UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31,
2010
Commission file
No. 333-144337
UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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75-2749762
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(State of
Incorporation)
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(I.R.S. Employer
Identification No.)
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15305 Dallas Parkway, Suite 1600
Addison, Texas
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75001
(Zip Code)
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(Address of principal executive
offices)
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(972) 713-3500
(Registrants telephone
number, including area code)
Securities Registered Pursuant to Section 12(b) of the
Act:
None
Securities Registered Pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes þ No o
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
None of the registrants common stock is held by
non-affiliates.
As of February 25, 2011, 100 shares of the
Registrants common stock were outstanding.
Documents
Incorporated by Reference
None.
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
2010
ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
2
FORWARD
LOOKING STATEMENTS
Certain statements contained in this Annual Report on
Form 10-K,
including, without limitation, statements containing the words
believes, anticipates,
expects, continues, will,
may, should, estimates,
intends, plans and similar expressions,
and statements regarding the Companys business strategy
and plans, constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements are based on
managements current expectations and involve known and
unknown risks, uncertainties and other factors, many of which
the Company is unable to predict or control, that may cause the
Companys actual results, performance or achievements to be
materially different from those expressed or implied by such
forward-looking statements. Such factors include, among others,
the following: our significant indebtedness; general economic
and business conditions, including without limitation the
condition of the financial markets, both nationally and
internationally; foreign currency fluctuations; demographic
changes; changes in, or the failure to comply with, laws and
governmental regulations; the ability to enter into or renew
managed care provider arrangements on acceptable terms; changes
in Medicare, Medicaid and other government funded payments or
reimbursement in the United States (U.S.) and the United Kingdom
(U.K.); the efforts of insurers, healthcare providers and others
to contain healthcare costs; the impact of federal healthcare
reform; liability and other claims asserted against us; the
highly competitive nature of healthcare; changes in business
strategy or development plans of healthcare systems with which
we partner; the ability to attract and retain qualified
physicians and personnel, including nurses and other health care
professionals and other personnel; the availability of suitable
acquisition and development opportunities and the length of time
it takes to complete acquisitions and developments; our ability
to integrate new and acquired businesses with our existing
operations; the availability and terms of capital to fund the
expansion of our business, including the acquisition and
development of additional facilities and certain additional
factors, risks and uncertainties discussed in this Annual Report
on
Form 10-K.
We disclaim any obligation and make no promise to update any
such factors or forward-looking statements or to publicly
announce the results of any revisions to any such factors or
forward-looking statements, whether as a result of changes in
underlying factors, to reflect new information as a result of
the occurrence of events or developments or otherwise. Given
these uncertainties, investors and prospective investors are
cautioned not to rely on such forward-looking statements.
3
PART I
General
United Surgical Partners International, Inc. (together with its
subsidiaries, we, the Company or
USPI) owns and operates short stay surgical
facilities including surgery centers and hospitals in the United
States and the United Kingdom. We focus on providing high
quality surgical facilities that meet the needs of patients,
physicians and payors better than hospital-based and other
outpatient surgical facilities. We believe that our facilities
(1) enhance the quality of care and the healthcare
experience of patients, (2) offer significant
administrative, clinical and economic benefits to physicians,
(3) offer a strategic approach for our health system
partners to expand capacity and access within the markets they
serve, and (4) offer an efficient and low cost alternative
for payors. We acquire and develop our facilities through the
formation of strategic relationships with physicians and
not-for-profit
healthcare systems to better access and serve the communities in
our markets. Our operating model is efficient and scalable, and
we have adapted it to each of our markets. We believe that our
acquisition and development strategy and operating model enable
us to continue to grow by taking advantage of highly-fragmented
markets and an increasing demand for short stay surgery.
Since physicians are critical to the direction of healthcare in
the U.S. and U.K., we have developed our operating model to
encourage physicians to affiliate with us and to use our
facilities as an extension of their practices. We operate our
facilities, structure our strategic relationships and adopt
staffing, scheduling and clinical systems and protocols with the
goal of increasing physician productivity. We believe that our
focus on physician satisfaction, combined with providing high
quality healthcare in a friendly and convenient environment for
patients, will continue to increase the number of procedures
performed at our facilities each year.
As of December 31, 2010, we operated 189 facilities,
consisting of 185 in the United States and four in the United
Kingdom. Of the 185 U.S. facilities, 132 are jointly owned
with major
not-for-profit
healthcare systems. Overall, as of December 31, 2010, we
held ownership interests in 188 of the facilities and operated
one under a service and management contract. Due in large part
to our partnerships with physicians and
not-for-profit
healthcare systems, we do not consolidate the financial results
of 130 of the 188 facilities in which we have ownership, meaning
that while we record a share of their net profit within our
operating income, we do not include their revenues and expenses
in the consolidated revenue and expense line items of our
consolidated financial statements.
This trend in our business contributed to our consolidated
revenues decreasing from $593.5 million in 2009 to
$576.7 million in 2010, even as our operating income
increased from $198.3 million to $210.5 million during
the same period. To help understand this relationship in our
consolidated financial statements, we review an operating
measure called systemwide revenue growth, which includes both
consolidated and unconsolidated facilities. While revenues of
our unconsolidated facilities are not recorded as revenues by
USPI, we believe the information is important in understanding
USPIs financial performance because these revenues are the
basis for calculating our management services revenues and,
together with the expenses of our unconsolidated facilities, are
the basis for USPIs equity in earnings of unconsolidated
affiliates. In addition, we disclose growth rates and operating
margins for the facilities that were operational in both the
current and prior year periods, a group we refer to as same
store facilities.
Donald E. Steen, who is our chairman, formed USPI with the
private equity firm Welsh, Carson, Anderson & Stowe in
February 1998. USPI had publicly traded equity securities from
June 2001 until April 2007. Pursuant to an Agreement and Plan of
Merger (the merger) dated as of January 7, 2007, with an
affiliate of Welsh, Carson, Anderson & Stowe X, L.P.
(Welsh Carson), we became a wholly owned subsidiary of USPI
Holdings, Inc. on April 19, 2007. USPI Holdings, Inc. is a
wholly owned subsidiary of USPI Group Holdings, Inc., which is
owned by an investor group that includes affiliates of Welsh
Carson, members of our management and other investors. As a
result of the merger, we no longer have publicly traded equity
securities. In this
Form 10-K,
we have reported our operating results and financial position
for the period subsequent to the merger date of April 19,
2007, as the Successor Period and all periods prior
to April 19, 2007, as Predecessor Periods.
4
Available
Information
We file annual, quarterly and current reports with the
Securities and Exchange Commission. You may read and copy any
document that we file at the SECs public reference room
located at 100 F Street, N.E., Washington, D.C.
20549. You may also call the Securities and Exchange Commission
at
1-800-SEC-0330
for information on the operation of the public reference room.
Our SEC filings are also available to you free of charge at the
SECs web site at
http://www.sec.gov.
We also maintain a web site at
http://www.uspi.com
that includes links to our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and any amendments to those reports. These reports are available
on our website without charge as soon as reasonably practicable
after such reports are filed with or furnished to the SEC.
Information on our web site is not deemed incorporated by
reference into this
Form 10-K.
Industry
Background
We believe many physicians prefer surgery centers and surgical
hospitals over general acute care hospitals. We believe that
this is due to the non-emergency nature of the procedures
performed at our surgery centers and surgical hospitals, which
allows physicians to schedule their time more efficiently and
therefore increase the number of surgeries they can perform in a
given amount of time. In addition, outpatient facilities usually
provide physicians with greater scheduling flexibility, more
consistent nurse staffing and faster turnaround time between
cases. While surgery centers and surgical hospitals generally
perform scheduled surgeries, acute care hospitals and national
health service facilities generally provide a broad range of
services, including high priority and emergency procedures.
Medical emergencies often demand the unplanned use of operating
rooms and result in the postponement or delay of scheduled
surgeries, disrupting physicians practices and
inconveniencing patients. Surgery centers and surgical hospitals
in the United States and the United Kingdom are designed to
improve physician work environments and improve physician
efficiency. In addition, many physicians choose to perform
surgery in facilities like ours because their patients prefer
the comfort of a less institutional atmosphere and the
convenience of simplified admissions and discharge procedures.
United
States
New surgical techniques and technology, as well as advances in
anesthesia, have significantly expanded the types of surgical
procedures that are being performed in surgery centers and have
helped drive the growth in outpatient surgery. Lasers,
arthroscopy, enhanced endoscopic techniques and fiber optics
have reduced the trauma and recovery time associated with many
surgical procedures. Improved anesthesia has shortened recovery
time by minimizing post-operative side effects such as nausea
and drowsiness, thereby avoiding the need for overnight
hospitalization in many cases. In addition, some states in the
United States permit surgery centers to keep a patient for up to
23 hours. This allows more complex surgeries, previously
only performed in an inpatient setting, to be performed in a
surgery center.
In addition to these technological and other clinical
advancements, a changing payor environment has contributed to
the rapid growth in outpatient surgery in recent years.
Government programs, private insurance companies, managed care
organizations and self-insured employers have implemented cost
containment measures to limit increases in healthcare
expenditures, including procedure reimbursement. These cost
containment measures have contributed to the significant shift
in the delivery of healthcare services away from traditional
inpatient hospitals to more cost-effective alternate sites,
including surgery centers. We believe that surgery performed at
a surgery center is generally less expensive than hospital-based
outpatient surgery because of lower facility development costs,
more efficient staffing and space utilization and a specialized
operating environment focused on quality of care and cost
containment.
Today, large healthcare systems in the United States generally
offer both inpatient and outpatient surgery on site. In
addition, a number of
not-for-profit
healthcare systems have begun to expand their portfolios of
facilities and services by entering into strategic relationships
with specialty operators of surgery centers in order to expand
capacity and access in the markets they serve. These strategic
relationships enable
not-for-profit
healthcare systems to offer patients, physicians and payors the
cost advantages, convenience and other benefits of outpatient
surgery in a freestanding facility. Further, these relationships
allow the
not-for-profit
healthcare systems to focus their attention and resources on
their core business without the challenge of acquiring,
developing and operating these facilities.
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United
Kingdom
The United Kingdom provides government-funded healthcare to all
of its residents through the National Health Service. However,
due to funding and capacity limitations, the demand for
healthcare services exceeds the public systems capacity.
In response to these shortfalls, private healthcare networks and
private insurance companies have developed in the United
Kingdom. Approximately 12% of the U.K. population has private
insurance to cover elective surgical procedures, and another
segment of the population pays for elective procedures from
personal funds. For the year ended December 31, 2010, in
the United Kingdom, we derived 67% of our revenues from private
insurance, 25% from self-pay patients, who typically arrange for
payment prior to surgery being performed, 4% from government
payors, and 4% from other payors.
Our
Business Strategy
Our goal is to steadily increase our revenues and cash flows.
The key elements of our business strategy are to:
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attract and retain top quality surgeons and other physicians;
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expand our presence in existing markets;
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pursue strategic relationships with
not-for-profit
healthcare systems;
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expand selectively in new markets; and
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enhance operating efficiencies.
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Attract
and retain top quality surgeons and other
physicians
Since physicians are critical to the direction of healthcare in
the U.S. and U.K., we have developed our operating model to
encourage physicians to affiliate with us and to use our
facilities as an extension of their practices. We believe we
attract physicians because we design our facilities, structure
our strategic relationships and adopt staffing, scheduling and
clinical systems and protocols to increase physician
productivity and promote their professional and financial
success. We believe this focus on physicians, combined with
providing high quality healthcare in a friendly and convenient
environment for patients, will continue to increase case volumes
at our facilities. In addition, in the United States, we
generally offer physicians the opportunity to purchase equity
interests in the facilities they use as an extension of their
practices. We believe this opportunity attracts quality
physicians to our facilities and ownership increases the
physicians involvement in facility operations, enhancing
quality of patient care, increasing productivity and reducing
costs.
Pursue
strategic relationships with
not-for-profit
healthcare systems
Through strategic relationships with us,
not-for-profit
healthcare systems can benefit from our operating expertise and
create a new cash flow opportunity with limited capital
expenditures. We believe that these relationships also allow
not-for-profit
healthcare systems to attract and retain physicians and improve
their hospital operations by focusing on their core business. We
also believe that strategic relationships with these healthcare
systems help us to more quickly develop relationships with
physicians, communities, and payors. Generally, the healthcare
systems with which we develop relationships have strong local
market positions and excellent reputations that we use in
branding our facilities. In addition, our relationships with
not-for-profit
healthcare systems enhance our acquisition and development
efforts by (1) providing opportunities to acquire
facilities the systems may own, (2) providing access to
physicians already affiliated with the systems,
(3) attracting additional physicians to affiliate with
newly developed facilities, and (4) encouraging physicians
who own facilities to consider a strategic relationship with us.
Expand
our presence in existing markets
Our primary strategy is to grow selectively in markets in which
we already operate facilities. We believe that selective
acquisitions and development of new facilities in existing
markets allow us to leverage our existing knowledge of these
markets and to improve operating efficiencies. In particular,
our experience has been that newly developed facilities in
markets where we already have a presence and a
not-for-profit
hospital partner are the best use of our invested capital.
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Expand
selectively in new markets
We may continue to enter targeted markets by acquiring and
developing surgical facilities. In the United States, we expect
to do this primarily in conjunction with a local
not-for-profit
healthcare system or hospital. We typically target the
acquisition or development of multi-specialty centers that
perform high volume, non-emergency, lower risk procedures
requiring lower capital and operating costs than hospitals. In
addition, we will also consider the acquisition of
multi-facility companies.
In determining whether to enter a new market, we examine
numerous criteria, including:
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the potential to achieve strong increases in revenues and cash
flows;
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whether the physicians, healthcare systems and payors in the
market are receptive to surgery centers
and/or
surgical hospitals;
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the demographics of the market;
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the number of surgical facilities in the market;
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the number and nature of outpatient surgical procedures
performed in the market;
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the case mix of the facilities to be acquired or developed;
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whether the facility is or will be well-positioned to negotiate
agreements with insurers and other payors; and
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licensing and other regulatory considerations.
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Upon identifying a target facility, we conduct financial, legal
and compliance, operational, technology and systems reviews of
the facility and conduct interviews with the facilitys
management, affiliated physicians and staff. Once we acquire or
develop a facility, we focus on upgrading systems and protocols,
including implementing our proprietary methodology of defined
processes and information systems, to increase case volume and
improve operating efficiencies.
Enhance
operating efficiencies
Once we acquire a new facility in the U.S., we integrate it into
our existing network by implementing a specific action plan to
support the local management team and incorporate the new
facility into our group purchasing contracts. We also implement
our systems and protocols to improve operating efficiencies and
contain costs. Our most important operational tool is our
management system Every Day Giving Excellence, which
we refer to as USPIs EDGE. This proprietary measurement
system allows us to track our clinical, service and financial
performance, best practices and key indicators in each of our
facilities. Our goal is to use USPIs EDGE to ensure that
we provide each of the patients using our facilities with high
quality healthcare, offer physicians a superior work environment
and eliminate inefficiencies. Using USPIs EDGE, we track
and monitor our performance in areas such as (1) providing
surgeons the equipment, supplies and surgical support they need,
(2) starting cases on time, (3) minimizing turnover
time between cases, and (4) providing efficient case and
personnel schedules. USPIs EDGE compiles and organizes the
specified information on a daily basis and is easily accessed
over the Internet by our facilities on a secure basis. The
information provided by USPIs EDGE enables our employees,
facility administrators and management to analyze trends over
time and share processes and best practices among our
facilities. In addition, the information is used as an
evaluative tool by our administrators and as a budgeting and
planning tool by our management. USPIs EDGE is now
deployed in substantially all of our U.S. facilities. In
addition to continuing to invest in USPIs EDGE, we are
currently investing in other tools that will allow us to better
manage our facilities.
Operations
Operations
in the United States
Our operations in the United States consist primarily of our
ownership and management of surgery centers. As of
December 31, 2010, we had ownership interests in 171
surgery centers and 13 surgical hospitals and operate, through a
service and management agreement, one additional surgery center.
We also own interests in and expect to
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operate five more surgical facilities that are currently under
construction and have one additional project under development,
and numerous other potential projects in various stages of
consideration, which may result in our adding additional
facilities during 2011. All of the facilities under construction
and in the earlier stages of development include a
not-for-profit
hospital partner. Approximately 8,000 physicians have privileges
to use our facilities. Our surgery centers are licensed
outpatient surgery centers, and our surgical hospitals are
licensed as hospitals. Each of our facilities is generally
equipped and staffed for multiple surgical specialties and
located in freestanding buildings or medical office buildings.
Our average surgery center has approximately 12,000 square
feet of space with three operating rooms, as well as ancillary
areas for preparation, recovery, reception and administration.
Our surgery center facilities range from a 4,000 square
foot, one operating room facility to a 33,000 square foot,
nine operating room facility. Our surgery centers are normally
open weekdays from 7:00 a.m. to approximately
5:00 p.m. or until the last patient is discharged. We
estimate that a surgery center with four operating rooms can
accommodate up to 6,000 procedures per year. Our surgical
hospitals average 56,000 square feet of space with seven
operating rooms, ranging in size from 30,000 to
167,000 square feet and having from four to eleven
operating rooms.
Our surgery center support staff typically consists of
registered nurses, operating room technicians, an administrator
who supervises the
day-to-day
activities of the surgery center, and a small number of office
staff. Each center also has appointed a medical director, who is
responsible for and supervises the quality of medical care
provided at the center. Use of our surgery centers is generally
limited to licensed physicians, podiatrists and oral surgeons
who are also on the medical staff of a local accredited
hospital. Each center maintains a peer review committee
consisting of physicians who use our facilities and who review
the professional credentials of physicians applying for surgical
privileges.
All of our U.S. surgical facilities are accredited by
either the Joint Commission on Accreditation of Healthcare
Organizations or by the Accreditation Association for Ambulatory
Healthcare or are in the process of applying for such
accreditation. We believe that accreditation is the quality
benchmark for managed care organizations. Many managed care
organizations will not contract with a facility until it is
accredited. We believe that our historical performance in the
accreditation process reflects our commitment to providing high
quality care in our surgical facilities.
Generally, our surgical facilities are limited partnerships,
limited liability partnerships or limited liability companies in
which ownership interests are also held by local physicians who
are on the medical staff of the facilities. Our ownership
interests in the facilities range from 5% to 99%, with our
average ownership being approximately 28%. Our partnership and
limited liability company agreements typically provide for the
monthly or quarterly pro rata distribution of cash equal to net
profits from operations, less amounts held in reserve for
expenses and working capital. Our facilities derive their
operating cash flow by collecting a fee from patients, insurance
companies, or other payors in exchange for providing the
facility and related services a surgeon requires in order to
perform a surgical case. Our billing systems estimate revenue
and generate contractual adjustments based on a fee schedule for
over 80% of the total cases performed at our facilities. For the
remaining cases, the contractual allowance is estimated based on
the historical collection percentages of each facility by payor
group. The historical collection percentage is updated quarterly
for each facility. We estimate each patients financial
obligation prior to the date of service. We request payment of
that obligation at the time of service. Any amounts not
collected at the time of service are subject to our normal
collection and reserve policy. We also have a management
agreement with each of the facilities under which we provide
day-to-day
management services for a management fee that is typically a
percentage of the net revenues of the facility.
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. Our
business could be adversely affected by the loss of our
relationship with, or a reduction in use of our facilities by, a
key physician or group of physicians. The physicians that
affiliate with us and use our facilities are not our employees.
However, we generally offer the physicians the opportunity to
purchase equity interests in the facilities they use.
8
Strategic
Relationships
A key element of our business strategy is to pursue strategic
relationships with
not-for-profit
healthcare systems (hospital partners) in selected markets. Of
our 185 U.S. facilities, 132 are jointly-owned with
not-for-profit
healthcare systems. Our strategy involves developing these
relationships in three primary ways. One way is by adding new
facilities in existing markets with our existing hospital
partners. An example of this is our relationship with the Baylor
Health Care System (Baylor) in Dallas, Texas. Our joint ventures
with Baylor own a network of 27 surgical facilities that serve
the approximately six million people in the
Dallas / Fort Worth area. These joint ventures
have added new facilities each year since their inception in
1999, including five during 2010. Another example of a growing
single-market relationship is our network of facilities in
Houston, Texas with Memorial Hermann Healthcare System, with
whom we opened our first facility in 2003 and with whom we now
operate 20 facilities, including three added during 2010.
A second way we develop these relationships is through expansion
into new markets, both with existing hospital partners and with
new partners. A good long-term example of this strategy is our
relationship with Ascension Health, with whom we initially owned
a single facility in Nashville, Tennessee and now have a total
of 19 facilities in four states. Similarly, with Catholic
Healthcare West (CHW) we began with one facility, which was in a
suburb of Las Vegas, Nevada. This relationship has expanded to a
total of 16 facilities, including seven in various California
markets and seven in the Phoenix, Arizona market. During 2008,
we entered into a new partnership with Legacy Health in
Portland, Oregon where we now have ownership in and manage two
surgical facilities. Also during 2008, we entered into a new
partnership with Centura Health in Colorado where we now have
ownership in and manage four surgical facilities, one of which
was added in December 2010.
A third way we develop our strategic relationships with
not-for-profit
healthcare systems is through the contribution of our ownership
interests in existing facilities to a joint venture
relationship. For example, during 2007, we added a hospital
partner, CHRISTUS Spohn, to two of our facilities in Corpus
Christi, Texas. We engaged in similar transactions with existing
partners, Memorial Hermann and CHW, during 2008 and 2010. We
expect to add a
not-for-profit
hospital partner in the future to some of the remaining 53
facilities that do not yet have such a partner.
Operations
in the United Kingdom
We operate three hospitals and an oncology center in greater
London. We acquired Parkside Hospital and Holly House Hospital
in 2000 and Highgate Hospital in 2003. In January 2011, we
acquired an ownership interest in a diagnostic and surgery
center in Edinburgh, Scotland. Parkside Hospital, located in
Wimbledon, a suburb southwest of London, has 72 registered acute
care beds, including four high dependency beds and four
operating theatres, one of which is a dedicated endoscopy suite
and an outpatient surgery unit. Parkside also has its own
on-site
pathology laboratory which provides services to the
on-site
cancer treatment center. The imaging department, which has been
extensively upgraded in the past four years, has two MRI
scanners, a CT scanner, and two X-ray screening rooms, plus
mammography, dental and ultrasound services available. Over 500
surgeons, anesthesiologists, and physicians have admitting
privileges to the hospital. Parksides key specialties
include orthopedics, oncology, gynecology, neurosurgery,
ear-nose-throat, endoscopy and general surgery. The expansion of
Parksides outpatient clinic was completed in August 2010,
and the refurbishment of a portion of the hospital is expected
to be completed in the second quarter of 2011.
Cancer Centre London opened in August 2003. In 2010 we partnered
with local physicians who purchased a 24% ownership in the
centre, which has a state of the art equipment designed to
provide a wide range of cancer treatments. The pre-treatment and
planning suite houses a dedicated CT scanner, which, along with
the linear accelerators and virtual simulation software, is
linked to the departments planning system. The centre
provides inverse planned intensity-modulated radiation therapy
(IMRT). The centre has its own pharmacy aseptic suite which
provides chemotherapy to the day case unit at the hospital. The
centre also has a nuclear medicine unit.
Holly House Hospital, located in a suburb northeast of London
near Essex, has 55 registered acute care beds, including the
ability to provide high dependency care. The hospital has three
operating theatres and its own
on-site
pathology laboratory and pharmacy. A diagnostic suite houses MRI
and CT scanners, X-ray screening rooms, mammography, ultrasound,
and other imaging services. Approximately 300 surgeons,
anesthesiologists, and
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physicians have admitting privileges at the hospital, and there
are well-established orthopedic, cosmetic, in vitro
fertilization, and general surgery practices. We have started a
refurbishment and expansion program at Holly House which is due
to be completed by late 2012. This expansion will provide three
new operating theater suites, an endoscopy suite, ten additional
patient rooms, an eight bed day unit, and six additional
consulting rooms.
Highgate Hospital is a 32 bed acute care hospital located in the
affluent Highgate area of London. The hospital has an
established cosmetic surgery business and additional practices
including endoscopy and general surgery. Approximately 200
surgeons, anesthesiologists, and physicians have admitting
privileges at the hospital.
Case
Mix
The following table sets forth the percentage of the internally
reported case volume of our U.S. facilities and internally
reported revenue from our U.K. facilities for the year ended
December 31, 2010 from each of the following specialties:
|
|
|
|
|
|
|
|
|
Specialty
|
|
U.S.
|
|
U.K.
|
|
Orthopedic
|
|
|
20
|
%
|
|
|
24
|
%
|
Pain management
|
|
|
18
|
|
|
|
2
|
|
Gynecology
|
|
|
3
|
|
|
|
7
|
(1)
|
General surgery
|
|
|
5
|
|
|
|
14
|
|
Ear, nose and throat
|
|
|
8
|
|
|
|
3
|
|
Gastrointestinal
|
|
|
21
|
|
|
|
2
|
|
Cosmetic surgery
|
|
|
3
|
|
|
|
15
|
|
Ophthalmology
|
|
|
12
|
|
|
|
1
|
|
Other
|
|
|
10
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Also includes in vitro fertilization. |
Payor
Mix
The following table sets forth the percentage of the internally
reported case volume of our U.S. surgical facilities and
internally reported revenue from our U.K. facilities for the
year ended December 31, 2010 from each of the following
payors:
|
|
|
|
|
|
|
|
|
Payor
|
|
U.S.
|
|
U.K.
|
|
Private insurance
|
|
|
60
|
%
|
|
|
67
|
%
|
Self-pay
|
|
|
2
|
|
|
|
25
|
|
Government
|
|
|
31
|
(1)
|
|
|
4
|
|
Other
|
|
|
7
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based solely on case volume. Because government payors typically
pay less than private insurance, the percentage of our U.S.
revenue attributable to government payors is approximately 16%
for Medicare and 2% for Medicaid. |
10
The following table sets forth information relating to the
not-for-profit
healthcare systems with which we were affiliated as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Facilities
|
|
|
Healthcare Systems
|
|
Operated
|
Healthcare System
|
|
Geographical Focus
|
|
with USPI
|
|
Single Market Systems:
|
|
|
|
|
|
|
Baylor Health Care System
|
|
Dallas/Fort Worth, Texas
|
|
|
27
|
|
Centura Health
|
|
Colorado
|
|
|
4
|
|
Cookeville Regional Medical Center
|
|
Middle Tennessee
|
|
|
1
|
|
Covenant Health
|
|
Eastern Tennessee
|
|
|
2
|
|
INTEGRIS Health
|
|
Oklahoma
|
|
|
2
|
|
Kennedy Health System
|
|
New Jersey
|
|
|
1
|
|
Legacy Health System
|
|
Portland, Oregon
|
|
|
2
|
|
McLaren Health Care Corporation
|
|
Michigan
|
|
|
5
|
|
Memorial Hermann Healthcare System
|
|
Houston, Texas
|
|
|
20
|
|
Meridian Health System
|
|
New Jersey
|
|
|
5
|
|
Mountain States Health Alliance
|
|
Northeast Tennessee
|
|
|
1
|
|
North Kansas City Hospital
|
|
Kansas City, Missouri
|
|
|
3
|
|
NorthShore University Health System
|
|
Chicago, Illinois
|
|
|
4
|
|
Scripps Health
|
|
San Diego, California
|
|
|
1
|
|
St. John Health System
|
|
Oklahoma
|
|
|
1
|
|
St. Johns Mercy Healthcare
|
|
Missouri
|
|
|
1
|
|
The Christ Hospital
|
|
Cincinnati, Ohio
|
|
|
1
|
|
Williamson Medical Center
|
|
Franklin, Tennessee
|
|
|
1
|
|
Multi-Market Systems:
|
|
|
|
|
|
|
Adventist Health System:
|
|
12 states(a)
|
|
|
2
|
|
Adventist Hinsdale Hospital
|
|
Hinsdale, Illinois
|
|
|
|
|
Huguley Memorial Medical Center
|
|
Fort Worth, Texas
|
|
|
|
|
Ascension Health:
|
|
19 states and D.C.(b)
|
|
|
19
|
|
Carondelet Health System (2 facilities)
|
|
Blue Springs, Missouri
|
|
|
|
|
St. Thomas Health Services System (13 facilities)
|
|
Middle Tennessee
|
|
|
|
|
St. Vincent Health (1 facility)
|
|
Indiana
|
|
|
|
|
Seton Healthcare Network (3 facilities)
|
|
Austin, Texas
|
|
|
|
|
Bon Secours Health System:
|
|
Seven states(c)
|
|
|
5
|
|
Bon Secours Health Center at Virginia Beach
|
|
Virginia Beach, Virginia
|
|
|
|
|
Mary Immaculate Hospital
|
|
Newport News, Virginia
|
|
|
|
|
Maryview Medical Center
|
|
Suffolk, Virginia
|
|
|
|
|
Memorial Regional Medical Center
|
|
Richmond, Virginia
|
|
|
|
|
St. Marys Hospital
|
|
Richmond, Virginia
|
|
|
|
|
Catholic Health Partners:
|
|
Four states(d)
|
|
|
1
|
|
Humility of Mary Health (1 facility)
|
|
|
|
|
|
|
Catholic Healthcare West:
|
|
California, Arizona and Nevada
|
|
|
16
|
|
Mercy Hospital of Folsom (1 facility)
|
|
Sacramento, California
|
|
|
|
|
Mercy Medical Center (3 facilities)
|
|
Redding, California
|
|
|
|
|
Mercy San Juan Medical Center (1 facility)
|
|
Roseville, California
|
|
|
|
|
Sierra Nevada Memorial Hospital (1 facility)
|
|
Grass Valley, California
|
|
|
|
|
St. Josephs Hospital and Medical Center (5 facilities) and
Arizona Orthopedic Surgical Hospital (2 facilities)
|
|
Phoenix, Arizona
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Facilities
|
|
|
Healthcare Systems
|
|
Operated
|
Healthcare System
|
|
Geographical Focus
|
|
with USPI
|
|
St. Josephs Medical Center (1 facility)
|
|
Stockton, California
|
|
|
|
|
St. Rose Dominican Hospital (2 facilities)
|
|
Las Vegas, Nevada
|
|
|
|
|
CHRISTUS Health:
|
|
Eight states(e)
|
|
|
4
|
|
CHRISTUS Health Central Louisiana (1 facility)
|
|
Alexandria, Louisiana
|
|
|
|
|
CHRISTUS Santa Rosa Health Corporation (1 facility)
|
|
San Antonio, Texas
|
|
|
|
|
CHRISTUS Spohn Health System (2 facilities)
|
|
Corpus Christi, Texas
|
|
|
|
|
Providence Health System:
|
|
Five states(f)
|
|
|
2
|
|
Providence Holy Cross Health Center
|
|
Santa Clarita, California
|
|
|
|
|
Providence Holy Cross Medical Center
|
|
Mission Hills, California
|
|
|
|
|
SSM Healthcare:
|
|
Four states(g)
|
|
|
|
|
SSM St. Clare Health System
|
|
St. Louis, Missouri
|
|
|
1
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Colorado, Florida, Georgia, Illinois, Kansas, Kentucky,
Missouri, North Carolina, Tennessee, Texas, West Virginia, and
Wisconsin. |
|
(b) |
|
Alabama, Arkansas, Arizona, Connecticut, District of Columbia,
Georgia Florida, Idaho, Illinois, Indiana, Kansas, Louisiana,
Maryland, Michigan, Missouri, New York, Tennessee, Texas,
Washington, and Wisconsin. |
|
(c) |
|
Florida, Kentucky, Maryland, New York, Pennsylvania, South
Carolina, and Virginia |
|
(d) |
|
Kentucky, Ohio, Pennsylvania and Tennessee |
|
(e) |
|
Arkansas, Georgia, Louisiana, Oklahoma, Missouri, New Mexico,
Texas, and Utah. |
|
(f) |
|
Alaska, California, Montana, Oregon, and Washington. |
|
(g) |
|
Illinois, Missouri, Oklahoma and Wisconsin. |
Facilities
The following table sets forth information relating to the
facilities that we operated as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Number
|
|
|
|
|
Acquisition
|
|
of
|
|
Percentage
|
|
|
|
|
or
|
|
Operating
|
|
Owned by
|
Facility
|
|
Affiliation
|
|
Rooms
|
|
USPI
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East West Surgery Center, Austell, Georgia
|
|
|
9/1/00
|
(2)
|
|
|
3
|
|
|
|
55
|
%
|
|
|
Lawrenceville Surgery Center, Lawrenceville, Georgia
|
|
|
8/1/01
|
|
|
|
2
|
|
|
|
15
|
|
|
|
Northwest Georgia Surgery Center, Marietta, Georgia
|
|
|
11/1/00
|
(2)
|
|
|
3
|
|
|
|
15
|
|
|
|
Orthopaedic South Surgical Center, Morrow, Georgia
|
|
|
11/28/03
|
|
|
|
2
|
|
|
|
15
|
|
|
|
Resurgens Surgical Center, Atlanta, Georgia
|
|
|
10/1/98
|
(2)
|
|
|
4
|
|
|
|
48
|
|
|
|
Roswell Surgery Center, Roswell, Georgia
|
|
|
10/1/00
|
(2)
|
|
|
3
|
|
|
|
15
|
|
Austin
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Cedar Park Surgery Center, Cedar Park, Texas
|
|
|
11/22/05
|
|
|
|
2
|
|
|
|
26
|
|
*
|
|
Medical Park Tower Surgery Center, Austin, Texas
|
|
|
8/27/10
|
|
|
|
5
|
|
|
|
33
|
|
*
|
|
Northwest Surgery Center, Austin, Texas(1)
|
|
|
5/30/07
|
|
|
|
6
|
|
|
|
29
|
|
|
|
Texan Surgery Center, Austin, Texas
|
|
|
6/1/03
|
|
|
|
3
|
|
|
|
55
|
|
Chicago
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Hinsdale Surgical Center, Hinsdale, Illinois
|
|
|
5/1/06
|
|
|
|
4
|
|
|
|
21
|
|
*
|
|
Same Day Surgery 25 East, Chicago, Illinois
|
|
|
10/15/04
|
|
|
|
4
|
|
|
|
45
|
|
*
|
|
Same Day Surgery Elmwood Park, Elmwood Park, Illinois
|
|
|
10/15/04
|
|
|
|
3
|
|
|
|
33
|
|
*
|
|
Same Day Surgery North Shore, Evanston, Illinois
|
|
|
10/15/04
|
|
|
|
2
|
|
|
|
36
|
|
*
|
|
Same Day Surgery River North, Chicago, Illinois
|
|
|
10/15/04
|
|
|
|
4
|
|
|
|
34
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Number
|
|
|
|
|
Acquisition
|
|
of
|
|
Percentage
|
|
|
|
|
or
|
|
Operating
|
|
Owned by
|
Facility
|
|
Affiliation
|
|
Rooms
|
|
USPI
|
|
Corpus Christi
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Corpus Christi Outpatient Surgery Center, Corpus Christi,
Texas(1)
|
|
|
5/1/02
|
|
|
|
5
|
|
|
|
29
|
|
*
|
|
Shoreline Surgery Center, Corpus Christi, Texas
|
|
|
7/1/06
|
|
|
|
4
|
|
|
|
26
|
|
Dallas/Fort Worth
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Baylor Medical Center at Frisco, Frisco, Texas(3)
|
|
|
9/30/02
|
|
|
|
11
|
|
|
|
25
|
|
*
|
|
Baylor Medical Center at Uptown, Dallas, Texas(3)
|
|
|
4/1/03
|
|
|
|
5
|
|
|
|
17
|
|
*
|
|
Baylor Orthopedic and Spine Hospital at Arlington, Arlington,
Texas(3)
|
|
|
2/22/10
|
|
|
|
6
|
|
|
|
25
|
|
*
|
|
Baylor Surgicare at Bedford, Bedford, Texas(1)
|
|
|
12/18/98
|
|
|
|
5
|
|
|
|
32
|
|
*
|
|
Baylor Surgicare at Carrollton, Carrollton, Texas
|
|
|
7/1/10
|
|
|
|
2
|
|
|
|
26
|
|
*
|
|
Baylor Surgicare, Dallas, Texas(1)
|
|
|
6/1/99
|
|
|
|
6
|
|
|
|
34
|
|
*
|
|
Baylor Surgicare at Denton, Denton, Texas(1)
|
|
|
2/1/99
|
|
|
|
4
|
|
|
|
25
|
|
*
|
|
Baylor Surgicare at Garland, Garland, Texas
|
|
|
2/1/99
|
|
|
|
4
|
|
|
|
30
|
|
*
|
|
Baylor Surgicare at Granbury, Granbury, Texas
|
|
|
2/1/09
|
|
|
|
4
|
|
|
|
26
|
|
*
|
|
Baylor Surgicare at Grapevine, Grapevine, Texas
|
|
|
2/16/02
|
|
|
|
4
|
|
|
|
29
|
|
*
|
|
Baylor Surgicare at Lewisville, Lewisville, Texas(1)
|
|
|
9/16/02
|
|
|
|
6
|
|
|
|
37
|
|
*
|
|
Baylor Surgicare at Mansfield, Mansfield, Texas
|
|
|
5/1/10
|
|
|
|
5
|
|
|
|
26
|
|
*
|
|
Baylor Surgicare at North Garland, Garland, Texas
|
|
|
5/1/05
|
|
|
|
6
|
|
|
|
26
|
|
*
|
|
Baylor Surgicare at Plano, Plano, Texas
|
|
|
10/1/07
|
|
|
|
1
|
|
|
|
27
|
|
*
|
|
Baylor Surgicare at Trophy Club, Trophy Club, Texas(3)
|
|
|
5/3/04
|
|
|
|
6
|
|
|
|
34
|
|
*
|
|
Bellaire Surgery Center, Fort Worth, Texas
|
|
|
10/15/02
|
|
|
|
4
|
|
|
|
25
|
|
*
|
|
Doctors Surgery Center at Huguley, Burleson, Texas
|
|
|
2/14/06
|
|
|
|
3
|
|
|
|
26
|
|
*
|
|
Heath Surgicare, Rockwall, Texas(1)
|
|
|
11/1/04
|
|
|
|
3
|
|
|
|
25
|
|
*
|
|
Irving-Coppell Surgical Hospital, Irving, Texas(3)
|
|
|
10/20/03
|
|
|
|
5
|
|
|
|
9
|
|
*
|
|
Lone Star Endoscopy, Keller, Texas
|
|
|
11/1/10
|
|
|
|
1
|
|
|
|
26
|
|
*
|
|
Medical Centre Surgical Hospital, Fort Worth, Texas(3)
|
|
|
12/18/98
|
|
|
|
8
|
|
|
|
35
|
|
*
|
|
North Central Surgical Center, Dallas, Texas(3)
|
|
|
12/12/05
|
|
|
|
10
|
|
|
|
18
|
|
*
|
|
North Texas Surgery Center, Dallas, Texas(1)
|
|
|
12/18/98
|
|
|
|
4
|
|
|
|
36
|
|
|
|
Park Cities Surgery Center, Dallas, Texas(1)
|
|
|
6/9/03
|
|
|
|
4
|
|
|
|
55
|
|
*
|
|
Physicians Surgical Center of Fort Worth, Fort Worth,
Texas
|
|
|
7/13/04
|
|
|
|
4
|
|
|
|
25
|
|
*
|
|
Rockwall Surgery Center, Rockwall, Texas
|
|
|
09/1/06
|
|
|
|
3
|
|
|
|
37
|
|
|
|
Southwestern Surgery Center, Ennis, Texas(4)
|
|
|
11/1/10
|
(6)
|
|
|
3
|
|
|
|
|
|
*
|
|
Surgery Center of Arlington, Arlington, Texas(1)
|
|
|
2/1/99
|
|
|
|
6
|
|
|
|
26
|
|
*
|
|
Tuscan Surgery Center at Las Colinas, Irving, Texas
|
|
|
12/1/10
|
|
|
|
1
|
|
|
|
26
|
|
*
|
|
Valley View Surgery Center, Dallas, Texas
|
|
|
12/18/98
|
|
|
|
4
|
|
|
|
31
|
|
Denver
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Crown Point Surgical Center, Parker, Colorado
|
|
|
10/1/08
|
|
|
|
4
|
|
|
|
43
|
|
*
|
|
Harvard Park Surgery Center, Denver Colorado
|
|
|
1/1/09
|
|
|
|
3
|
|
|
|
30
|
|
*
|
|
Summit View Surgery Center, Littleton, Colorado
|
|
|
1/1/09
|
|
|
|
3
|
|
|
|
33
|
|
Houston
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Doctors Outpatient Surgicenter, Pasadena, Texas(1)
|
|
|
9/1/99
|
|
|
|
5
|
|
|
|
43
|
|
*
|
|
Kingsland Surgery Center, Katy, Texas
|
|
|
12/31/08
|
|
|
|
4
|
|
|
|
28
|
|
*
|
|
KSF Orthopaedic Surgery Center, Houston, Texas(1)
|
|
|
5/1/07
|
|
|
|
3
|
|
|
|
45
|
|
*
|
|
Memorial Hermann Specialty Hospital Kingwood, Kingwood, Texas(3)
|
|
|
9/1/07
|
|
|
|
6
|
|
|
|
25
|
|
*
|
|
Memorial Hermann Surgery Center Katy, Katy, Texas(1)
|
|
|
1/19/07
|
|
|
|
4
|
|
|
|
10
|
|
*
|
|
Memorial Hermann Surgery Center Memorial Village,
Houston, Texas
|
|
|
12/1/2010
|
|
|
|
4
|
|
|
|
11
|
|
*
|
|
Memorial Hermann Surgery Center Northwest, Houston,
Texas(1)
|
|
|
9/1/04
|
|
|
|
5
|
|
|
|
10
|
|
*
|
|
Memorial Hermann Surgery Center Richmond, Richmond,
Texas
|
|
|
12/31/09
|
|
|
|
2
|
|
|
|
26
|
|
*
|
|
Memorial Hermann Surgery Center Southwest, Houston,
Texas(1)
|
|
|
9/21/06
|
|
|
|
6
|
|
|
|
10
|
|
*
|
|
Memorial Hermann Surgery Center Sugar Land, Sugar
Land, Texas(1)
|
|
|
9/21/06
|
|
|
|
4
|
|
|
|
11
|
|
*
|
|
Memorial Hermann Surgery Center Texas Medical
Center, Houston, Texas(1)
|
|
|
1/17/07
|
|
|
|
5
|
|
|
|
17
|
|
*
|
|
Memorial Hermann Surgery Center The Woodlands, The
Woodlands, Texas
|
|
|
8/9/05
|
|
|
|
4
|
|
|
|
10
|
|
*
|
|
Memorial Hermann Surgery Center West Houston ,
Houston, Texas
|
|
|
4/19/06
|
(5)
|
|
|
5
|
|
|
|
25
|
|
*
|
|
Memorial Hermann Surgery Center Woodlands Parkway,
Houston Texas
|
|
|
12/31/10
|
|
|
|
4
|
|
|
|
28
|
|
*
|
|
North Houston Endoscopy and Surgery, Houston, Texas
|
|
|
10/1/08
|
|
|
|
2
|
|
|
|
26
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Number
|
|
|
|
|
Acquisition
|
|
of
|
|
Percentage
|
|
|
|
|
or
|
|
Operating
|
|
Owned by
|
Facility
|
|
Affiliation
|
|
Rooms
|
|
USPI
|
|
*
|
|
North Houston GI, Houston, Texas
|
|
|
10/1/08
|
|
|
|
1
|
|
|
|
28
|
|
*
|
|
Sugar Land Surgical Hospital, Sugar Land, Texas(3)
|
|
|
12/28/02
|
|
|
|
4
|
|
|
|
13
|
|
*
|
|
TOPS Surgical Specialty Hospital, Houston, Texas(3)
|
|
|
7/1/99
|
|
|
|
7
|
|
|
|
45
|
|
*
|
|
United Surgery Center Southeast, Houston, Texas(1)
|
|
|
9/1/99
|
|
|
|
3
|
|
|
|
30
|
|
Kansas City
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Briarcliff Surgery Center, Kansas City, Missouri
|
|
|
6/1/05
|
|
|
|
2
|
|
|
|
29
|
|
*
|
|
Creekwood Surgery Center, Kansas City, Missouri(1)
|
|
|
7/29/98
|
|
|
|
4
|
|
|
|
38
|
|
*
|
|
Liberty Surgery Center, Liberty, Missouri
|
|
|
6/1/05
|
|
|
|
2
|
|
|
|
30
|
|
*
|
|
Saint Marys Surgical Center, Blue Springs, Missouri
|
|
|
5/1/05
|
|
|
|
4
|
|
|
|
27
|
|
*
|
|
Midwest Physicians Surgery Center, Lees Summit Missouri
|
|
|
11/1/10
|
(6)
|
|
|
3
|
|
|
|
26
|
|
Knoxville
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parkwest Surgery Center, Knoxville, Tennessee
|
|
|
7/26/01
|
|
|
|
5
|
|
|
|
22
|
|
|
|
Physicians Surgery Center of Knoxville, Knoxville,
Tennessee
|
|
|
1/1/08
|
|
|
|
6
|
|
|
|
26
|
|
Las Vegas
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Durango Outpatient Surgery Center, Las Vegas, Nevada
|
|
|
12/9/08
|
|
|
|
4
|
|
|
|
33
|
|
*
|
|
Parkway Surgery Center, Henderson, Nevada
|
|
|
8/3/98
|
|
|
|
5
|
|
|
|
29
|
|
Los Angeles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coast Surgery Center of South Bay, Torrance, California(1)
|
|
|
12/18/01
|
|
|
|
3
|
|
|
|
24
|
|
|
|
Pacific Endo-Surgical Center, Torrance, California
|
|
|
8/1/03
|
|
|
|
1
|
|
|
|
55
|
|
*
|
|
San Fernando Valley Surgery Center, Mission Hills,
California
|
|
|
11/1/04
|
|
|
|
4
|
|
|
|
26
|
|
|
|
San Gabriel Valley Surgical Center, West Covina, California
|
|
|
11/16/01
|
|
|
|
3
|
|
|
|
48
|
|
*
|
|
Santa Clarita Ambulatory Surgery Center, Santa Clarita,
California(1)
|
|
|
3/7/06
|
|
|
|
3
|
|
|
|
26
|
|
|
|
The Center for Ambulatory Surgical Treatment, Los Angeles,
California(1)
|
|
|
11/14/02
|
|
|
|
4
|
|
|
|
38
|
|
Michigan
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Clarkston Surgery Center, Clarkston, Michigan
|
|
|
6/1/09
|
|
|
|
4
|
|
|
|
36
|
|
*
|
|
Genesis Surgery Center, Lansing, Michigan
|
|
|
11/1/06
|
|
|
|
4
|
|
|
|
23
|
|
*
|
|
Lansing Surgery Center, Lansing, Michigan
|
|
|
11/1/06
|
|
|
|
4
|
|
|
|
23
|
|
*
|
|
McLaren ASC of Flint, Flint, Michigan
|
|
|
8/2/07
|
|
|
|
4
|
|
|
|
43
|
|
*
|
|
Utica Surgery and Endoscopy Center, Utica, Michigan
|
|
|
4/1/07
|
|
|
|
3
|
|
|
|
33
|
|
Nashville
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Baptist Ambulatory Surgery Center, Nashville, Tennessee
|
|
|
3/1/98
|
(2)
|
|
|
6
|
|
|
|
29
|
|
*
|
|
Baptist Plaza Surgicare, Nashville, Tennessee
|
|
|
12/3/03
|
|
|
|
9
|
|
|
|
27
|
|
*
|
|
Center for Spinal Surgery, Nashville, Tennessee(3)
|
|
|
12/31/08
|
|
|
|
6
|
|
|
|
20
|
|
*
|
|
Eye Surgery Center of Nashville, Nashville, Tennessee
|
|
|
11/1/10
|
(6)
|
|
|
1
|
|
|
|
26
|
|
*
|
|
Franklin Endoscopy Center, Franklin, Tennessee
|
|
|
11/1/10
|
(6)
|
|
|
2
|
|
|
|
26
|
|
*
|
|
Lebanon Endoscopy Center, Lebanon, Tennessee
|
|
|
11/1/10
|
(6)
|
|
|
2
|
|
|
|
26
|
|
*
|
|
Middle Tennessee Ambulatory Surgery Center, Murfreesboro,
Tennessee
|
|
|
7/29/98
|
|
|
|
4
|
|
|
|
35
|
|
*
|
|
Northridge Surgery Center, Nashville, Tennessee
|
|
|
4/19/06
|
(5)
|
|
|
5
|
|
|
|
31
|
|
*
|
|
Patient Partners Surgery Center, Gallatin, Tennessee
|
|
|
11/1/10
|
(6)
|
|
|
2
|
|
|
|
13
|
|
*
|
|
Physicians Pavilion Surgery Center, Smyrna, Tennessee
|
|
|
7/29/98
|
|
|
|
4
|
|
|
|
49
|
|
*
|
|
Saint Thomas Surgicare, Nashville, Tennessee
|
|
|
7/15/02
|
|
|
|
5
|
|
|
|
30
|
|
*
|
|
Tennessee Sports Medicine Surgery Center, Mt. Juliet, Tennessee
|
|
|
11/1/10
|
(6)
|
|
|
4
|
|
|
|
13
|
|
*
|
|
Williamson Surgery Center, Franklin, Tennessee
|
|
|
11/1/10
|
(6)
|
|
|
3
|
|
|
|
20
|
|
New Jersey
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Central Jersey Surgery Center, Eatontown, New Jersey
|
|
|
11/1/04
|
|
|
|
3
|
|
|
|
35
|
|
*
|
|
Northern Monmouth Regional Surgery Center, Manalapan, New Jersey
|
|
|
7/10/06
|
|
|
|
4
|
|
|
|
39
|
|
*
|
|
Select Surgical Center at Kennedy, Sewell, New Jersey
|
|
|
10/29/09
|
|
|
|
3
|
|
|
|
29
|
|
*
|
|
Shore Outpatient Surgicenter, Lakewood, New Jersey
|
|
|
11/1/04
|
|
|
|
3
|
|
|
|
42
|
|
*
|
|
Shrewsbury Surgery Center, Shrewsbury, New Jersey
|
|
|
4/1/99
|
|
|
|
4
|
|
|
|
14
|
|
|
|
Suburban Endoscopy Services, Verona, New Jersey
|
|
|
4/19/06
|
(5)
|
|
|
2
|
|
|
|
51
|
|
*
|
|
Toms River Surgery Center, Toms River, New Jersey
|
|
|
3/15/02
|
|
|
|
4
|
|
|
|
20
|
|
Oklahoma City
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Oklahoma Center for Orthopedic MultiSpecialty Surgery, Oklahoma
City, Oklahoma(3)
|
|
|
8/2/04
|
|
|
|
4
|
|
|
|
24
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Number
|
|
|
|
|
Acquisition
|
|
of
|
|
Percentage
|
|
|
|
|
or
|
|
Operating
|
|
Owned by
|
Facility
|
|
Affiliation
|
|
Rooms
|
|
USPI
|
|
*
|
|
Southwest Orthopaedic Ambulatory Surgery Center, Oklahoma City,
Oklahoma
|
|
|
8/2/04
|
|
|
|
2
|
|
|
|
24
|
|
Phoenix
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Arizona Orthopedic Surgical Hospital, Chandler, Arizona(3)
|
|
|
5/19/04
|
|
|
|
6
|
|
|
|
36
|
|
*
|
|
Desert Ridge Outpatient Surgery Center, Phoenix, Arizona
|
|
|
3/30/07
|
|
|
|
4
|
|
|
|
33
|
|
*
|
|
Metro Surgery Center, Phoenix, Arizona
|
|
|
4/19/06
|
(5)
|
|
|
4
|
|
|
|
83
|
|
|
|
Physicians Surgery Center of Tempe, Tempe, Arizona
|
|
|
4/19/06
|
(5)
|
|
|
2
|
|
|
|
10
|
|
*
|
|
St. Josephs Outpatient Surgery Center, Phoenix, Arizona(1)
|
|
|
9/2/03
|
|
|
|
8
|
|
|
|
29
|
|
*
|
|
Surgery Center of Peoria, Peoria, Arizona
|
|
|
4/19/06
|
(5)
|
|
|
3
|
|
|
|
30
|
|
*
|
|
Surgery Center of Scottsdale, Scottsdale, Arizona
|
|
|
4/19/06
|
(5)
|
|
|
4
|
|
|
|
29
|
|
|
|
Surgery Center of Gilbert, Gilbert, Arizona
|
|
|
4/19/06
|
(5)
|
|
|
3
|
|
|
|
22
|
|
*
|
|
Warner Outpatient Surgery Center, Chandler, Arizona
|
|
|
7/1/99
|
|
|
|
4
|
|
|
|
36
|
|
Portland
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
East Portland Surgical Center, Portland, Oregon
|
|
|
12/31/09
|
|
|
|
4
|
|
|
|
29
|
|
*
|
|
Northwest Surgery Center, Portland, Oregon
|
|
|
12/1/08
|
|
|
|
3
|
|
|
|
26
|
|
Redding
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Court Street Surgery Center, Redding, California
|
|
|
4/19/06
|
(5)
|
|
|
2
|
|
|
|
32
|
|
*
|
|
Mercy Surgery Center, Redding, California
|
|
|
3/1/08
|
|
|
|
4
|
|
|
|
32
|
|
*
|
|
Redding Surgery Center, Redding, California
|
|
|
4/19/06
|
(5)
|
|
|
2
|
|
|
|
32
|
|
Sacramento
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Folsom Outpatient Surgery Center, Folsom, California
|
|
|
6/1/05
|
|
|
|
2
|
|
|
|
31
|
|
*
|
|
Grass Valley Surgery Center, Grass Valley, California
|
|
|
7/1/10
|
|
|
|
2
|
|
|
|
23
|
|
*
|
|
Roseville Surgery Center, Roseville, California
|
|
|
7/1/06
|
|
|
|
2
|
|
|
|
29
|
|
San Antonio
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Alamo Heights Surgery Center, San Antonio, Texas(1)
|
|
|
12/1/04
|
|
|
|
3
|
|
|
|
59
|
|
|
|
San Antonio Endoscopy Center, San Antonio, Texas
|
|
|
5/1/05
|
|
|
|
1
|
|
|
|
54
|
|
St. Louis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced Surgical Care, Creve Coeur, Missouri(1)
|
|
|
1/1/06
|
|
|
|
2
|
|
|
|
60
|
|
|
|
Chesterfield Surgery Center, Chesterfield, Missouri(1)
|
|
|
1/1/06
|
|
|
|
2
|
|
|
|
65
|
|
|
|
Frontenac Surgery and Spine Care Center, Frontenac, Missouri(1)
|
|
|
5/1/07
|
|
|
|
2
|
|
|
|
40
|
|
|
|
Gateway Endoscopy Center, St. Louis, Missouri
|
|
|
5/1/10
|
|
|
|
2
|
|
|
|
50
|
|
|
|
Manchester Surgery Center, St. Louis, Missouri
|
|
|
2/1/07
|
|
|
|
3
|
|
|
|
62
|
|
|
|
Mason Ridge Surgery Center, St. Louis, Missouri(1)
|
|
|
2/1/07
|
|
|
|
2
|
|
|
|
56
|
|
|
|
Mid Rivers Surgery Center, Saint Peters, Missouri
|
|
|
1/1/06
|
|
|
|
2
|
|
|
|
64
|
|
|
|
Old Tesson Surgery Center, St. Louis, Missouri
|
|
|
8/1/08
|
|
|
|
3
|
|
|
|
61
|
|
|
|
Olive Surgery Center, St. Louis, Missouri
|
|
|
1/1/06
|
|
|
|
2
|
|
|
|
62
|
|
|
|
Riverside Ambulatory Surgery Center, Florissant, Missouri
|
|
|
8/1/06
|
|
|
|
2
|
|
|
|
76
|
|
|
|
South County Outpatient Endoscopy Services, St. Louis,
Missouri
|
|
|
10/1/08
|
|
|
|
2
|
|
|
|
25
|
|
*
|
|
SSM St. Clare Surgical Center, Fenton, Missouri
|
|
|
10/23/09
|
|
|
|
3
|
|
|
|
20
|
|
*
|
|
St. Louis Surgical Center, Creve Coeur, Missouri(1)
|
|
|
4/1/10
|
|
|
|
7
|
|
|
|
20
|
|
|
|
Sunset Hills Surgery Center, St. Louis, Missouri
|
|
|
1/1/06
|
|
|
|
2
|
|
|
|
66
|
|
|
|
The Ambulatory Surgical Center of St. Louis, Bridgeton,
Missouri
|
|
|
8/1/06
|
|
|
|
2
|
|
|
|
66
|
|
|
|
Twin Cities Ambulatory Surgery Center, St. Louis, Missouri
|
|
|
9/1/08
|
|
|
|
2
|
|
|
|
61
|
|
|
|
Webster Surgery Center, Webster Groves, Missouri(1)
|
|
|
3/1/07
|
|
|
|
2
|
|
|
|
28
|
|
Virginia
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Bon Secours Surgery Center at Harbour View, Suffolk, Virginia
|
|
|
11/12/07
|
|
|
|
6
|
|
|
|
21
|
|
*
|
|
Bon Secours Surgery Center at Virginia Beach, Virginia Beach,
Virginia
|
|
|
5/30/07
|
|
|
|
2
|
|
|
|
22
|
|
*
|
|
Mary Immaculate Ambulatory Surgical Center, Newport News,
Virginia
|
|
|
7/19/04
|
|
|
|
3
|
|
|
|
17
|
|
*
|
|
Memorial Ambulatory Surgery Center, Mechanicsville, Virginia
|
|
|
12/30/05
|
|
|
|
5
|
|
|
|
17
|
|
*
|
|
St. Marys Ambulatory Surgery Center, Richmond, Virginia
|
|
|
11/29/06
|
|
|
|
4
|
|
|
|
14
|
|
|
|
Surgi-Center of Central Virginia, Fredericksburg, Virginia
|
|
|
11/29/01
|
|
|
|
4
|
|
|
|
76
|
|
Additional Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Beaumont Surgical Affiliates, Beaumont, Texas(1)
|
|
|
4/19/06
|
(5)
|
|
|
6
|
|
|
|
25
|
|
|
|
Chico Surgery Center, Chico, California
|
|
|
4/19/06
|
(5)
|
|
|
3
|
|
|
|
80
|
|
*
|
|
CHRISTUS Cabrini Surgery Center, Alexandria, Louisiana
|
|
|
6/22/07
|
|
|
|
4
|
|
|
|
23
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of
|
|
Number
|
|
|
|
|
Acquisition
|
|
of
|
|
Percentage
|
|
|
|
|
or
|
|
Operating
|
|
Owned by
|
Facility
|
|
Affiliation
|
|
Rooms
|
|
USPI
|
|
|
|
Day-Op Center of Long Island, Mineola, New York(4)
|
|
|
12/4/98
|
|
|
|
4
|
|
|
|
99
|
|
|
|
Destin Surgery Center, Destin, Florida
|
|
|
9/25/02
|
|
|
|
2
|
|
|
|
61
|
|
*
|
|
Flatirons Surgery Center, Boulder, Colorado
|
|
|
12/1/10
|
|
|
|
3
|
|
|
|
32
|
|
|
|
Great Plains Surgery Center, Lawton, Oklahoma
|
|
|
4/19/06
|
(5)
|
|
|
2
|
|
|
|
49
|
|
|
|
Hope Square Surgical Center, Rancho Mirage, California
|
|
|
11/1/10
|
(6)
|
|
|
2
|
|
|
|
37
|
|
|
|
Idaho Surgery Center, Caldwell, Idaho
|
|
|
4/19/06
|
(5)
|
|
|
3
|
|
|
|
22
|
|
*
|
|
Memorial Surgery Center, Tulsa, Oklahoma
|
|
|
10/1/09
|
|
|
|
4
|
|
|
|
25
|
|
*
|
|
Mountain Empire Surgery Center, Johnson City, Tennessee
|
|
|
2/20/00
|
(2)
|
|
|
4
|
|
|
|
18
|
|
|
|
New Horizons Surgery Center, Marion, Ohio
|
|
|
4/19/06
|
(5)
|
|
|
2
|
|
|
|
11
|
|
|
|
New Mexico Orthopaedic Surgery Center, Albuquerque, New Mexico
|
|
|
2/29/00
|
(2)
|
|
|
6
|
|
|
|
51
|
|
|
|
Northeast Ohio Surgery Center, Cleveland, Ohio
|
|
|
4/19/06
|
(5)
|
|
|
3
|
|
|
|
49
|
|
|
|
Physicians Surgery Center of Chattanooga, Chattanooga, Tennessee
|
|
|
11/1/10
|
(6)
|
|
|
4
|
|
|
|
51
|
|
|
|
Reading Endoscopy Center, Wyomissing, Pennsylvania
|
|
|
11/1/10
|
(6)
|
|
|
2
|
|
|
|
51
|
|
|
|
Reading Surgery Center, Wyomissing, Pennsylvania
|
|
|
7/1/04
|
|
|
|
3
|
|
|
|
57
|
|
|
|
Redmond Surgery Center, Redmond, Oregon
|
|
|
4/19/06
|
(5)
|
|
|
2
|
|
|
|
69
|
|
*
|
|
Scripps Encinitas Surgery Center, Encinitas, California
|
|
|
2/6/08
|
|
|
|
3
|
|
|
|
20
|
|
*
|
|
St. Josephs Surgery Center, Stockton, California
|
|
|
2/1/09
|
|
|
|
6
|
|
|
|
5
|
|
*
|
|
Surgery Center of Canfield, Canfield, Ohio(1)
|
|
|
4/19/06
|
(5)
|
|
|
3
|
|
|
|
26
|
|
|
|
Surgery Center of Columbia, Columbia, Missouri(1)
|
|
|
8/1/06
|
|
|
|
2
|
|
|
|
59
|
|
|
|
Surgery Center of Fort Lauderdale, Fort Lauderdale,
Florida
|
|
|
11/1/04
|
|
|
|
4
|
|
|
|
51
|
|
|
|
SurgiCenter of Baltimore, Owings Mills, Maryland
|
|
|
11/1/10
|
(6)
|
|
|
5
|
|
|
|
33
|
|
*
|
|
Terre Haute Surgical Center, Terre Haute, Indiana
|
|
|
12/19/07
|
|
|
|
2
|
|
|
|
23
|
|
|
|
Teton Outpatient Services, Jackson, Wyoming(1)
|
|
|
8/1/98
|
(2)
|
|
|
2
|
|
|
|
49
|
|
*
|
|
The Christ Hospital Spine Surgery Center(1)
|
|
|
12/31/09
|
|
|
|
3
|
|
|
|
26
|
|
|
|
Tri-City Orthopaedic Center, Richland, Washington(4)
|
|
|
4/19/06
|
(5)
|
|
|
2
|
|
|
|
17
|
|
*
|
|
Tullahoma Surgery Center, Tullahoma, Tennessee
|
|
|
12/31/10
|
|
|
|
2
|
|
|
|
26
|
|
*
|
|
Upper Cumberland Physician Surgery Center, Cookeville, Tennessee
|
|
|
11/1/10
|
(6)
|
|
|
2
|
|
|
|
10
|
|
|
|
University Surgical Center, Winter Park, Florida
|
|
|
10/15/98
|
|
|
|
3
|
|
|
|
38
|
|
|
|
Victoria Ambulatory Surgery Center, Victoria, Texas
|
|
|
4/19/06
|
(5)
|
|
|
2
|
|
|
|
59
|
|
United Kingdom
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parkside Hospital, Wimbledon
|
|
|
4/6/00
|
|
|
|
4
|
|
|
|
100
|
|
|
|
Cancer Centre London, Wimbledon
|
|
|
8/1/03
|
|
|
|
|
|
|
|
76
|
|
|
|
Holly House Hospital, Essex
|
|
|
4/6/00
|
|
|
|
3
|
|
|
|
100
|
|
|
|
Highgate Private Clinic, Highgate
|
|
|
4/29/03
|
|
|
|
3
|
|
|
|
100
|
|
|
|
|
* |
|
Facilities jointly owned with
not-for-profit
hospital systems. |
|
(1) |
|
Certain of our surgery centers are licensed and equipped to
accommodate
23-hour
stays. |
|
(2) |
|
Indicates date of acquisition by OrthoLink Physician
Corporation. We acquired OrthoLink in February 2001. |
|
(3) |
|
Surgical hospitals, all of which are licensed and equipped for
overnight stays. |
|
(4) |
|
Operated through a consulting and administrative agreement. |
|
(5) |
|
Indicates the date of our acquisition of Surgis. |
|
(6) |
|
Indicates the date of our acquisition of HealthMark. |
We lease the majority of the facilities where our various
surgery centers and surgical hospitals conduct their operations.
Our leases have initial terms ranging from one to twenty years
and most of the leases contain options to extend the lease
period, in some cases for up to ten additional years.
Our corporate headquarters is located in a suburb of Dallas,
Texas. We currently lease approximately 83,000 square feet
of space at 15305 Dallas Parkway, Addison, Texas. The lease
expires in October 2020.
Our administrative office in the United Kingdom is located in
London. We currently lease 2,300 square feet. The lease
expires in October 2013.
16
We also lease approximately 40,000 square feet of total
additional space in Brentwood, Tennessee; Chicago, Illinois;
Houston, Texas; St. Louis, Missouri; Denver, Colorado; and
Pasadena, California for regional offices. These leases expire
between November 2012 and March 2021.
Acquisitions
and Development
The following table sets forth information relating to
facilities that are currently under construction at
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
|
|
Number of
|
|
|
Hospital
|
|
|
|
Opening
|
|
Operating
|
Facility Location
|
|
Partner
|
|
Type
|
|
Date
|
|
Rooms
|
|
Dallas, Texas
|
|
Baylor
|
|
Hospital
|
|
|
Q111
|
|
|
|
6
|
|
Murfreesboro, Tennessee
|
|
St. Thomas
|
|
Surgery center
|
|
|
Q111
|
|
|
|
2
|
|
Phoenix, Arizona
|
|
CHW
|
|
Hospital
|
|
|
Q211
|
|
|
|
8
|
|
Austin, Texas
|
|
Seton
|
|
Surgery center
|
|
|
Q211
|
|
|
|
4
|
|
Jersey City, New Jersey
|
|
Liberty Health
|
|
Surgery center
|
|
|
Q211
|
|
|
|
3
|
|
The hospital under construction in Dallas, Texas at
December 31, 2010 is a replacement facility for an existing
facility. The new facility opened in January 2011. We also have
additional projects under development, all of which involve a
hospital partner. It is possible that some of these projects, as
well as other projects which are in various stages of
negotiation with both current and prospective joint venture
partners, will result in our operating additional facilities
sometime in 2011. While our history suggests that many of these
projects will culminate with the opening of a profitable
surgical facility, we can provide no assurance that any of these
projects will reach that stage or will be successful thereafter.
Marketing
Our sales and marketing efforts are directed primarily at
physicians, who are principally responsible for referring
patients to our facilities. We market our facilities to
physicians by emphasizing (1) the high level of patient and
physician satisfaction with our facilities, which is based on
surveys we take concerning our facilities, (2) the quality
and responsiveness of our services, (3) the practice
efficiencies provided by our facilities, and (4) the
benefits of our affiliation with our hospital partners, if
applicable. We also directly negotiate, together in some
instances with our hospital partners, agreements with
third-party payors, which generally focus on the pricing, number
of facilities in the market and affiliation with physician
groups in a particular market. Maintaining access to physicians
and patients through third-party payor contracting is essential
for the economic viability of most of our facilities.
Competition
In all of our markets, our facilities compete with other
providers, including major acute care hospitals and other
surgery centers. Hospitals have various competitive advantages
over us, including their established managed care contracts,
community position, physician loyalty and geographical
convenience for physicians inpatient and outpatient
practices. However, we believe that, in comparison to hospitals
with which we compete, our surgery centers and surgical
hospitals compete favorably on the basis of cost, quality,
efficiency and responsiveness to physician needs in a more
comfortable environment for the patient.
We compete with other providers in each of our markets for
patients, physicians and for contracts with insurers or managed
care payors. Competition for managed care contracts with other
providers is focused on the pricing, number of facilities in the
market and affiliation with key physician groups in a particular
market. We believe that our relationships with our hospital
partners enhance our ability to compete for managed care
contracts. We also encounter competition with other companies
for acquisition and development of facilities and in the United
States for strategic relationships with not-for-profit
healthcare systems and physicians.
There are several companies, both public and private, that
acquire and develop freestanding multi-specialty surgery centers
and surgical hospitals. Some of these competitors have greater
resources than we do. The principal
17
competitive factors that affect our ability and the ability of
our competitors to acquire surgery centers and surgical
hospitals are price, experience, reputation and access to
capital. Further, in the United States many physician groups
develop surgery centers without a corporate partner, and this
presents a competitive threat to the Company.
In the United Kingdom, we face competition from both the
National Health Service and other privately operated hospitals.
Across the United Kingdom, a large number of private hospitals
are owned by the four largest hospital operators. In addition,
the two largest payors account for over half of the privately
insured market. We believe our hospitals can effectively compete
in this market due to location and specialty mix of our
facilities. Our hospitals also have a higher portion of self pay
business than the overall market. Although self pay business is
not influenced by the private insurers, it is more dramatically
affected by a downturn in the economy.
Employees
As of December 31, 2010, we employed approximately
7,100 people, 6,100 of whom are full-time employees and
1,000 of whom are part-time employees. Of these employees, we
employ approximately 6,000 in the United States and 1,100 in the
United Kingdom. The physicians that affiliate with us and use
our facilities are not our employees. However, we generally
offer the physicians the opportunity to purchase equity
interests in the facilities they use.
Professional
and General Liability Insurance
In the United States, we maintain professional and general
liability insurance through a wholly-owned captive insurance
company. We make premium payments to the captive insurance
company and accrue for claims costs based on actuarially
predicted ultimate losses and the captive insurance company then
pays administrative fees and the insurance claims. We also
maintain business interruption, property damage and umbrella
insurance with third party providers. The governing documents of
each of our surgical facilities require physicians who conduct
surgical procedures at those facilities to maintain stated
amounts of insurance. In the United Kingdom, we maintain general
public insurance, malpractice insurance and property and
business interruption insurance. Our insurance policies are
generally subject to annual renewals. We believe that we will be
able to renew current policies or otherwise obtain comparable
insurance coverage at reasonable rates. However, we have no
control over the insurance markets and can provide no assurance
that we will economically be able to maintain insurance similar
to our current policies.
Government
Regulation
United
States
General
The healthcare industry is subject to extensive regulation by
federal, state and local governments. Government regulation
affects our business by controlling growth, requiring licensing
or certification of facilities, regulating how facilities are
used and controlling payment for services provided. Further, the
regulatory environment in which we operate may change
significantly in the future. While we believe we have structured
our agreements and operations in material compliance with
applicable law, there can be no assurance that we will be able
to successfully address changes in the regulatory environment.
Every state imposes licensing and other requirements on
healthcare facilities. In addition, many states require
regulatory approval, including certificates of need, before
establishing or expanding various types of healthcare
facilities, including ambulatory surgery centers and surgical
hospitals, offering services or making capital expenditures in
excess of statutory thresholds for healthcare equipment,
facilities or programs. In addition, the federal Medicare
program imposes additional conditions for coverage and payment
rules for services furnished to Medicare beneficiaries. We may
become subject to additional regulations as we expand our
existing operations and enter new markets.
