Exhibit 99.2

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES AND EUROPEAN

SURGICAL PARTNERS LIMITED AND SUBSIDIARIES

Combined Balance Sheets

 

		March 31, 2015				December 31, 2014
		(Unaudited)
		(In thousands — except share data)
ASSETS
Cash and cash equivalents		$	49,688			$	37,169
Available for sale securities			10,746				10,831
Accounts receivable, net of allowance for doubtful accounts of $12,450 and $12,555, respectively			77,608				77,433
Other receivables			31,314				23,568
Inventories of supplies			15,080				14,129
Deferred tax asset, net			30,172				29,518
Prepaids and other current assets			27,004				24,453
Total current assets			241,612				217,101
Property and equipment, net			335,295				345,596
Investments in unconsolidated affiliates			595,899				605,100
Goodwill			1,310,736				1,301,940
Intangible assets, net			367,224				371,096
Other assets			29,854				30,653
Total assets		$	2,880,620			$	2,871,486
LIABILITIES AND EQUITY
Accounts payable		$	44,349			$	47,928
Accrued salaries and benefits			23,937				33,648
Due to affiliates			167,049				159,608
Accrued interest			20,208				11,802
Current portion of long-term debt			20,742				27,086
Other current liabilities			64,824				69,931
Total current liabilities			341,109				350,003
Long-term debt, less current portion			1,788,491				1,594,930
Other long-term liabilities			38,909				44,359
Deferred tax liability, net			208,182				205,985
Total liabilities			2,376,691				2,195,277
Noncontrolling interests — redeemable (Note 3)			195,637				195,059
Commitments and contingencies (Note 10)
Equity:
United Surgical Partners International, Inc. (USPI) and European Surgical Partners Limited (ESP) stockholder’s equity:
Common stock (Note 1)			61,961				61,961
Additional paid-in capital			220,059				222,996
Receivable from the sale of common stock			(7,100	)			(7,431	)
Accumulated other comprehensive loss			(12,089	)			(6,848	)
Retained earnings (deficit)			(15,558	)			156,228
Total USPI and ESP stockholder’s equity			247,273				426,906
Noncontrolling interests — non-redeemable (Note 3)			61,019				54,244
Total equity			308,292				481,150
Total liabilities and equity		$	2,880,620			$	2,871,486

See accompanying notes to combined financial statements.

 

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES AND EUROPEAN

SURGICAL PARTNERS LIMITED AND SUBSIDIARIES

Combined Statements of Income

 

		Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
		(Unaudited — in thousands)
Revenues:
Net patient service revenues		$	179,019			$	167,707
Management and contract service revenues			24,683				21,765
Other revenues			2,957				2,557
Total revenues			206,659				192,029
Equity in earnings of unconsolidated affiliates			21,364				17,882
Operating expenses:
Salaries, benefits, and other employee costs			61,169				56,477
Medical services and supplies			34,185				32,540
Other operating expenses			42,987				40,151
General and administrative expenses			18,814				14,810
Provision for doubtful accounts			2,260				2,004
Net loss on deconsolidations, disposals and impairments			282				1,014
Depreciation and amortization			9,503				10,386
Total operating expenses			169,200				157,382
Operating income			58,823				52,529
Interest income			369				460
Interest expense			(27,864	)			(26,294	)
Loss on early retirement of debt			(2,613	)			—
Other, net			(3	)			—
Total other expense, net			(30,111	)			(25,834	)
Income from continuing operations before income taxes			28,712				26,695
Income tax expense			(4,996	)			(4,305	)
Income from continuing operations			23,716				22,390
Discontinued operations, net of tax:
Loss on disposal of discontinued operations			—				(332	)
Net income			23,716				22,058
Less: Net income attributable to noncontrolling interests			(18,520	)			(15,712	)
Net income attributable to USPI and ESP’s common stockholders		$	5,196			$	6,346
Amounts attributable to USPI and ESP’s common stockholders:
Income from continuing operations, net of tax		$	5,196			$	6,678
Loss on disposal of discontinued operations, net of tax			—				(332	)
Net income attributable to USPI and ESP’s common stockholders		$	5,196			$	6,346

See accompanying notes to combined financial statements.

 

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES AND EUROPEAN

SURGICAL PARTNERS LIMITED AND SUBSIDIARIES

Combined Statements of Comprehensive Income (Loss)

 

		Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
		(Unaudited — in thousands)
Net income		$	23,716			$	22,058
Other comprehensive income:
Foreign currency translation adjustments			(5,287	)			683
Unrealized gain on available for sale securities, net of tax			46				3
Total other comprehensive (loss) income			(5,241	)			686
Comprehensive income			18,475				22,744
Comprehensive income attributable to noncontrolling interests			(18,520	)			(15,712	)
Comprehensive (loss) income attributable to USPI and ESP’s common stockholders		$	(45	)		$	7,032

See accompanying notes to combined financial statements.

