Fair Disclosure Wire
OPERATOR: Thank you for standing by, welcome to the Symbion Inc.
second-quarter 2005 conference call. During the presentations all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded Thursday, July 28, 2005. I would now like to turn the conference over to Mr. Richard Francis, Chief Executive Officer of Symbion Inc.
RICHARD FRANCIS, CEO, SYMBION, INC.: Welcome to today's conference call to discuss Symbion's second-quarter 2005 results. Thank all of you for your participation today whether by telephone or webcast.
With me today is Ken Mitchell CFO, and Cliff Adlerz our President and COO. Now I would like for Ken to read the disclaimer about forward-looking statements.
KEN MITCHELL, CFO, SYMBION, INC.: I would like to remind everyone that certain statements made on this conference call may be forward-looking statements within the meaning of section 21 E. of the securities act of 1933 and section 27 A. of the Securities Exchange Act of 1934. These forward-looking statements generally may be identified by use of words such as expect, believe, anticipate, intend, will, should and plan. We caution that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of risk and other factors. Information about certain of these factors can be found in our earnings release and in our recent filings with the SEC.
Also on this conference call we may discuss certain non GAAP financial measures such as EBITDA and EBITDA less minority interests, in talking about Symbion's performance during the second quarter and six months ended June 30, 2005. You can find a reconciliation of those measures to the most directly comparable GAAP financial measures on the Company's website Symbion.com.
Now we will turn the call back over to Richard.
RICHARD FRANCIS: This is the Company's sixth quarter as a public company and we are extremely pleased with our results. Net revenue for the quarter ended June 30, 2005 increased 23%, 64.7 million compared to 52.7 million for the same quarter 2004. This increase was driven by same-store growth of 6% of net revenue over same quarter last year resulting in a 7% increase in cases. Now being driven by a 7% increase in cases and a decline of 1% in revenue per case. This 1% decline in revenue per case was a result of a planned out-of-network to in network payor contracted strategy in two centers and a specialty mix change in two centers all contributing positively to our margins in same-store growth for the second quarter.
EBITDA less minority interest increased 28% to 11.9 million for the second quarter 2005 as compared with 9.3 million for the same quarter in 2004. Net income for the second quarter of 2005 increased 36% to 4.9 million or $0.22 per diluted share compared with 3.6 million or $0.17 per diluted share in the second quarter 2004. Moving on to six months ending June 30, 2005 revenues increased 21% to 126.8 million compared to 104.7 million for the first half of 2004. EBITDA less minority interest increased 23% to 23.2 million for the first half of 2005 compared to 18.8 million for the same period in 2004. Net income for the first half of 2005 increased 50% to 9.3 million compared with 6.2 million for the first half of 2004.
Earnings per diluted share for the six months ended June 30, 2005 increased 31% to $0.42 compared to $0.32 for the same period last year. Cash flow from operations was 8.9 million for the second quarter of 2005 as compared to 9.1 million for the same period in 2004. The second quarter 2005 cash flow from operations numbers include federal tax deposits of $4.5 million. CapEx for the second quarter 2005 was 2.5 million and as year-to-date 4.2 million.
Cash flow from operations for the year ending December 31, 2005 is projected to be 35 to 40 million and CapEx for the year is projected to be approximately 15 million. The Company continues to maintain a very strong balance sheet with indebtedness of approximately 67.7 million with a ratio of debt to total capital of 21%. In March 2005 the Company completed an amended credit facility raising its borrowing commitment from 110 million to 150 million providing for approximately 90 million of debt capacity at this time.
From a margin perspective for the second quarter and for the first six months of 2005 the Company experienced an operating income margin of 22.7% compared to 19.2 for the quarter ending June 30, 2004. And 19.4% for the six months ended June 30, 2004. Minority interest is 5.9 million for the second quarter 2005 as compared to 3.5 million for the same period last year. This increase was driven primarily by two components, increased profitability out of our existing centers and recent acquisitions.
