million note payable. Deconsolidations During the year-ended December 31, 2013, we completed two separate deconsolidation transactions. In one of these transactions, we sold a controlling equity interest, and transferred certain control rights, to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.1 million and recorded a pre-tax loss of approximately $1.6 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in “Loss (gain) on sale of investments” in the accompanying consolidated statements of operations. In the other transaction, we transferred certain control rights to partners in the entity. We retained a noncontrolling interest in this affiliate. We recorded a pre-tax loss of approximately $1.5 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in Equity in net income of nonconsolidated affiliates in the accompanying consolidated statements of operations. During the year-ended December 31, 2012, we completed one deconsolidation transaction. In the transaction, we sold a controlling equity interest in an ASC and transferred certain control rights to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $4.3 million and recorded a pre-tax gain of approximately $2.0 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The gain on this transaction is recorded in Gain on sale of investments in the accompanying consolidated statements of operations. During the year-ended December 31, 2011, we completed four separate deconsolidation transactions. In three of these transactions, we sold a controlling equity interest, and transferred certain control rights to a health 116
Table of Contents system. We retained a noncontrolling interest in these entities. In the other transaction, we transferred certain control rights to partners in the entity and retained a noncontrolling interest in this entity. In the aggregate, we received proceeds of approximately $3.2 million and recorded a pre-tax gain of approximately $3.9 million, which was primarily related to the revaluation of our remaining investment in these entities to fair value. The gain on these transactions is recorded in Gain on sale of investments in the accompanying consolidated statements of operations. Fair values for the retained noncontrolling interests are primarily estimated based on third-party valuations we have obtained in connection with such transactions and/or the amount of proceeds received for the controlling equity interest sold. Our continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations. Closures and Sales During the year-ended December 31, 2013, we closed two facilities. We recorded a pre-tax loss of approximately $1.4 million as a result of the closures. The loss on the transactions is recorded in the “Loss from discontinued operations, net of income tax” in the accompanying consolidated statements of operations. During the year-ended December 31, 2012, we closed two facilities. We recorded a pre-tax loss of approximately $3.2 million as a result of the closures. The loss on these transactions is recorded in the “Loss from discontinued operations, net of income tax” in the accompanying consolidated statements of operations. We also wrote off approximately $2.2 million of goodwill related to one closure. During the year-ended December 31, 2013, we sold all of our interest in two ASCs for aggregate consideration of $1.3 million. We recorded a pre-tax loss of approximately $8.4 million as a result of the sale. The loss on this transaction is recorded in the “Loss (gain) on sale of investments” in the accompanying consolidated statements of operations. Our continuing involvement as manager of these facilities precludes classification of these transactions as discontinued operations. During the year-ended December 31, 2012, we sold all of our interest in one ASC. We recorded a pre-tax gain of approximately $1.5 million as a result of the sale. The gain on this transaction is recorded in the “Loss from discontinued operations, net of income tax” in the accompanying consolidated statements of operations. Unaudited Pro Forma Financial Information Summarized below are our consolidated results of operations for the years ended December 31, 2013 and 2012, on an unaudited pro forma basis as if the HI acquisition and the East Brunswick, New Jersey ASC acquisition had occurred at the beginning of the earliest period presented. The pro forma information is based on the Company’s consolidated results of operations for the years ended December 31, 2013 and 2012, and on other available information. These pro forma amounts include historical financial statement amounts with the following adjustments: we converted the sellers’ historical financial statements to GAAP and applied the Company’s accounting policies and we adjusted for depreciation and amortization expense assuming the fair value adjustments to intangible assets had been applied beginning January 1, 2012. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transaction occurred on the basis assumed above, nor are they indicative of results of the future operations of the combined enterprises. YEAR-ENDED DECEMBER 31 In thousands
YEAR-ENDED DECEMBER 31
2013
Net operating revenues Income from continuing operations before income tax expense 117
$
834,112 80,366
2012
$
795,659 89,011
Table of Contents NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company, its subsidiaries and VIEs for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. We evaluate partially owned subsidiaries and joint ventures held in partnership form using authoritative guidance, which includes a framework for evaluating whether a general partner(s) or managing member(s) controls an affiliate and therefore should consolidate it. The framework includes the presumption that general partner or managing member control would be overcome only when the limited partners or members have certain rights. Such rights include the right to dissolve or liquidate the LP, LLP or LLC or otherwise remove the general partner or managing member “without cause,” or the right to effectively participate in significant decisions made in the ordinary course of business of the LP, LLP or LLC. To the extent that any noncontrolling investor has rights that inhibit our ability to control the affiliate, including substantive veto rights, we do not consolidate the affiliate. We use the equity method to account for our investments in affiliates with respect to which we do not have control rights but have the ability to exercise significant influence over operating and financial policies. Assets, liabilities, revenues and expenses are reported in the respective detailed line items on the consolidated financial statements for our consolidated affiliates. For our equity method affiliates, assets and liabilities are reported on a net basis in Investment in and advances to nonconsolidated affiliates on the consolidated balance sheets, and revenues and expenses are reported on a net basis in Equity in net income of nonconsolidated affiliates on the consolidated statements of operations. This difference in accounting treatment of equity method affiliates impacts certain financial ratios of the Company. Variable Interest Entities In order to determine if we are the primary beneficiary of a VIE for financial reporting purposes, we consider whether we have the power to direct the activities of the VIE that most significantly impact the economic performance of the VIE and whether we have the obligation to absorb losses or the right to receive returns that would be significant to the VIE. We consolidate a VIE when we are the primary beneficiary. In 2012, the Company entered into a transaction whereby we transferred our interest in two consolidated facilities and cash to an entity (the “future JV”) wholly owned by a health system in exchange for a promissory note. Concurrently, the health system transferred its interest in a facility it controlled to the future JV. The promissory note, which eliminates upon consolidation, has a fixed interest rate plus a variable component dependent on the earnings of the future JV. The promissory note contains a conversion feature that allows us to convert the promissory note to a 49% equity interest in the future JV at our option upon the occurrence of the renegotiation of certain contractual arrangements. We also entered into management services agreements with the facilities controlled by the future JV. As a result of the financial interest in the earnings of the future JV held by us via the promissory note and the powers granted us in the promissory note and the management services agreements, we have determined that the future JV is a VIE for which we are the primary beneficiary. We consolidated the future JV as of October 1, 2012. 118
Table of Contents The carrying amounts and classifications of the assets and liabilities of the future JV, which are included in our December 31, 2013 and 2012 consolidated balance sheets, were as follows: DECEMBER 31,
DECEMBER 31,
2013
2012
Assets Current assets Accounts receivable, net Other current assets Total current assets Property and equipment, net Goodwill Intangible assets Total assets Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long-term liabilities Total liabilities
$
$
$
$
5,362 3,423 8,785 14,674 21,154 4,931 49,544
$
6,172 6,172 5,984 12,156
$
$
$
1,867 4,635 6,502 3,663 12,265 5,792 28,222
1,348 1,348 88 1,436
The assets of the consolidated VIE can only be used to settle the obligations of the VIE. The creditors of the VIE have no recourse to us, with the exception of $4.0 million of debt guaranteed by us at December 31, 2013. There was no such guarantee at December 31, 2012. Reclassifications and Revisions Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. Such reclassifications primarily relate to facilities we closed or sold, which qualify for reporting as discontinued operations. We revised our consolidated statements of changes in equity and of cash flows for the year ended December 31, 2011, to adjust the classification of Member contributions that were inappropriately reflected in Other long-term liabilities in 2011. For the year ended December 31, 2011, this adjustment had the effect of decreasing Other long-term liabilities by $3.1 million with a corresponding increase to Contributed capital by $3.1 million, increasing Member contributions reported on the consolidated statement of changes in equity by $3.1 million, and decreasing cash flows from operating activities by $3.1 million with a corresponding increase to cash flows from financing activities. This revision resulted in an adjustment to our previously presented consolidated balance sheet at December 31, 2012 which had the effect of decreasing Other long-term liabilities by $3.1 million with a corresponding increase to Contributed capital by $3.1 million. These revisions are not material to the related financial statements for any prior periods and had no impact on our consolidated statements of operations. As prior period financial information is presented in future filings, we will similarly revise the applicable financial statements for comparative periods presented in future filings. The 2012 balance sheet includes reclassifications totaling $2.9 million within Accounts receivable, net, other current liabilities and Other long-term liabilities to conform the 2012 presentation to the 2013 presentation for certain recovery audit program and Medicaid-related liabilities. The 2012 statement of operations includes reclassifications totaling $3.7 million within the Other revenues and Provision for doubtful accounts lines to conform the 2012 presentation to the 2013 presentation. 119
Table of Contents Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include, but are not limited to: (1) allowance for contractual revenue adjustments; (2) allowance for doubtful accounts; (3) asset impairments, including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; (6) economic lives and fair value of leased assets; (7) provision for income taxes, including valuation allowances; (8) reserves for contingent liabilities; and (9) reserves for losses in connection with unresolved legal matters. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation as considered necessary. Actual results could differ from those estimates. Risks and Uncertainties We operate in a highly regulated industry and are required to comply with extensive and complex laws and regulations at the federal, state and local government levels. These laws and regulations relate to, among other things: •
licensure, certification and accreditation;
•
coding and billing for services;
•
relationships with physicians and other referral sources, including physician self-referral and anti-kickback laws;
•
quality of medical care;
•
use and maintenance of medical supplies and equipment;
•
maintenance and security of medical records;
•
acquisition and dispensing of pharmaceuticals and controlled substances; and
•
disposal of medical and hazardous waste.
Many of these laws and regulations are expansive, and we do not have the benefit of significant regulatory or judicial interpretation of them. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our investment structure, facilities, equipment, personnel, services, capital expenditure programs, operating procedures and contractual arrangements. If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including (1) criminal penalties, (2) civil penalties, including monetary penalties and the loss of our licenses to operate one or more of our ASCs and surgical hospitals and (3) exclusion or suspension of one or more of our ASCs and surgical hospitals from participation in Medicare, Medicaid and other federal and state healthcare programs. Historically, the United States Congress and some state legislatures have periodically proposed significant changes in regulations governing the healthcare system. Many of these changes have resulted in limitations on and, in some cases, significant reductions in the levels of payments to healthcare providers for services under many government reimbursement programs. Because we receive a significant percentage of our revenues from Medicare, such proposed changes in legislation might have a material adverse effect on our financial position, results of operations and cash flows, if any such changes were to occur. 120
Table of Contents Certain of our operating agreements have termination dates by which the agreement expires by its terms. In these situations, if we wish to continue the business, we would attempt to negotiate an amendment to the agreement and if necessary, to renegotiate material terms of the agreement, to prevent such termination. None of our operating agreements have termination dates in 2014. In addition, certain of our partnership and operating agreements contain provisions that give our partners or other members rights that include, but are not limited to, rights to purchase our interest, rights to require us to purchase the interests of our partners or other members or rights requiring the consent of our partners and other members prior to our transferring our ownership interest in a facility or prior to a change in control of us or certain of our subsidiaries. Almost all of our partnership and operating agreements contain restrictions on actions that we can take, even though we may be the general partner or the managing member, including rights of our partners and other members to approve the sale of substantially all of the assets of the entity, to dissolve the partnership or LLC, and to amend the partnership or operating agreement. Many of our agreements also restrict our ability in certain instances to compete with our existing facilities or with our partners. Where we hold only a limited partner or a non-managing member interest, the general partner or managing member may take certain actions without our consent, although we typically have certain protective rights to approve major decisions, such as the sale of substantially all of the assets of the entity, the dissolution of the partnership or LLC, and the amendment of the partnership or operating agreement. As discussed in Note 16, Commitments and Contingent Liabilities , we are a party to a number of lawsuits. We cannot predict the outcome of litigation filed against us. Substantial damages or other monetary remedies assessed against us could have a material adverse effect on our business, financial position, results of operations and cash flows. Revenue Recognition Our revenues consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state payors (primarily, the Medicare and Medicaid programs), commercial health insurance companies, workers’ compensation programs and employers. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. During the years-ended December 31, 2013, 2012 and 2011, approximately 60%, 61% and 62%, respectively, of our net patient revenues related to patients with commercial insurance coverage. Healthcare services providers are under increasing pressure to accept reduced reimbursement for services on these contracts. Continued reductions could have a material adverse impact on our financial position, results of operations and cash flows. During each of the years-ended December 31, 2013, 2012 and 2011, approximately 23%, 24% and 24%, respectively, of our net patient revenues related to patients participating in the Medicare and Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex, subject to interpretation and are routinely modified for provider reimbursement. The Centers for Medicare and Medicaid Services (“CMS”) has been granted authority to suspend payments, in whole or in part, to Medicare providers if CMS possesses reliable information that an overpayment, fraud or willful misrepresentation exists. If CMS suspects that payments are being made as the result of fraud or misrepresentation, CMS may suspend payment at any time without providing us with prior notice. The initial suspension period is limited to 180 days. However, the payment suspension period can be extended almost indefinitely if the matter is under investigation by the United 121
Table of Contents States Department of Health & Human Services Office of Inspector General (“OIG”) or the Department of Justice (“DOJ”). Therefore, we are unable to predict if or when we may be subject to a suspension of payments by the Medicare and/or Medicaid programs, the possible length of the suspension period or the potential cash flow impact of a payment suspension. Any such suspension would adversely impact our financial position, results of operations and cash flows. Our revenues also include Management fee revenues representing fees we earn from managing the facilities that we do not consolidate for financial reporting purposes. Management fee revenues are determined as dictated by management agreements between SCA and the facility and the fee for management services is generally a defined percentage of the facility’s net patient revenues. Cash and Cash Equivalents Cash and cash equivalents include all demand deposits reduced by the amount of outstanding checks and drafts where the right of offset exists for these bank accounts. As a result of the Company’s cash management system, checks issued but not presented to banks for payment may create negative book cash balances. Such negative balances are included in current liabilities as “checks issued in excess of bank balance.” There were no such balances at December 31, 2013 and 2012. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has not experienced any losses on such deposits. Restricted Cash As of December 31, 2013 and 2012, we had approximately $25.0 million and $27.6 million, respectively, of restricted cash in affiliate cash accounts maintained by partnerships in which we participate where one or more external partners requested, and we agreed, that the partnership’s cash not be commingled with other Company cash and be used only to fund the operations of those partnerships. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state payors (primarily the Medicare and Medicaid programs) commercial health insurance companies, workers’ compensation programs, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payor. The concentration of net patient service accounts receivable by payor class, as a percentage of total net patient service accounts receivable, as of the end of each of the reporting periods, is as follows: AS OF DECEMBER 31 2013 2012
Commercial health insurance payors Medicare Workers’ compensation Medicaid Patients and other third-party payors Total
63% 15 14 3 5 100%
62% 19 9 5 5 100%
Revenues and accounts receivable from government payors are significant to our operations; however, we do not believe there are significant credit risks associated with these government agencies. Revenue and accounts receivable from commercial health insurance payors are also significant to our operations. Because the category of commercial health insurance payors is composed of numerous individual payors which are geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. 122
Table of Contents Additions to the allowance for doubtful accounts are made by means of the Provision for doubtful accounts . We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts we estimate we will collect. We perform an analysis of our historical cash collection patterns and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operations, payor mix or trends in federal or state governmental healthcare coverage. Long-Lived Assets We report land, buildings, improvements and equipment at cost, net of asset impairment. We report assets under capital lease obligations at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. Useful lives are as follows: YEARS
Buildings Leasehold improvements Furniture, fixtures and equipment Assets under capital lease obligations: Real estate Equipment
15 to 30 5 to 20 3 to 7 15 to 25 3 to 5
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset. We capitalize interest expense on major construction and development projects while in progress. Interest of approximately $0.1 million was capitalized for the year-ended December 31, 2012; no interest was capitalized during the years-ended December 31, 2013 and 2011. We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the consolidated statements of operations. However, if the sale, retirement or disposal involves a discontinued operation, the resulting net amount, less any proceeds, is included in the results of discontinued operations. For operating leases, we recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease. Goodwill We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of October 1 st of each year. In 2013, we changed from one operating segment to six operating segments, which are aggregated into one reportable segment. Our six operating segments are generally organized geographically. As a result of this change, we ascribed goodwill to each reporting unit (same as our operating segments) using a relative fair value approach. In 2013, we evaluated our reporting units for goodwill impairment using a two-step process. 123
Table of Contents The first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step of the impairment test is not required. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by hypothetically allocating the fair value of the reporting unit to its identifiable assets and liabilities in a manner consistent with a business combination, with any excess fair value representing implied goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The carrying value of each operating segment was determined by assigning assets and liabilities to those reporting units as of the measurement date. We estimated the fair values of the operating segments by considering the indicated fair values derived from an income approach, which involves discounting estimated future cash flows. We considered market factors when determining the assumptions and estimates used in our valuation models. To substantiate the fair values derived from these valuations, we reconciled the reporting unit fair values to our market capitalization. For 2012 and 2011, in accordance with amended guidance for goodwill impairment testing, we performed a qualitative assessment because management estimated the fair value to significantly exceed the carrying value. In the qualitative assessments, we weighed the relative impact of factors that are specific to us as well as industry and macroeconomic factors. The factors specific to us that were considered included financial performance and changes to the carrying value since the most recent impairment test. We also considered growth projections from independent sources and significant developments within our industry. We determined that the impact of macroeconomic factors on the most recent impairment tests would not significantly affect the estimated fair value. Based on this qualitative assessment, considering the aggregation of these factors, we concluded that it is not more-likely-than-not that the fair value of the Company is less than its carrying amount and therefore performing the two-step impairment test was unnecessary. We recognize an impairment charge for any amount by which the carrying amount of goodwill exceeds its implied fair value. We present a goodwill impairment charge as a separate line item within income from continuing operations in the consolidated statements of operations, unless the goodwill impairment is associated with a discontinued operation. In that case, we include the goodwill impairment charge, on a net-oftax basis, within the results of discontinued operations. When we dispose of a business, the relative fair value of goodwill is allocated to the carrying amount of the business disposed of in determining the gain or loss on disposition. Impairment of Long-Lived Assets and Other Intangible Assets We assess the recoverability of long-lived assets (excluding goodwill) and identifiable acquired intangible assets with definite useful lives whenever events or changes in circumstances indicate we may not be able to recover the asset’s carrying amount. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of the asset to the expected net future cash flows to be generated by that asset, or, for identifiable intangibles with definite useful lives, by determining whether the amortization of the intangible asset balance over its remaining life can be recovered through undiscounted future cash flows. The amount of impairment of identifiable intangible assets with definite useful lives, if any, to be recognized is measured based on projected discounted future cash flows. We measure the amount of impairment of other long-lived assets (excluding goodwill) as the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. We 124
Table of Contents present an impairment charge as a separate line item within income from continuing operations in our consolidated statements of operations, unless the impairment is associated with a discontinued operation. In that case, we include the impairment charge, on a net-of-tax basis, within the results of discontinued operations. We classify long-lived assets to be disposed of other than by sale as held and used until they are disposed. We report long-lived assets to be disposed of by sale as held for sale and recognize those assets in the balance sheet at the lower of carrying amount or fair value less cost to sell, and cease depreciation. We amortize the cost of intangible assets with definite useful lives over their respective estimated useful lives to their estimated residual value. As of December 31, 2013, none of our definite useful lived intangible assets have an estimated residual value. As of December 31, 2013, we do not have any intangible assets with indefinite useful lives. The range of estimated useful lives of our other intangible assets is as follows: YEARS
Certificates of need Favorable contracts Favorable lease obligations Licenses Management agreements Noncompete agreements
10 to 30 4 5 15 to 20 3 to 15 2 to 15
For the years-ended December 31, 2013, 2012 and 2011, we recorded on our Consolidated Statement of Operations within Equity in net income of nonconsolidated affiliates amortization expense of $25.9 million, $20.3 million and $10.1 million, respectively, for definite-lived intangible assets attributable to equity method investments. Investment in and Advances to Nonconsolidated Affiliates Investments in entities we do not control, but in which we have the ability to exercise significant influence over the operating and financial policies of the investee, are accounted for under the equity method. Equity method investments are recorded at original cost and adjusted periodically to recognize our proportionate share of the investees’ net income or losses after the date of investment, additional contributions made and distributions received, amortization of definite-lived intangible assets attributable to equity method investments and impairment losses resulting from adjustments to the carrying value of the investment. We record equity method losses in excess of the carrying amount of an investment when we guarantee obligations or we are otherwise committed to provide further financial support to the affiliate. Management periodically assesses the recoverability of our equity method investments for impairment. We consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, as appropriate, including discounted cash flows, estimates of sales proceeds and external appraisals, as appropriate. If an equity method investment’s decline in value is other than temporary, we record an impairment in Equity in net income of nonconsolidated affiliates . Financing Costs We amortize financing costs using the effective interest method over the life of the related debt. The related expense is included in Interest expense in our consolidated statements of operations. Fair Value of Financial Instruments Our financial instruments consist mainly of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, letters of credit, long-term debt and interest rate swap agreements. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value 125
Table of Contents because of the short-term maturity of these instruments. The fair value of our letters of credit is deemed to be the amount of payment guaranteed on our behalf by third-party financial institutions. We determine the fair value of our long-term debt based on various factors, including maturity schedules, call features and current market rates. We also use quoted market prices, when available, or discounted cash flows to determine fair values of long-term debt. The fair value of our interest rate swaps is determined using information provided by a third-party financial institution and discounted cash flows. Derivative Instruments All derivative instruments are recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. As of December 31, 2013 and 2012, we held interest rate swaps to hedge the interest rate risk on a portion of our long-term debt. These swaps were historically designated as a cash flow hedge; however, in 2013 we de-designated these instruments. The de-designation resulted in the reclassification of all amounts related to the cash flow hedges in Accumulated other comprehensive loss to be reclassified to Interest expense . Prior to de-designation, all changes in the fair value of these interest rate swaps were reported in other comprehensive income on the consolidated statement of changes in equity. Net cash settlements on our interest rate swaps are included in investing activities in our consolidated statements of cash flows. For additional information regarding these interest rate swaps, see Note 8, Long-Term Debt . Noncontrolling Interest in Consolidated Affiliates The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Also, certain of the Company’s noncontrolling interests have industry-specific redemption features, such as a change in law that would prohibit the noncontrolling interests’ current form of ownership in ASCs, which are not solely within the control of the Company. We are not aware of events that would make a redemption probable. According to authoritative guidance, classification of these noncontrolling interests outside of permanent equity is required due to the redemption features. Equity-Based Compensation We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock as well as RSUs to key teammates, directors, service providers, consultants and affiliates. Under the Plans, our key teammates, directors, service providers, consultants and affiliates are provided with what we believe to be appropriate incentives to encourage them to continue employment with us or providing service to us or any of our affiliates and to improve our growth and profitability. Option awards are generally granted with an exercise price equal to at least the fair market value of the underlying share at the date of grant. Vesting in the option awards varies based upon time, attainment of certain 126
Table of Contents performance conditions, or upon the occurrence of a Liquidity Event (as defined in the applicable Plan) in which the TPG Funds and/or any of its affiliates achieves a minimum cash return on its original investment. All existing RSU awards vest over time. Income Taxes We provide for income taxes using the asset and liability method. This approach recognizes the amount of federal, state and local taxes payable or refundable for the current year, as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and income tax returns. Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates. A valuation allowance is required when it is more-likely-than-not that some portion of the deferred tax assets will not be realized. Realization is dependent on generating sufficient future taxable income. We file a consolidated federal income tax return. State income tax returns are filed on a separate, combined or consolidated basis in accordance with relevant state laws and regulations. LPs, LLPs, LLCs and other pass-through entities that we consolidate or account for using the equity method of accounting file separate federal and state income tax returns. We include the allocable portion of each pass-through entity’s income or loss in our federal income tax return. We allocate the remaining income or loss of each pass-through entity to the other partners or members who are responsible for their portion of the taxes. Assets Held for Sale and Results of Discontinued Operations Components of an entity that have been disposed of or are classified as held for sale and have operations and cash flows that can be clearly distinguished from the rest of the entity are reported as assets held for sale and discontinued operations. In the period a component of an entity has been disposed of or classified as held for sale, we reclassify the results of operations for current and prior periods into a single caption titled Loss from discontinued operations, net of income tax expense . In addition, assets and liabilities associated with facilities that qualify for reporting as discontinued operations are reflected in the consolidated balance sheets as Current assets related to discontinued operations, Assets related to discontinued operations, Current liabilities related to discontinued operations and Liabilities related to discontinued operations . We also classify cash flows related to discontinued operations as one line item within each category of cash flows in our consolidated statements of cash flows. Assessment of Loss Contingencies We have legal and other contingencies that could result in significant losses upon the ultimate resolution of such contingencies. We record accruals for such contingencies to the extent we conclude it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. A significant amount of judgment is involved in determining whether a loss is probable and reasonably estimable due to the uncertainty involved in determining the likelihood of future events and estimating the financial statement impact of such events. If further developments or resolution of a contingent matter are not consistent with our assumptions and judgments, we may need to recognize a significant charge in a future period related to an existing contingent matter. See Note 16, Commitments and Contingent Liabilities , for more information regarding these matters. 127
Table of Contents Earnings Per Share (EPS) We report two earnings per share numbers, basic and diluted. These are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:
In thousands
Weighted average shares outstanding Dilutive effect of equity-based compensation plans Weighted-average shares outstanding, assuming dilution
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
2012
2011
31,688 — 31,688
30,340 — 30,340
29,347 — 29,347
