Attached files

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EX-10.2 - EXHIBIT 10.2 - Surgery Partners, Inc.exhibit102registrationrigh.htm
EX-31.1 - EXHIBIT 31.1 - Surgery Partners, Inc.q32015exhibit311.htm
EX-3.2 - EXHIBIT 3.2 - Surgery Partners, Inc.exhibit32amendedandrestate.htm
EX-10.7 - EXHIBIT 10.7 - Surgery Partners, Inc.exhibit107formofrestricted.htm
EX-10.8 - EXHIBIT 10.8 - Surgery Partners, Inc.exhibit108cashincentiveplan.htm
EX-32.2 - EXHIBIT 32.2 - Surgery Partners, Inc.q32015exhibit322.htm
EX-10.1 - EXHIBIT 10.1 - Surgery Partners, Inc.exhibit101taxreceivableagr.htm
EX-31.2 - EXHIBIT 31.2 - Surgery Partners, Inc.q32015exhibit312.htm
EX-3.1 - EXHIBIT 3.1 - Surgery Partners, Inc.exhibit31amendedandrestate.htm
EX-10.6 - EXHIBIT 10.6 - Surgery Partners, Inc.exhibit106formofdirectorop.htm
EX-10.3 - EXHIBIT 10.3 - Surgery Partners, Inc.exhibit103reorganizationag.htm
EX-32.1 - EXHIBIT 32.1 - Surgery Partners, Inc.q32015exhibit321.htm
EX-10.5 - EXHIBIT 10.5 - Surgery Partners, Inc.exhibit105formofoptionaward.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
Form 10-Q
(Mark One)
T
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission file number:  001-37576
Surgery Partners, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
47-3620923
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

40 Burton Hills Boulevard, Suite 500
Nashville, Tennessee 37215
(Address of principal executive offices and zip code)
(615) 234-5900
(Registrant’s telephone number, including area code) 
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  x
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  x No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x
As of November 13, 2015, there were 48,156,990 shares of the registrant’s common stock outstanding.
 




SURGERY PARTNERS, INC.
FORM 10-Q
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Item 2.
 
 
 
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits





PART 1 - FINANCIAL INFORMATION
Item 1.  Financial Statements
SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, amounts in thousands, except shares and per share amounts)
 
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
56,848

 
$
74,920

Accounts receivable, less allowance for doubtful accounts of $12,693 and $5,329, respectively
 
164,604

 
144,960

Inventories
 
24,747

 
23,692

Prepaid expenses and other current assets
 
26,678

 
24,005

Acquisition escrow deposit
 
14,054

 

Indemnification receivable due from seller
 
1,072

 
1,072

Total current assets
 
288,003

 
268,649

Property and equipment, net
 
173,813

 
175,006

Intangible assets, net
 
53,137

 
54,888

Goodwill
 
1,330,050

 
1,298,753

Investments in and advances to affiliates
 
33,877

 
33,441

Restricted invested assets
 
316

 
316

Acquisition escrow deposit
 

 
16,232

Debt issuance costs
 
4,816

 
5,630

Other long-term assets
 
7,510

 
5,879

Total assets
 
$
1,891,522

 
$
1,858,794

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
40,807

 
$
43,063

Accrued payroll and benefits
 
23,391

 
22,370

Acquisition escrow liability
 
14,054

 

Other current liabilities
 
70,247

 
53,870

Current maturities of long-term debt
 
27,678

 
22,088

Total current liabilities
 
176,177

 
141,391

Long-term debt, less current maturities
 
1,370,991

 
1,339,266

Long-term deferred tax liabilities
 
59,749

 
49,170

Acquisition escrow liability
 

 
16,232

Other long-term liabilities
 
83,778

 
90,610

 
 
 
 
 
Non-controlling interests—redeemable
 
183,581

 
192,589

 
 
 
 
 
Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no shares issued at September 30, 2015; no shares authorized, issued or outstanding at December 31, 2014 (1)
 

 

Common stock, $0.01 par value, 300,000,000 shares authorized, 33,871,990 shares issued and outstanding at September 30, 2015; 1,000 shares authorized, issued and outstanding at December 31, 2014 (1)
 
339

 

Additional paid-in capital
 
59,766

 
58,151

Retained deficit
 
(337,543
)
 
(322,233
)
Total Surgery Partners, Inc. stockholders' deficit
 
(277,438
)
 
(264,082
)
Non-controlling interests—non-redeemable
 
294,684

 
293,618

Total stockholders' equity
 
17,246

 
29,536

Total liabilities and stockholders' equity
 
$
1,891,522

 
$
1,858,794

(1) As described in Note 1 herein, the authorized, issued and outstanding shares of the Company are those of Surgery Partners, Inc. as of September 30, 2015, and those of Surgery Center Holdings, Inc. as of December 31, 2014.
See notes to unaudited condensed consolidated financial statements.


1



SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, amounts in thousands, except shares and per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Revenues
 
$
239,599

 
$
76,303

 
$
696,569

 
$
223,598

Operating expenses:
 
 
 
 
 
 
 
 
Salaries and benefits
 
66,072

 
18,743

 
188,405

 
55,390

Supplies
 
60,377

 
17,129

 
176,550

 
50,068

Professional and medical fees
 
17,233

 
2,320

 
48,144

 
6,770

Lease expense
 
11,211

 
3,651

 
33,267

 
10,841

Other operating expenses
 
13,928

 
3,534

 
39,786

 
10,522

Cost of revenues
 
168,821

 
45,377

 
486,152

 
133,591

General and administrative expenses
 
11,236

 
6,738

 
34,944

 
20,038

Depreciation and amortization
 
8,611

 
2,834

 
25,538

 
8,557

Provision for doubtful accounts
 
5,840

 
1,383

 
16,049

 
4,411

Income from equity investments
 
(1,320
)
 

 
(2,866
)
 

Loss (gain) on disposal or impairment of long-lived assets, net
 
1,161

 
(8
)
 
(1,522
)
 
110

Loss on debt extinguishment
 

 

 

 
1,975

Merger transaction and integration costs
 
1,249

 
325

 
14,897

 
442

Electronic records incentives

57




107



Other income
 
(330
)
 

 
(356
)
 

Total operating expenses
 
195,325

 
56,649

 
572,943

 
169,124

Operating income
 
44,274

 
19,654

 
123,626

 
54,474

Interest expense, net
 
(26,573
)
 
(11,263
)
 
(78,507
)
 
(32,718
)
Income before income taxes
 
17,701

 
8,391

 
45,119

 
21,756

Provision for income taxes
 
3,917

 
7,961

 
8,368

 
12,043

Net income
 
13,784

 
430

 
36,751

 
9,713

Less: Net income attributable to non-controlling interests
 
(16,906
)
 
(7,338
)
 
(52,061
)
 
(21,346
)
Net loss attributable to Surgery Partners, Inc.
 
$
(3,122
)
 
$
(6,908
)
 
$
(15,310
)
 
$
(11,633
)
 
 
 
 
 
 
 
 
 
Net loss per share attributable to common stockholders
 
 
 
 
 
 
 
 
Basic
 
$
(0.10
)
 
$
(0.22
)
 
$
(0.48
)
 
$
(0.37
)
Diluted (1)
 
$
(0.10
)
 
$
(0.22
)
 
$
(0.48
)
 
$
(0.37
)
Weighted average common shares outstanding (2)
 
 
 
 
 
 
 
 
Basic
 
32,054,089


31,698,638


32,054,089


31,698,638

Diluted (1)
 
32,054,089


31,698,638


32,054,089


31,698,638

(1) The impact of potentially dilutive securities for the three and nine months ended September 30, 2015 and September 30, 2014 was not considered because the effect would be anti-dilutive in each of those periods.
(2) Effect of the Reorganization, as defined in Note 1, has been retrospectively applied to all periods presented.


See notes to unaudited condensed consolidated financial statements.



2



SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited, amounts in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Net income
 
$
13,784

 
$
430

 
$
36,751

 
$
9,713

Other comprehensive income
 

 

 

 

Comprehensive income
 
$
13,784

 
$
430

 
$
36,751

 
$
9,713

Less: Comprehensive income attributable to non-controlling interests
 
(16,906
)
 
(7,338
)
 
(52,061
)
 
(21,346
)
Comprehensive loss attributable to Surgery Partners, Inc.
 
$
(3,122
)
 
$
(6,908
)
 
$
(15,310
)
 
$
(11,633
)
See notes to unaudited condensed consolidated financial statements.




3



SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, amounts in thousands, except shares)
 
Common Stock (1)
 
Additional
Paid-in Capital
 
Retained Deficit
 
Non-Controlling Interests—
Non-Redeemable
 
Total
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2014
1,000

 
$

 
$
58,151

 
$
(322,233
)
 
$
293,618

 
$
29,536

Net (loss) income
 
 
 
 
 
 
(15,310
)
 
39,334

 
24,024

Equity-based compensation
 
 
 
 
1,279

 
 
 

 
1,279

Acquisition and disposal of shares of non-controlling interests, net
 
 
 
 
336

 

 
(2,544
)
 
(2,208
)
Distributions to non-controlling interests—non-redeemable holders
 
 
 
 
 
 
 
 
(35,724
)
 
(35,724
)
Effect of Reorganization (2)
33,870,990

 
339

 
 
 
 
 
 
 
339

Balance as of September 30, 2015
33,871,990

 
$
339

 
$
59,766

 
$
(337,543
)
 
$
294,684

 
$
17,246

(1) As described in Note 1 herein, the common stock of the Company is that of Surgery Partners, Inc. as of September 30, 2015 and that of Surgery Center Holdings,
Inc. as of December 31, 2014.
(2) As a result of the Reorganization that occurred on September 30, 2015 (as further described in Note 1), Surgery Center Holdings, Inc, became an indirect wholly
owned subsidiary of Surgery Partners, Inc. and the common stock of Surgery Center Holdings, Inc. is eliminated in consolidation.


