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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**Form 10-K**

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**(Mark One)**

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| **x**      | ** ** | **ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|------------|------------|----------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                               |
| ** ** | ** ** | **For  the Fiscal Year Ended December 31, 2008**                                                    |
| ** ** | ** ** | ** **                                                                                               |
| ** ** | ** ** | **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.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **62-1625480**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**40 Burton Hills Boulevard, Suite 500**

**Nashville, Tennessee 37215**

(Addressof principal executive offices and zip code)

 

**(615) 234-5900**

**(Registrant’stelephone number, including area code)**

** **

Securities Registered Pursuant to Section 12(b) of the Act:**  None**

Securities Registered Pursuant to Section 12(g) of the Act:**  None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes  o  No  x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes  o  No  x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer o           |   | Accelerated filer   o   |
|------------------------------------------|--------|----------------------------------------|
| Non-accelerated filer   x |   | Smaller reporting company  o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

None of the registrant’scommon stock is held by non-affiliates.

 

As of March 20,2009, 1,000 shares of the registrant’s common stock were outstanding.

 

 

 

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Table of Contents to Annual Report on Form 10-K for the Fiscal YearEnded December 31, 2008

 
| Part I   |        |                                                                                                              |
|----------|-------------|-------------------------------------------------------------------------------------------------------------------|
|     |        |                                                                                                              |
|     | Item 1.     | Business                                                                                                          |
|     | Item  1A.   | Risk  Factors                                                                                                     |
|     | Item 1B.    | Unresolved  Staff Comments                                                                                        |
|     | Item  2.    | Properties                                                                                                        |
|     | Item 3.     | Legal Proceedings                                                                                                 |
|     | Item 4.     | Submission  of Matters to a Vote of Security Holders                                                              |
|     |        |                                                                                                              |
| Part II  |        |                                                                                                              |
|     |        |                                                                                                              |
|     | Item 5.     | Market for  Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases  of Equity Security |
|     | Item 6.     | Selected Financial  Data                                                                                          |
|     | Item 7.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |
|     | Item 7A.    | Quantitative  and Qualitative Disclosures About Market Risk                                                       |
|     | Item 8.     | Financial  Statements and Supplementary Data                                                                      |
|     | Item 9.     | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                             |
|     | Item 9A(T). | Controls and  Procedures                                                                                          |
|     | Item 9B.    | Other Information                                                                                                 |
|     |        |                                                                                                              |
| Part III |        |                                                                                                              |
|     |        |                                                                                                              |
|     | Item 10.    | Directors,  Executive Officers and Corporate Governance                                                           |
|     | 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                                                                           |
|     |        |                                                                                                              |
| Part IV  |        |                                                                                                              |
|     |        |                                                                                                              |
|     | Item 15.    | Exhibits and  Financial Statement Schedules                                                                       |
|     |        |                                                                                                              |
|     |        | Signatures                                                                                                        |

 

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**CautionaryNote Regarding Forward-Looking Statements**

 

ThisAnnual Report on Form 10-K contains forward-looking statements based onour current expectations, estimates and assumptions about future events. Allstatements other than statements of current or historical fact contained inthis report, including statements regarding our future financial position,business strategy, budgets, projected costs and plans and objectives ofmanagement for future operations, are forward-looking statements. The words “anticipate,”“believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “will”and similar expressions are generally intended to identify forward-lookingstatements.

 

Theseforward-looking statements involve various risks and uncertainties, some ofwhich are beyond our control. Any or all of our forward-looking statements inthis report may turn out to be wrong. We have based these forward-lookingstatements largely on our current expectations and projections about futureevents and financial trends that we believe may affect our financial condition,results of operations, business strategy and financial needs. They can beaffected by inaccurate assumptions we might make or by known or unknown risks,uncertainties and assumptions, including the risks, uncertainties andassumptions described in Item 1A. “Risk Factors.”

