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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ________to ________
 Commission file number: 000-50574
 
 Symbion, Inc.
  Delaware
    
    62-1625480(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)40 Burton Hills Boulevard, Suite 500
    
    37215Nashville, Tennessee
    
    (Zip Code)(Address Of Principal Executive Offices)
 (615) 234-5900
  Title of each class
    
    Name of exchange on which registeredCommon Stock, $0.01 par value
    
    The NASDAQ Stock Market, LLCPreferred Stock Purchase Rights
    
    The NASDAQ Stock Market, LLC
 None
  o x
  o x
 x o
 x
  o x o




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o x
   DOCUMENTS INCORPORATED BY REFERENCE
    2




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TABLE OF CONTENTS  Cautionary Note Regarding Forward-Looking StatementsPART IPART IIReport of Independent Registered Public Accounting FirmPART IIIPART IVINDEX TO CONSOLIDATED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting FirmCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSEX-10.28 SUMMARY OF DIRECTOR COMPENSATIONEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF ERNST & YOUNG LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO    Table of Contents  
 Cautionary Note Regarding Forward-Looking Statements
     
 PART I
 Item 1. Business
 Overview
   Surgical Facility Industry
  1




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
    
    Physician and Patient Preference for Surgical Facilities.Physicians often prefer to
operate in surgical facilities, as compared to acute care hospitals, because of the
efficiency and convenience that surgical facilities afford. Procedures performed at
surgical facilities are typically non-emergency, so physicians can schedule their time more
efficiently and increase the number of procedures that they can perform in a given period.
Surgical facilities also provide physicians with greater scheduling flexibility, more
consistent nurse staffing and faster turnaround time between cases, as compared to acute
care hospitals. In addition, we believe patients prefer the comfort of a less institutional
setting and the more convenient process for scheduling and registration available in
surgical facilities, as compared to acute care hospitals.
    
    Lower Cost Alternative.Based upon our managements experience in the health care
industry, we believe that surgeries performed in surgical facilities are generally less
expensive than those performed in acute care hospitals because of lower facility
development costs, the focus on non-emergency procedures and more efficient staffing and
work flow processes. We believe that cost-conscious payors are attracted to the lower costs
afforded by surgical facilities, as compared to acute care hospitals.
    
    Advanced Technology and Improved Anesthesia.Advancements in medical technology such
as lasers, arthroscopy, fiber optics and enhanced endoscopic techniques have reduced the
trauma of surgery and the amount of recovery time required by patients following a surgical
procedure. Improvements in anesthesia also have shortened the recovery time for many
patients and have reduced post-operative side effects such as pain, nausea and drowsiness.
These medical advancements have enabled more patients to undergo surgery without an
overnight stay and reduced the need for hospitalization following surgery.
  Our Strategy
  
    
    Identify, recruit and retain leading surgeons and other physicians for our surgical
facilities.We believe that establishing and maintaining strong relationships with
surgeons and other physicians is a key factor to our success in acquiring, developing and
operating surgical facilities. We identify and partner with surgeons and other physicians
that we believe have established reputations for clinical excellence in their communities.
We believe that we have had success in recruiting and retaining physicians because of the
ownership structure of our surgical facilities and our staffing, scheduling and clinical
systems that are designed to increase physician productivity, promote physicians
professional success and enhance the quality of patient care. We also believe that forming
relationships with health care systems and other health care providers can enhance our
ability to recruit physicians. We currently have strategic relationships with eight health
care systems.
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
    
    Capitalize on our experienced management team to pursue multiple growth opportunities
in the surgical facility market.We believe that the experience and capabilities of our
senior management team provide a strategic advantage in improving the operations of our
surgical facilities, attracting physicians and identifying new development and acquisition
opportunities. Our executive officers have an average of over 30 years of experience in the
health care industry, including senior management positions at public and private health
care companies. The remaining members of our senior management team have an average of over
20 years of experience in the health care industry. Our managements broad industry
experience has allowed us to establish strong relationships with participants throughout
the health care industry. These relationships are helpful in forming leads for
acquisitions, and in making decisions about expanding into new markets and services. The
experience and capabilities of our management team also enable us to pursue multiple growth
strategies in the surgical facility market, including acquisitions of established surgical
facilities, de novo developments in attractive markets, strategic relationships with
prominent hospitals and other health care providers and turnaround opportunities in
connection with underperforming facilities. We have successfully executed each of these
growth strategies, and intend to pursue each of them in the future.
    
    Pursue a disciplined strategy of acquiring and developing surgical facilities.Since
January 1999, we have acquired 43 surgical facilities and developed 16 surgical facilities,
including nine surgical facilities that we subsequently divested. We anticipate acquiring
three to four facilities and developing four to six facilities during
2007, including the three that we announced in January 2007. We seek to
acquire and develop surgical hospitals and both single and
multi-specialty ambulatory surgery centers that meet our criteria. Our criteria includes prominence and quality of
physician partners, specialty mix, opportunities for growth, level of competition in the
local market, level of managed care penetration and our ability to access managed care
organization contracts. Our acquisition and development team conducts extensive due
diligence and applies a financial model that targets a threshold return on invested capital
over a period of five years. Once we acquire a surgical facility, our team establishes a
strategic plan to improve the facilitys operating systems and physical plant, enhance
physician recruitment, and capitalize on the facilitys competitive strengths. We have
historically targeted majority ownership in our facilities and currently hold a fifty
percent or more ownership interests in 74% of the surgical facilities in which we own an
interest. Majority ownership allows us to make and execute managerial decisions which we
believe provides greater opportunity for growth and higher returns. We also believe that by
starting with majority ownership of a facility, we can benefit by capturing a greater share
of the value we create in managing and improving the facility. We intend to continue to
target majority ownership in our facilities. However, when attractive opportunities arise,
we may acquire minority interests in developed surgical facilities or surgical facilities
that we may purchase. In addition, we have, and will continue to, acquire and develop
facilities in which we have buy-up rights if the opportunity is attractive to us from a
long-term perspective. Buy-up rights enable us, at our option, to increase our ownership
percentage after the initial acquisition. When appropriate, we also may reduce our
interest in majority owned surgical facilities.
    
    Increase revenues and profitability of existing surgical facilities through operational
focus.We seek to increase revenues, profitability and return on our invested capital at
all of our surgical facilities by focusing on operations. We have a dedicated team that is responsible
for implementing best practices, cost controls and overall efficiencies at each of our
surgical facilities. Our facilities benefit from our network of facilities by sharing best
practices and participating in group purchasing agreements designed to reduce the cost of
supplies and equipment. We intend to continue to recruit additional physicians and expand
the range of services offered at our surgical facilities to increase the number and types
of surgeries performed in our facilities, including a focus on higher
acuity cases. We also review our managed care contracts to
ensure we are operating under the most favorable contracts available to us. We are
committed to enhancing programs and services for our physicians and patients by providing
advanced technology, quality care, cost-effective service and convenience.
 Operations
 Surgical Facility Operations
  3




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Surgical Facility Ownership Structure
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Surgical Facilities
  Number of
    
    
    
    
    
    
    SymbionOperating
    
    
    Number of
    
    
    PercentageFacility
    
    City
    
    
    Rooms
    
    
    Treatment Rooms
    
    
    OwnershipAlabamaBirmingham Endoscopy Center
    
    Birmingham
    
    
    6
    
    
    
    3
    
    
    
    61
    %(1)North River Surgical Center
    
    Tuscaloosa
    
    
    2
    
    
    
    2
    
    
    
    80
    %(1)CaliforniaSpecialty Surgical Center of Beverly
Hills/Brighton Way
    
    Beverly Hills
    
    
    3
    
    
    
    1
    
    
    
    57
    %(1)Specialty Surgical Center of Beverly
Hills/Wilshire Boulevard
    
    Beverly Hills
    
    
    4
    
    
    
    2
    
    
    
    57
    %(1)Specialty Surgical Center of Encino
    
    Encino
    
    
    4
    
    
    
    2
    
    
    
    55
    %(1)Specialty Surgical Center of Irvine
    
    Irvine
    
    
    4
    
    
    
    1
    
    
    
    17
    %Specialty Surgical Center of Arcadia
    
    Arcadia
    
    
    3
    
    
    
    1
    
    
    
    18
    %ColoradoDry Creek Surgery Center
    
    Denver
    
    
    6
    
    
    
    2
    
    
    
    51
    %(1)Animas Surgical Hospital(2)
    
    Durango
    
    
    4
    
    
    
    1
    
    
    
    56
    %(1)12 hospital roomsFloridaDeLand Surgery Center
    
    DeLand
    
    
    3
    
    
    
    2
    
    
    
    76
    %(1)West Bay Surgery Center
    
    Largo
    
    
    4
    
    
    
    4
    
    
    
    51
    %(1)Jacksonville Beach Surgery Center
    
    Jacksonville
    
    
    4
    
    
    
    1
    
    
    
    81
    %(1)Cape Coral Ambulatory Surgery Center
    
    Cape Coral
    
    
    5
    
    
    
    2
    
    
    
    10
    %Lee Island Coast Surgery Center
    
    Fort Myers
    
    
    5
    
    
    
    3
    
    
    
    50
    %(1)Orlando Surgery Center
    
    Orlando
    
    
    5
    
    
    
    1
    
    
    
    66
    %(1)Tampa Bay Regional Surgery Center
    
    Largo
    
    
    1
    
    
    
    2
    
    
    
    51
    %(1)The Surgery Center of Ocala
    
    Ocala
    
    
    4
    
    
    
    2
    
    
    
    51
    %(1)GeorgiaPremier Surgery Center
    
    Brunswick
    
    
    3
    
    
    
    1
    
    
    
    58
    %(1)Savannah Outpatient Foot and Ankle
Surgery Center
    
    Savannah
    
    
    1
    
    
    
    
    
    
    
    76
    %(1)The Surgery Center
    
    Columbus
    
    
    4
    
    
    
    2
    
    
    
    65
    %(1)IllinoisValley Ambulatory Surgery Center
    
    St. Charles
    
    
    6
    
    
    
    1
    
    
    
    40
    %(1)IndianaVincennes Surgery Center
    
    Vincennes
    
    
    3
    
    
    
    1
    
    
    
    52
    %(1)New Albany Outpatient Surgery
    
    New Albany
    
    
    3
    
    
    
    1
    
    
    
    69
    %(1)KansasHeartland Specialty Surgical Hospital(2)
    
    Kansas City
    
    
    7
    
    
    
    3
    
    
    
    
    (3)19 hospital roomsCypress Surgery Center
    
    Wichita
    
    
    6
    
    
    
    2
    
    
    
    53
    %(1)KentuckyDuPont Surgery Center
    
    Louisville
    
    
    5
    
    
    
    
    
    
    
    61
    %(1)LouisianaGreater New Orleans Surgery Center
    
    Metairie
    
    
    2
    
    
    
    
    
    
    
    30
    %(1)Physicians Surgical Specialty Hospital(2)
    
    Houma
    
    
    5
    
    
    
    5
    
    
    
    57
    %(1)10 hospital roomsSurgery Center of Hammond
    
    Hammond
    
    
    4
    
    
    
    1
    
    
    
    87
    %(1)MassachusettsWorcester Surgery Center
    
    Worcester
    
    
    4
    
    
    
    1
    
    
    
    79
    %(1)Worcester ENT
    
    Worcester
    
    
    1
    
    
    
    
    
    
    
    51
    %(1)
 5




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Number of
    
    
    
    
    
    
    SymbionOperating
    
    
    Number of
    
    
    PercentageFacility
    
    City
    
    
    Rooms
    
    
    Treatment Rooms
    
    
    OwnershipMissouriCentral Missouri Medical Park Surgical
Center
    
    Jefferson City
    
    
    4
    
    
    
    2
    
    
    
    40
    %(1)Timberlake Surgery Center
    
    Chesterfield
    
    
    4
    
    
    
    1
    
    
    
    53
    %(1)MississippiDeSoto Surgery Center
    
    DeSoto
    
    
    2
    
    
    
    1
    
    
    
    
    (3)Physicians Outpatient Center
    
    Oxford
    
    
    4
    
    
    
    2
    
    
    
    
    (3)New YorkSouth Shore Ambulatory Surgery Center
    
    Lynbrook
    
    
    4
    
    
    
    1
    
    
    
    
    (4)North CarolinaOrthopaedic Surgery Center of Asheville
    
    Asheville
    
    
    3
    
    
    
    
    
    
    
    61
    %(1)Wilmington SurgCare
    
    Wilmington
    
    
    7
    
    
    
    3
    
    
    
    87
    %(1)OhioPhysicians Ambulatory Surgery Center
    
    Circleville
    
    
    2
    
    
    
    
    
    
    
    53
    %(1)Valley Surgical Center
    
    Steubenville
    
    
    3
    
    
    
    1
    
    
    
    56
    %(1)OklahomaLakeside Womens Hospital(2)
    
    Oklahoma City
    
    
    3
    
    
    16 hospital rooms
    
    
    42
    %1PennsylvaniaVillage SurgiCenter
    
    Erie
    
    
    5
    
    
    
    1
    
    
    
    73
    %(1)Rhode IslandBayside Endoscopy Center
    
    Providence
    
    
    
    
    
    
    6
    
    
    
    75
    %(1)South CarolinaThe Center for Specialty Surgery
    
    Greenville
    
    
    2
    
    
    
    1
    
    
    