See notes to unaudited condensed consolidated financial statements.



4



SURGERY PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, amounts in thousands)
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
Net income
 
$
36,751

 
$
9,713

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
25,538

 
8,557

Amortization of debt issuance costs and discounts
 
4,966

 
2,395

Amortization of unfavorable lease liability
 
(323
)
 

Equity-based compensation
 
1,279

 
342

(Gain) loss on disposal or impairment of long-lived assets, net
 
(1,522
)
 
110

Loss on debt extinguishment
 

 
1,975

Deferred income taxes
 
7,419

 
10,742

Provision for doubtful accounts
 
16,049

 
4,411

Income from equity investments, net of distributions received
 
(316
)
 

Changes in operating assets and liabilities, net of acquisitions and divestitures:
 
 
 
 
Accounts receivable
 
(34,538
)
 
(9,442
)
Other operating assets and liabilities
 
4,989

 
431

Net cash provided by operating activities
 
60,292

 
29,234

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment, net
 
(18,115
)
 
(3,437
)
Proceeds from divestitures
 
11,193

 

Payments for acquisitions, net of cash acquired
 
(32,562
)
 
(659
)
Net cash used in investing activities
 
(39,484
)
 
(4,096
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Principal payments on long-term debt
 
(63,461
)
 
(63,540
)
Borrowings of long-term debt
 
85,432

 
146,651

Payments of debt issuance costs
 

 
(2,120
)
Share issuance costs
 
(1,448
)
 

Distributions to non-controlling interest holders
 
(51,195
)
 
(21,408
)
Distribution to owners
 

 
(93,000
)
Payments related to ownership transactions with consolidated affiliates
 
(11,991
)
 
(275
)
Repurchase of units
 

 
(86
)
Financing lease obligation
 
3,783

 

Net cash used in financing activities
 
(38,880
)
 
(33,778
)
Net decrease in cash and cash equivalents
 
(18,072
)
 
(8,640
)
Cash and cash equivalents at beginning of period
 
74,920

 
13,026

Cash and cash equivalents at end of period
 
$
56,848

 
$
4,386

See notes to unaudited condensed consolidated financial statements.


5

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)


1. Organization
Surgery Partners, Inc., a Delaware corporation (together with its subsidiaries, the “Company”), was formed April 2, 2015, as a holding company for the purpose of facilitating an initial public offering (the “IPO”) of shares of common stock. Prior to September 30, 2015, the Company conducted business through Surgery Center Holdings, Inc. and its subsidiaries. Surgery Center Holdings, LLC was and is the sole direct owner of the equity interests of Surgery Center Holdings, Inc. and had no other material assets.
On September 30, 2015, Surgery Partners, Inc. became the direct parent and sole member of Surgery Center Holdings, LLC (the "Reorganization"). In the Reorganization, all of the equity interests held by the existing owners of Surgery Center Holdings, LLC were contributed to Surgery Partners, Inc. in exchange for 33,871,990 shares of common stock of Surgery Partners, Inc. and certain rights to additional payments under a tax receivable agreement. After giving effect to the Reorganization, Surgery Partners, Inc. is a holding company, and its sole material asset is an equity interest in Surgery Center Holdings, LLC. The Company's condensed consolidated financial statements for periods prior to the Reorganization represent the historical operating results and financial position of Surgery Center Holdings, Inc. and certain of its subsidiaries.
On November 3, 2014, the Company completed the acquisition of Symbion Holdings Corp. ("Symbion") ("the Merger"), which added 55 surgical facilities, including 49 ambulatory surgery centers ("ASCs") and six surgical hospitals, to its network of existing facilities. The Company acquired Symbion for a purchase price of $792.0 million pursuant to the terms of an Agreement and Plan of Merger dated as of June 13, 2014. The Symbion acquisition was financed through the issuance of approximately $1.4 billion under the Company's Term Loans and Revolving Facility.
As of September 30, 2015, the Company owned and operated a national network of surgical facilities and ancillary services in 28 states.  The surgical facilities, which include ASCs and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, cardiology, gastroenterology, ophthalmology, orthopedics and pain management. Some of the Company's surgical hospitals also provide acute care services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care. Ancillary services are comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services, optical services and specialty pharmacy services.
As of September 30, 2015, the Company owned or operated a portfolio of 99 surgical facilities, comprised of 94 ASCs, of which six are managed only, and five surgical hospitals. The Company owns these facilities in partnership with physicians and, in some cases, healthcare systems in the markets and communities it serves. The Company owned a majority interest in 71 of the surgical facilities and consolidated 88 of these facilities for financial reporting purposes. In addition, the Company operated or managed a network of 43 physician practices.
2. Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through its ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate's business. All significant intercompany balances and transactions are eliminated in consolidation.
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation of the Company's financial position and results of operations have been included. The Company’s fiscal year ends on December 31 and interim results are not necessarily indicative of results for a full year or any other interim period. The condensed consolidated balance sheet at December 31, 2014 has been derived from the audited financial statements as of that date. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 31, 2014. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Non-Controlling Interests
The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies.
Ownership interests in consolidated subsidiaries held by parties other than the Company are identified and generally presented in the condensed consolidated financial statements within the equity section but separate from the Company's equity. However, in instances in which certain redemption features that are not solely within the control of the Company are present, classification of non-controlling interests outside of permanent equity is required. Consolidated net income attributable to the Company and to the non-controlling interests are identified and


6

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

presented on the condensed consolidated statements of operations; changes in ownership interests are accounted for as equity transactions. Certain transactions with non-controlling interests are classified within financing activities in the condensed consolidated statements of cash flows.
The condensed consolidated financial statements of the Company include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership interests with respect to its consolidated subsidiaries that do not result in a change of control.
Non-Controlling Interests — Redeemable. Each of the partnerships and limited liability companies through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement.  In certain circumstances, the partnership and operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physicians’ ownership if certain adverse regulatory events occur, such as it becoming illegal for the physicians to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility.  The non-controlling interests - redeemable are reported outside of stockholders' equity in the condensed consolidated balance sheets.
A summary of activity related to the non-controlling interests—redeemable follows (in thousands):
Balance at December 31, 2014
 
$
192,589

Net income attributable to non-controlling interests—redeemable
 
12,727

Acquisition and disposal of shares of non-controlling interests, net—redeemable
 
(6,264
)
Distributions to non-controlling interest —redeemable holders
 
(15,471
)
Balance at September 30, 2015
 
$
183,581

Variable Interest Entities
The condensed consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary under the provisions of Accounting Standards Codification Topic ("ASC") 810, Consolidation. As of September 30, 2015, the variable interest entities include three surgical facilities and one anesthesia practice. At December 31, 2014, the variable interest entities included an additional surgical facility which was disposed of during the three months ended March 31, 2015 and an additional anesthesia practice which no longer met variable interest entity classification during the three months ended September 30, 2015. The Company has the power to direct the activities that most significantly impact the variable interest entity's economic performance. Additionally, the Company would absorb the majority of the expected losses of these entities should they occur. As of September 30, 2015 and December 31, 2014, the condensed consolidated balance sheets of the Company included total assets of $23.0 million and $24.7 million, respectively, and total liabilities of $2.0 million and $1.7 million, respectively, related to the Company's variable interest entities.

Equity Method Investments
The Company has non-consolidating investments in surgical facilities and management companies that own or manage surgical facilities. These investments are accounted for using the equity method of accounting. The total amount of these investments included in investments in and advances to affiliates in the condensed consolidated balance sheets was $33.9 million and $33.4 million as of September 30, 2015 and December 31, 2014, respectively.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and footnotes. Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments are of a normal, recurring nature. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the comparative periods' financial statements to conform to the three and nine months ended September 30, 2015 presentation. The reclassifications primarily related to the presentation of certain expenses within costs of revenue and had no impact on the Company's consolidated financial position, results of operations or cash flows.
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), inputs other than quoted prices in active markets that are either directly or indirectly observable (Level 2), or unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions (Level 3), depending on the nature of the item being valued.


7

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values.
A summary of the carrying amounts and fair values of the Company's long-term debt follows (in thousands):
 
 
Carrying Amount
 
Fair Value
 
 
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
 
 
 
 
2014 First Lien Credit Agreement, net of debt issuance and discount of $21,143 and $23,818 at September 30, 2015 and December 31, 2014, respectively
 
$
842,332

 
$
846,183

 
$
841,809

 
$
820,799

2014 Second Lien Credit Agreement, net of debt issuance and discount of $16,700 and $18,184 at September 30, 2015 and December 31, 2014, respectively
 
$
473,300

 
$
471,816

 
$
476,258

 
$
452,943

The fair values of the 2014 First Lien Credit Agreement and 2014 Second Lien Credit Agreement, as defined in Note 5 on Long-Term Debt, were based on a Level 2 computation using quoted prices for identical liabilities in inactive markets at September 30, 2015 and December 31, 2014, as applicable. The carrying amounts related to the Company's other long-term debt obligations approximate their fair values.
The Company maintains a supplemental executive retirement savings plan (the "SERP") for certain former Symbion executive officers. The SERP is a non-qualified deferred compensation plan for eligible executive officers and other key employees of the Company that allows participants to defer portions of their compensation. The fair value of the SERP asset and liability was based on a quoted market price, or a Level 1 computation. As of September 30, 2015 and December 31, 2014, the fair value of the assets in the SERP were $1.5 million and $1.4 million, respectively, and were included in other long-term assets in the condensed consolidated balance sheets. The Company had a liability related to the SERP of $1.5 million and $1.4 million as of September 30, 2015 and December 31, 2014, respectively, which was included in other long-term liabilities in the condensed consolidated balance sheets.
Revenues
The Company recognizes revenues in the period in which the services are performed. Patient service revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances, which the Company estimates based on the historical trend of its cash collections and contractual write-offs, accounts receivable agings, established fee schedules, contracts with payors and procedure statistics.