Moving onto development we are very pleased to announce the signing of a definitive agreement to acquire an interest in specialty surgery centers, five surgery centers in Southern California. We expect this transaction to close during the next 30 days. The Company will acquire a majority interest in three surgery centers. They are Specialty Surgical Center of Beverly Hills/Brighton Way, 3 OR, 1 minor procedure multi-specialty center located in Beverly Hills.
Number two, Specialty Surgery Center of Beverly Hills/Wilshire Boulevard, a 4 OR, 2 minor procedure room, multi-specialty center located in Beverly Hills also. And the last one would be Specialty Surgery Center in Encino, a 4 operating room, 2 minor procedure room multi-specialty center located in Encino. We will also acquire minority interest in two recently opened de novo centers, Specialty Surgical Center of Irvine, a 5 operating room, 1 minor procedure room multi-specialty center located in Irvine which opened in July 2004.
And a Specialty Center of Arcadia, a 3 operating room, 1 minor procedure room multi-specialty center located in Arcadia which opened in October 2004.
Lastly as part of this transaction, we would also acquire a minority interest in Specialty Surgical Center of Thousand Oaks which is expected to be a 4 operating room, 2 minor procedure room multi-specialty center located in Thousand Oaks which is scheduled to open in mid 2006. The Company will have the right to acquire a majority interest in each center at the end of two years of operation. We are extremely excited about this transaction and that the scope enables the Company to establish a meaningful position in the California market which positions us well for future growth.
In addition, we are pleased to partner with such outstanding physicians, clinical associates and management professionals, all of which we look forward to working to ensure a smooth integration of facilities over the next few months. We also completed the sale during the quarter of our ownership in our area (ph) Pennsylvania imaging center to Touchtone Medical Imaging, a 49% minority partner and manager of the facility. The Company recorded a onetime charge on the sale of $725,000. In addition the Company recorded a gain of approximately $782,000 related to individual facility syndication activities.
Given the transaction in California the Company now has acquired 6 centers year-to-date exceeding our guidance of 3 to 4 centers for the year. Also with the inclusion of the de novo project in Thousand Oaks we have now announced 3 de novo projects for this year, in line with our 2005 guidance of 3 to 4. Overall our current development pipeline remains quite strong providing the Company with high confidence for continued successful development activity for the remainder of the year.
In summary we are very pleased with the Company's performance both second quarter and the first half of this year. We ended the last half with much momentum supported by a very favorable balance sheet and highly confident regarding our results for 2005. With is in mind we are raising our previous 2005 guidance of 245 to 249 million in revenue and $0.78 to $0.80 included earnings per share to a range of 260 to 266 million in revenues and $0.84 to $0.86 in diluted earnings per share. This guidance assumes the completion of the California transaction and does not include any impact from additional future acquisitions.
With that, operator, we will be happy to entertain caller questions.
in OPERATOR: (OPERATOR INSTRUCTIONS) Justin Lake, UBS.
JUSTIN LAKE, ANALYST, UBS: Just a few questions here. First, looking at the same-store revenue growth of 5.8% you talked a little bit about the pricing, the negative pricing in the quarter or the negative revenue per procedure being down about 1% because of the mix shift and then some in network or out of network to in network strategy to the three centers. Can you give us a little more color on what those out of network strategies entailed as far as -- what was the change in pricing when you went out of network to in network?
KEN MITCHELL: As we had planned for this year and budgeted there were a couple of centers and we talked before about our strategy of trying to go in network as much as possible in our centers. So we had a strategy of moving a couple of contracts out of network to in network to two of our centers and the strategy there is to build additional volume but it is going to be at a lower revenue per case. So in the two centers that we moved the business we did reduce our revenue per case for those payors but we also built revenue in volume in those centers. We had a successful conversion from out of network to in network and that premium, depending on the contract can be anywhere from 20% to 50% premium over the in network pricing. That really varies by contract and by market, but in general we feel like where possible we want to be in network in these two centers we had planned to move those in network as part of modeling our guidance.
JUSTIN LAKE: As far as your existing group of centers can you give us an idea of how many others you have that might need to go and your looking to transition from out of network to in network?