    70
    %(1)TennesseeBaptist Germantown Surgery Center
    
    Memphis
    
    
    6
    
    
    
    4
    
    
    
    
    (3)Cool Springs Surgery Center
    
    Franklin
    
    
    5
    
    
    
    3
    
    
    
    35
    %East Memphis Surgery Center
    
    Memphis
    
    
    6
    
    
    
    5
    
    
    
    
    (3)Midtown Surgery Center
    
    Memphis
    
    
    4
    
    
    
    
    
    
    
    
    (3)Southwind GI
    
    Memphis
    
    
    1
    
    
    
    
    
    
    
    100
    %(1)Union City Center
    
    Union City
    
    
    2
    
    
    
    1
    
    
    
    
    (3)UroCenter
    
    Memphis
    
    
    3
    
    
    
    1
    
    
    
    
    (3)University Ambulatory Surgical Center
    
    Knoxville
    
    
    6
    
    
    
    3
    
    
    
    25
    %TexasCentral Park Surgery Center
    
    Austin
    
    
    5
    
    
    
    4
    
    
    
    43
    %(1)Clear Fork Surgery Center
    
    Fort Worth
    
    
    5
    
    
    
    5
    
    
    
    34
    %(1)Northeast Baptist Surgery Center
    
    San Antonio
    
    
    4
    
    
    
    4
    
    
    
    54
    %(1)NorthStar Surgical Center
    
    Lubbock
    
    
    6
    
    
    
    6
    
    
    
    46
    %(1)Surgery Center of Duncanville
    
    Duncanville
    
    
    4
    
    
    
    3
    
    
    
    41
    %(1)Texarkana Surgery Center
    
    Texarkana
    
    
    4
    
    
    
    5
    
    
    
    66
    %(1)WashingtonBellingham Surgery Center
    
    Bellingham
    
    
    4
    
    
    
    
    
    
    
    85
    %(1)
 
 (1)
    
    We consolidate this surgical facility for financial reporting purposes.(2)
    
    This facility is licensed as a hospital.(3)
    
    We manage this facility, but do not have an ownership interest in the facility.(4)
    
    We hold a 57% ownership interest in the limited liability company which provides
administrative services to this surgical facility. Due to regulatory restrictions in the State
of New York, we cannot directly own an interest in the facility. 6




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Case Mix
  Year Ended
    
    Year EndedDecember 31, 2006
    
    December 31, 2005SpecialtyEar, nose and throat
    
    
    8
    %
    
    
    8
    %Gastrointestinal
    
    
    25
    
    
    
    25General surgery
    
    
    5
    
    
    
    5Obstetrics/gynecology
    
    
    4
    
    
    
    4Ophthalmology
    
    
    13
    
    
    
    12Orthopedic
    
    
    17
    
    
    
    17Pain management
    
    
    16
    
    
    
    16Plastic surgery
    
    
    4
    
    
    
    4Other
    
    
    8
    
    
    
    9Total
    
    
    100
    %
    
    
    100
    %
 Case Growth
 Same Store Information
  Year Ended
    
    
    Year EndedDecember 31, 2006
    
    
    December 31, 2005Cases
    
    
    203,037
    
    
    
    190,605Cases growth
    
    
    6.5
    %
    
    
    N/ANet patient service revenue per case
    
    $
    1,340
    
    
    $
    1,326Net patient service revenue per case
growth
    
    
    1.1
    %
    
    
    N/ANumber of same store surgical facilities
    
    
    42
    
    
    
    N/A
  Year Ended
    
    
    Year EndedDecember 31, 2006
    
    
    December 31, 2005Cases
    
    
    185,272
    
    
    
    179,960Cases growth
    
    
    3.0
    %
    
    
    N/ANet patient service revenue per case
    
    $
    1,283
    
    
    $
    1,270Net patient service revenue per case
growth
    
    
    1.0
    %
    
    
    N/ANumber of same store surgical facilities
    
    
    38
    
    
    
    N/A
 7




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Consolidated Information
  Year Ended
    
    
    Year EndedDecember 31, 2006
    
    
    December 31, 2005Cases
    
    
    219,832
    
    
    
    191,534Cases growth
    
    
    14.8
    %
    
    
    N/ANet patient service revenue per case
    
    $
    1,301
    
    
    $
    1,297Net patient service revenue per case
growth
    
    
    0.3
    %
    
    
    N/ANumber of surgical facilities operated as
of end of the period (1)
    
    
    59
    
    
    
    59Number of consolidated surgical facilities
    
    
    44
    
    
    
    41
 
 (1)
    
    Includes surgical facilities that we manage but in which we do not have an ownership interest. Payor Mix
  Year Ended
    
    Year EndedDecember 31, 2006
    
    December 31, 2005PayorPrivate Insurance
    
    
    76
    %
    
    
    76
    %Government
    
    
    19
    
    
    
    18Self-pay
    
    
    4
    
    
    
    4Other
    
    
    1
    
    
    
    2Total
    
    
    100
    %
    
    
    100
    %
 8




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Strategic Relationships
  
    
    Vanderbilt Health Services, Inc., with which we own and operate a surgical facility in
Franklin, Tennessee;
    
    Vanguard Health Systems, Inc., with which we own and operate a surgical facility in San
Antonio, Texas;
    
    Baptist Memorial Health Services, Inc., for which we manage seven surgical facilities
in Memphis, Tennessee and surrounding areas;
    
    University Health System, Inc., with which we own and operate a surgical facility in
Knoxville, Tennessee;
    
    Harris Methodist Ft. Worth, with which we own and operate a surgical facility in Fort
Worth, Texas;
    
    Fairview Health System, with which we are developing a surgical facility with local
physicians in Minneapolis, Minnesota;
    
    Kings Daughters Hospital and a group of local physicians affiliated with Kings
Daughters Clinic, with whom we are developing a surgical facility in Temple, Texas; and
    
    Adventist Health System, with which we are developing a surgical facility in Orange
City, Florida.
   Acquisition and Development of Surgical Facilities
  Acquisition Program.
 9




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Development Program.
  Other Services
  Diagnostic Center
  10




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Physician Networks
  Information Systems and Controls
      Marketing
  11




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Competition
   Employees
  Environmental
  Insurance
  12




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Reimbursement
 Medicare  Ambulatory Surgery Centers
       13




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Medicare  Hospitals
   Private Third-Party Payors
   14




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Workers Compensation
   Governmental Regulation
 General
     15




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Certificates of Need and Licensure
     Medicare and Medicaid Participation
  16




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Antitrust Laws
     Federal Anti-Kickback Statute and Medicare Fraud and Abuse Laws
  17




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1.
    
    The ambulatory surgery center must be an ambulatory surgery center certified to
participate in the Medicare program, and its operating and recovery room space must be
dedicated exclusively to the ambulatory surgery center and not a part of a hospital
(although such space may be leased from a hospital if such lease meets the requirements of
the safe harbor for space rental).2.
    
    Each investor must be either (a) a physician who derived at least one-third of his or her
medical practice income for the previous fiscal year or 12-month period from performing
procedures on the list of Medicare-covered procedures for ambulatory surgery centers, (b) a
hospital, or (c) a person or entity not in a position to make or influence referrals to the
center, nor to provide items or services to the ambulatory surgery center, nor employed by
the ambulatory surgery center or any investor.3.
    
    Unless all physician-investors are members of a single specialty, each physician-investor
must perform at least one-third of his or her procedures at the ambulatory surgery center
each year. (This requirement is in addition to the requirement that the physician-investor
has derived at least one-third of his or her medical practice income for the past year from
performing procedures.)4.
    
    Physician-investors must have fully informed their referred patients of the physicians
investment interest.5.
    
    The terms on which an investment interest is offered to an investor are not related to
the previous or expected volume of referrals, services furnished or the amount of business
otherwise generated from that investor to the entity.6.
    
    Neither the ambulatory surgery center nor any other investor may loan funds to or
guarantee a loan for an investor if the investor uses any part of such loan to obtain the
investment interest.7.
    
    The amount of payment to an investor in return for the investment interest is directly
proportional to the amount of the capital investment (including the fair market value of any
pre-operational services rendered) of that investor.8.
    
    All physician-investors, any hospital-investor and the center agree to treat patients
receiving medical benefits or assistance under the Medicare or Medicaid programs.
 20




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9.
    
    All ancillary services performed at the ambulatory surgery center for beneficiaries of
federal health care programs must be directly and integrally related to primary procedures
performed at the ambulatory surgery center, and may not be billed separately.10.
    
    No hospital-investor may include on its cost report or any claim for payment from a
federal health care program any costs associated with the ambulatory surgery center.11.
    
    The ambulatory surgery center may not use equipment owned by or services provided by a
hospital-investor unless such equipment is leased in accordance with a lease that complies
with the equipment rental safe harbor and such services are provided in accordance with a
contract that complies with the personal services and management contracts safe harbor.12.
    
    No hospital-investor may be in a position to make or influence referrals directly or
indirectly to any other investor or the ambulatory surgery center.
    21




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Federal Physician Self-Referral Law
  
    
    clinical laboratory services;
    
    physical therapy services;
    
    occupational therapy services;
    
    radiology services, including magnetic resonance imaging, computerized axial
tomography scan and ultrasound services;
    
    radiation therapy services and supplies;
    
    durable medical equipment and supplies;
    
    parenteral and enteral nutrients, equipment and supplies;
    
    prosthetics, orthotics and prosthetic devices and supplies;
 22




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
    
    home health services;
    
    outpatient prescription drugs; and
    
    inpatient and outpatient hospital services.
       23




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False and Other Improper Claims
   qui tam
 24




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Health Information Practices
       25




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State Regulation
   26




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Health Care Regulations Affecting Our New York Operations
  Available Information
 www.symbion.com
 Item 1A. Risk Factors
  Risks Related to Our Business and Industry
 We depend on payments from third-party payors, including government health care programs and
managed care organizations. If these payments are reduced or eliminated, our revenues and
profitability could be adversely affected
   27




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##### Table of Contents



If we are unable to negotiate contracts or maintain satisfactory relationships with private
third-party payors, our revenues and operating income will decrease
    28




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##### Table of Contents



Our growth strategy depends in part on our ability to acquire and develop additional surgical
facilities on favorable terms. If we are unable to do so, our future growth could be limited and
our operating results could be adversely affected
  We may encounter numerous business risks in acquiring and developing additional surgical
facilities, and may have difficulty operating and integrating those surgical facilities.
    Efforts to regulate the construction, acquisition or expansion of health care facilities could
prevent us from acquiring additional surgical facilities, renovating our existing facilities or
expanding the breadth of services we offer
  29




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##### Table of Contents



If we fail to maintain good relationships with the physicians who use our facilities, our revenues
and profitability could be adversely affected
   We have a limited history operating many of our facilities.
  If we fail to comply with legislative and regulatory rules relating to privacy and security of
patient health information and standards for electronic transactions, we may experience delays in
payment of claims and increased costs and be subject to substantial fines
  30




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##### Table of Contents



If we fail to comply with laws and regulations relating to the operation of our facilities, we
could suffer penalties or be required to make significant changes to our operations
  
    
    qualification of medical and support persons;
    
    pricing of services by health care providers;
    
    the adequacy of medical care, equipment, personnel, operating policies and procedures;
    
    maintenance and protection of records; and
    
    environmental protection, health and safety.
   Our facilities do not satisfy all of the requirements for any of the safe harbors under the federal
Anti-Kickback Statute. If we fail to comply with the federal Anti-Kickback Statute, we could be
subject to criminal and civil penalties, loss of licenses and exclusion from the Medicare and
Medicaid programs, which may result in a substantial loss of revenues.
   31




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##### Table of Contents



If a federal or state agency asserts a different position or enacts new laws or regulations
regarding illegal remuneration under the Medicare, Medicaid or other governmental programs, we may
be subject to civil and criminal penalties, experience a significant reduction in our revenues or
be excluded from participation in the Medicare, Medicaid or other governmental programs
   If we fail to comply with physician self-referral laws as they are currently interpreted or may be
interpreted in the future, or if other legislative restrictions are issued, we could incur a
significant loss of reimbursement revenues
   32




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##### Table of Contents



Physician ownership of hospitals has been the subject of recent legislative debate, and future
statutory and regulatory changes could limit or impair our ability to own and operate our
hospitals
    We may be subject to actions for false and other improper claims
   33




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##### Table of Contents



qui tam
  If laws governing the corporate practice of medicine change, we may be required to restructure some
of our relationships, which may result in a significant loss of revenues and divert other
resources
  We are generally liable for debts and other obligations of the partnerships and limited liability
companies that own and operate some of our surgical facilities.
  34




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##### Table of Contents



If our operations in New York are found not to be in compliance with New York law, we may be unable
to continue or expand our operations in New York
  If regulations change, we may be obligated to purchase some or all of the ownership interests of
our physician partners or renegotiate some of our partnership and operating agreements with our
physician partners and management agreements with surgical facilities.
   
    
    make illegal the referral of Medicare or other patients to our surgical
facilities by physician investors;
    
    create a substantial likelihood that cash distributions to physician
investors from the partnerships or limited liability companies through which we operate
our surgical facilities would be illegal; or
    
    make illegal the ownership by the physician investors of interests in the
partnerships or limited liability companies through which we own and operate our surgical
facilities.
  If we become subject to malpractice and related legal claims, we could be required to pay
significant damages, which may not be covered by insurance
  35