 

Inlight of these risks, uncertainties and assumptions, the forward-looking eventsand circumstances discussed in this report may not occur and actual resultscould differ materially from those anticipated or implied in theforward-looking statements. When you consider these forward-looking statements,you should keep in mind these risk factors and other cautionary statements inthis report.

 

Ourforward-looking statements speak only as of the date made. Other than asrequired by law, we undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

 

**PART I**

 

**Item 1.****           *Business***

 

**Overview**

 

Weown and operate a national network of short stay surgical facilities in 25states, which includes ambulatory surgery centers and surgical hospitals(collectively, “surgical facilities”). Our surgical facilities primarily provide non-emergency surgicalprocedures across many specialties, including, among others, orthopedics, painmanagement, gastroenterology and ophthalmology. We own our surgical facilities in partnership with physicians and insome cases health care systems in the markets and communities we serve.  We apply a market-based approach instructuring our partnerships, with individual market dynamics driving thestructure.  We believe this approachaligns our interests with those of our partners.  We believe that our national scale and ouralignment with prominent physicians within our markets provide us with a strongcompetitive position.  Through oursurgical facilities, we offer high quality surgical services designed to meetthe health care needs of our patients, physicians and payors in an efficient,convenient and cost-effective manner. This value proposition positions us well to take advantage of thecontinued growth in outpatient surgeries going forward.

 

Asof December 31, 2008, we owned and operated 59 surgical facilities,including 56 ambulatory surgery centers and three surgical hospitals, andmanaged nine additional ambulatory surgery centers and two physician networks,including one physician network in a market in which we operate an ambulatorysurgery center. We owned a majority interest in 36 of the 59 owned surgicalfacilities and consolidated 51 of these facilities for financial reportingpurposes. We are reporting two of the 59 owned surgical facilities asdiscontinued operations.  As of December 31,2008, we had one surgical facility under development, which opened during January 2009.

 

BetweenJanuary 1999 and December 31, 2008, we acquired 49 surgical facilities anddeveloped 23 surgical facilities, including 13 surgical facilities that we havesubsequently divested. We believe our success in expanding our operatingplatform and improving our operating results can be attributed to theexperience of our senior management team. Our senior management team has anaverage of over 28 years of experience in the health care industry having heldsenior management positions at public and private health care companies.

 

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OnSeptember 16, 2002, we reincorporated in Delaware after originallyincorporating in Tennessee in January 1996. On August 23, 2007, wewere acquired by Symbion Holdings Corporation (“Holdings”), which is owned byCrestview Partners, L.P. (“Crestview”) and certain affiliated funds managed byCrestview and co-investors, in a merger transaction (the “Merger”).  As a result of the Merger, we no longer havepublically traded equity securities.

 

On June 3, 2008, we completed a private offering of $179.9 millionaggregate principal amount of the 11.0%/11.75% Senior PIK Toggle Notes due 2015(“Toggle Notes”).  On September 25,2008, we filed a registration statement under the Securities Act of 1933 toregister $184.6 million aggregateprincipal amount of Toggle Notes aswell as the guarantee of each wholly owned subsidiary of the Company.  On November 12, 2008, we filed anamendment to the registration statement to, among other things, register anadditional $75.4 million aggregate principal amount of Toggle Notes issuable ifwe elect to make payments of additional interest in kind by increasing theprincipal amount of the existing notes or issuing additional notes. Pursuant tothe registration statement, we exchanged our outstanding Toggle Notes for new 11.00%/11.75% Senior PIK Toggle Notes due 2015with an aggregate principal amount of $184.6 million registered underthe Securities Act of 1933, as amended.

 

Inthis Annual Report on Form 10-K, for the purposes of presenting acomparison of our 2008 results to our 2007 results, we have presented our 2007results as the sum of our operating results from the predecessor period priorto the Merger (January 1, 2007 through August 23, 2007) and ouroperating results from the successor period following the Merger (August 24,2007 through December 31, 2007).  Webelieve this presentation provides the most meaningful comparative informationabout our operating results.  Thisapproach is not consistent with generally accepted accounting principles (“GAAP”),and may yield results that are not strictly comparable on a period-to-periodbasis.

