S-1 1 d567345ds1.htm REGISTRATION STATEMENT Registration Statement
Table of Contents

As filed with the Securities and Exchange Commission on September 4, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ASC ACQUISITION LLC*

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   8090   20-8740447

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

520 Lake Cook Road, Suite 250,

Deerfield, IL 60015

(847) 236-0921

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

 

 

Richard L. Sharff, Jr., Esq.

Executive Vice President, General Counsel and Corporate Secretary

3000 Riverchase Galleria, Suite 500

Birmingham, AL 35244

(205) 545-2572

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

 

 

(Copies of all communications, including communications sent to agent for service)

 

Michael L. Ryan, Esq.

David Lopez, Esq.

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, New York 10006
(212) 225-2000

 

Dorothy D. Pak, Esq.

J. Andrew Robison, Esq.
Bradley Arant Boult

Cummings LLP
1819 5th Avenue North
Birmingham, Alabama 35203
(205) 521-8000

 

William V. Fogg, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza

825 Eighth Avenue
New York, New York 10019
(212) 474-1131

 

 

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   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(2)

Common stock, $0.01 par value per share

  $100,000,000   $13,640

 

 

 

(1) Includes shares of common stock to be sold by the selling stockholders and shares to be sold upon exercise of the underwriters’ allotment option.

 

(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”).

 

 

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 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

* ASC Acquisition LLC, a limited liability company organized under the laws of Delaware, is the registrant filing this Registration Statement with the Securities and Exchange Commission. Prior to the closing of this offering, ASC Acquisition LLC will be converted into a corporation organized under the laws of Delaware, pursuant to the Delaware Limited Liability Company Act Section 18-216 and the Delaware General Corporation Law Section 265. The securities issued to investors in connection with this offering will be shares of common stock in that corporation, which will be named Surgical Care Affiliates, Inc.


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated September 4, 2013.

PROSPECTUS

            Shares

 

LOGO

Surgical Care Affiliates, Inc.

Common Stock

 

 

This is an initial public offering of common stock of Surgical Care Affiliates, Inc. We are selling                 shares of our common stock. The selling stockholders identified in this prospectus are selling                 shares of our common stock. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholders.

This is our initial public offering and no public market currently exists for our common stock. The initial public offering price is expected to be between $         and $         per share. We have applied to list our common stock on the NASDAQ Stock Market under the symbol “            .”

 

 

We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”) and will be subject to reduced public company reporting requirements. See “Prospectus Summary — Implications of Being an Emerging Growth Company.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 20.

 

 

Neither the Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per
Share
     Total  

Public offering price

   $                    $                

Underwriting discount

   $         $     

Proceeds to us (before expenses)

   $         $     

Proceeds to the selling stockholders (before expenses)

   $         $     

The selling stockholders have granted the underwriters the right to purchase for a period of up to 30 days, up to additional shares of common stock at the public offering price less underwriting discounts and commissions.

The underwriters expect to deliver the shares of common stock to investors on or about                     , 2013.

 

 

 

J.P. Morgan       Citigroup
BofA Merrill Lynch   Barclays   Goldman, Sachs & Co.  

Morgan Stanley

BMO Capital Markets   SunTrust Robinson Humphrey   TPG Capital BD, LLC

 

 

The date of this prospectus is                     , 2013.


Table of Contents

We are responsible for the information contained in this prospectus and in any related free-writing prospectus we may prepare or authorize to be delivered to you. Neither we nor the underwriters have authorized anyone to give you any other information, and neither we nor the underwriters take any responsibility for any other information that others may give you. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus, regardless of the date of delivery of this prospectus.

 

 

TABLE OF CONTENTS

 

Market and Industry Data and Forecasts

     ii   

Prospectus Summary

     1   

Risk Factors

     20   

Special Note Regarding Forward-Looking Statements

     52   

Use of Proceeds

     55   

Dividend Policy

     56   

Capitalization

     57   

Dilution

     59   

Selected Historical Consolidated Financial and Other Data

     61   

Unaudited Pro Forma Condensed Combined Financial Information

     67   

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

     72   

Business

     108   

Management

     140   

Executive Compensation

     147   

Certain Relationships and Related Party Transactions

     155   

Principal and Selling Stockholders

     158   

Description of Certain Indebtedness

     162   

Description of Capital Stock

     167   

Shares Eligible for Future Sale

     173   

Certain U.S. Federal Income and Estate Tax Considerations to Non-U.S. Holders

     175   

Underwriting (Conflicts of Interest)

     177   

Legal Matters

     184   

Experts

     184   

Where You Can Find More Information

     185   

Index to Financial Statements

     F-1   

Until                     , 2013 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

i


Table of Contents

MARKET AND INDUSTRY DATA AND FORECASTS

Certain market and industry data included in this prospectus has been obtained from third-party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications and third-party forecasts in conjunction with our assumptions about our markets. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those discussed under the headings “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

 

ii


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It may not contain all the information that may be important to you. You should read the entire prospectus carefully, including the section entitled “Risk Factors” and our financial statements and the related notes, included elsewhere in this prospectus, before making an investment decision to purchase shares of our common stock.

On or prior to the completion of the offering, we will convert our company from a Delaware limited liability company (ASC Acquisition LLC) into a Delaware corporation (Surgical Care Affiliates, Inc.). See “—Our Reorganization as a Corporation” below for more information.

In this prospectus, unless we indicate otherwise or the context requires:

 

    “Surgical Care Affiliates,” “our company,” “we,” “our,” “ours” and “us” refer to ASC Acquisition LLC and its consolidated subsidiaries prior to the conversion, and to Surgical Care Affiliates, Inc. and its consolidated subsidiaries after the conversion;

 

    “SCA” refers to Surgical Care Affiliates, LLC, our direct operating subsidiary; and

 

    “TPG” refers to TPG Global, LLC and its affiliates, and the “TPG Funds” refers to one or more of TPG FOF V-A, L.P. (“FOF V-A”), TPG FOF V-B, L.P. (“FOF V-B”), and TPG Partners V, L.P. (“TPG Partners V”).

All dollar amounts in this prospectus are in U.S. dollars unless specified otherwise. The financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).

Our Company

We are a leading national provider of solutions to physicians, health systems and payors to optimize surgical care. We operate one of the largest networks of outpatient surgery facilities in the United States, which as of June 30, 2013, was comprised of 167 ambulatory surgery centers (“ASCs”), five surgical hospitals and one sleep center with 11 locations. Our business model is focused on building strategic relationships with leading health systems, physician groups and payors to acquire and develop facilities in an aligned economic model that enables better access to lower cost, high-quality care. As of June 30, 2013, we owned and operated facilities in partnership with 42 leading health systems and approximately 2,000 physician partners. We believe that our partnership strategy and comprehensive suite of solutions will enable continued growth by capitalizing on the increasing demand for high quality, cost-effective settings of care, the increasing need for scaled partners in healthcare, the transition to a coordinated care delivery model and the trend of physician and health system consolidation. For the year-ended December 31, 2012, we earned net operating revenues of $750.1 million and systemwide net operating revenues of $1,228.2 million, and we generated a net loss of $20.0 million and Adjusted EBITDA-NCI of $133.0 million. For the six-months ended June 30, 2013, we earned net operating revenues of $388.5 million and systemwide net operating revenues of $653.8 million, and we generated a net loss of $11.2 million and Adjusted EBITDA-NCI of $70.9 million. Systemwide net operating revenues and Adjusted EBITDA-NCI are non-GAAP financial measures and should not be considered a substitute for and are not comparable to our GAAP total net operating revenues or net income. Systemwide revenue measures are intended as supplemental measures of our performance. See “—Summary Historical Consolidated Financial and Other Data” for a description of systemwide net operating revenue and Adjusted EBITDA-NCI.

The healthcare industry is in the midst of a transition characterized by increasing focus on cost containment and clinical outcomes. We believe we provide a critical solution to this challenge due to our comprehensive,

 

 

1


Table of Contents

lower-cost delivery alternative that (1) we believe enhances the quality of care and patient experience, (2) provides a strategic approach for physicians that improves productivity and economic alignment, (3) enables our health system partners to expand access within their markets while addressing the pressures resulting from changing payment models and (4) offers an efficient and lower-cost alternative for payors, employers and other health plan sponsors.

Our scale of operations allows us to provide our affiliated physicians and health system partners with a comprehensive suite of services that support clinical quality, operational efficiency and enhanced financial performance. In addition to a growing network of lower-cost, high quality ASCs, we offer tools and systems in the areas of clinical benchmarking, clinical best practices, operating efficiency, care coordination and supply chain management. Our partnership model aligns the interests of our partners in achieving strong clinical and operational outcomes.

Following the purchase of our company in 2007 by TPG, MTS-SCA Acquisition LLC (“MTS”) and certain of our current and former directors, our senior leadership team has transformed our strategic approach from operating a scaled network of facilities to providing a comprehensive suite of solutions to multiple constituents along the surgical care continuum. We have experienced significant growth in our provider partnerships and enhanced our focus on clinical outcomes and patient experience, resulting in strong and consistent performance in our key financial and operating metrics. We believe our comprehensive solution set has established SCA facilities as a site of choice to patients, physicians, health systems and payors, as reflected in (1) our patient and physician Net Promoter Scores, which are measures of loyalty based on asking patients or physicians whether they would recommend our facilities to a friend or family member or colleague, as applicable, (2) growth in physician partners to approximately 2,000 as of June 30, 2013, with approximately 5,700 physicians performing procedures in our affiliated facilities in 2012 and (3) growth in health system partnerships from 18 to 42 from December 31, 2007 to June 30, 2013.

Our commitment to patient care, our outstanding teammates, our health system partnerships and our investments in systems and processes to drive results, coupled with strong industry trends, have enabled us to build a track record of growth. Our consolidated total net operating revenues increased from $715.0 million in 2010 to $750.1 million in 2012, representing a 2.4% compounded annual growth rate (“CAGR”). The revenues and expenses of affiliated facilities in which we do not have a controlling interest but do have an equity interest are not directly included in our consolidated GAAP results; rather only the net income earned from such facilities is reported and we refer to such facilities as our “nonconsolidated facilities.” Given the significant increase in the number of our nonconsolidated facilities, driven by the success of our health system and physician partnership growth strategy, we also review an internal supplemental and non-GAAP operating measure called systemwide net operating revenues, which includes both consolidated and nonconsolidated facilities (without adjustment based on our percentage of ownership). Our systemwide net operating revenues increased from $902.0 million in 2010 to $1,228.2 million in 2012, representing a 16.7% CAGR, and our Adjusted EBITDA-NCI increased from $104.2 million in 2010 to $133.0 million in 2012, representing a 13.0% CAGR.

Strategic Partnerships with Leading Health Systems

In 2008, recognizing the trend towards branded integrated delivery systems in healthcare, we began to selectively partner with leading health systems in specific markets. From December 31, 2007 to June 30, 2013, we have grown the number of our health system partners from 18 to 42. Our health system partners include many of the leaders in healthcare delivery such as Indiana University Health, Inc. (“IUH”), Sutter Health, Texas Health Resources (“THR”) and MemorialCare Health System (“MemorialCare”), among others. We believe we are a partner of choice to leading health systems because of our comprehensive suite of surgical solutions, expertise in clinical operations and efficiency programs and developmental expertise. Partnering with leading health systems allows us to enter new markets in a way that provides us with immediate relevance to our partners, physicians and payors, translating into greater stability and growth opportunity.

 

 

2


Table of Contents

When we partner with a health system in a three-way joint venture, we typically hold a noncontrolling ownership interest in a holding company that owns a majority or controlling ownership interest in the facility, while our health system partner holds the controlling interest in the holding company.

We typically have co-development arrangements with our health system partners to jointly develop a network of outpatient surgical facilities in a defined geographic area. These co-development arrangements are an important source of differentiation and growth for our business. For example, through our relationship with Sutter Health, we have acquired and developed 16 facilities since 2007. Our success with high quality health system partners has also led such partners, in some cases, to have us manage the surgical departments of their hospital sites through our recently introduced hospital management solutions.

In addition to expanding the number of co-developed facilities within our existing partnerships, we continue to establish new partnerships with market-leading providers. Over the past 12 months, we have added relationships with 18 new health system partners for an initial 36 affiliated facilities.

Our Affiliated Facilities

Our network of facilities includes:

 

    ASCs. Like hospitals, ASCs serve as locations where physicians on each individual facility’s medical staff perform surgeries on their patients. Our ASCs provide the facilities, equipment, supplies and clinical support staff necessary to provide non-emergency surgical services to patients not requiring hospitalization. Surgeries in ASCs are typically reimbursed at significantly lower rates than in a hospital setting, and ASCs generally operate with greater efficiency and lower costs. For each of the year-ended December 31, 2012 and the six-months ended June 30, 2013, our ASCs represented 87.5% of our net operating revenues.

 

    Surgical hospitals. Our surgical hospitals allow physicians to perform a broader range of surgical procedures, including more complex surgeries, and allow patients to stay in the hospital for up to three days. For the year-ended December 31, 2012 and the six-months ended June 30, 2013, our surgical hospitals represented 10.2% and 10.7%, respectively, of our net operating revenues.

 

    Hospital surgery departments. We also contract with hospitals to manage in-hospital surgery departments, which can focus exclusively on supporting physicians in the performance of surgeries on patients who do not require hospitalization (on an outpatient basis) or provide a full array of surgeries, including emergency surgeries, as well as surgeries on hospital inpatients and patients who will be admitted post-procedure. For the year-ended December 31, 2012 and the six-months ended June 30, 2013, such hospital surgery departments represented 0.1% and 0.2%, respectively, of our net operating revenues.

Physicians at our facilities provide surgical services in a wide variety of specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology, spine and gynecology, as well as other general surgery procedures. As of June 30, 2013, we consolidated the operations of 85 of our 173 affiliated facilities, had 60 nonconsolidated affiliated facilities and held no ownership in 28 affiliated facilities that contract with us to provide management services only.

Our Industry

Medical costs account for a substantial percentage of spending in America. The United States spent $2.7 trillion on healthcare in 2011, according to the Centers for Medicare and Medicaid Services (“CMS”), and the percentage of gross domestic product devoted to healthcare has increased from 7.2% in 1970 to 17.9% in 2011. Surgical delivery is one of the largest components of medical costs in the United States, currently representing approximately 30% of medical spending for individuals with commercial insurance, according to our estimates.

 

 

3


Table of Contents

Against this backdrop, we believe that we are well positioned to benefit from trends currently affecting the markets in which we compete, including:

Continued Migration of Procedures out of Hospitals

According to the American Hospital Association, from 1989 to 2009, outpatient surgeries increased from 48.5% of total surgery volumes to 63.2%. In addition, a significant share of outpatient surgeries shifted from hospitals to free-standing facilities over a similar period. Advancements in medical technology and anesthesia have reduced the trauma of surgery and the amount of recovery time required by patients following certain surgical procedures. These medical advancements have significantly increased the number of procedures that can be performed in a surgery center and fueled the migration of surgical procedures out of hospitals and into outpatient settings. We expect that continued advancements in healthcare delivery and regulatory reform will further this trend.

Growing Focus on Containment of Healthcare Costs

Because of an increased focus on controlling the growth of healthcare expenditures in our economy, constituents across the healthcare continuum, including government payors, private insurance companies and self-insured employers, are implementing meaningful cost containment measures. These initiatives have contributed to the shift in the delivery of healthcare services away from traditional inpatient hospitals to more cost-effective settings, such as ASCs. For example, based on 2013 Medicare fee schedules, a procedure in an ASC costs on average 58% of what the same procedure costs when performed in a hospital surgery department, according to the Ambulatory Surgery Center Association. We expect this cost effectiveness will continue to fuel the migration of procedures into the ASC setting.

In addition, as self-insured employers look to reduce their overall healthcare costs, they are shifting increased financial responsibility to patients through higher co-pays and deductibles. These changes to health plan design, coupled with increased pricing transparency, have encouraged patients to seek out more cost-effective options for their healthcare delivery. Because of their cost advantage and high patient satisfaction, ASCs stand to benefit from this increase in consumerism.

Opportunities Created by Healthcare Legislation

We anticipate that recent healthcare legislation will create greater opportunities for cost-effective providers of healthcare. The Patient Protection and Affordable Care Act (“PPACA”) and other related healthcare reform activities are expected to promote the transition from traditional fee-for-service payment models to more “at risk” or “capitated” models in which providers receive a flat fee per member per month from payors regardless of the cost of care. This shift will create real financial incentives for “at-risk” providers to direct patient procedures into the most cost-effective settings, such as ASCs.

Dynamics Impacting Health Systems

Many hospitals and health systems anticipate strategic and financial challenges stemming from healthcare reform and growing efforts to contain healthcare costs. In response, many health systems are focused on strategies to reduce operating costs, build market share, align with physicians, create additional service lines, expand their geographic footprint and prepare for new payment models, including Accountable Care Organizations (“ACOs”), which are networks of doctors, hospitals and other healthcare providers who share responsibility for providing coordinated care to patients with the goal of reducing overall spending. As a result, a growing number of health systems are entering into strategic partnerships with select provider organizations that can provide focused expertise, scaled operating systems, best practices, speed of execution and financial capital.

 

 

4


Table of Contents

Increased Pressure on Physicians and Physician Groups

Physicians in many markets are increasingly interested in affiliating with leading health systems, especially in the context of an operating partner that can help ensure the continued efficiency of their practices. Uncertainty regarding reimbursement along with increased financial and administrative burdens resulting from healthcare legislation have contributed to the trend toward health system partnerships. As a result, physicians in many markets are pursuing partnerships with surgical providers and health systems in order to gain greater stability, access to scaled clinical and operating systems and a pathway to participating in new payment models.

Continued Provider Consolidation Driven by Changing Environment

We believe that consolidation among healthcare providers will continue due to cost pressures, a changing regulatory environment and the requirements imposed by new payment and delivery models. Our industry remains highly fragmented relative to other healthcare sectors, with the three largest companies in our industry operating an aggregate of only 12% of approximately 5,300 Medicare-certified ASCs in the United States. We expect consolidation to continue, as larger operators bring to bear the benefits of systems, processes and larger-scale relationships.

Our Competitive Strengths

We believe that our commitment to outstanding patient care, our strategy and our market position align us to benefit from trends in the U.S. healthcare market. An environment that demands better access to high-quality care, improved patient experience, health system and physician partnership and continuous clinical and administrative improvement and efficiency aligns very well with our competitive strengths:

Multi-Pronged Growth Strategy Based on Aligned Economic Model and Diverse Business Mix

Our business model is focused on building strategic relationships with leading health systems, physician groups and payors to acquire and develop facilities in an aligned economic model. The alignment of strategic and financial interests through shared ownership is an integral component of our ability to achieve strong results – clinically, operationally and financially. We believe our business model, which is aligned with secular industry trends, enables the following multiple growth avenues and positions us for long-term sustainable growth:

 

    Strong same-site growth;

 

    In-market expansion and co-development with existing leading health system partnerships;

 

    New health system partnerships;

 

    Additional services across our broad suite of solutions; and

 

    Opportunistic acquisitions.

Strategic Partnerships with Leading Health Systems

We have positioned ourselves for the continued shift toward large scale, integrated delivery systems by selectively partnering with health systems that hold market-leading positions in their primary service areas. From December 31, 2007 to June 30, 2013, we have grown the number of our health system partners from 18 to 42, including many of the leaders in healthcare delivery, such as IUH, Sutter Health, THR and MemorialCare, among others. We believe we are a partner of choice to leading health systems because of our comprehensive suite of surgical solutions, expertise in clinical operations and efficiency programs and development expertise. Partnering with leading health systems allows us to enter new markets in a way that provides us with immediate

 

 

5


Table of Contents

relevance to our patients, physicians and payors, translating into greater stability and growth opportunity. Historically our partnerships have delivered above-market same-site revenue growth as well as growth from the co-development of additional facilities alongside our health system partners.

Leading National Brand and Scaled Franchise

We believe a healthcare environment characterized by cost pressure, regulatory change, increased consumerism and consolidation favors large scale competitors with strong reputations. We are one of the largest multi-specialty operators of ASCs in the United States, operating in 34 states, with 167 ASCs, five surgical hospitals and one sleep center with 11 locations. We operate a large surgical services purchasing platform that provides us substantial purchasing advantages. We believe our national presence and leading reputation provide us with a greater opportunity to establish strategic relationships with local healthcare systems and physicians. Our facilities have also developed a strong reputation among patients in our communities as a result of our principal focus on patient care and clinical quality.

Proprietary and Expanding Suite of Technology-Enabled Solutions

New payment models and increasing pressure on health systems and physicians to contain costs are forcing providers to make new investments in areas such as information systems and data analytics in an effort to become more efficient and meet the demands for improved clinical outcomes. We have developed a comprehensive set of proprietary technology tools that enable health systems, physicians and payors to optimize patient experience, clinical outcomes, physician productivity and operating performance. Our proprietary technology includes a case costing system, our “Every Case Optimized System” or “ECOSystem”, that provides detailed cost and margin data by matching supply and labor costs to individual procedures so that we can benchmark best practices by case type. We use similar tools to analyze operational measures, such as on-time starts and turn-times, and to manage our supply chain and scheduling, billing and collection practices. Together these and other tools allow us to provide our facilities, health system partners and the physicians who use our facilities with data analysis to drive lower costs and improve operations, training and efficiency in order to optimize patient experience and clinical outcomes. Our technology tools also allow us to work in partnership with payors to optimize the cost of surgery for their covered members.

Strategic Partner to Physicians

The evolving healthcare landscape, including regulatory changes, increasing administrative burden, payor consolidation, shifting competitive landscape and transition to new payment models, is increasing pressure on physicians. We offer physicians an attractive solution to help them operate successfully in this environment as we design our facilities, structure our strategic relationships and adopt staffing, scheduling and clinical systems and protocols with the aim of increasing physicians’ productivity and promoting their professional and financial success. Our success in forming productive relationships with physicians is reflected in both the growth in the number of our physician partners to approximately 2,000 as of June 30, 2013, many of whom are leading practitioners in their respective fields and geographies, and our Net Promoter Score of positive 90, which is a measure of loyalty ranging from negative 100 to positive 100.

Proven Management Team

Our senior leadership team of Andrew Hayek, President and Chief Executive Officer, Peter Clemens, Executive Vice President and Chief Financial Officer, Michael Rucker, Executive Vice President and Chief Operating Officer, Joseph T. Clark, Executive Vice President and Chief Development Officer, and Richard L. Sharff, Jr., Executive Vice President, General Counsel and Corporate Secretary, averages approximately 20 years of experience in the healthcare industry and has transformed our strategic approach to provide solutions to

 

 

6


Table of Contents

physicians, health systems and payors to optimize surgical care. Under this new management team, we have experienced significant growth in our provider partnerships and enhanced our focus on clinical outcomes and patient experience, resulting in strong and consistent performance in our key financial and operating metrics and positioning us well for long-term growth.

Our Business Strategy

We seek to provide outstanding patient care and clinical quality, and we seek to create measurable clinical, operational and financial advantages for our partners by leveraging our tools and processes, knowledge and experience and talented leaders in each market. The key components of our strategy include:

Delivering Outstanding Patient Care and Clinical Outcomes

We are committed to outstanding patient care and clinical quality. Our culture and operating systems reinforce this focus and commitment. We measure patient satisfaction, clinical outcomes and licensure and accreditation inspection readiness for each affiliated facility and combine those measures into our SCA Quality Index, which we monitor closely to identify areas for improvement and track progress. We also develop and implement clinical toolkits, clinical training and best practice sharing across our network to drive ongoing improvement in clinical outcomes.