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##### Table of Contents



Significant indebtedness could limit our ability to operate our business and pursue business
opportunities.
  
    
    we may be required to dedicate a substantial portion of our cash flows from
operations to the payment of principal and interest on our indebtedness, reducing the
funds available to fund working capital, capital expenditures and other general corporate
purposes;
    
    some of our borrowings are at variable rates of interest and we are
vulnerable to increases in interest rates;
    
    our flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate may be limited;
    
    we may be at a disadvantage to our competitors who are less leveraged;
    
    we may be more vulnerable to a downturn in our business or the economy generally;
    
    our senior credit facility contains numerous financial and other restrictive
covenants, including restrictions on paying dividends, incurring additional indebtedness
and buying or selling assets; and
    
    our senior credit facility requires us to pledge the capital stock or other
equity interests of our subsidiaries to the bank group as collateral security.
 We face intense competition for physicians, strategic relationships, acquisitions and managed care
contracts, which may result in a decline in our revenues, profitability and market share
  36




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##### Table of Contents



Many of our surgical facilities are located in Texas and Florida, which makes us particularly
sensitive to regulatory, economic and other conditions in those states. In addition, three of our
surgical facilities account for a significant portion of our patient service revenues
  We depend on our senior management and we may be adversely affected if we lose any member of our
senior management
  We face risks related to compliance with corporate governance laws and financial reporting
standards
  If we are unable to integrate and manage our information systems effectively, our operations could
be disrupted
  37




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##### Table of Contents



Risks Related to Our Corporate Structure
 We may have a special legal responsibility to the holders of ownership interests in the entities
through which we own our surgical facilities, which may conflict with the interests of our
stockholders and prevent us from acting solely in our own best interests or the interests of our
stockholders
  We are a holding company with no operations of our own
  We do not have exclusive control over the distribution of cash from our operating entities and may
be unable to cause all or a portion of the cash of these entities to be distributed
  38




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##### Table of Contents



Our stockholder rights plan, provisions of our certificate of incorporation and bylaws and Delaware
law could prevent or discourage a change in our management or a takeover you may consider
favorable
   
    
    authorize the issuance of blank check preferred stock;
    
    provide for a classified board of directors with staggered, three-year terms;
    
    prohibit cumulative voting in the election of directors;
    
    prohibit our stockholders from acting by written consent without the approval of our board of directors;
    
    limit the persons who may call special meetings of stockholders; and
    
    establish advance notice requirements for nominations for election to the
board of directors or for proposing matters to be approved at meetings of stockholders.
  Because our management and their affiliates together own a large percentage of our common stock,
they will be able to exert significant influence over all matters submitted to our stockholders for
approval, regardless of the preferences of our other stockholders
  
    
    the election of our board of directors;
    
    our management and policies; and
    
    the outcome of any corporate transaction or other matter submitted to our
stockholders for approval, including mergers, consolidations and the sale of all or
substantially all of our assets.
  Risks Related to Our Common Stock
 Because we have not paid dividends and do not anticipate paying dividends on our common stock in
the foreseeable future, you should not expect to receive dividends on shares of our common stock
  39




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##### Table of Contents



Our stock price is likely to be highly volatile
  
    
    our failure or delay in meeting our development and acquisition plans;
    
    our revenues and operating results failing to meet our earnings guidance and
the expectations of securities analysts or investors in any quarter;
    
    changes in laws and regulations governing health care and the surgical facility industry;
    
    proposed or enacted changes in reimbursement by governmental and other third-party payors;
    
    changes in securities analysts financial estimates or recommendations;
    
    investor perception of our industry or our prospects; and
    
    general economic trends and market conditions, including factors unrelated to
our operating performance.
  Item 1B. Unresolved Staff Comments
  Item 2. Properties
    Item 3. Legal Proceedings
  40




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Market for Common Stock.
 High
    
    
    Low2006First Quarter
    
    $
    25.10
    
    
    $
    22.52Second Quarter
    
    
    23.89
    
    
    
    19.44Third Quarter
    
    
    23.73
    
    
    
    18.03Fourth Quarter
    
    
    18.92
    
    
    
    16.28
 High
    
    
    Low2005First Quarter
    
    $
    22.95
    
    
    $
    18.39Second Quarter
    
    
    23.97
    
    
    
    21.04Third Quarter
    
    
    27.72
    
    
    
    22.20Fourth Quarter
    
    
    26.79
    
    
    
    21.95
  Dividends.
 41




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##### Table of Contents



Issuer Purchases of Equity Securities
  Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares that May YetPart of Publicly
    
    Be Purchased UnderTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    the Plans orPeriod
    
    Shares Purchased
    
    per Share
    
    Programs
    
    ProgramsOctober 1, 2006
through October 31,
2006
    
    
    
    
    
    $
    
    
    
    
    N/A
    
    
    
    N/ANovember 1, 2006
through November
30, 2006
    
    
    
    
    
    $
    
    
    
    
    N/A
    
    
    
    N/ADecember 1 2006
through December
31, 2006
    
    
    57,539
    
    
    $
    17.07
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    57,539
    
    
    $
    17.07
    
    
    
    N/A
    
    
    
    N/A
  42




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##### Table of Contents



Item 6. Selected Financial Data
   Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(dollars in thousands, except per share amounts)Consolidated Statement Of
Operations Data:Revenues
    
    $
    301,534
    
    
    $
    260,949
    
    
    $
    212,955
    
    
    $
    172,954
    
    
    $
    140,669Cost of revenues
    
    
    196,803
    
    
    
    162,597
    
    
    
    138,749
    
    
    
    114,353
    
    
    
    91,136General and administrative expense
    
    
    24,407
    
    
    
    21,993
    
    
    
    18,449
    
    
    
    15,874
    
    
    
    14,328Depreciation and amortization
    
    
    13,420
    
    
    
    12,975
    
    
    
    10,767
    
    
    
    9,145
    
    
    
    7,707Provision for doubtful accounts
    
    
    4,514
    
    
    
    4,143
    
    
    
    3,829
    
    
    
    2,558
    
    
    
    4,597Income on equity investments
    
    
    (2,423
    )
    
    
    (1,273
    )
    
    
    (1,272
    )
    
    
    (402
    )
    
    
    (541
    )Impairment and loss on disposal of long-lived assets.
    
    
    1,163
    
    
    
    1,541
    
    
    
    271
    
    
    
    437
    
    
    
    492Gain on sale of long-lived assets
    
    
    (1,808
    )
    
    
    (1,785
    )
    
    
    (250
    )
    
    
    (571
    )
    
    
    (457
    )Proceeds from insurance settlement, net
    
    
    (410
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from litigation settlement, net
    
    
    (588
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    235,078
    
    
    
    200,191
    
    
    
    170,543
    
    
    
    141,394
    
    
    
    117,262Operating income
    
    
    66,456
    
    
    
    60,758
    
    
    
    42,412
    
    
    
    31,560
    
    
    
    23,407Minority interests in income of consolidated
subsidiaries
    
    
    (27,894
    )
    
    
    (25,700
    )
    
    
    (15,629
    )
    
    
    (10,514
    )
    
    
    (7,061
    )Interest expense, net
    
    
    (7,093
    )
    
    
    (4,894
    )
    
    
    (4,847
    )
    
    
    (5,782
    )
    
    
    (4,628
    )Income before income taxes and discontinued operations
    
    
    31,469
    
    
    
    30,164
    
    
    
    21,936
    
    
    
    15,264
    
    
    
    11,718Provision (benefit) for income taxes
    
    
    12,115
    
    
    
    11,281
    
    
    
    8,445
    
    
    
    (2,205
    )
    
    
    (93
    )Income from continuing operations
    
    
    19,354
    
    
    
    18,883
    
    
    
    13,491
    
    
    
    17,469
    
    
    
    11,811Gain (loss) from discontinued operations, net of taxes
    
    
    (561
    )
    
    
    172
    
    
    
    61
    
    
    
    55
    
    
    
    491Net income
    
    $
    18,793
    
    
    $
    19,055
    
    
    $
    13,552
    
    
    $
    17,524
    
    
    $
    12,302Net income per share  continuing operations:Basic
    
    $
    0.90
    
    
    $
    0.89
    
    
    $
    0.68
    
    
    $
    1.66
    
    
    $
    1.14Diluted
    
    $
    0.89
    
    
    $
    0.86
    
    
    $
    0.66
    
    
    $
    1.38
    
    
    $
    0.97Net income per share:Basic
    
    $
    0.87
    
    
    $
    0.90
    
    
    $
    0.69
    
    
    $
    1.66
    
    
    $
    1.19Diluted
    
    $
    0.86
    
    
    $
    0.86
    
    
    $
    0.67
    
    
    $
    1.38
    
    
    $
    1.01Shares used to compute net income per share:Basic
    
    
    21,546,036
    
    
    
    21,285,211
    
    
    
    19,736,722
    
    
    
    10,536,745
    
    
    
    10,349,568Diluted
    
    
    21,733,103
    
    
    
    22,028,591
    
    
    
    20,347,385
    
    
    
    12,658,620
    
    
    
    12,144,140Cash Flow Data  continuing operations:Net cash provided by operating activities
    
    $
    31,043
    
    
    $
    41,438
    
    
    $
    27,731
    
    
    $
    20,247
    
    
    $
    20,912Net cash used in investing activities
    
    
    (65,411
    )
    
    
    (68,732
    )
    
    
    (104,726
    )
    
    
    (66,974
    )
    
    
    (21,592
    )Net cash provided by financing activities
    
    
    32,370
    
    
    
    32,095
    
    
    
    82,689
    
    
    
    43,177
    
    
    
    5,235Other Data:EBITDA (1)
    
    $
    51,982
    
    
    $
    48,033
    
    
    $
    37,550
    
    
    $
    30,191
    
    
    $
    24,053EBITDA as a % of revenues
    
    
    17.2
    %
    
    
    18.4
    %
    
    
    17.6
    %
    
    
    17.5
    %
    
    
    17.1
    %Number of surgical facilities operated as of the end
of period(2)
    
    
    59
    
    
    
    59
    
    
    
    54
    
    
    
    44
    
    
    
    34
 As of December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands)Consolidated Balance Sheet Data:Working capital
    
    $
    56,643
    
    
    $
    48,784
    
    
    $
    41,455
    
    
    $
    25,979
    
    
    $
    24,839Total assets
    
    
    503,806
    
    
    
    436,378
    
    
    
    365,761
    
    
    
    252,784
    
    
    
    188,888Total long-term debt, less current maturities
    
    
    136,553
    
    
    
    101,969
    
    
    
    69,747
    
    
    
    101,037
    
    
    
    57,738Total stockholders equity
    
    
    285,279
    
    
    
    260,058
    
    
    
    237,998
    
    
    
    104,015
    
    
    
    86,677
 43




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##### Table of Contents



(1)
    
    When we use the term EBITDA, we are referring to net income plus (a) gain (loss) on
discontinued operations, (b) income tax expense (provision), (c) interest expense, net and (d)
depreciation and amortization. Minority interest expense represents the interests of third
parties, such as physicians, hospitals and other health care providers, that own interests in
surgical facilities that we consolidate for financial reporting purposes. We consolidate for
financial reporting purposes the financial results of 44 of the 50 surgical facilities in
which we owned an interest as of December 31, 2006. Our operating strategy involves sharing
ownership of our surgical facilities with physicians, physician groups and hospitals. These
third parties own an interest in all but one of the facilities in which we own an interest. We
believe that it is preferable to present EBITDA because it excludes the portion of net income
attributable to these third-party interests and clarifies for investors our portion of EBITDA
generated by our surgical facilities and other operations.We use EBITDA as a measure of liquidity. We have included it because we believe that it provides
investors with additional information about our ability to incur and service debt and make
capital expenditures. We also use EBITDA, with some variation in the calculation, to determine
our compliance with some of the covenants under our senior credit facility, as well as to
determine the interest rate and commitment fee payable under the senior credit facility.EBITDA is not a measurement of financial performance or liquidity under generally accepted
accounting principles. It should not be considered in isolation or as a substitute for net
income, operating income, cash flows from operating, investing or financing activities, or any
other measure calculated in accordance with generally accepted accounting principles. The items
excluded from EBITDA are significant components in understanding and evaluating financial
performance and liquidity. Our calculation of EBITDA is not comparable to the EBITDA measure we
have used in prior reports but is consistent with the measure EBITDA less minority interests
that we previously reported. Our calculation of these measures may not be comparable to
similarly titled measures reported by other companies.The following table reconciles EBITDA to net cash provided by operating activities  continuing
operations: Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands)(unaudited)EBITDA
    
    $
    51,982
    
    
    $
    48,033
    
    
    $
    37,550
    
    
    $
    30,191
    
    
    $
    24,053Depreciation and amortization
    
    
    (13,420
    )
    
    
    (12,975
    )
    
    
    (10,767
    )
    
    
    (9,145
    )
    
    
    (7,707
    )Interest expense, net
    
    
    (7,093
    )
    
    
    (4,894
    )
    
    
    (4,847
    )
    
    
    (5,782
    )
    
    
    (4,628
    )Income taxes
    
    
    (12,115
    )
    
    
    (11,281
    )
    
    
    (8,445
    )
    
    
    2,205
    
    
    
    93Gain (loss) on discontinued operations, net of taxes
    
    
    (561
    )
    
    
    172
    
    
    
    61
    
    
    
    55
    
    
    
    491Net income
    
    
    18,793
    
    
    
    19,055
    
    
    