 

**Surgical Facility Industry**

 

Ambulatorysurgical providers such as Symbion have benefited from both the growth inoverall outpatient surgery cases as well as the migration of surgicalprocedures from the hospital to the ambulatory surgery center setting.According to a report from the National Center for Health Statistics at theCenters for Disease Control and Prevention, in 2006 an estimated 34.7 millionambulatory surgery visits were performed, representing a compound annual growthrate (“CAGR”) from 1981 to 2006 of 9.7%. In addition, the rate of visits performed in ambulatory surgery centersincreased 300% from 1996 to 2006, whereas the rate of visits performed in ahospital outpatient setting remained relatively unchanged.  Surgical visits performed in an ambulatorysurgery center setting represent 43.0% of all outpatient surgery visits. At thesame time, the development of ambulatory surgery centers has not kept pace withthe growth in demand. According to SDI Health, LLC, an independent health caremarket research and information firm (“SDI”), from 2000 to 2007, the number ofMedicare-certified surgical facilities increased at a CAGR of 7.3%,meaningfully lagging behind the growth in overall cases. We believe thiscreates an attractive operating environment for well capitalized surgicalproviders with scale and a national presence. In addition, with approximately4,964 Medicare-certified ambulatory surgery centers operating in the UnitedStates as of 2007 according to the Centers for Medicare and Medicaid Services (“CMS”),we believe significant opportunities exist for consolidation in this industry.The five largest national operators of outpatient surgical facilities by numberof ambulatory surgery centers represented an aggregate of less than 11.0% ofthe total number of ambulatory surgery centers in the United States as of 2008,according to SDI.

 

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Webelieve the following factors have contributed to the growth in surgicalprocedures in the ambulatory surgery center setting:

 

·                  *Physician and Patient Preference for SurgicalFacilities. *Physicians oftenprefer to operate in surgical facilities, as compared to acute care hospitals,because of the efficiency and convenience surgical facilities afford.Procedures performed at surgical facilities are typically non-emergency, sophysicians can schedule their time more efficiently and increase the number ofprocedures they can perform in a given period. Surgical facilities also providephysicians with more consistent nurse staffing and faster turnaround timebetween cases, as compared to acute care hospitals. Together with anopportunity to own an equity interest in the surgical facility, theseattributes meaningfully increase a physician’s productivity, professionalsuccess and income potential. Importantly, we also believe patients oftenprefer surgical facilities because of the comfort of a less institutionalsetting, the more convenient process for scheduling and registration availablein surgical facilities and in many instances a more convenient location thanacute care hospitals. As patients increasingly have more input into thedelivery of their health care, we believe this preference will be a driver ofthe growth in ambulatory surgery center utilization.

 

·                  *Lower Cost Alternative. *Based upon our management’sexperience in the health care industry, we believe that surgeries performed insurgical facilities are generally less expensive than those performed in acutecare hospitals because of lower facility development costs, the focus onnon-emergency procedures and more efficient staffing and work flow processes.According to a study conducted for the Ambulatory Surgery Center Association,the cost to the payor of a surgical procedure in an ambulatory surgery centersetting in 2007 was significantly less than the cost to the payor of performingthe same procedure in a hospital outpatient department setting. We believepayors are attracted to the lower costs available at surgical facilities, ascompared to acute care hospitals.

 

·                  *Advanced Technology and Improved Anesthesia. *Advancements in medical technologysuch as lasers, arthroscopy, fiber optics and enhanced endoscopic techniqueshave reduced the trauma of surgery and the amount of recovery time required bypatients following a surgical procedure. Improvements in anesthesia also haveshortened the recovery time for many patients and have reduced certain post-operativeside effects. These medical advancements have enabled more patients to undergosurgery not requiring an overnight stay and reduced the need forhospitalization following surgery.