In addition to extensive existing government healthcare
regulation, there have been numerous initiatives on the federal
and state levels for comprehensive reforms affecting the payment
for and availability of healthcare services. We believe that
these healthcare reform initiatives will continue during the
foreseeable future. If adopted, some aspects of proposed
reforms, such as further reductions in Medicare or Medicaid
payments, or additional
18
prohibitions on physicians financial relationships with
facilities to which they refer patients, could adversely affect
us.
We believe that our business operations materially comply with
applicable law. However, we have not received a legal opinion
from counsel or from any federal or state judicial or regulatory
authority to this effect, and many aspects of our business
operations have not been the subject of state or federal
regulatory scrutiny or interpretation. Some of the laws
applicable to us are subject to limited or evolving
interpretations; therefore, a review of our operations by a
court or law enforcement or regulatory authority might result in
a determination that could have a material adverse effect on us.
Furthermore, the laws applicable to us may be amended or
interpreted in a manner that could have a material adverse
effect on us. Our ability to conduct our business and to operate
profitably will depend in part upon obtaining and maintaining
all necessary licenses, certificates of need and other
approvals, and complying with applicable healthcare laws and
regulations.
The Patient Protection and Affordable Care Act and the Health
Care and Education Reconciliation Act of 2010 (the
Acts) were signed into law on March 23, 2010
and March 30, 2010, respectively, although a majority of
the measures contained in the Acts do not take effect until
2014. The Acts are intended to provide coverage and access to
substantially all Americans, to increase the quality of care
provided and to reduce the rate of growth in healthcare
expenditures. The changes include, among other things, reducing
payments to Medicare Advantage plans (which require the federal
government to contract with private health insurance payors to
provide inpatient and outpatient benefits to beneficiaries who
enroll in such plans), expanding Medicares 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, including disproportionate share payments, expanding
Medicare and Medicaid eligibility, requiring many health plans
(including Medicare) to cover, without cost-sharing, certain
preventative services, and expanding access to health insurance.
The Acts also place limitations on the Stark Law exception that
allows physicians to have ownership interests in hospitals,
referred to as the whole hospital exception. Among other things,
the Acts prohibit hospitals from increasing the percentages of
the total value of the ownership interests held in the hospital
by physicians after March 23, 2010, as well as place
restrictions on the ability of a hospital subject to the whole
hospital exception to add operating rooms, procedure rooms and
beds.
The Acts make several significant changes to health care fraud
and abuse laws, provide additional enforcement tools to the
government, increase cooperation between agencies by
establishing mechanisms for the sharing of information and
enhance criminal and administrative penalties for
non-compliance. For example, the Acts: (i) provide
$350 million in increased federal funding over the next
10 years to fight health care fraud, waste and abuse;
(ii) expand the scope of the recovery audit contractor
program to include Medicaid and Medicare Advantage plans;
(iii) authorize the Department of Health and Human
Services, in consultation with the Office of Inspector General,
to suspend Medicare and Medicaid payments to a provider of
services or a supplier pending an investigation of a
credible allegation of fraud; (iv) provide Medicare
contractors with additional flexibility to conduct random
prepayment reviews; and (iv) strengthen the rules for
returning overpayments made by governmental health programs,
including expanding False Claims Act liability to extend to
failures to timely repay identified overpayments.
As a result of the Acts, we also expect enhanced scrutiny of
healthcare providers compliance with state and federal
regulations, infection control standards and other quality
control measures. Effective January 15, 2009, CMS
promulgated three national coverage determinations that prevent
Medicare from paying for certain serious, preventable medical
errors performed in any healthcare facility, such as surgery
performed on the wrong patient. Several commercial payors also
do not reimburse providers for certain preventable adverse
events. In addition, federal law authorizes CMS to require
ambulatory surgery centers to submit data on certain quality
measures. Ambulatory surgery centers that fail to submit the
required data would face a two percentage point reduction in
their annual reimbursement rate increase. CMS has not yet
implemented the quality measure reporting requirement, but has
announced that it expects to do so in future rulemaking. In
addition, the Acts require the Department of Health and Human
Services to present a plan to Congress in early 2011 for
implementing a value-based purchasing system that would tie
Medicare payments to ambulatory surgery centers to quality and
efficiency measures. The Acts also require the Department of
Health and Human Services to study whether to expand to
ambulatory surgery centers its
19
current policy of not paying additional amounts for care
provided to treat conditions acquired during an inpatient
hospital stay.
The Acts also require the Department of Health and Human
Services to establish a Medicare Shared Savings Program to
promote the coordination of care through Accountable Care
Organizations (ACOs) by no later than
January 1, 2012. The program will allow providers
(including hospitals), physicians and other designated
professionals and suppliers to form ACOs and work together
to invest in infrastructure and redesign delivery processes with
the goal of increasing the quality and efficient delivery of
services. The program is intended to produce savings as a result
of improved quality and operational efficiency. ACOs that
achieve quality performance standards established by the
Department of Health and Human Services will be eligible to
share in a portion of the amounts saved by the Medicare program.
Licensure
and certificate-of-need regulations
Capital expenditures for the construction of new facilities, the
addition of capacity or the acquisition of existing facilities
may be reviewable by state regulators under statutory schemes
that are sometimes referred to as certificate of need laws.
States with certificate of need laws place limits on the
construction and acquisition of healthcare facilities and the
expansion of existing facilities and services. In these states,
approvals are required for capital expenditures exceeding
certain specified amounts and that involve certain facilities or
services, including ambulatory surgery centers and surgical
hospitals.
State certificate of need laws generally provide that, prior to
the addition of new beds, the construction of new facilities or
the introduction of new services, a designated state health
planning agency must determine that a need exists for those
beds, facilities or services. The certificate of need process is
intended to promote comprehensive healthcare planning, assist in
providing high quality healthcare at the lowest possible cost
and avoid unnecessary duplication by ensuring that only those
healthcare facilities that are needed will be built.
Typically, the provider of services submits an application to
the appropriate agency with information concerning the area and
population to be served, the anticipated demand for the facility
or service to be provided, the amount of capital expenditure,
the estimated annual operating costs, the relationship of the
proposed facility or service to the overall state health plan
and the cost per patient day for the type of care contemplated.
The issuance of a certificate of need is based upon a finding of
need by the agency in accordance with criteria set forth in
certificate of need laws and state and regional health
facilities plans. If the proposed facility or service is found
to be necessary and the applicant to be the appropriate
provider, the agency will issue a certificate of need containing
a maximum amount of expenditure and a specific time period for
the holder of the certificate of need to implement the approved
project.
Our healthcare facilities are also subject to state and local
licensing regulations ranging from the adequacy of medical care
to compliance with building codes and environmental protection
laws. To assure continued compliance with these regulations,
governmental and other authorities periodically inspect our
facilities. The failure to comply with these regulations could
result in the suspension or revocation of a healthcare
facilitys license.
Our U.S. healthcare facilities receive accreditation from
the Joint Commission on Accreditation of Healthcare
Organizations or the Accreditation Association for Ambulatory
Health Care, Inc., nationwide commissions which establish
standards relating to the physical plant, administration,
quality of patient care and operation of medical staffs of
various types of healthcare facilities. Generally, our
healthcare facilities must be in operation for at least six
months before they are eligible for accreditation. As of
December 31, 2010, all of our eligible healthcare
facilities had been accredited by either the Joint Commission on
Accreditation of Healthcare Organizations or the Accreditation
Association for Ambulatory Health Care, Inc. or are in the
process of applying for such accreditation. Many managed care
companies and third-party payors require our facilities to be
accredited in order to be considered a participating provider
under their health plans.
Medicare
and Medicaid Participation in Short Stay Surgical
Facilities
Medicare is a federally funded and administered health insurance
program, primarily for individuals entitled to social security
benefits who are 65 or older or who are disabled. Medicaid is a
health insurance program jointly
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funded by state and federal governments that provides medical
assistance to qualifying low income persons. Each state Medicaid
program has the option to determine coverage for ambulatory
surgery center services and to determine payment rates for those
services. All of the states in which we currently operate cover
Medicaid short stay surgical facility services; however, these
states may not continue to cover short stay surgical facility
services and states into which we expand our operations may not
cover or continue to cover short stay surgical facility services.
Medicare prospectively determines fixed payment amounts for
procedures performed at short stay surgical facilities. These
amounts are adjusted for regional wage variations. The various
state Medicaid programs also pay us a fixed payment for our
services, which amount varies from state to state. A portion of
our revenues are attributable to payments received from the
Medicare and Medicaid programs. For the years ended
December 31, 2010, 2009 and 2008, 31%, 28%, and 26%,
respectively, of our domestic case volumes were attributable to
Medicare and Medicaid payments, although the percentage of our
overall revenues these cases represent is significantly less
because government payors typically pay less than private
insurers. For example, approximately 16% and 2% of our 2010
domestic patient service revenues were contributed by Medicare
and Medicaid, respectively, despite those cases representing a
total of 31% of our domestic case volume during 2010.
In order to participate in the Medicare program, our facilities
must satisfy regulations known as conditions of participation
(COPs) for hospitals and conditions for coverage (CFCs) for
ambulatory surgery centers. Each facility can meet this
requirement through accreditation with the Joint Commission on
Accreditation of Healthcare Organizations or other CMS-approved
accreditation organizations, or through direct surveys at the
direction of CMS. All of our short stay surgical facilities in
the United States are certified or, with respect to newly
acquired or developed facilities, are awaiting certification to
participate in the Medicare program. We have established ongoing
quality assurance activities to monitor and ensure our
facilities compliance with these COPs or CFCs. Any failure
by a facility to maintain compliance with these COPs or CFCs as
determined by a survey could result in the loss of the
facilitys provider agreement with CMS, which would
prohibit reimbursement for services rendered to Medicare or
Medicaid beneficiaries until such time as the facility is found
to be back in compliance with the COPs or CFCs. This could have
a material adverse affect on the individual facilitys
billing and collections.
As with most government programs, the Medicare and Medicaid
programs are 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 short
stay surgical facilities. Beginning in 2008, CMS began
transitioning Medicare payments to ambulatory surgery centers to
a system based upon the hospital outpatient prospective payment
system. In 2011, that transition is now complete and payments to
ambulatory surgery centers will be solely based on the
outpatient prospective payment system (OPPS) relative weights.
CMS has cautioned that the final OPPS relative weights may
result in payment rates for the year being less than the payment
rates for the preceding year. On November 2, 2010, CMS
issued a final rule to update the Medicare programs
payment policies and rates for ambulatory surgery centers for
2011. The final rule applies a 0.2% increase to the ASC payment
rate. The final rule will also add six procedures to the list of
procedures for which Medicare will reimburse when performed in
an ASC. The Acts require the Department of Health and Human
Services to issue a plan in early 2011 for developing a
value-based purchasing program for ambulatory surgery centers.
Such a program may further impact Medicare reimbursement of
ambulatory surgery centers or increase our operating costs in
order to satisfy the value-based standards. For federal fiscal
year 2011 and each subsequent federal fiscal year, the Acts
provide for the annual market basket update to be reduced by a
productivity adjustment. The amount of that reduction will be
the projected nationwide productivity gains over the preceding
10 years. To determine the projection, the Department of
Health and Human Services will use the Bureau of Labor
Statistics
10-year
moving average of changes in specified economy-wide
productivity. The ultimate impact of the changes in Medicare
reimbursement will depend on a number of factors, including the
procedure mix at the centers and our ability to realize an
increased procedure volume.
Federal
Anti-Kickback Law
State and federal laws regulate relationships among providers of
healthcare services, including employment or service contracts
and investment relationships. These restrictions include a
federal criminal law, referred to herein
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as the anti-kickback statute, that prohibits offering, paying,
soliciting or receiving any form of remuneration in return for:
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referring patients for services or items payable under a federal
healthcare program, including Medicare or Medicaid, or
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purchasing, leasing or ordering, or arranging for or
recommending purchasing, leasing or ordering, any good,
facility, service or item for which payment may be made in whole
or in part by a federal healthcare program.
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A violation of the anti-kickback statute constitutes a felony.
Potential sanctions include imprisonment of up to five years,
criminal fines of up to $25,000, civil money penalties of up to
$50,000 per act plus three times the remuneration offered or
three times the amount claimed and exclusion from all federally
funded healthcare programs. The applicability of these
provisions to some forms of business transactions in the
healthcare industry has not yet been subject to judicial or
regulatory interpretation. Moreover, several federal courts have
held that the anti-kickback statute can be violated if only one
purpose (not necessarily the primary purpose) of the transaction
is to induce or reward a referral of business, notwithstanding
other legitimate purposes.
Pursuant to the anti-kickback statute, and in an effort to
reduce potential fraud and abuse relating to federal healthcare
programs, the federal government has announced a policy of a
high level of scrutiny of joint ventures and other transactions
among healthcare providers. The Office of the Inspector General
of the Department of Health and Human Services closely
scrutinizes healthcare joint ventures involving physicians and
other referral sources. The Office of the Inspector General
published a fraud alert that outlined questionable features of
suspect joint ventures in 1989 and a Special
Advisory Bulletin related to contractual joint ventures in 2003,
and the Office of the Inspector General has continued to rely on
fraud alerts in later pronouncements.
The anti-kickback statute contains provisions that insulate
certain transactions from liability. In addition, pursuant to
the provisions of the anti-kickback statute, the Health and
Human Services Office of the Inspector General has also
published regulations that exempt additional practices from
enforcement under the anti-kickback statute. These statutory
exceptions and regulations, known as safe harbors,
if fully complied with, assure participants in particular types
of arrangements that the Office of the Inspector General will
not treat their participation in that arrangement as a violation
of the anti-kickback statute. The statutory exceptions and safe
harbor regulations do not expand the scope of activities that
the anti-kickback statute prohibits, nor do they provide that
failure to satisfy the terms of a safe harbor constitutes a
violation of the anti-kickback statute. The Office of the
Inspector General has, however, indicated that failure to
satisfy the terms of an exception or a safe harbor may subject
an arrangement to increased scrutiny. Therefore, if a
transaction or relationship does not fit within an exception or
safe harbor, the facts and circumstances as well as intent of
the parties related to a specific transaction or relationship
must be examined to determine whether or not any illegal conduct
has occurred.
Our partnerships and limited liability companies that are
providers of services under the Medicare and Medicaid programs,
and their respective partners and members, are subject to the
anti-kickback statute. A number of the relationships that we
have established with physicians and other healthcare providers
do not fit within any of the statutory exceptions or safe harbor
regulations issued by the Office of the Inspector General. All
of the 184 surgical facilities in the United States in which we
hold an ownership interest are owned by partnerships or limited
liability companies, which include as partners or members
physicians who perform surgical or other procedures at the
facilities.
On November 19, 1999, the Office of the Inspector General
promulgated regulations setting forth certain safe harbors under
the anti-kickback statute, including a safe harbor applicable to
surgery centers. The surgery center safe harbor generally
protects ownership or investment interests in a center by
physicians who are in a position to refer patients directly to
the center and perform procedures at the center on referred
patients, if certain conditions are met. More specifically, the
surgery center safe harbor protects any payment that is a return
on an ownership or investment interest to an investor if certain
standards are met in one of four categories of ambulatory
surgery centers (1) surgeon-owned surgery centers,
(2) single-specialty surgery centers,
(3) multi-specialty surgery centers, and
(4) hospital/physician surgery centers.
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For multi-specialty ambulatory surgery centers, for example, the
following standards, among several others, apply:
(1) all of the investors must either be physicians who are
in a position to refer patients directly to the center and
perform procedures on the referred patients, group practices
composed exclusively of those physicians, or investors who are
not employed by the entity or by any of its investors, are not
in a position to provide items or services to the entity or any
of its investors, and are not in a position to make or influence
referrals directly or indirectly to the entity or any of its
investors;
(2) at least one-third of each physician investors
medical practice income from all sources for the previous fiscal
year or twelve-month period must be derived from performing
outpatient procedures that require an ambulatory surgery center
or specialty hospital setting in accordance with Medicare
reimbursement rules; and
(3) at least one third of the Medicare-eligible outpatient
surgery procedures performed by each physician investor for the
previous fiscal year or previous twelve-month period must be
performed at the ambulatory surgery center in which the
investment is made.
Similar standards apply to each of the remaining three
categories of ambulatory surgery centers set forth in the
regulations. In particular, each of the four categories includes
a requirement that no ownership interests be held by a
non-physician or non-hospital investor if that investor is
(a) employed by the center or another investor, (b) in
a position to provide items or services to the center or any of
its other investors, or (c) in a position to make or
influence referrals directly or indirectly to the center or any
of its investors.
Because one of our subsidiaries is an investor in each
partnership or limited liability company that owns one of our
ambulatory surgery centers, and since this subsidiary provides
management and other services to the surgery center, our
arrangements with physician investors do not fit within the
specific terms of the ambulatory surgery center safe harbor or
any other safe harbor.
In addition, because we do not control the medical practices of
our physician investors or control where they perform surgical
procedures, it is possible that the quantitative tests described
above will not be met, or that other conditions of the surgery
center safe harbor will not be met. Accordingly, while the
surgery center safe harbor is helpful in establishing that a
physicians investment in a surgery center should be
considered an extension of the physicians practice and not
as a prohibited financial relationship, we can give no
assurances that these ownership interests will not be challenged
under the anti-kickback statute. In an effort to monitor our
compliance with the safe harbors extension of practice
requirement, we have implemented an internal certification
process, which tracks each physicians annual extension of
practice certification. While this process provides support for
physician compliance with the safe harbors quantitative
tests, we can give no assurance of such compliance. However, we
believe that our arrangements involving physician ownership
interests in our ambulatory surgery centers do not fall within
the activities prohibited by the anti-kickback statute.
With regard to our hospitals, the Office of Inspector General
has not adopted any safe harbor regulations under the
anti-kickback statute for physician investments in hospitals.
Each of our hospitals is held in partnership with physicians who
are in a position to refer patients to the hospital. There can
be no assurances that these relationships will not be found to
violate the anti-kickback statute or that there will not be
regulatory or legislative changes that prohibit physician
ownership of hospitals.
While several federal court decisions have aggressively applied
the restrictions of the anti-kickback statute, they provide
little guidance regarding the application of the anti-kickback
statute to our partnerships and limited liability companies. We
believe that our operations do not violate the anti-kickback
statute. However, a federal agency charged with enforcement of
the anti-kickback statute might assert a contrary position.
Further, new federal laws, or new interpretations of existing
laws, might adversely affect relationships we have established
with physicians or other healthcare providers or result in the
imposition of penalties on us or some of our facilities. Even
the assertion of a violation could have a material adverse
effect upon us.
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Federal
Physician Self-Referral Law
Section 1877 of the Social Security Act, commonly known as
the Stark Law, prohibits any physician from
referring patients to any entity for the furnishing of certain
designated health services otherwise payable by
Medicare or Medicaid, if the physician or an immediate family
member has a financial relationship such as an ownership
interest or compensation arrangement with the entity that
furnishes services to Medicare beneficiaries, unless an
exception applies. Persons who violate the Stark Law are subject
to potential civil money penalties of up to $15,000 for each
bill or claim submitted in violation of the Stark Law and up to
$100,000 for each circumvention scheme they are
found to have entered into, and potential exclusion from the
Medicare and Medicaid programs. In addition, the Stark Law
requires the denial (or, refund, as the case may be) of any
Medicare and Medicaid payments received for designated health
services that result from a prohibited referral.
The list of designated health services under the Stark Law does
not include ambulatory surgery services as such. However, some
of the ten types of designated health services are among the
types of services furnished by our ambulatory surgery centers.
The Department of Health and Human Services, acting through the
Centers for Medicare and Medicaid Services, has promulgated
regulations implementing the Stark Law. These regulations
exclude health services provided by an ambulatory surgery center
from the definition of designated health services if
the services are included in the surgery centers composite
Medicare payment rate. Therefore, the Stark Laws
self-referral prohibition generally does not apply to health
services provided by an ambulatory surgery center. However, if
the ambulatory surgery center is separately billing Medicare for
designated health services that are not covered under the
ambulatory surgery centers composite Medicare payment
rate, or if either the ambulatory surgery center or an
affiliated physician is performing (and billing Medicare) for
procedures that involve designated health services that Medicare
has not designated as an ambulatory surgery center service, the
Stark Laws 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. However, it is possible that the Centers for
Medicare and Medicaid Services will further address the
exception relating to services provided by an ambulatory surgery
center in the future. Therefore, we cannot assure you that
future regulatory changes will not result in our ambulatory
surgery centers becoming subject to the Stark Laws
self-referral prohibition.
Thirteen of our U.S. facilities are hospitals rather than
ambulatory surgery centers. The Stark Law includes an exception
for physician investments in hospitals if the physicians
investment is in the entire hospital and not just a department
of the hospital. We believe that the physician investments in
our hospitals fall within the exception and are therefore
permitted under the Stark Law. However, over the past few years
there have been various legislative attempts to change the way
the hospital exception applies to physician investments in
hospitals and it is possible that there could be another
legislative attempt to alter this exception in the future. See
Risk Factors Future Legislation could restrict
our ability to operate our domestic surgical hospitals.
False and
Other Improper Claims
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, including, but not limited to,
penalties relating to violations of federal mail and wire fraud
statutes. While the criminal statutes are generally reserved for
instances of fraudulent intent, the government is applying its
criminal, civil and administrative penalty statutes in an
ever-expanding range of circumstances. For example, the
government has taken the position that a pattern of claiming
reimbursement for unnecessary services violates these statutes
if the claimant merely should have known the services were
unnecessary, even if the government cannot demonstrate actual
knowledge. The government has also taken the position that
claiming payment for low-quality services is a violation of
these statutes if the claimant should have known that the care
was substandard.
Over the past several years, the government has accused an
increasing number of healthcare providers of violating the
federal False Claims Act. The False Claims Act prohibits a
person from knowingly presenting, or causing to be presented, a
false or fraudulent claim to the U.S. government. The
statute defines knowingly to include not only actual
knowledge of a claims falsity, but also reckless disregard
for or intentional ignorance of the truth or falsity of a claim.
Because our facilities perform hundreds of similar procedures a
year for which they are
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paid by Medicare, and there is a relatively long statute of
limitations, a billing error or cost reporting error could
result in significant penalties. Additionally, anti-Kickback or
Stark Law claims can be bootstrapped to claims under
the False Claims Act on the theory that, when a provider submits
a claim to a federal health care program, the claim includes an
implicit certification that the provider is in compliance with
the Medicare Act, which would require compliance with other
laws, including the anti-kickback statute and the Stark Law. As
a result of this bootstrap theory, the
U.S. government can collect additional civil penalties
under the False Claims Act for claims that have been
tainted by the anti-kickback or Stark Law violation.
In addition, under the Acts, civil penalties may be imposed for
the failure to report and return an overpayment within
60 days of identifying the overpayment or by the date a
corresponding cost report is due, whichever is later.
Under the qui tam, or whistleblower, provisions of
the False Claims Act, private parties may bring actions on
behalf of the federal government. Such private parties, often
referred to as relators, are entitled to share in any amounts
recovered by the government through trial or settlement. Both
direct enforcement activity by the government and whistleblower
lawsuits have increased significantly in recent years and have
increased the risk that a healthcare company, like us, will have
to defend a false claims action, pay fines or be excluded from
the Medicare and Medicaid programs as a result of an
investigation resulting from a whistleblower case. Although we
believe that our operations materially 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
us.
State
Anti-Kickback and Physician Self-Referral Laws
Many states, including those in which we do or expect to do
business, have laws that prohibit payment of kickbacks or other
remuneration in return for the referral of patients. Some of
these laws apply only to services reimbursable under state
Medicaid programs. However, a number of these laws apply to all
healthcare services in the state, regardless of the source of
payment for the service. Based on court and administrative
interpretations of the federal anti-kickback statute, we believe
that the federal anti-kickback statute prohibits payments only
if they are intended to induce referrals. However, the laws in
most states regarding kickbacks have been subjected to more
limited judicial and regulatory interpretation than federal law.
Therefore, we can give you no assurances that our activities
will be found to be in compliance with these laws. Noncompliance
with these laws could subject us to penalties and sanctions and
have a material adverse effect on us.
A number of states, including those in which we do or expect to
do business, have enacted physician self-referral laws that are
similar in purpose to the Stark Law but which impose different
restrictions. Some states, for example, only prohibit referrals
when the physicians financial relationship with a
healthcare provider is based upon an investment interest. Other
state laws apply only to a limited number of designated health
services. Some states do not prohibit referrals, but require
that a patient be informed of the financial relationship before
the referral is made. We believe that our operations are in
material compliance with the physician self-referral laws of the
states in which our facilities are located.
Health
Information Security and Privacy Practices
The regulations promulgated under the federal Health Insurance
Portability and Accountability Act of 1996 (HIPAA)
contain, among other measures, provisions that require many
organizations, including us, to employ systems and procedures
designed to protect the privacy and security of each
patients individual healthcare information. Among the
standards that the Department of Health and Human Services has
adopted pursuant to HIPAA are standards for the following:
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electronic transactions and code sets;
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unique identifiers for providers, employers, health plans and
individuals;
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security and electronic signatures;
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privacy; and
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enforcement.
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In August 2000, the Department of Health and Human Services
finalized the transaction standards, with which we are in
material compliance. The transaction standards require us to use
standard code sets established by the rule when transmitting
health information in connection with some transactions,
including health claims and health payment and remittance
advices.
The Department of Health and Human Services has also published a
rule establishing standards for the privacy of individually
identifiable health information, with which we are in material
compliance. These privacy standards apply to all health plans,
all healthcare clearinghouses and many healthcare providers,
including healthcare providers that transmit health information
in an electronic form in connection with certain standard
transactions. We are a covered entity under the final rule. The
privacy standards protect individually identifiable health
information held or disclosed by a covered entity in any form,
whether communicated electronically, on paper or orally. These
standards not only require our compliance with rules governing
the use and disclosure of protected health information, but they
also require us to impose those rules, by contract, on any
business associate to whom such information is disclosed. A
violation of the privacy standards could result in civil money
penalties of $100 per incident, up to a maximum of $25,000 per
person per year per standard. The final rule also provides for
criminal penalties of up to $50,000 and one year in prison for
knowingly and improperly obtaining or disclosing protected
health information, up to $100,000 and five years in prison for
obtaining protected health information under false pretenses,
and up to $250,000 and ten years in prison for obtaining or
disclosing protected health information with the intent to sell,
transfer or use such information for commercial advantage,
personal gain or malicious harm.
Finally, the Department of Health and Human Services has also
issued a rule establishing, in part, standards for the security
of health information by health plans, healthcare clearinghouses
and healthcare providers that maintain or transmit any health
information in electronic form, regardless of format. We are an
affected entity under the rule. These security standards require
affected entities to establish and maintain reasonable and
appropriate administrative, technical and physical safeguards to
ensure integrity, confidentiality and the availability of the
information. The security standards were designed to protect the
health information against reasonably anticipated threats or
hazards to the security or integrity of the information and to
protect the information against unauthorized use or disclosure.
Although the security standards do not reference or advocate a
specific technology, and affected entities have the flexibility
to choose their own technical solutions, the security standards
required us to implement significant systems and protocols. We
also comply with these regulations.
Signed into law on February 17, 2009, the American Recovery
and Reinvestment Act of 2009 (ARRA) broadened the
scope of the HIPAA privacy and security regulations. Among other
things, the 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.
Violations of the HIPAA privacy and security regulations may
result in civil and criminal penalties, and the ARRA has
strengthened the enforcement provisions of HIPAA, which may
result in increased enforcement activity. The ARRA increased the
amount of civil penalties, with penalties now ranging up to
$50,000 per violation for a maximum civil penalty of $1,500,000
in a calendar year for violations of the same requirement. In
addition, the ARRA authorized state attorneys general to bring
civil actions seeking either injunction or damages in response
to violations of HIPAA privacy and security regulations that
threaten the privacy of state residents.
In addition to HIPAA, many states have enacted their own
security and privacy provisions concerning a patients
health information. These state privacy provisions will control
whenever they provide more stringent privacy protections than
HIPAA. Therefore, a health care facility could be required to
meet both federal and state privacy provisions if it is located
in a state with strict privacy protections.
EMTALA
All of our hospitals in the United States are subject to the
Emergency Medical Treatment and Active Labor Act
(EMTALA). This federal law requires any hospital
participating in the Medicare program to conduct an appropriate
medical screening examination of every individual who presents
to the hospitals emergency room for treatment and, if the
individual is suffering from an emergency medical condition, to
either stabilize the condition or make an appropriate transfer
of the individual to a facility able to handle the condition.
The obligation
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to screen and stabilize emergency medical conditions exists
regardless of an individuals ability to pay for treatment.
There are severe penalties under EMTALA if a hospital fails to
screen or appropriately stabilize or transfer an individual or
if the hospital delays appropriate treatment in order to first
inquire about the individuals ability to pay. Penalties
for violations of EMTALA include civil monetary penalties and
exclusion from participation in the Medicare program. In
addition, an injured individual, the individuals family or
a medical facility that suffers a financial loss as a direct
result of a hospitals violation of the law can bring a
civil suit against the hospital. We believe our hospitals are in
material compliance with EMTALA.
European
Union and United Kingdom
The European Commissions Directive on Data Privacy has
been implemented in national EU data protection laws (such as
the Data Protection Act of 1998). EU data protection legislation
prohibits the transfer of personal data to non-EEA countries
that do not meet the European adequacy standard for
privacy protection. The European Union privacy legislation
requires, among other things, the creation of government data
protection agencies, registration of processing with those
agencies, and in some instances prior approval before personal
data processing may begin.
The U.S. Department of Commerce, in consultation with the
European Commission, developed a safe harbor
framework to protect data transferred in trans-Atlantic
businesses like ours. The safe harbor provides a way for us to
avoid experiencing interruptions in our business dealings in the
European Union. It also provides a way to avoid prosecution by
European authorities under European privacy laws. By certifying
to the safe harbor, we will notify the European Union
organizations that we provide adequate privacy
protection, as defined by European privacy laws, in relation to
international data transfers to the USA. To certify to the safe
harbor, we must adhere to seven principles. These principles
relate to notice, choice, onward transfer or transfers to third
parties, access, security, data integrity and enforcement.
We intend to satisfy the requirements of the safe harbor. Even
if we are able to formulate programs that attempt to meet these
objectives, we may not be able to execute them successfully,
which could have a material adverse effect on our revenues,
profits or results of operations.
While there is no specific anti-kickback legislation in the
United Kingdom that is unique to the medical profession, general
criminal legislation prohibits bribery and corruption. Our
hospitals in the United Kingdom do not pay commissions to or
share profits with referring physicians who invoice patients or
insurers directly for fees relating to the provision of their
services, although we have explored the possibility of
syndicating ownership in certain facilities in the U.K. with
physicians. Hospitals in the United Kingdom are required to
register with the Healthcare Commission pursuant to the Care
Standards Act 2000, as amended by the Health and Social Care
(Community Health and Standards) Act 2003, which provides for
regular inspections of the facility by representatives of the
Healthcare Commission. Beginning April 1, 2009, these
registration and inspection functions will transfer to the Care
Quality Commission established under the Health and Social Care
Act 2008. Hospitals are also required to comply with the Private
and Voluntary Health Care (England) Regulations 2001. The
operation of a hospital without registration is a criminal
offense. Under the Misuse of Drugs Act 1971, the supply,
possession or production of controlled drugs without a license
from the Secretary of State is a criminal offense. The Data
Protection Act 1998 requires hospitals to register as data
controllers. The processing of personal data, such as
patient information and medical records, without prior
registration or maintaining an inaccurate registration is a
criminal offense. We believe that our operations in the United
Kingdom are in material compliance with the laws referred to in
this paragraph.
You should carefully read the risks and uncertainties
described below and the other information included in this
report. Any of the following risks could materially and
adversely affect our business, financial condition or results of
operations. Additional risks and uncertainties not currently
known to us or those we currently view to be immaterial may also
materially and adversely affect our business, financial
condition or results of operations.
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We
depend on payments from third party payors, including government
healthcare programs. If these payments are reduced, our revenue
will decrease.
We are dependent upon private and governmental third party
sources of payment for the services provided to patients in our
surgery centers and surgical hospitals. The amount of payment a
surgical facility receives for its services may be adversely
affected by market and cost factors as well as other factors
over which we have no control, including Medicare and Medicaid
regulations and the cost containment and utilization decisions
of third party payors. In the United Kingdom, a significant
portion of our revenues result from referrals of patients to our
hospitals by the national health system. We have no control over
the number of patients that are referred to the private sector
annually. Fixed fee schedules, capitation payment arrangements,
exclusion from participation in or inability to reach agreement
with managed care programs or other factors affecting payments
for healthcare services over which we have no control could also
cause a reduction in our revenues.
If we
are unable to acquire and develop additional surgical facilities
on favorable terms, are not successful in integrating operations
of acquired surgical facilities, or are unable to manage growth,
we may be unable to execute our acquisition and development
strategy, which could limit our future growth.
Our strategy is to increase our revenues and earnings by
continuing to acquire and develop additional surgical
facilities, primarily in collaboration with our hospital
partners. Our efforts to execute our acquisition and development
strategy may be affected by our ability to identify suitable
candidates and negotiate and close acquisition and development
transactions. We are currently evaluating potential acquisitions
and development projects and expect to continue to evaluate
acquisitions and development projects in the foreseeable future.
The surgical facilities we develop typically incur losses in
their early months of operation (more so in the case of surgical
hospitals) and, until their case loads grow, they generally
experience lower total revenues and operating margins than
established surgical facilities, and we expect this trend to
continue. Historically, most of our newly developed facilities
have generated positive cash flow within the first
12 months of operations. We may not be successful in
acquiring surgical facilities, developing surgical facilities or
achieving satisfactory operating results at acquired or newly
developed facilities. Further, the companies or assets we
acquire in the future may not ultimately produce returns that
justify our related investment. If we are not able to execute
our acquisition and development strategy, our ability to
increase revenues and earnings through future growth would be
impaired.
If we are not successful in integrating newly acquired surgical
facilities, we may not realize the potential benefits of such
acquisitions. Likewise, if we are not able to integrate acquired
facilities operations and personnel with ours in a timely
and efficient manner, then the potential benefits of the
transaction may not be realized. Further, any delays or
unexpected costs incurred in connection with integration could
have a material adverse effect on our operations and earnings.
In particular, if we experience the loss of key personnel or if
the effort devoted to the integration of acquired facilities
diverts significant management or other resources from other
operational activities, our operations could be impaired.
We have acquired interests in or developed all of our surgical
facilities since our inception. We expect to continue to expand
our operations in the future. Our rapid growth has placed, and
will continue to place, increased demands on our management,
operational and financial information systems and other
resources. Further expansion of our operations will require
substantial financial resources and management attention. To
accommodate our past and anticipated future growth, and to
compete effectively, we will need to continue to improve our
management, operational and financial information systems and to
expand, train, manage and motivate our workforce. Our personnel,
systems, procedures or controls may not be adequate to support
our operations in the future. Further, focusing our financial
resources and management attention on the expansion of our
operations may negatively impact our financial results. Any
failure to improve our management, operational and financial
information systems, or to expand, train, manage or motivate our
workforce, could reduce or prevent our growth.
28
Our
substantial leverage could adversely affect our ability to raise
additional capital to fund our operations, limit our ability to
react to changes in the economy or our industry, expose us to
interest rate risk to the extent of our variable rate debt and
prevent us from meeting our debt obligations.
We have a substantial amount of indebtedness. As of
December 31, 2010, we had $1.1 billion of total
indebtedness and a total indebtedness to total capitalization
percentage ratio of approximately 54%.
Our and our subsidiaries high degree of leverage could
have important consequences to you. For example, it:
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requires us and certain of our subsidiaries to dedicate a
substantial portion of cash flow from operations to payments on
indebtedness, reducing the availability of cash flow to fund
working capital, capital expenditures, development activity,
acquisitions and other general corporate purposes;
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increases vulnerability to adverse general economic or industry
conditions;
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limits flexibility in planning for, or reacting to, changes in
our business or the industry in which we operate;
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makes us and our subsidiaries more vulnerable to increases in
interest rates, as borrowings under our senior secured credit
facilities are at variable rates;
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limits our and our subsidiaries ability to obtain
additional financing in the future for working capital or other
purposes, such as raising the funds necessary to repurchase our
senior subordinated notes upon the occurrence of specified
changes of control, or
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places us at a competitive disadvantage compared to our
competitors that have less indebtedness.
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Our
significant indebtedness could limit our
flexibility.
We are significantly leveraged and will continue to have
significant indebtedness in the future. Our acquisition and
development program requires substantial capital resources,
estimated to range from $60.0 million to
$100.0 million per year over the next three years, although
the range could be exceeded if we identify attractive
multi-facility acquisition opportunities. The operations of our
existing surgical facilities also require ongoing capital
expenditures. We believe that our cash on hand, cash flows from
operations and available borrowings under our revolving credit
facility will be sufficient to fund our acquisition and
development activities in 2010, but if we identify favorable
acquisition and development opportunities that require
additional resources, we may be required to incur additional
indebtedness in order to pursue these opportunities. However, we
may be unable to obtain sufficient financing on terms
satisfactory to us, or at all, especially given the current
uncertainty in the credit markets. In that event, our
acquisition and development activities would have to be
curtailed or eliminated and our financial results could be
adversely affected.
Our
debt agreements contain restrictions that limit our flexibility
in operating our business.
The operating and financial restrictions and covenants in our
debt instruments, including our senior secured credit facilities
and the indenture governing our senior subordinated notes, may
adversely affect our ability to finance our future operations or
capital needs or engage in other business activities that may be
in our interest. For example, our senior secured credit facility
restricts, subject to certain exceptions, our and our
subsidiaries ability to, among other things:
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incur, assume or permit to exist additional indebtedness or
guarantees;
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incur liens and engage in sale leaseback transactions;
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make loans, investments and other advances;
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declare dividends, make payments or redeem or repurchase capital
stock;
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engage in mergers, acquisitions and other business combinations;
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prepay, redeem or repurchase certain indebtedness including the
notes;
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amend or otherwise alter terms of certain subordinated
indebtedness including the notes;
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enter into agreements limiting subsidiary distributions;
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sell assets;
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engage in certain transactions with affiliates;
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alter the business that we conduct; and
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issue and sell capital stock of subsidiaries.
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In addition, the senior secured U.K. credit facility restricts,
subject to certain exceptions, the ability of certain of our
subsidiaries existing in the United Kingdom to, among other
things:
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incur or permit to exist additional indebtedness;
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incur liens;
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make loans, investments or acquisitions;
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declare dividends or other distributions;
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enter into operating leases;
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engage in mergers, joint ventures or partnerships;
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sell assets;
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alter the business that the U.K. borrowers and their
subsidiaries conduct; and
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incur financial lease expenditures.
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The indenture governing our senior subordinated notes includes
similar restrictions. Our senior secured credit facility also
requires us to comply with a financial covenant with respect to
the revolving credit facility that becomes more restrictive over
time and the senior secured U.K. credit facility requires
certain of our subsidiaries in the United Kingdom to comply with
certain financial covenants, including a maximum leverage ratio
test, a debt service coverage ratio test and an interest
coverage ratio test. Our and our subsidiaries ability to
comply with these covenants and ratios may be affected by events
beyond our control. A breach of any covenant or required
financial ratio could result in a default under the senior
secured credit facilities. In the event of any default under the
senior secured credit facilities, the applicable lenders could
elect to terminate borrowing commitments and declare all
borrowings and accrued interest and fees to be due and payable,
to require us to apply all available cash to repay these
borrowings or to prevent us from making or permitting
subsidiaries to make distributions or dividends, the proceeds of
which are used by us to make debt service payments on our senior
subordinated notes, any of which would be an event of default
under the notes.
If we
incur material liabilities as a result of acquiring surgical
facilities, our operating results could be adversely
affected.
Although we conduct extensive due diligence prior to the
acquisition of surgical facilities and seek indemnification from
prospective sellers covering unknown or contingent liabilities,
we may acquire surgical facilities that have material
liabilities for failure to comply with healthcare laws and
regulations or other past activities. Although we maintain
professional and general liability insurance, we do not
currently maintain insurance specifically covering any unknown
or contingent liabilities that may have occurred prior to the
acquisition of surgical facilities. If we incur these
liabilities and are not indemnified or insured for them, our
operating results and financial condition could be adversely
affected.
We
depend on our relationships with not-for-profit healthcare
systems. If we are not able to maintain our relationships with
these not-for-profit healthcare systems, or enter into new
relationships, we may be unable to implement our business
strategies successfully.
Our domestic business depends in part upon the efforts and
success of our not-for-profit healthcare system partners and the
strength of our relationships with those healthcare systems. Our
business could be adversely
30
affected by any damage to those healthcare systems
reputations or to our relationships with them. We may not be
able to maintain our existing agreements on terms and conditions
favorable to us or enter into relationships with additional
not-for-profit healthcare systems. Our relationships with
not-for-profit healthcare systems and the joint venture
agreements that represent these relationships are structured to
comply with current revenue rulings published by the Internal
Revenue Service as well as case law relevant to joint ventures
between for-profit and not-for-profit healthcare entities.
Material changes in these authorities could adversely affect our
relationships with not-for-profit healthcare systems. If we are
unable to maintain our existing arrangements on terms favorable
to us or enter into relationships with additional not-for-profit
healthcare systems, we may be unable to implement our business
strategies successfully.
If we
and our not-for-profit healthcare system partners are unable to
successfully negotiate contracts and maintain satisfactory
relationships with managed care organizations or other third
party payors, our revenues may decrease.
Our competitive position has been, and will continue to be,
affected by initiatives undertaken during the past several years
by major domestic purchasers of healthcare services, including
federal and state governments, insurance companies and
employers, to revise payment methods and monitor healthcare
expenditures in an effort to contain healthcare costs. As a
result of these initiatives, managed care companies such as
health maintenance and preferred provider organizations, which
offer prepaid and discounted medical service packages, represent
a growing segment of healthcare payors, the effect of which has
been to reduce the growth of domestic healthcare facility
margins and revenue. Similarly, in the United Kingdom, most
patients at hospitals have private healthcare insurance, either
paid for by the patient or received as part of their employment
compensation. Our hospitals in the United Kingdom contract with
healthcare insurers on an annual basis to provide services to
insured patients.
As an increasing percentage of domestic patients become subject
to healthcare coverage arrangements with managed care payors, we
believe that our success will continue to depend upon our and
our not-for-profit healthcare system partners ability to
negotiate favorable contracts on behalf of our facilities with
managed care organizations, employer groups and other private
third party payors. We have structured our ventures with
not-for-profit healthcare system partners in a manner we believe
to be consistent with applicable regulatory requirements. If
applicable regulatory requirements were interpreted to require
changes to our existing arrangements, or if we are unable to
enter into these arrangements on satisfactory terms in the
future, we could be adversely affected. Many of these payors
already have existing provider structures in place and may not
be able or willing to change their provider networks. Similarly,
if we fail to negotiate contracts with healthcare insurers in
the United Kingdom on favorable terms, or if we fail to remain
on insurers networks of approved hospitals, such failure
could have a material adverse effect on us. We could also
experience a material adverse effect to our operating results
and financial condition as a result of the termination of
existing third party payor contracts.
We
depend on our relationships with the physicians who use our
facilities. Our ability to provide medical services at our
facilities would be impaired and our revenues reduced if we are
not able to maintain these relationships.
Our business depends upon the efforts and success of the
physicians who provide medical and surgical services at our
facilities and the strength of our relationships with these
physicians. Our revenues would be reduced if we lost our
relationship with one or more key physicians or group of
physicians or such physicians or groups reduce their use of our
facilities. Any failure of these physicians to maintain the
quality of medical care provided or to otherwise adhere to
professional guidelines at our surgical facilities or any damage
to the reputation of a key physician or group of physicians
could also damage our reputation, subject us to liability and
significantly reduce our revenues.
In addition, healthcare reform may contribute to increased
physician employment with hospitals, which could weaken our
relationships with these physicians. The Acts creation of
ACOs may cause physicians to accept employment to become part of
a network that includes an ACO. In addition, the Acts
focus on investing in infrastructure to increase efficiencies
may further contribute to shifting physicians practice
patterns from private practice to employment with hospitals and
ACOs. ACOs that achieve quality performance standards
established by the Department of Health and Human Services will
be eligible to share in a portion of the amounts saved by the
Medicare program. Because an individual physician may view the
costs associated with investing in technology and
31
processes to increase efficiencies as too large to bear
individually, the physician may turn to employment as a means to
participate in the Medicare savings and the capital investments
required by the Acts. Physicians who accept employment may be
restricted from owning interests in or utilizing our facilities.
Our
surgical facilities face competition for patients from other
health care providers.
The health care business is highly competitive, and competition
among hospitals and other health care providers for patients has
intensified in recent years. Generally, other facilities in the
local communities served by our facilities provide services
similar to those offered by our surgery centers and surgical
hospitals. In addition, the number of freestanding surgical
hospitals and surgery centers in the geographic areas in which
we operate has increased significantly. As a result, most of our
surgery centers and surgical hospitals operate in a highly
competitive environment. Some of the hospitals that compete with
our facilities are owned by governmental agencies or
not-for-profit corporations supported by endowments, charitable
contributions
and/or tax
revenues and can finance capital expenditures and operations on
a tax-exempt basis. Our surgery centers and surgical hospitals
are facing increasing competition from unaffiliated
physician-owned surgery centers and surgical hospitals for
market share in high margin services and for quality physicians
and personnel. If our competitors are better able to attract
patients, recruit physicians, expand services or obtain
favorable managed care contracts at their facilities than our
surgery centers and surgical hospitals, we may experience an
overall decline in patient volume.
Current
economic conditions may adversely affect our financial condition
and results of operations.
The current economic conditions will likely have an impact on
our business. We regularly monitor quantitative as well as
qualitative measures to identify changes in our business in
order to react accordingly. The most likely impact on us from
weakening economic conditions would be lower case volumes as
elective procedures may be deferred or cancelled, which could
have an adverse effect on our financial condition and results of
operations.
Our
United Kingdom operations are subject to unique risks, any of
which, if they actually occur, could adversely affect our
results.
We expect that revenue from our United Kingdom operations will
continue to account for a significant percentage of our total
revenue. Further, we may pursue additional acquisitions in the
United Kingdom, which would require substantial financial
resources and management attention. This focus of financial
resources and management attention could have an adverse effect
on our financial results. In addition, our United Kingdom
operations are subject to risks such as:
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fluctuations in exchange rates;
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competition with government sponsored healthcare systems;
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unforeseen changes in foreign regulatory requirements or
domestic regulatory requirements affecting our foreign
operations;
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identifying, attracting, retaining and working successfully with
qualified local management;
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difficulties in staffing and managing geographically and
culturally diverse, multinational operations;
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the economic conditions in the United Kingdom, which could
adversely affect the ability or willingness of employers and
individuals in these countries to purchase private health
insurance; and
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a higher concentration of self-pay business than our
U.S. facilities.
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These or other factors could have a material adverse effect on
our ability to successfully operate in the United Kingdom and
our financial condition and operations.
Our
revenues may be reduced by changes in payment methods or rates
under the Medicare or Medicaid programs.
The Department of Health and Human Services and the states in
which we perform surgical procedures for Medicaid patients may
revise the Medicare and Medicaid payment methods or rates in the
future. Any such changes
32
could have a negative impact on the reimbursements we receive
for our surgical services from the Medicare program and the
state Medicaid programs. In addition, the Acts requirement
that the Department of Health and Human Services develop a
value-based purchasing program for Ambulatory surgery centers
may further impact Medicare reimbursement of ambulatory surgery
centers or increase our operating costs in order to satisfy the
value-based standards. The ultimate impact of the changes in
Medicare reimbursement will depend on a number of factors,
including the procedure mix at the centers and our ability to
realize an increased procedure volume.
Efforts
to regulate the construction, acquisition or expansion of
healthcare facilities could prevent us from acquiring additional
surgical facilities, renovating our existing facilities or
expanding the breadth of services we offer.
Many states in the United States require prior approval for the
construction, acquisition or expansion of healthcare facilities
or expansion of the services they offer. When considering
whether to approve such projects, these states take into account
the need for additional or expanded healthcare facilities or
services. In a number of states in which we operate, we are
required to obtain certificates of need for capital expenditures
exceeding a prescribed amount, changes in bed capacity or
services offered and under various other circumstances. Other
states in which we now or may in the future operate may adopt
certificate of need legislation or regulatory provisions. Our
costs of obtaining a certificate of need have ranged up to
$500,000. Although we have not previously been denied a
certificate of need, we may not be able to obtain the
certificates of need or other required approvals for additional
or expanded facilities or services in the future. In addition,
at the time we acquire a facility, we may agree to replace or
expand the acquired facility. If we are unable to obtain the
required approvals, we may not be able to acquire additional
surgery centers or surgical hospitals, expand the healthcare
services provided at these facilities or replace or expand
acquired facilities.
Failure
to comply with federal and state statutes and regulations
relating to patient privacy and electronic data security could
negatively impact our financial results.
There are currently numerous federal and state statutes and
regulations that address patient privacy concerns and federal
standards that address the maintenance of the security of
electronically maintained or transmitted electronic health
information and the format of transmission of such information
in common health care financing information exchanges. These
provisions are intended to enhance patient privacy and the
effectiveness and efficiency of healthcare claims and payment
transactions. In particular, the Administrative Simplification
Provisions of the Health Insurance Portability and
Accountability Act of 1996 required us to implement new systems
and to adopt business procedures for transmitting health care
information and for protecting the privacy and security of
individually identifiable information.
We believe that we are in material compliance with existing
state and federal regulations relating to patient privacy,
security and with respect to the format for electronic health
care transactions. However, if we fail to comply with the
federal privacy, security and transactions and code sets
regulations, we could incur significant civil and criminal
penalties. Failure to comply with state laws related to privacy
could, in some cases, also result in civil fines and criminal
penalties.
If we
fail to comply with applicable laws and regulations, we could
suffer penalties 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 jurisdictions in which
we operate. These laws and regulations require that our
healthcare facilities meet various licensing, certification and
other requirements, including those relating to:
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physician ownership of our domestic facilities;
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the adequacy of medical care, equipment, personnel, operating
policies and procedures;
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building codes;
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licensure, certification and accreditation;
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billing for services;
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handling of medication;
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maintenance and protection of records; and
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environmental protection.
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We believe that we are in material compliance with applicable
laws and regulations. However, if we fail or have failed to
comply with applicable laws and regulations, we could suffer
civil or criminal penalties, including the loss of our licenses
to operate and our ability to participate in Medicare, Medicaid
and other government sponsored healthcare programs. A number of
initiatives have been proposed during the past several years to
reform various aspects of the healthcare system, both
domestically and in the United Kingdom. In the future, different
interpretations or enforcement of existing or new laws and
regulations could subject our current practices to allegations
of impropriety or illegality, or could require us to make
changes in our facilities, equipment, personnel, services,
capital expenditure programs and operating expenses. Current or
future legislative initiatives or government regulation may have
a material adverse effect on our operations or reduce the demand
for our services.
In pursuing our growth strategy, we may expand our presence into
new geographic markets. In entering a new geographic market, we
will be required to comply with laws and regulations of
jurisdictions that may differ from those applicable to our
current operations. If we are unable to comply with these legal
requirements in a cost-effective manner, we may be unable to
enter new geographic markets.
If a
federal or state agency asserts a different position or enacts
new laws or regulations regarding illegal remuneration under the
Medicare or Medicaid programs, we may be subject to civil and
criminal penalties, experience a significant reduction in our
revenues or be excluded from participation in the Medicare and
Medicaid programs.
The federal anti-kickback statute prohibits the offer, payment,
solicitation or receipt of any form of remuneration in return
for referrals for items or services payable by Medicare,
Medicaid, or any other federally funded healthcare program.
Additionally, the anti-kickback statute prohibits any form of
remuneration in return for purchasing, leasing or ordering, or
arranging for or recommending the purchasing, leasing or
ordering of items or services payable by Medicare, Medicaid or
any other federally funded healthcare program. The anti-kickback
statute is very broad in scope and many of its provisions have
not been uniformly or definitively interpreted by existing case
law or regulations. Moreover, several federal courts have held
that the anti-kickback statute can be violated if only one
purpose (not necessarily the primary purpose) of a transaction
is to induce or reward a referral of business, notwithstanding
other legitimate purposes. Violations of the anti-kickback
statute may result in substantial civil or criminal penalties,
including up to five years imprisonment and criminal fines of up
to $25,000 and civil penalties of up to $50,000 for each
violation, plus three times the remuneration involved or the
amount claimed and exclusion from participation in all federally
funded healthcare programs. An exclusion, if applied to our
surgery centers or surgical hospitals, could result in
significant reductions in our revenues, which could have a
material adverse effect on our business.
In July 1991, the Department of Health and Human Services issued
final regulations defining various safe harbors. Two
of the safe harbors issued in 1991 apply to business
arrangements similar to those used in connection with our
surgery centers and surgical hospitals: the investment
interest safe harbor and the personal services and
management contracts safe harbor. However, the structure
of the partnerships and limited liability companies operating
our surgery centers and surgical hospitals, as well as our
various business arrangements involving physician group
practices, do not satisfy all of the requirements of either safe
harbor. Therefore, our business arrangements with our surgery
centers, surgical hospitals and physician groups do not qualify
for safe harbor protection from government review or
prosecution under the anti-kickback statute. When a transaction
or relationship does not fit within a safe harbor, it does not
mean that an anti-kickback violation has occurred; rather, it
means that the facts and circumstances as well as the intent of
the parties related to a specific transaction or relationship
must be examined to determine whether or not any illegal conduct
has occurred.
On November 19, 1999, the Department of Health and Human
Services promulgated final regulations creating additional safe
harbor provisions, including a safe harbor that applies to
physician ownership of or investment
34
interests in surgery centers. The surgery center safe harbor
protects four types of investment arrangements: (1) surgeon
owned surgery centers; (2) single specialty surgery
centers; (3) multi-specialty surgery centers; and
(4) hospital/physician surgery centers. Each category has
its own requirements with regard to what type of physician may
be an investor in the surgery center. In addition to the
physician investor, the categories permit an
unrelated investor, who is a person or entity that
is not in a position to provide items or services related to the
surgery center or its investors. Our business arrangements with
our surgical facilities typically consist of one of our
subsidiaries being an investor in each partnership or limited
liability company that owns the facility, in addition to
providing management and other services to the facility. As a
result, these business arrangements do not comply with all the
requirements of the surgery center safe harbor, and, therefore,
are not immune from government review or prosecution.
Although we believe that our business arrangements do not
violate the anti-kickback statute, a government agency or a
private party may assert a contrary position. Additionally, new
domestic federal or state laws may be enacted that would cause
our relationships with the physician investors to become illegal
or result in the imposition of penalties against us or our
facilities. If any of our business arrangements with physician
investors were deemed to violate the anti-kickback statute or
similar laws, or if new domestic federal or state laws were
enacted rendering these arrangements illegal, our business could
be adversely affected.
Also, most of the states in which we operate have adopted
anti-kickback laws, many of which apply more broadly to all
third-party payors, not just to federal or state healthcare
programs. Many of the state laws do not have regulatory safe
harbors comparable to the federal provisions and have only
rarely been interpreted by the courts or other governmental
agencies. We believe that our business arrangements do not
violate these state laws. Nonetheless, if our arrangements were
found to violate any of these anti-kickback laws, we could be
subject to significant civil and criminal penalties that could
adversely affect our business.
If
physician self-referral laws are interpreted differently or if
other legislative restrictions are issued, we could incur
significant sanctions and loss of reimbursement
revenues.
The U.S. federal physician self-referral law, commonly
referred to as the Stark law, prohibits a physician from making
a referral for a designated health service to an
entity to furnish an item or service payable under Medicare if
the physician or a member of the physicians immediate
family has a financial relationship with the entity such as an
ownership interest or compensation arrangement, unless an
exception applies. The list of designated health services under
the Stark law does not include ambulatory surgery services as
such. However, some of the designated health services are among
the types of services furnished by our facilities.
The Department of Health and Human Services, acting through the
Centers for Medicare and Medicaid Services, has promulgated
regulations implementing the Stark law. These regulations
exclude health services provided by an ambulatory surgery center
from the definition of designated health services if
the services are included in the facilitys composite
Medicare payment rate. Therefore, the Stark laws
self-referral prohibition generally does not apply to health
services provided by a surgery center. However, if the surgery
center is separately billing Medicare for designated health
services that are not covered under the surgery centers
composite Medicare payment rate, or if either the surgery center
or an affiliated physician is performing (and billing Medicare)
for procedures that involve designated health services that
Medicare has not designated as an ambulatory surgery center
service, the Stark laws 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.
In addition, we believe that physician ownership of surgery
centers 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. 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. Exclusion of our surgery centers or surgical hospitals
from these programs through future judicial or agency
interpretation of existing laws or additional legislative
restrictions on physician ownership or investments in healthcare
entities could result in significant loss of reimbursement
revenues.
35
Companies
within the healthcare industry continue to be the subject of
federal and state audits and investigations, which increases the
risk that we may become subject to investigations in the
future.
Both federal and state government agencies, as well as private
payors, have heightened and coordinated audits and
administrative, civil and criminal enforcement efforts as part
of numerous ongoing investigations of healthcare organizations.
These investigations relate to a wide variety of topics,
including the following:
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cost reporting and billing practices;
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quality of care;
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financial reporting;
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financial relationships with referral sources; and
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medical necessity of services provided.
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In addition, the Office of the Inspector General of the
Department of Health and Human Services and the Department of
Justice have, from time to time, undertaken national enforcement
initiatives that focus on specific billing practices or other
suspected areas of abuse. Moreover, another trend impacting
healthcare providers is the increased use of the federal False
Claims Act, particularly by individuals who bring actions under
that law. Such qui tam or whistleblower
actions allow private individuals to bring actions on behalf of
the government alleging that a healthcare provider has defrauded
the federal government. If the government intervenes and
prevails in the action, the defendant may be required to pay
three times the actual damages sustained by the government, plus
mandatory civil monetary penalties of between $5,500 and $11,000
for each false claim submitted to the government. As part of the
resolution of a qui tam case, the party filing the initial
complaint may share in a portion of any settlement or judgment.
If the government does not intervene in the action, the qui tam
plaintiff may pursue the action independently. Additionally,
some states have adopted similar whistleblower and false claims
provisions. Although companies in the healthcare industry have
been, and may continue to be, subject to qui tam actions, we are
unable to predict the impact of such actions on our business,
financial position or results of operations.
If
laws governing the corporate practice of medicine change, we may
be required to restructure some of our domestic relationships
which may result in significant costs to us and divert other
resources.
The laws of various domestic jurisdictions in which we operate
or may operate in the future do not permit business corporations
to practice medicine, exercise control over physicians who
practice medicine or engage in various business practices, such
as fee-splitting with physicians. The interpretation and
enforcement of these laws vary significantly from state to
state. We are not required to obtain a license to practice
medicine in any jurisdiction in which we own or operate a
surgery center or surgical hospital because our facilities are
not engaged in the practice of medicine. The physicians who
utilize our facilities are individually licensed to practice
medicine. In most instances, the physicians and physician group
practices performing medical services at our facilities do not
have investment or business relationships with us other than
through the physicians ownership interests in the
partnerships or limited liability companies that own and operate
our facilities and the service agreements we have with some of
those physicians.
Through our OrthoLink subsidiary, we provide consulting and
administrative services to a number of physicians and physician
group practices affiliated with OrthoLink. Although we believe
that our arrangements with these and other physicians and
physician group practices comply with applicable laws, a
government agency charged with enforcement of these laws, or a
private party, might assert a contrary position. If our
arrangements with these physicians and physician group practices
were deemed to violate state corporate practice of medicine,
fee-splitting or similar laws, or if new laws are enacted
rendering our arrangements illegal, we may be required to
restructure these arrangements, which may result in significant
costs to us and divert other resources.
36
If
domestic regulations change, we may be obligated to purchase
some or all of the ownership interests of the physicians
affiliated with us.
Upon the occurrence of various fundamental regulatory changes,
we could be obligated to purchase some or all of the ownership
interests of the physicians affiliated with us in the
partnerships or limited liability companies that own and operate
our surgery centers and surgical hospitals. The regulatory
changes that could create this obligation include changes that:
|
|
|
|
|
make illegal the referral of Medicare or other patients to our
surgical facilities by physicians affiliated with us;
|
|
|
|
create the substantial likelihood that cash distributions from
the limited partnerships or limited liability companies through
which we operate our surgical facilities to physicians
affiliated with us would be illegal; or
|
|
|
|
make illegal the ownership by the physicians affiliated with us
of interests in the partnerships or limited liability companies
through which we own and operate our surgical facilities.
|
At this time, we are not aware of any regulatory amendments or
proposed changes that would trigger this obligation. Typically,
our partnership and limited liability company agreements allow
us to use shares of our common stock as consideration for the
purchase of a physicians ownership interest. The use of
shares of our common stock for that purpose would dilute the
ownership interests of our common stockholders. In the event
that we are required to purchase all of the physicians
ownership interests and our common stock does not maintain a
sufficient valuation, we could be required to use our cash
resources for the acquisitions, the total cost of which we
estimate to be up to approximately $469.0 million at
December 31, 2010. The creation of these obligations and
the possible termination of our affiliation with these
physicians could have a material adverse effect on us.
Healthcare
reform has restricted our ability to operate our domestic
surgical hospitals.
The Acts provide, among other
things: (i) a prohibition on hospitals from
having any physician ownership unless the hospital already had
physician ownership as of March 23, 2010 and a Medicare
provider agreement in effect on December 31, 2010;
(ii) a limitation on the percentage of total physician
ownership in the hospital to the percentage of physician
ownership as of March 23, 2010; (iii) a requirement
for written disclosures of physician ownership interests, along
with an annual report to the government detailing such
ownership; and (iv) severe restrictions on the ability of a
hospital subject to the whole hospital exception to add
operating rooms, procedure rooms and beds.
All of our existing hospitals and our hospital under
construction in Dallas, Texas were grandfathered at the dates of
enactment of the Acts, although they are largely prohibited from
expanding their physical plants. Our hospital under development
in Phoenix, Arizona will not be allowed to have any physician
ownership unless the Acts, which are currently subject to
certain judicial challenges, are overturned or otherwise
amended. As a result, we may be required to purchase our share
of the physician owners interest in the hospital for
approximately $4.0 million in cash. If future legislation
were to be enacted by Congress that prohibits physician
referrals to hospitals in which the physicians own an interest,
or that otherwise further limits physician ownership in existing
facilities, our financial condition and results of operations
could be materially adversely affected.
If we
become subject to significant legal actions, we could be subject
to substantial uninsured liabilities.
In recent years, physicians, surgery centers, hospitals and
other healthcare providers have become subject to an increasing
number of legal actions alleging malpractice or related legal
theories. Many of these actions involve large monetary claims
and significant defense costs. In particular, since all of our
hospitals maintain emergency departments, there is an increased
risk of claims at these facilities because of the nature of the
cases seen in the emergency departments. We do not employ any of
the physicians who conduct surgical procedures at our facilities
and the governing documents of each of our facilities require
physicians who conduct surgical procedures at our facilities to
maintain stated amounts of insurance. Additionally, to protect
us from the cost of these claims, we maintain (through a captive
insurance company) professional malpractice liability insurance
and general liability insurance coverage in amounts and with
deductibles that we believe to be appropriate for our
operations. Although
37
we have excess coverage beyond our captive, we are effectively
self-insured up to the excess. If we become subject to claims,
however, our insurance coverage may not cover all claims against
us or continue to be available at adequate levels of insurance.
If one or more successful claims against us were not covered by
or exceeded the coverage of our insurance, we could be adversely
affected.
If we
are unable to effectively compete for physicians, strategic
relationships, acquisitions and managed care contracts, our
business could be adversely affected.
The healthcare business is highly competitive. We compete with
other healthcare providers, primarily other surgery centers and
hospitals, in recruiting physicians and contracting with managed
care payors in each of our markets. In the United Kingdom, we
also compete with their national health system in recruiting
healthcare professionals. There are major unaffiliated hospitals
in each market in which we operate. These hospitals have
established relationships with physicians and payors. In
addition, other companies either are currently in the same or
similar business of developing, acquiring and operating surgery
centers and surgical hospitals or may decide to enter our
business. Many of these companies have greater financial,
research, marketing and staff resources than we do. We may also
compete with some of these companies for entry into strategic
relationships with not-for-profit healthcare systems and
healthcare professionals. If we are unable to compete
effectively with any of these entities, we may be unable to
implement our business strategies successfully and our business
could be adversely affected.
Because
our senior management has been key to our growth and success, we
may be adversely affected if we lose any member of our senior
management.
We are highly dependent on our senior management, including
Donald E. Steen, who is our chairman, and William H. Wilcox, who
is our president and chief executive officer. Although we have
employment agreements with Mr. Steen and Mr. Wilcox
and other senior managers, we do not maintain key
man life insurance policies on any of our officers.
Because our senior management has contributed greatly to our
growth since inception, the loss of key management personnel or
our inability to attract, retain and motivate sufficient numbers
of qualified management or other personnel could have a material
adverse effect on us.
The
growth of patient receivables and a deterioration in the
collectability of these accounts could adversely affect our
results of operations.
The primary collection risks of our accounts receivable relate
to patient receivables for which the primary insurance carrier
has paid the amounts covered by the applicable agreement but
patient responsibility amounts (deductibles and copayments)
remain outstanding. The allowance for doubtful accounts relates
primarily to amounts due directly from patients.
We provide for bad debts principally based upon the aging of
accounts receivable and use specific identification to write-off
amounts against our allowance for doubtful accounts, without
differentiation between payor sources. Our U.S. doubtful
account allowance at December 31, 2010 and 2009,
represented approximately 15% and 16% of our U.S. accounts
receivable balance, respectively. Due to the difficulty in
assessing future trends, we could be required to increase our
provisions for doubtful accounts. A deterioration in the
collectability of these accounts could adversely affect our
collection of accounts receivable, cash flows and results of
operations.
We may
have a special legal responsibility to the holders of ownership
interests in the entities through which we own surgical
facilities, and that responsibility may prevent us from acting
solely in our own best interests or the interests of our
stockholders.
Our ownership interests in surgery centers and surgical
hospitals generally are held through partnerships or limited
liability companies. We typically maintain an interest in a
partnership or limited liability company in which physicians or
physician practice groups also hold interests. As general
partner or manager of these entities, we may have a special
responsibility, known as a fiduciary duty, to manage these
entities in the best interests of the other owners. We also have
a duty to operate our business for the benefit of our
stockholders. As a result, we may encounter conflicts between
our responsibility to the other owners and our responsibility to
our stockholders. For example, we have entered into management
agreements to provide management services to our domestic
facilities
38
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 are 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 affiliated physicians with respect to a
particular business decision or regarding the interpretation of
the provisions of the applicable partnership or limited
liability company agreement. If we are unable to resolve a
dispute on terms favorable or satisfactory to us, our business
may be adversely affected.
We do
not have exclusive control over the distribution of revenues
from some of our domestic operating entities and may be unable
to cause all or a portion of the revenues of these entities to
be distributed.
All of the domestic surgical facilities in which we have
ownership interests are partnerships or limited liability
companies in which we own, directly or indirectly, ownership
interests. Our partnership, and limited liability company
agreements, which are typically with the physicians who perform
procedures at our surgical facilities, usually provide for the
monthly or quarterly pro-rata cash distribution of net profits
from operations, less amounts to satisfy obligations such as the
entities non-recourse debt and capitalized lease
obligations, operating expenses and working capital. The
creditors of each of these partnerships and limited liability
companies are entitled to payment of the entities
obligations to them, when due and payable, before ordinary cash
distributions or distributions in the event of liquidation,
reorganization or insolvency may be made. We generally control
the entities that function as the general partner of the
partnerships or the managing member of the limited liability
companies through which we conduct operations. However, we do
not have exclusive control in some instances over the amount of
net revenues distributed from some of our operating entities. If
we are unable to cause sufficient revenues to be distributed
from one or more of these entities, our relationships with the
physicians who have an interest in these entities may be damaged
and we could be adversely affected. We may not be able to
resolve favorably any dispute regarding revenue distribution or
other matters with a healthcare system with which we share
control of one of these entities. Further, the failure to
resolve a dispute with these healthcare systems could cause the
entity we jointly control to be dissolved.
Welsh
Carson controls us and may have conflicts of interest with us or
you in the future.
An investor group led by Welsh Carson owns substantially all of
the outstanding equity securities of our Parent, USPI Group
Holdings, Inc. Welsh Carson controls a majority of the voting
power of such outstanding equity securities and therefore
ultimately controls all of our affairs and policies, including
the election of our board of directors, the approval of certain
actions such as amending our charter, commencing bankruptcy
proceedings and taking certain corporate actions (including,
without limitation, incurring debt, issuing stock, selling
assets and engaging in mergers and acquisitions), and appointing
members of our management. The interests of Welsh Carson could
conflict with your interests.
Additionally, Welsh Carson is in the business of making
investments in companies and may from time to time acquire and
hold interests in businesses that compete directly or indirectly
with us. Welsh Carson may also pursue acquisition opportunities
that may be complementary to our business and, as a result,
those acquisition opportunities may not be available to us. So
long as investment funds associated with or designated by Welsh
Carson continue to indirectly own a significant amount of our
capital stock, even if such amount is less than 50% of our
outstanding common stock on a fully-diluted basis, Welsh Carson
will continue to be able to strongly influence or effectively
control our decisions.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
The response to this item is included in Item 1.
39
|
|
Item 3.
|
Legal
Proceedings
|
From time to time, we may be named as a party to legal claims
and proceedings in the ordinary course of business. We are not
aware of any claims or proceedings against us or our
subsidiaries that might have a material adverse impact on us.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
We are wholly-owned by USPI Holdings, Inc., which is
wholly-owned by USPI Group Holdings, Inc., both of which are
privately owned corporations. There is no public trading market
for our equity securities or those of USPI Holdings, Inc. or
USPI Group Holdings, Inc. As of February 25, 2011, there
were 106 holders of USPI Group Holdings, Inc. common stock.
|
|
Item 6.
|
Selected
Financial Data
|
The selected consolidated statement of operations data set forth
below for the years ended December 31, 2010, 2009 and 2008,
(Successor), the periods January 1 through April 18, 2007
(Predecessor) and April 19 through December 31, 2007
(Successor) and for the year ended December 31, 2006
(Predecessor), and the consolidated balance sheet data at
December 31, 2010, 2009, 2008 and 2007 (Successor) and
December 31, 2006 (Predecessor) are derived from our
consolidated financial statements.
The historical results presented below are not necessarily
indicative of results to be expected for any future period. The
comparability of the financial and other data included in the
table is affected by our merger transaction in 2007, loss on
early retirement of debt in 2007 and 2006 and various
acquisitions completed during the years presented. In addition,
the results of operations of subsidiaries sold by us have been
reclassified to discontinued operations for all data
presented in the table below except for the consolidated
balance sheet data. For a more detailed explanation of
this financial data, see Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and related notes
included elsewhere in this report.