    13,552
    
    
    
    17,524
    
    
    
    12,302Depreciation and amortization
    
    
    13,420
    
    
    
    12,975
    
    
    
    10,767
    
    
    
    9,145
    
    
    
    7,707Non-cash compensation expense
    
    
    3,865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-cash gains and losses
    
    
    (645
    )
    
    
    (244
    )
    
    
    21
    
    
    
    (134
    )
    
    
    35Minority interests in income of consolidated subsidiaries
    
    
    27,894
    
    
    
    25,700
    
    
    
    15,629
    
    
    
    10,514
    
    
    
    7,061Provision (benefit) for income taxes
    
    
    12,115
    
    
    
    11,281
    
    
    
    8,445
    
    
    
    (2,205
    )
    
    
    (93
    )Distributions to minority partners
    
    
    (25,447
    )
    
    
    (23,049
    )
    
    
    (14,420
    )
    
    
    (10,690
    )
    
    
    (6,177
    )Income on equity investments
    
    
    (2,423
    )
    
    
    (1,273
    )
    
    
    (1,272
    )
    
    
    (402
    )
    
    
    (541
    )Provision for bad debts
    
    
    4,514
    
    
    
    4,143
    
    
    
    3,829
    
    
    
    2,558
    
    
    
    4,597Excess tax benefit from share-based compensation
    
    
    (201
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:Accounts receivable
    
    
    (4,102
    )
    
    
    (4,958
    )
    
    
    (5,223
    )
    
    
    (3,757
    )
    
    
    (6,177
    )Other assets and liabilities
    
    
    (16,740
    )
    
    
    (2,192
    )
    
    
    (3,597
    )
    
    
    (2,306
    )
    
    
    2,198Net cash provided by operating activities  continuing operations
    
    $
    31,043
    
    
    $
    41,438
    
    
    $
    27,731
    
    
    $
    20,247
    
    
    $
    20,912
 (2)
    
    Includes surgical facilities that we manage but in which we do not have an ownership
interest.
 44




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Executive Overview
 Our Company
    45




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Revenues
     Year Ended December 31,2006
    
    2005
    
    2004Patient service revenues
    
    
    95
    %
    
    
    95
    %
    
    
    94
    %Physician service revenues
    
    
    1
    
    
    
    2
    
    
    
    2Other service revenues
    
    
    4
    
    
    
    3
    
    
    
    4Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Operating Trends
  46




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Acquisitions, Developments and Divestitures
 Acquisitions and Developments
    Divestitures
  47




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Accounting for the Impairment or Disposal of Long-Lived Assets
 2006
    
    
    2005
    
    
    2004Revenues
    
    $
    2,981
    
    
    $
    4,795
    
    
    $
    3,370Gain (loss) on operations before income taxes
    
    $
    (733
    )
    
    $
    281
    
    
    $
    98Gain (loss) on operations, net of taxes
    
    $
    (452
    )
    
    $
    172
    
    
    $
    61Loss on sale, net of taxes
    
    
    (109
    )
    
    
    
    
    
    
    Gain (loss) from discontinued operations,
net of taxes
    
    $
    (561
    )
    
    $
    172
    
    
    $
    61
    Critical Accounting Policies
  Consolidation and Control
  48




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Revenue Recognition
    Stock Option Compensation
 Share Based Payment
 49




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Allowance for Contractual Adjustments and Doubtful Accounts
    As of December 31,2006
    
    2005
    
    2004Days sales outstanding
    
    
    44
    
    
    
    43
    
    
    
    41
    50




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##### Table of Contents



2006
    
    
    2005% of
    
    
    
    
    
    
    % ofAmount
    
    
    Total
    
    
    Amount
    
    
    TotalCurrent
    
    $
    20,245
    
    
    
    30
    %
    
    $
    17,178
    
    
    
    32
    %31 to 60 days
    
    
    11,424
    
    
    
    17
    
    
    
    9,596
    
    
    
    1861 to 90 days
    
    
    6,280
    
    
    
    9
    
    
    
    5,062
    
    
    
    991 to 120 days.
    
    
    4,137
    
    
    
    6
    
    
    
    3,180
    
    
    
    6121 to 150 days
    
    
    3,441
    
    
    
    5
    
    
    
    2,318
    
    
    
    4Over 150 days
    
    
    22,984
    
    
    
    33
    
    
    
    16,360
    
    
    
    31Total
    
    $
    68,511
    
    
    
    100
    %
    
    $
    53,694
    
    
    
    100
    %
  Income Taxes
  Long-Lived Assets, Goodwill and Intangible Assets
   51




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##### Table of Contents



Professional and General Liability Risks
  Results of Operations
  Year Ended December 31,2006
    
    
    2005
    
    
    2004% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues(dollars in thousands)Revenues
    
    $
    301,534
    
    
    
    100.0
    %
    
    $
    260,949
    
    
    
    100.0
    %
    
    $
    212,955
    
    
    
    100.0
    %Cost of revenues
    
    
    196,803
    
    
    
    65.3
    
    
    
    162,597
    
    
    
    62.3
    
    
    
    138,749
    
    
    
    65.2General and administrative expense.
    
    
    24,407
    
    
    
    8.1
    
    
    
    21,993
    
    
    
    8.4
    
    
    
    18,449
    
    
    
    8.7Depreciation and amortization
    
    
    13,420
    
    
    
    4.5
    
    
    
    12,975
    
    
    
    5.0
    
    
    
    10,767
    
    
    
    5.1Provision for doubtful accounts
    
    
    4,514
    
    
    
    1.5
    
    
    
    4,143
    
    
    
    1.6
    
    
    
    3,829
    
    
    
    1.8Income on equity investments
    
    
    (2,423
    )
    
    
    (0.8
    )
    
    
    (1,273
    )
    
    
    (0.5
    )
    
    
    (1,272
    )
    
    
    (0.6
    )Impairment and loss on disposal of
long-lived assets
    
    
    1,163
    
    
    
    0.4
    
    
    
    1,541
    
    
    
    0.7
    
    
    
    271
    
    
    
    0.1Gain on sale of long-lived assets
    
    
    (1,808
    )
    
    
    (0.7
    )
    
    
    (1,785
    )
    
    
    (0.8
    )
    
    
    (250
    )
    
    
    (0.2
    )Proceeds from insurance settlement.
    
    
    (410
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from litigation settlement
    
    
    (588
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    235,078
    
    
    
    78.0
    %
    
    
    200,191
    
    
    
    76.7
    %
    
    
    170,543
    
    
    
    80.1
    %Operating income
    
    
    66,456
    
    
    
    22.0
    
    
    
    60,758
    
    
    
    23.3
    
    
    
    42,412
    
    
    
    19.9Minority interests in income of
consolidated subsidiaries
    
    
    (27,894
    )
    
    
    (9.3
    )
    
    
    (25,700
    )
    
    
    (9.8
    )
    
    
    (15,629
    )
    
    
    (7.3
    )Interest expense, net
    
    
    (7,093
    )
    
    
    (2.3
    )
    
    
    (4,894
    )
    
    
    (1.9
    )
    
    
    (4,847
    )
    
    
    (2.3
    )Income before income taxes and
discontinued operations
    
    
    31,469
    
    
    
    10.4
    
    
    
    30,164
    
    
    
    11.6
    
    
    
    21,936
    
    
    
    10.3Provision for income taxes
    
    
    12,115
    
    
    
    4.0
    
    
    
    11,281
    
    
    
    4.4
    
    
    
    8,445
    
    
    
    4.0Income from continuing operations
    
    
    19,354
    
    
    
    6.4
    
    
    
    18,883
    
    
    
    7.2
    
    
    
    13,491
    
    
    
    6.3Gain (loss) on discontinued
operations
    
    
    (561
    )
    
    
    (0.2
    )
    
    
    172
    
    
    
    0.1
    
    
    
    61
    
    
    
    0.1Net income
    
    $
    18,793
    
    
    
    6.2
    %
    
    $
    19,055
    
    
    
    7.3
    %
    
    $
    13,552
    
    
    
    6.4
    %
 52




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##### Table of Contents



Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 Overview.
 Revenues.
 Dollar
    
    
    Percent2006
    
    
    2005
    
    
    Variance
    
    
    VariancePatient service revenues:Same store revenues
    
    $
    240,269
    
    
    $
    232,211
    
    
    $
    8,058
    
    
    
    3.5
    %Revenues from other centers
    
    
    45,802
    
    
    
    16,174
    
    
    
    29,628
    
    
    
    Total patient service revenues
    
    
    286,071
    
    
    
    248,385
    
    
    
    37,686
    
    
    
    15.2Physician service revenues
    
    
    4,525
    
    
    
    4,325
    
    
    
    200
    
    
    
    4.6Other service revenues
    
    
    10,938
    
    
    
    8,239
    
    
    
    2,699
    
    
    
    32.8Total revenues
    
    $
    301,534
    
    
    $
    260,949
    
    
    $
    40,585
    
    
    
    15.6
    %
  Cost
of Revenues.
 Dollar
    
    
    Percent2006
    
    
    2005
    
    
    Variance
    
    
    VarianceSame store cost of revenues
    
    $
    159,231
    
    
    $
    147,109
    
    
    $
    12,122
    
    
    
    8.2
    %Cost of revenues from other centers
    
    
    37,572
    
    
    
    15,488
    
    
    
    22,084
    
    
    
    Total cost of revenues
    
    $
    196,803
    
    
    $
    162,597
    
    
    $
    34,206
    
    
    
    21.0
    %
  General and Administrative Expenses
 53




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##### Table of Contents



Depreciation
and Amortization.
 Dollar
    
    
    Percent2006
    
    
    2005
    
    
    Variance
    
    
    VarianceSame store depreciation and
amortization
    
    $
    11,166
    
    
    $
    10,769
    
    
    $
    397
    
    
    
    3.7
    %Depreciation and amortization from
other centers
    
    
    2,254
    
    
    
    2,206
    
    
    
    48
    
    
    
    Total depreciation and amortization
    
    $
    13,420
    
    
    $
    12,975
    
    
    $
    445
    
    
    
    3.4
    %
  Provision for Doubtful Accounts.
 Income
on Equity Investments.
 Impairment and Loss on Disposal of Long-Lived Assets.
 Gain on Sale of Long-Lived Assets.
 Proceeds from Insurance Settlement.
 54




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##### Table of Contents



Proceeds from Litigation Settlement.
 Operating Income
 Minority Interests in Income of Consolidated Subsidiaries
 Interest Expense, Net of Interest Income
 Provision for Income Taxes
 Income From Continuing Operations.
 Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 Overview.
 55




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##### Table of Contents



Revenues
 Dollar
    
    
    Percent2005
    
    
    2004
    
    
    Variance
    
    
    VariancePatient service revenues:Same store revenues
    
    $
    197,919
    
    
    $
    187,112
    
    
    $
    10,807
    
    
    
    5.8
    %Revenues from other centers
    
    
    50,466
    
    
    
    12,195
    
    
    
    38,271
    
    
    
    Total patient service revenues
    
    
    248,385
    
    
    
    199,307
    
    
    
    49,078
    
    
    
    24.9Physician service revenues
    
    
    4,325
    
    
    
    4,040
    
    
    
    285
    
    
    
    7.1Other service revenues
    
    
    8,239
    
    
    
    9,608
    
    
    
    (1,369
    )
    
    
    (14.2
    )Total revenues
    
    $
    260,949
    
    
    $
    212,955
    
    
    $
    47,994
    
    
    
    22.5
    %
  Cost of Revenues
 Dollar
    
    
    Percent2005
    
    
    2004
    
    
    Variance
    
    
    VarianceSame store cost of revenues
    
    $
    126,362
    
    
    $
    121,243
    
    
    $
    5,119
    
    
    
    4.2
    %Cost of revenues from other centers
    
    
    36,235
    
    
    
    17,506
    
    
    
    18,729
    
    
    
    Total cost of revenues
    
    $
    162,597
    
    
    $
    138,749
    
    
    $
    23,848
    
    
    
    17.2
    %
  General and Administrative Expenses
 Depreciation and Amortization
 Dollar
    
    
    Percent2005
    
    
    2004
    
    
    Variance
    
    
    VarianceSame store depreciation and
amortization
    
    $
    10,817
    
    
    $
    9,878
    
    
    $
    939
    
    
    
    9.5
    %Depreciation and amortization
other centers
    
    
    2,158
    
    
    
    889
    
    
    
    1,269
    
    
    
    Total depreciation and amortization
    
    $
    12,975
    
    
    $
    10,767
    
    
    $
    2,208
    
    
    
    20.5
    %
  56




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##### Table of Contents



Provision for Doubtful Accounts
 Income on Equity Investments.
 Impairment and Loss on Disposal of Long-Lived Assets.
 Gain on Sale of Long-Lived Assets.
 Operating Income
 Minority Interests in Income of Consolidated Subsidiaries
 Interest Expense, Net of Interest Income
 Provision for Income Taxes
 Income from Continuing Operations.
 57




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##### Table of Contents



Quarterly Results of Operations
  2006First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(dollars in thousands)(unaudited)Consolidated Statement of Operations Data:Revenues
    
    $
    71,884
    
    
    $
    77,289
    
    
    $
    73,476
    
    
    $
    78,885Operating expenses:Salaries and benefits
    
    
    19,118
    
    
    
    20,209
    
    
    
    19,809
    
    
    
    20,503Supplies
    
    
    13,758
    
    
    