Driving Strong and Consistent Same-Site Performance

Achieving strong performance on a same-site basis is important for us to drive organic revenue growth as well as support consistent operating performance for SCA and our partners. We believe that our partnership model aligns incentives such that we and our partners can achieve improved long-term performance. We also believe that our ability to affiliate with physicians as an extension of their practices is an important driver to sustained same-site performance. Our clinical protocols and proprietary technology tools are designed to improve physician productivity and increase the number of procedures performed in our facilities while improving both physician and patient satisfaction. In addition, our ability to attract physicians through recruitment initiatives provides an additional opportunity for us to drive same-site growth. This alignment with partner hospitals and physicians has facilitated annual same-site net operating revenue growth of 6% in both 2012 and 2011. We have shown an ability to improve facility-level profitability by gaining physician alignment around more efficient supply utilization, reducing clinical variation, more effectively contracting with payors and lowering administrative costs.

Capitalizing on Existing Health System Partnerships Poised for Growth

We believe that development of our existing health system relationships is an important part of our continued growth. While our facility count has grown significantly from 131 to 173 affiliated facilities from December 31, 2007 to June 30, 2013, our growth in partner health systems has been even stronger, more than doubling from 18 to 42 over the same time period. We believe this recent growth in health system partnerships creates significant opportunities. Our aligned model incentivizes our partners to work closely with us to identify strategically important and financially accretive growth opportunities in the markets we serve. Our experience has shown that demonstrated results in achieving exceptional patient care and strong physician partnerships have encouraged our partners to expand their relationships with us. For example, through our relationship with Sutter Health, as of June 30, 2013 we have acquired and developed 16 facilities since 2007. Our success with high quality health system partners has also led such partners, in some cases, to have us manage the surgical departments of their hospital sites through our recently introduced perioperative management solutions. Given many of our health system partnerships have been developed recently, including relationships with 18 new health

 

 

7


Table of Contents

system partners in the last twelve months alone, we believe we are in the early stages of a significant opportunity to expand the scope of these relationships in the near-term, similar to our experience to date.

Developing New Health System Partnerships

We are focused on developing new health system partnerships, and we expect this to continue as we position ourselves as a partner of choice to physician groups, health systems and payors. We believe our current footprint represents only a small percentage of potential health system partnerships and that we have substantial long-term opportunities to add new relationships. In addition, industry dynamics are encouraging health systems with which we do not already have relationships to seek partners. We believe our expertise developing tools that ensure improved outcomes, drive cost savings and support efficiencies in the clinical setting will further strengthen our value proposition as a partner of choice for new health system relationships.

Leveraging Our Core Competencies to Expand into New Service Lines

We intend to leverage significant expertise related to the provision of surgical solutions in the form of expansion into new lines of service. As an example, we launched our perioperative consulting services to health system partners to optimize physician engagement, operating and cost efficiency, margin enhancement, market share growth and the development of new service lines. As of June 30, 2013, we provided such services to 14 facilities, and we have a dedicated team of professionals focused on expanding this business, as we believe it represents a significant area of potential growth. In addition to providing a high growth and diversified revenue stream, our perioperative business also serves as a sales channel for potential health system partnerships. In addition to perioperative consulting, we also offer additional services relating to the delivery of surgical care, including management services, clinical co-management consulting services, supply chain management and data analytics.

Establishing Partnerships that Take Advantage of New Payment Models

We expect the evolving reimbursement landscape in healthcare to create opportunities to partner with physicians and payors in new payment models. We believe payment models such as “at risk” and “capitated” models drive surgical care to more cost-efficient settings, such as ASCs. We plan to continue working creatively with our various partners and potential partners to structure arrangements that provide solutions to the challenges created by the variety of new payment models.

Consolidating a Fragmented Industry

We are focused on continuing to add new affiliated facilities where we see opportunities to grow volumes by recruiting new physicians and improve profitability by leveraging our scale, technology and operating efficiencies while delivering outstanding patient care. We expect our acquisition activity to continue as we continue to position ourselves as a partner of choice to physician groups. Given that we operate in a relatively fragmented segment of the healthcare industry, with the three largest companies operating an aggregate of only 12% of the approximately 5,300 Medicare-certified ASCs, we believe there are and will continue to be robust opportunities to invest and partner in new facilities. We plan to leverage our proven strategy for target identification, thorough diligence, transaction execution and integration, which we have systematically implemented in acquisitions of nine consolidated and 30 nonconsolidated facilities from January 1, 2010 to June 30, 2013.

Corporate and Other Information

We and SCA, our principal operating subsidiary, were formed in 2007 with a focus on developing and operating ASCs and surgical hospitals in the United States. We previously comprised the surgery center division

 

 

8


Table of Contents

of a large healthcare company. In 2007, SCA was acquired by TPG, MTS, and certain of our current and former directors and became our wholly-owned subsidiary.

Our executive offices are located at 520 Lake Cook Road, Suite 250, Deerfield, Illinois 60015, and our telephone number is (847) 236-0921. Our Internet website address is www.scasurgery.com. Information on, or accessible through, our website is not part of this prospectus. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website.

Our Principal Stockholder

TPG

TPG is a leading global private investment firm founded in 1992 with $55.3 billion of assets under management as of June 30, 2013 and offices in San Francisco, Fort Worth, Austin, Beijing, Chongqing, Hong Kong, London, Luxembourg, Melbourne, Moscow, Mumbai, New York, Paris, São Paulo, Shanghai, Singapore and Tokyo. TPG has extensive experience with global public and private investments executed through leveraged buyouts, recapitalizations, spinouts, growth investments, joint ventures and restructurings. The firm’s investments span a variety of industries, including healthcare, financial services, travel and entertainment, technology, energy, industrials, retail, consumer, real estate and media and communications. For more information please visit www.tpg.com.

Following the completion of this offering, the TPG Funds will own approximately     % of our common stock, or     % if the underwriters’ option to purchase additional shares of our common stock is fully exercised. As a result, we expect to be a “controlled company” within the meaning of the corporate governance requirements of the NASDAQ Stock Market (the “NASDAQ”) on which we have applied for our shares to be listed. See “Risk Factors — Risks Related to this Offering — TPG 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, and which may result in conflicts with us or you in the future.”

Our Reorganization as a Corporation

Prior to the closing of this offering, we will convert from a Delaware limited liability company, ASC Acquisition LLC, into a Delaware corporation, Surgical Care Affiliates, Inc. Pursuant to the conversion, all of our currently outstanding membership units will be converted into shares of our common stock. The combined financial statements included elsewhere in this prospectus are those of ASC Acquisition LLC and its combined operations. We expect that our conversion from a Delaware limited liability company to a Delaware corporation will not have a material effect on our combined financial statements.

Risk Factors

Our business is subject to numerous risks. See “Risk Factors” beginning on page 20. In particular, our business may be adversely affected by:

 

    our dependence on payments from third-party payors, including governmental healthcare programs, commercial payors and workers’ compensation programs;

 

    our inability or the inability of our healthcare system partners to negotiate favorable contracts or renew existing contracts with non-governmental third-party payors on favorable terms;

 

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

 

 

9


Table of Contents
    the fact that the Medicare and Medicaid programs provide a significant portion of our revenues and are each particularly susceptible to legislative and regulatory change;

 

    the implementation by states of reduced fee schedules and reimbursement rates for workers’ compensation programs;

 

    our inability to maintain good relationships with our current health system partners or our inability to enter into relationships with new health system partners;

 

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

 

    shortages of, or quality control issues with, surgery-related products, equipment and medical supplies that could result in a disruption of our operations;

 

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

 

    the fact that we are subject to significant malpractice and related legal claims, and we could be required to pay significant damages in connection with those claims;

 

    the fact that we have a history of net losses and may not achieve profitability in the future;

 

    our $792.4 million of indebtedness (excluding capital leases) outstanding as of June 30, 2013, and our ability to incur additional indebtedness in the future;

 

    our inability to predict the impact on us of the Health Reform Law (as defined herein), which represents a significant change to the healthcare industry;

 

    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 or require us to make significant changes to our operations;

 

    our inability to manage and secure our information systems effectively, which could disrupt our operations;

 

    the fact that we are a “controlled company” within the meaning of the NASDAQ rules and, as a result, our stockholders will not have certain corporate governance protections concerning the independence of our board of directors and certain board committees that would otherwise apply to us; and

 

    the fact that TPG will retain significant influence over us and key decisions about our business following the offering that could limit other stockholders’ ability to influence the outcome of matters submitted to stockholders for a vote.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (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, which are not emerging growth companies. These provisions include:

 

    Reduced disclosure about our executive compensation arrangements;

 

    No non-binding stockholder advisory votes on executive compensation or golden parachute arrangements; and

 

    Exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.

 

 

10


Table of Contents

We may take advantage of these exemptions until such time that we are no longer an emerging growth company. We will remain an “emerging growth company” until the earliest of (1) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.0 billion, (3) the date on which we are deemed to be a large accelerated filer under the Exchange Act, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and (4) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We have taken advantage of reduced disclosure regarding executive compensation arrangements in this prospectus and we may choose to take advantage of some but not all of these reduced disclosure obligations in future filings. If we do, the information that we provide to stockholders may be different than you might get from other public companies in which you hold stock.

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we are choosing to “opt out” of this provision and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

 

11


Table of Contents

The Offering

 

Issuer

Surgical Care Affiliates, Inc.

 

Common stock we are offering

            shares.

 

Common stock offered by the selling stockholders

            shares.

 

Common stock to be issued and outstanding after this offering

            shares, assuming no exercise by the underwriters of their option to purchase additional shares of our common stock.

 

Underwriters’ Option to purchase additional shares of our common stock

The selling stockholders have granted the underwriters an option, for a period of 30 days, to purchase up to              additional shares of our common stock held by them on the same terms and conditions as set forth on the front cover of this prospectus.

 

Use of proceeds

We estimate that the net proceeds to us from the sale of shares in this offering, after deducting the underwriting discount and estimated offering expenses payable by us, will be approximately $         million, assuming the shares are offered at $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus. We intend to use $         million of the net proceeds from this offering to redeem all $150.0 million aggregate principal amount of SCA and Surgical Holdings, Inc.’s (the “Co-Issuer”) 10.0% senior subordinated notes due 2017 (the “Senior Subordinated Notes”) and any remaining net proceeds for general corporate purposes. We will not receive any proceeds from the sale of our common stock by the selling stockholders named in this prospectus.

 

  See “Use of Proceeds.”

 

Dividend policy

We do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business.

 

  Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial position, results of operations, liquidity, legal requirements and restrictions that may be imposed by the terms in current and future financing instruments. Our ability to pay dividends to holders of our shares of common stock is limited as a practical matter by the terms of some of our debt, including our amended and restated credit agreement (as further amended, the “Amended and Restated Credit Agreement”) for our Senior Secured Credit Facilities (as defined herein) and other indebtedness. See “Description of Certain Indebtedness” and “Dividend Policy.”

 

 

12


Table of Contents

Risk factors

You should read the section entitled “Risk Factors” beginning on page 20 for a discussion of some of the risks and uncertainties you should carefully consider before deciding to invest in our common stock.

 

Stock exchange listing and symbol

We have applied to have our common stock listed on the NASDAQ under the symbol “            .”

 

Conflicts of interest

Affiliates of TPG Capital BD, LLC, an underwriter of this offering, will own in excess of 10% of our issued and outstanding common stock following our conversion into a Delaware corporation. Therefore, a “conflict of interest” is deemed to exist under Rule 5121(f)(5)(B) of The Financial Industry Regulatory Authority (“FINRA”). In addition, because the TPG Funds are affiliates of TPG Capital BD, LLC and, as selling stockholders, will receive more than 5% of the net proceeds of this offering, a “conflict of interest” is also deemed to exist under FINRA Rule 5121(f)(5)(C)(ii). Accordingly, this offering will be made in compliance with the applicable provisions of FINRA Rule 5121. Pursuant to that rule, the appointment of a qualified independent underwriter is not necessary in connection with this offering. In accordance with FINRA Rule 5121(c), no sales of the shares will be made to any discretionary account over which TPG Capital BD, LLC exercises discretion without the prior specific written approval of the account holder. See “Use of Proceeds” and “Underwriting (Conflicts of Interest).”

The number of shares of common stock to be issued and outstanding after the completion of this offering is based on             shares of our common stock to be issued and outstanding after our conversion from a Delaware limited liability company to a Delaware corporation and excludes an additional             shares of our common stock reserved for issuance under our Management Equity Incentive Plan adopted November 16, 2007, as may be amended from time to time (the “Equity Plan”),              of which remain available for grant,             shares of our common stock reserved for issuance under our Director and Consultant Equity Incentive Plan, adopted June 24, 2008, as amended September 9, 2008 (the “Director Equity Plan”),              of which remain available for grant, and             shares of our common stock reserved for issuance under our 2013 Omnibus Long-Term Incentive Plan (the “2013 Omnibus Plan”),             of which remain available for grant.

Except as otherwise indicated, all information in this prospectus:

 

    assumes an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus;

 

    assumes no exercise by the underwriters of their option to purchase an additional             shares of common stock from the selling stockholders;

 

    gives effect to our conversion from a Delaware limited liability company to a Delaware corporation prior to the closing of this offering; and

 

    does not include the 14 facilities at which we provide perioperative consulting services as part of our facility counts or other facility totals, including consolidated, nonconsolidated or managed-only facility totals.

Figures in the tables included in this prospectus may not total due to rounding.

 

 

13


Table of Contents

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables summarize our historical consolidated financial and other data for our business for the periods presented. You should read this summary of financial and other data along with “Unaudited Pro Forma Condensed Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our financial statements and the related notes, all included elsewhere in this prospectus.

As of June 30, 2013, we accounted for our investment in 60 of our 173 facilities where we do not have control over the facility under the equity method, and treat such facilities as nonconsolidated affiliates. In addition, as of June 30, 2013, we held no ownership interest in 28 facilities, which contract with us to provide management services. For our nonconsolidated affiliates, our consolidated statements of operations reflect our earnings from such facilities in two line items:

 

    Equity in net income of nonconsolidated affiliates, which represents our combined share of the net income of each equity method facility that is based on such equity method facility’s net income and the percentage of such equity method facility’s outstanding equity interests owned by us; and

 

    Management fee revenues, which represents income from management fees that we earn from managing the day-to-day operations of the facilities that we do not consolidate for financial reporting purposes.

As of June 30, 2013, we consolidate four facilities where we do not currently hold an equity ownership interest but rather we hold a promissory note that is convertible into equity. The promissory note provides us with the power to direct the activities that most significantly impact the economic performance of these entities. We consolidate these facilities into our financial results as they are deemed to be variable interest entities (“VIEs”) under the Accounting Standards Codification §810.

The summary consolidated statement of operations data for the years ended December 31, 2012, December 31, 2011 and December 31, 2010 and the summary consolidated balance sheet data as of December 31, 2012 and December 31, 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for the six-months ended June 30, 2013 and June 30, 2012 and the summary consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements included herein include all adjustments (consisting of recurring adjustments) necessary to state fairly the information set forth herein. Our historical results are not necessarily indicative of the results to be expected in the future, and the results for the six-months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year.

 

 

14


Table of Contents
    Six-Months Ended
June 30,
    Year-Ended December 31,  
    2013     2012     2012     2011     2010  
   

(in millions)

 

Statement of Operations Data:

         

Net operating revenues:

         

Net patient revenues

  $ 370.6      $ 352.5      $ 716.2      $ 694.4      $ 698.6   

Management fee revenues

    11.5        9.2        17.8        11.3        6.7   

Other revenues

    6.4        8.1        16.1        13.7        9.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

    388.5        369.8        750.1        719.3        715.0   

Equity in net income of nonconsolidated affiliates

    12.0        11.8        16.8        22.2        15.3   

Operating expenses:

         

Salaries and benefits

    125.8        120.8        242.7        222.6        217.2   

Supplies

    85.7        83.2        170.3        161.0        172.9   

Other operating expenses

    58.1        61.1        118.7        114.9        113.1   

Depreciation and amortization

    20.9        20.3        41.7        40.5        37.4   

Occupancy costs

    13.4        13.2        26.8        26.6        27.7   

Provision for doubtful accounts

    7.0        8.1        16.9        18.3        17.3   

Impairment of intangible and long-lived assets

    —          0.4        1.1        —          —     

Loss (gain) on disposal of assets

    0.1        (0.1     (0.3     (0.8     0.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    311.0        307.1        617.8        583.0        586.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 89.5      $ 74.5      $ 149.1      $ 158.6      $ 144.3   

Interest expense

    34.3        30.5        58.8        56.0        52.6   

Loss from extinguishment of debt

    3.8        —          —          —          —     

Interest income

    (0.1     (0.2     (0.3     (0.4     (1.6

Loss (gain) on sale of investments

    1.0        (2.0     7.1        (3.9     (2.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

    50.5        46.3        83.5        106.8        95.2   

Provision for income tax expense

    4.4        4.6        8.3        20.4        14.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations(1)

    46.1        41.6        75.1        86.5        80.7   

Loss from discontinued operations, net of income tax expense

    (3.9     (5.1     (2.8     (3.0     (11.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    42.2        36.5        72.3        83.5        69.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

    (53.4     (46.7     (92.4     (93.2     (84.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ASC Acquisition

    (11.2     (10.2     (20.0     (9.7     (14.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow Data:

         

Net cash provided by (used in):

         

Operating activities

  $ 80.6      $ 83.0      $ 171.2      $ 165.3      $ 143.8   

Investing activities

    (34.2     (15.0     (21.8     (157.9     (45.9

Financing activities

    (21.4     (46.2     (102.1     30.2        (100.1

Facilities (at period end):

         

Consolidated facilities

    85        92        87        94        95   

Equity method facilities

    60        47        52        44        23   

Managed-only facilities

    28        7        8        4        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total facilities

    173        146        147        142        123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

15


Table of Contents
     Six-Months Ended
June 30,
     Year-Ended December 31,  
     2013            2012                  2011        
    

(in millions)

 

Balance Sheet Data (at period end):

        

Cash and cash equivalents

   $ 143.7       $ 118.7       $ 71.3   

Total current assets

     290.3         264.5         215.0   

Total assets(2)

     1,438.5         1,409.2         1,356.5   

Current portion of long-term debt

     19.2         15.2         16.2   

Long-term debt, net of current portion

     792.4         774.5         769.1   

Total current liabilities

     178.1         173.8         148.9   

Total liabilities(2)

     1,098.8         1,070.6         1,033.7   

Total ASC Acquisition equity

     142.5         144.4         167.2   

Noncontrolling interests — non-redeemable

     175.9         172.5         135.4   

Total equity

     318.4         316.9         302.6   

 

     Six-Months Ended
June 30, 2013
     Year-Ended
December 31, 2012
 

Pro Forma net loss per share(3):

     

Basic

   $                    $                

Diluted

     

Number of shares outstanding used to compute basis pro forma net loss per share(4)(5)

     

Number of shares outstanding used to compute diluted pro forma net loss per share(4)(5)

     

 

    Six-Months Ended
June 30,
    Year-Ended December 31,  
    2013     2012     2012     2011     2010  
   

(in millions, except cases, rate per case and growth rates in actual
amounts)

 

Systemwide Data:

         

Net Operating Revenues:

         

Consolidated facilities

  $ 388.5      $ 369.8      $ 750.1      $ 719.3      $ 715.0   

Equity method facilities

    265.3        233.3        478.0        335.6        187.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Systemwide net operating revenues(6)

    653.8        603.1        1,228.2        1,055.0        902.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Patient Revenues:

         

Consolidated facilities

  $ 370.6      $ 352.5      $ 716.2      $ 694.4      $ 698.6   

Equity method facilities

    263.4        231.4        474.4        332.6        185.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Systemwide net patient revenues(7)

    634.0        583.9        1,190.6        1,027.0        884.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Systemwide case volume(8)

    336,940        335,743        672,221        623,076        586,674   

Systemwide net patient revenues per case(9)

  $ 1,862      $ 1,739      $ 1,771      $ 1,648      $ 1,507   

Same site systemwide net operating revenue growth(10)

    8     8     6     6     5

Same site systemwide net patient revenue per case growth(10)

    7     3     4     7     5

Other Financial Data:

         

Adjusted EBITDA-NCI(11)

    70.9        60.6        133.0        120.0        104.2   

 

(1) Loss from continuing operations attributable to ASC Acquisition, which is income from continuing operations less net income attributable to noncontrolling interests, was $7.3 million and $5.1 million for the six-months ended June 30, 2013 and 2012, respectively, and $17.3 million, $6.7 million and $3.7 million for years ended December 31, 2012, 2011 and 2010, respectively.

 

 

16


Table of Contents
(2) Our consolidated total liabilities as of December 31, 2012 and June 30, 2013 include total liabilities of a VIE of $1.4 million and $6.0 million, respectively, for which the creditors of the VIE have no recourse to us. The assets of the consolidated VIE can only be used to settle the obligations of the VIE.
(3) Pro forma to reflect our conversion from a Delaware limited liability company to a Delaware corporation prior to the closing of this offering.
(4) Represents the number of shares issued and outstanding after giving effect to our sale of common stock in this offering and does not include common stock that may be issued and sold upon exercise of the underwriters’ option to purchase additional shares of our common stock.
(5) Calculated based on number of shares that would have been outstanding as of December 31, 2012 and June 30, 2013, assuming our conversion from a Delaware limited liability company to a Delaware corporation.
(6) Systemwide net operating revenues is a non-GAAP financial measure, which represents net operating revenues earned at all of the facilities we operate and is calculated as the aggregate of the net operating revenues earned by our consolidated facilities and at our equity method facilities (without adjustment based on our percentage of ownership). Systemwide net operating revenues includes management fee revenues from nonconsolidated affiliates and managed-only facilities, but does not include patient or other revenues from managed-only facilities (in which we hold no ownership interest). The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results, rather only the net income earned from such facilities is reported on a net basis in the line item “Equity in net income of nonconsolidated affiliates.” Because of this, management uses “systemwide” results, which treat our equity method facilities as if they were consolidated. As a non-GAAP financial measure, systemwide net operating revenues should not be considered a substitute for and is not comparable to our GAAP total net operating revenues. Systemwide net operating revenues is intended as a supplemental measure of our performance.
(7) Systemwide net patient revenues is a non-GAAP financial measure, which represents net patient revenues earned at all of the facilities we operate, excluding those facilities at which we hold no ownership interest and provide only management services, and is calculated as the aggregate of the net patient revenues earned by our consolidated facilities and at our equity method facilities (without adjustment based on our percentage of ownership). The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results, rather only the net income earned from such facilities is reported on a net basis in the line item “Equity in net income of nonconsolidated affiliates.” Because of this, management uses “systemwide” results, which treat our equity method facilities as if they were consolidated. As a non-GAAP financial measure, systemwide net patient revenues should not be considered a substitute for and is not comparable to our GAAP total net patient revenues. Systemwide net patient revenues is intended as a supplemental measure of our performance.
(8) Represents the aggregate of the case volume at our consolidated and our equity method facilities. The number of cases performed at our total facilities is a key metric utilized to regularly evaluate performance.
(9) Calculated by dividing our systemwide net patient revenue by our systemwide case volume. The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results, rather only the net income earned from such facilities is reported on a net basis in the line item “Equity in net income of nonconsolidated affiliates.” Because of this, management uses “systemwide” results, which treat our equity method facilities as if they were consolidated. Systemwide net patient revenues per case is a non-GAAP financial measure, which represents the revenues of all of our affiliated facilities, regardless of the accounting treatment, excluding those facilities at which we hold no ownership interest and provide only management services. Systemwide net patient revenues per case is intended as a supplemental measure of our performance.
(10) Same site refers to facilities that were operational for any amount of time in both the current and prior year or six-month period, as applicable.
(11)

Represents Adjusted EBITDA-NCI as historically computed and used by our management. Adjusted EBITDA-NCI means net income before provisions for income tax expense, net interest expense, depreciation and amortization, net loss from discontinued operations, equity method amortization expense,

 

 

17


Table of Contents
  loss on sale of investments, loss on extinguishment of debt, asset impairments, gain (loss) on disposal of assets, sponsor management fee, severance expense and non-cash stock compensation expense less net income attributable to noncontrolling interests. We present Adjusted EBITDA-NCI because we believe it is useful for investors to analyze our operating performance on the same basis as that used by our management. Our management believes Adjusted EBITDA-NCI can be useful to facilitate comparisons of operating performance between periods because it excludes the effect of depreciation and amortization, which represents a non-cash charge to earnings, income tax, interest expense and other expenses or income not related to the normal, recurring operations of our business. Adjusted EBITDA-NCI is considered a “non-GAAP financial measure” under SEC rules and should not be considered a substitute for net income (loss) or net operating income as determined in accordance with GAAP. Adjusted EBITDA-NCI has limitations as an analytical tool, including the following:

 

    Adjusted EBITDA-NCI does not reflect our historical capital expenditures, or future requirements for capital expenditures, or contractual commitments;

 

    Adjusted EBITDA-NCI does not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA-NCI does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments under our credit agreement; and

 

    Adjusted EBITDA-NCI does not reflect income tax expense or the cash requirements to pay our taxes.