8

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

A summary of revenues by service type as a percentage of total revenues follows:
 
 
Three Months Ended September 30,
 
 
2015
 
2014
Patient service revenues:
 
 
 
 
   Surgical facilities revenues
 
91.2
%
 
77.7
%
   Ancillary services revenues
 
6.8
%
 
17.7
%
 
 
98.0
%
 
95.4
%
Other service revenues:
 
 
 
 
   Optical services revenues
 
1.5
%
 
4.6
%
   Other
 
0.5
%
 
%
 
 
2.0
%
 
4.6
%
Total revenues
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Patient service revenues:
 
 
 
 
   Surgical facilities revenues
 
92.0
%
 
77.7
%
   Ancillary services revenues
 
5.9
%
 
17.5
%
 
 
97.9
%
 
95.2
%
Other service revenues:
 
 
 
 
   Optical services revenues
 
1.6
%
 
4.8
%
   Other
 
0.5
%
 
%
 
 
2.1
%
 
4.8
%
Total revenues
 
100.0
%
 
100.0
%
Patient service revenues.  The fee charged for healthcare procedures performed in surgical facilities varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, medical supplies, nursing staff and medications.  The fee does not normally include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor.  However, in several surgical facilities, the Company charges for anesthesia services. Ancillary service revenues include fees for patient visits to the Company's physician practices, pharmacy services and diagnostic tests ordered by physicians. Patient service revenues are recognized on the date of service, net of estimated contractual adjustments and discounts from third-party payors, including Medicare and Medicaid.  Changes in estimated contractual adjustments and discounts are recorded in the period of change. During the three and nine months ended September 30, 2015, the Company recognized an increase to patient service revenues as a result of changes in estimates to third-party settlements related to prior years of approximately $1.8 million and $1.5 million, respectively. These adjustments were related to two of the Company's surgical hospitals that were acquired in connection with the acquisition of Symbion on November 3, 2014.


9

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

The following table sets forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities (dollars in thousands):
    
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
 
Amount
 
%
 
Amount
 
%
Patient service revenues:
 
 
 
 
 
 
 
 
Private insurance
 
$
124,107

 
52.9
%
 
$
38,160

 
52.4
%
Government
 
95,050

 
40.5
%
 
25,681

 
35.3
%
Self-pay
 
3,336

 
1.4
%
 
1,614

 
2.2
%
Other
 
12,306

 
5.2
%
 
7,302

 
10.1
%
Total patient service revenues
 
$
234,799

 
100.0
%
 
$
72,757

 
100.0
%
Other service revenues:
 
 
 
 
 
 
 
 
Optical service revenues
 
$
3,621

 


 
$
3,546

 


Other revenues
 
1,179

 


 

 


Total net revenues
 
$
239,599

 
 
 
$
76,303

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
 
Amount
 
%
 
Amount
 
%
Patient service revenues:
 
 
 
 
 
 
 
 
Private insurance
 
$
368,003

 
54.0
%
 
$
114,361

 
53.8
%
Government
 
264,731

 
38.8
%
 
72,000

 
33.8
%
Self-pay
 
12,519

 
1.8
%
 
5,509

 
2.6
%
Other
 
37,007

 
5.4
%
 
20,787

 
9.8
%
Total patient service revenues
 
$
682,260

 
100.0
%
 
$
212,657

 
100.0
%
Other service revenues:
 
 
 
 
 
 
 
 
Optical service revenues
 
$
11,112

 


 
$
10,817

 


Other revenues
 
3,197

 


 
124

 


Total net revenues
 
$
696,569

 
 
 
$
223,598

 
 
Other service revenues. Optical service revenues consist of product sales from the Company's optical laboratories as well as handling charges billed to the members of the Company's optical products purchasing organization and sales from the Company's marketing products and services business. The Company's optical products purchasing organization negotiates volume buying discounts with optical products manufacturers. The buying discounts and any handling charges billed to the members of the buying group represent the revenue recognized for financial reporting purposes. Revenue is recognized as orders are shipped to members. The Company bases its estimates for sales returns and discounts on historical experience and has not experienced significant fluctuations between estimated and actual return activity and discounts given. The Company's optical laboratories manufacture and distribute corrective lenses and eyeglasses to ophthalmologists and optometrists. Revenue is recognized when product is shipped, net of allowance for discounts. The Company's marketing products and services businesses recognize revenue when product is shipped or services are rendered.
Other revenues include management and administrative service fees derived from the non-consolidated facilities that the Company accounts for under the equity method, management of surgical facilities in which it does not own an interest, and management services provided to physician practices for which the Company is not required to provide capital or additional assets. The fees derived from these management arrangements are based on a predetermined percentage of the revenues of each facility or practice and are recognized in the period in which services are rendered.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.
Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts
Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs),


10

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

managed care health plans, commercial insurance companies, employers and patients. Management recognizes that revenues and receivables from government agencies are significant to the Company's operations, but it does not believe that there is significant credit risk associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors. As of September 30, 2015 and December 31, 2014, the Company had third-party Medicaid settlements of $6.9 million and $11.7 million, respectively, in other current liabilities in the condensed consolidated balance sheets.
The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor.  However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are not significant.  The Company's policy is to collect co-payments and deductibles prior to providing medical services. It is also the Company's policy to verify a patient’s insurance 72 hours prior to the patient’s procedure.  Patient services of the Company are primarily non-emergency, which allows the surgical facilities to control the procedures for which third-party reimbursement is sought and obtained. The Company does not require collateral from self-pay patients.
The Company analyzes accounts receivable at each of its facilities to ensure the proper aged category and collection assessment. At a consolidated level, the Company's policy is to review accounts receivable aging, by facility, to determine the appropriate allowance for doubtful accounts. Patient account balances are reviewed for delinquency based on contractual terms. This review is supported by an analysis of the actual revenues, contractual adjustments and cash collections received. An account balance is written off only after the Company has pursued collection with legal or collection agency assistance or otherwise has deemed an account to be uncollectible.
The receivables related to the Company's optical products purchasing organization are recognized separately from patient accounts receivable, as discussed above, and are included in other current assets in the condensed consolidated balance sheets. Such receivables were $8.9 million and $7.6 million at September 30, 2015 and December 31, 2014, respectively.
Inventories
Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.
Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets follows (in thousands):
 
 
September 30, 2015
 
December 31,
2014
 
 
 
 
 
Prepaid expenses
 
$
8,122

 
$
7,050

Receivables - optical product purchasing organization
 
8,894

 
7,556

Other current assets
 
9,662

 
9,399

Total
 
$
26,678

 
$
24,005

Property and Equipment
Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally three to five years for computers and software and five to seven years for furniture and equipment.  Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are expensed as incurred, while expenditures that increase capacities or extend useful lives are capitalized.


11

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)


A summary of property and equipment follows (in thousands):
 
 
September 30, 2015
 
December 31,
2014
 
 
 
 
 
Land
 
$
6,790

 
$
6,790

Buildings and improvements
 
102,557

 
100,574

Furniture and equipment
 
13,932

 
13,662

Computer and software
 
22,127

 
20,622

Medical equipment
 
91,772

 
86,132

Construction in progress
 
2,445

 
2,923

Property and equipment, at cost
 
239,623

 
230,703

Less: Accumulated depreciation
 
(65,810
)
 
(55,697
)
Property and equipment, net
 
$
173,813

 
$
175,006

The Company also leases certain facilities and equipment under capital leases. Assets held under capital leases are stated at the present value of minimum lease payments at the inception of the related lease. Such assets are depreciated on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset. The carrying values of assets under capital lease were $11.3 million and $13.3 million as of September 30, 2015 and December 31, 2014, respectively, which included accumulated depreciation of $9.7 million and $6.8 million, respectively.
Intangible Assets
The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements, management agreements and customer relationships. Physician income guarantees are amortized into salaries and benefits costs in the condensed consolidated statements of operations over the commitment period of the contract, generally three to four years. Non-compete agreements and management rights agreements are amortized into depreciation and amortization expense in the condensed consolidated statements of operations over the service lives of the agreements, ranging from two years to 20 years for non-compete agreements and 15 years for the management rights agreements. Customer relationships are amortized into depreciation and amortization expense in the condensed consolidated statements of operations over the estimated lives of the relationships, ranging from three to ten years.
A summary of the activity related to intangible assets for the nine months ended September 30, 2015 follows (in thousands):
 
 
Physician Income Guarantees
 
Management Rights
 
Non-Compete Agreements
 
Certificates of Need
 
Customer Relationships
 
Other
 
Total Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
$
973

 
$
24,757

 
$
16,590

 
$
3,711

 
$
6,274

 
$
2,583

 
$
54,888

Additions
 
800

 

 
4,621

 

 

 

 
5,421

Recruitment expense
 
(500
)
 

 

 

 

 

 
(500
)
Amortization
 

 
(1,298
)
 
(4,017
)
 

 
(1,003
)
 
(354
)
 
(6,672
)
Balance at September 30, 2015
 
$
1,273

 
$
23,459

 
$
17,194

 
$
3,711

 
$
5,271

 
$
2,229

 
$
53,137



12

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

Goodwill
Goodwill represents the fair value of the consideration provided in an acquisition over the fair value of net assets acquired and is not amortized. Additions to goodwill include amounts resulting from new business combinations and incremental ownership purchases in the Company's subsidiaries.
A summary of activity related to goodwill for the nine months ended September 30, 2015 follows (in thousands):
Balance at December 31, 2014
 