    15,147
    
    
    
    14,671
    
    
    
    15,738Professional and medical fees
    
    
    3,310
    
    
    
    4,274
    
    
    
    4,448
    
    
    
    4,848Rent and lease expense
    
    
    4,598
    
    
    
    4,769
    
    
    
    4,801
    
    
    
    4,987Other operating expenses
    
    
    4,737
    
    
    
    5,441
    
    
    
    5,457
    
    
    
    6,180Cost of revenues
    
    
    45,521
    
    
    
    49,840
    
    
    
    49,186
    
    
    
    52,256General and administrative expenses
    
    
    6,538
    
    
    
    6,506
    
    
    
    5,017
    
    
    
    6,346Depreciation and amortization
    
    
    3,580
    
    
    
    2,826
    
    
    
    3,541
    
    
    
    3,473Provision for doubtful accounts
    
    
    659
    
    
    
    779
    
    
    
    1,444
    
    
    
    1,632Income on equity investments
    
    
    (245
    )
    
    
    (727
    )
    
    
    (511
    )
    
    
    (940
    )Impairment and loss on disposal of long-lived assets
    
    
    39
    
    
    
    529
    
    
    
    136
    
    
    
    459Gain on sale of long-lived assets
    
    
    
    
    
    
    (1,652
    )
    
    
    (81
    )
    
    
    (75
    )Proceeds from insurance settlement
    
    
    (410
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from litigation settlement
    
    
    (588
    )
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    55,094
    
    
    
    58,101
    
    
    
    58,732
    
    
    
    63,151Operating income
    
    
    16,790
    
    
    
    19,188
    
    
    
    14,744
    
    
    
    15,734Minority interests in income of consolidated subsidiaries
    
    
    (7,663
    )
    
    
    (7,594
    )
    
    
    (6,124
    )
    
    
    (6,513
    )Interest expense, net
    
    
    (1,498
    )
    
    
    (1,824
    )
    
    
    (1,791
    )
    
    
    (1,980
    )Income before income taxes
    
    
    7,629
    
    
    
    9,770
    
    
    
    6,829
    
    
    
    7,241Provision for income taxes
    
    
    2,937
    
    
    
    3,761
    
    
    
    2,630
    
    
    
    2,787Income from continuing operations
    
    
    4,692
    
    
    
    6,009
    
    
    
    4,199
    
    
    
    4,454Gain (loss) on discontinued operations
    
    
    (115
    )
    
    
    (107
    )
    
    
    (384
    )
    
    
    45Net income
    
    $
    4,577
    
    
    $
    5,902
    
    
    $
    3,815
    
    
    $
    4,499Other Data:Number of surgical facilities operated as of the end of period(1)
    
    
    61
    
    
    
    62
    
    
    
    61
    
    
    
    59
 58




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##### Table of Contents



2005First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(dollars in thousands)(unaudited)Consolidated Statement of Operations Data:Revenues
    
    $
    61,028
    
    
    $
    63,130
    
    
    $
    65,319
    
    
    $
    71,472Operating expenses:Salaries and benefits
    
    
    15,664
    
    
    
    15,426
    
    
    
    17,347
    
    
    
    17,777Supplies
    
    
    11,224
    
    
    
    11,550
    
    
    
    11,782
    
    
    
    13,220Professional and medical fees
    
    
    3,180
    
    
    
    3,369
    
    
    
    3,414
    
    
    
    3,496Rent and lease expense
    
    
    3,717
    
    
    
    3,959
    
    
    
    4,375
    
    
    
    4,697Other operating expenses
    
    
    4,458
    
    
    
    4,869
    
    
    
    4,319
    
    
    
    4,754Cost of revenues
    
    
    38,243
    
    
    
    39,173
    
    
    
    41,237
    
    
    
    43,944General and administrative expenses
    
    
    5,402
    
    
    
    5,904
    
    
    
    5,071
    
    
    
    5,616Depreciation and amortization
    
    
    3,079
    
    
    
    3,036
    
    
    
    3,281
    
    
    
    3,579Provision for doubtful accounts
    
    
    685
    
    
    
    1,107
    
    
    
    1,350
    
    
    
    1,001Income on equity investments
    
    
    (284
    )
    
    
    (325
    )
    
    
    (233
    )
    
    
    (431
    )Impairment and loss on disposal of long-lived assets
    
    
    109
    
    
    
    745
    
    
    
    666
    
    
    
    21Gain on sale of long-lived assets
    
    
    (241
    )
    
    
    (782
    )
    
    
    (762
    )
    
    
    Total operating expenses
    
    
    46,993
    
    
    
    48,858
    
    
    
    50,610
    
    
    
    53,730Operating income
    
    
    14,035
    
    
    
    14,272
    
    
    
    14,709
    
    
    
    17,742Minority interests in income of consolidated subsidiaries
    
    
    (5,955
    )
    
    
    (5,726
    )
    
    
    (6,464
    )
    
    
    (7,555
    )Interest expense, net
    
    
    (1,037
    )
    
    
    (883
    )
    
    
    (1,445
    )
    
    
    (1,529
    )Income before income taxes
    
    
    7,043
    
    
    
    7,663
    
    
    
    6,800
    
    
    
    8,658Provision for income taxes
    
    
    2,712
    
    
    
    2,948
    
    
    
    2,619
    
    
    
    3,002Income from continuing operations
    
    
    4,331
    
    
    
    4,715
    
    
    
    4,181
    
    
    
    5,656Gain (loss) on discontinued operations
    
    
    55
    
    
    
    165
    
    
    
    1
    
    
    
    (49
    )Net income
    
    $
    4,386
    
    
    $
    4,880
    
    
    $
    4,182
    
    
    $
    5,607Other Data:Number of surgical facilities operated as of the end of period(1)
    
    
    56
    
    
    
    56
    
    
    
    59
    
    
    
    59
 
 (1)
    
    Includes surgical facilities that we manage but in which we do not have an ownership
interest. Liquidity and Capital Resources
 Balance Sheet Information
    59




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##### Table of Contents



Cash Flow Statement Information
    Long-Term Debt
   60




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    years(in thousands)Long-term debt
    
    $
    135,548
    
    
    $
    1,292
    
    
    $
    2,269
    
    
    $
    131,987
    
    
    $
    Capital lease obligations
    
    
    3,153
    
    
    
    856
    
    
    
    1,473
    
    
    
    824
    
    
    
    Operating lease obligations
    
    
    143,959
    
    
    
    16,761
    
    
    
    32,610
    
    
    
    28,903
    
    
    
    65,685Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    282,660
    
    
    $
    18,909
    
    
    $
    36,352
    
    
    $
    161,714
    
    
    $
    65,685
  Amount of Commitment Expiration Per PeriodTotalOther Commercial Commitments
    
    Amounts
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    After 5Related to Unconsolidated Entities
    
    Committed
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    years(in thousands)Operating lease guarantees
    
    $
    767
    
    
    $
    271
    
    
    $
    496
    
    
    $
    
    
    
    $
    
 61




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##### Table of Contents



Inflation
  Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 Accounting for
Income Taxes
  Fair Value Measurements Accounting for Derivative Instruments and Hedging Activities
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  Item 8. Financial Statements and Supplementary Data
  62




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Managements Report on Internal Control over Financial Reporting.
    
 Report of Independent Registered Public Accounting Firm
    63




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##### Table of Contents



.
   
 Changes in Internal Control Over Financial Reporting.
 Limitations on the Effectiveness of Controls
  64




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##### Table of Contents



Item 9B. Other Information
  65




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##### Table of Contents



PART III
 Item 10. Directors, Executive Officers and Corporate Governance
 Directors and Executive Officers
  Code of Business Conduct and Ethics
 www.symbion.com
 Compliance with Section 16(a) of the Exchange Act
  Item 11. Executive Compensation
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  Item 13. Certain Relationships and Related Transactions, and Director Independence
  Item 14. Principal Accountant Fees and Services
  66




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##### Table of Contents



PART IV
 Item 15. Exhibits and Financial Statement Schedules
 (a) The following documents are filed as part of this report:
 Consolidated Financial Statements
  Consolidated Financial Statement Schedules
  Exhibits
 No.
    
    
    
    Description2.1
    
    
    
    Purchase Agreement, dated as of November 11, 2004, by and among the members of Surgery Center
Partners, L.L.C., Symbion Ambulatory Resource Centres, Inc. and SMBIMS Kirkwood, Inc. (a)2.2
    
    
    
    Purchase Agreement, dated as of July 27, 2005, by and among Members of Specialty Surgical
Center, LLC, Specialty Surgical Center of Encino, LLC, Specialty Surgical Center of Irvine,
LLC, Specialty Surgical Center of Arcadia, LLC, Symbion Ambulatory Resource Centres, Inc. and
Affiliates of Symbion Ambulatory Resource Centres, Inc. (b)3.1
    
    
    
    Certificate of Incorporation (c)3.2
    
    
    
    Certificate of Amendment to Certificate of Incorporation (d)3.3
    
    
    
    Certificate of Retirement of Stock (e)3.4
    
    
    
    Certificate of Designation of Rights and Preferences of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock (c)3.5
    
    
    
    Certificate of Designation of Series A Junior Participating Preferred Stock (d)3.6
    
    
    
    Bylaws (c)4.1
    
    
    
    Form of Common Stock Certificate (c)4.2
    
    
    
    Amended and Restated Investors Rights Agreement, dated as of June 25, 1999, among Symbion,
Inc. and the security holders named therein (f)4.3
    
    
    
    Amendment No. 1 to Amended and Restated Investors Rights Agreement, dated as of August 11,
1999, among Symbion, Inc. and the security holders named therein (f)4.4
    
    
    
    Amendment No. 2 to Amended and Restated Investors Rights Agreement, dated as of April 1,
2002, among Symbion, Inc. and the security holders named therein (f)4.5
    
    
    
    Form of Warrant for the purchase of shares of Symbion, Inc. common stock (f)4.6
    
    
    
    Rights Agreement, dated as of February 6, 2004, between Symbion, Inc. and SunTrust Bank (g)
 67




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##### Table of Contents



No.
    
    
    
    Description10.1
    
    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion, Inc.
and Richard E. Francis, Jr. (f) (s)10.2
    
    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion, Inc.
and Clifford G. Adlerz (f) (s)10.3
    
    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion, Inc.
and William V. B. Webb (f) (s)10.4
    
    
    
    Securities Purchase Agreement, dated as of July 18, 2003, among Symbion, Inc. and DLJ
Investment Partners II, L.P. and its affiliates (c)10.5
    
    
    
    Form of 143/4% Senior Subordinated Note due 2008 (c)10.6
    
    
    
    Amended and Restated Credit Agreement, dated as of March 21, 2005, among Symbion, Inc., the
subsidiaries of Symbion identified therein, Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, Credit Suisse First Boston, as Syndication Agent, KeyBank
National Association, as Documentation Agent and the other lenders party thereto (h)10.7
    
    
    
    First Amendment to Amended and Restated Credit Agreement, dated April 4, 2006, among Symbion,
Inc., various lenders party thereto and Bank of America, N.A., as Administrative Agent (n)10.8
    
    
    
    Lease Agreement, dated June 26, 2001, between Burton Hills IV Partners and Symbion, Inc. (f)10.9
    
    
    
    First Amendment to Lease Agreement, dated February 9, 2004, between Burton Hills IV Partners
and Symbion, Inc. (e)10.10
    
    
    
    Amended and Restated Ambulatory Resource Centres, Inc. 1997 Stock Option Plan (f) (s)10.11
    
    
    
    Ambulatory Resource Centres, Inc. Nonqualified Initial Option Plan (f) (n)10.12
    
    
    
    Symbion Long Term Incentive Plan (o) (s)10.13
    
    
    
    Form of Incentive Stock Option Agreement under the Long Term Incentive Plan (i) (s)10.14
    
    
    
    Form of Nonqualified Stock Option Agreement under the Long Term Incentive Plan (Form 1) (p) (s)10.15
    
    
    
    Form of Nonqualified Stock Option Agreement under the Long Term Incentive Plan (Form 2) (p) (s)10.16
    
    
    
    Form of Restricted Stock Agreement under the Long Term Incentive Plan (j) (s)10.17
    
    
    
    Symbion Non-Employee Directors Stock Option Plan (f) (s)10.18
    
    
    
    Form of Nonqualified Stock Option Agreement under the Non-Employee Directors Stock Option Plan
(q) (s)10.19
    
    
    
    Symbion Employee Stock Purchase Plan (f) (s)10.20
    
    
    
    Form of Stock Option Agreement under the Employee Stock Purchase Plan (p) (s)10.21
    
    
    
    First Amendment to Symbion Employee Stock Purchase Plan (f) (s)10.22
    
    
    
    Second Amendment to Symbion Employee Stock Purchase Plan (k) (s)
 68




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##### Table of Contents



No.
    