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
April 19
|
|
|
January 1
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
through
|
|
|
through
|
|
Years Ended
|
|
|
December 31
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
April 18,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
2007
|
|
2006
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
576,665
|
|
|
$
|
593,475
|
|
|
$
|
615,098
|
|
|
$
|
435,699
|
|
|
|
$
|
185,169
|
|
|
$
|
553,290
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
69,916
|
|
|
|
61,771
|
|
|
|
47,042
|
|
|
|
23,867
|
|
|
|
|
9,906
|
|
|
|
31,568
|
|
Operating expenses excluding depreciation and amortization
|
|
|
(406,266
|
)
|
|
|
(425,786
|
)
|
|
|
(431,731
|
)
|
|
|
(300,937
|
)
|
|
|
|
(156,227
|
)
|
|
|
(392,360
|
)
|
Depreciation and amortization
|
|
|
(29,799
|
)
|
|
|
(31,165
|
)
|
|
|
(32,305
|
)
|
|
|
(23,765
|
)
|
|
|
|
(11,301
|
)
|
|
|
(32,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
210,516
|
|
|
|
198,295
|
|
|
|
198,104
|
|
|
|
134,864
|
|
|
|
|
27,547
|
|
|
|
160,179
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
798
|
|
|
|
2,741
|
|
|
|
3,278
|
|
|
|
3,255
|
|
|
|
|
967
|
|
|
|
4,064
|
|
Interest expense
|
|
|
(70,038
|
)
|
|
|
(70,353
|
)
|
|
|
(84,916
|
)
|
|
|
(67,553
|
)
|
|
|
|
(9,394
|
)
|
|
|
(32,457
|
)
|
Loss on early retirement of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,435
|
)
|
|
|
(14,880
|
)
|
Other, net
|
|
|
708
|
|
|
|
373
|
|
|
|
32
|
|
|
|
72
|
|
|
|
|
(67
|
)
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
141,984
|
|
|
|
131,056
|
|
|
|
116,498
|
|
|
|
70,638
|
|
|
|
|
16,618
|
|
|
|
116,957
|
|
Income tax benefit (expense)
|
|
|
(32,328
|
)
|
|
|
879
|
|
|
|
(22,667
|
)
|
|
|
(14,588
|
)
|
|
|
|
(4,433
|
)
|
|
|
(22,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
109,656
|
|
|
|
131,935
|
|
|
|
93,831
|
|
|
|
56,050
|
|
|
|
|
12,185
|
|
|
|
94,296
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
|
(7,003
|
)
|
|
|
1,453
|
|
|
|
(1,179
|
)
|
|
|
(2,146
|
)
|
|
|
|
(786
|
)
|
|
|
(5,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
102,653
|
|
|
|
133,388
|
|
|
|
92,652
|
|
|
|
53,904
|
|
|
|
|
11,399
|
|
|
|
88,667
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(60,560
|
)
|
|
|
(63,722
|
)
|
|
|
(55,138
|
)
|
|
|
(45,175
|
)
|
|
|
|
(18,548
|
)
|
|
|
(54,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPIs common stockholders
|
|
$
|
42,093
|
|
|
$
|
69,666
|
|
|
$
|
37,514
|
|
|
$
|
8,729
|
|
|
|
$
|
(7,149
|
)
|
|
$
|
34,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of facilities operated as of the end of period(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
58
|
|
|
|
60
|
|
|
|
62
|
|
|
|
61
|
|
|
|
|
64
|
|
|
|
60
|
|
Equity method
|
|
|
130
|
|
|
|
109
|
|
|
|
102
|
|
|
|
94
|
|
|
|
|
85
|
|
|
|
81
|
|
Management contract only
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
189
|
|
|
|
169
|
|
|
|
164
|
|
|
|
155
|
|
|
|
|
149
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
$
|
169,064
|
|
|
$
|
180,610
|
|
|
$
|
142,119
|
|
|
$
|
109,933
|
|
|
|
$
|
47,177
|
|
|
$
|
155,466
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
As of
|
|
|
As of December 31
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
2006
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
$
|
(100,249
|
)
|
|
$
|
(113,016
|
)
|
|
$
|
(38,838
|
)
|
|
$
|
(12,569
|
)
|
|
|
$
|
(41,834
|
)
|
Cash and cash equivalents
|
|
|
60,253
|
|
|
|
34,890
|
|
|
|
49,435
|
|
|
|
76,758
|
|
|
|
|
31,740
|
|
Total assets
|
|
|
2,372,739
|
|
|
|
2,325,392
|
|
|
|
2,268,163
|
|
|
|
2,277,393
|
|
|
|
|
1,231,856
|
|
Total debt
|
|
|
1,069,826
|
|
|
|
1,071,528
|
|
|
|
1,097,947
|
|
|
|
1,098,062
|
|
|
|
|
347,330
|
|
Noncontrolling interests redeemable
|
|
|
81,668
|
|
|
|
63,865
|
|
|
|
51,961
|
|
|
|
52,769
|
|
|
|
|
49,261
|
|
Total equity
|
|
|
821,151
|
|
|
|
798,003
|
|
|
|
806,217
|
|
|
|
837,100
|
|
|
|
|
622,844
|
|
|
|
|
(a) |
|
Not derived from audited financial statements. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation
|
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with
Selected Financial Data and our consolidated
financial statements and related notes included elsewhere in
this report.
Overview
We operate ambulatory surgery centers and surgical hospitals in
the United States and the United Kingdom. As of
December 31, 2010, we operated 189 facilities, consisting
of 185 in the United States and four in the United Kingdom. All
185 of our U.S. facilities include local physician owners,
and 132 of these facilities are also partially owned by various
not-for-profit healthcare systems (hospital partners). In
addition to facilitating the joint ownership of the majority of
our existing facilities, our agreements with these healthcare
systems provide a framework for the planning and construction of
additional facilities in the future. All six facilities we are
currently developing include a hospital partner.
Our U.S. facilities, consisting of ambulatory surgery
centers and surgical hospitals, specialize in non-emergency
surgical cases. Due in part to advancements in medical
technology, the volume and complexity of surgical cases
performed in an outpatient setting has steadily increased over
the past two decades. Our facilities earn a fee from patients,
insurance companies, or other payors in exchange for providing
the facility and related services a surgeon requires in order to
perform a surgical case. In addition, we earn a monthly fee from
each facility we operate in exchange for managing its
operations. All but four of our facilities are located in the
U.S., where we have focused increasingly on adding facilities
with hospital partners, which we believe improves the long-term
profitability and potential of our facilities.
In the United Kingdom we operate three hospitals and an oncology
clinic, which supplement the services provided by the
government-sponsored healthcare system. Our patients choose to
receive care at private hospitals primarily because of waiting
lists to receive diagnostic procedures or elective surgery at
government-sponsored facilities and pay us either from personal
funds or through private insurance, which is offered by some
employers as a benefit to their employees. Since acquiring our
first two facilities in the United Kingdom in 2000, we have
expanded selectively by adding a third facility and increasing
the capacity and services offered at each facility, including
the construction of an oncology clinic near the campus of one of
our hospitals. In January 2011, we acquired an equity interest
in a diagnostic and surgery center located in Edinburgh,
Scotland.
Our growth and success depends on our ability to continue to
grow volumes at our existing facilities, to successfully open
new facilities we develop, to successfully integrate acquired
facilities into our operations, and to maintain productive
relationships with our physician and hospital partners. We
believe we will have significant opportunities to operate more
facilities in the future in existing and new markets and that
many of these will include hospital partners.
42
Due in large part to our partnerships with physician and
hospital partners, we do not consolidate 130 of the 188
facilities in which we have ownership interests. To help analyze
our results of operations, we disclose an operating measure we
refer to as systemwide revenue growth, which includes both
consolidated and unconsolidated facilities. While revenues of
our unconsolidated facilities are not recorded as revenues by
USPI, we believe the information is important in understanding
USPIs financial performance because these revenues are the
basis for calculating the Companys management services
revenues and, together with the expenses of our unconsolidated
facilities, are the basis for USPIs equity in earnings of
unconsolidated affiliates. In addition, USPI discloses growth
rates and operating margins (both consolidated and
unconsolidated) for the facilities that were operational in both
the current and prior year periods, a group the Company refers
to as same store facilities.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition, results
of operations and liquidity and capital resources are based on
our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in
the United States of America (GAAP). The preparation of
consolidated financial statements under GAAP requires our
management to make certain estimates and assumptions that impact
the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities as of the date of the
consolidated financial statements. These estimates and
assumptions also impact the reported amount of net earnings
during any period. Estimates are based on information available
as of the date financial statements are prepared. Accordingly,
actual results could differ from those estimates. Critical
accounting policies and estimates are defined as those that are
both most important to the portrayal of our financial condition
and operating results and that require managements most
subjective judgments. Our critical accounting policies and
estimates include our policies and estimates regarding
consolidation, revenue recognition and accounts receivable,
income taxes, and goodwill and intangible assets.
Consolidation
We own less than 100% of each U.S. facility we operate. As
discussed in Results of Operations, we operate all
of our U.S. facilities through joint ventures with
physicians. Increasingly, these joint ventures also include a
hospital partner. We generally have a leadership role in these
facilities through a significant voting and economic interest
and a contract to manage each facilitys operations, but
the degree of control we have varies from facility to facility.
Accordingly, as of December 31, 2010, we consolidated the
financial results of 58 of the facilities we operate, account
for 130 under the equity method and operate one facility under a
service and management contract.
Our consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries, and other investees
over which we have control or of which the Company is the
primary beneficiary. Investments in companies that we neither
control nor are the primary beneficiary, but over whose
operations we have the ability to exercise significant influence
(including investments where we have less than 20% ownership),
are accounted for under the equity method. We also consider the
relevant sections of the Financial Accounting Standards
Boards Accounting Standards Codification, Topic
810, Consolidation to determine if we are the primary
beneficiary of (and therefore should consolidate) any entity
whose operations we do not control with voting rights. At
December 31, 2010, we consolidated one entity as a result
of being its primary beneficiary. See further discussion in
Note 5 to the consolidated financial statements.
Accounting for an investment as consolidated versus equity
method has no impact on our net income (loss) or
stockholders equity in any accounting period, but it does
impact individual balances within the statement of operations
and balance sheet. Under either consolidation or equity method
accounting, the investors results of operations includes
its share of the investee entitys net income or loss based
generally on its ownership percentage.
Revenue
Recognition and Accounts Receivable
We recognize revenue in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements, as updated, which has four criteria that must be
met before revenue is recognized:
|
|
|
|
|
Existence of persuasive evidence that an arrangement exists;
|
43
|
|
|
|
|
Delivery has occurred or services have been rendered;
|
|
|
|
The sellers price to the buyer is fixed or
determinable; and
|
|
|
|
Collectibility is reasonably assured.
|
Our revenue recognition policies are consistent with these
criteria. Over 80% of our facilities surgical cases are
performed under contracted or government mandated fee schedules
or discount arrangements. The patient service revenues recorded
for these cases are recorded at the contractually defined amount
at the time of billing. We estimate the remaining revenue based
on historical collections, and adjustments to these estimates in
subsequent periods have not had a material impact in any period
presented. If the discount percentage used in estimating
revenues for the cases not billed pursuant to fee schedules were
changed by 1%, our 2010 after-tax net income would change by
approximately $0.2 million. The collection cycle for
patient services revenue is relatively short, typically ranging
from 30 to 60 days depending upon payor and geographic
norms, which allows us to evaluate our estimates frequently. Our
revenues earned under management and other service contracts are
typically based upon objective formulas driven by an
entitys financial performance and are generally earned and
paid monthly.
Our accounts receivable are comprised of receivables in both the
United Kingdom and the United States. As of December 31,
2010, approximately 21% of our total accounts receivable were
attributable to our U.K. business. Because our U.K. facilities
only treat patients who have a demonstrated ability to pay, our
U.K. patients arrange for payment prior to treatment and our bad
debt expense in the U.K. is low. In 2010, U.K. bad debt expense
was less than $0.1 million, as compared to our total U.K.
revenues of $102.7 million. Our average days sales
outstanding in the U.K. were 38 and 52 as of December 31,
2010 and 2009, respectively. The decrease in U.K. days sales
outstanding was caused by the receipt of several payments made
by large payors on December 31, 2010.
Our U.S. accounts receivable were approximately 79% of our
total accounts receivable as of December 31, 2010. In 2010,
uninsured or self-pay revenues only accounted for 2% of our
U.S. revenue and approximately 6% of our accounts
receivable balance was comprised of amounts owed from patients,
including the patient portion of amounts covered by insurance.
Insurance revenues (including government payors) accounted for
98% of our 2010 U.S. revenue and approximately 94% of our
accounts receivable balance was comprised of amounts owed from
contracted payors. Our U.S. facilities primarily perform
surgery that is scheduled in advance by physicians who have
already seen the patient. As part of our internal control
processes, we verify benefits, obtain insurance authorization,
calculate patient financial responsibility and notify the
patient of their responsibility, usually prior to surgery. The
nature of our business is such that we do not have any
significant receivables that are pending approval from third
party payors. We also focus our collection efforts on aged
accounts receivable. However, due to complexities involved in
insurance reimbursements and inherent limitations in
verification procedures, our business will always have some
level of bad debt expense. In both 2010 and 2009, our bad debt
expense attributable to U.S. revenue was approximately 2%.
In addition, as of December 31, 2010 and 2009, our average
days sales outstanding in the U.S. were 33 and
34 days, respectively. The aging of our U.S. accounts
receivable at December 31, 2010 was: 67% less than
60 days old, 13% between 60 and 120 days and 20% over
120 days old. Our U.S. bad debt allowance at
December 31, 2010 and 2009 represented approximately 15%
and 16% of our U.S. accounts receivable balance,
respectively.
Due to the nature of our business, management relies upon the
aging of accounts receivable as its primary tool to estimate bad
debt expense. Therefore, we reserve for bad debt based
principally upon the aging of accounts receivable, without
differentiating by payor source. We write off accounts on an
individual basis based on that aging. We believe our reserve
policy allows us to accurately estimate our allowance for
doubtful accounts and bad debt expense.
Income
Taxes
Our income tax policy is to record the estimated future tax
effects of temporary differences between the tax bases of assets
and liabilities and the bases of those assets and liabilities as
reported in our consolidated balance sheets. This estimation
process requires that we evaluate the need for a valuation
allowance against deferred tax assets, based on factors such as
historical financial information, expected timing of future
events, the probability of expected future taxable income and
available tax planning opportunities. While we recognized the
benefit of the
44
majority of our deferred tax assets in 2009, we still carry a
valuation allowance against deferred tax assets that have
restrictions as to use and are not considered more likely than
not to be realized. If our estimates related to the above items
change significantly, we may need to alter the amount of our
valuation allowance in the future through a favorable or
unfavorable adjustment to net income.
Goodwill
and Intangible Assets
Given the significance of our intangible assets as a percentage
of our total assets, we also consider our accounting policy
regarding goodwill and intangible assets to be a critical
accounting policy. Consistent with GAAP, we do not amortize
goodwill or indefinite-lived intangibles but rather test them
for impairment annually or more often when circumstances change
in a manner that indicates they may be impaired. Impairment
tests occur at the reporting unit level for goodwill; our
reporting units are defined as our operating segments (United
States and United Kingdom). Our intangible assets consist
primarily of indefinite-lived rights to manage individual
surgical facilities. The values of these rights are tested
individually. Intangible assets with definite lives primarily
consist of rights to provide management and other contracted
services to surgical facilities, hospitals, and physicians.
These assets are amortized over their estimated useful lives,
and the portfolios are tested for impairment when circumstances
change in a manner that indicates their carrying values may not
be recoverable.
To determine the fair value of our reporting units, we generally
use a present value technique (discounted cash flow)
corroborated by market multiples when available and as
appropriate. The factor most sensitive to change with respect to
our discounted cash flow analyses is the estimated future cash
flows of each reporting unit which is, in turn, sensitive to our
estimates of future revenue growth and margins for these
businesses. If actual revenue growth
and/or
margins are lower than our expectations, the impairment test
results could differ. We base our fair value estimates on
assumptions we believe to be reasonable and consistent with
market participant assumptions, but that are unpredictable and
inherently uncertain. The fair value of an indefinite-lived
intangible asset is compared to its carrying amount. If the
carrying amount of an indefinite-lived intangible asset exceeds
its fair value, an impairment loss is recognized. Fair values
for indefinite-lived intangible assets are estimated based on
market multiples and discounted cash flow models which have been
derived based on our experience in acquiring surgical
facilities, market participant assumptions and third party
valuations we have obtained with respect to such transactions.
Based on the results of our 2010 goodwill impairment testing,
both of our reporting units estimated fair values
substantially exceed their carrying values. During 2010, we
recorded a $5.9 million impairment charge related to six
indefinite-lived intangible assets (management contracts) as
further discussed in Note 8 to our consolidated financial
statements.
Merger
Transaction
USPI had publicly traded equity securities from June 2001
through April 2007. Pursuant to an Agreement and Plan of Merger
(the merger) dated as of January 7, 2007, between an
affiliate of Welsh, Carson, Anderson & Stowe X, L.P.
(Welsh Carson), we became a wholly owned subsidiary of USPI
Holdings, Inc. on April 19, 2007. USPI Holdings is a wholly
owned subsidiary of USPI Group Holdings, Inc. (Parent), which is
owned by an investor group that includes affiliates of Welsh
Carson, members of our management and other investors.
45
Acquisitions,
Equity Investments and Development Projects
As part of our growth strategy, we acquire interests in existing
surgical facilities from third parties and invest in new
facilities that we develop in partnership with hospital partners
and local physicians. Some of these transactions result in our
controlling the acquired entity (business combinations). During
the year ended December 31, 2010, we obtained control of
the following entities:
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
|
Investments
|
|
|
|
|
|
|
December 2010
|
|
Houston, Texas(1)
|
|
$
|
9.0 million
|
|
December 2010
|
|
Reading, Pennsylvania(2)
|
|
|
1.1 million
|
|
November 2010
|
|
Various(3)
|
|
|
31.1 million
|
|
October 2010
|
|
Houston, Texas(1)
|
|
|
2.4 million
|
|
May 2010
|
|
St. Louis, Missouri(4)
|
|
|
4.6 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
48.2 million
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisition of a controlling interest in and right to manage a
surgical facility in which we previously had no involvement. The
remainder of this facility is owned by a hospital partner and
local physicians. |
|
(2) |
|
Acquisition of a controlling interest in a surgical facility in
which we already held an ownership interest. |
|
(3) |
|
We acquired 100% of the equity interests in HealthMark Partners,
Inc. (HealthMark), a privately-held, Nashville-based owner and
operator of surgery centers. HealthMark holds an equity interest
in 14 surgery centers, all of which are accounted for under the
equity method. Eleven of these facilities are located in markets
in which we already operate. Local physicians have ownership in
all 14 facilities and by December 31, 2010 and
January 31, 2011, hospital partners had invested in nine
and ten of these facilities, respectively. |
|
(4) |
|
Acquisition of a controlling interest in and right to manage a
surgical facility in which we previously had no involvement.
This facility is jointly owned with local physicians. |
46
We also regularly engage in the purchase and sale of equity
interests with respect to our investments in unconsolidated
affiliates that do not result in a change of control. These
transactions are primarily the acquisitions and sales of equity
interests in unconsolidated surgical facilities and the
investment of additional cash in surgical facilities under
development. During the year ended December 31, 2010, these
transactions resulted in a net cash outflow of approximately
$21.3 million, which is summarized below:
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
|
Investments
|
|
|
|
|
|
|
December 2010
|
|
Irving, Texas(1)
|
|
$
|
1.9 million
|
|
December 2010
|
|
Boulder, Colorado(2)
|
|
|
4.7 million
|
|
December 2010
|
|
Houston, Texas(2)
|
|
|
0.9 million
|
|
December 2010
|
|
Chattanooga, Tennessee(3)
|
|
|
2.6 million
|
|
December 2010
|
|
Kansas City, Missouri(4)
|
|
|
1.2 million
|
|
December 2010
|
|
Nashville, Tennessee(5)
|
|
|
13.4 million
|
|
November 2010
|
|
Keller, Texas(1)
|
|
|
4.6 million
|
|
July 2010
|
|
Carrollton, Texas(1)
|
|
|
0.8 million
|
|
July 2010
|
|
Sacramento, California(2)
|
|
|
1.5 million
|
|
May 2010
|
|
Mansfield, Texas(1)
|
|
|
0.4 million
|
|
April 2010
|
|
Destin, Florida(3)
|
|
|
1.3 million
|
|
April 2010
|
|
St. Louis, Missouri(6)
|
|
|
0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.7 million
|
|
Sales(7)
|
|
|
|
|
|
|
December 2010
|
|
Phoenix, Arizona(8)
|
|
|
4.1 million
|
|
June 2010
|
|
Cincinnati, Ohio(9)
|
|
|
7.9 million
|
|
Various
|
|
Various(10)
|
|
|
0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.4 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
21.3 million
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisition of the right to manage a surgical facility in which
we previously had no involvement. Concurrent with this
transaction, an unconsolidated investee that we jointly own with
a hospital partner used cash on hand to acquire an equity
interest in this facility, resulting in our having an indirect
ownership interest in the facility. The remainder of this
facility is owned by local physicians. |
|
(2) |
|
Acquisition of a noncontrolling interest in and right to manage
a surgical facility in which we previously had no involvement.
This facility is jointly owned with one of our hospital partners
and local physicians. |
|
(3) |
|
Acquisition of an additional noncontrolling interest in a
surgical facility in which we already held an investment. This
facility is jointly owned with local physicians. |
|
(4) |
|
Acquisition of an additional noncontrolling interest in a
surgical facility in which we already held an investment. This
facility is jointly owned with one of our hospital partners and
local physicians. |
|
(5) |
|
Acquisition of an additional noncontrolling interest in three
surgical facilities in which we already held an investment and
one surgical facility in which we already provided management
services. These facilities are jointly owned with one of our
hospital partners and local physicians. |
|
(6) |
|
Acquisition of a noncontrolling interest in a surgical facility
in which we already provided management services. This facility
is jointly owned with one of our hospital partners and local
physicians. |
|
(7) |
|
Sale transactions not involving our surrendering control of the
facility are described in this section. Transactions involving
the sale of our entire interest in a facility or our
surrendering control of a facility are described in
Discontinued Operations and Other Dispositions. |
47
|
|
|
(8) |
|
Sale of a portion of our equity ownership in two facilities to a
hospital partner. The remainder of these facilities are owned by
local physicians. |
|
(9) |
|
Sale of a portion of our equity ownership in one facility to a
hospital partner. The remainder of this facility is owned by
local physicians. |
|
(10) |
|
Represents the net receipt related to various other purchases
and sales of equity interests and contributions of cash to
equity method investees. |
Similar to our investments in unconsolidated affiliates, we
regularly engage in the purchase and sale of equity interests in
our consolidated subsidiaries that do not result in a change of
control. These types of transactions are accounted for as equity
transactions, as they are undertaken among us, our consolidated
subsidiaries, and noncontrolling interests. During the year
ended December 31, 2010, we purchased and sold equity
interests in various consolidated subsidiaries in the amounts of
$2.9 million and $4.0 million, respectively. The
difference between our carrying amount and the proceeds received
or paid in each transaction is recorded as an adjustment to our
additional paid-in capital. These transactions resulted in a
$7.2 million decrease to our additional paid-in capital
during the year ended December 31, 2010.
As further described in the section, Discontinued
Operations and Other Dispositions, during 2010, we
received proceeds of $32.5 million related to our sale of
our wholly-owned subsidiary, American Endoscopy Services, Inc.
(AES). We also received cash proceeds of $0.6 million
related to the sale of a controlling interest in one facility to
a hospital partner.
During 2009, we acquired interests in existing surgical
facilities from third parties and invested in new facilities
that we are developing in partnership with hospital partners and
local physicians. Some of these transactions result in our
controlling the acquired entity (business combinations). In
December 2009, we invested $9.9 million in a subsidiary
jointly operated with one of our hospital partners, which the
subsidiary used to acquire a controlling interest in a facility
in Houston, Texas.
We also regularly engage in the purchase and sale of equity
interests with respect to our investments in unconsolidated
affiliates that do not result in a change of control. These
transactions are primarily the acquisitions and sales of equity
interests in unconsolidated surgical facilities and the
investment of additional cash in surgical facilities under
development. During the year ended December 31, 2009, these
transactions resulted in a net cash outflow of approximately
$47.4 million, which is summarized below:
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
|
Investments
|
|
|
|
|
|
|
December 2009
|
|
Cincinnati, Ohio(1)
|
|
$
|
17.7 million
|
|
December 2009
|
|
Portland, Oregon(2)
|
|
|
11.1 million
|
|
December 2009
|
|
Nashville, Tennessee(3)
|
|
|
6.1 million
|
|
September 2009
|
|
Fort Worth, Texas(3)
|
|
|
1.2 million
|
|
July 2009
|
|
Fort Worth, Texas(3)
|
|
|
1.0 million
|
|
May 2009
|
|
St. Louis, Missouri(4)
|
|
|
0.9 million
|
|
February 2009
|
|
Fort Worth, Texas(2)
|
|
|
2.0 million
|
|
February 2009
|
|
Stockton, California(2)
|
|
|
2.5 million
|
|
Various
|
|
Various(5)
|
|
|
7.3 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
49.8 million
|
|
Sales (6)
|
|
|
|
|
|
|
December 2009
|
|
Dallas, Texas(7)
|
|
|
2.4 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
47.4 million
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisition of a noncontrolling interest in and right to manage
a surgical facility in which we previously had no involvement.
This facility is jointly owned with local physicians. |
48
|
|
|
(2) |
|
Acquisition of a noncontrolling interest in and right to manage
a surgical facility in which we previously had no involvement.
This facility is jointly owned with one of our hospital partners
and local physicians. |
|
(3) |
|
Acquisition of additional ownership in one of our existing
facilities. |
|
(4) |
|
Acquisition of the right to manage a surgical facility in which
we previously had no involvement. We have a purchase option to
acquire a 20% equity interest in the facility within one year,
and after approximately three years, an option to purchase an
additional 20% equity interest. We acquired ownership in April
2010. |
|
(5) |
|
Represents the net purchase of additional ownership and equity
contributions in various unconsolidated affiliates, including
$3.4 million of investment in four de novos. |
|
(6) |
|
Sale transactions not involving our surrendering control of the
facility are described in this section. Transactions involving
the sale of our entire interest in a facility or our
surrendering control of a facility are described in
Discontinued Operations and Other Dispositions. |
|
(7) |
|
Sale of a portion of our noncontrolling interest in two
facilities to a hospital partner. This hospital partner is a
related party (Note 12). We retained a noncontrolling
interest in these facilities and continue to operate them. |
Additionally, effective January 1, 2009, we acquired
noncontrolling equity interests in and rights to manage two
surgical facilities in which we previously had no involvement.
These facilities are jointly owned with one of our hospital
partners and local physicians. The total purchase price of
$2.2 million was paid in December 2008.
Similar to our investments in unconsolidated affiliates, we
regularly engage in the purchase and sale of equity interests in
our consolidated subsidiaries that do not result in a change of
control. These types of transactions are accounted for as equity
transactions, as they are undertaken among us, our consolidated
subsidiaries, and noncontrolling interests. During the year
ended December 31, 2009, we purchased and sold equity
interests in various consolidated subsidiaries in the amounts of
$9.4 million and $7.4 million, respectively. The
$9.4 million of purchases includes the partial exercise of
our purchase option in one of our existing centers in
St. Louis for $7.1 million. The difference between our
carrying amount and the proceeds received or paid in each
transaction is recorded as an adjustment to our additional
paid-in capital. These transactions resulted in a
$14.3 million decrease to our additional paid-in capital
during the year ended December 31, 2009.
We engaged in the following business combinations and
transactions, formerly known as step acquisitions, during the
year ended December 31, 2008:
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
|
December 2008
|
|
St. Louis, Missouri(1)
|
|
$
|
0.4 million
|
|
October 2008
|
|
St. Louis, Missouri(2)
|
|
|
1.9 million
|
|
September 2008
|
|
St. Louis, Missouri(2)
|
|
|
15.8 million
|
|
September 2008
|
|
St. Louis, Missouri(3)
|
|
|
18.0 million
|
|
August 2008
|
|
St. Louis, Missouri(2)
|
|
|
3.0 million
|
|
June 2008
|
|
Dallas, Texas(4)
|
|
|
3.9 million
|
|
April 2008
|
|
St. Louis, Missouri(5)
|
|
|
14.1 million
|
|
Various
|
|
Various(6)
|
|
|
6.6 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
63.7 million
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We acquired additional ownership in one of our existing
facilities. |
|
(2) |
|
We had no previous investment in this facility. |
|
(3) |
|
We acquired additional ownership in two of our existing
facilities. |
|
(4) |
|
We purchased all of a healthcare systems ownership
interest in an entity it co-owned with us. This entity has
ownership in and manages five facilities in the
Dallas/Fort Worth area. This holding company was already a
subsidiary of our company and is now wholly owned by us. |
|
(5) |
|
We acquired additional ownership in three of our existing
facilities. |
|
(6) |
|
Represents the purchase of additional ownership in various
consolidated entities. |
49
We also engaged in transactions that are not business
combinations or step acquisitions. These transactions primarily
consist of acquisitions and sales of noncontrolling equity
interests in surgical facilities and the investment of
additional cash in surgical facilities under development. During
the year ended December 31, 2008, these transactions
resulted in a net cash outflow of approximately
$35.6 million, which is summarized below.
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
|
Investments
|
|
|
|
|
|
|
December 2008
|
|
Nashville, Tennessee(1)
|
|
$
|
18.3 million
|
|
December 2008
|
|
Houston, Texas(1)
|
|
|
5.4 million
|
|
December 2008
|
|
Portland, Oregon(1)
|
|
|
5.7 million
|
|
December 2008
|
|
Denver, Colorado(2)
|
|
|
2.2 million
|
|
October 2008
|
|
Houston, Texas(1)
|
|
|
5.2 million
|
|
October 2008
|
|
Denver, Colorado(1)
|
|
|
2.1 million
|
|
January 2008
|
|
Knoxville, Tennessee(1)
|
|
|
1.4 million
|
|
January 2008
|
|
Las Vegas, Nevada(1)
|
|
|
1.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.4 million
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
April 2008
|
|
Kansas City, Missouri(3)
|
|
|
3.6 million
|
|
Various
|
|
Various(4)
|
|
|
2.2 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.8 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
35.6 million
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisition of a noncontrolling equity interest in and right to
manage a surgical facility in which we previously had no
involvement. This facility is jointly owned with one of our
hospital partners and local physicians. |
|
(2) |
|
Acquisition of a noncontrolling equity interest in and right to
manage two surgical facilities in which we previously had no
involvement. These facilities are jointly owned with one of our
hospital partners and local physicians. The purchase price was
paid in December 2008 and our ownership became effective
January 1, 2009. |
|
(3) |
|
A not-for-profit hospital partner obtained ownership in a
facility. |
|
(4) |
|
Represents the net receipt related to various other purchases
and sales of equity interests and contributions of cash to
equity method investees. |
As further described in the section, Discontinued
Operations and Other Dispositions, during 2008, we
received proceeds of $3.4 million related to our sale of
all our ownership interests in five facilities. We also received
cash proceeds of $5.2 million related to the sale of
noncontrolling interests in five facilities to various
not-for-profit hospital partners.
Discontinued
Operations and Other Dispositions
Sales of consolidated subsidiaries in which we have no
continuing involvement are classified as discontinued
operations, as are consolidated subsidiaries that are held for
sale. The gains or losses on these transactions are classified
within discontinued operations in our consolidated statements of
income. Also, we have reclassified our historical results of
operations to remove the operations of these entities from our
revenues and expenses, collapsing the net income or loss from
these operations into a single line within discontinued
operations.
50
Discontinued operations are as follows :
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
Proceeds
|
|
|
Gain (Loss)
|
|
|
December 2010
|
|
Nashville, Tennessee
|
|
$
|
32.5 million
|
|
|
$
|
2.8 million
|
|
December 2010
|
|
Orlando, Florida
|
|
|
|
|
|
|
(2.0 million
|
)
|
December 2010
|
|
Templeton, California(1)
|
|
|
|
|
|
|
(1.9 million
|
)
|
December 2010
|
|
Houston, Texas(1)
|
|
|
|
|
|
|
(0.2 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
32.5 million
|
|
|
$
|
(1.3 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
June 2008
|
|
Cleveland, Ohio
|
|
$
|
1.6 million
|
|
|
$
|
(1.0 million
|
)
|
|
|
|
(1) |
|
These investments were written down to estimated fair value less
costs to sell at December 31, 2010, and were sold at
amounts approximating these estimated values in February 2011. |
Equity method investments that are sold do not represent
discontinued operations under GAAP. We did not sell any equity
method investments during 2010. During 2009 and 2008, we
completed sales of investments in ten facilities operated
through unconsolidated affiliates, including our equity
ownership in these entities as well as the related rights to
manage the facilities. Gains and losses on the disposals of
these investments are classified within Losses on
deconsolidations, disposals and impairments in the
accompanying consolidated statements of income. These
transactions are summarized below:
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
Proceeds (Costs)
|
|
|
Loss
|
|
|
December 2009
|
|
Oxnard, California
|
|
$
|
0.3 million
|
|
|
$
|
(0.3 million
|
)
|
December 2009
|
|
Baton Rouge, Louisiana(1)
|
|
|
(5.1 million
|
)
|
|
|
(8.2 million
|
)
|
September 2009
|
|
San Antonio, Texas
|
|
|
|
|
|
|
(2.6 million
|
)
|
July 2009
|
|
Cleveland, Ohio(2)
|
|
|
1.0 million
|
|
|
|
|
|
February 2009
|
|
Las Cruces, New Mexico
|
|
|
|
|
|
|
|
|
February 2009
|
|
East Brunswick, New Jersey
|
|
|
0.7 million
|
|
|
|
(2.6 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(3.1 million
|
)
|
|
$
|
(13.7 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
July 2008
|
|
Manitowoc, Wisconsin
|
|
$
|
0.8 million
|
|
|
$
|
|
|
July 2008
|
|
Orlando, Florida
|
|
|
0.5 million
|
|
|
|
(0.4 million
|
)
|
April 2008
|
|
Los Angeles, California
|
|
|
|
|
|
|
|
|
February 2008
|
|
Sarasota, Florida
|
|
|
0.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
1.8 million
|
|
|
$
|
(0.4 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We paid $5.1 million to settle contingent liabilities in
conjunction with the sale of this center. Such amount was
expensed and included in Losses on deconsolidations,
disposals and impairments in the accompanying consolidated
statements of income. |
|
(2) |
|
We financed the entire purchase price with the buyer and have a
security interest in the facilitys assets until the note
is collected, which is due in 2011. As a result, we deferred the
recognition of the gain, which is estimated at $0.6 million. |
As further described in Note 5 to our consolidated
financial statements, in 2010, we sold approximately 50% of our
ownership interests in an entity that was developing and
constructing a new hospital for one of our unconsolidated
affiliates. We received $3.1 million in cash related to
this sale.
In addition to the sales of ownership interests noted above, we
sold controlling interests to various hospital partners during
2010, 2009, and 2008 which are described below, as part of our
strategy for partnering with these systems. Our continuing
involvement as an equity method investor and manager of the
facilities precludes classification of these transactions as
discontinued operations. Gains and losses are classified within
Losses on deconsolidations, disposals and
impairments in the accompanying consolidated statements of
income.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
Proceeds
|
|
|
Gain (Loss)
|
|
|
|
|
|
December 2010
|
|
Phoenix, Arizona(1)
|
|
$
|
0.6 million
|
|
|
$
|
(1.5 million
|
)
|
|
|
|
|
December 2010
|
|
Dallas, Texas(2)
|
|
|
|
|
|
|
1.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
0.6 million
|
|
|
$
|
0.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2009
|
|
Dallas, Texas(3)
|
|
$
|
1.2 million
|
|
|
$
|
0.3 million
|
|
|
|
|
|
July 2009
|
|
Oklahoma City, Oklahoma(4)
|
|
|
0.2 million
|
|
|
|
0.1 million
|
|
|
|
|
|
March 2009
|
|
Phoenix, Arizona(5)
|
|
|
0.1 million
|
|
|
|
(8.2 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
1.5 million
|
|
|
$
|
(7.8 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2008
|
|
Beaumont, Texas
|
|
$
|
1.2 million
|
|
|
$
|
(0.5 million
|
)
|
|
|
|
|
June 2008
|
|
Dallas, Texas(3)
|
|
|
2.3 million
|
|
|
|
(0.9 million
|
)
|
|
|
|
|
June 2008
|
|
Houston, Texas(6)
|
|
|
0.6 million
|
|
|
|
|
|
|
|
|
|
March 2008
|
|
Redding, California(7)
|
|
|
1.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
5.8 million
|
|
|
$
|
(1.4 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A hospital partner acquired a portion of our interest in this
facility and shares control of it with us. |
|
(2) |
|
We previously controlled this facility but now shares control
with physician partners due to a change in the entitys
governing documents. |
|
(3) |
|
The hospital partner acquired a controlling interest from us in
this transaction. Additionally, this hospital partner is a
related party (Note 12). |
|
(4) |
|
We and the other owners of a facility consolidated by us agreed
to merge the facility into another entity in which we hold an
investment accounted for under the equity method. |
|
(5) |
|
A controlling interest in an entity was sold to a hospital
partner. The hospital partner already had a 49% ownership
interest in this entity, which owns and manages two surgical
facilities, and through the transaction acquired an additional
1.1% interest. The $8.2 million loss was primarily related
to the revaluation of our remaining investment in the entity to
fair value. |
|
(6) |
|
Because we are considered the primary beneficiary of this
entity, we consolidate the entity, and continue to consolidate
the facilitys operating results. The sales price of
$0.6 million was paid in the form of a note receivable from
the buyer. |
|
(7) |
|
We sold a controlling interest in two facilities and received a
noncontrolling interest in a third facility in Redding. |
Sources
of Revenue
Revenues primarily include the following:
|
|
|
|
|
net patient service revenues of the facilities that we
consolidate for financial reporting purposes, which are those in
which we have ownership interests of greater than 50% or
otherwise maintain effective control or we are the primary
beneficiary;
|
|
|
|
management and contract service revenues, consisting of the fees
that we earn from managing the facilities that we do not
consolidate for financial reporting purposes and the fees we
earn from providing certain consulting and other contracted
services to physicians and hospitals. Our consolidated revenues
and expenses do not include the management fees we earn from
operating the facilities that we consolidate for financial
reporting purposes as those fees are charged to subsidiaries and
thus eliminated in consolidation.
|
52
The following table summarizes our revenues by type and as a
percentage of total revenue for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Net patient service revenues
|
|
|
88
|
%
|
|
|
88
|
%
|
|
|
90
|
%
|
Management and contract service revenues
|
|
|
11
|
|
|
|
10
|
|
|
|
9
|
|
Other revenues
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of total revenues, net patient service revenues
remained consistent at 88% of our total revenues for the years
ended December 31, 2010 and 2009. Our net patient services
revenues decreased to 88% of total revenues in 2009 from 90% in
2008. This decrease was due in part to the U.S. dollar
being stronger on average against the British pound in 2009
compared to 2008, and also is due to shifting of more of our
facilities to joint ventures with hospital partners, which
usually requires us to account for the facility under the equity
method of accounting (as an unconsolidated affiliate). As we
execute our strategy of partnering with not-for-profit
healthcare systems, more of our business is being conducted
through unconsolidated affiliates. With respect to
unconsolidated facilities, we do not include the
facilities net patient service revenues in our financial
results; instead; our consolidated financial statements reflect
revenues we earn for our management and contract services as
noted below. Our share of the revenues, net of expenses of
unconsolidated facilities, is reported in our consolidated
financial statements as equity in earnings of
unconsolidated affiliates, which is displayed between
revenues and operating expenses. The percentage of our
U.S. facilities we account for under the equity method was
70%, 64%, and 63% at December 31, 2010, 2009, and 2008,
respectively.
Our management and contract service revenues are earned from the
following types of activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Management of surgical facilities
|
|
$
|
53,934
|
|
|
$
|
46,438
|
|
|
$
|
40,100
|
|
Contract services provided to other healthcare providers
|
|
|
10,904
|
|
|
|
11,888
|
|
|
|
12,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total management and contract service revenues
|
|
$
|
64,838
|
|
|
$
|
58,326
|
|
|
$
|
53,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our revenues by operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
United States
|
|
|
82
|
%
|
|
|
82
|
%
|
|
|
80
|
%
|
United Kingdom
|
|
|
18
|
|
|
|
18
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The proportion of our total revenues derived from U.K.
operations as stated in U.S. dollars remained constant at
18% for the years ended December 31, 2010 and 2009. From
2008 to 2009, the proportion of out total revenues derived from
U.K. operations decreased from 20% to 18%, respectively. The
decrease was primarily caused by the average value of the
British pound as compared to the U.S. dollar weakening
approximately 15% between December 31, 2008 and
December 31, 2009.
53
Results
of Operations
The following table summarizes certain consolidated statements
of income items expressed as a percentage of revenues for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
USPI
|
|
2010
|
|
2009
|
|
2008
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Equity in earnings of unconsolidated affiliates
|
|
|
12.1
|
|
|
|
10.4
|
|
|
|
7.6
|
|
Operating expenses, excluding depreciation and amortization
|
|
|
(70.5
|
)
|
|
|
(71.7
|
)
|
|
|
(70.2
|
)
|
Depreciation and amortization
|
|
|
(5.1
|
)
|
|
|
(5.3
|
)
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
36.5
|
|
|
|
33.4
|
|
|
|
32.2
|
|
Interest and other expense, net
|
|
|
(11.9
|
)
|
|
|
(11.3
|
)
|
|
|
(13.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
24.6
|
|
|
|
22.1
|
|
|
|
18.9
|
|
Income tax benefit (expense)
|
|
|
(5.6
|
)
|
|
|
0.1
|
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
19.0
|
|
|
|
22.2
|
|
|
|
15.2
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
|
(1.2
|
)
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
17.8
|
|
|
|
22.4
|
|
|
|
15.1
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(10.5
|
)
|
|
|
(10.7
|
)
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPIs common stockholder
|
|
|
7.3
|
%
|
|
|
11.7
|
%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our business model of partnering with not-for-profit hospitals
and physicians results in our accounting for 130 of our surgical
facilities under the equity method rather than consolidating
their results. The following table reflects the summarized
results of the unconsolidated facilities that we account for
under the equity method of accounting (amounts are expressed as
a percentage of unconsolidated affiliates revenues, and reflect
100% of the investees results on an aggregated basis):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
USPIs Unconsolidated Affiliates
|
|
2010
|
|
2009
|
|
2008
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating expenses, excluding depreciation and amortization
|
|
|
(69.7
|
)
|
|
|
(69.6
|
)
|
|
|
(70.6
|
)
|
Depreciation and amortization
|
|
|
(4.2
|
)
|
|
|
(4.3
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
26.1
|
|
|
|
26.1
|
|
|
|
24.6
|
|
Interest expense, net
|
|
|
(1.9
|
)
|
|
|
(2.1
|
)
|
|
|
(2.4
|
)
|
Other, net
|
|
|
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
24.2
|
|
|
|
24.4
|
|
|
|
22.2
|
|
Income tax expense
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
23.6
|
%
|
|
|
23.8
|
%
|
|
|
21.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Summary
Our strategy continues to focus on growing the profits of our
existing facilities, developing new facilities with hospital
partners, and adding other facilities selectively through
acquisition. We added 27 facilities during 2010 and operated 189
facilities at year-end, up from 169 at the end of 2009.
Consistent with our primary strategy, we continued to focus on
partnering both existing facilities and newly acquired or
constructed facilities with a not-for-profit health system
(hospital partner). The number of facilities with hospital
partners increased by 23 during 2010. We also sold two
facilities and an endoscopy business and designated two
additional facilities as held for sale at December 31,
2010. Our operating results were not as strong as in recent
years, but improved during the course of the year.
Surgical case volumes and profits at our facilities decreased
slightly in the early part of 2010 but improved during the year.
Overall for 2010, this translated to a 5% year-over-year
increase in the revenues of facilities we
54
operated in both 2009 and 2010 (same store facilities), as
compared to 8% for 2009 and 11% for 2008. However, in 2010 the
volumes and revenues of our same store facilities improved
during the year, with the fourth quarter growth rate of 8%
representing a significant improvement over earlier quarters,
particularly compared to the 2% rate we experienced during the
first quarter of 2010. Factoring in acquisitions, our overall
systemwide revenues increased 7% for the year (13% in the fourth
quarter).
While our systemwide revenues grew, USPIs 2010 reported
revenues, which consist only of consolidated businesses,
decreased compared to prior year by 3%. This decrease was driven
by two factors related to the deployment of our primary business
model, which is jointly owning our facilities with prominent
local physicians and a hospital partner. We generally do not
consolidate the businesses in these structures, but our profits
from them, which are reflected in equity in earnings of
unconsolidated affiliates, increased 13% in 2010. Excluding the
impact of an impairment charge with respect to one investment,
our equity in earnings of unconsolidated affiliates increased
19%. The revenues of these facilities, which are not included in
USPIs reported revenues, are growing more than our
consolidated facilities; the revenues of the unconsolidated
facilities we owned in both years increased $97.1 million
during 2010 as compared to the prior year, and additionally
increased through acquisitions and as a result of our partnering
four of these facilities with a hospital partner in 2010,
thereby deconsolidating them, which moves their revenues out of
our consolidated revenues and into the revenues of our
unconsolidated group of facilities. Our consolidated revenues
decreased primarily due to these deconsolidation
transactions, which moved $14.6 million from the
consolidated to the unconsolidated group, and additionally due
to declines in operational results ($9.4 million).
Operating income increased 6% year-over-year and was
significantly impacted by several amounts not directly related
to our facilities operating results. Excluding these
amounts, shown below, operating income and margin were up 2% and
180 basis points, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Losses on deconsolidations, disposals and impairments(1)
|
|
$
|
10.1
|
|
|
$
|
29.2
|
|
Expense related to previous acquisition and facility purchase
option
|
|
|
6.0
|
|
|
|
|
|
Acquisition costs
|
|
|
3.3
|
|
|
|
|
|
VAT assessment(2)
|
|
|
1.0
|
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
Total impact on operating income
|
|
$
|
20.4
|
|
|
$
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the 2010 amount, $3.7 million is classified within
equity in earnings of unconsolidated affiliates. |
|
(2) |
|
U.K. taxing authority awarded us a value-added tax refund in
2009 but reversed its position in 2010. We are appealing the
decision. |
While this increase in operating margin reflects some leveraging
of our consolidated operating expenses, we additionally focus on
U.S. same store facility level operating income margins
(which reflect all facilities results, consolidated and
unconsolidated) as indicators of the trend of our business,
because our earnings and cash flows are heavily driven by the
results at those facilities, whether we consolidate them or not.
For the full year, those margins actually decreased slightly,
reflecting the slower revenue growth described above. Because of
relationships like these (differences in the magnitude or
direction of consolidated versus systemwide revenues and
margins), which often are driven by deconsolidations
such as those described above, we supplementally focus on
systemwide revenues and facility level operating income margins
as important indicators for our business, given that our
earnings ultimately are driven heavily by facility level
revenues and operating margins. Facility level operating income
margins were down 60 basis points year-over-year, but as
with revenues the results improved as the year progressed,
culminating in facility operating income margins for the fourth
quarter being 60 basis points higher than the fourth
quarter of 2009.
As noted above, we continued to acquire and develop facilities
in 2010, acquiring 25 existing facilities and opening two newly
constructed facilities. Our U.S. development strategy
continues to focus most heavily on markets in which we have a
significant presence with prominent local physicians and often a
hospital partner. We also invest capital selectively in our U.K.
market and in new markets. Pursuing this strategy also leads us
to deconsolidate or divest of centers from time to time, as we
did in 2009 and 2010.
55
Also impacting year-over-year comparisons in 2010 was the 2009
recognition of a $31.2 million tax benefit reflecting the
Companys expectation that the majority of its
U.S. deferred tax assets would be utilized prior to their
expiration.
Our
Business and Key Measures
We operate surgical facilities in partnership with local
physicians and, in the majority of cases, a not-for-profit
health system partner. We hold an ownership interest in each
facility, each being operated through a separate legal entity
owned by us, the health systems and physicians. We operate each
facility on a day-to-day basis through a management services
contract. Our sources of earnings from each facility consist of:
|
|
|
|
|
our share of each facilitys net income, which is computed
by multiplying the facilitys net income times the
percentage of each facilitys equity interests owned by
us; and
|
|
|
|
management services revenues, computed as a percentage of each
facilitys net revenues (often net of bad debt expense).
|
Our role as an owner and day-to-day manager provides us with
significant influence over the operations of each facility. In a
growing majority of our facilities (currently 130 of our 189
facilities), this influence does not represent control of the
facility, so we account for our investment in the facility under
the equity method, i.e., as an unconsolidated affiliate. Of the
remaining facilities, we control 58 facilities and account for
these investments as consolidated subsidiaries and operate one
facility under a service and management contract.
Our net earnings from a facility are the same under either
method, but the classification of those earnings differs. For
consolidated subsidiaries, our financial statements reflect 100%
of the revenues and expenses of the subsidiaries, after the
elimination of intercompany amounts. The net profit attributable
to owners other than us is classified within net income
attributable to noncontrolling interests.
For unconsolidated affiliates, our consolidated statements of
income reflect our earnings in only two line items:
|
|
|
|
|
equity in earnings of unconsolidated affiliates: our share of
the net income of each facility, which is based on the
facilities net income and the percentage of the
facilitys outstanding equity interests owned by
us; and
|
|
|
|
management and administrative services revenues: income we earn
in exchange for managing the day-to-day operations of each
facility, usually quantified as a percentage of each
facilitys net revenues less bad debt expense.
|
In summary, USPIs operating income is driven by the
performance of all facilities we operate and by our ownership
interest in those facilities, but USPIs individual revenue
and expense line items only contain consolidated businesses,
which represent less than half of our operations. This
translates to trends in operating income that often do not
correspond with changes in revenues and expenses. The divergence
in these relationships is particularly significant when our
strategy is heavily weighted to unconsolidated affiliates, as it
has been in recent years during the ongoing deployment of our
strategy to partner with not-for-profit health systems.
Accordingly, we review several types of information in order to
monitor and analyze USPIs results of operations, including:
|
|
|
|
|
The results of operations of USPIs unconsolidated
affiliates
|
|
|
|
USPIs average ownership share in the facilities we
operate; and
|
|
|
|
Facility operating indicators, such as systemwide revenue
growth, same store revenue growth, and same store operating
margins
|
56
Our
Consolidated and Unconsolidated Results
The following table shows USPIs results of operations and
the results of operations of USPIs unconsolidated
affiliates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Variance to Prior Year
|
|
|
|
USPI As
|
|
|
|
|
|
USPI As
|
|
|
|
|
|
USPI As
|
|
|
|
|
|
|
Reported
|
|
|
|
|
|
Reported
|
|
|
|
|
|
Reported
|
|
|
|
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
504,765
|
|
|
$
|
1,322,393
|
|
|
$
|
523,899
|
|
|
$
|
1,171,242
|
|
|
$
|
(19,134
|
)
|
|
$
|
151,151
|
|
Management and contract service revenues
|
|
|
64,838
|
|
|
|
|
|
|
|
58,326
|
|
|
|
|
|
|
|
6,512
|
|
|
|
|
|
Other income
|
|
|
7,062
|
|
|
|
6,648
|
|
|
|
11,250
|
|
|
|
6,872
|
|
|
|
(4,188
|
)
|
|
|
(224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
576,665
|
|
|
|
1,329,041
|
|
|
|
593,475
|
|
|
|
1,178,114
|
|
|
|
(16,810
|
)
|
|
|
150,927
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
69,916
|
|
|
|
|
|
|
|
61,771
|
|
|
|
|
|
|
|
8,145
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits, and other employee costs
|
|
|
156,213
|
|
|
|
309,698
|
|
|
|
160,278
|
|
|
|
277,053
|
|
|
|
(4,065
|
)
|
|
|
32,645
|
|
Medical services and supplies
|
|
|
97,940
|
|
|
|
310,770
|
|
|
|
99,510
|
|
|
|
271,663
|
|
|
|
(1,570
|
)
|
|
|
39,107
|
|
Other operating expenses
|
|
|
99,075
|
|
|
|
273,649
|
|
|
|
89,347
|
|
|
|
243,241
|
|
|
|
9,728
|
|
|
|
30,408
|
|
General and administrative expenses
|
|
|
38,202
|
|
|
|
|
|
|
|
38,769
|
|
|
|
|
|
|
|
(567
|
)
|
|
|
|
|
Provision for doubtful accounts
|
|
|
8,458
|
|
|
|
31,396
|
|
|
|
8,720
|
|
|
|
28,528
|
|
|
|
(262
|
)
|
|
|
2,868
|
|
Losses on deconsolidations, disposals and impairments
|
|
|
6,378
|
|
|
|
1,025
|
|
|
|
29,162
|
|
|
|
(7
|
)
|
|
|
(22,784
|
)
|
|
|
1,032
|
|
Depreciation and amortization
|
|
|
29,799
|
|
|
|
55,216
|
|
|
|
31,165
|
|
|
|
50,251
|
|
|
|
(1,366
|
)
|
|
|
4,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
436,065
|
|
|
|
981,754
|
|
|
|
456,951
|
|
|
|
870,729
|
|
|
|
(20,886
|
)
|
|
|
111,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
210,516
|
|
|
|
347,287
|
|
|
|
198,295
|
|
|
|
307,385
|
|
|
|
12,221
|
|
|
|
39,902
|
|
Interest income
|
|
|
798
|
|
|
|
378
|
|
|
|
2,741
|
|
|
|
456
|
|
|
|
(1,943
|
)
|
|
|
(78
|
)
|
Interest expense
|
|
|
(70,038
|
)
|
|
|
(26,008
|
)
|
|
|
(70,353
|
)
|
|
|
(24,850
|
)
|
|
|
315
|
|
|
|
(1,158
|
)
|
Other, net
|
|
|
708
|
|
|
|
(200
|
)
|
|
|
373
|
|
|
|
4,572
|
|
|
|
335
|
|
|
|
(4,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(68,532
|
)
|
|
|
(25,830
|
)
|
|
|
(67,239
|
)
|
|
|
(19,822
|
)
|
|
|
(1,293
|
)
|
|
|
(6,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
141,984
|
|
|
|
321,457
|
|
|
|
131,056
|
|
|
|
287,563
|
|
|
|
10,928
|
|
|
|
33,894
|
|
Income tax (expense) benefit
|
|
|
(32,328
|
)
|
|
|
(7,562
|
)
|
|
|
879
|
|
|
|
(6,860
|
)
|
|
|
(33,207
|
)
|
|
|
(702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
109,656
|
|
|
|
313,895
|
|
|
|
131,935
|
|
|
|
280,703
|
|
|
|
(22,279
|
)
|
|
|
33,192
|
|
Earnings (loss) from discontinued operations, net
|
|
|
(7,003
|
)
|
|
|
|
|
|
|
1,453
|
|
|
|
|
|
|
|
(8,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
102,653
|
|
|
$
|
313,895
|
|
|
|
133,388
|
|
|
$
|
280,703
|
|
|
|
(30,735
|
)
|
|
$
|
33,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(60,560
|
)
|
|
|
|
|
|
|
(63,722
|
)
|
|
|
|
|
|
|
3,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPI
|
|
$
|
42,093
|
|
|
|
|
|
|
$
|
69,666
|
|
|
|
|
|
|
$
|
(27,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USPIs equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
$
|
69,916
|
|
|
|
|
|
|
$
|
61,771
|
|
|
|
|
|
|
$
|
8,145
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance to Prior Year
|
|
|
|
USPI As
|
|
|
|
|
|
USPI As
|
|
|
|
|
|
USPI As
|
|
|
|
|
|
|
Reported
|
|
|
|
|
|
Reported
|
|
|
|
|
|
Reported
|
|
|
|
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
Under
|
|
|
Unconsolidated
|
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
523,899
|
|
|
$
|
1,171,242
|
|
|
$
|
554,350
|
|
|
$
|
996,315
|
|
|
$
|
(30,451
|
)
|
|
$
|
174,927
|
|
Management and contract service revenues
|
|
|
58,326
|
|
|
|
|
|
|
|
53,027
|
|
|
|
|
|
|
|
5,299
|
|
|
|
|
|
Other income
|
|
|
11,250
|
|
|
|
6,872
|
|
|
|
7,721
|
|
|
|
6,066
|
|
|
|
3,529
|
|
|
|
806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
593,475
|
|
|
|
1,178,114
|
|
|
|
615,098
|
|
|
|
1,002,381
|
|
|
|
(21,623
|
)
|
|
|
175,733
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
61,771
|
|
|
|
|
|
|
|
47,042
|
|
|
|
13
|
|
|
|
14,729
|
|
|
|
(13
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits, and other employee costs
|
|
|
160,278
|
|
|
|
277,053
|
|
|
|
170,805
|
|
|
|
246,739
|
|
|
|
(10,527
|
)
|
|
|
30,314
|
|
Medical services and supplies
|
|
|
99,510
|
|
|
|
271,663
|
|
|
|
109,739
|
|
|
|
211,781
|
|
|
|
(10,229
|
)
|
|
|
59,882
|
|
Other operating expenses
|
|
|
89,347
|
|
|
|
243,241
|
|
|
|
101,846
|
|
|
|
218,337
|
|
|
|
(12,499
|
)
|
|
|
24,904
|
|
General and administrative expenses
|
|
|
38,769
|
|
|
|
|
|
|
|
40,155
|
|
|
|
|
|
|
|
(1,386
|
)
|
|
|
|
|
Provision for doubtful accounts
|
|
|
8,720
|
|
|
|
28,528
|
|
|
|
7,359
|
|
|
|
29,497
|
|
|
|
1,361
|
|
|
|
(969
|
)
|
Losses on deconsolidations, disposals and impairments
|
|
|
29,162
|
|
|
|
(7
|
)
|
|
|
1,827
|
|
|
|
1,161
|
|
|
|
27,335
|
|
|
|
(1,168
|
)
|
Depreciation and amortization
|
|
|
31,165
|
|
|
|
50,251
|
|
|
|
32,305
|
|
|
|
48,722
|
|
|
|
(1,140
|
)
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
456,951
|
|
|
|
870,729
|
|
|
|
464,036
|
|
|
|
756,237
|
|
|
|
(7,085
|
)
|
|
|
114,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
198,295
|
|
|
|
307,385
|
|
|
|
198,104
|
|
|
|
246,157
|
|
|
|
191
|
|
|
|
61,228
|
|
Interest income
|
|
|
2,741
|
|
|
|
456
|
|
|
|
3,278
|
|
|
|
1,687
|
|
|
|
(537
|
)
|
|
|
(1,231
|
)
|
Interest expense
|
|
|
(70,353
|
)
|
|
|
(24,850
|
)
|
|
|
(84,916
|
)
|
|
|
(25,788
|
)
|
|
|
14,563
|
|
|
|
938
|
|
Other
|
|
|
373
|
|
|
|
4,572
|
|
|
|
32
|
|
|
|
225
|
|
|
|
341
|
|
|
|
4,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(67,239
|
)
|
|
|
(19,822
|
)
|
|
|
(81,606
|
)
|
|
|
(23,876
|
)
|
|
|
14,367
|
|
|
|
4,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
131,056
|
|
|
|
287,563
|
|
|
|
116,498
|
|
|
|
222,281
|
|
|
|
14,558
|
|
|
|
65,282
|
|
Income tax benefit (expense)
|
|
|
879
|
|
|
|
(6,860
|
)
|
|
|
(22,667
|
)
|
|
|
(5,566
|
)
|
|
|
23,546
|
|
|
|
(1,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
131,935
|
|
|
|
280,703
|
|
|
|
93,831
|
|
|
|
216,715
|
|
|
|
38,104
|
|
|
|
63,988
|
|
Earnings (loss) from discontinued operations
|
|
|
1,453
|
|
|
|
|
|
|
|
(1,179
|
)
|
|
|
|
|
|
|
2,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
133,388
|
|
|
$
|
280,703
|
|
|
|
92,652
|
|
|
$
|
216,715
|
|
|
|
40,736
|
|
|
$
|
63,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(63,722
|
)
|
|
|
|
|
|
|
(55,138
|
)
|
|
|
|
|
|
|
(8,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPI
|
|
$
|
69,666
|
|
|
|
|
|
|
$
|
37,514
|
|
|
|
|
|
|
$
|
32,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USPIs equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
$
|
61,771
|
|
|
|
|
|
|
$
|
47,042
|
|
|
$
|
|
|
|
$
|
14,729
|
|
The following table provides other information regarding our
unconsolidated affiliates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Long-term debt of USPIs unconsolidated facilities
|
|
$
|
330,578
|
|
|
$
|
271,781
|
|
|
$
|
273,438
|
|
USPIs equity in earnings of unconsolidated affiliates
|
|
|
69,916
|
|
|
|
61,771
|
|
|
|
47,042
|
|
USPIs imputed weighted average ownership percentage based
on affiliates pretax income(1)
|
|
|
21.7
|
%
|
|
|
21.5
|
%
|
|
|
21.2
|
%
|
USPIs imputed weighted average ownership percentage based
on affiliates debt(2)
|
|
|
23.8
|
%
|
|
|
25.4
|
%
|
|
|
25.0
|
%
|
Unconsolidated facilities operated at period end
|
|
|
130
|
|
|
|
109
|
|
|
|
101
|
|
58
|
|
|
(1) |
|
Our weighted average percentage ownership in our unconsolidated
affiliates is calculated as USPIs equity in earnings of
unconsolidated affiliates divided by the total net income of
unconsolidated affiliates for each respective period. This is a
non-GAAP measure but management believes it provides further
useful information about USPIs involvement in
unconsolidated affiliates. |
|
(2) |
|
Our weighted average percentage ownership in our unconsolidated
affiliates is calculated as the total debt of each
unconsolidated affiliate, multiplied by the percentage ownership
USPI held in the affiliate as of the end of each respective
period, divided by the total debt of all of the unconsolidated
affiliates as of the end of each respective period. This is a
non-GAAP measure but management believes it provides further
useful information about USPIs involvement in
unconsolidated affiliates. |
One of our unconsolidated affiliates, Texas Health Ventures
Group, L.L.C., is considered significant to our consolidated
financial statements under regulations of the SEC. As a result,
we have filed Texas Health Ventures Group, L.L.C.s
consolidated financial statements with this
Form 10-K
for the appropriate periods.
As shown above, USPIs consolidated net patient service
revenues for the year ended December 31, 2010 decreased
$19.1 million compared to the prior year, and the net
patient service revenues of USPIs unconsolidated
affiliates increased $151.2 million. These variances are
analyzed more extensively in the Revenues section,
but in general they reflect the fact that we are conducting more
of our operations through unconsolidated affiliates. The
increase in revenues of these unconsolidated affiliates, net of
their expenses, led to the affiliates earning $33.2 million
more compared to the prior year. The affiliates increase
in net income, once allocated to USPI and the affiliates
other investors, led to USPIs equity in earnings of
unconsolidated affiliates increasing by $8.1 million, which
represents nearly 67% of the increase in USPIs operating
income from 2009 to 2010.
When comparing 2009 and 2008, the relationships were similar.
USPIs consolidated net patient services revenues decreased
$30.5 million for the year ended December 31, 2009
compared to 2008, and the net patient service revenues of
USPIs unconsolidated affiliates increased
$174.9 million, driving a $64.0 million increase in
the net income of the unconsolidated affiliates and an overall
increase of $14.7 million in USPIs equity in earnings
of unconsolidated affiliates.
Our
Ownership Interests in the Facilities We Operate
Our earnings are predominantly driven by our investments in the
facilities we operate, so we focus on those businesses
performance together with the percentage ownership interest we
hold in them to help us understand our results of operations.
Our average ownership interest in the U.S. surgical
facilities we operate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Unconsolidated facilities(1)
|
|
|
21.7
|
%
|
|
|
21.5
|
%
|
|
|
21.2
|
%
|
Consolidated facilities(2)
|
|
|
46.7
|
%
|
|
|
48.1
|
%
|
|
|
48.8
|
%
|
Total(3)
|
|
|
28.2
|
%
|
|
|
29.4
|
%
|
|
|
30.2
|
%
|
|
|
|
(1) |
|
Computed for unconsolidated facilities by dividing (a) our
total equity in earnings of unconsolidated affiliates by
(b) the aggregate net income of U.S. surgical facilities we
account for under the equity method. |
|
(2) |
|
Computed for consolidated facilities by dividing (a) the
aggregate net income of U.S. surgical facilities we operate less
our total minority interests in income of consolidated
subsidiaries by (b) the aggregate net income of our
consolidated U.S. surgical facilities. |
|
(3) |
|
Computed in total by dividing our share of the facilities
net income, defined as the sum of (a) in footnotes
(1) and (2), by the aggregate net income of our U.S.
surgical facilities, defined as the sum of (b) in footnotes
(1) and (2). |
Our average ownership interest for each group of facilities is
determined by many factors, including the ownership levels we
negotiate in our acquisition and development activities, the
relative performance of facilities in which we own percentages
higher or lower than average, and other factors. As described
earlier, our increased focus on partnering our facilities with
hospital partners in addition to physicians generally leads to
our accounting for
59
more facilities under the equity method (unconsolidated), and we
have moved three facilities from consolidated to unconsolidated
during 2010 and four facilities during each of 2009 and 2008.
Accordingly, our consolidated financial statements show
decreases in revenues and most expense line items compared to
the respective prior year. However, since our average ownership
in our facilities, as shown in the table above, did not
significantly change from the respective prior year, our success
in growing our facilities profits (whether consolidated or
unconsolidated) translated to increases in USPIs operating
income in 2010, 2009 and 2008.
While our ownership interests remained higher for consolidated
facilities than for unconsolidated facilities, our average
ownership in our consolidated facilities decreased from 2009 to
2010 due to relative performance of certain consolidated
facilities, namely that one markets facilities, in which
our ownership is higher than average, experienced steeper than
average drops in profitability compared to our other
consolidated facilities due to the execution of a long-term
payor contract.
Revenues
USPIs consolidated net revenues decreased approximately 3%
during the year ended December 31, 2010, as compared to the
year ended December 31, 2009. However, our operating income
increased 6%. The table below quantifies several significant
items impacting year over year growth.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2010
|
|
|
|
USPI as
|
|
|
|
|
|
|
Reported Under
|
|
|
Unconsolidated
|
|
|
|
GAAP
|
|
|
Affiliates
|
|
|
Total revenues, year ended December 31, 2009
|
|
$
|
593,475
|
|
|
$
|
1,178,114
|
|
Add: revenue from acquired facilities
|
|
|
8,070
|
|
|
|
45,909
|
|
Less: revenue of disposed facilities
|
|
|
|
|
|
|
(12,169
|
)
|
Less: revenue of deconsolidated facilities
|
|
|
(14,571
|
)
|
|
|
14,571
|
|
Impact of exchange rate
|
|
|
(1,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted base year
|
|
|
585,775
|
|
|
|
1,226,425
|
|
(Decrease) increase from operations
|
|
|
(9,366
|
)
|
|
|
97,093
|
|
Non-facility based revenue
|
|
|
256
|
|
|
|
5,523
|
|
|
|
|
|
|
|
|
|
|
Total revenues, year ended December 31, 2010
|
|
$
|
576,665
|
|
|
$
|
1,329,041
|
|
|
|
|
|
|
|
|
|
|
The reason for the discrepancy between revenue growth and income
growth is the increased proportion of our business being
conducted through unconsolidated affiliates. Growing the volume
and profits of unconsolidated facilities has relatively little
impact on our consolidated revenues, but our share of their
increasing net income (equity in earnings of unconsolidated
affiliates, which grew by 13%, 31% and 39% in 2010, 2009 and
2008, respectively) is reflected in our operating income and net
income. Accordingly, as described above, we focus on our
systemwide results in order to understand where our growth in
income is coming from. Our systemwide revenues, which include
revenues of facilities we account for under the equity method as
well as facilities we consolidate, grew by rates more
commensurate with our overall income growth: 7%, 9% and 14%
during the years ended December 31, 2010, 2009 and 2008,
respectively. As depicted above, a major component of the
decrease in consolidated revenues was the deconsolidation of
facilities, which caused a corresponding increase in the
revenues of unconsolidated affiliates. However, operations also
were a significant factor, although differently for each of the
two groups (consolidated and equity method). Despite only slight
growth in case volumes, a shift to more complex surgical cases
in several equity method facilities, and the resulting increased
revenue per case, actually caused an approximate
$97.1 million increase in the revenues of this group of
facilities, whereas the consolidated facilities experienced
decreases in average reimbursement as well as case volumes.
These factors combined to reduce consolidated revenues by
approximately $9.4 million.
60
Facility
Growth
As described above, our systemwide revenues (consisting of both
consolidated subsidiaries and unconsolidated affiliates) grew 7%
and 9% during 2010 and 2009. While systemwide revenue growth was
partially driven by acquisitions and development of new
facilities, the most significant component continued to be the
results of facilities that have been open for more than one year
(same store facilities). This group of facilities experienced
revenue growth of 5% and 8% during 2010 and 2009, respectively.
The growth in these facilities was driven more by increases in
net revenue per case than by increases in volume. While some of
this shift reflects increases in rates we negotiate with payors,
we believe a more significant portion of the increase is driven
by the type of cases we performed, which continue to shift to
more complex cases on average, particularly at several of our
larger facilities. Our U.S. case volumes started the year
sluggishly, decreasing 2% in the first quarter on a
year-over-year basis, but improved during the year, culminating
in a 3% year-over-year growth rate in the fourth quarter. While
the fourth quarter growth rate compares favorably with our 2%
annual growth rates for the full years 2008 and 2009,
U.S. cases for the full year 2010 were essentially flat as
a result of the sluggish early months. We believe this overall
lower case volume growth could have resulted from several
factors, including changes to health insurance plans to require
more patient responsibility for healthcare expenses and a
generally soft economy.
Our United Kingdom facilities revenues, when measured in
local currency (or constant exchange rate), declined 1% during
2010 as compared to 2009. This decline is largely due to a
decrease in the National Health Service business and in self-pay
business. While self-pay business represents only 2% of our
U.S. business, it represents 25% of our U.K. business.
Self-pay business is generally considered more susceptible to
changes in general economic conditions, as the cost of care is
borne entirely by the patient rather than shared with private
insurers or borne by the National Health Service. The
strengthening of the U.S. dollar versus the British pound
caused a significant drop (approximately $19.0 million) in
reported revenues during 2009 as compared to 2008, but in local
currency, our U.K. facilities continued to generate revenue
growth in 2009.
The following table summarizes our same store facility growth
rates, as compared to the corresponding prior year period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
United States facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
5
|
%
|
|
|
8
|
%
|
|
|
11
|
%
|
Surgical cases
|
|
|
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
Net revenue per case(1)
|
|
|
5
|
%
|
|
|
5
|
%
|
|
|
9
|
%
|
United Kingdom facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted admissions
|
|
|
(5
|
)%
|
|
|
(5
|
)%
|
|
|
9
|
%
|
Net revenue using actual exchange rates
|
|
|
(2
|
)%
|
|
|
(14
|
)%
|
|
|
3
|
%
|
Net revenue using constant exchange rates(2)
|
|
|
(1
|
)%
|
|
|
2
|
%
|
|
|
11
|
%
|
All same store facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue using actual exchange rates
|
|
|
5
|
%
|
|
|
6
|
%
|
|
|
10
|
%
|
|
|
|
(1) |
|
Our overall domestic same store growth in net revenue per case
for 2010 was favorably impacted by the 10% growth at our
thirteen same store surgical hospitals, which on average perform
more complex cases and thus earn a higher average net revenue
per case than ambulatory surgery centers. The net revenue per
case growth at our ambulatory surgery centers was 2% during
2010. The favorable impact, in the first quarter of 2008, of our
collecting amounts related to past patient services in
conjunction with our finalizing a new contract with a major
payor has been excluded from 2008 growth rates as it relates to
dates of service prior to January 1, 2008. The revenue
reductions related to two similar, but adverse, adjustments in
the second quarter of 2008 were excluded for similar reasons, as
was the unfavorable impact of such an amount which arose during
the second quarter of 2009. |
61
|
|
|
(2) |
|
Calculated using constant exchange rates for all periods.