$
1,298,753

Acquisitions
 
40,649

Divestitures
 
(8,399
)
Purchase price adjustments
 
(953
)
Balance at September 30, 2015
 
$
1,330,050

Impairment of Long-Lived Assets, Goodwill and Intangible Assets
The Company evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist in accordance with ASC 350, Intangibles- Goodwill and Other. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value.  The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. The Company tests its goodwill and intangible assets for impairment at least annually, or more frequently if certain indicators arise. 
Restricted Invested Assets
Restricted invested assets of $316,000 at September 30, 2015 and December 31, 2014 were related to a requirement under the operating lease agreement at the Company's Chesterfield, Missouri facility. In accordance with the provisions of the lease agreement, the Company has a deposit with the landlord that shall be held as security for performance under the Company's covenants and obligations within the agreement through January 2024.
Other Long-Term Assets
A summary of other long-term assets follows (in thousands):
 
 
September 30, 2015
 
December 31,
2014
Notes receivable
 
$
222

 
$
182

Deposits
 
2,405

 
2,196

Assets of SERP
 
1,522

 
1,402

Other
 
3,361

 
2,099

Total
 
$
7,510

 
$
5,879

Other Current Liabilities
A summary of other current liabilities follows (in thousands):
 
 
September 30, 2015
 
December 31,
2014
Interest payable
 
$
6,744

 
$
7,027

Current taxes payable
 
3,370

 
3,189

Insurance liabilities
 
4,897

 
5,552

Third-party settlements
 
6,921

 
11,708

Acquisition consideration payable
 
16,768

 

Amounts due to patients and payors
 
10,570

 
9,476

Other accrued expenses
 
20,977

 
16,918

Total
 
$
70,247

 
$
53,870



13

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

Other Long-Term Liabilities
A summary of other long-term liabilities follows (in thousands):
 
 
September 30, 2015
 
December 31,
2014
Facility lease obligations
 
$
54,220

 
$
50,749

Medical malpractice liability
 
4,253

 
4,253

Liability of SERP
 
1,522

 
1,415

Contingent consideration obligation
 
13,789

 
13,009

Acquisition consideration payable
 

 
16,768

Unfavorable lease liability
 
2,104

 
2,427

Other long-term liabilities
 
7,890

 
1,989

Total
 
$
83,778

 
$
90,610

The Company has facility lease obligations in connection with the surgical hospital located in Idaho Falls, Idaho and with a radiation oncology building at this facility. The obligation is payable to the lessor of this facility for the land, building and improvements. The current portion of the lease obligation was $729,000 and $568,000 at September 30, 2015 and December 31, 2014, respectively, and was included in other current liabilities in the consolidated balance sheets. The total of the facility lease obligations related to the surgical hospital and radiation oncology building in Idaho Falls, Idaho was $51.0 million and $51.3 million at September 30, 2015 and December 31, 2014, respectively.
During the three months ended September 30, 2015, the Company sold real estate in Ocala, Florida for $4.2 million and subsequently leased the real estate from the new owner. As this transaction did not qualify for sale leaseback treatment under ASC 840, Leases, the Company recorded a financing lease obligation of $4.2 million. The obligation is payable to the lessor of this facility for the building. The current portion of the liability was $165,000 included in other current liabilities and $4.0 million included in other long-term liabilities at September 30, 2015.
Operating Leases
The Company leases office space and equipment for its surgical facilities, including surgical facilities under development.  The lease agreements generally require the lessee, or the Company, to pay all maintenance, property taxes, utilities and insurance costs.  The Company accounts for operating lease obligations and sublease income on a straight-line basis.  Contingent obligations of the Company, as defined by each lease agreement, are recognized when specific contractual measures have been met, typically the result of an increase in the Consumer Price Index.  Lease obligations paid in advance are recorded as prepaid rent and included in prepaid expenses and other current assets on the condensed consolidated balance sheets.  The difference between actual lease payments and straight-line lease expense over the initial lease term, excluding optional renewal periods, is recorded as deferred rent and included in other current liabilities and other long-term liabilities on the condensed consolidated balance sheets. As part of the Merger, the Company ceased use of four of their operating leases and accrued a liability of $4.6 million, net of discounting and sublease income, during the three months ended June 30, 2015. The Company expensed this through merger transaction and integration costs, as the leases related to offices shut down in connection with the Merger.

Equity-Based Compensation
The Company recognizes in the financial statements the cost of employee services received in exchange for awards of equity instruments based on the fair value of those awards. Prior to the Reorganization, on the grant date, the Company employed a market approach to estimate the fair value of equity-based awards based on various considerations and assumptions, including implied earnings multiples and other metrics of relevant market participants, the Company’s operating results and forecasted cash flows and the Company’s capital structure. Such estimates require the input of highly subjective, complex assumptions. However, such assumptions will not be required to determine fair value of shares of the Company’s common stock once its underlying shares begin trading publicly. Once the shares begin trading publicly, the fair value of future stock options awarded will be based on the quoted market price of the Company’s common stock upon grant, as well as assumptions including expected stock price volatility, risk-free interest rate, expected dividends, and expected term.
The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time. The Company’s equity-based compensation expense can vary in the future depending on many factors, including levels of forfeitures and whether performance targets are met and whether a liquidity event occurs. Prior to the Reorganization, employees held membership units in Surgery Center Holdings, LLC, and the associated expense was referred to as unit-based compensation; following the Reorganization, such expense is referred to as share-based compensation.
Professional, General and Workers' Compensation Insurance
The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some


14

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. Workers' compensation insurance is on an occurrence basis.
The Company expenses the costs under the self-insured retention exposure for general and professional liability and workers compensation claims which relate to (i) claims made during the policy period, which are offset by insurance recoveries and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Reserves and provisions are based upon actuarially determined estimates. The reserves are estimated using individual case-basis valuations and actuarial analysis. Reserves for professional, general and workers' compensation claim liabilities are determined with no regard for expected insurance recoveries and are presented gross on the condensed consolidated balance sheets. Expected insurance recoveries are presented on the condensed consolidated balance sheets separately from the liabilities of which $2.9 million and $3.1 million are included in other current liabilities as of September 30, 2015 and December 31, 2014, respectively and $4.3 million is included in other long-term liabilities on the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014. Expected insurance recoveries of $2.2 million is included in prepaid expenses and other current assets and $2.8 million is included in other long-term assets on the condensed consolidated balance sheets at September 30, 2015 and December 31, 2014.
Electronic Health Record Incentives
The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments beginning in calendar year 2011 for eligible hospitals and professionals that implement and achieve meaningful use of certified Electronic Health Records ("EHR") technology. Several of the Company's surgical hospitals, which were acquired in connection with the acquisition of Symbion, have implemented plans to comply with the EHR meaningful use requirements of the Health Information Technology for Economic and Clinical Health Act ("HITECH") in time to qualify for the maximum available incentive payments.
Compliance with the meaningful use requirements has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing the Company's EHR solutions, along with costs associated with the hardware and software components of the project. The Company currently estimates that total costs incurred to comply will be recovered through the total EHR incentive payments over the projected life cycle of this initiative. The Company incurs both capital expenditures and operating expenses in connection with the implementation of its various EHR initiatives. The amount and timing of these expenditures do not directly correlate with the timing of the Company's cash receipts or recognition of the EHR incentives as other income. The Company expects to receive incentive payments and recognize corresponding revenue upon the completion of the EHR meaningful use requirements. The Company recorded expense for returned payments of $57,000 and $107,000 during the three and nine months ended September 30, 2015, respectively. No electronic records incentives were recorded during the three and nine months ended September 30, 2014.
Income Taxes and Tax Receivable Agreement
The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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. If a net operating loss carryforward exists, the Company makes a determination as to whether that net operating loss carryforward will be utilized in the future. A valuation allowance is established for certain net operating loss carryforwards when their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances.
The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations for years prior to 2010.
As part of the Reorganization that was effective September 30, 2015, the Company entered into a Tax Receivable Agreement (“TRA”) under which generally the Company will be required to pay to its stockholders as of immediately prior to the IPO 85% of the cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes, including NOLs, capital losses, charitable deductions, alternative minimum tax credit carryforwards and federal and state tax credits of Surgery Partners, Inc. and its affiliates relating to taxable years ending on or before the date of the Reorganization (calculated by assuming the taxable year of the relevant entity closes on the date of the Reorganization) that are or become available to the Company and its wholly-owned subsidiaries as a result of the Reorganization, and (ii) tax benefits attributable to payments made under the TRA, together with interest accrued at a rate of LIBOR plus 300 basis points from the date the applicable tax return is due (without extension) until paid. The Company expects the payments it will be required to make under the TRA will be substantial. If the Company had elected to terminate the TRA immediately after the IPO, the Company estimates that it would have been required to pay $116.0 million in the aggregate under the TRA.
The amounts payable under the TRA will vary depending upon a number of factors, including the amount, character and timing of the taxable income of Surgery Partners, Inc. in the future. The Company estimates the total amounts payable to be between $110 million and $115 million, if the tax benefits of related deferred tax assets are ultimately realized. The amounts payable are not currently recognized as liabilities as of September 30, 2015 because it is not probable that these amounts will be paid, consistent with the Company’s current