    
    
    Description10.23
    
    
    
    Third Amendment to Symbion Employee Stock Purchase Plan (r) (s)10.24
    
    
    
    Executive Change in Control Severance Plan, dated December 11, 1997 (f) (s)10.25
    
    
    
    Supplemental Executive Retirement Plan (l) (s)10.26
    
    
    
    Form of Deferred Stock Purchase Program Agreement (l) (s)10.27
    
    
    
    Management Rights Purchase Agreement, dated as of July 27, 2005, by and among Parthenon
Management Partners, LLC, Andrew A. Brooks, M.D., Randhir S. Tuli and SymbionARC Management
Services, Inc. (b)10.28
    
    
    
    Summary of Director Compensation (s)10.29
    
    
    
    2006 Executive Officer Compensation (r) (s)10.30
    
    
    
    2007 Executive Officer Compensation (m) (s)21
    
    
    
    Subsidiaries of Registrant23.1
    
    
    
    Consent of Ernst & Young LLP31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (a)
    
    Incorporated by reference to exhibits filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 2004 (File No. 000-50574).(b)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed August 2, 2005 (File No. 000-50574).(c)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-1 (Registration No. 333-110555).(d)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-8 (Registration No. 333-113272).(e)
    
    Incorporated by reference to exhibits filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 2003 (File No. 000-50574).(f)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-1 (Registration No. 333-89554).(g)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on February 6, 2004 (Registration
No. 000-50574). 69




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##### Table of Contents



(h)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed March 25, 2005 (File No. 000-50574).(i)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed December 14, 2004 (File No. 000-50574).(j)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed January 11, 2005 (File No. 000-50574).(k)
    
    Incorporated by reference to exhibits filed with the Registrants Quarterly Report on Form
10-Q for the quarter ended September 30, 2005 (File No. 000-50574).(l)
    
    Incorporated by reference to exhibits filed with the Registrants Quarterly Report on Form
10-Q for the quarter ended March 31, 2005 (File No. 000-50574).(m)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed February 26, 2007 (File No. 000-50574).(n)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed April 5, 2006 (File No. 000-50574).(o)
    
    Incorporated by reference to Appendix A of the Registrants Definitive Proxy Statement filed
April 4, 2006 (File No. 000-50574).(p)
    
    Incorporated by reference to exhibits filed with the Registrants Quarterly Report on Form
10-Q for the quarter ended March 31, 2006 (File No. 000-50574).(q)
    
    Incorporated by reference to exhibits filed with the Registrants Quarterly Report on Form
10-Q for the quarter ended June 30, 2006 (File No. 000-50574).(r)
    
    Incorporated by reference to exhibits filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 2005 (File No. 000-50574).(s)
    
    Compensation plan or arrangement.
 70




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31, 2006, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
     Share-Based Payment,
   
 F-2




---



##### Table of Contents



SYMBION, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (dollars in thousands, except per share amounts)
 December 31,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,163
    
    
    $
    28,319Accounts receivable, less allowance for doubtful accounts of $28,133 and $19,615, respectively
    
    
    37,111
    
    
    
    31,995Inventories
    
    
    8,453
    
    
    
    7,440Prepaid expenses and other current assets
    
    
    14,178
    
    
    
    7,914Current assets of discontinued operations
    
    
    
    
    
    
    827Total current assets
    
    
    86,905
    
    
    
    76,495Land
    
    
    3,597
    
    
    
    1,625Buildings and improvements
    
    
    52,212
    
    
    
    45,153Furniture and equipment
    
    
    82,700
    
    
    
    66,993Computers and software
    
    
    8,023
    
    
    
    7,472146,532
    
    
    
    121,243Less accumulated depreciation
    
    
    (64,167
    )
    
    
    (49,627
    )Property and equipment, net
    
    
    82,365
    
    
    
    71,616Goodwill
    
    
    314,980
    
    
    
    268,312Other intangible assets, net
    
    
    
    
    
    
    650Investments in and advances to affiliates
    
    
    16,463
    
    
    
    13,753Other assets
    
    
    3,093
    
    
    
    3,740Long-term assets of discontinued operations
    
    
    
    
    
    
    1,812Total assets
    
    $
    503,806
    
    
    $
    436,378LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,983
    
    
    $
    6,527Accrued payroll and benefits
    
    
    8,112
    
    
    
    8,591Other accrued expenses
    
    
    14,019
    
    
    
    10,652Current maturities of long-term debt
    
    
    2,148
    
    
    
    1,347Current liabilities of discontinued operations
    
    
    
    
    
    
    594Total current liabilities
    
    
    30,262
    
    
    
    27,711Long-term debt, less current maturities
    
    
    136,553
    
    
    
    101,969Other liabilities
    
    
    18,944
    
    
    
    17,102Minority interests
    
    
    32,768
    
    
    
    29,538Stockholders equity:Common stock, 225,000,000 shares, $0.01 par value, authorized at December 31, 2006 and at
December 31, 2005; 21,643,291 shares issued and outstanding at December 31, 2006, 21,444,463
shares issued and outstanding at December 31, 2005
    
    
    216
    
    
    
    214Additional paid-in-capital
    
    
    212,452
    
    
    
    206,418Stockholder notes receivable
    
    
    
    
    
    
    (228
    )Accumulated other comprehensive income
    
    
    485
    
    
    
    321Retained earnings
    
    
    72,126
    
    
    
    53,333Total stockholders equity
    
    
    285,279
    
    
    
    260,058Total liabilities and stockholders equity
    
    $
    503,806
    
    
    $
    436,378
  F-3




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##### Table of Contents



SYMBION, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (dollars in thousands, except per share amounts)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Revenues
    
    $
    301,534
    
    
    $
    260,949
    
    
    $
    212,955Operating expenses:Salaries and benefits
    
    
    79,639
    
    
    
    66,214
    
    
    
    55,422Supplies
    
    
    59,314
    
    
    
    47,776
    
    
    
    41,913Professional and medical fees
    
    
    16,880
    
    
    
    13,459
    
    
    
    11,116Rent and lease expense
    
    
    19,155
    
    
    
    16,748
    
    
    
    13,338Other operating expenses
    
    
    21,815
    
    
    
    18,400
    
    
    
    16,960Cost of revenues
    
    
    196,803
    
    
    
    162,597
    
    
    
    138,749General and administrative expense
    
    
    24,407
    
    
    
    21,993
    
    
    
    18,449Depreciation and amortization
    
    
    13,420
    
    
    
    12,975
    
    
    
    10,767Provision for doubtful accounts
    
    
    4,514
    
    
    
    4,143
    
    
    
    3,829Income on equity investments
    
    
    (2,423
    )
    
    
    (1,273
    )
    
    
    (1,272
    )Impairment and loss on disposal of long-lived assets.
    
    
    1,163
    
    
    
    1,541
    
    
    
    271Gain on sale of long-lived assets
    
    
    (1,808
    )
    
    
    (1,785
    )
    
    
    (250
    )Proceeds from insurance settlement, net
    
    
    (410
    )
    
    
    
    
    
    
    Proceeds from litigation settlement, net
    
    
    (588
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    235,078
    
    
    
    200,191
    
    
    
    170,543Operating income
    
    
    66,456
    
    
    
    60,758
    
    
    
    42,412Minority interests in income of consolidated
subsidiaries
    
    
    (27,894
    )
    
    
    (25,700
    )
    
    
    (15,629
    )Interest expense, net
    
    
    (7,093
    )
    
    
    (4,894
    )
    
    
    (4,847
    )Income before income taxes and discontinued operations
    
    
    31,469
    
    
    
    30,164
    
    
    
    21,936Provision for income taxes
    
    
    12,115
    
    
    
    11,281
    
    
    
    8,445Income from continuing operations
    
    
    19,354
    
    
    
    18,883
    
    
    
    13,491Gain (loss) from discontinued operations, net of taxes
    
    
    (561
    )
    
    
    172
    
    
    
    61Net income
    
    $
    18,793
    
    
    $
    19,055
    
    
    $
    13,552Net income per share  continuing operations:Basic:
    
    $
    0.90
    
    
    $
    0.89
    
    
    $
    0.68Diluted:
    
    $
    0.89
    
    
    $
    0.86
    
    
    $
    0.66Net income per share:Basic:
    
    $
    0.87
    
    
    $
    0.90
    
    
    $
    0.69Diluted:
    
    $
    0.86
    
    
    $
    0.86
    
    
    $
    0.67Weighted average number of common shares
outstanding and common equivalent shares:Basic:
    
    
    21,546,036
    
    
    
    21,285,211
    
    
    
    19,736,722Diluted:
    
    
    21,733,103
    
    
    
    22,028,591
    
    
    
    20,347,385
  F-4




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##### Table of Contents



SYMBION, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (dollars in thousands, except per share amounts)
 Symbion, Inc.Series A and Series B
    
    
    Symbion, Inc.Convertible Preferred Stock
    
    
    Common Stock
    
    
    Additional
    
    
    Stockholder
    
    
    Accumulated Other
    
    
    
    
    
    
    TotalPaid-In
    
    
    Notes
    
    
    Comprehensive
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Receivable
    
    
    Income
    
    
    Earnings
    
    
    EquityBalance at December 31, 2003
    
    
    6,946,316
    
    
    $
    21,742
    
    
    
    10,612,687
    
    
    $
    106
    
    
    $
    61,746
    
    
    $
    (305
    )
    
    $
    
    
    
    $
    20,726
    
    
    $
    104,015Public offering of common stock
    
    
    
    
    
    
    
    
    
    
    8,280,000
    
    
    
    83
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83Conversion of Preferred Stock at time of public offering
    
    
    (6,946,316
    )
    
    
    (21,742
    )
    
    
    1,789,341
    
    
    
    18
    
    
    
    24,795
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,071Other initial public offering activity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,764
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,764Issuance of warrants and common stock, net of repurchases,
and other
    
    
    
    
    
    
    
    
    
    
    350,749
    
    
    
    3
    
    
    
    5,492
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    5,513Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,552
    
    
    
    13,552Balance at December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    21,032,777
    
    
    $
    210
    
    
    $
    203,797
    
    
    $
    (287
    )
    
    $
    
    
    
    $
    34,278
    
    
    $
    237,998Issuance of warrants and common stock, net of repurchases,
and other
    
    
    
    
    
    
    
    
    
    
    411,686
    
    
    
    4
    
    
    
    2,558
    
    
    
    59
    
    
    
    
    
    
    
    
    
    
    
    2,621Amortized compensation expense related to restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Unrealized gain on interest rate swap, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321
    
    
    
    
    
    
    
    321Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,055
    
    
    
    19,055Balance at December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    21,444,463
    
    
    $
    214
    
    
    $
    206,418
    
    
    $
    (228
    )
    
    $
    321
    
    
    $
    53,333
    
    
    $
    260,058Issuance of warrants and common stock, net of repurchases,
and other
    
    
    
    
    
    
    
    
    
    
    198,828
    
    
    
    2
    
    
    
    1,516
    
    
    
    228
    
    
    
    
    
    
    
    
    
    
    
    1,746Amortized compensation expense related to restricted
stock and stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,518
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,518Unrealized gain on interest rate swap, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    164
    
    
    
    
    
    
    
    164Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,793
    
    
    
    18,793Balance at December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    21,643,291
    
    
    $
    216
    
    
    $
    212,452
    
    
    $
    
    
    
    $
    485
    
    
    $
    72,126
    
    
    $
    285,279
  F-5




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##### Table of Contents



SYMBION, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (dollars in thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    18,793
    
    
    $
    19,055
    
    
    $
    13,552Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    13,420
    
    
    
    12,975
    
    
    
    10,767Non-cash stock option compensation expense
    
    
    3,865
    
    
    
    
    
    
    
    Non-cash gains and losses
    
    
    (645
    )
    
    
    (244
    )
    
    
    21Minority interests
    
    
    27,894
    
    
    
    25,700
    
    
    
    15,629Provision for income taxes
    
    
    12,115
    
    
    
    11,281
    
    
    
    8,445Distributions to minority partners
    
    
    (25,447
    )
    
    
    (23,049
    )
    
    
    (14,420
    )Income on equity investments
    
    
    (2,423
    )
    
    
    (1,273
    )
    
    
    (1,272
    )Provision for doubtful accounts
    
    
    4,514
    
    
    
    4,143
    
    
    
    3,829Excess tax benefit from share-based compensation
    
    
    (201
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:Accounts receivable
    
    
    (4,102
    )
    
    
    (4,958
    )
    
    
    (5,223
    )Other assets
    
    
    (1,522
    )
    
    
    1,200
    
    
    
    1,511Other liabilities
    
    
    (15,218
    )
    
    
    (3,392
    )
    
    
    (5,108
    )Net cash provided by operating activities  continuing operations
    
    
    31,043
    
    
    
    41,438
    
    
    
    27,731Net cash provided by operating activities  discontinued operations
    
    
    1,014
    
    
    
    437
    
    
    
    269Net cash provided by operating activities
    
    
    32,057
    
    
    
    41,875
    
    
    
    28,000Cash flows from investing activities:Payments for acquisitions, net of cash acquired
    
    
    (47,085
    )
    
    
    (55,479
    )
    
    
    (95,198
    )Purchases of property and equipment, net
    
    
    (15,618
    )
    
    
    (13,636
    )
    
    
    (10,996
    )Change in other assets
    
    
    (2,708
    )
    
    
    383
    
    
    
    1,468Net cash used in investing activities  continuing operations
    
    
    (65,411
    )
    
    
    (68,732
    )
    
    
    (104,726
    )Net cash used in investing activities  discontinued operations
    
    
    (161
    )
    
    
    (108
    )
    
    
    (126
    )Net cash used in investing activities
    
    
    (65,572
    )
    
    
    (68,840
    )
    
    
    (104,852
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (54,732
    )
    
    
    (34,353
    )
    
    
    (118,820
    )Proceeds from debt issuances
    
    
    85,558
    
    
    
    61,938
    
    
    