Although this computation represents a non-GAAP measure, we
believe that using a constant currency translation rate more
accurately reflects the trend of the business. |
Joint
Ventures with Not-for-Profit Hospitals
Our addition of new facilities continues to be more heavily
weighted to U.S. surgical facilities with a hospital
partner, both as we initiate joint venture agreements with new
systems and as we add facilities to our existing arrangements.
Facilities have been added to hospital joint ventures both
through construction of new facilities (de novos) and through
our contribution of our equity interests in existing facilities
into a hospital joint venture structure, effectively creating
three-way joint ventures by sharing our ownership in these
facilities with a hospital partner while leaving the existing
physician ownership intact.
Consistent with this strategy, our overall number of facilities
increased by 20 from December 31, 2009 to December 31,
2010, driven by a net increase of 23 facilities partnered with
not-for-profit hospitals and local physicians. All five
facilities under construction at December 31, 2010, involve
a hospital partner, and we continue to explore affiliating more
facilities with hospital partners, especially for facilities in
markets where we already operate other facilities with a
hospital partner.
The following table summarizes the facilities we operated as of
December 31, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
United States facilities(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
With a hospital partner
|
|
|
132
|
|
|
|
109
|
|
|
|
99
|
|
Without a hospital partner
|
|
|
53
|
|
|
|
56
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. facilities
|
|
|
185
|
|
|
|
165
|
|
|
|
161
|
|
United Kingdom facilities
|
|
|
4
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total facilities operated
|
|
|
189
|
|
|
|
169
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from prior year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
De novo (newly constructed)
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
Acquisition
|
|
|
25
|
|
|
|
7
|
|
|
|
10
|
|
Disposals(2)
|
|
|
(7
|
)
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in number of facilities
|
|
|
20
|
|
|
|
5
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2010, physicians own a portion of all of
these facilities. |
|
(2) |
|
During 2010, we merged two of our Dallas-area surgery centers
into one location, and also merged two of our Ohio surgery
centers into one location. We sold our ownership interests in a
facility in Orlando, Florida and are classifying a facility in
Templeton, California and Houston, Texas as held for sale at
December 31, 2010 (sold in February 2011). During 2009, we
sold our ownership interests in facilities in East Brunswick,
New Jersey; Cleveland, Ohio; San Antonio, Texas; Baton
Rouge, Louisiana; and Oxnard, California. We also merged one of
our surgery centers into one of our surgical hospitals in
Oklahoma. During 2008, we sold ownership interests in facilities
in Sarasota, Florida; Los Angeles, California; Cleveland, Ohio;
Manitowoc, Wisconsin; and Las Cruces, New Mexico. |
Facility
Operating Margins
Same store U.S. facility operating margins decreased
60 basis points for the year ended December 31, 2010
as compared to 2009. The decrease was broad-based, and was
largely due to lower case volumes early in the year that were
not offset by a proportionate decrease in operating expenses.
Following the pattern of same facility revenues, and driven by
similar factors, margins improved during the year, recovering
from a 240 basis point drop in year-over-year margins for
the first quarter of 2010 to finish the year down 60 basis
points on a full year basis, due to an improvement each quarter
ending with a fourth quarter that was up 60 basis points
over prior year. Continuing a
62
trend we experienced in 2008 and 2009, the year-over-year change
in the operating margins of facilities partnered with a
not-for-profit healthcare system was more favorable (or, in the
case of 2010, less unfavorable) than the change experienced by
the facilities that do not have a hospital partner.
In 2009, same store U.S. facility operating margins
increased 250 basis points, largely driven by continued
revenue growth together with cost saving measures introduced
during 2009 at our facilities. While the improvement was
broad-based, it was particularly notable in the group of
facilities jointly owned with hospital partners, the margins of
which improved 340 basis points. The margins of facilities
we operate without a hospital partner did not fare as well, but
were up 20 basis points as compared to the year ended
December 31, 2008. We believe this disparity in recent
years generally reflects the benefits of our increased focus on
developing some of our larger markets, where we more often have
a hospital partner. During 2008, same store U.S. facility
operating margins increased slightly (10 basis points)
largely due to improved leveraging of expenses at some of our
larger facilities, which underwent expansions during 2007.
Our U.K. facilities, which comprise four of our 189 facilities
at December 31, 2010, experienced a decrease in overall
facility margins in 2010 as compared to 2009, also due to lower
volumes that were not offset by a proportionate decrease in
operating expenses. While margins were still down, expenses were
controlled more successfully in 2010 than in 2009.
The following table summarizes our year-over-year increases
(decreases) in same store operating margins (see footnote 1
below):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
United States facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
With a hospital partner
|
|
|
(40
|
) bps
|
|
|
340
|
bps
|
|
|
170
|
bps
|
Without a hospital partner
|
|
|
(120
|
)
|
|
|
20
|
|
|
|
(260
|
)
|
Total U.S. facilities(2)
|
|
|
(60
|
)
|
|
|
250
|
|
|
|
10
|
|
United Kingdom facilities(3)
|
|
|
(110
|
) bps
|
|
|
(160
|
) bps
|
|
|
80
|
bps
|
|
|
|
(1) |
|
Operating margin is calculated as operating income divided by
total revenues. This table aggregates all of the same store
facilities we operate using 100% of their results. This does not
represent the overall margin for USPIs operations in
either the U.S. or U.K. because we have a variety of ownership
levels in the facilities we operate, and facilities open for
less than a year are excluded from same store calculations. |
|
(2) |
|
The favorable impact, in the first quarter of 2008, of our
collecting amounts related to past patient services in
conjunction with our finalizing a new contract with a major
payor has been excluded from these growth rates as it relates to
dates of service prior to January 1, 2008. The revenue
reductions related to two similar, but adverse, adjustments in
the second quarter of 2008 were excluded for similar reasons, as
was the unfavorable impact of such an amount which arose during
the second quarter of 2009. |
|
(3) |
|
Calculated using constant exchange rates for all periods.
Although this computation represents a non-GAAP measure, we
believe that using a constant translation rate more accurately
reflects the trend of the business. In addition, The
$1.0 million unfavorable impact of a payment of value-added
tax in the first quarter of 2010 has been excluded from U.K.
same store facility operating margins. The favorable impact of
this value-added tax recorded in the second quarter of 2009 was
also excluded. |
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009
As discussed more fully in Revenues, our
consolidated revenues decreased by $16.8 million, or 2.8%,
to $576.7 million for the year ended December 31, 2010
from $593.5 million for the year ended December 31,
2009 as our business continued to shift to unconsolidated
affiliates, whose revenues increased 13% but are not included in
our consolidated revenues. The number of facilities we account
for under the equity method increased by 21 from
December 31, 2009 to December 31, 2010; the number of
facilities we consolidate decreased by two during this period.
63
Equity in earnings of unconsolidated affiliates increased by
$8.1 million, or 13.2% to $69.9 million for the year
ended December 31, 2010 from $61.8 million for the
year ended December 31, 2009. Excluding an impairment
charge we recorded on an equity method investment during 2010 of
$3.7 million, our equity in earnings increased 19%, driven
by the growth in revenues of our unconsolidated affiliates.
Operating income increased 6% year-over-year and was
significantly impacted by several items described in
Executive Summary, the most significant of which
were losses on deconsolidations, disposals, and impairments,
which decreased $22.8 million to $6.4 million for the
year ended December 31, 2010 from $29.2 million for
the year ended December 31, 2009. During 2010, we recorded
impairment charges of $5.9 million on six indefinite lived
management contracts. These impairment charges were partially
offset by a net gain on the sale or deconsolidation of various
facilities of approximately $1.7 million. In 2009, we
recorded approximately $21.4 million in losses on the sale
or deconsolidation of various facilities, impairment charges
totaling $5.7 million related to three management contracts
and $2.1 million of termination fees related to two
acquisitions we made in 2007. We elected not to purchase
additional ownership in these facilities and expensed the
termination fee. Operating expenses, like our revenues, were
also reduced due to deconsolidations. This was the primary
factor in the $1.4 million, or 4.3%, decrease in
depreciation and amortization to $29.8 million for the year
ended December 31, 2010 from $31.2 million for the
year ended December 31, 2009.
Interest expense, net of interest income, increased
$1.6 million to $69.2 million for the year ended
December 31, 2010 from $67.6 million for the year
ended December 31, 2009. While market interest rates and
our debt balance were lower in 2010 than 2009, the
$1.6 million increase can primarily be attributed to a
$0.8 million interest income on a settlement we received in
the second quarter of 2009 from the British tax authority
related to the VAT noted above, whereas in the first quarter of
2010, we recorded a $0.8 million expense as the British tax
authority reclaimed the amount.
Provision for income taxes was an income tax expense of
$32.3 million for the year ended December 31, 2010 as
compared to a $0.9 million benefit for the year ended
December 31, 2009. The benefit in 2009 was primarily the
result of our reversing the valuation allowance
($31.2 million) against a majority of our
U.S. deferred tax assets. During the third quarter of 2009,
we determined it was more likely than not that we would generate
taxable income to recover these assets in future periods. Our
effective tax rate for the year ended December 31, 2010 was
approximately 40%. Our effective tax rate, excluding the benefit
of reversing the deferred tax asset allowance, was approximately
45% for the year ended December 31, 2009.
Total (loss) gain from discontinued operations was a loss of
$7.0 million for the year ended December 31, 2010 as
compared to earnings of $1.5 million for the year ended
December 31, 2009. The $7.0 million represents loss
from discontinued operations of $0.2 million and a loss on
disposal of discontinued operations of $6.8 million. We
sold two entities in 2010 and designated two others as held for
sale. Because these entities are classified as discontinued
operations, our consolidated statements of income and the year
over year comparisons reflect the historical results of their
operations in discontinued operations for all periods presented.
Net income was $102.7 million for the year ended
December 31, 2010 as compared to $133.4 million for
the year ended December 31, 2009. While our surgical
facilities earned more in 2010 than 2009, the factors described
above, such as the 2009 tax benefit and 2010 loss on
discontinued operations, resulted in our net income decreasing
compared to 2009.
Net income attributable to noncontrolling interests decreased
$3.2 million, or 5.0%, to $60.6 million for the year
ended December 31, 2010 from $63.7 million for the
year ended December 31, 2009, as a result of more of our
profits coming from unconsolidated affiliates and less from
consolidated subsidiaries, as discussed above.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Revenues decreased by $21.6 million, or 3.5%, to
$593.5 million for the year ended December 31, 2009
from $615.1 million for the year ended December 31,
2008. This decrease was primarily the result of our selling a
partial interest in four of our consolidated facilities, which
resulted in our deconsolidating the facilities. This
$42.4 million decrease, together with a decrease in U.K.
revenues of $18.9 million as a result of the
U.S. dollar strengthening against the British pound, more
than offset the increases from growth in facilities we
consolidated in both years or
64
acquired during late 2008 or 2009. As described above, the fact
that we account for the majority of our U.S. facilities
under the equity method means that our growth in net income
generally outpaces our growth in reported revenues.
Equity in earnings of unconsolidated affiliates increased by
$14.7 million, or 31.3% to $61.8 million for the year
ended December 31, 2009 from $47.0 million for the
year ended December 31, 2008. This increase in equity in
earnings was primarily driven by same store growth
($10.9 million), acquisitions of additional facilities we
account for under the equity method ($3.6 million) and the
deconsolidation of four facilities which we now account for
under the equity method ($0.2 million). The number of
facilities we account for under the equity method increased by
eight from December 31, 2008 to December 31, 2009.
Operating expenses, excluding depreciation and amortization and
losses on deconsolidations, disposals and impairments, decreased
by $33.3 million, or 7.7%, to $396.6 million for the
year ended December 31, 2009 from $429.9 million for
the year ended December 31, 2008. This decrease was largely
driven by the deconsolidation of four facilities (approximately
$28.5 million) and the recovery of $1.0 million in
value added tax previously expensed by our U.K. subsidiary.
Operating expenses, excluding depreciation and amortization and
losses on deconsolidations, disposals and impairments, decreased
as a percentage of revenues to 66.8% for the year ended 2009,
from 69.9% for the year ended 2008. This decrease as a
percentage of revenues is primarily attributable to cost saving
measures being employed across our facilities.
Losses on deconsolidations, disposals and impairments increased
$27.3 million to $29.2 million for the year ended
December 31, 2009 from $1.8 million for the year ended
December 31, 2008. In 2009, we recorded approximately
$21.4 million in losses on the sale or deconsolidation of
various facilities, impairment charges totaling
$5.7 million related to three management contracts and
$2.1 million of termination fees related to two
acquisitions we made in 2007. We elected not to purchase
additional ownership in these facilities and expensed the
termination fee. In 2008, the components were a
$1.9 million loss on the sale of equity interests in four
facilities offset by $1.0 million of other income related
to a terminated administrative service contract and by a
$0.8 million impairment of one of our management contracts.
Depreciation and amortization decreased $1.1 million, or
3.5%, to $31.2 million for the year ended December 31,
2009 from $32.3 million for the year ended
December 31, 2008, primarily as a result of the
deconsolidation of four facilities whose deprecation expense is
no longer included in our consolidated statements of income.
Depreciation and amortization, as a percentage of revenues, was
5.3% for the year ended December 31, 2009 and 5.2% for the
year ended December 31, 2008.
Operating income increased $0.2 million to
$198.3 million for the year ended December 31, 2009
from $198.1 million for the year ended December 31,
2008. Operating income, as a percentage of revenues, increased
to 33.4% for the year ended December 31, 2009 from 32.2%
for the prior year, primarily as a result of the growth in our
equity in earnings of unconsolidated affiliates and cost saving
measures, which was mostly offset by losses on deconsolidations,
disposal and impairments of $29.2 million noted above.
Interest expense, net of interest income, decreased
$14.0 million to $67.6 million for the year ended
December 31, 2009 from $81.6 million for the year
ended December 31, 2008, primarily due to lower interest
rates and additionally due to lower overall debt balances as
compared to the prior period.
Income from continuing operations before income taxes increased
$14.6 million, or 12.5%, to $131.1 million for the
year ended December 31, 2009 from $116.5 million for
the year ended December 31, 2008, increased primarily as a
result of the growth in our equity in earnings of unconsolidated
affiliates and cost saving measures, which was mostly offset by
losses on deconsolidations, disposal and impairments of
$29.2 million noted above, and benefited from lower net
interest expense of $14.0 million.
Provision for income taxes was a $0.9 million benefit for
the year ended December 31, 2009, compared to
$22.7 million of tax expense for the year ended
December 31, 2008. The benefit in 2009 was primarily the
result of our reversing the valuation allowance
($31.2 million) against a majority of our
U.S. deferred tax assets. During the third quarter of 2009,
we determined it was more likely than not that we would generate
taxable income to recover these assets in future periods. Our
effective tax rate in 2008 was 36.9%. Our effective tax rate,
excluding the benefit of reversing the deferred tax asset
allowance, was 47.6% at December 31, 2009.
65
Total (loss) gain from discontinued operations was earnings of
$1.5 million for the year ended December 31, 2009 as
compared to a loss of $1.2 million for the year ended
December 31, 2008. The $1.5 million represents the net
earnings of four facilities we are accounting for as
discontinued operations at December 31, 2010. In 2008, we
classified the operations of surgery center as discontinued
operations. We recorded a loss of approximately
$0.6 million, net of tax, related to the sale of this
facility and a net loss of $0.6 million on its operations.
Net income was $133.4 million for the year ended
December 31, 2009 as compared to $92.7 million for the
year ended December 31, 2008. Represents the net effect of
many factors described above, including an increase in equity in
earnings of unconsolidated affiliates ($14.7 million), a
decrease in interest expense ($14.0 million), and the
recognition of the benefit of U.S. deferred tax assets
($31.2 million), which together more than offset
$29.2 million in losses on disposals, deconsolidations, and
impairments. In addition, despite our U.K. operations growing
their profits in local currency, the strengthening
U.S. dollar decreased our reported net income by
$2.2 million.
Net income attributable to noncontrolling interests increased
$8.6 million, or 15.6%, to $63.7 million for the year
ended December 31, 2009 from $55.1 million for the
year ended December 31, 2008. The increase was due to
increased profitability of certain of our existing consolidated
facilities and our acquisition activities, which primarily
involve our acquiring less than 100% ownership.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Net cash provided by operating activities
|
|
$
|
169,064
|
|
|
$
|
180,610
|
|
|
$
|
142,119
|
|
Net cash used in investing activities
|
|
|
(72,040
|
)
|
|
|
(85,829
|
)
|
|
|
(100,863
|
)
|
Net cash used in financing activities
|
|
|
(73,999
|
)
|
|
|
(111,247
|
)
|
|
|
(70,168
|
)
|
Overview
At December 31, 2010, we had cash and cash equivalents
totaling $60.3 million, as compared to $34.9 million
at December 31, 2009. A more detailed discussion of changes
in our liquidity follows.
Operating
Activities
Our cash flows from operating activities were
$169.1 million, $180.6 million, and
$142.1 million in the years ended December 31, 2010,
2009, and 2008, respectively. Operating cash flows in 2010 were
lower than 2009 by $11.5 million, or 6.4%, primarily due to
the Company utilizing U.S. net operating loss carryforwards
to settle the bulk of its U.S. federal tax liability in
2009. Operating cash flows in 2009 were higher than 2008
primarily due to lower interest costs during 2009, facility-wide
cost reductions and the timing of distributions of earnings to
our unconsolidated affiliates. Operating cash flows in 2008 were
also impacted by these factors, but the impact on 2008 was
unfavorable.
A significant element of our cash flows from operating
activities is the collection of patient receivables and the
timing of payments to our vendors and service providers.
Collections efforts for patient receivables are conducted
primarily by our personnel at each facility or in centralized
service centers for some metropolitan areas with multiple
facilities. These collection efforts are facilitated by our
patient accounting system, which prompts individual account
follow-up
through a series of phone calls
and/or
collection letters written 30 days after a procedure is
billed and at 30 day intervals thereafter. Bad debt
reserves are established in increasing percentages by aging
category based on historical collection experience. Generally,
the entire amount of all accounts remaining uncollected
180 days after the date of service are written off as bad
debt and sent to an outside collection agency. Net amounts
received from collection agencies are recorded as recoveries of
bad debts. Our operating cash flows, including changes in
accounts payable and other current liabilities, are impacted by
the timing of payments to our vendors. We typically pay our
vendors and service providers in accordance with invoice terms
and conditions, and take advantage of invoice discounts when
available. In 2010, 2009 and 2008, we did not make any
significant changes to our payment timing to our vendors.
66
Our net working capital deficit was $100.2 million at
December 31, 2010 as compared to a net working capital
deficit of $113.0 million in the prior year. The overall
negative working capital position at December 31, 2010 and
2009 is primarily the result of $116.1 million and
$129.3 million due to affiliates associated with our cash
management system being employed for our unconsolidated
facilities. As discussed further below, we have sufficient
availability under our revolving credit agreement, together with
our expected future operating cash flows, to service our
obligations.
Investing
Activities
During the years ended December 31, 2010, 2009 and 2008,
respectively, our net cash used for investing activities was
$72.0 million, $85.8 million and $100.9 million,
respectively. The majority of the cash used in our investing
activities relates to our purchases of businesses, incremental
investment in unconsolidated affiliates and purchases of
property and equipment and was funded by cash flows from
operating activities. The cash used in investing activities was
funded primarily from cash on hand as well as draws upon the
revolving feature of our senior secured credit facility.
Acquisitions
and Sales
During the year ended December 31, 2010, we invested
$33.3 million, net of cash received, for the purchase and
sales of businesses and investments in unconsolidated
affiliates. These 2010 transactions are described earlier in
this Item 7 under the captions Acquisitions, Equity
Investments and Development Projects and
Discontinued Operations and Other Dispositions.
These transactions are summarized below:
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
|
Investments
|
|
|
|
|
|
|
December 2010
|
|
Houston, Texas
|
|
$
|
9.0 million
|
|
December 2010
|
|
Reading, Pennsylvania
|
|
|
1.1 million
|
|
December 2010
|
|
Irving, Texas
|
|
|
1.9 million
|
|
December 2010
|
|
Boulder, Colorado
|
|
|
4.7 million
|
|
December 2010
|
|
Houston, Texas
|
|
|
0.9 million
|
|
December 2010
|
|
Chattanooga, Tennessee
|
|
|
2.6 million
|
|
December 2010
|
|
Kansas City, Missouri
|
|
|
1.2 million
|
|
December 2010
|
|
Nashville, Tennessee
|
|
|
13.4 million
|
|
November 2010
|
|
Various (HealthMark)
|
|
|
31.1 million
|
|
November 2010
|
|
Keller, Texas
|
|
|
4.6 million
|
|
October 2010
|
|
Houston, Texas
|
|
|
2.4 million
|
|
July 2010
|
|
Carrollton, Texas
|
|
|
0.8 million
|
|
July 2010
|
|
Sacramento, California
|
|
|
1.5 million
|
|
May 2010
|
|
St. Louis, Missouri
|
|
|
4.6 million
|
|
May 2010
|
|
Mansfield, Texas
|
|
|
0.4 million
|
|
April 2010
|
|
Destin, Florida
|
|
|
1.3 million
|
|
April 2010
|
|
St. Louis, Missouri
|
|
|
0.4 million
|
|
Various
|
|
Various
|
|
|
1.8 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83.7 million
|
|
Sales
|
|
|
|
|
|
|
December 2010
|
|
Nashville, Tennessee
|
|
|
32.5 million
|
|
December 2010
|
|
Phoenix, Arizona
|
|
|
4.7 million
|
|
June 2010
|
|
Cincinnati, Ohio
|
|
|
7.9 million
|
|
Various
|
|
Various
|
|
|
5.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50.4 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
33.3 million
|
|
|
|
|
|
|
|
|
67
During the years 2009 and 2008, we invested $59.5 million
and $64.3 million, respectively (all net of cash acquired)
to make similar acquisitions. These transactions are summarized
in this Item 7 under the caption Acquisitions, Equity
Investments and Development Projects.
As part of our business strategy, we have made, and expect to
continue to make, selective acquisitions in existing markets to
leverage our existing knowledge of these markets and to improve
operating efficiencies. Additionally, we may also make
acquisitions in new markets. In making such acquisitions, we may
use available cash on hand or draw upon our revolving credit
facility as discussed below.
Property
and Equipment/Facilities under Development
During the year ended December 31, 2010, approximately
$21.3 million of the property and equipment purchases
related to expansion and development projects, and the remaining
$18.7 million primarily represents purchase of equipment at
existing facilities. We added $29.7 million of property and
equipment in the year 2009, of which $14.7 million related
to expansion and development projects and the remaining
$15.0 million related to purchases at existing facilities.
Additionally, in 2008, we added $17.4 million of property
and equipment for expansion and development projects and
purchased $13.3 million of property and equipment for
existing facilities. Approximately $8.1 million of the
property and equipment purchases was paid to acquire property
adjacent to one of our London facilities.
At December 31, 2010, we and our affiliates had five
surgical facilities under construction and one additional
facility in the development stage in the United States; one of
these facilities opened in January 2011. Costs to develop a
short-stay surgical facility, which include construction,
equipment and initial operating losses, vary depending on the
range of specialties that will be undertaken at the facility.
Our affiliates have budgeted a total of $80.0 million for
development costs for the projects under construction.
Development costs are typically funded with approximately 50%
debt at the entity level with the remainder provided as equity
from the owners of the entity. Additionally, as each of these
facilities becomes operational, each will have obligations
associated with debt and capital lease arrangements.
Generally, we estimate that we will add 12 to 15 facilities per
year through a combination of acquisition and de novo projects.
This program will continue to require substantial capital
resources, which for this number of facilities we would estimate
to range from $60.0 million to $100.0 million per year
over the next three years. If we identify strategic acquisition
opportunities that are larger than usual for us, then these
costs could increase greatly.
Other than the specific transactions described above, our
acquisition and development activities primarily include the
development of new facilities, buyups of additional ownership in
facilities we already operate, and acquisitions of additional
facilities. In addition, the operations of our existing surgical
facilities will require ongoing capital expenditures. The amount
and timing of these purchases and related cash outflows in
future periods is difficult to predict and is dependent on a
number of factors including hiring of employees, the rate of
change in technology/equipment used in our business and our
business outlook.
Financing
Activities
Cash flows used in financing activities were $74.0 million,
$111.2 million and $70.2 million in the years ended
December 31, 2010, 2009 and 2008, respectively.
Historically, our cash flows from financing activities have been
received through proceeds from long-term debt, offset by
payments on long-term debt, as well as proceeds received from
the issuance of our common stock. We also manage the cash of our
unconsolidated affiliates. Cash distributions to noncontrolling
interests are also a large component of our financing activities
and were $59.0 million, $63.6 million and
$56.5 million in the years ended December 31, 2010,
2009 and 2008, respectively.
We intend to fund our ongoing capital and working capital
requirements through a combination of cash flows from operations
and borrowings under our $85.0 million revolving credit
facility. We believe that funds generated by operations and
funds available under the revolving credit facility will be
sufficient to meet working capital requirements over at least
the next 12 months. However, in the future, we may have to
incur additional debt or issue additional debt or equity
securities from time to time. We may be unable to obtain
sufficient financing on satisfactory terms or at all.
68
We and our subsidiaries, affiliates (subject to certain
limitations imposed by existing indebtedness), or significant
stockholders, in their sole discretion, may from time to time,
purchase, redeem, exchange or retire any of our outstanding debt
in privately negotiated or open market purchases, or otherwise.
Such transactions will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other
factors.
Dividend
Payment
On December 1, 2009, our board of directors declared and we
paid a special cash dividend in the amount of $88.6 million
on our common stock. The proceeds of the dividend were used by
USPI Holdings, Inc., our sole stockholder, to pay a special cash
dividend on its common stock. In turn, the proceeds were used by
USPI Group Holdings, Inc., the sole stockholder of USPI
Holdings, Inc., to pay amounts currently accrued on its
preferred stock.
Debt
Senior
secured credit facility
The senior secured credit facility (credit facility) provides
for borrowings of up to $615.0 million (with a
$150.0 million accordion feature described below),
consisting of (1) an $85.0 million revolving credit
facility with a maturity of six years, including a
$20.0 million letter of credit sub-facility, and a
$20.0 million swing-line loan sub-facility; and (2) a
$530.0 million term loan facility (including a
$100.0 million delayed draw facility) with a maturity of
seven years. We have utilized the availability under the
$530.0 million term loan facility and are making scheduled
quarterly principal payments. The term loans require principal
payments each year in an amount of $4.3 million per annum
in equal quarterly installments and $0.2 million per
quarter with respect to the delayed draw facility with the
remaining balance maturing in 2014. No principal payments are
required on the revolving credit facility until its maturity in
2013.
We may request additional tranches of term loans or additional
commitments to the revolving credit facility in an aggregate
amount not exceeding $150.0 million, subject to certain
conditions. Interest rates on the credit facility are based on
LIBOR plus a margin of 2.00% to 2.25%. Additionally, we
currently pay 0.50% per annum on the daily-unused commitment of
the revolving credit facility. We also currently pay a quarterly
participation fee of 2.13% per annum related to outstanding
letters of credit. At December 31, 2010, we had
$553.4 million of debt outstanding under the credit
facility at a weighted average interest rate of approximately
3.5%. At December 31, 2010, we had $58.4 million
available for borrowing under the revolving credit facility,
representing the facilitys $85.0 million capacity,
net of the $25.0 million outstanding balance at
December 31, 2010 and $1.6 million of outstanding
letters of credit. The $25.0 million outstanding on the
revolving line of credit was repaid in January 2011.
The credit facility is guaranteed by USPI Holdings, Inc. and its
current and future direct and indirect wholly-owned domestic
subsidiaries, subject to certain exceptions, and borrowings
under the credit facility are secured by a first priority
security interest in all real and personal property of these
subsidiaries, as well as a first priority pledge of our capital
stock, the capital stock of each of our wholly owned domestic
subsidiaries and 65% of the capital stock of certain of our
wholly-owned foreign subsidiaries. Additionally, the credit
facility contains various restrictive covenants, including
financial covenants that limit our ability and the ability of
our subsidiaries to borrow money or guarantee other
indebtedness, grant liens, make investments, sell assets, pay
dividends, enter into sale-leaseback transactions or issue and
sell capital stock. We believe we were in compliance with these
covenants as of December 31, 2010.
Senior
subordinated notes
Also in connection with the merger, we issued
$240.0 million of
87/8% senior
subordinated notes and $200.0 million of
91/4%/10% senior
subordinated toggle notes (together, the Notes), all due in
2017. Interest on the Notes is payable on May 1 and November 1
of each year, which commenced on November 1, 2007. All
interest payments on the senior subordinated notes are payable
in cash. The initial interest payment on the toggle notes was
payable in cash. For any interest period after November 1,
2007 through November 1, 2012, we may pay interest on the
toggle notes (i) in cash, (ii) by increasing the
principal amount of the outstanding toggle notes or by issuing
payment-in-kind
notes (PIK Interest) or (iii) by paying interest on half
the principal amount of the toggle notes in
69
cash and half in PIK Interest. PIK Interest is paid at 10% and
cash interest is paid at
91/4%
per annum. To date, we have paid all interest payments in cash.
During 2009, we repurchased approximately $2.5 million in
principal amount of the senior subordinated toggle notes in the
open market. At December 31, 2010, we had
$437.5 million of Notes outstanding. The Notes are
unsecured senior subordinated obligations of our Company;
however, the Notes are guaranteed by all of our current and
future direct and indirect wholly-owned domestic subsidiaries.
Additionally, the Notes contain various restrictive covenants,
including financial covenants that limit our ability and the
ability of our subsidiaries to borrow money or guarantee other
indebtedness, grant liens, make investments, sell assets, pay
dividends, enter into sale-leaseback transactions or issue and
sell capital stock. We believe we were in compliance with these
covenants as of December 31, 2010.
United
Kingdom borrowings
In April 2007, we entered into an amended and restated credit
agreement, which covered our existing overdraft facility and
term loan facility (Term Loan A). This agreement provides a
total overdraft facility of £2.0 million, and an
additional Term Loan B facility of £10 million, which
was drawn in April 2007. In March 2008, we further amended our
U.K. Agreement to provide for a £2.0 million Term Loan
C facility. We borrowed the entire £2.0 million in
March 2008 to acquire property adjacent to one of our hospitals
in London. In June 2009, we renewed our overdraft facility.
Under the renewal, we must pay a commitment fee of 0.5% per
annum on the unused portion of the overdraft facility each
quarter. Excluding availability on the overdraft facility, no
additional borrowings can be made under the Term Loan A, B or C
facilities. At December 31, 2010, we had approximately
£32.5 million (approximately $50.0 million)
outstanding under the U.K. credit facility at a weighted average
interest rate of approximately 4.6%.
Interest on the borrowings is based on a three-month or
six-month LIBOR, or other rate as the bank may agree, plus a
margin of 1.25% to 2.00%. Quarterly principal payments are
required on the Term Loan A, which began in June 2007, and
approximate $4.6 million in the first and second year,
$6.2 million in the third and fourth year;
$7.7 million in the fifth year, with the remainder due in
the sixth year after the April 2007 closing. The Term Loan B
does not require any principal payments prior to maturity and
matures in 2013. The Term Loan C requires quarterly principal
payments of approximately £0.1 million
($0.2 million), which began in June 2008 and continue
through its maturity date of February 2013 when the final
payment of £0.5 million ($0.8 million) is due.
The borrowings are guaranteed by certain of our subsidiaries in
the United Kingdom with a security interest in various assets,
and a pledge of the capital stock of the U.K. borrowers and the
capital stock of certain guarantor subsidiaries. The Agreement
contains various restrictive covenants, including financial
covenants that limit our ability and the ability of certain U.K.
subsidiaries to borrow money or guarantee other indebtedness,
grant liens on our assets, make investments, use assets as
security in other transactions, pay dividends, enter into leases
or sell assets or capital stock. We believe we were in
compliance with these covenants as of December 31, 2010.
We also have the ability to borrow under a capital asset finance
facility in the U.K. of up to £2.5 million
($3.8 million). We borrowed against the facility in June
2010 and November 2010 and have £1.5 million
($2.3 million) outstanding at December 31, 2010. The
terms of the borrowings require monthly principal and interest
payments over 48 months. We have pledged capital assets as
collateral against these borrowings. No amounts were outstanding
at December 31, 2009.
Purchases
and Sales of Noncontrolling Interests
During 2010, 2009 and 2008, we purchased and sold a net of
$1.1 million, $2.1 million and $26.4 million of
noncontrolling interests. Transactions with noncontrolling
interests in which we do not lose control of an entity are
classified as financing activities. These transactions represent
equity transactions because they are between us (or our
subsidiaries) and noncontrolling interests.
70
Contractual
Cash Obligations
Our contractual cash obligations as of December 31, 2010
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Within
|
|
|
Years
|
|
|
Years
|
|
|
Beyond
|
|
Contractual Cash Obligations
|
|
Total
|
|
|
1 Year
|
|
|
2 and 3
|
|
|
4 and 5
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Long term debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured credit facility(1)
|
|
$
|
533,445
|
|
|
$
|
5,265
|
|
|
$
|
35,530
|
|
|
$
|
492,650
|
|
|
$
|
|
|
Senior subordinated notes, due 2017(1)
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
Senior subordinated toggle notes, due 2017(1)
|
|
|
197,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,515
|
|
U.K. credit facility(1)
|
|
|
49,981
|
|
|
|
7,797
|
|
|
|
42,184
|
|
|
|
|
|
|
|
|
|
Other debt at operating subsidiaries(1)
|
|
|
22,347
|
|
|
|
5,275
|
|
|
|
8,004
|
|
|
|
3,550
|
|
|
|
5,518
|
|
Interest on long-term debt obligations(2)
|
|
|
326,410
|
|
|
|
62,450
|
|
|
|
121,640
|
|
|
|
85,496
|
|
|
|
56,824
|
|
Capitalized lease obligations(3)
|
|
|
43,089
|
|
|
|
6,549
|
|
|
|
10,850
|
|
|
|
6,001
|
|
|
|
19,689
|
|
Operating lease obligations
|
|
|
72,255
|
|
|
|
13,651
|
|
|
|
22,170
|
|
|
|
13,986
|
|
|
|
22,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
1,485,042
|
|
|
$
|
100,987
|
|
|
$
|
240,378
|
|
|
$
|
601,683
|
|
|
$
|
541,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Scheduled principal payments. |
|
(2) |
|
Represents interest due on long-term debt obligations. For
variable rate debt, the interest is calculated using the
December 31, 2010 rates applicable to each debt instrument
and also gives effect to the interest rate swaps designated in a
cash flow hedging relationship against portions of the U.K.
credit facility and the senior secured credit facility in the
U.S. |
|
(3) |
|
Includes principal and interest. |
Debt at
Operating Subsidiaries
Our operating subsidiaries, many of which have noncontrolling
interest holders who share in the cash flow of these entities,
have debt consisting primarily of capitalized lease obligations.
This debt is generally non-recourse to USPI and is generally
secured by the assets of those operating entities. The total
amount of these obligations, which was $46.6 million at
December 31, 2010, is included in our consolidated balance
sheet because the borrower or obligated entity meets the
requirements for consolidated financial reporting. Our average
percentage ownership, weighted based on the individual
subsidiarys amount of debt and capitalized lease
obligations, of these consolidated subsidiaries was
approximately 45% at December 31, 2010. As further
discussed below, our unconsolidated affiliates that we account
for under the equity method have debt and capitalized lease
obligations that are generally non-recourse to USPI and are not
included in our consolidated financial statements.
We believe that existing funds, cash flows from operations,
borrowings under our credit facilities, and borrowings under
capital lease arrangements at newly developed or acquired
facilities will provide sufficient liquidity for the next twelve
months. We may require additional debt or equity financing for
our future acquisitions and development projects. There are no
assurances that needed capital will be available on acceptable
terms, if at all. If we are unable to obtain funds when needed
or on acceptable terms, we will be required to curtail our
acquisition and development program.
In connection with our acquisition of equity interests in a
surgery center in 2007, we had the option to purchase additional
ownership in the facility during a specified time period in the
purchase agreement. If we did not exercise the purchase option,
we were required to pay an option termination fee, which was
equal to the lesser of an EBITDA calculation, as specified in
the purchase agreement, or $2.5 million. We elected to
purchase only a portion of the ownership as stated in the
agreement and therefore paid a $1.5 million termination fee
in 2009. The parties agreed to another purchase option that can
be exercised at any time during the 60 day period following
September 30, 2011 or the remaining $1.0 million
option termination fee would be required to be paid. The
$1.5 million termination fee
71
was recorded in Losses on deconsolidations, disposals and
impairments in the accompanying consolidated statements of
income for 2009.
In addition, our U.K. subsidiary has begun expanding our
Parkside hospital, already our largest facility. Located outside
London in the Wimbledon area, this facilitys expansion is
expected to cost approximately £11.5 million
(approximately $17.7 million). The expansion of the
outpatient clinic was completed in August 2010 and the
refurbishment of a portion of the hospital is expected to be
completed by the second quarter of 2011. A
£17.0 million ($26.2 million) refurbishment and
extension program has also begun at our Holly House hospital and
is due to be completed by late 2012. This expansion will provide
three new operating theater suites, an endoscopy suite, ten
additional patient rooms, an eight bed day unit, and six
additional consulting rooms.
Off-Balance
Sheet Arrangements
As a result of our strategy of partnering with physicians and
not-for-profit health systems, we do not own controlling
interests in the majority of our facilities. We account for 130
of our 189 surgical facilities under the equity method. Similar
to our consolidated facilities, our unconsolidated facilities
have debts, including capitalized lease obligations, that are
generally non-recourse to USPI. With respect to our
unconsolidated facilities, these debts are not included in our
consolidated financial statements. At December 31, 2010,
the total debt on the balance sheets of our unconsolidated
affiliates was approximately $330.6 million. Our average
percentage ownership, weighted based on the individual
affiliates amount of debt, of these unconsolidated
affiliates was approximately 24% at December 31, 2010. USPI
or one of its wholly-owned subsidiaries had collectively
guaranteed $22.5 million of the $330.6 million in
total debt of our unconsolidated affiliates as of
December 31, 2010. In addition, our unconsolidated
affiliates have obligations under operating leases, of which
USPI or a wholly-owned subsidiary had guaranteed
$13.4 million as of December 31, 2010, of which
$8.7 million represents guarantees of two facilities we
have sold. We have full recourse to the buyers with respect to
such amounts. Some of the facilities we are currently developing
will be accounted for under the equity method. As these
facilities become operational, they will have debt and lease
obligations.
As described above, our unconsolidated affiliates own
operational surgical facilities or surgical facilities that are
under development. These entities are structured as limited
partnerships, limited liability partnerships, or limited
liability companies. None of these affiliates provide financing,
liquidity, or market or credit risk support for us. They also do
not engage in hedging, research and development services with
us. Moreover, we do not believe that they expose us to any of
their liabilities that are not otherwise reflected in our
consolidated financial statements and related disclosures.
Except as noted above with respect to guarantees, we are not
obligated to fund losses or otherwise provide additional funding
to these affiliates other than as we determine to be
economically required in order to successfully implement our
development plans.
Related
Party Transactions
We have entered into agreements with certain majority and
minority owned surgery centers to provide management services.
As compensation for these services, the surgery centers are
charged management fees which are either fixed in amount or
represent a fixed percentage of each centers net revenue
less bad debt. The percentages range from 3% to 8%. Amounts
recognized under these agreements, after elimination of amounts
from consolidated surgery centers, totaled approximately
$52.1 million, $45.2 million, and $39.1 million
in 2010, 2009, and 2008, respectively, and are included in
management and contract service revenues in our consolidated
statements of income.
We regularly engage in purchases and sales of ownership
interests in our facilities. We operate 27 surgical facilities
in partnership with the Baylor Health Care System (Baylor) and
local physicians in the Dallas/Fort Worth area.
Baylors Chief Executive Officer is a member of our board
of directors. The following table summarizes transactions with
Baylor during 2009 and 2008. We had no such transactions in
2010. We believe that the sale prices
72
were approximately the same as if they had been negotiated on an
arms length basis, and the prices equaled the value
assigned by an external appraiser who valued the businesses
immediately prior to the sale.
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
Proceeds
|
|
|
Gain (Loss)
|
|
|
December 2009
|
|
Dallas, Texas(1)
|
|
$
|
1.2 million
|
|
|
$
|
0.3 million
|
|
December 2009
|
|
Fort Worth, Texas(2)
|
|
|
2.4 million
|
|
|
|
0.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
3.6 million
|
|
|
$
|
0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2008
|
|
Dallas, Texas(3)
|
|
$
|
2.3 million
|
|
|
$
|
(0.9 million
|
)
|
|
|
|
(1) |
|
Baylor acquired a controlling interest in a facility from us,
which transferred control of the facility from us to Baylor. |
|
(2) |
|
Baylor acquired a controlling interest in two facilities. We
continue to account for these facilities under the equity method
of accounting. |
|
(3) |
|
Baylor acquired an additional ownership interest in a facility
it already co-owned with us and local physicians, which
transferred control of the facility from us to Baylor. |
In June 2009, we agreed to lend up to $10.0 million to
Trinity MC, LLC (Trinity), an acute care hospital in the
Dallas/Fort Worth area. A majority interest (71%) in
Trinity is owned by BRMCG Holdings, LLC, a wholly owned
subsidiary of Baylor Regional Medical Center at Grapevine, a
controlled affiliate of Baylor. Trinity operates Baylor Medical
Center at Carrollton (BMCC). We have no ownership in Trinity.
The revolving note earned interest at a rate of 6.0% per annum
and was paid in full in December 2009. We believe the terms of
the revolving note were approximately the same as if they had
been negotiated on an arms length basis.
In June 2008, we purchased all of Baylors ownership
interests in an entity Baylor co-owned with us. This entity had
ownership and managed five facilities in the
Dallas/Fort Worth area. The purchase price was
approximately $3.9 million in cash. This entity is now
wholly owned by us. We believe that the sales price was
approximately the same as if it had been negotiated on an
arms length basis, and the price equaled the value
assigned by an external appraiser who valued the business
immediately prior to the sale. After this transaction, we
account for all of the facilities we operate with Baylor under
the equity method.
Our Parent issued warrants with an estimated fair value of
$0.3 million to Baylor in January 2008. Similar grants have
been made to other healthcare systems with which we operate
facilities.
Included in general and administrative expenses are management
fees payable to an affiliate of Welsh Carson, which holds a
controlling interest in our company, in the amount of
$2.0 million for the years ended December 31, 2010,
2009 and 2008. Such amounts accrue at an annual rate of
$2.0 million. We pay $1.0 million in cash per year
with the unpaid balance due and payable upon a change in
control. At December 31, 2010, we had approximately
$4.5 million accrued related to such management fee, of
which $0.8 million is included in other current liabilities
and $3.7 million is included in other long term liabilities
in the accompanying consolidated balance sheet. At
December 31, 2009, we had approximately $3.5 million
accrued related to such management fee, of which
$0.8 million is included in other current liabilities and
$2.7 million is included in other long term liabilities in
the accompanying consolidated balance sheet.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market risk represents the risk of loss that may impact our
financial position, results of operations or cash flows due to
adverse changes in interest rates and other relevant market
risks. Our primary market risk is a change in interest rates
associated with variable-rate borrowings. Historically, we have
not held or issued derivative financial instruments other than
the use of variable-to-fixed interest rate swaps for portions of
our borrowings under credit facilities with commercial lenders
as required by credit agreements. We do not use derivative
instruments for speculative purposes. The interest rate swaps
serve to stabilize our cash flow and expense but ultimately may
cost more or less in interest than if we had carried all of our
debt at a variable rate over the swap term.
As further discussed in Note 10 to the accompanying
consolidated financial statements, in order to manage interest
rate risk related to a portion of our variable-rate U.K. debt,
on February 29, 2008, we entered into an interest
73
rate swap agreement for a notional amount of
£20.0 million ($30.8 million). The interest rate
swap requires us to pay 4.99% and to receive interest at a
variable rate of three-month GBP-LIBOR (0.8% at
December 31, 2010), which is reset quarterly. The interest
rate swap expires in March 2011. No collateral is required under
the interest rate swap agreement. As of December 31, 2010,
the rate under our swap agreement was unfavorable compared to
the market.
Additionally, effective July 24, 2008, in order to manage
interest rate risk related to a portion of our variable-rate
U.S. Term Loan B, we entered into an interest rate swap
agreement for a notional amount of $200.0 million. The
interest rate swap requires us to pay 3.6525% and to receive
interest at a variable rate of three-month USD-LIBOR (0.3% at
December 31, 2010), which is paid and reset on a quarterly
basis. The interest rate swap expires in July 2011. No
collateral is required under the interest rate swap agreement.
As of December 31, 2010, the rate under our swap agreement
was unfavorable compared to the market.
At December 31, 2010, the fair values of the U.K. and
U.S. interest rate swaps were current liabilities of
approximately $0.3 million and $3.6 million,
respectively. The estimated fair value of the interest rate
swaps was determined using present value models of the
contractual payments. Inputs to the models were based on
prevailing LIBOR market data and incorporate credit data that
measure nonperformance risk. The estimated fair value represents
the theoretical exit cost we would have to pay to transfer the
obligations to a market participant with similar credit risk.
These estimated fair values may not be representative of actual
values that will be realized in the future.
Our financing arrangements with many commercial lenders are
based on the spread over Prime or LIBOR. At December 31,
2010, $690.6 million of our outstanding debt was in fixed
rate instruments and the remaining $352.6 million was in
variable rate instruments. Accordingly, a hypothetical
100 basis point increase in market interest rates would
result in additional annual expense of approximately
$3.5 million.
Our United Kingdom revenues are a significant portion of our
total revenues. We are exposed to risks associated with
operating internationally, including foreign currency exchange
risk and taxes and regulatory changes. Our United Kingdom
facilities operate in a natural hedge to a large extent because
both expenses and revenues are denominated in the local
currency. Additionally, our borrowings in the United Kingdom are
currently denominated in the local currency. Historically, the
cash generated from our operations in the United Kingdom has
been utilized within that country to finance development and
acquisition activity as well as for repayment of debt
denominated in the local currency. Accordingly, we have not
generally utilized financial instruments to hedge our foreign
currency exchange risk.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
For the financial statements and supplementary data required by
this Item 8, see the Index to Consolidated Financial
Statements included elsewhere in this
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the periods specified
in the rules and forms of the Commission. Such information is
accumulated and communicated to our management, including the
principal executive officer and principal financial officer, as
appropriate, to allow timely decisions regarding required
disclosure. As of the end of the period covered by this Annual
Report on
Form 10-K,
we have carried out an evaluation, under the supervision and
with the participation of management, including our principal
executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation, the
principal executive officer and principal financial officer
concluded that, as of December 31, 2010, our disclosure
controls and procedures are effective in timely alerting them to
material information required to be included in our reports
filed
74
with the Commission. There have been no significant changes in
our internal controls which could significantly affect the
internal controls subsequent to the date of their evaluation in
connection with the preparation of this Annual Report on
Form 10-K.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally
accepted accounting principles.
Our internal control over financial reporting includes those
policies and procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of our assets.
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting
principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management
and board of directors; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
|
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2010. In making
this assessment, management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated
Framework. Managements assessment included an
evaluation of the design and testing of the operational
effectiveness of the Companys internal control over
financial reporting. USPI acquired several subsidiaries and
equity method investments during 2010. Accordingly,
managements evaluation excluded the operations of the
following subsidiaries and equity method investments acquired
during 2010, with total assets of approximately
$69.4 million and approximately $3.9 million of
revenues included in the Companys consolidated financial
statements as of December 31, 2010:
|
|
|
|
|
HealthMark Partners, Inc.
|
|
|
|
USP Denver, Inc. (Investment in Flatirons Surgery Center, LLC)
|
|
|
|
USP Houston, Inc. (Investments in Memorial Hermann
Endoscopy & Surgery Center North Houston, LLC;
Memorial Hermann Surgery Center Woodlands Parkway, LLC and
Memorial Hermann Surgery Center Memorial City, LLC)
|
|
|
|
USP Gateway, Inc.
|
|
|
|
USP North Texas, Inc. (Investments in Metrocrest Surgery Center,
LP; Baylor Surgicare of Duncanville, LLC; Tuscan Surgery Center
at Las Colinas, LLC; and Lone Star Endoscopy, LLC)
|
|
|
|
USP Sacramento, Inc. (Investment in Grass Valley Outpatient
Surgery Center, LP)
|
Based on this assessment, management did not identify any
material weakness in the Companys internal control, and
management has concluded that the Companys internal
control over financial reporting was effective as of
December 31, 2010.
KPMG LLP, the registered public accounting firm that audited the
Companys consolidated financial statements included in
this report, has issued an attestation report on
managements assessment of internal control over financial
reporting, a copy of which is included with the Companys
consolidated financial statements in Item 15(a)(1).
75
Limitations
on the Effectiveness of Controls
Our management, including the principal executive officer and
the principal financial officer, recognizes that any set of
controls and procedures, no matter how well-designed and
operated, can provide only reasonable, not absolute, assurance
of achieving the desired control objectives. Further, the design
of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, with the Company have been detected.
These inherent limitations include the realities that judgments
in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by
collusion of two or more people or by management override of
controls. For these reasons, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting identified in connection with the evaluation described
above that occurred during our last fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
ITEM 10.
|
Directors,
Executive Officers and Corporate Governance
|
Directors
and Executive Officers
Executive officers of USPI are elected annually by the board of
directors and serve until their successors are duly elected and
qualified. Directors are elected by USPIs stockholders and
serve until their successors are duly elected and qualified.
There are no arrangements or understandings between any officer
or director and any other person pursuant to which any officer
or director was, or is to be, selected as an officer, director,
or nominee for officer or director. There are no family
relationships among any of our executive officers or directors.
The names, ages as of February 25, 2011, and positions of
the executive officers and directors of USPI are listed below
along with their relevant business experience.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
Donald E. Steen
|
|
|
64
|
|
|
Chairman of the Board
|
William H. Wilcox
|
|
|
59
|
|
|
President, Chief Executive Officer and Director
|
Brett P. Brodnax
|
|
|
46
|
|
|
Executive Vice President and Chief Development Officer
|
Mark A. Kopser
|
|
|
46
|
|
|
Executive Vice President and Chief Financial Officer
|
Niels P. Vernegaard
|
|
|
54
|
|
|
Executive Vice President and Chief Operating Officer
|
Philip A. Spencer
|
|
|
41
|
|
|
Senior Vice President, Business Development
|
Joel T. Allison
|
|
|
63
|
|
|
Director
|
Michael E. Donovan
|
|
|
34
|
|
|
Director
|
John C. Garrett, M.D.
|
|
|
68
|
|
|
Director
|
D. Scott Mackesy
|
|
|
42
|
|
|
Director
|
James Ken Newman
|
|
|
67
|
|
|
Director
|
Boone Powell, Jr.
|
|
|
74
|
|
|
Director
|
Paul B. Queally
|
|
|
46
|
|
|
Director
|
Raymond A. Ranelli
|
|
|
63
|
|
|
Director
|
76
Donald E. Steen founded USPI in February 1998 and served
as its chief executive officer until April 2004. Mr. Steen
continues to serve as chairman of the board of directors and the
executive committee. Mr. Steen was chairman of AmeriPath,
Inc. and chief executive officer of AmeriPath, Inc. from July
2004 until May 2007. Mr. Steen served as president of the
International Group of HCA, Inc. from 1995 until 1997 and as
president of the Western Group of HCA from 1994 until 1995.
Mr. Steen founded Medical Care International, Inc., a
pioneer in the surgery center business, in 1982. Mr. Steen
also serves as a director of Kinetic Concepts, Inc.
Mr. Steens experience in the healthcare industry as
well as his leadership of USPI and his role as a director since
its founding provides the board with a deeper insight into the
Companys business, challenges and opportunities.
William H. Wilcox joined USPI as its president and a
director in September 1998. Mr. Wilcox has served as
USPIs president and chief executive officer since April
2004 and is a member of the executive committee. Mr. Wilcox
served as president and chief executive officer of United Dental
Care, Inc. from 1996 until joining USPI. Mr. Wilcox served
as president of the Surgery Group of HCA and president and chief
executive officer of the Ambulatory Surgery Division of HCA from
1994 until 1996. Prior to that time, Mr. Wilcox served as
the chief operating officer and a director of Medical Care
International, Inc. Mr. Wilcox, through his intimate
knowledge of the operational, financial and strategic
development of USPI and his experience in the healthcare
industry, provides the board with a valuable perspective into
the opportunities and challenges facing the Company.
Brett P. Brodnax serves as the executive vice president
and chief development officer of USPI. Prior to joining USPI in
December 1999, Mr. Brodnax was an assistant vice president
of the Baylor Health Care System (Baylor) from 1990 until 1999.
Mr. Brodnax also served as a director of AmeriPath, Inc.
from January 2005 until May 2007.
Mark A. Kopser serves as the executive vice president and
chief financial officer of USPI. Prior to joining USPI in May
2000, Mr. Kopser served as chief financial officer for the
International Division of HCA from 1997 until 2000 and as chief
financial officer for the London Division of HCA from 1992 until
1996.
Niels P. Vernegaard joined USPI as the executive vice
president and chief operating officer in June 2006. Prior to
joining USPI, Mr. Vernegaard served in various positions
with HCA (or predecessors) for 25 years, including as
president and chief executive officer of HCAs Research
Medical Center in Kansas City, Missouri, and chief executive
officer of the Wellington Hospital in London, England.
Philip A. Spencer joined USPI in July 2009. From
November 2006 until joining USPI, Mr. Spencer served
as President, Anatomic Pathology Services for AmeriPath, Inc.
From November 2003 to November 2006, he served as Executive Vice
President of Healthcare Sales and Marketing for LabOne, Inc.
From December 2000 to November 2003, Mr. Spencer served as
Vice President, Business Development for Laboratory Corporation
of America.
Joel T. Allison has served on our board since March 2002.
Mr. Allison has served as president and chief executive
officer of Baylor since 2000 and served as its senior executive
vice president from 1993 until 2000. Mr. Allison brings an
important perspective to the board through his role in leading a
major healthcare system and his familiarity with issues
impacting physicians and the delivery of healthcare in the U.S.
Michael E. Donovan joined our board in April 2007 and
serves as a member of the executive and audit and compliance
committees. Mr. Donovan is currently a general partner at
Welsh, Carson, Anderson & Stowe. Prior to joining
Welsh Carson in 2001, Mr. Donovan worked at Windward
Capital Partners and in the investment banking division at
Merrill Lynch. He is a member of the board of directors of
several private companies. Mr. Donovans experience in
healthcare transactions and finance provides the board greater
insight into the healthcare industry and financial strategy.
John C. Garrett, M.D. has served on our board since
February 2001 and is a member of the audit and compliance
committee. Dr. Garrett had been a director of OrthoLink
Physicians Corporation, which was acquired by USPI in February
2001, since July 1997. Dr. Garrett founded
Resurgens, P.C. in 1986, where he maintained a specialized
orthopedics practice in arthroscopic and reconstructive knee
surgery until his retirement in 2007. Dr. Garrett is a
Fellow of the American Academy of Orthopedic Surgeons. The board
benefits from Dr. Garretts knowledge of clinical and
regulatory issues impacting our facilities and physician
partners and his familiarity with USPI with which he has served
as a director since 2001.
77
D. Scott Mackesy joined our board, executive
committee and compensation committee in April 2007.
Mr. Mackesy is a general partner of Welsh, Carson,
Anderson & Stowe, where he focuses primarily on
investments in the healthcare industry and is a managing member
of the general partner of Welsh, Carson, Anderson &
Stowe X, L.P. Prior to joining Welsh Carson, Mr. Mackesy
was a research analyst at Morgan Stanley Dean Witter, where he
was responsible for coverage of the healthcare services
industry. He is a member of the board of directors of several
private companies. Mr. Mackesy, through his lengthy and
broad focus on the healthcare industry, offers the board greater
insight into industry dynamics as well as investment and
acquisition strategies.
James Ken Newman has served on our board since May 2005
and is a member of the audit and compliance committee.
Mr. Newman served as president and chief executive officer
of Horizon Health Corporation from May 2003 until its sale in
June 2007 and as chairman of the board from February 1992 until
June 2007. From July 1989 until September 1997, he served as
president of Horizon Health and from July 1989 until October
1998, he also served as chief executive officer of Horizon
Health. Mr. Newmans leadership and experience in the
healthcare industry helps the board better assess the challenges
and opportunities facing USPI.
Boone Powell, Jr. has served on our board since June
1999. Mr. Powell served as the chairman of Baylor until
June 2001 and served as its president and chief executive
officer from 1980 until 2000. Mr. Powell also serves as a
director of US Oncology, Inc. Mr. Powell, through over a
decade of experience with USPI, provides the board with a
comprehensive knowledge of the Company and its structure and
management team. In addition, his experience in overseeing the
management of a major healthcare system gives him valuable
insight into the competitive environment of the healthcare
industry.
Paul B. Queally has served as a director of USPI since
its inception in February 1998 and serves as the chairman of the
compensation committee and a member of the executive committee.
Mr. Queally is Co-President of Welsh, Carson,
Anderson & Stowe, where he focuses primarily on
investments in the healthcare industry and is a managing member
of the general partner of Welsh, Carson, Anderson &
Stowe IX, L.P. Prior to joining Welsh Carson in 1996,
Mr. Queally was a general partner at the Sprout Group, the
private equity group of the former Donaldson, Lufkin &
Jenrette. He is a member of the boards of directors of AGA
Medical Corporation, Aptuit, Inc. and several private companies.
Mr. Queallys service on the boards of multiple
private and public companies and his extensive experience in
corporate transactions, including M&A, leveraged buyouts
and private equity financing, provide the board with an
important perspective in making strategic decisions.
Raymond A. Ranelli joined our board in May 2007 and
serves as the chairman of the audit and compliance committee.
Mr. Ranelli retired from PricewaterhouseCoopers in 2003
where he was a partner for over 20 years. Mr. Ranelli
held several positions at PricewaterhouseCoopers including Vice
Chairman and Global Leader of the Financial Advisory Services
practice. Mr. Ranelli is also a director of United Vision
Logistics, Ozburn-Hessey Logistics and Syniverse Technologies,
Inc. Mr. Ranelli possesses in-depth, practical knowledge of
financial and accounting principles, having served in the
financial services sector for over 20 years and serving on
other boards and committees. This background, along with his
past experience as a certified public accountant, is important
to his role as chairman of the audit and compliance committee.
Audit
Committee Financial Expert
Our board has determined that Raymond A. Ranelli, a director and
chairman of the audit and compliance committee, is a financial
expert and is independent as that term is used in the rules of
the National Association of Securities Dealers listing
standards (NASDAQ Rules).
Nominations
for the Board of Directors
Our board of directors does not have a separately designated,
standing nominating committee, a nominating committee charter,
or a formal procedure for security holders to recommend nominees
to the board of directors. USPI is not listed on a national
securities exchange or in an automated inter-dealer quotation
system of a national securities association, and we are not
subject to either the listing standards of the New York Stock
Exchange or the NASDAQ Rules.
78
Section 16(a)
Beneficial Ownership Reporting Compliance
USPI does not have any class of equity securities registered
under Section 12 of the Exchange Act. Consequently,
Section 16(a) of the Exchange Act is not applicable.
Code of
Ethics
We have adopted a Code of Conduct and a Financial Code of Ethics
both applicable to our principal executive officer, principal
financial officer, principal accounting officer or controller,
or other persons performing similar functions. Copies of the
Code of Conduct and the Financial Code of Ethics may be
obtained, free of charge, by writing to the secretary of the
Company at: United Surgical Partners International, Inc., 15305
Dallas Parkway, Suite 1600, Addison, Texas 75001.
|
|
Item 11.
|
Executive
Compensation
|
Overview
The compensation committee of our board of directors makes
decisions regarding salaries, annual bonuses and equity
incentive compensation for our named executive officers. Our
named executive officers include our chief executive officer,
our chief financial officer and our three most highly
compensated executive officers other than our chief executive
officer and chief financial officer. The compensation committee
is also responsible for reviewing and approving corporate goals
and objectives relevant to the compensation of our named
executive officers, as well as evaluating their performance in
light of those goals and objectives. Based on this evaluation,
the compensation committee determines and approves the named
executive officers compensation. The compensation
committee solicits input from our chief executive officer
regarding the performance of the companys other named
executive officers. Finally, the compensation committee also
administers our equity incentive plan.
The chief executive officer reviews our compensation plan. Based
on his analysis, the chief executive officer recommends a level
of compensation to the compensation committee, other than for
himself, which he views as appropriate to attract, retain and
motivate executive talent. The compensation committee determines
and approves the chief executive officers and other named
executive officers compensation.
Our
Compensation Philosophy and Objectives
We have sought to create an executive compensation program that
balances short-term versus long-term payments and awards, cash
payments versus equity awards and fixed versus contingent
payments and awards in ways that we believe are most appropriate
to motivate our executive officers. Our executive compensation
program is designed to:
|
|
|
|
|
attract and retain superior executive talent in the healthcare
industry;
|
|
|
|
motivate and reward executives to achieve optimum short-term and
long-term corporate operating results;
|
|
|
|
align the interests of our executive officers and stockholders
by motivating executive officers to increase stockholder
value; and
|
|
|
|
provide a compensation package that recognizes individual
contributions as well as overall business results.
|
In determining each component of, and the overall, compensation
of our named executive officers, the compensation committee does
not exclusively use quantitative methods or formulas, but
instead considers various factors, including the position of the
named executive officer, the compensation of officers of
comparable companies within the healthcare industry, the
performance of the named executive officer with respect to
specific objectives, increases in responsibilities,
recommendations of the chief executive officer and other
objective and subjective criteria as the compensation committee
deems appropriate. The specific objectives for each named
executive officer vary each year in accordance with the scope of
the officers position, the potential inherent in that
position for impacting the Companys operating and
financial results and the actual operating and financial
contributions produced by the officer in previous years.
79
Compensation
Components
Our compensation consists primarily of three elements: base
salary, annual bonus and long-term equity incentives. We
describe each element of compensation in more detail below.
Base
Salary
Base salaries for our named executive officers are established
based on the scope of their responsibilities and their prior
relevant experience, taking into account competitive market
compensation paid by other companies in our industry for similar
positions and the overall market demand for such executives at
the time of hire. A named executive officers base salary
is also determined by reviewing the executives other
compensation to ensure that the executives total
compensation is in line with our overall compensation
philosophy. Base salaries are reviewed annually and may be
increased for merit reasons, based on the executives
success in meeting or exceeding individual performance
objectives. Additionally, we may adjust base salaries as
warranted throughout the year for promotions or other changes in
the scope or breadth of an executives role or
responsibilities. For 2010, the compensation committee
determined that the existing base salaries for the
Companys named executive officers when combined with the
bonus opportunities available under the Companys incentive
programs were generally competitive for the healthcare industry
and accordingly did not increase base salaries for any of the
named executive officers. See Employment Arrangements and
Agreements.
Annual
Bonus
Our compensation program includes eligibility for an annual
incentive cash bonus. The compensation committee assesses the
level of the named executive officers achievement of
meeting individual goals, as well as that officers
contribution towards our long-term, Company-wide goals. The
amount of the cash bonus depends primarily on the Company
meeting budgeted EBITDA goals, with a target bonus for each
named executive officer generally set as a percentage of base
salary. Target bonuses for the named executive officers were set
at 50% of base salary for 2010, except for Mr. Wilcox whose
target bonus was set at 75% of base salary for 2010. Based on
the Companys EBITDA performance compared to budget in
2010, all named executive officers received a bonus of 25% of
their base salaries.
EBITDA is not a measure defined under GAAP. The Company believes
EBITDA is an important measure for purposes of assessing
performance. EBITDA, which is computed by adding operating
income plus depreciation and amortization and losses on
deconsolidations, disposals and impairments, is commonly used as
an analytical indicator within the healthcare industry and also
serves as a measure of leverage capacity and debt service
ability. EBITDA should not be considered as measures of
financial performance under GAAP and EBITDA targets and the
Companys achievement of such targets should not be
understood as managements prediction of future performance
or guidance to investors.
Long-Term
Equity Incentives
We believe that equity-based awards allow us to reward named
executive officers for their sustained contributions to the
Company. We also believe that equity awards reward continued
employment by a named executive officer, with an associated
benefit to us of employee continuity and retention. We believe
that equity awards provide management with a strong link to
long-term corporate performance and the creation of stockholder
value. The compensation committee has the authority to grant
shares of restricted stock and options to purchase shares of
certain classes of common and preferred equity securities of our
Parent. The compensation committee does not award equity awards
according to a prescribed formula or target. Instead, the
compensation committee takes into account the individuals
position, scope of responsibility, ability to affect profits and
the individuals historic and recent performance and the
value of the awards in relation to other elements of the
individual executives total compensation. No equity awards
were awarded in 2010. For a further description of the
Companys equity-based plan, see Restricted Stock and
Option Plan below.
80
Termination
Based Compensation
For payments due to our named executive officers upon
termination, and the acceleration of vesting of equity-based
awards in the event of a change of control under our new equity
plan, see Restricted Stock and Option Plan and
Employment Arrangements and Agreements below.
Other
Benefits and Perquisites
We provide health and welfare benefits to our named executive
officers that are available to all of the Companys
employees. Included in these benefits is a 401(k) plan that we
maintain because we wish to encourage our employees to save a
percentage of their cash compensation, through voluntary
deferrals, for their eventual retirement. We match fifty percent
of the first six percent of cash compensation contributed by
individual employees subject to IRS limitations.
We also make available to our named executive officers certain
perquisites and other benefits that we believe are reasonable
and consistent with the perquisites that would be available to
them at companies with whom we compete for experienced senior
management. The primary perquisite we currently provide to named
executive officers as well as certain other select members of
the management team is access to a Deferred Compensation Plan
(DCP) through which the individuals can voluntarily
defer up to 75% of their base salary and 100% of their bonus. We
match fifty percent of the first ten percent of compensation
voluntarily deferred under this plan. Additionally, in 2010 we
contributed $200,000 and $75,000 respectively to
Messrs. Wilcoxs and Vernegaards DCP accounts.
Compensation
Committee Report
The compensation committee of USPI has reviewed and discussed
the Compensation Discussion and Analysis required by
Item 402(b) of
Regulation S-K
with management and, based on such review and discussions, the
compensation committee has recommended to the board of directors
that the Compensation Discussion and Analysis be included in
this Annual Report on
Form 10-K.
The Compensation Committee
Paul B. Queally, Chairman
D. Scott Mackesy
81
Summary
Compensation Table for 2010
The following table sets forth the total remuneration paid by us
for each of the last three fiscal years to the named executive
officers.
|
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Change in
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Nonqualified
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Non-Equity
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Deferred
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Stock
|
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Option
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Incentive Plan
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Compensation
|
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All Other
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Name and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Awards(1)
|
|
Awards(1)
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
|
William H. Wilcox
|
|
|
2010
|
|
|
$
|
600,000
|
|
|
$
|
150,000
|
(2)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
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147,624
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|
|
$
|
273,866
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(3)
|
|
$
|
1,171,490
|
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President, Chief
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|
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2009
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|
|
|
600,000
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|
|
|
750,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,982
|
|
|
|
264,350
|
(3)
|
|
|
1,858,332
|
|
Executive Officer and
|
|
|
2008
|
|
|
|
600,000
|
|
|
|
540,000
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129,167
|
)
|
|
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251,275
|
(3)
|
|
|
1,262,108
|
|
Director
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brett P. Brodnax
|
|
|
2010
|
|
|
|
384,000
|
|
|
|
96,000
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,887
|
|
|
|
40,860
|
(3)
|
|
|
599,747
|
|
Executive Vice President
|
|
|
2009
|
|
|
|
384,000
|
|
|
|
288,000
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,867
|
|
|
|
38,050
|
(3)
|
|
|
839,917
|
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and Chief Development
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|
|
2008
|
|
|
|
379,167
|
|
|
|
230,000
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,590
|
)
|
|
|
32,702
|
(3)
|
|
|
541,279
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark A. Kopser
|
|
|
2010
|
|
|
|
358,000
|
|
|
|
89,500
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,159
|
|
|
|
38,591
|
(3)
|
|
|
525,250
|
|
Executive Vice President
|
|
|
2009
|
|
|
|
358,000
|
|
|
|
268,500
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,803
|
|
|
|
35,546
|
(3)
|
|
|
743,849
|
|
and Chief Financial
|
|
|
2008
|
|
|
|
353,000
|
|
|
|
205,917
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,177
|
)
|
|
|
29,238
|
(3)
|
|
|
495,978
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip A. Spencer
|
|
|
2010
|
|
|
|
325,000
|
|
|
|
81,250
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,505
|
|
|
|
23,600
|
(3)
|
|
|
433,355
|
|
Senior Vice President,
|
|
|
2009
|
|
|
|
139,167
|
|
|
|
104,375
|
|
|
|
380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,505
|
(3)
|
|
|
626,047
|
|
Business Development
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Niels P. Vernegaard
|
|
|
2010
|
|
|
|
428,000
|
|
|
|
107,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,782
|
|
|
|
119,700
|
(3)
|
|
|
729,482
|
|
Executive Vice President
|
|
|
2009
|
|
|
|
428,000
|
|
|
|
321,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,422
|
|
|
|
116,039
|
(3)
|
|
|
956,461
|
|
and Chief Operating
|
|
|
2008
|
|
|
|
421,333
|
|
|
|
245,778
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,187
|
|
|
|
110,592
|
(3)
|
|
|
799,890
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
(1) |
|
We account for the cost of stock-based compensation awarded
under the 2007 Equity Incentive Plan adopted by our Parent under
which the cost of equity awards to employees is measured by the
aggregate grant date fair value of the awards on their grant
date calculated in accordance with the FASBs Accounting
Standards Codification Topic 718. No forfeitures occurred
during 2008, 2009 or 2010. The stock awards issued to
Mr. Spencer in August 2009 were valued at $0.76 per share
equal to the fair value per share of common stock as determined
by the compensation committee. Assumptions used in calculation
of these amounts are included in Note 14 to our
consolidated audited financial statements for the fiscal year
ended December 31, 2010, included in this Annual Report on
Form 10-K. |
|
(2) |
|
Ninety percent of the amount shown was paid in cash and ten
percent was deferred at our named executive officers
election pursuant to USPIs Deferred Compensation Plan (the
DCP). |
82
|
|
|
(3) |
|
Includes discretionary contributions to the named executive
officers DCP and matching contributions to the named
executive officers DCP and 401(k) accounts as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discretionary
|
|
Matching
|
|
Matching
|
|
|
Contribution
|
|
Contribution
|
|
Contribution
|
|
|
to DCP
|
|
401(k)
|
|
DCP
|
|
Mr. Wilcox
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
200,000
|
|
|
$
|
7,350
|
|
|
$
|
66,516
|
|
2009
|
|
|
200,000
|
|
|
|
7,350
|
|
|
|
57,000
|
|
2008
|
|
|
200,000
|
|
|
|
6,900
|
|
|
|
44,375
|
|
Mr. Brodnax
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
7,350
|
|
|
|
33,510
|
|
2009
|
|
|
|
|
|
|
7,350
|
|
|
|
30,700
|
|
2008
|
|
|
|
|
|
|
6,900
|
|
|
|
25,433
|
|
Mr. Kopser
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
7,350
|
|
|
|
31,241
|
|
2009
|
|
|
|
|
|
|
7,350
|
|
|
|
28,196
|
|
2008
|
|
|
|
|
|
|
6,900
|
|
|
|
24,024
|
|
Mr. Spencer
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
7,350
|
|
|
|
16,250
|
|
2009
|
|
|
|
|
|
|
2,505
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Vernegaard
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
75,000
|
|
|
|
7,350
|
|
|
|
37,350
|
|
2009
|
|
|
75,000
|
|
|
|
7,350
|
|
|
|
33,689
|
|
2008
|
|
|
75,000
|
|
|
|
6,900
|
|
|
|
28,692
|
|
|
|
|
(4) |
|
Seventy-five percent of the amount shown was paid in cash and
twenty-five percent was deferred at Mr. Wilcoxs
election pursuant to the DCP. |
|
(5) |
|
Fifty percent of the amount shown was paid in cash and fifty
percent was deferred at Mr. Brodnaxs election
pursuant to the DCP. |
Grant of
Plan-Based Awards
No plan-based awards were granted to the named executive
officers during 2010.
