Amendment No. 2 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on September 21, 2015

Registration No. 333-206439

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Surgery Partners, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   8062   47-3620923
(State or other jurisdiction of   (Primary standard industrial   (I.R.S. employer
incorporation or organization)   classification code number)   identification number)

40 Burton Hills Boulevard

Suite 500

Nashville, Tennessee 37215

(615) 234-5900

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Michael Doyle

Chief Executive Officer

40 Burton Hills Boulevard

Suite 500

Nashville, Tennessee 37215

(615) 234-5900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Carl Marcellino, Esq.

Ropes & Gray LLP

1211 Avenue of the Americas

New York, NY 10036

Telephone: (212) 596-9000

Facsimile: (212) 596-9090

  

Rachel W. Sheridan, Esq.

John H. Chory, Esq.

Latham & Watkins LLP

555 Eleventh Street, NW

Suite 100

Washington, DC 20004

Telephone: (202) 637-2200

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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. (Check one).

 

Large accelerated filer  ¨      Accelerated filer  ¨
Non-accelerated filer  x      Smaller reporting company  ¨
(Do not check if a smaller reporting company)   

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount to be

Registered(1)

 

Proposed

Maximum

Offering Price

Per Share

 

Proposed

Maximum

Aggregate

Offering Price(2)

 

Amount of

Registration Fee(3)

Common Stock, $0.01 par value per share

  16,427,750   $26.00   $427,121,500   $49,632

 

 

(1) Includes 2,142,750 shares of common stock that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended (the “Securities Act”).
(3) Previously paid.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated September 21, 2015

PROSPECTUS

14,285,000 Shares

 

LOGO

Surgery Partners, Inc.

Common Stock

 

 

This is the initial public offering of shares of common stock of Surgery Partners, Inc. We are offering 14,285,000 shares of common stock. The selling stockholders named in this prospectus, which include an affiliate of our Sponsor, H.I.G. Capital, LLC and members of our management, may sell shares of our common stock in the offering on a pro rata basis in the event that gross proceeds from the offering exceed $350 million. We will not receive any proceeds from the sale of shares by any of the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The initial public offering price per share of our common stock is expected to be between $23.00 and $26.00. We have applied to list our common stock on the NASDAQ Global Market under the symbol “SGRY.”

Our business is currently conducted through Surgery Center Holdings, Inc. and its subsidiaries. Immediately prior to the completion of this offering, Surgery Partners, Inc. will become the direct or indirect parent of Surgery Center Holdings, Inc.

After the completion of this offering, we expect that an affiliate of our Sponsor will continue to own a majority of the voting power of our outstanding shares of common stock (based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus). As a result, we expect to be a “controlled company” within the meaning of the corporate governance rules of NASDAQ. See the section entitled “Management—Board Composition Following this Offering” in this prospectus.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, may elect to comply with certain reduced public company reporting requirements. See the section entitled “Prospectus Summary—Implications of Being an Emerging Growth Company” in this prospectus.

Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 23.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $           $     

Underwriting discount(1)

   $           $     

Proceeds, before expenses, to us

   $           $     

Proceeds, before expenses, to the selling stockholders

   $           $     

 

(1) We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting.”

The underwriters have an option to purchase up to 2,142,750 additional shares from the selling stockholders named in this prospectus at the initial public offering price, less the underwriting discount. The underwriters can exercise this option at any time and from time to time within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Delivery of the shares of our common stock will be made on or about                     , 2015.

 

 

 

BofA Merrill Lynch   Goldman, Sachs & Co.   Jefferies

 

Citigroup   Morgan Stanley   Credit Suisse   Raymond James   RBC Capital Markets

Stifel

 

 

The date of this Prospectus is                     , 2015.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

 

 

Prospectus Summary

     1   

Risk Factors

     23   

Cautionary Note Regarding Forward-Looking Statements

     61   

Use of Proceeds

     63   

Dividend Policy

     64   

Capitalization

     65   

Dilution

     67   

Unaudited Pro Forma As Adjusted Condensed Combined Financial Information

     69   

Selected Consolidated Financial and Other Data

     74   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     77   

Business

     106   

Management

     145   

Executive Compensation

     151   

Certain Relationships and Related Party Transactions

     161   

Description of Indebtedness

     164   

Principal and Selling Stockholders

     169   

Description of Capital Stock

     172   

Shares Eligible for Future Sale

     177   

Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of Common Stock

     179   

Underwriting

     183   

Legal Matters

     191   

Experts

     191   

Where You Can Find More Information

     191   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

 

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Market and Other Industry Data

Unless otherwise indicated, market data and certain industry forecasts used throughout this prospectus were obtained from various sources, including internal surveys, market research, consultant surveys, publicly available information and industry publications and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. The future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in these publications and reports.

Trademarks and Other Intellectual Property Rights

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, tag-lines, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this prospectus are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks.

 

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PROSPECTUS SUMMARY

The following summary highlights information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, and in particular, the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes relating to those statements included elsewhere in this prospectus. Some of the statements in this prospectus constitute forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

Unless otherwise indicated or the context otherwise requires, references in this prospectus to the “Company”, “Surgery Partners”, “we”, “us” and “our” refer to, (i) Surgery Center Holdings, LLC and its consolidated subsidiaries, including Surgery Center Holdings, Inc., immediately prior to the Reorganization and (ii) Surgery Partners, Inc. and its consolidated subsidiaries, including Surgery Center Holdings, LLC and Surgery Center Holdings, Inc., immediately following the Reorganization. Unless the context implies otherwise, the term “affiliates” means direct and indirect subsidiaries of Surgery Center Holdings, LLC and Surgery Partners, Inc., as applicable, and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of Surgery Partners, and the term “employees” refers to employees of affiliates of Surgery Partners. References to the “period ended December 31, 2014,” or “2014” made in connection with financial or other data are to the Company’s fiscal year ended December 31, 2014, which includes the results of Symbion Holdings Corporation (“Symbion”) following its acquisition for the period from November 3, 2014 through December 31, 2014. References to financial or other data presented as “pro forma” or “on a pro forma basis” refer to a presentation that applies adjustments to give pro forma effect to the Symbion acquisition over the applicable time period or as of the relevant date. For more information, see the section entitled “Unaudited Pro Forma As Adjusted Condensed Combined Financial Information” included elsewhere in this prospectus. All information in this prospectus assumes no exercise of the underwriters’ option to purchase additional shares from the selling stockholders, unless otherwise noted.

Our Company

We are a leading healthcare services company with a differentiated outpatient delivery model focused on providing high quality, cost effective solutions for surgical and related ancillary care in support of our patients and physicians. Founded in 2004, we are now one of the largest and fastest growing surgical services businesses in the country. As of August 17, 2015, we owned or operated, primarily in partnership with physicians, a portfolio of 99 surgical facilities comprised of 94 ambulatory surgery centers (“ASCs” or “surgery centers”) and five surgical hospitals (“surgical hospitals,” and together with ASCs referred to as “surgical facilities” or “facilities”) across 28 states. On a pro forma basis in 2014, approximately 4,000 physicians provided services to over 500,000 patients in our surgical facilities. As of June 30, 2015, approximately 70% of these facilities were multi-specialty focused. Our innovative strategy provides a suite of targeted and complementary ancillary services in support of our patients and physicians. This suite of ancillary services is comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services, optical services and specialty pharmacy services (our “Ancillary Services”). We believe this approach improves the quality of care provided to our patients, results in superior clinical outcomes and allows us to realize the revenue associated with these Ancillary Services that are otherwise outsourced to unrelated third-party providers.

Driven by an experienced and innovative management team, the implementation of our differentiated strategy resulted in industry leading same-facility revenue growth of approximately 9% during 2014, and an average of approximately 8% annually on a pro forma basis from 2012 to 2014. Our transformational acquisition of Symbion in November of 2014, a private owner and operator of 55 surgical facilities at the time of the acquisition, has further diversified our geographic footprint, surgical specialty mix and ancillary network, while enhancing our scale and providing significant cost and revenue synergy opportunities that we believe we are positioned to achieve

 



 

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over the next two to three years. To that end, we have been actively executing our integration plan to realize these synergies, which include reductions in corporate overhead, supply chain rationalization, enhanced physician engagement, improved payor contracting, and revenue synergies associated with rolling out our suite of Ancillary Services throughout the Symbion portfolio. Without giving effect to the Symbion acquisition, we would have derived approximately 27% of our 2014 revenue from our Ancillary Services. On a pro forma basis, approximately 10% of our 2014 revenue was derived from these same services, a percentage that we will focus on increasing as we continue to deploy our Ancillary Services offerings.

Our patient- and physician-centric culture, our commitment to high quality care, our differentiated approach to physician engagement and our suite of complementary Ancillary Services have been instrumental to our growth. These areas of focus, along with investments in systems and processes, strategic acquisitions and favorable industry trends, have all contributed to our industry leading track record of growth.

Our pro forma revenue for 2014 was $871.2 million, which represents a compound annual growth rate (“CAGR”) of approximately 83% compared to revenue of $260.2 million for the year ended December 31, 2012. For the six months ended June 30, 2015, our revenue was $457.0 million, compared to revenue of $147.3 million for the same period during 2014. In 2014, on a pro forma basis, we experienced a net loss of $8.6 million as compared to net income of $1.9 million for the year ended December 31, 2012. For the six months ended June 30, 2015, we experienced a net loss of $12.2 million as compared to $4.7 million for the same period during 2014. Our pro forma Adjusted EBITDA was $153.3 million for 2014, representing an approximately 74% CAGR when compared to Adjusted EBITDA of $51.0 million for the year ended December 31, 2012. For the six months ended June 30, 2015, our Adjusted EBITDA was $74.4 million as compared to Adjusted EBITDA of $30.0 million for the same period during 2014. For a definition of EBITDA, Adjusted EBITDA, pro forma EBITDA and pro forma Adjusted EBITDA and a reconciliation of Adjusted EBITDA and pro forma Adjusted EBITDA to net income (loss) and pro forma net income (loss), respectively, see “—Summary Historical and Pro Forma Condensed Consolidated Financial and Other Data.”

Our Differentiated Business Strategy and Powerful Value Proposition

Our portfolio of outpatient surgical facilities is complemented by our suite of Ancillary Services, which support our physicians in providing high quality and cost-efficient patient care. Our differentiated business strategy provides meaningful value to patients, physicians and payors, and enables us to capitalize on recent trends in the healthcare industry. As a result, we believe we are positioned for continued growth.

As of June 30, 2015, we owned or operated 99 surgical facilities primarily in partnership with physicians and, on a select basis, physicians and health systems. We provide care across a variety of specialties, including ear, nose and throat (“ENT”), gastrointestinal (“GI”), general surgery, ophthalmology, orthopedics, cardiology and pain management. Many of our surgical patients require additional complementary healthcare services, and our suite of Ancillary Services aims to address the needs of patients and physicians through the provision of these services in a high quality, cost effective manner. We believe this strategy provides numerous benefits to patients and physicians as it improves our coordination of the various services they require, and enhances the quality of our patients’ clinical outcomes as well as their overall experience.

Our flexible facility ownership model further supports our strategy and growth objectives. We primarily hold majority ownership positions in our surgical facilities in partnership with physicians. In select cases, we enter into three-way joint venture partnerships with physicians and leading in-market health systems. Our flexible ownership model:

 

    facilitates successful implementation of our differentiated business strategy;

 

    provides us financial control as well as geographic and operational flexibility;

 



 

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    drives economic alignment with physician partners to enhance operational efficiency;

 

    contributes to high levels of physician satisfaction and successful recruitment and retention efforts;

 

    provides us control to selectively implement operational and strategic changes to enhance site performance, such as expanding service offerings and recruiting new physicians; and

 

    allows us to best position our facilities against evolving market-specific dynamics.

We believe that our differentiated business strategy and our flexible ownership model ultimately benefit our patients, physicians and payors.

Patients: Our approach delivers superior clinical outcomes for patients in a more convenient, comfortable and cost-efficient setting. According to internal surveys conducted in 2014 (which had a range of 12 to 33 questions and sought patient feedback regarding the facility, physicians, staff, and which were distributed to approximately 192,000 of our patients), approximately 94% of the approximately 61,000 respondents responded favorably as to their overall experience at, or impressions of, the facility that they visited. We believe this is a direct result of our patient-centric approach and our focus on quality. In addition, on average, our facilities exceeded industry averages for each of Centers for Medicare and Medicaid Services’, or CMS’, 2014 Ambulatory Surgical Center Quality Reporting (ASCQR) program’s five key core ASC quality measures, of which four are outcome measures (patient burn, patient fall, prophylactic intravenous antibiotic timing and surgical errors) and one is a process of care measure (hospital transfer admission). Patients benefit from our intense focus on their care and our ability to conveniently and cost-effectively provide targeted Ancillary Services. We believe that patients realize cost savings when undergoing surgery in one of our ASCs as compared to a hospital outpatient department (“HOPD”). Based on Medicare fee schedules, it is estimated that the costs associated with the facility for surgeries performed at an ASC cost patients, in the aggregate, approximately 45% less as compared to having the same procedures performed in an HOPD. According to the US Department of Health and Human Services Office of Inspector General, this translates into potential savings of approximately $3 billion to Medicare beneficiaries between 2012 through 2017.

Physicians: Physicians choose us because of our flexible approach to physician engagement, our patient- and physician-centric culture, our convenient and efficient facilities, and our differentiated outpatient delivery model that enhances the coordination of services to improve quality and outcomes. We engage with physicians pursuant to three primary arrangements to best suit their needs and the needs of the communities we serve. These include (i) partnering with physicians in the ownership of our surgical facilities, (ii) directly employing physicians and (iii) allowing physicians to utilize our facilities to perform procedures. Our physician-centric focus and our sophisticated administrative and clinical infrastructure improve productivity and reduce administrative burdens, allowing physicians to focus their time on delivering superior patient care. These attributes have been important contributors to our approximately 96% physician partner retention rate from 2009 through 2014.

Payors: Payors, employers and other health plan sponsors rely on our platform for the provision of high quality care at a significantly lower cost compared to an HOPD. For outpatient procedures commonly performed in both HOPDs and ASCs, the cost benefits to Medicare of having such procedures performed in an ASC such as ours instead of in an HOPD was identified by the Office of Inspector General as an opportunity to potentially save Medicare approximately $12 billion from calendar year 2012 through calendar year 2017. Commercial payors can also expect to save approximately 45% on their reimbursement obligation with respect to the costs associated with the facility for procedures at an ASC as compared to an HOPD, since reimbursement rates are generally derived from Medicare rates.

Incorporating our Ancillary Services strategy with our broader surgical facilities platform has been a primary focus for us since early 2011. The 15 ASCs in which we have incorporated multiple Ancillary Services

 



 

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have experienced, from 2011 to 2014, an additional increase to their operating income CAGR of approximately 20% and an enhanced improvement in their operating income margin of approximately 10%. We see significant opportunity to continue to further deploy this strategy throughout our portfolio to continue to drive our Company’s growth.

Our Innovative Approach Differentiates Us from Competitors

Based on our innovative approach, we believe we are well positioned as a surgical services platform of choice for patients, physicians and payors. Our focus on providing care, complemented by our targeted suite of Ancillary Services, is a key differentiating factor of our strategy. We believe this approach drives physician engagement, better coordination of care, continuous clinical and administrative improvement and enhanced efficiency, all while reducing costs. We believe the following are key differentiators of our platform:

 

    One of the Nation’s Largest and Fastest Growing Surgical Services Platforms with a Highly Favorable Business and Surgical Specialty Mix;

 

    Complementary Suite of Rapidly Growing Ancillary Services Targeted to Meet the Needs of Patients and Physicians in Existing and New Markets;

 

    Differentiated Operating Model with Suite of Ancillary Services Offerings, which Creates a Significant Value Proposition for Patients and Physicians and Drives Robust Organic Growth;

 

    Proven Track Record of Delivering Synergies and Creating Value from Transformational and Independent Surgical Facility Acquisitions; and

 

    Experienced and Innovative Management Team that has Successfully Driven Industry Leading Growth.

One of the Nation’s Largest and Fastest Growing Surgical Services Platforms with a Highly Favorable Business and Surgical Specialty Mix

Our surgical services platform is among the largest in the country and is growing its revenue faster than any of its competitors. Founded with a single facility in Florida in 2004, we have since expanded our footprint nationally, establishing a high growth, diversified platform across 28 states. As of June 30, 2015, our multi-specialty and single-specialty surgical facilities portfolio was comprised of 94 ASCs and five surgical hospitals primarily owned in partnership with physicians. On a pro forma basis, approximately 4,000 physicians provided services to over 500,000 patients in our surgical facilities during 2014. Our portfolio of surgical facilities is further complemented with our suite of Ancillary Services. We experienced approximately 9% same-facility revenue growth during 2014 and have averaged approximately 8% annual same-facility revenue growth on a pro forma basis from 2012 to 2014.

We have a strong presence in growing markets, such as Florida and Texas, where demographic trends are expected to lead to increased demand for outpatient surgical services. According to the U.S. Census Bureau, our markets possess several favorable qualities as compared to national averages. The majority of our markets have a higher concentration of senior populations, a higher median household income than the national average and a lower unemployment rate. For example, as of 2012, the median household income of our markets exceeded the national average by approximately 10%.

Our diversified business and surgical specialty mixes provide several advantages, including: (i) driving increased stable and predictable revenue, (ii) providing multiple levers to grow volume and increase profitability,

 



 

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(iii) allowing flexibility to enter primary and secondary markets, (iv) generating strong free cash flow conversion and (v) broadening the pool of surgical specialists from which we recruit.

 

Surgical Case Mix:

Six Months Ended June 30, 2015

 

LOGO

  

Revenue Mix:

Six Months Ended June 30, 2015(2)

 

LOGO

 

(1)   Other is comprised of cardiology, obstetrics/gynecology, plastic surgery, podiatry, neurology and urology.

  

 

(2)   For segment reporting purposes, revenue from anesthesia services is included within our Surgical Facility Services Segment. As of June 30, 2015, our revenue for segment reporting purposes is as follows: Surgical Facility Services Segment: 93%; Ancillary Services: 6%; Optical Services: 1%.

Complementary Suite of Rapidly Growing Ancillary Services Targeted to Meet the Needs of Patients and Physicians in Existing and New Markets

A differentiated aspect of our model is our Ancillary Services strategy supporting our patients and physicians. These services present significant growth opportunities for our Company and are not additive to the cost of care for patients and payors as these services are otherwise provided by unrelated third-parties. We believe our Ancillary Services better support our physicians by providing control over the quality of these services and less variation in clinical outcomes.

The 15 ASCs in our portfolio where we have incorporated multiple Ancillary Services demonstrate the successful execution of our Ancillary Services strategy. In these surgical facilities, we have experienced, from 2011 to 2014, an additional increase to their operating income CAGR of approximately 20% and an enhanced improvement in their operating income margin of approximately 10%. We have been, and plan to, continue deploying our Ancillary Services strategy across the rest of our platform, which we believe will be an important driver of our future growth.

Differentiated Operating Model with Suite of Ancillary Services Offerings, which Creates a Significant Value Proposition for Patients and Physicians and Drives Robust Organic Growth

We believe our business model provides us with the platform to drive significant growth through multiple channels:

Physician Recruitment, Engagement and Retention

Over 4,000 physicians performed procedures in our facilities in 2014 on a pro forma basis. We have a tailored physician model that provides flexibility in how we engage and build relationships with our physicians to suit their needs and preferences. We partner with physicians in the ownership of most of our surgical facilities. In addition, through our 38 owned or operated physician practices, we employed over 100 physicians across multiple specialties as of August 17, 2015. Finally, we recruit physicians who are neither owners nor employees to utilize our facilities to perform procedures. This flexible model, combined with our patient- and physician-centric culture,

 



 

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contributed to our outstanding track record of recruiting high quality physicians, and our approximately 96% physician partner retention rate from 2009 through 2014. In addition to driving high quality patient care, we believe our approach best enables us to effectively and efficiently utilize the capacity in our facilities.

Flexibility to Expand in Existing Markets and Enter New Markets

Our flexible ownership structure, combined with our expertise operating multi-specialty surgical facilities, enables us to tailor our surgical specialty offerings based on market demand. We strive to maximize efficiency and are positioned to leverage excess capacity in certain of our facilities to drive incremental growth. When mutually beneficial, we also enter into three-way joint ventures with physicians and health systems.

Successful Continued Deployment of Ancillary Services in Existing and New Markets

We have the opportunity to leverage our Ancillary Services for growth through multiple channels, including expanding our offerings to currently unaffiliated physicians in existing and new markets as well as further penetrating our existing and newly acquired facilities. Our recent acquisition of Symbion provides us with a significant opportunity to accelerate the growth of our Ancillary Services by offering these services to legacy Symbion physicians. Additionally, we intend to continue to broaden our suite of Ancillary Services, enhancing the services we can offer to our patients and physicians.

Operating Leverage from Scalability of the Current Platform

Our national presence and large scale afford us significant operating leverage as our business continues to grow. As our platform expands, we will continue to leverage our centralized corporate infrastructure, including essential functions such as accounting, finance, billing, credentialing, regulatory compliance and legal, to drive operational efficiencies and enhance our financial performance. We also have the opportunity to benefit from operating leverage and scale at the facility level as we increase utilization. Our ability to deliver superior quality of care in the most cost efficient manner attracts physicians and patients, which enhance utilization and drive growth at our facilities.

Proven Track Record of Delivering Synergies and Creating Value from Transformational and Independent Surgical Facility Acquisitions

We have a consistent track record of creating value through acquisitions. Within 15 months of our acquisition of NovaMed, Inc. (“NovaMed”) in 2011, we had fully integrated the acquired company and realized synergies by eliminating approximately $5.2 million in expenses and generating approximately $9.3 million of incremental revenue, representing approximately 5% and 6%, of NovaMed’s pre-acquisition operating expenses and revenue, respectively. We believe our transformational acquisition of Symbion not only further diversified our geographic footprint, business and surgical specialty mix, but also potentially provides even greater synergy opportunities than realized through the NovaMed acquisition. We believe that over the next two to three years we are positioned to achieve significant cost and revenue synergies in connection with our acquisition of Symbion. Approximately $9 million of these synergies are reflected in our pro forma Adjusted EBITDA for 2014 presented below under “—Summary Consolidated Historical and Pro Forma Condensed Combined Financial and Other Data.” Incremental synergies are expected to include cost savings from reductions in corporate overhead, supply chain rationalization, enhanced physician engagement, improved payor contracting, and revenue synergies associated with rolling out our suite of Ancillary Services throughout the Symbion portfolio. We are currently executing on our integration plans relative to the Symbion acquisition and have achieved significant cost synergies to date.

In addition, we have also completed other independent surgical facility acquisitions (also referred to as “tuck-in” acquisitions) and have achieved consistent value creation through these acquisitions. Our surgical

 



 

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facility acquisitions have largely been completed at effective multiples we believe to be accretive and attractive, in part due to our systematic approach to integration. Our integration strategy typically includes the rationalization of operating and overhead costs, improvement in managed care contracting, continued physician recruitment and the targeted utilization of our Ancillary Services platform. We have a robust pipeline of additional tuck-in acquisitions and, with the top ten providers in the industry operating less than 20% of the 5,400 Medicare-certified ASCs in the United States, we believe there is significant opportunity to continue our strategy of consolidating the highly fragmented surgical facility industry.

Experienced and Innovative Management Team that has Successfully Driven Industry Leading Growth

Our Company is led by an exceptional management team with strong operational capabilities and an ability to deliver industry leading growth and margins, while executing accretive tuck-ins as well as large-scale transformational acquisitions. We are led by Michael Doyle, our Chief Executive Officer and Director, and Teresa Sparks, our Executive Vice President and Chief Financial Officer, who together have over 40 years of combined experience in the healthcare industry. Mr. Doyle started as our President and Chief Operating Officer in 2004 before being appointed Chief Executive Officer in 2009. Mr. Doyle was instrumental in leading the successful acquisition and integration of NovaMed in 2011, as well as the acquisition of Symbion in 2014. He brings to the position both clinical experience and an extensive healthcare management background. Teresa Sparks joined us through the acquisition of Symbion, where she was Chief Financial Officer since 2007. Through the combined work of Mr. Doyle, Ms. Sparks and our entire management team, meaningful cost and revenue synergies on our combined platform have been achieved to date. The team’s deep operational and acquisition integration experience, combined with our model and our platform’s sophisticated infrastructure, position us well to execute on our ongoing integration and growth strategies.

Our Growth Strategies

Our differentiated operating model employs a multifaceted strategy to grow revenue, earnings and cash flow. We believe the following are key components to this strategy:

Deliver Outstanding Patient Care and Clinical Outcomes

Rising consumerism in healthcare services, along with greater transparency in outcomes data, is expected to empower patients to make more informed healthcare decisions. We expect this trend will significantly benefit overall outpatient surgical facility case volume due to the clinical and cost benefits that surgical facilities offer relative to alternative sites of care such as outpatient departments of acute care hospitals. We believe the industry wide implementation of CMS’ ASCQR Program will further differentiate our facilities as high quality locations based on the strength of our performance across the key quality measures, providing an additional opportunity to gain market share.

We have established a dedicated clinical team of experienced professionals focused on ensuring that the highest level of quality is targeted throughout our platform. Our proprietary quality reporting system generates detailed case-level analytics that we use to measure our clinical results on a physician-by-physician basis against a robust set of quality metrics, providing opportunities to quickly and effectively identify areas for improvement, implement initiatives and track progress. Additionally, our suite of complementary Ancillary Services allows us to provide greater coordination over the provision of these services.

Expand Ancillary Services Across Our National Platform

Our differentiated business strategy and established infrastructure allow us to retain Ancillary Service revenue that is otherwise outsourced to unrelated third-party providers. We have a successful track record of executing on our strategy of incorporating Ancillary Services throughout our surgical facilities portfolio, which

 



 

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has been a key contributor to our strong same-facility pro forma revenue growth of approximately 9% in 2014, and annual average same-facility pro forma revenue growth of approximately 8% from 2012 to 2014. As an example, over the course of four years following the acquisition of one of our surgical hospitals, capacity was expanded via the addition of multiple operating rooms, a state of the art radiation oncology center, several oncology practices, multiple urgent care facilities and several high volume physicians. These initiatives drove approximately 40% growth in this surgical hospital’s net income from 2011 through 2014.

While many of our Ancillary Service lines have been established and growing for a number of years, we see significant growth opportunities from further penetration of these services across our national portfolio of ASCs and surgical hospitals. In particular, our recent acquisition of the Symbion portfolio, with its 55 facilities and network of approximately 700 physician partners represents a large and relatively untapped opportunity for the provision of Ancillary Services. Further, in addition to penetrating our Ancillary Service offerings through our employed and partnered physicians, we believe a substantial opportunity exists to market many of these services to the approximately 800,000 practicing physicians in the U.S. not currently affiliated with our Company.

Continue to Execute and Expand Upon our Physician Engagement Strategy in Attractive Markets

We have a successful track record of owning and operating physician groups dating back to our inception. We believe our flexible approach to physician engagement, including partnering, employing and affiliating with physicians, best allows us to drive high quality patient care, efficiently utilize the capacity in our facilities, implement our complementary Ancillary Services strategy and drive organic growth. Through our recruiting efforts and capital-efficient acquisitions, as of August 17, 2015, we had 38 owned or operated physician practices that comprised of over 100 physicians across multiple surgical specialties (including ENT, GI, general surgery, ophthalmology, orthopedics, cardiology and pain management). Our infrastructure, including scheduling, billing and collections, regulatory compliance, staffing, and analytics, among other services, facilitates significant improvement in efficiency and performance of our practices. In building our existing platform of 38 owned or operated physician practices, we have a demonstrated track record of delivering on our value proposition to physicians, executing on our strategy of growing practice profitability and creating value for our Company.

Our physician engagement strategy also benefits our existing physician partners. We focus on strategically recruiting physicians, and acquiring high quality physician practices complementary to our existing surgical facilities, to better utilize the capacity in our facilities. We believe our ability to implement this strategy ultimately improves our relationships with our existing physician partners and is a powerful differentiator for our platform.

We also believe there is significant opportunity to accelerate our physician engagement strategy. Based on a national survey of over 5,000 physicians in 2014, we estimate approximately 25% of the approximately 300,000 independent practicing physicians in the U.S. are considering selling their practice, resulting in a meaningful pipeline of physician practice targets to affiliate with or acquire.

Drive Organic Growth at Existing Facilities through Targeted Physician Recruitment, Service Line Expansion and Implementing our Efficient Operating Model

We have achieved industry leading organic growth through our differentiated operating strategy. We work closely with our physicians to achieve greater efficiency through optimal scheduling and facility utilization, reduction in administrative costs, and better procurement. As a complement to our initiatives to drive organic growth, we have executed and will continue to execute on select, strategic service line expansion opportunities to capture and address patient needs in our markets, exemplified by our successful introduction of orthopedic and spine services in legacy NovaMed facilities.

 



 

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Our acquisition of Symbion significantly enhanced our scale and provides us with significant cost and revenue synergy opportunities that we believe we are positioned to achieve over the next two to three years. The ongoing integration of the legacy Symbion operations also provides the opportunity to benefit from incremental synergies, including reductions in corporate overhead, supply chain rationalization, enhanced physician engagement, improved payor contracting and revenue synergies associated with rolling out our suite of Ancillary Services throughout the Symbion portfolio.