 

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES AND EUROPEAN SURGICAL PARTNERS LIMITED AND SUBSIDIARIES

Combined Statement of Changes in Equity

For the Three Months Ended March 31, 2015

 

		USPI’s Common Stockholder												ESP’s Common Stockholders
		Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings				Common Stock				Additional Paid-in Capital				Retained Earnings (Deficit)				Accumulated Other Comprehensive Loss				Note Receivable from Stockholders				Noncontrolling Interests — Nonredeemable				Combined Total
Balance, December 31, 2014		$	220,135			$	(4	)		$	111,713			$	61,961			$	2,861			$	44,515			$	(6,844	)		$	(7,431	)		$	54,244			$	481,150
Distributions to noncontrolling interests			—				—				—				—				—				—				—				—				(3,229	)			(3,229	)
Purchases of noncontrolling interests			(397	)			—				—				—				—				—				—				—				(31	)			(428	)
Sales of noncontrolling interests			(2,974	)			—				—				—				—				—				—				—				328				(2,646	)
Acquisition of new businesses			—				—				—				—				—				—				—				—				7,037				7,037
Contribution related to equity award grants by USPI Group Holdings, Inc. and other			434				—				—				—				—				—				—				331				—				765
Dividend to ESP stockholders (Note 4)			—				—				—				—				—				(176,982	)			—				—				—				(176,982	)
Net income (loss)			—				—				8,523				—				—				(3,327	)			—				—				2,670				7,866
Other comprehensive income (loss)			—				46				—				—				—				—				(5,287	)			—				—				(5,241	)
Balance, March 31, 2015		$	217,198			$	42			$	120,236			$	61,961			$	2,861			$	(135,794	)		$	(12,131	)		$	(7,100	)		$	61,019			$	308,292

See accompanying notes to combined financial statements.

 

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES AND EUROPEAN SURGICAL PARTNERS LIMITED AND SUBSIDIARIES

Combined Statement of Changes in Equity

For the Three Months Ended March 31, 2014

 

		USPI’s Common Stockholder (Note 1)												ESP’s Common Stockholders (Note 1)
		Additional Paid-in Capital				Accumulated Other Comprehensive Income				Retained Earnings				Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income				Note Receivable from Shareholders				Noncontrolling Interests — Nonredeemable				Combined Total
Balance, December 31, 2013		$	228,794			$	10			$	50,818			$	61,961			$	2,861			$	41,602			$	2,122			$	(7,908	)		$	51,846			$	432,106
Distributions to noncontrolling interests			—				—				—				—				—				—				—				—				(3,134	)			(3,134	)
Purchases of noncontrolling interests			1,769				—				—				—				—				—				—				—				(20	)			1,749
Sales of noncontrolling interests			(8,755	)			—				—				—				—				—				—				—				481				(8,274	)
Contribution related to equity award grants by USPI Group Holdings, Inc. and other			508				—				—				—				—				—				—				(48	)			—				460
Net income			—				—				5,230				—				—				1,116				—				—				2,256				8,602
Other comprehensive income			—				3				—				—				—				—				683				—				—				686
Balance, March 31, 2014		$	222,316			$	13			$	56,048			$	61,961			$	2,861			$	42,718			$	2,805			$	(7,956	)		$	51,429			$	432,195

See accompanying notes to combined financial statements

 

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES AND EUROPEAN

SURGICAL PARTNERS LIMITED AND SUBSIDIARIES

Combined Statements of Cash Flows

 

		Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
		(Unaudited — in thousands)
Cash flows from operating activities:
Net income		$	23,716			$	22,058
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations			—				332
Loss on early retirement of debt			2,613				—
Provision for doubtful accounts			2,260				2,004
Depreciation and amortization			9,503				10,386
Amortization of debt issue costs			1,371				1,428
Deferred income taxes			1,553				918
Net loss on deconsolidations, disposals and impairments			282				1,014
Equity in earnings of unconsolidated affiliates, net of distributions received			10,128				25,569
Equity-based compensation			677				518
Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses:
Accounts receivable			(1,253	)			1,616
Other receivables			(3,058	)			(2,455	)
Inventories of supplies, prepaids and other current assets			(4,455	)			(4,478	)
Accounts payable and other current liabilities			(10,190	)			7,443
Long-term liabilities			(10,737	)			(1,681	)
Net cash provided by operating activities			22,410				64,672
Cash flows from investing activities:
Purchases of new businesses and equity interests, net of cash received			(5,084	)			(37,064	)
Proceeds from sales of businesses and equity interests			—				430
Purchases of property and equipment			(2,038	)			(5,616	)
Sales and purchases of marketable securities, net			151				461
Returns of capital from unconsolidated affiliates			—				22,000
Decrease in deposits and notes receivable			834				4
Net cash used in investing activities			(6,137	)			(19,785	)
Cash flows from financing activities:
Proceeds from long-term debt			338,770				2,532
Payments on long-term debt			(149,552	)			(7,062	)
Increase (decrease) in cash held on behalf of unconsolidated affiliates and other			7,219				(41,210	)
Purchases and sales of noncontrolling interests, net			(802	)			(944	)
Payment of dividend to ESP stockholders			(176,982	)			—
Distributions to noncontrolling interests			(22,341	)			(18,955	)
Net cash used in financing activities			(3,688	)			(65,639	)
Effect of exchange rate on cash			(66	)			(2	)
Net increase (decrease) in cash and cash equivalents			12,519				(20,754	)
Cash and cash equivalents at beginning of period			37,169				78,741
Cash and cash equivalents at end of period		$	49,688			$	57,987
Supplemental information:
Interest paid		$	16,213			$	15,135
Income taxes paid			11,322				3,747
Non-cash transactions:
Assets acquired under capital lease obligations		$	4,439			$	1,244