Outstanding
Equity Awards at Fiscal Year-End
The following table shows all outstanding equity awards held by
our named executive officers as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
Stock Awards(1)
|
|
|
Number of Shares
|
|
Fair Value of
|
|
|
or Units of Stock
|
|
Shares or Units of
|
|
|
that have not
|
|
Stock that have
|
Name
|
|
Vested
|
|
not Vested(2)
|
|
William H. Wilcox
|
|
|
2,968,750
|
(3)
|
|
$
|
5,492,188
|
|
|
|
|
495,536
|
(4)
|
|
|
916,742
|
|
Brett P. Brodnax
|
|
|
1,187,500
|
(3)
|
|
|
2,196,875
|
|
|
|
|
275,853
|
(4)
|
|
|
510,328
|
|
Mark A. Kopser
|
|
|
1,062,500
|
(3)
|
|
|
1,965,625
|
|
|
|
|
220,683
|
(4)
|
|
|
408,264
|
|
Philip A. Spencer
|
|
|
375,000
|
(5)
|
|
|
693,750
|
|
|
|
|
|
|
|
|
|
|
Niels P. Vernegaard
|
|
|
1,062,500
|
(3)
|
|
|
1,965,625
|
|
|
|
|
245,203
|
(4)
|
|
|
453,626
|
|
83
|
|
|
(1) |
|
Upon consummation of the merger, our named executive officers
received new stock awards under the 2007 Equity Incentive Plan. |
|
(2) |
|
Because there is no active trading market for our common stock,
we rely on members of the compensation committee and Welsh
Carson to determine in good faith the fair value of our common
stock. As of December 31, 2010, this value was determined
to be $1.85 per share of common stock. Neither USPI, USPI
Holdings, Inc. nor USPI Group Holdings, Inc. has any class of
equity securities registered under Section 12 of the
Exchange Act. |
|
(3) |
|
The restrictions with respect to 20% of such shares will lapse
on April 19, 2011. The restrictions with respect to the
remaining shares will lapse on April 19, 2015; provided
however, that such restrictions may lapse sooner if certain
internal rate of return targets are met. |
|
(4) |
|
The restrictions with respect to such shares will lapse upon a
change of control or other exit event provided that Welsh Carson
shall have disposed of all of its shares of our Parent acquired
in connection with the merger and received its cost basis in
such shares plus a return of at least 100%. |
|
(5) |
|
The restrictions with respect to 33% of such shares will lapse
on April 19, 2011. The restrictions with respect to the
remaining shares will lapse on April 19, 2015; provided
however, that such restrictions may lapse sooner if certain
internal rate of return targets are met. |
Option
Exercises and Stock Values
The following table shows all stock options exercised during
2010 and the value realized upon exercise, and all stock awards
vested during 2010 and the value realized upon vesting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
|
Acquired on
|
|
Realized on
|
|
Acquired on
|
|
Realized
|
Name
|
|
Exercise
|
|
Exercise
|
|
Vesting
|
|
on Vesting(1)
|
|
William H. Wilcox
|
|
|
N/A
|
|
|
$
|
|
|
|
|
593,750
|
|
|
$
|
961,875
|
|
Brett P. Brodnax
|
|
|
N/A
|
|
|
|
|
|
|
|
237,500
|
|
|
|
384,750
|
|
Mark A. Kopser
|
|
|
N/A
|
|
|
|
|
|
|
|
212,500
|
|
|
|
344,250
|
|
Philip A. Spencer
|
|
|
N/A
|
|
|
|
|
|
|
|
125,000
|
|
|
|
202,500
|
|
Niels P. Vernegaard
|
|
|
N/A
|
|
|
|
|
|
|
|
212,500
|
|
|
|
344,250
|
|
|
|
|
(1) |
|
Because there is no active trading market for our common stock,
we rely on members of the compensation committee and Welsh
Carson to determine in good faith the fair value of our common
stock. As of April 19, 2010, this value was determined to
be $1.62 per share of common stock. Neither USPI, USPI Holdings,
Inc. nor USPI Group Holdings, Inc. has any class of equity
securities registered under Section 12 of the Exchange Act. |
Restricted
Stock and Option Plan
Our Parent adopted the 2007 Equity Incentive Plan which became
effective contemporaneously with the consummation of the merger,
which we sometimes refer to as the equity plan. The purposes of
the equity plan are to attract and retain the best available
personnel, provide additional incentives to our employees,
directors and consultants and to promote the success of our
business. A maximum of 20,726,523 shares of common stock
may be delivered in satisfaction of awards made under the equity
plan.
The compensation committee administers the equity plan (the
Administrator). Participation in the plan is limited
to those key employees and directors, as well as consultants and
advisors, who in the Administrators opinion are in a
position to make a significant contribution to the success of
USPI and its affiliated corporations and who are selected by the
Administrator to receive an award. The plan provides for awards
of stock appreciation rights (SARs), stock options,
restricted stock, unrestricted stock, stock units, including
restricted stock units, and performance awards pursuant to the
Administrators discretion and the provisions set forth in
the plan. Eligibility for incentive stock options
(ISOs) is limited to employees of USPI or of a
parent corporation or subsidiary
corporation of USPI as those terms are defined in
Section 424 of the United States Internal Revenue Code of
1986,
84
as amended. Each option granted pursuant to the plan will be
treated as providing by its terms that it is to be a
non-incentive stock option unless, as of the date of grant, it
is expressly designated as an ISO.
The exercise price of each stock option and the share value
above which appreciation is to be measured in the case of a SAR
will be 100% of the fair value of the stock subject to the stock
option or SAR, determined as of the date of grant, or such
higher amount as the Administrator may determine in connection
with the grant.
Neither ISOs nor, except as the Administrator otherwise
expressly provides, other awards may be transferred other than
by will or by the laws of descent and distribution. During a
recipients lifetime an ISO and, except as the
Administrator may provide, other non-transferable awards
requiring exercise may be exercised only by the recipient.
Awards permitted by the Administrator to be transferred may be
transferred only to a permitted transferee.
No awards may be made after April 18, 2017, but previously
granted awards may continue beyond that date in accordance with
their terms. The Administrator may at any time amend the equity
plan or any outstanding award for any purpose which may at the
time be permitted by law, and may at any time terminate the
equity plan as to any future grants of awards; provided, that
except as otherwise expressly provided in the plan, the
Administrator may not, without the participants consent,
alter the terms of an award so as to affect adversely the
participants right under the award, unless the
Administrator expressly reserved the right to do so at the time
of the award.
Upon termination of a named executive officers employment
for any reason (including, without limitation, as a result of
death, disability, incapacity, retirement, resignation, or
dismissal with or without cause), then any vested shares as of
the date of such termination shall remain vested shares, and no
additional shares will become vested after the date of such
termination, except if otherwise determined by the Administrator
or within 180 days after the executives termination,
USPI consummates a change of control, in which case, the
provisions pertaining to a change of control will apply.
The shares acquired under the equity plan shall vest in full
upon a change of control if, as a result of such change of
control, Welsh Carson shall have disposed of all of the investor
shares and received its cost basis in its investor shares plus
an investor return of at least 100%. In the event the shares do
not vest on such change of control, such shares shall be
forfeited upon the closing of such change of control.
Nonqualified
Deferred Compensation
The following table shows certain information regarding the
named executive officers DCP accounts as of
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Activity
|
|
Aggregate
|
|
|
|
|
|
|
|
|
Aggregate
|
|
Balance at
|
|
|
Executive
|
|
USPI
|
|
Aggregate
|
|
Withdrawals/
|
|
December 31,
|
Name
|
|
Contribution
|
|
Contribution
|
|
Earnings
|
|
Distributions
|
|
2010
|
|
William H. Wilcox
|
|
$
|
133,031
|
|
|
$
|
266,516
|
|
|
$
|
147,624
|
|
|
$
|
600,033
|
|
|
$
|
2,554,397
|
|
Brett P. Brodnax
|
|
|
181,500
|
|
|
|
33,510
|
|
|
|
78,887
|
|
|
|
230,246
|
|
|
|
725,530
|
|
Mark A. Kopser
|
|
|
62,482
|
|
|
|
31,241
|
|
|
|
39,159
|
|
|
|
130,840
|
|
|
|
375,969
|
|
Philip A. Spencer
|
|
|
32,500
|
|
|
|
16,250
|
|
|
|
3,505
|
|
|
|
|
|
|
|
52,255
|
|
Niels P. Vernegaard
|
|
|
74,699
|
|
|
|
112,350
|
|
|
|
74,782
|
|
|
|
|
|
|
|
1,015,544
|
|
Deferred
Compensation Plan
USPI has a deferred compensation plan that certain of its
directors, executive officers and other employees participate in
which allows such participants to defer a portion of their
compensation to be paid upon certain specified events (including
death, termination of employment, disability or some future
date). Under the terms of the DCP, all amounts payable under the
DCP would become immediately vested in connection with a change
of control of USPI, and as a result, each participant would be
entitled to be paid their full account balance upon consummation
of such a transaction. Notwithstanding the foregoing, USPI
amended the DCP to exclude the merger from the definition of a
change of control for purposes of the DCP. As a result, the
merger had no effect on the vesting of the account balance of
any participant in the deferred compensation plan.
85
Our board of directors designates those persons who are eligible
to participate in the DCP. Currently, each of
Messrs. Steen, Wilcox, Brodnax, Vernegaard, Kopser and
Spencer are eligible to participate in the DCP. The DCP enables
participants to defer all or a portion of their bonus in a
calendar year and up to 75% of their base salary, typically by
making a deferral election in the calendar year prior to the
year in which the bonus relates or the annual salary is
otherwise payable.
Although participants are 100% vested in their deferrals of
salary and bonus, USPI contributions to the DCP are subject to
vesting schedules established by the compensation committee in
its sole discretion (which may vary among different
contributions). Notwithstanding such vesting schedules,
participants will become 100% vested in their accounts under the
DCP in the event of (i) retirement on or after the earlier
to occur of (a) age 60 following the completion of
five years of service with USPI or (b) age 65,
(ii) a change in control or (iii) death.
Benefits are payable upon termination of employment.
Participants may also elect, at the time they make an annual
deferral, to receive a lump sum in-service distribution payable
in a calendar year that is three or more years after the
calendar year to which the deferral is related. A participant
who elects an in-service distribution may defer the distribution
for an additional five years from the original payment date so
long as such election is made at least 12 months prior to
the original payment date. Participants may also make an
in-service withdrawal from the DCP on account of an
unforeseeable emergency (as defined in the DCP). Amounts under
the DCP are distributed in a lump sum cash payment, except as
provided below, unless the distribution is on account of
retirement at normal retirement age under the DCP. A participant
can elect, at the time of a deferral under the DCP, to receive
his retirement benefit in either a lump sum or pursuant to
annual installments over five, 10 or 15 years. Participants
may change the form of payment of their retirement benefit from
a lump sum to an annual installment payment, provided such
election is submitted one year prior to the participants
retirement.
A participants account will be credited with earnings and
losses based on returns on deemed investment options selected by
the participant from a group of deemed investments established
by the deferred compensation plan committee.
USPI may make a discretionary contribution on behalf of any or
all participants depending upon the financial strength of USPI.
The amount of the contribution, if any, is determined in the
sole discretion of the compensation committee. Currently, USPI
matches fifty percent of any deferral by a named executive
officer, subject to a total cap on the matching contribution of
five percent of the officers compensation.
The DCP is administered by USPIs compensation committee.
The DCP is an unfunded arrangement for purposes of
ERISA. Accordingly, the DCP consists of a mere promise by USPI
to make payments in accordance with the terms of the DCP and
participants and beneficiaries have the status of general
unsecured creditors of USPI. A participants account and
benefits payable under the DCP are not assignable. USPI may
amend or terminate the DCP provided that no amendment adversely
affects the rights of any participant with respect to amounts
that have been credited to his account under the DCP prior to
the date of such amendment. Upon termination of the DCP, a
participants account will be paid out as though the
participant experienced a termination of employment on the date
of the DCPs termination or, for participants who have
attained normal retirement age, in the form of payment elected
by the participant.
Employment
Arrangements and Agreements
Set forth below is a description of our employment agreements
and other compensation arrangements with our named executive
officers.
We have employment agreements with William H. Wilcox as
President and Chief Executive Officer, Mark A. Kopser as
Executive Vice President and Chief Financial Officer, Brett P.
Brodnax as Executive Vice President and Chief Development
Officer, Niels Vernegaard as Executive Vice President and Chief
Operating Officer and Philip A. Spencer as Senior Vice
President, Business Development.
The initial term of our employment agreement with William H.
Wilcox was for two years from April 18, 2007. Thereafter,
Mr. Wilcoxs employment agreement automatically renews
for additional two-year terms unless at least 30 days prior
to the end of a two-year term, USPI or Mr. Wilcox gives
notice that it or he does not wish to extend the
86
agreement. Mr. Wilcox is paid a base salary of $600,000 per
year, subject to increase from time to time with the possibility
of a bonus, determined by the compensation committee in its sole
discretion.
The initial term of our employment agreements with Mark A.
Kopser and Brett P. Brodnax was for one year from April 18,
2007 to April 18, 2008. Thereafter, each agreement
automatically renews for additional one-year terms unless at
30 days prior to the end of a one-year term, USPI or the
executive gives notice that it or he does not wish to extend the
agreement. Mr. Kopser is paid a base salary of $358,000 per
year and Mr. Brodnax, $384,000 per year, and each is
subject to increase from time to time with the possibility of a
bonus, determined by the compensation committee in its sole
discretion.
The initial term of our employment agreement with Niels P.
Vernegaard was for two years from April 18, 2007.
Thereafter, Mr. Vernegaards employment agreement
automatically renews for additional one-year terms unless at
30 days prior to the end of a one-year term, USPI or
Mr. Vernegaard gives notice that it or he does not wish to
extend the agreement. Mr. Vernegaard is paid a base salary
of $428,000 per year, subject to increase from time to time with
the possibility of a bonus determined by the compensation
committee in its sole discretion.
The initial term of our employment agreement with Philip A.
Spencer is for three years from July 29, 2009. Thereafter,
Mr. Spencers employment agreement automatically
renews for additional one-year terms unless at 30 days
prior to the end of a one-year term, USPI or Mr. Spencer
gives notice that it or he does not wish to extend the
agreement. Mr. Spencer is paid a base salary of $325,000
per year, subject to increase from time to time with the
possibility of a bonus determined by the compensation committee
in its sole discretion.
Each of the employment agreements with our named executive
officers also provides that if the executive is terminated for
cause, or if he terminates his employment agreement without
certain enumerated good reasons, we shall pay to him any accrued
or unpaid base salary through the date of his termination. In
addition, if we terminate the employment without cause or upon
failure to renew his employment agreement, or if he terminates
his employment for certain enumerated good reasons, we will
(i) continue to pay him his base salary at the rate in
effect on the date of his termination for twelve months (or, for
Mr. Spencer, until July 29, 2012 if the date of
termination occurs more than twelve months prior to
July 29, 2012); (ii) continue his health insurance
benefits for 12 months following his date of termination
(24 months for Mr. Wilcox and, for Mr. Spencer,
until July 29, 2012 if the date of termination occurs more
than twelve months prior to July 29, 2012) or the
economic equivalent thereof if such continuation is not
permissible under the terms of our health insurance plan; and
(iii) pay him a good faith estimate of the bonus he would
have received had he remained employed through the end of the
fiscal year in which his termination occurred (or, for
Mr. Spencer, a good faith estimate of the bonus
compensation he would have received until July 29, 2012,
which shall be no less than fifty percent of his base salary on
the date of termination, if his date of termination occurs more
than twelve months prior to July 29, 2012). Our obligations
set forth in items (i) to (iii) above are conditioned
on the executive signing a release of claims and the continued
performance of his continuing obligations under his employment
agreement.
In connection with the consummation of the merger and the
adoption of our Parents equity plan, certain of our
executive officers, including our named executive officers, were
awarded restricted shares of our Parents common stock
under the equity plan pursuant to an agreement between each such
named executive officer and our Parent. Pursuant to these
restricted stock award agreements with our named executive
officers, upon termination of such named executive
officers employment for any reason (including, without
limitation, as a result of death, disability, incapacity,
retirement, resignation, or dismissal with or without cause),
any vested shares as of the date of such termination shall
remain vested shares and no additional shares will become vested
after the date of such termination unless USPI consummates a
change of control within 180 days after such named
executive officers termination, in which case, such
unvested shares shall become fully vested if such awards would
have become fully vested had such named executive officer not
been terminated on the date of such change of control as
described below. Additionally, pursuant to such restricted stock
award agreements with our named executive officers, all unvested
restricted shares vest in full upon a change of control if, as a
result of such change of control, Welsh Carson shall have
disposed of all of its shares of our Parent acquired in
connection with the merger and received its cost basis in such
shares plus a return of at least 100%. In the event such
restricted shares do not vest on such change of control, then
such restricted shares shall be forfeited upon the closing of
such change of control.
87
Potential
Payments Upon Termination or Change of Control
The following table sets forth for each named executive officer
potential post-employment payments and payments on a change in
control and assumes that the triggering event took place on
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
Accelerated
|
|
|
Severance
|
|
Accrued
|
|
|
|
Vesting upon
|
Name
|
|
Payment
|
|
Bonus(1)(2)
|
|
Benefits(3)
|
|
Change of Control(4)
|
|
William H. Wilcox
|
|
$
|
1,200,000
|
(5)
|
|
$
|
150,000
|
|
|
$
|
13,464
|
(5)
|
|
$
|
6,408,930
|
|
Brett P. Brodnax
|
|
|
384,000
|
(6)
|
|
|
96,000
|
|
|
|
6,432
|
(6)
|
|
|
2,707,203
|
|
Mark A. Kopser
|
|
|
358,000
|
(6)
|
|
|
89,500
|
|
|
|
8,388
|
(6)
|
|
|
2,373,889
|
|
Philip A. Spencer
|
|
|
514,583
|
(7)
|
|
|
257,292
|
|
|
|
18,620
|
(7)
|
|
|
693,750
|
|
Niels P. Vernegaard
|
|
|
428,000
|
(6)
|
|
|
107,000
|
|
|
|
8,388
|
(6)
|
|
|
2,419,251
|
|
|
|
|
(1) |
|
Amounts are based on the bonus amount paid with respect to 2010. |
|
(2) |
|
Amounts will be paid at such time as annual bonuses are payable
to other executive and officers of USPI in accordance with
USPIs normal payroll practices. |
|
(3) |
|
Amounts consist of the cost to continue to pay such named
executive officers health insurance benefits for the
designated term or the economic equivalent thereof if such
continuation is not permissible under the terms of the
USPIs health insurance plan. |
|
(4) |
|
Pursuant to the restricted stock award agreements with our named
executive officers, all unvested restricted shares of our
Parents common stock will vest in full upon a change of
control if, as a result of such change of control, Welsh Carson
shall have disposed of all of its shares of our Parent acquired
in connection with the merger and received its cost basis in
such shares plus a return of at least 100%. A change of control
is not defined to include an initial public offering of our
stock. In the event such restricted shares do not vest on such
change of control, then such restricted shares shall be
forfeited upon the closing of such change of control
transaction. The results in this column are the result of
multiplying the total possible number of restricted shares of
our Parents common stock that vest upon a change of
control by $1.85 per share. Because there is no active trading
market for our common stock, we rely on members of the
compensation committee and Welsh Carson to determine in good
faith the fair value of our common stock. As of
December 31, 2010, this value was determined to be $1.85
per share of common stock. Neither USPI, USPI Holdings, Inc. nor
USPI Group Holdings, Inc. has any class of equity securities
registered under Section 12 of the Exchange Act. |
|
(5) |
|
Amounts to be paid over twenty-four months. |
|
(6) |
|
Amounts to be paid over twelve months. |
|
(7) |
|
Amounts to be paid over nineteen months. |
Director
Compensation
The chairman and members of our board of directors who are also
officers or employees of USPI, affiliates of Welsh Carson and
Mr. Allison do not receive compensation for their services
as directors. At Mr. Allisons direction, his
compensation for his service as a director are paid to his
employer Baylor. The other directors (non- employee
directors) receive cash compensation in the amount of
$25,000 per year and are eligible to participate in our group
insurance benefits. If a non-employee director elects to
participate, the director will pay the full cost of such
benefits. Non-employee directors also receive the following for
all meetings attended: $2,500 per board meeting, $1,250 per
telephonic meeting, $1,500 per audit committee meeting and
$1,000 per other committee meeting. In addition, the audit
committee chairman is paid a retainer of $20,000 per year.
88
The following table sets forth the compensation paid to our
non-employee directors in 2010.
2010
Non-Employee Director Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
Stock
|
|
All Other
|
|
|
Name
|
|
Paid in Cash
|
|
Awards
|
|
Compensation
|
|
Total
|
|
Joel T. Allison
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
John C. Garrett, M.D.
|
|
|
39,750
|
|
|
|
|
|
|
|
|
|
|
|
39,750
|
|
James Ken Newman
|
|
|
39,750
|
|
|
|
|
|
|
|
|
|
|
|
39,750
|
|
Boone Powell, Jr.
|
|
|
33,750
|
|
|
|
|
|
|
|
|
|
|
|
33,750
|
|
Raymond A. Ranelli
|
|
|
59,750
|
|
|
|
|
|
|
|
|
|
|
|
59,750
|
|
Compensation
Risk Assessment
At the request of the Compensation Committee, management
conducted an assessment of the Companys compensation plans
to determine whether such plans encourage excessive or
inappropriate risk taking by our employees. This assessment
included a review of the risk characteristics of our business
and the design of our compensation plans. Although a significant
portion of our executive compensation program is
performance-based, the Compensation Committee has focused on
aligning the Companys compensation plans with the
long-term interests of the Company and its stockholders and
avoiding rewards or incentive structures that could encourage
unnecessary risks to the Company.
Management reported its findings from this assessment to the
Compensation Committee. The Compensation Committee agreed that
the Companys compensation plans do not encourage excessive
or inappropriate risk taking and are not reasonably likely to
have a material, adverse effect on the Company.
Compensation
Committee Interlocks and Insider Participation
The compensation committee of the board of directors consists of
Messrs. Queally (Chairman) and Mackesy. None of such
persons are officers or employees or former officers or
employees of the Company. None of the executive officers of the
Company served as a member of the compensation committee of any
other company during 2010, except that Mr. Wilcox served on
the compensation committee of Concentra, Inc. No officer or
employee of Concentra, Inc. serves on our board of directors.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
USPI does not issue any of its equity securities in conjunction
with an equity compensation plan. See Item 11,
Executive Compensation- Restricted Stock and Option
Plan, for a discussion of Parents equity
compensation plan.
89
All of the issued and outstanding stock of USPI is owned by
Holdings, which in turn is wholly-owned by Parent. The following
table sets forth information as of February 25, 2011, with
respect to the beneficial ownership of the capital stock of our
Parent by (i) our chief executive officer and each of the
other named executive officers, (ii) each of our directors,
(iii) all of our directors and executive officers as a
group and (iv) each holder of five percent (5%) or more of
any class of our Parents outstanding capital stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Participating
|
|
Percent of
|
|
|
Common
|
|
Percent of
|
|
Preferred
|
|
Outstanding
|
|
|
Shares
|
|
Outstanding
|
|
Shares
|
|
Participating
|
|
|
Beneficially
|
|
Common
|
|
Beneficially
|
|
Preferred
|
Name of Beneficial Owner(1)
|
|
Owned
|
|
Shares
|
|
Owned
|
|
Shares
|
|
Welsh, Carson, Anderson & Stowe(2)
|
|
|
136,448,356
|
|
|
|
86.4
|
%
|
|
|
17,326,775
|
|
|
|
96.3
|
%
|
California State Teachers Retirement System(3)
|
|
|
22,183,099
|
|
|
|
14.0
|
%
|
|
|
2,816,901
|
|
|
|
15.7
|
%
|
CPP Investment Board (USRE II) Inc.(4)
|
|
|
26,619,718
|
|
|
|
16.8
|
%
|
|
|
3,380,282
|
|
|
|
18.8
|
%
|
Silvertech Investment PTE Ltd(5)
|
|
|
8,873,239
|
|
|
|
5.6
|
%
|
|
|
1,126,761
|
|
|
|
6.3
|
%
|
Donald E. Steen(6)
|
|
|
1,421,127
|
|
|
|
*
|
|
|
|
78,873
|
|
|
|
*
|
|
William H. Wilcox(7)
|
|
|
6,488,790
|
|
|
|
4.1
|
%
|
|
|
157,746
|
|
|
|
*
|
|
Brett P. Brodnax(8)
|
|
|
2,388,811
|
|
|
|
1.5
|
%
|
|
|
27,042
|
|
|
|
*
|
|
Mark A. Kopser(9)
|
|
|
2,364,345
|
|
|
|
1.5
|
%
|
|
|
56,338
|
|
|
|
*
|
|
Niels P. Vernegaard(10)
|
|
|
2,007,194
|
|
|
|
1.3
|
%
|
|
|
7,872
|
|
|
|
*
|
|
Philip A. Spencer(11)
|
|
|
500,000
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
|
Joel T. Allison
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael E. Donovan(12)(13)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
John C. Garrett, M.D.(13)
|
|
|
173,095
|
|
|
|
*
|
|
|
|
16,901
|
|
|
|
*
|
|
D. Scott Mackesy(12)(13)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
James K. Newman(13)
|
|
|
217,463
|
|
|
|
*
|
|
|
|
22,535
|
|
|
|
*
|
|
Boone Powell, Jr.(13)
|
|
|
111,001
|
|
|
|
*
|
|
|
|
9,016
|
|
|
|
*
|
|
Paul B. Queally (12)(14)
|
|
|
215,457
|
|
|
|
*
|
|
|
|
22,281
|
|
|
|
*
|
|
Raymond A. Ranelli(13)
|
|
|
95,448
|
|
|
|
*
|
|
|
|
7,435
|
|
|
|
*
|
|
All directors and executive officers as a group(15)
|
|
|
16,380,659
|
|
|
|
10.3
|
%
|
|
|
411,673
|
|
|
|
2.3
|
%
|
|
|
|
* |
|
Less than one percent |
|
(1) |
|
Unless otherwise indicated, the principal executive offices of
each of the beneficial owners identified are located at 15305
Dallas Parkway, Suite 1600, Addison, Texas 77001. |
|
(2) |
|
Represents (A) 54,671,610 common shares and 6,942,423
participating preferred shares held by Welsh Carson over which
Welsh Carson has sole voting and investment power,
(B) 25,200 common shares and 3,200 participating preferred
shares held by WCAS Management Corporation, an affiliate of
Welsh Carson, over which WCAS Management Corporation has sole
voting and investment power, (C) an aggregate 1,462,785
common shares and 185,752 participating preferred over which
individuals who are general partners of WCAS X Associates LLC,
the sole general partner of Welsh Carson, and/or otherwise
employed by an affiliate of Welsh, Carson, Anderson &
Stowe have voting and investment power, and (D) an
aggregate 80,288,761 common shares and 10,195,400 participating
preferred shares held by other co-investors, over which Welsh
Carson has sole voting power. WCAS X Associates LLC, the sole
general partner of Welsh Carson and the individuals who serve as
general partners of WCAS X Associates LLC, including D. Scott
Mackesy, Paul B. Queally and Michael E. Donovan, may be deemed
to beneficially own the shares beneficially owned by Welsh
Carson. Such persons disclaim beneficial ownership of such
shares. The principal executive offices of Welsh, Carson,
Anderson & Stowe are located at 320 Park Avenue,
Suite 2500, New York, New York 10022. |
|
(3) |
|
Such beneficial owner has granted to Welsh Carson sole voting
power over its shares. The principal executive offices of such
beneficial owner is 7667 Folsom Blvd., Suite 250,
Sacramento, California 95826. |
90
|
|
|
(4) |
|
Such beneficial owner has granted to Welsh Carson sole voting
power over its shares. The principal executive offices of such
beneficial owner is One Queen Street East, Suite 2600,
Toronto, Ontario, M5C 2W5, Canada. |
|
(5) |
|
Such beneficial owner has granted to Welsh Carson sole voting
power over its shares. The principal executive offices of such
beneficial owner is 255 Shoreline Drive, Suite 600, Redwood
City, California 94065. |
|
(6) |
|
Includes 100,000 common shares owned by the Michelle Ann Steen
Trust and 100,000 common shares owned by the Marcus Anthony
Steen Trust for which, in each case, Mr. Steen acts as a
trustee and has voting and investment power over such shares.
Such shares are subject to restrictions on transfer set forth in
a restricted stock award agreement entered into at the time of
the consummation of the merger. Also included are another
600,000 common shares which are subject to restrictions on
transfer set forth in a restricted stock award agreement entered
into at the time of the consummation of the merger. |
|
(7) |
|
Includes 5,246,536 common shares which are subject to
restrictions on transfer set forth in a restricted stock award
agreement entered into at the time of the consummation of the
merger. |
|
(8) |
|
Includes 2,175,853 common shares which are subject to
restrictions on transfer set forth in a restricted stock award
agreement entered into at the time of the consummation of the
merger. |
|
(9) |
|
Includes 1,920,683 common shares which are subject to
restrictions on transfer set forth in a restricted stock award
agreement entered into at the time of the consummation of the
merger. |
|
(10) |
|
Includes 1,945,203 common shares which are subject to
restrictions on transfer set forth in a restricted stock award
agreement entered into at the time of the consummation of the
merger. |
|
(11) |
|
Includes 500,000 common shares which are subject to restrictions
on transfer set forth in a restricted stock award agreement
entered into at the time of initial employment with USPI. |
|
(12) |
|
Does not include (A) 54,671,610 common shares or 6,942,423
participating preferred shares owned by Welsh Carson, or
(B) 25,200 common shares or 3,200 participating preferred
shares owned by WCAS Management Corporation. Messrs Queally,
Mackesy and Donovan, as general partners of WCAS X Associates
LLC, the sole general partner of Welsh Carson, and officers of
WCAS Management Corporation, may be deemed to beneficially own
the shares beneficially owned by Welsh Carson and WCAS
Management Corporation. Each of Messrs Queally, Mackesy and
Donovan disclaims beneficial ownership of such shares. The
principal executive offices of Messrs Queally, Mackesy and
Donovan are located at 320 Park Avenue, Suite 2500, New
York, New York 10022. |
|
(13) |
|
Includes 40,000 common shares which are subject to restrictions
on transfer set forth in a restricted stock award agreement. |
|
(14) |
|
Includes (A) an aggregate 3,090 common shares and 393
preferred shares owned by certain trusts established for the
benefit of Mr. Queallys children for which, in each
case, Mr. Queally acts as a trustee and has voting and
investment power over such shares and (B) 40,000 common
shares which are subject to restrictions on transfer set forth
in a restricted stock awards agreement. |
|
(15) |
|
Does not include (A) 54,671,610 common shares or 6,942,423
participating preferred shares owned by Welsh Carson, or
(B) 25,200 common shares or 3,200 participating preferred
shares owned by WCAS Management Corporation. Includes an
aggregate 12,361,836 common shares which are subject to
restrictions on transfer set forth in restricted stock award
agreements entered into at the time of the consummation of the
merger. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
This Item 13 describes certain relationships and
transactions involving us and certain of our directors,
executive officers, and other related parties. We believe that
all the transactions described in this Item 13 are upon
fair and reasonable terms no less favorable than could be
obtained in comparable arms length transactions with
unaffiliated third parties under the same or similar
circumstances.
Arrangements
with Our Investors
Welsh Carson, its co-investors and the rollover stockholders
entered into agreements described below with our Parent. Welsh
Carsons co-investors includes individuals and entities
invited by Welsh Carson to participate in our Parents
financings such as affiliated investment funds, individuals
employed by affiliates of Welsh Carson and limited partners of
Welsh Carson.
91
Stockholders
Agreement
The stockholders agreement contains certain restrictions on the
transfer of equity securities of our Parent and provides certain
stockholders with certain preemptive and information rights.
Management
Agreement
In connection with the merger, USPI entered into a management
agreement with WCAS Management Corporation, an affiliate of
Welsh Carson, pursuant to which WCAS Management Corporation will
provide management and financial advisory services to us. WCAS
Management Corporation receives an annual management fee of
$2.0 million, of which $1.0 million will be payable in
cash on an annual basis and the remainder will accrue annually
over time, and annual reimbursement for
out-of-pocket
expenses incurred in connection with the provision of such
services.
Other
Arrangements with Directors and Executive Officers
Restricted
Stock and Option Plan
In connection with the merger, our Parent adopted a new
restricted stock and option plan. Members of our management,
including some of those who are participating in the merger as
rollover stockholders, received awards under this plan. See
Compensation Discussion and Analysis
Restricted Stock and Option Plan.
Employment
Agreements
Each of the named executive officers of USPI have employment
agreements with us. See Compensation Discussion and
Analysis Employment Arrangements and
Agreements.
Other
Arrangements
We have entered into agreements with certain majority and
minority owned surgery centers to provide management services.
As compensation for these services, the surgery centers are
charged management fees which are either fixed in amount or
represent a fixed percentage of each centers net revenue
less bad debt. The percentages range from 3% to 8%. Amounts
recognized under these agreements, after elimination of amounts
from consolidated surgery centers, totaled approximately
$52.1 million, $45.2 million, and $39.1 million
in 2010, 2009 and 2008, respectively, and are included in
management and contract service revenue in our consolidated
statements of income.
We regularly engage in purchases and sales of ownership
interests in our facilities. We operate 27 surgical facilities
in partnership with the Baylor Health Care System (Baylor) and
local physicians in the Dallas/Fort Worth area.
Baylors Chief Executive Officer is a member of our board
of directors. The following table summarizes transactions with
Baylor during 2009 and 2008. We had no such transactions in
2010. We believe that the sale prices were approximately the
same as if they had been negotiated on an arms length
basis, and the prices equaled the value assigned by an external
appraiser who valued the businesses immediately prior to the
sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
|
Proceeds
|
|
|
Gain
|
|
|
December 2009
|
|
|
Dallas, Texas(1
|
)
|
|
$
|
1.2 million
|
|
|
$
|
0.3 million
|
|
December 2009
|
|
|
Fort Worth, Texas(2
|
)
|
|
|
2.4 million
|
|
|
|
0.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
3.6 million
|
|
|
$
|
0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Baylor acquired a controlling interest in a facility from us,
which transferred control of the facility to Baylor. |
|
(2) |
|
Baylor acquired a controlling interest in two facilities. We
continue to account for these facilities under the equity method
of accounting. |
Additionally, we derived 2% of our revenues and approximately
45% of our equity in earnings of unconsolidated affiliates in
2010 from our joint venture with Baylor.
92
Marc Steen, the son of Donald E. Steen, is employed by USPI as
the market president for Atlanta. During 2010, Marc Steen earned
approximately $230,300 in salary and bonus.
USPI does not have a written policy on related party
transactions, however, the audit and compliance committee will
review and approve all related party transactions required to be
reported pursuant to item 404(a) of
Regulation S-X.
Neither the Company, UPSI Holdings, Inc. nor Parent are listed
on a national securities exchange or in an automated
inter-dealer quotation system of a national securities
association, and we are not subject to either the listing
standards of the New York Stock Exchange or the NASDAQ Rules.
For the purposes of the following determinations of director
independence, we have chosen to use the NASDAQ Rules. Using such
Rules, we have determined that each of the directors on our
board of directors are independent for general board service,
except Messrs. Steen, Wilcox, Mackesy, Queally, Donovan and
Allison.
Our board of directors has a separately designated, standing
audit and compliance committee comprised of the following
members of the board: Messrs. Ranelli (Chairman), Donovan,
Garrett and Newman. Under the NASDAQ Rules,
Messrs. Ranelli, Garrett and Newman would be considered
independent for the purposes of audit and compliance committee
service.
Our board of directors also has a separately designated,
standing compensation committee comprised of the following
members of the board: Messrs. Queally (Chairman) and
Mackesy. Under the NASDAQ Rules, Messrs. Queally and
Mackesy would not be considered independent for the purposes of
compensation committee service.
|
|
ITEM 14.
|
Principal
Accounting Fees and Services
|
The following table shows the aggregate fees billed by KPMG LLP,
our independent registered public accounting firm, during the
years ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
Description of Fees
|
|
2010
|
|
|
2009
|
|
|
Audit Fees(1)
|
|
$
|
1,489,640
|
|
|
$
|
1,331,900
|
|
Audit Related Fees(2)
|
|
|
|
|
|
|
41,995
|
|
Tax Fees(3)
|
|
|
|
|
|
|
|
|
All Other Fees(4)
|
|
|
332,250
|
|
|
|
198,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,821,890
|
|
|
$
|
1,571,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Audit Fees. Includes fees billed for
professional services rendered for the audit of our annual
financial statements included in our
Form 10-K,
reviews of our quarterly financial statements included in
Forms 10-Q,
audits of subsidiaries, reviews of our other filings with the
SEC, and other research work necessary to comply with generally
accepted accounting standards for the years ended
December 31, 2010 and 2009. |
|
(2) |
|
Audit Related Fees. Includes fees billed for
assurance and related services that are reasonably related to
the performance of the audit or review of our financial
statements and are not reported under Audit Fees.
These services include other accounting and reporting
consultations. |
|
(3) |
|
Tax Fees. Includes fees billed for tax
compliance, tax advice, and tax planning. |
|
(4) |
|
All Other Fees. Includes fees billed for
assistance with preparation of Medicare cost reports and due
diligence procedures on potential acquisitions. |
The charter of our audit and compliance committee provides that
the committee must approve in advance all audit and non-audit
services provided by KPMG LLP. The audit and compliance
committee approved all of these services.
93
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) (1) Financial Statements
The following consolidated financial statements are filed as
part of this
Form 10-K:
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
S-1
|
|
(3) The following consolidated financial statements of Texas
Health Ventures Group, L.L.C. and Subsidiaries are presented
pursuant to
Rule 3-09
of
Regulation S-X:
|
|
|
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6
|
|
|
|
|
7
|
|
|
|
|
8
|
|
|
|
|
23
|
|
|
|
|
24
|
|
|
|
|
25
|
|
|
|
|
26
|
|
|
|
|
27
|
|
|
|
|
28
|
|
|
|
|
29
|
|
|
|
|
IV-1
|
|
94
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
United Surgical Partners International, Inc.:
We have audited the accompanying consolidated balance sheets of
United Surgical Partners International, Inc. (the Company) and
subsidiaries as of December 31, 2010 and 2009, and the
related consolidated statements of income, comprehensive income
(loss), changes in equity and cash flows for each of the years
in the three year period ended December 31, 2010. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedule. These consolidated financial statements and the
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of United Surgical Partners International, Inc. and
subsidiaries as of December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the
years in the three year period ended December 31, 2010, in
conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
United Surgical Partners International, Inc.s internal
control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated February 25, 2011 expressed an unqualified
opinion on the effectiveness of the Companys internal
control over financial reporting.
Dallas, Texas
February 25, 2011
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholder
United Surgical Partners International, Inc.:
We have audited United Surgical Partners International,
Inc.s (the Company) internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). United Surgical
Partners International, Inc.s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the
accompanying Managements Report on Internal Control
over Financial Reporting. Our responsibility is to express
an opinion on the Companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, United Surgical Partners International, Inc.
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
United Surgical Partners International, Inc. acquired several
subsidiaries and equity method investments during 2010, and
management excluded from its assessment of the effectiveness of
United Surgical Partners International, Inc.s internal
control over financial reporting as of December 31, 2010,
the Companys internal control over financial reporting
associated with total assets of $69.4 million and
$3.9 million of revenues included in the consolidated
financial statements of United Surgical Partners International,
Inc. and subsidiaries as of and for the year ended
December 31, 2010. Our audit of internal control over
financial reporting of United Surgical Partners International,
Inc. also excluded an evaluation of the internal control over
financial reporting of those subsidiaries and equity method
investments which are listed below:
|
|
|
|
|
HealthMark Partners, Inc.
|
|
|
|
USP Denver, Inc. (Investment in Flatirons Surgery Center, LLC)
|
|
|
|
USP Houston, Inc. (Investments in Memorial Hermann
Endoscopy & Surgery Center North Houston, LLC;
Memorial Hermann Surgery Center Woodlands Parkway, LLC and
Memorial Hermann Surgery Center Memorial City, LLC)
|
|
|
|
USP Gateway, Inc.
|
|
|
|
USP North Texas, Inc. (Investments in Metrocrest Surgery Center,
LP; Baylor Surgicare of Duncanville, LLC; Tuscan Surgery Center
at Las Colinas, LLC; and Lone Star Endoscopy, LLC)
|
|
|
|
USP Sacramento, Inc. (Investment in Grass Valley Outpatient
Surgery Center, LP)
|
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of United Surgical Partners
International, Inc. and subsidiaries as of December 31,
2010 and 2009, and the related consolidated statements of
income, comprehensive income (loss), changes in equity and cash
flows for each of the years in the three year period ended
December 31, 2010 and our report dated February 25,
2011 expressed an unqualified opinion on those consolidated
financial statements.
Dallas, Texas
February 25, 2011
F-2
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands,
|
|
|
|
except share amounts)
|
|
|
ASSETS
|
Cash and cash equivalents (Note 1)
|
|
$
|
60,253
|
|
|
$
|
34,890
|
|
Accounts receivable, net of allowance for doubtful accounts of
$7,481 and $8,160, respectively
|
|
|
50,082
|
|
|
|
54,237
|
|
Other receivables (Note 6)
|
|
|
15,242
|
|
|
|
15,246
|
|
Inventories of supplies
|
|
|
9,191
|
|
|
|
8,789
|
|
Deferred tax asset, net (Note 13)
|
|
|
14,961
|
|
|
|
16,400
|
|
Prepaids and other current assets
|
|
|
14,682
|
|
|
|
14,382
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
164,411
|
|
|
|
143,944
|
|
Property and equipment, net (Note 7)
|
|
|
202,260
|
|
|
|
198,506
|
|
Investments in unconsolidated affiliates (Note 3)
|
|
|
393,561
|
|
|
|
355,499
|
|
Goodwill (Note 8)
|
|
|
1,268,663
|
|
|
|
1,279,291
|
|
Intangible assets, net (Note 8)
|
|
|
319,213
|
|
|
|
322,896
|
|
Other assets
|
|
|
24,631
|
|
|
|
25,256
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,372,739
|
|
|
$
|
2,325,392
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Accounts payable
|
|
$
|
23,488
|
|
|
$
|
23,475
|
|
Accrued salaries and benefits
|
|
|
26,153
|
|
|
|
33,015
|
|
Due to affiliates
|
|
|
116,104
|
|
|
|
129,296
|
|
Accrued interest
|
|
|
8,714
|
|
|
|
8,784
|
|
Current portion of long-term debt (Note 9)
|
|
|
22,386
|
|
|
|
23,337
|
|
Other current liabilities
|
|
|
67,815
|
|
|
|
39,053
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
264,660
|
|
|
|
256,960
|
|
Long-term debt, less current portion (Note 9)
|
|
|
1,047,440
|
|
|
|
1,048,191
|
|
Other long-term liabilities
|
|
|
26,615
|
|
|
|
32,466
|
|
Deferred tax liability, net (Note 13)
|
|
|
131,205
|
|
|
|
125,907
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,469,920
|
|
|
|
1,463,524
|
|
Noncontrolling interests redeemable (Note 4)
|
|
|
81,668
|
|
|
|
63,865
|
|
Commitments and contingencies (Notes 4 and 16)
|
|
|
|
|
|
|
|
|
Equity (Note 14):
|
|
|
|
|
|
|
|
|
United Surgical Partners International, Inc. (USPI)
stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 100 shares authorized,
issued and outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
784,573
|
|
|
|
789,505
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(66,351
|
)
|
|
|
(58,845
|
)
|
Retained earnings
|
|
|
68,535
|
|
|
|
27,292
|
|
|
|
|
|
|
|
|
|
|
Total USPI stockholders equity
|
|
|
786,757
|
|
|
|
757,952
|
|
Noncontrolling interests nonredeemable (Note 4)
|
|
|
34,394
|
|
|
|
40,051
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
821,151
|
|
|
|
798,003
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,372,739
|
|
|
$
|
2,325,392
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-3
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
504,765
|
|
|
$
|
523,899
|
|
|
$
|
554,350
|
|
Management and contract service revenues
|
|
|
64,838
|
|
|
|
58,326
|
|
|
|
53,027
|
|
Other revenues
|
|
|
7,062
|
|
|
|
11,250
|
|
|
|
7,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
576,665
|
|
|
|
593,475
|
|
|
|
615,098
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
69,916
|
|
|
|
61,771
|
|
|
|
47,042
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits, and other employee costs
|
|
|
156,213
|
|
|
|
160,278
|
|
|
|
170,805
|
|
Medical services and supplies
|
|
|
97,940
|
|
|
|
99,510
|
|
|
|
109,739
|
|
Other operating expenses
|
|
|
99,075
|
|
|
|
89,347
|
|
|
|
101,846
|
|
General and administrative expenses
|
|
|
38,202
|
|
|
|
38,769
|
|
|
|
40,155
|
|
Provision for doubtful accounts
|
|
|
8,458
|
|
|
|
8,720
|
|
|
|
7,359
|
|
Losses on deconsolidations, disposals and impairments
(Notes 2 and 8)
|
|
|
6,378
|
|
|
|
29,162
|
|
|
|
1,827
|
|
Depreciation and amortization
|
|
|
29,799
|
|
|
|
31,165
|
|
|
|
32,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
436,065
|
|
|
|
456,951
|
|
|
|
464,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
210,516
|
|
|
|
198,295
|
|
|
|
198,104
|
|
Interest income
|
|
|
798
|
|
|
|
2,741
|
|
|
|
3,278
|
|
Interest expense
|
|
|
(70,038
|
)
|
|
|
(70,353
|
)
|
|
|
(84,916
|
)
|
Other, net
|
|
|
708
|
|
|
|
373
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(68,532
|
)
|
|
|
(67,239
|
)
|
|
|
(81,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
141,984
|
|
|
|
131,056
|
|
|
|
116,498
|
|
Income tax benefit (expense) (Note 13)
|
|
|
(32,328
|
)
|
|
|
879
|
|
|
|
(22,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
109,656
|
|
|
|
131,935
|
|
|
|
93,831
|
|
Discontinued operations, net of tax (Note 2):
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
(221
|
)
|
|
|
1,453
|
|
|
|
(554
|
)
|
Loss on disposal of discontinued operations
|
|
|
(6,782
|
)
|
|
|
|
|
|
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings (loss) from discontinued operations
|
|
|
(7,003
|
)
|
|
|
1,453
|
|
|
|
(1,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
102,653
|
|
|
|
133,388
|
|
|
|
92,652
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
(60,560
|
)
|
|
|
(63,722
|
)
|
|
|
(55,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPIs common stockholder
|
|
$
|
42,093
|
|
|
$
|
69,666
|
|
|
$
|
37,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to USPIs common stockholder:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax
|
|
$
|
49,123
|
|
|
$
|
68,023
|
|
|
$
|
38,488
|
|
Earnings (loss) from discontinued operations, net of tax
|
|
|
(7,030
|
)
|
|
|
1,643
|
|
|
|
(974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to USPIs common stockholder
|
|
$
|
42,093
|
|
|
$
|
69,666
|
|
|
$
|
37,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-4
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net income
|
|
$
|
102,653
|
|
|
$
|
133,388
|
|
|
$
|
92,652
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(11,638
|
)
|
|
|
21,967
|
|
|
|
(71,790
|
)
|
Unrealized gain (loss) on interest rate swaps, net of tax
|
|
|
3,408
|
|
|
|
3,894
|
|
|
|
(10,051
|
)
|
Pension adjustments, net of tax
|
|
|
724
|
|
|
|
(698
|
)
|
|
|
(682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(7,506
|
)
|
|
|
25,163
|
|
|
|
(82,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
95,147
|
|
|
|
158,551
|
|
|
|
10,129
|
|
Less: Comprehensive income attributable to noncontrolling
interests
|
|
|
(60,560
|
)
|
|
|
(63,722
|
)
|
|
|
(55,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to USPIs common
stockholder
|
|
$
|
34,587
|
|
|
$
|
94,829
|
|
|
$
|
(45,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-5
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USPI Common Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Comprehensive
|
|
|
Outstanding
|
|
|
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Interests
|
|
|
|
Total
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Nonredeemable
|
|
|
|
|
|
|
|
|
|
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
837,100
|
|
|
|
|
|
|
|
100
|
|
|
$
|
|
|
|
$
|
799,562
|
|
|
$
|
(1,485
|
)
|
|
$
|
8,729
|
|
|
$
|
30,294
|
|
Distributions to noncontrolling interests
|
|
|
(5,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,112
|
)
|
Purchases and sales of noncontrolling interests, net and other
|
|
|
14,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,359
|
|
Contribution related to equity award grants by USPI Group
Holdings, Inc.
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
40,053
|
|
|
$
|
37,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,514
|
|
|
|
2,539
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(71,790
|
)
|
|
|
(71,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,790
|
)
|
|
|
|
|
|
|
|
|
Unrealized loss on interest rate swaps, net of tax
|
|
|
(10,051
|
)
|
|
|
(10,051
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,051
|
)
|
|
|
|
|
|
|
|
|
Pension liability adjustment, net of tax
|
|
|
(682
|
)
|
|
|
(682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(82,523
|
)
|
|
|
(82,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(42,470
|
)
|
|
$
|
(45,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
806,217
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
801,902
|
|
|
|
(84,008
|
)
|
|
|
46,243
|
|
|
|
42,080
|
|
Distributions to noncontrolling interests
|
|
|
(5,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,749
|
)
|
Purchases of noncontrolling interests
|
|
|
(3,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,411
|
)
|
|
|
|
|
|
|
|
|
|
|
4,597
|
|
Sales of noncontrolling interests
|
|
|
(6,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,922
|
)
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
Deconsolidation of subsidiaries
|
|
|
(6,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,682
|
)
|
Payment of common stock dividend
|
|
|
(88,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88,617
|
)
|
|
|
|
|
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
|
|
1,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
75,611
|
|
|
$
|
69,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,666
|
|
|
|
5,945
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
21,967
|
|
|
|
21,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,967
|
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
3,894
|
|
|
|
3,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,894
|
|
|
|
|
|
|
|
|
|
Pension liability adjustment, net of tax
|
|
|
(698
|
)
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
25,163
|
|
|
|
25,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
100,774
|
|
|
$
|
94,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
798,003
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
789,505
|
|
|
|
(58,845
|
)
|
|
|
27,292
|
|
|
|
40,051
|
|
Distributions to noncontrolling interests
|
|
|
(5,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,710
|
)
|
Purchases of noncontrolling interests
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(452
|
)
|
|
|
|
|
|
|
|
|
|
|
329
|
|
Sales of noncontrolling interests
|
|
|
(6,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,774
|
)
|
|
|
|
|
|
|
|
|
|
|
678
|
|
Deconsolidation of subsidiaries
|
|
|
(6,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,621
|
)
|
Contribution related to equity award grants by USPI Group
Holdings, Inc. and other
|
|
|
2,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend to USPI Holdings, Inc/USPI Group Holdings, Inc.
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(850
|
)
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
47,760
|
|
|
$
|
42,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,093
|
|
|
|
5,667
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(11,638
|
)
|
|
|
(11,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,638
|
)
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
3,408
|
|
|
|
3,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,408
|
|
|
|
|
|
|
|
|
|
Pension liability adjustment, net of tax
|
|
|
724
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
(7,506
|
)
|
|
|
(7,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
40,254
|
|
|
$
|
34,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
821,151
|
|
|
|
|
|
|
|
100
|
|
|
$
|
|
|
|
$
|
784,573
|
|
|
$
|
(66,351
|
)
|
|
$
|
68,535
|
|
|
$
|
34,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-6
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
102,653
|
|
|
$
|
133,388
|
|
|
$
|
92,652
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (income) from discontinued operations
|
|
|
7,003
|
|
|
|
(1,453
|
)
|
|
|
1,179
|
|
Provision for doubtful accounts
|
|
|
8,458
|
|
|
|
8,720
|
|
|
|
7,359
|
|
Depreciation and amortization
|
|
|
29,799
|
|
|
|
31,165
|
|
|
|
32,305
|
|
Amortization of debt issue costs and discount
|
|
|
3,348
|
|
|
|
3,337
|
|
|
|
2,860
|
|
Deferred income taxes
|
|
|
8,290
|
|
|
|
(10,401
|
)
|
|
|
14,214
|
|
Loss on deconsolidations, disposals and impairments
|
|
|
6,378
|
|
|
|
29,162
|
|
|
|
1,827
|
|
Equity in earnings of unconsolidated affiliates, net of
distributions received
|
|
|
1,265
|
|
|
|
(6,951
|
)
|
|
|
(8,591
|
)
|
Equity-based compensation
|
|
|
1,694
|
|
|
|
1,695
|
|
|
|
1,785
|
|
Increases (decreases) in cash from changes in operating assets
and liabilities, net of effects from purchases of new businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,416
|
)
|
|
|
(7,780
|
)
|
|
|
(9,332
|
)
|
Other receivables
|
|
|
(3,304
|
)
|
|
|
(1,491
|
)
|
|
|
(8,347
|
)
|
Inventories of supplies, prepaids and other assets
|
|
|
4,386
|
|
|
|
(3,607
|
)
|
|
|
7,921
|
|
Accounts payable and other current liabilities
|
|
|
1,545
|
|
|
|
2,561
|
|
|
|
7,157
|
|
Other long-term liabilities
|
|
|
2,965
|
|
|
|
2,265
|
|
|
|
(870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
169,064
|
|
|
|
180,610
|
|
|
|
142,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of new businesses and equity interests, net of cash
received
|
|
|
(83,676
|
)
|
|
|
(59,549
|
)
|
|
|
(76,450
|
)
|
Proceeds from sales of businesses and equity interests, net
|
|
|
50,377
|
|
|
|
22
|
|
|
|
12,151
|
|
Purchases of property and equipment
|
|
|
(40,035
|
)
|
|
|
(29,704
|
)
|
|
|
(30,689
|
)
|
Returns of capital from unconsolidated affiliates
|
|
|
1,193
|
|
|
|
2,894
|
|
|
|
3,039
|
|
Decrease (increase) in deposits and notes receivable
|
|
|
101
|
|
|
|
508
|
|
|
|
(8,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(72,040
|
)
|
|
|
(85,829
|
)
|
|
|
(100,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt, net of debt issuance costs
|
|
|
38,974
|
|
|
|
5,600
|
|
|
|
45,090
|
|
Payments on long-term debt
|
|
|
(40,126
|
)
|
|
|
(25,670
|
)
|
|
|
(26,914
|
)
|
Net equity contribution from USPI Group Holdings, Inc.
|
|
|
72
|
|
|
|
(39
|
)
|
|
|
40
|
|
(Purchases) sales of noncontrolling interests, net
|
|
|
1,086
|
|
|
|
(2,067
|
)
|
|
|
(26,430
|
)
|
Payment of common stock dividend
|
|
|
(850
|
)
|
|
|
(88,617
|
)
|
|
|
|
|
(Decrease) increase in cash held on behalf of unconsolidated
affiliates
|
|
|
(14,166
|
)
|
|
|
63,101
|
|
|
|
(5,440
|
)
|
Distributions to noncontrolling interests
|
|
|
(58,989
|
)
|
|
|
(63,555
|
)
|
|
|
(56,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(73,999
|
)
|
|
|
(111,247
|
)
|
|
|
(70,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
|
4,339
|
|
|
|
4,602
|
|
|
|
3,627
|
|
Investing cash flows
|
|
|
(1,471
|
)
|
|
|
(2,099
|
)
|
|
|
(550
|
)
|
Financing cash flows
|
|
|
(699
|
)
|
|
|
(778
|
)
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
2,169
|
|
|
|
1,725
|
|
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
169
|
|
|
|
196
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
25,363
|
|
|
|
(14,545
|
)
|
|
|
(27,323
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
34,890
|
|
|
|
49,435
|
|
|
|
76,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
60,253
|
|
|
$
|
34,890
|
|
|
$
|
49,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized
|
|
$
|
69,331
|
|
|
$
|
70,920
|
|
|
$
|
86,025
|
|
Income taxes (refund received) paid, net
|
|
|
16,955
|
|
|
|
8,060
|
|
|
|
(1,906
|
)
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired under capital lease obligations
|
|
$
|
13,481
|
|
|
$
|
2,985
|
|
|
$
|
1,966
|
|
Receipt of note receivable for sale of noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
601
|
|
See accompanying notes to consolidated financial statements
F-7
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
December 31, 2010, 2009 and 2008
|
|
(1)
|
Summary
of Significant Accounting Policies and Practices
|
|
|
(a)
|
Description
of Business
|
United Surgical Partners International, Inc., a Delaware
Corporation, and subsidiaries (USPI or the Company) was formed
in February 1998 for the primary purpose of ownership and
operation of ambulatory surgery centers, surgical hospitals and
related businesses in the United States and Europe. At
December 31, 2010 the Company, headquartered in Dallas,
Texas, operated 189 short-stay surgical facilities. Of these 189
facilities, the Company consolidates the results of 58, accounts
for 130 under the equity method and operates the remaining
facility under a services and management contract. The Company
operates in two countries, with 185 of its 189 facilities
located in the United States of America; the remaining four
facilities are located in the United Kingdom. The majority of
the Companys U.S. facilities are jointly owned with
local physicians and a
not-for-profit
healthcare system that has other healthcare businesses in the
region. At December 31, 2010, the Company had agreements
with
not-for-profit
healthcare systems providing for joint ownership of 132 of the
Companys 185 U.S. facilities and also providing a
framework for the planning and construction of additional
facilities in the future. All of the Companys
U.S. facilities include physician owners.
Global Healthcare Partners Limited (Global), a USPI subsidiary
incorporated in England, manages and wholly owns three surgical
hospitals and an oncology clinic in the greater London area.
The Company is subject to changes in government legislation that
could impact Medicare, Medicaid and foreign government
reimbursement levels and is also subject to increased levels of
managed care penetration and changes in payor patterns that may
impact the level and timing of payments for services rendered.
The Company maintains its books and records on the accrual basis
of accounting, and the consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America.
The Company had publicly traded equity securities from June 2001
through April 2007. Pursuant to an Agreement and Plan of Merger
(the merger) dated as of January 7, 2007, between an
affiliate of Welsh, Carson, Anderson & Stowe X, L.P.
(Welsh Carson), the Company became a wholly owned subsidiary of
USPI Holdings, Inc. on April 19, 2007. USPI Holdings is a
wholly owned subsidiary of USPI Group Holdings, Inc. (Parent),
which is owned by an investor group that includes affiliates of
Welsh Carson, members of the Companys management and other
investors.
Certain amounts in the consolidated financial statements for
prior periods have been reclassified to conform to the 2010
presentation. Net operating results have not been affected by
these reclassifications.
|
|
(b)
|
Translation
of Foreign Currencies
|
The financial statements of foreign subsidiaries are measured in
local currency and then translated into U.S. dollars. All
assets and liabilities have been translated using the current
rate of exchange at the balance sheet date. Results of
operations have been translated using the average rates
prevailing throughout the year. Translation gains or losses
resulting from changes in exchange rates are accumulated in a
separate component of stockholders equity.
|
|
(c)
|
Principles
of Consolidation
|
The consolidated financial statements include the financial
statements of USPI and its wholly-owned and majority-owned
subsidiaries. In addition, the Company consolidates the accounts
of certain investees of which it does not own a majority
ownership interest because the Company maintains effective
control over the investees
F-8
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
assets and operations. All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company also determines if it is the primary beneficiary of
(and therefore should consolidate) any entity whose operations
it does not control with voting rights. At December 31,
2010 and 2009, the Company consolidated one and two such
entities, respectively (Note 5).
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires management to make a number of estimates
and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
|
|
(e)
|
Cash
and Cash Equivalents
|
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with
original or remaining maturities of three months or less to be
cash equivalents. Cash and cash equivalents at times may exceed
the FDIC limits. The Company believes no significant
concentration of credit risk exists with respect to these cash
investments.
The Companys wholly-owned insurance subsidiary maintains
certain balances in cash and cash equivalents that are used in
connection with its retained professional and general liability
risks and are not designated for general corporate purposes. At
December 31, 2010 and 2009, these cash and cash equivalents
balances were $6.0 million and $2.9 million,
respectively.
|
|
(f)
|
Inventories
of Supplies
|
Inventories of supplies are stated at cost, which approximates
market, and are expensed as used.
|
|
(g)
|
Property
and Equipment
|
Property and equipment are stated at cost or, when acquired as
part of a business combination, fair value at date of
acquisition. Depreciation is calculated on the straight-line
method over the estimated useful lives of the assets. Upon
retirement or disposal of assets, the asset and accumulated
depreciation accounts are adjusted accordingly, and any gain or
loss is reflected in earnings or loss of the respective period.
Maintenance costs and repairs are expensed as incurred;
significant renewals and betterments are capitalized. Assets
held under capital leases are classified as property and
equipment and amortized using the straight-line method over the
shorter of the useful lives or lease terms, and the related
obligations are recorded as debt. Amortization of assets under
capital leases and of leasehold improvements is included in
depreciation expense. The Company records operating lease
expense on a straight-line basis unless another systematic and
rational allocation is more representative of the time pattern
in which the leased property is physically employed. The Company
amortizes leasehold improvements, including amounts funded by
landlord incentives or allowances, for which the related
deferred rent is amortized as a reduction of lease expense, over
the shorter of their economic lives or the lease term.
|
|
(h)
|
Goodwill
and Intangible Assets
|
Intangible assets consist of costs in excess of net assets
acquired (goodwill), costs of acquired management and other
contract service rights, and other intangibles, which consist
primarily of debt issue costs. Most of the Companys
intangible assets have indefinite lives. Accordingly, these
assets, along with goodwill, are not amortized but are instead
tested for impairment annually, or more frequently if changing
circumstances warrant. Goodwill is
F-9
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
tested for impairment at the reporting unit level, which
corresponds to the Companys operating segments, or
countries. The Company amortizes intangible assets with definite
useful lives over their respective useful lives to their
estimated residual values and reviews them for impairment in the
same manner as long-lived assets, discussed below.
|
|
(i)
|
Impairment
of Long-lived Assets
|
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset, or related groups of assets, may not be fully recoverable
from estimated future cash flows. In the event of impairment,
measurement of the amount of impairment may be based on
appraisal, market values of similar assets or estimates of
future discounted cash flows using market participant
assumptions with respect to the use and ultimate disposition of
the asset.
|
|
(j)
|
Fair
Value Measurements
|
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in an orderly transaction
between market participants to sell the asset or transfer the
liability. The Company uses fair value measurements based on
quoted prices in active markets for identical assets or
liabilities (Level 1), significant other observable inputs
(Level 2) or unobservable inputs for assets or
liabilities (Level 3), depending on the nature of the item
being valued. The Company discloses on a yearly basis the
valuation techniques and discloses any change in method of such
within the body of each applicable footnote. The estimated fair
values may not be representative of actual values that will be
realized or settled in the future.
The carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these
instruments.
|
|
(k)
|
Derivative
Instruments and Hedging Activities
|
The Company accounts for its derivative instruments at fair
value and records the value on its consolidated balance sheet as
an asset or liability. The Company does not engage in derivative
instruments for speculative purposes. Because the Companys
current derivatives (interest rate swaps) qualify for hedge
accounting, gains or losses resulting from changes in the values
of the Companys derivatives are reported in accumulated
other comprehensive income (loss), a separate component of
equity (Note 10).
Revenues consist primarily of net patient service revenues,
which are based on the facilities established billing
rates less allowances and discounts, principally for patients
covered under contractual programs with private insurance
companies. The Company derives approximately 70% of its net
patient service revenues from private insurance payors,
approximately 15% from governmental payors and approximately 15%
from self-pay and other payors. Amounts are recognized as
services are provided.
With respect to management and contract service revenues,
amounts are also recognized as services are provided. The
Company is party to agreements with certain surgical facilities,
hospitals and physician practices to provide management
services. As compensation for these services each month, the
Company charges the managed entities management fees which are
either fixed in amount or represent a fixed percentage of each
entitys earnings, typically defined as net revenue less a
provision for doubtful accounts or operating income. In many
cases the Company also holds equity ownership in these entities
(Note 12). Amounts charged to consolidated facilities
eliminate in consolidation.
F-10
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
(m)
|
Concentration
of Credit Risk
|
Concentration of credit risk with respect to accounts receivable
is limited due to the large number of customers comprising the
Companys customer base and their breakdown among
geographical locations in which the Company operates. The
Company provides for bad debts principally based upon the aging
of accounts receivable and uses specific identification to write
off amounts against its allowance for doubtful accounts. The
Company believes the allowance for doubtful accounts adequately
provides for estimated losses as of December 31, 2010 and
2009. The Company has a risk of incurring losses if such
allowances are not adequate.
|
|
(n)
|
Investments
and Equity in Earnings of Unconsolidated
Affiliates
|
Investments in unconsolidated companies in which the Company
exerts significant influence but does not control or otherwise
consolidate are accounted for using the equity method. The
Companys ownership in these entities range from 5% to 69%.
Certain investments in unconsolidated companies in which the
Company owns a majority interest are not consolidated due to the
substantive participating rights of the minority owners.
These investments are included as investments in unconsolidated
affiliates in the accompanying consolidated balance sheets. The
carrying amounts of these investments are greater than the
Companys equity in the underlying net assets of many of
these companies due in part to goodwill, which is not subject to
amortization. The Company monitors its investments for
other-than-temporary
impairment by considering factors such as current economic and
market conditions and the operating performance of the companies
and records reductions in carrying values when necessary.
Equity in earnings of unconsolidated affiliates consists of the
Companys share of the profits or losses generated from its
noncontrolling equity investments in 130 surgical facilities.
Because these operations are central to the Companys
business strategy, equity in earnings of unconsolidated
affiliates is classified as a component of operating income in
the accompanying consolidated statements of income. The Company
has contracts to manage these facilities, which results in the
Company having an active role in the operations of these
facilities and devoting a significant portion of its corporate
resources to the fulfillment of these management
responsibilities.
The Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which these
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is
more likely than not that some or all of the deferred tax assets
may not be realized.
|
|
(p)
|
Equity-Based
Compensation
|
The Company accounts for equity-based compensation, such as
stock options and other stock-based awards to employees and
directors, at fair value. The fair value is measured at the date
of grant and recognized as expense over the employees
requisite service period. The Company also accounts for equity
instruments issued to non-employees at fair value.
F-11
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
(q)
|
Commitments
and Contingencies
|
Liabilities for loss contingencies arising from claims,
assessments, litigation, fines and penalties, and other sources
are recorded when it is probable that a liability has been
incurred and the amount of the assessment can be reasonably
estimated.
|
|
(2)
|
Discontinued
Operations and Other Dispositions
|
Sales of consolidated subsidiaries in which the Company has no
continuing involvement are classified as discontinued
operations, as are consolidated subsidiaries that are held for
sale. The gains or losses on these transactions are classified
within discontinued operations in our consolidated statements of
income. Also, the Company has reclassified its historical
results of operations to remove the operations of these entities
from its revenues and expenses, collapsing the net income or
loss from these operations into a single line within
discontinued operations.
Discontinued operations are as follows :
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
Proceeds
|
|
|
Gain (Loss)
|
|
|
December 2010
|
|
Nashville, Tennessee(1)
|
|
$
|
32.5 million
|
|
|
$
|
2.8 million
|
|
December 2010
|
|
Orlando, Florida
|
|
|
|
|
|
|
(2.0 million
|
)
|
December 2010
|
|
Templeton, California(2)
|
|
|
|
|
|
|
(1.9 million
|
)
|
December 2010
|
|
Houston, Texas(2)
|
|
|
|
|
|
|
(0.2 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
32.5 million
|
|
|
$
|
(1.3 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
June 2008
|
|
Cleveland, Ohio
|
|
$
|
1.6 million
|
|
|
$
|
(1.0 million
|
)
|
|
|
|
(1) |
|
The Company sold an endoscopy service business that was based in
Nashville, Tennessee. |
|
(2) |
|
These investments were written down to estimated fair value less
costs to sell at December 31, 2010, and were sold at
amounts approximating these estimated values in February 2011.