The shares used reflect the conversion to a Delaware corporation discussed in Note 1 for all periods. All dilutive share equivalents are reflected in our earnings per share calculations. Antidilutive share equivalents are not included in our EPS calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average shares outstanding computation are excluded. The excluded shares for the years-ended December 31 are as follows: 2013 — 216,682, 2012 — 98,439 and 2011 — 114,537. Reportable Segments We have six operating segments, which aggregate into one reportable segment. Our six operating segments are generally organized geographically. For reporting purposes, we have aggregated our operating segments into one reportable segment as the nature of the services are similar and the businesses exhibit similar economic characteristics, processes, types and classes of customers, methods of service delivery and distribution and regulatory environments. Distribution On September 16, 2013, we declared a cash distribution of approximately $0.24 per outstanding membership unit, resulting in a total distribution to our membership unit holders of $74.9 million. The distribution was payable promptly after the date it was declared. In addition, on September 16, 2013, the board of directors of the Company resolved to pay a cash bonus to eligible holders of vested options and restricted equity units of approximately $0.24 per vested option or restricted equity unit, as applicable, resulting in a total bonus payment of $4.6 million, and to reduce the exercise price of any such holder’s unvested options by approximately $0.24 per unvested option. The cash bonus payment was recorded as compensation expense in the third quarter of 2013. We will record stock compensation expense over the remaining vesting periods related to the adjustment to unvested options. Recent Revisions to Authoritative Guidance In February 2013, the Financial Accounting Standards Board issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update requires companies to include reclassification adjustments for items that are reclassified from other comprehensive income to net income in a single note or on the face of the financial statements. The amendment was effective for annual and interim reporting periods beginning after December 15, 2012. The adoption of this standard did not have a material impact on the consolidated financial statements of the Company. We do not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. 128
Table of Contents NOTE 4 — ACCOUNTS RECEIVABLE Accounts receivable consist of the following: AS OF DECEMBER 31 2013 2012
Accounts receivable Less: Allowance for doubtful accounts Accounts receivable, net
$103,701 (11,918) $ 91,783
$88,120 (5,928) $82,192
The following is the activity related to our allowance for doubtful accounts: YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Balance at beginning of period Provision for doubtful accounts Deductions and accounts written off Balance at end of period
$
$
5,928 15,033 (9,043) 11,918
YEAR-ENDED DECEMBER 31
2012
$
$
2011
9,414 13,200 (16,686) 5,928
$
$
6,710 14,599 (11,895) 9,414
NOTE 5 — PROPERTY AND EQUIPMENT Property and equipment consists of the following: AS OF DECEMBER 31 2013 2012
Land Buildings Leasehold improvements Furniture, fixtures and equipment
$ 20,222 41,840 43,493 162,533 268,088 (84,768) 183,320 16,552 $199,872
Less: Accumulated depreciation Construction in progress Property and equipment, net 129
$ 21,205 47,141 31,800 141,143 241,289 (77,316) 163,973 15,890 $179,863
Table of Contents The amount of depreciation expense, amortization expense and accumulated amortization relating to assets under capital lease obligations, and rent expense under operating leases is as follows: YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Depreciation expense Assets under capital lease obligations: Buildings Equipment Accumulated depreciation Assets under capital lease obligations, net Amortization expense Rent Expense: Minimum rent payments Contingent and other rents Total rent expense
YEAR-ENDED DECEMBER 31
2012
2011
$
29,831
$
31,061
$
30,088
$
17,062 28,484 45,546 (16,588) 28,958 6,418
$
13,004 16,768 29,772 (15,498) 14,274 5,698
$
14,917 13,511 28,428 (12,808) 15,620 4,861
22,288 10,999 33,287
$
21,780 11,795 33,575
$
$ $ $ $
$ $
$
$ $
$
21,736 11,391 33,127
Leases We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates through 2031. We also lease certain buildings and equipment under capital leases expiring at various dates through 2023. Operating leases generally have 3 to 22 year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Various facility leases include provisions for rent escalation to recognize increased operating costs or require us to pay certain maintenance and utility costs. Contingent rents are included in rent expense in the year incurred. Some facilities are subleased to other parties. Rental income from subleases approximated $0.6 million, $0.9 million and $1.0 million for the years-ended December 31, 2013, 2012 and 2011, respectively. Certain leases contain annual escalation clauses based on changes in the Consumer Price Index while others have fixed escalation terms. The excess of cumulative rent expense (recognized on a straight-line basis) over cumulative rent payments made on leases with fixed escalation terms is recognized as straight-line rental accrual and is included in Other long-term liabilities in the accompanying consolidated balance sheets. Our facilities lease land, buildings and equipment, with most leases being for terms of three to ten years. Additionally, the lease for our Birmingham, Alabama office, which commenced on March 1, 2008, had an initial term of five years. In 2012, it was extended for an additional two year period through March 31, 2015. Future minimum lease payments at December 31, 2013 for those leases of the Company and its subsidiaries having an initial or remaining non-cancelable lease term of one year or more are as follows: OPERATING LEASES
YEAR ENDING DECEMBER 31,
2014 2015 2016 2017 2018 2019 and thereafter
$
$ Less: interest portion Obligations under capital leases
24,270 20,188 15,249 10,043 7,742 25,613 103,105
CAPITAL LEASE OBLIGATIONS
$
$ 130
8,541 6,048 4,269 2,759 1,983 7,476 31,076 (3,906) 27,170
TOTAL
$ 32,811 26,236 19,518 12,802 9,725 33,089 $134,181
Table of Contents Obligations Under Lease Guarantees In conjunction with the sale of certain facilities in prior years, the leases of certain properties were assigned to the purchasers and, as a condition of the lease, the Company is a guarantor on the lease. Should the purchaser fail to pay the rent due on these leases, the lessor would have contractual recourse against the Company. We have not recorded a liability for these guarantees because we do not believe it is probable that we will have to perform under these agreements. If we are required to perform under these guarantees, we could potentially have recourse against the purchaser for recovery of any amounts paid. The amount remaining on these guarantees is not material to our financial statements. These guarantees are not secured by any assets under the leases. As of December 31, 2013, the Company has not been required to perform under any such lease guarantees. Impairment of Long-Lived Assets During 2013, 2012 and 2011, we examined our long-lived assets for impairment due to facility closings and facilities experiencing cash flow insufficient to recover the net book value of its long-lived assets. Based on this review, $1.1 million of impairment charges were recorded for the year-ended December 31, 2012. No material impairment charges were recorded for the years-ended December 31, 2013 and December 31, 2011. For all periods presented, the fair value of the impaired long-lived assets at our facilities was determined primarily based on the assets’ estimated fair value using valuation techniques that included discounted future cash flows. NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. Other definite-lived intangibles consist primarily of certificates of need, licenses, noncompete agreements and management agreements. We have no accumulated impairment of goodwill for the periods ended December 31, 2013 or December 31, 2012. The following tables show changes in the carrying amount of goodwill for the years-ended December 31, 2013 and December 31, 2012: YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Balance at beginning of period Acquisitions (Note 2) Deconsolidations (Note 2) Sales Closure and other VIE related (Note 3) Conversion of equity method investment to consolidated Balance at end of period
$
$
706,495 48,346 (7,351) (10,062) (515) 4,104 3,079 744,096
2012
$
$
We performed impairment reviews as of October 1, 2013 and 2012, and concluded that no goodwill impairment existed. 131
679,463 17,156 (11,676) (3,574) (2,609) 8,923 18,812 706,495
Table of Contents The following table provides information regarding our other intangible assets: AS OF DECEMBER 31 2013 2012
Certificates of need Gross carrying amount Accumulated amortization Net Management agreements Gross carrying amount Accumulated amortization Net Licenses Gross carrying amount Accumulated amortization Net Noncompete agreements Gross carrying amount Accumulated amortization Net Total other intangible assets Gross carrying amount Accumulated amortization Net
$ 20,097 (8,073) $ 12,024
$ 18,529 (6,812) $ 11,717
$ 49,978 (15,410) $ 34,568
$ 38,627 (12,250) $ 26,377
$ 8,031 (1,612) $ 6,419
$ 8,575 (1,306) $ 7,269
$ 9,954 (1,029) $ 8,925
$ 3,323 (595) $ 2,728
$ 88,060 (26,124) $ 61,936
$ 69,054 (20,963) $ 48,091
During 2013, 2012 and 2011, we examined our intangible assets for impairment due to facility closings and facilities experiencing cash flow insufficient to recover the net book value of its long-lived assets. In all periods presented, no impairment charge was deemed necessary for intangible assets. For the years-ended December 31, 2013, December 31, 2012 and December 31, 2011, we recorded $25.9 million, $20.3 million and $10.1 million, respectively, of amortization expense for definite-lived intangible assets attributable to equity method investments. These expenses are included in Equity in net income of nonconsolidated affiliates in our consolidated financial statements. Amortization expense for other intangible assets is as follows: YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Amortization expense
$
6,692
YEAR-ENDED DECEMBER 31
2012
$
2011
4,869
$
Total estimated amortization expense for our other intangible assets for the next five years is as follows: ESTIMATED AMORTIZATION YEAR ENDING DECEMBER 31
EXPENSE
2014 2015 2016 2017 2018
$
132
5,811 5,418 5,372 5,369 5,382
5,468
Table of Contents NOTE 7 — RESULTS OF OPERATIONS OF NONCONSOLIDATED AFFILIATES As of December 31, 2013, Investment in and advances to nonconsolidated affiliates represents Surgical Care Affiliates’ investment in 60 partially owned entities, most of which are general partnerships, LPs, LLPs, LLCs or joint ventures in which SCA or one of our subsidiaries is a general or limited partner, managing member, member or venturer, as applicable. We do not control these affiliates but have the ability to exercise significant influence over the operating and financial policies of certain of these affiliates. Accordingly, we account for these affiliates using the equity method. Our ownership percentage in these affiliates generally ranged from 5% to 50% as of December 31, 2013. Our investment in these affiliates is an integral part of our operations. During the year-ended December 31, 2013, we completed two separate deconsolidation transactions. In one of these transactions, we sold a controlling equity interest, and transferred certain control rights, to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $2.1 million and recorded a pre-tax loss of approximately $1.6 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in Loss (gain) on sale of investments in the accompanying consolidated statements of operations. In the other transaction, we transferred certain control rights to partners in the entity. We retained a noncontrolling interest in this affiliate. We recorded a pre-tax loss of approximately $1.5 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The loss on this transaction is recorded in Equity in net income of nonconsolidated affiliates in the accompanying consolidated statements of operations. During 2012, we completed a deconsolidation transaction. In the transaction, we sold a controlling equity interest in an ASC and transferred certain control rights to a health system. We retained a noncontrolling interest in this affiliate. We received cash proceeds of approximately $4.3 million and recorded a pre-tax gain of approximately $2.0 million, which was primarily related to the revaluation of our remaining investment in this affiliate to fair value. The gain on this transaction is recorded in Loss (gain) on sale of investments in the accompanying consolidated statement of operations. Also during 2012, the Company completed a transaction whereby we contributed our interest in two consolidated facilities (“Surgical Care Affiliates facilities”) and $1.6 million to a newly formed entity that is jointly owned by us and a California health system (the “JV”). Concurrently, the California health system contributed its controlling interest in a facility (“Health System facility”) to the JV. We also entered into management services agreements with the facilities contributed to the JV. As a result of the transaction, the operations of one of the contributed Surgical Care Affiliates facilities were merged with and into the Health System facility; the Health System facility was the surviving entity. Accordingly, two facilities remain as a result of the transaction. We have a noncontrolling interest in the surviving facilities, which are presented under the equity method of accounting. The net effect of these contributions resulted in the Company recording a loss of approximately $3.3 million, related to the conversion of the two Surgical Care Affiliates facilities into an equity method investment. The loss on this transaction is recorded in Loss (gain) on sale of investments in the accompanying consolidated statement of operations. During 2011, we completed four separate deconsolidation transactions. In three of these transactions, we sold a controlling equity interest, and transferred certain control rights, to a health system. In the other transaction, we transferred certain control rights to partners in the entity and retained a noncontrolling interest in this entity. We retained a noncontrolling interest in these entities. In the aggregate, we received proceeds of approximately $3.2 million and recorded a pre-tax gain of approximately $3.9 million, which was primarily related to the revaluation of our remaining investment in these entities to fair value. The gain on these transactions is recorded in Loss ( g ain) on sale of investments in the accompanying consolidated statement of operations. Fair values for the retained noncontrolling interests are primarily estimated based on third-party valuations we have obtained in connection with such transactions. Our continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations. 133
Table of Contents During 2013, we recorded $6.1 million of impairment to our investments in nonconsolidated affiliates due to a decline in the expected future cash flows of five nonconsolidated affiliates that we determined to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . This decline in the expected future cash flows was caused by events specific to each impacted facility, as further described below. The impairments included: •
a $1.5 million impairment on our investment in Wausau Surgery Center, L.P. related to an offer received to purchase our interest in the facility;
•
a $2.3 million impairment on our investment in Premier Surgery Center of Louisville, L.P. related to insufficient forecasted growth at the facility;
•
a $0.9 million impairment on our investment in Kerlan-Jobe Surgery Center, LLC related to a buy-out agreement for the facility;
•
a $0.8 million impairment on our investment in Surgery Center of Fort Collins, LLC related to insufficient forecasted growth at the facility; and
•
a $0.6 million impairment on our investment in Surgery Center of Lexington, LLC related to insufficient forecasted growth at the facility.
During 2012, we recorded $9.2 million of impairment to our investments in nonconsolidated affiliates due to a decline in the expected future cash flows of five nonconsolidated affiliates that we determined to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . This decline in the expected future cash flows was caused by events specific to each impacted facility, as further described below. The impairments included: •
a $1.1 million impairment on our investment in Pueblo Ambulatory Surgery Center, LLC related to declining volumes and earnings at the facility;
•
a $3.3 million impairment on our investment in Premier Surgery Center of Louisville, L.P. related to insufficient forecasted growth at the facility;
•
a $1.7 million impairment on our investment in Endoscopy Center West, LLC related to a buy-out offer received for our interest in the facility;
•
a $0.4 million impairment on our investment in Kerlan-Jobe Surgery Center, LLC related to a buy-out agreement for the facility; and
•
a $2.7 million impairment on our investment in Surgical Center at Premier, LLC related to an estimated valuation obtained for the facility based upon our search for a new health system partner.
In determining whether an impairment charge is necessary on a particular investment, we consider all available information, including the recoverability of the investment, the earnings and near-term prospects of the affiliate, factors related to the industry, conditions of the affiliate and our ability, if any, to influence the management of the affiliate. We assess fair value based on valuation methodologies, including discounted cash flows, estimates of sales proceeds and external appraisals, as appropriate. 134
Table of Contents We account for investments in nonconsolidated affiliates primarily using the equity method of accounting. The difference between the carrying amount of the investment and the underlying equity in net assets was $76.9 million and $109.4 million at December 31, 2013 and 2012, respectively, and is primarily attributable to goodwill and other intangible assets. Our investments consist of the following: AS OF DECEMBER 31 2013 2012
INVESTMENT IN AND ADVANCES TO NONCONSOLIDATED AFFILIATES:
Beginning balance Share of income (1) Share of distributions Acquisitions Conversion to/from investments in nonconsolidated affiliates Sale/closure of investments in nonconsolidated affiliates Other Total investment in and advances to nonconsolidated affiliates (1)
$194,299 23,364 (53,097) 5,126 186 (2,133) 1,079 $168,824
$212,608 16,767 (38,652) 21,414 (2,717) (20,880) 5,759 $194,299
Includes $6.1 million and $9.2 million of impairments at December 31, 2013 and 2012, respectively, as previously noted.
Included in the 2013 and 2012 Share of income amount above is amortization expense of $25.9 million and $20.3 million, respectively, for definite-lived intangible assets attributable to equity method investments. The following summarizes the combined assets, liabilities and equity of our nonconsolidated affiliates (on a 100% basis):
Assets Current Noncurrent Total assets Liabilities Current Noncurrent Total liabilities Partners’ capital and shareholders’ equity Surgical Care Affiliates Outside parties Total partners’ capital and shareholders’ equity Total liabilities and partners’ capital and shareholders’ equity
DECEMBER 31
DECEMBER 31
2013
2012
$ $ $
$ 135
191,765 138,238 330,003
$
45,523 38,665 84,188
$
91,952 153,863 245,815 330,003
$
$
143,536 97,682 241,218 31,044 18,803 49,847 84,885 106,486 191,371 241,218
Table of Contents The following summarizes the combined condensed results of operations of our nonconsolidated affiliates:
Net operating revenues: Net patient revenues Other revenues Total net operating revenues Operating expenses: Salaries and benefits Supplies Other operating expenses Depreciation and amortization Total operating expenses Operating income Interest expense, net of interest income Loss on sale of investments Income from continuing operations before income tax expense Net income
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
2012
2011
$
$ $
600,600 5,166 605,766 128,892 99,587 122,764 17,281 368,524 237,242 1,627 22 235,593 235,522
$
474,354 3,153 477,507 108,803 78,824 95,909 14,045 297,581 179,926 1,501 — 178,425 178,365
$ $
$
$ $
332,631 2,209 334,840 80,538 57,897 69,796 11,383 219,614 115,226 1,410 — 113,816 113,760
NOTE 8 — LONG-TERM DEBT Our long-term debt outstanding consists of the following: As of
Bonds payable Class B Term Loan due 2017 Class C Term Loan due 2018 Discount of Class C Term Loan Class A Term Loan due 2014 Incremental Term Loan due 2018 Discount of Incremental Term Loan 10.0% Senior Subordinated Notes due 2017 8.875% Senior PIK-election Notes due 2015 Notes payable to banks and others Capital lease obligations Less: Current portion Long-term debt, net of current portion
December 31,
December 31,
2013
2012
214,429 388,050 (784) — — — — — 44,023 27,170 672,888 (23,166) $ 649,722
216,634 — — 118,970 98,500 (786) 150,000 164,785 24,338 17,295 789,736 (15,220) $ 774,516
The following chart shows scheduled principal payments due on long-term debt, including capital leases, for the next five years and thereafter: Year Ending December 31
2014 2015 2016 2017 2018 Thereafter Total
$ 23,166 18,542 17,162 220,146 377,603 16,269 $672,888 136
Table of Contents The following table provides information regarding our total Interest expense presented in our consolidated statements of operations for both continuing and discontinued operations:
Continuing operations: Interest expense Amortization of bond issue costs Total interest expense and amortization of bond issue costs for continuing operations Discontinued operations: Interest expense Total interest expense for discontinued operations Total interest expense and amortization of bond Issue costs
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
2012
2011
$
$
56,547 3,891
$
55,862 2,980
$
53,278 2,762
60,438
58,842
56,040
178 178 60,616
242 242 59,084
331 331 56,371
$
$
Capital Lease Obligations We engage in a significant number of leasing transactions, including real estate, medical equipment, computer equipment and other equipment utilized in operations. Certain leases that meet the lease capitalization criteria have been recorded as an asset and liability at the net present value of the minimum lease payments at the inception of the lease. Interest rates used in computing the net present value of the lease payments generally range from 2.3% to 12.2% based on the incremental borrowing rate at the inception of the lease. Our leasing transactions include arrangements for equipment with major equipment finance companies and manufacturers who retain ownership of the equipment during the term of the lease and with a variety of both small and large real estate owners. Senior Subordinated Notes and Senior PIK-election Notes In connection with the amendment to the Company’s Senior Secured Credit Facility (the “Credit Facility”) in the second quarter of 2013, on June 14, 2013 we extinguished the Senior PIK-election Notes at par, including a payment of accrued interest through July 15, 2015. Additionally, we redeemed the Senior Subordinated Notes at a premium of 3.333% on December 4, 2013. An aggregate loss on extinguishment of debt of $10.3 million was recorded in connection with these two redemptions. Credit Facility With respect to the Credit Facility, as of December 31, 2013, we had $602.5 million outstanding under the senior secured term loan facility consisting of the following: •
$214.4 million under the Class B Term Loan (as defined below) due December 30, 2017. The interest rate on the Class B Term Loan was 4.25% at December 31, 2013.
•
$388.1 million under the Class C Term Loan (as defined below) due June 30, 2018. The interest rate on the Class C Term Loan was 4.25% at December 31, 2013.
We must repay the Class B Term Loan and the Class C Term Loan in quarterly installments equal to 0.25% of the original principal amount, with the remaining amount payable in full on the maturity date noted above. Borrowings under each portion of the Credit Facility bear interest at a base rate or at the London interbank market for the interest period relevant to such borrowings (“LIBOR”), as elected by the Company, plus an applicable margin. The base rate is determined by reference to the higher of (i) the prime rate of JPMorgan Chase 137
Table of Contents Bank, N.A. and (ii) the federal funds effective rate plus 0.50%. The LIBOR rate is determined by reference to the interest rate for dollar deposits in the London interbank market for the interest period relevant to such borrowings. The below table outlines the applicable margin for each portion of the Credit Facility. Applicable Margin (per annum) Base Rate Borrowings LIBOR Borrowings
Facility
Class B Revolving Credit Facility Class B Term Loan Class C Term Loan
2.50% 3.00% 2.00% or 2.25% (with a base rate floor of 2.00%) depending upon the total leverage ratio
3.50% 4.00% 3.00% or 3.25% (with a LIBOR floor of 1.00%) depending upon the total leverage ratio
There was no outstanding balance under the senior secured revolving credit facility (the “Class B Revolving Credit Facility”) as of December 31, 2013 or December 31, 2012. As of December 31, 2013 the Revolver had a capacity of $132.3 million under the Class B revolver with a maturity date of June 30, 2016. On June 29, 2013, our Class A Revolving Credit Facility was terminated after we decided not to renew such revolving credit facility. Any utilization of the Class B Revolving Credit Facility (other than issuances of up to an aggregate of $5.0 million of letters of credit) will be subject to compliance with a total leverage ratio test. At December 31, 2013, we had approximately $1.7 million in such letters of credit outstanding. 2013 Amendment to the Credit Facility In the second quarter of 2013, we amended our credit agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a Class C Term Loan Facility (“Class C Term Loan”) of $388.1 million ($387.3 million, net of discount) as of December 31, 2013. The Class C Term Loan will mature on June 30, 2018. We utilized the proceeds of the Class C Term Loan plus $8.7 million in cash to extinguish the Senior PIK-election Notes, the Class A Term Loan and the Incremental Term Loan. The applicable margin for borrowings under the Class C Term Loan is (i) 2.25% with respect to base rate borrowings (with a base rate floor of 2.00%) and (ii) 3.25% with respect to LIBOR borrowings (with a LIBOR floor of 1.00%). The interest rate on the Class C Term Loan was 4.25% at December 31, 2013. Until maturity, quarterly amortization payments will be made in an amount equal to 0.25% of the original principal amount of the Class C Term Loan. We incurred a loss on extinguishment of debt of $3.8 million in connection with the settlement of existing debt due to the closing of the Class C Term Loan. The Credit Facility is guaranteed by the Company and certain of SCA’s direct 100% owned domestic subsidiaries (the “Guarantors”), subject to certain exceptions, and borrowings under the Credit Facility are secured by a first priority security interest in all equity interests of SCA and of each 100% owned domestic subsidiary directly held by SCA or a Guarantor. The Credit Facility generally restricts SCA and SCA’s restricted subsidiaries’ ability to, among other things: •
incur liens;
•
incur or assume additional debt or guarantees or issue or sell certain types of preferred stock;
•
pay dividends or make redemptions and repurchases with respect to capital stock;
•
prepay, or make redemptions and repurchases of, subordinated debt;
•
make loans or investments; and
•
engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates. 138
Table of Contents The Company believes it and SCA were in compliance with these covenants as of December 31, 2013. The Amended Credit Agreement contains a provision that could require prepayment of a portion of our indebtedness if SCA has excess cash flow, as defined by the Amended Credit Agreement. No such prepayment was required at December 31, 2013. Interest Rate Swaps We use an interest rate risk management strategy that incorporates the use of derivative financial instruments to limit its exposure to interest rate risk. The swaps are “receive floating/pay fixed” instruments that define a fixed rate of interest on the economically hedged debt that the Company will pay, meaning we receive floating rate payments, which fluctuate based on LIBOR, from the counterparty and pay at a fixed rate to the counterparty, the result of which is to convert the interest rate of a portion of our floating rate debt into fixed rate debt, or to limit the variability of interest related payments caused by changes in LIBOR. At December 31, 2013, interest rate swaps of $240.0 million remained outstanding. As a result of the amendment to the Credit Facility, we de-designated the cash flow hedging instruments. The de-designation resulted in the reclassification of all amounts related to the cash flow hedges in Accumulated other comprehensive loss to be reclassified to Interest expense . The following table presents changes in the components of Accumulated other comprehensive loss , net of related income tax effects: YEAR-ENDED DECEMBER 31, 2013
Balance at Beginning of Period Other comprehensive income before reclassifications Amounts reclassified from accumulated other comprehensive loss Balance at End of Period
$
$
(8,327) 847 7,480 —
All derivative instruments are recognized on the balance sheet on a gross basis at fair value. The fair value of the interest rate swaps is recorded in the Company’s consolidated balance sheets, either in Other current liabilities and Other long-term liabilities or Prepaids and other current assets and Other long-term assets , depending on the changes in the fair value of the swaps and the period remaining until the expiration of the swap, with an offsetting adjustment reported as Interest expense on the Company’s consolidated statements of operation. At December 31, 2012, gross liabilities in the amount of $2.2 million were included in Other current liabilities , and $3.1 million and $3.9 million were included in Other long-term liabilities at December 31, 2013 and December 31, 2012, respectively, in the consolidated balance sheets based on the fair value of the derivative instruments. Although all our derivative instruments are subject to master netting arrangements, no amounts have been netted against the gross liabilities previously detailed and no collateral has been posted with counterparties. During the year-ended December 31, 2013, the liability related to the swaps decreased by $3.0 million. The decrease was due to swap settlements and the change in fair value resulting in a $2.2 million decrease in Other current liabilities and a $0.8 million decrease in Other long-term liabilities . During the year-ended December 31, 2013, the Company recorded losses of approximately $8.3 million within Interest expense due to the de-designation of interest rate swaps and subsequent changes in fair value of derivative instruments. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge related to foreign currency exposure. The Company previously designated its interest rate swaps as a cash flow hedge; however, as noted above, the interest rate swaps were de-designated as hedges in the second quarter of 2013. Credit risk occurs when a counterparty to a derivative instrument fails to perform according to the terms of the agreement. Derivative instruments expose us to credit risk and could result in material changes from period to 139
Table of Contents period. The Company minimizes its credit risk by entering into transactions with highly rated counterparties. In addition, at least quarterly, we evaluate our exposure to counterparties who have experienced or may likely experience significant threats to their ability to perform according to the terms of the derivative agreements to which we are a party. We have completed this review of the financial strength of the counterparty to our interest rate swaps using publicly available information, as well as qualitative inputs, as of December 31, 2013. Based on this review, we do not believe there is a significant counterparty credit risk associated with these derivative instruments. However, no assurances can be provided regarding our potential exposure to counterparty credit risk in the future. NOTE 9 — NONCONTROLLING INTERESTS The following table shows the breakout of net loss attributable to Surgical Care Affiliates between continuing operations and discontinued operations:
Net loss from continuing operations, net of tax, attributable to Surgical Care Affiliates Net loss from discontinued operations, net of tax, attributable to Surgical Care Affiliates Net loss, net of tax, attributable to Surgical Care Affiliates
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
2012
2011
$
(43,952)
$
(17,920)
$
(6,693)
$
(7,392) (51,344)
$
(2,090) (20,010)
$
(2,984) (9,677)
The following table shows the effects of changes to Surgical Care Affiliates’ ownership interest in its subsidiaries on Surgical Care Affiliates’ equity: YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Net loss attributable to Surgical Care Affiliates Increase (decrease) in equity due to sales to noncontrolling interests (Decrease) increase in equity due to purchases from noncontrolling interests Change from net loss attributable to Surgical Care Affiliates and transfers to/from noncontrolling interests
$
(51,344) 2,056
2012
$
(1,394) $
(50,682)
YEAR-ENDED DECEMBER 31
(20,010) (4,243)
2011
$
(1,738) $
(25,991)
(9,677) 4,573 320
$
(4,784)
Certain of the Company’s noncontrolling interests have industry-specific redemption features whereby the Company could be obligated, under the terms of certain of its operating subsidiaries’ partnership and operating agreements, to purchase some or all of the noncontrolling interests of the consolidated subsidiaries. As a result, these noncontrolling interests are not included as part of the Company’s equity and are carried as Noncontrolling interests-redeemable on the Company’s consolidated balance sheets. 140
Table of Contents The activity relating to the Company’s noncontrolling interests — redeemable is summarized below: YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Balance at beginning of period Net income attributable to noncontrolling interests-redeemable Net change in equity related to amendments in agreements with noncontrolling interests Net change related to purchase/(sale) of ownership interestsredeemable Contributions from noncontrolling interests Change in distribution accrual Distributions to noncontrolling interests-redeemable Balance at end of period
$
21,709 24,139
2012
$
(1,050)
$
580 1,622 (433) (24,665) 21,902
YEAR-ENDED DECEMBER 31 2011
20,215 24,616
$
20,594 24,807
—
$
1,800 — (689) (24,233) 21,709
(491)
$
(1,928) 37 569 (23,373) 20,215
NOTE 10 — FAIR VALUE OF FINANCIAL INSTRUMENTS We follow the provisions of the authoritative guidance for fair value measurements, which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. The fair value of an asset or liability 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. As a basis for considering assumptions, the authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: •
Level 1 — Observable inputs such as quoted prices in active markets;
•
Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
•
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of three valuation techniques, as follows: •
Market approach — Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
•
Cost approach — Amount that would be required to replace the service capacity of an asset (i.e., replacement cost); and
•
Income approach — Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing models, and lattice models). 141
Table of Contents The fair values of our assets and liabilities that are measured on a recurring basis are as follows (in millions): December 31, 2013 Total Assets/Liabilities
Fair Value Measurements Using Level 1
Assets Other long-term assets Total assets Liabilities Other current liabilities Other long-term liabilities Total liabilities
Level 2
Level 3
Valuation Technique 1
at Fair Value
$ $
— —
$ $
— —
$ $
0.3 0.3
$ $
0.3 0.3
I
$
— — —
$
— 3.1 3.1
$ $ $
— — —
$
— 3.1 3.1
I I
$
$
$ December 31, 2012
Valuation Technique
Fair Value Measurements Using Level 1
Liabilities Other current liabilities Other long-term liabilities Total liabilities 1
$ $
— — —
Level 2
$ $
2.2 3.9 6.1
Level 3
$ $ $
— — —
1
Total
$2.2 3.9 $6.1
I I
As discussed above, the authoritative guidance identifies three valuation techniques: market approach (M), cost approach (C), and income approach (I).