See accompanying notes to combined financial statements

 

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES AND EUROPEAN

SURGICAL PARTNERS LIMITED AND SUBSIDIARIES

Notes to Combined Financial Statements (Unaudited)

(1) Basis of Presentation

(a) Description of Business

United Surgical Partners International, Inc., a Delaware corporation, and subsidiaries (USPI) was formed in February 1998 for the primary purpose of ownership and management of ambulatory surgery centers, surgical hospitals and related businesses. At March 31, 2015, USPI, headquartered in Dallas, Texas, operated 218 short-stay surgical facilities in the United States. Of these 218 facilities, USPI consolidates the results of 63 and accounts for 155 under the equity method. The majority of USPI facilities are jointly owned with local physicians and a health system partner that has other healthcare businesses in the region. At March 31, 2015, USPI had agreements with health system partners providing for joint ownership of 154 of USPI’s 218 facilities and also providing a framework for the planning and construction of additional facilities in the future. All but two of USPI’s facilities include physician owners.

European Surgical Partners Limited (ESP) and subsidiaries, headquartered in London, England, was formed after the spin-off from USPI. At March 31, 2015, ESP manages and owns nine facilities in England and Scotland. USPI had previously owned the businesses which became ESP, but spun them off to its controlling shareholder, Welsh, Carson, Anderson & Stowe (Welsh Carson) in April 2012.

USPI and ESP (together, the Company) are 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 consolidated financial results of the Company have been combined in these financial statements (combined financial statements) and are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Both USPI and ESP are controlled by the private equity firm of Welsh Carson. The combined financial statements are not necessarily indicative of the results of operations that would have occurred if USPI and ESP had been consolidated on the dates indicated, nor is it indicative of the future operating results of USPI or ESP.

The Company maintains its books and records on the accrual basis of accounting, and the accompanying combined financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The accompanying combined financial statements and notes should be read in conjunction with the Company’s December 31, 2014 combined financial statements. It is management’s opinion that the accompanying combined financial statements reflect all adjustments necessary for a fair presentation of the results for the periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

The preparation of financial statements in conformity with 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.

Each company, USPI and ESP, operates in one business segment, the ownership and operation of surgical facilities in the United States and the United Kingdom, respectively.

USPI’s common stock has a $0.01 par value per share and it has 100 shares authorized, issued and outstanding. The common stock of ESP has a par value of £1.00 per share and has 39,609,571 shares authorized, issued and outstanding.

(2) Investments in Unconsolidated Affiliates and Business Combination

The Company acquires interests in existing surgery centers from third parties and invests in new facilities that it develops in partnership with health system 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 Company’s combined financial statements beginning on the acquisition’s effective closing date. In March 2015, the Company paid £3.5 million (approximately $5.4 million) to acquire a 50% controlling ownership interest in Nova Healthcare (Nova). Nova, which is located in Leeds, England, is a provider of care and treatment for patients that have been diagnosed with cancer, blood disorders and neurological diseases. The adjustments to arrive at pro forma operating results for this acquisition are not material.

 

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The Company controls 63 of its U.S. entities and therefore consolidates their results. However, the Company accounts for a majority (155 of its 218 U.S. facilities at March 31, 2015) as investments in unconsolidated affiliates, i.e., under the equity method, as the Company’s 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 Company’s equity method investees on a combined basis is as follows (amounts are in thousands, except number of facilities, and reflect 100% of the investees’ results on an aggregated basis and are unaudited):

 

		Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
Unconsolidated U.S. facilities operated at period-end			155				150
Income statement information:
Revenues		$	486,359			$	418,088
Operating expenses:
Salaries, benefits, and other employee costs			120,177				106,396
Medical services and supplies			123,310				103,952
Other operating expenses			119,961				103,254
Gain on asset disposals, net			(293	)			(1,746	)
Depreciation and amortization			19,475				18,373
Total operating expenses			382,630				330,229
Operating income			103,729				87,859
Interest expense, net			(6,972	)			(7,315	)
Other, net			(49	)			311
Income before income taxes		$	96,708			$	80,855
Balance sheet information:
Current assets		$	394,558			$	329,346
Noncurrent assets			547,776				553,531
Current liabilities			210,029				204,152
Noncurrent liabilities			347,574				358,628

The Company 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 cash in unconsolidated affiliates that need capital for acquisitions, new construction or other business growth opportunities. During the three months ended March 31, 2015, these transactions resulted in a net cash outflow of approximately $1.2 million.