The assets and liabilities of these entities were not material. |
The table below summarizes certain amounts related to the
Companys discontinued operations for the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
29,180
|
|
|
$
|
28,889
|
|
|
$
|
30,234
|
|
Income (loss) from discontinued operations before income taxes
|
|
$
|
(340
|
)
|
|
$
|
2,235
|
|
|
$
|
(853
|
)
|
Income tax (expense) benefit
|
|
|
119
|
|
|
|
(782
|
)
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
(221
|
)
|
|
$
|
1,453
|
|
|
$
|
(554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations before income taxes
|
|
$
|
(1,332
|
)
|
|
$
|
|
|
|
$
|
(963
|
)
|
Income tax (expense) benefit
|
|
|
(5,450
|
)
|
|
|
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from disposal of discontinued operations
|
|
$
|
(6,782
|
)
|
|
$
|
|
|
|
$
|
(625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Equity method investments that are sold do not represent
discontinued operations under GAAP. During 2009 and 2008, the
Company completed sales of investments in ten facilities
operated through unconsolidated affiliates, including its equity
ownership in these entities as well as the related rights to
manage the facilities. The Company did not sell any equity
method investments during 2010. Gains and losses on the
disposals of these investments are classified within
Losses on deconsolidations, disposals and
impairments in the accompanying consolidated statements of
income. These transactions are summarized below:
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
Proceeds (Costs)
|
|
|
Loss
|
|
|
December 2009
|
|
Oxnard, California
|
|
$
|
0.3 million
|
|
|
$
|
(0.3 million
|
)
|
December 2009
|
|
Baton Rouge, Louisiana(1)
|
|
|
(5.1 million
|
)
|
|
|
(8.2 million
|
)
|
September 2009
|
|
San Antonio, Texas
|
|
|
|
|
|
|
(2.6 million
|
)
|
July 2009
|
|
Cleveland, Ohio(2)
|
|
|
1.0 million
|
|
|
|
|
|
February 2009
|
|
Las Cruces, New Mexico
|
|
|
|
|
|
|
|
|
February 2009
|
|
East Brunswick, New Jersey
|
|
|
0.7 million
|
|
|
|
(2.6 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(3.1 million
|
)
|
|
$
|
(13.7 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
July 2008
|
|
Manitowoc, Wisconsin
|
|
$
|
0.8 million
|
|
|
$
|
|
|
July 2008
|
|
Orlando, Florida
|
|
|
0.5 million
|
|
|
|
(0.4 million
|
)
|
April 2008
|
|
Los Angeles, California
|
|
|
|
|
|
|
|
|
February 2008
|
|
Sarasota, Florida
|
|
|
0.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
1.8 million
|
|
|
$
|
(0.4 million
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company paid $5.1 million to settle contingent
liabilities in conjunction with the sale of this center. Such
amount was expensed and included in Losses on
deconsolidations, disposals and impairments in the
accompanying consolidated statements of income. |
|
(2) |
|
The Company financed the entire purchase price with the buyer
and has a security interest in the facilitys assets until
the note is collected, which is due in 2011. As a result, the
Company deferred the recognition of the gain, which is estimated
at $0.6 million. |
The Company from time to time surrenders control of an entity
but retains a noncontrolling interest (classified within
investments in unconsolidated affiliates). These
types of transactions result in a gain or loss, computed as the
difference between (a) the sales proceeds and fair value of
the retained investment and (b) the Companys carrying
value of the investment prior to the transaction. Gains or
losses for such transactions are classified within Losses
on deconsolidations, disposals and impairments in the
accompanying consolidated statements of income. The
Companys continuing involvement as an equity method
investor and manager of the facilities precludes classification
of these transactions as discontinued operations. Fair values
for the retained noncontrolling interests are estimated based on
market multiples and discounted cash flow models which have been
derived from the Companys experience in acquiring surgical
facilities and third party valuations it has obtained with
respect to such transactions.
F-13
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
During the years ended December 31, 2010, 2009, and 2008,
the Company surrendered control of, but retained an equity
method investment in, ten entities as summarized below:
|
|
|
|
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Proceeds
|
|
|
Gain (Loss)
|
|
|
December 2010
|
|
Phoenix, Arizona(1)
|
|
$
|
0.6 million
|
|
|
$
|
(1.5 million)
|
|
December 2010
|
|
Dallas, Texas(2)
|
|
|
|
|
|
|
1.6 million
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
0.6 million
|
|
|
$
|
0.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2009
|
|
Dallas, Texas(3)
|
|
$
|
1.2 million
|
|
|
$
|
0.3 million
|
|
July 2009
|
|
Oklahoma City, Oklahoma(4)
|
|
|
0.2 million
|
|
|
|
0.1 million
|
|
March 2009
|
|
Phoenix, Arizona(5)
|
|
|
0.1 million
|
|
|
|
(8.2) million
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
1.5 million
|
|
|
$
|
(7.8 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2008
|
|
Beaumont, Texas
|
|
$
|
1.2 million
|
|
|
$
|
(0.5 million)
|
|
June 2008
|
|
Dallas, Texas(6)
|
|
|
2.3 million
|
|
|
|
(0.9 million)
|
|
June 2008
|
|
Houston, Texas(7)
|
|
|
0.6 million
|
|
|
|
|
|
March 2008
|
|
Redding, California(8)
|
|
|
1.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
5.8 million
|
|
|
$
|
(1.4 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A hospital partner acquired a portion of the Companys
interest in this facility and shares control of the facility
with the Company. |
|
(2) |
|
The Company previously controlled this facility but now shares
control with physicians due to a change in the entitys
governing documents. |
|
(3) |
|
A controlling interest in a facility was sold to a hospital
partner as part of the Companys strategy for partnering
with this hospital system. The Company recorded a net gain of
$0.3 million on the sale and deconsolidation of the
facility. The gain is comprised of a $1.4 million gain
related to the remeasurement of the Companys retained
interest to fair value, offset by a loss of $1.1 million,
the amount by which the carrying value of the investment
exceeded the proceeds received. This hospital system is a
related party (Note 12). |
|
(4) |
|
The Company and other owners of a facility consolidated by the
Company agreed to merge the facility into another entity in
which the Company holds an investment accounted for under the
equity method. The Company recorded a gain of $0.1 million
on the sale and deconsolidation of the facility. |
|
(5) |
|
A controlling interest in an entity was sold to a hospital
partner as part of the Companys strategy for partnering
with this hospital system. The hospital partner already had a
49% ownership interest in this entity, which owns and manages
two surgical facilities, and through the transaction acquired an
additional 1.1% interest. The $8.2 million loss was
primarily related to the revaluation of the Companys
remaining investment in the entity to fair value. |
|
(6) |
|
The hospital partner already had an ownership interest in the
facility and acquired a controlling interest from the Company in
this transaction. Additionally, this hospital partner is a
related party (Note 12). |
|
(7) |
|
Because the Company is considered the primary beneficiary of
this entity, the Company consolidates the entity to which it
transferred its interest in the facility, and accordingly
continues to consolidate the facilitys operating results.
The sales price of $0.6 million was paid in the form of a
note receivable from the buyer. |
|
(8) |
|
The Company sold a controlling interest in two facilities and
received a noncontrolling interest in a third facility in
Redding. |
F-14
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
(3)
|
Business
Combinations and Investments in Unconsolidated
Affiliates
|
The Company acquires interests in existing surgery centers from
third parties and invests in new facilities that it develops in
partnership with hospital partners and local physicians. Some of
these transactions result in the Company controlling the
acquired entity and meet the GAAP definition of a business
combination. The financial results of the acquired entities are
included in the Companys consolidated financial statements
beginning on the acquisitions effective closing date. The
adjustments to arrive at pro forma operating results for these
acquisitions are not material.
During the year ended December 31, 2010, the Company
obtained control of the following entities:
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
|
Investments
|
|
|
|
|
|
|
May 2010
|
|
St. Louis, Missouri(1)
|
|
$
|
4.6 million
|
|
October 2010
|
|
Houston, Texas(2)
|
|
|
2.4 million
|
|
November 2010
|
|
Various(3)
|
|
|
31.1 million
|
|
December 2010
|
|
Houston, Texas(2)
|
|
|
9.0 million
|
|
December 2010
|
|
Reading, Pennsylvania(4)
|
|
|
1.1 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
48.2 million
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisition of a noncontrolling interest in and right to manage
a surgical facility in which the Company previously had no
involvement. This facility is jointly owned with local
physicians. |
|
(2) |
|
Acquisition of a controlling interest in and right to manage a
surgical facility in which the Company previously had no
involvement. The remainder of this facility is owned by a
hospital partner and local physicians. |
|
(3) |
|
As further discussed below, the Company acquired 100% of the
equity interests in HealthMark Partners, Inc. (HealthMark).
HealthMark has an equity investment in 14 surgery centers. Local
physicians have ownership in all 14 facilities and by
December 31, 2010 and January 31, 2011, hospital
partners had invested in nine and ten of these facilities,
respectively. |
|
(4) |
|
Acquisition of a controlling interest in a surgical facility in
which the Company already held an ownership interest. The
Companys original ownership was acquired in the HealthMark
acquisition. |
Effective November 1, 2010, the Company completed the
acquisition of 100% of the equity interests in HealthMark, a
privately-held, Nashville-based owner and operator of surgery
centers. HealthMark has an equity investment in 14 surgery
centers, 11 of which are located in markets in which the Company
already operates. The Company paid cash totaling approximately
$31.1 million, subject to certain purchase price
adjustments set forth in the purchase agreement. The purchase
price was allocated to the HealthMarks tangible and
identifiable intangible assets and liabilities based upon
estimates of fair value, with the remainder allocated to
goodwill. The Company funded the purchase through cash on hand
and a $25.0 million borrowing under the Companys
revolving credit agreement. The Company incurred approximately
$1.7 million in acquisition and severance costs, of which
$0.4 million is included in other operating
expenses and the remaining $1.3 million is included
in salaries, benefits, and other employee costs in
accompanying consolidated statements of income.
F-15
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The following is a summary of the assets acquired and
liabilities assumed in the acquisition of HealthMark:
|
|
|
|
|
|
|
|
|
Purchase price allocated
|
|
|
|
|
|
$
|
31,072
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of net tangible assets acquired:
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
$
|
4,280
|
|
Other current assets
|
|
|
|
|
|
|
26
|
|
Investments in affiliates
|
|
|
|
|
|
|
12,140
|
|
Property and equipment
|
|
|
|
|
|
|
344
|
|
Current liabilities
|
|
|
|
|
|
|
(1,431
|
)
|
Long term liabilities
|
|
|
|
|
|
|
(153
|
)
|
|
|
|
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
|
|
|
|
15,206
|
|
Intangible assets acquired
|
|
|
|
|
|
|
6,559
|
|
Goodwill
|
|
|
|
|
|
|
9,307
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
$
|
31,072
|
|
|
|
|
|
|
|
|
|
|
The goodwill recorded in conjunction with the HealthMark
acquisition was allocated to the Companys United States
reporting unit and the Company expects that approximately
$0.7 million of the goodwill will be deductible for income
tax purposes. Indefinite-lived intangibles of $6.0 million
relate to long-term management contracts and are not subject to
amortization. Other service contract intangibles of
approximately $0.6 million are being amortized over their
estimate lives of approximately one to five years.
The Company controls 58 of its entities and therefore
consolidates their results. However, the Company accounts for an
increasing majority (130 of its 185 U.S. facilities at
December 31, 2010) as investments in unconsolidated
affiliates, i.e., under the equity method, as the Companys
level of influence is significant but does not reach the
threshold of controlling the entity. The majority of these
investments are partnerships or limited liability companies,
which require the associated tax benefit or expense to be
recorded by the partners or members. Summarized financial
information for the Companys equity method investees on a
combined basis is as follows
F-16
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
(amounts are in thousands, except number of facilities, and
reflect 100% of the investees results on an aggregated
basis and are unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Unconsolidated facilities operated at year-end
|
|
|
130
|
|
|
|
109
|
|
|
|
101
|
|
Income statement information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,329,041
|
|
|
$
|
1,178,114
|
|
|
$
|
1,002,394
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits, and other employee costs
|
|
|
309,698
|
|
|
|
277,053
|
|
|
|
246,739
|
|
Medical services and supplies
|
|
|
310,770
|
|
|
|
271,663
|
|
|
|
211,781
|
|
Other operating expenses
|
|
|
305,045
|
|
|
|
271,769
|
|
|
|
247,834
|
|
Loss (gain) on asset disposals, net
|
|
|
1,025
|
|
|
|
(7
|
)
|
|
|
1,161
|
|
Depreciation and amortization
|
|
|
55,216
|
|
|
|
50,251
|
|
|
|
48,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
981,754
|
|
|
|
870,729
|
|
|
|
756,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
347,287
|
|
|
|
307,385
|
|
|
|
246,157
|
|
Interest expense, net
|
|
|
(25,630
|
)
|
|
|
(24,394
|
)
|
|
|
(24,101
|
)
|
Other, net
|
|
|
(200
|
)
|
|
|
4,572
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
321,457
|
|
|
$
|
287,563
|
|
|
$
|
222,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
303,627
|
|
|
$
|
264,944
|
|
|
$
|
236,108
|
|
Noncurrent assets
|
|
|
495,765
|
|
|
|
412,977
|
|
|
|
403,956
|
|
Current liabilities
|
|
|
177,909
|
|
|
|
152,081
|
|
|
|
138,199
|
|
Noncurrent liabilities
|
|
|
343,007
|
|
|
|
283,951
|
|
|
|
288,429
|
|
The Companys equity method investment in Texas Health
Ventures Group, L.L.C., is considered significant to the
Companys 2010 consolidated financial statements under
regulations of the SEC. As a result, the Company has filed Texas
Health Ventures Group, L.L.C.s consolidated financial
statements with this
Form 10-K
for the required periods.
During 2010, the Company recorded an impairment on one of its
equity method investments due to the decline in the fair value
of the investment being other than temporary. The impairment was
approximately $3.7 million and is recorded within
Equity in earnings of unconsolidated affiliates in
the accompanying consolidated statement of income.
The Company also regularly engages in the purchase and sale of
equity interests with respect to its investments in
unconsolidated affiliates that do not result in a change of
control. These transactions are primarily the acquisitions and
sales of equity interests in unconsolidated surgical facilities
and the investment of additional
F-17
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
cash in surgical facilities under development. During the year
ended December 31, 2010, these transactions resulted in a
cash outflow of approximately $21.3 million, which is
summarized as follows:
|
|
|
|
|
|
|
Effective Date
|
|
Facility Location
|
|
Amount
|
|
|
Investments
|
|
|
|
|
|
|
December 2010
|
|
Nashville, Tennessee(1)
|
|
$
|
13.4 million
|
|
December 2010
|
|
Boulder, Colorado(2)
|
|
|
4.7 million
|
|
December 2010
|
|
Chattanooga, Tennessee(3)
|
|
|
2.6 million
|
|
December 2010
|
|
Irving, Texas(4)
|
|
|
1.9 million
|
|
December 2010
|
|
Kansas City, Missouri(5)
|
|
|
1.2 million
|
|
December 2010
|
|
Houston, Texas(2)
|
|
|
0.9 million
|
|
November 2010
|
|
Keller, Texas(4)
|
|
|
4.6 million
|
|
July 2010
|
|
Sacramento, California(2)
|
|
|
1.5 million
|
|
July 2010
|
|
Carrollton, Texas(4)
|
|
|
0.8 million
|
|
May 2010
|
|
Mansfield, Texas(4)
|
|
|
0.4 million
|
|
April 2010
|
|
Destin, Florida(3)
|
|
|
1.3 million
|
|
April 2010
|
|
St. Louis, Missouri(6)
|
|
|
0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.7 million
|
|
Sales
|
|
|
|
|
|
|
December 2010
|
|
Phoenix, Arizona(7)
|
|
|
4.1 million
|
|
June 2010
|
|
Cincinnati, Ohio(8)
|
|
|
7.9 million
|
|
Various
|
|
Various(9)
|
|
|
0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.4 million
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
21.3 million
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisition of an additional noncontrolling interest in three
surgical facilities in which the Company already held an
investment and one surgical facility in which the Company
already provided management services. These facilities are
jointly owned with one of the Companys hospital partners
and local physicians. |
|
(2) |
|
Acquisition of a noncontrolling interest in and right to manage
a surgical facility in which the Company previously had no
involvement. This facility is jointly owned with one of the
Companys hospital partners and local physicians. |
|
(3) |
|
Acquisition of an additional noncontrolling interest in a
surgical facility in which the Company already held an
investment. This facility is jointly owned with local physicians. |
|
(4) |
|
Acquisition of the right to manage a surgical facility in which
the Company previously had no involvement. Concurrent with this
transaction, an unconsolidated investee that the Company jointly
owns with a hospital partner used cash on hand to acquire an
equity interest in this facility, resulting in the Company
having an indirect ownership interest in the facility. The
remainder of this facility is owned by local physicians. |
|
(5) |
|
Acquisition of an additional noncontrolling interest in a
surgical facility in which the Company already held an
investment. This facility is jointly owned with one of the
Companys hospital partners and local physicians. |
|
(6) |
|
Acquisition of a noncontrolling interest in a surgical facility
in which the Company already provided management services. This
facility is jointly owned with one of the Companys
hospital partners and local physicians. |
F-18
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
(7) |
|
Sale of a portion of the Companys equity ownership in two
facilities to a hospital partner. The remainder of these
facilities are owned by local physicians. The Company recorded a
loss of $1.2 million related to this sale, which is
classified in Losses on deconsolidations, disposals and
impairments on the accompanying consolidated statements of
income. |
|
(8) |
|
Sale of a portion of the Companys equity ownership in one
facility to a hospital partner. The remainder of this facility
is owned by local physicians. The Company recorded a loss of
$0.2 million related to this sale, which is classified in
Losses on deconsolidations, disposals and
impairments on the accompanying consolidated statements of
income. |
|
(9) |
|
Represents the net receipt related to various other purchases
and sales of equity interests and contributions of cash to
equity method investees. |
|
|
(4)
|
Noncontrolling
Interests
|
The Company controls and therefore consolidates the results of
58 of its 189 facilities. Similar to its investments in
unconsolidated affiliates, the Company regularly engages in the
purchase and sale of equity interests with respect to its
consolidated subsidiaries that do not result in a change of
control. These transactions are accounted for as equity
transactions, as they are undertaken among the Company, its
consolidated subsidiaries, and noncontrolling interests, and
their cash flow effect is classified within financing activities.
During the year ended December 31, 2010, the Company
purchased and sold equity interests in various consolidated
subsidiaries in the amounts of $2.9 million and
$4.0 million, respectively. The basis difference between
the Companys carrying amount and the proceeds received or
paid in each transaction is recorded as an adjustment to
additional paid-in capital. The impact of these transactions is
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net income attributable to USPIs common stockholder
|
|
$
|
42,093
|
|
|
$
|
69,666
|
|
Transfers to the noncontrolling interests:
|
|
|
|
|
|
|
|
|
Decrease in USPIs additional paid-in capital for sales of
subsidiaries equity interests
|
|
|
(6,774
|
)
|
|
|
(5,922
|
)
|
Decrease in USPIs additional paid-in capital for purchases
of subsidiaries equity interests
|
|
|
(452
|
)
|
|
|
(8,411
|
)
|
|
|
|
|
|
|
|
|
|
Net transfers to noncontrolling interests
|
|
|
(7,226
|
)
|
|
|
(14,333
|
)
|
|
|
|
|
|
|
|
|
|
Change in equity from net income attributable to USPI and
transfers to noncontrolling interests
|
|
$
|
34,867
|
|
|
$
|
55,333
|
|
|
|
|
|
|
|
|
|
|
F-19
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Upon the occurrence of various fundamental regulatory changes,
the Company could be obligated, under the terms of its
investees partnership and operating agreements, to
purchase some or all of the noncontrolling interests related to
the Companys consolidated U.S. subsidiaries. These
repurchase requirements are limited to the portions of its
facilities that are owned by physicians who perform surgery at
the Companys facilities and would be triggered by
regulatory changes making the existing ownership illegal. While
the Company is not aware of events that would make the
occurrence of such a change probable, regulatory changes are
outside the control of the Company. Accordingly, the
noncontrolling interests subject to these repurchase provisions,
and the income attributable to those interests, are not included
as part of the Companys equity and are carried as
noncontrolling interests-redeemable on the Companys
consolidated balance sheets. The activity for the years ended
December 31, 2010, 2009 and 2008 is summarized below (in
thousands):
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
Interests
|
|
|
|
Redeemable
|
|
|
Balance, December 31, 2007
|
|
$
|
52,769
|
|
Net income attributable to noncontrolling interests
|
|
|
52,599
|
|
Distributions to noncontrolling interests
|
|
|
(51,401
|
)
|
Purchases of noncontrolling interests
|
|
|
(7,446
|
)
|
Sales of noncontrolling interests
|
|
|
8,928
|
|
Deconsolidation of noncontrolling interests and other
|
|
|
(3,488
|
)
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
51,961
|
|
Net income attributable to noncontrolling interests
|
|
|
57,777
|
|
Distributions to noncontrolling interests
|
|
|
(57,807
|
)
|
Purchases of noncontrolling interests
|
|
|
(2,519
|
)
|
Sales of noncontrolling interests
|
|
|
12,403
|
|
Deconsolidation of noncontrolling interests and other
|
|
|
2,050
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
63,865
|
|
Net income attributable to noncontrolling interests
|
|
|
54,893
|
|
Distributions to noncontrolling interests
|
|
|
(53,485
|
)
|
Purchases of noncontrolling interests
|
|
|
(2,180
|
)
|
Sales of noncontrolling interests
|
|
|
9,984
|
|
Deconsolidation of noncontrolling interests and other
|
|
|
8,591
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
81,668
|
|
|
|
|
|
|
The consolidated financial statements include the financial
statements of USPI and subsidiaries the Company effectively
controls, usually indicated by majority ownership. The Company
also determines if it is the primary beneficiary of (and
therefore should consolidate) any entity whose operations it
does not control with voting rights. At December 31, 2010,
the Company consolidated one such entity. At December 31,
2009, the Company consolidated two entities in accordance with
this accounting guidance.
One of these entities operates and manages six surgical
facilities in the Houston, Texas area. Despite not holding a
controlling voting interest, the Company is the primary
beneficiary because the Company has lent the entity funds to
purchase surgical facilities, but the Company does not have full
recourse to the entitys other owner with respect to
repayment of the loans. As the entity earns management fees and
receives cash distributions of
F-20
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
earnings from the surgical facilities, a portion of those
proceeds are used to repay the loans prior to being eligible for
distribution to the entitys other owner. At
December 31, 2010 and 2009, $8.1 million and
$11.3 million, respectively, of such advances are
outstanding and are included in other long-term assets. The
Company has no exposure for the entitys losses beyond this
investment. Accordingly, the Company did not provide any
financial or other support to the entity that it was not
previously contractually required to provide during the years
ended December 31, 2010 or 2009. At December 31, 2010
and 2009, the total assets of this entity were
$82.3 million and $55.4 million, and the total
liabilities owed to third parties were $22.6 million and
$22.8 million, respectively. Such amounts are included in
the accompanying consolidated balance sheets.
In November 2010, due to changes in the economic structuring of
the second entity, the entity is no longer considered a variable
interest entity, and the Company does not hold voting control of
the entity. As a result, it was deconsolidated in November 2010.
The Company recorded no gain or loss on the deconsolidation. The
entity was developing and constructing a new hospital for one of
the Companys unconsolidated affiliates, which opened in
January 2011. The total project cost was approximately
$25.0 million, which was funded by cash contributions from
its partners and debt financing. The Company made its required
equity contribution of $6.3 million in December 2009. The
Company sold approximately 50% of its interest for
$3.1 million in November 2010. The entity arranged bank
financing totaling $17.4 million, of which 70% is
guaranteed by the Company, which is now indemnified for
approximately 50% of its guarantee by the entitys new
investors. None of the bank financing was borrowed at
December 31, 2009 and approximately $11.8 million is
outstanding at December 31, 2010. The Company had no
exposure for the entitys losses beyond its investment and
bank guarantee. The Company did not provide any financial or
other support to the entity that it was not previously
contractually required to provide during the years ended
December 31, 2010 or 2009. At December 31, 2009, total
assets and liabilities of this entity were $9.0 million and
$0.1 million, respectively. Such amounts are included in
the accompanying 2009 consolidated balance sheet.
The Company also has investments in two unconsolidated variable
interest entities in which it was not considered the primary
beneficiary. These entities own real estate and fixed assets
that are leased to various surgical facilities. The total assets
of these entities were $7.2 million and $8.8 million,
and the total liabilities of these entities were
$8.3 million and $8.7 million at December 31,
2010 and 2009, respectively. The Companys investment in
these entities and maximum exposure to loss as a result of its
involvement with these entities is not material. The Company did
not provide any financial or other support to these entities
that it was not previously contractually required to provide
during the years ended December 31, 2010 or 2009.
Other receivables consist primarily of amounts receivable for
services performed and funds advanced under management and
administrative service agreements. As discussed in Note 12,
many of the entities to which the Company provides management
and administrative services are related parties, due to the
Company being an investor in those facilities. At
December 31, 2010 and 2009, the amounts receivable from
related parties, which are included in other receivables on the
Companys consolidated balance sheet, totaled
$6.2 million and $4.4 million, respectively.
F-21
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
(7)
|
Property
and Equipment
|
At December 31, 2010 and 2009, property and equipment
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
|
|
|
|
$
|
29,379
|
|
|
$
|
34,259
|
|
Buildings and leasehold improvements
|
|
|
7-50 years
|
|
|
|
135,631
|
|
|
|
118,669
|
|
Equipment
|
|
|
3-12 years
|
|
|
|
113,135
|
|
|
|
106,091
|
|
Furniture and fixtures
|
|
|
4-20 years
|
|
|
|
10,137
|
|
|
|
9,526
|
|
Construction in progress
|
|
|
|
|
|
|
7,248
|
|
|
|
7,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,530
|
|
|
|
276,221
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(93,270
|
)
|
|
|
(77,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
|
|
|
$
|
202,260
|
|
|
$
|
198,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, assets recorded under
capital lease arrangements, included in property and equipment,
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land and buildings
|
|
$
|
16,955
|
|
|
$
|
21,037
|
|
Equipment and furniture
|
|
|
15,666
|
|
|
|
10,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,621
|
|
|
|
31,806
|
|
Accumulated amortization
|
|
|
(10,450
|
)
|
|
|
(8,258
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment under capital leases
|
|
$
|
22,171
|
|
|
$
|
23,548
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
|
Goodwill
and Intangible Assets
|
Under GAAP, goodwill and intangible assets with indefinite
useful lives are not amortized but instead are tested for
impairment at least annually, with tests of goodwill occurring
at the reporting unit level (defined as an operating segment or
one level below an operating segment). Intangible assets with
definite useful lives are amortized over their respective useful
lives to their estimated residual values. The Company determined
that its reporting units are at the operating segment (country)
level. The Company completed the required annual impairment
tests during 2010, 2009 and 2008. No impairment losses were
identified in any reporting unit as a result of these goodwill
impairment tests.
As a result of impairment testing performed on the
Companys indefinite-lived management contracts, the
Company recorded impairment losses on six contracts in 2010 and
three contracts in 2009. These losses totaled approximately
$5.9 million and $5.7 million, respectively, and were
primarily triggered by a reduction in the Companys
expected earnings under the contracts. The Company recorded a
similar impairment charge of $0.8 million in 2008 related
to one of its indefinite-lived management contracts. Fair values
for indefinite-lived intangible assets are estimated based on
market multiples and discounted cash flow models which have been
derived from the Companys experience in acquiring surgical
facilities, market participant assumptions and third party
valuations it has obtained with respect to such transactions.
The inputs used in these models are Level 3 inputs, which
under GAAP, are significant unobservable inputs. Inputs into
these models include expected revenue growth, expected gross
margins and discount factors. Such expense is recorded in
Losses on deconsolidations, disposals and
impairments in the accompanying consolidated statements of
income.
F-22
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The following is a summary of changes in the carrying amount of
goodwill by operating segment and reporting unit for the years
ended December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
United
|
|
|
|
|
|
|
States
|
|
|
Kingdom
|
|
|
Total
|
|
|
Balance at December 31, 2008
|
|
$
|
1,075,609
|
|
|
$
|
194,678
|
|
|
$
|
1,270,287
|
|
Additions
|
|
|
4,047
|
|
|
|
|
|
|
|
4,047
|
|
Disposals
|
|
|
(15,517
|
)
|
|
|
|
|
|
|
(15,517
|
)
|
Other
|
|
|
|
|
|
|
20,474
|
|
|
|
20,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
1,064,139
|
|
|
|
215,152
|
|
|
|
1,279,291
|
|
Additions
|
|
|
27,474
|
|
|
|
|
|
|
|
27,474
|
|
Disposals
|
|
|
(27,820
|
)
|
|
|
|
|
|
|
(27,820
|
)
|
Other
|
|
|
|
|
|
|
(10,282
|
)
|
|
|
(10,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
1,063,793
|
|
|
$
|
204,870
|
|
|
$
|
1,268,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill additions resulted primarily from business combinations
and additionally from purchases of additional interests in
subsidiaries. Disposals of goodwill relate to businesses that
the Company has sold or the deconsolidation of entities the
Company no longer controls. In the United Kingdom, the other
changes were primarily due to foreign currency translation
adjustments.
Intangible assets with definite useful lives are amortized over
their respective estimated useful lives, ranging from
approximately one to nine years, to their estimated residual
values. The majority of the Companys management contracts
have indefinite useful lives. Most of these contracts have
evergreen renewal provisions that do not contemplate a specific
termination date. Some of the contracts have provisions which
make it possible for the facilitys other owners to
terminate them at certain dates and under certain circumstances.
Based on the Companys history with these contracts, the
Companys management considers the lives of these contracts
to be indefinite and therefore does not amortize them unless
facts and circumstances indicate otherwise.
The following is a summary of intangible assets at
December 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Definite Useful Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and other service contracts
|
|
$
|
17,242
|
|
|
$
|
(7,856
|
)
|
|
$
|
9,386
|
|
Other
|
|
|
30,405
|
|
|
|
(11,580
|
)
|
|
|
18,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,647
|
|
|
$
|
(19,436
|
)
|
|
$
|
28,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite Useful Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
Management contracts
|
|
|
|
|
|
|
|
|
|
|
291,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
319,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Definite Useful Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and other service contracts
|
|
$
|
26,605
|
|
|
$
|
(8,500
|
)
|
|
$
|
18,105
|
|
Other
|
|
|
30,401
|
|
|
|
(8,262
|
)
|
|
|
22,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,006
|
|
|
$
|
(16,762
|
)
|
|
$
|
40,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite Useful Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
Management contracts
|
|
|
|
|
|
|
|
|
|
|
282,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
322,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense from continuing operations related to
intangible assets with definite useful lives was
$2.0 million and $2.5 million for the year ended
December 31, 2010 and 2009, respectively. The amortization
of debt issuance costs, which is included within interest
expense, was $3.3 million in each of the years ended
December 31, 2010 and 2009.
The following table provides estimated amortization expense,
including amounts that will be classified within interest
expense, related to intangible assets with definite useful lives
for each of the years in the five-year period ending
December 31, 2015 (in thousands):
|
|
|
|
|
2011
|
|
$
|
5,563
|
|
2012
|
|
|
5,703
|
|
2013
|
|
|
5,556
|
|
2014
|
|
|
4,270
|
|
2015
|
|
|
3,887
|
|
At December 31, 2010 and 2009 long-term debt consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Senior secured credit facility
|
|
$
|
533,445
|
|
|
$
|
518,710
|
|
U.K. senior credit agreement
|
|
|
49,981
|
|
|
|
59,966
|
|
Senior subordinated notes
|
|
|
437,515
|
|
|
|
437,515
|
|
Notes payable to financial institutions
|
|
|
22,347
|
|
|
|
25,045
|
|
Capital lease obligations (Note 11)
|
|
|
26,538
|
|
|
|
30,292
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
1,069,826
|
|
|
|
1,071,528
|
|
Current portion
|
|
|
(22,386
|
)
|
|
|
(23,337
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$
|
1,047,440
|
|
|
$
|
1,048,191
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Senior
secured credit facility
|
The senior secured credit facility (credit facility) provides
for borrowings of up to $615.0 million (with a
$150.0 million accordion feature described below),
consisting of (1) an $85.0 million revolving credit
facility with a maturity of six years, including a
$20.0 million letter of credit
sub-facility,
and a $20.0 million swing-line loan
F-24
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
sub-facility;
and (2) a $530.0 million term loan facility (including
a $100.0 million delayed draw facility) with a maturity of
seven years. The Company has utilized the availability under the
$530.0 million term loan facility and is making scheduled
quarterly principal payments. The term loans require principal
payments each year in an amount of $4.3 million per annum
in equal quarterly installments and $0.2 million per
quarter with respect to the delayed draw facility with the
remaining balance maturing in 2014. No principal payments are
required on the revolving credit facility until its maturity in
2013.
The Company may request additional tranches of term loans or
additional commitments to the revolving credit facility in an
aggregate amount not exceeding $150.0 million, subject to
certain conditions. Interest rates on the credit facility are
based on LIBOR plus a margin of 2.00% to 2.25%. Additionally,
the Company currently pays 0.50% per annum on the daily-unused
commitment of the revolving credit facility. The Company also
currently pays a quarterly participation fee of 2.13% per annum
related to outstanding letters of credit. At December 31,
2010, the Company had $533.4 million of debt outstanding
under the credit facility at a weighted average interest rate of
approximately 3.5%. At December 31, 2010, the Company had
$58.4 million available for borrowing under the revolving
credit facility, representing the facilitys
$85.0 million capacity, net of the $25.0 million
outstanding balance at December 31, 2010 and
$1.6 million of outstanding letters of credit. The
$25.0 million outstanding on the revolving line of credit
was repaid in January 2011.
The credit facility is guaranteed by USPI Holdings, Inc. and its
current and future direct and indirect wholly-owned domestic
subsidiaries, subject to certain exceptions, and borrowings
under the credit facility are secured by a first priority
security interest in all real and personal property of these
subsidiaries, as well as a first priority pledge of the
Companys capital stock, the capital stock of each of its
wholly owned domestic subsidiaries and 65% of the capital stock
of certain of its wholly-owned foreign subsidiaries.
Additionally, the credit facility contains various restrictive
covenants, including financial covenants that limit the
Companys ability and the ability of its subsidiaries to
borrow money or guarantee other indebtedness, grant liens, make
investments, sell assets, pay dividends, enter into
sale-leaseback transactions or issue and sell capital stock.
Fees paid for unused portions of the senior secured credit
facility were approximately $0.4 million, $0.5 million
and $0.8 million for the years ended December 31,
2010, 2009 and 2008, respectively, and are included within
interest expense in the Companys consolidated statements
of income.
|
|
(b)
|
Senior
subordinated notes
|
Also in connection with the merger, the Company issued
$240.0 million of
87/8% senior
subordinated notes and $200.0 million of
91/4%/10% senior
subordinated toggle notes (together, the Notes), all due in
2017. Interest on the Notes is payable on May 1 and November 1
of each year, which commenced on November 1, 2007. All
interest payments on the senior subordinated notes are payable
in cash. The initial interest payment on the toggle notes was
payable in cash. For any interest period after November 1,
2007 through November 1, 2012, the Company may pay interest
on the toggle notes (i) in cash, (ii) by increasing
the principal amount of the outstanding toggle notes or by
issuing
payment-in-kind
notes (PIK Interest) or (iii) by paying interest on half
the principal amount of the toggle notes in cash and half in PIK
Interest. PIK Interest is paid at 10% and cash interest is paid
at
91/4%
per annum. To date, the Company has paid all interest payments
in cash. During 2009, the Company repurchased approximately
$2.5 million in principal amount of the senior subordinated
toggle notes in the open market. At December 31, 2010, the
Company had $437.5 million of Notes outstanding. The Notes
are unsecured senior subordinated obligations of the Company;
however, the Notes are guaranteed by all of its current and
future direct and indirect wholly-owned domestic subsidiaries.
Additionally, the Notes contain various restrictive covenants,
including financial covenants that limit its ability and the
ability of its subsidiaries to borrow money or guarantee other
indebtedness, grant liens, make investments, sell assets, pay
dividends, enter into sale-leaseback transactions or issue and
sell capital stock.
F-25
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
(c)
|
United
Kingdom borrowings
|
In April 2007, the Company entered into an amended and restated
credit agreement, which covered its existing overdraft facility
and term loan facility (Term Loan A). This agreement provides a
total overdraft facility of £2.0 million, and an
additional Term Loan B facility of £10 million, which
was drawn in April 2007. In March 2008, the Company further
amended its U.K. Agreement to provide for a
£2.0 million Term Loan C facility. The Company
borrowed the entire £2.0 million in March 2008 to
acquire property adjacent to one of its hospitals in London. In
June 2009, the Company renewed its overdraft facility. Under the
renewal, the Company must pay a commitment fee of 0.5% per annum
on the unused portion of the overdraft facility each quarter.
Excluding availability on the overdraft facility, no additional
borrowings can be made under the Term Loan A, B or C facilities.
At December 31, 2010, the Company had approximately
£32.5 million (approximately $50.0 million)
outstanding under the U.K. credit facility at a weighted average
interest rate of approximately 4.6%.
Interest on the borrowings is based on a three-month or
six-month LIBOR, or other rate as the bank may agree, plus a
margin of 1.25% to 2.00%. Quarterly principal payments are
required on the Term Loan A, which began in June 2007, and
approximate $4.6 million in the first and second year,
$6.2 million in the third and fourth year;
$7.7 million in the fifth year, with the remainder due in
the sixth year after the April 2007 closing. The Term Loan B
does not require any principal payments prior to maturity and
matures in 2013. The Term Loan C requires quarterly principal
payments of approximately £0.1 million
($0.2 million), which began in June 2008 and continue
through its maturity date of February 2013 when the final
payment of £0.5 million ($0.8 million) is due.
The borrowings are guaranteed by certain of the Companys
subsidiaries in the United Kingdom with a security interest in
various assets, and a pledge of the capital stock of the U.K.
borrowers and the capital stock of certain guarantor
subsidiaries. The Agreement contains various restrictive
covenants, including financial covenants that limit the
Companys ability and the ability of certain U.K.
subsidiaries to borrow money or guarantee other indebtedness,
grant liens on its assets, make investments, use assets as
security in other transactions, pay dividends, enter into leases
or sell assets or capital stock.
The Company also has the ability to borrow under a capital asset
finance facility in the U.K. of up to £2.5 million
($3.8 million). The Company borrowed against the facility
in June 2010 and November 2010 and have £1.5 million
($2.3 million) outstanding at December 31, 2010. The
terms of the borrowings require monthly principal and interest
payments over 48 months. The Company has pledged capital
assets as collateral against these borrowings. No amounts were
outstanding at December 31, 2009.
The Company and its subsidiaries have notes payable to financial
institutions and other parties of $22.3 million, which
mature at various dates through 2020 and accrue interest at
fixed and variable rates ranging from 4.4% to 8.8%. Capital
lease obligations in the carrying amount of $26.5 million
are secured by underlying real estate and equipment and have
implicit interest rates ranging from 3.7% to 18.6%.
The aggregate maturities of long-term debt for each of the five
years subsequent to December 31, 2010 are as follows (in
thousands): 2011, $22,386; 2012, $21,964; 2013, $70,618; 2014,
$496,375; 2015, $2,537 and thereafter, $455,946.
The fair value of the Companys long-term debt is
determined by either (i) estimation of the discounted
future cash flows of the debt at rates currently quoted or
offered to the Company for similar debt instruments of
comparable maturities by its lenders, or (ii) quoted market
prices at the reporting date for traded debt securities. At
December 31, 2010, the aggregate carrying amount and
estimated fair value of long-term debt was $1.1 billion. At
December 31, 2009, the aggregate carrying amount and
estimated fair value of long-term debt was $1.1 billion and
$1.0 billion, respectively.
F-26
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The Company does not enter into derivative contracts for
speculative purposes but has at times entered into interest rate
swaps to fix the rate of interest owed on a portion of its
variable rate debt. By using derivative financial instruments to
hedge exposures to changes in interest rates, the Company
exposes itself to credit risk and market risk. Credit risk is
the failure of the counterparty to perform under the terms of
the derivative contract. If the fair value of a derivative
contract is positive, the counterparty owes the Company, which
creates credit risk for the Company. The Company minimizes the
credit risk in derivative instruments by entering into
transactions with counterparties who maintain a strong credit
rating. Market risk is the risk of an adverse effect on the
value of a derivative instrument that results from a change in
interest rates. This risk essentially represents the risk that
variable interest rates decline to a level below the fixed rate
the Company has locked in. The market risk associated with
interest rate contracts is managed by establishing and
monitoring parameters that limit the types and degree of market
risk that may be undertaken.
At the inception of the interest rate swap, the Company formally
documents the hedging relationship and its risk-management
objective and strategy for undertaking the hedge, the hedging
instrument, the hedged item, the nature of the risk being
hedged, how the hedging instruments effectiveness in
offsetting the hedged risk will be assessed prospectively and
retrospectively, and a description of the method of measuring
ineffectiveness. The Company also formally assesses, both at the
hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items.
In order to manage the Companys interest rate risk related
to a portion of its variable-rate U.K. debt, on
February 29, 2008, the Company entered into an interest
rate swap agreement for a notional amount of
£20.0 million ($30.8 million). The interest rate
swap requires the Company to pay 4.99% and to receive interest
at a variable rate of three- month GBP-LIBOR (0.8% at
December 31, 2010), which is reset quarterly. The interest
rate swap matures in March 2011. No collateral is required under
the interest rate swap agreement.
In order to manage the Companys interest rate risk related
to a portion of its variable-rate senior secured credit
facility, effective July 24, 2008, the Company entered into
a three-year interest rate swap agreement for a notional amount
of $200.0 million. The interest rate swap requires the
Company to pay 3.6525% and to receive interest at a variable
rate of three-month USD-LIBOR (0.3% at December 31, 2010),
which is reset quarterly. No collateral is required under the
interest rate swap agreement.
The proceeds from the swaps are used to settle the
Companys interest obligations on the hedged portion of the
variable rate debt, which has the overall outcome of the Company
paying and expensing a fixed rate of interest on the hedged debt.
The Company recognizes all derivative instruments as either
assets or liabilities at fair value in the consolidated balance
sheet. The Company designated the interest rate swaps as cash
flow hedges of certain of its variable-rate borrowings. For
derivative instruments that are designated and qualify as a cash
flow hedge, the effective portion of the gain or loss on the
derivative is reported as a component of other comprehensive
income (loss) and reclassified to earnings in the same period or
periods during which the hedged transaction affects earnings.
Gains and losses on the derivatives representing either hedge
ineffectiveness or hedge components excluded from the assessment
of effectiveness are recognized in current earnings and would be
classified as interest expense in the Companys
consolidated statements of income. The Company recorded no
expense related to ineffectiveness for the years ended
December 31, 2010, 2009 or 2008. For the years ended
December 31, 2010, 2009 and 2008, the Company reclassified
$7.9 million, $6.4 million and $0.5 million,
respectively, out of other comprehensive income to interest
expense related to the swaps. Through the expiration date of the
swaps, if current interest rates remain at December 31,
2010 levels, the Company will record $4.1 million more
interest expense than if it had not entered into the interest
rate swaps.
F-27
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
At December 31, 2010, the fair values of the U.K. and
U.S. interest rate swaps were current liabilities of
$0.3 million and $3.6 million, respectively and
were included in other current liabilities in the accompanying
2010 consolidated balance sheet, with the offset to other
comprehensive income (loss). At December 31, 2009, the fair
values of the U.K. and U.S. interest rate swaps were
liabilities of approximately $1.5 million and
$7.7 million, respectively and were included in other
long-term liabilities in the accompanying 2009 consolidated
balance sheet, with the offset to other comprehensive income
(loss). During the years ended December 31, 2010, 2009 and
2008, the amounts, net of taxes, recorded in other comprehensive
income (loss) related to the interest rate swaps were
$3.4 million, $3.9 million and ($10.1 million),
respectively. The estimated fair value of the interest rate
swaps was determined using present value models of the
contractual payments. Inputs to the models were based on
prevailing LIBOR market data and incorporate credit data that
measure nonperformance risk. The estimated fair value represents
the theoretical exit cost the Company would have to pay to
transfer the obligations to a market participant with similar
credit risk. The interest rate swap agreements are classified
within Level 3 of the valuation hierarchy.
The Company leases various office equipment and office space
under a number of operating lease agreements, which expire at
various times through the year 2024. Such leases do not involve
contingent rentals, nor do they contain significant renewal or
escalation clauses. Office leases generally require the Company
to pay all executory costs (such as property taxes, maintenance
and insurance).
Minimum future payments under noncancelable leases, with
remaining terms in excess of one year as of December 31,
2010 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
6,549
|
|
|
$
|
13,651
|
|
2012
|
|
|
6,472
|
|
|
|
12,147
|
|
2013
|
|
|
4,378
|
|
|
|
10,023
|
|
2014
|
|
|
3,216
|
|
|
|
7,786
|
|
2015
|
|
|
2,785
|
|
|
|
6,200
|
|
Thereafter
|
|
|
19,689
|
|
|
|
22,448
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
43,089
|
|
|
$
|
72,255
|
|
|
|
|
|
|
|
|
|
|
Amount representing interest
|
|
|
(16,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
26,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rent expense from continuing operations under operating
leases was $15.8 million, $16.4 million and
$17.3 million for the years ended December 31, 2010,
2009 and 2008, respectively.
|
|
(12)
|
Related
Party Transactions
|
The Company has entered into agreements with certain majority
and minority owned surgery centers to provide management
services. As compensation for these services, the surgery
centers are charged management fees which are either fixed in
amount or represent a fixed percentage of each centers net
revenue less bad debt. The percentages range from 3% to 8%.
Amounts recognized under these agreements, after elimination of
amounts from consolidated surgery centers, totaled approximately
$52.1 million, $45.2 million and $39.1 million
for the years ended December 31, 2010, 2009 and 2008,
respectively. Such amounts are included in management and
contract service revenues in the accompanying consolidated
statements of income.
F-28
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
As discussed in Notes 3 and 4, the Company regularly
engages in purchases and sales of ownership interests in its
facilities. The Company operates 27 surgical facilities in
partnership with the Baylor Health Care System (Baylor) and
local physicians in the Dallas/Fort Worth area.
Baylors Chief Executive Officer is a member of the
Companys board of directors. The following table
summarizes transactions with Baylor during 2009 and 2008. The
Company did not sell any ownership interests in facilities to
Baylor during 2010. The Company believes that the sale prices
were approximately the same as if they had been negotiated on an
arms length basis, and the prices equaled the value
assigned by an external appraiser who valued the businesses
immediately prior to the sale.
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Facility Location
|
|
Proceeds
|
|
|
Gain (Loss)
|
|
|
December 2009
|
|
Dallas, Texas(1)
|
|
$
|
1.2 million
|
|
|
$
|
0.3 million
|
|
December 2009
|
|
Fort Worth, Texas(2)
|
|
|
2.4 million
|
|
|
|
0.1 million
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
3.6 million
|
|
|
$
|
0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2008
|
|
Dallas, Texas(3)
|
|
$
|
2.3 million
|
|
|
$
|
(0.9 million
|
)
|
|
|
|
(1) |
|
Baylor acquired a controlling interest in a facility from the
Company, which transferred control of the facility to Baylor. |
|
(2) |
|
Baylor acquired a controlling interest in two facilities. The
Company continues to account for these facilities under the
equity method of accounting. |
|
(3) |
|
Baylor acquired an additional ownership interest in a facility
it already co-owned with the Company and local physicians, which
transferred control of the facility from the Company to Baylor. |
In June 2009, the Company agreed to lend up to
$10.0 million to Trinity MC, LLC (Trinity), an acute care
hospital in the Dallas/Fort Worth area. A majority interest
(71%) in Trinity is owned by BRMCG Holdings, LLC, a wholly owned
subsidiary of Baylor Regional Medical Center at Grapevine, a
controlled affiliate of Baylor. Trinity operates Baylor Medical
Center at Carrollton (BMCC). The Company has no ownership in
Trinity. The revolving note earned interest at a rate of 6.0%
per annum and was paid in full in December 2009. The Company
believes the terms of the revolving note were approximately the
same as if they had been negotiated on an arms length
basis.
In June 2008, the Company purchased all of Baylors
ownership interests in an entity Baylor co-owned with the
Company. This entity had ownership and managed five facilities
in the Dallas/Fort Worth area. The purchase price was
approximately $3.9 million in cash. This entity is now
wholly owned by the Company. The Company believes that the sales
price was approximately the same as if it had been negotiated on
an arms length basis, and the price equaled the value
assigned by an external appraiser who valued the business
immediately prior to the sale. After this transaction, the
Company accounts for all of the facilities it operates with
Baylor under the equity method.
As discussed in Note 14, the Companys parent issued
warrants with an estimated fair value of $0.3 million to
Baylor in 2008. Similar grants have been made to other
healthcare systems with which the Company operates facilities.
Included in general and administrative expenses are management
fees payable to an affiliate of Welsh Carson, which holds a
controlling interest in the Company, in the amount of
$2.0 million for the years ended December 31, 2010,
2009 and 2008. Such amounts accrue at an annual rate of
$2.0 million. The Company pays $1.0 million in cash
per year with the unpaid balance due and payable upon a change
in control. At December 31, 2010, the Company had
approximately $4.5 million accrued related to such
management fee, of which $0.8 million is included in other
current liabilities and $3.7 million is included in other
long term liabilities in the accompanying consolidated balance
sheet. At December 31, 2009, the Company had approximately
$3.5 million accrued related to such management fee, of
which $0.8 million is included in other current liabilities
and $2.7 million is included in other long term liabilities
in the accompanying consolidated balance sheet.
F-29
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The components of income from continuing operations before
income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Domestic
|
|
$
|
129,174
|
|
|
$
|
112,508
|
|
|
$
|
96,259
|
|
Foreign
|
|
|
12,810
|
|
|
|
18,548
|
|
|
|
20,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
141,984
|
|
|
$
|
131,056
|
|
|
$
|
116,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) attributable to income from
continuing operations consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Year ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
17,024
|
|
|
$
|
7,726
|
|
|
$
|
24,750
|
|
State and local
|
|
|
3,880
|
|
|
|
627
|
|
|
|
4,507
|
|
Foreign
|
|
|
3,134
|
|
|
|
(63
|
)
|
|
|
3,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax expense
|
|
$
|
24,038
|
|
|
$
|
8,290
|
|
|
$
|
32,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
1,260
|
|
|
$
|
(9,859
|
)
|
|
$
|
(8,599
|
)
|
State and local
|
|
|
3,144
|
|
|
|
|
|
|
|
3,144
|
|
Foreign
|
|
|
5,118
|
|
|
|
(542
|
)
|
|
|
4,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax expense (benefit)
|
|
$
|
9,522
|
|
|
$
|
(10,401
|
)
|
|
$
|
(879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
43
|
|
|
$
|
14,156
|
|
|
$
|
14,199
|
|
State and local
|
|
|
3,020
|
|
|
|
|
|
|
|
3,020
|
|
Foreign
|
|
|
5,390
|
|
|
|
58
|
|
|
|
5,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax expense
|
|
$
|
8,453
|
|
|
$
|
14,214
|
|
|
$
|
22,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Income tax expense differed from the amount computed by applying
the U.S. federal income tax rate of 35% to pretax income
from continuing operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Computed expected tax expense
|
|
$
|
49,694
|
|
|
$
|
45,870
|
|
|
$
|
40,778
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Book income of consolidated entities attributable to
noncontrolling interests
|
|
|
(21,195
|
)
|
|
|
(22,303
|
)
|
|
|
(19,298
|
)
|
Differences between U.S. financial reporting and foreign
statutory reporting
|
|
|
(218
|
)
|
|
|
(152
|
)
|
|
|
23
|
|
State tax expense, net of federal benefit
|
|
|
2,979
|
|
|
|
1,824
|
|
|
|
1,963
|
|
Removal of foreign tax rate differential
|
|
|
(982
|
)
|
|
|
(1,211
|
)
|
|
|
(1,227
|
)
|
Nondeductible goodwill
|
|
|
1,366
|
|
|
|
6,338
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
(31,193
|
)
|
|
|
(223
|
)
|
Other
|
|
|
684
|
|
|
|
(52
|
)
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,328
|
|
|
$
|
(879
|
)
|
|
$
|
22,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 2010 and 2009 are presented
below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss and other tax carryforwards
|
|
$
|
8,276
|
|
|
$
|
4,413
|
|
Accrued expenses
|
|
|
11,687
|
|
|
|
10,730
|
|
Bad debts/reserves
|
|
|
3,334
|
|
|
|
3,741
|
|
Interest rate swaps
|
|
|
1,359
|
|
|
|
3,091
|
|
Capitalized costs and other
|
|
|
1,605
|
|
|
|
2,983
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
26,261
|
|
|
|
24,958
|
|
Valuation allowance
|
|
|
(685
|
)
|
|
|
(3,283
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
$
|
25,576
|
|
|
$
|
21,675
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Basis difference of acquisitions
|
|
$
|
139,362
|
|
|
$
|
128,474
|
|
Accelerated depreciation
|
|
|
1,126
|
|
|
|
1,826
|
|
Capitalized interest and other
|
|
|
1,332
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
141,820
|
|
|
$
|
131,182
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment.
F-31
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
In conjunction with Welsh Carsons acquisition of the
Company in April 2007, which increased the Companys debt,
caused the Company to generate U.S. taxable losses, and
reduced the likelihood of the Company generating
U.S. taxable income, the Company established a valuation
allowance against its U.S. deferred tax assets. Subsequent
to the acquisition, the Company continued to establish a full
valuation allowance against newly generated U.S. deferred
tax assets and has continuously assessed the likelihood of the
assets being realized at a future date. During the third quarter
of 2009, the Company determined, based on factors such as those
described above, including recent favorable operating trends,
expected future taxable income, and other factors, that it is
more likely than not that the majority of these assets, which
include net operating loss carryforwards and other items, will
be realized in the future. Accordingly, the Companys
results of operations for 2009 include an income tax benefit of
$31.2 million related to the reversal of a majority of the
Companys valuation allowance against its deferred tax
assets. The Company still carries a valuation allowance totaling
$0.7 million against certain of its deferred tax assets,
which relates to deferred tax assets that have restrictions as
to use and are not considered more likely than not to be
realized. It the Companys estimates related to the above
items change significantly, the Company may need to alter the
amount of its valuation allowance in the future through a
favorable or unfavorable adjustment to net income.
At December 31, 2010, the Company had federal net operating
loss carryforwards for U.S. federal income tax purposes of
approximately $22.0 million. The Companys ability to
offset future taxable income with these carryforwards would
begin to be forfeited in 2022, if unused. The Company does not
believe that it is more likely than not that it will be able to
generate state taxable income in future periods to utilize its
net operating loss carryforwards and other deferred tax assets.
The Companys U.K. operations have no net operating loss
carryforwards or other deferred tax assets. These operations
continued to be profitable in 2010, and the Company therefore
has accrued the related income tax expense.
The Company has analyzed its income tax filing positions in all
of the federal and state jurisdictions where it is required to
file income tax returns for all open tax years in these
jurisdictions for uncertainty in tax positions. The Company
believes, based on the facts and technical merits associated
with each of its income tax filing positions and deductions,
that each of its income tax filing positions would be sustained
on audit. Further, the Company has concluded that to the extent
any adjustments to its income tax filing positions were not to
be sustained upon an IRS or other audit, such adjustments would
not have a material effect on the Companys consolidated
financial statements. As a result, no reserves for uncertain
income tax positions have been recorded. The Companys
policy for recording interest and penalties associated with
audits is to record such items as a component of income before
taxes. The Company has not recorded any material amounts for
interest or penalties related to audit or other activity.
|
|
(14)
|
Equity
and Equity-Based Compensation
|
On December 1, 2009, the Companys board of directors
declared and the Company paid a special cash dividend in the
amount of $88.6 million on the Companys common stock.
The proceeds of the dividend were used by USPI Holdings, Inc.,
the sole stockholder of the Company, to pay a special cash
dividend on its common stock. In turn, the proceeds were used by
USPI Group Holdings, Inc., the sole stockholder of USPI
Holdings, Inc., to pay amounts currently accrued on its
preferred stock.
The Company accounts for equity-based compensation, such as
stock options and other stock-based awards to employees and
directors, at fair value. The fair value of the compensation is
measured at the date of grant and recognized as expense over the
recipients requisite service period.
The Companys parent, USPI Group Holdings, Inc. (Parent),
granted stock options and nonvested share awards to certain
employees and members of the board of directors. These awards
were granted pursuant to the 2007 Equity Incentive Plan (the
Plan) which was adopted by Parents board of directors. The
board of directors or a designated
F-32
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
administrator has the sole authority to determine which
individuals receive grants, the type of grant to be received,
the vesting period and all other option terms. Stock options
granted generally have a term not to exceed eight years. A
maximum of 20,726,523 shares of stock may be delivered
under the Plan. As 5,534,125 shares had been delivered
under the Plan at December 31, 2010, 15,192,398 remained
available for delivery, with 15,823,832 having been granted at
December 31, 2010.
Total equity-based compensation included in the consolidated
statements of income, classified by line item, is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Salaries, benefits and other employee costs
|
|
$
|
566
|
|
|
$
|
548
|
|
|
$
|
471
|
|
General and administrative expenses
|
|
|
1,128
|
|
|
|
1,016
|
|
|
|
978
|
|
Other operating expenses
|
|
|
|
|
|
|
131
|
|
|
|
336
|
|
Discontinued operations
|
|
|
474
|
|
|
|
256
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense before income tax benefit
|
|
|
2,168
|
|
|
|
1,951
|
|
|
|
2,297
|
|
Income tax benefit
|
|
|
(494
|
)
|
|
|
(389
|
)
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation expense, net of tax
|
|
$
|
1,674
|
|
|
$
|
1,562
|
|
|
$
|
1,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation, included in the consolidated
statements of income, classified by type of award, is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Share awards
|
|
$
|
1,331
|
|
|
$
|
1,215
|
|
|
$
|
1,150
|
|
Stock options
|
|
|
837
|
|
|
|
605
|
|
|
|
811
|
|
Warrants
|
|
|
|
|
|
|
131
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense before income tax benefit
|
|
|
2,168
|
|
|
|
1,951
|
|
|
|
2,297
|
|
Income tax benefit
|
|
|
(494
|
)
|
|
|
(389
|
)
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity-based compensation expense, net of tax
|
|
$
|
1,674
|
|
|
$
|
1,562
|
|
|
$
|
1,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrecognized compensation related to nonvested awards of
stock options and nonvested shares was $12.1 million at
December 31, 2010 of which $3.3 million is expected to
be recognized over a weighted average period of approximately
two years. The remaining $8.8 million relates to restricted
share awards exchanged in conjunction with the merger and will
be expensed only upon the occurrence of a change in control or
other qualified exit event.
During the years ended December 31, 2010 and 2008, the
Company received immaterial cash proceeds from the exercise of
stock options. No stock options were exercised during the year
ended December 31, 2009.
Stock
Options
Parent generally grants stock options vesting 25% per year over
four years and having an eight-year contractual life. The fair
value of stock options is estimated using the Black-Scholes
formula. The expected lives of options are determined using the
simplified method which defines the life as the
average of the contractual term of the options and the weighted
average vesting period for all option tranches. The risk-free
interest rates are equal to rates of U.S. Treasury notes
with maturities approximating the expected life of the option.
Volatility was
F-33
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
calculated as a weighted average based on the historical
volatility of the Companys predecessor before the merger
as well as industry peers. The assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
4.82
|
|
|
|
4.82
|
|
|
|
4.82
|
|
Risk-free interest rates
|
|
|
1.35-2.59
|
%
|
|
|
2.09
|
%
|
|
|
2.37-2.75
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Volatility
|
|
|
45.16
|
%
|
|
|
45.16
|
%
|
|
|
45.16
|
%
|
Weighted average grant-date fair value
|
|
$
|
0.65
|
|
|
$
|
0.37
|
|
|
$
|
0.55
|
|
Stock option activity during the year ended December 31,
2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
Successor
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
Stock Options
|
|
Shares (000)
|
|
Price
|
|
Life (Years)
|
|
Value ($000)
|
|
Outstanding at January 1, 2010
|
|
|
4,562
|
|
|
$
|
0.59
|
|
|
|
5.7
|
|
|
$
|
3,051
|
|
Additional grants
|
|
|
479
|
|
|
|
1.62
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(137
|
)
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(229
|
)
|
|
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
4,675
|
|
|
$
|
0.68
|
|
|
|
4.9
|
|
|
$
|
5,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
2,789
|
|
|
$
|
0.49
|
|
|
|
4.5
|
|
|
$
|
3,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
Awards
On April 19, 2007, Parent granted nonvested share awards to
certain company employees. The first tranche (50%) of the share
awards vest 25% over four years, while the second tranche (50%)
vests 100% in April 2015, but can vest earlier upon the
occurrence of a qualified exit event and Company performance. An
additional grant was made to Parents board of directors in
August 2007. The nonvested shares granted to the board of
directors vests 25% each year over four years. The value of such
share awards is equal to the share price on the date of grant.
Additionally, in conjunction with the merger, Parent cancelled
379,000 restricted share awards of the Companys
predecessor. These share awards were replaced with 2,212,957
nonvested shares of Parent. This cancellation and exchange was
accounted for as a modification. The replacement awards vest
only upon the occurrence of a change in control or other exit
event as defined in the award agreement and Company performance.
As a result of the modification, approximately $8.8 million
of unamortized compensation cost related to the Predecessor
awards will only be expensed upon the occurrence of a change in
control or qualified exit event, and the completion of the
derived service period. At December 31, 2010, 2,212,957 of
these share awards were outstanding and unvested.
F-34
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The grants of nonvested share awards, excluding the awards
exchanged concurrent with the merger, during the year ended
December 31, 2010 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
Successor
|
|
Number of
|
|
Grant-Date
|
Nonvested Shares
|
|
Shares (000)
|
|
Fair Value
|
|
Nonvested at January 1, 2010
|
|
|
10,598
|
|
|
$
|
0.47
|
|
Additional grants
|
|
|
200
|
|
|
|
1.62
|
|
Vested
|
|
|
(1,861
|
)
|
|
|
0.49
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010
|
|
|
8,937
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value per share award was
$1.62 and $0.76 for the year ended December 31, 2010 and
2009, respectively. The total fair value of shares which vested
during the years ended December 31, 2010 and 2009 was
approximately $3.0 million and $1.7 million,
respectively.
Warrants
During 2009, Parent granted warrants to a
not-for-profit
healthcare system (hospital partner) that holds ownership in
some of the Companys facilities. The warrants are to
purchase Parents common stock and were fully vested and
non-forfeitable at the date of grant but contain exercise
restrictions. Because the warrants are fully vested, the expense
associated with them was recorded upon grant within other
operating expenses at a fair value determined using the
Black-Scholes formula. The assumptions included an expected life
equal to the contractual life; a risk free interest rate of
2.7%; a dividend yield of 0.0%; and an estimated volatility of
approximately 58%. In this grant, the hospital partner received
333,330 warrants with an exercise price of $3.00 per share, of
which 55,555 were exercisable immediately; the exercise
restrictions on additional tranches of 55,555 warrants lapse
each December 1 which began in 2009 and ends in 2013. At
December 31, 2010, 166,665 warrants are exercisable. The
warrants have a contractual life of approximately
81/2 years
and a fair value of approximately $0.1 million.
During 2008, one of the Companys hospital partners,
Baylor, was granted 666,666 warrants to purchase Parents
common stock for $3.00 per share. The warrants are fully vested
and nonforfeitable but contain exercise restrictions. The
exercise restrictions on 111,111 warrants lapse each December 31
which began in 2008 and ends in 2013. The warrants have a
contractual life of ten years. The total fair value of the
warrants was approximately $0.3 million and was determined
using the Black Scholes formula. The assumptions included an
expected life equal to the contractual life of the warrants; a
risk free interest rate of 3.5%, a dividend yield of 0.0%; and
an estimated volatility of approximately 59%. Because the
warrants are fully vested, the expense associated with these
warrants was recorded upon grant within other operating
expenses. Baylors Chief Executive Officer is a member of
the Companys Board of Directors (Note 12). At
December 31, 2010, 333,333 warrants are exercisable.
During 2007, Parent granted a total of 2,333,328 warrants to
purchase its common stock to four of the Companys hospital
partners. The exercise price of the warrants was $3.00 per
share. All of the warrants are fully vested and non-forfeitable
but contain exercise restrictions. Of the 2,333,328 warrants
outstanding at December 31, 2010, 1,499,997 warrants are
exercisable and a portion of the remaining 833,331 warrants will
become exercisable in 2011 and become fully exercisable by 2013.
The warrants have a contractual life of eight to ten years. The
total fair value of the warrants was approximately
$1.1 million and was determined using the Black Scholes
formula. The assumptions included an expected life equal to the
contractual life of each warrant; a risk free interest rate of
3.6% to 4.6%; a dividend yield of 0.0%; and an estimated
volatility of approximately 59%. Because the warrants are fully
vested, the expense associated with these warrants was recorded
upon grant within other operating expenses.
F-35
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The Companys business is the operation of surgical
facilities and related businesses in the United States and the
United Kingdom. The Companys chief operating decision
maker, as that term is defined in GAAP, regularly reviews
financial information about its surgical facilities for
assessing performance and allocating resources both domestically
and abroad. Accordingly, the Companys reportable segments
consist of (1) U.S. based facilities and
(2) United Kingdom based facilities. All amounts related to
discontinued operations have also been removed from all periods
presented (Note 2).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
United
|
|
|
|
|
|
|
States
|
|
|
Kingdom
|
|
|
Total
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
402,049
|
|
|
$
|
102,716
|
|
|
$
|
504,765
|
|
Other revenues
|
|
|
71,900
|
|
|
|
|
|
|
|
71,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
473,949
|
|
|
$
|
102,716
|
|
|
$
|
576,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
22,493
|
|
|
$
|
7,306
|
|
|
$
|
29,799
|
|
Operating income
|
|
|
194,610
|
|
|
|
15,906
|
|
|
|
210,516
|
|
Net interest expense
|
|
|
(66,144
|
)
|
|
|
(3,096
|
)
|
|
|
(69,240
|
)
|
Income tax expense
|
|
|
(29,257
|
)
|
|
|
(3,071
|
)
|
|
|
(32,328
|
)
|
Total assets
|
|
|
2,051,144
|
|
|
|
321,595
|
|
|
|
2,372,739
|
|
Capital expenditures
|
|
|
31,149
|
|
|
|
22,367
|
|
|
|
53,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
United
|
|
|
|
|
|
|
States
|
|
|
Kingdom
|
|
|
Total
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
418,802
|
|
|
$
|
105,097
|
|
|
$
|
523,899
|
|
Other revenues
|
|
|
69,576
|
|
|
|
|
|
|
|
69,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
488,378
|
|
|
$
|
105,097
|
|
|
$
|
593,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
24,432
|
|
|
$
|
6,733
|
|
|
$
|
31,165
|
|
Operating income
|
|
|
178,176
|
|
|
|
20,119
|
|
|
|
198,295
|
|
Net interest expense
|
|
|
(66,041
|
)
|
|
|
(1,571
|
)
|
|
|
(67,612
|
)
|
Income tax benefit (expense)
|
|
|
5,455
|
|
|
|
(4,576
|
)
|
|
|
879
|
|
Total assets
|
|
|
2,000,087
|
|
|
|
325,305
|
|
|
|
2,325,392
|
|
Capital expenditures
|
|
|
20,296
|
|
|
|
12,393
|
|
|
|
32,689
|
|
F-36
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
United
|
|
|
|
|
|
|
States
|
|
|
Kingdom
|
|
|
Total
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
432,319
|
|
|
$
|
122,031
|
|
|
$
|
554,350
|
|
Other revenues
|
|
|
60,748
|
|
|
|
|
|
|
|
60,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
493,067
|
|
|
$
|
122,031
|
|
|
$
|
615,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
25,480
|
|
|
$
|
6,825
|
|
|
$
|
32,305
|
|
Operating income
|
|
|
172,642
|
|
|
|
25,462
|
|
|
|
198,104
|
|
Net interest expense
|
|
|
(76,465
|
)
|
|
|
(5,173
|
)
|
|
|
(81,638
|
)
|
Income tax expense
|
|
|
(17,215
|
)
|
|
|
(5,452
|
)
|
|
|
(22,667
|
)
|
Total assets
|
|
|
1,983,676
|
|
|
|
284,487
|
|
|
|
2,268,163
|
|
Capital expenditures
|
|
|
15,772
|
|
|
|
16,883
|
|
|
|
32,655
|
|
|
|
(16)
|
Commitments
and Contingencies
|
As of December 31, 2010, the Company had issued guarantees
of the indebtedness and other obligations of its investees to
third parties, which could potentially require the Company to
make maximum aggregate payments totaling approximately
$61.0 million. Of the total, $25.2 million relates to
the obligations of consolidated subsidiaries, whose obligations
are included in the Companys consolidated balance sheet
and related disclosures, and $23.0 million of the remaining
$35.8 million relates to the obligations of unconsolidated
affiliated companies, whose obligations are not included in the
Companys consolidated balance sheet and related
disclosures. The remaining $12.8 million represents a
guarantee of obligations of three facilities. The Company has
full recourse to third parties with respect to this amount.
The Company has recorded long-term liabilities totaling
approximately $0.2 million related to the guarantees the
Company has issued to unconsolidated affiliates on or after
January 1, 2003, and has not recorded any liabilities
related to guarantees issued prior to that date. Generally,
these arrangements (a) consist of guarantees of real estate
and equipment financing, (b) are secured by the related
property and equipment, (c) require payments by the
Company, when the collateral is insufficient, in the event of a
default by the investee primarily obligated under the financing,
(d) expire as the underlying debt matures at various dates
through 2022, and (e) provide no recourse for the Company
to recover any amounts from third parties. The Company also has
$1.6 million of letters of credit outstanding, as discussed
in Note 9.
From time to time the Company is named as a party to legal
claims and proceedings in the ordinary course of business. The
Companys management is not aware of any claims or
proceedings that are expected to have a material adverse impact
on the Company.
|
|
(c)
|
Self
Insurance and Professional Liability Claims
|
The Company is self-insured for certain losses related to health
and workers compensation claims, although we obtain
third-party insurance coverage to limit our exposure to these
claims. The Company estimates its self-insured liabilities using
a number of factors including historical claims experience, an
estimate of incurred but not reported claims, demographic
factors, severity factors and actuarial valuations. The Company
believes that the accruals established at December 31,
2010, which were estimated based on actual employee health claim
patterns,
F-37
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
adequately provide for its exposure under this arrangement. The
Companys potential for losses related to professional and
general liability is managed through a wholly-owned insurance
captive.
|
|
(d)
|
Employee
Benefit Plans
|
The Companys eligible U.S. employees may choose to
participate in the United Surgical Partners International, Inc.
401(k) Plan under which the Company may elect to make
contributions that match from zero to 100% of participants
contributions. Charges to expense under this plan were
$2.0 million in each of the years ended December 31,
2010, 2009 and 2008.
One of the Companys U.K. subsidiaries, which the Company
acquired in 2000, has obligations remaining under a defined
benefit pension plan that originated in 1991 and was closed to
new participants at the end of 1998. The plans overall
strategy is to outperform the CAPS Pooled Fund Median over
rolling three year periods. To implement this strategy the plan
invests in a wide diversification of asset types and fund
strategies. The target allocations for plan assets are
approximately 82% equity securities, 12% bonds and 6% to all
other types of investments. At December 31, 2010, the plan
had 59 participants, plan assets of $10.4 million, an
accumulated pension benefit obligation of $13.1 million,
and a projected benefit obligation of $13.1 million. At
December 31, 2009, the plan had 64 participants, plan
assets of $9.6 million, an accumulated pension benefit
obligation of $13.5 million, and a projected benefit
obligation of $13.5 million. Pension expense for the years
ended December 31, 2010, 2009 and 2008 was
$0.5 million, $0.5 million and $0.3 million,
respectively.
At December 31, 2010, the estimated fair value of
U.K.s pension plan assets by asset type was:
$8.6 million equities;
$1.0 million bonds;
$0.5 million cash; and $0.3 million of
other investments, which are primarily mutual funds invested in
real estate properties. At December 31, 2009, the estimated
fair value of U.K.s pension plan assets by asset type was:
$7.9 million equities;
$0.9 million bonds;
$0.5 million cash; and $0.3 million of
other investments, which are primarily mutual funds invested in
real estate properties. The estimated fair value of equities,
bonds and cash are calculated using Level 1 inputs. The
estimated fair value of property mutual funds are based on
Level 3 inputs. There was no significant activity within
the Level 3 investments during 2010 or 2009.