Interest Rate Swaps On a recurring basis, we measure our interest rate swaps at fair value. The fair value of our interest rate swaps is derived from models based upon well recognized financial principles and reasonable estimates about relevant future market conditions and calculations of the present value of future cash flows, discounted using market rates of interest. Further, included in the fair value is approximately $0.1 million related to non-performance risk associated with the interest rate swaps at December 31, 2013 and December 31, 2012. Contingent Consideration As further described in Note 2, $8.9 million of the HI consideration was placed into escrow as contingent consideration. The amount payable as contingent consideration depends upon the successful continuation and/or renewal of certain management agreement contracts held by HI and, in the case of renewals, will be determined by comparing the contract revenue prior to renewal against the expected contract revenue after renewal. As of the acquisition date and December 31, 2013, approximately $8.6 million of contingent consideration was recognized. Level 3 Disclosures for Recurring Measurements The following table provides quantitative information associated with the fair value measurement of our recurring Level 3 inputs (in millions): Level 3 Contingent Consideration
Level 3 Assets as of December 31, 2013
Income Approach
$
Weighted Significant Unobservable Input
0.3
Range of Inputs
Average
Probabilities of retention of management contracts (a) 142
75% - 100%
98%
Table of Contents (a)
The fair value of adjustment to the contingent consideration is based on a formula driven threshold contract value set at the time of the HI transaction. The threshold contract value is a function of revenue and probability of retention of each contract over 12 to 18 months from the transaction date. Significant increases or decreases in any of the probabilities of renewal would result in a significantly lower or higher fair value measurement, respectively. The following table provides a roll-forward of the recurring fair value balance that used Level 3 inputs (in millions): Contingent Consideration
Beginning balance as of December 31, 2012 Addition of contingent consideration asset Ending balance as of December 31, 2013
$ $
— 0.3 0.3
Nonrecurring Measurements Where applicable, on a nonrecurring basis, we measure property and equipment, goodwill, other intangible assets, investments in nonconsolidated affiliates and assets and liabilities of discontinued operations at fair value. The fair values of our property and equipment and other intangible assets are determined using discounted cash flows and significant unobservable inputs. The fair value of our investments in nonconsolidated affiliates is determined using discounted cash flows or earnings, or market multiples derived from a set of comparables. The fair value of our assets and liabilities of discontinued operations is determined using discounted cash flows and significant unobservable inputs unless there is an offer to purchase such assets and liabilities, which would be the basis for determining fair value. The fair value of our goodwill is determined using discounted cash flows, and, when available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. Goodwill is tested for impairment as of October 1 of each year, absent any interim impairment indicators. An impairment charge of $1.5 million was recorded during 2013 for an investment in a nonconsolidated affiliate. In conjunction with the deconsolidation of this affiliate (as described in Note 2), we adjusted the investment to fair value. The fair value of the investment in the nonconsolidated affiliate was determined based on the estimated fair value using valuations techniques that included recent market transactions. Also during 2013 we recorded $4.6 million of impairment to our investments in a nonconsolidated affiliates due to the decline of future cash flows of such nonconsolidated affiliates that we judged to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . During 2012 we recorded $9.2 million of impairment to our investments in nonconsolidated affiliates due to a decline in the expected future cash flows of three nonconsolidated affiliates that we judged to be other than temporary. This impairment is included in Equity in net income of nonconsolidated affiliates . 143
Table of Contents The investment in nonconsolidated affiliates measured at fair value on a nonrecurring basis is as follows (in millions of U.S. dollars): Fair Value Measurements Using Significant Net Carrying
Quoted Prices in Active Markets for
Other Observable
Significant Unobservable
Value as of:
Identical Assets (Level 1)
Inputs (Level 2)
Inputs (Level 3)
—
—
Total Losses December 31, 2013
Investment in nonconsolidated affiliate
$
6.4
$
6.4
Year-ended:
$
4.6
Significant Net Carrying
Quoted Prices in Active Markets for
Other Observable
Significant Unobservable
Value as of:
Identical Assets (Level 1)
Inputs (Level 2)
Inputs (Level 3)
—
—
Total Losses June 30, 2013
Investment in nonconsolidated affiliate
$
2.9
$
2.9
Year-ended:
$
1.5
Significant Net Carrying
Quoted Prices in Active Markets for
Other Observable
Significant Unobservable
Value as of:
Identical Assets (Level 1)
Inputs (Level 2)
Inputs (Level 3)
—
—
Total Losses December 31, 2012
Investment in nonconsolidated affiliate
$
7.0
$
7.0
Year-ended:
$
9.2
The inputs used by the Company in estimating the value of Level 3 Investment in nonconsolidated affiliate may include the weighted average cost of capital (“WACC”), revenue growth rates and exit price. Assumptions used by the Company due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s results of operations. The following table includes information regarding the significant unobservable input used in the estimation of Level 3 fair value measurement.
Level 3 Investment in nonconsolidated affiliate
Level 3 Assets as of December 31, 2013
Income Approach
$
6.4
Significant Unobservable Inputs
Range of Inputs
WACC Revenue growth rates
11.4% - 15% 0.0% - 3.0%
Significant Unobservable
Range of
Level 3 Assets Level 3 Investment in nonconsolidated affiliate
as of June 30, 2013
Market Approach
$
(a)
Input
Inputs
Exit price (a)
2.9
$
The exit price was determined using the amount stated in a firm offer letter for the investment.
Level 3 Investments
Level 3 Assets as of December 31, 2012
Income Approach
$
4.0
CAGR (a) Discount rate (b) EBITDA multiple
(2.8) - 8.8% 11.4%
$
3.0
(c)
6.8x
Market Approach
(a) (b) (c)
2.9
Significant Unobservable Inputs
Weighted Range of Inputs
Average
7.7% 11.4% 6.8x
“CAGR” is defined as cumulative average growth rate. The CAGR is determined utilizing probability weighted estimates of future cash flows. The discount rate utilized is an estimate of what would be used by a market participant. The EBITDA multiple is Earnings before Interest, Taxes, Depreciation and Amortization of the underlying affiliate times a multiple that would be used by a market participant.
During the three-month period ended March 31, 2012, we recorded an impairment charge of $0.4 million for an asset group consisting of property and equipment. During the fourth quarter of 2012, we recorded a separate 144
Table of Contents impairment charge of $0.7 million for an asset group consisting of property and equipment, resulting in an aggregate impairment charge of $1.1 million recorded for the year-ended December 31, 2012. No material impairment charges were recorded during the years-ended December 31, 2013 and December 31, 2011 for intangible and long-lived assets. Facilities experiencing declining trends of earnings from operations or triggering events, such as the loss of a physician partner or increased local competition, resulted in the impairment charges recorded in 2012. The fair value of the impaired long-lived assets was determined based on the assets’ estimated fair value using valuation techniques that included third-party appraisals. Property and equipment measured at fair value on a nonrecurring basis are as follows (in millions of U.S. dollars): Fair Value Measurements Using Significant Net Carrying
Quoted Prices in Active Markets for
Other Observable
Significant Unobservable
Value as of:
Identical Assets (Level 1)
Inputs (Level 2)
Inputs (Level 3)
Total Losses December 31, 2012
Property and equipment
Year-ended:
$
0.7
—
—
$
0.7
$
0.7
$
0.9
—
—
$
0.9
$
0.4
March 31, 2012
Property and equipment
The inputs we used in estimating the value of Level 3 Property and equipment include the replacement cost per square foot, depreciation percentage and market price per square foot. Based on available inputs with respect to the two separate events, we used the market approach for determining the fair value of assets for the March 31, 2012 impairment event and the cost approach for determining the fair value of assets for the December 31, 2012 event. Assumptions used by us due to the lack of observable inputs may significantly impact the resulting fair value and, consequently, the Company’s results of operations. The following table includes information regarding significant unobservable inputs used in the estimation of Level 3 fair value measurements.
Level 3 Property and equipment
Level 3 Assets as of December 31, 2012
Cost Approach
$
0.7
Level 3 Property and equipment
Level 3 Assets as of March 31, 2012
Market Approach
$
(a)
0.9
Range of Significant Unobservable Input
Cost per square foot (a) Depreciation (b)
Inputs
$ 271 92.5% Range of
Significant Unobservable Input
Inputs
Price per square foot (a)
$ 109
Price per square foot is multiplied times the total square footage of a facility to determine the approximate market value. 145
Weighted Average
$
271 92.5% Weighted Average
$
109
Table of Contents The following table presents the carrying amounts and estimated fair values of our financial instruments that are classified as long-term liabilities in our consolidated balance sheets (in thousands). The carrying value equals fair value for our financial instruments that are classified as current in our consolidated balance sheets. The carrying amounts of a portion of our long-term debt approximate fair value due to various characteristics of those issues, including short-term maturities, call features and rates that are reflective of current market rates. For our long-term debt without such characteristics, we determined the fair market value by using quoted market prices, when available, or discounted cash flows to calculate their fair values. The fair values utilize inputs other than quoted prices in active markets, although the inputs are observable either directly or indirectly; accordingly, the fair values are in level 2 of the fair value hierarchy. As of December 31, 2013 Carrying Estimated Amount Fair Value
Interest rate swap agreements (includes short-term component) Long-term debt: Advances under $132.3 million Class B Revolving Credit Facility Class A Term Loan due 2014 Class B Term Loan due 2017 Class C Term Loan due 2018 Incremental Term Loan due 2018 8.875%/9.625% Senior PIK-Election Notes due 2015 10% Senior Subordinated Notes due 2017 Notes payable to banks and others Financial commitments
$
3,126
$
— — 214,429 388,050 — — — 44,023 $ —
$
$
As of December 31, 2012 Carrying Estimated Amount Fair Value
3,126
$
— — 214,563 389,020 — — — 44,023 $ —
$
6,105
— 118,970 216,634 — 98,500 164,785 150,000 24,338 $ —
$
6,105
$ — 118,673 215,280 — 98,500 167,119 157,313 24,338 $ —
NOTE 11 — EQUITY-BASED COMPENSATION We have one active equity-based compensation plan, the 2013 Omnibus Long-Term Incentive Plan, and two legacy equity-based compensation plans, the Management Equity Incentive Plan and the Directors and Consultants Equity Incentive Plan, under which we are no longer issuing new awards (together, the “Plans”). The Plans provide or have provided for the granting of options to purchase our stock as well as RSUs to key teammates, directors, service providers, consultants and affiliates. Option awards are generally granted with an exercise price equal to at least the fair market value of the underlying share at the date of grant. Vesting in the option awards varies based upon time, attainment of certain performance conditions, or upon the occurrence of a Liquidity Event (as defined in the applicable Plan) in which the TPG Funds and/or any of its affiliates achieves a minimum cash return on its original investment. All existing RSU awards vest over time. At December 31, 2013, 3,007,121 stock-based awards were authorized for grant under the Plans and 2,330,099 stock-based awards were available for future equity grants. In conjunction with our conversion to a Delaware corporation on October 30, 2013 (see Note 1), every 10.25 outstanding membership units of ASC Acquisition LLC were converted into one share of common stock of Surgical Care Affiliates, Inc., and options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates, Inc. at a ratio of 10.25 membership units of ASC Acquisition LLC underlying such options to each one share of common stock of Surgical Care Affiliates, Inc. underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. In addition, every 10.25 outstanding restricted equity units of ASC Acquisition LLC were converted into one restricted equity share of Surgical Care Affiliates, Inc. All information in this footnote is presented giving effect to the conversion. 146
Table of Contents On September 16, 2013, our Board of Directors accelerated the vesting of all performance-based options. This modification was a “probable-to-probable” modification under the authoritative guidance. As a result of the acceleration, the Company recognized $0.8 million of additional stock-based compensation expense in the year-ended December 31, 2013. The additional expense represents the incremental fair value as a result of the modification. As a result of the acceleration, no unvested performance-based options existed at December 31, 2013. Also on September 16, 2013, our Board of Directors resolved to pay a cash bonus of $2.46 per vested option and adjust downward the exercise price of all unvested options by approximately $2.46 per unvested option. As such, the Company recorded additional compensation expense of $4.6 million during the year-ended December 31, 2013. We will record stock-based compensation expense over the remaining vesting periods related to the adjustment to unvested options. This modification was a “probable-to-probable” modification under the authoritative guidance. We will record $1.5 million of additional stock-based compensation expense over remaining vesting periods of the modified options. Information pertaining to equity-based compensation was as follows (in thousands): YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Equity-based compensation expense Cash received from option exercises
$
YEAR-ENDED DECEMBER 31
2012
2,724 453
$
2011
1,719 —
$
1,680 —
As of December 31, 2013, the Company had total unrecognized compensation cost of approximately $7,794 related to non-vested awards, which the Company expects to recognize through 2017 and over a weighted-average period of 2.2 years. Option Awards A summary of option activity under the Plans as of December 31, 2013, and changes during the year-ended December 31, 2013 are presented below: WEIGHTEDUNITS (IN 000’S )
Outstanding, December 31, 2012 Granted Exercised Forfeitures Expirations Outstanding, December 31, 2013 Exercisable, December 31, 2013
2,485 612 (41) (49) — 3,007 1,974
AVERAGE EXERCISE PRICE
$ $ $ $ $
10.52 13.05 12.09 11.51 n/a 19.96
REMAINING CONTRACTUAL LIFE (YEARS)
2.6 –10.0 9.2 –10.0
AGGREGATE INTRINSIC VALUE
$ $
5.5 –9.5 0.6 –10.0
$
56,779 13,338 — — — 70,117
The weighted average grant-date fair value per option of all options granted during the year-ended December 31, 2013, was $6.68. The weighted average grant-date fair value per option of all options granted during the year-ended December 31, 2012, was $3.79. The weighted average grant-date fair value per option of all options granted during the year-ended December 31, 2011 was $3.38. The fair value of each option award is estimated on the date of grant utilizing two methodologies. For the Time-Based Options, the Company estimates the fair value of the grant utilizing the Black-Scholes-Merton model that utilizes the assumptions shown in the table below. Expected volatilities are based on observed historical trends in the industry and other factors. The expected term of the options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate was based on the time horizon of the expected term and is based on the U.S. Treasury yield curve in effect at the time of the grant. 147
Table of Contents YEAR-ENDED DECEMBER 31, 2013
YEAR-ENDED DECEMBER 31, 2012
YEAR-ENDED DECEMBER 31, 2011
35% -40% 1.0% -1.35% 6.25 0.00%
37% -39% 1.0% -1.35% 6.25 0.00%
38%-39% 1.2% -3.1% 6.5 0.00%
Expected volatility Risk-free interest rate Expected term (years) Dividend yield
The fair value of the Performance-Based Options is based on the application of a Monte Carlo simulation model. Expected volatilities are based on observed historical trends in the industry and other factors. The expected term of the options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate was based on the time horizon of the expected term and is based on the U.S. Treasury yield curve in effect at the time of the grant. On September 16, 2013, our Board of Directors accelerated the vesting of all performance-based options. This modification was a “probable-to-probable” modification under the authoritative guidance. As a result of the acceleration, the Company recognized $0.8 million of additional stock-based compensation expense. The additional expense represents the incremental fair value as a result of the modification. For the expected volatility assumption, an emphasis was placed on identifying comparable public companies that operate ambulatory surgery centers. The Company utilized comparable public company volatility rates to estimate the expected volatility. The Company used the exponentially weighted moving average volatility of the public companies identified, adjusted for changes in the capital structure (as described by ASC 718), for the derived expected term for the Time-Based Options. RSU Awards A summary of activity associated with RSU awards during 2013 is presented below: GRANT DATE UNITS (IN 000’S )
Nonvested RSUs at December 31, 2012 Granted Vested Forfeited Nonvested RSUs at December 31, 2013
20 77 (17) 0 80
FAIR VALUE PER UNIT
$ $ $ $
11.64 24.58 11.64 n/a 24.58
GRANT DATE UNITS (IN 000’S )
Total RSUs at December 31, 2012 Granted Vested Forfeited Total RSUs at December 31, 2013
74 77 — — 151
NOTE 12 — EMPLOYEE BENEFIT PLANS SCA has certain employee benefit plans, including the following: •
Company sponsored healthcare plans, including coverage for medical and dental benefits;
•
The Retirement Investment Plan, which is a qualified 401(k) savings plan; and
•
The Senior Management Bonus Program. 148
FAIR VALUE PER UNIT
$ $ $ $
10.63 24.58 n/a n/a 17.71
Table of Contents Substantially all teammates are eligible to enroll in the SCA’s sponsored healthcare plans, including coverage for medical and dental benefits. Our primary healthcare plans are national plans administered by third-party administrators, for which we are self-insured. The cost associated with these plans, net of amounts paid by teammates, was approximately $21.0 million, $16.9 million and $14.0 million for the yearsended December 31, 2013, 2012 and 2011, respectively. The Retirement Investment Plan is a qualified 401(k) savings plan. The plan allows eligible teammates to contribute up to 100% of their pay on a pre-tax basis into their individual retirement account in the plan, subject to the maximum annual limits set by the IRS. SCA’s employer matching contribution is 50% of the first 4% of each participant’s elective deferrals. All contributions to the plan are in the form of cash. Substantially all teammates who are at least 21 years of age are eligible to participate in the plan. Employer contributions vest over a six-year service period. Participants are immediately fully vested in their own contributions. Employer contributions made to the Retirement Investment Plan approximated $2.9 million, $2.8 million and $2.4 million during the years-ended December 31, 2013, 2012 and 2011, respectively. SCA has a Senior Management Bonus Program designed to reward senior management for performance, based on a combination of corporate, regional and individual goals. The corporate goals are based upon the Company meeting a pre-determined financial goal. Similarly, regional goals, if any, are based upon a pre-determined set of financial goals for the applicable region. Individual goals are initially proposed by each participant in consultation with his or her immediate supervisor and, with respect to our executive officers, are then approved by our Compensation Committee. We recorded expense of approximately $8.5 million, $4.8 million and $5.4 million under the Senior Management Bonus Program for the years-ended December 31, 2013, 2012 and 2011, respectively. NOTE 13 — INCOME TAXES The Company is subject to U.S. federal, state and local income taxes. The Income from continuing operations before income tax expense is as follows: YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Income from continuing operations before income tax expense
$
YEAR-ENDED DECEMBER 31
2012
72,745
$
2011
83,301
$
106,757
The significant components of the provision for income taxes related to continuing operations are as follows:
Current: Federal State and local Total current expense Deferred: Federal State and local Total deferred expense Total income tax expense related to continuing operations
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
2012
2011
$
$ 149
200 661 861 9,442 2,342 11,784 12,645
$
$
— 497 497 6,745 1,622 8,367 8,864
$
$
— 393 393 16,121 3,755 19,876 20,269
Table of Contents A reconciliation of differences between the federal income tax at statutory rates and our actual income tax expense on income from continuing operations, which include federal, state and other income taxes, is as follows:
Tax expense at statutory rate Increase (decrease) in tax rate resulting from: Federal income tax assumed by noncontrolling interests Increase in valuation allowance State income taxes, net of federal tax benefit Non-deductible stock issuance costs Other, net Income tax expense
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
2012
2011
35.0%
35.0%
35.0%
(50.1) 30.3 (2.0) 3.9 0.3 17.4%
(38.8) 14.6 (0.5) — 0.3 10.6%
(30.5) 13.5 0.8 — 0.2 19.0%
The income tax expense at the statutory rate is the expected income tax expense resulting from the income from continuing operations. Income tax expense, subsequent to the removal of tax expense related to noncontrolling interest income, is greater than the statutory rate for the year-ended December 31, 2013, 2012 and 2011, due to a valuation allowance and goodwill amortization related to indefinite-lived intangible assets. After consideration of all evidence, both positive and negative, management concluded that it is more-likely-than-not that the Company will not realize its net deferred tax assets. Therefore, a full valuation allowance has been established on our net deferred tax assets. The deferred tax liability resulting from goodwill amortization is considered an indefinite-lived intangible and cannot be looked upon as a source of future taxable income to support the realization of deferred tax assets for purposes of establishing a valuation allowance. Deferred income taxes recognize the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes and the impact of available net operating loss (“NOL”) carryforwards. The significant components of the Company’s deferred tax assets and liabilities are as follows: AS OF DECEMBER 31 2013 2012
Current Deferred income tax assets: Allowance for doubtful accounts Accrued liabilities Valuation allowance Deferred income tax liabilities: Prepaid expenses Net current deferred income tax liability Non-current Deferred income tax assets: Net operating loss Capital loss Investment in nonconsolidated affiliates Other comprehensive income Interest rate swaps Other Valuation allowance Deferred income tax liabilities: Goodwill and other indefinite-lived intangibles Property, net Intangible assets Net non-current deferred income tax liability Total deferred income tax liability 150
$
2,760 11,148 (12,824)
$
1,108 10,146 (10,656)
(1,561) (477)
(1,178) (580)
112,795 30,604 16,554 — 1,254 6,843 (153,321)
102,353 31,610 11,445 3,350 — 257 (141,163)
(116,698) (7,391) (6,861) (116,221) $(116,698)
(101,288) (6,924) (348) (100,708) $(101,288)
Table of Contents We reduce our deferred income tax assets by a valuation allowance if, based on the weight of the available evidence, it is more-likely-thannot that all or a portion of a deferred tax asset will not be realized. We assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative. Our most recent operating performance, the scheduled reversal of temporary differences and our forecast of taxable income in future periods are important considerations in our assessment. Management has considered all positive and negative evidence available at this time and continues to believe it is more-likely-than-not we will not realize a portion of our deferred tax assets. We have established a full valuation allowance against net deferred tax assets other than the deferred tax liability resulting from the goodwill amortization which is considered an indefinite-lived intangible. Based on these conclusions, a valuation allowance of $166.1 million, $151.8 million and $142.4 million is necessary as of December 31, 2013, 2012 and 2011, respectively. For the years-ended December 31, 2013, 2012 and 2011, the increases in the valuation allowance were $14.3 million, $9.4 million and $14.1 million, respectively. Adjustments to the valuation allowance may be made in future periods if there is a change in management’s assessment of the amount of deferred income tax assets that is realizable. At December 31, 2013, we had federal net operating loss carryforwards (“NOLs”) of approximately $263.7 million. Such losses expire in various amounts at varying times beginning in 2027. These NOL carryforwards are subject to a valuation allowance. At December 31, 2012, we had federal NOL carryforwards of $243.4 million. At this time, we do not believe the limitations imposed by Internal Revenue Code Section 382 will restrict our ability to use any NOLs before they expire. However, we cannot assure you that will be the case. The Company has no tax liability for uncertain tax positions as of December 31, 2013 or December 31, 2012. NOTE 14 — DISCONTINUED OPERATIONS The Company has closed or sold certain facilities that qualify for reporting as discontinued operations. The assets and liabilities associated with these facilities are reflected in the accompanying consolidated balance sheets as of December 31, 2013 and December 31, 2012 as Current assets related to discontinued operations, Assets related to discontinued operations, Current liabilities related to discontinued operations and Liabilities related to discontinued operations . Additionally, the accompanying consolidated statements of operations and cash flows reflect the loss, net of income tax expense, and the net cash (used in) provided by operating, investing and financing activities, respectively, associated with these facilities as discontinued operations. The operating results of discontinued operations are as follows: YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Net operating revenues Costs and expenses (Loss) gain on sale of investments Impairments Loss from discontinued operations Income tax benefit (expense) Net loss from discontinued operations
$
$
4,076 (5,363) (2,493) — (3,780) (3,612) (7,392) 151
YEAR-ENDED DECEMBER 31
2012
$
$
16,654 (17,911) (1,773) (13) (3,043) 953 (2,090)
2011
$
$
24,391 (26,524) 1,573 (49) (609) (2,375) (2,984)
Table of Contents The assets and liabilities related to discontinued operations consist of the following: DECEMBER 31,
DECEMBER 31,
2013
2012
Assets Current assets Accounts receivable, net Other current assets Total current assets Property and equipment, net Other long term assets Total assets Liabilities Current liabilities Accounts payable and other current liabilities Total current liabilities Other long-term liabilities Total liabilities
$
$
$
$
198 99 297 2,136 225 2,658
$
167 167 380 547
$
$
$
1,308 270 1,578 2,322 234 4,134
596 596 397 993