(3) Noncontrolling Interests

The Company controls and therefore consolidates the results of 63 of its 218 U.S. 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.

 

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During the three months ended March 31, 2015, the Company purchased and sold equity interests in various consolidated subsidiaries in the amounts of $1.4 million and $0.6 million, respectively. The basis difference between the Company’s 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):

 

		Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
Net income attributable to USPI and ESP’s common stockholders		$	5,196			$	6,346
Transfers to the noncontrolling interests:
Decrease in USPI’s additional paid-in capital for sales of subsidiaries’ equity interests			(2,974	)			(8,755	)
(Decrease) increase in USPI’s additional paid-in capital for purchases of subsidiaries’ equity interests			(397	)			1,769
Net transfers to noncontrolling interests			(3,371	)			(6,986	)
Change in equity from net income attributable to USPI and ESP and transfers to noncontrolling interests		$	1,825			$	(640	)

Upon the occurrence of certain 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 Company’s consolidated subsidiaries. These repurchase requirements are limited to the portions of its facilities that are owned by physicians who perform surgery at the Company’s facilities and would be triggered by regulatory changes making the existing ownership structure 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, have been classified outside of equity and are carried as “noncontrolling interests — redeemable” on the Company’s combined balance sheets. The activity for the three months ended March 31, 2015 and 2014 is summarized below (in thousands):

 

		Noncontrolling Interests — Redeemable- 2015
Balance, December 31, 2014		$	195,059
Net income attributable to noncontrolling interests			15,850
Distributions to noncontrolling interests			(18,956	)
Purchases of noncontrolling interests			(931	)
Sales of noncontrolling interests			798
Acquisition of new business			3,817
Balance, March 31, 2015		$	195,637

 

		Noncontrolling Interests — Redeemable- 2014
Balance, December 31, 2013		$	166,578
Net income attributable to noncontrolling interests			13,457
Distributions to noncontrolling interests			(15,821	)
Purchases of noncontrolling interests			(3,776	)
Sales of noncontrolling interests			9,791
Acquisition of new business			1,542
Balance, March 31, 2014		$	171,771

 

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(4) U.K. Real Estate Transaction and Dividend

In March 2015, two subsidiaries of ESP were sold that owned four real-estate properties to a third party for net proceeds of approximately £225.5 million ($336.0 million) in cash. The proceeds were used to pay off all outstanding ESP bank debt of approximately £86.5 million ($128.9 million) and a dividend of approximately £118.8 million ($177.0 million) was paid to ESP’s stockholders. The remainder of the proceeds is for fees related to the transaction and general corporate purposes. The properties were leased back under agreements with the third party. The leases began on March 4, 2015, and have a 25 year term and expire in March 2040. The leases contain one 25 year renewal option. The lease payments increase annually by the change in the U.K. Retail Price Index, subject to a floor of 1.5% in year two, 2.25% in year three and 2.5% thereafter. The leases also require the Company to pay all executory costs (such as maintenance and insurance).

Due to the Company’s continuing involvement with the properties, as defined under GAAP, the transaction has been accounted for as a financing. As a result, the properties continue to be reported as assets of the Company and depreciated over their remaining useful lives until the termination of the lease. No gain or loss was recognized. The Company recorded a long-term lease obligation equal to the proceeds received. A portion of the monthly payment will be applied to the long-term lease obligation with the balance of the payment charged to interest expense using the effective interest method. At March 31, 2015, the total lease obligation was approximately £225.5 million ($336.0 million) and $0.3 million and is included within “Current portion of long-term debt” and $335.7 million is included within “Long-term debt” in the accompanying combined balance sheet.

As of March 31, 2015, the aggregate maturities of this financing obligation for each of the five years subsequent to March 31, 2015 were as follows and uses the March 31, 2015 period end exchange rate (in thousands):

 

		Payments
2015		$	316
2016			667
2017			1,212
2018			1,862
2019			2,567
Thereafter			329,371
Total		$	335,995

(5) Other Investments

The combined financial statements include the financial statements of USPI, ESP 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.

The Company has ownership in an entity that operates and manages ten surgical facilities in the Houston, Texas area. Despite not holding a controlling voting interest, the Company is the primary beneficiary because the Company is able to make the decisions that are most significant to the operations of the entity and has provided all of the funding for the entity, which the entity has used to acquire surgical facilities. The Company is entitled to a majority of the entity’s earnings until the Company has received a specified return on the investment. The Company has no exposure for the entity’s 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 three months ended March 31, 2015 or 2014. At March 31, 2015 and 2014, the total assets of this entity were $127.2 million and $120.7 million, and the total liabilities owed to third parties were $24.8 million and $22.7 million, respectively. Such amounts are included in the Company’s combined balance sheets.