 

·                  *Expansion in Medicare Reimbursed Procedures. *On October 30, 2008, CMSfinalized a rule that added an additional 27 surgical procedures toMedicare’s list of approved ambulatory surgery center procedures for thecalendar year 2009.  This will have theeffect of further expanding the market opportunity with respect to the Medicarepopulation, which is expected to grow significantly as a greater proportion ofthe population reaches Medicare eligible age.

 

**Our Strategy**

 

We intend to expand our network of surgical facilitiesin attractive markets throughout the United States by acquiring establishedfacilities and developing new facilities while enhancing the performance of ourexisting facilities.  We also seek toprovide patients with high-quality surgical services across many specialties.When attractive opportunities arise, we may acquire or develop other types offacilities. The key components of our strategy are to:

 

·                  *Identify, recruit and retain leading surgeons andother physicians for our surgical facilities.*  We believe that establishing and maintainingstrong relationships with surgeons and other physicians is a key factor to oursuccess in acquiring, developing and operating surgical facilities. We identifyand partner with surgeons and other physicians that we believe have establishedreputations for clinical excellence in their communities. We believe that wehave had success in recruiting and retaining physicians because of theownership structure of our surgical facilities and our staffing, scheduling andclinical systems that are designed to increase physician productivity, promotephysicians’ professional success and enhance the quality of patient care. Wealso believe that forming relationships with health 

 

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care systems andother health care providers can enhance our ability to recruit physicians. Wecurrently have strategic relationships with six health care systems.

 

·                  *Capitalize on our experienced management team topursue multiple growth opportunities in the surgical facility market.*  We believethat the experience and capabilities of our senior management team provide astrategic advantage in improving the operations of our surgical facilities,attracting physicians and identifying new development and acquisitionopportunities. Our senior management team has an average of over 28 years ofexperience in the health care industry having held senior management positionsat public and private health care companies. Our management’s broad industryexperience has allowed us to establish strong relationships with participantsthroughout the health care industry. These relationships are helpful in formingleads for acquisitions, and in making decisions about expanding into newmarkets and services. The experience and capabilities of our management teamalso enable us to pursue multiple growth strategies in the surgical facilitymarket, including acquisitions of established surgical facilities, de novodevelopments in attractive markets, strategic relationships with prominenthospitals and other health care providers and turnaround opportunities inconnection with underperforming facilities. We have successfully executed eachof these growth strategies and intend to pursue each of them in the future.

 

·                  *Pursue a disciplined strategy of acquiring anddeveloping surgical facilities.* Between January 1999 and December 31, 2008, we acquired 49 surgicalfacilities and developed 23surgical facilities, including 13 surgical facilities that we subsequentlydivested. We anticipate acquiring one to three facilities and developing one tothree facilities annually.  We seek toacquire and develop surgical hospitals and both single and multi-specialtyambulatory surgery centers that meet our criteria.  Our criteria include prominence and qualityof physician partners, specialty mix, opportunities for growth, level ofcompetition in the local market, level of managed care penetration and ourability to access managed care organization contracts.  Our acquisition and development team conductsextensive due diligence and applies a financial model that targets a thresholdreturn on invested capital over a period of five years. Once we acquire asurgical facility, our team establishes a strategic plan to improve thefacility’s operating systems and physical plant, enhance physician recruitmentand capitalize on the facility’s competitive strengths. We have historicallytargeted majority ownership in our facilities. Majority ownership allows us to make and execute managerial decisionswhich we believe provides greater opportunity for growth and higher returns. Wealso believe that by starting with majority ownership of a facility, we canbenefit by capturing a greater share of the value we create in managing andimproving the facility.  We intend tocontinue to target majority ownership in our facilities. However, whenattractive opportunities arise, we may acquire minority interests in developedsurgical facilities or surgical facilities that we may purchase.  In addition, we have, and will continue toacquire and develop, facilities in which we have “buy-up” rights if theopportunity is attractive to us from a long-term perspective.  Buy-up rights enable us, at our option, toincrease our ownership percentage after the initial acquisition.  When appropriate, we also may reduce ourinterest in majority owned surgical facilities.