In addition, you should be aware that there is no certainty that we will not incur expenses in the future that are similar to those excluded in the calculation of Adjusted EBITDA-NCI. Other companies in our industry may calculate Adjusted EBITDA-NCI differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA-NCI should not be considered the primary measure of the operating performance of our business. We strongly encourage you to review the GAAP financial statements included elsewhere in this prospectus and not to rely on any single financial measure to evaluate our business.

 

 

18


Table of Contents

The following table represents the reconciliation of net income to Adjusted EBITDA-NCI for the periods indicated below:

 

     Six-Months Ended
June 30,
    Year-Ended
December 31,
 
     2013     2012     2012     2011     2010  
     (in millions)  

Net income

   $ 42.2      $ 36.5      $ 72.3      $ 83.5      $ 69.5   

Plus (minus):

          

Interest expense, net

     34.2        30.3        58.5        55.6        51.1   

Provision for income tax expense

     4.4        4.6        8.3        20.4        14.6   

Depreciation and amortization

     20.9        20.3        41.7        40.5        37.4   

Loss from discontinued operations, net

     3.9        5.1        2.8        3.0        11.1   

Equity method amortization expense(a)

     10.0        10.1        20.3        10.1          

Loss (gain) on sale of investments

     1.0        (2.0     7.1        (3.9     (2.1

Loss on extinguishment of debt

     3.8                               

Asset impairments

     2.0        0.4        10.2               3.0   

Loss (gain) on disposal of assets

     0.1        (0.1     (0.3     (0.8     0.4   

Sponsor management fee(b)

     1.1        1.0        2.0        2.0        2.0   

Severance expense

     0.3        0.2        0.6        1.1        0.4   

Non-cash stock compensation expense(c)

     0.4        0.8        1.7        1.7        1.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     124.3        107.3        225.4        213.2        188.7   

(Minus):

          

Net income attributable to noncontrolling interests

     (53.4     (46.7     (92.4     (93.2     (84.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA-NCI

   $ 70.9        60.6        133.0        120.0        104.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) For the years ended December 31, 2012 and December 31, 2011, we recorded $20.3 million and $10.1 million, respectively, of amortization expense for definite-lived intangible assets attributable to equity method investments. For the six-months ended June 30, 2013 and 2012, we recorded $10.0 million and $10.1 million, respectively, of amortization expense for definite-lived intangible assets attributable to equity method investments. These expenses are included in Equity in net income of nonconsolidated affiliates in our consolidated financial statements. There was no such amortization expense for the year-ended December 31, 2010.
  (b) Represents the yearly fees we paid to TPG for management services pursuant to the management services agreement. Upon completion of this offering, we will pay to TPG Capital (as defined herein) an $8.0 million fee payable pursuant to our management services agreement and the management services agreement will be terminated. See “Certain Relationships and Related Party Transactions — Management Services Agreement” for additional information regarding the management services agreement.
  (c) Represents a non-cash expense relating our equity-based compensation program.

 

 

19


Table of Contents

RISK FACTORS

This offering and investing in our common stock involves a high degree of risk. You should carefully consider the following risks and uncertainties described below, as well as the other information contained in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before deciding to invest in our common stock. The occurrence of any of the following risks could have a material adverse effect on our business, prospects, results of operations or financial condition, in which case the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to our Business

We depend on payments from third-party payors, including government healthcare programs, commercial payors and workers’ compensation programs. If these payments are reduced or eliminated, or do not increase as our costs increase, our revenues and profitability could decrease.

We depend upon governmental, commercial and workers’ compensation third-party sources of payment for the services provided to patients in our surgical facilities. The amount that our surgical facilities receive in payment for their services may be adversely affected by factors 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 ASC payment system and refinements by CMS to Medicare’s reimbursement policies. Similarly, third-party payors may be successful in negotiating reduced reimbursement schedules with our facilities. Any reduction or elimination of these payments or an increase in the payments at a rate that is less than the increase in our costs could have a material adverse effect on our business, prospects, results of operations and financial condition.

If we or our health system partners are unable to negotiate and enter into favorable contracts or maintain satisfactory relationships and renew existing contracts on favorable terms with non-governmental third-party payors, our revenues and profitability may decrease.

Payments from non-governmental third-party payors represented approximately 60% and 59% of our net patient revenues for the year-ended December 31, 2012 and the six-months ended June 30, 2013, respectively. We receive most of these payments from third-party payors that have contracts with our facilities. These payors use a variety of methods for reimbursement depending on the insurance arrangement involved. These arrangements include preferred provider organizations, health maintenance organizations, as well as prepaid and discounted medical service packages, capitated (fixed fee) contracts, Medicare Advantage Plans and contracts with Independent Physician Associations. If we or our health system partners fail to enter into favorable contracts or to maintain satisfactory relationships and renew existing contracts on favorable terms with these payors, our revenues and profitability may decrease. Other healthcare providers may impact our ability to negotiate increases and other favorable terms in our reimbursement arrangements with non-governmental third-party payors. For example, some of our competitors may negotiate exclusivity provisions with non-governmental third-party payors or otherwise restrict the ability of non-governmental third-party payors to contract with us or our health system partners. Moreover, these third-party payors are increasingly implementing cost containment measures, such as fixed fee schedules and reductions to reimbursement schedules, which may reduce our revenues and profitability now or in the future. Further, the trend toward consolidation among non-governmental third-party payors tends to increase their bargaining power over fee structures. As various provisions of the PPACA, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (the “Reconciliation Act” and together with the PPACA, the “Health Reform Law”) are implemented, including the establishment of health insurance exchanges, non-governmental third-party payors increasingly may demand reduced fees. In addition, there is a growing trend for third-party payors and employer-sponsored healthcare plans to take steps to shift the primary cost of care to the plan participant by increasing co-payments, co-insurance and deductibles, and these actions could discourage such patients from seeking treatment at our surgical facilities. Because some commercial third-party payors rely on all or portions of Medicare payment systems to determine payment rates,

 

20


Table of Contents

changes to government healthcare programs that reduce payments under these programs may negatively impact payments from commercial third-party payors. Patient volumes could decrease if we or our health system partners are unable to enter into acceptable contracts with such third-party payors, which could lead to a material adverse effect on our business, prospects, results of operations and financial condition.

For the year-ended December 31, 2012, approximately 3.3% of our net patient revenues was derived from providing “out-of-network” services, where payments to us come from third-party payors with which our surgical facilities do not have contracts. In such cases, we generally charge patients a co-payment and submit claims to the payor, which typically have been paid at higher than comparable contracted rates. However, there is a trend for third-party payors to adopt out-of-network fee schedules that are more comparable to our contracted rates or to discourage their enrollees from seeking treatment at out-of-network surgical facilities. In such situations, we may be forced to choose between not providing services to out-of-network patients and accepting a payor contract with relatively low payment rates. In certain situations, we have seen an increase in case volume upon transitioning to in-network billing, although we may experience an overall decrease in revenues. We can provide no assurance that we will see a sufficient increase in volume of cases to compensate for the decrease in per case revenues where we transition to in-network billing, or that when we decline to sign a payor contract we will see a sufficient increase in payment rates to compensate for the decrease in volume of cases resulting from being out-of-network.

Significant changes in our payor mix or 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 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 and Medicaid, 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 result in a material adverse effect on our business, prospects, results of operations and financial condition. Case mix refers to the relative share of total cases performed by specialty, such as orthopedics, gastroenterology, pain management and otolaryngology. Generally speaking, we derive relatively higher revenues from certain types of cases. For example, orthopedic cases are generally higher revenue cases than pain management procedures, and if an orthopedic case that would have been performed at our facilities was replaced by a pain management case that was performed at our facilities, we would expect the revenue earned from that pain management case to be lower than the revenue that would have been earned for the orthopedic case. Therefore, a significant shift in our 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 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.

Payments we receive from workers’ compensation programs are subject to reduction as states implement reduced fee schedules and deal with increased budgeting and economic challenges.

Payments from workers’ compensation payors represented approximately 11% and 12% of our net patient revenues for the year-ended December 31, 2012 and the six-months ended June 30, 2013, respectively. Several states have recently considered or 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

 

21


Table of Contents

same services. Additionally, budgeting and economic challenges have caused some states to reduce the payments made to us under workers’ compensation programs. In 2012, California enacted legislation that reduced the reimbursement rate for patients receiving care through its workers’ compensation program by 33% beginning on January 1, 2013. In addition, North Carolina has also recently enacted legislation to reduce its workers’ compensation reimbursement rates by 15%, effective April 1, 2013. Finally, Indiana has passed legislation that will reduce workers’ compensation reimbursement rates by 53%, which is scheduled to go into effect on July 1, 2014. If the trend of states adopting lower workers’ compensation fee schedules continues, or the budgeting and economic challenges faced by states continue, resulting in reductions to reimbursement rates, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

Our relationships with health systems, including not-for-profit health systems, are important to our growth strategy. If we are not able to maintain good relationships with these health systems, or enter into new relationships, we may be unable to implement our growth strategy successfully, which could adversely affect our profitability.

Our business depends in part upon the success of our health system partners and the strength of our relationships with those healthcare systems. Our business could be adversely affected by any damage to those health systems’ reputation or to our relationships with them, or as a result of an irreconcilable dispute with a health system partner. At June 30, 2013, we held ownership interests in 60 facilities in partnership with 31 different health systems. Our health system relationships include local health systems, regional health systems and national health systems. We enter into co-development agreements or have informal co-development arrangements with health systems in which we agree to jointly develop a network of surgical facilities in a defined geographic area. We expect our acquisition activity to continue with the primary focus on the creation of partnerships with health systems. If we are unable to develop and maintain good relationships with such health systems, maintain our existing agreements on terms and conditions favorable to us or enter into relationships with additional health systems on favorable terms, or at all, we may be unable to implement our growth strategies successfully and such a failure could adversely affect our profitability. In addition, we are increasingly entering into joint ventures that we do not control because we do not have a majority stake in the joint venture or otherwise do not possess sufficient contractual rights to control the entity. Our failure to control such joint ventures may impair our ability to achieve the desired operating results from such joint ventures.

Material changes in revenue rulings published by the Internal Revenue Service (the “IRS”), case law or the interpretation of such rulings and case law could adversely affect our relationships with our not-for-profit health system partners and have a material adverse effect on our business, prospectus, results of operations and financial condition.

Our relationships with tax-exempt, not-for-profit health systems and the joint venture agreements that represent these relationships are structured to minimize the possibility of adverse tax consequences to the non-profit systems, such as the imposition of the unrelated business income tax or the loss of tax exemption. These relationships are generally structured with the assistance of counsel to the non-profit systems, who rely on revenue rulings published by the IRS as well as case law relevant to joint ventures between for-profit and not-for-profit healthcare entities. Material changes in these rulings and case law, or the interpretation of such rulings and case law by the IRS, could adversely affect our relationships with our not-for-profit health system partners. Further, our compliance with the rules applicable to tax-exempt entities could have an adverse impact on the margins of facilities we own in partnership with our not-for-profit health system partners. Such rules, revenue rulings, case law and interpretations may preclude us from being able to enter into joint venture agreements or new relationships with not-for-profit health systems, which could have a material adverse effect on our business, prospectus, results of operations and financial condition.

We depend on physician utilization of our facilities, which could decrease if we fail to maintain good relationships with physicians or due to other factors outside of our control.

Our business depends upon the efforts and success of the physicians who provide medical services at our facilities, and the strength of our relationships with these physicians. These physicians are not employees of our

 

22


Table of Contents

facilities and are generally not contractually required to use our facilities. We typically do not have contracts with physicians who use our facilities, other than partnership and operating agreements with physicians who own interests in our facilities, provider agreements with physicians who provide anesthesiology services in our surgical facilities and independent contractor agreements with physicians who provide certain limited services to the facilities, such as medical director services. Physicians who use our surgical facilities usually also use other surgery centers or hospitals. Due to technological advances, physicians may also choose to perform procedures that might otherwise be performed at our surgical facilities in their office, such as pain management procedures, endoscopies and cataract removals. Although many physicians who own an interest in our facilities are subject to agreements restricting them from having an ownership interest in competing facilities, these agreements do not restrict physicians from performing procedures at other facilities. Also, these agreements restricting ownership of competing facilities can be difficult to enforce, and we may be unsuccessful in preventing physicians who own an interest in our facilities from acquiring an interest in a competing facility.

We also depend on the quality of care provided by the physicians who provide medical services at our facilities. While those physicians are independent contractors and not employed by us or our facilities and maintain their own liability insurance coverage, the failure of particular groups of physicians who utilize our facilities to provide quality medical care or to otherwise adhere to professional guidelines at our surgical facilities or any damage to the reputation of a particular group of physicians with whom we are affiliated could also damage our reputation, subject us to liability and significantly reduce our revenues.

Healthcare reform and other factors are leading more physicians to accept employment by hospitals. The creation of ACOs may cause physicians to accept employment to become part of a network that includes an ACO. In addition, Medicare’s push for healthcare providers to invest in technology infrastructure to increase efficiencies may cause more physicians to move from private practice to employment with hospitals and ACOs because an individual physician or small group of physicians may view the costs associated with investing in technology as too large to bear individually. Physicians who accept employment with ACOs, hospitals or other organizations may be less likely to own, or may be contractually restricted from owning, interests in our facilities or, in some cases, restricted from using our facilities.

We have had and are likely to continue to have disputes with physicians who use our facilities or own interests in our facilities. Furthermore, we may in the future have disputes with key groups of physicians and such disputes, if they were to occur, could have a material adverse effect on our business, prospects, results of operations and financial condition. In addition, key groups of physicians may elect to leave a facility for a variety of reasons unrelated to us, including, for example, to be employed by a hospital or health system that competes with our facility. Our revenues and profitability could be reduced if we lose our relationship with key groups of physicians, or if key groups of physicians cease or reduce their use of our facilities, and we are unable to replace those groups of physicians with others who will use our 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. In addition, 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 revenues. Any reduction in our revenues due to a decrease in the use by physicians of our surgical facilities could have a material adverse effect on our business, prospects, results of operations and financial condition.

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

Controls imposed by Medicare, managed Medicare, Medicaid, managed 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 revenues and profitability. Additionally, trends in physician treatment protocols and commercial health insurance plan design, such as plans that shift increased costs and

 

23


Table of Contents

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 attract new physician investors, and to acquire and develop additional surgical facilities, on favorable terms. If we are unable to achieve either of these goals, our future growth could be limited.

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, see “— Risks Related to Healthcare Regulation — Our surgical facilities do not satisfy the requirements for any of the safe harbors under the Anti-Kickback Statute. If we fail to comply with the Anti-Kickback Statute, 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 revenues” and “— Risks Related to Healthcare Regulation — 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 revenues.”

In addition, our growth strategy includes the acquisition 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. From January 2010 to June 30, 2013, we acquired nine consolidated facilities and 30 noncontrolling interests in facilities accounted for as equity method investments. 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. Our acquisition and development activities require substantial capital resources, and we may need to obtain additional capital or financing, from time to time, to fund these activities. 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 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.

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, 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, we would be unable to perform certain surgeries, which could adversely affect our case volume or result in a negative shift in our 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 our case volume, product costs and our reputation. In addition, we may

 

24


Table of Contents

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.

Competition for staffing, shortages of qualified personnel or other factors could increase our labor costs and adversely affect our results of operations and cash flows.

Our operations are dependent on the efforts, abilities and experience of our management and clinical personnel, particularly nurses. We compete with other healthcare providers in recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our facilities. 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, 2012 and the six-months ended June 30, 2013, our salary and benefit expenses represented 32.4% and 32.4%, respectively, of our net operating revenues. 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 revenues 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 teammates 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.

We face intense competition for patients, physicians, strategic relationships 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, in recruiting physicians to utilize our facilities and in contracting with commercial payors. 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 hospitals and health systems that compete with us in each market in which we operate, and many of them have more established relationships with physicians and payors than we do. To the extent that a majority of physicians within an individual community or market decide to partner with a competing surgery center, hospital or health system and not with us, our affiliated facility in such community may become unprofitable and the value of this asset may decrease, even drastically. In addition, other companies are currently in the same or similar business of developing, acquiring and operating surgical facilities, or may decide to enter this business. We also compete with some of these companies for entry into strategic relationships with health systems and physicians. Moreover, many physicians develop surgical facilities without a corporate partner, using consultants who perform services that we often perform for a fee and do not take an equity interest in the ongoing operations of the facility. As a result of the differing competitive factors within the markets in which we operate, the individual results of our facilities may be volatile. If we are unable to compete effectively with any of these entities or groups, we may be unable to implement our business strategies successfully, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

We often are subject to malpractice and related legal claims, and we could be required to pay significant damages in connection with those claims, which may not be covered by insurance.

In the ordinary course of business, we are subject to legal actions alleging malpractice or related legal claims arising out of the treatment of patients at our facilities. Many of these actions involve large monetary

 

25


Table of Contents

claims and significant defense costs. In some cases, it may be difficult to control the level of risk in this area. For example, it is possible that our facilities could inadvertently purchase tainted products from ostensibly reputable suppliers. Other providers are facing substantial litigation costs, and could face substantial damages, in connection with medical malpractice and products liability claims associated with the purchase of tainted epidural steroids, the administration of which by ASCs and other types of providers resulted in the recent nationwide meningitis outbreak. We maintain liability insurance in amounts that we believe are appropriate for our operations, including professional and general liability insurance that provides coverage on a claims-made basis of $1.0 million per occurrence and $3.0 million in annual aggregate coverage per surgical facility. We also maintain umbrella liability insurance in the aggregate amount of $10.0 million and excess liability insurance in the aggregate amount of $15.0 million. See “Business — Operational Risk and Insurance” for additional information regarding our insurance coverage. However, this insurance coverage may not cover all claims against us, and insurance coverage may not continue to be available at a cost satisfactory to us to allow for the maintenance of adequate levels of insurance. If one or more successful claims against us were not covered by or exceeded the coverage of our insurance, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

Our volume and case mix may be adversely affected due to current and future economic conditions.

The U.S. economy continues to experience difficult conditions. Our case volume and case mix may be adversely affected by patients’ inability 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. However, a majority of the procedures performed in our surgical facilities are not considered truly elective in nature. Therefore, 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.

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.

Many of our facilities are concentrated in certain states, which makes us particularly sensitive to regulatory, economic and other conditions in those states.

Our revenues are particularly sensitive to regulatory, economic and other conditions in certain states where we have a greater concentration of facilities. For the six-months ended June 30, 2013, our facilities located in North Carolina, California and Texas represented approximately 14%, 14% and 12%, respectively, of our net patient revenues. Additionally, facilities located in each of Alabama, Alaska, Connecticut, Florida and Idaho represented in excess of 5% of our net patient revenues for the six-months ended June 30, 2013. Of our 60 nonconsolidated facilities accounted for as equity method investments, as of June 30, 2013, 27 of these facilities were located in California and 11 of these facilities were located in Indiana. If there were an adverse regulatory, economic or other development in any of the states in which we have a higher concentration of facilities, our case volumes could decline in these 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.

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

We have historically incurred periods of net losses, including net losses of approximately $20.0 million in 2012, $9.7 million in 2011 and $14.9 million in 2010. We cannot assure you that our revenues will grow or that we will achieve or maintain profitability in the future. 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.” If we are not able to achieve, sustain or increase profitability, our business will be adversely affected and our stock price may decline.

 

26


Table of Contents

Certain of our partnership and operating agreements contain termination dates that will require us to amend and possibly renegotiate such agreements.

Certain of our limited partnership (“LP”) agreements, general partnership agreements and limited liability company (“LLC”) operating agreements have termination dates by which the agreement expires by its terms. In some cases, termination dates are required under the applicable state law governing the form of entity. In these situations we would attempt to negotiate an amendment to the agreement to prevent such termination if we wish to continue the business. Any such amendment could also require us to renegotiate material terms of the agreements with our physician and health system partners. There is no guarantee that we will be able to renegotiate these agreements on terms that are favorable or satisfactory to us or at all. If we are unable to amend or renew our agreements on terms that are satisfactory to us or at all, this could have a material adverse effect on our business, prospects, results of operations and financial condition. We have one agreement involving one facility with a termination date in 2013 and two agreements involving three facilities with termination dates in 2014.

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.

In one case, the agreement governing six facilities that we co-own with Sutter Health gives them the absolute right to purchase our interest in the facilities, including our ongoing profits from managing the facilities, after the passage of a certain amount of time. The first of these rights to be triggered will occur in 2017. The purchase price of our interest will be the fair market value as determined by an independent appraisal. This agreement further provides that if our partner forgoes the right to acquire our interest upon the initial trigger date, such right will renew and offer our partner the same opportunity every three years. There are an additional three facilities co-owned with Sutter Health for which they have the right to purchase up to 20% of our ownership interest in one facility and up to 10% of our ownership interest in two facilities, also at fair market value. Although the stated purchase price for these acquisitions is fair market value, the purchase of our interests by our partner will prevent us from continuing to recognize ongoing profits from owning and managing these facilities, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

In addition to the purchase and consent rights described above, almost all of our partnership and operating agreements contain restrictions on actions that we can take, even though we may be the general partner or the managing member. 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.

 

27


Table of Contents

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.

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, 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 interest holders. We may encounter conflicts between our responsibility to the other interest holders and our own best interests. 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. 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 LP agreement or operating 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.

We may have difficulty operating and integrating newly acquired or developed facilities.

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. Moreover, the integration of acquired facilities may result in the diversion of our management’s time from our existing operations.

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. 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.

In addition, 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 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. See “Business — Operational Risk and Issuance” for additional information regarding our insurance coverage. 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.