Continue our Disciplined Acquisition Strategy

We have historically pursued, and successfully execute a disciplined acquisition strategy to diversify our geographic footprint and revenue mix, while driving greater scale. Acquiring facilities has been a core component of our strategy since inception. We have a long track record of meticulously and methodically identifying, evaluating, executing and integrating accretive acquisitions. Through these acquisitions, we have achieved meaningful cost and revenue synergies, enhancing the value of our acquired facilities and meaningfully reducing the effective purchase multiple paid. As a result of our recent acquisition of Symbion, as of June 30, 2015 we have achieved annualized cost and revenue synergies in an aggregate amount of approximately $8 million, primarily through reductions in head count, office closures and reductions to prices paid for supplies through volume discounts. We expect this acquisition to drive significant cost and revenue synergies over the next two to three fiscal years, which we estimate will ultimately exceed $30 million in the aggregate (an amount that includes the approximately $8 million of synergies realized as of June 30, 2015). The cost savings that are contemplated as an element of these synergies are being measured against the combined cost basis of the two companies at the pre-merger period ended November 3, 2014. We believe there is a significant opportunity to continue our strategy of consolidating in a highly fragmented market. As we enter new markets, we will then focus on expanding our penetration of complementary Ancillary Services.

We also expect to grow our Company by acquiring businesses which provide select Ancillary Services that complement our surgical facilities and support our physicians. Our differentiated and capital-efficient Ancillary Services strategy substantially broadens our pool of potential acquisitions beyond physician and surgical facility opportunities. By capturing revenue from Ancillary Services in our newly acquired facilities, it also allows us to achieve lower effective purchase multiples. Additionally, our strategy has the potential to facilitate our surgical facility business development effort as we begin marketing Ancillary Service offerings to currently unaffiliated physicians.

Introduce New Service Offerings to Provide a More Comprehensive Continuum of Care

We are committed to building an integrated outpatient delivery model to better serve the needs of patients, physicians and payors. We believe offering services across the continuum of outpatient care will better position our Company for evolving reimbursement structures, further support our physicians, enhance the quality of care for our patients and drive exceptional organic growth. In addition to new revenue generated from procedures in our facilities, we also believe certain service offerings could broaden the types of procedures we can offer in our surgical facilities. For instance, providing patients with rehabilitation and physical therapy services would allow our ASCs to offer more complex spine and orthopedic procedures that typically occur in a hospital setting.

Our Industry

Surgical Facilities

According to CMS, in 2013, the U.S. spent approximately $2.9 trillion on healthcare expenditures, which is projected to grow approximately 6% annually from 2015 through 2023. For many years, government programs, private insurance companies, managed care organizations and self-insured employers have

 



 

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implemented cost containment measures intended to limit the growth of healthcare expenditures. These cost-containment measures, together with technological advances, have contributed to the significant shift in the delivery of healthcare services away from traditional inpatient hospital settings to more cost effective surgical facilities, including ASCs and surgical hospitals. According to industry sources, in 2014, the United States outpatient surgical center industry has grown into an estimated $23 billion industry and includes approximately 5,400 Medicare-certified ASCs. We believe we are well positioned to benefit from trends currently affecting the markets in which we compete, including:

 

    increasing demand for surgical procedures in outpatient settings;

 

    rising trend of consumerism and quality consciousness on the part of patients;

 

    advancements in medical technology that drive higher acuity in the outpatient setting;

 

    efforts to improve outcomes and convenience for patients at lower costs;

 

    economic alignment and operating efficiency for physicians; and

 

    reduced costs for payors and enable quality outcomes based reimbursement models.

Ancillary Services

In the areas of specialty where our physicians are focused, the associated Ancillary Services include a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services, optical services and specialty pharmacy services. According to industry sources, these industries represent approximately $127 billion of annual healthcare expenditures and provide a broad opportunity for us to expand our Ancillary Services outreach to support patients and physicians.

Our History

Since our founding in 2004, we have evolved into one of the nation’s premier owners and operators of surgical facilities with a robust and growing Ancillary Services platform. Starting with a single facility in Florida, we have grown to include 94 ASCs and five surgical hospitals across 28 states as of June 30, 2015. In May 2011, we acquired NovaMed, a publicly traded owner and operator of 36 ASCs at the time of our acquisition. In November 2014, we acquired Symbion and its portfolio of 55 facilities, pursuant to the terms of an Agreement and Plan of Merger dated as of June 13, 2014.

Acquisition of Symbion

On November 3, 2014, we acquired Symbion, a private owner and operator of 55 facilities, for a purchase price of $792.0 million pursuant to the terms of an Agreement and Plan of Merger dated as of June 13, 2014. At the closing of the merger, each outstanding share of common stock of Symbion was converted into the right to receive a cash payment.

At closing, we paid approximately $300.1 million in cash, including $16.2 million funded to an escrow account, and assumed approximately $472.4 million of outstanding indebtedness of Symbion, plus related accrued and unpaid interest. In connection therewith, we paid off all of the $522.1 million outstanding under our first lien credit agreement dated April 11, 2013, (the “2013 First Lien Credit Agreement”), second lien credit agreement dated April 11, 2013 (the “2013 Second Lien Credit Agreement”) and revolving credit agreement dated April 11, 2013 (the “2013 Revolver Agreement” and, together with the 2013 First Lien Credit Agreement and 2013 Second Lien Credit Agreement, the “2013 Credit Facilities”), including accrued interest thereon, which

 



 

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was entirely repaid through the issuance of approximately $1.4 billion under our Term Loans and Revolving Facility. We are required to fund an additional $16.8 million to the escrow account by May 3, 2016. The remaining $30.9 million escrow balance as of June 30, 2015, is payable to the former equityholders of Symbion on May 3, 2016, pending the resolution of any adjustments to acquired working capital and the settlement of any other indemnities.

The Reorganization

Our business is currently conducted through Surgery Center Holdings, Inc. and its subsidiaries. Surgery Center Holdings, LLC is the sole owner of the equity interests of Surgery Center Holdings, Inc. and has no other material assets. Upon the earlier to occur of (i) immediately prior to the effectiveness of the registration statement of which this prospectus forms a part and (ii) June 30, 2016, Surgery Partners, Inc., a Delaware corporation, will become the direct parent and sole member of Surgery Center Holdings, LLC. We refer to the existing equity owners of Surgery Center Holdings, LLC as the “Existing Owners.” We refer to this capital structure modification, as further described below, as the “Reorganization.”

In the Reorganization, all of the equity interests held by the Existing Owners will be contributed to Surgery Partners, Inc. in exchange for a certain number of shares of common stock of Surgery Partners, Inc. and certain rights to additional payments under a tax receivable agreement. As part of the Reorganization, certain Existing Owners holding unvested units will receive shares of common stock subject to a restricted stock agreement and will, within 30 days of the date of the Reorganization, make a Section 83(b) election in accordance with U.S. Treasury Regulations. In addition, we will enter into a registration rights agreement with certain of our Existing Owners, and the limited liability company agreement of Surgery Center Holdings, LLC will be amended and restated to, among other things, modify its capital structure to create a single new class of units, which we refer to as “Holdings Units,” all of which will be held by Surgery Partners, Inc. See the sections entitled “Certain Relationships and Related Party Transactions” and “Description of Capital Stock” in this prospectus.

After giving effect to the Reorganization, Surgery Partners, Inc. will be a holding company, and its sole material asset will be an equity interest in Surgery Center Holdings, LLC. As the sole managing member of Surgery Center Holdings, LLC, Surgery Partners, Inc. will operate and control all of the business and affairs of Surgery Center Holdings, LLC and, through Surgery Center Holdings, LLC and its subsidiaries, conduct our business.

The Tax Receivable Agreement

We will indirectly acquire favorable tax attributes in connection with the Reorganization. These tax attributes would not be available to us in the absence of the consummation of the Reorganization. As part of the Reorganization, we will enter into a tax receivable agreement under which generally we will be required to pay to the Existing Owners 85% of the cash savings, if any, in U.S. federal, state or local tax that we actually realize (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes, including net operating losses, of Surgery Center Holdings, Inc. and its affiliates relating to taxable years ending on or before the date of the Reorganization (calculated by assuming the taxable year of the relevant entity closes on the date of the Reorganization) that are or become available to us and our wholly-owned subsidiaries as a result of the Reorganization, and (ii) tax benefits attributable to payments made under the tax receivable agreement, together with interest accrued at a rate of LIBOR plus 300 basis points from the date the applicable tax return is due (without extension) until paid. Under this agreement, generally we will retain the benefit of the remaining 15% of the applicable tax savings. We expect the payments we will be required to make under the tax receivable agreement will be substantial. If we were to elect to terminate the tax receivable agreement immediately after this offering, we estimate that we would be required to pay $114.5 million in the aggregate under the tax receivable agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Income Taxes and Tax Receivable Agreement.”

 



 

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Corporate Information

Surgery Partners, Inc. was incorporated in Delaware in April 2015. Surgery Partners, Inc. has not, to date, conducted any activities other than those incident to its formation and the preparation of this registration statement. Our principal executive offices are located at 40 Burton Hills Boulevard, Suite 500, Nashville, TN 37215. Our telephone number is (615) 234-5900 and our website can be found at http://www.surgerypartners.com. The information on, or that can be accessed through, our website is not part of this prospectus, and you should not rely on any such information in making the decision whether to purchase our common stock.

Our Equity Sponsor

H.I.G. Capital, LLC (“H.I.G.” or our “Sponsor”) is a leading global private equity and alternative assets firm with more than $17.0 billion in equity capital under management. Since its founding in 1993, H.I.G., though various affiliates and subsidiaries, has invested in and managed more than 250 companies with combined revenues in excess of $30 billion. H.I.G’s investors include leading financial institutions, insurance companies, university endowments, pension funds and sovereign wealth funds.

Upon completion of this offering, an affiliate of H.I.G. will control 27,714,950 shares of our common stock (representing 57.6% of all common stock outstanding), or 25,951,396 shares of our common stock (representing 53.9% of all common stock outstanding) if the underwriters exercise their option to purchase additional shares from the selling stockholders in full, in each case based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus. In the event that the gross proceeds from the offering exceed $350 million, an affiliate of our Sponsor, along with certain other selling stockholders named in this prospectus, may sell shares of our common stock in the offering on a pro rata basis. Each additional 50,000 shares of our common stock sold by such affiliate of our Sponsor would further decrease our Sponsor’s ownership in us by 0.1%.

For fiscal years 2013 and 2014, we incurred a total of $4.8 million and $20.1 million, respectively, in expenses paid to Bayside Capital, Inc., an affiliate of our Sponsor, in connection with our Management and Investment Advisory Services Agreement with Bayside Capital, Inc. We have agreed to terminate this agreement with Bayside Capital, Inc. upon the completion of this offering. Bayside Capital, Inc. will be paid a transaction fee pursuant to the agreement of $7.0 million as a result of this offering (based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus). See the section entitled “Certain Relationships and Related Party Transactions—Management Services” in this prospectus. Two of our directors, Messrs. Laitala and Lozow, are employees of our Sponsor.

Summary Risk Factors

Investing in our common stock involves significant risks. Any of the factors set forth in the section entitled “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, you should evaluate the specific factors set forth in the section entitled “Risk Factors” in deciding whether to invest in our common stock. Some of the principal risks we face include:

 

    our dependence on payments from third-party payors, including governmental healthcare programs and managed care organizations;

 

    our inability to negotiate favorable contracts or renew existing contracts with nongovernmental third-party payors on favorable terms;

 

    significant changes in our payor mix or surgical case mix resulting from fluctuations in the types of cases performed at our facilities;

 



 

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    the fact that Surgery Partners and Symbion have a limited operating history as a single company;

 

    our dependence on physician utilization of our facilities, which could decrease if we fail to maintain good relationships with these physicians;

 

    the competition we face for patients, physician use of our facilities, strategic relationships and commercial payor contracts;

 

    the competition we face for accretive acquisitions;

 

    our substantial indebtedness and the limits that places on our flexibility in operating our business;

 

    the substantial payments we expect to be required to make to the Existing Owners under the tax receivable agreement;

 

    our failure to comply with numerous federal and state laws and regulations relating to our facilities, which could lead to the incurrence of significant penalties by us, cause us to expand substantial financial resources to comply with government investigations or require us to make significant changes to our operations;

 

    our principal stockholders’ and their affiliates’ ownership of a substantial portion of our outstanding equity, as their interests may not always coincide with the interests of the other stockholders; and

 

    the increased costs we will face as a result of being a public company.

Implications of Being an Emerging Growth Company

As a company with less than $1 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

    only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

    reduced disclosure about our executive compensation arrangements;

 

    exemption from the non-binding advisory votes on executive compensation, including golden parachute arrangements; and

 

    exemption from the auditor attestation requirement in the assessment of our internal controls over financial reporting.

Generally, we may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1 billion in annual revenue, we have more than $700 million in market value of our stock held by non-affiliates or we issue more than $1 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 



 

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In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 



 

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The Offering

 

Common stock offered by us

14,285,000 shares.(1)

 

Common stock to be outstanding immediately after completion of this offering

48,156,990 shares.(1)

 

Option to purchase additional shares from the selling stockholders

The selling stockholders have granted to the underwriters the option, exercisable for 30 days of the date of this prospectus, to purchase up to 2,142,750 additional shares of common stock.

 

Use of proceeds

We expect to receive net proceeds, after deducting estimated offering expenses and underwriting discounts and commissions, of approximately $324.9 million, based on an assumed offering price of $24.50 per share (the mid-point of the price range set forth on the cover of this prospectus). We intend to use all of the net proceeds received from this offering to repay a portion of the borrowings outstanding under our Second Lien Term Loan (as defined herein) and to pay fees and expenses associated with this offering. We will not receive any proceeds from the sale of the shares of our common stock by the selling stockholders, if any, pursuant to the underwriters’ option to purchase additional shares, or in the event that the gross proceeds from this offering exceed $350 million and certain of the selling stockholders named in this prospectus, including an affiliate of our Sponsor, sell shares in the offering. See the section entitled “Use of Proceeds” in this prospectus.

 

Dividend policy

Our board of directors does not currently intend to pay dividends on our common stock. See the section entitled “Dividend Policy” in this prospectus.

 

Listing

We have applied to list our common stock on the NASDAQ Global Market under the symbol “SGRY.”

 

Risk factors

You should read carefully the “Risk Factors” section of this prospectus for a discussion of factors that you should consider before deciding to invest in shares of our common stock.

 

Principal stockholders

Upon completion of this offering, our Sponsor will continue to beneficially own a controlling interest in us (based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus). As a result, we intend to avail ourselves of certain controlled company exemptions under the rules of NASDAQ. See the section entitled “Management” in this prospectus. In the event that the ownership percentage of our Sponsor, together with its affiliates, goes below 50% as a result of selling shares in the offering should the gross

 

(1)  In the event that the gross proceeds from this offering exceed $350 million, certain of the selling stockholders named in this prospectus, including an affiliate of our Sponsor, may sell shares of our common stock in the offering on a pro rata basis.

 



 

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proceeds from the offering exceed $350 million or in connection with the underwriters’ option to purchase additional shares from the selling stockholders (in either case, on a pro rata basis), we will not be a “controlled company” and will not be able to rely on exemptions from certain corporate governance requirements. See “Risk Factors—Risks Related to Our Common Stock and this Offering—We expect to be a “controlled company” within the meaning of NASDAQ rules and, if so, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.”

References in this section to number of shares of common stock to be issued and outstanding after this offering is based on shares issued and outstanding as of September 15, 2015 (after giving effect to the Reorganization), and excludes:

 

                shares of common stock reserved for issuance, and not subject to outstanding options, under the 2015 Omnibus Plan.

Except as otherwise indicated, all information in this prospectus:

 

    assumes no exercise of the underwriters’ option to purchase additional shares from the selling stockholders;

 

    assumes that the gross proceeds from this offering will not exceed $350 million and that all of the shares of our common stock sold in the offering will be sold by the Company; and

 

    assumes an initial public offering price of $24.50 per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus).

 



 

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Summary Consolidated Historical and Pro Forma Condensed Combined Financial and Other Data

The following tables summarize consolidated historical and combined unaudited pro forma condensed financial information of our subsidiary, Surgery Center Holdings, Inc., and consolidated historical condensed financial information of Symbion, Inc. as of and for the periods indicated. The issuer, Surgery Partners, Inc., was formed in April 2015 and has not, to date, conducted any activities other than those incident to its formation and the preparation of this registration statement. This prospectus includes an audited balance sheet of Surgery Partners, Inc. as of May 31, 2015 and an unaudited balance sheet as of June 30, 2015, but does not include any other financial statements of Surgery Partners, Inc., as it has been incorporated solely for the purpose of effecting this offering and currently holds no material assets and does not engage in any operations. The summary historical financial data of Surgery Center Holdings, Inc. for the years ended December 31, 2014, 2013 and 2012 and the summary historical condensed consolidated balance sheets as of December 31, 2014 and 2013 have been derived from the historical audited financial statements of Surgery Center Holdings, Inc. included elsewhere in this prospectus. The summary historical financial data of Surgery Holdings, Inc. for the six months ended June 30, 2015 and 2014, respectively, and summary balance sheet data as of June 30, 2015 have been derived from our unaudited condensed consolidated interim financial statements appearing elsewhere in this prospectus.

The summary historical financial data of Symbion for the years ended December 31, 2013 and 2012 have been derived from Symbion’s historical audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated financial data of Symbion for the period ended November 3, 2014, which is the date of our acquisition of Symbion, have been derived from Symbion’s unaudited interim condensed consolidated financial statements for the nine-months ended September 30, 2014, included elsewhere in this prospectus, combined with its results of operations for the period from October 1, 2014 through November 3, 2014. Symbion’s unaudited interim condensed consolidated financial statements are based on assumptions and were prepared on the same basis as its audited consolidated financial statements and include, in our opinion, all adjustments, consisting of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those financial statements.

The summary unaudited pro forma condensed combined statement of operations data for the year ended December 31, 2014 gives effect to the Symbion acquisition as if it had occurred on January 1, 2014 and have been derived from the pro forma financial information set forth in the section entitled “Unaudited Pro Forma As Adjusted Condensed Combined Financial Information” appearing elsewhere in this prospectus. The summary historical condensed consolidated balance sheet of Surgery Center Holdings, Inc. as of December 31, 2014 also gives effect to the Symbion acquisition.

References to financial or other data presented as “pro forma” refer to a presentation that applies adjustments to give pro forma effect to the Symbion acquisition over the applicable time period or as of the relevant date. Where we refer to “as adjusted” financial or other data, we refer to a presentation that applies adjustments to give effect to (i) the Reorganization, (ii) this offering and (iii) the use of proceeds as described in the section entitled “Use of Proceeds.”

Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results for a full fiscal year.

This summary historical consolidated financial and other data should be read in conjunction with the disclosures set forth in the sections entitled “Capitalization,” “Unaudited Pro Forma As Adjusted Condensed Combined Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 



 

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Surgery Center Holdings, Inc.

Consolidated Historical and Pro Forma Condensed Combined Financial Information

(in thousands, except cases, revenue per case, shares and per share amounts)

 

   

Six Months Ended

June 30,

   

Pro Forma

Year Ended

December 31, 2014

    Years Ended December 31,  
    2015     2014       2014     2013     2012  
    (unaudited)     (unaudited)     (unaudited)     (audited)     (audited)     (audited)  

Consolidated Statements of Operations Data:

           

Revenues

  $ 456,970      $ 147,294      $ 871,294      $ 403,289      $ 284,599      $ 260,215   

Operating Expenses:

           

Salaries and benefits

    122,332        36,648        231,487        101,283        69,650        66,991   

Cost of sales and supplies

    116,172        32,939        212,321        92,020        61,946        54,699   

Professional and medical fees

    30,912        4,450        53,634        15,363        6,320        5,945   

Lease expense

    22,056        7,190        41,927        19,389        14,048        14,245   

Other operating expenses

    25,859        6,987        57,412        26,123        17,880        17,466   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

    317,331        88,214        596,781        254,178        169,844        159,346   

General and administrative expenses

    23,708        13,300        42,273        31,452        26,339        25,263   

Depreciation and amortization

    16,928        5,722        30,735        15,061        11,663        11,208   

Provision for doubtful accounts

    10,209        3,028        22,197        9,509        5,885        3,073   

Income from equity investments

    (1,546     —          (3,837     (1,264     —          —     

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

    (2,485     60        (10     1,804        2,482        832   

Loss on debt extinguishment

    —          1,975        —          23,414        9,863        —     

Electronic health records incentives income

    —          —          (3,742     (3,356     —          —     

Merger transaction and integration costs

    13,648        117        —          21,690        —          —     

Other (income) expenses

    25        —          (176     (6     297        40   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    377,818        112,416        684,221        352,482        226,373        199,762   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    79,152        34,878        187,073        50,807        58,226        60,453   

Interest and other expense, net(1)

    (51,737 )(2)      (21,514     (103,590 )(2)      (62,101     (32,929     (28,482
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    27,415        13,364        83,483        (11,294     25,297        31,971   

Provision for income taxes

    4,452        4,081        23,611       15,758        7,570        6,110   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    22,963        9,283        59,872        (27,052     17,727        25,861   

Less: Net income attributable to non-controlling interests

    (35,154     (14,009     (68,431     (38,845     (26,789     (23,945
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Surgery Center Holdings, Inc.

  $ (12,191 )(3)    $ (4,726   $ (8,559 )(3)    $ (65,897   $ (9,062   $ 1,916   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Statements of Cash Flow Data:

           

Net cash provided by operating activities

  $ 30,986      $ 14,876        $ 21,949      $ 49,078      $ 46,377   

Net cash used in investing activities

    (12,742     (2,254       (271,016     (3,622     (3,468

Net cash provided by (used in) financing activities

    (45,257     (19,709       310,961        (37,662     (43,061

Net Income (Loss) per Share:

           

Net income (loss) per share

           

Basic

    (12,191 )(4)      (4,726     (8,559 )(4)      (65,897     (9,062     1,916   

Diluted

    (12,191 )(4)      (4,726     (8,559 )(4)      (65,897     (9,062     1,916   

Weighted average common shares outstanding

           

Basic

    1,000 (4)      1,000        1,000 (4)      1,000        1,000        1,000   

Diluted

    1,000 (4)      1,000        1,000 (4)      1,000        1,000        1,000   

Other Data:

           

Adjusted EBITDA(5)

  $ 74,442      $ 29,971      $ 153,309      $ 77,034      $ 57,900      $ 50,959   

Adjusted EBITDA as a % of revenues

    16.3     20.3     17.6     19.1     20.3     19.6

Number of surgical facilities as of the end of period

    99        47        102        103        47        49   

Number of consolidated surgical facilities as of the end of period

    88        47        90        91        47        49   

Cases

    189,558        80,676        368,900        200,461        164,644        160,114   

Revenue per case

  $ 2,411      $ 1,826      $ 2,362      $ 2,012      $ 1,729      $ 1,625   

Same-facility revenue growth

    8.1     N/A        9.0     9.0     10.6     10.7

Same-facility revenue per case growth

    4.0     N/A        9.2     9.2     6.2     3.0

 



 

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Table of Contents
     June 30, 2015     As Adjusted
Surgery Center
Holdings, Inc.

June 30, 2015
    December 31,  
         2014     2013  
     (unaudited)           (audited)     (audited)  

Consolidated Balance Sheet Data (in thousands):

        

Cash and cash equivalents

   $ 47,907      $ 39,231 (6)    $ 74,920      $ 13,026   

Total current assets

     271,779        263,103 (6)      268,649        82,510   

Total assets

   $ 1,848,148      $ 1,838,807 (6)(7)    $ 1,858,794      $ 474,701   

Current portion of long-term debt

   $ 22,784      $ 22,784      $ 22,088      $ 8,842   

Long-term debt, less current maturities

     1,336,919        1,031,053 (8)      1,339,266        418,559   

Total current liabilities

     165,205        165,205        141,391        42,454   

Total liabilities

   $ 1,634,993      $ 1,329,127 (8)    $ 1,636,669      $ 489,076   

Non-controlling interests—redeemable

   $ 186,660      $ 186,660      $ 192,589      $ —     

Total Surgery Center Holdings, Inc. stockholders’ equity (deficit)

   $ (273,333   $ 23,192 (9)    $ (264,082   $ (103,617

Noncontrolling interests—non-redeemable

     299,828        299,828        293,618        89,242   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 26,495      $ 323,020 (9)    $ 29,536      $ (14,375

 

 

(1) Presented as “interest expense, net” in the historical financial statements of Surgery Center Holdings, Inc., but is presented here inclusive of “other expense” for purposes of calculating the 2014 pro forma financials.
(2) On an as adjusted basis, interest expense, net was $75.2 million and $37.6 million for the pro forma period ended December 31, 2014 and the six months ended June 30, 2015, respectively, due to a decrease of $28.4 million and $14.2 million, respectively, in interest expense related to the partial repayment of our Second Lien Term Loan, net of discount and issuance costs, with the net proceeds from this offering (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus). See the section entitled “Unaudited Pro Forma As Adjusted Condensed Combined Financial Information” in this prospectus.
(3) On an as adjusted basis, net income attributable to Surgery Center Holdings, Inc. was $19.9 million and $2.0 million for the pro forma period ended December 31, 2014 and the six months ended June 30, 2015, respectively, due to the decrease to interest expense, net, described above. See the section entitled “Unaudited Pro Forma As Adjusted Condensed Combined Financial Information” in this prospectus.
(4) On an as adjusted basis, basic and diluted net income per share was $0.41 and $0.04 (based on, in each case, 47,959,162 basic weighted average common shares outstanding and 48,156,990 diluted weighted average common shares outstanding) for the pro forma period ended December 31, 2014 and the six months ended June 30, 2015, respectively, due to the increase in shares outstanding as a result of the Reorganization and this offering, and due to the increase in net income resulting from the decrease to interest expense, net, described above. The 197,828 share difference between basic and diluted weighted average common shares outstanding is as a result of the impact of restricted shares granted upon exchange of units of Surgery Center Holdings, LLC in connection with the Reorganization that were subject to time-based vesting. See the section entitled “Unaudited Pro Forma As Adjusted Condensed Combined Financial Information” in this prospectus.
(5) We report our financial results in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), however, management believes that the evaluation of our ongoing operating results may be enhanced by a presentation of EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA, which are non-GAAP financial measures. As set forth below, EBITDA is net income less net income attributable to non-controlling interests before interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is EBITDA plus (a) non-cash stock-based compensation expense, (b) merger transaction costs, (c) sponsor management fees, (d) loss on debt extinguishment, (e) net loss from discontinued operations and (f) net loss (gain) on disposal of investments and long-lived assets. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that we consolidate for financial reporting purposes. Pro forma EBITDA and pro forma Adjusted EBITDA, respectively, are EBITDA and Adjusted EBITDA, respectively, each giving pro forma effect to the Symbion acquisition as of the applicable date.

 



 

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We have included EBITDA, Adjusted EBITDA and pro forma Adjusted EBITDA in this prospectus because we believe it is useful to investors in evaluating our operating performance compared to that of other companies in our industry, as its calculation eliminates the effects of financing, income taxes and the accounting effects of capital spending, as these items may vary for different companies for reasons unrelated to overall operating performance. When analyzing our operating performance, investors should not consider EBITDA, Adjusted EBITDA or pro forma Adjusted EBITDA in isolation or as a substitute for net loss, cash flows from operating activities or other operation statement or cash flow statement data prepared in accordance with U.S. GAAP. Our calculation of EBITDA is not necessarily comparable to those of other similarly titled measures reported by other companies. The following table represents the reconciliation of Adjusted EBITDA and pro forma Adjusted EBITDA to net income (loss) and pro forma net income (loss), respectively, attributable to Surgery Partners for the periods indicated below:

 

    Six Months Ended
June 30,
   

Pro Forma

Year Ended

December 31, 2014

    Years Ended December 31,  
    2015     2014       2014     2013     2012  
   

(unaudited)

   

(unaudited)

    (unaudited)     (audited)     (audited)     (audited)  

Consolidated Statements of Operations Data (in thousands):

           

Net income

  $ 22,963      $ 9,283      $ 59,872      $ (27,052   $ 17,727      $ 25,861   

(Minus):

           

Net income attributable to non-controlling interests

    35,154        14,009        68,431        38,845        26,789        23,945   

Plus (minus):

           

Provision for income tax expense

    4,452        4,081        23,611        15,758        7,570        6,110   

Interest and other expense, net(a)

    51,737        21,514        103,590        62,101        32,929        28,482   

Depreciation and amortization

    16,928        5,722        30,735        15,061        11,663        11,208   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 60,926      $ 26,591      $ 149,377      $ 27,023      $ 43,100      $ 47,716   

Plus:

           

Sponsor management fee(b)

    1,500        1,000        3,000        2,161        2,000        2,000   

Merger transaction and integration costs

    13,648        117        —          21,690        —          —     

Non-cash stock compensation expense

    853        228        942 (c)      942        455        411   

Loss on debt extinguishment

    —          1,975        —          23,414        9,863        —     

Loss (gain) on disposal of investments and long-lived assets, net

    (2,485     60        (10     1,804        2,482        832   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 74,442      $ 29,971      $ 153,309      $ 77,034      $ 57,900      $ 50,959   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Presented as “interest expense, net” in the historical financial statements of Surgery Center Holdings, Inc., but is presented here inclusive of “other expense” for purposes of calculating the 2014 pro forma financials.
  (b) Gives effect to the amended Management and Investment Advisory Services Agreement with our Sponsor. Effective November 3, 2014, the management fee increased from $2.0 million to $3.0 million annually. See Note 14 – Related Party Transactions in our 2014 audited financial statements.
  (c) Represents the non-cash compensation expense of $0.9 million that we recorded for the year ended December 31, 2014 related to recognizing the fair value of units that vested during 2014. See Note 12 – Unit-Based Compensation in our 2014 audited financial statements.
(6) Reflects payment of a $7.0 million transaction fee in connection with this offering to Bayside Capital, Inc., an affiliate of our Sponsor, in accordance with the terms of our Management Agreement, and $1.7 million in offering expenses paid out of existing cash (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus). See “Certain Relationships and Related Party Transactions — Management Services”.
(7) Reflects the reduction in the capitalized debt issuance costs of $0.7 million related to the repayment of a portion of our Second Lien Term Loan in connection with the offering (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).
(8) Reflects the adjustment of the repayment of $317.0 million, net of $11.1 million of discount and issuance costs, on our Second Lien Term Loan from the application of the net proceeds from the offering (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).
(9) Reflects the proceeds from this offering, net of the impact of underwriting discounts and commissions and estimated offering costs, a reduction in equity due to the payment of the $7.0 million transaction fee to Bayside Capital, Inc., an additional $1.7 offering expenses paid out of existing operating cash and a $21.3 million loss on debt extinguishment in connection with the repayment of a portion of our Second Lien Term Loan (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).
 