NOTE 15 — RELATED PARTY TRANSACTIONS The Company paid management fees to TPG Capital Management, L.P., an affiliate of TPG Global LLC and its affiliates (“TPG”), our majority owner, of $1.5 million during the year-ended December 31, 2013 and $2.0 million during each of the years-ended December 31, 2012 and 2011, respectively. In connection with the completion of our initial public offering (see Note 1), the Company no longer pays management fees to TPG and the related management services agreement has been terminated. In conjunction with the completion of our initial public offering, TPG is entitled to a fee payable under our management services agreement in an amount equal to $8.0 million. This fee was paid during the fourth quarter of 2013 and recorded in Other operating expenses in the accompanying consolidated statement of operations. Also in connection with the IPO, we entered into a registration rights agreement with the TPG Funds and certain members of our management and of our Board of Directors (the “Registration Rights Agreement”), which provides the TPG Funds with certain demand registration rights, including shelf registration rights, in respect of any shares of our common stock held by them, subject to certain conditions and limitations. The TPG Funds are entitled to an unlimited number of demand registrations, upon written notice. In connection with the amendment of our Amended Credit Agreement on May 8, 2013, TPG Capital BD, LLC, an affiliate of TPG, served as an arranger for purposes of the amendment and was paid an arrangement fee in the amount of $0.5 million during the year-ended December 31, 2013. In addition, TPG Capital BD, LLC participated as an underwriter underwriting the shares of our common stock in connection with our initial public offering of common stock and was paid an underwriting discount of approximately $0.7 million by us and the selling stockholders. Certain directors of the Company have received options to purchase shares of the Company under the Directors Plan as part of their compensation for service on the Company’s Board and for consulting services provided to the Company. Total expense recognized by the Company related to these options was immaterial for the years-ended December 31, 2013, 2012 and 2011. The law firm of Bradley Arant Boult Cummings LLP provided certain legal services to us. We paid approximately $1.8 million, $1.0 million and $0.9 million to this law firm in 2013, 2012 and 2011, respectively, for such legal services. The spouse of one of our executive officers, Richard Sharff, is a partner of this law firm. 152
Table of Contents NOTE 16 — COMMITMENTS AND CONTINGENT LIABILITIES Legal Proceedings The Company provides services in a highly regulated industry and is subject to various legal actions and regulatory and other governmental and internal audits and investigations from time to time. As a result, we expect that various lawsuits, claims and legal and regulatory proceedings may be instituted or asserted against us, including, without limitation, employment-related claims and medical negligence claims. Additionally, governmental agencies often possess a great deal of discretion to assess a wide range of monetary penalties and fines. We record accruals for contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including, but not limited to: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes. The outcome of any current or future litigation or governmental or internal investigations, cannot be accurately predicted, nor can we predict any resulting penalties, fines or other sanctions that may be imposed at the discretion of federal or state regulatory authorities. Nevertheless, it is reasonably possible that any such penalties, fines or other sanctions could be substantial, and the outcome of these matters may have a material adverse effect on our results of operations, financial position and cash flows and may affect our reputation. Litigation On May 5, 2006, Dr. Hansel DeBartolo filed a lawsuit captioned DeBartolo, et al. v. HealthSouth Corporation et al, in the United States District Court for the Northern District of Illinois, Eastern Division, against Joliet Surgery Center Limited Partnership (the “Partnership”), the general partner of that Partnership, Surgicare of Joliet, Inc., and its then-parent, HealthSouth Corporation, for a declaratory judgment and an injunction relating to the forced repurchase of his partnership interest (the “Federal Court Action”). We agreed to take responsibility from HealthSouth Corporation (our parent until SCA was purchased by ASC Acquisition LLC) regarding this matter. Dr. DeBartolo claimed that the partnership agreement’s requirement that an investor in a surgical center perform one-third of his surgical procedures at the center violates the federal Anti-Kickback Statute and its underlying federal policy, and he sought an order prohibiting the repurchase of his partnership interest. After the trial court dismissed the case by holding that no private cause of action exists under the Anti-Kickback Statute, Dr. DeBartolo appealed to the Seventh Circuit Court of Appeals, which directed the trial court to dismiss the case because the Federal courts did not have jurisdiction over the subject matter involved. On February 8, 2010, Dr. DeBartolo filed a lawsuit in the Twelfth Judicial Circuit Court, Will County, Illinois making the same claim and seeking the same relief as he sought in the Federal Court Action. On February 5, 2014, the Circuit Court entered an Order granting summary judgment in favor of the Defendants. On March 4, 2014, Plaintiff filed a Notice of Appeal in the Appellate Court of Illinois Third District seeking reversal of the Circuit Court’s Order. Risk Insurance Risk insurance for SCA and most of our facilities is provided through SCA’s risk insurance program. We insure our professional liability, general liability and workers’ compensation risks through commercial insurance plans placed with unrelated carriers. Provisions for these risks are based upon market driven premiums and actuarially determined estimates for incurred but not reported exposure under claims made policies. Provisions for losses within the policy deductibles represent the estimated ultimate net cost of all reported and unreported losses incurred through the consolidated balance sheet dates. Those estimates are subject to the effects of trends in loss severity and frequency. While we believe the provisions for losses are adequate, we cannot be sure the ultimate costs will not exceed our estimates. 153
Table of Contents Reserves for incurred but not reported professional and general liability risks were approximately $6.3 million and $5.5 million at December 31, 2013 and December 31, 2012, and are included in Other long-term liabilities in the consolidated balance sheets. Expenses related to professional and general liability risks were $4.6 million, $3.4 million and $3.8 million for the years-ended December 31, 2013, 2012 and 2011, respectively, and are classified in Other operating expenses in our consolidated statements of operations. Expenses associated with workers’ compensation were $2.1 million, $2.2 million and $1.7 million for the years-ended December 31, 2013, 2012 and 2011, respectively, and are classified in Salaries and benefits in our consolidated statements of operations. Leases We lease certain land, buildings and equipment under non-cancelable operating leases expiring at various dates through 2031. We also lease certain buildings and equipment under capital leases expiring at various dates through 2023. Operating leases generally have 3 to 22 year terms with one or more renewal options and with terms to be negotiated at the time of renewal. NOTE 17 — SUBSEQUENT EVENTS Effective January 1, 2014, a partner in our Fort Walton, FL ASC, which was a consolidated affiliate as of December 31, 2013, purchased SCA’s controlling equity interest in the facility for $2.4 million pursuant to the partner exercising a contractual right to repurchase our equity interest in the facility as described in “Operations— Facility Level Ownership .” SCA, through an indirect wholly owned subsidiary, retains a noncontrolling interest in the facility. Effective January 1, 2014, the owners and operators of a non-SCA affiliated ASC located in Riverside, CA (the “contributed facility”) contributed substantially all of the contributed facility’s assets to a current SCA facility located in Riverside, CA (“Riverside facility”), which is a consolidated affiliate, in exchange for a limited partnership interest in the Riverside facility. Operations of the two facilities were consolidated into the Riverside facility location, and the contributed facility location ceased operations. Effective January 1, 2014, an indirect wholly owned subsidiary of SCA purchased for $2.5 million a noncontrolling interest in a joint venture entity that owns and operates an ASC in Fishers, IN. Effective February 1, 2014, the owners and operators of a non-SCA affiliated ASC located in Sartell, MN (“Sartell facility”) contributed 100% of their ownership interests in the Sartell facility to a current SCA facility located in St. Cloud, MN (“St. Cloud facility”), which is a consolidated affiliate, in exchange for a limited partnership interest in the St. Cloud facility as well as cash in the amount of $1.7 million. In addition, we acquired newly issued units of the St. Cloud facility for $1.7 million in cash. The Sartell and St. Cloud facilities continue to operate in separate locations. The operations of the Sartell location will be consolidated into the St. Cloud location at a later date, and the Sartell location will cease operations. Effective February 28, 2014, an indirect wholly owned subsidiary of SCA exercised its right to repurchase our partner’s entire noncontrolling interest in our Houston, TX surgical hospital for $0.3 million. NOTE 18 — CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY Surgical Care Affiliates has no material assets or standalone operations other than its ownership in SCA and its subsidiaries. There are significant restrictions on the Surgical Care Affiliates’ ability to obtain funds from any of its subsidiaries through dividends, loans or advances. Accordingly, these condensed financial statements have been presented on a “Parent-only” basis. Under a Parent-only presentation, the Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting. These Parent-only financial statements should be read in conjunction with the Company’s Consolidated Financial Statements. 154
Table of Contents The following tables present the financial position of Surgical Care Affiliates as of December 31, 2013 and 2012 and the results of its operations and cash flows for the years-ended December 31, 2013, 2012 and 2011. Surgical Care Affiliates, Inc. Condensed Balance Sheets (In thousands of U.S. dollars)
Assets Cash and cash equivalents Investment in SCA Total assets Liabilities Due to SCA Total liabilities Equity Common stock Additional paid in capital Contributed capital Accumulated deficit Total equity Total liabilities and equity
DECEMBER 31,
DECEMBER 31,
2013
2012
$ $ $
$
16,193 205,686 221,879
$
16,193 16,193
$
$
382 413,419 — (208,115) 205,686 221,879
$
200 147,517 147,717 200 200 — — 304,826 (157,309) 147,517 147,717
Surgical Care Affiliates, Inc. Condensed Statements of Comprehensive Income (In thousands, except per share data) YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Equity in net loss of SCA Stock compensation expense Loss before income taxes Provision for income taxes Net loss Equity in comprehensive income of SCA Comprehensive loss Basic and diluted loss per share Basic and diluted average shares outstanding
$
$ $ 155
(48,620) 2,724 (51,344) — (51,344) 8,327 (43,017) (1.62) 31,688
YEAR-ENDED DECEMBER 31
2012
$
$ $
(18,291) 1,719 (20,010) — (20,010) 986 (19,024) (0.66) 30,340
2011
$
$ $
(7,997) 1,680 (9,677) — (9,677) 3,997 (5,680) (0.33) 29,347
Table of Contents Surgical Care Affiliates, Inc. Condensed Statements of Cash Flows (In thousands of U.S. dollars) YEAR-ENDED DECEMBER 31
YEAR-ENDED DECEMBER 31
2013
Net loss Adjustment to reconcile net loss to net cash from operating activities Equity in net loss of SCA Stock compensation expense Net cash from operating activities Investing activities: Investment in SCA Distributions from SCA Net cash used in investing activities Financing activities: Member contributions Proceeds from issuance of shares pursuant to IPO Distributions to unitholders Net cash provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental schedule of noncash investing and financing activities IPO fees paid by SCA
$
YEAR-ENDED DECEMBER 31
2012
(51,344)
$
2011
(20,010)
48,620 2,724 —
$
(9,677)
18,291 1,719 —
7,997 1,680 —
(160,793) 74,900 (85,893)
— — —
(28,134) — (28,134)
— 176,786 (74,900) 101,886 15,993 200 16,193
— — — — — 200 200
25,205 — — 25,205 (2,929) 3,129 200
$ $
$
4,909
$
—
—
Quarterly Statement of Earnings Data (Unaudited) The following table presents certain quarterly statement of earnings data for the years ended December 31, 2013 and 2012. The quarterly statement of earnings data set forth below was derived from our unaudited financial statements and includes all adjustments, consisting of normal recurring adjustments, which we consider necessary for a fair presentation thereof. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods. 2013
Net operating revenues Income from continuing operations before income taxes Income from continuing operations (Loss) gain from discontinued operations, net of income tax Net income Less: Net income attributable to noncontrolling interests Net loss attributable to Surgical Care Affiliates Basic and diluted net earnings (loss) from continuing operations per common share Basic and diluted net loss per common share
2012
Q1
Q2
Q3
Q4 Q1 (In thousands, except per share data)
$191,991
$197,417
$195,080
$217,547
31,031 27,661
19,516 18,439
14,840 9,130
(1,426) 26,235
(2,434) 16,005
(397) 8,733
Q2
Q3
Q4
$179,750
$187,331
$180,213
$197,566
7,358 4,870
22,965 19,909
23,248 21,115
22,018 18,050
15,070 15,363
(3,135) 1,735
(624) 19,285
(3,935) 17,180
1,076 19,126
1,393 16,756
(27,671) (25,768) (21,441) (29,172) (22,750) (23,972) (22,118) (23,517) $ (1,436) $ (9,763) $ (12,708) $ (27,437) $ (3,465) $ (6,792) $ (2,992) $ (6,761) $ $
0.00 $ (.05) $
(.24) $ (.32) $ 156
(.41) $ (.42) $
(.68) $ (.77) $
(.08) $ (.12) $
(.09) $ (.22) $
(.14) $ (.10) $
(.27) (.22)
Table of Contents Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable. Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures The Company has carried out an evaluation under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2013, the Company’s disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. Management’s Annual Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Changes in Internal Control Over Financial Reporting There has been no change in the Company’s internal control over financial reporting during the Company’s fourth quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B.
Other Information
Not applicable. 157
Table of Contents PART III Item 10.
Directors, Executive Officers and Corporate Governance
Our Board of Directors Our Certificate of Incorporation provides that our Board of Directors will consist of at least five directors but no more than 11 directors, with the exact number of directors to be fixed from time to time by resolution of our Board of Directors. We currently have seven directors. The Board of Directors is divided into three classes, as follows: •
Class I, which currently consists of Todd B. Sisitsky, Sharad Mansukani, M.D. and Jeffrey K. Rhodes, whose terms expire at our 2014 annual meeting of stockholders;
•
Class II, which currently consists of Thomas C. Geiser and Curtis S. Lane, whose terms expire at our annual meeting of stockholders to be held in 2015; and
•
Class III, which currently consists of Andrew P. Hayek and Frederick A. Hessler, whose terms expire at our annual meeting of stockholders to be held in 2016.
Upon the expiration of the initial term of office for each class of directors, each director in such class shall be elected for a term of three years and serve until a successor is duly elected and qualified or until his or her earlier death, resignation or removal. Any additional directorships resulting from an increase in the number of directors or a vacancy may be filled by the directors then in office. In connection with the closing of our initial public offering on November 4, 2013 (the “IPO”), we entered into a stockholders’ agreement (the “Stockholders’ Agreement”) with TPG FOF V-A, L.P., TPG FOF V-B, L.P., and TPG Partners V, L.P. (collectively, the “TPG Funds”) that provides that, so long as the Stockholders’ Agreement remains in effect, the TPG Funds will have certain nomination rights to designate for nomination candidates for our Board of Directors. We are required to use our reasonable best efforts to cause our Board of Directors and the Nominating and Corporate Governance Committee to include such persons designated by the TPG Funds in the slate of nominees recommended by the Board of Directors for election by the stockholders. As set forth in the Stockholders’ Agreement, for so long as the TPG Funds collectively own at least 50% of the shares of our common stock held by them at the closing of the IPO, they are entitled to designate for nomination a majority of the seats on our Board of Directors. When the TPG Funds collectively own less than 50% of the shares of our common stock held by them as of the closing of the IPO, but collectively own at least 30% of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination three directors. When the TPG Funds collectively own less than 30% of the shares of our common stock held by them as of the closing of the IPO, but collectively own at least 10% of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination two directors. Thereafter, the TPG Funds will be entitled to designate for nomination one director so long as they own at least 3% of the shares of our common stock held by them as of the closing of the IPO. However, if on or before November 4, 2014 (the first anniversary of the IPO), our Board of Directors is increased to nine members, and at such time the TPG Funds collectively own at least 50% of the shares of our common stock held by them as of the closing of the IPO, the number of seats on our Board of Directors that the TPG Funds will be entitled to designate for nomination, as described above, will be increased by one seat, so long as the TPG Funds collectively own at least 20% of the shares of our common stock held by them as of the closing of the IPO. When the TPG Funds collectively own less than 20% of the shares of our common stock held by them as of the closing of the IPO, but collectively own at least 10% of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination two directors. Thereafter, the TPG Funds will be entitled to designate for nomination one director so long as they own at least 3% of the shares of our common stock held by them as of the closing of the IPO. In the event that the size of our Board of Directors is otherwise increased or decreased in size at any time, the nomination rights afforded to the TPG Funds will be proportionately adjusted as well, rounded up to the nearest whole person. 158
Table of Contents As our Board of Directors currently consists of seven members and the TPG Funds continue to collectively own at least 50% of the shares of our common stock held by them at the closing of the IPO, the TPG Funds have the right to designate for nomination four directors to our Board of Directors. In accordance with the Stockholders’ Agreement, the TPG Funds designated Thomas C. Geiser, Sharad Mansukani, M.D., Todd B. Sisitsky and Jeffrey K. Rhodes as nominees of the TPG Funds to serve on our Board of Directors. Our Certificate of Incorporation does not provide for cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of common stock can elect all of the directors standing for election, and the holders of the remaining shares are not able to elect any directors, subject to our obligations under our Stockholders’ Agreement. Information about the Directors Set forth below are the biographies of each of our directors, including their names, their ages, their offices in the Company, if any, their principal occupations or employment for at least the past five years, the length of their tenure as directors, and the names of other public companies in which such persons hold or have held directorships during the past five years. Additionally, information about the specific experience, qualifications, attributes or skills that led to the conclusion that each person listed below should serve as a director is set forth below. Name
Age
Position(s) with the Company
Andrew P. Hayek Todd B. Sisitsky Thomas C. Geiser Curtis S. Lane Sharad Mansukani, M.D. Jeffrey K. Rhodes Frederick A. Hessler
40 42 63 56 44 39 65
Director, President and Chief Executive Officer Director and Chairman of the Board of Directors Director Director Director Director Director
Andrew P. Hayek was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA, our direct operating subsidiary, in 2008. He has also served as our President and Chief Executive Officer since 2008. Prior to joining the Company, Mr. Hayek served as the President of VillageHealth, a division of renal dialysis provider DaVita Inc. (“DaVita”), from 2007 to 2008 and as President and Chief Operating Officer of Alliance Healthcare Services Inc., a diagnostic imaging and radiation therapy provider, from 2003 to 2006. Mr. Hayek also previously worked at KKR Capstone, an affiliate of private equity firm Kohlberg Kravis Roberts & Co. and at The Boston Consulting Group, a strategy consulting firm. He currently serves on the board of advisors of Sg2, a healthcare analytics and consulting firm. Mr. Hayek earned his bachelor’s degree summa cum laude from Yale University. We believe that Mr. Hayek’s knowledge of the healthcare industry and his leadership experience make him a valuable asset to our management and the Board of Directors. Todd B. Sisitsky was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA in 2007. Mr. Sisitsky is a Partner of TPG where he leads TPG’s investment activities in the healthcare sector globally. Mr. Sisitsky serves on the board of directors of Aptalis Pharma, Inc., formerly Axcan Pharma, IASIS Healthcare Corp., HealthScope Ltd., Immucor Inc., IMS Health Holdings, Inc. and Par Pharmaceuticals Companies, Inc. and previously served on the boards of Biomet Inc. and Fenwal Inc. He also serves on the board of the Campaign for Tobacco Free Kids, a global not-for-profit organization, and the Dartmouth Medical School Board of Overseers. Prior to joining TPG in 2003, Mr. Sisitsky worked at Forstmann Little & Company and Oak Hill Capital Partners. Mr. Sisitsky earned an M.B.A. from the Stanford Graduate School of Business, where he was an Arjay Miller Scholar, and earned his undergraduate degree from Dartmouth College, where he graduated summa cum laude . We believe that Mr. Sisitsky’s financial expertise and experience leading investments in numerous healthcare companies make him a valuable asset to the Board of Directors. Thomas C. Geiser was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA in 2007. Mr. Geiser has served as a Senior Advisor of TPG Global, LLC since 2006 and served as the 159
Table of Contents Executive Vice President and General Counsel of WellPoint Health Networks Inc. (“WellPoint”) from its inception in 1993 to 2005. Mr. Geiser was responsible for WellPoint’s legal, legislative and regulatory affairs in fifty states and served as its principal contact with state and federal regulators. Prior to joining WellPoint, Mr. Geiser worked as an attorney in private law practice, coming to WellPoint from Brobeck, Phleger & Harrison LLP in San Francisco. He currently serves on the board of directors for Novasom, Inc., IASIS Healthcare Corp., the Library Foundation of Los Angeles and Saint John’s Health Center. Mr. Geiser earned his J.D. from the University of California, Hastings College of Law and earned his undergraduate degree in English from the University of Redlands. Mr. Geiser has extensive expertise and experience providing leadership in legal, legislative, regulatory and compliance affairs to both public and private companies in the healthcare industry, which we believe makes him a valuable asset to the Board of Directors. Curtis S. Lane was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA in 2007. Mr. Lane is a Senior Managing Director of MTS Health Partners, L.P., a merchant banking firm focused on healthcare advisory and investment opportunities. Prior to forming MTS Health Partners, L.P. in 2000, Mr. Lane founded and managed the healthcare investment banking group at Bear, Stearns & Co. Inc. from its inception in 1986 until 1998. Mr. Lane serves on the board of directors for Alliance Healthcare Services, Loving Care Agency and ProVen Pharmaceuticals, LLC and serves as a board of directors observer for DDC — DNA Diagnostic Center and Senior Home Care, Inc. Mr. Lane serves on the board of America’s Camp, which was formed to provide services to children that lost parents on September 11 th , and is an emeritus board member of the University of Pennsylvania Health System. Mr. Lane earned his M.B.A. from the Wharton School of the University of Pennsylvania and also earned his bachelor’s degree from the Wharton School of the University of Pennsylvania. We believe that Mr. Lane’s financial and healthcare advisory experience and experience serving on numerous boards of directors make him a valuable asset to the Board of Directors. Sharad Mansukani, M.D. was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA in 2007. Dr. Mansukani has served as a Senior Advisor of TPG Global, LLC since 2005. He serves on the board of directors of IASIS Healthcare Corp., Immucor Inc., IMS Health Holdings, Inc. and Par Pharmaceuticals Companies, Inc. Dr. Mansukani serves as Strategic Advisor to the board of directors of CIGNA and previously served as Vice Chairman of HealthSpring Inc. Dr. Mansukani also serves on the board of directors of the Children’s Hospital of Philadelphia and on the editorial boards of the American Journal of Medical Quality , Managed Care , Biotechnology Healthcare and American Health & Drug Benefits . Dr. Mansukani was appointed to Medicare’s Payment Advisory and Oversight Committee, and he was previously Senior Advisor to CMS and a member of the Medicare Reform Executive Committee. Dr. Mansukani previously served on the faculty at the University of Pennsylvania and at Temple University School of Medicine. Dr. Mansukani completed his residency and fellowship in ophthalmology at the University of Pennsylvania School of Medicine and a fellowship in quality management and managed care at the Wharton School of the University of Pennsylvania. Dr. Mansukani has substantial experience in the healthcare industry and has a deep understanding of the medical community and the dynamic regulatory and reimbursement environment, which we believe makes him a valuable asset to the Board of Directors. Jeffrey K. Rhodes was appointed to our Board of Directors on October 30, 2013 and the board of directors of SCA in 2010. Mr. Rhodes is a Principal of TPG, where he is a leader of the firm’s investment activities in the healthcare services and pharmaceutical/medical device sectors. Mr. Rhodes serves on the board of directors of Biomet Inc., EnvisionRx, IMS Health Holdings, Inc., Immucor Inc., and Par Pharmaceuticals Companies, Inc. Prior to joining TPG in 2005, Mr. Rhodes worked at McKinsey & Company and Article 27 LTD, a software company. Mr. Rhodes earned his M.B.A. from the Harvard Business School, where he was a Baker Scholar, and earned his undergraduate degree in Economics from Williams College, where he graduated summa cum laude . We believe that Mr. Rhodes’ financial expertise and experience overseeing investments in numerous healthcare companies make him a valuable asset to the Board of Directors. Frederick A. Hessler was appointed to our Board of Directors and the board of directors of SCA on October 30, 2013. Mr. Hessler is a retired Managing Director of Citigroup Global Markets Inc., where he headed 160
Table of Contents the Not-for-Profit Health Care Investment Banking Group from 1990 to 2013. Prior to joining Citigroup Global Markets Inc. in 1985, Mr. Hessler was a Partner and Regional Director for healthcare at Ernst & Young LLP, where he was responsible for conducting audits and performing feasibility, corporate reorganization and strategic planning studies for healthcare clients. Mr. Hessler serves on the Operations Committee and chairs the Investment Committee for the American Hospital Association and is a board member of The Center for Health Design, LHP Hospital Group, Inc., the National Center for Healthcare Leadership and the Public Health Institute and is a member of the senior advisory board of MedAssets, Inc. Mr. Hessler also previously served as chair of the Board of Trustees of the Health Research and Education Trust and the Health Insights Foundation and was a member of The Center for Healthcare Governance’s Blue Ribbon Panel on Trustee Core Competencies and the Healthcare Executives Study Society. Mr. Hessler earned his bachelor’s degree in accounting from Wayne State University and is a Certified Public Accountant (inactive status). We believe that Mr. Hessler’s financial and accounting expertise and his substantial investment banking and advisory experience in the healthcare industry make him a valuable asset to the Board of Directors. There are no family relationships between or among any of our directors or nominees. The principal occupation and employment during the past five years of each of our directors and nominees was carried on, in each case except as specifically identified above, with a corporation or organization that is not a parent, subsidiary or other affiliate of us. Except as described above in connection with the Stockholders’ Agreement, there is no arrangement or understanding between any of our directors or nominees and any other person or persons pursuant to which he or she was or is to be selected as a director or nominee. There are no legal proceedings to which any of our directors is a party adverse to us or any of our subsidiaries or in which any such person has a material interest adverse to us or any of our subsidiaries. The stock ownership with respect to each director is set forth in the table entitled “Security Ownership of Certain Beneficial Owners and Management” under Item 12 below. Executive Officers The following table sets forth certain information regarding our executive officers who are not also directors. As described below under Item 11 below, we have employment agreements with each of our executive officers. Name
Peter J. Clemens Michael A. Rucker Joseph T. Clark Richard L. Sharff, Jr.