(6) 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 for assets or liabilities (Level 3), depending on the nature of the item being valued. 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, accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments.

 

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The fair value of the Company’s 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 the traded debt securities. At March 31, 2015, both the aggregate carrying amount and estimated fair value of long-term debt was approximately $1.9 billion. At March 31, 2014, the aggregate carrying amount and estimated fair value of long-term debt was approximately $1.6 billion and $1.7 billion, respectively. The fair value of debt is classified within Level 2 of the valuation hierarchy.

At March 31, 2015 and 2014, the Company had approximately $10.7 million and $10.3 million, respectively, of marketable securities, which are held by the Company’s wholly-owned insurance subsidiary. These investments are used in connection with its retained professional and general liability risks and are not available for general corporate purposes. The marketable securities consist of U.S. Treasury and corporate debt, are classified as available-for-sale and are recorded at fair value on the combined balance sheet. The fair value of these securities are classified within Level 2 of the valuation hierarchy, and are based on closing market prices of the investments when applicable, or alternatively, valuations utilizing market data and other observable inputs. Realized gains and losses on the sale of these securities are reclassified out of other comprehensive income and into “Other, net” on the accompanying combined statements of income.

(7) 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 of the compensation is measured at the date of grant and recognized as expense over the recipient’s requisite service period.

The Company’s equity-based compensation consists primarily of stock options and restricted stock granted by the USPI’s parent, USPI Group Holdings, Inc., to certain employees and members of the board of directors. The fair value of stock options was estimated at the date of grant using the Black-Scholes formula based on assumptions derived from historical experience. Total equity-based compensation included in the combined statements of income, classified by income statement line item, is as follows (in thousands):

 

		Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
Salaries, benefits and other employee costs		$	189			$	149
General and administrative expenses			488				369
Expense before income tax benefit			677				518
Income tax benefit			(228	)			(171	)
Total equity-based compensation expense, net of tax		$	449			$	347

Total equity-based compensation, included in the combined statements of income, classified by type of award, is as follows (in thousands):

 

		Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
Share awards		$	187			$	151
Stock options			490				367
Expense before income tax benefit			677				518
Income tax benefit			(228	)			(171	)
Total equity-based compensation expense, net of tax		$	449			$	347

 

11

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(8) Segment Disclosures

The Company’s business is the operation of surgical facilities and related businesses in the United States (USPI) and the United Kingdom (ESP). Company’s 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. Accordingly, the Company’s reportable segments consist of (1) U.S. based facilities and (2) United Kingdom based facilities.

 

		United States				United Kingdom				Total
Three Months Ended March 31, 2015
Net patient service revenues		$	130,418			$	48,601			$	179,019
Other revenues			27,640				—				27,640
Total revenues		$	158,058			$	48,601			$	206,659
Depreciation and amortization		$	6,243			$	3,260			$	9,503
Operating income			55,813				3,010				58,823
Net interest expense			(23,100	)			(4,395	)			(27,495	)
Loss on early retirement of debt			—				(2,613	)			(2,613	)
Income tax (expense) benefit			(5,826	)			830				(4,996	)
Total assets			2,579,367				301,253				2,880,620
Capital expenditures			3,663				2,814				6,477

 

		United States				United Kingdom				Total
Three Months Ended March 31, 2014
Net patient service revenues		$	120,979			$	46,728			$	167,707
Other revenues			24,322				—				24,322
Total revenues		$	145,301			$	46,728			$	192,029
Depreciation and amortization		$	6,485			$	3,901			$	10,386
Operating income			47,574				4,955				52,529
Net interest expense			(23,099	)			(2,735	)			(25,834	)
Income tax expense			(3,501	)			(804	)			(4,305	)
Total assets			2,449,460				298,079				2,747,539
Capital expenditures			2,925				3,936				6,861

(9) Related Party Transactions

Included in general and administrative expenses are management fees payable to an affiliate of Welsh Carson, which holds a controlling interest in USPI, in the amount of $0.5 million for the three months ended March 31, 2015 and 2014. Such amounts accrue at an annual rate of $2.0 million. USPI pays $1.0 million in cash per year with the unpaid balance due and payable upon a change in control. At March 31, 2015, USPI had approximately $8.0 million accrued related to this management fee, which is included in other long-term liabilities in the accompanying combined balance sheet.

In June 2012, ESP entered into a $5.0 million U.S. Dollar denominated loan with Welsh Carson for a ten-year term at 10.0%. Interest is paid in cash on a bi-annual basis. No principal payments are required until the earlier of a change in control or June 2022, the loan’s maturity date.

As described in Note 13, Welsh Carson sold a controlling interest in USPI and 100% of ESP to Tenet Healthcare Corporation (Tenet) on June 16, 2015, at which time USPI and ESP repaid all amounts owed to Welsh Carson.