In developing new facilities, we may be unable to attract physicians to use our facilities or to enter into favorable contracts with commercial payors. In addition, newly developed facilities typically incur net losses during the initial periods of operation and, unless and until their case loads grow, they generally experience lower total revenues and operating margins than established facilities. Integrating a new facility can be expensive and time consuming and could disrupt our ongoing business and distract our management and other key teammates.

 

28


Table of Contents

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 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. Our provision for doubtful accounts relates primarily to amounts due directly from patients.

We provide for bad debts principally based upon the type of payor and the age of the receivables. Our allowance for doubtful accounts at December 31, 2012 and June 30, 2013 represented approximately 7.5% and 7.2% 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.

Because our senior management has been key to our growth and success, we may be adversely affected if we lose the services of our senior management.

Our success depends to a significant extent upon the efforts and abilities of our senior management team and key financial and operating teammates. Although we have employment agreements with senior management, we do not maintain “key man” life insurance policies for any of our senior management. 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. Many of our senior management and other financial and operating key teammates were recruited by us specifically due to their industry experience or specific expertise. The loss of senior management or other key teammates, without adequate replacements, or our inability to attract, retain and motivate sufficient numbers of qualified senior management or other key teammates, could have a material adverse effect on our business, prospects, results of operations and financial condition.

We rely on our private equity sponsor.

We have in recent years depended on our relationship with TPG, our private equity sponsor, to help guide our business plan. TPG has significant expertise in financial matters. This expertise has been available to us through the representatives TPG has had on SCA’s board of directors and as a result of our management services agreement with TPG. In connection with the completion of this offering, the management services agreement with TPG will terminate. Pursuant to the Stockholders’ Agreement (as defined herein) to be executed in connection with the closing of this offering, representatives of TPG will have the ability to appoint      members to our board of directors, and as a result Mr. Sisitsky, a TPG Partner, Mr. Rhodes, a TPG Principal, and Mr. Geiser and Dr. Mansukani, each of whom provide consulting services to TPG, will be appointed to our board of directors following the completion of this offering. After the offering, TPG may elect to reduce its 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 it. See “ — Risks Related to this Offering — TPG 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, and which may results in conflicts with us or you in the future.”

We have a substantial amount of indebtedness, which may adversely affect our available cash flow and our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness.

We have a substantial amount of indebtedness. As of June 30, 2013, we had approximately $792.4 million of indebtedness (excluding capital leases), which includes $605.5 million under our Senior Secured Credit

 

29


Table of Contents

Facilities and $150.0 million of Senior Subordinated Notes. We also have $132.3 million of unused commitments under our Class B Revolving Credit Facility (as defined herein). At June 30, 2013, we had approximately $1.7 million in letters of credit outstanding. For more information regarding our existing indebtedness, see “Description of Certain Indebtedness.”

Our substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial indebtedness, combined with our other financial obligations and contractual commitments, could have important consequences. For example, it could:

 

    make 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;

 

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

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

    place us at a competitive disadvantage compared to our competitors that are less highly leveraged and therefore able to take advantage of opportunities that our indebtedness prevents us from exploiting; and

 

    limit our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other purposes.

Any of the above listed factors could have a material adverse effect on our business, prospects, results of operations and financial condition. Furthermore, our interest expense could increase if interest rates increase because a portion of our debt under our Senior Secured Credit Facilities bears interest at floating rates, which could adversely affect our cash flows. If we do not have sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell securities, none of which we can guarantee we will be able to do.

In addition, our Senior Secured Credit Facilities and Senior Subordinated Notes contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. A breach of any of these restrictive covenants, if not cured or waived, could result in an event of default that could trigger acceleration of our indebtedness and may result in the acceleration of or default under any other debt to which a cross-acceleration or cross-default provision applies, which could have a material adverse effect on our business and financial condition. Utilization of the Class B Revolving Credit Facility is subject to compliance with a total leverage ratio test. In addition, our Senior Secured Credit Facilities require prepayment of the outstanding indebtedness thereunder if we have certain excess cash flow, as described therein. Finally, our Senior Secured Credit Facilities require the repayment in full of all amounts outstanding thereunder upon a change of control, as defined therein, and the Indenture for our Senior Subordinated Notes requires us upon a change of control, as defined therein, to make an offer to repurchase all of the outstanding Senior Subordinated Notes.

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 Indenture governing the Senior Subordinated Notes and the Amended and Restated Credit Agreement governing our Senior Secured Credit Facilities contain restrictions on the incurrence

 

30


Table of Contents

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. 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.

The terms of our Senior Secured Credit Facilities and the Indenture governing the Senior Subordinated Notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

Our Senior Secured Credit Facilities and the Indenture governing the Senior Subordinated Notes contain, and any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interests.

The Amended and Restated Credit Agreement governing our Senior Secured Credit Facilities and the Indenture governing the Senior Subordinated Notes include covenants restricting, among other things, our ability to:

 

    incur liens;

 

    incur or assume additional debt or guarantees or issue or sell certain types of preferred stock;

 

    pay dividends or make redemptions and repurchases with respect to capital stock;

 

    prepay, or make redemptions and repurchases of, subordinated debt;

 

    make loans or investments; and

 

    engage in mergers, acquisitions, asset sales, sale/leaseback transactions and transactions with affiliates.

 

31


Table of Contents

The operating restrictions and covenants in these debt agreements and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. Our ability to comply with these covenants may be affected by events beyond our control, and any material deviations from our forecasts could require us to seek waivers or amendments of covenants, alternative sources of financing or reductions in expenditures. In addition, the outstanding indebtedness under our Senior Secured Credit Facilities are, subject to certain exceptions, secured by security interests in substantially all of our, SCA’s and the other Guarantors’ (as defined herein) assets. A breach of any of the restrictive covenants in the Amended and Restated Credit Agreement governing the Senior Secured Credit Facilities would result in a default, and our lenders may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable, or enforce and foreclose on their security interest and liquidate some or all of such pledged assets, any of which would result in an event of default under the Senior Subordinated Notes. The lenders under our Senior Secured Credit Facilities also have the right in these circumstances to terminate any commitments they have to provide further borrowings.

We are exposed to market risks related to interest rate changes.

We are exposed to market risk related to changes in interest rates as a result of the floating interest rates applicable to the outstanding debt under our Senior Secured Credit Facilities, including our $215.5 million Class B Term Loan due December 30, 2017 and our $390.0 million Class C Incremental Term Loan due June 30, 2018. The interest rate on the Class B Term Loan and the Class C Incremental Term Loan at June 30, 2013 was 4.28% and 4.25%, respectively. The weighted average interest rate for the outstanding debt under our Senior Secured Credit Facilities as of June 30, 2013 was 4.26%. Borrowings under each portion of the Senior Secured Credit Facilities bear interest at a base rate or at LIBOR, as elected by us, plus an applicable margin. The base rate is determined by reference to the higher of (i) the prime rate of JPMorgan Chase Bank, N.A. and (ii) the federal funds effective rate plus 0.50%. The LIBOR rate is determined by reference to the interest rate for dollar deposits in the London interbank market for the interest period relevant to such borrowings. There is no cap on the maximum interest rate for the Senior Secured Credit Facilities. As of June 30, 2013, we held forward starting interest rate swaps hedging interest rate risk on $240.0 million of our variable rate debt to manage our exposure to these fluctuations. These forward starting interest rate swaps, which are swaps that are entered into at a specified trade date but do not begin to accrue interest until a future start date, extend the interest rate swaps that we terminated in 2012 and will terminate in 2013. These swaps are “receive floating/pay fixed” instruments, meaning we receive floating rate payments, which fluctuate based on LIBOR, from the counterparty and provide payments to the counterparty at a fixed rate, the result of which is to convert the interest rate of a portion of our floating rate debt into fixed rate debt in order to limit the variability of interest-related payments caused by changes in LIBOR. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk.”

We make significant loans to the partnerships and limited liability companies that own and operate certain of our facilities.

For certain of our surgical facilities, indebtedness at the partnership or LLC level is funded through intercompany loans that we provide. Through many of these loans, which totaled approximately $42.4 million to 46 surgical facilities and $38.9 million to 43 surgical facilities as of December 31, 2012 and June 30, 2013, respectively, we have a security interest in the partnership’s or LLC’s assets. However, our business, prospects, financial condition and results of operations could be materially adversely affected if our surgical facilities are unable to repay these intercompany loans.

We are liable for certain debts and other obligations of the partnerships and limited liability companies that own and operate certain of our facilities.

In certain of the general partnerships, LPs, LLPs or LLCs in which one of our affiliates is the general partner or managing member, our affiliate is liable for some or all of the debts and other obligations of the entity. Our partners or co-members are often required to guarantee their pro rata share of any indebtedness or lease agreements to which the entity is a party in proportion to their ownership interest in the entity. As of June 30, 2013, we guaranteed a total of $38.1 million of debt, consisting of $35.5 million at consolidated facilities and

 

32


Table of Contents

$2.6 million in the aggregate at nonconsolidated and managed-only facilities. For more information regarding guarantees made to nonconsolidated or managed-only facilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Off-Balance Sheet Transactions.” There can be no assurance that a third-party lender or lessor would seek performance of the guarantees rather than seek repayment from us of any obligation of the general partnership, LP, LLP or LLC if there is a default, or that the physician partners or co-members would have sufficient assets to satisfy their guarantee obligations.

We may recognize impairments on long-lived assets, including goodwill and other intangible assets, or recognize impairments on our equity method investments.

Our balance sheet at June 30, 2013 contained intangible assets, including goodwill, of $754.5 million. Future acquisitions that result in the recognition of additional long-lived and intangible assets would cause an increase in these types of assets. On an ongoing basis, we evaluate whether facts and circumstances indicate any potential impairment to the carrying value of these assets could exist. Estimates of the future cash flows associated with the assets are critical to the impairment assessments. Changes in estimates based on changed economic conditions or business strategies could result in material impairment charges and therefore have a material adverse impact on our business, prospects, results of operations and financial condition.

We recognize an impairment charge when the decline in the estimated fair value of our equity method investments in our nonconsolidated facilities below their book value are judged to be other-than-temporary. Significant judgment is used to identify events or circumstances that would likely have a significant adverse effect on the future prospects of an equity method investment. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery and the financial condition and near-term prospects of the facility. Our current evaluation of other-than-temporary impairments reflects our intent to maintain our equity method investments for a reasonable period of time sufficient for a forecasted recovery of fair value. However, our intent to hold certain of these investments may change in future periods as a result of facts and circumstances impacting the operations of the facility. If our intent changes and we do not expect the equity method investment to fully be recoverable, we will write down the investment to its fair value in the period that our intent changes.

We may not be able to fully realize the value of our net operating loss carryforwards.

As of December 31, 2012, we had unused federal net operating loss carryforwards (“NOLs”) of approximately $241.1 million. Such losses expire in various amounts at varying times beginning in 2027. Unless they expire, these NOLs may be used to offset future taxable income and thereby reduce our income taxes otherwise payable. While we believe we will be able to use a substantial portion of these tax benefits before they expire, no such assurances can be provided. For further discussion of our NOLs see Note 13, Income Taxes, to the accompanying consolidated financial statements.

As of December 31, 2012, we maintained a full valuation allowance of $151.8 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 June 30, 2013, 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

 

33


Table of Contents

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% 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. It is possible that future transactions, not all of which would be within our control (including a possible sale by the TPG Funds 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 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.

Our facilities may be adversely impacted by weather and other factors beyond our control.

The financial results of our facilities may be adversely 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, teammates and physician partners and force certain of our facilities to close temporarily or for an extended period of time. In certain markets, including Southern and Northern California, we have a large concentration of surgery centers that may be simultaneously affected by adverse weather conditions, earthquakes, wildfires or other events beyond our control.

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 Health Inventures, LLC. 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 Health Inventures, LLC 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 condensed combined financial statements of operations and related notes.

Risks Related to Healthcare Regulation

We are currently unable to predict the impact of the Health Reform Law, which represents a significant change to the healthcare industry.

The Health Reform Law will change how healthcare services are covered, delivered and reimbursed through, among other things, expanded coverage of uninsured individuals, reduced growth in Medicare program spending and the establishment of programs where reimbursement is tied to quality. In addition, the Health Reform Law reforms certain aspects of health insurance, expands existing efforts to tie Medicare and Medicaid payments to performance and quality, and contains provisions intended to strengthen fraud and abuse enforcement. Further, the Health Reform Law provides for a value-based purchasing program, the establishment of ACOs and bundled payment pilot programs, through which healthcare providers are paid a single “bundled” payment for multiple services delivered to a single patient during a specific episode of care or period of time.

 

34


Table of Contents

The Health Reform Law was signed into law in March of 2010 and was largely upheld as constitutional by the Supreme Court on June 28, 2012. However, many of its measures do not take effect until 2014. In addition, the Health Reform Law’s employer mandate, which requires firms with 50 or more full-time employees to offer health insurance or pay fines, will be delayed until January 1, 2015. Further, it is unclear how many states will decline to implement the Medicaid expansion provisions of the law. The Health Reform Law is intended to provide coverage and access to substantially all Americans, to increase the quality of care provided and to reduce the rate of growth in healthcare expenditures. The changes include, among other things, expanding Medicare’s use of value-based purchasing programs, tying facility payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, reducing Medicare and Medicaid payments, expanding Medicaid eligibility, requiring many health plans (including Medicare) to cover, without cost-sharing, certain preventative services and expanding access to health insurance. The Health Reform Law also places limitations on an exception to Section 1877 of the Social Security Act, or the “Stark Law,” which allows physicians to invest in hospitals if the physicians’ investments are in the entire hospital and not just a department of the hospital (the “whole hospital exception”). Among other things, the Health Reform Law prohibits hospitals from increasing the percentages of the total value of the ownership interests held in the hospital by physicians after March 23, 2010, and places restrictions on the ability of a hospital subject to the whole hospital exception to add operating rooms, procedure rooms and beds. The Health Reform Law provides for additional enforcement tools, cooperation between federal agencies and funding for enforcement. It is difficult to predict the impact the Health Reform Law will have on our operations given the delay in implementing regulation, pending court challenges and possible amendment or repeal of elements of the Health Reform Law. The Health Reform Law mandates reductions in reimbursement, such as adjustments to the hospital inpatient and outpatient prospective payment system market basket updates and productivity adjustments to Medicare’s annual inflation updates, which became effective in 2010 and 2012. Further, additional cuts to Medicare and Medicaid payments are expected as Congress continues to deal with the U.S. fiscal crisis.

The Health Reform Law makes several significant changes to healthcare fraud and abuse laws, provides additional enforcement tools for the Federal government, increases cooperation between federal agencies by establishing mechanisms for the sharing of information and enhances criminal and administrative penalties for non-compliance. For example, the Health Reform Law (i) provides $350 million in increased federal funding over the next 10 years to fight healthcare fraud, waste and abuse; (ii) expands the scope of the Recovery Audit Contractor (“RAC”) program to include both the Medicaid and Medicare Advantage plans; (iii) authorizes the U.S. Department of Health and Human Services (“HHS”), in consultation with the Office of Inspector General (“OIG”), to suspend Medicare and Medicaid payments to a provider of services or a supplier “pending an investigation of a credible allegation of fraud”; (iv) provides Medicare contractors with additional flexibility to conduct random prepayment reviews; and (v) strengthens the rules for returning overpayments made by governmental health programs, including expanding liability under the False Claims Act (the “FCA”) to extend to failures to timely repay identified overpayments.

As a result of the Health Reform Law, we expect enhanced scrutiny of healthcare providers’ compliance with state and federal regulations, increased enforcement of infection control standards and implementation of other quality control measures. Several commercial payors also do not reimburse providers for certain preventable adverse events. The Health Reform Law also contains a number of provisions that are intended to improve the quality of care that is provided to Medicare and Medicaid beneficiaries. For example, CMS has established an ASC Quality Reporting Program, which will be implemented beginning with 2014 payment determinations, based on data collected beginning in 2012. An increased emphasis by government and accreditation agencies on the accuracy of quality reporting, quality performance and more rigorous performance standards and oversight could result in a reduction of the payments and fees that we receive from Medicare.

Because of the many fluid and dynamic variables involved, we are currently unable to predict the net effect of the Health Reform Law and other associated changes within the healthcare industry on us or our operations. Further, it is unclear how efforts to repeal or revise the Health Reform Law will be resolved or what the impact, if any, would be of any resulting changes to the law. However, depending on how the Health Reform Law is ultimately interpreted, amended and implemented, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

35


Table of Contents

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.

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, certification and other requirements, including, but not limited to, those relating to:

 

    ownership and control of our facilities;

 

    qualification of medical and support persons;

 

    pricing of, billing for and coding of services and properly handling overpayments;

 

    the 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;

 

    provision of emergency services;

 

    antitrust;

 

    state licensing standards; 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.

We do not control compliance programs at certain of our nonconsolidated facilities; however, if there are failures in compliance or regulatory violations at those facilities, such failures or violations could have a material adverse effect on our business, prospects, results of operations and financial condition.

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 will not be able to expand into new states.

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

Regulatory changes or changes in the interpretation of existing laws or regulations may obligate us to purchase all of the ownership interests of the physician investors in partnerships or limited liability companies that own and operate our facilities. Such changes would include those that:

 

    make illegal the referral of patients to our facilities by physician investors;

 

36


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

 

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

In addition, some of our partnership and operating agreements with our physician partners and management agreements with our facilities require us to renegotiate such agreements upon the occurrence of various fundamental regulatory changes or changes in the interpretation of existing regulations and provide for termination of such agreements if such renegotiations are not successful.

We cannot control whether or when any of these regulatory events might occur. In the event we are required to purchase all of the physicians’ ownership interests in our facilities, our existing capital resources would not be sufficient for us to meet this obligation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” These obligations and the possible termination of our partnership, operating and management agreements would have a material adverse effect on our business, prospects, results of operations and financial condition.

The Medicare and Medicaid programs, which together provide a material portion of our net patient revenues, are particularly susceptible to legislative and regulatory changes that could adversely affect our revenues and profitability.

The Medicare and Medicaid programs are subject to statutory and regulatory changes, retroactive and prospective rate adjustments, spending freezes, federal and state funding reductions and administrative rulings and interpretations concerning, without limitation, patient eligibility requirements, funding levels and the method of calculating payments or reimbursements. Any of these factors could adversely affect the level and timing of payments to our surgical facilities. For the year-ended December 31, 2012, payments from Medicare and Medicaid represented approximately 21% and 4% of our net patient revenues, respectively and for the six-months ended June 30, 2013, payments from Medicare and Medicaid represented 22% and 3% of our net patient revenues, respectively.

In recent years, legislative and regulatory changes have resulted in limitations on and, in some cases, reductions in levels of payments to healthcare providers for certain services under the Medicare program. The Budget Control Act of 2011 (the “BCA”) requires automatic spending reductions of $1.2 trillion for federal fiscal years 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. The percentage reduction for Medicare may not be more than 2% for a fiscal year, with a uniform percentage reduction across all Medicare programs. The BCA-mandated spending reductions went into effect on March 1, 2013. We are unable to predict how these spending reductions will be structured, what other deficit reduction initiatives may be proposed by Congress or whether Congress will attempt to suspend or restructure the automatic budget cuts. These reductions will be in addition to reductions mandated by the Health Reform Law, which provides for material reductions in the growth of Medicare program spending.

Many states must operate with balanced budgets and the Medicaid program is often the largest budget expenditure for many states. The current economic environment has increased the budgetary pressures on many states and these budgetary pressures have resulted, and likely will continue to result, in decreased spending or decreased spending growth for Medicaid programs in many states. Some states that provide Medicaid supplemental payments are reviewing these programs or have filed waiver requests with CMS to replace these programs, which could result in Medicaid supplemental payments being reduced or eliminated.

The Tax Relief and Health Care Act of 2006 permitted the Secretary of HHS to require ASCs to report certain quality information beginning in 2009. CMS has established an ASC Quality Reporting Program, which will be implemented beginning with 2014 payment determinations, based on data collected beginning in 2012. An increased emphasis by government and accreditation agencies on the accuracy of quality reporting could result in a reduction of the payments that we receive from Medicare.

 

37


Table of Contents

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 or if the scope of services covered by governmental payors is limited there could be, in either case, a material adverse effect on our business, prospects, results of operations and financial condition.

Our surgical facilities do not satisfy the requirements for any of the safe harbors under the Anti-Kickback Statute. If we fail to comply with the Anti-Kickback Statute, 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 revenues.

The Anti-Kickback Statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or services payable by Medicare, Medicaid or any other federally funded healthcare program. The Anti-Kickback Statute is broad in scope, and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. Courts have found a violation of the Anti-Kickback Statute if just one purpose of the remuneration is to generate referrals, even if there are other lawful purposes. Violations of the Anti-Kickback Statute may result in substantial civil or criminal penalties, plus three times the remuneration involved or the amount claimed and exclusion from participation in the Medicare and Medicaid 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 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, HHS issued final regulations defining various “safe harbors” under the Anti-Kickback Statute. Business arrangements that meet the requirements of the safe harbors are deemed to be in compliance with 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. However, the structure of the entities operating our facilities generally does not satisfy all of the requirements of either such safe harbor.

In November 1999, HHS issued final regulations creating additional safe harbor provisions, including a safe harbor that applies to physician ownership of, or investment interests in, ASCs. However, our ASC arrangements do not comply with all the requirements of the ASC safe harbor and, therefore, are not immune from government review or prosecution.

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

Although we believe that our business arrangements do not violate the Anti-Kickback Statute or similar state laws, a government agency or a private party may assert a contrary position. Additionally, new federal or state laws may be enacted that would cause our relationships with our physician partners to become illegal or result in the imposition of penalties against us or our facilities. If any of our business arrangements with physician partners 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.

 

38


Table of Contents

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 revenues.

The federal physician self-referral law, commonly referred to as the Stark Law, prohibits a physician from making a referral to an entity for the furnishing of certain “designated health services” otherwise payable under Medicare or Medicaid if the physician or a member of the physician’s immediate family has a financial relationship with the entity, such as an ownership interest or compensation arrangement, unless an exception applies. The Stark Law also prohibits entities that provide designated health services otherwise payable by Medicare or Medicaid from billing the Medicare and Medicaid programs for any items or services that result from a prohibited referral and requires the entities to refund amounts received for items or services provided pursuant to the prohibited referral. HHS, acting through CMS, has promulgated regulations implementing the Stark Law. These regulations exclude health services provided by an ASC from the definition of “designated health services” if the services are included in the facility’s composite Medicare payment rate. Therefore, the Stark Law’s self-referral prohibition generally does not apply to health services provided by an ASC. However, if the ASC is separately billing Medicare for designated health services that are not covered under the ASC’s composite Medicare payment rate, or if either the ASC or an affiliated physician is performing (and billing Medicare) for procedures that involve designated health services that Medicare has not designated as an ASC service, the Stark Law’s self-referral prohibition would apply and such services could implicate the Stark Law. We believe that our operations do not violate the Stark Law, as currently interpreted. All services provided by our ASCs that would otherwise constitute designated health services are reimbursed by Medicare as part of the composite payment rate and are thus subject to an exception from the Stark Law, with the exception of implants. The Stark Law provides for a special exception for implants, such as intraocular lenses and artificial joints, furnished in ASCs as long as certain regulatory requirements are met. These requirements provide that the implant must be implanted by the referring physician or a member of his or her group practice, that the implant be implanted during a surgical procedure reimbursed as an ASC procedure by Medicare, that the arrangement for the furnishing of the implant not violate the Anti-Kickback Statute and that the billing for the implant be conducted legally. In addition, we believe that physician ownership of ASCs is not prohibited by similar self-referral statutes enacted at the state level. However, the Stark Law and similar state statutes are subject to different interpretations with respect to many important provisions. Moreover, the Stark Law applies to our five surgical hospitals. Violations of these self-referral laws may result in substantial civil or criminal penalties, including large civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs. If physician self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur significant sanctions and loss of revenues, or we could have to change our arrangements and operations in a way that could have a material adverse effect on our business, prospects, results of operations and financial condition.