15

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

estimate that related deferred tax assets are not more likely than not to be realized. If the valuation allowance recorded against the deferred tax assets applicable to the tax attributes referenced above is released in a future period, the TRA liability will likely be considered probable at that time and will be recorded as a component of net income.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. This ASU provides companies the option of applying a full or modified retrospective approach upon adoption. This ASU was originally set to be effective for fiscal years beginning after December 15, 2016, and early adoption was not permitted. In July 2015, the FASB deferred the effective date for the standard to be effective for fiscal years beginning after December 15, 2017. The FASB will now permit companies to early adopt within one year of the new effective date. The Company will adopt this ASU on January 1, 2018 and is currently evaluating its plan for adoption and the impact on the Company's revenue recognition policies, procedures and the resulting impact on the Company's condensed consolidated financial position, results of operations and cash flows.
In February 2015, the FASB issued ASU 2015-02 “Amendments to the Consolidation Analysis,” which amends the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. Under this analysis, limited partnerships and other similar entities will be considered a variable-interest entity unless the limited partners hold substantive kick-out rights or participating rights. The provisions of ASU 2015-02 are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2015-02 will have on its financial position, results of operation, cash flows and financial disclosures.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs," which simplifies the presentation of debt issuance costs by requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, and the new guidance should be applied retrospectively. The Company plans to adopt this ASU on January 1, 2016, and does not anticipate that such adoption will have a material effect on its consolidated financial position, results of operations, or cash flows.
In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" which clarifies the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on this topic in ASU 2015-03. The SEC staff has announced that it would “not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement.” The Company plans to adopt this ASU on January 1, 2016, and does not anticipate that such adoption will have a material effect on its consolidated financial position, results of operations, or cash flows.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments” which eliminates the requirement for an acquirer to retrospectively adjust its financial statements for changes to provisional amounts that are identified during the measurement-period following the consummation of a business combination. Instead, ASU 2015-16 requires these types of adjustments to be made during the reporting period in which they are identified and would require additional disclosure or separate presentation of the portion of the adjustment that would have been recorded in the previously reported periods as if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those years. The Company is currently evaluating the impact that the adoption of ASU 2015-02 will have on its financial position, results of operation, cash flows and financial disclosures.
3. Acquisitions and Developments
The Company accounts for its business combinations in accordance with the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer can be identified for each business combination. The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control. The assets acquired, liabilities assumed and any non-controlling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.
2015 Transactions
Surgical Facility Acquisitions
During the nine months ended September 30, 2015, the Company acquired a controlling interest in one surgical facility located in a new market and one surgical facility and two anesthesia practices in existing markets for an aggregate purchase price of $20.2 million. The Company consolidates these facilities for financial reporting purposes. These transactions were funded with a combination of cash from operations, facility ownership, and proceeds from the refinancing of the Company's credit facilities in connection with the Symbion acquisition.



16

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

Additionally, the Company acquired incremental ownership in two of its consolidated surgical facilities and in an existing anesthesia practice for an aggregate purchase price of $7.7 million.
Ancillary Services
During the nine months ended September 30, 2015, through its recruiting efforts and capital-efficient acquisitions, the Company completed eleven in-market physician practice transactions through an aggregate investment of $30.4 million. These transactions added total of 14 physicians to the Company’s physician network and were funded with a combination of cash from operations and revolver proceeds.
Acquisition of Symbion
On June 13, 2014, the Company, through its wholly-owned subsidiary, SCH Acquisition Corp. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Symbion Holdings Corporation ("Symbion"). Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Symbion, with Symbion being the surviving corporation in the merger (the “Merger”). At the closing of the Merger, each share of common stock of Symbion, other than those held by Symbion or by the Company, Merger Sub or their subsidiaries and other than those shares with respect to which appraisal rights are properly exercised in accordance with the General Corporation Law of the State of Delaware, were converted into the right to receive a cash payment per share equal to (x) $792.0 million, subject to certain adjustments for Symbion’s cash, debt, transaction expenses, working capital and other items at closing, plus the aggregate exercise price of all vested options, minus certain escrowed amounts relating to post-closing purchase price adjustment and indemnity obligations, divided by (y) the number of shares outstanding on a fully-diluted basis assuming full exercise of vested options and exercise of rights to receive shares upon the exchange of the 8.00% Senior PIK Exchangeable Notes due 2017 issued by Symbion (the “Merger Consideration”). In addition, each outstanding option to purchase shares of Symbion’s common stock were cancelled, and the holders of vested options were paid an amount equal to the excess, if any, of the Merger Consideration over the per-share exercise price of such vested options.
The Company obtained financing commitments for the transactions contemplated by the Merger Agreement, the aggregate proceeds of which were sufficient for the Company to pay the aggregate Merger Consideration and all related fees and expenses.
The Company completed the Merger effective November 3, 2014. At closing, the Company paid approximately $300.1 million in cash, including $16.2 million funded to an escrow account, and assumed approximately $472.4 million of outstanding indebtedness of Symbion, plus related accrued and unpaid interest. During the three months ended June 30, 2015, $2.1 million of the escrow account was distributed based on a working capital settlement reducing the total amount funded on the escrow account to $14.1 million as of September 30, 2015. The Company received $1.2 million of the escrow disbursement reducing the cash consideration to $298.9 million and adjusted the purchase price allocation to goodwill. The Company will fund an additional $16.8 million to the escrow account by May 3, 2016. The $30.9 million remaining escrow balance is payable to Symbion on May 3, 2016, pending the resolution of any adjustments and the settlement of any other indemnities.
The acquisition of Symbion enhances the growth profile of the Company by expanding its network of surgical facilities in attractive markets throughout the United States.
The Merger was financed through the issuance of $1.4 billion of Senior Secured Credit Facilities ("Facilities"), which includes an $870.0 million first lien term loan due November 3, 2020, a $490.0 million second lien term loan due November 3, 2021 and an $80.0 million revolving credit facility.
Fees associated with the Merger, which includes fees incurred related to the Company's debt financings, were approximately $93.3 million. Approximately $5.3 million was capitalized as deferred financing costs, $21.7 million related to legal and other transaction fees was expensed as transaction costs, $42.9 million was recorded as a reduction of the carrying value of the Facilities and $23.4 million was recorded as debt extinguishment costs during the year ended December 31, 2014.
Acquired assets and assumed liabilities include, but are not limited to, fixed assets, intangible assets and professional liabilities. The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed. A majority of the deferred income taxes recognized as a component of the Company's purchase price allocation is a result of the difference between the book and tax basis of the amortizable intangible assets recognized.


17

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

The purchase price amount has been preliminarily allocated to the related assets acquired and liabilities assumed based upon their respective fair values as follows:
Cash consideration
$
298,857

Acquisition consideration payable
16,768

Fair value of non-controlling interests
395,663

Fair value of Symbion
711,288

Net assets acquired:
 
Cash
40,374

Accounts receivable, net
79,830

Inventories
18,389

Prepaid expenses and other current assets
9,876

Property and equipment
153,179

Investments in and advances to affiliates
32,728

Intangible assets
31,534

Restricted invested assets
316

Other long-term assets
6,239

Accounts payable
(20,419
)
Accrued payroll and benefits
(14,300
)
Other current liabilities
(44,272
)
Current maturities of long-term debt
(83,805
)
Long-term debt, less current maturities
(376,395
)
Long-term deferred tax liabilities
(17,895
)
Other long-term liabilities
(60,500
)
     Net assets acquired
(245,121
)
Excess of fair value over identifiable net assets acquired
$
956,409

The entire amount of goodwill acquired in connection with the Merger was allocated to the Company's surgical facility services operating segment. The total amount of the goodwill related to the acquisition of Symbion that will be deductible for tax purposes is $142.5 million.
Fair value attributable to non-controlling interests was based on a Level 3 computation using significant inputs that are not observable in the market. Key inputs used to determine the fair value include financial multiples used in the purchase of non-controlling interests, primarily from acquisitions of surgical facilities. Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability. Fair value attributable to the property and equipment acquired was based on Level 3 computations using key inputs such as cost trend data and comparable asset sales. Fair value attributable to the intangible assets acquired was based on Level 3 computations using key inputs such as the Company's internally-prepared financial projections. Fair values assigned to acquired working capital were based on carrying amounts reported by Symbion at the date of acquisition, which approximate their fair values. The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition.


18

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

The unaudited consolidated pro forma results for three and nine months ended September 30, 2014, assuming the Symbion acquisition had been consummated on January 1, 2014, are as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2014
Net revenues
$
218,595

 
$
642,065

 
 
 
 
Net income
3,646

 
23,401

Less: net income attributable to non-controlling interests
(16,158
)
 
(48,445
)
Net loss attributable to Surgery Partners, Inc.
$
(12,512
)
 
$
(25,044
)
These pro forma amounts for the three and nine months ended September 30, 2014, exclude expenses related to the Merger transaction of $702,000 and $3.1 million, respectively. In addition, the nine months ended September 30, 2014 excludes $2.0 million of expense related to loss on debt extinguishment.
4. Divestitures
During the nine months ended September 30, 2015, the Company sold its interest in three surgical facilities and received aggregate proceeds of $10.9 million resulting in a pre-tax gain of approximately $2.9 million in the condensed consolidated statements of operations.
5. Long-Term Debt
A summary of long-term debt follows (in thousands):
 
 
September 30, 2015
 
December 31,
2014
 
 
 
 
 
2014 Revolver Loan
 
$
35,250

 
$

2014 First Lien Credit Agreement, dated November 3, 2014, maturing November 3, 2020, net of debt issuance and discount of $21,143 and $23,818 at September 30, 2015 and December 31, 2014, respectively
 
842,332

 
846,183

2014 Second Lien Credit Agreement, dated November 3, 2014, maturing November 3, 2021, net of debt issuance and discount of $16,700 and $18,184 at September 30, 2015 and December 31, 2014, respectively
 