(10) Commitments and Contingencies

As of March 31, 2015, 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 $37.2 million. Of the total, $9.3 million relates to the obligations of consolidated subsidiaries, whose obligations are included in the Company’s combined balance sheet and related disclosures, and $25.2 million of the remaining $27.9 million relates to the obligations of unconsolidated affiliated companies, whose obligations are not included in the Company’s combined balance sheet and related disclosures. The remaining $2.7 million represents a guarantee of the obligations of two facilities which have been sold. The Company has full recourse to the buyers with respect to these amounts.

 

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The Company has recorded long-term liabilities totaling approximately $0.5 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.

(11) Condensed Combined Consolidating Financial Statements

The following information is presented as required by regulations of the U.S. Securities and Exchange Commission (SEC). None of this information is routinely prepared for use by management. The operating and investing activities of the separate legal entities included in the combined 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 Notes were issued in a private offering on April 3, 2012 and were subsequently registered as publicly traded securities through a Form S-4 declared effective by the SEC on September 5, 2012. The exchange offer was completed in October 2012. The Notes were repaid at the closing of Tenet’s acquisition of the Company on June 16, 2015. The Notes were unsecured obligations of the Company; however, the Notes were guaranteed by most of its direct and indirect 100%-owned domestic subsidiaries. USPI, which issued the Notes, does not have independent assets or operations. USPI’s investees in which USPI owns less than 100% were not guarantors of the obligation. ESP was neither a guarantor nor a party to these Notes. 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 Company’s ownership percentage in non-participating investees is not high enough to permit the application of pushdown accounting.

Condensed Combined Consolidating Balance Sheets:

 

As of March 31, 2015		Guarantors				Non-Participating Investees				Consolidation Adjustments				ESP				Combined Total
ASSETS
Current assets:
Cash and cash equivalents		$	29,703			$	8,473			$	—			$	11,512			$	49,688
Available for sale securities			10,746				—				—				—				10,746
Accounts receivable, net			—				53,493				—				24,115				77,608
Other receivables			119,467				29,276				(117,429	)			—				31,314
Inventories of supplies			—				9,956				—				5,124				15,080
Prepaids and other current assets			49,361				2,323				(3,443	)			8,935				57,176
Total current assets			209,277				103,521				(120,872	)			49,686				241,612
Property and equipment, net			36,655				91,105				260				207,275				335,295
Investments in affiliates			1,026,761				49,683				(480,545	)			—				595,899
Goodwill and intangible assets, net			965,528				263,411				404,729				44,292				1,677,960
Other assets			31,896				1,055				(3,097	)			—				29,854
Total assets		$	2,270,117			$	508,775			$	(199,525	)		$	301,253			$	2,880,620
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	4,091			$	17,600			$	—			$	22,658			$	44,349
Accrued expenses and other			285,744				104,845				(121,025	)			6,454				276,018
Current portion of long-term debt			10,257				8,876				(155	)			1,764				20,742
Total current liabilities			300,092				131,321				(121,180	)			30,876				341,109
Long-term debt, less current portion			1,391,350				50,596				(3,115	)			349,660				1,788,491
Other long-term liabilities			241,199				5,541				(181	)			532				247,091
Parent’s equity (deficit)			337,476				253,929				(253,929	)			(90,203	)			247,273
Noncontrolling interests			—				67,388				178,880				10,388				256,656
Total liabilities and equity		$	2,270,117			$	508,775			$	(199,525	)		$	301,253			$	2,880,620

 

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As of December 31, 2014		Guarantors				Non-Participating Investees				Consolidation Adjustments				ESP				Combined Total
ASSETS
Current assets:
Cash and cash equivalents		$	27,404			$	9,150			$	—			$	615			$	37,169
Available for sale securities			10,831				—				—				—				10,831
Accounts receivable, net			—				57,616				—				19,817				77,433
Other receivables			118,384				35,521				(130,337	)			—				23,568
Inventories of supplies			—				8,681				—				5,448				14,129
Prepaids and other current assets			44,014				1,714				—				8,243				53,971
Total current assets			200,633				112,682				(130,337	)			34,123				217,101
Property and equipment, net			37,622				90,959				306				216,709				345,596
Investments in affiliates			1,032,638				55,224				(482,762	)			—				605,100
Goodwill and intangible assets, net			966,466				262,467				404,718				39,385				1,673,036
Other assets			34,116				1,636				(5,099	)			—				30,653
Total assets		$	2,271,475			$	522,968			$	(213,174	)		$	290,217			$	2,871,486
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	5,680			$	17,592			$	—			$	24,656			$	47,928
Accrued expenses and other			276,814				119,101				(130,332	)			9,406				274,989
Current portion of long-term debt			10,232				8,749				(313	)			8,418				27,086
Total current liabilities			292,726				145,442				(130,645	)			42,480				350,003
Long-term debt, less current portion			1,408,843				50,889				(2,529	)			137,727				1,594,930
Other long-term liabilities			238,062				5,439				(2,795	)			9,638				250,344
Parent’s equity			331,844				250,444				(250,444	)			95,062				426,906
Noncontrolling interests			—				70,754				173,239				5,310				249,303
Total liabilities and equity		$	2,271,475			$	522,968			$	(213,174	)		$	290,217			$	2,871,486