 



 

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Symbion, Inc.

Consolidated Historical Condensed Financial Information

(in thousands, except cases and revenue per case)

 

   

Period Ended
November 3,

2014

      Years Ended December 31,    
      2013     2012  

Consolidated Statements of Operations Data:

    (unaudited)        (audited     (audited)   
                   

Revenues

  $ 470,164      $ 535,587      $ 491,804   

Operating Expenses:

     

Cost of revenues

    346,181        397,133        351,308   

General and administrative expenses

    19,219        21,976        26,901   

Depreciation and amortization

    19,261        22,993        21,360   

Provision for doubtful accounts

    12,759        11,149        10,211   

Income from equity investments

    (2,573     (4,246     (4,490

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

    (108     5,870        (6,195

Electronic health record incentives

    (386     (4,553     (1,054

Proceeds from Insurance Settlements, net

    (89     (919     —     

Merger Transaction Costs

    2,694        —          —     

Litigation Settlements, net

    (81     (233     (532
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    396,877        449,170        397,509   
 

 

 

   

 

 

   

 

 

 

Operating income

    73,287        86,417        94,295   

Interest expense, net

    (48,440     (57,982     (57,641
 

 

 

   

 

 

   

 

 

 

Income before income taxes and discontinued operations

    24,847        28,435        36,654   

Provision for income taxes

    7,853        5,330        10,939   
 

 

 

   

 

 

   

 

 

 

Income from continuing operations

    16,994        23,105        25,715   

Income (loss) from discontinued operations, net of taxes

    (3,835     1,882        1,132   
 

 

 

   

 

 

   

 

 

 

Net income (loss)

    13,159        24,987        26,847   

Less: Net income attributable to non-controlling interests

    (30,137     (37,607     (38,557
 

 

 

   

 

 

   

 

 

 

Net loss attributable to Symbion, Inc.

  $ (16,978   $ (12,620   $ (11,710
 

 

 

   

 

 

   

 

 

 

Consolidated Statements of Cash Flow Data—Continuing Operations:

     

Net cash provided by operating activities

  $ 65,486      $ 61,493      $ 66,679   

Net cash used in investing activities

    (8,761     (24,788     (23,848

Net cash (used in) provided by financing activities

    (55,131     (58,942     (40,662

Other Data:

     

Adjusted EBITDA(1)

  $ 65,321      $ 78,083      $ 72,960   

Adjusted EBITDA as a % of revenues

    14.0     14.6     14.8

Number of surgical facilities included in continuing operations as of the end of period(2)

    55        56        57   

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

    44        45        44   

Cases

    171,557        208,072        209,318   

Revenue per case

  $ 2,740      $ 2,574      $ 2,350   

Same-facility revenue growth

    9.1     3.5     10.4

Same-facility revenue per case growth

    8.6     5.9     11.5

 



 

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November 3,
2014

    

December 31,
2013

 
     (unaudited)      (audited)  

Consolidated Balance Sheet Data (in thousands):

     

Cash and cash equivalents

   $ 57,433       $ 56,026   

Working capital

     72,949         87,735   

Total current assets

     165,963         162,676   

Total assets

   $ 992,574       $ 1,006,739   

Current portion of long-term debt(2)

   $ 83,805       $ 9,102   

Long-term debt, less current maturities

     484,190         551,046   

Total current liabilities

     166,144         74,941   

Total liabilities

   $ 793,406       $ 763,600   

Noncontrolling interests - redeemable

   $ 29,505       $ 35,150   

Total Symbion, Inc. equity

   $ 106,754       $ 136,691   

Noncontrolling interests - non-redeemable

     62,909         71,298   
  

 

 

    

 

 

 

Total stockholders’ equity

   $ 169,663       $ 207,989   

 

(1) Symbion reported its financial results in accordance with U.S. GAAP, however, its management and ours believes that the evaluation of our operating results may be enhanced by a presentation of EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. As set forth below, EBITDA is net loss before interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is EBITDA plus (a) non-cash stock-based compensation expense and (b) merger transaction costs, minus (c) net income attributable to non-controlling interests. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that we consolidate for financial reporting purposes.

We have included EBITDA and Adjusted EBITDA in this prospectus because we believe it is useful to investors in evaluating operating performance compared to that of other companies in our industry, as its calculation eliminates the effects of financing, income taxes and the accounting effects of capital spending, as these items may vary for different companies for reasons unrelated to overall operating performance. When analyzing operating performance, investors should not consider EBITDA or Adjusted EBITDA in isolation or as a substitute for net loss, cash flows from operating activities or other operation statement or cash flow statement data prepared in accordance with U.S. GAAP. The following calculation of EBITDA is not necessarily comparable to those of other similarly titled measures reported by other companies. The following table represents the reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for the periods indicated below:

 

     Period Ended
November 3,
    Years Ended
December 31,
 
     2014     2013     2012  
     (unaudited)     (audited)     (audited)  

    Consolidated Statements of Operations Data (in thousands):

      

    Net income

   $ 13,159      $ 24,987      $ 26,847   

    (Minus):

      

Net income attributable to non-controlling interests

     30,137        37,607        38,557   

    Plus (minus):

      

Provision for income tax expense

     7,853        5,330        10,939   

Interest and other expense, net

     47,607        57,982        57,641   

Depreciation and amortization

     19,261        22,993        21,360   
  

 

 

   

 

 

   

 

 

 

    EBITDA

   $ 57,743      $ 72,685      $ 77,230   

    Plus:

      

Sponsor management fee

     833        1,000        1,000   

Merger transaction cost

     2,694        —          —     

Non-cash stock compensation expense

     324        410        2,057   

Loss (income) from discontinued operations, net

     3,835        (1,882     (1,132

(Gain) loss on disposal of investments and long-lived assets, net

     (108     5,870        (6,195
  

 

 

   

 

 

   

 

 

 

    Adjusted EBITDA

   $ 65,321      $ 78,083      $ 72,690   
  

 

 

   

 

 

   

 

 

 

 

(2) Includes $73.1 million related to toggle notes with a maturity date of August 23, 2015 which were extinguished as part of the acquisition of Symbion.

 



 

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RISK FACTORS

An investment in our common stock involves various risks. You should carefully consider the following risks and all of the other information contained in this prospectus before investing in our common stock. The risks described below are those which we believe are the material risks that we face. Additional risks not presently known to us or which we currently consider immaterial may also adversely affect our Company. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment in our common stock. Some statements in this prospectus, including such statements in the following risk factors, constitute forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements” in this prospectus.

Risks Related to Our Business and Industry

We depend on payments from third-party payors, including government healthcare programs and managed care organizations. If these payments are reduced or eliminated, our revenue and profitability could be materially and adversely affected.

We depend upon private and governmental third-party sources of payment for the services provided by physicians in our physician network, to patients in our surgical facilities and by our laboratory and diagnostic services. The amount that we receive in payment for our services may be adversely affected by market and cost factors that we do not control, including Medicare, Medicaid and state regulation changes, cost containment decisions and changes in reimbursement schedules of payors, legislative changes, refinements to the Medicare Ambulatory Surgery Center payment system and refinements made by CMS to Medicare’s reimbursement policies. For instance, cuts to the federal budget caused a 2.0% reduction in Medicare provider payments in 2013. Similarly, third-party payors may be successful in negotiating reduced reimbursement schedules with our facilities. Fixed fee schedules, capitation payment arrangements, exclusion from participation in or inability to reach agreements with managed care programs, reduction or elimination of payments or an increase in the payments at a rate that is less than the increase in our costs, or other factors affecting payments for healthcare services over which we have no control could have a material adverse effect on our business, prospects, results of operations and financial condition.

If we are unable to negotiate and enter into favorable contracts or maintain satisfactory relationships and renew existing contracts on favorable terms with managed care organizations or other private third-party payors, our revenue and profitability may decrease.

Payments from private third-party payors, including state workers’ compensation programs and managed care organizations, represented 52.1%, 60.6% and 59.8% of our patient service revenue for the years ended December 31, 2014 (on a pro forma basis), 2013 and 2012, respectively, as well as 54.9% and 54.3% of our patient service revenue for the six months ended June 30, 2015 and 2014, respectively. Most of these payments came from third-party payors with which our facilities have contracts. Managed care companies such as health maintenance organizations (“HMOs”) and preferred provider organizations (“PPOs”), which offer prepaid and discounted medical service packages, represent a growing segment of private third-party payors. If we fail to enter into favorable contracts or maintain satisfactory relationships with managed care organizations, our revenue may decrease. Our competitive position has been, and will continue to be, affected by initiatives undertaken during the past several years by major purchasers of healthcare services, including insurance companies and employers, to revise payment methods and monitor healthcare expenditures in an effort to contain healthcare costs. For instance, managed care payors may lower reimbursement rates in response to increased obligations on payors imposed by the Affordable Care Act or future reductions in Medicare reimbursement rates. Further, managed care payors may narrow their provider networks in response to the need to negotiate lower reimbursement rates with providers. If we are unable to maintain strong relationships with payors, we may not be able to ensure participation in these narrow provider networks. Cost containment measures, such as fixed fee schedules, capitation payment arrangements, reductions in reimbursement schedules by third-party payors and closed provider networks, could also cause a reduction of our revenue in the future.

 

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Some of our payments from third-party payors come from third-party payors with which our surgical facilities, physicians or subsidiaries that provide diagnostic services do not have a contract. In those cases where we provide services to a patient that does not use a third-party payor with which we have contracted, commonly known as “out-of-network” services, we generally charge the patients the same co-payment or other patient responsibility amounts that we would have charged had our surgical facilities had a contract with the payor. In accordance with insurance laws and regulations, we submit a claim for the services to the payor along with full disclosure that our surgical facility has charged the patient an in-network patient responsibility amount. Historically, those third-party payors who do not have contracts with our surgical facilities typically have paid our claims at higher than comparable contracted rates. However, over the past five years we have observed an increase in third-party payors adopting out-of-network fee schedules that are more comparable to our contracted rates or to take other steps to discourage their enrollees from seeking treatment at out-of-network surgical facilities. In these cases, we seek to enter into contracts with the payors.

Payments from workers’ compensation payors represented approximately 8.2% of our patient service revenue for the year ended December 31, 2014 (on a pro forma basis) and the six months ended June 30, 2015. A majority of states have implemented workers’ compensation provider fee schedules. In some cases, the fee schedule rates contain lower rates than the rates our surgical facilities have historically been paid for the same services. If states reduce the amounts paid to providers under the workers’ compensation fee schedules, it could have a material adverse effect on our financial condition and results of operations.

Significant changes in our payor mix or surgical case mix resulting from fluctuations in the types of cases performed at our facilities could have a material adverse effect on our business, prospects, results of operations and financial condition.

Our results may change from period to period due to fluctuations in payor mix or surgical case mix or other factors relating to the type of cases performed by physicians at our facilities. Payor mix refers to the relative share of total cases provided to patients with, respectively, no insurance, commercial insurance, Medicare coverage, Medicaid coverage and workers’ compensation insurance. Since, generally speaking, we receive relatively higher payment rates from commercial and workers’ compensation insurers than Medicare, Medicaid and other government-funded programs, a significant shift in our payor mix toward a higher percentage of Medicare and Medicaid cases, which could occur for reasons beyond our control, could have an adverse effect on our business, prospects, results of operations and financial condition.

Surgical case mix refers to the relative share of total cases performed by specialty, such as ENT, GI, general surgery, ophthalmology, orthopedic, cardiology and pain management. Generally speaking, certain types of our cases, such as orthopedic cases, generate relatively higher revenue than other types of cases, such as pain management and GI cases. Therefore, a significant shift in our surgical case mix toward a higher percentage of lower revenue cases, which could occur for reasons beyond our control, could result in a material adverse effect on our business, prospects, results of operations and financial condition.

As we operate in multiple markets, each with a different competitive landscape, shifts within our payor mix or surgical case mix may not be uniform across all of our affiliated facilities. Rather, these shifts may be concentrated within certain markets due to local competitive factors. Therefore, the results of our individual affiliated facilities, including facilities that are material to our results, may be volatile, which could result in a material adverse effect on our business, prospects, results of operations and financial condition.

Surgery Partners and legacy Symbion have a limited history of working together as a single company. Should we fail to successfully integrate the operations of Surgery Partners and legacy Symbion, our results of operations and profitability could be materially and adversely impacted.

We may not be successful in integrating the operations of Surgery Partners and legacy Symbion, and the combined company may not perform as we expect or achieve the net cost savings and other synergies that we anticipate. A significant element of our business strategy is the improvement of our operating efficiencies and a

 

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reduction of our operating costs. A variety of factors could cause us not to achieve the benefits of the cost savings plan, or could result in harm to our business, including delays in the anticipated timing of activities related to our cost savings plan and our inability to reduce corporate and administrative expenses. As a result, we may not achieve our expected cost savings in the time anticipated, or at all. In such case, our results of operations and profitability could be negatively impaired.

Furthermore, our limited operating history and the challenge of integrating previously independent businesses make evaluating our business and our future financial prospects difficult. Our potential for future business success and operating profitability must be considered in light of the risks, uncertainties, expenses and difficulties typically encountered by recently organized or combined companies. Further, the process of integrating our existing operations with legacy Symbion may require a disproportionate amount of resources and management attention. Our management team may encounter unforeseen difficulties in managing this integration. Any substantial diversion of management attention or difficulties in operating the combined business could affect our sales and ability to achieve operational, financial and strategic objectives.

Further, the estimated valuations assumed by management and reflected by the pro forma financial statements included in this prospectus may differ materially from actual results, and such valuation differences may result in material changes (including possible material adverse changes) to our future financial condition and results of operations compared to those anticipated by management. In addition, the projected operational efficiencies resulting from our acquisition of Symbion included in this prospectus are based on preliminary estimates of management and have not been independently verified. While these estimates are based on management’s good faith, they are subject to change and to a variety of factors that could cause us to not achieve the operational efficiencies or any other cost savings within the time period prescribed or at all.

We may be unable to effectively integrate the Surgery Partners and legacy Symbion operations and realize the potential and anticipated benefits from the Symbion acquisition.

We may be unable to effectively integrate the Surgery Partners and legacy Symbion operations and realize the potential and anticipated benefits from the Symbion acquisition. As a result of our recent acquisition of Symbion, as of June 30, 2015 we have achieved annualized cost and revenue synergies in an aggregate amount of approximately $8 million, primarily through reductions in head count, office closures and reductions to prices paid for supplies through volume discounts. We expect this acquisition to drive significant cost and revenue synergies over the next two to three fiscal years, which we estimate will ultimately exceed $30 million in the aggregate (an amount that includes the approximately $8 million of synergies realized as of June 30, 2015). The cost savings that are contemplated as an element of these synergies are being measured against the combined cost basis of the two companies at the pre-merger period ended November 3, 2014. In order to realize our targeted annualized synergies resulting from the Symbion acquisition, we expect to make certain limited cash outlays over the next two to three fiscal years.

Our targeted cost and revenue synergies are based upon assumptions about our ability to implement multiple measures in a timely fashion and within certain parameters which may not be within our control. Further, our ability to achieve our targeted synergies is dependent upon a significant number of factors, some of which may be beyond our control. If one or more of our underlying assumptions regarding these projections proves to be incorrect, these efforts could lead to substantially higher costs or lower revenues than planned and we may not be able to fully realize, or may be delayed from fully realizing, the expected benefits of our targeted synergies. For example, we may be unsuccessful, or less successful, in (i) increasing the use of our diagnostic or anesthesia services by our physicians and at facilities across our platform, (ii) realigning and standardizing rates, (iii) increasing the adoption of DNA testing for certain at-risk patients or (iv) obtaining volume discounts for prices paid for supplies, and in any such event, we would achieve smaller cost and revenue synergies than we anticipate. We can provide no assurance that the number of our physicians or facilities that we believe will commence using our diagnostic or anesthesia services will in fact do so, or if any at all will, and they may choose not to utilize our ancillary services for any reason. Further, we cannot assure that we will be able to standardize

 

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rates because, for instance, payors may not be willing to accept our standardized rates, or that additional DNA testing services will be utilized because, for example, our physicians may not deem it necessary in many or all cases. Nor can we assure you that we will be able to obtain volume discounts on prices paid for supplies as efficiently as anticipated, or at all, because, for example, our suppliers may change the terms of their pricing schedules.

The continued integration of legacy Symbion’s operations could have unintended consequences, such as the loss of key physicians, customers and suppliers. Our inability to realize the targeted cost and revenue synergies from the Symbion acquisition could have a material adverse effect on our business, results of operations and financial condition.

Our pro forma financial information may not be representative of our future performance.

In preparing the pro forma financial information included in this prospectus, we have made adjustments to our historical financial information based upon currently available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of the acquisition of Symbion. The estimates and assumptions used in the calculation of the pro forma financial information in this prospectus may be materially different from our actual experience. Accordingly, the pro forma financial information included in this prospectus does not purport to indicate the results that would have actually been achieved had the acquisition of Symbion been completed on the assumed date or for the periods presented, or which may be realized in the future, nor does the pro forma financial information give effect to any events other than those discussed in our unaudited pro forma as adjusted condensed combined financial statements of operations and related notes.

We have a history of net losses and may not achieve or sustain profitability in the future.

We have incurred periods of net losses, including net losses of approximately $65.9 million in 2014, which includes a $21.7 million loss attributable to a one-time transaction cost associated with the Symbion acquisition and loss on debt extinguishment of $23.4 million, and net losses of $9.1 million in 2013, which includes a loss on debt extinguishment of $9.9 million. During the six months ended June 30, 2015, we experienced a net loss of $12.2 million. We cannot assure you that our revenue will grow or that we will achieve or maintain profitability in the future. Growth of our revenue may slow or revenue may decline and expenses may increase for a number of possible reasons, including reduced demand for our services, regulatory shifts, failure to successfully integrate the operations of Surgery Partners and Symbion and other risks and uncertainties. Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. Our ability to achieve profitability will be affected by the other risks and uncertainties described in this section and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All of these factors could contribute to further net losses and, if we are unable to meet these risks and challenges as we encounter them, our business may suffer. If we are not able to achieve, sustain or increase profitability, our business will be adversely affected and our stock price may decline.

We depend on physician utilization of our surgical facilities, which could decrease if we fail to maintain good relationships with affiliated physicians. Our ability to provide medical services at our facilities would be impaired and our revenue reduced if we are not able to maintain these relationships.

Our business depends, among other things, upon the efforts and success of affiliated physicians who provide medical services at our surgical facilities and the strength of our relationships with these physicians. Most physicians are not employees of our surgical facilities and are not contractually required to use our facilities. We generally do not enter into contracts with physicians who use our surgical facilities, other than partnership and operating agreements with physicians who own interests in our surgical facilities, provider agreements with anesthesiology groups that provide anesthesiology services in our surgical facilities, medical director agreements, among others. Physicians who use our surgical facilities also use other facilities or hospitals

 

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and may choose to perform procedures in an office-based setting that might otherwise be performed at our surgical facilities. In recent years, pain management and gastrointestinal procedures have been performed increasingly in an office-based setting because of potential cost savings or better access. Although physicians who own interests in our surgical facilities are subject to agreements restricting ownership of competing facilities, these agreements may not restrict procedures performed in a physician office or in other unrelated facilities. Also, these agreements restricting ownership of competing facilities are difficult to enforce, and we may be unsuccessful in preventing physicians who own interests in our surgical facilities from acquiring interests in competing facilities.

The financial success of our facilities is in part dependent upon the volume of procedures performed by the physicians who use our facilities, which is affected by the economy, healthcare reform, increases in patient co-payments and deductibles and other factors outside our or their control. The physicians who use our surgical facilities may choose not to accept patients who pay for services through certain third-party payors, which could reduce our revenue. From time to time, we may have disputes with physicians who use our surgical facilities and/or own interests in our surgical facilities or our Company. Our revenue and profitability could be significantly reduced if we lost our relationship with one or more key physicians or groups of physicians, or if such physicians or groups reduce their use of any of our surgical facilities. In addition, any damage to the reputation of a key physician or group of physicians or the failure of these physicians to provide quality medical care or adhere to professional guidelines at our surgical facilities could damage our reputation, subject us to liability and significantly reduce our revenue.

Physician treatment methodologies and governmental or commercial health insurance controls designed to reduce the number of surgical procedures may reduce our revenue and profitability.

Controls imposed by Medicare and Medicaid, employer-sponsored healthcare plans and commercial health insurance payors designed to reduce surgical volumes, in some instances referred to as “utilization review,” could adversely affect our facilities. Although we are unable to predict the effect these changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees may reduce our revenue and profitability. Additionally, trends in physician treatment protocols and commercial health insurance plan design, such as plans that shift increased costs and accountability for care to patients, could reduce our surgical volumes in favor of lower intensity and lower cost treatment methodologies, each of which could, in turn, have a material adverse effect on our business, prospects, results of operations and financial condition.

Our growth strategy depends in part on our ability to integrate operations of acquired surgical facilities, attract new physician partners, and to acquire and develop additional surgical facilities, on favorable terms. If we are unable to achieve any of these goals, our future growth could be limited and our operating results could be adversely affected.

We believe that an important component of our financial performance and growth is our ability to provide physicians who use our facilities with the opportunity to purchase ownership interests in our facilities. We may not be successful in attracting new physician investment in our surgical facilities, and that failure could result in a reduction in the quality, efficiency and profitability of our facilities. Based on competitive factors and market conditions, physicians may be able to negotiate relatively higher levels of equity ownership in our facilities, consequently limiting or reducing our share of the profits from these facilities. In addition, physician ownership in our facilities is subject to certain regulatory restrictions.

In addition, our growth strategy includes the acquisition and development of existing surgical facilities and the development of new surgical facilities jointly with local physicians and, in some cases, healthcare systems and other strategic partners. We have acquired interests in or developed all of our surgical facilities since our inception and we expect to continue to expand our operations in the future. We are currently evaluating potential acquisitions and development projects and expect to continue to evaluate acquisitions and development

 

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projects in the foreseeable future. If we are unable to successfully execute on this strategy in the future, our future growth could be limited. We may be unable to identify suitable acquisition and development opportunities, or to complete acquisitions and new projects in a timely manner and on favorable terms. Further, the companies or assets we acquire in the future may not ultimately produce returns that justify our related investment.

Our acquisition activities, and our limited development activities, require substantial capital resources, and we may need to obtain additional capital or financing, from time to time, to fund these activities. Historically, we have funded acquisition and development activities through our credit facilities. As a result, we may take actions that could have a material adverse effect on our business, prospects, results of operations and financial condition, including incurring substantial debt with certain restrictive terms. Further, sufficient capital or financing may not be available to us on satisfactory terms, if at all. In addition, our ability to acquire and develop additional surgical facilities may be limited by state certificate of need programs, licensure requirements, antitrust laws, and other regulatory restrictions on expansion. We also face significant competition from local, regional and national health systems and other owners of surgical facilities in pursuing attractive acquisition candidates. The limited number of surgical facilities we develop typically incur losses in their early months of operation (more so in the case of surgical hospitals) and, until their case loads grow, they generally experience lower total revenue and operating margins than established surgical facilities, and we expect this trend to continue.

If we are not successful in integrating newly acquired surgical facilities, we may not realize the potential benefits of such acquisitions. Likewise, if we are not able to integrate acquired facilities’ operations and personnel with ours in a timely and efficient manner, then the potential benefits of the transaction may not be realized. Further, any delays or unexpected costs incurred in connection with integration could have a material adverse effect on our operations and earnings. In particular, if we experience the loss of key personnel or if the effort devoted to the integration of acquired facilities diverts significant management or other resources from other operational activities, our operations could be impaired.

If we acquire or develop additional facilities, we may experience difficulty in retaining or integrating their operations, key physicians, systems and personnel. In some acquisitions, we may have to renegotiate, or risk losing, one or more of the facility’s commercial payor contracts. We may also be unable to immediately collect the accounts receivable of an acquired facility while we align the payors’ payment systems and accounts with our own systems. Certain transactions can require licensure changes which, in turn, result in disruptions in payment for services.

In addition, although we conduct extensive due diligence prior to the acquisition of surgical facilities and seek indemnification from prospective sellers covering unknown or contingent liabilities, we may acquire facilities with unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. Although we maintain professional and general liability insurance that provides coverage on a claims-made basis of $1.0 million per occurrence with a retention of $25,000 per occurrence and $3.0 million in annual aggregate coverage per surgical facility, we do not maintain insurance specifically covering all unknown or contingent liabilities that may have occurred prior to the acquisition of facilities. In some cases, our right to indemnification for these liabilities from the seller may be subject to negotiated limits or limits on our ability to enforce indemnification rights.

Our rapid growth has placed, and will continue to place, increased demands on our management, operational and financial information systems and other resources. Furthermore, expansions into new geographic markets and services may require us to comply with new and unfamiliar legal and regulatory requirements, which could impose substantial obligations on us and our management, cause us to expend additional time and resources, and increase our exposure to penalties or fines for non-compliance with such requirements. To accommodate our past and anticipated future growth, and to compete effectively, we will need to continue to improve our management, operational and financial information systems and to expand, train, manage and motivate our workforce. Our personnel, systems, procedures or controls may not be adequate to support our

 

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operations in the future. Further, focusing our financial resources and management attention on the expansion of our operations may negatively impact our financial results. Any failure to improve our management, operational and financial information systems, or to expand, train, manage or motivate our workforce, could reduce or prevent our growth.

Shortages of surgery-related products, equipment and medical supplies and quality control issues with such products, equipment and medical supplies could disrupt our operations and adversely affect our case volume, surgical case mix and profitability.

Our operations depend significantly upon our ability to obtain sufficient surgery-related products, drugs, equipment and medical supplies from suppliers on a timely basis. If we are unable to obtain such necessary products, or if we fail to properly manage existing inventory levels, the surgical facilities may be unable to perform certain surgeries, which could adversely affect case volume or result in a negative shift in surgical case mix. In addition, as a result of shortages, we could suffer, among other things, operational disruptions, disruptions in cash flows, increased costs and reductions in profitability. At times, supply shortages have occurred in our industry, and such shortages may be expected to recur from time to time.

Medical supplies and services can also be subject to supplier product quality control incidents and recalls. In addition to contributing to materials shortages, product quality can affect patient care and safety. Material quality control incidents have occurred in the past and may occur again in the future, for reasons beyond our control, and such incidents can negatively impact case volume, product costs and our reputation. In addition, we may have to incur costs to resolve quality control incidents related to medical supplies and services regardless of whether they were caused by us. Our inability to obtain the necessary amount and quality of surgery-related products, equipment and medical supplies due to a quality control incident or recall could have a material adverse effect on our business, prospects, results of operations and financial condition.

We face competition for patients, physicians and commercial payor contracts.

The healthcare business is highly competitive and each of the individual geographic areas in which we operate has a different competitive landscape. In each of our markets we compete with other healthcare providers for patients and in contracting with commercial payors. In addition, because the number of physicians available to utilize and invest in our facilities is finite, we face intense competition from other surgery centers, hospitals, health systems and other healthcare providers in recruiting physicians to utilize and invest in our facilities. We are in competition with other surgery centers, hospitals and healthcare systems in the communities we serve to attract patients and provide them with the care they need.

There are also unaffiliated hospitals in each market in which we operate. These hospitals have established relationships with physicians and payors. In addition, other companies either currently are in the same or similar business of developing, acquiring and operating surgical facilities or may decide to enter our business. Many of these companies have greater resources than we do, including financial, marketing, staff and capital resources. We also may compete with some of these companies for entry into strategic relationships with healthcare systems and healthcare professionals. In addition, many physician groups develop surgical facilities without a corporate partner. In recent years, more physicians are choosing to perform procedures, including pain management and gastrointestinal procedures, in an office-based setting rather than in a surgical facility. If we are unable to compete effectively with any of these entities or groups, we may be unable to implement our business strategies successfully and our financial position and results of operations could be adversely affected.

Competition for physicians and nurses, shortages of qualified personnel or other factors could increase our labor costs and adversely affect our revenue, profitability and cash flows.