    83,000Proceeds from capital contributions by minority partners
    
    
    1,488
    
    
    
    3,630
    
    
    
    1,364Proceeds from initial public offering, net
    
    
    
    
    
    
    
    
    
    
    115,506Change in other long-term liabilities
    
    
    (1,492
    )
    
    
    (1,570
    )
    
    
    738Excess tax benefit from share-based compensation
    
    
    201
    
    
    
    
    
    
    
    Net proceeds from issuance of common stock
    
    
    1,347
    
    
    
    2,450
    
    
    
    901Net cash provided by financing activities  continuing operations
    
    
    32,370
    
    
    
    32,095
    
    
    
    82,689Net cash used in financing activities  discontinued operations
    
    
    (11
    )
    
    
    
    
    
    
    (306
    )Net cash provided by financing activities
    
    
    32,359
    
    
    
    32,095
    
    
    
    82,383Net increase (decrease) in cash and cash equivalents
    
    
    (1,156
    )
    
    
    5,130
    
    
    
    5,531Cash and cash equivalents at beginning of period
    
    
    28,319
    
    
    
    23,189
    
    
    
    17,658Cash and cash equivalents at end of period
    
    $
    27,163
    
    
    $
    28,319
    
    
    $
    23,189
  F-6




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##### Table of Contents



SYMBION, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
(dollars in thousands, except per share amounts)
 1. Organization
  2. Significant Accounting Policies and Practices
 Basis of Presentation and Use of Estimates
  Principles of Consolidation
  Fair Value of Financial Instruments
  F-7




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##### Table of Contents



Cash and Cash Equivalents
  Accounts Receivable
  2006
    
    
    2005Surgery centers
    
    $
    36,448
    
    
    $
    31,411Physician networks
    
    
    663
    
    
    
    584Total
    
    $
    37,111
    
    
    $
    31,995
  Payor
    
    2006
    
    
    2005Private insurance
    
    
    67
    %
    
    
    70
    %Government
    
    
    11
    
    
    
    10Self-pay
    
    
    16
    
    
    
    14Other
    
    
    6
    
    
    
    6Total
    
    
    100
    %
    
    
    100
    %
   Allowance for Doubtful Accounts
  F-8




---



##### Table of Contents



Allowance
    
    
    Charged toBalance at
    
    
    Revenues,
    
    
    Charged to
    
    
    
    
    
    
    AllowanceBeginning of
    
    
    Costs and
    
    
    Other
    
    
    
    
    
    
    Balance atPeriod
    
    
    Expenses
    
    
    Accounts(1)
    
    
    Other
    
    
    End of PeriodYear ended December 31:2004
    
    $
    12,105
    
    
    $
    3,829
    
    
    $
    437
    
    
    $
    (3,039
    )
    
    $
    13,3322005
    
    
    13,332
    
    
    
    4,143
    
    
    
    5,002
    
    
    
    (2,862
    )
    
    
    19,6152006
    
    
    19,615
    
    
    
    4,514
    
    
    
    824
    
    
    
    3,180
    
    
    
    28,133
 
 (1)
    
    Relates to allowances for doubtful accounts recorded under the purchase method of accounting
for acquired entities. Inventories
  Property and Equipment
   Goodwill and Indefinite Lived Intangible Assets
  Service Agreement Rights
  F-9




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##### Table of Contents



Minority Interests
  Investments in and Advances to Affiliates
  Other Assets
   Comprehensive Income
 Accounting for Derivative Instruments and Hedging
Activities
 Revenues
  2006
    
    
    2005
    
    
    2004Patient service revenues
    
    $
    286,071
    
    
    $
    248,385
    
    
    $
    199,308Physician service revenues
    
    
    4,525
    
    
    
    4,325
    
    
    
    4,040Other service revenues
    
    
    10,938
    
    
    
    8,239
    
    
    
    9,607Total revenues
    
    $
    301,534
    
    
    $
    260,949
    
    
    $
    212,955
 F-10




---



##### Table of Contents



Patient Service Revenues
   Payor
    
    2006
    
    
    2005
    
    
    2004Private insurance
    
    
    76
    %
    
    
    76
    %
    
    
    76
    %Government
    
    
    19
    
    
    
    18
    
    
    
    20Self-pay
    
    
    4
    
    
    
    4
    
    
    
    3Other
    
    
    1
    
    
    
    2
    
    
    
    1Total
    
    
    100
    %
    
    
    100
    %
    
    
    100.0
    %
 Physician Service Revenues
   2006
    
    
    2005
    
    
    2004Professional services revenues
    
    $
    13,281
    
    
    $
    12,619
    
    
    $
    11,028Contractual adjustments and bad debt expense
    
    
    (6,145
    )
    
    
    (5,680
    )
    
    
    (4,924
    )Clinic revenue
    
    
    7,136
    
    
    
    6,939
    
    
    
    6,104Medical group retainage
    
    
    (2,611
    )
    
    
    (2,614
    )
    
    
    (2,064
    )Physician service revenues
    
    $
    4,525
    
    
    $
    4,325
    
    
    $
    4,040
 Other Service Revenues
  F-11




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##### Table of Contents



Stock-Based Compensation
 Share-Based Payment
 Income Taxes
  Supplemental Cash Flow Information
   Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 Accounting for
Income Taxes
  Fair Value Measurements
 F-12




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##### Table of Contents



Accounting for Derivative Instruments and Hedging Activities
 Reclassifications
  3. Reverse Stock Split and Initial Public Offering
   4. Acquisitions and Developments
  2006
    
    
    2005
    
    
    2004Fair value of assets acquired
    
    $
    55,384
    
    
    $
    62,425
    
    
    $
    77,582Liabilities assumed
    
    
    (8,773
    )
    
    
    (11,983
    )
    
    
    (11,271
    )Net assets acquired
    
    $
    46,611
    
    
    $
    50,442
    
    
    $
    66,311
    2006 Significant Activity
  F-13




---



##### Table of Contents



2005 Significant Activity
 de novo
 de
novo de novo
 2004 Significant Activity
    F-14




---



##### Table of Contents



Developments and Other
 de novo de novo
  5. Dispositions
 Accounting for the Impairment or Disposal of Long-Lived
Assets
 2006
    
    
    2005
    
    
    2004Revenues
    
    $
    2,981
    
    
    $
    4,795
    
    
    $
    3,370Gain (loss) on operations before income taxes
    
    $
    (733
    )
    
    $
    281
    
    
    $
    98Gain (loss) on operations, net of taxes
    
    $
    (452
    )
    
    $
    172
    
    
    $
    61Loss on sale, net of taxes
    
    
    (109
    )
    
    
    
    
    
    
    Gain (loss) from discontinued operations,
net of taxes
    
    $
    (561
    )
    
    $
    172
    
    
    $
    61Basic earnings (loss) per share 
discontinued operations
    
    $
    (0.03
    )
    
    $
    0.01
    
    
    $
    0.01Diluted earnings (loss) per share 
discontinued operations
    
    $
    (0.03
    )
    
    $
    0.01
    
    
    $
    0.01
   F-15




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##### Table of Contents



6. Goodwill and Intangible Assets
  Balance at December 31, 2004
    
    $
    215,533Purchase price allocations
    
    
    49,366Finalized purchase price allocations
    
    
    3,413Balance at December 31, 2005
    
    
    268,312Purchase price allocations
    
    
    43,562Finalized purchase price allocations
    
    
    3,106Balance at December 31, 2006
    
    $
    314,980
   7. Operating Leases
   2007
    
    $
    16,7612008
    
    
    16,8662009
    
    
    15,7442010
    
    
    14,7512011
    
    
    14,152Thereafter
    
    
    65,685Total minimum lease payments
    
    $
    143,959
 F-16




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##### Table of Contents



8. Long-Term Debt
  December 31,2006
    
    
    2005Senior credit facility
    
    $
    129,000
    
    
    $
    96,000Notes payable to banks
    
    
    5,685
    
    
    
    4,752Secured term loans
    
    
    863
    
    
    
    1,254Capital lease obligations
    
    
    3,153
    
    
    
    1,310138,701
    
    
    
    103,316Less current maturities
    
    
    (2,148
    )
    
    
    (1,347
    )$
    136,553
    
    
    $
    101,969
 Senior Credit Facility
     F-17




---



##### Table of Contents



Notes Payable to Banks
  Capital Lease Obligations
  Other Long-Term Debt Information
  Long-termDebt
    
    

CapitalLeaseObligations
    
    
    Total2007
    
    $
    1,292
    
    
    $
    1,027
    
    
    $
    2,3192008
    
    
    1,233
    
    
    
    816
    
    
    
    2,0492009
    
    
    1,036
    
    
    
    807
    
    
    
    1,8432010
    
    
    131,987
    
    
    
    631
    
    
    
    132,6182011
    
    
    
    
    
    
    254
    
    
    
    254Thereafter
    
    
    
    
    
    
    
    
    
    
    135,548
    
    
    
    3,535
    
    
    
    139,083Less current maturities
    
    
    (1,292
    )
    
    
    (856
    )
    
    
    (2,148
    )Amounts representing interest
    
    
    
    
    
    
    (382
    )
    
    
    (382
    )$
    134,256
    
    
    $
    2,297
    
    
    $
    136,553
 9. Stockholders Equity
 Capital
   Stock Options
 Overall Description
 Share-Based Payment Accounting for Stock Issued to Employees
 F-18




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##### Table of Contents



Accounting for Stock-Based Compensation
    Valuation Methodology
  Weighted average risk-free interest rate
  Expected volatility
  F-19




---



##### Table of Contents



Expected life, in years
  Expected dividend yield
  Expected forfeiture rate
  Pro Forma Net Income and Earnings Per Share
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Net income as reported
    
    $
    18,793
    
    
    $
    19,055
    
    
    $
    13,552Add: Total compensation expense for stock option
grants included in net income, net of taxes
    
    
    
    
    
    
    40
    
    
    
    Pro forma compensation expense for stock option grants
    
    
    
    
    
    
    (2,385
    )
    
    
    (1,842
    )Pro forma net income
    
    $
    18,793
    
    
    $
    16,710
    
    
    $
    11,710Basic earnings per share:As reported
    
    $
    0.87
    
    
    $
    0.90
    
    
    $
    0.69Pro forma
    
    
    N/A
    
    
    
    0.79
    
    
    
    0.59Diluted earnings per share:As reported
    
    $
    0.86
    
    
    $
    0.86
    
    
    $
    0.67Pro forma
    
    
    N/A
    
    
    
    0.76
    
    
    
    0.58
 F-20




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##### Table of Contents



Outstanding Option Information
  WeightedNumber of
    
    
    AverageShares
    
    
    Exercise PriceDecember 31, 2003
    
    
    1,718,475
    
    
    $
    11.87Granted
    
    
    305,000
    
    
    
    19.37Exercised
    
    
    (101,788
    )
    
    
    9.85Expired
    
    
    (59,137
    )
    
    
    12.82December 31, 2004
    
    
    1,862,550
    
    
    
    13.17Granted
    
    
    463,950
    
    
    
    19.46Exercised
    
    
    (327,846
    )
    
    
    9.59Expired
    
    
    (45,438
    )
    
    
    15.95December 31, 2005
    
    
    1,953,216
    
    
    
    15.19Granted
    
    
    450,875
    
    
    
    23.74Exercised
    
    
    (347,703
    )
    
    
    8.64Expired
    
    
    (108,602
    )
    
    
    17.97December 31, 2006
    
    
    1,947,786
    
    
    
    18.18
   Options Outstanding
    
    Options ExercisableWeighted-Outstanding
    
    Average
    
    Weighted-
    
    Exercisable
    
    Weighted-as of
    
    Remaining
    
    Average
    
    as of
    
    AverageRange of
    
    Dec. 31,
    
    Contractual
    
    Exercise
    
    Dec. 31,
    
    ExerciseExercise Prices
    
    2006
    
    Life
    
    Price
    
    2006
    
    Price$ 0.00  $10.10
    
    
    1,650
    
    
    
    1.3
    
    
    $
    0.54
    
    
    
    1,650
    
    
    $
    0.54$10.11  $12.63
    
    
    933
    
    
    
    5.0
    
    
    $
    10.69
    
    
    
    933
    
    
    $
    10.69$12.64  $15.15
    
    
    829,218
    
    
    
    6.0
    
    
    $
    14.32
    
    
    
    730,834
    
    
    $
    14.23$15.16  $19.70
    
    
    666,660
    
    
    
    8.0
    
    
    $
    19.30
    
    
    
    246,428
    
    
    $
    19.26$19.71  $23.80
    
    
    449,325
    
    
    
    8.9
    
    
    $
    23.73
    
    
    
    20,500
    
    
    $
    23.671,947,786
    
    
    
    7.3
    
    
    $
    18.18
    
    
    
    1,000,345
    
    
    $
    15.64
  F-21




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##### Table of Contents



10. Earnings Per Share
  Year Ended December 31,2006
    
    
    2005
    
    
    2004Numerator for basic and diluted income per share:Net income
    
    $
    18,793
    
    
    $
    19,055
    
    
    $
    13,552Denominator:Denominator for basic income per share
weighted-average shares outstanding
    
    
    21,546,036
    
    
    
    21,285,211
    
    
    
    19,736,722Effect of dilutive securities:Employee stock options
    
    
    152,635
    
    
    
    698,382
    
    
    
    353,432Warrants
    
    
    34,432
    
    
    