Condensed Combined Consolidating Statements of Income (Loss):

 

For the Three Months Ended March 31, 2015		Guarantors				Non-Participating Investees				Consolidation Adjustments				ESP				Combined Total
Revenues		$	31,619			$	132,998			$	(6,559	)		$	48,601			$	206,659
Equity in earnings of unconsolidated affiliates			34,230				1,750				(14,616	)			—				21,364
Operating expenses, excluding depreciation and amortization			27,913				95,984				(6,531	)			42,331				159,697
Depreciation and amortization			1,769				4,428				46				3,260				9,503
Operating income			36,167				34,336				(14,690	)			3,010				58,823
Interest expense, net			(22,233	)			(867	)			—				(4,395	)			(27,495	)
Other expense, net			—				(3	)			—				(2,613	)			(2,616	)
Income (loss) before income taxes			13,934				33,466				(14,690	)			(3,998	)			28,712
Income tax (expense) benefit			(5,411	)			(415	)			—				830				(4,996	)
Net income (loss)			8,523				33,051				(14,690	)			(3,168	)			23,716
Less: Net income attributable to noncontrolling interests			—				(6,397	)			(11,964	)			(159	)			(18,520	)
Net income (loss) attributable to USPI and ESP’s stockholders		$	8,523			$	26,654			$	(26,654	)		$	(3,327	)		$	5,196

 

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For the Three Months Ended March 31, 2014		Guarantors				Non-Participating Investees				Consolidation Adjustments				ESP				Combined Total
Revenues		$	28,715			$	123,232			$	(6,646	)		$	46,728			$	192,029
Equity in earnings of unconsolidated affiliates			28,694				1,412				(12,224	)			—				17,882
Operating expenses, excluding depreciation and amortization			24,841				90,894				(6,611	)			37,872				146,996
Depreciation and amortization			1,929				4,524				32				3,901				10,386
Operating income			30,639				29,226				(12,291	)			4,955				52,529
Interest expense, net			(22,287	)			(812	)			—				(2,735	)			(25,834	)
Income from continuing operations before income taxes			8,352				28,414				(12,291	)			2,220				26,695
Income tax expense			(2,790	)			(711	)			—				(804	)			(4,305	)
Income from continuing operations			5,562				27,703				(12,291	)			1,416				22,390
Loss from discontinued operations, net of tax			(332	)			—				—				—				(332	)
Net income			5,230				27,703				(12,291	)			1,416				22,058
Less: Net income attributable to noncontrolling interests			—				(4,502	)			(10,910	)			(300	)			(15,712	)
Net income attributable to USPI and ESP’s stockholders		$	5,230			$	23,201			$	(23,201	)		$	1,116			$	6,346

Condensed Combined Consolidating Statements of Comprehensive Income (Loss):

 

Three Months Ended March 31, 2015		Guarantors				Non-Participating Investees				Consolidation Adjustments				ESP				Combined Total
Net income (loss)		$	8,523			$	33,051			$	(14,690	)		$	(3,168	)		$	23,716
Other comprehensive income:
Foreign currency translation adjustments			—				—				—				(5,287	)			(5,287	)
Unrealized gain on available for sale securities, net of tax			46				—				—				—				46
Total other comprehensive gain (loss)			46				—				—				(5,287	)			(5,241	)
Comprehensive income (loss)			8,569				33,051				(14,690	)			(8,455	)			18,475
Comprehensive income attributable to noncontrolling interests			—				(6,397	)			(11,964	)			(159	)			(18,520	)
Comprehensive income (loss) attributable to USPI and ESP		$	8,569			$	26,654			$	(26,654	)		$	(8,614	)		$	(45	)

 

Three Months Ended March 31, 2014		Guarantors				Non-Participating Investees				Consolidation Adjustments				ESP				Combined Total
Net income		$	5,230			$	27,703			$	(12,291	)		$	1,416			$	22,058
Other comprehensive income:
Foreign currency translation adjustments			—				—				—				683				683
Unrealized gain on available for sale securities, net of tax			3				—				—								3
Total other comprehensive income			3				—				—				683				686
Comprehensive income			5,233				27,703				(12,291	)			2,099				22,744
Comprehensive income attributable to noncontrolling interests			—				(4,502	)			(10,910	)			(300	)			(15,712	)
Comprehensive income attributable to USPI and ESP		$	5,233			$	23,201			$	(23,201	)		$	1,799			$	7,032

 

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Condensed Combined Statements of Cash Flows:

 