473,300

 
471,816

Subordinated Notes
 
1,000

 
1,000

Notes payable and secured loans
 
36,445

 
31,600

Capital lease obligations
 
10,342

 
10,755

Total debt
 
1,398,669

 
1,361,354

Less: Current maturities
 
27,678

 
22,088

Total long-term debt
 
$
1,370,991

 
$
1,339,266

The acquisition of Symbion on November 3, 2014 and payoff of the senior debt was financed through new $1.440 billion Senior Secured Credit Facilities (the "Facilities") consisting of the following:
$80.0 million revolving credit facility ("2014 Revolver Loan")
$870.0 million 1st lien term loan facility ("2014 First Lien Credit Agreement")
$490.0 million 2nd lien term loan facility ("2014 Second Lien Credit Agreement")
On November 3, 2014, in connection with the consummation of the Symbion acquisition, the Company assumed and paid down approximately $440.0 million of outstanding indebtedness of Symbion, including accrued interest. Simultaneously, the Company paid off all of the debt outstanding under its then-existing credit agreements ("Credit Facilities") and revolver loan.
2014 Revolver Loan
The 2014 Revolver Loan (“Revolver”) will be used for working capital, acquisitions and development activities and general corporate purposes in an aggregate principal amount at any time outstanding not to exceed $80.0 million and matures on November 3, 2019. The Company has the option of classifying borrowings under the Revolver as either Alternate Base Rate ("ABR") loans or Eurodollar ("ED") loans. The interest base rate on an ABR loan is equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) the adjusted LIBO Rate for a Eurodollar Borrowing with a one-month interest


19

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

period plus 1.00%. In addition to the base rate, the Company is required to pay a 3.25% margin for ABR loans. The interest base rate on an ED loan is equal to (x) the LIBO Rate for such Eurodollar borrowing in effect for such Interest Period divided by (y) One minus the Statutory Reserves (if any) for such Eurodollar Borrowing for such interest period. In addition to the base rate, the Company is required to pay a 4.25% margin for ED loans. As of September 30, 2015, the Company availability on the Revolver was $41.6 million.
The Company paid $2.3 million in connection with obtaining the Revolver and recorded this amount as debt issuance costs, which is presented, net of accumulated amortization of approximately $417,000 and $76,000, in the accompanying consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively. The Company must also pay quarterly commitment fees of 0.50% per annum of the average daily unused amount of the Revolver.
The credit agreement that governs the Revolver contains various covenants that include limitations on the Company's indebtedness, liens, acquisitions and investments. It additionally includes the requirement that the Company maintain a net leverage ratio within a specified range. At September 30, 2015, the Company was in compliance with the covenants contained in the credit agreement.
2014 First Lien Credit Agreement
The 2014 First Lien Credit Agreement (“2014 First Lien”) is a senior secured obligation of Surgery Center Holdings, Inc. and is guaranteed on a senior secured basis by the Company and certain of its subsidiaries. The 2014 First Lien matures on November 3, 2020. The Company has the option of classifying the 2014 First Lien as either an ABR loan or an ED loan. The interest base rate on an ABR loan is equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50%, and (c) the Adjusted LIBO Rate for a Eurodollar Borrowing with a one-month interest period plus 1.00%; provided that the base rate shall not be less than 2.00% per annum. In addition to the base rate, the Company is required to pay a 3.25% margin for ABR loans. The interest base rate on an ED loan is equal to (x) the LIBO Rate for such Eurodollar borrowing in effect for such Interest Period divided by (y) One minus the Statutory Reserves (if any) for such Eurodollar Borrowing for such interest period; provided that the rate shall not be less than 1.00% per annum. In addition to the base rate, the Company is required to pay a 4.25% margin for ED loans. In 2014, the Company classified the 2014 First Lien as an ED loan with an interest rate of 5.25% (1.00% base rate plus a 4.25% margin). Accrued interest is payable in arrears on a quarterly basis. Within five business days after the earlier of (i) 90 days after the end of each fiscal year or (ii) the date on which financial statements have been delivered, the Company is required to make mandatory prepayments in amounts calculated in accordance with the excess cash flow provisions of the 2014 First Lien Credit Agreement. There were no excess cash flow payments required as of September 30, 2015.
In 2014, the Company recorded $4.4 million and $20.0 million as a reduction of the carrying value of the 2014 First Lien as original issue discount and amounts paid to lender for debt related issuance costs, respectively, which are accreted to interest expense over the term of the loan. During the nine months ended September 30, 2015, approximately $2.7 million was accreted to interest expense. The Company also paid $1.9 million in connection with obtaining the 2014 First Lien and recorded this amount as debt issuance costs, which is presented as an asset, net of accumulated amortization of approximately $237,000 and $41,000, in the accompanying condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.
The credit agreement that governs the 2014 First Lien contains various covenants that include limitations on the Company's indebtedness, liens, acquisitions and investments. It additionally includes the requirement that the Company maintain a net leverage ratio within a specified range. At September 30, 2015, the Company was in compliance with the covenants contained in the credit agreement. The 2014 First Lien is collateralized by substantially all of the assets of the Company.
2014 Second Lien Credit Agreement
The 2014 Second Lien Credit Agreement (“2014 Second Lien”) is a senior secured obligation of Surgery Center Holdings, Inc. and is guaranteed on a senior secured basis by the Company and certain of its subsidiaries. The 2014 Second Lien matures on November 3, 2021. The Company has the option of classifying the 2014 Second Lien as either an ABR loan or an ED loan. The interest base rate on an ABR loan is equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) the Adjusted LIBO Rate for a Eurodollar Borrowing with a one-month interest period plus 1.00%; provided that the base rate shall not be less than 2.00% per annum. In addition to the base rate, the Company is required to pay a 6.50% margin for ABR loans. The interest base rate on an ED loan is equal to (x) the LIBO Rate for such Eurodollar Borrowing in effect for such interest period divided by (y) One minus the Statutory Reserves (if any) for such Eurodollar Borrowing for such interest period; provided that the base rate shall not be less than 1.00% per annum. In addition to the base rate, the Company is required to pay a 7.50% margin for ED loans. During 2014, the Company classified the 2014 Second Lien as an ED loan with an interest rate of 8.50% (1.00% base rate plus a 7.50% margin). Accrued interest is payable in arrears on a quarterly basis, on the last business day of each March, June, September and December. The Company is required to pay the principal balance of $490.0 million upon maturity of the 2014 Second Lien on November 3, 2021. The Company has the right at any time to prepay any borrowings, in whole or in part, provided that each partial prepayment shall be in an amount that is an integral multiple of $0.5 million and not less than $1.0 million. Within five business days after the earlier of (i) 90 days after the end of each fiscal year or (ii) the date on which financial statements have been delivered, the Company is required to make mandatory prepayments in amounts calculated in accordance with the excess cash flow provisions of the 2014 Second Lien. There were no excess cash flow payments required as of September 30, 2015.
The Company recorded $4.9 million and $13.6 million as a reduction of the carrying value of the 2014 Second Lien as original issue discount and amounts paid to lender for debt related issuance costs, respectively, which are accreted to interest expense over the term of the loan. During the nine months ended September 30, 2015, approximately $1.5 million was accreted to interest expense. The Company also


20

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

paid $1.1 million in connection with obtaining the 2014 Second Lien and recorded this amount as debt issuance costs, which is presented as an asset, net of accumulated amortization of approximately $84,000 and $14,000, in the accompanying condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.
The credit agreement that governs the 2014 Second Lien contains various covenants that include limitations on the Company's indebtedness, liens, acquisitions and investments. It additionally includes the requirement that the Company maintain a maximum net leverage ratio. At September 30, 2015, the Company was in compliance with the covenants contained in the credit agreement. The 2014 Second Lien is collateralized by substantially all of the assets of the Company.
Other Debt Transactions
On January 27, 2014, the Company obtained $90.0 million in additional borrowings on the Credit Facilities to return capital to shareholders. The Company recorded $1.4 million and $2.9 million as a reduction of the carrying value of the additional borrowings as original issue discount and amounts paid to lender for debt related issuance costs, respectively, which are accreted to interest expense over the term of the loan. During the nine months ended September 30, 2014, approximately $339,000 was accreted to interest expense. The $90.0 million in additional borrowings, including the related debt issuance costs, were included in the extinguishment of debt that was financed with the proceeds of the Facilities obtained in connection with the acquisition of Symbion on November 3, 2014.
Subordinated Notes
Effective April 11, 2013, the Company amended and reduced the size of its subordinated debt facility ("Subordinated Notes") to $1.0 million from $53.8 million. The Company accounted for the amendment as extinguishment of debt. H.I.G. Surgery Centers, LLC, an affiliate of the Company, purchased the Subordinated Notes from an independent third party. At September 30, 2015 and December 31, 2014, the debt is payable to H.I.G. Surgery Centers, LLC. and mature on August 4, 2017. Effective January 1, 2014, the Subordinated Notes bear interest of 17.00% per annum.
Notes Payable and Secured Loans
Certain of the Company’s subsidiaries have outstanding bank indebtedness, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made.  The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions. At September 30, 2015, the Company was in compliance with its covenants contained in the credit agreement. The Company and its subsidiaries had notes payable to financial institutions of $36.4 million and $31.6 million as of September 30, 2015 and December 31, 2014, respectively.
Letters of Credit
As of December 31, 2014, the Company had two outstanding letters of credit at its optical purchasing group of $200,000 and $730,000. In May 2015, the Company increased one of these letters of credit from $200,000 to $500,000. The Company had two outstanding letters of credit issued to the landlords for two of its surgical facilities in Orlando, Florida in the amount of $100,000 and in Lubbock, Texas for $1.0 million. In addition, the Company had one outstanding letter of credit related to the Symbion, Inc. workers compensation self-insured plan for $835,000.
Capital Lease Obligations
The Company is liable to various vendors for several equipment leases classified as capital leases.  The carrying value of the leased assets was $11.3 million and $13.3 million as of September 30, 2015 and December 31, 2014, respectively.
6. Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with ASC 260, Earnings Per Share, based on the weighted-average number of shares outstanding in each period and dilutive stock options, unvested shares and warrants, to the extent such securities exist and have a dilutive effect on earnings per share. The following is a reconciliation of the numerator and denominator of basic and diluted earnings per share for the three and nine months ended September 30, 2015 and 2014 (in thousands except share and per share amounts):


21

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net loss attributable to Surgery Partners, Inc.
 