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 Health Reform Law 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 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 Health Reform Law 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

 

39


Table of Contents

reporting and billing practices; quality of care; financial reporting; financial relationships with referral sources; and medical necessity of services provided. In addition, the OIG and the U.S. Department of Justice (“DOJ”) have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse.

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. Claims filed with private insurers can also lead to criminal and civil penalties. 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 accused an increasing number of healthcare providers of violating the FCA, which 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.

Under the “qui tam,” or whistleblower, provisions of the FCA, private parties may bring actions on behalf of the Federal 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, under the Health Reform Law, if we receive an overpayment, we must report and refund the overpayment before the later of sixty days after the overpayment was identified or the date any corresponding cost report is due, if applicable. Any overpayment that is retained after this deadline is considered an obligation subject to an action under the FCA. Although we believe that our operations comply with both federal and state laws, they may nevertheless be the subject of a whistleblower lawsuit or may otherwise be challenged or scrutinized by governmental authorities. A determination that we have violated these laws could have a material adverse effect on our business, prospects, results of operations and financial condition.

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 believe that our surgical facilities are in material compliance with all such laws, regulations and contractual provisions regarding the submission of claims. We cannot be sure, however, 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 Health Reform Law expanded the RAC program’s scope to include managed Medicare plans and to include Medicaid claims. In addition, CMS employs Medicaid Integrity Contractors

 

40


Table of Contents

(“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. The Health Reform Law 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 internal audits and monitoring. Depending on the nature of the conduct found in such audits and whether the underlying conduct could be considered systemic, 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 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 and 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.

We are subject to federal privacy regulations enacted under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and ensuring continued compliance with HIPAA could require us to expend significant resources and capital, impair our profitability and limit our ability to grow our business.

HIPAA mandates the adoption of privacy, security and integrity standards related to patient information and standardizes the method for identifying providers, employers, health plans and patients. Numerous federal regulations have been adopted under HIPAA. We have taken actions to comply with the HIPAA privacy regulations and believe that we are in substantial compliance with those regulations. These actions include the establishment of policies and procedures, 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.

Other federal regulations adopted under HIPAA require our surgical facilities to conduct certain standardized healthcare transactions, including billing and other claim transactions. We have undertaken significant efforts involving substantial time and expense to ensure that our surgical facilities and hospitals submit HIPAA-compliant transactions. We anticipate that continual time and expense will be required to submit HIPAA-compliant transactions and to ensure that any newly acquired facilities can submit HIPAA-compliant transactions.

In addition, compliance with the HIPAA security regulations requires ASCs, hospitals and other covered entities to implement reasonable technical, physical and administrative security measures to safeguard protected healthcare information maintained, used and disclosed in electronic form. We have taken actions in an effort to be in compliance with these regulations and believe that we are in substantial compliance with the HIPAA security regulations. A cyber-attack 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 fines. Ongoing implementation and oversight of these security measures involves significant time, effort and expense. For additional information regarding the risks related to management and security of our information systems, see “— If we are unable to manage and secure our information systems effectively, our operations could be disrupted.”

 

41


Table of Contents

The American Recovery and Reinvestment Act of 2009, as amended (“ARRA”), broadened the scope of the HIPAA privacy and security regulations. Among other things, ARRA extends the application of certain provisions of the security and privacy regulations to business associates (entities that handle identifiable health information on behalf of covered entities) and subjects business associates to civil and criminal penalties for violation of the regulations. ARRA and its implementing regulations also require 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. Pursuant to a rule issued to implement ARRA, HHS has created a presumption that all non-permitted uses or disclosures of unsecured protected health information are breaches unless the covered entity or business associate establishes that there is a low probability the information has been compromised. Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties, and ARRA strengthened HIPAA’s enforcement provisions. ARRA increased the amount of civil penalties, with penalties now ranging up to $50,000 per violation and a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement. In addition, ARRA 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.

In addition, states may impose more protective privacy laws, and 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. If we fail to comply with HIPAA or similar state laws, we could incur substantial monetary penalties.

If we are unable to manage and secure our information systems effectively, 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 revenues. Moreover, 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, 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 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 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.

If we fail to effectively and timely implement electronic health record systems and transition to the ICD-10 coding system, our operations could be adversely affected.

As required by ARRA, the Secretary of HHS has developed and implemented an incentive payment program for eligible hospitals and healthcare professionals that adopt and meaningfully use certified electronic health record (“EHR”) technology. We have incurred and will continue to incur both capital costs and operating expenses in order to implement certified EHR technology and meet meaningful use requirements. We have incurred $3.5 million of operating expenses to implement our certified EHR technology and to meet meaningful

 

42


Table of Contents

use requirements. These expenses are ongoing and are projected to continue over all stages of implementation of meaningful use. The timing of expenses will not correlate with the receipt of the incentive payments and the recognition of incentive income. If our eligible hospitals are unable to meet the requirements for participation in the incentive payment program, we will not be eligible to receive incentive payments that could offset some of the costs of implementing EHR systems. In addition, although the ARRA incentive payment program does not apply to surgery centers, we have not yet determined an EHR solution for our surgery center facilities. A requirement that surgery centers adopt and meaningfully use EHR technology could cause us to incur significant additional capital costs and operating expenses. As physicians become more integrated with EHR in their practices, we could incur additional capital costs and operating expenses in connection with implementing new technologies at our surgery centers.

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, 2014. This transition requires significant investment in coding technology and software, and training of staff involved in the coding and billing process. In addition to these upfront costs of transitioning to ICD-10, our facilities could experience disruption or delays in payment due to technical or coding errors or other implementation issues involving either our systems, or the systems and implementation efforts of health plans and their business partners. Further, the extent to which the transition to the more detailed ICD-10 coding system could result in decreased reimbursement, because the use of ICD-10 codes results in conditions being reclassified to payment groupings with lower levels of reimbursement than assigned under the previous system, is unknown at this time.

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

Some states require us to apply for and receive prior approval, typically in the form of a certificate of need (“CON”), for the construction, relocation, acquisition, change of ownership or change of control of healthcare facilities or expansion of the number of operating or procedure rooms or services our facilities offer. In granting approval, these states consider the need for additional or expanded healthcare facilities or for additional or expanded services. Additionally, third parties, including our competitors, have the right to, and often do, object to our applications for a CON. In many of the states in which we currently operate, CONs must be obtained for capital expenditures exceeding a prescribed amount, changes in capacity or services offered and various other matters, including change of control or change of ownership. At such time that TPG’s percentage of ownership of us drops below 50%, whether as result of our issuances of additional shares of common stock or as a result of TPG’s sale of shares of our common stock, or there is otherwise deemed to be a change of control or change of ownership of us, certain states will require that either a new CON be obtained, or an exemption to such requirement be applied for and granted. Other states in which we now or may in the future operate may adopt similar legislation. Our costs of obtaining a CON could be significant, and we cannot ensure that we will be able to obtain the CON or other required approvals for the addition, expansion or change of control or change of ownership of facilities or services in the future. If we are unable to obtain required approvals, we may not be able to acquire additional facilities, expand healthcare services we provide at our existing facilities or replace, expand or relocate our 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

 

43


Table of Contents

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 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 this Offering

We will be a “controlled company” within the meaning of the NASDAQ rules and, as a result, 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.

Upon completion of this offering, the TPG Funds will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the NASDAQ corporate governance requirements. Under these rules, a company of which more than 50% 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 requirements:

 

    that a majority of the board of directors consists of independent directors;

 

    that we have a nominating and corporate governance committee that is composed entirely of independent directors;

 

    that we have a compensation committee that is composed entirely of independent directors; and

 

    that an annual performance evaluation of the nominating and corporate governance and compensation committees occurs.

Following this offering, we intend to utilize these exemptions. As a result, we will not have a majority of independent directors, our nominating and corporate governance committee and compensation committee will not consist entirely of independent directors and such committees will not be subject to annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.

In addition, on June 20, 2012, the SEC passed final rules implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 pertaining to compensation committee independence and the role and disclosure of compensation consultants and other advisers to the compensation committee. The SEC’s rules directed each of the national securities exchanges to develop listing standards requiring, among other things, that:

 

    compensation committees be composed of fully independent directors, as determined pursuant to new independence requirements;

 

    compensation committees be explicitly charged with hiring and overseeing compensation consultants, legal counsel and other committee advisors; and

 

    compensation committees be required to consider, when engaging compensation consultants, legal counsel or other advisors, certain independence factors, including factors that examine the relationship between the consultant or advisor’s employer and us.

 

44


Table of Contents

On January 11, 2013, the SEC approved the proposed listing standards of the national securities exchanges, including the NASDAQ, related to, among other items, compensation committee independence requirements. As a “controlled company,” we will not be subject to these compensation committee independence requirements, but we will be subject to the other requirements.

TPG 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, and which may result in conflicts with us or you in the future.

We are controlled, and after this offering is completed will continue to be controlled, by TPG. Upon consummation of this offering, the TPG Funds will own approximately     % of our common stock (or     % if the underwriters’ option to purchase additional shares of our common stock is exercised in full). In connection with the completion of this offering, the management services agreement with TPG will terminate. Pursuant to the Stockholders’ Agreement, at the completion of this offering representatives of TPG will have the right to designate          seats on our board of directors, and as a result Mr. Sisitsky, a TPG Partner, Mr. Rhodes, a TPG Principal, and Mr. Geiser and Dr. Mansukani, each of whom provide consulting services to TPG, will be appointed to our board of directors following the completion of this offering. As a result, TPG will be able to exercise control over our affairs and policies, including the approval of certain actions such as amending our Certificate of Incorporation, commencing bankruptcy proceedings and taking certain corporation actions (including, without limitation, incurring debt, issuing stock, selling assets and engaging in mergers and acquisitions), appointing members of our management and any transaction that requires stockholder approval regardless of whether others believe that such change or transaction is in our best interests. The interests of TPG may not be consistent with your interests as a stockholder. So long as the TPG Funds continue to hold a majority of our outstanding common stock, TPG will have the ability to control the vote in any election of directors, amend our Certificate of Incorporation or By-Laws or take other actions requiring the vote of our stockholders. Even if such amount is less than 50%, TPG will continue to be able to strongly influence or effectively control our decisions. So long as the TPG Funds collectively own at least     % of all outstanding shares of our common stock, they will be able to nominate a majority of the seats on our board of directors. This control may also have the effect of deterring hostile takeovers, delaying or preventing changes of control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of our company. In addition, although we have opted out of the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), which regulates corporate takeovers, our Certificate of Incorporation contains similar provisions related to business combinations with interested stockholders and provides that TPG and any of its direct or indirect transferees and any group as to which such persons are a party, do not constitute interested stockholders for purposes of this provision.

Additionally, TPG is in the business of making investments in companies and may currently hold, and may from time to time in the future acquire, controlling interests in businesses engaged in industries that complement or compete, directly or indirectly, with certain portions of our business. Further, if TPG pursues other acquisitions in our industry, those acquisitions may not be available to us. So long as the TPG Funds continue to indirectly own a significant amount of our equity, TPG will continue to be able to strongly influence or effectively control our decisions.

We are an “emerging growth company” under the JOBS 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,” under the JOBS Act, and we are permitted to, and intend to, take advantage of certain exemptions from certain disclosure requirements. We are an “emerging growth company” until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of $1.0 billion or more, (ii) the last day of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in

 

45


Table of Contents

non-convertible debt or (iv) the date on which we are deemed a “large accelerated filer” as defined under the federal securities laws. For so long as we remain an “emerging growth company”, 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, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on certain executive compensation matters, such as “say on pay” and “say on frequency.” As a result, our stockholders may not have access to certain information that they may deem important. Although we intend to rely on the exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have determined to opt out of such extended transition period and, as a result, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised financial accounting standards is irrevocable.

We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.

Some provisions of Delaware law and our governing documents could discourage a takeover that stockholders may consider favorable.

In addition to the TPG Funds’ ownership of a controlling percentage of our common stock, Delaware law and provisions contained in our Certificate of Incorporation and By-Laws could have the effect of delaying, deferring or preventing a change of control of us. A change of control could be proposed in the form of a tender offer or takeover proposal that might result in a premium over the market price for our common stock. In addition, these provisions could make it more difficult to bring about a change in the composition of our board of directors, which could result in entrenchment of current management. For example, our Certificate of Incorporation and By-Laws will:

 

    establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

    require that the number of directors be determined, and any vacancy or new board seat be filled, only by the board of directors;

 

    not permit stockholders to act by written consent once TPG ceases to beneficially own more than 50% of our outstanding shares entitled to vote generally in the election of directors;

 

    not permit stockholders to call a special meeting, provided, however, at any time when TPG beneficially owns at least 50% of our outstanding shares entitled to vote generally in the election of directors, special meetings of our stockholders shall also be called by the board of directors or the chairman of the board of directors at the request of TPG;

 

    require a 66 23% vote of all outstanding shares entitled to vote generally in the election of directors in order to amend certain provisions in the Certificate of Incorporation and By-Laws;

 

    provide that our directors may be removed only for cause by the affirmative vote of at least 66 23% of our outstanding shares entitled to vote generally in the election of directors;

 

46


Table of Contents
    establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;

 

    authorize the issuance of undesignated preferred stock, or “blank check” preferred stock, by our board of directors without stockholder approval; and

 

    contain provisions similar to that of Section 203 of the DGCL related to business combinations with interested stockholders and provide that TPG and any of its direct or indirect transferees and any group as to which such persons are a party, do not constitute interested stockholders for purposes of this provision.

Many of our employment agreements, plans and equity arrangements with our executive officers also contain change of control provisions. Under the terms of these arrangements, the executive officers are entitled to receive (i) certain payments or benefits upon a termination without cause or for good reason and (ii) accelerated vesting of option awards if the executive is terminated without cause or for good cause within the two-year period following a change in control. We note that a change in control should not be triggered under these arrangements solely by this offering. See “Executive Compensation” for disclosure regarding potential payments to named executive officers following a change of control.

These and other provisions of our organizational documents and Delaware law may have the effect of delaying, deferring or preventing changes of control or changes in management, even if such transactions or changes would have significant benefits for our stockholders. See “Description of Capital Stock.” As a result, these provisions could limit the price some investors might be willing to pay in the future for shares of our common stock.

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 the 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 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.

You will incur immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

Prior investors have paid substantially less per share of our common stock than the price in this offering. The initial public offering price of our common stock is substantially higher than the net tangible book value per share of outstanding common stock prior to completion of the offering. Based on our net tangible book value as of June 30, 2013 and upon the issuance and sale of             shares of common stock by us at an assumed initial public offering price of $ per share (the midpoint of the price range indicated on the cover of this prospectus), if you purchase our common stock in this offering, you will pay more for your shares than the amounts paid by our existing stockholders for their shares and you will suffer immediate dilution of approximately $         per share in net tangible book value. We also have a large number of outstanding stock options to purchase common stock with exercise prices that are below the estimated initial public offering price of our common stock. In addition, HealthSouth Corporation (“HealthSouth”) holds an unvested option to purchase equity securities constituting 5% of the equity securities issued and outstanding as of the closing of our acquisition in 2007 on a fully diluted basis,

 

47


Table of Contents

which becomes exercisable upon certain customary liquidity events, including an initial public offering of shares of our common stock that results in 30% or more of our common stock being listed or traded on a national securities exchange. See “Principal and Selling Stockholders—Option Agreement” for additional information regarding the option held by HealthSouth. To the extent that these stock options are exercised or the option held by HealthSouth to purchase common shares becomes vested and is exercised, you will experience further dilution. See “Dilution.”

The market price of our common stock may fluctuate significantly following the offering, our common stock may trade at prices below the initial public offering price, and you could lose all or part of your investment as a result.

The initial public offering price of our common stock has been determined by negotiation between us and the representatives of the underwriters based on a number of factors as further described under “Underwriting (Conflicts of Interest)” and may not be indicative of prices that will prevail in the open market following completion of this offering. You may not be able to resell your shares at or above the initial public offering price due to a number of factors such as those listed in “— Risks Related to Our Business” and the following, some of which are beyond our control:

 

    quarterly variations in our results of operations;

 

    results of operations that vary from the expectations of securities analysts and investors;

 

    results of operations that vary from those of our competitors;

 

    changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

 

    strategic actions by us or our competitors;

 

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

 

    changes in business or regulatory conditions;

 

    investor perceptions or the investment opportunity associated with our common stock relative to other investment alternatives;

 

    the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

    guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

    changes in accounting principles;

 

    announcements by third parties or governmental entities of significant claims or proceedings against us;

 

    new laws and governmental regulations applicable to the healthcare industry, including the Health Reform Law;

 

    a default under the agreements governing our indebtedness;

 

    future sales of our common stock by us, directors, executives and significant stockholders;

 

    changes in domestic and international economic and political conditions and regionally in our markets; and

 

    other events or factors, including those resulting from natural disasters, war, acts of terrorism or responses to these events.

Furthermore, the stock market has recently experienced extreme volatility that, in some cases, has been unrelated or disproportionate to the operating performance of particular companies. These broad market and

 

48


Table of Contents

industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. As a result, our common stock may trade at a price significantly below the initial public offering price.

In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.

Fluctuations in our future operating results may negatively affect the market price of our common stock.

Our operating results have fluctuated in the past and can be expected to fluctuate from time to time in the future. Some of the factors that may cause these fluctuations include but are not limited to:

 

    the timing, volume and pricing of procedures at our facilities;

 

    the impact to the marketplace of competitive products and pricing;

 

    surgery-related supplies, implants and equipment availability and cost;

 

    changes in or announcements regarding potential changes to Medicare reimbursement rates; and

 

    shifts in our ownership percentage in our facilities.

If our operating results are below the expectations of securities analysts or investors, the market price of our common stock may fall abruptly and significantly.

If we or our existing investors sell additional shares of our common stock after this offering, the market price of our common stock could decline.

The market price of our common stock could decline as a result of sales of a large number of shares of common stock in the market after this offering, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon the completion of this offering, we will have                 million shares of common stock outstanding,                 million shares if the underwriters’ option to purchase additional shares of our common stock is exercised in full. Of these outstanding shares of common stock, we expect all of the shares of common stock sold in this offering will be freely tradable in the public market. We expect                 shares of common stock will be restricted securities as defined in Rule 144 under the Securities Act (“Rule 144”) and may be sold by the holders into the public market from time to time in accordance with and subject to limitation on sales by affiliates under Rule 144.

We, our directors, our executive officers, the TPG Funds and the selling stockholders have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 180 days after the date of this prospectus without first obtaining the written consent of J.P. Morgan Securities LLC and Citigroup Global Markets Inc.

As of                     , 2013,                 shares of our common stock were outstanding,                 shares were issuable upon the exercise of outstanding vested stock options under our stock incentive plans,                  shares were subject to outstanding unvested stock options under our stock incentive plans, and                 shares were reserved for future grant under our stock incentive plans. Shares acquired upon the exercise of vested options under our stock incentive plans will first become eligible for resale                  days after the date of this prospectus. Sales of a substantial number of shares of our common stock following the vesting of outstanding stock options could cause the market price of our shares of common stock to decline.

 

49


Table of Contents

Because we do not currently intend 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 currently intend to retain future earnings, if any, for future operation, expansion and debt repayment and do not intend 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, restrictions imposed by applicable law or the SEC 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 Secured Credit Facilities. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. 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.

We are a holding company with nominal net worth and will depend on dividends and distributions from our subsidiaries to pay any dividends.

Surgical Care Affiliates is a holding company with nominal net worth. We do not have any assets or conduct any business operations other than our investments in our subsidiaries. Our business operations are conducted primarily out of our direct operating subsidiary, SCA. As a result, our ability to pay dividends, if any, will be dependent upon cash dividends and distributions or other transfers from our subsidiaries, including from SCA. Payments to us by our subsidiaries will be contingent upon their respective earnings and subject to any limitations on the ability of such entities to make payments or other distributions to us. See “— Risks Related to our Business — The terms of our Senior Secured Credit Facilities and the Indenture governing the Senior Subordinated Notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.” for additional information regarding the limitations currently imposed by our Senior Secured Credit Facilities and the Indenture governing the Senior Subordinated Notes. In addition, our subsidiaries, including our direct operating subsidiary, SCA, are separate and distinct legal entities and have no obligation to make any funds available to us.

Our internal controls over financial reporting 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” under the JOBS 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 shall 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

 

50


Table of Contents

may issue an adverse opinion due to ineffective internal controls over financial reporting and we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could have a material adverse effect on our business, prospects, results of operations and financial condition.

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 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.

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” under the JOBS 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.