UNIDENTIFIED COMPANY REPRESENTATIVE: We didn't have any others with a set strategy to do that. We are generally in network in our markets.
There is always going to be selective markets where you do have some out of network business as all of the companies do. And you don't necessarily in a market always need to convert that, but we felt in these markets that we needed to and that is why we said that these were planned.
JUSTIN LAKE: Two quick follow-ups on this. One, when you made the decision that you needed to go out of network to in network was that because of pressure by the payors? We hear a lot on managed care calls from managed care companies that they are looking to move their outpatient from percentage of charges to fee schedules that is a really big focus. Can you give us an idea of -- was that something where the managed care payors were initiating that and putting pressure on you or putting pressure on the doctors?
UNIDENTIFIED COMPANY REPRESENTATIVE: (indiscernible) it was primarily a market assessment that we felt we could build volume and attract more physicians if we had a couple of payor contracts in in markets.
So we made just an assessment of the markets to make that move. In this case, no, it was not due to that.
JUSTIN LAKE: And you are not seeing any of that out there right now?
UNIDENTIFIED COMPANY REPRESENTATIVE: There are general trends yes, of payers evaluating that and again, that is why we talked about that in the past that we want to generally try to be in network, so that trend is there. In these two cases that was not why we went in network. We were trying to build more business in centers now and in the future. But yes, there is a definite trend of payors looking at out of network business. They are not enamored with it in every market and, again it is market by market and area of the country by area of the country depending on which payors you're working with.
But I think the payors are aware of it. In certain markets where there is a lot of competition not happy with it, and there are some strategies there. So we are very aware of that and that is why in general we are trying to move things in network. But in these two cases that was not part of that trend.
JUSTIN LAKE: Last on that question, can you give us an idea what your percentage of your case mix is out of network?
UNIDENTIFIED COMPANY REPRESENTATIVE: About 15%.
JUSTIN LAKE: How is that trended?
UNIDENTIFIED COMPANY REPRESENTATIVE: That is trending down a couple of points.
JUSTIN LAKE: Great, I will jump back in the queue.
OPERATOR: David Supros (ph), Merrill Lynch.
DAVID SUPROS, ANALYST, MERRILL LYNCH: I would just guess from the additives of the centers that you intend to acquire that you may realize higher revenue per case than your corporate average, so I want to find out about the case mix in these facilities.
RICHARD FRANCIS: You mean case mix?
DAVID SUPROS: The types of procedures in these facilities being done right now.
RICHARD FRANCIS: It is a pretty standard mix, similar to what we have seen in our other facilities, a little less orthopedics and a little more specialized ENT, other surgeries. But in general it is going to be a pretty standard case mix multispecialty center. So I would think it is going to mirror our overall Company case mix.
DAVID SUPROS: Then related to that, is the payor mix pretty standard too or is there more private pay versus Medicare or?
RICHARD FRANCIS: Pretty standard payor mix; Blue Cross is a big payor, and it is really pretty standard payor mix.
DAVID SUPROS: Finally, before your acquisition were these facilities 100% owned by the physicians or was there another corporate entity that you're acquiring them from?
UNIDENTIFIED COMPANY REPRESENTATIVE: We are acquiring them from specialty service centers company based in Los Angeles.
DAVID SUPROS: Okay. That is it. Thanks.
OPERATOR: Art Henderson, Jefferies & Co.
ART HENDERSON, ANALYST, JEFFERIES & CO: Just looking at how you have raised your guidance; it looks like about 15 million of incremental revenue that kicked in. Is that pretty much those acquisitions that you have done, those three majority-owned pieces, is that what bridges that gap there?
RICHARD FRANCIS: We haven't broken those down for TheStreet and we have wrapped up everything in that. But (indiscernible) a significant portion of it would be.
ART HENDERSON: Looking forward at your pipeline you have mentioned that it kind of looks healthy, are there certain areas that you are looking at geographically that you think you might be able to do more this year? Obviously we're midway through the year, you have already met your guidance. Can you give us some parameters around kind of what you think you might end up doing by the end of the year?