Our operations are dependent on the efforts, abilities and experience of our physicians and clinical personnel. We compete with other healthcare providers, primarily hospitals and other surgical facilities, in

 

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attracting physicians to utilize our surgical facilities, nurses and medical staff to support our surgical facilities, recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our facilities and in contracting with managed care payors in each of our markets. In some markets, the lack of availability of clinical personnel, such as nurses, has become a significant operating issue facing all healthcare providers. This shortage may require us to continue to enhance wages and benefits to recruit and retain qualified personnel or to contract for more expensive temporary personnel. For the year-ended December 31, 2014 and the six months ended June 30, 2015, our salary and benefit expenses represented 25.1% and 26.8%, respectively, of our revenue. We also depend on the available labor pool of semi-skilled and unskilled workers in each of the markets in which we operate.

If our labor costs increase, we may not be able to raise rates to offset these increased costs. Because a significant percentage of our revenue consist of fixed, prospective payments, our ability to pass along increased labor costs is limited. In particular, if labor costs rise at an annual rate greater than our net annual consumer price index basket update from Medicare, our results of operations and cash flows will likely be adversely affected. Any union activity at our facilities that may occur in the future could contribute to increased labor costs. Certain proposed changes in federal labor laws and the National Labor Relations Board’s modification of its election procedures could increase the likelihood of employee unionization attempts. Although none of our employees are currently represented by a collective bargaining agreement, to the extent a significant portion of our employee base unionizes, it is possible our labor costs could increase materially. Our failure to recruit and retain qualified management and medical personnel, or to control our labor costs, could have a material adverse effect on our business, prospects, results of operations and financial condition.

Some jurisdictions preclude us from entering into non-compete agreements with our physicians, and other non-compete agreements and restrictive covenants applicable to certain physicians and other clinical employees may not be enforceable.

We have contracts with physicians and other health professionals in many states. Some of our physician services contracts, as well as many of our physician services contracts with hospitals, include provisions preventing these physicians and other health professionals from competing with us both during and after the term of our contract with them. The law governing non-compete agreements and other forms of restrictive covenants varies from state to state. Some jurisdictions prohibit us from entering into non-compete agreements with our professional staff. Other states are reluctant to strictly enforce non-compete agreements and restrictive covenants against physicians and other healthcare professionals. Therefore, there can be no assurance that our non-compete agreements related to employed or otherwise contracted physicians and other health professionals will be enforceable if challenged in certain states. In such event, we would be unable to prevent former employed or otherwise contracted physicians and other health professionals from competing with us, potentially resulting in the loss of some of our hospital contracts and other business. Additionally, certain facilities have the right to employ or engage our providers after the termination or expiration of our contract with those facilities and cause us not to enforce our non-compete provisions related to those providers.

We may become involved in litigation which could negatively impact the value of our business.

From time-to-time we are involved in lawsuits, claims, audits and investigations, including those arising out of services provided, personal injury claims, professional liability claims, billing and marketing practices, employment disputes and contractual claims. We may become subject to future lawsuits, claims, audits and investigations that could result in substantial costs and divert our attention and resources and adversely affect our business condition. In addition, since our current growth strategy includes acquisitions, among other things, we may become exposed to legal claims for the activities of an acquired business prior to the acquisition. These lawsuits, claims, audits or investigations, regardless of their merit or outcome, may also adversely affect our reputation and ability to expand our business.

In addition, from time to time we have received, and expect to continue to receive, correspondence from former employees terminated by us who threaten to bring claims against us alleging that we have violated one or

 

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more labor and employment regulations. In certain instances former employees have brought claims against us and we expect that we will encounter similar actions against us in the future. An adverse outcome in any such litigation could require us to pay contractual damages, compensatory damages, punitive damages, attorneys’ fees and costs.

If we become subject to large malpractice or other legal claims, we could be required to pay significant damages, which may not be covered by insurance.

In recent years, physicians, hospitals and other healthcare providers have become subject to an increasing number of legal actions alleging malpractice, product liability or related legal theories. Many of these actions involve large monetary claims and significant defense costs. We also owe certain defense and indemnity obligations to our officers and directors.

We maintain liability insurance in amounts that we believe are customary for the industry. Currently, we maintain professional and general liability insurance that provides coverage on a claims-made basis of $1.0 million per occurrence with a retention of $25,000 per occurrence and $3.0 million in annual aggregate coverage per surgical facility. We also maintain business interruption insurance and property damage insurance. For the surgical facilities we acquired in connection with the Symbion Acquisition, we maintain professional and general liability insurance that provides coverage on a claims-made basis of $1.0 million per occurrence with a retention of $50,000 per occurrence and $3.0 million annual aggregate coverage per surgical facility, including the facility and employed staff. We also maintain business interruption insurance and property damage insurance, as well as an additional umbrella liability insurance policy in the aggregate amount of $25.0 million. Coverage under certain of these policies is contingent upon the policy being in effect when a claim is made regardless of when the events which caused the claim occurred. In addition, physicians who provide professional services in our surgical facilities are required to maintain separate malpractice coverage with similar minimum coverage limits. We also maintain a directors’ and officers’ insurance policy, which insures our directors and officers against unindemnified losses arising from certain wrongful acts in their capacities as directors and officers and reimburses us for those losses for which we have lawfully indemnified the directors and officers.

This insurance coverage may not cover all claims against us. Insurance coverage may not continue to be available at a cost allowing us to maintain adequate levels of insurance. If one or more successful claims against us were not covered by or exceeded the coverage of our insurance, our financial condition and results of operations could be adversely affected. Our business, profitability and growth prospects could suffer if we face negative publicity or we pay damages or defense costs in connection with a claim that is outside the scope or limits of coverage of any applicable insurance coverage, including claims related to adverse patient events, contractual disputes, professional and general liability, and directors’ and officers’ duties.

In addition, if our costs of insurance and claims increase, then our earnings could decline. Market rates for insurance premiums and deductibles have been steadily increasing. Our earnings and cash flows could be materially and adversely affected by any of the following:

 

    the collapse or insolvency of our insurance carriers;

 

    further increases in premiums and deductibles;

 

    increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; or

 

    an inability to obtain one or more types of insurance on acceptable terms, if at all.

Financial pressures on patients, and current and future economic condition, may adversely affect our volume and surgical case mix.

Even as the U.S. economy shows signs of sustained, if modest, growth, many individuals throughout the country continue to experience difficult financial conditions. Our case volume and surgical case mix may be

 

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adversely affected by patients’ unwillingness to pay for procedures in our facilities. Higher numbers of unemployed individuals generally translates into more individuals without healthcare insurance to help pay for procedures, thereby increasing the potential for persons to elect not to have procedures performed. Even procedures normally thought to be non-elective may be delayed or may not be performed if the patient cannot afford the procedure due to a lack of insurance or money to pay their portion of our facilities’ fee. Although we have taken steps to minimize the impact of these conditions, it is difficult to predict the degree to which our business will continue to be impacted by such conditions or the course of the economy in the future.

In addition, the difficult conditions of the U.S. economy have adversely affected and could continue to adversely affect the budgets of individual states and the federal government, which has resulted in and could continue to result in attempts to reduce payments made to us by federal and state government healthcare programs, including Medicare, military services, Medicaid and workers’ compensation programs, a reduction in the scope of services covered by those programs and an increase in taxes and assessments on our activities. Additionally, even though the Supreme Court upheld an IRS rule extending tax credits to individuals purchasing health insurance under the Affordable Care Act through federally established exchanges in its decision in King v. Burwell, there continues to be uncertainty regarding the future implementation of the Affordable Care Act, and any such result could adversely affect our business by exacerbating the financial pressures on patients, leading them to further delay or cancel non-emergency surgical procedures.

Our surgical facilities are sensitive to regulatory, economic and other conditions in the states where they are located. In addition, three of our surgical facilities account for a significant portion of our patient service revenue.

Our revenue are particularly sensitive to regulatory, economic and other conditions in the states of Florida and Texas. As of June 30, 2015, we owned and operated four consolidated surgical facilities in Texas and 22 consolidated surgical facilities in Florida. The Texas facilities represented 12.7%, 5.0% and 5.2% of our revenue during the years ended December 31, 2014 (on a pro forma basis), 2013 and 2012, respectively, and 11.6% of our revenue during the six months ended June 30, 2015. The Florida facilities represented 14.3%, 30.9% and 29.5% of our revenue during the years ended December 31, 2014 (on a pro forma basis), 2013 and 2012, respectively, and 15.2% of our revenue during the six months ended June 30, 2015.

In addition, our surgical hospital located in Idaho Falls, Idaho represented 16.5% of our revenue in 2014 (on a pro forma basis) and 17.3% of our revenue during the six months ended June 30, 2015. If there were an adverse regulatory, economic or other development in any of the states in which we have a higher concentration of facilities, including Idaho, our case volumes could decline in such states or there could be other unanticipated adverse impacts on our business in those states, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

If any of our existing healthcare facilities lose their accreditation status or any of our new facilities fail to receive accreditation, such facilities could become ineligible to receive reimbursement under Medicare or Medicaid or other third-party payors.

The construction and operation of healthcare facilities are subject to extensive federal, state and local regulation relating to, among other things, the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection. Additionally, such facilities are subject to periodic inspection by government authorities and accreditation organizations to assure their continued compliance with these various standards.

All of our facilities are deemed certified, meaning that they are accredited, properly licensed under the relevant state laws and regulations and certified under the Medicare program or are in the process of applying for such accreditation, licensing or certification. The effect of maintaining certified facilities is to allow such facilities to participate in the Medicare and Medicaid programs. We believe that all of our facilities are in

 

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material compliance with applicable federal, state, local and other relevant accreditation and certification regulations and standards. However, should any of our healthcare facilities lose their deemed certified status and thereby lose certification under the Medicare or Medicaid programs, such facilities would be unable to receive reimbursement from either or both of those programs, and possibly from other third-party payors, and our business could be materially adversely affected.

Certain of our partnership and operating agreements contain provisions giving rights to our partners and other members that may be adverse to our interests.

Certain of the agreements governing the LPs, general partnerships and LLCs through which we own and operate our facilities contain provisions that give our partners or other members rights that may, in certain circumstances, be adverse to our interests. These rights include, but are not limited to, rights to purchase our interest in the partnership or LLC, 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. With respect to these purchase rights, the agreements generally include a specified formula or methodology to determine the applicable purchase price, which may or may not reflect fair market value.

Additionally, many 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. Examples of these restrictions include the rights of our partners and other members to approve the sale of substantially all of the assets of the partnership or LLC, to dissolve the partnership or LLC, to appoint a new or additional general partner or managing member and to amend the partnership or operating agreements. 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, dissolution of the partnership or LLC and the amendment of the partnership or operating agreement. These management and governance rights held by our partners and other members limit and restrict our ability to make unilateral decisions about the management and operation of the facilities without the approval of our partners and other members.

We may have a special legal responsibility to the holders of ownership interests in the entities through which we own our facilities, which may conflict with, and prevent us from acting solely in, our own best interests or the interests of our stockholders.

We generally hold our ownership interests in facilities through limited or general partnerships, LLCs or limited liability partnerships (“LLPs”) in which we maintain an ownership interest along with physicians and, in some cases, physicians and health systems. As general partner and manager of most of these entities, we may have a special responsibility, known as a fiduciary duty, to manage these entities in the best interests of the other owners. We also have a duty to operate our business for the benefit of our stockholders. As a result, we may encounter conflicts between our responsibility to the other owners and our responsibility to our stockholders. For example, we have entered into management agreements to provide management services to our surgical facilities in exchange for a fee. Disputes may arise as to the nature of the services to be provided or the amount of the fee to be paid. In these cases, we may be obligated to exercise reasonable, good faith judgment to resolve the disputes and may not be free to act solely in our own best interests or the stockholders best interest. Disputes may also arise between us and our physician investors with respect to a particular business decision or regarding the interpretation of the provisions of the applicable partnership or limited liability company agreement. We seek to avoid these disputes but have not implemented any measures to resolve these conflicts if they arise. If we are unable to resolve a dispute on terms favorable or satisfactory to us, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

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Growth of patient receivables or deterioration in the ability to collect on these accounts, due to changes in economic conditions or otherwise, could have a material adverse effect on our business, prospects, results of operations and financial condition.

The current practice of providing medical services in advance of payment or, in many cases, prior to assessment of ability to pay for such services, may have significant negative impact on our revenue, bad debt expense and cash flow. We bill numerous and varied payors, such as self-pay patients, managed care payors and Medicare and Medicaid. These different payors typically have different billing requirements that must be satisfied prior to receiving payment for services rendered. Reimbursement is typically conditioned on our documenting medical necessity and correctly applying diagnosis codes. Incorrect or incomplete documentation and billing information could result in non-payment for services rendered. The primary collection risks with respect to our patient receivables relate to patient accounts for which the primary third-party payor has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and co-payments) remain outstanding.

Additional factors that could complicate our billing include:

 

    disputes between payors as to which party is responsible for payment;

 

    failure of information systems and processes to submit and collect claims in a timely manner;

 

    variation in coverage for similar services among various payors;

 

    the difficulty of adherence to specific compliance requirements, diagnosis coding and other procedures mandated by various payors; and

 

    failure to obtain proper physician credentialing and documentation in order to bill various payors.

We provide for bad debts principally based upon the type of payor and the age of the receivables. Our allowance for doubtful accounts at June 30, 2015 and December 31, 2014, represented 6.1% and 3.5% of our accounts receivable balance, respectively.

Due to the difficulty in assessing future trends, including the effects of changes in economic conditions, we could be required to increase our provision for doubtful accounts. An increase in the amount of patient receivables or a deterioration in the collectability of these accounts could have a material adverse effect on our business, prospects, results of operations and financial condition.

We depend on our senior management, and we may be adversely affected if we lose any member of our senior management.

Because our senior management has been key to our growth and success, we are highly dependent on our senior management, including Michael Doyle, our Chief Executive Officer, and Teresa Sparks, our Executive Vice President and Chief Financial Officer. We do not maintain “key man” life insurance policies on any of our officers. Competition for senior management generally, and within the healthcare industry specifically, is intense and we may not be able to recruit and retain the personnel we need if we were to lose an existing member of senior management. Because our senior management has contributed greatly to our growth since inception, the loss of key management personnel, without adequate replacements, or our inability to attract, retain and motivate sufficient numbers of qualified management personnel could have a material adverse effect on our financial condition and results of operations.

 

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The loss of certain physicians can have a disproportionate impact on certain of our facilities.

Generally, the top referring physicians within each of our facilities represent a large share of our revenue and admissions. The loss of one or more of these physicians, even if temporary, could cause a material reduction in our revenue, which could take significant time to replace given the difficulty and cost associated with recruiting and retaining physicians.

We rely on our private equity sponsor and the interests of our Sponsor may conflict with the interests of the Company and its other stockholders.

We have in recent years depended on our relationship with our Sponsor, to help guide our business plan. Our Sponsor has significant expertise in financial matters. This expertise has been available to us through the representatives our Sponsor has on our board of directors and as a result of our Management Agreement with an affiliate of our Sponsor. In connection with the completion of this offering, the Management Agreement with an affiliate of our Sponsor will terminate. After the closing of this offering, our Sponsor and its affiliates may elect to reduce their ownership in our Company or reduce its involvement on our board of directors, which could reduce or eliminate the benefits we have historically achieved through our relationship with our Sponsor.

Additionally, our Sponsor is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsor may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as an affiliate of our Sponsor continues to indirectly own a significant amount of our capital stock, even if such amount is less than a majority of our outstanding common stock on a fully-diluted basis, our Sponsor will continue to be able to strongly influence or effectively control our decisions.

We may write-off intangible assets, such as goodwill.

As a result of purchase accounting for our various acquisition transactions, our balance sheet at June 30, 2015 contained intangible assets designated as either goodwill or intangibles totaling approximately $1.3 billion in goodwill and approximately $53.1 million in intangibles. Additional acquisitions that result in the recognition of additional intangible assets would cause an increase in these intangible assets. On an ongoing basis, we evaluate whether facts and circumstances indicate any impairment of the value of intangible assets. As circumstances change, we cannot assure you that the value of these intangible assets will be realized by us. If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs.

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our outstanding indebtedness.

As of June 30, 2015, we had total indebtedness of approximately $1.4 billion under our $870 million senior secured first lien term loan (the “First Lien Term Loan”), which includes $80 million under a revolving credit facility (the “Revolver”) of which approximately $76.8 million was undrawn, and $490 million senior secured second lien credit facility (the “Second Lien Term Loan” and, together with the First Lien Term Loan and the Revolver, the “Term Loans and Revolving Facility”), where our subsidiary, Surgery Center Holdings, Inc., is the borrower. In addition, subject to the restrictions in our Term Loans and Revolving Facility, we may incur significant additional indebtedness, which may be secured, from time to time, which could have important consequences, including:

 

    making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under such instruments;

 

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    making us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation;

 

    limiting cash flow available for general corporate purposes, including capital expenditures and acquisitions, because a substantial portion of our cash flow from operations must be dedicated to servicing our debt;

 

    limiting our ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions;

 

    limiting our flexibility in reacting to competitive and other changes in our industry and economic conditions generally; and

 

    exposing us to risks inherent in interest rate fluctuations because some of our borrowings will be at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

Our ability to pay or to refinance our indebtedness will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control.

Restrictive covenants in our debt instruments may adversely affect us.

Our Term Loans and Revolving Facility contain various covenants that limit, among other things, our ability and the ability of our restricted subsidiaries to:

 

    incur additional indebtedness;

 

    make certain distributions, investments and other restricted payments;

 

    dispose of our assets;

 

    grant liens on our assets;

 

    engage in transactions with affiliates;

 

    merge, consolidate or transfer substantially all of our assets; and

 

    make payments to us (in the case of our restricted subsidiaries).

In addition, our Term Loans and Revolving Facility contain other and more restrictive covenants, including covenants requiring us to maintain specified financial ratios triggered in certain situations and to satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will continue to meet those tests. A breach of any of these covenants could result in a default under our Term Loans and Revolving Facility. Upon the occurrence of an event of default under our Term Loans and Revolving Facility, the lenders could elect to declare all amounts outstanding under our Term Loans and Revolving Facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets, other than assets of our non-guarantor subsidiaries, as security under our Term Loans and Revolving Facility. If the lenders under our Term Loans and Revolving Facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our Term Loans and Revolving Facility and our other indebtedness.

We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated revenue growth and operating improvements will be realized or that future borrowings will be

 

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available to us under our Term Loans and Revolving Facility in amounts sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. If we are unable to meet our debt service obligations or fund our other liquidity needs, we could attempt to restructure or refinance our indebtedness or seek additional equity capital. We cannot assure you that we will be able to accomplish those actions on satisfactory terms, if at all.

Despite our current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future, including secured indebtedness. Although the credit agreements governing our Term Loans and Revolving Facility contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. In addition, as of June 30, 2015 we had approximately $76.8 million available for additional borrowings under our Revolver, all of which is permitted to be incurred under the credit agreement governing our Term Loans and Revolving Facility. If new debt is added to our or our subsidiaries’ current debt levels, the related risks that we face would be increased.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could have a material adverse effect on our business, prospects, results of operations and financial condition.

Our ability to pay interest on and principal of our debt obligations principally depends upon our operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments.

In addition, we conduct our operations through our subsidiaries. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In particular, the constituent documents governing many of our non-wholly owned subsidiaries limit, under certain circumstances, our ability to access the cash generated by those subsidiaries in a timely manner.

If we do not generate sufficient cash flow from operations to satisfy our debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or capital expenditures or seeking to raise additional capital. Our ability to restructure or refinance our debt, if at all, will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt instruments may restrict us from adopting some of these alternatives. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance our obligations at all or on commercially reasonable terms, could affect our ability to satisfy our debt obligations and have a material adverse effect on our business, prospects, results of operations and financial condition.

We are a holding company with no operations of our own.

We are a holding company, and our ability to service our debt is dependent upon the earnings from the business conducted by our subsidiaries that operate the surgical facilities. The effect of this structure is that we depend on the earnings of our subsidiaries, and the distribution or payment to us of a portion of these earnings to meet our obligations, including those under our Term Loans and Revolving Facility and any of our other debt obligations. The distributions of those earnings or advances or other distributions of funds by these entities to us,

 

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all of which are contingent upon our subsidiaries’ earnings, are subject to various business considerations. In addition, distributions by our subsidiaries could be subject to statutory restrictions, including state laws requiring that such subsidiaries be solvent, or contractual restrictions. Some of our subsidiaries may become subject to agreements that restrict the sale of assets and significantly restrict or prohibit the payment of dividends or the making of distributions, loans or other payments to stockholders, partners or members.

We make significant loans to, and are generally liable for debts and other obligations of, the partnerships and limited liability companies that own and operate some of our surgical facilities.

We own and operate our surgical facilities through limited partnerships and limited liability companies. Local physicians, physician groups and healthcare systems also own an interest in all but two of these partnerships and limited liability companies. In the partnerships in which we are the general partner, we are liable for 100% of the debts and other obligations of the partnership, even if we do not own all of the partnership interests. For some of our surgical facilities, indebtedness at the partnership level is funded through intercompany loans that we provide. At June 30, 2015, our intercompany loans totaled $24.9 million. Through these loans we have a security interest in the partnership’s or limited liability company’s assets. However, our financial condition and results of operations would be materially adversely affected if our surgical facilities are unable to repay these intercompany loans, or such loans are challenged under certain health care laws. Additionally, at June 30, 2015, our global intercompany note, which we use to transfer debt balances between our subsidiaries, had a zero balance.

Our Term Loans and Revolving Facility allow us to borrow funds that we can lend to the partnerships and limited liability companies in which we own an interest. Although most of our intercompany loans are secured by the assets of the partnership or limited liability company, the physicians and physician groups that own an interest in these partnerships and limited liability companies generally do not guarantee a pro rata amount of this debt or the other obligations of these partnerships and limited liability companies.

From time to time, we may guarantee our pro-rata share of the third-party debts and other obligations of many of the non-consolidated partnerships and limited liability companies in which we own an interest, subject to a limit provided in our credit agreements. In most instances of these guarantees, the physicians and/or physician groups have also guaranteed their pro-rata share of the indebtedness to secure the financing.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.

Borrowings under our Term Loans and Revolving Facility are at variable rates of interest and expose us to interest rate risk. As of June 30, 2015, we had total indebtedness of approximately $1.4 billion under our Term Loans and Revolving Facility, including (i) $843.6 million (after giving effect to discount and issuance costs) outstanding under our First Lien Term Loan at an annual interest rate of 4.25% plus the adjusted LIBOR Rate, (ii) $0 outstanding under our Revolver at an interest rate of 4.25% plus the adjusted LIBOR Rate, and (iii) $472.8 million (after giving effect to discount and issuance costs) outstanding under our Second Lien Term Loan at an annual interest rate of 7.5% plus the adjusted LIBOR Rate. If interest rates increase, our debt service obligations on variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease.

Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.

The Company’s First Lien Term Loan is a senior secured first lien obligation of Surgery Center Holdings, Inc. and is guaranteed on a senior secured first priority basis and secured by substantially all of the assets, including pledges of equity interests, of Surgery Center Holdings, Inc., SP Holdco I, Inc. and the subsidiary guarantors described in the documentation, which are comprised of material wholly-owned non-

 

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excluded subsidiaries of Surgery Center Holdings, Inc. The Company has the option of classifying the First Lien Term Loan as either an ABR loan or an ED loan. The interest base rate on an ABR loan is equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.5%, and (c) the Adjusted LIBO Rate for a Eurodollar Borrowing with a one-month interest period plus 1.0%; provided that the base rate shall not be less than 2.00% per annum. In addition to the base rate, the Company is required to pay a 3.25% margin for ABR loans. The interest base rate on an ED loan is equal to (x) the LIBO Rate for such Eurodollar borrowing in effect for such Interest Period divided by (y) one minus the Statutory Reserves (if any) for such Eurodollar Borrowing for such interest period; provided that the rate shall not be less than 1.00% per annum. In addition to the base rate, the Company is required to pay a 4.25% margin for ED loans. In 2014, the Company classified the First Lien Term Loan as an ED loan with an interest rate of 5.25% (1.0% base rate plus a 4.25% margin). Accrued interest is payable in arrears on a quarterly basis.

The Company’s Second Lien Term Loan is a senior secured second lien obligation of Surgery Center Holdings, Inc. and is guaranteed on a senior secured second priority basis and secured by substantially all of the assets, including pledges of equity interests, of Surgery Center Holdings, Inc., SP Holdco I, Inc. and the subsidiary guarantors described in the documentation, which are comprised of material wholly-owned non-excluded subsidiaries of Surgery Center Holdings, Inc. The Company has the option of classifying the Second Lien Term Loan as either an ABR loan or an ED loan. The interest base rate on an ABR loan is equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.5% and (c) the Adjusted LIBO Rate for a Eurodollar Borrowing with a one-month interest period plus 1.0%; provided that the base rate shall not be less than 2.0% per annum. In addition to the base rate, the Company is required to pay a 6.5% margin for ABR loans. The interest base rate on an ED loan is equal to (x) the LIBO Rate for such Eurodollar Borrowing in effect for such interest period divided by (y) one minus the Statutory Reserves (if any) for such Eurodollar Borrowing for such interest period; provided that the base rate shall not be less than 1.0% per annum. In addition to the base rate, the Company is required to pay a 7.5% margin for ED loans. During 2014, the Company classified the Second Lien Term Loan as an ED loan with an interest rate of 8.5% (1.0% base rate plus a 7.5% margin). Accrued interest is payable in arrears on a quarterly basis, on the last business day of each of March, June, September and December.

We may be limited in our ability to utilize, or may not be able to utilize, net operating loss carryforwards to reduce our future tax liability.

As of June 30, 2015, we had U.S. federal net operating loss (“NOL”) carryforwards of approximately $323 million and state NOL carryforwards of approximately $470 million, which may be limited annually due to certain change in ownership provisions of Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In addition, as a result of the Symbion acquisition, approximately $179 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million, and, as a result of the Novamed acquisition, approximately $17 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million. These limitations, when combined with amounts allowable due to net unrecognized built in gains, are not expected to impact the realization of the deferred tax assets associated with these NOLs. Our federal NOL carryforwards will begin to expire in 2025 and will completely expire in 2034, and our state NOL carryforwards will begin to expire in 2015 and will completely expire in 2034. Although we do not expect this offering to cause an ownership change within the meaning of Section 382 of the Code, future ownership changes may subject our NOL carryforwards to further annual limitations, which could restrict our ability to use them to offset our taxable income in periods following the ownership changes. We currently maintain a full valuation allowance for our deferred tax assets, including our federal and state NOL carryforwards.

We will enter into a tax receivable agreement that will require us to pay to the Existing Owners for certain tax benefits, including for tax benefits attributable to pre-IPO NOLs, which amounts are expected to be material.

We will indirectly acquire favorable tax attributes in connection with the Reorganization. These tax attributes would not be available to us in the absence of the consummation of the Reorganization. As part of the

 

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Reorganization, we will enter into a tax receivable agreement (the “TRA”) under which generally we will be required to pay to the Existing Owners 85% of the cash savings, if any, in U.S. federal, state or local tax that we actually realize (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes, including NOLs, capital losses, charitable deductions, alternative minimum tax credit carryforwards and federal and state tax credits of Surgery Center Holdings, Inc. and its affiliates relating to taxable years ending on or before the date of the Reorganization (calculated by assuming the taxable year of the relevant entity closes on the date of the Reorganization) that are or become available to us and our wholly-owned subsidiaries as a result of the Reorganization, and (ii) tax benefits attributable to payments made under the TRA. Under this agreement, generally we will retain the benefit of the remaining 15% of the applicable tax savings. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Income Taxes and Tax Receivable Agreement.”

The actual utilization of the tax attributes that are the subject of the TRA, as well as the timing of any payments under the TRA, will vary depending upon a number of factors, including the amount, character and timing of our and our subsidiaries’ taxable income in the future, our use of NOL carryforwards and the portion of our payments under the TRA constituting imputed interest. Limitations to the use of the NOLs may apply, including limitations under Section 382 of the Code.

Payments under the TRA are not conditioned on the Existing Owners continuing to own shares of our common stock. Payments under the TRA are expected to give rise to certain additional tax benefits attributable to deductions for imputed interest. Any such benefits are the subject of the TRA and will increase the amounts due thereunder. In addition, the TRA will provide for interest, at a rate equal to LIBOR plus 300 basis points, accrued from the due date (without extensions) of the corresponding federal, state or local tax return to the date of payment specified by the TRA. Payments under the TRA will be based on the tax reporting positions that we determine, consistent with the terms of the TRA. We will not be reimbursed for any payments previously made under the TRA if the utilization of any tax attributes that are the subject of the TRA are subsequently disallowed; if it is determined that excess payments have been made under the TRA, certain future payments, if any, otherwise to be made will be reduced. As a result, in certain circumstances, payments could be made under the TRA in excess of the benefits that we actually realize in respect of the attributes to which the TRA relates.