 

·                  *Increase revenues and profitability of existingsurgical facilities through operational focus.*  We seek to increase revenues, profitabilityand return on our invested capital at all of our surgical facilities byfocusing on operations. We have a dedicated team that is responsible forimplementing best practices, cost controls and overall efficiencies at each ofour surgical facilities. Our facilities benefit from our network of facilitiesby sharing best practices and participating in group purchasing agreementsdesigned to reduce the cost of supplies and equipment. We intend to continue torecruit additional physicians and expand the range of services offered at oursurgical facilities to increase the number and types of surgeries performed inour facilities, including a focus on higher acuity cases.  We also review our managed care contracts toensure we are operating under the most favorable contracts available tous.  We are committed to enhancingprograms and services for our physicians and patients by providing advancedtechnology, quality care, cost-effective service and convenience.

 

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**Operations**

 

***Surgical Facility Operations***

 

As of December 31,2008, we owned (with physician investors or healthcare systems) and operated 59surgical facilities and managed nine additional surgical facilities. Three ofour surgical facilities are licensed as hospitals. Our typical ambulatorysurgery center is a freestanding facility with about 14,000 square feet ofspace and four fully equipped operating rooms, two treatment rooms andancillary areas for preparation, recovery, reception and administration.

 

Our typicalsurgical hospital is larger than a typical ambulatory surgery center andincludes inpatient hospital rooms and, in some cases, an emergency department.Our surgical facilities primarily provide non-emergency surgical proceduresamong many specialties, including orthopedic, gynecology, general surgery, ear,nose and throat, pain management, gastroenterology, plastic surgery andophthalmology. Our hospitals may also provide additional services such asdiagnostic imaging, pharmacy, laboratory and obstetrical services. In certainmarkets where we believe it is appropriate, we operate surgical facilities thatfocus on a single specialty.

 

Our surgicalfacilities are generally located in close proximity to physicians’ offices.Each surgical facility typically employs a staff of about 30, depending on itssize, the number of cases and the type of services provided. Our staff at eachsurgical facility generally includes a facility administrator, a businessmanager, a medical director, registered nurses, operating room technicians andclerical workers. At each of our surgical facilities, we have arrangements withanesthesiologists to provide anesthesiology services. We also provide each ofour surgical facilities with a full range of financial, marketing and operatingservices. For example, our regional managed care directors assist the localmanagement team at each of our surgical facilities in developing relationshipswith managed care providers and negotiating managed care contracts.

 

The majority ofour surgical facilities are Medicare-certified. To ensure that a high level ofcare is provided, we implement quality assurance procedures at each of oursurgical facilities. In addition, a majority of our surgical facilities arealso independently accredited by either the Joint Commission or theAccreditation Association for Ambulatory Health Care. Each of our surgicalfacilities is available for use only by licensed physicians who have metprofessional credentialing requirements established by the facility’s medicaladvisory committee. In addition, each surgical facility’s medical directorsupervises and is responsible for the quality of medical care provided at thesurgical facility.

 

***Surgical Facility Ownership Structure***

 

We own and operateour surgical facilities through partnerships or limited liability companies.Local physicians or physician groups also own an interest in most of oursurgical facilities. In some cases, a hospital system may own an interest inour surgical facility. One of our wholly-owned subsidiaries typically serves asthe general partner or managing member of our surgical facilities. We seek toown a majority interest in our surgical facilities, or otherwise havesufficient control over the facilities to be able to consolidate the financialresults of operations of the facilities with ours. In some instances, we willacquire ownership in a surgical facility with the prior owners retainingownership, and, in some cases, we offer new ownership to other physicians orhospital partners. We hold majority ownership in 36 of the 59 surgicalfacilities in which we own an interest. We typically guarantee all of the debtsof these partnerships and limited liability companies, even though we do notown all of the interests in the surgical facilities. We also provide intercompanydebt which is usually secured by a pledge of assets of the partnership orlimited liability company. We also have a management agreement with each of thesurgical facilities, under which we provide day-to-day management services fora management fee, which is typically equal to 4% to 6% of the revenues of thefacility.