Age
49 44 57 45
Position
Executive Vice President and Chief Financial Officer Executive Vice President and Chief Operating Officer Executive Vice President and Chief Development Officer Executive Vice President, General Counsel and Corporate Secretary
Peter J. Clemens is our Executive Vice President and Chief Financial Officer and has served in such capacity since 2011. Prior to joining SCA, Mr. Clemens held various positions at Caremark Rx, Inc. and CVS Caremark Corporation from 1995 until 2010, including most recently as Executive Vice President and Chief Financial Officer of Caremark, the pharmacy services division of CVS Caremark Corporation. Mr. Clemens has also held various positions in corporate banking with Wachovia Bank and Regions Bank. Mr. Clemens earned his M.B.A. from The Owen School at Vanderbilt University and earned his bachelor’s degree from Samford University. Michael A. Rucker is our Executive Vice President and Chief Operating Officer and has served in such capacity since 2009. Prior to joining SCA, Mr. Rucker served in a number of capacities at DaVita and its predecessor companies from 1995 to 2008, including most recently as Divisional Vice President of Operations. Mr. Rucker also served as an associate in the healthcare group of Houlihan, Lokey, Howard & Zukin Inc. and worked in public accounting as a CPA. Mr. Rucker earned his M.B.A. from the Wharton School of the University of Pennsylvania and his bachelor’s degree from Miami University. Joseph T. Clark is our Executive Vice President and Chief Development Officer and has served in such capacity since 2007. Prior to joining SCA, Mr. Clark served as President of the Surgery Division of HealthSouth 161
Table of Contents from 2005 to 2007. Mr. Clark also served as the President and Chief Executive Officer of HealthMark Partners, Inc., an owner, operator and developer of ASCs and specialty hospitals and in various senior management roles, including Chief Executive Officer of Response Oncology, Inc., a provider of cancer treatment services. He earned a bachelor’s degree from Dartmouth College. Richard L. Sharff, Jr. is our Executive Vice President, General Counsel and Corporate Secretary and has served in such capacity since 2007. Prior to joining SCA, Mr. Sharff practiced law from 1994 to 2007 at Bradley Arant Rose and White LLP (now Bradley Arant Boult Cummings LLP (“Bradley Arant”)), where he represented a variety of clients in the healthcare industry. Mr. Sharff earned his J.D. from the University of Virginia and earned his bachelor’s degree from the University of Virginia. He is a member of the bars in Alabama and California (inactive status). There are no family relationships between or among any of our executive officers. The principal occupation and employment during the past five years of each of our executive officers was carried on, in each case except as specifically identified above, with a corporation or organization that is not a parent, subsidiary or other affiliate of us. There is no arrangement or understanding between any of our executive officers and any other person or persons pursuant to which he was or is to be selected as an executive officer. There are no legal proceedings to which any of our executive officers is a party adverse to us or any of our subsidiaries or in which any such person has a material interest adverse to us or any of our subsidiaries. The stock ownership with respect to each of our executive officers is set forth in the table entitled “Security Ownership of Certain Beneficial Owners and Management” under Item 12 below. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our directors and officers, and persons who own more than ten percent (10%) of our common stock, to file reports of ownership and changes in ownership of Company common stock held by them with the SEC. Copies of these reports must also be provided to the Company. Based on our review of these reports, we believe that, during the year ended December 31, 2013, all reports required to be filed during such year were filed on a timely basis. Committees of the Board of Directors Standing Committees The Board of Directors has established five standing committees to assist it in carrying out its responsibilities: the Audit Committee, the Nominating and Corporate Governance Committee, the Compensation Committee, the Compliance Committee and the Acquisition Committee. Each of the committees operates under its own written charter adopted by the Board of Directors, each of which is available on the Company’s Investor Relations Web site at http://investor.scasurgery.com under “Corporate Governance.” In addition, special committees may be established under the direction of our Board of Directors when necessary to address specific issues. The membership and functions of each of the standing committees are described below. Audit Committee The Audit Committee is responsible for, among other things: •
appointing the independent auditor, reviewing the quality of its work annually, monitoring its independence and replacing it as necessary; pre-approving all the audit and non-audit services; reviewing with the auditor the scope and plan of the annual audit; reviewing with the auditor any review of the quarterly financial statements that the committee may direct the auditor to perform;
•
reviewing with the senior internal audit services executive the results of the audit work at least annually and more frequently as provided in the policy for reporting financial accounting and auditing concerns, as approved by the committee; at least annually reviewing the experience and qualifications of the senior members of the internal audit services team; 162
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discussing with management and the auditor the annual audited financial statements, the financial information to be included in our annual and quarterly reports to be filed with the SEC and the adequacy of the internal controls over financial reporting;
•
discussing with management and the auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements, including any significant changes in our selection or application of accounting principles, any significant issues (material weaknesses or significant deficiencies as such terms are defined in the Sarbanes-Oxley Act) as to the adequacy of our accounting controls;
•
reviewing the adequacy of disclosure controls and procedures with the Chief Executive Officer, the Chief Financial Officer and the General Counsel at least quarterly;
•
overseeing company policies and practices with respect to financial risk assessment and risk management;
•
reviewing related party transactions;
•
approving guidelines for the hiring of former employees of the independent auditor;
•
establishing and publishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters, referred to as “whistleblowing” procedures;
•
reviewing with management, including the General Counsel, the implementation and effectiveness of the compliance and ethics program, including the “whistleblowing” procedures;
•
meeting separately and periodically with management and the auditor; and
•
regularly reporting its work to the Board of Directors.
The current members of the Audit Committee are Frederick A. Hessler (Chairman), Curtis S. Lane and Jeffrey K. Rhodes. Our Board of Directors has determined that (i) Messrs. Hessler, Lane and Rhodes are each “independent directors” under the NASDAQ listing rules, (ii) Messrs. Hessler and Lane each satisfy the heightened independence requirements of Rule 10A-3 under the Exchange Act, (iii) each member of the Audit Committee is financially literate and (iv) Mr. Hessler qualifies as an “audit committee financial expert” under the criteria set forth in the rules and regulations of the SEC. Nominating and Corporate Governance Committee The Nominating and Corporate Governance Committee is responsible for, among other things: •
establishing the criteria for selecting new directors;
•
recommending to the Board of Directors corporate governance guidelines and reviewing such guidelines at least annually;
•
reviewing the performance of our Board of Directors;
•
making recommendations to the Board of Directors regarding the selection of candidates, qualification and competency requirements for service on the Board of Directors and the suitability of proposed nominees as directors;
•
reviewing and making recommendations to the Board of Directors regarding the charters, structure and operations of the committees of the Board of Directors, including membership of these committees; and
•
reviewing succession planning for the Chief Executive Officer and other senior executives, and making recommendations on such matters to the Board of Directors; and
•
regularly reporting its activities to the Board of Directors. 163
Table of Contents The members of the Nominating and Corporate Governance Committee are Jeffrey K. Rhodes (Chairman), Thomas C. Geiser and Todd B. Sisitsky. Because we are a “controlled company” under the NASDAQ listing rules, our Nominating and Corporate Governance Committee is not required to be fully independent, although if such rules change in the future or we no longer meet the definition of a “controlled company” under the current rules, we will adjust the composition of the Nominating and Corporate Governance Committee accordingly in order to comply with such rules. Compensation Committee The Compensation Committee is responsible for, among other things: •
reviewing and approving corporate goals and objectives relevant to compensation of our executive officers, including the balance between short-term compensation and long-term incentives;
•
conducting the evaluation process for our executive officers in light of these goals and objectives;
•
determining and approving or recommending to the Board of Directors for approval the total compensation package of the executive officers;
•
making recommendations to the Board of Directors with respect to the establishment and terms of incentive-compensation and equity-based plans for our executive officers; granting awards under and otherwise administering these plans and approving and administering any other compensation plan in which our executive officers participate;
•
periodically establishing and reviewing policies with respect to management perquisites;
•
advising the Board of Directors with respect to proposed changes in the compensation of the Board of Directors or the Compensation Committee;
•
reviewing annually any stock ownership guidelines applicable to our directors and senior management and recommending to the Board of Directors revisions to such guidelines as appropriate;
•
retaining compensation consultants and approving the compensation consultants’ fees and other terms and conditions of retention, after considering all relevant factors, including any business or personal relationship of the consultant or consultant’s employer with any of our executive officers;
•
reviewing and discussing with management, prior to the filing of the proxy statement, the disclosure prepared regarding executive compensation; and
•
regularly reporting its work to the Board of Directors.
Pursuant to the Compensation Committee’s charter, the Compensation Committee may delegate any of its responsibilities to a subcommittee comprised of one or more members of the committee. The current members of the Compensation Committee are Todd B. Sisitsky (Chairman), Thomas C. Geiser and Sharad Mansukani, M.D. Because we are a “controlled company” under the NASDAQ listing rules, our Compensation Committee is not required to be fully independent, although if such rules change in the future or we no longer meet the definition of a controlled company under the current rules, we will adjust the composition of the Compensation Committee accordingly in order to comply with such rules. Compliance Committee The Compliance Committee is responsible for, among other things: •
overseeing, monitoring and evaluating our compliance with our federal, state and local regulatory obligations, with the exception of obligations relating to compliance with tax and securities-related laws, rules and regulations (which are the responsibility of the Audit Committee);
•
ensuring the establishment, maintenance and oversight of an effective regulatory compliance program to prevent and detect violations of law; reviewing and approving the annual regulatory compliance program and the implementation and effectiveness of such program; 164
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establishing the qualifications, authority and responsibilities of the compliance officer and assisting with and overseeing the activities of the compliance officer; performing an annual evaluation of the compliance officer in carrying out an effective compliance program;
•
monitoring our compliance with any corporate integrity agreement or similar undertaking, with the OIG, HHS or any other government agency;
•
receiving and reviewing periodic reports from the compliance officer, including an annual report summarizing compliance-related activities undertaken by us during the year and the results of all regulatory compliance audits conducted during the year;
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establishing and publishing appropriate mechanisms for receipt, retention and treatment of complaints regarding potential violations of our compliance policies and applicable laws and regulations, and reviewing such complaints;
•
discussing with management our major compliance risks and steps management has taken to monitor and control such risk, including any policies and procedures with respect to risk assessment and risk management; and
•
recommending such actions or measures to be adopted by the Board of Directors that it deems appropriate to improve the effectiveness of the regulatory compliance program.
The members of the Compliance Committee are Thomas C. Geiser (Chair), Sharad Mansukani, M.D. and Curtis S. Lane. Acquisition Committee The Acquisition Committee is responsible for, among other things: •
reviewing our acquisition strategies in connection with our management;
•
investigating acquisition candidates;
•
authorizing and approving acquisitions valued in an amount not to exceed $5.0 million in cash, stock or a combination thereof; and
•
recommending acquisition strategies and acquisition candidates valued in an amount above $5.0 million to our Board of Directors.
The members of the Acquisition Committee are Thomas C. Geiser (Chairman) and Jeffrey K. Rhodes. Meetings and Executive Sessions Under our Corporate Governance Guidelines, directors are expected to use their reasonable best efforts to attend all or substantially all Board meetings and meetings of the committees of the Board on which they serve, as well as annual meetings of stockholders. Executive sessions of the independent directors of the Board must be held at least two times a year and otherwise as needed. These sessions are chaired by an independent director selected by a majority of the independent directors participating in the executive session. Process for Stockholders to Recommend Director Candidates Stockholders who wish to recommend candidates for the Nominating and Corporate Governance Committee’s consideration must submit a written recommendation to the Secretary of the Company at 520 Lake Cook Road, Suite 250, Deerfield, IL 60015. Recommendations must be sent by certified or registered mail and received by November 15th for consideration at the following year’s annual meeting of stockholders. Recommendations must include the following: •
The recommending stockholder’s name, number of shares owned, length of period held, and proof of ownership;
•
The candidate’s name, address, phone number, e-mail address and age; 165
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A resume describing, at a minimum, the candidate’s educational background, occupation, employment history, and material outside commitments (e.g., memberships on other boards and committees, charitable foundations, etc.);
•
A supporting statement which describes the stockholder’s and candidate’s reasons for nomination to the Board and documents the candidate’s ability to satisfy the director qualifications described above;
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The candidate’s consent to a background investigation;
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The candidate’s written consent to stand for election if nominated by the Board and to serve if elected by the stockholders; and
•
Any other information that will assist the Nominating and Corporate Governance Committee in evaluating the candidate in accordance with this procedure.
The Corporate Secretary will promptly forward these materials to the Chairman of the Nominating and Corporate Governance Committee and the Board Chairperson. The Nominating and Corporate Governance Committee may contact recommended candidates to request additional information necessary for its evaluation or for disclosure under applicable SEC rules, including without limitation information relating to such candidate that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Exchange Act. Code of Business Conduct and Ethics We are committed to having sound corporate governance principles. Having such principles is essential to running our business efficiently and to maintaining our integrity in the marketplace. We have adopted a document known as the Standards of Legal and Regulatory Conduct that is applicable to all of our directors and teammates (“Code of Business Conduct”). We have also adopted a Code of Ethical Conduct for Financial Leaders that applies to our Chief Executive Officer, Chief Financial Officer and other senior financial officers at the corporate level (the “Senior Officers Code”). Both the Code of Business Conduct and the Senior Officers Code are available on our website at www.scasurgery.com in the “Investors” section under “Corporate Governance.” Any future changes or amendments to the Senior Officers Code or the Code of Business Conduct, and any waiver of the Senior Officers Code or the Code of Business Conduct that applies to our Chief Executive Officer, Chief Financial Officer or Principal Accounting Officer will be posted to our website at the above location. Item 11.
Executive Compensation
Overview The following discussion relates to the compensation of our President and Chief Executive Officer, Andrew P. Hayek, and our two most highly compensated executive officers in 2013 (other than our Chief Executive Officer), Joseph T. Clark, our Executive Vice President and Chief Development Officer, and Michael A. Rucker, our Executive Vice President and Chief Operating Officer (Messrs. Hayek, Clark and Rucker are collectively referred to herein as our “Named Executive Officers”). Our Named Executive Officers’ compensation is determined by our Compensation Committee and is generally reviewed annually. Our executive compensation program is designed to attract, motivate and retain high-quality leadership and incentivize our executive officers and other key teammates to achieve company and individual performance goals over the short- and long-term. Our pay-for-performance approach to executive compensation places an emphasis on both short- and longterm incentives, which serves to align the interests of our executive officers with those of our stockholders. On October 30, 2013, prior to the closing of the IPO, we converted from a Delaware limited liability company, ASC Acquisition LLC, to a Delaware corporation. Pursuant to the conversion, options to purchase membership units of ASC Acquisition were converted into options to purchase shares of common stock of Surgical Care Affiliates at a ratio of 10.25 membership units underlying such options to each one share of common stock underlying such converted options. In connection with the conversion, the exercise prices of such converted options 166
Table of Contents were adjusted accordingly. In addition, every 10.25 outstanding Restricted Equity Units (“REUs”) of ASC Acquisition LLC were converted into one RSU of Surgical Care Affiliates. The vesting and other terms of the options and REUs generally remained the same. Elements of Executive Compensation The compensation of our Named Executive Officers consists of base salary, annual cash bonuses, equity awards and employee benefits, as described below. Our Named Executive Officers are also entitled to certain compensation and benefits upon qualifying terminations of employment pursuant to their employment agreements. Base Salaries . Base salaries for our Named Executive Officers are determined based on each officer’s responsibilities and his experience and contributions to our business. Base salaries for our Named Executive Officers are reviewed periodically by our Compensation Committee. When reviewing base salaries for potential increase, our Compensation Committee considers each officer’s experience and individual performance, our performance, and general industry conditions. Annual Cash Bonuses . Our Named Executive Officers are eligible to participate in our Senior Management Bonus Program, which was established to promote and reward the achievement of corporate, regional and individual performance goals. Corporate goals are based upon Surgical Care Affiliates meeting pre-determined financial goals. Similarly, regional goals, if any, are based upon a pre-determined set of financial goals for the applicable region. Individual goals are initially proposed by each participant in consultation with his or her immediate supervisor and are then approved by the Compensation Committee. The target and maximum amounts of any annual bonus that may be earned by an executive officer are expressed as a percentage of the executive’s annual base salary in effect with respect to the applicable year. For fiscal year 2013, Mr. Hayek had a target annual bonus of 100% of base salary, up to a maximum of 200% of base salary. Mr. Clark had a target annual bonus of 70% of base salary, up to a maximum of 140% of base salary. Mr. Rucker had a target annual bonus of 75% of base salary, up to a maximum of 150% of base salary. The bonuses paid to each of our Named Executive Officers for fiscal year 2013 are set forth in the Summary Compensation Table below. Equity Awards . Our Named Executive Officers participate in the Management Equity Incentive Plan adopted on November 16, 2007, as amended (the “2007 Equity Plan”). See “2007 Equity Plan” beginning on page 172 below for additional details about our 2007 Equity Plan. Grants under the 2007 Equity Plan, including those made to our Named Executive Officers, have consisted of option awards, which provide our executive officers with appropriate incentives to continue in our employ and to improve our growth and profitability, and which serve to align the interests of our Named Executive Officers with our stockholders. A portion of the option awards granted to each Named Executive Officer are subject to time-based vesting and a portion were subject to performance-based vesting, subject to the Named Executive Officer continuing to be employed on the applicable vesting date. Approximately 24% of Mr. Hayek’s outstanding awards are subject to time-based vesting and approximately 76% were subject to performance-based vesting. Approximately 29% of Mr. Clark’s outstanding awards are subject to time-based vesting and approximately 71% were subject to performance-based vesting. Approximately 49% of Mr. Rucker’s outstanding awards are subject to time-based vesting and approximately 51% were subject to performance-based vesting. As of September 16, 2013, all of the performancebased options were deemed to be fully vested. The vesting of the time-based option awards is generally in four or five equal annual installments of 25% or 20% per year, respectively, following the grant, and accelerates upon certain qualifying terminations, as described below. Our Named Executive Officers are also eligible to participate in the 2013 Omnibus Long-Term Incentive Plan adopted on October 29, 2013 (the “2013 Omnibus Plan”); however, no awards have been made to the Named Executive Officers to date under the 2013 Omnibus Plan. See “2013 Omnibus Plan” beginning on page 173 below for a description of our 2013 Omnibus Plan. 167
Table of Contents On July 24, 2008, Mr. Hayek was granted 700,000 REUs (or 68,292 RSUs after giving effect to our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013), which were subject to time-based vesting over a period of five years from the date of grant and as of July 24, 2013 were fully vested. Mr. Hayek’s RSUs will be settled for shares of common stock (or, in the Board of Directors’ discretion, cash) upon the earlier of (i) the termination of Mr. Hayek’s employment or (ii) a qualifying change in control of the Company or SCA. Special Cash Bonus . In September 2013, we paid a cash distribution of $0.241279 per outstanding membership unit of ASC Acquisition LLC (or approximately $2.46 per share of our common stock after giving effect to our conversion to a corporation) (the “2013 Distribution”). In connection with the 2013 Distribution, in September 2013, SCA paid the 2013 Special Cash Bonus Payment to holders of vested options and REUs who remained employed by SCA as of the date of payment, including our Named Executive Officers, equal to $0.241279 per vested option or REU (or $2.46 per option or RSU after giving effect to our conversion to a corporation). In connection with the 2013 Distribution and the 2013 Special Cash Bonus Payment, the Company also reduced the exercise price of unvested options by the same amount. Holders of unvested REUs did not receive a cash payment or any adjustment with respect to their unvested REUs. To the extent teammates, including our Named Executive Officers, owned membership units of ASC Acquisition LLC outright, such teammates also received a payment in respect of such membership units as part of the 2013 Distribution. Benefits and Perquisites . We provide the following benefits to our Named Executive Officers on the same basis as all other eligible executives: •
Company sponsored healthcare plans, including coverage for medical and dental benefits.
•
A qualified 401(k) savings plan with a matching contribution.
•
Payment of life insurance premiums.
•
Payment of long-term disability insurance premiums.
•
With respect to Mr. Hayek, dues and expenses for his memberships in the Young Presidents Organization (“YPO”) and the YPOWPO International in the amount of approximately $8,830 in 2013.