Three Months Ended March 31, 2015		Guarantor				Non-Participating Investees				Consolidation Adjustments				ESP				Combined Total
Cash flows from operating activities:
Net income (loss)		$	8,523			$	33,051			$	(14,690	)		$	(3,168	)		$	23,716
Changes in operating and intercompany assets and liabilities and noncash items included in net income (loss)			10,354				1,522				1,355				(14,537	)			(1,306	)
Net cash provided by (used in) operating activities			18,877				34,573				(13,335	)			(17,705	)			22,410
Cash flows from investing activities:
Purchases of property and equipment, net			(689	)			(1,097	)			—				(252	)			(2,038	)
Purchases of new businesses and equity interests, net			(731	)			(459	)			—				(3,894	)			(5,084	)
Other items, net			(1,188	)			1,958				214				1				985
Net cash (used in) provided by investing activities			(2,608	)			402				214				(4,145	)			(6,137	)
Cash flows from financing activities:
Long-term borrowings, net			(17,457	)			(2,184	)			(413	)			209,272				189,218
Purchases and sales of noncontrolling interests, net			(802	)			—				—				—				(802	)
Distributions to noncontrolling interests			—				(35,228	)			13,334				(447	)			(22,341	)
Payments of dividend to ESP stockholders			—				—				—				(176,982	)			(176,982	)
Increase in cash held on behalf of noncontrolling interest holders and other			4,289				1,760				200				970				7,219
Net cash (used in) provided by financing activities			(13,970	)			(35,652	)			13,121				32,813				(3,688	)
Effects of exchange rate on cash			—				—				—				(66	)			(66	)
Net increase (decrease) in cash			2,299				(677	)			—				10,897				12,519
Cash at the beginning of the period			27,404				9,150				—				615				37,169
Cash at the end of the period		$	29,703			$	8,473			$	—			$	11,512			$	49,688

 

Three Months Ended March 31, 2014		Guarantor				Non-Participating Investees				Consolidation Adjustments				ESP				Combined Total
Cash flows from operating activities:
Net income		$	5,230			$	27,703			$	(12,291	)		$	1,416			$	22,058
Loss from discontinued operations			332				—				—				—				332
Changes in operating and intercompany assets and liabilities and noncash items included in net income			33,795				8,349				(2,079	)			2,217				42,282
Net cash provided by operating activities			39,357				36,052				(14,370	)			3,633				64,672
Cash flows from investing activities:
Purchases of property and equipment, net			(596	)			(1,085	)			—				(3,935	)			(5,616	)
Purchases of new businesses and equity interests, net			(33,970	)			(2,664	)			—				—				(36,634	)
Other items, net			21,051				4,938				(3,524	)			—				22,465
Net cash (used in) provided by investing activities			(13,515	)			1,189				(3,524	)			(3,935	)			(19,785	)
Cash flows from financing activities:
Long-term borrowings, net			(2,457	)			(2,605	)			165				367				(4,530	)
Purchases and sales of noncontrolling interests, net			(944	)			—				—				—				(944	)
Distributions to noncontrolling interests			—				(33,006	)			14,370				(319	)			(18,955	)
(Decrease) increase in cash held on behalf of noncontrolling interest holders and other			(46,405	)			1,580				3,359				256				(41,210	)
Net cash (used in) provided by financing activities			(49,806	)			(34,031	)			17,894				304				(65,639	)
Effects of exchange rates on cash			—				—				—				(2	)			(2	)
Net increase (decrease) in cash			(23,964	)			3,210				—				—				(20,754	)
Cash at the beginning of the period			73,765				4,976				—				—				78,741
Cash at the end of the period		$	49,801			$	8,186			$	—			$	—			$	57,987

 

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(12) New Accounting Pronouncements

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The ASU permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that the ASU will have on its combined financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

On February 18, 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU), which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships and limited liability companies among others. The ASU reduces the number of consolidation models from four to two and places more emphasis on the risk of loss when determining a controlling financial interest, reduces the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity and can change consolidation conclusions for companies that make use of limited partnerships or variable interest entities. The new standard is effective on January 1, 2016, however early adoption is permitted. The Company is evaluating the effect that the ASU may have on its combined financial statements and disclosures.

(13) Joint Venture Agreement

On March 23, 2015, Tenet Healthcare Corporation (Tenet) and Welsh Carson, USPI’s controlling shareholder, signed a definitive agreement under which Tenet and USPI will combine their U.S. short-stay surgery and imaging center assets into a new joint venture. Tenet will initially own 50.1% of the joint venture and will consolidate its financial results. Welsh Carson and the other existing shareholders in USPI will initially own the remaining 49.9%. Tenet will have a path to full ownership of USPI over the next five years through a put/call structure. Tenet also announced that it was acquiring 100% of ESP for approximately $215 million from Welsh Carson and other existing shareholders. Both transactions closed on June 16, 2015. All amounts owed by USPI and ESP to Welsh Carson were repaid at closing, as was USPI’s $1.5 billion of senior debt.

(14) Subsequent Events

The Company has entered 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.

 

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