 

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Each of the partnershipsand limited liability companies through which we own and operate our surgicalfacilities is governed by a partnership or operating agreement. Thesepartnership and operating agreements typically provide, among other things, forvoting rights and limited transfer of ownership. The partnership and operatingagreements also provide for the distribution of available cash to the owners.In addition, the agreements typically restrict the physician owners from owningan interest in a competing surgical facility during the period in which thephysician owns an interest in our surgical facility and for one year after thatperiod. The partnership and operating agreements for our surgical facilitiestypically provide that the facilities will purchase all of the physicians’ownership if certain adverse regulatory events occur, such as it becomingillegal for the physicians to own an interest in a surgical facility, referpatients to a surgical facility or receive cash distributions from a surgicalfacility. The purchase price that we would be required to pay for the ownershipis based on pre-determined formulas, typically either a multiple of thesurgical facility’s EBITDA, as defined in our partnership and operatingagreements, or the fair market value of the ownership as determined by athird-party appraisal. Some of these agreements require us to make a good faitheffort to restructure our relationships with the physician investors in amanner that preserves the economic terms of the relationship prior topurchasing these interests. See “Risk Factors” and “—Governmental Regulation.”In certain circumstances, we have the right to purchase a physician’sownership, including upon a physician’s breach of the restriction on ownershipprovisions of a partnership or operating agreement. In some cases, we have theright to require the physician owners to purchase our ownership in the eventour management agreement with a surgical facility is terminated. In onesurgical facility, the physician owners have the right to purchase ourownership upon a change in our control.

 

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***Surgical Facilities***

 

The followingtable sets forth information regarding each of our surgical facilities as of December 31,2008:

 
| **Surgical Facility**                                     | ** ** | **City**         | ** ** | **Number of  Operating  Rooms** | ** ** | **Number of  Treatment  Rooms** | ** ** | **Symbion  Percentage  Ownership** | ** ** |
|----------------------------------------------------------------|------------|------------------|------------|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **Alabama**                                                    |       |             |       |                                 |       |                                 |       |                               |       |
| Birmingham  Surgery Center                                     |       | Birmingham       |       | 5                                    |       | 3                                    |       | 59                                 | %(1)       |
| **California**                                                 |       |             |       |                                 |       |                                 |       |                               |       |
| Specialty  Surgical Center of Beverly Hills/Brighton Way       |       | Beverly Hills    |       | 3                                    |       | 1                                    |       | 60                                 | %(1)       |
| Specialty  Surgical Center of Beverly Hills/Wilshire Boulevard |       | Beverly Hills    |       | 4                                    |       | 2                                    |       | 61                                 | %(1)       |
| Specialty  Surgical Center of Encino                           |       | Encino           |       | 4                                    |       | 2                                    |       | 57                                 | %(1)       |
| Specialty  Surgical Center of Irvine                           |       | Irvine           |       | 5                                    |       | 1                                    |       | 51                                 | %(1)       |
| Specialty  Surgical Center of Arcadia                          |       | Arcadia          |       | 3                                    |       | 1                                    |       | 37                                 | %          |
| Specialty  Surgical Center of Thousand Oaks                    |       | Westlake Village |       | 4                                    |       | 2                                    |       | 1                                  | %          |
| **Colorado**                                                   |       |             |       |                                 |       |                                 |       |                               |       |
| Minimally  Invasive Spine Institute                            |       | Boulder          |       | 2                                    |       | 1                                    |       | 44                                 | %(1)       |
| Surgery  Center at Inverness(5)                                |       | Englewood        |       | 6                                    |       | 2                                    |       | 100                                | %(1)       |
| Animas  Surgical Hospital(2)                                   |       | Durango          |       | 4                                    |       | 1                                    |       | 57                                 | %(1)       |
| **Florida**                                                    |       |             |       |                                 |       | 12 hospital  rooms                   |       |                               |       |
| 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                                    |       | 6                                    |       | 65                                 | %(1)       |
| Lee  Island Coast Surgery Center                               |       | Fort Myers       |       | 5                                    |       | 3                                    |       | 50                                 | %(1)       |
| Orlando  Surgery Center                                        |       | Orlando          |       | 5                                    |       | 2                                    |       | 66                                 | %(1)       |
| Tampa  Bay Regional Surgery Center                             |       | Largo            |       | 1                                    |       | 2                                    |       | 51                                 | %(1)       |
| The  Surgery Center of Ocala                                   |       | Ocala            |       | 4                                    |       | 2                                    |       | 51                                 | %(1)       |
| Blue  Springs Surgery Center                                   |       | Orange City      |       | 3                                    |       | 2                                    |       | 29                                 | %(1)       |
| **Georgia**                                                    |       |             |       |                                 |       |                                 |       |                               |       |
| Premier  Surgery Center                                        |       | Brunswick        |       | 3                                    |       | —                               |       | 58                                 | %(1)       |
| The  Surgery Center                                            |       | Columbus         |       | 4                                    |       | 2                                    |       | 63                                 | %(1)       |
| **Hawaii**                                                     |       |             |       |                                 |       |                                 |       |                               |       |
| Honolulu  Spine Center                                         |       | Honolulu         |       | 2                                    |       | 1                                    |       | 50                                 | %(1)       |
| **Illinois**                                                   |       |             |       |                                 |       |                                 |       |                               |       |
| Valley  Ambulatory Surgery Center                              |       | St. Charles |       | 6                                    |       | 1                                    |       | 40                                 | %(1)       |
| **Indiana**                                                    |       |             |       |                                 |       |                                 |       |                               |       |
| Vincennes  Surgery Center                                      |       | Vincennes        |       | 3                                    |       | 1                                    |       | 52                                 | %(1)       |
| New  Albany Outpatient Surgery                                 |       | New Albany       |       | 3                                    |       | 1                                    |       | 79                                 | %(1)       |
| **Kansas**                                                     |       |             |       |                                 |       |                                 |       |                               |       |
| Cypress  Surgery Center                                        |       | Wichita          |       | 6                                    |       | 5                                    |       | 54                                 | %(1)       |
| **Kentucky**                                                   |       |             |       |                                 |       |                                 |       |                               |       |
| DuPont  Surgery Center                                         |       | Louisville       |       | 5                                    |       | —                               |       | 63                                 | %(1)       |
| **Louisiana**                                                  |       |             |       |                                 |       |                                 |       |                               |       |
| Greater  New Orleans Surgery Center                            |       | Metairie         |       | 2                                    |       | —                               |       | 30                                 | %(1)       |
| Physicians  Medical Center(2)                                  |       | Houma            |       | 5                                    |       | 8                                    |       | 53                                 | %(1)       |
|                                                           |       |             |       |                                 |       | 27 hospital  rooms                   |       |                               |       |
| St.  Luke’s Surgery Center                                |       | Hammond          |       | 4                                    |       | 2                                    |       | 73                                 | %(1)       |
| **Massachusetts****Worcester  Surgery Center**                 |       | Worcester        |       | 4                                    |       | 1                                    |       | 58                                 | %(1)       |
| Worcester  ENT                                                 |       | Worcester        |       | 1                                    |       | —                               |       | 51                                 | %(1)       |
| **Michigan**                                                   |       |             |       |                                 |       |                                 |       |                               |       |
| Novi  Surgery Center                                           |       | Novi             |       | 4                                    |       | 3                                    |       | 13                                 | %          |
| **Minnesota**                                                  |       |             |       |                                 |       |                                 |       |                               |       |
| Fairview  Maple Grove Surgery Center(5)                        |       | Maple Grove      |       | 4                                    |       | 3                                    |       | 20                                 | %          |