    44,998
    
    
    
    109,514Preferred stock
    
    
    
    
    
    
    
    
    
    
    140,712Common stock held in escrow
    
    
    
    
    
    
    
    
    
    
    7,005Denominator for diluted income per share 
adjusted weighted-average shares outstanding
    
    
    21,733,103
    
    
    
    22,028,591
    
    
    
    20,347,385Basic net income per share
    
    $
    0.87
    
    
    $
    0.90
    
    
    $
    0.69Diluted net income per share
    
    $
    0.86
    
    
    $
    0.86
    
    
    $
    0.67
  11. Income Taxes
   2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    12,437
    
    
    $
    6,609
    
    
    $
    337State
    
    
    1,163
    
    
    
    1,121
    
    
    
    582Deferred
    
    
    (1,485
    )
    
    
    3,551
    
    
    
    7,526Income tax expense (benefit)
    
    $
    12,115
    
    
    $
    11,281
    
    
    $
    8,445
  2006
    
    
    2005
    
    
    2004Tax at U.S. statutory rates
    
    $
    11,014
    
    
    $
    10,648
    
    
    $
    7,712State income taxes, net of federal tax benefit
    
    
    227
    
    
    
    268
    
    
    
    225Change in valuation allowance
    
    
    887
    
    
    
    152
    
    
    
    261Other
    
    
    (13
    )
    
    
    213
    
    
    
    247$
    12,115
    
    
    $
    11,281
    
    
    $
    8,445
 F-22




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##### Table of Contents



2006
    
    
    2005Deferred tax assets:Amortization
    
    $
    53
    
    
    $
    Accrued vacation
    
    
    199
    
    
    
    195Net operating loss carryforward
    
    
    4,255
    
    
    
    3,767Deferred project costs
    
    
    105
    
    
    
    115Other deferred assets
    
    
    7,818
    
    
    
    3,336Total gross deferred tax assets
    
    
    12,430
    
    
    
    7,413Less: Valuation allowance
    
    
    (4,615
    )
    
    
    (3,728
    )Total deferred tax assets
    
    
    7,815
    
    
    
    3,685Deferred tax liabilities:Depreciation on property and equipment
    
    
    (2,835
    )
    
    
    (608
    )Amortization on intangible assets
    
    
    
    
    
    
    (203
    )Basis differences of partnerships and joint ventures
    
    
    (12,611
    )
    
    
    (10,953
    )Other liabilities
    
    
    (228
    )
    
    
    (36
    )Total deferred tax liabilities
    
    
    (15,674
    )
    
    
    (11,800
    )Net deferred tax liability
    
    $
    (7,859
    )
    
    $
    (8,115
    )
  12. Employee Benefit Plans
 Symbion, Inc. 401(k) Plan
  Employee Stock Purchase Plan
  F-23




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##### Table of Contents



Supplemental Retirement Savings Plan
  13. Commitments and Contingencies
 Debt and Lease Guaranty on Unconsolidated Entities
  Professional and General Liability Risks
  Current Operations
  Acquired Centers
  F-24




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##### Table of Contents



Potential Physician Investor Liability
  F-25




---



##### Table of Contents



14. Selected Quarterly Financial Data (Unaudited)
  2006First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(unaudited)Revenues
    
    $
    71,884
    
    
    $
    77,289
    
    
    $
    73,476
    
    
    $
    78,885Cost of Revenues
    
    
    45,521
    
    
    
    49,840
    
    
    
    49,186
    
    
    
    52,256Income from continuing operations
    
    
    4,692
    
    
    
    6,009
    
    
    
    4,199
    
    
    
    4,454Net Income
    
    
    4,577
    
    
    
    5,902
    
    
    
    3,815
    
    
    
    4,499Net income per share:Basic
    
    
    0.21
    
    
    
    0.27
    
    
    
    0.18
    
    
    
    0.21Diluted
    
    
    0.21
    
    
    
    0.27
    
    
    
    0.17
    
    
    
    0.21
 2005First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(unaudited)Revenues
    
    $
    61,028
    
    
    $
    63,130
    
    
    $
    65,319
    
    
    $
    71,472Cost of Revenues
    
    
    38,243
    
    
    
    39,173
    
    
    
    41,237
    
    
    
    43,944Income from continuing operations
    
    
    4,331
    
    
    
    4,715
    
    
    
    4,181
    
    
    
    5,656Net Income
    
    
    4,386
    
    
    
    4,880
    
    
    
    4,182
    
    
    
    5,607Net income per share:Basic
    
    
    0.21
    
    
    
    0.23
    
    
    
    0.20
    
    
    
    0.26Diluted
    
    
    0.20
    
    
    
    0.22
    
    
    
    0.19
    
    
    
    0.25
 F-26




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##### Table of Contents



SIGNATURES
  SYMBION, INC.By:
    /s/ Richard E. Francis, Jr.Richard E. Francis, Jr.Chairman and Chief Executive Officer  Signature
    
    Title
    
    Date/s/ Richard E. Francis, Jr.

Richard E. Francis, Jr.
    
    Chairman of the Board, Chief Executive
Officer,
Director (principal executive officer)
    
    March 15, 2007/s/ Kenneth C. Mitchell

Kenneth C. Mitchell
    
    Chief Financial Officer, Senior Vice
President of Finance
(principal financial and accounting officer)
    
    March 15, 2007/s/ Clifford G. Adlerz

Clifford G. Adlerz
    
    President, Chief Operating Officer,
Director
    
    March 15, 2007/s/ Frederick L. Bryant

Frederick L. Bryant
    
    Director
    
    March 15, 2007/s/ Donald W. Burton

Donald W. Burton
    
    Director
    
    March 15, 2007/s/ Eve M. Kurtin

Eve M. Kurtin
    
    Director
    
    March 15, 2007/s/ Jack Tyrrell

Jack Tyrrell
    
    Director
    
    March 15, 2007/s/ David M. Wilds

David M. Wilds
    
    Director
    
    March 15, 2007




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##### Table of Contents



EXHIBIT INDEX
 No.
    
    
    
    Description2.1
    
    
    
    Purchase Agreement, dated as of November 11, 2004, by and among the members of Surgery Center
Partners, L.L.C., Symbion Ambulatory Resource Centres, Inc. and SMBIMS Kirkwood, Inc. (a)2.2
    
    
    
    Purchase Agreement, dated as of July 27, 2005, by and among Members of Specialty Surgical
Center, LLC, Specialty Surgical Center of Encino, LLC, Specialty Surgical Center of Irvine,
LLC, Specialty Surgical Center of Arcadia, LLC, Symbion Ambulatory Resource Centres, Inc. and
Affiliates of Symbion Ambulatory Resource Centres, Inc. (b)3.1
    
    
    
    Certificate of Incorporation (c)3.2
    
    
    
    Certificate of Amendment to Certificate of Incorporation (d)3.3
    
    
    
    Certificate of Retirement of Stock (e)3.4
    
    
    
    Certificate of Designation of Rights and Preferences of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock (c)3.5
    
    
    
    Certificate of Designation of Series A Junior Participating Preferred Stock (d)3.6
    
    
    
    Bylaws (c)4.1
    
    
    
    Form of Common Stock Certificate (c)4.2
    
    
    
    Amended and Restated Investors Rights Agreement, dated as of June 25, 1999, among Symbion,
Inc. and the security holders named therein (f)4.3
    
    
    
    Amendment No. 1 to Amended and Restated Investors Rights Agreement, dated as of August 11,
1999, among Symbion, Inc. and the security holders named therein (f)4.4
    
    
    
    Amendment No. 2 to Amended and Restated Investors Rights Agreement, dated as of April 1,
2002, among Symbion, Inc. and the security holders named therein (f)4.5
    
    
    
    Form of Warrant for the purchase of shares of Symbion, Inc. common stock (f)4.6
    
    
    
    Rights Agreement, dated as of February 6, 2004, between Symbion, Inc. and SunTrust Bank (g)10.1
    
    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion, Inc.
and Richard E. Francis, Jr. (f) (s)10.2
    
    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion, Inc.
and Clifford G. Adlerz (f) (s)10.3
    
    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion, Inc.
and William V. B. Webb (f) (s)10.4
    
    
    
    Securities Purchase Agreement, dated as of July 18, 2003, among Symbion, Inc. and DLJ
Investment Partners II, L.P. and its affiliates (c)10.5
    
    
    
    Form of 143/4% Senior Subordinated Note due 2008 (c)




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##### Table of Contents



No.
    
    
    
    Description10.6
    
    
    
    Amended and Restated Credit Agreement, dated as of March 21, 2005, among Symbion, Inc., the
subsidiaries of Symbion identified therein, Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, Credit Suisse First Boston, as Syndication Agent, KeyBank
National Association, as Documentation Agent and the other lenders party thereto (h)10.7
    
    
    
    First Amendment to Amended and Restated Credit Agreement, dated April 4, 2006, among Symbion,
Inc., various lenders party thereto and Bank of America, N.A., as Administrative Agent (n)10.8
    
    
    
    Lease Agreement, dated June 26, 2001, between Burton Hills IV Partners and Symbion, Inc. (f)10.9
    
    
    
    First Amendment to Lease Agreement, dated February 9, 2004, between Burton Hills IV Partners
and Symbion, Inc. (e)10.10
    
    
    
    Amended and Restated Ambulatory Resource Centres, Inc. 1997 Stock Option Plan (f) (s)10.11
    
    
    
    Ambulatory Resource Centres, Inc. Nonqualified Initial Option Plan (f) (n)10.12
    
    
    
    Symbion Long Term Incentive Plan (o) (s)10.13
    
    
    
    Form of Incentive Stock Option Agreement under the Long Term Incentive Plan (i) (s)10.14
    
    
    
    Form of Nonqualified Stock Option Agreement under the Long Term Incentive Plan (Form 1) (p) (s)10.15
    
    
    
    Form of Nonqualified Stock Option Agreement under the Long Term Incentive Plan (Form 2) (p) (s)10.16
    
    
    
    Form of Restricted Stock Agreement under the Long Term Incentive Plan (j) (s)10.17
    
    
    
    Symbion Non-Employee Directors Stock Option Plan (f) (s)10.18
    
    
    
    Form of Nonqualified Stock Option Agreement under the Non-Employee Directors Stock Option Plan
(q) (s)10.19
    
    
    
    Symbion Employee Stock Purchase Plan (f) (s)10.20
    
    
    
    Form of Stock Option Agreement under the Employee Stock Purchase Plan (p) (s)10.21
    
    
    
    First Amendment to Symbion Employee Stock Purchase Plan (f) (s)10.22
    
    
    
    Second Amendment to Symbion Employee Stock Purchase Plan (k) (s)10.23
    
    
    
    Third Amendment to Symbion Employee Stock Purchase Plan (r) (s)10.24
    
    
    
    Executive Change in Control Severance Plan, dated December 11, 1997 (f) (s)10.25
    
    
    
    Supplemental Executive Retirement Plan (l) (s)10.26
    
    
    
    Form of Deferred Stock Purchase Program Agreement (l) (s)10.27
    
    
    
    Management Rights Purchase Agreement, dated as of July 27, 2005, by and among Parthenon
Management Partners, LLC, Andrew A. Brooks, M.D., Randhir S. Tuli and SymbionARC Management
Services, Inc. (b)10.28
    
    
    
    Summary of Director Compensation (s)




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##### Table of Contents



No.
    
    
    
    Description10.29
    
    
    
    2006 Executive Officer Compensation (r) (s)10.30
    
    
    
    2007 Executive Officer Compensation (m) (s)21
    
    
    
    Subsidiaries of Registrant23.1
    
    
    
    Consent of Ernst & Young LLP31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (a)
    
    Incorporated by reference to exhibits filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 2004 (File No. 000-50574).(b)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed August 2, 2005 (File No. 000-50574).(c)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-1 (Registration No. 333-110555).(d)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-8 (Registration No. 333-113272).(e)
    
    Incorporated by reference to exhibits filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 2003 (File No. 000-50574).(f)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-1 (Registration No. 333-89554).(g)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on February 6, 2004 (Registration
No. 000-50574).(h)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed March 25, 2005 (File No. 000-50574).(i)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed December 14, 2004 (File No. 000-50574).(j)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed January 11, 2005 (File No. 000-50574).(k)
    
    Incorporated by reference to exhibits filed with the Registrants Quarterly Report on Form
10-Q for the quarter ended September 30, 2005 (File No. 000-50574).(l)
    
    Incorporated by reference to exhibits filed with the Registrants Quarterly Report on Form
10-Q for the quarter ended March 31, 2005 (File No. 000-50574).(m)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed February 26, 2007 (File No. 000-50574).(n)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed April 5, 2006 (File No. 000-50574).




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##### Table of Contents



(o)
    
    Incorporated by reference to Appendix A of the Registrants Definitive Proxy Statement filed
April 4, 2006 (File No. 000-50574).(p)
    
    Incorporated by reference to exhibits filed with the Registrants Quarterly Report on Form
10-Q for the quarter ended March 31, 2006 (File No. 000-50574).(q)
    
    Incorporated by reference to exhibits filed with the Registrants Quarterly Report on Form
10-Q for the quarter ended June 30, 2006 (File No. 000-50574).(r)
    
    Incorporated by reference to exhibits filed with the Registrants Annual Report on Form 10-K
for the year ended December 31, 2005 (File No. 000-50574).(s)
    
    Compensation plan or arrangement.