Employment Agreements . We have entered into employment agreements with each of our Named Executive Officers, which include severance and restrictive covenant provisions. We believe that reasonable severance benefits are necessary in order to attract and retain highquality, talented executive officers. Role of Executive Officers in Decisions Relating to Executive Officer and Director Compensation Our Chief Executive Officer makes recommendations to the Compensation Committee regarding base salaries, bonuses and equity compensation grants for the remainder of our executives. However, the Chief Executive Officer is not present during deliberations or voting relating to his own compensation. The Compensation Committee has discretion to approve, disapprove or modify recommendations made by the Chief Executive Officer. Role of Compensation Consultant The Compensation Committee has engaged a compensation consultant, Deloitte Consulting LLP (“Deloitte”), to review, assess and provide recommendations with respect to certain aspects of our compensation program for executive officers and directors. Deloitte was previously engaged, beginning in July 2013, by the compensation committee of the board of directors of SCA to assist with executive compensation matters in connection with the possibility of either us or SCA transitioning to become a public company. In its role as compensation consultant, Deloitte has rendered services to the compensation committee of SCA, and since the IPO, to our Compensation Committee, including examining the overall pay mix for our executives, conducting a competitive assessment of our executive compensation program and making recommendations and advising on compensation design and 168
Table of Contents levels. Deloitte has also provided advice on structuring annual and long-term incentive arrangements for executives. In addition, Deloitte has provided and is expected to continue to provide advice to the Compensation Committee on the compensation elements and levels for nonemployee directors. In addition to the compensation consulting services provided by Deloitte to the Compensation Committee, Deloitte affiliates have provided certain services to us and SCA, at the request of management, consisting of internal audit support services and business valuation services. Deloitte’s fees for executive and director compensation services in 2013 were $106,953. For the additional services provided by affiliates of Deloitte, as described above, the aggregate fees in 2013 were $242,037. The Compensation Committee believes that, given the nature and scope of these projects, these additional services did not raise a conflict of interest and did not impair Deloitte’s ability to provide independent advice to the Compensation Committee concerning executive and director compensation matters. In making this determination, the Compensation Committee has considered, among other things, the following factors: (i) the types of non-compensation services provided by the affiliates of Deloitte, (ii) the amount of fees for such non-compensation services, noting in particular that such fees are negligible when considered in the context of the aggregate total revenues of Deloitte and its affiliates for the period, (iii) Deloitte’s policies and procedures concerning conflicts of interest, (iv) the fact that Deloitte representatives who advise the Compensation Committee do not provide any non-compensation related services to us or SCA, (v) the fact that there are no other business or personal relationships between our management or members of the Compensation Committee, on the one hand, and any Deloitte representatives who provide compensation services to us, on the other hand, and (vi) the fact that neither Deloitte nor any of the Deloitte representatives who provide compensation services to the Compensation Committee owns any of our common stock. Summary Compensation Table The table below summarizes the total compensation paid to or earned by each of the Company’s Named Executive Officers for the fiscal years ended December 31, 2013 and December 31, 2012. Non-Equity Incentive Plan Stock Awards Name and Principal Position
Bonus ($)
Option Awards ($) (1)
Nonqualified Deferred Compensation
Compensation
Year
Salary ($)
Andrew P. Hayek President and Chief Executive Officer
2013 2012
595,327 582,000
1,871,032(4) 31,440(5)
-0-0-
1,743,524 -0-
579,898 196,211
-0-0-
9,110 9,000
4,798,891 818,651
Michael A. Rucker Executive Vice President and Chief Operating Officer
2013 2012
424,338 415,000
433,906(6) 20,375(7)
-0-0-
887,121 369,000
315,909 110,536
-0-0-
9,056 9,000
2,070,330 923,911
Joseph T. Clark Executive Vice President and Chief Development Officer
2013 2012
458,559 448,000
497,638(8) 33,904(9)
-0-0-
515,588 95,000
320,991 97,883
-0-0-
9,080 9,000
1,801,856 683,787
($)
($) (2)
Earnings ($)
All Other Compensation ($) (3)
Total ($)
(1) The amounts presented in this column represent the fair value of the options granted to purchase membership units of ASC Acquisition LLC (or, since October 30, 2013, shares of our common stock) on the date of grant in accordance with FASB ASC Topic 718. Further detail surrounding the options awarded, the method of valuation and the assumptions made are set forth in the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” section, under “Critical Accounting Policies.” For 2013, in addition to the grant date fair value of the option awards granted to the Named Executive Officers in fiscal year 2013, the amounts reported include (i) the incremental fair value of the performance-based options that were accelerated on September 16, 2013, computed as of the acceleration date in accordance with ASC Topic 718, or $174,635 for Mr. Hayek, $130,809 for Mr. Rucker and $52,562 for Mr. Clark and (ii) the incremental fair value recognized for the reduction on September 16, 2013 of the exercise price of previously granted options that were unvested as of such date, computed in accordance with ASC Topic 718, or $368,894 for Mr. Hayek, $276,317 for Mr. Rucker and $111,030 for Mr. Clark.
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Table of Contents (2) The amounts presented in this column represent the portion of the cash bonuses earned by the executive officers under our Senior Management Bonus Program for the applicable year that were attributable to the attainment of pre-established corporate and/or individual performance goals for such year. Any discretionary bonuses, whether paid under the Senior Management Bonus Program or otherwise, are reported under the “Bonus” column rather than the “Non-Equity Incentive Plan Compensation” column. (3) The amounts presented in this column represent 401(k) matching contributions and life insurance premiums paid on behalf of the Named Executive Officers by the Company. (4) $1,495,930 of this amount represents the amount of a one-time cash bonus paid to Mr. Hayek in September 2013 in respect of vested options and REUs, as described above under “Elements of Executive Compensation — Special Cash Bonus,” and $375,102 represents an additional special cash bonus paid to Mr. Hayek in connection with the successful completion of the Company’s initial public offering. (5) Represents the discretionary portion of the bonus paid to Mr. Hayek under our Senior Management Bonus Program for 2012. (6) Represents the amount of a one-time cash bonus paid to Mr. Rucker in September 2013 in respect of vested options, as described above under “Elements of Executive Compensation — Special Cash Bonus.” (7) Represents the discretionary portion of the bonus paid to Mr. Rucker under our Senior Management Bonus Program for 2012. (8) Represents the amount of a one-time cash bonus paid to Mr. Clark in September 2013 in respect of vested options, as described above under “Elements of Executive Compensation — Special Cash Bonus.” (9) Represents the discretionary portion of the bonus paid to Mr. Clark under our Senior Management Bonus Program for 2012.
Outstanding Equity Awards at 2013 Fiscal Year-End The following table sets forth information regarding equity awards held by our Named Executive Officers as of December 31, 2013 and reflects our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013. Option Awards
Stock Awards Equity Incentive Plan Awards:
Number of Securities Underlying Unexercised Vesting Start Date
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised
Number of Securities Underlying Unexercised Option Option Options Exercise Expiration (#) Unearned Unexercisable Options (#) Price ($) Date (c) (d) (e) (f) — (1) — 10.25 4/21/2018 — (1) — 11.18 3/24/2020 21,951(1) — 8.72(4) 3/24/2020 182,926(2) — 12.41(4) 5/06/2023
Equity Incentive Market or Market Payout Number of Value of Plan Awards: Value of Shares or Number of Unearned Shares or Units of Unearned Shares, Units Units of Stock Shares, Units or or Other Stock That That Have Other Rights Rights That Have Not Not That Have Not Have Not Vested (#) Vested ($) Vested (#) Vested ($) (g) (h) (i) (j) — — — — — — — —
4/21/2008 3/24/2010 3/24/2010 5/06/2013
Options (#) Exercisable (b) 360,975(1) 175,610(1) 21,951(1) —
Michael A. Rucker
9/15/2008 7/23/2009 7/23/2009 3/24/2010 3/24/2010 2/8/2011 2/8/2011 3/6/2012 3/6/2012 5/6/2013
53,500(1) 37,765(1) — (1) 46,829(1) 5,854(1) 13,659(1) 1,951(1) 23,696(2) 23,695(2) — (2)
— (1) — (1) 4,196(1) — (1) 5,853(1) — (1) 3,902(1) — (2) 47,390(2) 73,170(2)
— — — — — — — — — —
12.10 12.10 9.64(4) 11.18 8.72(4) 11.18 8.72(4) 13.94 11.48(4) 12.41(4)
9/15/2018 7/23/2019 7/23/2019 3/24/2020 3/24/2020 2/8/2021 2/8/2021 3/6/2022 3/6/2022 5/6/2023
— — — — — — — — — —
— — — — — — — — — —
Joseph T. Clark
6/29/2007 3/6/2012 3/6/2012 5/6/2013
195,121(1) (3) 6,098(2) 6,097(2) — (2)
— — (2) 12,195(2) 53,658(2)
— — — —
10.25 13.94 11.48(4) 12.41(4)
6/29/2014 3/6/2022 3/6/2022 5/6/2023
— — — —
— — — —
Name (a) Andrew Hayek
(1) Half of these option awards are subject to time-based vesting, with 20% vesting on each of the first, second, third, fourth and fifth anniversaries of the date of grant, and half were subject to performance-based vesting, which half were deemed vested as of September 16, 2013. (2) These option awards are subject to time-based vesting, with 25% vesting on each of the first, second, third and fourth anniversaries of the date of grant. (3) On January 15, 2014, Mr. Clark exercised all of these options pursuant to an Option Net-Settlement Exercise Agreement, dated October 8, 2013, between the Company and Mr. Clark, which agreement granted Mr. Clark the ability to exercise, on a net-settlement basis, these options beginning on January 1, 2014. (4) Reflects a $2.46 per share reduction in the exercise price of these options on September 26, 2013 in connection with the IPO.
170
Table of Contents Employment Agreements On October 30, 2013, we entered into employment agreements with each of our Named Executive Officers (collectively, the “Employment Agreements”). The initial term of the Employment Agreements is three years, in each case with automatic renewals for successive one-year terms unless either party to the agreement provides notice of non-renewal at least 90 days prior to the expiration of the initial term or the applicable renewal term. The Employment Agreements establish a base salary for each of our Named Executive Officers, subject to possible annual increases as determined by the Board of Directors or the Compensation Committee. The annual base salaries currently in effect for Messrs. Hayek, Clark and Rucker are $780,000, $469,000, and $439,000, respectively. Additionally, the Employment Agreements provide that the Named Executive Officers are eligible to participate in our Senior Management Bonus Program, under which they may earn a cash bonus each year, subject to the achievement of company and individual performance objectives established by the Compensation Committee. The target and maximum amounts of any annual bonus that may be earned by an executive are expressed as a percentage of the executive’s annual base salary in effect with respect to such year. The Employment Agreements also provide that each Named Executive Officer is entitled to participate in all savings and retirement plans and welfare benefits provided by us which are generally made available to other executives. The Employment Agreements contain standard ongoing confidentiality, non-solicitation and non-competition restrictions. The nonsolicitation restrictions remain in place for 18 months for Messrs. Clark and Rucker, and two years for Mr. Hayek, in each case following termination of employment, and the non-competition restrictions remain in place for 18 months for Messrs. Clark, Rucker and Hayek, following termination of employment. Each of the Employment Agreements provides that if a Named Executive Officer is terminated for cause, or if he terminates his employment without good reason (as such terms are defined in the applicable Employment Agreement), he will be entitled to any earned and unpaid base salary through the date of his termination. If a Named Executive Officer is terminated without cause, if he terminates his employment for good reason or if the Company delivers a notice of non-renewal, in each case other than in connection with a change in control, he will be entitled to the following payments and benefits: (i) continued base salary payments for 18 months (24 months for Mr. Hayek) following the date of termination of employment, (ii) health insurance benefits for 18 months following the date of termination of employment or until he becomes re-employed with another employer and is eligible to receive health insurance benefits under another employer-provided plan, whichever comes earlier, and (iii) a pro rata portion of his annual bonus based upon the achievement of the applicable performance objectives payable in a lump sum at the same time as the annual bonuses are otherwise paid to other employees. In addition, each of the Employment Agreements provides that if a Named Executive Officer’s employment terminates as a result of his death or disability, he will be entitled to any earned and unpaid base salary through the date of his termination, as well as a pro rata portion of his annual bonus based upon the achievement of the applicable performance objectives. In the event a Named Executive Officer’s employment is terminated without cause, for good reason or if the Company delivers a notice of non-renewal, in each case within the three months prior to the consummation of, or within the twenty-four month period following, a change in control, in addition to any earned and unpaid base salary through the date of termination, he will be entitled to (i) an amount equal to 1.5 times (two times in the case of Mr. Hayek) the sum of the Named Executive Officer’s then-current base salary and his target annual bonus, payable in a lump sum within forty days following the date of such termination, (ii) health insurance benefits for 18 months following the date of termination of employment or until he becomes re-employed with another employer and is eligible to receive health insurance benefits under another employer-provided plan, whichever comes earlier and (iii) a pro rata portion of his annual bonus based upon the achievement of the applicable performance objectives payable in a lump sum at the same time as the annual bonuses are otherwise paid to other employees. Payments of severance and other benefits are conditioned upon the Named Executive Officer executing a release of claims, and such release becoming effective, and compliance with restrictive covenants. 171
Table of Contents Retirement Benefits We maintain the SCA Retirement Investment Plan, a tax-qualified 401(k) savings plan (the “401(k) Plan”), in which our Named Executives participate. The 401(k) Plan allows participants to contribute up to 100% of their pay on a pre-tax basis into individual retirement accounts, subject to the maximum annual limits set by the IRS. SCA makes a matching employer contribution in an amount equal to 50% of the first 4% of each plan participant’s elective deferrals. All contributions to the 401(k) Plan are in the form of cash. Employer contributions vest over a six-year service period. Participants are immediately fully vested in their own contributions to the 401(k) Plan. Potential Payments Upon Termination or a Change in Control The Employment Agreements contain severance provisions pursuant to which the Named Executive Officers are entitled to certain payments or benefits upon a termination without cause or for good reason. Please refer to the “Employment Agreements” section above for further information about such payments and benefits. In addition, the 2007 Equity Plan provides for accelerated vesting of the outstanding option awards subject to time-based vesting if the executive is terminated without cause or for good reason within the two-year period following a change in control. For any change in control consummated on or before January 1, 2015, Mr. Hayek has the right to receive a “gross-up” for any excise tax imposed by Section 4999 of the Code, or any federal, state or local income tax under the terms of his Employment Agreement in the event the amount of the “parachute payments” he is entitled to receive exceeds the safe harbor limit under Section 280G of the Code by more than 10%. Any amounts below that 10% limit would be reduced to fall within the safe harbor limit. For any change in control consummated after January 1, 2015, Mr. Hayek is not entitled to a gross up. 2007 Equity Plan The 2007 Equity Plan, which became effective on November 16, 2007, provides for the grant of options to purchase our membership units to our and our affiliates’ key teammates, directors, service providers and consultants. The summary of the 2007 Equity Plan contained in this proxy statement is not a complete description of all provisions of the 2007 Equity Plan and is qualified in its entirety by reference to the 2007 Equity Plan, which is filed as an exhibit to the Company’s Registration Statement on Form S-1 filed with the SEC on September 5, 2013 and incorporated into this Annual Report on Form 10-K by reference. The 2007 Equity Plan is administered by our Compensation Committee, which has authority to select award recipients and to determine the terms of all awards, including the time or times at which awards vest or become exercisable. Unless otherwise provided by our Compensation Committee in a participant’s grant agreement or other agreement, a participant’s unvested options will immediately expire on the date such participant’s employment is terminated for any reason, and vested options will remain outstanding for one year following the participant’s death or disability and for 90 days following termination of employment for any other reason (or, in each case, until the award’s expiration date, if earlier). If a participant’s employment is terminated for cause (as defined in the 2007 Equity Plan), all awards then held by the participant will be forfeited immediately, whether or not vested. Options granted after 2010 expire 10 years from the date of grant. The 2007 Equity Plan provides that if an individual’s employment is terminated within a certain period following a change in control, either by the company without cause or by the individual for good reason, all unvested time-based options shall become fully vested. Prior to 2010, with the exception of options granted to Mr. Hayek, all options granted to participants expired seven years from the date of grant (Mr. Hayek’s options granted prior to 2010 expire 10 years from the date of grant). In 2011, we offered to cancel all of the outstanding options under the 2007 Equity Plan that had seven year terms and replace such options with a larger number of options with similar terms and with an expiration date of 10 years from the original date of grant (rather than seven years). 172
Table of Contents 2013 Omnibus Plan Prior to the IPO, we adopted the 2013 Omnibus Plan. All equity-based awards subsequent to the IPO have been and will be granted under the 2013 Omnibus Plan. No awards have been made to date to the Named Executive Officers under the 2013 Omnibus Plan. This summary of the 2013 Omnibus Plan is not a complete description of all provisions of the 2013 Omnibus Plan and is qualified in its entirety by reference to the 2013 Omnibus Plan, which is filed as an exhibit to this Annual Report on Form 10-K. Purpose . The purpose of the 2013 Omnibus Plan is to advance our interests by providing for the grant to participants of equity-based awards. Plan Administration . The 2013 Omnibus Plan is administered by our Compensation Committee. Our Compensation Committee has the authority to, among other things, interpret the 2013 Omnibus Plan, determine eligibility for, grant and determine the terms of awards under the 2013 Omnibus Plan, and to do all things necessary to carry out the purposes of the 2013 Omnibus Plan. Our Compensation Committee’s determinations under the 2013 Omnibus Plan are conclusive and binding. Our Compensation Committee selects participants from among our key teammates, directors, and consultants who are in a position to make a significant contribution to our success. Eligibility for options intended to be incentive stock options is limited to our teammates or employees. Authorized Shares . Subject to adjustment, the maximum number of shares of our common stock that may be delivered in satisfaction of awards under the 2013 Omnibus Plan is 2,220,000. Shares of common stock to be issued under the 2013 Omnibus Plan may be authorized but unissued shares of common stock or previously-issued shares acquired by us. Any shares of common stock underlying awards that are settled in cash or otherwise expire, terminate, are not delivered or are forfeited prior to the issuance of common stock will again be treated as not issued under the 2013 Omnibus Plan. Individual Limits. The maximum number of shares for which equity-based awards may be granted to any person in any calendar year is 450,000 shares. The maximum amount that may be paid to any person in any calendar year with respect to cash awards is $3,500,000. Types of Awards . The 2013 Omnibus Plan provides for grants of options, stock appreciation rights, restricted and unrestricted stock and stock units, performance awards, cash awards, and other awards convertible into or otherwise based on shares of our stock. Dividend equivalents may also be provided in connection with an award under the 2013 Omnibus Plan. Performance Criteria . The 2013 Omnibus Plan provides that our Compensation Committee may grant incentive awards that are based upon, and subject to achievement of, objective business criteria and that qualify as performance-based compensation under Section 162(m) of the Code. The 2013 Omnibus Plan provides that performance measures may relate to the performance of the plan participant, us, one of our subsidiaries, any business group, any of our business units or other subdivisions, or any combination of the foregoing, as our Compensation Committee deems appropriate, and may be expressed as an amount, as an increase or decrease over a specified period, as a relative comparison to the performance of a group of comparator companies or a published or special index, or any other measure of the selected performance criteria, as our Compensation Committee deems appropriate. Adjustments. In the event of certain corporate transactions (including a stock dividend or split, recapitalization, merger, consolidation combination or exchange of shares or similar corporate change), our Compensation Committee will appropriately adjust the maximum aggregate number of shares that may be delivered under and the individual limits included in the 2013 Omnibus Plan, and will also make appropriate adjustments to the number and type of shares of shares subject to awards, the exercise price of such awards or any other terms of such awards as our Compensation Committee deems appropriate. 173
Table of Contents Amendment and Termination. Our Compensation Committee may amend or suspend the 2013 Omnibus Plan or outstanding awards, or terminate the 2013 Omnibus Plan as to future grants of awards, except that our Compensation Committee will not be able to alter the terms of an award if it would affect adversely a participant’s rights under the award without the participant’s consent (unless expressly provided in the 2013 Omnibus Plan). Stockholder approval will be required for any amendment to the 2013 Omnibus Plan to the extent such approval is required by law, including the Code or applicable NASDAQ listing rules. Director Compensation The following table sets forth information concerning the compensation earned by our directors during 2013. Non-Equity Incentive Plan Fees Earned or Name (1)
Todd B. Sisitsky Thomas C. Geiser Curtis S. Lane Sharad Mansukani, M.D. Jeffrey K. Rhodes Frederick A. Hessler (1) (2)
(3) (4) (5)
Paid in Cash ($)
— 50,000 50,000 50,000 — 16,250
Stock Awards ($)(2)(3)
Option Awards
Compensation
($)(4)
($)
— 30,000 30,000 30,000 — 30,000
— — — — — —
Nonqualified Deferred Compensation Earnings ($)
— — — — — —
— — — — — —
All Other Compensation ($)(5)
— 363,496 136,846 198,882 — —
Total ($)
— 443,496 216,846 278,882 — 46,250
Andrew P. Hayek, the Company’s President and Chief Executive Officer, is not included in this table as he is, and at all times during 2013 was, an employee of the Company and thus received no compensation for his service as director. The compensation received by Mr. Hayek as an employee of the Company is shown in the Summary Compensation Table on page 169. The amounts presented in this column represent the fair value of the REUs granted (or, since October 30, 2013, RSUs granted) on the date of grant in accordance with FASB ASC Topic 718. Further detail surrounding the REUs awarded, the method of valuation and the assumptions made are set forth in the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” section, under “Critical Accounting Policies.” At the end of fiscal year 2013, the aggregate number of RSUs outstanding for each director was as follows: (i) for Mr. Geiser, 4,036, (ii) for Mr. Lane, 4,036, (iii) for Dr. Mansukani, 4,036, and (iv) for Mr. Hessler, 1,324. At the end of fiscal year 2013, the aggregate number of option awards outstanding (all of which have vested) for each director was as follows: (i) for Mr. Geiser, 146,976, (ii) for Mr. Lane, 55,331, and (iii) for Dr. Mansukani, 80,417. Represents the amount of the one-time cash bonus paid in September 2013 in respect of vested options and REUs held by then current teammates and directors.
Under our current director compensation program, certain members of our Board of Directors who are not employees of the Company are eligible to receive cash compensation for their services as a director as follows: Mr. Geiser, Mr. Lane, Mr. Hessler and Dr. Mansukani each receive $12,500 in cash fees in arrears each quarter. Additionally, commencing January 1, 2014, Mr. Geiser receives an additional annual cash retainer of $15,000 (payable quarterly in arrears), representing two individual retainers of $7,500 each, for serving as the Chair of the Compliance Committee and the Chair of the Acquisition Committee. Additionally, commencing October 1, 2013, Mr. Hessler receives an additional annual cash retainer (payable quarterly in arrears) of $15,000 for serving as Chair of the Audit Committee. Starting in 2012, the Company elected to make annual grants of REUs pursuant to Restricted Equity Unit Grant Agreements with each of our non-employee directors, generally in an aggregate amount equal to $30,000. 174
Table of Contents Upon the conversion of the Company from a Delaware limited liability company to a Delaware corporation on October 30, 2013, the REUs became RSUs that may be settled in shares of common stock (or, in the discretion of the Board of Directors, cash). The RSUs are subject to time-based vesting, with 50% of such RSUs vesting on each of the first two anniversaries of the date of grant, subject to the grantee continuing to serve as a director on each vesting date. In 2013, the Company granted 20,690 REUs (or 2,018 RSUs after giving effect to our conversion to a Delaware corporation on October 30, 2013) to each of Messrs. Geiser and Lane and Dr. Mansukani, and the Company granted 1,324 RSUs to Mr. Hessler, whose RSUs were granted under the 2013 Omnibus Plan. 50% of the RSUs granted to these directors vest on the first anniversary of the date of grant and the other 50% vest on the second anniversary of the date of grant. Vested RSUs are settled for shares of common stock or cash, at the Board’s discretion, upon the earlier of (i) the director ceasing to provide services as a director of the Company or (ii) a qualifying change in control of the Company. Any portion of the RSUs that remain unvested on the date that the director ceases to be a director for any reason will be forfeited, and the director will cease to have any rights with respect thereto. Pursuant to our Director and Consultant Equity Incentive Plan, adopted June 24, 2008, as amended September 9, 2008 (the “Director Equity Plan”), directors are eligible to receive grants of options subject to time-based vesting that become exercisable only upon the occurrence of a Liquidity Event (as defined in the Director Equity Plan) in which TPG achieves a minimum cash return on its original investment. The options granted pursuant to the Director Equity Plan may also accelerate vesting but not exercisability in the event of certain qualifying terminations (as defined in the Director Equity Plan). In September 2013, the Company paid a cash bonus to holders of vested options and REUs who continued to provide services to us on the date of payment, including Messrs. Geiser and Lane and Dr. Mansukani, equal to $0.241279 per vested option or REU (or $2.46 per option or RSU after giving effect to our conversion to a Delaware corporation). The Board of Directors resolved to adjust downward the exercise price of any unvested options by the same amount. Holders of unvested REUs did not receive a cash payment or any adjustment with respect to their unvested REUs. To the extent non-employee directors owned membership units outright, they also received a payment in respect of such membership units as a result of this distribution. Compensation Committee Interlocks and Insider Participation From the date of designation of our Compensation Committee on October 30, 2013, the Compensation Committee has been comprised of Messrs. Sisitsky and Geiser and Dr. Mansukani. We did not have a compensation committee prior to October 30, 2013; however, these individuals comprised the compensation committee of SCA from January 1, 2013 until October 30, 2013. No member of the Compensation Committee has at any time been an officer or employee of ours or an executive officer of another entity whose executive officers served on our Compensation Committee. None of our executive officers serves as a member of the board of directors or compensation committee of another entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee. 175
Table of Contents Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance under Equity Compensation Plans The following table provides certain information as of December 31, 2013 about common stock that may be issued under all of the Company’s existing equity compensation plans: Number of Securities Remaining Available for Number of Securities to be
Plan Category
Equity Compensation Plans Approved by Security Holders Equity Compensation Plans Not Approved by Security Holders Total
Issued Upon Exercise of Outstanding Options, Warrants and Rights
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column)
3,167,761(1)
$
11.41(2)
2,256,181(3)
— 3,167,761(1)
$
— 11.41(2)
— 2,256,181(3)
(1)
Consists of (i) options to purchase 2,538,203 shares of common stock granted under our 2007 Equity Plan, (ii) options to purchase 457,898 shares of common stock granted under our Director Equity Plan, (iii) options to purchase 20,776 shares of common stock granted under our 2013 Omnibus Plan, (iv) RSUs for 70,484 shares of common stock granted under our 2013 Omnibus Plan and (v) RSUs for 80,400 shares of common stock which were not granted pursuant to an equity incentive plan. Excludes the option held by HealthSouth to purchase shares of our common stock.