 

51


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus may contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. These statements can be identified by the fact that they do not relate strictly to historical or current facts, and you can often identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “projects,” “forecasts,” “shall,” “contemplates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this prospectus are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of this forward-looking information should not be regarded as a representation by us, the selling stockholders, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. You should not place undue reliance on any forward-looking statements and should consider the following factors, as well as the factors discussed elsewhere in this prospectus, including under “Risk Factors” beginning on page 20. We believe that these factors include, but are not limited to:

 

    our dependence on payments from third-party payors, including governmental healthcare programs, commercial payors and workers’ compensation programs;

 

    our inability or the inability of our healthcare system partners to negotiate favorable contracts or renew existing contracts with non-governmental third-party payors on favorable terms;

 

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

 

    the fact that the Medicare and Medicaid programs provide a significant portion of our revenues and are each particularly susceptible to legislative and regulatory change;

 

    the implementation by states of reduced fee schedules and reimbursement rates for workers’ compensation programs;

 

    our inability to maintain good relationships with our current health system partners or our inability to enter into relationships with new health system partners;

 

    material changes in IRS revenue rulings, case law or the interpretation of such rulings;

 

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

 

    the potential reduction in the number of surgical procedures because of physician treatment methodologies and governmental or commercial health insurance controls;

 

    our inability to attract new physician investors and to acquire and develop additional surgical facilities on favorable terms;

 

    shortages of, or quality control issues with, surgery-related products, equipment and medical supplies that could result in a disruption of our operations;

 

    the competition for staffing, shortages of qualified personnel or other factors that drive up labor costs;

 

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

 

    the fact that we are subject to significant malpractice and related legal claims, and we could be required to pay significant damages in connection with those claims;

 

    the adverse effect of current and future economic conditions on volume and case mix;

 

52


Table of Contents
    the regulatory, economic and other conditions in certain states in which many of our facilities are concentrated;

 

    the fact that we have a history of net losses and may not achieve profitability in the future;

 

    the fact that 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 interest;

 

    the difficulty in operating and integrating newly acquired or developed facilities;

 

    the growth of patient receivables or the deterioration in the ability to collect on those accounts;

 

    the loss of the service of our senior management;

 

    our reliance on our private equity sponsors;

 

    our $792.4 million of indebtedness (excluding capital leases) outstanding as of June 30, 2013, and our ability to incur additional indebtedness in the future;

 

    our inability to generate sufficient cash in order to meet our debt service obligations;

 

    restrictions on our current and future operations because of the terms of our Senior Secured Credit Facilities and the Indenture governing the Senior Subordinated Notes;

 

    market risks related to interest rate changes;

 

    significant loans that we have made to the partnerships and limited liability companies that own and operate certain of our facilities;

 

    our liability for certain debt and other obligations of the partnerships and limited liability companies that own and operate certain of our facilities;

 

    recognition of impairment on our long-lived assets or equity method investments;

 

    our inability to fully realize the value of our NOLs;

 

    adverse impact of weather and other factors beyond our control on our facilities;

 

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

 

    our inability to predict the impact on us of the Health Reform Law, which represents a significant change to the healthcare industry;

 

    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 or require us to make significant changes to our operations;

 

    our obligations to purchase some or all of the ownership interests of our physician partners or renegotiate some of our partnership and operating agreements because of changes to laws or regulations governing physician ownership of our facilities;

 

    our failure to comply with the Anti-Kickback Statute or the physician self-referral laws;

 

    restrictions by federal law on our ability to expand surgical capacity of our surgical hospitals;

 

    our being subject to federal and state audits and investigations, including actions for false and improper claims;

 

    our failure to comply with Medicare’s conditions for coverage and conditions of participation, which could result in loss of program payment or other government sanctions;

 

    ensuring our continued compliance with HIPAA, which could require us to expend significant resources and capital;

 

    our inability to manage and secure our information systems effectively, which could disrupt our operations;

 

    our failure to effectively and timely implement EHR systems and transition to the ICD-10 coding system;

 

53


Table of Contents
    efforts to regulate the construction, relocation, acquisition, change of ownership, change of control or expansion of healthcare facilities, which could prevent us from acquiring additional facilities, renovating our existing facilities or expanding the breadth of services we offer;

 

    our being subject to enforcement action from antitrust authorities;

 

    our being subject to constantly evolving healthcare laws and regulations;

 

    the fact that we are a “controlled company” within the meaning of the NASDAQ rules and as a result, our stockholders will not have certain corporate governance protections concerning the independence of our board of directors and certain board committees that would otherwise apply to us; and

 

    the fact that TPG will retain significant influence over us and key decisions about our business following the offering that could limit other stockholders’ ability to influence the outcome of matters submitted to stockholders for a vote.

The factors identified above should not be construed as exhaustive list of factors that could affect our future results, and should be read in conjunction with the other cautionary statements that are included in this prospectus. The forward-looking statements made in this prospectus are made only as of the date of this prospectus. We do not undertake any obligation to publicly update or review any forward-looking statement except as required by law, whether as a result of new information, future developments or otherwise.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. You should specifically consider the factors identified in this prospectus that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.

 

54


Table of Contents

USE OF PROCEEDS

The net proceeds to us from the sale of the             shares of common stock offered hereby are estimated to be approximately $         million, assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the underwriting discount and estimated offering expenses payable by us. We intend to use $         million of the net proceeds to redeem all $150.0 million aggregate principal amount of the 10.0% Senior Subordinated Notes due July 15, 2017 (at a purchase price equal to $         million, 103.333% of their principal amount, plus accrued and unpaid interest through the date of redemption, assuming a redemption date of                     , 2013) and any remaining net proceeds for general corporate purposes. The net proceeds from the issuance of the Senior Subordinated Notes were used to fund a portion of the purchase price paid by TPG and the other co-investors to purchase our company in 2007 and to pay related fees and expenses.

Pending use of the net proceeds from this offering described above, we may hold any net proceeds in cash or invest them in short-term securities or investments.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

We will not receive any proceeds from the sale of our common stock by the selling stockholders named in this prospectus. Assuming an initial public offering price of $         per share (the midpoint of the price range set forth on the front cover page of this prospectus) and after deducting the underwriting discount, the selling stockholders will receive approximately $         million of proceeds from this offering if the underwriters do not exercise their option to purchase additional shares of our common stock and approximately $         million of proceeds if the underwriters exercise their option to purchase additional shares of our common stock in full.

Affiliates of TPG Capital BD, LLC, an underwriter of this offering, will own in excess of 10% of our issued and outstanding common stock following our conversion into a Delaware corporation. Therefore, a “conflict of interest” is deemed to exist under FINRA Rule 5121(f)(5)(B). In addition, because the TPG Funds are affiliates of TPG Capital BD, LLC and, as selling stockholders, will receive more than 5% of the net proceeds of this offering, a “conflict of interest” is also deemed to exist under FINRA Rule 5121(f)(5)(C)(ii). Accordingly, this offering will be made in compliance with the applicable provisions of FINRA Rule 5121. Pursuant to that rule, the appointment of a qualified independent underwriter is not necessary in connection with this offering. In accordance with FINRA Rule 5121(c), no sales of the shares will be made to any discretionary account over which TPG Capital BD, LLC exercises discretion without the prior specific written approval of the account holder. See “Underwriting (Conflicts of Interest).”

 

55


Table of Contents

DIVIDEND POLICY

Prior to our conversion from a Delaware limited liability company to a Delaware corporation in connection with this offering, we did not make any dividend payments to our members. Following our conversion to a Delaware corporation, we do not expect to pay dividends on our common stock for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used for the operation and growth of our business. Our ability to pay dividends to holders of our common stock is limited as a practical matter by the terms of some of our debt, including the Amended and Restated Credit Agreement and other indebtedness. See “Description of Certain Indebtedness.” In addition, because we are a holding company, our ability to pay dividends depends on our receipt of cash dividends and distributions from our subsidiaries, including from SCA, our principal operating subsidiary.

Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend upon many factors, including our financial position, results of operations, liquidity, legal requirements, restrictions that may be imposed by the terms in current and future financing instruments and other factors deemed relevant by our board of directors.

 

56


Table of Contents

CAPITALIZATION

The following sets forth our cash and cash equivalents and capitalization as of June 30, 2013:

 

    on an actual basis; and

 

    on an as adjusted pro forma basis to give effect to:

 

  ¡    our conversion from a Delaware limited liability company to a Delaware corporation, which will occur prior to the completion of this offering;

 

  ¡    the receipt of approximately $         million in net proceeds from the sale of                 shares of common stock by us in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discount and estimated offering expenses payable by us;

 

  ¡    our payment from available cash to TPG Capital of an $8.0 million fee, payable under our management services agreement in connection with the completion of this offering; and

 

  ¡    the application of the net proceeds of this offering as described under “Use of Proceeds.”

You should read this table in conjunction with “Use of Proceeds,” “Selected Historical Consolidated Financial and Other Data,” “Unaudited Pro Forma Condensed Combined Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes and other financial information included elsewhere in this prospectus.

 

     June 30, 2013  
     Actual     As Adjusted
Pro Forma(1)
 
     (in millions)  

Cash and cash equivalents

   $ 143.7      $                
  

 

 

   

 

 

 

Debt:

    

Long-term debt, including current portion:

    

Class B Revolving Credit Facility(2)

   $ —        $                

Class B Term Loans due 2017

     215.5     

Class C Incremental Term Loans due 2018

     390.0     

Discount of Class C Incremental Term Loans

    
(1.1

 

10.0% Senior Subordinated Notes due 2017

     150.0     

Notes Payable to Banks and Others

     38.0     

Capital Lease Obligations

     19.3     
  

 

 

   

 

 

 

Total Long-term Debt

   $ 811.7      $                

Equity:

    

ASC Acquisition LLC equity:

    

Contributed capital

     311.0     

Surgical Care Affiliates, Inc. equity:

    

Common stock, par value $0.01 per share no shares authorized or issued and outstanding (                shares authorized;                 shares issued and outstanding at                     , 2013)

     —       

Accumulated other comprehensive loss

     —       

Accumulated deficit

     (168.5  
  

 

 

   

 

 

 

Total ASC Acquisition LLC members’ or Surgical Care Affiliates, Inc.’s stockholders’ equity

     142.5     
  

 

 

   

 

 

 

Noncontrolling interests — non-redeemable

     175.9     
  

 

 

   

 

 

 

Total members’ or stockholders’ equity

     318.4     
  

 

 

   

 

 

 

Total capitalization

   $ 1,130.1      $                
  

 

 

   

 

 

 

 

(1)

A $1.00 increase or decrease in the assumed initial public offering price of $        , the midpoint of the price range set forth on the front cover of this prospectus, would result in an approximately $         million

 

57


Table of Contents
  increase or decrease in each of the total Surgical Care Affiliates, Inc.’s equity, total stockholders’ equity and total capitalization, assuming the number of shares offered by us set forth on the front cover of this prospectus remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease total Surgical Care Affiliates, Inc.’s equity, total stockholders’ equity and total capitalization by approximately $             million assuming the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the front cover of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us. The as adjusted pro forma information discussed above is illustrative only and will adjust based on the actual initial public offering price and terms of this offering determined at pricing.
(2) As of June 30, 2013, $132.3 million remained available and undrawn under our Class B Revolving Credit Facility. See “Description of Certain Indebtedness — Interest Rate, Fees and Amortization” for the requirements with respect to utilization of the Class B Revolving Credit Facility.

The table above excludes                 shares of our common stock that may be purchased by the underwriters from the selling stockholders pursuant to the underwriters’ option to purchase additional shares of our common stock, and excludes an additional                 shares of our common stock reserved for issuance under our Equity Plan,              of which remain available for grant,                 shares of our common stock reserved for issuance under our Director Equity Plan,             of which remain available for grant and                  shares of our common stock reserved for issuance under our 2013 Omnibus Plan,                  of which remain available for grant.

 

58


Table of Contents

DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price in this offering per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock upon consummation of this offering. Net tangible book value per share represents the book value of our total tangible assets less the book value of our total liabilities divided by the number of shares of common stock then issued and outstanding.

Our historical net tangible book value as of June 30, 2013 was approximately $         million, or approximately $         per share based on the                 shares of common stock issued and outstanding after our conversion from a Delaware limited liability company to a Delaware corporation as of such date. After giving effect to our sale of common stock in this offering at the initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the underwriting discount and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2013 would have been $         million, or $         per share (assuming no exercise of the underwriters’ option to purchase additional shares of our common stock). This represents an immediate and substantial dilution of $         per share to new investors purchasing common stock in this offering. The following table illustrates this dilution per share:

 

Assumed initial public offering price per share

    $                

Historical net tangible book value per share as of June 30, 2013

  $                  

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

    $                

Pro forma as adjusted net tangible book value per share after giving effect to this offering

    $                

Dilution per share to new investors in this offering

    $                

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) our historical net tangible book value by $         million, the pro forma as adjusted net tangible book value per share after this offering by $         per share and the dilution to new investors in this offering by $         per share, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

The following table summarizes, on a pro forma basis as of June 30, 2013, the differences between the number of shares of common stock purchased from us, the total price and the average price per share paid by existing stockholders and by the new investors in this offering, before deducting the underwriting discount and estimated offering expenses payable by us, at an assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus).

 

     Shares Purchased     Total Consideration     Average
Price per
Share
 
      
     Number    Percent     Amount      Percent    
           (in millions)        

Existing Stockholders

               $                             $                

New investors in this offering

            

Total

        100   $                      100   $     

A $1.00 increase (decrease) in the assumed initial offering price would increase (decrease) total consideration paid by new investors and average price per share paid by new investors by $         million and $1.00 per share, respectively. An increase (decrease) of 1.0 million in the number of shares offered by us would increase (decrease) total consideration paid by new investors and average price per share paid by new investors by $         million and $         per share, respectively.

 

59


Table of Contents

If the underwriters’ option to purchase additional shares of our common stock is fully exercised, the pro forma as adjusted net tangible book value per share after this offering as of June 30, 2013 would be approximately $         per share and the dilution to new investors per share after this offering would be $         per share.

The discussion and table above assume no exercise of stock options outstanding and no issuance of shares of our common stock reserved for issuance under our equity incentive plans. As of                     , 2013, there were an additional                 shares of our common stock reserved for issuance under our Equity Plan,              of which remain available for grant,                  shares of our common stock reserved for issuance under our Directors Equity Plan,              of which remain available for grant and                  shares of our common stock reserved for issuance under our 2013 Omnibus Plan,                  of which remain available for grant.

 

60


Table of Contents

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

You should read the following selected historical consolidated financial and operating data along with “Unaudited Pro Forma Condensed Combined Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and our financial statements and the related notes, all included elsewhere in this prospectus. The selected financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the financial statements and related notes included in this prospectus.

As of June 30, 2013, we accounted for our investment in 60 of our 173 facilities where we do not have control over the facility under the equity method, and treat such facilities as nonconsolidated affiliates. In addition, as of June 30, 2013, we held no ownership interest in 28 facilities, which contract with us to provide management services. For our nonconsolidated affiliates, our consolidated statements of operations reflect our earnings from such facilities in two line items:

 

    Equity in net income of nonconsolidated affiliates, which represents our combined share of the net income of each equity method facility that is based on such equity method facility’s net income and the percentage of such equity method facility’s outstanding equity interests owned by us; and

 

    Management fee revenues, which represents income from management fees that we earn from managing the day-to-day operations of the facilities that we do not consolidate for financial reporting purposes.

As of June 30, 2013, we consolidate four facilities where we do not currently hold an equity ownership interest, but rather we hold a promissory note that is convertible into equity. The promissory note provides us with the power to direct the activities that most significantly impact the economic performance of these entities. We consolidate these facilities into our financial results as they are deemed to be VIEs under the Accounting Standards Codification 810.

The summary consolidated statement of operations data for the years ended December 31, 2012, December 31, 2011 and December 31, 2010 and the summary consolidated balance sheet data as of December 31, 2012 and December 31, 2011 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for the six-months ended June 30, 2013 and June 30, 2012 and the summary consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements included herein include all adjustments (consisting of recurring adjustments) necessary to state fairly the information set forth herein. Our historical results are not necessarily indicative of the results to be expected in the future, and the results for the six-months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year.

 

61


Table of Contents
    Six-Months Ended
June 30,
    Year-Ended December 31,  
    2013     2012     2012     2011     2010  
   

(in millions, except facilities in actual amounts)

 

Statement of Operations Data:

         

Net operating revenues:

         

Net patient revenues

  $ 370.6      $ 352.5      $ 716.2      $ 694.4      $ 698.6   

Management fee revenues

    11.5        9.2        17.8        11.3        6.7   

Other revenues

    6.4        8.1        16.1        13.7        9.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

    388.5        369.8        750.1        719.3        715.0   

Equity in net income of nonconsolidated affiliates

    12.0        11.8        16.8        22.2        15.3   

Operating expenses:

         

Salaries and benefits

    125.8        120.8        242.7        222.6        217.2   

Supplies

    85.7        83.2        170.3        161.0        172.9   

Other operating expenses

    58.1        61.1        118.7        114.9        113.1   

Depreciation and amortization

    20.9        20.3        41.7        40.5        37.4   

Occupancy costs

    13.4        13.2        26.8        26.6        27.7   

Provision for doubtful accounts

    7.0        8.1        16.9        18.3        17.3   

Impairment of intangible and long-lived assets

    —          0.4        1.1        —          —     

Loss (gain) on disposal of assets

    0.1        (0.1     (0.3     (0.8     0.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    311.0        307.1        617.8        583.0        586.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 89.5      $ 74.5      $ 149.1      $ 158.6      $ 144.3   

Interest expense

    34.3        30.5        58.8        56.0        52.6   

Loss from extinguishment of debt

    3.8        —          —          —          —     

Interest income

    (0.1     (0.2     (0.3     (0.4     (1.6

Loss (gain) on sale of investments

    1.0        (2.0     7.1        (3.9     (2.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

    50.5        46.3        83.5        106.8        95.2   

Provision for income tax expense

    4.4        4.6        8.3        20.4        14.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations(1)

    46.1        41.6        75.1        86.5        80.7   

Loss from discontinued operations, net of income tax expense

    (3.9     (5.1     (2.8     (3.0     (11.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    42.2        36.5        72.3        83.5        69.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

    (53.4     (46.7     (92.4     (93.2     (84.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ASC Acquisition

    (11.2     (10.2     (20.0     (9.7     (14.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per unit attributable to ASC Acquisition:

         

Continuing operations attributable to ASC Acquisition

  $ (.03   $ (.02   $ (.05   $ (.02   $ (.02

Discontinued operations attributable to ASC Acquisition

    (.01     (.01     (.01   $ (.01     (.03
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per unit attributable to ASC Acquisition

  $ (.04   $ (.03   $ (.06   $ (.03   $ (.05
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flow Data:

         

Net cash provided by (used in):

         

Operating activities

  $ 80.6      $ 83.0      $ 171.2      $ 165.3      $ 143.8   

Investing activities

    (34.2     (15.0     (21.8     (157.9     (45.9

Financing activities

    (21.4     (46.2     (102.1     30.2        (100.1

Facilities (at period end):

         

Consolidated facilities

    85        92        87        94        95   

Equity method facilities

    60        47        52        44        23   

Managed-only facilities

    28        7        8        4        5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total facilities

    173        146        147        142        123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

62


Table of Contents
     Six-Months Ended
June 30,
     Year-Ended December 31,  
     2013      2012      2011  
    

(in millions)

 

Balance Sheet Data (at period end):

        

Cash and cash equivalents

   $ 143.7       $ 118.7       $ 71.3   

Total current assets

     290.3         264.5         215.0   

Total assets(2)

     1,438.5         1,409.2         1,356.5   

Current portion of long-term debt

     19.2         15.2         16.2   

Long-term debt, net of current portion

     792.4         774.5         769.1   

Total current liabilities

     178.1         173.8         148.9   

Total liabilities(2)

     1,098.8         1,070.6         1,033.7   

Total ASC Acquisition equity

     142.5         144.4         167.2   

Noncontrolling interests — non-redeemable

     175.9         172.5         135.4   

Total equity

     318.4         316.9         302.6   

 

     Six-Months Ended
June 30, 2013
     Year-Ended
December 31, 2012
 

Pro Forma net loss per share(3):

     

Basic

   $                    $                

Diluted

     

Number of shares outstanding used to compute basis pro forma net loss per share(4)(5)

     

Number of shares outstanding used to compute diluted pro forma net loss per share(4)(5)

     

 

     Six-Months Ended
June 30,
    Year-Ended December 31,  
     2013     2012     2012     2011     2010  
    

(in millions, except cases, rate per case and growth rates in actual
amounts)

 

Systemwide Data:

          

Net Operating Revenues:

          

Consolidated facilities

   $ 388.5      $ 369.8      $ 750.1      $ 719.3      $ 715.0   

Equity method facilities

     265.3        233.3        478.0        335.6        187.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Systemwide net operating revenues(6)

     653.8        603.1        1,228.2        1,055.0        902.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Patient Revenues:

          

Consolidated facilities

   $ 370.6      $ 352.5      $ 716.2      $ 694.4      $ 698.6   

Equity method facilities

     263.4        231.4        474.4        332.6        185.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Systemwide net patient revenues(7)

     634.0        583.9        1,190.6        1,027.0        884.3   

Systemwide case volume(8)

     336,940        335,743        672,221        623,076        586,674   

Systemwide net patient revenues per case(9)

   $ 1,882      $ 1,739      $ 1,771      $ 1,648      $ 1,507   

Same site systemwide net operating revenue growth(10)

     8     8     6     6     5

Same site systemwide net patient revenue per case growth(10)

     7     3     4     7     5

Other Financial Data:

          

Adjusted EBITDA-NCI(11)

   $ 70.9      $ 60.6      $ 133.0      $ 120.0      $ 104.2   

 

(1) Loss from continuing operations attributable to ASC Acquisition, which is income from continuing operations less net income attributable to noncontrolling interests, was $7.3 million and $5.1 million for the six-months ended June 30, 2013 and 2012, respectively, and $17.3 million, $6.7 million and $3.7 million for years ended December 31, 2012, 2011 and 2010, respectively.

 

63


Table of Contents
(2) Our consolidated total liabilities as of December 31, 2012 and June 30, 2013 include total liabilities of a VIE of $1.4 million and $6.0 million, respectively, for which the creditors of the VIE have no recourse to us. The assets of the consolidated VIE can only be used to settle the obligations of the VIE.
(3) Pro forma to reflect our conversion from a Delaware limited liability company to a Delaware corporation prior to the closing of this offering.
(4) Represents the number of shares issued and outstanding after giving effect to our sale of common stock in this offering and does not include common stock that may be issued and sold upon exercise of the underwriters’ option to purchase additional shares of our common stock.
(5) Calculated based on number of shares that would have been outstanding as of December 31, 2012 and June 30, 2013, assuming our conversion from a Delaware limited liability company to a Delaware corporation.
(6) Systemwide net operating revenues is a non-GAAP financial measure, which represents net operating revenues earned at all of the facilities we operate and is calculated as the aggregate of the net operating revenues earned by our consolidated facilities and at our equity method facilities (without adjustment based on our percentage of ownership). Systemwide net operating revenues includes management fee revenue from nonconsolidated affiliates and managed-only facilities, but does not include patient or other revenues from managed-only facilities (in which we hold no ownership interest). The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results, rather only the net income earned from such facilities is reported on a net basis in the line item “Equity in net income of nonconsolidated affiliates.” Because of this, management uses “systemwide” results, which treat our equity method facilities as if they were consolidated. As a non-GAAP financial measure, systemwide net operating revenues should not be considered a substitute for and is not comparable to our GAAP total net operating revenues. Systemwide net operating revenues is intended as a supplemental measure of our performance.
(7) Systemwide net patient revenues is a non-GAAP financial measure, which represents net patient revenues earned at all of the facilities we operate, excluding those facilities at which we hold no ownership interest and provide only management services, and is calculated as the aggregate of the net patient revenues earned by our consolidated facilities and at our equity method facilities (without adjustment based on our percentage of ownership). The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results, rather only the net income earned from such facilities are reported on a net basis in the line item “Equity in net income of nonconsolidated affiliates.” Because of this, management uses “systemwide” results, which treat our equity method facilities as if they were consolidated. As a non-GAAP financial measure, systemwide net patient revenues should not be considered a substitute for and is not comparable to our GAAP total net patient revenues. Systemwide net patient revenues is intended as a supplemental measure of our performance.
(8) Represents the aggregate of the case volume at our consolidated and our equity method facilities. The number of cases performed at our total facilities is a key metric utilized to regularly evaluate performance.
(9) Calculated by dividing our systemwide net patient revenue by our systemwide case volume. The revenues and expenses of equity method facilities are not directly included in our consolidated GAAP results, rather only the net income earned from such facilities is reported on a net basis in the line item “Equity in net income of nonconsolidated affiliates.” Because of this, management uses “systemwide” results, which treat our equity method facilities as if they were consolidated. Systemwide net patient revenues per case is a non-GAAP financial measure, which represents the revenues of all of our affiliated facilities, regardless of the accounting treatment, excluding those facilities at which we hold no ownership interest and provide only management services. Systemwide net patient revenues per case is intended as a supplemental measure of our performance.
(10) Same site refers to facilities that were operational for any amount of time in both the current and prior year or six-month period, as applicable.
(11)

Represents Adjusted EBITDA-NCI as historically computed and used by our management. Adjusted EBITDA-NCI means net income before provisions for income tax expense, net interest expense, depreciation and amortization, net loss from discontinued operations, equity method amortization, expense, loss on sale of investments, loss on extinguishment of debt, asset impairments, gain (loss) on disposal of assets, sponsor management fee, severance expense and non-cash stock compensation expense less net income attributable to

 

64


Table of Contents
  noncontrolling interests. We present Adjusted EBITDA-NCI because we believe it is useful for investors to analyze our operating performance on the same basis as that used by our management. Our management believes Adjusted EBITDA-NCI can be useful to facilitate comparisons of operating performance between periods because it excludes the effect of depreciation and amortization, which represents a non-cash charge to earnings, income tax, interest expense and other expenses or income not related to the normal, recurring operations of our business. Adjusted EBITDA-NCI is considered a “non-GAAP financial measure” under SEC rules and should not be considered a substitute for net income (loss) or net operating income as determined in accordance with GAAP. Adjusted EBITDA-NCI has limitations as an analytical tool, including the following:

 

    Adjusted EBITDA-NCI does not reflect our historical capital expenditures, or future requirements for capital expenditures, or contractual commitments;

 

    Adjusted EBITDA-NCI does not reflect changes in, or cash requirements for, our working capital needs;

 

    Adjusted EBITDA-NCI does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments under our credit agreement; and

 

    Adjusted EBITDA-NCI does not reflect income tax expense or the cash requirements to pay our taxes.