The Companys Deferred Compensation Plan covers select
members of management as determined by its Compensation
Committee. Under the plan, eligible employees may contribute a
portion of their salary and annual bonus on a pretax basis. The
plan is a non-qualified plan; therefore, the associated
liabilities are included in the Companys consolidated
balance sheets as of December 31, 2010 and 2009. In
addition, the Company maintains an irrevocable grantors
trust to hold assets that fund benefit obligations under the
plan, including corporate-owned life insurance policies. The
cash surrender value of such policies is included in the
consolidated balance sheets in other noncurrent assets and
totaled $11.0 million and $10.2 million at
December 31, 2010 and 2009, respectively. The
Companys obligations related to the plan were
$13.1 million and $11.6 million, at December 31,
2010 and 2009, respectively, of which $2.3 million in both
2010 and 2009 are included in accrued salaries and benefits with
the remaining amounts included in other long-term liabilities.
Total expense under the plan for the years ended
December 31, 2010, 2009 and 2008 was $0.8 million,
$0.3 million and $1.2 million, respectively.
|
|
(e)
|
Employment
Agreements
|
The Company entered into employment agreements dated
April 19, 2007 with Donald E. Steen and
William H. Wilcox. The agreement with Mr. Steen,
who serves as the Companys Chairman provides for annual
base compensation of $300,000 (as of December 31, 2010),
subject to increases approved by the board of directors, a
performance bonus based on the sole discretion of the
Companys Board of Directors, and his continued employment
until November 14, 2011.
F-38
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
The agreement with Mr. Wilcox, the Companys President
and Chief Executive Officer provides for annual base
compensation of $600,000 (as of December 31, 2010), subject
to increases approved by the board of directors, and
Mr. Wilcox is eligible for a performance bonus based on the
sole discretion of the Companys Board of Directors. The
agreement renews automatically for two-year terms unless
terminated by either party.
At December 31, 2010, the Company has employment agreements
with 19 other senior managers which generally include one year
terms and renew automatically for additional one year terms
unless terminated by either party. The total annual base
compensation under these agreements is $5.7 million as of
December 31, 2010, subject to increases approved by the
board of directors, and performance bonuses of up to a total of
$3.7 million per year.
The Company has entered into letters of intent with various
entities regarding possible joint venture, development or other
transactions. These possible joint ventures, developments or
other transactions are in various stages of negotiation.
|
|
(19)
|
Condensed
Consolidating Financial Statements
|
The following information is presented as required by
regulations of the SEC in connection with the Companys
senior subordinated notes that have been registered with the
SEC. While not required by SEC regulations, additional
disclosures have also been presented in this note as required by
the Companys senior secured credit facilitys
covenants. None of this information is routinely prepared for
use by management. The operating and investing activities of the
separate legal entities included in the consolidated financial
statements are fully interdependent and integrated. Accordingly,
the operating results of the separate legal entities are not
representative of what the operating results would be on a
stand-alone basis. Revenues and operating expenses of the
separate legal entities include intercompany charges for
management and other services.
The $240.0 million of
87/8% senior
subordinated notes and $200.0 million of
91/4%/10% senior
subordinated toggle notes, all due 2017 (the Notes), were issued
in a private offering on April 19, 2007 and were
subsequently registered as publicly traded securities through a
Form S-4
declared effective by the SEC on July 25, 2007. The
exchange offer was completed in August 2007. The Notes are
unsecured senior subordinated obligations of the Company;
however, the Notes are guaranteed by all of the Companys
current and future direct and indirect wholly-owned domestic
subsidiaries. USPI, which issued the Notes, does not have
independent assets or operations. USPIs investees in the
United Kingdom are not guarantors of the obligation. USPIs
investees in the United States in which USPI owns less than 100%
are not guarantors of the obligation. The financial positions
and results of operations (below, in thousands) of the
respective guarantors are based upon the guarantor relationship
at the end of the period presented. Consolidation adjustments
include purchase accounting entries for investments in which the
Companys ownership percentage in non-participating
investees is not high enough to permit the application of
pushdown accounting.
F-39
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Condensed
Consolidating Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
As of December 31, 2010
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
60,186
|
|
|
$
|
67
|
|
|
$
|
|
|
|
$
|
60,253
|
|
Accounts receivable, net
|
|
|
|
|
|
|
50,082
|
|
|
|
|
|
|
|
50,082
|
|
Other receivables
|
|
|
27,313
|
|
|
|
45,146
|
|
|
|
(57,217
|
)
|
|
|
15,242
|
|
Inventories of supplies
|
|
|
685
|
|
|
|
8,506
|
|
|
|
|
|
|
|
9,191
|
|
Prepaids and other current assets
|
|
|
27,477
|
|
|
|
2,166
|
|
|
|
|
|
|
|
29,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
115,661
|
|
|
|
105,967
|
|
|
|
(57,217
|
)
|
|
|
164,411
|
|
Property and equipment, net
|
|
|
24,343
|
|
|
|
177,803
|
|
|
|
114
|
|
|
|
202,260
|
|
Investments in affiliates
|
|
|
1,010,592
|
|
|
|
|
|
|
|
(617,031
|
)
|
|
|
393,561
|
|
Goodwill and intangible assets, net
|
|
|
904,108
|
|
|
|
342,777
|
|
|
|
340,991
|
|
|
|
1,587,876
|
|
Other assets
|
|
|
91,151
|
|
|
|
2,602
|
|
|
|
(69,122
|
)
|
|
|
24,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,145,855
|
|
|
$
|
629,149
|
|
|
$
|
(402,265
|
)
|
|
$
|
2,372,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,684
|
|
|
$
|
21,804
|
|
|
$
|
|
|
|
$
|
23,488
|
|
Accrued expenses and other
|
|
|
236,835
|
|
|
|
37,868
|
|
|
|
(55,917
|
)
|
|
|
218,786
|
|
Current portion of long-term debt
|
|
|
4,932
|
|
|
|
19,751
|
|
|
|
(2,297
|
)
|
|
|
22,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
243,451
|
|
|
|
79,423
|
|
|
|
(58,214
|
)
|
|
|
264,660
|
|
Long-term debt, less current portion
|
|
|
966,999
|
|
|
|
82,732
|
|
|
|
(2,291
|
)
|
|
|
1,047,440
|
|
Other long-term liabilities
|
|
|
148,648
|
|
|
|
9,692
|
|
|
|
(520
|
)
|
|
|
157,820
|
|
Parents equity
|
|
|
786,757
|
|
|
|
432,261
|
|
|
|
(432,261
|
)
|
|
|
786,757
|
|
Noncontrolling interests
|
|
|
|
|
|
|
25,041
|
|
|
|
91,021
|
|
|
|
116,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,145,855
|
|
|
$
|
629,149
|
|
|
$
|
(402,265
|
)
|
|
$
|
2,372,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
As of December 31, 2009
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27,430
|
|
|
$
|
7,460
|
|
|
$
|
|
|
|
$
|
34,890
|
|
Accounts receivable, net
|
|
|
|
|
|
|
54,202
|
|
|
|
35
|
|
|
|
54,237
|
|
Other receivables
|
|
|
46,975
|
|
|
|
45,776
|
|
|
|
(77,505
|
)
|
|
|
15,246
|
|
Inventories of supplies
|
|
|
428
|
|
|
|
8,361
|
|
|
|
|
|
|
|
8,789
|
|
Prepaids and other current assets
|
|
|
26,264
|
|
|
|
4,518
|
|
|
|
|
|
|
|
30,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
101,097
|
|
|
|
120,317
|
|
|
|
(77,470
|
)
|
|
|
143,944
|
|
Property and equipment, net
|
|
|
16,197
|
|
|
|
181,857
|
|
|
|
452
|
|
|
|
198,506
|
|
Investments in affiliates
|
|
|
1,027,814
|
|
|
|
|
|
|
|
(672,315
|
)
|
|
|
355,499
|
|
Goodwill and intangible assets, net
|
|
|
857,802
|
|
|
|
353,212
|
|
|
|
391,173
|
|
|
|
1,602,187
|
|
Other assets
|
|
|
96,205
|
|
|
|
2,213
|
|
|
|
(73,162
|
)
|
|
|
25,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,099,115
|
|
|
$
|
657,599
|
|
|
$
|
(431,322
|
)
|
|
$
|
2,325,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,396
|
|
|
$
|
22,079
|
|
|
$
|
|
|
|
$
|
23,475
|
|
Accrued expenses and other
|
|
|
235,904
|
|
|
|
50,200
|
|
|
|
(75,956
|
)
|
|
|
210,148
|
|
Current portion of long-term debt
|
|
|
5,480
|
|
|
|
20,116
|
|
|
|
(2,259
|
)
|
|
|
23,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
242,780
|
|
|
|
92,395
|
|
|
|
(78,215
|
)
|
|
|
256,960
|
|
Long-term debt, less current portion
|
|
|
952,311
|
|
|
|
118,892
|
|
|
|
(23,012
|
)
|
|
|
1,048,191
|
|
Other long-term liabilities
|
|
|
146,072
|
|
|
|
13,122
|
|
|
|
(821
|
)
|
|
|
158,373
|
|
Parents equity
|
|
|
757,952
|
|
|
|
412,362
|
|
|
|
(412,362
|
)
|
|
|
757,952
|
|
Noncontrolling interests
|
|
|
|
|
|
|
20,828
|
|
|
|
83,088
|
|
|
|
103,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,099,115
|
|
|
$
|
657,599
|
|
|
$
|
(431,322
|
)
|
|
$
|
2,325,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Condensed
Consolidating Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
Year Ended December 31, 2010
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Revenues
|
|
$
|
97,463
|
|
|
$
|
501,505
|
|
|
$
|
(22,303
|
)
|
|
$
|
576,665
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
132,846
|
|
|
|
2,116
|
|
|
|
(65,046
|
)
|
|
|
69,916
|
|
Operating expenses, excluding depreciation and amortization
|
|
|
86,521
|
|
|
|
342,690
|
|
|
|
(22,945
|
)
|
|
|
406,266
|
|
Depreciation and amortization
|
|
|
7,249
|
|
|
|
22,346
|
|
|
|
204
|
|
|
|
29,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
136,539
|
|
|
|
138,585
|
|
|
|
(64,608
|
)
|
|
|
210,516
|
|
Interest expense, net
|
|
|
(61,205
|
)
|
|
|
(7,945
|
)
|
|
|
(90
|
)
|
|
|
(69,240
|
)
|
Other income (expense), net
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
76,042
|
|
|
|
130,640
|
|
|
|
(64,698
|
)
|
|
|
141,984
|
|
Income tax expense
|
|
|
(26,946
|
)
|
|
|
(5,382
|
)
|
|
|
|
|
|
|
(32,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
49,096
|
|
|
|
125,258
|
|
|
|
(64,698
|
)
|
|
|
109,656
|
|
Loss from discontinued operations, net of tax
|
|
|
(7,003
|
)
|
|
|
(533
|
)
|
|
|
533
|
|
|
|
(7,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
42,093
|
|
|
|
124,725
|
|
|
|
(64,165
|
)
|
|
|
102,653
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
(12,879
|
)
|
|
|
(47,681
|
)
|
|
|
(60,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Parent
|
|
$
|
42,093
|
|
|
$
|
111,846
|
|
|
$
|
(111,846
|
)
|
|
$
|
42,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
Year Ended December 31, 2009
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Revenues
|
|
$
|
96,861
|
|
|
$
|
519,293
|
|
|
$
|
(22,679
|
)
|
|
$
|
593,475
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
133,230
|
|
|
|
2,413
|
|
|
|
(73,872
|
)
|
|
|
61,771
|
|
Operating expenses, excluding depreciation and amortization
|
|
|
101,711
|
|
|
|
346,489
|
|
|
|
(22,414
|
)
|
|
|
425,786
|
|
Depreciation and amortization
|
|
|
7,380
|
|
|
|
23,409
|
|
|
|
376
|
|
|
|
31,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
121,000
|
|
|
|
151,808
|
|
|
|
(74,513
|
)
|
|
|
198,295
|
|
Interest expense, net
|
|
|
(60,386
|
)
|
|
|
(7,221
|
)
|
|
|
(5
|
)
|
|
|
(67,612
|
)
|
Other income (expense), net
|
|
|
384
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
60,998
|
|
|
|
144,576
|
|
|
|
(74,518
|
)
|
|
|
131,056
|
|
Income tax benefit (expense)
|
|
|
7,215
|
|
|
|
(6,336
|
)
|
|
|
|
|
|
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
68,213
|
|
|
|
138,240
|
|
|
|
(74,518
|
)
|
|
|
131,935
|
|
Earnings from discontinued operations, net of tax
|
|
|
1,453
|
|
|
|
996
|
|
|
|
(996
|
)
|
|
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
69,666
|
|
|
|
139,236
|
|
|
|
(75,514
|
)
|
|
|
133,388
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
(11,128
|
)
|
|
|
(52,594
|
)
|
|
|
(63,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Parent
|
|
$
|
69,666
|
|
|
$
|
128,108
|
|
|
$
|
(128,108
|
)
|
|
$
|
69,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
Year Ended December 31, 2008
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Revenues
|
|
$
|
93,595
|
|
|
$
|
545,428
|
|
|
$
|
(23,925
|
)
|
|
$
|
615,098
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
114,656
|
|
|
|
2,465
|
|
|
|
(70,079
|
)
|
|
|
47,042
|
|
Operating expenses, excluding depreciation and amortization
|
|
|
77,594
|
|
|
|
377,753
|
|
|
|
(23,616
|
)
|
|
|
431,731
|
|
Depreciation and amortization
|
|
|
6,993
|
|
|
|
24,772
|
|
|
|
540
|
|
|
|
32,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
123,664
|
|
|
|
145,368
|
|
|
|
(70,928
|
)
|
|
|
198,104
|
|
Interest expense, net
|
|
|
(70,024
|
)
|
|
|
(11,710
|
)
|
|
|
96
|
|
|
|
(81,638
|
)
|
Other income (expense), net
|
|
|
7
|
|
|
|
25
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
53,647
|
|
|
|
133,683
|
|
|
|
(70,832
|
)
|
|
|
116,498
|
|
Income tax expense
|
|
|
(14,954
|
)
|
|
|
(7,717
|
)
|
|
|
4
|
|
|
|
(22,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
38,693
|
|
|
|
125,966
|
|
|
|
(70,828
|
)
|
|
|
93,831
|
|
Loss from discontinued operations, net of tax
|
|
|
(1,179
|
)
|
|
|
(1,140
|
)
|
|
|
1,140
|
|
|
|
(1,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
37,514
|
|
|
|
124,826
|
|
|
|
(69,688
|
)
|
|
|
92,652
|
|
Less: Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
(6,960
|
)
|
|
|
(48,178
|
)
|
|
|
(55,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Parent
|
|
$
|
37,514
|
|
|
$
|
117,866
|
|
|
$
|
(117,866
|
)
|
|
$
|
37,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statements of Comprehensive Income
(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
Year Ended December 31, 2010
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Net income
|
|
$
|
42,093
|
|
|
$
|
124,725
|
|
|
$
|
(64,165
|
)
|
|
$
|
102,653
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(11,638
|
)
|
|
|
(11,638
|
)
|
|
|
11,638
|
|
|
|
(11,638
|
)
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
3,408
|
|
|
|
780
|
|
|
|
(780
|
)
|
|
|
3,408
|
|
Pension adjustments, net of tax
|
|
|
724
|
|
|
|
724
|
|
|
|
(724
|
)
|
|
|
724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
(7,506
|
)
|
|
|
(10,134
|
)
|
|
|
10,134
|
|
|
|
(7,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
34,587
|
|
|
|
114,591
|
|
|
|
(54,031
|
)
|
|
|
95,147
|
|
Less: Comprehensive income attributable to noncontrolling
interests
|
|
|
|
|
|
|
(12,879
|
)
|
|
|
(47,681
|
)
|
|
|
(60,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Parent
|
|
$
|
34,587
|
|
|
$
|
101,712
|
|
|
$
|
(101,712
|
)
|
|
$
|
34,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
Year Ended December 31, 2009
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Net income
|
|
$
|
69,666
|
|
|
$
|
139,236
|
|
|
$
|
(75,514
|
)
|
|
$
|
133,388
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
21,967
|
|
|
|
21,967
|
|
|
|
(21,967
|
)
|
|
|
21,967
|
|
Unrealized gain on interest rate swaps, net of tax
|
|
|
3,894
|
|
|
|
108
|
|
|
|
(108
|
)
|
|
|
3,894
|
|
Pension adjustments, net of tax
|
|
|
(698
|
)
|
|
|
(698
|
)
|
|
|
698
|
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
25,163
|
|
|
|
21,377
|
|
|
|
(21,377
|
)
|
|
|
25,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
94,829
|
|
|
|
160,613
|
|
|
|
(96,891
|
)
|
|
|
158,551
|
|
Less: Comprehensive income attributable to noncontrolling
interests
|
|
|
|
|
|
|
(11,128
|
)
|
|
|
(52,594
|
)
|
|
|
(63,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Parent
|
|
$
|
94,829
|
|
|
$
|
149,485
|
|
|
$
|
(149,485
|
)
|
|
$
|
94,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
Year Ended December 31, 2008
|
|
Guarantor
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Net income
|
|
$
|
37,514
|
|
|
$
|
124,826
|
|
|
$
|
(69,688
|
)
|
|
$
|
92,652
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(71,790
|
)
|
|
|
(71,790
|
)
|
|
|
71,790
|
|
|
|
(71,790
|
)
|
Unrealized loss on interest rate swaps, net of tax
|
|
|
(10,051
|
)
|
|
|
(1,280
|
)
|
|
|
1,280
|
|
|
|
(10,051
|
)
|
Pension adjustments, net of tax
|
|
|
(682
|
)
|
|
|
(682
|
)
|
|
|
682
|
|
|
|
(682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
(82,523
|
)
|
|
|
(73,752
|
)
|
|
|
73,752
|
|
|
|
(82,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
(45,009
|
)
|
|
|
51,074
|
|
|
|
4,064
|
|
|
|
10,129
|
|
Less: Comprehensive income (loss) attributable to noncontrolling
interests
|
|
|
|
|
|
|
(6,960
|
)
|
|
|
(48,178
|
)
|
|
|
(55,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Parent
|
|
$
|
(45,009
|
)
|
|
$
|
44,114
|
|
|
$
|
(44,114
|
)
|
|
$
|
(45,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Condensed
Consolidating Statements of USPI Stockholders
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
|
|
Guarantors
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Balance, December 31, 2008
|
|
$
|
764,137
|
|
|
$
|
371,335
|
|
|
$
|
(371,335
|
)
|
|
$
|
764,137
|
|
Net income
|
|
|
69,666
|
|
|
|
139,236
|
|
|
|
(75,514
|
)
|
|
|
133,388
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
(11,128
|
)
|
|
|
(52,594
|
)
|
|
|
(63,722
|
)
|
Contribution related to equity award grants by USPI Group
Holdings, Inc.
|
|
|
1,937
|
|
|
|
282
|
|
|
|
(282
|
)
|
|
|
1,937
|
|
Acquisitions and contributions
|
|
|
(9,536
|
)
|
|
|
26,410
|
|
|
|
(26,410
|
)
|
|
|
(9,536
|
)
|
Disposals and deconsolidations
|
|
|
(4,798
|
)
|
|
|
(17,259
|
)
|
|
|
17,259
|
|
|
|
(4,798
|
)
|
Distributions
|
|
|
|
|
|
|
(117,890
|
)
|
|
|
117,890
|
|
|
|
|
|
Dividend on common stock
|
|
|
(88,617
|
)
|
|
|
|
|
|
|
|
|
|
|
(88,617
|
)
|
Foreign currency translation and other
|
|
|
25,163
|
|
|
|
21,376
|
|
|
|
(21,376
|
)
|
|
|
25,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
757,952
|
|
|
|
412,362
|
|
|
|
(412,362
|
)
|
|
|
757,952
|
|
Net income
|
|
|
42,093
|
|
|
|
124,725
|
|
|
|
(64,165
|
)
|
|
|
102,653
|
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
(12,879
|
)
|
|
|
(47,681
|
)
|
|
|
(60,560
|
)
|
Contribution related to equity award grants by USPI Group
Holdings, Inc.
|
|
|
2,294
|
|
|
|
527
|
|
|
|
(527
|
)
|
|
|
2,294
|
|
Acquisitions and contributions
|
|
|
(452
|
)
|
|
|
36,090
|
|
|
|
(36,090
|
)
|
|
|
(452
|
)
|
Disposals and deconsolidations
|
|
|
(6,774
|
)
|
|
|
(5,857
|
)
|
|
|
5,857
|
|
|
|
(6,774
|
)
|
Distributions
|
|
|
|
|
|
|
(112,573
|
)
|
|
|
112,573
|
|
|
|
|
|
Dividend on common stock
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
(850
|
)
|
Foreign currency translation and other
|
|
|
(7,506
|
)
|
|
|
(10,134
|
)
|
|
|
10,134
|
|
|
|
(7,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
786,757
|
|
|
$
|
432,261
|
|
|
$
|
(432,261
|
)
|
|
$
|
786,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
Condensed
Consolidating Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
Year Ended December 31, 2010
|
|
Guarantor
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
42,093
|
|
|
$
|
124,725
|
|
|
$
|
(64,165
|
)
|
|
$
|
102,653
|
|
Loss on discontinued operations
|
|
|
7,003
|
|
|
|
533
|
|
|
|
(533
|
)
|
|
|
7,003
|
|
Changes in operating and intercompany assets and liabilities and
noncash items included in net income
|
|
|
17,222
|
|
|
|
31,072
|
|
|
|
11,114
|
|
|
|
59,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
66,318
|
|
|
|
156,330
|
|
|
|
(53,584
|
)
|
|
|
169,064
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(5,437
|
)
|
|
|
(34,598
|
)
|
|
|
|
|
|
|
(40,035
|
)
|
Purchases of new businesses and equity interests, net
|
|
|
(21,698
|
)
|
|
|
(11,601
|
)
|
|
|
|
|
|
|
(33,299
|
)
|
Other items, net
|
|
|
(9,306
|
)
|
|
|
(2,350
|
)
|
|
|
12,950
|
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(36,441
|
)
|
|
|
(48,549
|
)
|
|
|
12,950
|
|
|
|
(72,040
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings, net
|
|
|
14,735
|
|
|
|
(20,400
|
)
|
|
|
4,513
|
|
|
|
(1,152
|
)
|
Purchases and sales of noncontrolling interests, net
|
|
|
737
|
|
|
|
349
|
|
|
|
|
|
|
|
1,086
|
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
(112,573
|
)
|
|
|
53,584
|
|
|
|
(58,989
|
)
|
Dividend payment on common stock
|
|
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
(850
|
)
|
Decrease in cash held on behalf of noncontrolling interest
holders and other
|
|
|
(11,743
|
)
|
|
|
15,112
|
|
|
|
(17,463
|
)
|
|
|
(14,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,879
|
|
|
|
(117,512
|
)
|
|
|
40,634
|
|
|
|
(73,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
2,169
|
|
|
|
|
|
|
|
2,169
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
32,756
|
|
|
|
(7,393
|
)
|
|
|
|
|
|
|
25,363
|
|
Cash at the beginning of the period
|
|
|
27,430
|
|
|
|
7,460
|
|
|
|
|
|
|
|
34,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the period
|
|
$
|
60,186
|
|
|
$
|
67
|
|
|
$
|
|
|
|
$
|
60,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
Year Ended December 31, 2009
|
|
Guarantor
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
69,666
|
|
|
$
|
139,236
|
|
|
$
|
(75,514
|
)
|
|
$
|
133,388
|
|
Income from discontinued operations
|
|
|
(1,453
|
)
|
|
|
(996
|
)
|
|
|
996
|
|
|
|
(1,453
|
)
|
Changes in operating and intercompany assets and liabilities and
noncash items included in net income
|
|
|
(1,582
|
)
|
|
|
30,074
|
|
|
|
20,183
|
|
|
|
48,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
66,631
|
|
|
|
168,314
|
|
|
|
(54,335
|
)
|
|
|
180,610
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(5,139
|
)
|
|
|
(24,565
|
)
|
|
|
|
|
|
|
(29,704
|
)
|
Purchases of new businesses and equity interests, net
|
|
|
(57,625
|
)
|
|
|
(11,816
|
)
|
|
|
9,914
|
|
|
|
(59,527
|
)
|
Other items, net
|
|
|
3,837
|
|
|
|
(10,668
|
)
|
|
|
10,233
|
|
|
|
3,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(58,927
|
)
|
|
|
(47,049
|
)
|
|
|
20,147
|
|
|
|
(85,829
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings, net
|
|
|
(2,750
|
)
|
|
|
(18,905
|
)
|
|
|
1,585
|
|
|
|
(20,070
|
)
|
Purchases and sales of noncontrolling interests, net
|
|
|
(4,662
|
)
|
|
|
2,595
|
|
|
|
|
|
|
|
(2,067
|
)
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
(117,890
|
)
|
|
|
54,335
|
|
|
|
(63,555
|
)
|
Dividend payment on common stock
|
|
|
(88,617
|
)
|
|
|
|
|
|
|
|
|
|
|
(88,617
|
)
|
Increase in cash held on behalf of noncontrolling interest
holders and other
|
|
|
73,730
|
|
|
|
11,064
|
|
|
|
(21,732
|
)
|
|
|
63,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(22,299
|
)
|
|
|
(123,136
|
)
|
|
|
34,188
|
|
|
|
(111,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
1,725
|
|
|
|
|
|
|
|
1,725
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(14,595
|
)
|
|
|
50
|
|
|
|
|
|
|
|
(14,545
|
)
|
Cash at the beginning of the period
|
|
|
42,025
|
|
|
|
7,410
|
|
|
|
|
|
|
|
49,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the period
|
|
$
|
27,430
|
|
|
$
|
7,460
|
|
|
$
|
|
|
|
$
|
34,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Participating
|
|
|
Consolidation
|
|
|
Consolidated
|
|
Year Ended December 31, 2008
|
|
Guarantor
|
|
|
Investees
|
|
|
Adjustments
|
|
|
Total
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
37,514
|
|
|
$
|
124,826
|
|
|
$
|
(69,688
|
)
|
|
$
|
92,652
|
|
Loss on discontinued operations
|
|
|
1,179
|
|
|
|
1,140
|
|
|
|
(1,140
|
)
|
|
|
1,179
|
|
Changes in operating and intercompany assets and liabilities and
noncash items included in net income
|
|
|
11,739
|
|
|
|
24,196
|
|
|
|
12,353
|
|
|
|
48,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
50,432
|
|
|
|
150,162
|
|
|
|
(58,475
|
)
|
|
|
142,119
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment, net
|
|
|
(4,189
|
)
|
|
|
(26,500
|
)
|
|
|
|
|
|
|
(30,689
|
)
|
Purchases of new businesses and equity interests, net
|
|
|
(64,192
|
)
|
|
|
(107
|
)
|
|
|
|
|
|
|
(64,299
|
)
|
Other items, net
|
|
|
(5,202
|
)
|
|
|
(3,084
|
)
|
|
|
2,411
|
|
|
|
(5,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(73,583
|
)
|
|
|
(29,691
|
)
|
|
|
2,411
|
|
|
|
(100,863
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings, net
|
|
|
28,700
|
|
|
|
(12,051
|
)
|
|
|
1,527
|
|
|
|
18,176
|
|
Purchases and sales of noncontrolling interests, net
|
|
|
(26,430
|
)
|
|
|
|
|
|
|
|
|
|
|
(26,430
|
)
|
Distributions to noncontrolling interests
|
|
|
|
|
|
|
(113,462
|
)
|
|
|
56,948
|
|
|
|
(56,514
|
)
|
Other items, net
|
|
|
(3,759
|
)
|
|
|
770
|
|
|
|
(2,411
|
)
|
|
|
(5,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,489
|
)
|
|
|
(124,743
|
)
|
|
|
56,064
|
|
|
|
(70,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
1,638
|
|
|
|
|
|
|
|
1,638
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(24,640
|
)
|
|
|
(2,683
|
)
|
|
|
|
|
|
|
(27,323
|
)
|
Cash at the beginning of the period
|
|
|
66,665
|
|
|
|
10,093
|
|
|
|
|
|
|
|
76,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at the end of the period
|
|
$
|
42,025
|
|
|
$
|
7,410
|
|
|
$
|
|
|
|
$
|
49,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
UNITED
SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Continued)
|
|
(22)
|
Selected
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Quarters
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Net revenues
|
|
$
|
137,871
|
|
|
$
|
143,190
|
|
|
$
|
141,392
|
|
|
$
|
154,212
|
|
Income from continuing operations
|
|
|
25,442
|
|
|
|
30,697
|
|
|
|
25,875
|
|
|
|
27,642
|
|
Net income attributable to noncontrolling interests
|
|
|
(13,635
|
)
|
|
|
(15,135
|
)
|
|
|
(14,309
|
)
|
|
|
(17,481
|
)
|
Net income attributable to USPIs common stockholder
|
|
|
12,011
|
|
|
|
15,887
|
|
|
|
11,848
|
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Quarters
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Net revenues
|
|
$
|
150,178
|
|
|
$
|
149,305
|
|
|
$
|
145,025
|
|
|
$
|
148,967
|
|
Income from continuing operations
|
|
|
21,402
|
|
|
|
32,522
|
|
|
|
53,254
|
|
|
|
24,757
|
|
Net income attributable to noncontrolling interests
|
|
|
(16,295
|
)
|
|
|
(16,105
|
)
|
|
|
(14,807
|
)
|
|
|
(16,515
|
)
|
Net income attributable to USPIs common stockholder
|
|
|
5,687
|
|
|
|
16,752
|
|
|
|
38,704
|
|
|
|
8,523
|
|
Quarterly operating results are not necessarily representative
of operations for a full year for various reasons, including
case volumes, interest rates, acquisitions, changes in
contracts, the timing of price changes, and financing
activities. In addition, the Company has completed acquisitions
and opened new facilities throughout 2009 and 2010, all of which
significantly affect the comparability of net income from
quarter to quarter. The results from 2009 have been adjusted to
reflect the effects of discontinued operations that were
reported in 2010.
F-50
|
|
(2)
|
Financial
Statement Schedule
|
The following financial statement schedule is filed as part of
this
Form 10-K:
Schedule II Valuation and Qualifying Accounts
SCHEDULE II:
VALUATION AND QUALIFYING ACCOUNTS
Allowance
for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Additions Charged to:
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Other
|
|
|
|
Other
|
|
End of
|
|
|
Period
|
|
Expenses
|
|
Accounts
|
|
Deductions(2)
|
|
Items(3)
|
|
Period
|
|
|
(In thousands)
|
|
Year ended December 31, 2008(1)
|
|
$
|
12,721
|
|
|
$
|
7,568
|
|
|
$
|
|
|
|
$
|
(9,063
|
)
|
|
$
|
318
|
|
|
$
|
11,544
|
|
Year ended December 31, 2009(1)
|
|
|
11,544
|
|
|
|
8,958
|
|
|
|
|
|
|
|
(10,149
|
)
|
|
|
(2,193
|
)
|
|
|
8,160
|
|
Year ended December 31, 2010(1)
|
|
|
8,160
|
|
|
|
8,458
|
|
|
|
|
|
|
|
(8,742
|
)
|
|
|
(395
|
)
|
|
|
7,481
|
|
Valuation
allowance for deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Additions Charged to:
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Other
|
|
|
|
Other
|
|
End of
|
|
|
Period
|
|
Expenses
|
|
Accounts(4)
|
|
Deductions(5)
|
|
Items
|
|
Period
|
|
|
(In thousands)
|
|
Year ended December 31, 2008
|
|
$
|
37,822
|
|
|
$
|
1,332
|
|
|
$
|
(596
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38,558
|
|
Year ended December 31, 2009
|
|
|
38,558
|
|
|
|
|
|
|
|
|
|
|
|
(31,193
|
)
|
|
|
(4,082
|
)
|
|
|
3,283
|
|
Year ended December 31, 2010
|
|
|
3,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,598
|
)
|
|
|
685
|
|
|
|
|
(1) |
|
Includes amounts related to companies disposed of in 2008
through 2010. |
|
(2) |
|
Accounts written off. |
|
(3) |
|
Primarily beginning balances for purchased businesses and
entities that were deconsolidated. |
|
(4) |
|
Recorded to goodwill |
|
(5) |
|
Reversal of deferred tax asset allowance (Note 13),
recorded as a reduction of income tax expense. |
All other schedules are omitted because they are not applicable
or not required or because the required information is included
in the consolidated financial statements or notes thereto.
S-1
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Consolidated Financial Statements
Years Ended June 30, 2010 and 2009
(With Independent Auditors Report Thereon)
1
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2010 AND 2009
CONTENTS
|
|
|
|
|
|
|
|
3
|
|
Audited Financial Statements
|
|
|
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6
|
|
|
|
|
7
|
|
|
|
|
8
|
|
2
REPORT OF
PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS
To The Board of Managers
Texas Health Ventures Group, L.L.C.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, of changes in
equity, and of cash flows present fairly, in all material
respects, the financial position of Texas Health Ventures Group,
L.L.C and Subsidiaries (the Company) at
June 30, 2010 and 2009, and the results of their operations
and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers LLP
December 8,
2010
3
TEXAS
HEALTH VENTURES GROUP, L.L.C AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
JUNE 30,
2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
522
|
|
|
$
|
8,315
|
|
Patient receivables, net of allowance for doubtful accounts of
$12,560 and $9,097 at June 30, 2010 and 2009, respectively
|
|
|
48,468
|
|
|
|
41,489
|
|
Due from affiliate (Note 9)
|
|
|
43,709
|
|
|
|
70,370
|
|
Supplies
|
|
|
8,903
|
|
|
|
7,570
|
|
Prepaid and other current assets
|
|
|
2,096
|
|
|
|
2,120
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
103,698
|
|
|
|
129,864
|
|
PROPERTY AND EQUIPMENT, net (Note 2)
|
|
|
170,428
|
|
|
|
141,603
|
|
OTHER LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
Investments in unconsolidated affiliates (Note 4)
|
|
|
1,871
|
|
|
|
1,687
|
|
Goodwill and intangible assets, net (Note 6)
|
|
|
143,915
|
|
|
|
137,303
|
|
Other
|
|
|
1,051
|
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
420,963
|
|
|
$
|
411,090
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,335
|
|
|
$
|
13,063
|
|
Accrued expenses and other
|
|
|
16,504
|
|
|
|
14,316
|
|
Due to affiliates (Note 9)
|
|
|
|
|
|
|
3,119
|
|
Current portion of long-term obligations (Note 7)
|
|
|
12,887
|
|
|
|
12,856
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
45,726
|
|
|
|
43,354
|
|
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION (Note 7)
|
|
|
142,709
|
|
|
|
120,357
|
|
OTHER LIABILITIES
|
|
|
14,540
|
|
|
|
13,376
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
202,975
|
|
|
|
177,087
|
|
NONCONTROLLING INTERESTS REDEEMABLE
|
|
|
30,352
|
|
|
|
24,400
|
|
COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9 and 10)
|
|
|
|
|
|
|
|
|
EQUITY:
|
|
|
|
|
|
|
|
|
Members equity
|
|
|
172,091
|
|
|
|
194,591
|
|
Noncontrolling interests nonredeemable
|
|
|
15,545
|
|
|
|
15,012
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
187,636
|
|
|
|
209,603
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
420,963
|
|
|
$
|
411,090
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
TEXAS
HEALTH VENTURES GROUP, L.L.C AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE YEARS ENDED JUNE 30, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$
|
478,973
|
|
|
$
|
424,071
|
|
Management and royalty fee income (Note 9)
|
|
|
600
|
|
|
|
588
|
|
Other income
|
|
|
517
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
480,090
|
|
|
|
425,191
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES (Note 4)
|
|
|
1,100
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Salaries, benefits, and other employee costs
|
|
|
102,498
|
|
|
|
92,664
|
|
Medical services and supplies
|
|
|
120,017
|
|
|
|
98,270
|
|
Management and royalty fees (Note 9)
|
|
|
19,181
|
|
|
|
17,021
|
|
Professional fees
|
|
|
3,348
|
|
|
|
3,880
|
|
Other operating expenses
|
|
|
65,665
|
|
|
|
59,491
|
|
Provision for doubtful accounts
|
|
|
15,283
|
|
|
|
12,420
|
|
Depreciation and amortization
|
|
|
19,635
|
|
|
|
18,898
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
345,627
|
|
|
|
302,644
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
135,563
|
|
|
|
123,524
|
|
NONOPERATING INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(13,680
|
)
|
|
|
(13,251
|
)
|
Interest income (Note 9)
|
|
|
338
|
|
|
|
640
|
|
Other income (expense), net
|
|
|
31
|
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
122,252
|
|
|
|
110,661
|
|
INCOME TAXES
|
|
|
(3,009
|
)
|
|
|
(2,888
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
119,243
|
|
|
|
107,773
|
|
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
Redeemable
|
|
|
(57,886
|
)
|
|
|
(52,871
|
)
|
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
Nonredeemable
|
|
|
(4,444
|
)
|
|
|
(3,889
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company
|
|
$
|
56,913
|
|
|
$
|
51,013
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Members Equity
|
|
|
Interests
|
|
|
|
Total
|
|
|
USP
|
|
|
BHS
|
|
|
BUMC
|
|
|
Total
|
|
|
Nonredeemable
|
|
|
|
(In thousands)
|
|
|
Balance at June 30, 2008
|
|
$
|
174,532
|
|
|
$
|
79,798
|
|
|
$
|
1,760
|
|
|
$
|
78,360
|
|
|
$
|
159,918
|
|
|
$
|
14,614
|
|
Net income
|
|
|
54,902
|
|
|
|
25,434
|
|
|
|
604
|
|
|
|
24,975
|
|
|
|
51,013
|
|
|
|
3,889
|
|
Distributions to members
|
|
|
(19,934
|
)
|
|
|
(8,132
|
)
|
|
|
(222
|
)
|
|
|
(7,986
|
)
|
|
|
(16,340
|
)
|
|
|
(3,594
|
)
|
Purchase of noncontrolling interests
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353
|
|
Sale of noncontrolling interests
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
Assign remaining BHS 1.1% interest in THVG to BUMC, effective
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
(2,142
|
)
|
|
|
2,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
|
209,603
|
|
|
|
97,100
|
|
|
|
|
|
|
|
97,491
|
|
|
|
194,591
|
|
|
|
15,012
|
|
Net income
|
|
|
61,357
|
|
|
|
28,400
|
|
|
|
|
|
|
|
28,513
|
|
|
|
56,913
|
|
|
|
4,444
|
|
Distributions to members
|
|
|
(87,059
|
)
|
|
|
(41,368
|
)
|
|
|
|
|
|
|
(41,534
|
)
|
|
|
(82,902
|
)
|
|
|
(4,157
|
)
|
Contributions
|
|
|
4,766
|
|
|
|
2,238
|
|
|
|
|
|
|
|
2,247
|
|
|
|
4,485
|
|
|
|
281
|
|
Purchase of noncontrolling interests
|
|
|
495
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
(96
|
)
|
|
|
(191
|
)
|
|
|
686
|
|
Sales of noncontrolling interests
|
|
|
(1,526
|
)
|
|
|
(402
|
)
|
|
|
|
|
|
|
(403
|
)
|
|
|
(805
|
)
|
|
|
(721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
187,636
|
|
|
$
|
85,873
|
|
|
$
|
|
|
|
$
|
86,218
|
|
|
$
|
172,091
|
|
|
$
|
15,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2010 AND
2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
119,243
|
|
|
$
|
107,773
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
15,283
|
|
|
|
12,420
|
|
Depreciation and amortization
|
|
|
19,635
|
|
|
|
18,898
|
|
Amortization of debt issue costs
|
|
|
5
|
|
|
|
4
|
|
Equity in earnings of unconsolidated affiliates, net of
distributions received
|
|
|
(183
|
)
|
|
|
(94
|
)
|
Changes in operating assets and liabilities, net of effects from
purchases of new businesses:
|
|
|
|
|
|
|
|
|
Patient receivables
|
|
|
(20,815
|
)
|
|
|
(7,988
|
)
|
Due to affiliates, net
|
|
|
(3,119
|
)
|
|
|
(97
|
)
|
Supplies, prepaids, and other assets
|
|
|
(835
|
)
|
|
|
(437
|
)
|
Accounts payable and accrued expenses
|
|
|
2,829
|
|
|
|
(3,829
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
132,043
|
|
|
|
126,650
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of new businesses and equity interests, net of cash
received of $1,506 and $1,758 for 2010 and 2009, respectively
|
|
|
1,506
|
|
|
|
46
|
|
Sale of equity interests
|
|
|
|
|
|
|
25
|
|
Purchases of property and equipment
|
|
|
(16,842
|
)
|
|
|
(6,611
|
)
|
Sales of property and equipment
|
|
|
100
|
|
|
|
45
|
|
Change in deposits and notes receivables
|
|
|
43
|
|
|
|
|
|
Change in cash management balances with affiliate
|
|
|
26,229
|
|
|
|
(39,661
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
11,036
|
|
|
|
(46,156
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
$
|
9,988
|
|
|
$
|
3,534
|
|
Payments on long-term obligations
|
|
|
(17,703
|
)
|
|
|
(13,164
|
)
|
Distributions to noncontrolling interest owners
|
|
|
(61,361
|
)
|
|
|
(53,158
|
)
|
Purchases of noncontrolling interests
|
|
|
(1,838
|
)
|
|
|
(1,348
|
)
|
Sales of noncontrolling interests
|
|
|
2,944
|
|
|
|
4,770
|
|
Distributions to members
|
|
|
(82,902
|
)
|
|
|
(16,340
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(150,872
|
)
|
|
|
(75,706
|
)
|
|
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH
|
|
|
(7,793
|
)
|
|
|
4,788
|
|
CASH, beginning of period
|
|
|
8,315
|
|
|
|
3,527
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
522
|
|
|
$
|
8,315
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
13,397
|
|
|
$
|
13,441
|
|
Cash paid for income taxes
|
|
|
2,816
|
|
|
|
2,365
|
|
Noncash transactions:
|
|
|
|
|
|
|
|
|
Noncash assets contributed by Members (Note 3)
|
|
|
4,766
|
|
|
|
|
|
Assets acquired under capital leases
|
|
|
25,339
|
|
|
|
2,675
|
|
See accompanying notes to consolidated financial statements.
7
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
FOR THE
YEARS ENDED JUNE 30, 2010 AND 2009
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Description
of Business
Texas Health Ventures Group, L.L.C. and subsidiaries (THVG or
the Company), a Texas limited liability company, was formed on
January 21, 1997, for the primary purpose of developing,
acquiring, and operating ambulatory surgery centers and related
entities. Prior to June 29, 2008, Baylor Health Services
(BHS), a Texas nonprofit corporation that is a controlled
affiliate of Baylor Health Care System (BHCS), a Texas nonprofit
corporation, owned 50.1% interest in THVG. On June 29,
2008, BHS distributed 49% of its existing 50.1% interest in THVG
to Baylor University Medical Center (BUMC), a Texas nonprofit
corporation whose sole member is BHCS. THVG is ultimately a
subsidiary of BHCS through the combined ownership by BUMC and
BHS (collectively referred to herein as Baylor). USP North
Texas, Inc. (USP), a Texas corporation and subsidiary of United
Surgical Partners International, Inc. (USPI), owns 49.9% of
THVG. On June 30, 2009, BHS assigned its 1.1% remaining
interest to BUMC. THVGs fiscal year ends June 30.
THVGs subsidiaries fiscal years end December 31;
however, the financial information of these subsidiaries
included in these consolidated financial statements is as of and
for the twelve months ended June 30, 2010 and 2009.
THVG owns equity interests in and operates ambulatory surgery
centers, surgical hospitals, and related businesses in the
Dallas/Fort Worth, Texas, metropolitan area. At
June 30, 2010, THVG operated twenty-six facilities (the
Facilities) under management contracts, twenty-five of which are
consolidated for financial reporting purposes and one of which
is accounted for under the equity method. In addition, THVG
holds equity method investments in two partnerships that each
own the real estate used by two of the Facilities.
THVG has been funded by capital contributions from its members
and by cash distributions from the Facilities. The board of
managers, which is controlled by Baylor, initiates requests for
capital contributions. The Facilities operating agreements
provide that cash flows available for distribution will be
distributed at least quarterly to THVG and other owners of the
Facilities.
THVGs operating agreement provides that the board of
managers determine, on at least a quarterly basis, if THVG
should make a cash distribution based on a comparison of
THVGs excess cash on hand versus current and anticipated
needs, including, without limitation, needs for operating
expenses, debt service, acquisitions, and a reasonable
contingency reserve. The terms of THVGs operating
agreement provide that any distributions, whether driven by
operating cash flows or by other sources, such as the
distribution of noncash assets or distributions in the event
THVG liquidates, are to be shared according to each
members overall ownership level in THVG. Those ownership
levels were 50.1% for BUMC and 49.9% for USP as of June 30,
2010 and 2009.
Basis of
Accounting
THVG maintains its books and records on the accrual basis of
accounting, and the consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America.
Principles
of Consolidation
The consolidated financial statements include the financial
statements of THVG and its wholly owned subsidiaries and other
entities THVG controls. All significant intercompany balances
and transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management of THVG to make estimates and
assumptions that affect the
8
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
Recently
Adopted Accounting Pronouncements
Effective July 1, 2009, THVG adopted Statement of Financial
Accounting Standards (SFAS) No. 141 (revised 2007),
Business Combinations, (SFAS 141R) and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB
No. 51 (SFAS 160). SFAS 141R and
SFAS 160 are now included in the Financial Accounting
Standards Boards (FASB) Accounting Standards
Codification (ASC), Topic 805, Business Combinations
and Topic 810, Consolidations, respectively. The ASC
is now the source of GAAP recognized by the FASB to be applied
to nongovernmental entities.
Under ASC 805, THVG is required to recognize the assets
acquired, liabilities assumed, contractual contingencies and
contingent consideration at their fair value at the acquisition
date. ASC 805 further requires that acquisition-related
costs are to be recognized separately from the acquisition and
expensed as incurred. Among other changes, ASC 805 also
requires that negative goodwill be recognized in
earnings as a gain attributable to the acquisition, and any
deferred tax benefits resulting from a business combination be
recognized in income from continuing operations in the period of
the combination.
ASC 810 now requires THVG to clearly identify and present
ownership interests in subsidiaries held by parties other than
THVG in the consolidated financial statements within the equity
section but separate from THVGs equity, except as noted
below. It also requires the amounts of consolidated net income
attributable to THVG and the noncontrolling interests to be
clearly identified and presented on the face of the consolidated
statement of income; changes in ownership interests to be
accounted for as equity transactions; and when a subsidiary is
deconsolidated, any retained noncontrolling equity investment in
the former subsidiary and the gain or loss on the
deconsolidation of the subsidiary to be measured at fair value.
The implementation of ASC 810 also results in the cash flow
impact of certain transactions with noncontrolling interests
being classified within financing activities, consistent with
the view that under ASC 810 transactions between THVG (or
its subsidiaries) and noncontrolling interests are considered to
be equity transactions. These changes are summarized in the
table below, along with the cash flow classifications of several
similar types of transactions that did not change as a result of
ASC 810:
|
|
|
|
|
|
|
|
|
|
|
Before ASC 810
|
|
ASC 810
|
|
Changes in Cash Flow Classification:
|
|
|
|
|
|
|
|
|
Distributions of earnings paid to noncontrolling interests
|
|
|
Operating
|
|
|
|
Financing
|
|
Acquisitions or sales of equity interests in consolidated
subsidiaries, no change of control
|
|
|
Investing
|
|
|
|
Financing
|
|
No Change in Cash Flow Classification:
|
|
|
|
|
|
|
|
|
Distributions of earnings received from unconsolidated affiliates
|
|
|
Operating
|
|
|
|
Operating
|
|
Returns of capital paid to noncontrolling interests
|
|
|
Financing
|
|
|
|
Financing
|
|
Returns of capital received from unconsolidated affiliates
|
|
|
Investing
|
|
|
|
Investing
|
|
Sales of equity interests in consolidated subsidiaries resulting
in a change of control
|
|
|
Investing
|
|
|
|
Investing
|
|
Acquisitions or sales of equity interests in unconsolidated
affiliates, no change of control
|
|
|
Investing
|
|
|
|
Investing
|
|
Acquisitions of equity interests in unconsolidated affiliates,
resulting in change of control
|
|
|
Investing
|
|
|
|
Investing
|
|
Business combinations with no previous ownership by THVG
|
|
|
Investing
|
|
|
|
Investing
|
|
9
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
As summarized below, THVG has retrospectively applied the
classification requirements as required by ASC 810 to all
periods presented. The effect of these changes on previously
reported consolidated financial statements is as follows (in
thousands):
|
|
|
|
|
|
|
June 30, 2009
|
|
|
Consolidated Balance Sheet
|
|
|
|
|
Total equity as previously reported
|
|
$
|
194,591
|
|
Reclassification of nonredeemable noncontrolling interests to
equity as required by ASC 810
|
|
|
15,012
|
|
|
|
|
|
|
Total equity as adjusted for ASC 810
|
|
$
|
209,603
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows
|
|
|
|
|
Net cash provided by operating activities as previously recorded
|
|
$
|
73,765
|
|
Reclassification of distributions to noncontrolling interests to
financing activities
|
|
|
52,885
|
|
|
|
|
|
|
Net cash provided by operating activities as adjusted for
ASC 810
|
|
$
|
126,650
|
|
|
|
|
|
|
Net cash used in investing activities as previously reported
|
|
$
|
(42,734
|
)
|
Reclassification of purchases and sales of noncontrolling
interests to financing activities
|
|
|
(3,422
|
)
|
|
|
|
|
|
Net cash used in investing activities as adjusted for
ASC 810
|
|
$
|
(46,156
|
)
|
|
|
|
|
|
Net cash used in financing activities as previously reported
|
|
$
|
(26,244
|
)
|
Reclassifications of distributions to noncontrolling from
interests from operating activities
|
|
|
(52,885
|
)
|
Reclassifications of purchases and sales of noncontrolling
interests from investing activities
|
|
|
3,423
|
|
|
|
|
|
|
Net cash used in financing activities as adjusted for
ASC 810
|
|
$
|
(75,706
|
)
|
|
|
|
|
|
Upon the occurrence of various fundamental regulatory changes,
THVG could be obligated, under the terms of its investees
partnership and operating agreements, to purchase some or all of
the noncontrolling interests related to THVGs consolidated
subsidiaries. These repurchase requirements are limited to the
portions of its facilities that are owned by physicians who
perform surgery at THVGs facilities and would be triggered
by regulatory changes making the existing ownership structure
illegal. While THVG is not aware of events that would make the
occurrence of such a change probable, regulatory changes are
outside the control of THVG. Accordingly, the noncontrolling
interests subject to these repurchase provisions, and the income
attributable to those interests, have been classified in the
mezzanine, outside of equity, on THVGs consolidated
balance sheets.
The implementation of ASC 810 also had a significant impact
on THVGs statement of income format. Whereas in prior
periods THVGs consolidated statement of income listed
minority interests in the income of consolidated
subsidiaries above the income tax expense line
item, that order is reversed under ASC 810, which requires
that minority interests (now called net income
attributable to noncontrolling interests) be listed below
income tax expense. This change has no effect on the computation
or amounts of THVGs tax expense or payments.
Cash
Equivalents
For purposes of the consolidated financial statements, THVG
considers all highly liquid instruments with original maturities
when purchased of three months or less to be cash equivalents.
There were no cash equivalents at June 30, 2010 or 2009.
10
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Patient
Receivables
Patient receivables are stated at estimated net realizable
value. Significant concentrations of patient receivables at
June 30, 2010 and 2009 include:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Commercial and managed care providers
|
|
|
64
|
%
|
|
|
65
|
%
|
Government-related programs
|
|
|
18
|
%
|
|
|
16
|
%
|
Self-pay patients
|
|
|
18
|
%
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Receivables from government-related programs (i.e. Medicare and
Medicaid) represent the only concentrated groups of credit risk
for THVG and management does not believe that there are any
credit risks associated with these receivables. Commercial and
managed care receivables consist of receivables from various
payors involved in diverse activities and subject to differing
economic conditions, and do not represent any concentrated
credit risk to THVG. THVG maintains allowances for uncollectible
accounts for estimated losses resulting from the payors
inability to make payments on accounts. THVG assesses the
reasonableness of the allowance account based on historic
write-offs, the aging of accounts and other current conditions.
Furthermore, management continually monitors and adjusts the
allowances associated with its receivables. Accounts are written
off when collection efforts have been exhausted.
Supplies
Supplies, consisting primarily of pharmaceuticals and supplies
inventories, are stated at cost, which approximates market
value, and are expensed as used.
Property
and Equipment
Property and equipment are initially recorded at cost or, when
acquired as part of a business combination, at fair value at the
date of acquisition. Depreciation is calculated on the straight
line method over the estimated useful lives of the assets. Upon
retirement or disposal of assets, the asset and accumulated
depreciation accounts are adjusted accordingly, and any gain or
loss is reflected in earnings or loss of the respective period.
Maintenance costs and repairs are expensed as incurred;
significant renewals and betterments are capitalized. Assets
held under capital leases are classified as property and
equipment and amortized using the straight line method over the
shorter of the useful lives or the lease terms, and the related
obligations are recorded as debt. Amortization of property and
equipment held under capital leases and leasehold improvements
is included in depreciation and amortization expense. THVG
records operating lease expense on a straight-line basis unless
another systematic and rational allocation is more
representative of the time pattern in which the leased property
is physically employed. THVG amortizes leasehold improvements,
including amounts funded by landlord incentives or allowances,
for which the related deferred rent is amortized as a reduction
of lease expense, over the shorter of their economic lives or
the lease term.
Investments
in Unconsolidated Affiliates
Investments in unconsolidated affiliates in which THVG exerts
significant influence, but has less than a controlling
ownership, are accounted for under the equity method. THVG
exerts significant influence in the operations of its
unconsolidated affiliates through representation on the
governing bodies of the investees and additionally, with respect
to the Facilities, through contracts to manage the operations of
the investees.
11
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Intangible
Assets and Goodwill
Intangible assets consist of costs in excess of net assets
acquired (goodwill), costs associated with the purchase of
management service contract rights, and other intangibles. Most
of these assets have indefinite lives. Accordingly, these assets
are not amortized but are instead tested for impairment annually
or more frequently if changing circumstances warrant. The amount
by which the carrying amount would exceed fair value identified
in a test for impairment would be recorded as an impairment loss
in the consolidated statements of income. No such impairment was
identified in 2010 or 2009. THVG amortizes intangible assets
with definite useful lives over their respective useful lives to
the estimated residual values and reviews them for impairment in
the same manner as long-lived assets, as discussed below.
Impairment
of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset, or related groups of assets, may not be fully recoverable
from estimated future cash flows. In the event of impairment,
measurement of the amount of impairment may be based on
appraisal, fair values of similar assets or estimates of future
discounted cash flows resulting from use and ultimate
disposition of the asset. No such impairment was identified in
2010 or 2009.
Fair
Value of Financial Instruments
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in an orderly transaction
between market participants to sell the asset or transfer the
liability. The Company uses fair value measurements based on
quoted prices in active markets for identical assets or
liabilities (Level 1), significant other observable inputs
(Level 2) or unobservable inputs (Level 3),
depending on the nature of the item being valued. The Company
does not have financial assets and liabilities measured at fair
value on a recurring basis at June 30, 2010. The carrying
amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these
instruments.
The fair value of the Companys long-term debt is
determined by estimation of the discounted future cash flows of
the debt at rates currently quoted or offered to a comparable
company for similar debt instruments of comparable maturities by
its lenders. At June 30, 2010, the aggregate carrying
amount and estimated fair value of long-term debt were
$41,174,000 and $38,705,000, respectively. At June 30,
2009, the aggregate carrying amount and estimated fair value of
long-term debt were approximately $41,500,000 and $40,900,000,
respectively.
Revenue
Recognition
THVG has agreements with third-party payors that provide for
payments to THVG at amounts different from its established
rates. Payment arrangements include prospectively-determined
rates per discharge, reimbursed costs, discounted charges, and
per diem payments. Net patient service revenue is reported at
the estimated net realizable amount from patients, third-party
payors, and others for services rendered, including estimated
contractual adjustments under reimbursement agreements with
third party payors. Contractual adjustments are accrued on an
estimated basis in the period the related services are rendered
and adjusted in future periods as final settlements are
determined. These contractual adjustments are related to the
Medicare and Medicaid programs, as well as managed care
contracts.
Net patient service revenue from the Medicare and Medicaid
programs accounted for approximately 12% and 9% of total net
patient service revenue in 2010 and 2009, respectively.
Net patient service revenue from managed care contracts
accounted for approximately 82% and 89% of net patient service
revenue in 2010 and 2009, respectively.
12
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Net patient service revenue from private payors accounted for
approximately 6% and 2% of total net patient service revenue in
2010 and 2009, respectively.
For facilities licensed as hospitals, federal regulations
require the submission of annual cost reports covering medical
costs and expenses associated with services provided to program
beneficiaries. Medicare and Medicaid cost report settlements are
estimated in the period services are provided to beneficiaries.
Laws and regulations governing the Medicare and Medicaid
programs are extremely complex and subject to interpretation. As
a result, there is a reasonable possibility that recorded
estimates with respect to the five THVG facilities licensed as
hospitals may change as interpretations are clarified. These
initial estimates are revised as needed until final cost reports
are settled.
Equity in
Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates consists of
THVGs share of the profits and losses generated from its
noncontrolling equity investments. Because these operations are
central to THVGs business strategy, equity in earnings of
unconsolidated affiliates is classified as a component of
operating income in the accompanying consolidated statements of
income. THVG has contracts to manage these facilities, which
results in THVG having an active role in the operations of these
facilities.
Income
Taxes
No amounts for federal income taxes have been reflected in the
accompanying consolidated financial statements because the
federal tax effects of THVGs activities accrue to the
individual members.
The Texas franchise tax applies to all THVG entities for any tax
reports filed on or after January 1, 2008 and is reflected
in the accompanying consolidated statements of income. Under the
revised law, the tax is calculated on a margin base and is
therefore reflected in THVGs consolidated statements of
income for the years ended June 30, 2010 and 2009 as income
tax expense.
THVG follows the provisions of ASC 740, Income
Taxes, which prescribes a single model to address
uncertainty in tax positions and clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the
financial statements. The impact on THVGs financial
statements resulting from the adoption of new provisions within
ASC 740 on July 1, 2007 was not material.
As of June 30, 2010 and 2009, THVG had no gross
unrecognized tax benefits. THVG files a partnership income tax
return in the U.S. federal jurisdiction and a franchise tax
return in the state of Texas. THVG is no longer subject to
U.S. federal, state and local income tax examinations by
tax authorities for years prior to 2006. THVG has identified
Texas as a major state taxing jurisdiction. THVG
does not expect or anticipate a significant change over the next
twelve months in the unrecognized tax benefits.
Commitments
and Contingencies
Liabilities for loss contingencies arising from claims,
assessments, litigation, fines and penalties, and other sources
are recorded when it is probable that a liability has been
incurred and the amount can be reasonably estimated.
13
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
2.
|
PROPERTY
AND EQUIPMENT
|
At June 30, 2010 and 2009, property and equipment and
related accumulated depreciation and amortization consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
|
|
|
|
$
|
612
|
|
|
$
|
|
|
Buildings and leasehold improvements
|
|
|
5-25 years
|
|
|
|
145,242
|
|
|
|
114,414
|
|
Equipment
|
|
|
3-15 years
|
|
|
|
80,515
|
|
|
|
70,405
|
|
Furniture and fixtures
|
|
|
5-15 years
|
|
|
|
12,730
|
|
|
|
10,190
|
|
Construction in progress
|
|
|
|
|
|
|
3,441
|
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,540
|
|
|
|
196,545
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(72,112
|
)
|
|
|
(54,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
|
|
|
$
|
170,428
|
|
|
$
|
141,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010 and 2009, assets recorded under capital
lease arrangements included in property and equipment consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Buildings
|
|
$
|
105,186
|
|
|
$
|
81,271
|
|
Equipment and furniture
|
|
|
14,773
|
|
|
|
16,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,959
|
|
|
|
97,862
|
|
Less accumulated amortization
|
|
|
(23,893
|
)
|
|
|
(20,584
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment under capital leases
|
|
$
|
96,066
|
|
|
$
|
77,278
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
CAPITAL
CONTRIBUTIONS BY MEMBERS
|
As discussed in Note 1, THVG receives part of its funding
through cash and capital contributions from its members. During
2010, THVG received noncash capital contributions consisting
primarily of investments in partnerships that operate surgery
centers in the Dallas/Fort Worth area. These noncash
capital contributions, including THVGs ownership in the
investee, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
Net Assets
|
|
|
Investee
|
|
Percentage
|
|
Contributed
|
|
Effective Date
|
|
DeSoto Surgicare Partners, Ltd. (DeSoto)
|
|
|
50.1
|
%
|
|
$
|
1,684
|
|
|
December 1, 2009
|
Physicians Surgical Center of Fort Worth, L.L.P. (FW
Physicians)
|
|
|
50.13
|
%
|
|
|
3,082
|
|
|
December 31, 2009
|
USP previously had a controlling interest in DeSoto and had an
equity method investment (ASC 323) in FW Physicians through
another subsidiary. On the effective dates listed above, USP
sold 25.1% interest in DeSoto and 25.12% interest in FW
Physicians to Baylor. Through the contributions of USP and
Baylor, THVG obtained control of DeSoto and FW Physicians, and
accounted for the acquisitions as business combinations in
accordance with ASC 805. THVG recorded the contributions
from Baylor at predecessor basis, as they were common control
transactions between a parent and subsidiary. In this
transaction, Baylors predecessor basis is the same as fair
value since the transfer happened at the same time of the
business combination for Baylor. THVG recorded the contributions
from USP at fair value, based on an appraisal, as USP is a
noncontrolling interest holder.
Concurrent with the contributions, THVG began managing the
operations of these facilities. The results of these
transactions are included in THVGs consolidated results of
operations from the date of contribution.
14
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The assets acquired and liabilities assumed resulting from the
above contributions are summarized
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
DeSoto
|
|
|
FW Physicians
|
|
|
Current assets
|
|
$
|
649
|
|
|
$
|
1,732
|
|
Property and equipment
|
|
|
2,678
|
|
|
|
2,180
|
|
Goodwill Parent
|
|
|
402
|
|
|
|
2,547
|
|
Goodwill Noncontrolling interests
|
|
|
|
|
|
|
372
|
|
Other noncurrent asset
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
3,732
|
|
|
|
6,831
|
|
Current liabilities
|
|
|
1,154
|
|
|
|
1,556
|
|
Long-term debt
|
|
|
178
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,332
|
|
|
|
1,806
|
|
Noncontrolling interests
|
|
|
716
|
|
|
|
1,943
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,684
|
|
|
$
|
3,082
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
INVESTMENTS
IN SUBSIDIARIES AND UNCONSOLIDATED AFFILIATES
|
THVGs investments in consolidated subsidiaries and
unconsolidated affiliates consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Owned
|
|
|
|
|
|
|
June 30,
|
|
June 30,
|
Legal Name
|
|
Facility
|
|
City
|
|
2010
|
|
2009
|
|
Consolidated subsidiaries(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Bellaire Outpatient Surgery Center, L.L.P.
|
|
Bellaire Surgery Center
|
|
Fort Worth
|
|
|
50.1
|
%
|
|
|
50.1
|
%
|
Dallas Surgical Partners, L.L.C.
|
|
Baylor Surgicare
|
|
Dallas
|
|
|
62.6
|
|
|
|
62.6
|
|
Dallas Surgical Partners, L.L.C.
|
|
Texas Surgery Center
|
|
Dallas
|
|
|
62.6
|
|
|
|
62.6
|
|
Dallas Surgical Partners, L.L.C.
|
|
Physicians Day Surgery Center
|
|
Dallas
|
|
|
62.6
|
|
|
|
62.6
|
|
Denton Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Denton
|
|
Denton
|
|
|
50.1
|
|
|
|
50.1
|
|
Frisco Medical Center, L.L.P.
|
|
Baylor Medical Center at Frisco
|
|
Frisco
|
|
|
50.3
|
|
|
|
50.1
|
|
Garland Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Garland
|
|
Garland
|
|
|
50.1
|
|
|
|
50.1
|
|
Grapevine Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Grapevine
|
|
Grapevine
|
|
|
50.1
|
|
|
|
50.3
|
|
Lewisville Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Lewisville
|
|
Lewisville
|
|
|
52.4
|
|
|
|
53.1
|
|
MSH Partners, L.L.C.
|
|
Mary Shiels Hospital
|
|
Dallas
|
|
|
31.7
|
|
|
|
42.4
|
|
North Central Surgical Center, L.L.P.
|
|
North Central Surgery Center
|
|
Dallas
|
|
|
32.2
|
|
|
|
32.2
|
|
North Garland Surgery Center, L.L.P.
|
|
North Garland Surgery Center
|
|
Garland
|
|
|
51.6
|
|
|
|
52.4
|
|
Rockwall/Heath Surgery Center, L.L.P.
|
|
Baylor Surgicare at Heath
|
|
Heath
|
|
|
50.2
|
|
|
|
50.1
|
|
Trophy Club Medical Center, L.P.
|
|
Trophy Club Medical Center
|
|
Fort Worth
|
|
|
51.2
|
|
|
|
52.5
|
|
Valley View Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Valley View
|
|
Dallas
|
|
|
50.1
|
|
|
|
50.1
|
|
Fort Worth Surgicare Partners, Ltd.
|
|
Baylor Surgical Hospital of Fort Worth
|
|
Fort Worth
|
|
|
50.1
|
|
|
|
50.2
|
|
Arlington Surgicare Partners, Ltd.
|
|
Surgery Center of Arlington
|
|
Arlington
|
|
|
50.1
|
|
|
|
50.1
|
|
Rockwall Ambulatory Surgery Center, L.L.P.
|
|
Rockwall Surgery Center
|
|
Rockwall
|
|
|
50.1
|
|
|
|
50.1
|
|
Baylor Surgicare at Plano, L.L.C.
|
|
Baylor Surgicare at Plano
|
|
Plano
|
|
|
50.1
|
|
|
|
50.1
|
|
Metroplex Surgicare Partners, Ltd.
|
|
Metroplex Surgicare
|
|
Bedford
|
|
|
50.1
|
|
|
|
50.1
|
|
Arlington Orthopedic and Spine Hospitals, LLC
|
|
Arlington Hospital
|
|
Arlington
|
|
|
50.1
|
|
|
|
50.1
|
|
Baylor Surgicare at Granbury, LLC
|
|
Granbury Surgical Plaza
|
|
Granbury
|
|
|
51.8
|
|
|
|
50.6
|
|
Physicians Center of Fort Worth, L.L.P.
|
|
Baylor Surgicare at Fort Worth I & II
|
|
Fort Worth
|
|
|
50.1
|
|
|
|
|
|
DeSoto Surgicare, Ltd.
|
|
North Texas Surgery Center
|
|
Desoto
|
|
|
50.1
|
|
|
|
|
|
Baylor Surgicare at Mansfield, L.L.C.
|
|
Baylor Surgicare at Mansfield
|
|
Mansfield
|
|
|
51.0
|
|
|
|
|
|
Unconsolidated affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denton Surgicare Real Estate, Ltd.
|
|
(2)
|
|
n/a
|
|
|
49.0
|
|
|
|
49.0
|
|
Irving-Coppell Surgical Hospital, L.L.P.
|
|
Irving-Coppell Surgical Hospital
|
|
Irving
|
|
|
18.3
|
|
|
|
8.3
|
|
MCSH Real Estate Investors, Ltd.
|
|
(2)
|
|
n/a
|
|
|
2.0
|
|
|
|
2.0
|
|
15
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
(1) |
|
List excludes holding companies, which are wholly owned by the
Company and hold the Companys investments in the
Facilities. |
|
(2) |
|
These entities are not surgical facilities and do not have
ownership in any surgical facilities. |
Effective February 1, 2009, THVG acquired 50.63 membership
units, a 50.63% equity interest, in Granbury Surgical Plaza
(Granbury), for a purchase price of $805,000. Granbury, like the
other facilities in which THVG invests, is operated by Baylor
and USP through THVG, as described in Note 9.
Effective May 1, 2010, THVG assumed ownership of 51
membership units, a 51% equity interest, in Baylor Surgicare at
Mansfield (Mansfield), for no consideration. Mansfield, like
other facilities in which TVHG invests, is operated by Baylor
and USP through THVG, as described in Note 9.
The following table summarizes the recorded values of the assets
acquired and liabilities assumed at the dates of acquisition (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Mansfield
|
|
|
Granbury Surgical Plaza
|
|
|
Current assets
|
|
$
|
1,066
|
|
|
$
|
2,454
|
|
Property and equipment
|
|
|
1,305
|
|
|
|
2,847
|
|
Goodwill parent
|
|
|
1,705
|
|
|
|
3,916
|
|
Goodwill noncontrolling interests
|
|
|
1,638
|
|
|
|
|
|
Long-term assets
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
5,714
|
|
|
|
9,231
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
2,202
|
|
|
|
882
|
|
Long-term liabilities
|
|
|
950
|
|
|
|
1,776
|
|
Long-term debt
|
|
|
2,562
|
|
|
|
5,768
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
5,714
|
|
|
|
8,426
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
|
|
|
$
|
805
|
|
|
|
|
|
|
|
|
|
|
The acquisition of Mansfield was accounted for in accordance
with ASC 805 and the acquisition method was applied. The
acquisition was recorded at fair value, which resulted in
goodwill for the parent and noncontrolling interest holders.
Fair values for noncontrolling interest holders are estimated
based on market multiples and discounted cash flow models which
have been derived from the Companys experience in
acquiring surgical facilities, market participant assumptions
and third party valuations it has obtained with respect to such
transactions. The inputs used in these models are Level 3
inputs, which under GAAP, are significant unobservable inputs.
Inputs into these models include expected revenue growth,
expected gross margins and discount factors.
The acquisition of Granbury was accounted for using the purchase
method of accounting and accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired
and liabilities assumed based on the estimated fair values at
the date of acquisition.
The results of these acquisitions are included in THVGs
consolidated statements of income from the date of acquisition.
Total acquisition costs included in professional fees on
THVGs consolidated statement of income for 2010 was
$175,000.
|
|
5.
|
NONCONTROLLING
INTERESTS
|
The Company controls and therefore consolidates the results of
25 of its 26 facilities. Similar to its investments in
unconsolidated affiliates, the Company regularly engages in the
purchase and sale of equity interests with respect
16
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
to its consolidated subsidiaries that do not result in a change
of control. These transactions are accounted for as equity
transactions, as they are undertaken among the Company, its
consolidated subsidiaries, and noncontrolling interests, and
their cash flow effect is classified within financing activities.