RICHARD FRANCIS: We are optimistic that we will continue to be successful in our development work here and we have a track record of doing that and we are optimistic about the rest of the year and we will have to see where it ends up.
ART HENDERSON: Sounds good. Thank you.
OPERATOR: Jeffrey (inaudible) Bank of America Securities.
UNIDENTIFIED SPEAKER: A couple questions related to the acquisitions.
There has been talk recently about increased competition for some of these acquisitions. I know you guys didn't disclose numbers but were the multiples a little bit higher than average or are you seeing roughly the same multiples?
RICHARD FRANCIS: Our average multiple post California has not changed.
UNIDENTIFIED SPEAKER: So roughly the same. Next, on the majority interest are these generally 51% or did you take any higher stakes on any of them?
RICHARD FRANCIS: That will all come out in the disclosure but the majorities are majorities.
UNIDENTIFIED SPEAKER: I know there was some concern the last quarter, there was one minority stake you guys took was about 10%. Are these minority stakes that low?
RICHARD FRANCIS: No, no. The one you're referring to last quarter was in Fort Myers where we already had a center there and the synergies and the management contracts for both those centers was a unique situation there. But these minority physicians are roughly 18% on the operating centers, and we have the ability to buy majority position in two years from the close of the transaction.
UNIDENTIFIED SPEAKER: You would take that to that 51 or?
RICHARD FRANCIS: A minimum of that number, yes.
OPERATOR: Eric Percher, Thomas Weisel Partners.
ERIC PERCHER, ANALYST, THOMAS WEISEL PARTNERS: One question left on the out of network, or in network, have you done out of network by intention at all on any payor relationships over the last year?
RICHARD FRANCIS: These two transactions we're talking about are basically de novos, that were opened in the last three to five years; in fact two to four years. Natural evolution is a growth of that. Our strategy is definitely to go in network when we can, but if we are in a situation whereby we deem because of belligerence or whatever you want to call it with a payor then we might elect to have a strategy in an isolated location to go out of network. But that is not our plan, nor our desire.
ERIC PERCHER: You might elect to do but is that a no comment on whether you have done it in the past year?
UNIDENTIFIED COMPANY REPRESENTATIVE: We have not intentionally gone out of network.
ERIC PERCHER: Thanks for that. And then quickly on the centers where you're taking a minority interest it seems like that may open up some new opportunities for you if you are willing to do that in multiple, for other transactions. What does that do to the economics of the deal from the physician side when they sign on for that?
RICHARD FRANCIS: They will own more at the outset than owning a minority position obviously from the outset, so therefore they participate greater in the initial value creation which is what is driving this notion. We are entertaining more of those and may very well continue to do those where we have an option to acquire a majority position down the road.
ERIC PERCHER: When that is finally paid out it ends up looking like the average multiple amount?
RICHARD FRANCIS: That is generally negotiated up front on that option. And most of the time it is within the ballpark of the original multiple you paid, sometimes it might be tagged to a market value at that point in time.
ERIC PERCHER: Thank you very much.
OPERATOR: Pito Chickering Deutsche Bank.
PITO CHICKERING, ANALYST, DEUTSCHE BANK SECURITIES: What does it take on the Medicare payment refunded (ph) for surgery centers? What do you think is the going rate (indiscernible) timetables?
RICHARD FRANCIS: That is a good question. We are optimistic that there will be some legislation put on the table within the next sixty days. That will be widely supported by the ASC industry which is a first for our industry. We have had I think a lot of dialogue among ourselves and I think that the legislation that will be put on the table will be one that will be fair for the industry and we are trying to create a situation that would be fair for the payor, CMS at this point in time going forward. We do not expect from our efforts to see anything happen within the next year to 18 months at all. And so we think what we gather and what our intelligence is that as far as the Medicare reimbursement it is going to be stable for at least that period of time. As you well know we are frozen through 2009 as it is. Any legislation we're trying to move would be to try to open that up a little bit sooner. We also are encouraged by the Medicare procedure list that it is going to be loosened up to allow us to do more procedures going forward. From a Medicare perspective we think we have got more positive winds behind us than we have had in quite a while.