$
(3,122
)
 
$
(6,908
)
 
$
(15,310
)
 
$
(11,633
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted average shares outstanding- basic (1)
 
32,054,089

 
31,698,638

 
32,054,089

 
31,698,638

Effect of dilutive securities (2)
 

 

 

 

Weighted average shares outstanding- diluted
 
32,054,089

 
31,698,638

 
32,054,089

 
31,698,638

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
(0.10
)
 
$
(0.22
)
 
$
(0.48
)
 
$
(0.37
)
Diluted earnings per share (2)
 
$
(0.10
)
 
$
(0.22
)
 
$
(0.48
)
 
$
(0.37
)
(1) Effect of the Reorganization has been retrospectively applied to all periods presented.
(2) The impact of potentially dilutive securities for the three and nine months ended September 30, 2015 and September 30, 2014 was not considered because the effect would be anti-dilutive in each of those periods.

7. Related Party Transactions
On December 24, 2009, the Company and Bayside Capital, Inc. (or "Bayside"), an affiliate of H.I.G. Capital, LLC (or "H.I.G."), entered into a Management and Investment Advisory Services Agreement ("Management Agreement") pursuant to which the Company will receive certain management, consulting and financial advisory services. Effective November 3, 2014, the Management Agreement was amended pursuant to the Symbion acquisition and the management fee was increased to $3.0 million annually. Fees related to the Management Agreement for the nine months ended September 30, 2015 and September 30, 2014 are recognized as general and administrative expense in the accompanying condensed consolidated statements of operations. Bayside was paid a transaction fee pursuant to the Management Agreement of $5.4 million as a result of the IPO and the Management Agreement was terminated upon the completion of the IPO.
8. Commitments and Contingencies
Lease and Debt Guarantees of Non-Consolidated Facilities
As of September 30, 2015 and December 31, 2014, the Company had guaranteed approximately $196,000 and $539,000, respectively, of operating lease payments for certain non-consolidated surgical facilities that were acquired in connection with the Symbion transaction. These operating leases typically have ten-year terms, with optional renewal periods.
Professional, General and Workers' Compensation Liability Risks
The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. To cover these claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. Workers' compensation insurance is on an occurrence basis. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that would have a material adverse effect on the Company's business, financial condition or results of operations.


22

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

Laws and Regulations
Laws and regulations governing the Company's business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how the Company's surgical facilities conduct their operations, from licensing requirements to how and whether the Company's facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians. It is the Company's current practice and future intent to cooperate fully with such inquiries. The Company is not aware of any such inquiry that would have a material adverse effect on the Company's business, results of operations or financial condition.
Acquired Facilities
The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.
The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other healthcare providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.
Potential Physician Investor Liability
A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.
Contingent Consideration
Pursuant to a purchase agreement dated December 24, 2009 (“the Purchase Agreement”), the Company acquired controlling interests in thirty-six business entities in various Florida locations which operate freestanding ASCs and provided anesthesia and pain management services (“the 2009 Acquisition”). Non-controlling interests in the ASCs were owned by certain physicians that remained partners/members in the ASCs and other operating entities.
The Purchase Agreement provided for maximum potential contingent consideration of up to $10.0 million based on operating results subsequent to the acquisition for the period from January 1, 2010 to December 31, 2010. Pursuant to the Purchase Agreement, the contingent consideration is payable as principal under a Subordinated Promissory Note, the form of which was delivered concurrent with the Purchase Agreement. The balance is still outstanding due to ongoing litigation as a result of the civil claim discussed in detail below. The Subordinated Promissory Note bears interest at 8% and during the nine months ended September 30, 2015 and 2014, the Company recorded approximately $781,000 and $723,000, respectively, of interest expense related to the note. As discussed below, the Company has made indemnification claims against the Seller exceeding the amount of the contingent consideration liability. The Company has a contractual right of offset against the contingent consideration. The fair value of the contingent consideration liability, including accrued interest, as of September 30, 2015 and December 31, 2014 was $13.8 million and $13.0 million, respectively.
In conjunction with the 2009 Acquisition, an escrow account in the amount of $2.9 million was created to cover any contingencies. With the formation of this escrow account, the Company was indemnified against certain indemnification obligations. In 2010, $589,000 was paid to the Company in settlement of the acquisition price adjustment noted above. In December 2010, the Company filed an indemnification claim against the Seller alleging breaches of and inaccuracies in representations and warranties included in the Purchase Agreement. Pursuant to the Purchase Agreement, the escrow agent has not paid the remaining escrow funds due to the unresolved claim associated with this acquisition.
Pursuant to the terms of the Purchase Agreement, in December 2010, the Company filed a claim for indemnification from the Seller for reimbursement of amounts to be repaid to payors for overpayment amounts received by the Seller prior to the date of acquisition, including


23

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

other losses sustained, and submitted a withdrawal notice to the escrow agent in the amount of approximately $4.4 million. The indemnification claim asserts, among other allegations, that certain operating entities acquired from the Seller improperly recorded payments received from certain payors as income and that one acquired entity used improper billing, coding and collection practices for dates of service prior to acquisition date. The Seller submitted an objection to this claim and filed a civil claim requesting the court to dismiss the Company’s claim and release funds out of escrow.
The Company has included in the accompanying condensed consolidated balance sheets a net indemnification receivable due from Seller of $1.1 million as of September 30, 2015 and December 31, 2014 pursuant to the terms of the Purchase Agreement. The amount due to the payors of approximately $1.8 million is included in accrued expenses in the accompanying condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014.
Subsequent to the acquisition date, the Company determined the acquired accounts receivable were not properly recorded at the net realizable value of the asset. The Company determined the fair value assigned in the initial acquisition accounting resulted in accounts receivable being recorded at an amount which was approximately $14.0 million in excess of the fair value. On June 10, 2013, the court issued a judgment in favor of the Company regarding its indemnification claim and its claim regarding the overstatement of accounts receivable. Specifically, the court ruled that the Company is entitled to recover approximately $454,000 for the indemnification claims which represents the amount of the original claim less the application of deductibles. The court also ruled that the Company is entitled to receive approximately $10.8 million for the overstated net accounts receivable. The Purchase Agreement provides for any award of damages to the Company to be offset first by the money in the escrow account and then by an offset to the contingent consideration. Therefore, the court ordered that the funds in the escrow account be paid to the Company and the balance of approximately $8.3 million be offset against the $10.0 million contingent consideration. To date, no final judgment has been made regarding the award of attorneys’ fees and interest.
Following the judgment noted above, an appeal was filed by the Seller and the outcome of the appeal is still pending. The funds from the escrow account have not been released to the Company and the Company has retained the contingent consideration liability on its condensed consolidated balance sheets at September 30, 2015 and December 31, 2014.
9. Segment Reporting
A public company is required to report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or "CODM," in deciding how to allocate resources and in assessing performance.
The Company operates in three major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities, the operation of optical services and the operation of ancillary services, which includes physician practices, a diagnostic laboratory and a specialty pharmacy.
During the three months ended June 30, 2015, the Company made changes to its internal reports issued to and reviewed by the CODM.
The primary effect of these changes was to remove the allocation of general and administrative expense and assets to the reportable operating segments. The Company has revised the segment disclosures below to present corporate overhead and corporate assets as a reconciling item back to the reported condensed consolidated financial information.

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


Three Months Ended September 30,

Nine Months Ended September 30,


2015

2014

2015

2014
Net Revenues:








Surgical facility services

$
219,631


$
59,245


$
643,900


$
173,730

Ancillary services

16,347


13,512


41,557


39,051

Optical services

3,621


3,546


11,112


10,817

        Total

$
239,599


$
76,303


$
696,569


$
223,598



24

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)



Three Months Ended September 30,

Nine Months Ended September 30,


2015

2014

2015

2014
Segment Operating Income:








Surgical facility services

$
54,223


$
21,509


$
160,795


$
61,647

Ancillary services

4,115


4,937


11,730


14,487

Optical services

525


525


1,900


1,726

        Total

$
58,863


$
26,971


$
174,425


$
77,860










General and administrative

$
(12,179
)

$
(7,000
)

$
(37,424
)

$
(20,859
)
(Loss) gain on disposal or impairment of long-lived assets, net

(1,161
)

8


1,522


(110
)
Loss on debt extinguishment







(1,975
)
Merger transaction and integration costs

(1,249
)

(325
)

(14,897
)

(442
)
Operating income

$
44,274


$
19,654


$
123,626


$
54,474

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Supplemental Information:
 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
 
    Surgical facility services
 
$
6,714

 
$
1,705

 
$
20,620

 
$
5,158

    Ancillary services
 
550

 
458

 
1,219

 
1,352

    Optical services
 
404

 
409

 
1,219

 
1,226

           Total
 
$
7,668

 
$
2,572

 
$
23,058

 
$
7,736

 
 
 
 
 
 
 
 
 
General and administrative
 
$
943

 
$
262

 
$
2,480

 
$
821

Total depreciation and amortization
 
$
8,611

 
$
2,834

 
$
25,538

 
$
8,557

 
 
September 30, 2015
 
December 31, 2014
Assets:
 
 
 
 
Surgical facility services
 
$
1,656,762

 
$
1,638,874

Ancillary services
 
104,072

 
70,370

Optical services
 
26,561

 
25,876

           Total
 
1,787,395

 
1,735,120

 
 