(2)
Does not take into account RSUs, which have no exercise price.
(3)
Consists of (i) 97,535 shares available under our 2007 Equity Plan, (ii) 29,906 shares available under our Director Equity Plan and (iii) 2,128,740 shares available under our 2013 Omnibus Plan. We do not intend to use the 2007 Equity Plan or the Director Equity Plan to make any future grants of equity awards. 176
Table of Contents Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 20, 2014, by: (i) each of our directors and director nominees; (ii) each executive officer of the Company, including the Named Executive Officers listed in the Summary Compensation Table on page 169; (iii) all of our current directors and executive officers as a group; and (iv) each stockholder known by us to beneficially own more than 5% of our common stock. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Shares of common stock that may be acquired by an individual or group within 60 days of March 20, 2014, pursuant to derivative securities, such as options or RSUs, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Percentage of ownership is based on an aggregate of 38,261,138 shares of common stock outstanding as of March 20, 2014. Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such stockholders. Unless otherwise indicated, the address for each director and executive officer is: c/o Surgical Care Affiliates, Inc., 520 Lake Cook Road, Suite 250, Deerfield, Illinois 60015. Percentage of Common Number of Shares of Common Stock Beneficially Owned
Beneficial Owner
Five Percent Stockholders TPG Funds (1) MTS-SCA Acquisition LLC (2) FMR LLC (3) Directors and Executive Officers Andrew P. Hayek (4) Todd B. Sisitsky (5) Thomas C. Geiser (6) Frederick A. Hessler Curtis S. Lane (7) Sharad Mansukani, M.D. (8) Jeffrey K. Rhodes (9) Joseph T. Clark (10) Peter J. Clemens (11) Michael A. Rucker (12) Richard L. Sharff, Jr. (13) All Current Executive Officers and Directors as a Group (14) * (1)
Stock Beneficially Owned
23,940,916 2,328,027 2,332,250
62.6% 6.1% 6.1%
721,568 — 245,545 5,000 56,340 81,426 — 132,077 127,927 256,176 132,417 1,758,476
1.9% — * * * * — * * * * 4.4%
Represents beneficial ownership of less than 1% of the shares of common stock. The “TPG Funds” refers collectively to TPG Partners V, L.P., a Delaware limited partnership (“TPG Partners V”), TPG FOF V-A, L.P., a Delaware limited partnership (“FOF V-A”), and TPG FOF V-B, L.P., a Delaware limited partnership (“FOF V-B”). The TPG Funds directly hold an aggregate of 23,940,916 shares of common stock (the “TPG Shares”), consisting of: (a) 23,828,317 shares of common stock held by 177
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(2)
(3)
(4)
(5) (6)
TPG Partners V, (b) 62,335 shares of common stock held by FOF V-A, and (c) 50,264 shares of common stock held by FOF V-B. The general partner of each of TPG Partners V, FOF V-A and FOF V-B is TPG GenPar V, L.P., a Delaware limited partnership, whose general partner is TPG GenPar V Advisors, LLC, a Delaware limited liability company, whose sole member is TPG Holdings I, L.P., a Delaware limited partnership, whose general partner is TPG Holdings I-A, LLC, a Delaware limited liability company, whose sole member is TPG Group Holdings (SBS), L.P., a Delaware limited partnership, whose general partner is TPG Group Holdings (SBS) Advisors, Inc., a Delaware corporation (“Group Advisors”). Because of Group Advisors’ relationship to the TPG Funds, Group Advisors may be deemed to beneficially own the TPG Shares. David Bonderman and James G. Coulter are officers and sole shareholders of Group Advisors and may therefore also be deemed to be the beneficial owners of the TPG Shares. Messrs. Bonderman and Coulter disclaim beneficial ownership of the TPG Shares except to the extent of their pecuniary interest therein. The address of each of Group Advisors and Messrs. Bonderman and Coulter is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. This information is based upon our review of a Schedule 13G filed jointly by Group Advisors and Messrs. Bonderman and Coulter on February 13, 2014, reporting beneficial ownership as of December 31, 2013. Consists of shares of common stock held directly by MTS-SCA Acquisition LLC. OCM Principal Opportunities Fund IV, L.P., the managing member and holder of a majority of interest in MTS-SCA Acquisition LLC, OCM Principal Opportunities Fund IV GP, L.P., the general partner of OCM Principal Opportunities Fund IV, L.P., OCM Principal Opportunities Fund IV GP Ltd., the general partner of OCM Principal Opportunities Fund IV GP, L.P., Oaktree Fund GP I, L.P., the sole shareholder and general partner of OCM Principal Opportunities Fund IV GP Ltd., Oaktree Capital I, L.P., the general partner of Oaktree Fund GP I, L.P., OCM Holdings I, LLC, the general partner of Oaktree Capital I, L.P., Oaktree Holdings, LLC, the managing member of OCM Holdings I, LLC, Oaktree Capital Group, LLC, the managing member of Oaktree Holdings, LLC and the sole shareholder of Oaktree Holdings, Inc., Oaktree Capital Group Holdings GP, LLC, the manager of Oaktree Capital Group, LLC, Oaktree Capital Management, L.P., the investment manager of OCM Principal Opportunities Fund IV, L.P., and Oaktree Holdings, Inc., the general partner of Oaktree Capital Management, L.P. (collectively, the “Oaktree Entities”), may be deemed to share beneficial ownership of the shares held directly by MTS-SCA Acquisition LLC. Each of the Oaktree Entities disclaims beneficial ownership of such shares except to the extent of their respective pecuniary interests therein. The principal business address of the Oaktree Entities is c/o Oaktree Capital Management, L.P., 333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071. This information is based upon our review of a Schedule 13G filed by MTS-SCA Acquisition LLC with the SEC on February 14, 2014, reporting beneficial ownership as of December 31, 2013. Based on a Schedule 13G filed with the SEC on February 14, 2014. As of December 31, 2013, FMR LLC, a parent holding company, and Edward C. Johnson 3d, may be deemed the beneficial owners of 2,332,250 shares of common stock. FMR has sole voting power of 208,750 shares, no shared voting power, sole investment power of 2,332,250 shares and no shared investment power. No one person’s interest relates to more than 5% of the outstanding shares of common stock. The address of FMR LLC is 245 Summer Street, Boston, MA 02210. Includes 68,292 shares of common stock underlying Restricted Stock Units and 604,268 shares of common stock underlying options, each that are currently exercisable or exercisable within 60 days of March 20, 2014 for shares of common stock. All of the shares of common stock, Restricted Stock Units and options are owned by the Andrew Hayek 2008 Living Trust (of which Mr. Hayek is the sole trustee). Todd B. Sisitsky, who is one of our directors, is a Partner of TPG Global, LLC. Mr. Sisitsky has no voting or investment power over and disclaims beneficial ownership of the TPG Shares. Mr. Sisitsky’s address is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. Includes (a) 1,009 shares of common stock underlying Restricted Stock Units and 146,976 shares of common stock underlying options, each that are currently exercisable or exercisable within 60 days of March 20, 2014 for shares of common stock and (b) 97,560 shares of common stock owned by TDK Properties, L.P., which is a California limited partnership whose general partner and owner of 1% of its limited partnership interests is TDK Management Company, LLC, a California limited liability company whose sole member is The Geiser Schweers Family Trust u/a/d 6/8/98, as amended, and whose trustees are 178
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(7) (8) (9) (10) (11) (12) (13) (14)
Thomas C. Geiser and Donna L. Schweers. 99% of the limited partnership interests of TDK Properties, L.P. are held by The Geiser Schweers 2006 Irrevocable Insurance Trust dated August 14, 2006, whose trustee is Kim T. Schoknecht. Includes 1,009 shares of common stock underlying Restricted Stock Units and 55,331 shares of common stock underlying options, each that are currently exercisable or exercisable within 60 days of March 20, 2014 for shares of common stock. The address for Mr. Lane is c/o MTS Health Partners, L.P., 623 Fifth Avenue, 14th Floor, New York, NY 10022. Includes 1,009 shares of common stock underlying Restricted Stock Units and 80,417 shares of common stock underlying options, each that are currently exercisable or exercisable within 60 days of March 20, 2014 for shares of common stock. Jeffrey K. Rhodes, who is one of our directors, is a Principal of TPG Global, LLC. Mr. Rhodes has no voting or investment power over and disclaims beneficial ownership of the TPG Shares. The address of Mr. Rhodes is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, TX 76102. Includes 125,610 shares of common stock underlying options that are currently exercisable or exercisable within 60 days of March 20, 2014 for shares of common stock. Includes 107,927 shares of common stock underlying options that are currently exercisable or exercisable within 60 days of March 20, 2014 for shares of common stock. Includes 225,242 shares of common stock underlying options that are currently exercisable or exercisable within 60 days of March 20, 2014 for shares of common stock. Includes 115,224 shares of common stock underlying options that are currently exercisable or exercisable within 60 days of March 20, 2014 for shares of common stock. Includes Restricted Stock Units and options, each that are exercisable for shares of common stock as described in footnotes (4)-(13).
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Policy for the Review and Approval of Related Person Transactions Under SEC rules, a “related person” is an officer, director, nominee for director or beneficial holder of more than 5% of any class of our voting securities since the beginning of the last fiscal year or an immediate family member of any of the foregoing. Pursuant to our related party transaction written policy, directors (including director nominees), executive officers and employees are required to report any transactions or circumstances that may create or appear to create a conflict between the personal interests of the individual and our interests, regardless of the amount involved. The Audit Committee of the Board of Directors is responsible for evaluating each related party transaction and making a recommendation to the disinterested members of the Board of Directors as to whether the transaction at issue is fair, reasonable and within our policy and whether it should be ratified and approved. The Audit Committee, in making its recommendation, considers various factors, including the benefit of the transaction to us, the terms of the transaction and whether they are at arm’s-length and in the ordinary course of our business, the direct or indirect nature of the related person’s interest in the transaction, the size and expected term of the transaction and other facts and circumstances that bear on the materiality of the related party transaction under applicable law and listing standards. The Audit Committee reviews, at least annually, a summary of our transactions with our directors and officers and with firms that employ our directors, as well as any other related person transactions. Related Person Transactions Entered into by the Company Other than compensation agreements and other arrangements which are described under “Executive Compensation” and the transactions described below, since January 1, 2011, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed $120,000 and in which any related person had or will have a direct or indirect material interest. 179
Table of Contents Operating Agreement Providing for Certain Purchase Rights On August 22, 2007, we, the TPG Funds, MTS and certain other co-investors, including members of our management, entered into the Second Amended and Restated Limited Liability Company Operating Agreement of ASC Acquisition LLC (the “Operating Agreement”). The Operating Agreement contained agreements among the parties including with respect to tag-along rights, drag-along rights, rights of first refusal, transfer restrictions and other corporate governance provisions. Pursuant to the Operating Agreement, certain of our existing stockholders (who were members of ASC Acquisition LLC prior to our conversion to a corporation) purchased additional membership units of ASC Acquisition LLC on June 28, 2011, August 12, 2011 and September 23, 2011. The Operating Agreement terminated in connection with our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013. Management Unit Holders’ Agreement On August 22, 2007, we and certain investors that are members of our management entered into the management unit holders’ agreement (the “Management Unit Holders’ Agreement”), which contains certain arrangements among the parties including with respect to restrictions on transfer of interests in us, call rights in certain specified situations, drag-along rights and tag-along rights. In addition, all parties to the Management Unit Holders’ Agreement are subject to a contractual lock-up provision during the 180 day period following the date of our IPO in October 2013. Except for this lock-up provision, the Management Unit Holders’ Agreement terminated by its terms on the date of our IPO. Stockholders’ Agreement with the TPG Funds In connection with the IPO, we entered into a stockholders’ agreement with the TPG Funds, dated November 4, 2013 (the “Stockholders’ Agreement”), that provides that, so long as the Stockholders’ Agreement remains in effect, the TPG Funds will have certain rights to designate for nomination candidates for our Board of Directors. We are required to use our reasonable best efforts to cause the Board of Directors and the Nominating and Corporate Governance committee to include such persons designated by the TPG Funds in the slate of nominees recommended by the Board of Directors for election by the stockholders. As set forth in the Stockholders’ Agreement, for so long as the TPG Funds collectively own at least 50% of the shares of our common stock held by them at the closing of the IPO, they will be entitled to designate for nomination a majority of the seats on our Board of Directors. When the TPG Funds collectively own less than 50%, but at least 30%, of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination three directors. When the TPG Funds collectively own less than 30%, but at least 10%, of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination two directors. Thereafter, the TPG Funds will be entitled to designate for nomination one director so long as they own at least 3% of the shares of our common stock held by them as of the closing of the IPO. However, if on or before the first anniversary of the IPO, our Board of Directors is increased to nine members, and at such time the TPG Funds collectively own at least 50% of the shares of our common stock held by them as of the closing of the IPO, the number of seats on our Board of Directors that the TPG Funds will be entitled to designate for nomination, as described above, will be increased by one seat, so long as the TPG Funds collectively own at least 20% of the shares of our common stock held by them as of the closing of the IPO. When the TPG Funds collectively own less than 20%, but at least 10%, of the shares of our common stock held by them as of the closing of the IPO, the TPG Funds will be entitled to designate for nomination two directors. Thereafter, the TPG Funds will be entitled to designate for nomination one director so long as they own at least 3% of the shares of our common stock held by them as of the closing of the IPO. In the event that the size of our Board of Directors is otherwise increased or decreased in size at any time, the nomination rights afforded to the TPG Funds will be proportionately adjusted as well, rounded up to the nearest whole person. 180
Table of Contents As our Board of Directors currently consists of seven members, in accordance with the Stockholders’ Agreement, the TPG Funds have designated Thomas Geiser, Sharad Mansukani, M.D., Todd Sisitsky and Jeffrey Rhodes as nominees of the TPG Funds to serve on our Board of Directors. Registration Rights Agreement In connection with the IPO, we entered into a registration rights agreement with the TPG Funds and certain members of our management and of our Board of Directors (the “Registration Rights Agreement”), which provides the TPG Funds with certain demand registration rights, including shelf registration rights, in respect of any shares of our common stock held by them, subject to certain conditions and limitations. The TPG Funds are entitled to an unlimited number of demand registrations. In addition, in the event that we register additional shares of common stock for sale to the public following the completion of the IPO, we are required to give notice of such registration to the TPG Funds, certain members of management and our Board of Directors party to the Registration Rights Agreement of our intention to effect such a registration, and, subject to certain limitations, include any shares of common stock requested to be included in such registration held by them. Upon request from the TPG Funds following the one year anniversary of the IPO, we will undertake to file a shelf registration statement, and to use reasonable best efforts to have the shelf registration statement declared effective promptly and to remain effective until, subject to certain limitations, the earlier of the date on which all of the TPG Funds’ shares of common stock have been sold pursuant to a registration statement and the date no shares of common stock are held by the TPG Funds. We are required to bear the registration expenses, other than underwriting discounts and commissions and transfer taxes, associated with any registration of shares of common stock pursuant to the Registration Rights Agreement. The Registration Rights Agreement includes customary indemnification provisions in favor of the TPG Funds and the members of management and our Board of Directors party to the agreement, any person who is or might be deemed a control person (within the meaning of the Securities Act or the Exchange Act) and related parties, including, without limitation, officers, directors and employees, against certain losses and liabilities (including reasonable costs of investigation and legal expenses) resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which such selling stockholder sells shares of our common stock, unless such liability arose from the applicable selling stockholder’s misstatement or omission and the applicable selling stockholder has agreed to indemnify us against losses caused by its misstatements or omissions, subject to certain limitations. Management Services Agreement Until October 2013, we were party to a management services agreement with TPG Capital, L.P. (now TPG Capital Management) (“TPG Capital”), an affiliate of TPG, pursuant to which TPG Capital provided us with management, advisory and consulting services (the “Management Services Agreement”). In connection with our acquisition by TPG in 2007, SCA paid a transaction fee to TPG Capital of $10.0 million for services rendered in connection with the acquisition and for certain operating advice. Under the Management Services Agreement, TPG Capital received an annual management fee of $2.0 million, payable quarterly in advance on or before the start of each calendar quarter. TPG Capital was entitled to an additional fee in connection with any financing, acquisition, disposition, spin-off, split-off or change of control transactions involving us or any of our subsidiaries equal to customary fees charged by internationally-recognized investment banks for serving as financial advisor in similar transactions. In conjunction with our IPO, TPG Capital was entitled under the Management Services Agreement to receive a fee in an amount equal to $8.0 million, which we paid in the fourth quarter of 2013. In addition, TPG Capital was entitled to reimbursement for out-of-pocket expenses incurred in connection with the provision of services under the Management Services Agreement. The Management Services Agreement was terminated in connection with the IPO. Pursuant to certain consulting arrangements, two of our current directors, Mr. Geiser and Dr. Mansukani, and one of our former directors, Leonard Schaeffer, provided certain consulting services to us. As compensation for such services, each individual was paid a percentage of the annual management fee paid by us to TPG Capital. Mr. Geiser received $243,750 in 2013 and $325,000 in each of 2012 and 2011, respectively. 181
Table of Contents Dr. Mansukani received $250,000 in each of 2013, 2012 and 2011, respectively. Until Mr. Schaeffer’s resignation from SCA’s Board of Directors in September 2011, he had received $318,750 during the nine-months ended September 30, 2011. These consulting arrangements terminated in connection with the completion of the IPO, and no further payments are expected to be made by TPG Capital pursuant to these arrangements. Indemnification Agreements We have entered into indemnification agreements with each of our current directors and employment agreements containing indemnification provisions with each of our current executive officers. It is anticipated that future directors and officers will enter into indemnification arrangements with us in substantially similar form. The indemnification and employment agreements generally provide, among other things, that we will indemnify and hold harmless each person subject to such agreement (each, an “indemnitee”) to the fullest extent permitted by applicable law from and against all expenses, losses, damages, judgments, fines, and other specified costs that may result or arise in connection with such indemnitee serving in his or her capacity as a director of ours or serving at our direction as a director, officer, employee or agent of another entity. These agreements further provide that, upon an indemnitee’s request and subject to certain conditions, we will advance expenses to the indemnitee to the fullest extent permitted by applicable law. Pursuant to the indemnification agreements, an indemnitee is presumed to be entitled to indemnification and we have the burden of proving otherwise. The indemnification agreements also require us to maintain in full force and effect directors’ liability insurance on the terms described in the indemnification agreement. The foregoing is only a brief description of the indemnification and employment agreements, does not purport to be complete and is qualified in its entirety by reference to the Company’s form of indemnification agreement, filed as Exhibit 10.30 to its Annual Report on Form 10-K for the year ended December 31, 2013, and employment agreements with its executives, filed as Exhibits to such Annual Report on Form 10-K. Certain Relationships During 2011, 2012 and 2013, and continuing into 2014, Bradley Arant has provided certain legal services to us. We paid approximately $1.8 million, $1.0 million, and $865,000 in 2013, 2012 and 2011, respectively, and paid approximately $105,000 during the month ended January 31, 2014, to Bradley Arant for the provision of legal services. The spouse of one of our executive officers, Mr. Sharff, is a partner at Bradley Arant. In connection with the amendment of our Amended Credit Agreement on May 8, 2013, TPG Capital BD, LLC, an affiliate of TPG Global, LLC, served as an arranger for purposes of the amendment and was paid an arrangement fee in the amount of $486,750. In addition, TPG Capital BD, LLC participated in the underwriting of the shares of our common stock that were offered and sold in the IPO. From time to time, we do business with other companies affiliated with TPG Global, LLC. We believe that all such arrangements have been entered into in the ordinary course of business and have been conducted on an arms-length basis. Director Independence NASDAQ listing standards generally require that listed companies have a majority of independent directors, that compensation committees of listed companies be comprised entirely of independent directors and that nominating committees, if any, of listed companies be comprised entirely of independent directors. Under NASDAQ rules, however, a “controlled company” (which is a listed company of which more than 50% of the voting power for the election of directors is held by an individual, a group or another company) may elect not to comply with these three independence requirements. Because the TPG Funds own a majority of our outstanding common stock, we currently are a “controlled company” under the NASDAQ rules, and we have availed ourselves of the exemption from the independence requirements described above as a result of that status. In the 182
Table of Contents event that we are no longer considered a “controlled company” under the NASDAQ rules, then (i) a majority of our Board must be independent within one year of the date of our loss of “controlled company” status and (ii) at least one member of each of our Compensation Committee and our Nominating and Corporate Governance Committee must be independent as of the date of our loss of “controlled company” status, a majority of the members of each of these committees must be independent within 90 days of the date of the change in status, and all members of these committees must be independent within one year of the date of the change in status. Even as a “controlled company,” we must comply with the rules applicable to audit committees set forth in NASDAQ and SEC rules. However, as result of the phase-in of certain SEC rules applicable to audit committees of newly public companies, only a majority of the members of our Audit Committee are required to satisfy the heightened independence standards imposed by Rule 10A-3 under the Exchange Act until the first anniversary of the date of effectiveness of the Company’s Registration Statement on Form S-1 filed with the SEC in connection with the IPO, or October 29, 2014, at which time all of the members of our Audit Committee must be independent. Our Board of Directors has reviewed the materiality of any relationship that each of our directors has with Surgical Care Affiliates, either or directly or indirectly. Based upon this review, our Board has determined that Frederick A. Hessler, Curtis S. Lane, Jeffrey K. Rhodes and Todd B. Sisitsky are “independent directors” within the meaning of the NASDAQ rules. Additionally, our Board has determined that Frederick A. Hessler and Curtis S. Lane satisfy the heightened independence requirements of Rule 10A-3 under the Exchange Act for purposes of Audit Committee membership. Item 14.
Principal Accountant Fees and Services
Fees Paid to PricewaterhouseCoopers LLP The following table presents fees for professional services rendered by PricewaterhouseCoopers LLP (“PwC”) for the audit of the Company’s annual financial statements for the years ended December 31, 2013 and December 31, 2012, and fees billed for other services rendered by PwC during those periods.
Audit Fees Audit-Related Fees Tax Fees All Other Fees TOTAL
2013
2012
$2,365,633 $ 350,974 $ 0 $ 0 $2,716,607
$1,160,000 $ 50,000 $ 0 $ 0 $1,210,000
Audit Fees. Audit Fees for the last two years were for professional services rendered by the independent registered public accountants in connection with (i) the audits of the Company’s annual financial statements and (ii) the review of the Company’s quarterly financial statements. Audit fees for 2013 were also for services related to the Company’s initial public offering, acquisitions, debt refinancing transactions and consents related to the Company’s SEC filings. Audit-Related Fees. Audit-Related Fees for 2013 and 2012 were for services related to audits of significant subsidiaries (as defined under Rule 3-05 of Regulation S-X), internal controls optimization and agreed-upon procedures. All audit-related services were pre-approved by the Company’s Audit Committee. Tax Fees. There were no Tax Fees for 2013 or 2012. All Other Fees. All Other Fees encompasses any services provided by the independent registered public accountants other than the services reported in the other above categories. There were no such fees in 2013 or 2012. 183
Table of Contents Pre-Approval Policy Prior to March 4, 2014, the Audit Committee’s policy was to specifically pre-approve all audit and non-audit services to be rendered by the independent registered public accountants. Through this policy, the Audit Committee has been able to effectively monitor the costs of services and ensure that the provision of such services does not impair the registered accountants’ independence. As of March 4, 2014, the Audit Committee has adopted policies and procedures for the pre-approval of audit and non-audit services performed by the independent registered public accountants pursuant to which the Audit Committee generally is required to pre-approve the audit and permissible non-audit services performed by the independent registered public accountants in order to assure that the provision of such services does not impair the registered accountants’ independence. Unless a type of service to be provided by the independent registered public accountants has received general pre-approval, the service will require specific pre-approval by the Audit Committee. Any proposed services exceeding pre-approved cost levels will require specific pre-approval by the Audit Committee. On an annual basis, the Audit Committee may pre-approve specific services that are expected to be provided to the Company by the independent registered public accountants during the following twelve months. The Audit Committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated must report any pre-approval decisions to the Audit Committee at its next scheduled meeting. 184
Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a)(3) and (b) — Exhibits. The exhibits listed on the Exhibit Index beginning on page 211 of this Form 10-K are filed herewith or are incorporated herein by reference. (a)(1) and (c) — Financial Statements Financial Statements : The Financial Statements and related Financial Statements Schedule of Surgical Care Affiliates are included herein in Part II, Item 8. The following audited and unaudited consolidated financial statements of ASC Operators, LLC are presented pursuant to Rule 3-09 of Regulation S-X: 185
Table of Contents ASC Operators, LLC Unaudited Consolidated Financial Statements December 31, 2013 INDEX Unaudited Consolidated Financial Statements Page (s)
Balance Sheet Statement of Operations Statement of Changes in Equity Statement of Cash Flows Notes to Financial Statements
187 188 189 190 191 186
Table of Contents ASC Operators, LLC Unaudited Consolidated Balance Sheet (In thousands of U.S. dollars) D ECEMBER
31 2013
Assets Current assets Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts ($210) Due from related party Prepaids and other current assets Total current assets Property and equipment, net of accumulated depreciation ($12,185) Goodwill Intangible assets, net of accumulated amortization ($643) Total assets Liabilities and Equity Current liabilities Current portion of long-term debt Accounts payable Accrued payroll Other current liabilities Due to related party Total current liabilities Long-term debt, net of current portion Other long-term liabilities Total liabilities Commitments and contingent liabilities Equity Members’ equity Noncontrolling interests Total equity Total liabilities and equity
The accompanying notes are an integral part of these unaudited consolidated financial statements. 187
$
7,361 9,011 871 295 17,538 11,030 26,534 1,254 $ 56,356
$
5,863 1,689 273 936 1,735 10,496 459 13 10,968
29,117 16,271 45,388 $ 56,356
Table of Contents ASC Operators, LLC Unaudited Consolidated Statement of Operations (In thousands of U.S. dollars) Year Ended December 31 2013
Net operating revenues: Net patient revenues Other revenues Total net operating revenues Operating expenses: Salaries and benefits Supplies Professional and contractual services Other operating expenses Depreciation and amortization Occupancy costs Provision for doubtful accounts Loss on sale of property and equipment Total operating expenses Operating income Interest expense Net income Less: Net income attributable to noncontrolling interests Net income attributable to ASC Operators
$
58,309 100 58,409
15,257 10,066 3,454 3,796 1,966 1,738 1,183 86 37,546 20,863 42 20,821 (10,232) $ 10,589
The accompanying notes are an integral part of these unaudited consolidated financial statements. 188
Table of Contents ASC Operators, LLC Unaudited Consolidated Statement of Changes in Equity (In thousands of U.S. dollars)
Balance at December 31, 2012 Net income Distributions to members Contributions from members Distributions to noncontrolling interests Balance at December 31, 2013
SCA
Sutter
Total Members Equity
$16,367 5,189 (8,883) 915 — $13,588
$18,418 5,400 (9,245) 952 — $15,525
$ 34,785 10,589 (18,128) 1,867 — $ 29,117
Noncontrolling
$
Interests
$
15,953 10,232 — 621 (10,531) 16,271
The accompanying notes are an integral part of these unaudited consolidated financial statements. 189
Total Equity
$ 50,738 20,821 (18,128) 2,488 (10,531) $ 45,388
Table of Contents ASC Operators, LLC Unaudited Consolidated Statement of Cash Flows (In thousands of U.S. dollars) Y EAR E NDED D ECEMBER
31 2013
Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Provision for doubtful accounts Depreciation and amortization Loss on disposal of assets Increase in assets Accounts receivable Other assets Increase in liabilities Accounts payable Accrued payroll Accrued interest Other liabilities Net cash provided by operating activities Cash flows from investing activities Capital expenditures Proceeds from disposal of assets Changes in due to/from related party Net cash provided used in investing activities Cash flows from financing activities Borrowings under construction loan and long-term debt Principal payments on long-term debt Principal payments under capital lease obligations Capital contributions Contributions from noncontrolling interests of consolidated affiliates Distributions to members Distributions to noncontrolling interests of consolidated affiliates Net cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow information: Cash paid during the year for interest
The accompanying notes are an integral part of these unaudited consolidated financial statements. 190
$ 20,821 1,183 1,966 86 (2,071) (119) 388 3 1 758 23,016 (7,935) 7 (1,295) (9,223) 6,094 (151) (367) 1,867 621 (18,128) (10,531) (20,595) (6,802) 14,163 $ 7,361 $
24
Table of Contents ASC Operators, LLC Notes to Unaudited Consolidated Financial Statements (Amounts in tables are in thousands of U. S. dollars unless otherwise indicated) 1.