We expect the payments we will be required to make under the TRA will be substantial. If we were to elect to terminate the tax receivable agreement immediately after this offering, we estimate that we would be required to pay $114.5 million in the aggregate under the tax receivable agreement. It is also possible we will be required to make withholding tax payments in respect of one or more Existing Owners. Because we are a holding company with no operations of our own, our ability to make payments under the TRA is dependent on the ability of our subsidiaries to make distributions to us. The TRA will restrict our and our subsidiaries’ ability to enter into any agreement or indenture that would restrict or encumber our ability to make payments under the TRA. To the extent that we are unable to make payments under the TRA, and such inability is a result of the terms of credit agreements and other debt documents that are materially more restrictive than those existing as of the date of the TRA, such payments will be deferred and will accrue interest at a rate of LIBOR plus 500 basis points until paid. If the terms of such credit agreements and other debt documents cause us to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of the date of the TRA, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid. There can be no assurance that we will be able to finance our obligations under the TRA in a manner that does not adversely affect our working capital and growth requirements.

The TRA will contain provisions that require, in certain cases, the acceleration of payments under the TRA to the Existing Owners, or payments which may significantly exceed the actual benefits we realize in respect of the tax attributes that are the subject of the TRA.

The terms of the TRA will, in certain circumstances, including certain changes of control, divestitures, or breaches of any material obligations under it (such as a failure to make any payment when due, subject to a specified cure period), provide for our (or our successor’s) obligations under the TRA to accelerate and become

 

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payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions, including that we would have at such time sufficient taxable income to fully utilize the tax attributes that are the subject of the TRA. Additionally, if we or any of our subsidiaries transfers any asset to a corporation with which we do not file a consolidated tax return, we will be treated as having sold that asset in a taxable transaction for purposes of determining certain amounts payable pursuant to the TRA. As a result of the foregoing, (i) we could be required to make payments under the TRA that are greater than or less than the specified percentage of the actual tax savings we realize in respect of the tax attributes that are the subject of the TRA and (ii) we may be required to make an immediate lump sum payment equal to the present value of the anticipated future tax savings, which payment may be made years in advance of the actual realization of such future benefits, if any such benefits are ever realized. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity and could have the effect of adversely affecting our working capital and growth, and of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. If we were to elect to terminate the TRA immediately after this offering, we estimate that we would be required to pay $114.5 million in the aggregate under the TRA. See the section entitled “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” in this prospectus.

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our financial condition and results of operations.

We will be subject to income taxes in the United States, and our domestic tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

    changes in the valuation of our deferred tax assets and liabilities;

 

    expected timing and amount of the release of any tax valuation allowances;

 

    tax effects of stock-based compensation;

 

    costs related to intercompany restructurings;

 

    changes in tax laws, regulations or interpretations thereof; or

 

    lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future

 

    earnings in jurisdictions where we have higher statutory tax rates.

In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal, state, local and foreign authorities. Outcomes from these audits could have an adverse effect on our financial condition and results of operations.

Our facilities may be adversely impacted by weather and other factors beyond our control, and disruptions in our disaster recovery systems or management continuity planning could limit our ability to operate our business effectively.

The financial results of our facilities may be negatively impacted by adverse weather conditions, such as tornadoes, earthquakes and hurricanes, or other factors beyond our control, such as wildfires. These weather conditions or other factors could disrupt patient scheduling, displace our patients, employees and physician partners and force certain of our facilities to close temporarily or for an extended period of time. In certain markets, we have a large concentration of surgery centers that may be simultaneously affected by adverse weather condition or events beyond our control.

 

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While we have disaster recovery systems and business continuity plans in place, any disruptions in our disaster recovery systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations. Despite our implementation of a variety of security measures, our technology systems could be subject to physical or electronic break-ins, and similar disruptions from unauthorized tampering or weather related disruptions where our headquarters is located. In addition, in the event that a significant number of our management personnel were unavailable in the event of a disaster, our ability to effectively conduct business could be adversely affected.

Risks Related to Government Regulation

We cannot predict the effect that healthcare reform and other changes in government programs may have on our business, financial condition or results of operations.

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the Affordable Care Act, dramatically alter the United States healthcare system and are intended to decrease the number of uninsured Americans and reduce overall healthcare costs. The Affordable Care Act attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments, expanding the Medicare program’s use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, and bundling payments to hospitals and other providers. The Affordable Care Act also contains a number of measures that are intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of Recovery Audit Contractors (“RACs”) in the Medicaid program expanding the scope of the federal False Claims Act and generally prohibiting physician-owned hospitals from adding new physician owners or increasing the number of beds and operating rooms for which they are licensed. The Affordable Care Act provides for additional enforcement tools, cooperation between agencies, and funding for enforcement. Since their enactment, the Affordable Care Act has been subject to a number of challenges to its constitutionality. On June 28, 2012, the United States Supreme Court upheld challenges to the constitutionality of the “individual mandate” provision, which generally requires all individuals to purchase healthcare insurance or pay a penalty, but struck down as unconstitutional the provision that would have allowed the federal government to revoke all federal Medicaid funding to any state that did not expand its Medicaid program. As a result, many states have refused to extend Medicaid eligibility to more individuals as envisioned by the law. Other legal challenges are pending.

In addition, several bills have been and will likely continue to be advanced in Congress that would defund, repeal or amend all or significant provisions of the Affordable Care Act, and a number of provisions of the Affordable Care Act that were supposed to become effective, have been delayed by the Obama administration. As a result, it is difficult to predict the impact the Affordable Care Act will have on our business given the threats to and uncertainty surrounding key provisions of the Affordable Care Act. However, depending on how the Affordable Care Act is ultimately interpreted, amended and implemented, it could have an adverse effect on our business, financial condition and results of operations.

Moreover, other legislative changes have also been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments, will remain in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period

 

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for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other health care funding, which could have a material adverse effect on our financial operations.

If we fail to comply with or otherwise incur liabilities under the numerous federal and state laws and regulations relating to the operation of our facilities, we could incur significant penalties or other costs or be required to make significant changes to our operations.

The healthcare industry is heavily regulated and we are subject to many laws and regulations at the federal, state and local government levels in the markets in which we operate. These laws and regulations require that our facilities meet various licensing, accreditation, certification and other requirements, including, but not limited to, those relating to:

 

    ownership and control of our facilities;

 

    operating policies and procedures

 

    qualification, training and supervision of medical and support persons;

 

    pricing of, billing for and coding of services and properly handling overpayments, debt collection practices and the submission of false statements or claims;

 

    the necessity, appropriateness and adequacy of medical care, equipment, personnel, operating policies and procedures; maintenance and preservation of medical records;

 

    financial arrangements between referral sources and our facilities;

 

    the protection of privacy, including patient and credit card information;

 

    screening, stabilization and transfer of individuals who have emergency medical conditions and provision of emergency services;

 

    antitrust;

 

    building codes;

 

    workplace health and safety;

 

    licensure, certification and accreditation;

 

    fee-splitting and the corporate practice of medicine;

 

    handling of medication;

 

    confidentiality, data breach, identity theft and maintenance and protection of health-related and other personal information and medical records; and

 

    environmental protection, health and safety.

If we fail or have failed to comply with applicable laws and regulations, we could subject ourselves to administrative, civil or criminal penalties, cease and desist orders, forfeiture of amounts owed and recoupment of amounts paid to us by governmental or commercial payors, loss of licenses necessary to operate and disqualification from Medicare, Medicaid and other government-sponsored healthcare programs.

 

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Many of these laws and regulations have not been fully interpreted by regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Different interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or require us to make changes in our operations, facilities, equipment, personnel, services, capital expenditure programs or operating expenses to comply with the evolving rules. Any enforcement action against us, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

In pursuing our growth strategy, we may seek to expand our presence into states in which we do not currently operate. In new geographic areas, we may encounter laws and regulations that differ from those applicable to our current operations. If we are unwilling or unable to comply with these legal requirements in a cost-effective manner, we may be unable to expand into new geographic markets.

A number of initiatives have been proposed during the past several years to reform various aspects of the healthcare system in the United States. In the future, different interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. In addition, some of the governmental and regulatory bodies that regulate us are considering or may in the future consider enhanced or new regulatory requirements. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these possibilities, if they occurred, could detrimentally affect the way we conduct our business and manage our capital, either of which, in turn, could have a material adverse effect on our business, prospects, results of operations and financial condition.

If laws governing the corporate practice of medicine or fee-splitting change, we may be required to restructure some of our relationships, which may result in a significant loss of revenue and divert other resources.

The laws of various states in which we operate or may operate in the future do not permit business corporations to practice medicine, to exercise control over or employ physicians who practice medicine or to engage in various business practices, such as fee-splitting with physicians (i.e., sharing in a percentage of professional fees). The interpretation and enforcement of these laws vary significantly from state to state. We provide management services to a physician network. If our arrangements with this network were deemed to violate state corporate practice of medicine, fee-splitting or similar laws, or if new laws are enacted rendering our arrangements illegal, we may be subject to civil and/or criminal penalties and could be required to restructure or terminate these arrangements, any of which may result in a significant loss of revenue and divert other resources.

If regulations change, we may be obligated to purchase some or all of the ownership of our physician partners or renegotiate some of our partnership and operating agreements with our physician partners and management agreements with surgical facilities.

Upon the occurrence of various fundamental regulatory changes or changes in the interpretation of existing regulations, we may be obligated to purchase all of the ownership of the physician investors in most of the partnerships or limited liability companies that own and operate our surgical facilities. The purchase price that we would be required to pay for the ownership is typically based on either a multiple of the surgical facility’s EBITDA, as defined in our partnership and operating agreements with these surgical facilities, or the fair market value of the ownership as determined by a third-party appraisal. The physician investors in some of our surgical facilities can require us to purchase their interests in exchange for cash or shares of our common stock if these regulatory changes occur. In addition, some of our partnership agreements with our physician partners and management agreements with surgical facilities require us to attempt to renegotiate the agreements upon the occurrence of various fundamental regulatory changes or changes in the interpretation of existing regulations and provide for termination of the agreements if renegotiations are not successful.

 

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Regulatory changes that could create purchase or renegotiation obligations include changes that:

 

    make illegal the referral of Medicare or other patients to our surgical facilities by physician investors;

 

    create a substantial likelihood that cash distributions to physician investors from the partnerships or limited liability companies through which we operate our surgical facilities would be illegal;

 

    make illegal the ownership by the physician investors of interests in the partnerships or limited liability companies through which we own and operate our surgical facilities; or

 

    require us to reduce the aggregate percentage of physician investor ownership in our hospitals.

We do not control whether or when any of these regulatory events might occur. In the event we are required to purchase all of the physicians’ ownership, our existing capital resources would not be sufficient for us to meet this obligation. These obligations and the possible termination of our partnership and management agreements would have a material adverse effect on our financial condition and results of operations.

Our revenue will decline if federal or state programs reduce our Medicare or Medicaid payments or if managed care companies reduce reimbursement amounts. In addition, the financial condition of payors and healthcare cost containment initiatives may limit our revenue and profitability.

For the years ended December 31, 2014 (on a pro forma basis), 2013 and 2012, we derived 35.7%, 28.0% and 31.5% of our revenue, respectively, from government payors, including Medicare and Medicaid programs and 37.7% for the six months ended June 30, 2015. The Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions, any of which could materially increase or decrease payments from these government programs in the future, as well as affect the timing of payments to our facilities.

Additionally, the Budget Control Act of 2011 requires that Medicare reimbursement rates be reduced by 2%, which went into effect in April 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2024 unless additional Congressional action is taken.

We cannot predict whether these automatic spending reductions will be rescinded, extended or increased by future legislative action. If these automatic spending reductions are increased or extended, such action could adversely affect our business, results of operations and/or financial condition.

We are unable to predict the effect of future government healthcare funding policy changes on our operations. If the rates paid by governmental payors are reduced, if the scope of services covered by governmental payors is limited or if we, or one or more of our surgical facilities, are excluded from participation in the Medicare, Medicaid or other government-sponsored healthcare programs, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.

During the past several years, healthcare payors, such as federal and state governments, insurance companies and employers, have undertaken initiatives to revise payment methodologies and monitor healthcare costs. As part of their efforts to contain healthcare costs, payors increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk relating to paying for care provided, often in exchange for exclusive or preferred participation in their benefit plans. We expect efforts to impose greater discounts and more stringent cost controls by government and other payors to continue, thereby reducing the payments we receive for our services.

 

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By way of example, under the Medicare program, physician payments are updated on an annual basis according to a statutory formula. Because application of the statutory formula for the update factor would have resulted in a decrease in total physician payments for the past several years, Congress has intervened with interim legislation to prevent the reductions. In April 2015, however, the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, was signed into law, which repealed and replaced the statutory formula for Medicare payment adjustments to physicians. MACRA provides a permanent end to the annual interim legislative updates that had previously been necessary to delay or prevent significant reductions to payments under the Medicare Physician Fee Schedule. MACRA extended existing payment rates through June 30, 2015, with a 0.5% update for July 1, 2015 through December 31, 2015, and for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. In addition, MACRA requires the establishment of the Merit-Based Incentive Payment System (“MIPS”), beginning in 2019, under which physicians may receive performance-based payment incentives or payment reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities and meaningful use of electronic health records. MACRA also requires Centers for Medicare & Medicaid Services, or CMS, beginning in 2019, to provide incentive payments for physicians and other eligible professionals that participate in alternative payment models, such as accountable care organizations, that emphasize quality and value over the traditional volume-based fee-for-service model. It is unclear what impact, if any, MACRA will have on our business and operating results, but any resulting decrease in payment may result in reduced demand for our services.

The amount of our provision for doubtful accounts is based on our assessments of historical collection trends, business and economic conditions, trends in federal and state governmental and private employer health coverage and other collection indicators. A continuation in trends that results in increasing the proportion of accounts receivable being comprised of uninsured accounts and deterioration in the collectability of these accounts could adversely affect our collections of accounts receivable, results of operations and cash flows. As enacted, the Affordable Care Act seeks to decrease, over time, the number of uninsured individuals. Specifically, the Affordable Care Act expands Medicaid eligibility and provides incentives to employers to offer and individuals to purchase health insurance. It is difficult to predict the full impact of the Affordable Care Act due to pending court challenges, legislative threats, implementation uncertainty, and its complexity.

Our surgical facilities do not satisfy the requirements for any of the safe harbors under the federal Anti-Kickback Statute. If a federal or state agency asserts a different position or enacts new laws in this regard, we could be subject to criminal and civil penalties, loss of licenses and exclusion from governmental programs, which may result in a substantial loss of revenue.

The statute commonly known as the federal Anti-Kickback statute (the “Anti-Kickback Statute”) prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referrals for items or services payable by Medicare, Medicaid, or any other federally funded healthcare program. Additionally, the Anti-Kickback Statute prohibits any form of remuneration in return for purchasing, leasing or ordering, or arranging for or recommending the purchasing, leasing or ordering of items or services payable by Medicare, Medicaid or any other federally funded healthcare program. The Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. Moreover, several federal courts have held that the Anti-Kickback Statute can be violated if only one purpose (not necessarily the primary purpose) of a transaction is to induce or reward a referral of business, notwithstanding other legitimate purposes. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Moreover, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act (discussed below). Violations of the Anti-Kickback Statute may result in substantial civil or criminal penalties, including up to five years imprisonment and criminal fines of up to $25,000 and civil penalties of up to $50,000 for each violation, plus three times the remuneration involved or the amount claimed and exclusion from participation in all federally funded healthcare programs. Our exclusion from participation in such programs would have a material adverse effect on our business, prospects, results of operations and financial condition. In addition, many of the states in

 

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which we operate have also adopted laws, similar to the Anti-Kickback Statute, that prohibit payments to physicians in exchange for referrals, some of which apply regardless of the source of payment for care. These statutes typically impose criminal and civil penalties, including the loss of a license to do business in the state.

In July 1991, the U.S. Department of Health and Human Services, or HHS, issued final regulations defining various “safe harbors” under the Anti-Kickback Statute. Business arrangements that meet the requirements of the safe harbors are not treated as criminal violations under the Anti-Kickback Statute. Business arrangements that do not meet the safe harbor requirements do not necessarily violate the Anti-Kickback Statute, but may be subject to scrutiny by the federal government to determine compliance. Two of the original safe harbors issued in 1991 apply to business arrangements similar to those used in connection with our surgical facilities: the “investment interest” safe harbor and the “personal services and management contracts” safe harbor. However, the structure of the partnerships and limited liability companies operating our surgery centers and surgical hospitals, as well as our various business arrangements involving physician group practices, do not satisfy all of the requirements of either safe harbor.

On November 19, 1999, HHS promulgated final regulations creating additional safe harbor provisions, including a safe harbor that applies to physician ownership of or investment interests in surgery centers. The surgery center safe harbor protects four types of investment arrangements: (1) surgeon owned surgery centers; (2) single specialty surgery centers; (3) multi-specialty surgery centers; and (4) hospital/physician surgery centers. Each category has its own requirements with regard to what type of physician may be an investor in the surgery center. In addition to the physician investor, the categories permit an “unrelated” investor, who is a person or entity that is not in a position to provide items or services related to the surgery center or its investors. Our business arrangements with our surgical facilities typically consist of one of our subsidiaries being an investor in each partnership or limited liability company that owns the facility, in addition to providing management and other services to the facility. Therefore, our business arrangements with our surgery centers, surgical hospitals and physician groups do not qualify for “safe harbor” protection from government review or prosecution under the Anti-Kickback Statute, however, we attempt to otherwise structure our surgery centers to fit as closely as possible within the safe harbor. When a transaction or relationship does not fit within a safe harbor, it does not mean that an Anti-Kickback Statute violation has occurred; rather, it means that the facts and circumstances as well as the intent of the parties related to a specific transaction or relationship must be examined to determine whether or not any illegal conduct has occurred.

We employ dedicated marketing personnel whose job functions include the recruitment of physicians to perform surgery at our centers. These employees are paid a base salary plus a productivity bonus. We believe our employment arrangements with these employees are consistent with a safe harbor provision designed to protect payments made to employees. However, a government agency or private party may assert a contrary position.

We also enter into lease agreements with physicians from time to time for the rental of space for our surgical facilities. We seek to structure these lease agreements so that they are in compliance with the Anti-Kickback Statute safe harbor provision regarding real estate leases. However, a government agency or private party may assert a contrary position.

If any of our business arrangements with physicians or sales and marketing personnel were alleged or deemed to violate the Anti-Kickback Statute or similar laws, or if new federal or state laws were enacted rendering these arrangements illegal, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

If we fail to comply with physician self-referral laws as they are currently interpreted or may be interpreted in the future, or if other legislative restrictions are issued, we could incur substantial monetary penalties and a significant loss of revenue.

The federal physician self-referral law, commonly referred to as the Stark Law, prohibits a physician from making a Medicare or Medicaid reimbursed referral for a “designated health service” to an entity if the

 

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physician or a member of the physician’s immediate family has a “financial relationship” with the entity unless an exception applies. The list of “designated health services” under the Stark Law does not generally include ambulatory surgery services, but it does include services such as clinical laboratory services, and certain imaging services that may be provided and separately billed by an ASC. Under the current Stark Law and related regulations, services provided at an ASC are not covered by the statute, even if those services include imaging, laboratory services or other Stark designated health services, provided that (i) the ASC does not bill for these services separately, or (ii) if the center is permitted to bill separately for these services, they are specifically exempted from Stark Law prohibitions. These are generally radiology and other imaging services integral to performance of surgical procedures that meet certain requirements and certain outpatient prescription drugs. We believe that services provided at our facilities licensed as hospitals are covered by the Stark Law, but referrals for such services are exempt from the Stark Law under its “whole hospital exception,” which was significantly amended by the Affordable Care Act. We also believe that certain services provided by our managed physician network are covered by the Stark Law, but referrals for those services are exempt from the Stark Law under its “in-office ancillary services exception,” among others. Our diagnostic laboratory is also subject to the Stark Law, but we believe that we have structured our agreements with physicians so as to not violate the Stark Law and related regulations.

The Stark Law and similar state statutes are subject to different interpretations with respect to many important provisions. Violations of these self-referral laws may result in substantial civil or criminal penalties, including treble damages for amounts improperly claimed, civil monetary penalties of up to $15,000 per prohibited service billed, up to $100,000 per prohibited circumvention scheme and exclusion from participation in the Medicare and Medicaid and other federal and state healthcare programs. Violations of the Stark Law will also create liability under the federal False Claims Act. Exclusion of our ASCs or hospitals from these programs through judicial or agency interpretation of existing laws or additional legislative restrictions on physician ownership or investments in healthcare entities could result in a significant loss of reimbursement revenue. We cannot provide assurances that CMS will not undertake other rulemaking to address additional revisions to or interpretations of the Stark Law regulations. If future rules modify the provisions of the Stark Law regulations that are applicable to our business, our revenue and profitability could be materially adversely affected and could require us to modify our relationships with our physician and healthcare system partners.

Federal law restricts the ability of our surgical hospitals to expand surgical capacity.

The Stark Law includes an exception that permits physicians to refer Medicare and Medicaid patients to hospitals in which they have an ownership interest if certain requirements are met. However, the Affordable Care Act dramatically curtailed this exception and prohibits physician ownership in hospitals that did not have a Medicare provider agreement by December 31, 2010. This prohibition does not apply to any of our five surgical hospitals, each of which had a Medicare provider agreement in place prior to December 31, 2010 and are therefore able to continue operating with their existing ownership structure. However, the Affordable Care Act prohibits “grandfathered” hospitals from increasing their percentage of physician ownership, and it limits to a certain extent their ability to grow, because it prohibits such hospitals from increasing the aggregate number of inpatient beds, operating rooms and procedure rooms.

Companies within the healthcare industry continue to be the subject of federal and state audits and investigations, and we may be subject to such audits and investigations, including actions for false and other improper claims.

Federal and state government agencies, as well as commercial payors, have increased their auditing and administrative, civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare organizations. These audits and investigations relate to a wide variety of topics, including the following: cost reporting and billing practices; quality of care; financial reporting; financial relationships with referral sources; and medical necessity of services provided. In addition, the Office of the Inspector General of the U.S. Department of Health and Human Services (the “OIG”) and the U.S. Department of Justice (“DOJ”) have, from

 

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time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. In its 2013 Work Plan, the OIG stated its intention to review the safety and quality of care for Medicare beneficiaries having surgeries and procedures in ambulatory surgery centers and hospital outpatient departments. We have not received any material related audit letters to date.

The federal government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs and other federal and state healthcare programs. Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes, as well as penalties under the anti-fraud provisions of the HIPAA (as defined below). While the criminal statutes are generally reserved for instances of fraudulent intent, the federal government is applying its criminal, civil and administrative penalty statutes in an ever-expanding range of circumstances, including claiming payment for unnecessary services if the claimant merely should have known the services were unnecessary and claiming payment for low-quality services if the claimant should have known that the care was substandard. In addition, a violation of the Stark Law or the Anti-Kickback Statute can result in liability under the FCA.

Over the past several years, the federal government has investigated an increasing number of healthcare providers for potential FCA violations, which, among other things, prohibits a person from knowingly presenting, or causing to be presented, a false or fraudulent claim to the federal government. The statute defines “knowingly” to include not only actual knowledge of a claim’s falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a claim. Violators of the FCA are subject to severe financial penalties, including treble damages and per claim penalties in excess of $10,000. Because our facilities perform hundreds or thousands of similar procedures each year for which they are paid by Medicare, and since the statute of limitations for such claims extends for six years under normal circumstances (and possibly as long as ten years in the event of failure to discover material facts), a repetitive billing error or cost reporting error could result in significant, material repayments and civil or criminal penalties.

Moreover, another trend impacting healthcare providers is the increased use of the FCA, particularly by individuals who bring actions under that law. Under the “qui tam,” or whistleblower, provisions of the FCA, private parties may bring actions on behalf of the federal government. If the government intervenes and prevails in the action, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil monetary penalties of between $5,500 and $11,000 for each false claim submitted to the government. These private parties, often referred to as relators, are entitled to share in any amounts recovered by the government through trial or settlement. These qui tam cases are sealed by the court at the time of filing. The only parties privy to the information contained in the complaint are the relator, the federal government and the presiding court. It is possible that qui tam lawsuits have been filed against us and that we are unaware of such filings. Both direct enforcement activity by the government and whistleblower lawsuits under the FCA have increased significantly in recent years; thus, the risk that we will have to defend a false claims action, pay significant fines or be excluded from the Medicare and Medicaid programs has increased.

In addition, the Fraud Enforcement and Recovery Act of 2009 (“FERA”) further expanded the scope of the FCA to create liability for knowingly and improperly avoiding or decreasing an obligation to pay money to the federal government and FERA, along with statutory provisions found in the Acts, created federal False Claims Act liability for the knowing failure to report and return an overpayment within 60 days of the identification of the overpayment or, in certain cases, the date by which a corresponding cost report is due, whichever is later. Governmental authorities may challenge or scrutinize our operations or we may be the subject of a whistleblower lawsuit at any time. A determination that we have violated these laws could have a material adverse effect on our business, prospects, results of operations and financial condition.

The federal Health Insurance Portability and Accountability Act of 1996, as amended and its implementing regulations in effect from time to time (“HIPAA”) also created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud

 

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any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

In addition, a person who offers or transfers to a Medicare or Medicaid beneficiary any remuneration, including waivers of co-payments and deductible amounts (or any part thereof), that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services may be liable for civil monetary penalties of up to $10,000 for each wrongful act. Moreover, in certain cases, providers who routinely waive copayments and deductibles for Medicare and Medicaid beneficiaries can also be held liable under the Anti-Kickback Statute and civil False Claims Act, which can impose additional penalties associated with the wrongful act. Although this prohibition applies only to federal healthcare program beneficiaries, the routine waivers of copayments and deductibles offered to patients covered by commercial payors may implicate applicable state laws related to, among other things, unlawful schemes to defraud, excessive fees for services, tortious interference with patient contracts and statutory or common law fraud. To the extent our patient assistance programs or other discount policies are found to be inconsistent with applicable laws, we may be required to restructure or discontinue such programs, or be subject to other significant penalties.

To enforce compliance with the federal laws, the DOJ has recently increased its scrutiny of interactions between health care companies and health care providers, which has led to a number of investigations, prosecutions, convictions and settlements in the health care industry. Dealing with investigations can be time and resource consuming and can divert management’s attention from the business. In addition, settlements with the DOJ or other law enforcement agencies have forced healthcare providers to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.

We are also subject to various state laws and regulations, as well as contractual provisions with commercial payors that prohibit us from submitting inaccurate, incorrect or misleading claims. We cannot be sure that none of our surgical facilities’ claims will ever be challenged. If we were found to be in violation of a state’s laws or regulations, or of a commercial payor contract, we could be forced to discontinue the violative practice and be subject to recoupment actions, fines and criminal penalties, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

All payors are increasingly conducting post-payment audits. For example, CMS has implemented the RAC program, involving Medicare claims audits nationwide. Under the program, CMS contracts with RACs on a contingency fee basis to conduct post-payment reviews to detect and correct improper payments in the fee-for-service Medicare program. The Affordable Care Act expanded the RAC program’s scope to include managed Medicare plans and to include Medicaid claims. In addition, CMS employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. The Affordable Care Act increases federal funding for the MIC program. In addition to RACs and MICs, the state Medicaid agencies and other contractors have increased their review activities. We are regularly subject to these external audits and we also perform both internal and third-party audits and monitoring. For instance, recently HMS Federal Solutions, a MIC, completed an audit of one of our surgical hospitals for the period July 1, 2009 through May 31, 2012 and determined an overpayment obligation in the amount of approximately $4.6 million based on its extrapolation of a statistical sampling of claims, as well as a civil monetary penalty in the amount of $162,000, for a total amount owed to Idaho’s Department of Health and Welfare, Medicaid Program Integrity Unit of approximately $4.7 million for failure to comply with Medicaid rules by billing for (i) non-covered services, (ii) services provided by non-eligible providers, (iii) services not provided and (iv) unauthorized services. We are in the process of preparing an appeal to the audit. Although all other repayments requested to date as a result of RAC, MIC and ZPIC audits have not been material to our Company, we are unable to quantify the financial

 

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impact of these audits on our facilities given the pending appeals and uncertainty about the extent of future audits and whether the underlying conduct could be considered systemic. As such, the resolution of these audits could have a material adverse effect on our business, prospects, results of operations and financial condition.

Failure to comply with Medicare’s conditions for coverage and conditions of participation may result in loss of program payment or other governmental sanctions.

To participate in and receive payment from the Medicare program, our facilities must comply with regulations promulgated by CMS. These regulations, known as “conditions for coverage” for ASCs and “conditions of participation” for hospitals, set forth specific requirements with respect to, among other things, the facility’s physical plant, equipment, personnel and standards of medical care. All of our surgery centers and surgical hospitals are certified to participate in the Medicare program. As such, these facilities are subject to on-site, unannounced surveys by state survey agencies working on behalf of CMS. Under the ASC survey process, the surveyors are becoming more familiar with expanded interpretive guidance and the updated ASC conditions for coverage, which may lead to an increased number of deficiency citations requiring remedy with appropriate action plans. Failure to comply with Medicare’s conditions for coverage or conditions of participation may result in loss of payment or other governmental sanctions, including termination from participation in the Medicare program. We have established ongoing quality assurance activities to monitor our facilities’ compliance with these conditions and respond to surveys, but we cannot be sure that our facilities are or will always remain in full compliance with the requirements.

Our use and disclosure of personally identifiable information, including health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.

The Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (the “HITECH Act”), and their implementing regulations (collectively referred to as “HIPAA”) as well as numerous other federal and state laws and regulations, govern the collection, dissemination, use, privacy, security, confidentiality, integrity and availability of personally identifiable information (“PII”), including protected health information (“PHI”). HIPAA applies national privacy and security standards for PHI to covered entities such as us. HIPAA requires covered entities to maintain policies and procedures governing PHI that is used or disclosed, and to implement administrative, physical and technical safeguards to protect PHI, including PHI maintained, used and disclosed in electronic form. These safeguards include teammate training, identifying “business associates” with whom we need to enter into HIPAA-compliant contractual arrangements and various other measures. Ongoing implementation and oversight of these measures involves significant time, effort and expense. While we undertake substantial efforts to secure the PHI we maintain, use and disclose in electronic form, a cyber-attack or other intrusion that bypasses our information security systems causing an information security breach, loss of protected health information or other data subject to privacy laws or a material disruption of our operational systems could result in a material adverse impact on our business, along with potentially substantial fines and penalties. Ongoing implementation and oversight of these security measures involves significant time, effort and expense.

HIPAA also requires our surgical facilities to use standard transaction code sets and identifiers for certain standardized healthcare transactions, including billing and other claim transactions. We have undertaken significant efforts involving substantial time and expense to implement these requirements, and we anticipate that continual time and expense will be required to submit standardized transactions and to ensure that any newly acquired facilities can submit HIPAA-compliant transactions.

HIPAA requires covered entities to report breaches of unsecured protected health information to affected individuals without unreasonable delay and in no case later than 60 days after the discovery of the breach by the covered entity or its agents. Notification must also be made to HHS and, in certain situations involving large breaches, to the media. The HIPAA rules created a presumption that all non-permitted uses or disclosures of

 

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unsecured protected health information are breaches unless the covered entity establishes that there is a low probability the information has been compromised. HIPAA imposes mandatory civil and criminal penalties for violations of its requirements ranging up to $50,000 per violation, with a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement. However, a single breach incident can result in violations of multiple requirements, resulting in possible penalties well in excess of $1.5 million. In addition, the HITECH Act authorized state attorneys general to bring civil actions seeking either an injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents.

HIPAA also authorizes state attorneys general to bring civil actions seeking either an injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA’s requirements, its standards have been used as a basis for the duty of care in state civil suits, such as those for negligence or recklessness in the handling of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities such as us.

In addition, many states in which we operate may impose laws that are more protective of the privacy and security of PII than HIPAA. Where these state laws are more protective than HIPAA, we have to comply with their stricter provisions. Note only may some of these state laws impose fines and penalties upon violators, but some may afford private rights of action to individuals who believe their PII has been misused. California’s patient privacy laws, for example, provide for penalties of up to $250,000 and permit injured parties to sue for damages. Both state and federal laws are subject to modification or enhancement of privacy protection at any time. Our facilities will continue to remain subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These statutes vary and could impose additional requirements on us and more severe penalties for disclosures of confidential health information. New health information standards could have a significant effect on the manner in which we do business, and the cost of complying with new standards could be significant. We may not remain in compliance with the diverse privacy requirements in all of the jurisdictions in which we do business. If we fail to comply with HIPAA or similar state laws, we could incur substantial civil monetary or criminal penalties.

If we are unable to integrate and operate our information systems effectively or implement new systems and processes, our operations could be disrupted.

Our operations depend significantly on effective information systems, which require continual maintenance, upgrading and enhancement to meet our operational needs. Any system failure that causes an interruption in service or availability of our systems could adversely affect operations or delay the collection of revenue. Moreover, we use the development and implementation of sophisticated and specialized technology to improve our profitability, our growth and acquisition strategy will require frequent transitions and integration of various information systems. If we are unable to properly integrate other information systems or expand our current information systems it may have an adverse effect on our ability to obtain new business, retain existing business and maintain or increase our profit margins and we could suffer, among other things, operational disruptions, disruptions in cash flows and increases in administrative expenses.

Information security risks have generally increased in recent years because of threats from malicious persons and groups, new vulnerabilities, the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. A failure in or breach of our operational or information security systems as a result of cyber-attacks or information security breaches could disrupt our business, result in the loss, disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs or lead to fines and financial losses. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. Although we believe that we have robust information security procedures and other safeguards in place, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities.

 

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Failure of the Company, third-party payors or physicians to comply with the ICD-10-CM Code Set by the compliance date of October 1, 2015, could negatively impact our reimbursement, profitability and cash flow.

Health plans and providers, including our facilities, are required to transition to the new ICD-10 coding system, which greatly expands the number and detail of billing codes used for third-party claims. Use of the ICD-10 system is required beginning October 1, 2015. In addition, beginning on January 1, 2014, health care providers were required to comply with the Operating Rules for electronic funds transfers and remittance advice transactions. The Company will continue its assessment and remediation of computer systems, applications and processes for compliance with these requirements. Our facilities, physicians and laboratories are typically required to submit health care claims with diagnosis codes to third-party payors. The diagnosis codes must be obtained from the ordering physician. The failure of the Company, third-party payors or physicians to transition within the required timeframe could have an adverse impact on reimbursement and cash collections.

Efforts to regulate the construction, acquisition or expansion of healthcare facilities could prevent us from acquiring additional surgical facilities, renovating our existing facilities or expanding the breadth of services we offer.

Some states require prior approval for the construction, acquisition or expansion of healthcare facilities or expansion of the services the facilities offer. In giving approval, these states consider the need for additional or expanded healthcare facilities or services, as well as the financial resources and operational experience of the potential new owners of existing healthcare facilities. In many of the states in which we currently operate, certificates of need must be obtained for capital expenditures exceeding a prescribed amount, changes in capacity or services offered and various other matters. The remaining states in which we now or may in the future operate may adopt similar legislation. Our costs of obtaining a certificate of need could be significant, and we cannot assure you that we will be able to obtain the certificates of need or other required approvals for additional or expanded surgical facilities or services in the future. In addition, at the time we acquire a surgical facility, we may agree to replace or expand the acquired facility. If we are unable to obtain required approvals, we may not be able to acquire additional surgical facilities, expand healthcare services we provide at these facilities or replace or expand acquired facilities.

If antitrust enforcement authorities conclude that our market share in any particular market is too concentrated, that our or our health system partners’ commercial payor contract negotiating practices are illegal, or that we other violate antitrust laws, we could be subject to enforcement actions that could have a material adverse effect on our business, prospects, results of operations and financial condition.

The federal government and most states have enacted antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. These laws prohibit price fixing, concerted refusal to deal, market monopolization, price discrimination, tying arrangements, acquisitions of competitors and other practices that have, or may have, an adverse effect on competition. Violations of federal or state antitrust laws can result in various sanctions, including criminal and civil penalties. Antitrust enforcement in the healthcare industry is currently a priority of the Federal Trade Commission (the “FTC”). We believe we are in compliance with federal and state antitrust laws, but courts or regulatory authorities may reach a determination in the future that could have a material adverse effect on our business, prospects, results of operations and financial condition.

The healthcare laws and regulation to which we are subject is constantly evolving and may change significantly in the future.

The regulation applicable to our business and to the healthcare industry generally to which we are subject is constantly in a state of flux. While we believe that we have structured our agreements and operations in material compliance with applicable healthcare laws and regulations, there can be no assurance that we will be able to successfully address changes in the current regulatory environment. We believe that our business

 

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operations materially comply with applicable healthcare laws and regulations. However, some of the healthcare laws and regulations applicable to us are subject to limited or evolving interpretations, and a review of our business or operations by a court, law enforcement or a regulatory authority might result in a determination that could have a material adverse effect on us. Furthermore, the healthcare laws and regulations applicable to us may be amended or interpreted in a manner that could have a material adverse effect on our business, prospects, results of operations and financial condition.

Risks Related to Our Common Stock and this Offering

We expect to be a “controlled company” within the meaning of NASDAQ rules and, if so, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After the completion of this offering, an affiliate of our Sponsor will continue to control a majority of the voting power of our outstanding common stock (based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus). As a result, we will be a “controlled company” within the meaning of the corporate governance standards of NASDAQ. Under these rules, a company of which more than a majority of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements including:

 

    the requirement that a majority of the board of directors consist of independent directors;

 

    the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

    the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

Following this offering we intend to utilize certain of these exemptions. As a result, we will not have a majority of independent directors and we will not have a nominating and corporate governance committee. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ.

Our Sponsor, however, is not subject to any contractual obligation to retain its controlling interest, except that it has agreed, subject to certain exceptions, not to sell or otherwise dispose of any shares of our common stock or other capital stock or other securities exercisable or convertible therefor for a period of at least 180 days after the date of this prospectus without the prior written consent of certain of the underwriters. Except for this period, there can be no assurance as to the period of time during which our Sponsor will maintain its ownership of our common stock following the closing of this offering. Further, in the event that the gross proceeds from this offering exceed $350 million, certain of the selling stockholders named in this prospectus, including an affiliate of our Sponsor, may sell shares of our common stock in the offering on a pro rata basis. Each additional 50,000 shares of our common stock sold by such affiliate of our Sponsor would further decrease our Sponsor’s ownership in us by 0.1% (based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus). In the event that the ownership percentage of our Sponsor, together with its affiliates, goes below 50% as a result of any such sales, we will not be a “controlled company” and will not be able to rely on exemptions from the aforementioned corporate governance requirements.

 

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We are an “emerging growth company,” as defined in the Securities Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a non-binding shareholder advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, our stockholders may not have access to certain information that they may deem important. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if our total annual gross revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt during any three-year period, or if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.

The stock market in general has been highly volatile. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our operating performance or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this prospectus and others such as:

 

    variations in our operating performance and the performance of our competitors;

 

    actual or anticipated fluctuations in our quarterly or annual operating results;

 

    publication of research reports by securities analysts about us or our competitors or our industry;

 

    announcements by us, our competitors or our vendors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

 

    our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;

 

    additions and departures of key personnel;

 

    strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

 

    the passage of legislation or other regulatory developments affecting us or our industry;

 

    speculation in the press or investment community;

 

    changes in accounting principles;

 

    terrorist acts, acts of war or periods of widespread civil unrest;

 

    natural disasters and other calamities; and

 

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    changes in general market and economic conditions.

In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

There has been no prior public market for our common stock and an active, liquid trading market for our common stock may not develop.

Prior to this offering, there has not been a public market for our common stock. We cannot assure you that an active trading market will develop after this offering or how active and liquid that market may become. Although we have applied to have our common stock approved for listing on NASDAQ, we do not know whether third parties will find our common stock to be attractive or whether firms will be interested in making a market in our common stock. If an active and liquid trading market does not develop, you may have difficulty selling any of our common stock that you purchase. The initial public offering price for the shares will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all, and may suffer a loss on your investment.

Your percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which stockholders vote.

Following the closing of this offering, our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock.

There may be sales of a substantial amount of our common stock after this offering by our current stockholders, and these sales could cause the price of our common stock to fall.

After this offering, there will be 48,156,990 shares of common stock outstanding. Of our issued and outstanding shares, all the common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”). Following completion of this offering, approximately 65.0% of our outstanding common stock (or 60.9% if the underwriters exercise in full their option to purchase additional shares from the selling stockholders) will be held by an affiliate of our Sponsor and our executive officers (based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus). In the event that the gross proceeds from the offering exceed $350 million, certain of the selling stockholders named in this prospectus, including an affiliate of our Sponsor, may sell shares of our common stock in the offering on a pro rata basis, in addition to any shares sold in connection with the underwriters’ option to purchase additional shares from such selling stockholders as described in this prospectus.

Each of our directors and executive officers and all of our equity holders (including affiliates of our Sponsor) have entered into a lock-up agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co. and Jefferies LLC, as representatives on behalf of the underwriters, which regulates their sales of our common stock for a period of 180 days after the date of this prospectus, subject to certain exceptions and automatic extensions in certain circumstances. See the section entitled “Shares Eligible for Future Sale—Lock-Up Agreements” in this prospectus.

 

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Sales of substantial amounts of our common stock in the public market after this offering, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future. Of the shares to be outstanding after the closing of this offering, the shares offered by this prospectus will be eligible for immediate sale in the public market without restriction by persons other than our affiliates.

Beginning 180 days after this offering, subject to certain exceptions and automatic extensions in certain circumstances, holders of shares of our common stock may require us to register their shares for resale under the federal securities laws, and holders of additional shares of our common stock would be entitled to have their shares included in any such registration statement, all subject to reduction upon the request of the underwriter of the closing of this offering, if any. See the section entitled “Related Party Transactions—Arrangements With Our Investors” in this prospectus. Registration of those shares would allow the holders to immediately resell their shares in the public market. Any such sales or anticipation thereof could cause the market price of our common stock to decline.

Provisions in our charter documents and Delaware law may deter takeover efforts that could be beneficial to stockholder value.

Our certificate of incorporation and by-laws and Delaware law contain provisions that could make it harder for a third party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include a classified board of directors and limitations on actions by our stockholders. In addition, our board of directors has the right to issue preferred stock without stockholder approval that could be used to dilute a potential hostile acquiror. Our certificate of incorporation also imposes some restrictions on mergers and other business combinations between us and any holder of 15.0% or more of our outstanding common stock other than affiliates of our Sponsor. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the Company may be unsuccessful. See the section entitled “Description of Capital Stock” in this prospectus.

Our amended and restated certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a “Covered Proceeding”). In addition, our amended and restated certificate of incorporation provides that if any action the subject matter of which is a Covered Proceeding is filed in a court other than the specified Delaware courts without the approval of our board of directors (each, a “Foreign Action”), the claiming party will be deemed to have consented to (i) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (ii) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the Foreign Action as agent for such claiming party. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to these provisions. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of

 

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incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

If you purchase shares in this offering, you will suffer immediate and substantial dilution.

If you purchase shares of our common stock in this offering, you will incur immediate and substantial dilution in the pro forma book value of your stock, which would have been $(17.56) per share as of June 30, 2015 based on an assumed initial public offering price of $24.50 per share (the midpoint of the offering range shown on the cover of this prospectus), because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. You will experience additional dilution upon the exercise of options and warrants to purchase our common stock, including those options currently outstanding and those granted in the future, and the issuance of restricted stock or other equity awards under our stock incentive plans. To the extent we raise additional capital by issuing equity securities, our stockholders will experience substantial additional dilution. See the section entitled “Dilution” in this prospectus.

Our Sponsor will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of key transactions, including a change of control.

We are currently controlled, and after this offering is completed we expect to continue to be controlled, by our Sponsor. Upon completion of this offering, an affiliate of our Sponsor will beneficially own 57.6% of our outstanding common stock (53.9% if the underwriters exercise in full their option to purchase additional shares from the selling stockholders), based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus. For as long as our Sponsor continues to beneficially own shares of common stock representing more than a majority of the voting power of our common stock, it will be able to direct the election of all of the members of our board of directors and could exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends. Similarly, our Sponsor will have the power to determine matters submitted to a vote of our stockholders without the consent of our other stockholders, will have the power to prevent a change in our control and could take other actions that might be favorable to it. Even if our Sponsor ceases to beneficially own a majority of the voting power of our common stock, it will continue to be able to strongly influence or effectively control our decisions. In the event that the gross proceeds from this offering exceed $350 million, certain of the selling stockholders named in this prospectus, including an affiliate of our Sponsor, may sell shares in the offering on a pro rata basis. Each additional 50,000 shares of our common stock sold by such affiliate of our Sponsor would further decrease our Sponsor’s ownership in us by 0.1% (based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus). In the event that the ownership percentage of our Sponsor, together with its affiliates, goes below 50% as a result of any such sales, we will not be a “controlled company” and will not be able to rely on exemptions from the aforementioned corporate governance requirements.

Additionally, our Sponsor is in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly with us. Our Sponsor may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

 

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Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our senior credit facility. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

As a result of becoming a public company, we will be obligated to report on the effectiveness of our internal controls over financial reporting. These internal controls may not be effective and our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

We are not currently required to comply with SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. However, at such time as Section 302 of the Sarbanes-Oxley Act is applicable to us, which we expect to occur immediately following effectiveness of this registration statement, we will be required to evaluate our internal controls over financial reporting. Furthermore, at such time as we cease to be an “emerging growth company”, as more fully described in “—We are an “emerging growth company,” as defined in the Securities Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors,” we will also be required to comply with Section 404 of the Sarbanes-Oxley Act. At such time, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent registered public accounting firm.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an “emerging growth company” under the JOBS Act.

Following the completion of this offering, we will be required to comply with various regulatory and reporting requirements, including those required by the SEC. Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us and could have a material adverse effect on our business, results of operations and financial condition.

As a public company, we will be subject to the reporting requirements of the Exchange Act, and requirements of the Sarbanes-Oxley Act. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and

 

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provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We also expect that operating as a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. This could also make it more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees, or as executive officers.

Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, and other regulatory action and potentially civil litigation, which could have a material adverse effect on our financial condition and results of operations.

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We will remain an “emerging growth company” for up to five years, although we may cease to be an emerging growth company earlier under certain circumstances. See “—We are an “emerging growth company,” as defined in the Securities Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors” for additional information on when we may cease to be an emerging growth company. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our Company, the trading price for our common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price and trading volume to decline.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements.” These forward-looking statements can generally be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “potentially,” “can,” “should,” “seeks,” “projects,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this prospectus and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industries in which we and our partners operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). We believe that these risks and uncertainties include, but are not limited to, those described in the section entitled “Risk Factors,” which include but are not limited to the following:

 

    reductions in payments from government healthcare programs and managed care organizations;

 

    inability to contract with private third-party payors;

 

    failure to fully integrate the operations of Surgery Partners and legacy Symbion;

 

    changes in our payor mix or surgical case mix;

 

    failure to maintain relationships with our physicians;

 

    payor controls designed to reduce the number of surgical procedures;

 

    inability to integrate operations of acquired surgical facilities, attract new physician partners, or acquire additional surgical facilities;

 

    shortages or quality control issues with surgery-related products, equipment and medical supplies;

 

    competition for physicians, nurses, strategic relationships, acquisitions and managed care contracts;

 

    inability to enforce non-compete restrictions against our physicians;

 

    material liabilities incurred as a result of acquiring surgical facilities;

 

    litigation or medical malpractice claims;

 

    changes in the regulatory, economic and other conditions of the states where our surgical facilities are located; and

 

    substantial payments we expect to be required to make under the tax receivable agreement.

These factors should not be construed as exhaustive and should be read with the other cautionary statements in this prospectus.

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performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this prospectus, those results or developments may not be indicative of results or developments in subsequent periods.

You are cautioned not to place undue reliance on the forward-looking statements contained in this prospectus as predictions of future events, and we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements contained in this prospectus will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.

Any forward-looking statement that we make in this prospectus speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.

You should read this prospectus and the documents that we have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. We qualify all forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of our common stock in this offering will be approximately $324.9 million, based upon an assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated offering expenses and underwriting discounts and commissions payable by us. We will not receive the proceeds from the sale of shares of our common stock by the selling stockholders, if any, pursuant to the underwriters’ option to purchase additional shares, or in the event that the aggregate gross proceeds from this offering exceed $350 million and certain of the selling stockholders named in this prospectus, including an affiliate of our Sponsor, sell shares in the offering in addition to any shares sold pursuant to the underwriters’ option to purchase additional shares. For more information about the selling stockholders, see “Principal and Selling Stockholders.”

We intend to use all of the net proceeds from this offering that we receive to repay a portion of the borrowings outstanding under our Second Lien Term Loan and to pay fees and expenses associated with this offering.

As of June 30, 2015, we had $472.8 million (after giving effect to discount and issuance costs) outstanding under our Second Lien Term Loan at a floating annual interest rate of 7.5%, plus the adjusted LIBOR Rate. The Second Lien Term Loan, which was issued on November 3, 2014 and is set to mature on November 3, 2021, provides for aggregate commitments of $490.0 million. We used the proceeds of the Second Lien Term Loan, together with the proceeds of our First Lien Term Loan, to (a) pay a portion of the Symbion acquisition purchase price and (b) refinance existing debt (including accrued and unpaid interest and applicable premiums) including the repayment of all of the $522.1 million outstanding under the 2013 Credit Facilities. If we voluntarily prepay all or a portion of the Second Lien Term Loan on or prior to the first anniversary of the closing date of the Symbion acquisition, we must prepay 103% of the aggregate principal amount of the Second Lien Term Loan. For additional information related to our outstanding loan, including a detailed description of the maturity and interest rate, see the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Long-Term Debt—Second Lien Term Loan” and “Description of Indebtedness—Second Lien Term Loan” in this prospectus.

A $1.00 increase (decrease) in the assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds from this offering by $13.4 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated offering expenses and underwriting discounts and commissions payable by us. Certain of the selling stockholders named in this prospectus, including an affiliate of our Sponsor, may sell shares of our common stock in the offering on a pro rata basis in the event that gross proceeds from the offering exceed $350 million. We will not receive any proceeds from the sale of shares by any of the selling stockholders.

 

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DIVIDEND POLICY

Our board of directors does not currently intend to pay regular dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basis following this offering and may, subject to compliance with the covenants contained in the credit agreements governing our Term Loans and Revolving Facility, in the future determine to pay dividends. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our earnings, capital requirements, results of operations, financial condition, business prospects and other factors that our board of directors considers relevant.

 

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CAPITALIZATION

The following table sets forth the cash and cash equivalents and consolidated capitalization as of June 30, 2015 of (1) Surgery Center Holdings, Inc. on an actual basis and (2) Surgery Partners, Inc. on an as adjusted basis, giving effect to the Reorganization, our issuance and sale of shares of common stock in this offering at an assumed initial public offering price of $24.50 per share (the midpoint of the price range set forth on the cover page of this prospectus), the receipt of the estimated proceeds from this offering net of estimated underwriting discounts and commissions and estimated offering expenses, and the use of such estimated net proceeds as described under the section entitled “Use of Proceeds”.

This table should be read in conjunction with “Use of Proceeds,” “Selected Consolidated Financial and Other Data,” “Unaudited Pro Forma as Adjusted Condensed Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

    

As of June 30, 2015

 
(dollars in thousands)   

Historical

   

As Adjusted

 

Cash and equivalents

   $ 47,907      $ 39,231 (1) 
  

 

 

   

 

 

 

Debt:

    

First Lien Term Loan

     843,596       
843,596
  

Second Lien Term Loan

     472,789        166,923 (2)(3) 

Subordinated Notes A

     1,000        1,000   

Notes payable and secured loans

     32,449        32,449   

Capital lease obligations

     9,869        9,869   
  

 

 

   

 

 

 

Total debt

     1,359,703        1,053,837   

Stockholders’ equity (deficit):

    

Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding, actual; 300,000,000 shares authorized and 48,156,990 shares issued and outstanding, as adjusted

     —         
482
  

Additional paid-in-capital

     61,091        387,119   

Retained deficit

     (334,424     (364,409 )(2) 
  

 

 

   

 

 

 

Total Surgery Center Holdings, Inc. stockholders’ equity

     (273,333     23,192   

Non-controlling interests—non-redeemable

     299,828        299,828   
  

 

 

   

 

 

 

Total equity

     26,495        323,020   
  

 

 

   

 

 

 

Total capitalization

   $ 1,386,198      $ 1,376,857   
  

 

 

   

 

 

 

 

(1) Represents an adjustment of $7.0 million related to the payment of a transaction fee in connection with this offering to Bayside Capital, Inc., an affiliate of our Sponsor, in accordance with the terms of our Management Agreement, and $1.7 million in offering expenses paid out of existing operating cash (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus). See “Certain Relationships and Related Party Transactions—Management Services”.
(2) The repayment of our Second Lien Term Loan includes a 3% prepayment penalty of $9.5 million (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus). This penalty is reflected in the change in retained deficit.
(3) Reflects the repayment of $317.0 million, net of $11.1 million of discount and issuance costs, on our Second Lien Term Loan from the application of the net proceeds from the offering (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).

A $1.00 increase (decrease) in the assumed initial public offering price of $24.50 per share, the midpoint of the price range set forth on the cover page of this prospectus, would (decrease) increase the outstanding amount of our Second Lien Term Loan by $13.4 million, assuming the number of shares offered, as set forth on the cover page

 

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of this prospectus, remains the same and after deducting assumed underwriting discounts and commissions and estimated offering expenses. Similarly, an increase (decrease) of one million shares of common stock sold in this offering by us would (decrease) increase the outstanding amount of our Second Lien Term Loan by $23.0 million, based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting assumed underwriting discounts and commissions and estimated offering expenses. However, in the event of an increase to the assumed initial public offering price of $24.50 per share of our common stock, the midpoint of the price range set forth on the cover page of this prospectus, the amount outstanding under our Second Lien Term Loan would be unchanged, assuming that the gross proceeds from this offering exceed $350 million and certain of the selling stockholders named in this prospectus, including an affiliate of our Sponsor, sell shares in the offering.

 

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DILUTION

If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. Dilution results from the fact that the initial public offering price per share of the common stock is substantially in excess of the book value per share of common stock attributable to the existing stockholders for the presently outstanding shares of common stock. We calculate net tangible book value per share of our common stock by dividing the net tangible book value by the number of outstanding shares of our common stock.

Our net tangible book value deficiency at June 30, 2015 was approximately $(1.1) billion, or $(33.76) per share of our common stock pro forma before giving effect to this offering. Pro forma net tangible book value deficiency per share before the offering has been determined by dividing net tangible book value (total consolidated tangible assets less total consolidated liabilities) by the number of shares of common stock outstanding at June 30, 2015. Dilution in net tangible book value deficiency per share represents the difference between the amount per share that you pay in this offering and the net tangible book value deficiency per share immediately after this offering.

After giving effect to the receipt of the estimated net proceeds from our sale of shares in this offering, assuming an initial public offering price of $24.50 per share (the midpoint of the offering range shown on the cover of this prospectus), and the application of the estimated net proceeds therefrom as described under the section entitled “Use of Proceeds,” our pro forma as adjusted net tangible book value deficiency at June 30, 2015 would have been approximately $(845.0) million, or $(17.56) per share of common stock. This represents an immediate decrease in net tangible book value deficiency per share of $16.21 to existing stockholders and an immediate increase in net tangible book value deficiency per share of $42.06 to you. The following table illustrates this dilution per share.

 

Assumed initial public offering price per share

     $ 24.50   

Net tangible book value per share at June 30, 2015

   $ (33.76  

Increase in pro forma net tangible book value per share attributable to this offering

   $ 16.21     

Pro forma net tangible book value per share after this offering

     $ (17.56

Dilution per share to new investors in this offering

     $ (42.06
    

 

 

 

The following table sets forth, as of June 30, 2015, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of common stock in this offering, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

    

Shares Purchased

   

Total Consideration

   

Average
Price
Per Share

 
    

Number

    

Percent

   

Amount

    

Percent

   

Existing stockholders

               $           $   

New investors

     14,285,000          100   $ 349,982,500          100   $ 24.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     14,285,000         100   $ 349,982,500         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. A $1.00 increase in the assumed initial public offering price of $24.50 per share of our common stock, the midpoint of the price range set forth on the cover page of this prospectus, would increase our pro forma net tangible book value deficiency after giving effect to the offering by $13.4 million, whereas a $1.00 decrease in the assumed initial public offering price of $24.50 per share of our common stock, the midpoint of the price range set forth on the cover page of this

 

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prospectus, would decrease our pro forma net tangible book value deficiency after giving effect to the offering by $13.0 million, in each case assuming no change to the number of shares of our common stock offered by us as set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated expenses payable by us. In the event that the gross proceeds from this offering exceed $350 million, certain of the selling stockholders named in this prospectus, including an affiliate of our Sponsor, may sell shares in the offering on a pro rata basis.

If the underwriters were to fully exercise their option to purchase additional shares of our common stock from the selling stockholders, the percentage of shares of our common stock held by existing stockholders would be 65.9%, and the percentage of shares of our common stock held by new investors would be 34.1%.

To the extent any outstanding options are exercised or become vested or any additional options are granted and exercised or other equity awards are granted and become vested or other issuances of shares of our common stock are made, there may be further economic dilution to new investors. The number of shares of our common stock set forth in the table above is based on shares of our common stock outstanding and does not reflect:

 

                shares of common stock reserved for issuance, and not subject to outstanding options, under the 2015 Omnibus Plan.

 

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UNAUDITED PRO FORMA AS ADJUSTED CONDENSED COMBINED FINANCIAL INFORMATION

The following tables summarize (i) the condensed combined statements of income of our subsidiary, Surgery Center Holdings, Inc., for the year ended December 31, 2014 and pro forma information for the year ended December 31, 2014, as if the Symbion acquisition had occurred on January 1, 2014, (ii) the condensed combined statements of income of Surgery Center Holdings, Inc. for the six months ended June 30, 2015, as adjusted to give effect to the Reorganization and this offering (including the use of proceeds therefrom), and (iii) consolidated balance sheet data of Surgery Center Holdings, Inc. as of June 30, 2015, as adjusted to give effect to the Reorganization and this offering (including the use of proceeds therefrom). The unaudited pro forma as adjusted condensed combined financial information has been prepared from, and should be read in conjunction with, the respective audited and unaudited historical consolidated financial statements and related notes of the Company and Symbion included in this prospectus. References to financial or other data presented as “pro forma” refer to a presentation that applies adjustments to give pro forma effect to the Symbion acquisition over the applicable time period or as of the relevant date. Where we refer to “as adjusted” financial or other data, we refer to a presentation that applies adjustments to give effect to (i) the Reorganization, (ii) this offering and (iii) the use of proceeds as described in the section entitled “Use of Proceeds.” The issuer, Surgery Partners, Inc., was formed in April 2015 and has not, to date, conducted any activities other than those incident to its formation and the preparation of this registration statement.