 
 
 
General and administrative
 
$
104,127

 
$
123,674

Total assets
 
$
1,891,522

 
$
1,858,794



25

SURGERY PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2015
(Unaudited)

 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Supplemental Information:
 
 
 
 
Cash purchases of property and equipment, net:
 
 
 
 
    Surgical facility services
 
$
13,300

 
$
1,391

    Ancillary services
 
561

 
765

    Optical services
 
89

 
315

           Total
 
$
13,950

 
$
2,471

 
 
 
 
 
General and administrative
 
$
4,165

 
$
966

Total cash purchases of property and equipment, net
 
$
18,115

 
$
3,437

10. Subsequent Events
Initial Public Offering and Use of Proceeds
On October 1, 2015, the Company completed its IPO of 14,285,000 shares of common stock at an offering price of $19.00 per share. On October 6, 2015, the Company received net proceeds from the sale of common stock in this offering of $255.8 million, after deducting underwriting discounts and other fees of $15.6 million. These net proceeds were used to repay a portion of the borrowings outstanding under the 2014 Second Lien and to pay fees associated with this offering.
In connection with the completion of the IPO, the Company paid a transaction fee to Bayside of $5.4 million and terminated the Management Agreement.
On October 6, 2015, the Company prepaid $243.5 million in principal, net of $8.3 million of discounts and issuance costs, and $65,000 of accrued interest on the 2014 Second Lien. Further, the Company incurred a prepayment penalty of 3% of the aggregate principal amount or $7.3 million.
On a quarterly basis, the Company assesses the likelihood of realization of its deferred tax assets considering all available evidence, both positive and negative. In conjunction with the IPO, the repayment of debt and associated reduction in interest expense anticipated to occur in the quarter ending December 31, 2015 and the continued integration of Symbion into its operations, its analysis upon completion of the fourth quarter of fiscal 2015 may indicate an increased likelihood that deferred tax assets will be realized. If there is a change to the assessment of the amount of deferred income tax assets that is realizable, the valuation allowance will be adjusted and recorded as a component of income tax expense.
Other Activity
On October 7, 2015, the Company entered into an amendment to the 2014 First Lien to increase certain lenders’ commitments under the 2014 Revolving Loan from $80.0 million to an aggregate of $150.0 million.



26

SURGERY PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)
SEPTEMBER 30, 2015



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report and included in the final prospectus we filed with the Securities and Exchange Commission on October 2, 2015 in connection with our IPO. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those estimated or projected in any of these forward-looking statements. Unless otherwise indicated or the context otherwise requires, references herein to the “Company”, “Surgery Partners”, “we”, “us” and “our” refer to, (i) Surgery Center Holdings, LLC and its consolidated subsidiaries, including Surgery Center Holdings, Inc., immediately prior to the Reorganization and (ii) Surgery Partners, Inc. and its consolidated subsidiaries, including Surgery Center Holdings, LLC and Surgery Center Holdings, Inc., immediately following the Reorganization. Unless the context implies otherwise, the term “affiliates” means direct and indirect subsidiaries of Surgery Center Holdings, LLC and Surgery Partners, Inc., as applicable, and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of Surgery Partners, and the term “employees” refers to employees of affiliates of Surgery Partners.
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements, which are based on our current expectations, estimates and assumptions about future events. All statements other than statements of current or historical fact contained in this report, including statements regarding our future financial position, business strategy, budgets, effective tax rate, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” and similar expressions are generally intended to identify forward-looking statements. These statements involve risks, uncertainties and other factors that may cause actual results to differ from the expectations expressed in the statements. Many of these factors are beyond our ability to control or predict.  These factors include, without limitation: (i) reductions in payments from government healthcare programs and managed care organizations; (ii) inability to contract with private third-party payors; (iii) failure to fully integrate the operations of Surgery Partners and legacy Symbion; (iv) changes in our payor mix or surgical case mix; (v) failure to maintain relationships with our physicians; (vi) payor controls designed to reduce the number of surgical procedures; (vii) inability to integrate operations of acquired surgical facilities, attract new physician partners, or acquire additional surgical facilities; (viii) shortages or quality control issues with surgery-related products, equipment and medical supplies; (ix) competition for physicians, nurses, strategic relationships, acquisitions and managed care contracts; (x) inability to enforce non-compete restrictions against our physicians; (xi) material liabilities incurred as a result of acquiring surgical facilities; (xii) litigation or medical malpractice claims; (xiii) changes in the regulatory, economic and other conditions of the states where our surgical facilities are located; (xiv) substantial payments we expect to be required to make under the tax receivable agreement; and (xv) other risks and uncertainties described in this report and set forth under the heading “Risk Factors” in the Company’s final prospectus filed with the Securities and Exchange Commission on October 2, 2015 in connection with our IPO.
In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report.
These forward-looking statements speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Executive Overview
As of November 13, 2015, we owned and operated a national network of surgical facilities and physician practices in 28 states. Our surgical facilities, which include ASCs and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, otolaryngology ("ENT"), gastroenterology ("GI"), general surgery, ophthalmology, orthopedics, cardiology and pain management. Some of our surgical hospitals also provide acute care services, such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care. We also provide our suite of ancillary services, comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services, optical services and specialty pharmacy services. As a result, we believe we are well positioned to benefit from rising consumerism and payors’ and patients’ focus on the delivery of high quality care and superior clinical outcomes in the lowest cost and care setting.
As of November 13, 2015, we owned or operated, primarily in partnership with physicians, a portfolio of 99 surgical facilities comprised of 94 ASCs, of which six are managed only, and five surgical hospitals across 28 states. As of November 13, 2015, we owned a majority interest in 71 of the surgical facilities and consolidated 88 of these facilities for financial reporting purposes. In addition to surgical facilities, we owned or operated a network of 43 physician practices as of November 13, 2015. For the nine months ended September 30, 2015, approximately 286,961 surgical procedures were performed in our surgical facilities, generating approximately $643.9 million in revenue, as compared to the year ended December 31, 2014, during which approximately 200,000 surgical procedures were performed in our surgical facilities, generating approximately $339.3 million in revenue.
We continue to focus on improving our same-facility performance, selectively acquiring established facilities and developing new facilities. During the three months ended September 30, 2015, through our recruiting efforts and capital-efficient acquisitions, we


27

SURGERY PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)
SEPTEMBER 30, 2015


completed nine in-market physician practice transactions including two denovo, or newly developed, practices through an aggregate investment of $26.7 million. These transactions added a total of 12 physicians to our physician network.
In addition, during the three months ended September 30, 2015, we acquired a controlling interest in one anesthesia practice in an existing market for a purchase price of $600,000, along with incremental ownership in two of our consolidated surgical facilities and in an existing anesthesia practice for an aggregate purchase price of $7.7 million.
During the nine months ended September 30, 2015, we completed eleven in-market physician practice transactions through an aggregate investment of $30.4 million adding a total of 16 physicians added to our physician network.
In addition, during the nine months ended September 30, 2015, we acquired a controlling interest in one surgical facility located in a new market and one surgical facility and two anesthesia practices in existing markets for an aggregate purchase price of $20.2 million. Additionally, we acquired incremental ownership in two of our consolidated surgical facilities and in an existing anesthesia practice for an aggregate purchase price of $7.7 million.
On November 3, 2014, we completed the acquisition of Symbion ("the Merger"), which added 55 surgical facilities, including 49 ASCs and 6 surgical hospitals, to our network of existing facilities. We acquired Symbion for a purchase price of $792.0 million pursuant to the terms of an Agreement and Plan of Merger dated as of June 13, 2014. The Symbion acquisition was financed through the issuance of approximately $1.4 billion under our Term Loans and Revolving Facility. We believe that over the next two to three years we are positioned to achieve significant cost and revenue synergies in connection with this acquisition. Incremental synergies are expected to include cost savings from reductions in corporate overhead, supply chain rationalization, enhanced physician engagement, improved payor contracting, and revenue synergies associated with rolling out our suite of ancillary services throughout our portfolio.
On October 1, 2015, we completed our IPO issuing 14,285,000 shares of common stock to the public at an offering price of $19.00 per share. On October 6, 2015, we received net proceeds from the sale of common stock in this offering of $255.8 million, after deducting underwriting discounts and other fees of $15.6 million. These net proceeds were used to repay a portion of the borrowings outstanding under the 2014 Second Lien and to pay fees associated with this offering.
Revenues
Our revenues consist of patient service revenues and other service revenues. Patient service revenues consist of revenue from our surgical facility services and ancillary services segments. Specifically, patient service revenues include fees for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes, as well as for patient visits to our physician practices, anesthesia services, pharmacy services and diagnostic screens ordered by our physicians. Other service revenues consist of product sales from our optical laboratories, as well as the discounts and handling charges billed to the members of our optical products purchasing organization. Other service revenues also include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method, management of surgical facilities and physician practices in which we do not own an interest and management services we provide to physician practices for which we are not required to provide capital or additional assets.
The following table summarizes our revenues by service type as a percentage of total revenues for the periods indicated:


28

SURGERY PARTNERS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)
SEPTEMBER 30, 2015


<
 
 
Three Months Ended September 30,
 
 
2015
 
2014
Patient service revenues:
 
 
 
 
   Surgical facilities revenues
 
91.2
%
 
77.7
%
   Ancillary services revenues
 
6.8
%
 
17.7
%
 
 
98.0
%
 
95.4
%
Other service revenues:
 
 
 
 
   Optical services revenues
 
1.5
%
 
4.6
%
   Other
 
0.5
%
 
%
 
 
2.0
%
 
4.6
%
Total revenues
 
100.0
%
 
100.0
%
 
 
 
 
 
 
 
Nine Months Ended September 30,