DESCRIPTION OF THE BUSINESS Nature of Operations ASC Operators, LLC (“ASC Operators,” the “Company” or “we”), a California limited liability company, was formed on May 2, 2007, primarily to own and operate a network of multi-specialty ambulatory surgery centers (“ASCs”) in the Sacramento, California, metropolitan area. ASC Operators is a 51% owned subsidiary of Sutter Health. Surgery Centers – West Holdings, LLC, a California limited liability company and a subsidiary of Surgical Care Affiliates, LLC (SCA), owns 49% of ASC Operators. As of December 31, 2013, the Company had an interest in and/or operated six ASCs in the Sacramento, California, metropolitan area. Our ASCs primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. Basis of Presentation The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such financial statements include the assets, liabilities, revenues, and expenses of all majority-owned subsidiaries over which we exercise control and, when applicable, entities in which we have a controlling financial interest.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include, but are not limited to: (1) allowance for contractual revenue adjustments; (2) allowance for doubtful accounts; (3) asset impairments, including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; and (6) economic lives and fair value of leased assets. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation as considered necessary. Actual results could differ from those estimates. 191
Table of Contents Revenue Recognition Revenues consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the healthcare services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. Cash and Cash Equivalents Cash and cash equivalents include all demand deposits reduced by the amount of outstanding checks and drafts where the right of offset exists for these bank accounts. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has not experienced any losses on such deposits. Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, workers’ compensation, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payors. The concentration of net patient service accounts receivable by payor class, as a percentage of total net patient service accounts receivable, as of the end of each of the reporting periods, is as follows: A S OF D ECEMBER
31 2013
Managed care and other discount plans Medicare Workers’ compensation Patients and other third-party payors Total
53% 40 6 1 100%
We recognize that revenues and accounts receivable from government agencies are significant to our operations; however, we do not believe there are significant credit risks associated with these government agencies. We also recognize that revenue and accounts receivable from managed care and other discount plans are significant to our operations. Because the category of managed care and other discount plans is composed of numerous individual payors which are geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. 192
Table of Contents Property and Equipment We report improvements and equipment at cost, net of asset impairment. We report assets under capital lease obligations at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. Useful lives are as follows: Years
Leasehold improvements Furniture, fixtures, and equipment Assets under capital lease obligations: Equipment
5 to 20 3 to 10 3 to 5
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset. We capitalize interest expense on major construction and development projects while in progress. Capitalized interest for the year ended December 31, 2013 was approximately $19,000. We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the consolidated statements of operations. For operating leases, we recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease. Goodwill Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing each year. We have no accumulated impairment of goodwill for the year ended December 31, 2013. Fair Value of Financial Instruments Our financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the shortterm maturity of these instruments. We determine the fair value of our long-term debt based on various factors, including maturity schedules, call features and current market rates. Noncontrolling Interest in Consolidated Affiliates The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable 193
Table of Contents portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Newly Issued Authoritative Guidance We do not believe any recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. 3.
PROPERTY AND EQUIPMENT Property and equipment consists of the following: A S OF D ECEMBER
31 2013
Leasehold improvements Furniture, fixtures and equipment
$
Less: Accumulated depreciation and amortization Construction in progress Property and equipment, net
4,363 12,144 16,507 (12,185) 4,322 6,708 $ 11,030
Depreciation expense for the year ended December 31, 2013, was approximately $1.7 million and is included in the consolidated statement of income as a component of operating expenses. The amount of amortization expense and accumulated amortization relating to assets under capital lease obligations and rent expense under operating leases is as follows: Y EAR E NDED
D ECEMBER
31 2013
Assets under capital lease obligations: Equipment Accumulated amortization Assets under capital lease obligations, net Amortization expense Rent Expense: Minimum rent payments Contingent and other rents Total rent expense
$ $ $ $ $ 194
1,099 (796) 303 350 1,602 206 1,808
Table of Contents Leases Future minimum lease payments at December 31, 2013 for those leases of ASC Operators, LLC and its subsidiaries having an initial or remaining non-cancelable lease term of one year or more are as follows: Year Ending December 31 2014 2015 2016 2017 2018 2019 and thereafter
4.
$ 1,645 1,619 1,583 1,620 1,153 4,565 $12,185
GOODWILL Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We have no accumulated impairment of goodwill for the period ended December 31, 2013. There was no change in goodwill for the year ended December 31, 2013. We performed impairment reviews and concluded that no goodwill impairment existed.
5.
LONG-TERM DEBT Our long-term debt outstanding consists of the following: A S OF D ECEMBER
31 2013
Notes payable Less: Current portion Long-term debt, net of current portion
$
6,322 (5,863) $ 459
$5.7 million of the Notes payable balance relates to a no-interest construction loan classified in the current portion of long-term debt. We expect to refinance the construction loan after completion of the construction activity. The following chart shows scheduled principal payments due on long-term debt for the next five years: Year Ending December 31 2014 2015 2016 2017 2018 Total
$5,863 189 159 90 21 $6,322 195
Table of Contents 6.
NONCONTROLLING INTERESTS The following table shows the effects of changes to ASC Operators, LLC ownership interest in its subsidiaries on ASC Operators, LLC equity: Y EAR E NDED D ECEMBER
31 2013
Net income attributable to ASC Operators (Decrease) increase in equity due to sales to noncontrolling interests Decrease in equity due to purchases from noncontrolling interests Change from net income attributable to ASC Operators
7.
$ 10,589 — — $ 10,589
RELATED PARTY TRANSACTIONS The Company was involved in various transactions with affiliated companies. The surgery centers were owed $0.9 million from Surgical Care Affiliates, LLC and related affiliates for services at December 31, 2013, and such amounts are classified as due from related party in the accompanying consolidated balance sheets. The surgery centers owed Sutter Health and related entities $1.7 million for services at December 31, 2013, and such amounts were classified as due to related party in the accompanying consolidated balance sheets.
8.
SUBSEQUENT EVENTS The Company’s management has evaluated subsequent events through March 24, 2014, and concluded that there were no material subsequent events. 196
Table of Contents ASC Operators, LLC Audited Consolidated Financial Statements December 31, 2012 and 2011 INDEX Page (s)
Report of Independent Auditors
198
Consolidated Financial Statements Balance Sheets Statements of Operations Statements of Changes in Equity Statements of Cash Flows Notes to Financial Statements
199 200 201 202 203 197
Table of Contents Independent Auditor’s Report To Board of Directors and Members of ASC Operators, LLC: We have audited the accompanying consolidated financial statements of ASC Operators, LLC and its subsidiaries (“the Company”), which comprise the consolidated balance sheets as of December 31, 2012, and December 31, 2011, and the related consolidated statements of operations, changes in equity, and cash flows for each of the two years in the period ended December 31, 2012. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ASC Operators, LLC and its subsidiaries at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for the two years in the period ended December 31, 2012 in accordance with accounting principles generally accepted in the United States of America. /s/ PricewaterhouseCoopers LLP Birmingham, AL March 24, 2014 198
Table of Contents ASC Operators, LLC Consolidated Balance Sheets (In thousands of U.S. dollars)
Assets Current assets Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts (2012 - $241; 2011 - $377) Due from related party Prepaids and other current assets Total current assets Property and equipment, net of accumulated depreciation (2012 - $11,852; 2011 - $10,400) Goodwill Intangible assets, net of accumulated amortization (2012 - $398; 2011 - $119) Total assets Liabilities and Equity Current liabilities Current portion of long-term debt Accounts payable Accrued payroll Other current liabilities Due to related party Total current liabilities Long-term debt, net of current portion Other long-term liabilities Total liabilities Commitments and contingent liabilities
D ECEMBER 31 2012
D ECEMBER 31 2011
$
14,163 8,124 882 175 23,344 4,909 26,534 1,499 56,286
$
460 1,302 270 167 3,041 5,240 287 21 5,548
$
$
$
$
3,292 6,810 5,788 763 16,653 4,257 22,848 269 44,027
420 1,064 731 997 — 3,212 285 13 3,510
Equity Members’ equity Noncontrolling interests Total equity Total liabilities and equity
$
34,785 15,953 50,738 56,286
The accompanying notes are an integral part of these consolidated financial statements. 199
$
27,238 13,279 40,517 44,027
Table of Contents ASC Operators, LLC Consolidated Statements of Operations (In thousands of U.S. dollars)
Net operating revenues: Net patient revenues Other revenues Total net operating revenues Operating expenses: Salaries and benefits Supplies Other operating expenses Depreciation and amortization Occupancy costs Provision for doubtful accounts Loss (gain) on disposal of assets Total operating expenses Operating income Interest expense Interest income Net income Less: Net income attributable to noncontrolling interests Net income attributable to ASC Operators
Year Ended December 31 2012
Year Ended December 31 2011
$
$
60,591 65 60,656
15,173 8,960 6,940 1,861 1,600 1,067 2 35,603 25,053 35 (1) 25,019 (11,048) $ 13,971
The accompanying notes are an integral part of these consolidated financial statements. 200
58,639 67 58,706
12,158 7,708 7,951 1,277 1,480 817 (29) 31,362 27,344 6 (1) 27,339 (11,208) $ 16,131
Table of Contents ASC Operators, LLC Consolidated Statements of Changes in Equity (In thousands of U.S. dollars)
Balance at December 31, 2010 Net income Distributions to members Net change in equity related to purchase/(sale) of ownership interests Distributions to noncontrolling interests Balance at December 31, 2011 Net income Distributions to members Contributions from members Net change in equity related to purchase/(sale) of ownership interests Distributions to noncontrolling interests Balance at December 31, 2012
SCA
Sutter
Total Members Equity
$13,802 7,292 (7,806)
$14,503 8,839 (8,125)
$ 28,305 16,131 (15,931)
(619) — $12,669 6,846 (3,148) —
(648) — $14,569 7,125 (3,276) —
(1,267) — $ 27,238 13,971 (6,424) —
— — $16,367
— — $18,418
— — $ 34,785
Noncontrolling Interests
$
$
$
The accompanying notes are an integral part of these consolidated financial statements. 201
Total Equity
9,715 11,208 —
$ 38,020 27,339 (15,931)
4,147 (11,791) 13,279 11,048 — —
2,880 (11,791) $ 40,517 25,019 (6,424) —
2,176 (10,550) 15,953
2,176 (10,550) $ 50,738
Table of Contents ASC Operators, LLC Consolidated Statements of Cash Flows (In thousands of U.S. dollars)
Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Provision for doubtful accounts Depreciation and amortization Loss (gain) on disposal of assets (Increase) decrease in assets, net of business combinations Accounts receivable Other assets Increase (decrease) in liabilities, net of business combinations Accounts payable Accrued payroll Other liabilities Other, net Net cash provided by operating activities Cash flows from investing activities Capital expenditures Proceeds from disposal of assets Business acquisitions, net of cash acquired of 2012 - $169; 2011 - $211 Changes in due to/from related party Net cash provided by (used in) investing activities Cash flows from financing activities Principal payments on long-term debt Principal payments under capital lease obligations Distributions to members Distributions to noncontrolling interests of consolidated affiliates Repurchase of equity interests of consolidated affiliates Other Net cash used in financing activities Change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow information: Cash paid during the year for interest
Y EAR E NDED D
Y EAR E NDED D
ECEMBER
ECEMBER
31 2012
31 2011
$ 25,019
$ 27,339
1,067 1,861 2
817 1,277 (29)
(2,040) 594
(796) (121)
(89) (462) (824) (54) 25,074
38 (5) (22) — 28,498
(1,586) 268 (3,281) 7,947 3,348
(912) 259 (3,934) 1,511 (3,076)
(65) (512) (6,424) (10,550) — — (17,551) 10,871 3,292 $ 14,163
— (138) (15,931) (11,791) (758) — (28,618) (3,196) 6,488 $ 3,292
$
$
Supplemental schedule of noncash investing and financing activities Property and equipment acquired through capital leases and installment purchases Repurchase of equity interests in consolidated affiliates
The accompanying notes are an integral part of these consolidated financial statements. 202
14 202 —
6 843 (509)
Table of Contents ASC Operators, LLC Notes to Consolidated Financial Statements (Amounts in tables are in thousands of U. S. dollars unless otherwise indicated) 1.
DESCRIPTION OF THE BUSINESS Nature of Operations ASC Operators, LLC (“ASC Operators,” the “Company” or “we”), a California limited liability company, was formed on May 2, 2007, primarily to own and operate a network of multi-specialty ambulatory surgery centers (“ASCs”) in the Sacramento, California, metropolitan area. ASC Operators is a 51% owned subsidiary of Sutter Health. Surgery Centers — West Holdings, LLC, a California limited liability company and a subsidiary of Surgical Care Affiliates, LLC (SCA), owns 49% of ASC Operators. As of December 31, 2012, the Company had an interest in and/or operated six ASCs in the Sacramento, California, metropolitan area. Our ASCs primarily provide the facilities, equipment and medical support staff necessary for physicians to perform non-emergency surgical and other procedures in various specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology and gynecology, as well as other general surgery procedures. At our ASCs, physicians perform same-day surgical procedures. Basis of Presentation The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such financial statements include the assets, liabilities, revenues, and expenses of all majority-owned subsidiaries over which we exercise control and, when applicable, entities in which we have a controlling financial interest.
2.
ACQUISITIONS Effective May 1, 2012, we purchased a controlling interest in a multi-specialty surgery center located in Roseville, California for $3.5 million and entered into a management services agreement with the facility. The fair values of assets and liabilities assumed May 1, 2012 are as follows: Cash Accounts receivable Fixed assets Other assets Noncompete agreements Certificates of need Management agreements Goodwill Noncontrolling interests Accounts payable and other liabilities Net assets acquired
$
169 341 716 6 198 126 1,185 3,686 (2,176) (801) $ 3,450
Effective January 1, 2011, we purchased a controlling interest in a multi-specialty surgery center located in Sacramento, California for $4.1 million in cash and entered into a management services agreement with the facility. 203
Table of Contents The fair values of assets and liabilities assumed January 1, 2011 are as follows: Cash Accounts receivable Fixed assets Noncompete agreements Licenses Goodwill Noncontrolling interests Accounts payable and other liabilities Net assets acquired
3.
$
211 265 769 237 151 6,675 (3,928) (235) $ 4,145
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries for which we are the primary beneficiary. All significant intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include, but are not limited to: (1) allowance for contractual revenue adjustments; (2) allowance for doubtful accounts; (3) asset impairments, including goodwill; (4) depreciable lives of assets; (5) useful lives of intangible assets; and (6) economic lives and fair value of leased assets. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained, and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluation as considered necessary. Actual results could differ from those estimates. Revenue Recognition Revenues consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period the healthcare services are provided, based upon the estimated amounts due from patients and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and employers. Estimates of contractual allowances under third-party payor arrangements are based upon the payment terms specified in the related contractual agreements and payment history. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates. Cash and Cash Equivalents Cash and cash equivalents include all demand deposits reduced by the amount of outstanding checks and drafts where the right of offset exists for these bank accounts. The Company has deposits with certain financial institutions which exceed federally insured limits. The Company has not experienced any losses on such deposits. 204
Table of Contents Accounts Receivable We report accounts receivable at estimated net realizable amounts from services rendered from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, workers’ compensation, employers and patients. Our accounts receivable are geographically dispersed, but a significant portion of our accounts receivable are concentrated by type of payors. The concentration of net patient service accounts receivable by payor class, as a percentage of total net patient service accounts receivable, as of the end of each of the reporting periods, is as follows: As of December 31 2012 2011
Managed care and other discount plans Medicare Workers’ compensation Medicaid Patients and other third-party payors Total
52% 16 22 5 5 100%
56% 14 24 6 — 100%
We recognize that revenues and accounts receivable from government agencies are significant to our operations; however, we do not believe there are significant credit risks associated with these government agencies. We also recognize that revenue and accounts receivable from managed care and other discount plans are significant to our operations. Because the category of managed care and other discount plans is composed of numerous individual payors which are geographically dispersed, our management does not believe there are any significant concentrations of revenues from any individual payor that would subject us to significant credit risks in the collection of our accounts receivable. Property and Equipment We report improvements and equipment at cost, net of asset impairment. We report assets under capital lease obligations at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. We depreciate our assets using the straight-line method over the shorter of the estimated useful life of the assets or life of the lease term, excluding any lease renewals, unless the lease renewals are reasonably assured. Useful lives are as follows: Years
Leasehold improvements Furniture, fixtures, and equipment Assets under capital lease obligations: Equipment
5 to 20 3 to 10 3 to 5
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life of an asset. We capitalize interest expense on major construction and development projects while in progress. No interest was capitalized during the years ended December 31, 2012 and 2011. We retain fully depreciated assets in property and accumulated depreciation accounts until we remove them from service. In the case of sale, retirement or disposal, the asset cost and related accumulated depreciation balance is removed from the respective account, and the resulting net amount, less any proceeds, is included as a component of income from continuing operations in the consolidated statements of operations. For operating leases, we recognize escalated rents, including any rent holidays, on a straight-line basis over the term of the lease. 205
Table of Contents Goodwill Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We test goodwill for impairment using a fair value approach at least annually, absent some triggering event that would require an interim impairment assessment. Absent any impairment indicators, we perform our goodwill impairment testing as of October 1 st of each year. We have no accumulated impairment of goodwill for the periods ended December 31, 2012 and 2011. Fair Value of Financial Instruments Our financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the shortterm maturity of these instruments. We determine the fair value of our long-term debt based on various factors, including maturity schedules, call features and current market rates. Noncontrolling Interest in Consolidated Affiliates The consolidated financial statements include all assets, liabilities, revenues and expenses of less-than-100%-owned affiliates that we control. Accordingly, we have recorded a noncontrolling interest in the earnings and equity of such affiliates. We record adjustments to noncontrolling interest for the allocable portion of income or loss to which the noncontrolling interest holders are entitled based upon the portion of the subsidiaries they own. Distributions to holders of noncontrolling interests reduce the respective noncontrolling interest holders’ balance. Newly Issued Authoritative Guidance Goodwill Impairment Testing . In September 2011, the FASB issued accounting guidance related to goodwill impairment testing. The guidance allows an entity to elect to first perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment, that it is more-likelythan-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further impairment testing is required. The guidance refers to several factors to consider when performing the qualitative analysis, including macroeconomic factors, industry factors and entity-specific factors. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted provided that the entity has not yet performed its annual impairment test for goodwill. The Company performs its annual impairment test for goodwill as of October 1 of each year. The adoption of this new accounting guidance did not have a material impact on the Company’s financial statements. We do not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on our consolidated financial position, results of operations or cash flows. 206
Table of Contents 4.
PROPERTY AND EQUIPMENT Property and equipment consists of the following: As of December 31 2012 2011
Leasehold improvements Furniture, fixtures and equipment
$ 4,222 12,052 16,274 (11,852) 4,422 487 $ 4,909
Less: Accumulated depreciation and amortization Construction in progress Property and equipment, net
$ 3,781 10,824 14,605 (10,400) 4,205 52 $ 4,257
Depreciation expense for the years ended December 31, 2012 and 2011 was approximately $1.6 million and $1.2 million, respectively, and is included in the consolidated statements of income as a component of operating expenses. The amount of amortization expense and accumulated amortization relating to assets under capital lease obligations and rent expense under operating leases is as follows:
Assets under capital lease obligations: Equipment Accumulated amortization Assets under capital lease obligations, net Amortization expense Rent Expense: Minimum rent payments Contingent and other rents Total rent expense
Y EAR E
Y EAR E
NDED
NDED
D
D
ECEMBER
ECEMBER
31 2012
31 2011
$ $ $ $ $
1,045 (447) 598 268
$
1,589 223 1,812
$
$ $
$
843 (94) 749 94 1,325 384 1,709
Leases Future minimum lease payments at December 31, 2012 for those leases of ASC Operators, LLC and its subsidiaries having an initial or remaining non-cancelable lease term of one year or more are as follows: Operating Year ending December 31,
Leases
2013 2014 2015 2016 2017 2018 and thereafter
$
955 734 508 305 35 327 $ 2,864
Less: interest portion Obligations under capital leases
Capital Lease Obligations
$
$ 207
368 2 1 1 — — 372 (4) 368
Total
$1,323 736 509 306 35 327 $3,236
Table of Contents 5.
GOODWILL Goodwill represents the unallocated excess of purchase price over the fair value of identifiable assets and liabilities acquired in business combinations. Goodwill also includes the unallocated excess of purchase price plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair value of identifiable assets and liabilities acquired in business combinations. We have no accumulated impairment of goodwill for the periods ended December 31, 2012 and 2011. The following table shows changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011:
Balance at beginning of period Acquisitions (Note 2) Other Balance at end of period
Y EAR E NDED D
Y EAR E NDED D
ECEMBER
ECEMBER
31 2012
31 2011
$ 22,848 3,686 — $ 26,534
$ 16,463 6,675 (290) $ 22,848
We performed impairment reviews and concluded that no goodwill impairment existed. 6.
LONG-TERM DEBT Our long-term debt outstanding consists of the following: As of December 31 2012 2011
Capital lease obligations Notes payable
$
368 379 747 (460) $ 287
Less: Current portion Long-term debt, net of current portion
$
705 — 705 (420) $ 285
The following chart shows scheduled principal payments due on long-term debt for the next five years and thereafter: Year Ending December 31
2013 2014 2015 2016 2017 Thereafter Total
$460 103 109 75 — — $747 208
Table of Contents 7.
NONCONTROLLING INTERESTS The following table shows the effects of changes to ASC Operators, LLC ownership interest in its subsidiaries on ASC Operators, LLC equity:
Net income attributable to ASC Operators (Decrease) increase in equity due to sales to noncontrolling interests Decrease in equity due to purchases from noncontrolling interests Change from net loss attributable to ASC Operators and transfers to/from noncontrolling interests
8.
Y EAR E NDED D
Y EAR E NDED D
ECEMBER
ECEMBER
31 2012
31 2011
$ 13,971 — — $ 13,971
$ 16,131 (271) (996) $ 14,864
RELATED PARTY TRANSACTIONS The Company was involved in various transactions with affiliated companies. The surgery centers were owed $0.9 million and $5.8 million from Surgical Care Affiliates, LLC and related affiliates for services at December 31, 2012 and 2011, respectively, and such amounts are classified as due from related party in the accompanying consolidated balance sheets. The surgery centers owed Sutter Health and related entities $3.0 million for services at December 31, 2012, and such amounts were classified as due to related party in the accompanying consolidated balance sheets.
9.
SUBSEQUENT EVENTS The Company’s management has evaluated subsequent events through March 24, 2014, and concluded that there were no material subsequent events. 209