During the fiscal year ended June 30, 2010, the Company
purchased and sold equity interests in various consolidated
subsidiaries in the amounts of $1,838,000 and $2,944,000,
respectively. The basis difference between the Companys
carrying amount and the proceeds received or paid in each
transaction is recorded as an adjustment to the Companys
equity. The impact of these transactions is summarized as
follows (in thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
Net income attributable to the Company
|
|
$
|
56,913
|
|
Transfers to the noncontrolling interests:
|
|
|
|
|
Decrease in the Companys equity for losses incurred
related to sales of subsidiaries equity interests
|
|
|
(805
|
)
|
Decrease in the Companys equity for losses incurred
related to purchases of subsidiaries equity interests
|
|
|
(192
|
)
|
|
|
|
|
|
Net transfers to noncontrolling interests
|
|
|
(997
|
)
|
|
|
|
|
|
Change in equity from net income attributable to the Company and
transfers to noncontrolling interests
|
|
$
|
55,916
|
|
|
|
|
|
|
As further described in Note 1, upon the occurrence of
various fundamental regulatory changes, the Company could be
obligated, under the terms of its investees partnership
and operating agreements, to purchase some or all of the
noncontrolling interests related to the Companys
consolidated subsidiaries. As a result, these noncontrolling
interests are not included as part of the Companys equity
and are carried as noncontrolling interests-redeemable on the
Companys consolidated balance sheets. The activity for the
years ended June 30, 2010 and 2009 is summarized below (in
thousands):
|
|
|
|
|
Balance, June 30, 2008
|
|
$
|
15,296
|
|
Net income attributable to noncontrolling interests
|
|
|
52,870
|
|
Distributions to noncontrolling interests
|
|
|
(49,564
|
)
|
Purchases of noncontrolling interests
|
|
|
(1,701
|
)
|
Sales of noncontrolling interests
|
|
|
4,990
|
|
Noncontrolling interests attributable to business combinations
|
|
|
2,509
|
|
|
|
|
|
|
Balance, June 30, 2009
|
|
|
24,400
|
|
|
|
|
|
|
Net income attributable to noncontrolling interests
|
|
|
57,886
|
|
Distributions to noncontrolling interests
|
|
|
(57,204
|
)
|
Purchases of noncontrolling interests
|
|
|
(1,860
|
)
|
Sales of noncontrolling interests
|
|
|
4,471
|
|
Noncontrolling interests attributable to business combinations
|
|
|
2,659
|
|
|
|
|
|
|
Balance, June 30, 2010
|
|
$
|
30,352
|
|
|
|
|
|
|
17
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
6.
|
GOODWILL
AND INTANGIBLE ASSETS
|
At June 30, 2010 and 2009, goodwill and intangible assets,
net of accumulated amortization, consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Goodwill parent
|
|
$
|
140,707
|
|
|
$
|
136,119
|
|
Goodwill noncontrolling interests
|
|
|
2,010
|
|
|
|
|
|
Other intangible assets
|
|
|
1,198
|
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,915
|
|
|
$
|
137,303
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of changes in the carrying amount of
goodwill for the years ended June 30, 2010 and 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
Parent
|
|
|
Interests
|
|
|
Balance, June 30, 2008
|
|
$
|
130,137
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Acquisition of Granbury
|
|
|
3,916
|
|
|
|
|
|
Purchase of additional interests in USPD
|
|
|
1,121
|
|
|
|
|
|
Additional contribution from BHS for the Metroplex acquisition
|
|
|
107
|
|
|
|
|
|
Other
|
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009
|
|
|
136,119
|
|
|
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Contribution of DeSoto
|
|
|
402
|
|
|
|
|
|
Contribution of FW Physicians
|
|
|
2,547
|
|
|
|
372
|
|
Acquisition of Mansfield
|
|
|
1,705
|
|
|
|
1,638
|
|
Other
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010
|
|
$
|
140,707
|
|
|
$
|
2,010
|
|
|
|
|
|
|
|
|
|
|
As described in Note 1, with the adoption of ASC 805
and ASC 810 effective July 1, 2009, goodwill additions
resulting from business combinations are recorded and assigned
to the parent and noncontrolling interests.
Intangible assets with definite useful lives are amortized over
their respective estimated useful lives. THVG records interest
expense related to debt issuance costs on a straight-line basis
over the term of the debt obligation, which approximates the
effective interest method. The agreements underlying THVGs
management contract assets have no determinable termination date
and, consequently, the related intangible assets have indefinite
useful lives. Goodwill and intangible assets with indefinite
useful lives are not amortized but instead are tested for
impairment at least annually. No impairment was identified in
2010 or 2009.
18
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following is a summary of other intangible assets at
June 30, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Definite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issue costs
|
|
$
|
104
|
|
|
$
|
(55
|
)
|
|
$
|
49
|
|
Indefinite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Management contracts
|
|
|
1,149
|
|
|
|
|
|
|
|
1,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,253
|
|
|
$
|
(55
|
)
|
|
$
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Definite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issue costs
|
|
$
|
84
|
|
|
$
|
(50
|
)
|
|
$
|
34
|
|
Indefinite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Management contracts
|
|
|
1,150
|
|
|
|
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,234
|
|
|
$
|
(50
|
)
|
|
$
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issue costs in the amount of approximately
$5,000 and $4,000 are included in interest expense for the years
ended June 30, 2010 and 2009, respectively.
At June 30, 2010 and 2009, long-term obligations consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Capital lease obligations (Note 8)
|
|
$
|
114,422
|
|
|
$
|
91,679
|
|
Notes payable to financial institutions
|
|
|
41,174
|
|
|
|
41,534
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
155,596
|
|
|
|
133,213
|
|
Less current portion
|
|
|
(12,887
|
)
|
|
|
(12,856
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations, less current portion
|
|
$
|
142,709
|
|
|
$
|
120,357
|
|
|
|
|
|
|
|
|
|
|
The aggregate maturities of notes payable for each of the five
years subsequent to June 30, 2010 and thereafter are as
follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
9,750
|
|
2012
|
|
|
9,810
|
|
2013
|
|
|
7,062
|
|
2014
|
|
|
5,219
|
|
2015
|
|
|
3,279
|
|
Thereafter
|
|
|
6,054
|
|
|
|
|
|
|
Total long-term obligations
|
|
$
|
41,174
|
|
|
|
|
|
|
The Facilities have notes payable to financial institutions
which mature at various dates through 2016 and accrue interest
at fixed and variable rates ranging from 3% to 9%. Each note is
collateralized by certain assets of the respective Facility.
19
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Capital lease obligations are collateralized by underlying real
estate or equipment and have interest rates ranging from 2% to
13.9%.
The Facilities lease various office equipment, medical
equipment, and office space under a number of operating lease
agreements, which expire at various times through the year 2030.
Such leases do not involve contingent rentals, nor do they
contain significant renewal or escalation clauses. Office leases
generally require the Facilities to pay all executory costs
(such as property taxes, maintenance and insurance).
Minimum future payments under noncancelable leases with
remaining terms in excess of one year as of June 30, 2010
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Year ending June 30:
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
15,276
|
|
|
$
|
12,992
|
|
2012
|
|
|
14,936
|
|
|
|
12,649
|
|
2013
|
|
|
14,536
|
|
|
|
11,060
|
|
2014
|
|
|
14,192
|
|
|
|
10,377
|
|
2015
|
|
|
14,506
|
|
|
|
10,435
|
|
Thereafter
|
|
|
180,738
|
|
|
|
78,524
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
254,184
|
|
|
$
|
136,037
|
|
|
|
|
|
|
|
|
|
|
Amount representing interest
|
|
|
(139,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal payments
|
|
$
|
114,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rent expense under operating leases was approximately
$14,702,000 and $13,149,000 for the years ended June 30,
2010 and 2009, respectively, and is included in other operating
expenses in the accompanying consolidated statements of income.
|
|
9.
|
RELATED-PARTY
TRANSACTIONS
|
THVG operates the Facilities under management and royalty
contracts, and THVG in turn is managed by Baylor and USP,
resulting in THVG incurring management and royalty fee expense
payable to Baylor and USP in amounts equal to the management and
royalty fee income THVG receives from the Facilities.
THVGs management and royalty fee income from the
facilities it consolidates for financial reporting purposes
eliminates in consolidation with the facilities expense
and therefore is not included in THVGs consolidated
revenues. THVGs management and royalty fee income from
facilities which are not consolidated was approximately $600,000
and $588,000 for the years ended June 30, 2010 and 2009,
respectively, and is included in the consolidated revenues of
THVG.
The management and royalty fee expense to Baylor and USP was
approximately $19,181,000 and $17,021,000 for the years ended
June 30, 2010 and 2009, respectively, and is reflected in
operating expenses in THVGs consolidated statements of
income. Of the total, 64.3% and 34.0% represent management fees
payable to USP and Baylor, respectively, and 1.7% represents
royalty fees payable to Baylor.
Under the management and royalty agreements, the Facilities pay
THVG an amount ranging from 4.5% to 7% of their net patient
service revenue less provision for doubtful accounts annually,
subject, in some cases, to an annual cap. Management and royalty
fees and other reimbursable costs owed by THVG and its
Facilities to USP and Baylor totaled approximately $0 and
$3,119,000 at June 30, 2010 and 2009, respectively, and are
included in due to affiliates in the accompanying consolidated
balance sheets.
20
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
In addition, a subsidiary of USPI frequently pays bills on
behalf of THVG and has custody of substantially all of
THVGs excess cash, paying THVG and the Facilities interest
income on the net balance at prevailing market rates. Amounts
held by USPI on behalf of THVG and the facilities totaled
$43,709,000 and $70,370,000 at June 30, 2010 and 2009,
respectively. The interest income amounted to $338,000 and
$640,000 for the years ended June 30, 2010 and 2009,
respectively.
|
|
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Financial
Guarantees
THVG guarantees portions of the indebtedness of its investees to
third-parties, which could potentially require THVG to make
maximum aggregate payments totaling approximately $10,574,000.
Of the total, $8,165,000 relates to the obligations of five
consolidated subsidiaries, whose obligations are included in
THVGs consolidated balance sheet and related disclosures,
and the remaining $2,409,000 relates to the obligations of
unconsolidated affiliated companies, whose obligations are not
included in THVGs consolidated balance sheet and related
disclosures. These arrangements (a) consist of guarantees
of real estate and equipment financing, (b) are
collateralized by all or a portion of the investees
assets, (c) require payments by THVG in the event of a
default by the investee primarily obligated under the financing,
(d) expire as the underlying debt matures at various dates
through 2021, or earlier if certain performance targets are met,
and (e) provide no recourse for THVG to recover any amounts
from third-parties. The fair value of the guarantee liability
was not material to the consolidated financial statements and,
therefore, no amounts were recorded at June 30, 2010
related to these guarantees. When THVG incurs guarantee
obligations that are disproportionately greater than the
guarantees provided by the investees other owners, THVG
charges the investee a fair market value fee based on the value
of the contingent liability THVG is assuming.
Litigation
and Professional Liability Claims
In their normal course of business, the Facilities are subject
to claims and lawsuits relating to patient treatment. THVG
believes that its liability for damages resulting from such
claims and lawsuits is adequately covered by insurance or is
adequately provided for in its consolidated financial
statements. USPI, on behalf of THVG and each of the Facilities,
maintains professional liability insurance that provides
coverage on a claims-made basis of $1,000,000 per incident and
$11,000,000 in annual aggregate amount with retroactive
provisions upon policy renewal. Certain of THVGs insurance
policies have deductibles and contingent premium arrangements.
THVG believes that the expense recorded through June 30,
2010, which was estimated based on historical claims, adequately
provides for its exposure under these arrangements.
Additionally, from time to time, THVG may be named as a party to
other legal claims and proceedings in the ordinary course of
business. THVG is not aware of any such claims or proceedings
that have more than a remote chance of having a material adverse
impact on THVG.
THVG regularly engages in exploratory discussions or enters into
letters of intent with various entities regarding possible joint
ventures, development, or other transactions. These possible
joint ventures, developments of new facilities, or other
transactions are in various stages of negotiation.
Effective July 1, 2010, THVG acquired 51% in Metrocrest
Surgery Center, LP for approximately $4 million.
THVG has performed an evaluation of subsequent events through
December 8, 2010, which is the date the consolidated
financials statements were available to be issued.
21
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Consolidated
Financial Statements
Years Ended June 30, 2009 and 2008
(With Independent Auditors Reports Thereon)
22
REPORT OF
PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS
To The Board of Managers
Texas Health Ventures Group, L.L.C.:
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of income, of changes in
members equity, and of cash flows present fairly, in all
material respects, the financial position of Texas Health
Ventures Group, L.L.C and Subsidiaries (the Company)
at June 30, 2009, and the results of their operations and
their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
The consolidated financial statements of the Company as of
June 30, 2008 and for the year then ended were audited by
other auditors whose report dated October 17, 2008
expressed an unqualified opinion on those statements.
/s/ PricewaterhouseCoopers
LLP
October 28, 2009
23
Report of
Ernst & Young LLP, Independent Auditors
The Board Managers
Texas Health Ventures Group, L.L.C.
We have audited the accompanying consolidated balance sheet of
Texas Health Ventures Group, L.L.C. and subsidiaries (the
Company) as of June 30, 2008, and the related consolidated
statements of income, members equity, and cash flows for
the year then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit
of the Companys internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Texas Health Ventures Group, L.L.C. and
subsidiaries at June 30, 2008, and the consolidated results
of their operations and their cash flows for the year then ended
in conformity with U.S. generally accepted accounting
principles.
October 17, 2008
Dallas, Texas
24
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
JUNE 30, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
8,315
|
|
|
$
|
3,527
|
|
Patient receivables, net of allowance for doubtful accounts of
$9,097 and $10,448 at June 30, 2009 and 2008, respectively
|
|
|
41,489
|
|
|
|
45,417
|
|
Due from affiliate (Note 8)
|
|
|
70,370
|
|
|
|
30,676
|
|
Supplies
|
|
|
7,570
|
|
|
|
7,337
|
|
Prepaid and other current assets
|
|
|
2,120
|
|
|
|
1,728
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
129,864
|
|
|
|
88,685
|
|
PROPERTY AND EQUIPMENT, net (Note 2)
|
|
|
141,603
|
|
|
|
148,411
|
|
OTHER LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
Investments in unconsolidated affiliates (Note 4)
|
|
|
1,687
|
|
|
|
1,618
|
|
Goodwill and intangible assets, net (Note 5)
|
|
|
137,303
|
|
|
|
131,319
|
|
Other
|
|
|
633
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
411,090
|
|
|
$
|
370,685
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
13,063
|
|
|
$
|
18,013
|
|
Accrued expenses and other
|
|
|
14,316
|
|
|
|
13,687
|
|
Due to affiliates (Note 8)
|
|
|
3,119
|
|
|
|
3,216
|
|
Current portion of long-term obligations (Note 6)
|
|
|
12,856
|
|
|
|
12,057
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
43,354
|
|
|
|
46,973
|
|
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION (Note 6)
|
|
|
120,357
|
|
|
|
123,646
|
|
OTHER LIABILITIES
|
|
|
13,376
|
|
|
|
10,238
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
177,087
|
|
|
|
180,857
|
|
MINORITY INTERESTS
|
|
|
39,412
|
|
|
|
29,910
|
|
COMMITMENTS AND CONTINGENCIES(Notes 7, 8, and 9)
|
|
|
|
|
|
|
|
|
MEMBERS EQUITY (Note 3)
|
|
|
194,591
|
|
|
|
159,918
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
411,090
|
|
|
$
|
370,685
|
|
|
|
|
|
|
|
|
|
|
25
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$
|
424,071
|
|
|
$
|
348,203
|
|
Management and royalty fee income (note 8)
|
|
|
588
|
|
|
|
600
|
|
Other income
|
|
|
532
|
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
425,191
|
|
|
|
349,272
|
|
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES (note 4)
|
|
|
977
|
|
|
|
1,059
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Salaries, benefits, and other employee costs
|
|
|
92,664
|
|
|
|
82,316
|
|
Medical services and supplies
|
|
|
98,270
|
|
|
|
78,203
|
|
Management and royalty fees (note 8)
|
|
|
17,021
|
|
|
|
14,546
|
|
Professional fees
|
|
|
3,880
|
|
|
|
5,714
|
|
Other operating expenses
|
|
|
59,491
|
|
|
|
52,434
|
|
Provision for doubtful accounts
|
|
|
12,420
|
|
|
|
13,646
|
|
Depreciation and amortization
|
|
|
18,898
|
|
|
|
17,706
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
302,644
|
|
|
|
264,565
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
123,524
|
|
|
|
85,766
|
|
NONOPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(13,251
|
)
|
|
|
(13,570
|
)
|
Interest income (note 8)
|
|
|
640
|
|
|
|
1,445
|
|
Other expense, net
|
|
|
(252
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
Income before minority interests and income taxes
|
|
|
110,661
|
|
|
|
73,580
|
|
MINORITY INTERESTS IN INCOME OF CONSOLIDATED SUBSIDIARIES
|
|
|
(56,760
|
)
|
|
|
(34,341
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
53,901
|
|
|
|
39,239
|
|
INCOME TAXES
|
|
|
(2,888
|
)
|
|
|
(3,673
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
51,013
|
|
|
$
|
35,566
|
|
|
|
|
|
|
|
|
|
|
26
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF MEMBERS EQUITY
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed Capital
|
|
|
Retained Earnings
|
|
|
|
|
|
|
USP
|
|
|
BHS
|
|
|
BUMC
|
|
|
USP
|
|
|
BHS
|
|
|
BUMC
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at June 30, 2007
|
|
$
|
45,748
|
|
|
$
|
45,932
|
|
|
$
|
|
|
|
$
|
21,335
|
|
|
$
|
21,420
|
|
|
$
|
|
|
|
$
|
134,435
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,747
|
|
|
|
17,819
|
|
|
|
|
|
|
|
35,566
|
|
Contributions
|
|
|
14,381
|
|
|
|
7,457
|
|
|
|
4,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,930
|
|
Distributions to members
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,971
|
)
|
|
|
(18,042
|
)
|
|
|
|
|
|
|
(36,013
|
)
|
Assign BUMC 49% of BHS 50.1% interest in THVG, effective
June 30, 2008
|
|
|
|
|
|
|
(52,983
|
)
|
|
|
52,983
|
|
|
|
|
|
|
|
(20,731
|
)
|
|
|
20,731
|
|
|
|
|
|
Transfer of equity in accordance with L.L.C. agreement
|
|
|
(1,442
|
)
|
|
|
888
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
58,687
|
|
|
|
1,294
|
|
|
|
57,629
|
|
|
|
21,111
|
|
|
|
466
|
|
|
|
20,731
|
|
|
|
159,918
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,434
|
|
|
|
604
|
|
|
|
24,975
|
|
|
|
51,013
|
|
Distributions to members
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
(8,132
|
)
|
|
|
(179
|
)
|
|
|
(7,986
|
)
|
|
|
(16,340
|
)
|
Assign remaining BHS 1.1% interest in THVG to BUMC, effective
June 30, 2009
|
|
|
|
|
|
|
(1,251
|
)
|
|
|
1,251
|
|
|
|
|
|
|
|
(891
|
)
|
|
|
891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
58,687
|
|
|
$
|
|
|
|
$
|
58,880
|
|
|
$
|
38,413
|
|
|
$
|
|
|
|
$
|
38,611
|
|
|
$
|
194,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
51,013
|
|
|
$
|
35,566
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
12,420
|
|
|
|
13,646
|
|
Depreciation and amortization
|
|
|
18,898
|
|
|
|
17,706
|
|
Amortization of debt issue costs
|
|
|
3
|
|
|
|
3
|
|
Equity in earnings of unconsolidated affiliates, net of
distributions received
|
|
|
(94
|
)
|
|
|
(230
|
)
|
Minority interests in income of consolidated subsidiaries, net
of distributions paid
|
|
|
3,875
|
|
|
|
2,280
|
|
Changes in operating assets and liabilities, net of acquisitions
|
|
|
|
|
|
|
|
|
Patient receivables
|
|
|
(7,988
|
)
|
|
|
(26,173
|
)
|
Due from (to) affiliates, net
|
|
|
(97
|
)
|
|
|
743
|
|
Supplies, prepaids, and other assets
|
|
|
(437
|
)
|
|
|
(1,704
|
)
|
Accounts payable and accrued expenses
|
|
|
(3,828
|
)
|
|
|
4,295
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
73,765
|
|
|
|
46,132
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of new businesses and equity interests, net of cash
received of $1,762 and $291 for 2009 and 2008, respectively
|
|
|
(5,554
|
)
|
|
|
(9,476
|
)
|
Sale of equity interests
|
|
|
9,048
|
|
|
|
952
|
|
Purchases of property and equipment
|
|
|
(6,612
|
)
|
|
|
(18,301
|
)
|
Sales of property and equipment
|
|
|
45
|
|
|
|
26
|
|
Cash collections on notes receivable from affiliates
|
|
|
|
|
|
|
1,338
|
|
Change in cash management balances with affiliate
|
|
|
(39,660
|
)
|
|
|
7,692
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(42,733
|
)
|
|
|
(17,769
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
$
|
3,534
|
|
|
$
|
19,798
|
|
Payments on long-term obligations
|
|
|
(13,164
|
)
|
|
|
(14,089
|
)
|
Returns of capital to minority interest holders
|
|
|
(274
|
)
|
|
|
(817
|
)
|
Distributions to Company members
|
|
|
(16,340
|
)
|
|
|
(36,013
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(26,244
|
)
|
|
|
(31,121
|
)
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH
|
|
|
4,788
|
|
|
|
(2,758
|
)
|
CASH, beginning of period
|
|
|
3,527
|
|
|
|
6,285
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
8,315
|
|
|
$
|
3,527
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
13,441
|
|
|
$
|
12,814
|
|
Cash paid for income taxes
|
|
|
2,365
|
|
|
|
2,375
|
|
Noncash transactions:
|
|
|
|
|
|
|
|
|
Noncash assets contributed by Members (note 3)
|
|
|
|
|
|
|
25,930
|
|
Asset acquired under capital leases
|
|
|
2,675
|
|
|
|
1,840
|
|
28
TEXAS
HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
FOR THE YEARS ENDED JUNE 30, 2009 AND 2008
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Description
of Business
Texas Health Ventures Group, L.L.C. and subsidiaries (THVG or
the Company), a Texas limited liability company, was formed on
January 21, 1997 for the primary purpose of developing,
acquiring, and operating ambulatory surgery centers and related
entities. Prior to June 29, 2008, Baylor Health Services
(BHS), a Texas nonprofit corporation that is a controlled
affiliate of Baylor Health Care System (BHCS), a Texas nonprofit
corporation, owned 50.1% interest in THVG. On June 29,
2008, BHS distributed 49% of its existing 50.1% interest in THVG
to Baylor University Medical Center (BUMC), a Texas nonprofit
corporation whose sole member is BHCS. THVG is ultimately a
subsidiary of BHCS through the combined ownership by BUMC and
BHS (collectively referred to herein as Baylor). USP North
Texas, Inc. (USP), a Texas corporation and subsidiary of United
Surgical Partners International, Inc. (USPI), owns 49.9% of
THVG. On June 30, 2009, BHS assigned its 1.1% remaining
interest to BUMC. THVGs fiscal year ends June 30.
THVGs subsidiaries fiscal years end December 31;
however, the financial information of these subsidiaries
included in these consolidated financial statements is as of and
for the twelve months ended June 30, 2009 and 2008.
THVG owns equity interests in and operates ambulatory surgery
centers, surgical hospitals, and related businesses in the
Dallas/Fort Worth, Texas, metropolitan area. At
June 30, 2009, THVG operated twenty-three facilities (the
Facilities) under management contracts, twenty-two of which are
consolidated for financial reporting purposes, and one of which
is accounted for under the equity method. In addition, THVG
holds equity method investments in two partnerships that each
own the real estate used by two of the Facilities.
THVG has been funded by capital contributions from its members
and by cash distributions from the Facilities. The board of
managers, which is controlled by Baylor, initiates requests for
capital contributions. The Facilities operating agreements
provide that cash flows available for distribution will be
distributed at least quarterly to THVG and other owners of the
Facilities.
THVGs operating agreement provides that the board of
managers determine, on at least a quarterly basis, if THVG
should make a cash distribution based on a comparison of
THVGs excess cash on hand versus current and anticipated
needs, including, without limitation, needs for operating
expenses, debt service, acquisitions, and a reasonable
contingency reserve. The terms of THVGs operating
agreement provide that any distributions, whether driven by
operating cash flows or by other sources, such as the
distribution of noncash assets or distributions in the event
THVG liquidates, are to be shared according to each
members overall ownership level in THVG. Those ownership
levels were 50.1% for BUMC and 49.9% for USP as of June 30,
2009, and 49% for BUMC, 1.1% for BHS and 49.9% for USP as of
June 30, 2008.
Basis of
Accounting
THVG maintains its books and records on the accrual basis of
accounting, and the consolidated financial statements are
prepared in accordance with accounting principles generally
accepted in the United States of America.
Principles
of Consolidation
The consolidated financial statements include the financial
statements of THVG and its wholly owned subsidiaries and other
entities THVG controls. THVG consolidates the results of North
Central Surgical Center, L.L.P. (North Central) as a result of
owning a controlling, majority interest in University Surgical
Partners of Dallas, L.L.P., which in turn owns a controlling,
majority interest in North Central. All significant intercompany
balances and transactions have been eliminated in consolidation.
29
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management of THVG to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results
could differ from those estimates.
Recently
Adopted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurements, or
SFAS 157, which became effective for fiscal years beginning
after November 15, 2007. This statement provides a single
definition of fair value, establishes a framework for measuring
fair value, and expanded disclosures concerning fair value
measurements. In February 2008, the FASB agreed to a one-year
deferral of the effective date for non-financial assets and
liabilities that are recognized or disclosed at fair values in
the consolidated financial statements on a nonrecurring basis.
THVG adopted the provisions of SFAS 157 on July 1,
2008 for financial assets and liabilities. The adoption did not
have a material impact on THVGs consolidated financial
position or results of operations. THVG does not expect that the
adoption of the provisions for non-financial assets or
liabilities will have a material impact on its results of
operations or financial position.
In February 2007, the Financial Accounting Standards Board
issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities, or
SFAS 159, which became effective for fiscal years beginning
after November 15, 2007, with early adoption permitted. The
statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The
unrealized gains and losses on items for which the fair value
option has been elected would be reported in earnings. The
objective of SFAS 159 is to improve financial reporting by
providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. THVG adopted SFAS 159 on
July 1, 2008. Since THVG has not utilized the fair value
option for any allowable items, the adoption of SFAS 159
did not have an impact on THVGs consolidated financial
position or results of operations. However, in the future, THVG
may elect to measure certain financial instruments at fair value
in accordance with this standard.
In May 2009, the Financial Accounting Standards Board issued
SFAS No. 165, Subsequent Events, or
SFAS 165, which establishes general standards of accounting
for and disclosure of events that occur after the balance sheet
date but before financial statements are issued, and
specifically requires the disclosure of the date through which
an entity has evaluated subsequent events and the basis for that
date. SFAS 165 is effective for THVG for the year ended
June 30, 2009 and will be applied prospectively.
Recently
Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
issued SFAS No. 141R, Business
Combinations, or SFAS 141R, which broadens the
guidance of SFAS No. 141, extending its applicability
to all transactions and other events in which one entity obtains
control over one or more other businesses. It broadens the fair
value measurement and recognition of assets acquired,
liabilities assumed, and interests transferred as a result of
business combinations; and stipulates that acquisition related
costs be expensed rather than included as part of the basis of
the acquisition. SFAS 141R expands required disclosures to
improve the ability to evaluate the nature and financial effects
of business combinations. SFAS 141R is effective for
business combinations entered into on or after July 1,
2009. THVG has not evaluated all of the provisions of
SFAS 141R, however the impact of this new standard will be
driven by the level of transactions and acquisitions entered
into by THVG subsequent to the effective date.
In December 2008, the Financial Accounting Standards Board
issued SFAS No. 160, Non-controlling
Interests in Consolidated Financial Statements an
amendment of ARB No. 51, or SFAS 160, which
is effective for fiscal years beginning on or after
December 15, 2009. SFAS 160 requires a company to
clearly identify and present ownership interests in subsidiaries
held by parties other than the company in the financial
statements within the equity section but separate from the
companys equity. It also requires the amounts of
consolidated net income
30
attributable to the parent and to the non-controlling interest
to be clearly identified and presented on the face of the
consolidated statement of income; changes in ownership interest
to be accounted for as equity transactions; and when a
subsidiary is deconsolidated, any retained non-controlling
equity investment in the former subsidiary and the gain or loss
on the deconsolidation of the subsidiary must be measured at
fair value. THVG has not evaluated all of the provisions of
SFAS 160, and therefore has not determined the impact on
the consolidated financial position or results of operations
from the adoption of SFAS 160.
In June 2009, the Financial Accounting Standards Board
concurrently issued SFAS No. 166, Accounting
for Transfers of Financial Assets, an amendment of FASB
Statement No. 140, or SFAS 166, and
Statement No. 167, Amendments to FASB
Interpretation No. 46(R), or SFAS 167, that
change the way entities account for securitizations and other
transfers of financial instruments. In addition to increased
disclosure, these standards eliminate the concept of qualifying
special purpose entities and change the test for consolidation
of variable interest entities. These standards are effective for
annual reporting periods beginning after November 15, 2009.
THVG has not evaluated all of the provisions of these standards,
but does not anticipate a material impact on the consolidated
financial position or results of operations from the adoption of
SFAS 166 or SFAS 167.
In June 2009, the Financial Accounting Standards Board issued
SFAS No. 168, The FASB Accounting Standards
CodificationTM
and the Hierarchy of Generally Accepted Accounting Principles (a
replacement of FASB Statement No. 162. or
SFAS 168, that establishes the FASB Accounting Standards
CodificationTM
(Codification) as the single source of authoritative US GAAP.
The Codification does not create any new GAAP standards but
incorporates existing accounting and reporting standards into a
new topical structure. The Codification is effective for THVG on
July 1, 2009, and beginning with the financial statements
for the year ending June 30, 2010, a new referencing system
will be used to identify authoritative accounting standards.
Cash
Equivalents
For purposes of the consolidated financial statements, THVG
considers all highly liquid instruments with original maturities
when purchased of three months or less to be cash equivalents.
There were no cash equivalents at June 30, 2009 or 2008.
Patient
Receivables
Patient receivables are stated at estimated net realizable
value. Significant concentrations of patient receivables at
December 31, 2009 and 2008 include:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Commercial and managed care providers
|
|
|
65
|
%
|
|
|
69
|
%
|
Government-related programs
|
|
|
16
|
%
|
|
|
18
|
%
|
Self-pay patients
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Receivables from government-related programs (i.e. Medicare and
Medicaid) represent the only concentrated groups of credit risk
for THVG and management does not believe that there is any
credit risks associated with these receivables. Commercial and
managed care receivables consist of receivables from various
payors involved in diverse activities and subject to differing
economic conditions, and do not represent any concentrated
credit risk to THVG. THVG maintains allowances for uncollectible
accounts for estimated losses resulting from the payors
inability to make payments on accounts. THVG assesses the
reasonableness of the allowance account based on historic
write-offs, the aging of accounts and other current conditions.
Furthermore, management continually monitors and adjusts the
allowances associated with its receivables. Accounts are written
off when collection efforts have been exhausted.
Supplies
Supplies, consisting primarily of pharmaceuticals and supplies
inventories, are stated at cost, which approximates market
value, and are expensed as used.
31
Property
and Equipment
Property and equipment are stated at cost or, when acquired as
part of a business combination, at fair value at the date of
acquisition. Depreciation is calculated on the straight line
method over the estimated useful lives of the assets. Upon
retirement or disposal of assets, the asset and accumulated
depreciation accounts are adjusted accordingly, and any gain or
loss is reflected in earnings or loss of the respective period.
Maintenance costs and repairs are expensed as incurred;
significant renewals and betterments are capitalized. Assets
held under capital leases are classified as property and
equipment and amortized using the straight line method over the
shorter of the useful lives or the lease terms, and the related
obligations are recorded as debt. Amortization of property and
equipment held under capital leases and leasehold improvements
is included in depreciation and amortization expense. THVG
records operating lease expense on a straight-line basis unless
another systematic and rational allocation is more
representative of the time pattern in which the leased property
is physically employed. THVG amortizes leasehold improvements,
including amounts funded by landlord incentives or allowances,
for which the related deferred rent is amortized as a reduction
of lease expense, over the shorter of their economic lives or
the lease term.
Investments
in Unconsolidated Affiliates
Investments in unconsolidated affiliates in which THVG exerts
significant influence, but has less than a controlling ownership
are accounted for under the equity method. THVG exerts
significant influence in the operations of its unconsolidated
affiliates through representation on the governing bodies of the
investees and additionally, with respect to the Facilities,
through contracts to manage the operations of the investee.
Intangible
Assets and Goodwill
Intangible assets consist of costs in excess of net assets
acquired (goodwill), costs associated with the purchase of
management service contract rights, and other intangibles. Most
of these assets have indefinite lives. Accordingly, these assets
are not amortized but are instead tested for impairment annually
or more frequently if changing circumstances warrant. Any
decrease in fair value identified in a test for impairment would
be recorded as an impairment loss in the consolidated statements
of income. No such impairment was identified in 2009 or 2008.
THVG amortizes intangible assets with definite useful lives over
their respective useful lives to the estimated residual values
and reviews them for impairment in the same manner as long-lived
assets, discussed below.
Impairment
of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset, or related groups of assets, may not be fully recoverable
from estimated future cash flows. In the event of impairment,
measurement of the amount of impairment may be based on
appraisal, fair values of similar assets or estimates of future
discounted cash flows resulting from use and ultimate
disposition of the asset. No such impairment was identified in
2009 or 2008.
Fair
Value of Financial Instruments
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in an orderly transaction
between market participants to sell the asset or transfer the
liability. In accordance with SFAS 157, the Company uses
fair value measurements based on quoted prices in active markets
for identical assets or liabilities (Level 1), significant
other observable inputs (Level 2) or unobservable
inputs (Level 3), depending on the nature of the item being
valued. The Company does not have financial assets and
liabilities measured at fair value on a recurring basis at
June 30, 2009. The carrying amounts of cash, accounts
receivable, and accounts payable approximate fair value because
of the short maturity of these instruments.
The fair value of the Companys long-term debt is
determined by estimation of the discounted future cash flows of
the debt at rates currently quoted or offered to the Company for
similar debt instruments of comparable maturities by its
lenders. At June 30, 2009, the aggregate carrying amount
and estimated fair value of long-term debt were $41,500,000 and
$40,900,000, respectively. At June 30, 2008, the aggregate
carrying amount and estimated fair value of long-term debt were
$43,700,000 and $44,600,000, respectively.
32
Revenue
Recognition
THVG has agreements with third-party payors that provide for
payments to THVG at amounts different from its established
rates. Payment arrangements include prospectively-determined
rates per discharge, reimbursed costs, discounted charges, and
per diem payments. Net patient service revenue is reported at
the estimated net realizable amount from patients, third-party
payors, and others for services rendered, including estimated
contractual adjustments under reimbursement agreements with
third party payors. Contractual adjustments are accrued on an
estimated basis in the period the related services are rendered
and adjusted in future periods as final settlements are
determined. These contractual adjustments are related to the
Medicare and Medicaid programs, as well as managed care
contracts.
Net patient service revenue from the Medicare and Medicaid
programs accounted for approximately 9% and 8% of total net
patient service revenue in 2009 and 2008, respectively.
Net patient service revenue from managed care contracts
accounted for approximately 89% and 85% of net patient service
revenue in 2009 and 2008, respectively.
Net patient service revenue from private payors and charity care
programs accounted for approximately 2% and 7% of total net
patient service revenue in 2009 and 2008, respectively.
For facilities licensed as hospitals, federal regulations
require the submission of annual cost reports covering medical
costs and expenses associated with services provided to program
beneficiaries. Medicare and Medicaid cost report settlements are
estimated in the period services are provided to beneficiaries.
Laws and regulations governing the Medicare and Medicaid
programs are extremely complex and subject to interpretation. As
a result, there is a reasonable possibility that recorded
estimates with respect to the five THVG facilities licensed as
hospitals may change by a material amount as interpretations are
clarified. These initial estimates are revised as needed until
final cost reports are settled.
Equity in
Earnings of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates consists of
THVGs share of the profits and losses generated from its
noncontrolling equity investments. Because these operations are
central to THVGs business strategy, equity in earnings of
unconsolidated affiliates is classified as a component of
operating income in the accompanying consolidated statements of
income. THVG has contracts to manage these facilities, which
results in THVG having an active role in the operations of these
facilities.
Income
Taxes
No amounts for federal income taxes have been reflected in the
accompanying consolidated financial statements because the
federal tax effects of THVGs activities accrue to the
individual members.
The Texas franchise tax now applies to all THVG entities for any
tax reports filed on or after January 1, 2008 and is
reflected in the accompanying consolidated statements of income.
Under the revised law, the tax is calculated on a margin base
and is therefore reflected in THVGs consolidated
statements of income for the years ended June 30, 2008 and
2009 as income tax expense.
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes- an interpretation of FASB Statement
No. 109, Accounting for Income Taxes,
(FIN 48), prescribes a single model to address uncertainty
in tax positions and clarifies the accounting for income taxes
by prescribing the minimum recognition threshold a tax position
is required to meet before being recognized in the financial
statements. Prior to FIN 48, the determination of when to
record a liability for a tax exposure was based on whether a
liability was considered probable and reasonably estimable in
accordance with FASB Statement No. 5,Accounting
for Contingencies. On July 1, 2007, THVG adopted
FIN 48 with no material impact on THVGs consolidated
financial statements.
As of June 30, 2009 and 2008, THVG had no gross
unrecognized tax benefits. THVG files a partnership income tax
return in the U.S. federal jurisdiction and a franchise tax
return in the state of Texas. THVG is no longer subject to
U.S. federal, state and local income tax examinations by
tax authorities for years prior to 2005. THVG has
33
identified Texas as a major state taxing
jurisdiction. THVG does not expect or anticipate a significant
increase over the next twelve months in the unrecognized tax
benefits.
Commitments
and Contingencies
Liabilities for loss contingencies arising from claims,
assessments, litigation, fines and penalties, and other sources
are recorded when it is probable that a liability has been
incurred and the amount can be reasonably estimated.
|
|
2.
|
PROPERTY
AND EQUIPMENT
|
At June 30, 2009 and 2008, property and equipment and
related accumulated depreciation and amortization consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Lives
|
|
|
2009
|
|
|
2008
|
|
|
Buildings and leasehold improvements
|
|
|
5-25 years
|
|
|
$
|
114,414
|
|
|
$
|
110,629
|
|
Equipment
|
|
|
3-15 years
|
|
|
|
70,405
|
|
|
|
68,405
|
|
Furniture and fixtures
|
|
|
5-15 years
|
|
|
|
10,190
|
|
|
|
8,880
|
|
Construction in progress
|
|
|
|
|
|
|
1,536
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,545
|
|
|
|
188,038
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(54,942
|
)
|
|
|
(39,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
|
|
|
$
|
141,603
|
|
|
$
|
148,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009 and 2008, assets recorded under capital
lease arrangements included in property and equipment consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Buildings
|
|
$
|
81,271
|
|
|
$
|
81,112
|
|
Equipment and furniture
|
|
|
16,591
|
|
|
|
16,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,862
|
|
|
|
97,275
|
|
Less accumulated amortization
|
|
|
(20,584
|
)
|
|
|
(15,823
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment under capital leases
|
|
$
|
77,278
|
|
|
$
|
81,452
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
CAPITAL
CONTRIBUTIONS BY MEMBERS
|
As discussed in Note 1, THVG receives part of its funding
through cash and capital contributions from its members. During
2008, THVG received noncash capital contributions consisting
primarily of investments in partnerships that operate surgery
centers in the Dallas/Fort Worth area.
These noncash capital contributions, including THVGs
ownership in the investee, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
Net Assets
|
|
|
Investee
|
|
Percentage
|
|
Contributed
|
|
Effective Date
|
|
Arlington Surgicare Partners, Ltd. (Arlington)
|
|
|
50.1
|
%
|
|
$
|
12,683
|
|
|
July 1, 2007
|
Rockwall Ambulatory Surgery Center, L.L.P. (Rockwall)
|
|
|
50.1
|
%
|
|
|
3,766
|
|
|
July 1, 2007
|
Metroplex Surgicare Partners, Ltd. (Metroplex)
|
|
|
50.1
|
%
|
|
|
9,438
|
|
|
June 30, 2008
|
USP and Baylor previously owned the assets (noted in the table
above) through another company they operate, THVG/HealthFirst
(HealthFirst), which is a subsidiary of USP. On the effective
dates listed above, HealthFirst, which held the assets and
managed the facilities, distributed the assets to USP and
Baylor, who in turn recontributed
34
the majority of the assets to THVG. THVG recorded the
contribution from Baylor at Baylors carrying value, as
this was a contribution between a parent and subsidiary. THVG
recorded the contribution from USP at fair value, based on an
appraisal, as USP is a non-controlling member. Using these
different bases is appropriate under generally accepted
accounting principles and causes USPs capital account to
be greater than 49.9% of THVGs total capital. However, any
distributions of THVGs assets continue to be allocated
according to overall ownership levels, which are 50.1% to Baylor
and 49.9% to USP as of June 30, 2009 and 2008,
respectively. Accordingly, the impact of the difference has been
reallocated on the accompanying consolidated statements of
members equity to ensure that the capital account balances
of THVGs members correspond to the proportions at which
net assets would be distributed. Concurrent with the
contributions, THVG began managing the operations of the
facility. The results of these transactions are included in
THVGs consolidated results of operations from the date of
contribution.
The assets acquired and liabilities assumed resulting from the
above contributions are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arlington
|
|
|
Rockwall
|
|
|
Metroplex
|
|
|
Current assets
|
|
$
|
2,955
|
|
|
$
|
1,250
|
|
|
$
|
2,002
|
|
Property and equipment
|
|
|
4,196
|
|
|
|
805
|
|
|
|
1,436
|
|
Goodwill
|
|
|
11,912
|
|
|
|
8,254
|
|
|
|
8,424
|
|
Other noncurrent assets
|
|
|
164
|
|
|
|
20
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
19,227
|
|
|
|
10,329
|
|
|
|
11,887
|
|
Current liabilities
|
|
|
2,360
|
|
|
|
905
|
|
|
|
1,172
|
|
Long-term debt
|
|
|
3,412
|
|
|
|
5,606
|
|
|
|
267
|
|
Other noncurrent liabilities
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
5,772
|
|
|
|
6,519
|
|
|
|
1,439
|
|
Minority interests
|
|
|
772
|
|
|
|
44
|
|
|
|
1,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
12,683
|
|
|
$
|
3,766
|
|
|
$
|
9,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
4.
|
INVESTMENTS
IN SUBSIDIARIES AND UNCONSOLIDATED AFFILIATES
|
THVGs investments in consolidated subsidiaries and
unconsolidated affiliates consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Owned
|
|
|
|
|
|
|
June 30,
|
|
June 30,
|
Legal Name
|
|
Facility
|
|
City
|
|
2009
|
|
2008
|
|
Consolidated subsidiaries(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Bellaire Outpatient Surgery Center, L.L.P.
|
|
Bellaire Surgery Center
|
|
Fort Worth
|
|
|
50.1
|
%
|
|
|
50.1
|
%
|
Dallas Surgical Partners, L.L.P.
|
|
Baylor Surgicare
|
|
Dallas
|
|
|
62.6
|
|
|
|
56.9
|
|
Dallas Surgical Partners, L.L.P.
|
|
Texas Surgery Center
|
|
Dallas
|
|
|
62.6
|
|
|
|
56.9
|
|
Dallas Surgical Partners, L.L.P.
|
|
Physicians Day Surgery Center
|
|
Dallas
|
|
|
62.6
|
|
|
|
56.9
|
|
Denton Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Denton
|
|
Denton
|
|
|
50.1
|
|
|
|
50.1
|
|
Frisco Medical Center, L.L.P.
|
|
Baylor Medical Center at Frisco
|
|
Frisco
|
|
|
50.1
|
|
|
|
50.1
|
|
Garland Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Garland
|
|
Garland
|
|
|
50.1
|
|
|
|
50.1
|
|
Grapevine Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Grapevine
|
|
Grapevine
|
|
|
50.3
|
|
|
|
50.1
|
|
Lewisville Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Lewisville
|
|
Lewisville
|
|
|
53.1
|
|
|
|
52.8
|
|
MSH Partners, L.P.
|
|
Mary Shiels Hospital
|
|
Dallas
|
|
|
42.4
|
|
|
|
56.9
|
|
North Central Surgical Center, L.L.P.
|
|
North Central Surgery Center
|
|
Dallas
|
|
|
32.2
|
|
|
|
28.9
|
|
North Garland Surgery Center, L.L.P.
|
|
North Garland Surgery Center
|
|
Garland
|
|
|
52.4
|
|
|
|
52.4
|
|
Rockwall/Heath Surgery Center, L.L.P.
|
|
Baylor Surgicare at Heath
|
|
Heath
|
|
|
50.1
|
|
|
|
50.1
|
|
Trophy Club Medical Center, L.P.
|
|
Trophy Club Medical Center
|
|
Fort Worth
|
|
|
52.5
|
|
|
|
50.5
|
|
Valley View Surgicare Partners, Ltd.
|
|
Baylor Surgicare at Valley View
|
|
Dallas
|
|
|
50.1
|
|
|
|
50.1
|
|
Baylor Surgical Hospital of Fort Worth Surgicare Partners,
Ltd.
|
|
Fort Worth
|
|
Fort Worth
|
|
|
50.2
|
|
|
|
50.1
|
|
Arlington Surgicare Partners, Ltd.
|
|
Surgery Center of Arlington
|
|
Arlington
|
|
|
50.1
|
|
|
|
50.1
|
|
Rockwall Ambulatory Surgery Center, L.L.P.
|
|
Rockwall Surgery Center
|
|
Rockwall
|
|
|
50.1
|
|
|
|
50.1
|
|
Baylor Surgicare at Plano, L.L.C.
|
|
Baylor Surgicare at Plano
|
|
Plano
|
|
|
50.1
|
|
|
|
50.1
|
|
Metroplex Surgicare Partners, Ltd.
|
|
Metroplex Surgicare
|
|
Bedford
|
|
|
50.1
|
|
|
|
50.1
|
|
Arlington Orthopedic and Spine Hospitals, LLC
|
|
Arlington Hospital
|
|
Arlington
|
|
|
50.1
|
|
|
|
50.1
|
|
Baylor Surgicare at Granbury, LLC
|
|
Granbury Surgical Plaza
|
|
Granbury
|
|
|
50.6
|
|
|
|
|
|
Unconsolidated affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denton Surgicare Real Estate, Ltd.
|
|
(2)
|
|
n/a
|
|
|
49.0
|
|
|
|
49.0
|
|
Irving-Coppell Surgical Hospital, L.L.P.
|
|
Irving-Coppell Surgical Hospital
|
|
Irving
|
|
|
18.3
|
|
|
|
18.4
|
|
MCSH Real Estate Investors, Ltd.
|
|
(2)
|
|
n/a
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
|
(1) |
|
List excludes holding companies, which are wholly owned by the
Company and hold the Companys investments in the
Facilities. |
|
(2) |
|
These entities are not surgical facilities and do not have
ownership in any surgical facilities. |
Additionally, in the ordinary course of business, THVG engages
in purchases and sales of individual partnership units with
physicians who invest in the Facilities and invests cash in
projects under development. These transactions are summarized as
follows:
|
|
|
|
|
Net payments made for the year ended June 30, 2008 for the
purchase of additional interests in University Surgical Partners
of Dallas, L. L. P. (USPD) totaling approximately $3,774,000.
USPD consists of the following facilities: Baylor Surgicare,
Texas Surgery Center, and Physicians Day Surgery Center.
|
|
|
|
Net proceeds received for the year ended June 20, 3009 from
sales of additional interests in MSH Partners, L.P. (Mary Shiels
Hospital) totaling approximately $1,983,000.
|
|
|
|
Payments made of $3,579,000 and proceeds received of $5,306,000
for the year ended June 30, 2009, and payments made of
$1,538,000 and proceeds received of $952,000 for the year ended
June 30, 2008, related
|
36
|
|
|
|
|
to other transactions, primarily purchases and sales of
individual partnership units with physicians who invest in the
facilities.
|
Effective February 1, 2009, THVG acquired 50.63 membership
units, a 50.63% equity interest, in Granbury Surgical Plaza
(Granbury), for a purchase price of $805,000. Granbury, like the
other facilities in which THVG invests, is operated by Baylor
and USP through THVG, as described in Note 8.
The following table summarizes the recorded values of
Granburys assets acquired and liabilities assumed at the
date of acquisition, as determined by internal and third-party
valuations (in thousands):
|
|
|
|
|
|
|
Granbury Surgical Plaza
|
|
|
Current assets
|
|
$
|
2,454
|
|
Property and equipment
|
|
|
2,847
|
|
Goodwill
|
|
|
3,916
|
|
Long-term assets
|
|
|
14
|
|
|
|
|
|
|
Total assets acquired
|
|
|
9,231
|
|
|
|
|
|
|
Current liabilities
|
|
|
882
|
|
Long-term liabilities
|
|
|
1,776
|
|
Long-term debt
|
|
|
5,768
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
8,426
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
805
|
|
|
|
|
|
|
The acquisition of Granbury was accounted for using the purchase
method of accounting and accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired
and liabilities assumed based on the estimated fair values at
the date of acquisition. Some of those estimates are preliminary
and subject to further adjustment. The results of the
acquisition are included in THVGs consolidated results of
operations from the date of acquisition.
|
|
5.
|
GOODWILL
AND INTANGIBLE ASSETS
|
At June 30, 2009 and 2008, goodwill and intangible assets,
net of accumulated amortization, consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Goodwill
|
|
$
|
136,119
|
|
|
$
|
130,137
|
|
Other intangible assets
|
|
|
1,184
|
|
|
|
1,182
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
137,303
|
|
|
$
|
131,319
|
|
|
|
|
|
|
|
|
|
|
37
The following is a summary of changes in the carrying amount of
goodwill for the years ended June 30, 2009 and 2008 (in
thousands):
|
|
|
|
|
Balance, July 1, 2007
|
|
$
|
92,332
|
|
Additions:
|
|
|
|
|
Contribution of Arlington (note 3)
|
|
|
11,912
|
|
Contribution of Rockwall (note 3)
|
|
|
8,254
|
|
Contribution of Metroplex (note 3)
|
|
|
8,317
|
|
Acquisition of Plano
|
|
|
4,299
|
|
Purchase of additional interests in USPD
|
|
|
3,360
|
|
Other
|
|
|
1,663
|
|
|
|
|
|
|
Balance, June 30, 2008
|
|
|
130,137
|
|
Additions:
|
|
|
|
|
Acquisition of Granbury
|
|
|
3,916
|
|
Purchase of additional interests in USPD
|
|
|
1,121
|
|
Additional contribution from BHS for the Metroplex acquisition
|
|
|
107
|
|
Other
|
|
|
838
|
|
|
|
|
|
|
Balance, June 30, 2009
|
|
$
|
136,119
|
|
|
|
|
|
|
Intangible assets with definite useful lives are amortized over
their respective estimated useful lives. THVG records interest
expense for intangible debt issue costs on a straight-line basis
over the term of the debt obligation, which approximates the
effective interest method. The agreements underlying THVGs
management contract assets have no determinable termination date
and, consequently, the related intangible assets have indefinite
useful lives. Goodwill and intangible assets with indefinite
useful lives are not amortized but instead are tested for
impairment at least annually. No impairment was recorded in 2009
or 2008.
The following is a summary of intangible assets at June 30,
2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Definite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issue costs
|
|
$
|
84
|
|
|
$
|
(50
|
)
|
|
$
|
34
|
|
Indefinite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Management contracts
|
|
|
1,150
|
|
|
|
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,234
|
|
|
$
|
(50
|
)
|
|
$
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Total
|
|
|
Definite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issue costs
|
|
$
|
79
|
|
|
$
|
(47
|
)
|
|
$
|
32
|
|
Indefinite useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Management contracts
|
|
|
1,150
|
|
|
|
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,229
|
|
|
$
|
(47
|
)
|
|
$
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt issue costs in the amount of $3,000 is
included in interest expense for both years ended June 30,
2009 and 2008.
38
At June 30, 2009 and 2008, long-term obligations consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Capital lease obligations (Note 7)
|
|
$
|
91,679
|
|
|
$
|
92,044
|
|
Notes payable to financial institutions
|
|
|
41,534
|
|
|
|
43,659
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
133,213
|
|
|
|
135,703
|
|
Less current portion
|
|
|
(12,856
|
)
|
|
|
(12,057
|
)
|
|
|
|
|
|
|
|
|
|
Long-term obligations, less current portion
|
|
$
|
120,357
|
|
|
$
|
123,646
|
|
|
|
|
|
|
|
|
|
|
The aggregate maturities of long-term obligations for each of
the five years subsequent to June 30, 2009 and thereafter
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
$
|
10,015
|
|
2011
|
|
|
|
|
|
|
9,667
|
|
2012
|
|
|
|
|
|
|
8,751
|
|
2013
|
|
|
|
|
|
|
4,368
|
|
2014
|
|
|
|
|
|
|
3,103
|
|
Thereafter
|
|
|
|
|
|
|
5,630
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
|
|
|
$
|
41,534
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations are collateralized by underlying real
estate or equipment and have interest rates ranging from 3.50%
to 12.66%.
The Facilities have notes payable to financial institutions
which mature at various dates through 2016 and accrue interest
at fixed and variable rates ranging from 3.11% to 9.5%. Each
note is collateralized by certain assets of the respective
Facility.
The Facilities lease various office equipment, medical
equipment, and office space under a number of operating lease
agreements, which expire at various times through the year 2029.
Such leases do not involve contingent rentals, nor do they
contain significant renewal or escalation clauses. Office leases
generally require the Facilities to pay all executory costs
(such as property taxes, maintenance and insurance).
Minimum future payments under noncancelable leases with
remaining terms in excess of one year as of June 30, 2009
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Year ending June 30:
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
13,069
|
|
|
$
|
10,272
|
|
2011
|
|
|
12,517
|
|
|
|
8,996
|
|
2012
|
|
|
12,124
|
|
|
|
8,925
|
|
2013
|
|
|
11,922
|
|
|
|
8,259
|
|
2014
|
|
|
11,671
|
|
|
|
8,007
|
|
Thereafter
|
|
|
151,961
|
|
|
|
74,057
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
213,264
|
|
|
$
|
118,516
|
|
|
|
|
|
|
|
|
|
|
Amount representing interest
|
|
|
(121,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal payments
|
|
$
|
91,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Total rent expense under operating leases was approximately
$13,149,000 and $12,163,000 for the years ended June 30,
2009 and 2008, respectively, and is included in other operating
expenses in the accompanying consolidated statements of income.
|
|
8.
|
RELATED-PARTY
TRANSACTIONS
|
THVG operates the facilities under management and royalty
contracts, and THVG in turn is managed by Baylor and USP,
resulting in THVG incurring management and royalty fee expense
payable to Baylor and USP in amounts equal to the management and
royalty fee income THVG receives from the Facilities.
THVGs management and royalty fee income from the
facilities it consolidates for financial reporting purposes
eliminates in consolidation with the facilities expense
and therefore is not included in THVGs consolidated
revenues. THVGs management and royalty fee income from
facilities which are not consolidated was approximately $588,000
and $600,000 for the years ended June 30, 2009 and 2008,
respectively, and is included in the consolidated revenues of
THVG.
The management and royalty fee expense to Baylor and USP was
$17,021,000 and $14,546,000 for the years ended June 30,
2009 and 2008, respectively, and is reflected in operating
expenses in THVGs consolidated statements of income. Of
the total, 64.3% and 34.0% represent management fees payable to
USP and Baylor, respectively, and 1.7% represents royalty fees
payable to Baylor.
Under the management and royalty agreements, the Facilities pay
THVG an amount ranging from 4.5% to 7% of their net patient
service revenue less provision for doubtful accounts annually,
subject, in some cases, to an annual cap. Management and royalty
fees and other reimbursable costs owed by THVG and its
Facilities to USP and Baylor totaled $3,119,000 and $3,216,000
at June 30, 2009 and 2008, respectively, and are included
in due to affiliates in the accompanying consolidated balance
sheets.
In addition, a subsidiary of USPI frequently pays bills on
behalf of THVG and has custody of substantially all of
THVGs excess cash, paying THVG and the Facilities interest
income on the net balance at prevailing market rates. Amounts
held by USPI on behalf of THVG and the facilities totaled
$70,370,000 and $30,676,000 at June 30, 2009 and 2008,
respectively. The interest income amounted to $604,000 and
$1,306,000 for the years ended June 30, 2009 and 2008,
respectively.
|
|
9.
|
COMMITMENTS
AND CONTINGENCIES
|
Financial
Guarantees
As of June 30, 2009, THVG issued guarantees of portions of
the indebtedness of its investees to third-parties, which could
potentially require THVG to make maximum aggregate payments
totaling approximately $10,100,000. Of the total, $7,500,000
relates to the obligations of four consolidated subsidiaries,
whose obligations are included in THVGs consolidated
balance sheet and related disclosures, and the remaining
$2,600,000 relates to the obligations of unconsolidated
affiliated companies, whose obligations are not included in
THVGs consolidated balance sheet and related disclosures.
These arrangements (a) consist of guarantees of real estate
and equipment financing, (b) are collateralized by all or a
portion of the investees assets, (c) require payments
by THVG in the event of a default by the investee primarily
obligated under the financing, (d) expire as the underlying
debt matures at various dates through 2021, or earlier if
certain performance targets are met, and (e) provide no
recourse for THVG to recover any amounts from third-parties. The
fair value of the guarantee liability was not material to the
consolidated financial statements and, therefore, no amounts
were recorded at June 30, 2009 related to these guarantees.
When THVG incurs guarantee obligations that are
disproportionately greater than the guarantees provided by the
investees other owners, THVG charges the investee a fair
market value fee based on the value of the contingent liability
THVG is assuming.
Litigation
and Professional Liability Claims
In their normal course of business, the facilities are subject
to claims and lawsuits relating to patient treatment. THVG
believes that its liability for damages resulting from such
claims and lawsuits is adequately covered by insurance or is
adequately provided for in its consolidated financial
statements. USPI, on behalf of THVG and each of the Facilities,
maintains professional liability insurance that provides
coverage on a claims-made basis of
40
$1,000,000 per incident and $11,000,000 in annual aggregate
amount with retroactive provisions upon policy renewal. Certain
of THVGs insurance policies have deductibles and
contingent premium arrangements. THVG believes that the expense
recorded through June 30, 2009, which was estimated based
on historical claims, adequately provides for its exposure under
these arrangements. Additionally, from time to time, THVG may be
named as a party to other legal claims and proceedings in the
ordinary course of business. THVG is not aware of any such
claims or proceedings that have more than a remote chance of
having a material adverse impact on THVG.
THVG regularly engages in exploratory discussions or enters into
letters of intent with various entities regarding possible joint
venture, development, or other transactions. These possible
joint ventures, developments of new facilities, or other
transactions are in various stages of negotiation.
THVG has performed an evaluation of subsequent events thru
October 28, 2009, which is the date the consolidated
financials statements were available to be issued.
41
(4) Exhibits:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger dated as of January 27, 2006,
by and among United Surgical Partners International, Inc., Peak
ASC Acquisition Corp. and Surgis, Inc. (previously filed as
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed with the Commission on January 31, 2006 and
incorporated herein by reference).(1)
|
|
2
|
.2
|
|
Agreement and Plan of Merger, dated as of January 7, 2007,
by and among the Company, UNCN Holdings, Inc. and UNCN
Acquisition Corp. (previously filed as Exhibit 2.1 to the
Companys Current Report on
Form 8-K
filed with the Commission on January 8, 2007 and
incorporated herein by reference).(1)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (previously
filed as Exhibit 3.1(A) to the Companys Registration
Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)
|
|
3
|
.2
|
|
Amended and Restated Bylaws (previously filed as
Exhibit 3.1(B) to the Companys Registration Statement
on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)
|
|
4
|
.1
|
|
Indenture governing
87/8% Senior
Subordinated Note due 2017 and
91/4%/10% Senior
Subordinated Toggle Note due 2017, among the Company, the
Guarantors named therein and U.S. Bank National Association, as
trustee. (previously filed as an exhibit to the Companys
Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)
|
|
4
|
.2
|
|
Form of
87/8% Senior
Subordinated Note due 2017 and
91/4%/10% Senior
Subordinate Toggle Note due 2017 (previously filed as an exhibit
to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)
|
|
10
|
.1
|
|
Credit Agreement, dated as of April 19, 2007, among USPI
Holdings, Inc., the Company, as Borrower, the Lenders party
thereto, Citibank, N.A., as Administrative Agent and Collateral
Agent, Lehman Brothers, Inc., as Syndication Agent, and Bear
Stearns Corporate Lending., Inc. and UBS Securities LLC, as
Co-Documentation Agents.(1)
|
|
10
|
.2
|
|
Amendment No. 1 to that certain Credit Agreement dated as
of April 19, 2007, among United Surgical Partners
International, Inc., USPI Holdings, Inc., as Borrower, the
Lenders party thereto, Citibank, N.A., as Administrative Agent
and Collateral Agent, Lehman Brothers, Inc., as Syndication
Agent, and Bear Stearns Corporate Lending, Inc. and UBS
Securities LLC, as Co-Documentation Agents (previously filed as
an exhibit to the Companys Current Report on
Form 8-K
filed with the Commission on August 4, 2009 and
incorporated herein by reference).(1)
|
|
10
|
.3
|
|
Guarantee and Collateral Agreement, dated as of April 19,
2007, among USPI Holdings, Inc., the Company, the subsidiaries
of the Company identified therein and Citibank, N.A., as
Collateral Agent.(1)
|
|
10
|
.4
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and Donald E. Steen (previously filed as an
exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.5
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and William H. Wilcox (previously filed as
an exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.6
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and Brett P. Brodnax (previously filed as an
exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.7
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and Niels P. Vernegaard (previously filed as
an exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.8
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and Mark A. Kopser (previously filed as an
exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.9
|
|
Employment Agreement, dated as of April 21, 2009, by and
between the Company and Philip A. Spencer.(2)(3)
|
|
10
|
.10
|
|
USPI Group Holdings, Inc. 2007 Equity Incentive Plan (previously
filed as an exhibit to the Companys Quarterly Report on
Form 10-Q
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
IV-1
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.11
|
|
First Amendment to the USPI Group Holdings, Inc. 2007 Equity
Incentive Plan (previously filed as an exhibit to the
Companys Current Report on
Form 10-K
filed with the Commission on February 26, 2009 and
incorporated herein by reference).(1)(3)
|
|
10
|
.12
|
|
Amended and Restated Deferred Compensation Plan (previously
filed as an exhibit to the Companys Current Report on
Form 10-K
filed with the Commission on February 26, 2009 and
incorporated herein by reference).(1)(3)
|
|
10
|
.13
|
|
Form of Indemnification Agreement between United Surgical
Partners International, Inc. and its directors and officers
(previously filed as an exhibit to Amendment No. 1 to the
Companys Registration Statement on
Form S-1
(No. 333-55442)
and incorporated herein by reference).(1)(3)
|
|
21
|
.1
|
|
List of the Companys subsidiaries.(2)
|
|
24
|
.1
|
|
Power of Attorney Donald E. Steen(2)
|
|
24
|
.2
|
|
Power of Attorney Joel T. Allison(2)
|
|
24
|
.3
|
|
Power of Attorney Michael E. Donovan(2)
|
|
24
|
.4
|
|
Power of Attorney John C. Garrett, M.D.(2)
|
|
24
|
.5
|
|
Power of Attorney D. Scott Mackesy(2)
|
|
24
|
.6
|
|
Power of Attorney James Ken Newman(2)
|
|
24
|
.7
|
|
Power of Attorney Boone Powell, Jr.(2)
|
|
24
|
.8
|
|
Power of Attorney Paul B. Queally(2)
|
|
24
|
.9
|
|
Power of Attorney Raymond A. Ranelli(2)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(2)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(2)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002(2)
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002(2)
|
|
|
|
(1) |
|
Previously filed. |
|
(2) |
|
Filed herewith. |
|
(3) |
|
Management contract or compensatory plan or arrangement in which
a director or executive officer participates. |
IV-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
United Surgical Partners
International, Inc.
|
|
|
|
By:
|
/s/ William
H. Wilcox
|
William H. Wilcox
President, Chief Executive Officer and Director
Date: February 25, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Donald
E. Steen
|
|
Chairman of the Board
|
|
February 25, 2011
|
|
|
|
|
|
/s/ William
H. Wilcox
William
H. Wilcox
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
February 25, 2011
|
|
|
|
|
|
/s/ Mark
A. Kopser
Mark
A. Kopser
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
February 25, 2011
|
|
|
|
|
|
/s/ J.
Anthony Martin
J.
Anthony Martin
|
|
Vice President, Corporate Controller And Chief Accounting
Officer (Principal Accounting Officer)
|
|
February 25, 2011
|
|
|
|
|
|
*
Joel
T. Allison
|
|
Director
|
|
February 25, 2011
|
|
|
|
|
|
*
Michael
E. Donovan
|
|
Director
|
|
February 25, 2011
|
|
|
|
|
|
*
John
C. Garrett, M.D.
|
|
Director
|
|
February 25, 2011
|
|
|
|
|
|
*
D.
Scott Mackesy
|
|
Director
|
|
February 25, 2011
|
|
|
|
|
|
*
James
Ken Newman
|
|
Director
|
|
February 25, 2011
|
|
|
|
|
|
*
Boone
Powell, Jr.
|
|
Director
|
|
February 25, 2011
|
IV-3
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Paul
B. Queally
|
|
Director
|
|
February 25, 2011
|
|
|
|
|
|
*
Raymond
A. Ranelli
|
|
Director
|
|
February 25, 2011
|
|
|
|
* |
|
John J. Wellik, by signing his name hereto, does hereby sign
this Annual Report on
Form 10-K
on behalf of each of the above-named directors and officers of
the Company on the date indicated below, pursuant to powers of
attorney executed by each of such directors and officers and
contemporaneously filed herewith with the Commission. |
John J. Wellik
Attorney-in-fact
Date: February 25, 2011
IV-4
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger dated as of January 27, 2006,
by and among United Surgical Partners International, Inc., Peak
ASC Acquisition Corp. and Surgis, Inc. (previously filed as
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed with the Commission on January 31, 2006 and
incorporated herein by reference).(1)
|
|
2
|
.2
|
|
Agreement and Plan of Merger, dated as of January 7, 2007,
by and among the Company, UNCN Holdings, Inc. and UNCN
Acquisition Corp. (previously filed as Exhibit 2.1 to the
Companys Current Report on
Form 8-K
filed with the Commission on January 8, 2007 and
incorporated herein by reference).(1)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (previously
filed as Exhibit 3.1(A) to the Companys Registration
Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)
|
|
3
|
.2
|
|
Amended and Restated Bylaws (previously filed as
Exhibit 3.1(B) to the Companys Registration Statement
on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)
|
|
4
|
.1
|
|
Indenture governing
87/8% Senior
Subordinated Note due 2017 and
91/4%/10% Senior
Subordinated Toggle Note due 2017, among the Company, the
Guarantors named therein and U.S. Bank National Association, as
trustee. (previously filed as an exhibit to the Companys
Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)
|
|
4
|
.2
|
|
Form of
87/8% Senior
Subordinated Note due 2017 and
91/4%/10% Senior
Subordinate Toggle Note due 2017 (previously filed as an exhibit
to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)
|
|
10
|
.1
|
|
Credit Agreement, dated as of April 19, 2007, among USPI
Holdings, Inc., the Company, as Borrower, the Lenders party
thereto, Citibank, N.A., as Administrative Agent and Collateral
Agent, Lehman Brothers, Inc., as Syndication Agent, and Bear
Stearns Corporate Lending., Inc. and UBS Securities LLC, as
Co-Documentation Agents.(1)
|
|
10
|
.2
|
|
Amendment No. 1 to that certain Credit Agreement dated as
of April 19, 2007, among United Surgical Partners
International, Inc., USPI Holdings, Inc., as Borrower, the
Lenders party thereto, Citibank, N.A., as Administrative Agent
and Collateral Agent, Lehman Brothers, Inc., as Syndication
Agent, and Bear Stearns Corporate Lending, Inc. and UBS
Securities LLC, as Co-Documentation Agents (previously filed as
an exhibit to the Companys Current Report on
Form 8-K
filed with the Commission on August 4, 2009 and
incorporated herein by reference).(1)
|
|
10
|
.3
|
|
Guarantee and Collateral Agreement, dated as of April 19,
2007, among USPI Holdings, Inc., the Company, the subsidiaries
of the Company identified therein and Citibank, N.A., as
Collateral Agent.(1)
|
|
10
|
.4
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and Donald E. Steen (previously filed as an
exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.5
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and William H. Wilcox (previously filed as
an exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.6
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and Brett P. Brodnax (previously filed as an
exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.7
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and Niels P. Vernegaard (previously filed as
an exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.8
|
|
Employment Agreement, dated as of April 19, 2007, by and
between the Company and Mark A. Kopser (previously filed as an
exhibit to the Companys Registration Statement on
Form S-4
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
|
10
|
.9
|
|
Employment Agreement, dated as of April 21, 2009, by and
between the Company and Philip A. Spencer.(2)(3)
|
|
10
|
.10
|
|
USPI Group Holdings, Inc. 2007 Equity Incentive Plan (previously
filed as an exhibit to the Companys Quarterly Report on
Form 10-Q
(No. 333-144337)
and incorporated herein by reference).(1)(3)
|
IV-5
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.11
|
|
First Amendment to the USPI Group Holdings, Inc. 2007 Equity
Incentive Plan (previously filed as an exhibit to the
Companys Current Report on
Form 10-K
filed with the Commission on February 26, 2009 and
incorporated herein by reference).(1)(3)
|
|
10
|
.12
|
|
Amended and Restated Deferred Compensation Plan (previously
filed as an exhibit to the Companys Current Report on
Form 10-K
filed with the Commission on February 26, 2009 and
incorporated herein by reference).(1)(3)
|
|
10
|
.13
|
|
Form of Indemnification Agreement between United Surgical
Partners International, Inc. and its directors and officers
(previously filed as an exhibit to Amendment No. 1 to the
Companys Registration Statement on
Form S-1
(No. 333-55442)
and incorporated herein by reference).(1)(3)
|
|
21
|
.1
|
|
List of the Companys subsidiaries.(2)
|
|
24
|
.1
|
|
Power of Attorney Donald E. Steen(2)
|
|
24
|
.2
|
|
Power of Attorney Joel T. Allison(2)
|
|
24
|
.3
|
|
Power of Attorney Michael E. Donovan(2)
|
|
24
|
.4
|
|
Power of Attorney John C. Garrett, M.D.(2)
|
|
24
|
.5
|
|
Power of Attorney D. Scott Mackesy(2)
|
|
24
|
.6
|
|
Power of Attorney James Ken Newman(2)
|
|
24
|
.7
|
|
Power of Attorney Boone Powell, Jr.(2)
|
|
24
|
.8
|
|
Power of Attorney Paul B. Queally(2)
|
|
24
|
.9
|
|
Power of Attorney Raymond A. Ranelli(2)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(2)
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(2)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002(2)
|
|
32
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002(2)
|
|
|
|
(1) |
|
Previously filed. |
|
(2) |
|
Filed herewith. |
|
(3) |
|
Management contract or compensatory plan or arrangement in which
a director or executive officer participates. |
IV-6