In addition, you should be aware that there is no certainty that we will not incur expenses in the future that are similar to those excluded in the calculation of Adjusted EBITDA-NCI. Other companies in our industry may calculate Adjusted EBITDA-NCI differently than we do, limiting its usefulness as a comparative measure.

Because of these limitations, Adjusted EBITDA-NCI should not be considered the primary measure of the operating performance of our business. We strongly encourage you to review the GAAP financial statements included elsewhere in this prospectus, and not to rely on any single financial measure to evaluate our business.

The following table represents the reconciliation of net income to Adjusted EBITDA-NCI for the periods indicated below:

 

     Six-Months
Ended
June 30,
    Year-Ended
December 31,
 
     2013     2012     2012     2011     2010  
     (in millions)  

Net income

   $ 42.2      $ 36.5      $ 72.3      $ 83.5      $ 69.5   

Plus (minus):

          

Interest expense, net

     34.2        30.3        58.5        55.6        51.1   

Provision for income tax expense

     4.4        4.6        8.3        20.4        14.6   

Depreciation and amortization

     20.9        20.3        41.7        40.5        37.4   

Loss from discontinued operations, net

     3.9        5.1        2.8        3.0        11.1   

Equity method amortization expense(a)

     10.0        10.1        20.3        10.1        —     

Loss (gain) on sale of investments

     1.0        (2.0     7.1        (3.9     (2.1

Loss on extinguishment of debt

     3.8        —          —          —          —     

Asset impairments

     2.0        0.4        10.2        —          3.0   

Loss (gain) on disposal of assets

     0.1        (0.1     (0.3     (0.8     0.4   

Sponsor management fee(b)

     1.1        1.0        2.0        2.0        2.0   

Severance expense

     0.3        0.2        0.6        1.1        0.4   

Non-cash stock compensation expense(c)

     0.4        0.8        1.7        1.7        1.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     124.3        107.3        225.5        213.2        188.7   

(Minus):

          

Net income attributable to noncontrolling interests

     (53.4     (46.7     (92.4     (93.2     (84.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA-NCI

   $ 70.9        60.6        133.0        120.0        104.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a)

For the years ended December 31, 2012 and December 31, 2011, we recorded $20.3 million and $10.1 million, respectively, of amortization expense for definite-lived intangible assets attributable to equity

 

65


Table of Contents
  method investments. For the six-months ended June 30, 2013 and 2012, we recorded $10.0 million, and $10.1 million, respectively of amortization expense for definite-lived intangible assets attributable to equity method investments. These expenses are included in Equity in net income of nonconsolidated affiliates in our consolidated financial statements. There was no such amortization expense for the year-ended December 31, 2010.
  (b) Represents the yearly fees we paid to TPG for management services pursuant to the management services agreement. Upon completion of this offering, we will pay to TPG Capital an $8.0 million fee payable pursuant to our management services agreement and the management services agreement will be terminated. See “Certain Relationships and Related Party Transactions — Management Services Agreement” for additional information regarding the management services agreement.
  (c) Represents a non-cash expense relating our equity-based compensation program.

 

66


Table of Contents

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined statements of operations for the six-months ended June 30, 2013 and for the year-ended December 31, 2012 give effect to our acquisition of Health Inventures, LLC (“Health Inventures”) on June 1, 2013 (the “acquisition”) as if it had occurred on the first day of the earliest period presented. An unaudited pro forma condensed combined consolidated balance sheet is not presented herein as the acquisition is reflected in ASC Acquisition LLC’s unaudited condensed consolidated balance sheet as of June 30, 2013.

The pro forma financial information and adjustments are preliminary and have been made solely for purposes of providing these unaudited pro forma condensed combined statements of operations. Differences between these preliminary estimates and the final acquisition accounting may occur and these differences could have a material impact on the pro forma financial information presented and the combined company’s future results of operations and financial position. The actual results reported in future periods may differ significantly from that reflected in these pro forma financial information for a number of reasons, including but not limited to differences between the assumptions used to prepare this pro forma financial statements and actual amounts, as well as cost savings from operating and expense efficiencies and potential income enhancements.

The unaudited pro forma condensed combined statements of operations do not reflect any cost savings from operating and expense efficiencies, potential income enhancements or other restructurings that could result from the acquisition. In addition, the unaudited pro forma condensed combined statements of operations do not give effect to the consummation of this offering. As a result, the pro forma information does not purport to be indicative of what the financial condition or results of operations would have been had the transactions been completed on the applicable dates of this pro forma financial information. The unaudited pro forma condensed combined statements of operations are for informational purposes only and do not purport to project the future financial condition and results of operations after giving effect to the transactions.

The following unaudited pro forma condensed combined statements of operations are derived from the historical financial statements of ASC Acquisition and Health Inventures. You should read these unaudited pro forma condensed combined statements of operations in conjunction with the accompanying notes, “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements as of and for the year-ended December 31, 2012 and our unaudited consolidated financial statements as for and for the six-months ended June 30, 2013, each included elsewhere in this prospectus. In addition, you should read these unaudited pro forma condensed combined statements of operations in conjunction with Health Inventures’ audited combined financial statements as of and for the year-ended December 31, 2012 and Health Inventures’ unaudited combined financial statements as of and for the three-months ended March 31, 2013, each also included elsewhere in this prospectus.

 

67


Table of Contents

ASC Acquisition LLC

Pro Forma Condensed Combined Statement of Operations

For the Six-Months Ended June 30, 2013

(Unaudited)

 

     Historical                     
     ASC
Acquisition
    Health
Inventures
(Note 2)
     Reclassifications
(Note 3)
    Pro Forma
Adjustments
    Pro Forma
Combined
 
                  (in millions)              

Net operating revenues:

           

Net patient revenues

   $ 370.6      $ —         $ —        $ —        $ 370.6   

Management fee revenues

     11.5        —           16.8        —          28.3   

Other revenues

     6.4        —           0.3        —          6.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total net operating revenues

     388.5        —           17.1        —          405.6   

Net revenues

     —          17.1         (17.1     —          —     

Cost of services

     —          14.1         (14.1     —          —     

Equity in net income of nonconsolidated affiliates

     12.0        0.6         —          —          12.6   

Operating expenses:

           

Salaries and benefits

     125.8        —           14.2        —          140.0   

Supplies

     85.7        —           —          —          85.7   

Other operating expenses

     58.1        —           1.6        —          59.6   

Depreciation and amortization

     20.9        0.1         —          0.5  (4A)      21.5   

Occupancy costs

     13.4        —           0.1        —          13.6   

Provision for doubtful accounts

     7.0        —           —          —          7.0   

Impairment of intangible and long-lived assets

     —          —           —          —          —     

Loss on disposal of assets

     0.1        —           —          —          0.1   

Selling, general and administrative expenses

     —          1.8         (1.8       —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     310.9        1.8         14.1        0.5        327.3   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     89.6        1.8         —          (0.5     90.9   

Interest expense

     34.3        —           —          —          34.3   

Loss on extinguishment of debt

     3.8        —           —          —          3.8   

Interest income

     (0.1     —           —          —          (0.1

Loss on sale of investments

     1.0        —           —          —          1.0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

     50.6        1.8         —          (0.5     51.9   

Provision for income tax expense

     4.4        —           —          0.1  (4B)      4.5   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations

     46.2        1.8         —          (0.6     47.4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

     (53.4     —           —          —          (53.4
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

(Loss) income attributable to ASC Acquisition from continuing operations

   $ (7.3   $ 1.8       $ —        $ (0.6   $ (6.0
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

See Notes to Unaudited Pro Forma Condensed Combined Statements of Operations

 

68


Table of Contents

ASC Acquisition LLC

Pro Forma Condensed Combined Statement of Operations

For the Year-Ended December 31, 2012

(Unaudited)

 

     Historical      Reclassifications
(Note 3)
    Pro Forma
Adjustments
    Pro Forma
Combined
 
     ASC
Acquisition
    Health
Inventures
(Note 2)
        
                  (in millions)              

Net operating revenues:

           

Net patient revenues

   $ 716.2      $ —         $ —        $ —        $ 716.2   

Management fee revenues

     17.8        —           37.9        —          55.7   

Other revenues

     16.1        —           0.8        —          16.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total net operating revenues

     750.1        —           38.7        —          788.8   

Net revenues

     —          38.7         (38.7     —          —     

Cost of services

     —          31.7         (31.7     —          —     

Equity in net income of nonconsolidated affiliates

     16.8        1.3         —          —          18.1   

Operating expenses:

           

Salaries and benefits

     242.7        —           32.6        —          275.4   

Supplies

     170.3        —           —          —          170.3   

Other operating expenses

     118.7        —           3.6        —          122.3   

Depreciation and amortization

     41.7        0.5         —          0.8  (4A)      43.0   

Occupancy costs

     26.8        —           0.3        —          27.1   

Provision for doubtful accounts

     16.9        —           —          —          16.9   

Impairment of intangible and long-lived assets

     1.1        —           —          —          1.1   

Gain on disposal of assets

     (0.3     —           —          —          (0.3

Selling, general and administrative expenses

     —          4.9         (4.9     —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     617.8        5.4         31.7        0.8        655.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     149.1        2.9         —          (0.8     151.3   

Interest expense

     58.8        —           —          —          58.8   

Interest income

     (0.3     —           —          —          (0.3

Loss (gain) on sale of investments

     7.1        —           —          —          7.1   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

     83.5        2.9         —          (0.8     85.6   

Provision for income tax expense

     8.3        —           —          0.2  (4B)      8.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations

     75.1        2.9         —          (1.0     77.1   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Less: Net income attributable to noncontrolling interests

     (92.4     —           —          —          (92.4
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

(Loss) income attributable to ASC Acquisition from continuing operations

   $ (17.2   $ 2.9       $ —        $ (1.0   $ (15.3
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Pro Forma Condensed Combined Statements of Operations

 

69


Table of Contents

ASC Acquisition LLC

Notes to Unaudited Pro Forma Condensed Combined Statements of Operations

NOTE 1. BASIS OF PRESENTATION

The unaudited pro forma condensed combined statements of operations were prepared using the acquisition method of accounting under existing GAAP standards and are based on the historical consolidated financial statements of ASC Acquisition LLC for the six-months ended June 30, 2013 and for the year-ended December 31, 2012 and the combined financial statements of Health Inventures for the five-months ended May 31, 2013 and for the year-ended December 31, 2012.

The unaudited pro forma condensed combined statements of operations for the six-months ended June 30, 2013 and for the year-ended December 31, 2012 each give effect to the acquisition as if it had occurred on the first day of the earliest period presented. Because the effect of the acquisition of Health Inventures is reflected in our historical balance sheet as of June 30, 2013, no pro forma balance sheet is presented.

The fair values assigned to the tangible and intangible assets acquired and liabilities assumed from Health Inventures are based on management’s estimates and assumptions. The estimated fair values of these assets acquired and liabilities assumed are considered preliminary. We believe that the information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed; however, the provisional measurements of fair value are subject to change. We expect to finalize the valuation of the net tangible and intangible assets as soon as practicable, but not later than one-year from the acquisition date.

The unaudited pro forma condensed combined statements of operations are provided for illustrative purposes only and do not purport to represent what our actual consolidated results of operations would have been had the acquisition occurred on the dates assumed, nor are they necessarily indicative of our future consolidated results of operations. Moreover, the unaudited pro forma condensed combined statements of operations do not reflect the consummation of this offering.

The unaudited pro forma condensed combined statements of operations do not reflect any cost savings from operating and expense efficiencies, potential income enhancements or other restructurings that could result from the acquisition.

NOTE 2. ACQUISITION OF HEALTH INVENTURES, LLC

In June 2013, we acquired 100% of the interest in Health Inventures, a surgical and physician services company, for total consideration of $18.5 million. $9.6 million of the consideration was paid to the sellers in cash; the remaining amount, $8.9 million, was placed into escrow as contingent consideration. The amount payable as contingent consideration depends upon the successful continuation and/or renewal of management agreement contracts and is determined by comparing the contract revenue prior to renewal against contract revenue post-renewal. The undiscounted range of amounts that could be paid as contingent consideration is zero to $8.9 million. As of the acquisition date approximately $7.2 million of contingent consideration was recognized.

 

70


Table of Contents

The amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed from Health Inventures are as follows:

 

Assets

(in millions)

  

Current assets

  

Cash and cash equivalents

   $ 1.2   

Accounts receivable

     2.1   

Other current assets

     0.4   
  

 

 

 

Total current assets

     3.7   
  

 

 

 

Property and equipment

     0.6   

Goodwill

     2.3   

Intangible assets

     7.6   

Investment in and advances to nonconsolidated affiliates

     4.4   
  

 

 

 

Total assets

   $ 18.5   
  

 

 

 

Liabilities

(in millions)

  

Current liabilities

  

Accounts payable and other current liabilities

   $ 1.7   
  

 

 

 

Total current liabilities

     1.7   
  

 

 

 

Total liabilities

   $ 1.7   
  

 

 

 

The goodwill and intangible assets acquired from Health Inventures are expected to be fully deductible for tax purposes. The Health Inventures purchase price allocation is preliminary and subject to adjustment.

NOTE 3. RECLASSIFICATIONS

Amounts historically included in Cost of services and Selling, general and administrative expenses on Health Inventures’ combined statements of income have been reclassified to Salaries and benefits, Other operating expenses and Occupancy costs in order to conform with our financial statement presentation. Amounts historically included in Net revenues on Health Inventures’ combined statements of income have been reclassified to Management fee revenues and Other revenues in order to conform with our financial statement presentation.

NOTE 4. UNAUDITED PRO FORMA ADJUSTMENTS

(A) To record the difference in associated depreciation and amortization expenses between the historical amounts of Health Inventures’ Intangible assets, net and Property and equipment, net and preliminary fair values of the Intangible assets and Property and equipment acquired in connection with our acquisition of Health Inventures.

(B) The adjustments to the Provision for income tax expense assume a tax rate of approximately 40% related to the impact of goodwill amortization for tax purposes.

 

71


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto and other financial information appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Special Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those contained in forward-looking statements as a result of many factors, including those discussed in “Risk Factors” and elsewhere in this prospectus. Unless the context otherwise indicates or requires, the terms “Surgical Care Affiliates,” the “Company,” “we,” “us,” and “our” refer to ASC Acquisition LLC and its consolidated affiliates prior to our conversion from a Delaware limited liability company to a Delaware corporation and to Surgical Care Affiliates, Inc. and its consolidated subsidiaries after the conversion. In addition, unless the context otherwise indicates or requires, the term “SCA” refers to Surgical Care Affiliates LLC, our direct operating subsidiary.

Overview

We are a leading provider of surgical solutions to health systems and payors, providing high quality, cost-effective surgical care. Prior to the closing of this offering, we will convert from a Delaware limited liability company to a corporate form of organization and will be renamed Surgical Care Affiliates, Inc. For all periods covered by our financial statements, we were a Delaware limited liability company that was formed with a focus on developing and operating a network of multi-specialty ASCs and surgical hospitals in the United States. As of June 30, 2013, we operated in 34 states and had an interest in and/or operated 167 freestanding ASCs, five surgical hospitals and one sleep center with 11 locations. Of these 173 facilities, we consolidated the operations of 85 affiliated facilities, had 60 nonconsolidated affiliated facilities and held no ownership in 28 affiliated facilities that contract with us to provide management services only. In addition, at June 30, 2013, we provided perioperative consulting services to 14 facilities, which are not included in the facility count.

With the exception of the managed only facilities, the entities that own our facilities are structured as general partnerships, limited partnerships, limited liability partnerships or limited liability companies in which either one of our subsidiaries or a joint venture in which one of our subsidiaries is an owner serves as the general partner, limited partner, managing member or member. Our partners or co-members in these entities are generally licensed physicians and hospitals or health systems.

Our Consolidated Subsidiaries and Nonconsolidated Affiliates

At facilities where we serve as an owner and day-to-day manager, we have significant influence over the operations of such facilities. When we have control of the facility, we account for our investment in the facility as a consolidated subsidiary. When this influence does not represent control of the facility, but we have the ability to exercise significant influence over operating and financial policies, we account for our investment in the facility under the equity method, and treat the facility as a nonconsolidated affiliate. Our net earnings from a facility are the same under either method, but the classification of those earnings in our consolidated statements of operations differs.

For our consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses for these subsidiaries, after elimination of intercompany transactions and accounts. The net income attributable to owners of our consolidated subsidiaries, other than us, is classified within the line item “Net income attributable to noncontrolling interests.

 

72


Table of Contents

For our nonconsolidated affiliates, our consolidated statements of operations reflect our earnings from such facilities in two line items:

 

    Equity in net income of nonconsolidated affiliates, which represents our combined share of the net income of each equity method facility that is based on such equity method facility’s net income and the percentage of such equity method facility’s outstanding equity interests owned by us; and

 

    Management fee revenues, which represents our combined income from management fees that we earn from managing the day-to-day operations of the facilities that we do not consolidate for financial reporting purposes.

As of June 30, 2013, we consolidate four facilities into our financial results where we do not currently hold an equity ownership interest in the facility. All four facilities are majority-owned and controlled by a common parent company (the “Future JV”). We hold a promissory note from the Future JV that is convertible into equity of the Future JV at our option upon the occurrence of the renegotiation of certain contractual arrangements. The promissory note has a fixed interest rate of 4% plus a variable component that is dependent on the earnings of the Future JV. We also entered into management services agreements with the facilities controlled by the Future JV. As a result of the financial interest in the earnings of the Future JV held by us via the promissory note and the powers granted to us in the promissory note and the management services agreements, we have determined, under the Accounting Standards Codification §810, that the Future JV is a VIE for which we are the primary beneficiary and as a result we consolidate these facilities into our financial results.

Our equity in net income of nonconsolidated affiliates is primarily a function of the performance of our nonconsolidated affiliates and our percentage of ownership interest in those affiliates. However, our net patient revenue and associated expense line items only contain the results from our consolidated facilities. As a result of this incongruity in our reported results, management uses a variety of supplemental information to analyze our systemwide results of operations, including:

 

    the results of operations of our consolidated subsidiaries and nonconsolidated affiliates;

 

    our ownership share in the facilities we operate; and

 

    facility operating indicators, such as systemwide revenue growth, systemwide revenue per case, same site systemwide revenue growth and same site systemwide revenue per case.

While revenues of our nonconsolidated affiliates are not recorded in our net operating revenues, we believe this information is important in understanding our financial performance because these revenues are typically the basis for calculating the line item “Management fee revenues” and, together with the expenses of our nonconsolidated affiliates, are the basis for deriving the line item “Equity in net income of nonconsolidated affiliates.” As we execute on our strategy of partnering with health systems, we expect the number of our facilities that we account for as equity method facilities will increase relative to our total number of facilities.

To assist management in analyzing our results of operations, we prepare and disclose certain supplemental “systemwide” operating measures, which treat our equity method facilities as if they were consolidated. While the revenues earned at our equity method facilities are not recorded in our consolidated financial statements, we believe systemwide net operating revenues are important to understand our financial performance because it is used by management to help interpret the sources of our growth and the revenues earned by all of our affiliated facilities, regardless of the accounting treatment. Systemwide revenue measures are non-GAAP financial measures and should not be considered a substitute for and are not comparable to our GAAP revenues. Systemwide revenue measures are intended as supplemental measures of our performance. See “Selected Historical Consolidated Financial and Other Data” for an explanation of the systemwide revenue measures.

One of the nonconsolidated affiliates that we account for under the equity method, ASC Operators, LLC, is considered significant to our operations in accordance with Rule 3-09 of Regulation S-X under the Securities Act. As a result, this prospectus also contains audited consolidated financial statements for ASC Operators, LLC for the appropriate periods as determined in accordance with the regulations of the SEC.

 

73


Table of Contents

Key Measures

Facilities

Changes in our ownership of individual facilities and related changes in how we account for such facilities drive changes in our consolidated results from period to period in several ways, including:

 

    Deconsolidations. As a result of a deconsolidation transaction, an affiliated facility that was previously consolidated becomes a nonconsolidated facility. Any income we earn, based upon our ownership percentage in the facility, is reported on a net basis in the line item “Equity in net income of nonconsolidated affiliates,” whereas prior to deconsolidation transaction, the affiliated facility’s results were reported as part of our consolidated net operating revenues and the associated expense line items.

 

    Consolidations. As a result of a consolidation transaction, an affiliated facility that was previously nonconsolidated and accounted for on an equity method basis becomes a consolidated facility. After consolidation, revenues and expenses of the affiliated facility are included as part of our consolidated results.

 

    Acquisitions. Our corporate strategy includes an ongoing effort to acquire previously established surgical facilities and groups of facilities. If we acquire a controlling interest in a facility, patient revenues and expenses will be included in our consolidated results. If we acquire a noncontrolling interest in a facility, we will include additional net income from the facility, based upon our percentage of ownership.

 

    Shifts in Ownership Percentage. Our net income is driven in part by our ownership percentage in a facility since a portion of the net income earned by the facility is attributable to any noncontrolling owners in the facility, even if we consolidate such facility. As a result of our partnerships with physicians our percentage of ownership in a facility may shift overtime, which may result in an increase or a decrease in the net income we earn from such facility.

We have taken several steps during the years ended December 31, 2012, 2011 and 2010 and the six-months ended June 30, 2013 to optimize our facility portfolio, including by acquiring, consolidating, deconsolidating, contributing to joint ventures, closing and selling certain consolidated facilities and noncontrolling interests in facilities accounted for as equity method investments. On June 1, 2013, we completed the acquisition of Health Inventures, LLC for a purchase price of $18.5 million. In the transaction, we acquired Health Inventures, ownership interests in four ASCs and one surgical hospital and management agreements with 19 facilities that together are affiliated with 11 different health systems. Health Inventures, audited combined financial statements as of December 30, 2012 and for the year-ended December 30, 2012 and unaudited combined financial statements as of March 31, 2013 and 2012 and for the three-months ended March 31, 2013 and 2012 and related notes are each included elsewhere in this prospectus. In addition, unaudited pro forma condensed combined financial statements for the year-ended December 31, 2012 and the six-months ended June 30, 2013 giving effect to the acquisition of Health Inventures are included in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information.”

 

74


Table of Contents

The following table presents a breakdown of the changes in number of consolidated, nonconsolidated and managed-only facilities during the periods presented.