The Symbion acquisition has been accounted for using the acquisition method of accounting in accordance with current accounting guidance for business combinations and non-controlling interests. As a result, the total purchase price for the Symbion acquisition has been preliminarily allocated to the net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed is recognized as goodwill. The preliminary allocation reflects management’s best estimates of fair value, which are based on key assumptions of the acquisition, including prior acquisition experience, benchmarking of similar acquisitions and historical data. In addition, portions of the preliminary allocation are dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Upon completion of detail valuation studies and the final determination of fair value, we may make additional adjustments to the fair value allocation, which may differ significantly from the valuations set forth in the unaudited pro forma as adjusted condensed combined financial information. The final allocation of the purchase price will be completed within the required measurement period in accordance with the accounting guidance for business combinations, but in no event later than one year following the completion of the acquisition.

The unaudited pro forma as adjusted condensed combined statements of operations are based on estimates and assumptions, which have been made solely for the purposes of developing such pro forma information. Pro forma adjustments arising from the Symbion acquisition are derived from the estimated fair value of the assets acquired and liabilities assumed. The unaudited pro forma as adjusted condensed combined statements of operations also includes certain purchase accounting adjustments such as increased amortization expense on acquired intangible assets, changes in interest expense on the debt incurred to complete the Symbion acquisition and debt repaid as part of the Symbion acquisition as well as the tax impacts related to these adjustments. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable.

The unaudited condensed combined pro forma as adjusted financial information is not a projection of our results of operations or financial position for any future period or date. The preparation of the unaudited pro forma as adjusted condensed combined financial information requires the use of certain estimates and assumptions, which may be materially different from our actual experience.

 

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Surgery Center Holdings, Inc.

Unaudited Pro Forma As Adjusted Condensed Combined Statement of Income

Year Ended December 31, 2014

(in thousands, except for shares and per share amounts)

 

   

Historical
Surgery

Center
Holdings,  Inc.(a)

   

Historical

Symbion (b)

   

Pro Forma
Adjustments

   

Pro Forma
Surgery
Center
Holdings, Inc.

   

Reorganization
and Offering
Adjustments

   

Pro Forma
As Adjusted
Surgery Center
Holdings, Inc.

 

Revenues

  $ 403,289      $ 470,164      $ (2,159 )(c)    $ 871,294      $ —        $ 871,294   

Operating Expenses:

           

Salaries and benefits

    101,283        131,246        (1,042 )(d)      231,487        —          231,487   

Cost of sales and supplies

    92,020        121,844        (1,543 )(e)      212,321        —          212,321   

Professional and medical fees

    15,363        38,229        42 (f)      53,634        —          53,634   

Lease expense

    19,389        23,102        (564 )(g)      41,927        —          41,927   

Other operating expenses

    26,123        31,760        (471 )(h)      57,412        —          57,412   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

    254,178        346,181        (3,578     596,781        —          596,781   

General and administrative expenses

    31,452        19,219        (8,398 )(i)      42,273        —          42,273   

Depreciation and amortization

    15,061        19,261        (3,587 )(j)      30,735        —          30,735   

Provision for doubtful accounts

    9,509        12,759        (71 )(k)      22,197        —          22,197   

Income from equity investments

    (1,264     (2,573     —          (3,837     —          (3,837

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

    1,804        (108     (1,706 )(l)      (10     —          (10

Loss on debt extinguishment

    23,414        —          (23,414 )(m)      —          —          —     

Electronic health records incentives income

    (3,356     (386     —          (3,742     —          (3,742

Merger transaction costs

    21,690        2,694        (24,384 )(n)      —          —          —     

Other (income) expenses

    (6     (170     —          (176     —          (176
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    352,482        396,877        (65,138     684,221        —          684,221   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    50,807        73,287        62,979        187,073        —          187,073   

Interest expense, net

    (62,101     (48,440     6,951 (o)      (103,590     28,417 (r)      (75,173
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (11,294     24,847      $ 69,930        83,483        28,417        111,900   

Provision for income taxes

    15,758        7,853        —         23,611       —   (s)      23,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    (27,052     16,994        69,930        59,872        28,417        88,289   

(Loss) income from discontinued operations, net of taxes

    —          (3,835     3,835 (p)      —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (27,052     13,159        73,765        59,872        28,417        88,289   

Less: Net income attributable to non-controlling interests

    (38,845     (30,137     551 (q)      (68,431     —          (68,431
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Surgery Center Holdings, Inc.

  $ (65,897   $ (16,978   $ 74,316      $ (8,559   $ 28,417      $ 19,858   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) per Share:

           

Net income (loss) per share

           

Basic

  $ (65,897       $ (8,559     $ 0.41   

Diluted

  $ (65,897       $ (8,559     $ 0.41   

Weighted average common shares outstanding

           

Basic

    1,000            1,000          47,959,162 (t) 

Diluted

    1,000            1,000          48,156,990 (t) 

 

Notes to Unaudited Pro Forma As Adjusted Condensed Combined Statements of Income for the Year Ended December 31, 2014

 

(a) Represents the audited statement of operations for Surgery Center Holdings, Inc. for the twelve months ended December 31, 2014 which includes the results of operations from Symbion subsequent to the acquisition on November 3, 2014.

 

(b) Represents the unaudited statement of operations for Symbion for the period January 1, 2014 through the acquisition on November 3, 2014.

 

(c) Represents the pro forma adjustments of approximately $2.4 million for pre-acquisition revenue related to three physician practices acquired during 2014 offset by the removal of approximately $4.6 million of revenue of one of our surgical facilities located in Orange City, Florida, which was required to be divested as a condition to close the acquisition of Symbion.

 

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(d) Represents the pro forma adjustments of approximately $0.1 million of salaries and benefits related to three physician practices acquired during 2014 offset by approximately $1.1 million related to one of our surgical facilities located in Orange City, Florida, the divestiture of which was required as a condition to close the acquisition of Symbion.

 

(e) Represents the pro forma adjustments of approximately $0.1 million of cost of sales and supplies related to three physician practices acquired during 2014 offset by approximately $1.6 million related to one of our surgical facilities located in Orange City, Florida, the divestiture of which was required as a condition to close the acquisition of Symbion.

 

(f) Represents the pro forma adjustments of approximately $0.3 million of professional and medical fees related to three physician practices acquired during 2014 offset by approximately $0.3 million related to one of our surgical facilities located in Orange City, Florida, the divestiture of which was required as a condition to close the acquisition of Symbion.

 

(g) Represents the pro forma adjustments of approximately $0.2 million in lease expense related to one of our surgical facilities located in Orange City, Florida, the divestiture of which was required as a condition to close the acquisition of Symbion, Inc. and approximately $0.4 million resulting from fair value adjustments made to our lease agreements as a result of the acquisition of Symbion.

 

(h) Represents the pro forma adjustments of approximately $0.1 million of other operating expenses related to three physician practices acquired during 2014 offset by approximately $0.5 million related to of one of our surgical facilities located in Orange City, Florida, the divestiture of which was required as a condition to close the acquisition of Symbion.

 

(i) Represents the pro forma adjustments of approximately $0.9 million of additional management fees related to the amended management agreement with H.I.G. offset by the removal of approximately $0.3 million of stock based compensation expense incurred by Symbion during the period January 1, 2014 through November 3, 2014 and additional legal expenses incurred related to the acquisition. Additionally, includes pro forma adjustment of approximately $8.6 million of general and administrative expenses related to corporate employees terminated at the date of the acquisition of Symbion.

 

(j) Represents the pro forma adjustments of approximately $0.5 million in lease expense related to one of our surgical facilities located in Orange City, Florida, the divestiture of which was required as a condition to close the acquisition of Symbion and approximately $3.1 million resulting from fixed asset fair value adjustments as a result of the acquisition of Symbion.

 

(k) Represents the pro forma adjustments of approximately $0.1 million in provision for doubtful accounts related to one of our surgical facilities located in Orange City, Florida, the divestiture of which was required as a condition to close the acquisition of Symbion.

 

(l) Represents the pro forma adjustments of approximately $1.7 million in loss on disposal of investments and long-lived assets related to one of our surgical facilities located in Orange City, Florida, the divestiture of which was required as a condition to close the acquisition of Symbion.

 

(m) Represents the pro forma adjustments related to the debt extinguishment costs related to refinancing our 2013 First Lien Credit Agreement and 2013 Second Lien Credit Agreement.

 

(n) Represents the pro forma adjustments of approximately $21.7 million in merger transaction costs we incurred as part of the acquisition of Symbion, Inc. and approximately $2.7 million in merger transaction costs incurred by Symbion, Inc. for January 1, 2014 through November 3, 2014.

 

(o) Represents the pro forma adjustments of an increase of approximately $35.6 million in interest expense related to our First Lien Term Loan and Second Lien Term Loan, which replaced our 2013 First Lien Credit Agreement and 2013 Second Lien Credit Agreement, offset by approximately $42.5 million of interest expense related to Symbion, Inc.’s Senior Secured Notes, PIK Toggle Notes, and Exchangeable Notes and approximately $0.1 million in interest expense related to one of our surgical facilities located in Orange City, Florida, the divestiture of which was required as a condition to close the acquisition of Symbion.

 

(p) Represents the pro forma adjustments related to facilities located in Worcester, Massachusetts and Lynbrook, New York which Symbion had classified as discontinued operations and were disposed of during the period January 1, 2014 through November 3, 2014.

 

(q) Represents the pro forma adjustments related to the acquisition of incremental ownership interest at our surgical hospital in Idaho Falls, Idaho made by Symbion in March 2014.

 

(r) Represents the pro forma adjustments of a decrease of approximately $28.4 million in interest expense related to the repayment of $317.0 million, net of $11.1 million of discount and issuance costs, on our Second Lien Term Loan with the net proceeds of the offering (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).

 

(s) Upon the completion of the offering, we will reevaluate our use of deferred tax asset valuation allowances. In the event we release a portion of the valuation allowance, a net deferred tax asset of approximately $136.2 million would be recorded, based on the balances at June 30, 2015. The impact of this transaction would be recorded as a component of income tax expense.

 

(t) The 197,828 share difference between basic and diluted weighted average common shares outstanding is as a result of the impact of restricted shares granted upon exchange of units of Surgery Center Holdings, LLC in connection with the Reorganization that were subject to time-based vesting.

 

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Surgery Center Holdings, Inc.

Unaudited As Adjusted Condensed Combined Financial Information

Six Months Ended June 30, 2015

(in thousands, except for shares and per share amounts)

 

   

Surgery Center
Holdings, Inc.

   

Reorganization
and Offering
Adjustments

   

As Adjusted
Surgery Center
Holdings, Inc.

 

Consolidated Statement of Income Data:

     

Revenues

    $456,970        $     —          $456,970   

Operating Expenses:

     

Salaries and benefits

    122,332        —          122,332   

Cost of sales and supplies

    116,172        —          116,172   

Professional and medical fees

    30,912        —          30,912   

Lease expense

    22,056        —          22,056   

Other operating expenses

    25,859        —          25,859   
 

 

 

   

 

 

   

 

 

 

Cost of revenues

    317,331        —          317,331   

General and administrative expenses

    23,708        —          23,708   

Depreciation and amortization

    16,928        —          16,928   

Provision for doubtful accounts

    10,209        —          10,209   

Income from equity investments

    (1,546     —          (1,546)   

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

    (2,485     —          (2,485)   

Loss on debt extinguishment

    —          —          —     

Electronic health records incentives income

    —          —          —     

Merger transaction costs

    13,648        —          13,648   

Other (income) expenses

    25        —          25   
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    377,818        —          377,818   
 

 

 

   

 

 

   

 

 

 

Operating income

    79,152        —          79,152   

Interest expense, net

    (51,737     14,177 (1)      (37,560)   
 

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    27,415        14,177        41,592   

Provision for income taxes

    4,452        —          4,452   
 

 

 

   

 

 

   

 

 

 

Net (loss) income

    22,963        14,177        37,140   

Less: Net income attributable to non-controlling interests

    (35,154     —          (35,154)   
 

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Surgery Center Holdings, Inc.

  $ (12,191     $14,177      $     1,986   
 

 

 

   

 

 

   

 

 

 

Net Income (Loss) per Share:

     

Net income (loss) per share

     

Basic

  $ (12,191       $0.04   

Diluted

  $ (12,191       $0.04   

Weighted average common shares outstanding

     

Basic

    1,000          47,959,162 (2) 

Diluted

    1,000          48,156,990 (2) 

 

     Surgery
Center
Holdings, Inc.
    Reorganization
and Offering
Adjustments
    As Adjusted
Surgery Center
Holdings, Inc.
 

Consolidated Balance Sheet Data:

      

Cash and cash equivalents .

   $ 47,907      $ (8,676 )(3)    $ 39,231   

Total current assets

     271,779        (8,676 )(3)      263,103   

Total assets

   $ 1,848,148      $ (9,341 )(3)(4)    $ 1,838,807   

Current portion of long-term debt

   $ 22,784      $ —        $ 22,784   

Long-term debt, less current maturities

     1,336,919        (305,866 )(5)      1,031,053   

Total current liabilities

     165,205        —          165,205   

Total liabilities .

   $ 1,634,993      $ (305,866 )(5)    $ 1,329,127   

Non-controlling interests—redeemable

   $ 186,660      $ —        $ 186,660   

Total Surgery Center Holdings, Inc. stockholders’ equity (deficit)

   $ (273,333   $ 296,525 (6)    $ 23,192   

Noncontrolling interests—non-redeemable

     299,828        —          299,828   
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 26,495      $ 296,525 (6)    $ 323,020   

 

(1) Represents a decrease of approximately $14.2 million in interest expense related to the repayment of $317.0 million, net of $11.1 million of discount and issuance costs, on our Second Lien Term Loan with the net proceeds of the offering (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).

 

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(2) The 197,828 share difference between basic and diluted weighted average common shares outstanding is as a result of the impact of restricted shares granted upon exchange of units of Surgery Center Holdings, LLC in connection with the Reorganization that were subject to time-based vesting.
(3) Represents payment of a $7.0 million transaction fee in connection with the offering to Bayside Capital, Inc., an affiliate of our Sponsor, in accordance with the terms of our Management Agreement, and $1.7 million in offering expenses paid out of existing operating cash (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus). See “Certain Relationships and Related Party Transactions — Management Services”.
(4) Represents the reduction in the capitalized debt issuance costs of $0.7 million related to the repayment of a portion of our Second Lien Term Loan in connection with the offering (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).
(5) Represents the repayment of $317.0 million, net of $11.1 million of discount and issuance costs, on our Second Lien Term Loan from the application of the net proceeds from the offering (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).
(6) Represents the proceeds from this offering, net of the impact of underwriting discounts and commissions and estimated offering expenses, a reduction in equity due to the payment of the $7.0 million transaction fee to Bayside Capital, Inc., an additional $1.7 million in offering expenses paid out of existing operating cash and a $21.3 million loss on debt extinguishment in connection with the repayment of a portion of our Second Lien Term Loan (based on an assumed initial public offering price of $24.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus).

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present selected consolidated condensed financial information of our subsidiary, Surgery Center Holdings, Inc., which has historically been our operating company, and Symbion, Inc. as of the dates and for the periods indicated. The issuer, Surgery Partners, Inc., was formed in April 2015 and has not, to date, conducted any activities other than those incident to its formation and the preparation of this registration statement. This prospectus includes an audited balance sheet of Surgery Partners, Inc. as of May 31, 2015 and an unaudited balance sheet as of June 30, 2015, but does not include any other financial statements of Surgery Partners, Inc., as it has been incorporated solely for the purpose of effecting this offering and currently holds no material assets and does not engage in any operations.

The selected historical financial data of Surgery Center Holdings, Inc. for the years ended December 31, 2014, 2013 and 2012 and the selected historical condensed consolidated balance sheets as of December 31, 2014 and 2013 have been derived from the historical audited financial statements of Surgery Center Holdings, Inc. included elsewhere in this prospectus. The selected historical financial data of Surgery Center Holdings, Inc. for the six months ended June 30, 2015 and 2014, respectively, and selected consolidated balance sheet data as of June 30, 2015 have been derived from the unaudited condensed consolidated interim financial statements appearing elsewhere in this prospectus.

The selected historical financial data of Symbion for the years ended December 31, 2013 and 2012 have been derived from Symbion’s historical audited financial statements included elsewhere in this prospectus. The selected historical financial data of Symbion for the period ended November 3, 2014, the date of our acquisition of Symbion, have been derived from Symbion’s unaudited interim condensed consolidated financial statements for the nine-months ended September 30, 2014, included elsewhere in this prospectus, combined with its results of operations for the period from October 1, 2014 through November 3, 2014. Symbion’s unaudited interim condensed consolidated financial statements are based on assumptions and were prepared on the same basis as its audited consolidated financial statements and include, in our opinion, all adjustments, consisting of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those financial statements.

References to per share data presented as “pro forma” refer to a presentation that applies adjustments to give pro forma effect to the Symbion acquisition over the applicable time period or as of the relevant date.

Historical results are not necessarily indicative of the results to be expected for future periods.

This selected historical consolidated financial and other data should be read in conjunction with the disclosures set forth under “Capitalization,” “Unaudited Pro Forma As Adjusted Condensed Combined Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

 

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Surgery Center Holdings, Inc.

Selected Consolidated Financial Information

(in thousands, except for shares and per share amounts)

 

   

Six Months Ended

June 30,

   

Years Ended December 31,

 
   

2015

   

2014

   

2014

   

2013

   

2012

   

2011

 
    (unaudited)     (unaudited)     (audited)     (audited)     (audited)     (audited)  

Consolidated Statements of Operations Data:

           

Revenues

  $ 456,970      $ 147,294      $ 403,289      $ 284,599      $ 260,215      $ 177,876   

Operating expenses:

           

Salaries and benefits

    122,332        36,648        101,283        69,650        66,991        46,130   

Cost of sales and supplies

    116,172        32,939        92,020        61,946        54,699        41,276   

Professional and medical fees

    30,912        4,450        15,363        6,320        5,945        5,035   

Lease expense

    22,056        7,190        19,389        14,048        14,245        11,080   

Other operating expenses

    25,859        6,987        26,123        17,880        17,466        17,464   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

    317,331        88,214        254,178        169,844        159,346        120,985   

General and administrative expenses

    23,708        13,300        31,452        26,339        25,263        15,925   

Depreciation and amortization

    16,928        5,722        15,061        11,663        11,208        9,720   

Provision for doubtful accounts

    10,209        3,028        9,509        5,885        3,073        1,491   

Income from equity investments

    (1,546     —          (1,264     —          —          —     

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

    (2,485     60        1,804        2,482        832        —     

Loss on debt extinguishment

    —          1,975        23,414        9,863        —          4,853   

Electronic health records incentives income

    —          —          (3,356     —          —          —     

Merger transaction and integration costs

    13,648        117        21,690        —          —          14,563   

Other (income) expenses

    25        —          (6     297        40        113   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    377,818        112,416        352,482        226,373        199,762        167,650   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    79,152        34,878        50,807        58,226        60,453        10,226   

Interest expense, net

    (51,737     (21,514     (62,101     (32,929     (28,482     (22,367
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    27,415        13,364        (11,294     25,297        31,971        (12,141

Provision for income taxes

    4,452        4,081        15,758        7,570        6,110        (1,185
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    22,963        9,283        (27,052     17,727        25,861        (10,956

Less: Net income attributable to non-controlling interests

    (35,154     (14,009     (38,845     (26,789     (23,945     (15,388
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Surgery Center Holdings, Inc.

  $ (12,191   $ (4,726   $ (65,897   $ (9,062   $ 1,916      $ (26,344
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Statements of Cash Flow Data:

           

Net cash provided by operating activities

  $ 30,986      $ 14,876      $ 21,949      $ 49,078      $ 46,377      $ 9,057   

Net cash used in investing activities

    (12,742     (2,254     (271,016     (3,622     (3,468     (114,779

Net cash (used in) provided by financing activities

    (45,257     (19,709     310,961        (37,662     (43,061     107,476   

Net Income (Loss) per Share:

           

Net income (loss) per share

           

Basic

    (12,191     (4,726     (65,897     (9,062     1,916        (26,344

Diluted

    (12,191     (4,726     (65,897     (9,062     1,916        (26,344

Weighted average common shares outstanding

           

Basic

    1,000        1,000        1,000        1,000        1,000        1,000   

Diluted

    1,000        1,000        1,000        1,000        1,000        1,000   

 

    

June 30,

2015

     December 31,  
       

2014

    

2013

 
     (unaudited)      (audited)      (audited)  

Consolidated Balance Sheet Data (in thousands):

        

Cash and cash equivalents .

   $ 47,907       $ 74,920       $ 13,026   

Total current assets

     271,779         268,649         82,510   

Total assets

   $ 1,848,148       $ 1,858,794       $ 474,701   

Current portion of long-term debt

   $ 22,784       $ 22,088       $ 8,842   

Long-term debt, less current maturities

     1,336,919         1,339,266         418,559   

Total current liabilities

     165,205         141,391         42,454   

Total liabilities .

   $ 1,634,993       $ 1,636,669       $ 489,076   

Non-controlling interests—redeemable

   $ 186,660       $ 192,589       $ —     

Total Surgery Center Holdings, Inc. stockholders’ equity (deficit)

   $ (273,333    $ (264,082    $ (103,617

Noncontrolling interests—non-redeemable

     299,828         293,618         89,242   
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

   $ 26,495       $ 29,536       $ (14,375

Surgery Partners, Inc.

Selected Financial Information

 

    

June 30,
2015

    

May 31,

2015

 
       
     (unaudited)      (audited)  

Balance Sheet Data:

     

Common stock, $0.01 par value, 1,000 shares authorized, 100 shares issued and outstanding

   $ 1       $ 1   

Stockholder receivable

     (1      (1
  

 

 

    

 

 

 

Total stockholders’ equity

   $         —         $         —     

 

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Symbion, Inc.

Consolidated Historical Condensed Financial Information

(in thousands)

 

    

Period Ended
November 3,

2014

   

Years Ended

December 31,

 
       2013     2012  
     (unaudited)     (audited)     (audited)  

Consolidated Statements of Operations Data:

      

Revenues

   $ 470,164      $ 535,587      $ 491,804   

Operating Expenses:

      

Cost of revenues

     346,181        397,133        351,308   

General and administrative expenses

     19,219        21,976        26,901   

Depreciation and amortization

     19,261        22,993        21,360   

Provision for doubtful accounts

     12,759        11,149        10,211   

Income from equity investments

     (2,573     (4,246     (4,490

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

     (108     5,870        (6,195

Electronic health record incentives

     (386     (4,553     (1,054

Proceeds from Insurance Settlements

     (89     (919     —     

Merger Transaction Costs

     2,694        —          —     

Litigation Settlements

     (81     (233     (532
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     396,877        449,170        397,509   
  

 

 

   

 

 

   

 

 

 

Operating income

     73,287        86,417        94,295   

Interest expense, net

     (48,440     (57,982     (57,641
  

 

 

   

 

 

   

 

 

 

Income before income taxes and discontinued operations

     24,847        28,435        36,654   

Provision for income taxes

     7,853        5,330        10,939   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     16,994        23,105        25,715   

Income (loss) from discontinued operations, net of taxes

     (3,835     1,882        1,132   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     13,159        24,987        26,847   

Less: Net income attributable to non-controlling interests

     (30,137     (37,607     (38,557
  

 

 

   

 

 

   

 

 

 

Net loss attributable to Symbion, Inc.

   $ (16,978   $ (12,620   $ (11,710
  

 

 

   

 

 

   

 

 

 

Consolidated Statements of Cash Flow Data—Continuing Operations:

      

Net cash provided by operating activities

   $ 65,486      $ 61,493      $ 66,679   

Net cash used in investing activities

     (8,761     (24,788     (23,848

Net cash (used in) provided by financing activities

     (55,131     (58,942     (40,662

 

    

November 3,
2014

    

December 31,
2013

 
     (unaudited)      (audited)  

Consolidated Balance Sheet Data (in thousands):

     

Cash and cash equivalents

   $ 57,433       $ 56,026   

Working capital

     72,949         87,735   

Total current assets

     165,963         162,676   

Total assets

   $ 992,574       $ 1,006,739   

Current portion of long-term debt

   $ 83,805       $ 9,102   

Long-term debt, less current maturities

     484,190         551,046   

Total current liabilities

     166,144         74,941   

Total liabilities

   $ 793,406       $ 763,600   

Noncontrolling interests—redeemable

   $ 29,505       $ 35,150   

Total Symbion, Inc. equity

   $ 106,754       $ 136,691   

Noncontrolling interests—non-redeemable

     62,909         71,298   
  

 

 

    

 

 

 

Total stockholders’ equity

   $ 169,663       $ 207,989   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Surgery Partners, Inc. is a newly formed Delaware corporation that has not, to date, conducted any activities other than those incident to its formation and the preparation of this registration statement. The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes and other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. See the section entitled “Cautionary Note Regarding Forward-Looking Statements” in this prospectus. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this prospectus.

Executive Overview

As of August 17, 2015, we owned and operated a national network of surgical facilities and physician practices in 28 states. Our surgical facilities, which include ASCs and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, ENT, GI, general surgery, ophthalmology, orthopedics, cardiology and pain management. Some of our surgical hospitals also provide acute care services, such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care. We also provide our suite of Ancillary Services, comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services, optical services and specialty pharmacy services. As a result, we believe we are well positioned to benefit from rising consumerism and payors’ and patients’ focus on the delivery of high quality care and superior clinical outcomes in the lowest cost and care setting.

As of August 17, 2015, we owned or operated, primarily in partnership with physicians, a portfolio of 99 surgical facilities comprised of 94 ASCs and five surgical hospitals across 28 states. Of the 94 ASCs, six are managed only. As of June 30, 2015, we owned a majority interest in 71 of the surgical facilities and consolidated 88 of these facilities for financial reporting purposes. For the six months ended June 30, 2015, approximately 189,500 surgical procedures were performed in our surgical facilities, generating approximately $424.3 million in revenue, as compared to the year ended December 31, 2014, during which approximately 200,000 surgical procedures were performed in our surgical facilities, generating approximately $339.3 million in revenue. In addition to surgical facilities, we owned or operated a network of 38 physician practices as of August 17, 2015.

We continue to focus on improving our same-facility performance, selectively acquiring established facilities and developing new facilities. On November 3, 2014, we completed the acquisition of Symbion Holdings Corporation (“Symbion”), which added 55 surgical facilities, including 49 ASCs and six surgical hospitals, to our network of existing facilities. We acquired Symbion for a purchase price of $792.0 million pursuant to the terms of an Agreement and Plan of Merger dated as of June 13, 2014. At the closing of the merger, each outstanding share of common stock of Symbion was converted into the right to receive a cash payment. The Symbion acquisition was financed through the issuance of approximately $1.4 billion under our Term Loans and Revolving Facility.

We completed the merger effective November 3, 2014. At closing, we paid approximately $300.1 million in cash, including $16.2 million funded to an escrow account, and assumed approximately $472.4 million of outstanding indebtedness of Symbion, plus related accrued and unpaid interest. In connection therewith, we paid off all of the $522.1 million outstanding under the 2013 First Lien Credit Agreement, 2013 Second Lien Credit Agreement and 2013 Revolver Agreement, including accrued interest thereon, which was entirely repaid through the issuance of approximately $1.4 billion under our Term Loans and Revolving Facility. During the six months ended June 30, 2015, $2.1 million of the escrow account was funded based on a working capital settlement reducing the total amount funded on the escrow account to $14.1 million as of June 30, 2015. We received $1.2 million of the escrow disbursement reducing the cash consideration to $298.9 million and adjusted

 

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the purchase price allocation to goodwill. We are required to fund an additional $16.8 million to the escrow account by May 3, 2016. The $30.9 million remaining escrow balance is payable to the former equity holders of Symbion on May 3, 2016, pending the resolution of the settlement of any indemnities.

We believe that over the next two to three years we are positioned to achieve significant cost and revenue synergies in connection with our recent acquisition of Symbion. Incremental synergies are expected to include cost savings from reductions in corporate overhead, supply chain rationalization, enhanced physician engagement, improved payor contracting, and revenue synergies associated with rolling out our suite of Ancillary Services throughout our portfolio.

Revenues

Our revenue consists of patient service revenues and other service revenues. Patient service revenues consist of revenue from our Surgical Facility Services and Ancillary Services Segments. Specifically, patient service revenues include fees for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes, as well as for patient visits to our physician practices, anesthesia services, pharmacy services and diagnostic screens ordered by our physicians. Other service revenues consist of product sales from our optical laboratories, as well as the discounts and handling charges billed to the members of our optical products purchasing organization. Other service revenues also include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method, management of surgical facilities and physician practices in which we do not own an interest and management services we provide to physician practices for which we are not required to provide capital or additional assets.

The operating results of Symbion are included in our 2014 operating results effective November 3, 2014. For the year ended December 31, 2014, on a pro forma basis assuming the acquisition of Symbion had been completed on January 1, 2014, 92%, 6% and 2% of our revenue would have been generated by our Surgical Facilities Segment, Ancillary Services Segment and Optical Services Segment, respectively. For the six months ended June 30, 2015, 92.9%, 5.5% and 1.6% of our revenue would have been generated by our Surgical Facilities Segment, Ancillary Services Segment and Optical Services Segment, respectively. For information about our reportable segments, please see the caption entitled “—Segment Information” below, “Note 17—Segment Reporting” to our consolidated financial statements and Note 9 to our condensed consolidated financial statements included elsewhere in this prospectus.