PITO CHICKERING: Can you discuss in a little more detail what your new credit facility looks like? Specifically what is the pricing on it, and are there any new covenants that we should be aware of?
UNIDENTIFIED COMPANY REPRESENTATIVE: We filed that document; it is a public document so you can see some of the covenants from the different debt covenants we have got on that. We increased our facility from 110 million to 150 million. We improved our pricing, it is a matrix, a performance pricing matrix that currently our spread over LIBOR is about 150 basis points and that changes and increases as our leverage ratio goes up.
PITO CHICKERING: The last one is two housekeeping questions on the P&L, there is a slight downward trend in the supply cost relative to revenue in the past two quarters, is this level maintainable or do you think you'll bump up to historical levels?
KEN MITCHELL: I think to some degree it is a little bit to do with our mix there has something to do with that. But we have had a very favorable operating results there and our expense management there in that area has been very favorable. We think that can continue.
PITO CHICKERING: Do you have any guidance on where the salaries and benefits will go for the remainder of the year?
RICHARD FRANCIS: We don't anticipate anything materially change out of those.
OPERATOR: John Ransom, Raymond James.
JOHN RANSOM, ANALYST, RAYMOND JAMES: Your big cousin in Nashville, obviously HCA, is getting more aggressive and buying up surgery centers. I think they talked about buying 25 on the call this week.
Do you see in any markets are they trying to take a bigger role in your business to the extent of trying to muscle the managed care companies into trying to keep more of that outpatient surgery business by themselves to their kind of big marketshare profile? Are you seeing any of that in any of your markets yet?
RICHARD FRANCIS: I have not seen anything unusual in the last year.
They have continued to operate the way they have always operated, very aggressively. We have been competing with them in certain markets since we started the Company. We haven't seen anything in a material nature different as it relates to that. Any big competitor walks a fine line trying to leverage inpatient business relative to outpatient business. There are some legal issues associated with that and HCA has been very reasonable in terms of that. We don't see a whole lot there and lastly I would say, I am going to take issue to being related to HCA, I am not a cousin. Used to work there but not related to them.
JOHN RANSOM: I thought we were all related somehow in the South. The other question I had was obviously the technology has allowed orthopedic is probably the best example of the type of procedure category that has been moving out of the hospital, and you guys have obviously done a good job taking advantage of that. As you look over the horizon over the next two or three years is there another big procedure class that you see might be right for the picking? Because as we look at it I would say optomology and G.I. are getting fairly mature, orthopedic obviously has a nice growth profile. Is there anything else out there that we're not thinking about as a category where the technology can continue to move it along? Thanks.
UNIDENTIFIED COMPANY REPRESENTATIVE: We are seeing a couple of things. The whole neuro area and doing more back work, the technology there is improving and they are starting to consider doing more laminectomies and those types of things on an outpatient basis. An area that we are starting to revisit that traditionally was outpatient, and we haven't talked a lot about but plastics and plastic surgery is an area where we think there is a lot of opportunity, a lot of plastic surgeons disfranchised from hospital ORs and that type of thing. So several in our group are starting to look at plastics again and they are doing obviously -- the area has developed. They are more and more procedures and they are doing more complex procedures and multiple procedures which requires more of an OR setting than an office setting which is where many of them have gone. We are starting to look at plastics as an area. Those are two areas that we are starting to see quite a bit of activity lately and starting to pay attention to the trends.
JOHN RANSOM: Is there any opportunity with refractive surgery and some of the new technologies in refractives such as the implantable lenses and maybe some of the things opening up for presbyopia. Is that a market that you have thought about revisiting?
UNIDENTIFIED COMPANY REPRESENTATIVE: Yes, I mean optomology just keeps finding new things and sometimes we kind of forget about that one. But obviously our centers have paid a lot of attention to it, and that business held very steady for us and as one area that is kind of declines, in optomology another area picks up in the business and general stays pretty steady as a trend. Definitely one that we continue to pay attention to as a good part of our mix, and so I would say it is a solid specialty for outpatient surgery centers.