 

     During the
Six-
Months Ended

June 30,
2013
    During the
Year-
Ended
December 31,
2012
    During the
Year-
Ended
December 31,
2011
    During the
Year-
Ended
December 31,
2010
 

Facilities at Beginning of Period

        

Consolidated Facilities:

     87        94        95        105   

Equity Method Facilities:

     52        44        23        19   

Managed only Facilities:

     8        4        5        1   

Total Facilities:

     147        142        123        125   

Strategic Activities Undertaken

        

Acquisitions

        

Consolidated facilities acquired:

     1        2        3        3   

Noncontrolling interests acquired in facilities accounted for as equity method investments:

     6        8        17          

Management agreements entered into:

     20        4        3        2   

Consolidations / Deconsolidations

        

Conversion transactions or contributions to joint ventures or other partnerships completed such that the facility is accounted for as a consolidated affiliate:

            4                 

Conversion transactions or contributions to joint ventures or other partnerships completed such that the facility is accounted for as equity method investment:

     2        3        4        5   

Change to Managed-Only Facility

        

Change to providing management services only:

                          2   

Closures and Sales

        

Consolidated facilities sold:

            3               5   

Noncontrolling interests in facilities accounted for as equity method investments sold:

            1               1   

Consolidated facilities closed:

     1        3               1   

Management agreements exited from:

                   4          

Facilities at End of Period

        

Consolidated Facilities:

     85        87        94        95   

Equity Method Facilities:

     60        52        44        23   

Managed-only Facilities:

     28        8        4        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Facilities:

     173        147        142        123   

Average Ownership Interest

        

Consolidated Facilities:

     53.1     54.8     58.1     58.8

Equity Method Facilities:

     26.6     27.7     29.4     32.5

Revenues

Our consolidated net operating revenues for the six-months ended June 30, 2013 and 2012 were $388.5 million and $369.8 million, respectively. Our consolidated net operating revenues for the years ended December 31, 2012, 2011 and 2010 were $750.1 million, $719.3 million and $715.0 million, respectively.

 

75


Table of Contents

In addition to systemwide growth, which is largely driven by the acquisition and disposition of facilities, we also manage our facilities utilizing certain supplemental same site systemwide revenue metrics. For the year-ended December 31, 2012 and for the six-month period ended June 30, 2013, same site systemwide net operating revenue growth rates were higher than systemwide net operating revenue growth. Increases in same site systemwide net operating revenues and same site systemwide net patient revenues per case from period to period reflect increases in rates, case volumes and changes in the types of cases we perform (which generally continues to shift to a more complex case mix).

The following table summarizes our same site systemwide revenue and same site systemwide revenue growth. Systemwide revenue measures are non-GAAP financial measures and should not be considered a substitute for and are not comparable to our GAAP revenues. See “Selected Historical Consolidated Financial and Other Data” for an explanation of the systemwide revenue measures.

 

     Six-Months Ended
June 30,
    Year-Ended
December 31,
 
(in millions, except cases in thousands and rate per case and growth rates in
actual amounts)
   2013     2012         2012             2011             2010      

Systemwide net operating revenue (1)

   $ 653.8        603.1        1,228.2        1,055.0        902.0   

Systemwide case volume (2)

     336.9        335.7        672.2        623.1        586.7   

Systemwide net patient revenues per case (3)

   $ 1,882        1,739        1,771        1,648        1,507   

Same site systemwide net operating revenues growth (4)

     8     8     6     6     5

Same site systemwide net patient revenues per case growth (4)

     7     3     4     7     5

 

(1) Systemwide net operating revenue includes operating revenue earned from all of the facilities we operate and is calculated as the aggregate of the net operating revenues earned by our consolidated facilities and at our equity method facilities, without adjustment based on our percentage of ownership. Systemwide revenues includes management fee revenues from nonconsolidated affiliates and managed-only facilities, but does not include patient or other revenues from managed-only facilities (in which we hold no ownership interest).
(2) Systemwide case volume includes case volume from all facilities excluding managed-only facilities (in which we hold no ownership interest), and is calculated as the aggregate of the case volume at our consolidated and our equity method facilities.
(3) Systemwide net patient revenue per case is calculated by dividing our systemwide net patient revenue by our systemwide case volume. Systemwide net patient revenue includes patient revenue earned from all of the facilities we operate (excluding managed-only facilities, in which we hold no ownership interest), and is calculated as the aggregate of the net patient revenues earned by our consolidated facilities and at our equity method facilities, without adjustment based on our percentage of ownership.
(4) Same site refers to facilities that were operational for any amount of time in both the current and prior year or six-month periods, as applicable.

Six-Months Ended June 30, 2013 Compared to Six-Months Ended June 30, 2012

Our consolidated net operating revenues increased by $18.7 million, or 5.1%, for the six-months ended June 30, 2013 to $388.5 million from $369.8 million for the six-months ended June 30, 2012. Consolidated net patient revenues per case increased by 8.3% to $1,716 per case during the six-months ended June 30, 2013 from $1,585 per case during the six-months ended June 30, 2012.

During the six-months ended June 30, 2013, we increased systemwide net operating revenues by $50.7 million, or 8.4%, to $653.8 million during the six-months ended June 30, 2013 from $603.1 million during the six-months ended June 30, 2012. Systemwide net patient revenues per case increased 8.2% compared to the prior year.

 

76


Table of Contents

The table below quantifies several significant items impacting our period-over-period net operating revenues growth and systemwide net operating revenues growth.

 

    Six-Months Ended
June 30, 2013
 
    Surgical Care
Affiliates as Reported
Under GAAP
    Nonconsolidated
Affiliates
    Systemwide Basis  
    (in millions)  

Total net operating revenues, six-months ended June 30, 2012(1)(2)

  $ 369.8      $ 233.3      $ 603.1   

Add: revenue from acquired facilities

    5.0        12.8        17.8   

           revenue from consolidations

    5.2        (5.2     —     

Less: revenue of disposed facilities

    —          (15.6     (15.6

           revenue from deconsolidated facilities

    (3.3     3.3        —     
 

 

 

   

 

 

   

 

 

 

Adjusted base year

    376.7        228.6        605.3   

Increase from operations

    11.2        36.7        47.9   

Non-facility based revenue

    0.6        —          0.6   
 

 

 

   

 

 

   

 

 

 

Total net operating revenues, six-months ended June 30, 2013:

  $ 388.5      $ 265.3      $ 653.8   
 

 

 

   

 

 

   

 

 

 

 

(1) $4.4 million in revenues have been removed from prior periods presented related to facilities accounted for as discontinued operations.
(2) Additions to revenue represent revenue from acquisition or consolidation of facilities during the 12 months after the date of acquisition or consolidation, as applicable. Deductions from revenue represent revenue from disposition or deconsolidation of facilities that were owned or consolidated in a prior period but are not owned or consolidated at the end of the current period.

During the six-months ended June 30, 2013, systemwide case volume increased by 1,197 cases, or 0.4%, to 336,940 cases during the six-months ended June 30, 2013 from 335,743 cases during the six-months ended June 30, 2012. The increase in systemwide case volume is primarily due to acquisitions completed since the prior period, partially offset by the sale of our interest in a nonconsolidated facility completed in December 2012.

Year-Ended December 31, 2012 Compared to the Year-Ended December 31, 2011

Our consolidated net operating revenues increased by $30.8 million, or 4.3%, for the year-ended December 31, 2012 to $750.1 million from $719.3 million for the year-ended December 31, 2011. Consolidated net patient revenues per case increased by 1.5% to $1,608 per case during 2012 from $1,585 per case during the prior period.

During the year-ended December 31, 2012, we increased systemwide net operating revenues by $173.2 million, or 16.4%, to $1,228.2 million during the year-ended December 31, 2012 from $1,055.0 million during the year-ended December 31, 2011. Systemwide net patient revenues per case increased 7.4% compared to the prior year.

 

77


Table of Contents

The table below quantifies several significant items impacting year-over-year net operating revenue growth and systemwide net operating revenue growth.

 

    Year-Ended
December 31, 2012
 
    Surgical Care
Affiliates as Reported
Under GAAP
    Nonconsolidated
Affiliates
    Systemwide Basis  
    (in millions)  

Total net operating revenues, year-ended December 31, 2011(1)(2)

  $ 719.3      $ 335.6      $ 1,055.0   

Add: revenue from acquired facilities

    4.5        106.1        110.6   

           revenue from consolidations

    12.6        (12.6     —     

Less: revenue of disposed facilities

    —          —          —     

           revenue from deconsolidated facilities

    (22.1     22.1        —     
 

 

 

   

 

 

   

 

 

 

Adjusted base year

    714.3        451.2        1,165.6   

Increase from operations

    26.8        26.1        52.9   

Non-facility based revenue

    9.0        0.7        9.7   
 

 

 

   

 

 

   

 

 

 

Total net operating revenues, year-ended December 31, 2012:

  $ 750.1      $ 478.0        1,228.2   
 

 

 

   

 

 

   

 

 

 

 

(1) $25.6 million in revenues have been removed from prior periods presented related to facilities accounted for as discontinued operations.
(2) Additions to revenue represent revenue from acquisition or consolidation of facilities during the 12 months after the date of acquisition or consolidation, as applicable. Deductions from revenue represent revenue from disposition or deconsolidation of facilities that were owned or consolidated in a prior period but are not owned or consolidated at the end of the current period.

During the year-ended December 31, 2012, we increased systemwide case volume by 49,145 cases, or 7.9%, to 672,221 cases during the year-ended December 31, 2012 from 623,076 cases during the year-ended December 31, 2011. This increase in systemwide case volume is primarily due to the inclusion of a full year of volume from acquisitions made during 2011.

Year-Ended December 31, 2011 Compared to Year-Ended December 31, 2010

Our consolidated net operating revenues increased by $4.3 million, or 0.6%, for the year-ended December 31, 2011 to $719.3 million from $715.0 million for the year-ended December 31, 2010. Consolidated net patient revenues per case increased by 5.2% to $1,585 per case during 2011 from $1,507 per case during the prior period.

During the year-ended December 31, 2011, we increased systemwide net operating revenues by $153.0 million, or 17.0%, to $1,055.0 million during the year-ended December 31, 2011 from $902.0 million during the year-ended December 31, 2010. Systemwide net patient revenues per case increased 9.4% compared to the prior year.

 

78


Table of Contents

The table below quantifies several significant items impacting year-over-year net operating revenue growth and systemwide net operating revenue growth.

 

    Year-Ended
December 31, 2011
 
    Surgical Care
Affiliates as Reported
Under GAAP
    Nonconsolidated
Affiliates
    Systemwide Basis  
    (in millions)  

Total net operating revenues, year-ended December 31, 2010(1)(2)

  $ 715.0      $ 187.0      $ 902.0   

Add: revenue from acquired facilities

    2.2        102.2        104.3   

           revenue from consolidations

    —          —          —     

Less: revenue of disposed facilities

    —          —          —     

           revenue from deconsolidated facilities

    (27.3     27.3        —     
 

 

 

   

 

 

   

 

 

 

Adjusted base year

    689.9        316.5        1,006.3   

Increase from operations

    21.0        17.4        38.4   

Non-facility based revenue

    8.4        1.8        10.2   
 

 

 

   

 

 

   

 

 

 

Total net operating revenues, year-ended December 31, 2011:

  $ 719.3      $ 335.6        1,055.9   
 

 

 

   

 

 

   

 

 

 

 

(1) $25.1 million in revenues have been removed from prior periods presented related to facilities accounted for as discontinued operations.
(2) Additions to revenue represent revenue from acquisition or consolidation of facilities during the 12 months after the date of acquisition or consolidation, as applicable. Deductions from revenue represent revenue from disposition or deconsolidation of facilities that were owned or consolidated in a prior period but are not owned or consolidated at the end of the current period.

During the year-ended December 31, 2011, we increased systemwide case volume by 36,402 cases, or 6.2%, to 623,076 cases during the year-ended December 31, 2011 from 586,674 cases during the year-ended December 31, 2010. This increase in systemwide case volume is primarily due to increased volumes from acquired facilities and a slight increase in our same site facilities.

The tables below show the reconciliation from systemwide net operating revenues, systemwide net patient revenues and systemwide case volume to net patient revenues, net operating revenues and case volume, each of ASC Acquisition as reported under GAAP.

 

     Six-Months Ended June 30, 2013  
     Surgical Care
Affiliates as
Reported Under
GAAP
     Nonconsolidated
Affiliates
     Systemwide  
(amounts in millions, except case volume in actual amounts)                     

Net Operating Revenues:

        

Net patient revenues

   $ 370.6       $ 263.4       $ 634.0   

Management fee revenues

     11.5         —           11.5   

Other revenues

     6.4         1.9         8.3   
  

 

 

    

 

 

    

 

 

 

Total net operating revenues

     388.5         265.3         653.8   
  

 

 

    

 

 

    

 

 

 

Other Data:

        

Case volume

     215,993         120,947         336,940   

 

79


Table of Contents
     Six-Months Ended June 30, 2012  
     Surgical Care
Affiliates as
Reported Under
GAAP
     Nonconsolidated
Affiliates
     Systemwide  
(amounts in millions, except case volume in actual amounts)                     

Net Operating Revenues:

        

Net patient revenues

   $ 352.5       $ 231.4       $ 583.9   

Management fee revenues

     9.2         —           9.2   

Other revenues

     8.1         1.9         10.0   
  

 

 

    

 

 

    

 

 

 

Total net operating revenues

     369.8         233.3         603.1   
  

 

 

    

 

 

    

 

 

 

Other Data:

        

Case volume

     222,435         113,308         335,743   

 

     Year-Ended December 31, 2012  
     Surgical Care
Affiliates as
Reported Under
GAAP
     Nonconsolidated
Affiliates
     Systemwide  
(amounts in millions, except case volume in actual amounts)                     

Net Operating Revenues:

        

Net patient revenues

   $ 716.2       $ 474.4       $ 1,190.6   

Management fee revenues

     17.8         —           17.8   

Other revenues

     16.1         3.7         19.8   
  

 

 

    

 

 

    

 

 

 

Total net operating revenues

     750.1         478.0         1,228.2   
  

 

 

    

 

 

    

 

 

 

Other Data:

        

Case volume

     445,361         226,860         672,221   

 

     Year-Ended December 31, 2011  
     Surgical Care
Affiliates as
Reported Under
GAAP
     Nonconsolidated
Affiliates
     Systemwide  
(amounts in millions, except case volume in actual amounts)                     

Net Operating Revenues:

        

Net patient revenues

   $ 694.4       $ 332.6       $ 1,027.0   

Management fee revenues

     11.3         —           11.3   

Other revenues

     13.7         3.0         16.7   
  

 

 

    

 

 

    

 

 

 

Total net operating revenues

     719.3         335.6         1,055.0   
  

 

 

    

 

 

    

 

 

 

Other Data:

        

Case volume

     438,216         184,860         623,076   

 

     Year-Ended December 31, 2010  
     Surgical Care
Affiliates as
Reported Under
GAAP
     Nonconsolidated
Affiliates
     Systemwide  
(amounts in millions, except case volume in actual amounts)                     

Net Operating Revenues:

        

Net patient revenues

   $ 698.5       $ 185.7       $ 884.3   

Management fee revenues

     6.7         —           6.7   

Other revenues

     9.8         1.2         11.0   
  

 

 

    

 

 

    

 

 

 

Total net operating revenues

     715.0         187.0         902.0   
  

 

 

    

 

 

    

 

 

 

Other Data:

        

Case volume

     463,454         123,220         586,674   

 

80


Table of Contents

Summary of Key Line Items

Net Operating Revenues

The vast majority of our net operating revenues consist of net patient revenues from the facilities we consolidate for financial reporting purposes. Net patient revenues are derived from fees we collect from insurance companies, Medicare, state workers’ compensation programs, patients and other payors in exchange for providing the facility and related services and supplies a physician requires to perform a surgical procedure. Our net operating revenues also includes the line item “Management fee revenues,” which includes fees we earn from managing the facilities that we do not consolidate for financial reporting purposes. The line item “Other revenues” is composed of other ancillary services and fees received for anesthesia services. The physicians who perform procedures at our facilities bill and collect from their patients and other payors directly for their professional services, and their revenues from such professional services are not included in our net operating revenues.

Net Patient Revenues

Net patient revenues are recorded during the period in which the healthcare services are provided, based upon the estimated amounts due from insurance companies, patients and other government and third-party payors, including federal and state agencies (under the Medicare and Medicaid programs), state workers’ compensation programs and employers.

The following table presents a breakdown by payor source of the percentage of net patient revenues for the periods presented:

Consolidated Facilities

 

     Six-Months
Ended

June 30,
    Year-Ended
December 31,
 
     2013     2012     2012     2011     2010  

Commercial health insurance payors

     59     59     60     61     62

Medicare

     22        21        21        20        20   

Workers’ compensation

     12        11        11        11        9   

Patients and other third-party payors

     4        5        4        5        5   

Medicaid

     3        4        4        3        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonconsolidated Facilities

 

     Six-Months
Ended

June 30,
    Year-Ended
December 31,
 
     2013     2012     2012     2011     2010  

Commercial health insurance payors

     74     72     74     68     65

Medicare

     16        15        13        16        17   

Workers’ compensation

     6        8        8        10        12   

Patients and other third-party payors

     3        2        3        3        3   

Medicaid

     1        3        2        3        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

81


Table of Contents

Systemwide

 

     Six-Months
Ended

June 30,
    Year-Ended
December 31,
 
     2013     2012     2012     2011     2010  

Commercial health insurance payors

     64     64     65     63     63

Medicare

     20        19        18        19        20   

Workers’ compensation

     10        10        10        11        10   

Patients and other third-party payors

     4        4        4        4        4   

Medicaid

     2        3        3        3        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The majority of our net patient revenues are related to patients with commercial health insurance coverage. The reimbursement rates we have been able to negotiate, on an average basis across our portfolio, have held relatively stable.

Medicare accounts for 21%, 20% and 20% of our net patient revenues for the years ended December 31, 2012, 2011 and 2010, respectively, and 22% and 21% of our net patient revenues for the six-months ended June 30, 2013 and 2012, respectively. The Medicare program is subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and funding reductions, all of which may adversely affect the level of payments to our facilities. Significant spending reductions mandated by the BCA and impacting the Medicare program went into effect on March 1, 2013. Under the BCA, the percentage reduction for Medicare may not be more than 2% for a fiscal year, with a uniform percentage reduction across all providers. The impact from these spending reductions has not been material to our results.

For the six-months ended June 30, 2013, our facilities located in North Carolina, California and Texas collectively represented approximately 14%, 14% and 12%, respectively, of our net patient revenues. Additionally, our facilities located in each of Alabama, Alaska, Connecticut, Florida and Idaho represented in excess of 5% of our net patient revenues for the six-months ended June 30, 2013. Of our 60 nonconsolidated facilities accounted for as equity method investments, as of June 30, 2013, 27 of these facilities were located in California and 11 of these facilities were located in Indiana.

Operating Expenses

Salaries and Benefits

Salaries and benefits represent the most significant cost to us and include all amounts paid to full and part-time teammates, including all related costs of benefits provided to such teammates. Salaries and benefits expense represented 32.4%, 30.9% and 30.4% of our net operating revenues for the years ended December 31, 2012, 2011 and 2010, respectively, and 32.4% and 32.7% of our net operating revenues for the six-months ended June 30, 2013 and 2012, respectively.

Supplies

Supplies expense includes all costs associated with medical supplies used while providing patient care at our consolidated facilities. Our supply costs primarily include sterile disposables, pharmaceuticals, implants and other similar items. Supplies expense represented 22.7%, 22.4% and 24.2% of our net operating revenues for the years ended December 31, 2012, 2011 and 2010, respectively, and represented 22.1% and 22.5% of our net operating revenues for the six-months ended June 30, 2013 and 2012, respectively, making it important for our facilities to appropriately manage these costs. Supplies expense is typically closely related not only to case volume but also to case mix, as an increase in the acuity of cases and the use of implants in those cases tends to drive supplies expense higher.

 

82


Table of Contents

Other Operating Expenses

Other operating expenses consists primarily of expenses related to insurance premiums, contract services, legal fees, repairs and maintenance, professional and licensure dues, office supplies and miscellaneous expenses. Other operating expenses do not generally correlate with changes in net patient revenues.

Occupancy Costs

Occupancy costs include facility rent, utility and maintenance expense. Occupancy costs do not generally correlate with changes in net patient revenues.

Provision for Doubtful Accounts

We write off uncollectible accounts against the allowance for doubtful accounts after exhausting collection efforts and adding subsequent recoveries. Net accounts receivable include only those amounts we estimate we will collect. We perform an analysis of our historical cash collection patters and consider the impact of any known material events in determining the allowance for doubtful accounts. In performing our analysis, we consider the impact of any adverse changes in general economic conditions, business office operating, payor mix or trends in federal or state governmental healthcare coverage.

 

83


Table of Contents

Summary Results of Operations

Six-Months Ended June 30, 2013 Compared to Six-Months Ended June 30, 2012

Our Consolidated Results and Results of Nonconsolidated Affiliates

The following tables show our results of operations and the results of operations of our nonconsolidated affiliates for the six-months ended June 30, 2013 and 2012.

 

    SIX-MONTHS ENDED JUNE 30,     VARIANCE FROM PRIOR
PERIOD
 
    2013     2012    
    As
Reported
Under GAAP
    Nonconsolidated
Affiliates(1)
    As
Reported
Under GAAP
    Nonconsolidated
Affiliates(1)
    As
Reported
Under GAAP
    Nonconsolidated
Affiliates(1)
 
    (in millions, except cases and facilities in actual amounts)  

Net operating revenues:

           

Net patient revenues

  $ 370.6      $ 263.4      $ 352.5      $ 231.4      $ 18.1      $ 32.0   

Management fee revenues

    11.5        —          9.2        —          2.3        —     

Other revenues

    6.4        1.9        8.1        1.9        (1.7     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net operating revenues

    388.5        265.3        369.8        233.3        18.7        32.0   

Equity in net income of nonconsolidated affiliates(2)

    12.0        —          11.8        —          0.2        —     

Operating expense:

           

Salaries and benefits

    125.8        59.1        120.8        54.4        5.0        4.7   

Supplies

    85.7        44.3        83.2        38.3        2.5        6.0   

Other operating expenses

    58.1        40.3        61.1        33.6        (3.0     6.7   

Depreciation and amortization

    20.9        7.8        20.3        6.8        0.5        1.0   

Occupancy costs

    13.4        10.3        13.2        10.3        0.2        —     

Provision for doubtful accounts

    7.0        4.1        8.1        4.4        (1.1     (0.3

Impairment of intangible and long-lived assets

    —          —          0.4        —          (0.4     —     

Loss (gain) on disposal of assets

    0.1        (0.1     (0.1     0.1        0.2        (0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    311.0        165.8        307.1        147.9        3.9        17.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    89.5        99.5        74.5        85.4        15.0        14.1   

Interest expense

    34.3        0.7        30.5        0.8        3.8        (0.1

Loss from extinguishment of debt

    3.8        —          —          —          3.8        —     

Interest income(3)

    (0.1     0.0        (0.2     0.0        0.1        0.0   

Loss (gain) on sale of investments

    1.0        0.0        (2.0     —          3.0        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

    50.5        98.8        46.2        84.6        4.2        14.1   

Provision for income tax expense(4)

    4.4        0.0        4.6        0.0        (0.2     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    46.1        98.7        41.6        84.6        4.5