The following table summarizes our revenues by service type as a percentage of total revenues for the periods indicated:

 

     Six Months Ended
June 30,
   

Years Ended

December 31,

 
     2015     2014     2014     2013     2012  

Patient service revenues:

          

Surgical facilities revenues

     92.4     77.8     83.9     78.9     81.0

Ancillary services revenues

     5.5     17.3     12.3     15.5     12.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     97.9     95.1     96.2     94.4     93.9

Other service revenues:

          

Optical services revenues

     1.6     4.9     3.5     5.6     6.1

Surgical facilities other

     0.5     —       0.3     —       —  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2.1     4.9     3.8     5.6     6.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Payor Mix

The following table sets forth by type of payor the percentage of our patient service revenues generated at the surgical facilities which we consolidate for financial reporting purposes in the periods indicated:

 

     Six months ended
June 30,
   

Years Ended

December 31,

 
     2015     2014     2014     2013     2012  

Private insurance payors

     54.9     54.3     52.1     60.6     59.8

Government payors

     37.7     33.3     34.5     28.0     31.5

Self-pay payors

     2.0     2.7     3.5     2.8     3.0

Other payors(1)

     5.4     9.7     9.9     8.6     5.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other is comprised of auto liability, letters of protection and other payor types.

The percentage of our patient service revenue generated by private insurance payors decreased 8.5% in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to the Symbion acquisition, and increased 0.6% in the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The percentage of our patient service revenue generated by government payors increased 6.5% and 4.4% in the year ended December 31, 2014 compared to the year ended December 31, 2013 and in the six months ended June 30, 2015 compared to the six months ended June 30, 2014, respectively. These increases were primarily attributable to the Symbion acquisition. The percentage of our patient service revenue generated by self-pay payors increased 0.7% in the year ended December 31, 2014 compared to the year ended December 31, 2013, while it decreased 0.7% during the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The percentage of our patient service revenue generated by other payors increased 1.3% in the year ended December 31, 2014 compared to the year ended December 31, 2013, while it decreased 4.3% during the six months ended June 30, 2015 compared to the six months ended June 30, 2014.

Surgical Case Mix

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

The following table sets forth the percentage of cases in each specialty performed at the surgical facilities which we consolidate for financial reporting purposes for the periods indicated:

 

     Six months ended
June 30,
   

Years Ended

December 31,

 
     2015     2014     2014     2013     2012  

Cardiology

     1.0     —       0.3     —       —  

Ear, nose and throat

     4.0     2.2     2.8     2.5     2.7

Gastrointestinal

     22.3     11.5     15.0     10.7     8.8

General surgery

     3.0     2.7     2.9     2.4     2.7

Obstetrics/gynecology

     1.9     —       0.6     —        —  

Ophthalmology

     29.9     45.5     40.7     47.6     48.8

Orthopedic

     12.5     10.6     11.6     10.8     10.5

Pain management

     17.5     23.7     21.5     22.2     22.5

Plastic surgery

     2.1     2.1     2.0     2.2     2.0

Other

     5.8     1.7     2.6     1.6     2.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The percentage of procedures performed at our facilities that were gastrointestinal cases increased 4.3% and 10.8% in the year ended December 31, 2014 compared to the year ended December 31, 2013 and in the six months ended June 30, 2015 compared to the six months ended June 30, 2014, respectively. The percentage of procedures performed at our facilities that were ophthalmology cases decreased 6.9% and 15.6% in the year ended December 31, 2014 compared to the year ended December 31, 2013 and in the six months ended June 30, 2015 compared to the six months ended June 30, 2014, respectively. The increases in gastrointestinal cases and the decreases in ophthalmology cases were primarily attributable to the Symbion acquisition.

Case Growth

Same-facility Information

For the years ended December 31, 2014 and 2013, we define same-facility growth as the growth at those facilities that we owned and operated since January 1, 2013. For the six months ended June 30, 2015 and 2014, we define same-facility growth as the growth at those facilities that we owned and operated since July 1, 2014. We include the revenue from our surgical facilities, along with the revenue from our anesthesia services, physician practices, optical services, diagnostic laboratory, and specialty pharmacy that complement our surgical facilities in our existing markets.

 

     Six Months Ended
June 30,
    

Years Ended

December 31,

 
     2015     2014      2014     2013  

Cases

     193,393        186,157         366,098        366,534   

Case growth

     3.9     N/A         (0.1 )%      N/A   

Revenue per case

   $ 2,438      $ 2,343       $ 2,237      $ 2,049   

Revenue per case growth

     4.0     N/A         9.2     N/A   

Number of facilities

     92        N/A         95        N/A   

Operating Income Margin

Our operating income margin for the year ended December 31, 2014 decreased to 12.6% from 20.5% for the year ended December 31, 2013. In 2014, we incurred $23.4 million of debt extinguishment costs and $21.7 million of merger transaction costs related to the Symbion acquisition. In 2013 we incurred $9.9 million of debt extinguishment costs related to a refinancing transaction. Excluding the impact of these costs, our operating income margin was 23.8% in 2014 and 23.9% in 2013.

Our operating income margin for the six months ended June 30, 2015, decreased to 17.3% from 23.7% for the six months ended June 30, 2014. In the 2015 period, we recorded $13.6 million of merger transaction and integration costs related to the Symbion acquisition and recorded a gain of $2.5 million related to the sale of our ownership interest in a surgical facility located in Austin, Texas. In the 2014 period, we incurred $2.0 million of debt extinguishment costs related to a refinancing transaction. Excluding the impact of these items, our operating income margin was 19.8% for the 2015 period and 25.0% for the 2014 period.

Segment Information

A public company is required to report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or “CODM,” in deciding how to allocate resources and in assessing performance. Aggregation of similar operating segments into a single reportable operating segment is permitted if the businesses have similar economic characteristics and meet the criteria established by U.S. GAAP.

 

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Our business is comprised of the following three operating segments:

 

    Surgical Facility Services Segment: Our Surgical Facility Services Segment consists of the operation of ASCs and surgical hospitals, and includes our anesthesia services. Our surgical facilities primarily provide non-emergency surgical procedures across many specialties, including, among others, ENT, GI, general surgery, ophthalmology, orthopedics, cardiology and pain management.

 

    Ancillary Services Segment: Our Ancillary Services Segment consists of a diagnostic laboratory, a specialty pharmacy and multi-specialty physician practices. These physician practices include our owned and operated physician practices pursuant to long-term management service agreements.

 

    Optical Services Segment: Our Optical Services Segment consists of an optical laboratory, an optical products group purchasing organization and a marketing business. Our optical laboratory manufactures eyewear, while our optical products purchasing organization negotiates volume buying discounts with optical product manufacturers.

The Company’s financial information by operating segment is prepared on an internal management reporting basis that the chief operating decision maker uses to allocate resources and assess the performance of the operating segments. The Company’s operating segments have been defined based on the separate financial information that is regularly produced and reviewed by the Company’s chief operating decision maker, which is its Chief Executive Officer.

During the three months ended June 30, 2015, the Company made changes to its internal reports issued to and reviewed by the CODM. The primary effect of these changes was to remove the allocation of general and administrative expenses and assets to the reportable operating segments. The Company has revised the segment disclosures below to present general and administrative expenses and assets as a reconciling item back to the reported consolidated financial information.

The following tables present financial information for each reportable segment (in thousands):

 

     Six Months Ended
June 30,
     Years Ended December 31,  
     2015      2014      2014      2013      2012  

Net Revenue:

              

Surgical Facility Services

   $ 424,269       $ 114,484       $ 339,309       $ 224,578       $ 210,872   

Ancillary Services

     25,210         25,539         49,787         44,103         33,570   

Optical Services

     7,491         7,271         14,193         15,918         15,773   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 456,970       $ 147,294       $ 403,289       $ 284,599       $ 260,215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Six Months Ended
June 30,
     Years Ended December 31,  
     2015      2014      2014      2013      2012  

Segment Operating Income:

              

Surgical Facility Services

   $ 106,570       $ 40,138       $ 112,237       $ 77,905       $ 74,482   

Ancillary Services

     7,615         9,550         16,389         16,909         9,948   

Optical Services

     1,375         1,201         2,238         3,032         2,981   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 115,560       $ 50,899       $ 130,864       $ 97,946       $ 87,411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

General and administrative expenses

   $ (25,245    $ (13,859    $ (33,149    $ (27,275    $ (26,126

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

     2,485         (60      (1,804      (2,482      (832

Loss on debt extinguishment

     —           (1,975      (23,414      (9,863      —     

Merger transaction and integration costs

     (13,648      (117      (21,690      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income per consolidated statements of operations

   $ 79,152       $ 34,878       $ 50,807       $ 58,226       $ 60,453   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended
June 30,
     Years Ended December 31,  
     2015      2014      2014      2013      2012  

Supplemental Information:

              

Depreciation and amortization:

              

Surgical Facility Services

   $ 13,906       $ 3,452       $ 9,911       $ 7,405       $ 7,237   

Ancillary Services

     669         894         1,812         1,460         1,123   

Optical Services

     816         817         1,641         1,862         1,985   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,391       $ 5,163       $ 13,364       $ 10,727       $ 10,345   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

General and administrative

   $ 1,537       $ 559       $ 1,697       $ 936       $ 863   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization per consolidated statements of operations

   $ 16,928       $ 5,722       $ 15,061       $ 11,663       $ 11,208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended
June 30,
     Years Ended December 31,  
     2015      2014      2013  

Assets:

        

Surgical Facility Services

   $ 1,646,807       $ 1,638,874       $ 364,605   

Ancillary Services

     74,220         70,370         65,532   

Optical Services

     26,695         25,876         26,532   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,747,722       $ 1,735,120       $ 456,669   
  

 

 

    

 

 

    

 

 

 

General and administrative

   $ 100,426       $ 123,674       $ 18,032   
  

 

 

    

 

 

    

 

 

 

Total assets per consolidated balance sheet

   $ 1,848,148       $ 1,858,794       $ 474,701   
  

 

 

    

 

 

    

 

 

 

Acquisitions and Developments

Part of our strategy is to expand our network of surgical facilities in attractive markets throughout the United States by selectively acquiring established facilities, developing new facilities and expanding the Company’s presence in existing markets. We account for business combinations in accordance with Financial Accounting Standards Board’s Accounting Standards Codification, Topic 805, Business Combinations.

 

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2015 Transactions

Effective January 31, 2015, we acquired an ownership interest of 51.0% in a surgical facility located in Newark, Delaware for a purchase price of $8.6 million, resulting in approximately $12.8 million of goodwill. We will consolidate this facility for financial reporting purposes. This transaction was funded with proceeds from the refinancing of our credit facilities in connection with the Symbion acquisition.

Effective April 9, 2015, the surgical hospital located in Lubbock, Texas, in which we have a 58.3% ownership interest, acquired a 100.0% ownership in an ASC located in the same market, in which we have a 45.6% ownership interest. The total purchase price was $10.0 million and the surgical hospital used a combination of equity and cash of $2.9 million to fund the transaction. As a result of this acquisition, our ownership in the surgical hospital increased to 59.8%.

During the six months ended June 30, 2015, we acquired three physician practices in Florida and one physician practice in Idaho for a total purchase price of $3.8 million which was funded through a cash payment of $2.9 million and a note payable of $0.9 million. These acquisitions added four physicians to our network.

Effective July 24, 2015, we acquired a physician practice located in Merritt Island, Florida for a purchase price of $12.0 million. We used proceeds from the Revolver to fund $5.4 million of the purchase price and issued a note payable of $6.6 million for the remainder of the purchase price. This acquisition added four physicians to our network. We also purchased an incremental ownership of 45.0% in the surgical facility located in Merritt Island, Florida for $5.9 million. We used proceeds from the Revolver to fund this transaction and now own a 100% interest in this surgical facility. Additionally, we purchased an incremental ownership of 50.0% in the anesthesia group located in Merritt Island, Florida for $1.3 million. We used proceeds from the Revolver to fund this transaction and now own 100% of the group.

Effective July 31, 2015, we acquired a physician practice located in Idaho Falls, Idaho for a purchase price of $3.8 million, which was funded through cash from operations. This transaction added two physicians to our network.

Effective August 14, 2015, we acquired two physician practices in Florida for a purchase price of $3.6 million. We used proceeds from the Revolver to fund these transactions. These acquisitions added two physicians to our network.

2014 Acquisition of Symbion

Effective November 3, 2014, we completed the acquisition of Symbion, a privately owned national operator of short stay surgical facilities. The Symbion acquisition added 55 facilities, which includes 49 ASCs and six surgical hospitals, to our network of existing facilities. At closing, we paid approximately $300.1 million in cash, including $16.2 million funded to an escrow account, and assumed approximately $472.4 million of outstanding indebtedness of Symbion, including related accrued and unpaid interest. Simultaneously, the Company paid the $522.1 million outstanding under its 2013 Credit Facilities, including accrued interest. The Company recognized a loss of approximately $23.4 million related to the extinguishment of these debt instruments. The Symbion acquisition was financed through the issuance of approximately $1.4 billion under our Term Loans and Revolving Facility. The operating results of Symbion are included in our 2014 operating results beginning November 3, 2014. For more information, see the section entitled “Description of Indebtedness” included elsewhere in this prospectus.

During the six months ended June 30, 2015, $2.1 million of the escrow account was funded based on a working capital settlement reducing the total amount funded on the escrow account to $14.1 million as of June 30, 2015. We received $1.2 million of the escrow disbursement reducing the cash consideration to $298.9 million and adjusted the purchase price allocation to goodwill. We will fund an additional $16.8 million to the escrow account by May 3, 2016. The $30.9 million remaining escrow balance is payable to Symbion on May 3, 2016, pending the resolution of any adjustments to acquired working capital and the settlement of any other indemnities.

 

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Other Transactions During 2014, 2013 and 2012

Throughout 2014, the Company acquired three physician practices for an aggregate purchase price of $1.6 million. These transactions were funded with cash from operations.

During 2013, the Company acquired 100% ownership interests in both a specialty pharmacy and a physician practice. The aggregate purchase price of these transactions was approximately $0.4 million.

Effective October 25, 2012, the Company acquired a 100% ownership interest in an optical laboratory for a purchase price of approximately $0.6 million. The purchase price was funded with approximately $0.1 million in cash, and the remaining approximately $0.5 million was financed through a note payable over seven years. The total amount of the purchase price was allocated to intangible assets.

Discontinued Operations and Divestitures

Effective February 27, 2015, we sold our interest in an ASC in Orange City, Florida for one dollar. In connection with the divestiture, we paid down the outstanding indebtedness of the ASC. We recognized a pre-tax loss of approximately $2,000 related to this divestiture in the condensed consolidated statements of operations for the six months ended June 30, 2015.

Effective March 2, 2015, we sold our majority interest in an ASC in Dallas, Texas for $8.4 million. We recognized a pre-tax gain of approximately $0.4 million related to this divestiture in the condensed consolidated statements of operations for the six months ended June 30, 2015.

Effective April 22, 2015, we received approximately $2.5 million for the sale of a 25% ownership interest in a surgical hospital in Austin, Texas. We recognized a pre-tax gain of approximately $2.5 million related to this divestiture in the condensed consolidated statements of operations for the six months ended June 30, 2015.

In October 2013, we received net proceeds of $1.0 million for the sale of an ASC in Merrillville, Indiana. We recorded a pre-tax gain of approximately $0.6 million related to this divestiture.

In March 2013, we closed an ASC in Sebring, Florida and a physician practice in Indiana. We recorded net losses of approximately $3.2 million related to these dispositions.

Effective April 2012, we sold our majority interest in an ASC in Richmond, Virginia for approximately $1.5 million and recorded a loss on sale of approximately $0.8 million in the consolidated statement of operations. For more information, see “Note 4—Divestitures” to our audited financial statements included elsewhere in this prospectus.

Critical Accounting Policies

Our significant accounting policies and practices are described in Note 2 of our audited consolidated financial statements included elsewhere in this report. In preparing our consolidated financial statements in conformity with GAAP in the United States, our management must make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Certain accounting estimates are particularly sensitive because of their complexity and the possibility that future events affecting them may differ materially from our current judgments and estimates. Our actual results could differ from those estimates. We believe that the following critical accounting policies are important to the portrayal of our financial condition and results of operations and require our management’s subjective or complex judgment because of the sensitivity of the methods, assumptions and estimates used. This listing of critical accounting policies is not intended to be a

 

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comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP in the United States, with no need for management’s judgment regarding accounting policy.

Consolidation and Control

Our consolidated financial statements include the accounts of our Company, wholly-owned or controlled subsidiaries and variable interest entities in which we are the primary beneficiary. Our controlled subsidiaries consist of wholly-owned subsidiaries and other subsidiaries that we control through our ownership of a majority voting interest or other rights granted to us by contract to function as the sole general partner or managing member of the surgical facility. The rights of limited partners or minority members at our controlled subsidiaries are generally limited to those that protect their ownership interests, including the right to approve the issuance of new ownership interests, and those that protect their financial interests, including the right to approve the acquisition or divestiture of significant assets or the incurrence of debt that either physician limited partners or minority members are required to guarantee on a pro rata basis based upon their respective ownership, or that exceeds 20.0% of the fair market value of the related surgical facility’s assets. All significant intercompany balances and transactions, including management fees from consolidated surgical facilities, are eliminated in consolidation.

We hold non-controlling interests in five surgical facilities over which we exercise significant influence. Significant influence includes financial interests, duties, rights and responsibilities for the day-to-day management of the surgical facility. These non-controlling interests are accounted for under the equity method.

We also consider the relevant sections of the Financial Accounting Standards Board’s Accounting Standards Codification, Topic 810, Consolidation, to determine if we have the power to direct the activities and are the primary beneficiary of (and therefore should consolidate) any entity whose operations we do not control with voting rights. At December 31, 2014, because we determined that we were the primary beneficiary, we consolidated six entities.

Revenue Recognition

Our patient service revenue are derived from surgical procedures performed at our ASCs, patient visits to physician practices, anesthesia services provided to patients, pharmacy services and diagnostic screens ordered by our physicians. The fees for such services are billed either to the patient or a third-party payor, including Medicare and Medicaid. We recognize patient service revenue, net of contractual allowances, which we estimate based on the historical trend of our cash collections and contractual write-offs.

Our optical products purchasing organization negotiates volume buying discounts with optical product manufacturers. The buying discounts and any handling charges billed to the members of the purchasing organization represent the revenue recognized for financial reporting purposes. Revenue is recognized as orders are shipped to members. Product sales revenue from our optical laboratories and marketing products and services businesses, net of an allowance for returns and discounts, is recognized when the product is shipped or service is provided to the customer. We base our estimates for sales returns and discounts on historical experience and have not experienced significant fluctuations between estimated and actual return activity and discounts given.

Other service revenue consist of management and administrative service fees derived from non-consolidated surgical facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest and management services we provide to physician networks for which we are not required to provide capital or additional assets. The fees we derive from these management arrangements are based on a predetermined percentage of the revenue of each surgical facility and physician network. We recognize other service revenue in the period in which services are rendered.

 

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Allowance for Contractual Adjustments and Doubtful Accounts

Our patient service revenue and other receivables from third-party payors are recorded net of estimated contractual adjustments and allowances from third-party payors, which we estimate based on the historical trend of our surgical facilities’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, relationships with payors and procedure statistics. While changes in estimated reimbursement from third-party payors remain a possibility, we expect that any such changes would be minimal and, therefore, would not have a material effect on our financial condition or results of operations.

We estimate our allowances for bad debts using similar information and analysis. While we believe that our allowances for contractual adjustments and bad debts are adequate, if the actual write-offs are significantly different from our estimates, it could have a material adverse effect on our financial condition and results of operations. Because in most cases we have the ability to verify a patient’s insurance coverage before services are rendered, and because we have entered into contracts with third-party payors which account for a majority of our total revenue, the out-of-period contractual adjustments have been minimal. Our net accounts receivable reflected allowances for doubtful accounts of $10.2 million, $5.3 million and $5.0 million at June 30, 2015, December 31, 2014 and December 31, 2013, respectively.

Our collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The operating systems used to manage our patient accounts provide for an aging schedule in 30-day increments, by payor, physician and patient. We analyze accounts receivable at each of our surgical facilities to ensure the proper collection and aged category. The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts. Collection efforts include direct contact with insurance carriers or patients, written correspondence and the use of legal or collection agency assistance, as required. Our days sales outstanding were 52 days, 50 days and 54 days for the years ended December 31, 2014, 2013 and 2012, respectively, and 60 days for the six months ended June 30, 2015.

At a consolidated level, we review the standard aging schedule, by facility, to determine the appropriate provision for doubtful accounts by monitoring changes in our consolidated accounts receivable by aged schedule, day’s sales outstanding and bad debt expense as a percentage of revenue. At a consolidated level, we do not review a consolidated aging by payor. Regional and local employees review each surgical facility’s aged accounts receivable by payor schedule. These employees have a closer relationship with the payors and have a more thorough understanding of the collection process for that particular surgical facility. Furthermore, this review is supported by an analysis of the actual revenue, contractual adjustments and cash collections received. If our internal collection efforts are unsuccessful, we further review patient accounts with balances of $25 or more. We then classify the accounts based on any external collection efforts we deem appropriate. An account is written-off only after we have pursued collection with legal or collection agency assistance or otherwise deemed an account to be uncollectible. Typically, accounts will be outstanding a minimum of 120 days before being written-off.

We recognize that final reimbursement of outstanding accounts receivable is subject to final approval by each third-party payor. However, because we have contracts with our third-party payors and we verify the insurance coverage of the patient before services are rendered, the amounts that are pending approval from third-party payors are minimal. Amounts are classified outside of self-pay if we have an agreement with the third-party payor or we have verified a patient’s coverage prior to services rendered. It is our policy to collect co-payments and deductibles prior to providing services. It is also our policy to verify a patient’s insurance 72 hours prior to the patient’s procedure. Because our services are primarily non-emergency, our surgical facilities have the ability to control these procedures. Our patient service revenue from self-pay payors as a percentage of total revenue was approximately 3.5%, 2.8% and 3.0% for the years ended December 31, 2014, 2013 and 2012, respectively, and 2.0% and 2.7% for the six months ended June 30, 2015 and 2014, respectively.

 

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Income Taxes and Tax Receivable Agreement

We use the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If a net operating loss carryforward exists, we make a determination as to whether that net operating loss carryforward will be utilized in the future. A valuation allowance will be established for certain net operating loss carryforwards and other deferred tax assets where their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets is based upon estimates and assumptions related to our ability to generate sufficient future taxable income in certain tax jurisdictions. If these estimates and related assumptions change in the future, we will be required to adjust our deferred tax valuation allowances.

As of June 30, 2015, we had unused federal net operating loss carryforwards (“NOLs”) of approximately $323 million. Such losses expire in various amounts at varying times beginning in 2025. Unless they expire, these NOLs may be used to offset future taxable income and thereby reduce our income taxes otherwise payable.

As of June 30, 2015, we maintained a full valuation allowance of $148.9 million against our deferred tax assets. On a quarterly basis, we assess the likelihood of realization of our deferred tax assets considering all available evidence, both positive and negative. While we have concluded that a full valuation allowance continued to be appropriate as of December 31, 2014, we are continually monitoring actual and forecasted earnings. 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.

If reversal of the valuation allowance does occur, we will need to continue to monitor results. If our expectations for future operating results on a consolidated basis or at the state jurisdiction level vary from actual results due to changes in healthcare regulations, general economic conditions, or other factors, we may need to adjust the valuation allowance, for all or a portion of our deferred tax assets. Our income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on our future earnings.

Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended (the “Code”) imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its NOLs to reduce its tax liability. An “ownership change” is generally defined as any change in ownership of more than 50.0% of a corporation’s “stock” by its “5-percent shareholders” (as defined in Section 382) over a rolling three-year period based upon each of those shareholder’s lowest percentage of stock owned during such period. As a result of the Symbion acquisition, approximately $179 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million, and, as a result of the Novamed acquisition, approximately $17 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million. It is possible that future transactions, not all of which would be within our control (including a possible sale by an affiliate of our Sponsor of some or all of their shares of our common stock), could cause us to undergo an ownership change as defined in Section 382. In that event, we would not be able to use our pre-ownership-change NOLs in excess of the limitation imposed by Section 382. At this time, we do not believe these limitations, when combined with amounts allowable due to net unrecognized built in gains, will affect our ability to use any NOLs before they expire. However, no such assurances can be provided. If our ability to utilize our NOLs to offset taxable income generated in the future is subject to this limitation, it could have an adverse effect on our business, prospects, results of operations and financial condition.

As part of the Reorganization, we will enter into the TRA under which generally we will be required to pay to the Existing Owners 85% of the cash savings, if any, in U.S. federal, state or local tax that we actually

 

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realize (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes, including NOLs, capital losses, charitable deductions, alternative minimum tax credit carryforwards and federal and state tax credits of Surgery Center Holdings, Inc. and its affiliates relating to taxable years ending on or before the date of the Reorganization (calculated by assuming the taxable year of the relevant entity closes on the date of the Reorganization) that are or become available to us and our wholly-owned subsidiaries as a result of the Reorganization, and (ii) tax benefits attributable to payments made under the TRA, together with interest accrued at a rate of    % from the date the applicable tax return is due (without extension) until paid. Under this agreement, generally we will retain the benefit of the remaining 15% of the applicable tax savings. We expect the payments we will be required to make under the TRA will be substantial. If we were to elect to terminate the tax receivable agreement immediately after this offering, we estimate that we would be required to pay $114.5 million in the aggregate under the tax receivable agreement.

Long-Lived Assets, Goodwill and Intangible Assets

Long-lived assets, including property, plant and equipment, comprise a significant portion of our total assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. When events, circumstances or operating results indicate that the carrying values of certain long-lived assets and the related identifiable intangible assets might be impaired, we assess whether the carrying value of the assets will be recovered through undiscounted future cash flows expected to be generated from the use of the assets and their eventual disposition. If the assessment indicates that the recorded carrying value will not be recoverable, that cost will be reduced to estimated fair value. Estimated fair value will be determined based on a discounted future cash flow analysis.

Goodwill represents our single largest asset and is a significant portion of our total assets. We review goodwill and indefinite-lived intangible assets annually, as of December 31, or more frequently if certain indicators arise. We review goodwill at the reporting unit level, which we have determined includes the following: 1) surgical facilities 2) physician practices, 3) Midwest Labs 4) The Alliance, including Optical Synergies 5) Family Vision Care and 6) Patient Education Concepts, our marketing products and services business. We compare the carrying value of the net assets of the reporting unit to the estimated fair value of the reporting unit. If the carrying value exceeds the net present value of the estimated discounted future cash flows, an impairment indicator exists and an estimate of the possible impairment loss is calculated. The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact our financial position and results of operations.

As previously discussed, we completed the acquisition of Symbion on November 3, 2014. We accounted for the transaction using the purchase method of accounting. As a result, we recorded goodwill of $957.7 million.

We performed our annual goodwill impairment assessment by developing a fair value estimate of the business enterprise as of December 31, 2014 using a discounted cash flows approach. We corroborated the results of our fair value estimate using a market-based approach. As we do not have publicly traded equity from which to derive a market value, an assessment of peer-company trading data was performed, whereby management selected comparable peers based on growth and leverage ratios, as well as industry specific characteristics. Management estimated a reasonable market value of the Company as of December 31, 2014 based on earnings multiples and trading data of the Company’s peers. This market-based approach was then used to assess the reasonableness of the discounted cash flows approach. The result of our annual goodwill impairment test at December 31, 2014 indicated no potential impairment.

Due to the sensitivity of the business enterprise value model, and the potential for further deterioration in the market, more specifically the surgical facility and healthcare industries, we will continually monitor the trading market of our peers, as well as our discrete future cash flow forecast. While we do not anticipate such a

 

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change, if projected future cash flows become less favorable than those projected by management, an assessment of possible impairments may become necessary that could have a material non-cash impact on our financial position and results of operations.

Off-Balance Sheet Arrangements

We guarantee our pro-rata share of the third-party debts and other obligations of many of the non-consolidated partnerships and limited liability companies in which we own an interest. In most instances of these guarantees, the physicians and/or physician groups have also guaranteed their pro-rata share of the indebtedness to secure the financing. At June 30, 2015, we did not guarantee any debt of our non-consolidated surgical facilities.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Unit-Based Compensation

The Company recognizes in the financial statements the cost of employee services received in exchange for awards of equity instruments based on the fair value of those awards. Currently, on the grant date, the Company employs a market approach to estimate the fair value of unit-based awards based on various considerations and assumptions, including implied earnings multiples and other metrics of relevant market participants, the Company’s operating results and forecasted cash flows and the Company’s capital structure. Such estimates require the input of highly subjective, complex assumptions. However, such assumptions will not be required to determine fair value of shares of the Company’s common stock once its underlying shares begin trading publicly. Once the shares begin trading publicly, the fair value of future stock options awarded will be based on the quoted market price of the Company’s common stock upon grant, as well as assumptions including expected stock price volatility, risk-free interest rate, expected dividends, and expected term.

The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time. The Company’s equity-based compensation expense can vary in the future depending on many factors, including levels of forfeitures and whether performance targets are met and whether a liquidity event occurs.

 

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