JOHN RANSOM: But nothing new and dramatic there, just more steady?
UNIDENTIFIED COMPANY REPRESENTATIVE: I think more steady.
JOHN RANSOM: And what about ENT? ENT on paper looks like a big opportunity that the industry has not necessarily embraced to any great degree. Do you see anything there?
UNIDENTIFIED COMPANY REPRESENTATIVE: That is a good comment. All of the endoscopy procedures that are coming along for ENT and we have got several centers that are doing more ENT business right now, so I think that is a good comment. They are getting more and more used to the endoscopy's scopes and those type of things now. As that develops, I think it is going to be a good area.
JOHN RANSOM: Thank you very much.
OPERATOR: William Bonello, Wachovia securities.
WILLIAM BONELLO, ANALYST, WACHOVIA SECURITIES: I apologize if you discussed this already, I don't think you did. Operating cash flow was down just a little bit year-over-year, is that timing of cash flows or --?
KEN MITCHELL: Yes, in the second quarter of this year in '05 second quarter, we had about $4.5 million of federal tax deposits that we made. As you remember we were using our net operating loss carryforwards from prior, in 2004, so we were not making a federal tax deposit. That is the main difference. Without that on a comparable basis we would have had an increase in cash flow.
WILLIAM BONELLO: Can you explain when we talked about acquiring interest in a de novo center does that imply that the physicians or the company was already building that center, construction was already underway and that is what you mean by acquiring a de novo?
RICHARD FRANCIS: The de novo (technical difficulty) is being developed as we speak. Syndications, land, construction so on and so forth on the very early stages. We bought into that legal entity that is creating that in Thousand Oaks.
WILLIAM BONELLO: Is that kind of unique just because you are dealing with a company that already operates multiple centers?
RICHARD FRANCIS: It might be from that perspective, but a lot of times de novos is just one off de novos, the physicians are already -- have already started the concept themselves and they bring companies in in the early stages. The notion of a company coming in from a de novo that is already germinated is nothing unusual. In fact the matter is it is quite common. From this standpoint we had a company developing with a group of doctors, and then we bought interest within the company and so we stepped in the shoes on that too.
WILLIAM BONELLO: Would the economics on that kind of de novo be similar to the economics on the de novo if you were involved from day one?
RICHARD FRANCIS: On this one in particular yes, because it is such an early stage.
WILLIAM BONELLO: Okay, great. The last question was just on management fees, are those still on the acquired centers are those still consistent with what they --?
RICHARD FRANCIS: Yes.
WILLIAM BONELLO: Okay, great. Thank you.
OPERATOR: (OPERATOR INSTRUCTIONS) Nancy Weaver, Stephens.
NANCY WEAVER, ANALYST, STEPHENS, INC.: Give me the update on workers comp in California; I know we had cuts last year assuming that probably these centers -- I don't know how much of their business is workers comp -- can you just give me how the outlook looks like the next couple years, I assume all the bad new is behind us (multiple speakers).
RICHARD FRANCIS: All the bad news is behind. In fact the matter is they swallowed that pill about a little over a year ago. The overall workers compensation in these acquisitions are less than 5%, somewhere in that neighborhood. Second of all workers comp in California is based off a percent of HOPD Medicare rates, not ASC Medicare rates. The percentage I believe was 120% of Medicare but that is Medicare, HOPD, Nancy, not Medicare ASC rates.
NANCY WEAVER: Cliff, are they doing a lot of plastics in that Beverly Hills Center?
CLIFF ADLERZ, COO, SYMBION, INC.: No, not a lot. They are down the street though.
NANCY WEAVER: There seems to be a couple other packages out there right now in terms of again some kind of three and four sets of centers; I assume your continuing to look at all those?
RICHARD FRANCIS: They seem to cross our desk from time to time and we will take a look at them.
NANCY WEAVER: Congratulations.
OPERATOR: Justin Lake, UBS.
JUSTIN LAKE: Just kind of a follow-up to what Bill Bonello was asking regarding the de novo pipeline. Just wanted to try and get your thoughts on how you think about the economics on those de novos that you purchase, as far as obviously -- particularly the way I kind of think about it is you make mid teens returns on an acquisition but you could make 30, 40 even better returns on a pure de novo. What do you pay to get into those de novo projects? I would assume it is the multiple that is somewhere - a prospective multiple of an EBITDA run rate down the road?
UNIDENTIFIED COMPANY REPRESENTATIVE: It depends upon what time and one joint comes into a de novo. The two de novos that we acquired in Southern California were open, one open for a year and one open for 6, 8 months. Within that perspective you look at a pro forma early on and it is a negotiation at that point in time. It is not something that is -- if you have a range of what you would pay on pro forma it is generally in the lower end of the range. While we look on those at a higher rate of return, okay. We look for mid-20s on a pure acquisition return, five-year return, IRRs. On a pure de novo we start out from scratch, we look in the high 40s. These that you buy in some time in after they are begun, you are probably in the mid 30 range somewhere in that neighborhood, expectation to turns which then drives your net present values and your multiples. We are somewhere in that middle on the ones that have begun. Again, there is a different valuation for the one that has been in process for a year than the one that has been in process for six months. Now the ones that haven't even started yet, it is not all that difference in the valuation of buying on those.
JUSTIN LAKE: That is actually what I was referring to is the one that hasn't even started yet.
UNIDENTIFIED COMPANY REPRESENTATIVE: Not a lot of difference in the buying on those, fact of the matter is it is almost like you bring your money to the table just like everybody else.
JUSTIN LAKE: So you are not paying any -- you are basically paying exactly your portion of whatever the startup costs are? There is no incremental value (multiple speakers).
UNIDENTIFIED COMPANY REPRESENTATIVE: I wouldn't say exactly but it is not going to be that materially different.
JUSTIN LAKE: Okay, great. Thank you.
OPERATOR: John Ransom, Raymond James.
JOHN RANSOM: Following this acquisition this quarter, how many centers total would you have a minority stake in and how many would be consolidated into your financial sources, what would show up in just a minority interest line?
UNIDENTIFIED COMPANY REPRESENTATIVE: We currently got 6 nonconsolidated centers. And this will add another 2 nonconsolidated.
JOHN RANSOM: So 8 nonconsolidated. How many centers do you have where you own less than 50% but you do consolidate those centers?
KEN MITCHELL: We have probably about maybe 4 or 5 of those that we have less than 50% that we still consolidate.
JOHN RANSOM: What is the accounting rule on that where you can own less than a majority but you still get to consolidate?
KEN MITCHELL: It is based on controls, it is the real factor that you assess, determine if you have enough control rights to consolidate the center. You look at voting rights but you also look at day to day management controls, you are in charge of the budget. There is no review process or no approval by the other investors as far as budgeting, payor contracting, capital expenditures, debt, all those things. If we control those then we have a chance to consolidate the center.
JOHN RANSOM: Is there an ownership threshold where it gets absurd to consolidate it even if you do control those things, I mean would you think about some (indiscernible) number of ownership? I would assume you could not own 1% of a center, but control all those things and get to consolidate.
KEN MITCHELL: Under the new accounting rules you could have -- if you are a primary beneficiary of an entity you may not have any ownership. But determine that you are the primary beneficiary so you would have to consolidate it. For instance, in our New York surgery center the actual surgery center we have no ownership in but it is consolidated into our operating company which we own 56% of. There is a lot of factors yet to go through there but typically we are not going to have an ownership less than 30 to 40% and still consolidate that.
JOHN RANSOM: Thank you very much.
OPERATOR: There are no further questions at this time. I will now turn call back to you.
RICHARD FRANCIS: Thank you very much, we want to thank everyone for the time you spent on the call this morning. We are excited about the quarter and the year year-to-date. And look forward to a very successful 2005. Keep in touch and thank you very much.
OPERATOR: That does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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