 

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| **Surgical Facility**                     | ** ** | **City**       | ** ** | **Number of  Operating  Rooms** | ** ** | **Number of  Treatment  Rooms** | ** ** | **Symbion  Percentage  Ownership** | ** ** |
|------------------------------------------------|------------|----------------|------------|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **Missouri**                                   |       |           |       |                                 |       |                                 |       |                               |       |
| Central  Missouri Medical Park Surgical Center |       | Jefferson City |       | 4                                    |       | 2                                    |       | 40                                 | %(1)       |
| Timberlake  Surgery Center                     |       | Chesterfield   |       | 4                                    |       | 1                                    |       | 56                                 | %(1)       |
| St.  Louis Spine and Orthopedic                |       | Chesterfield   |       | 3                                    |       | 1                                    |       | 13                                 | %          |
| **Mississippi**                                |       |           |       |                                 |       |                                 |       |                               |       |
| DeSoto  Surgery Center                         |       | DeSoto         |       | 2                                    |       | 1                                    |       | —                             | (3)        |
| Physicians  Outpatient Center                  |       | Oxford         |       | 4                                    |       | 2                                    |       | —                             | (3)        |
| **New York**                                   |       |           |       |                                 |       |                                 |       |                               |       |
| South  Shore Ambulatory Surgery Center         |       | Lynbrook       |       | 4                                    |       | 1                                    |       | 65                                 | %(4)       |
| **North Carolina**                             |       |           |       |                                 |       |                                 |       |                               |       |
| Orthopaedic  Surgery Center of Asheville       |       | Asheville      |       | 3                                    |       | —                               |       | 61                                 | %(1)       |
| Wilmington  SurgCare                           |       | Wilmington     |       | 7                                    |       | 3                                    |       | 75                                 | %(1)       |
| **Ohio**                                       |       |           |       |                                 |       |                                 |       |                               |       |
| Physicians  Ambulatory Surgery Center          |       | Circleville    |       | 2                                    |       | —                               |       | 53                                 | %(1)       |
| Valley  Surgical Center                        |       | Steubenville   |       | 3                                    |       | 1                                    |       | 56                                 | %(1)       |
| **Oklahoma**                                   |       |           |       |                                 |       |                                 |       |                               |       |
| Lakeside  Women’s Hospital(2)             |       | Oklahoma City  |       | 3                                    |       | 3                                    |       | 42                                 | %          |
|                                           |       |           |       |                                 |       | 23 hospital  rooms                   |       |                               |       |
| **Pennsylvania**                               |       |           |       |                                 |       |                                 |       |                               |       |
| Village  SurgiCenter                           |       | Erie           |       | 5                                    |       | 1                                    |       | 71                                 | %(1)       |
| Surgery  Center of Pennsylvania                |       | Havertown      |       | 5                                    |       | 1                                    |       | 49                                 | %(1)       |
| **Rhode Island**                               |       |           |       |                                 |       |                                 |       |                               |       |
| Bayside  Endoscopy Center                      |       | Providence     |       | —                               |       | 6                                    |       | 75                                 | %(1)       |
| East  Greenwich Endoscopy Center               |       | East Greenwich |       | —                               |       | 2                                    |       | 45                                 | %(1)       |
| **South Carolina**                             |       |           |       |                                 |       |                                 |       |                               |       |
| The  Center for Specialty Surgery              |       | Greenville     |       | 2                                    |       | —                               |       | 78                                 | %(1)       |
| Ocean  Ambulatory Surgery Center               |       | Myrtle Beach   |       | 2                                    |       | 2                                    |       | —                             | (3)        |
| **Tennessee**                                  |       |           |       |                                 |       |                                 |       |                               |       |
| Baptist  Germantown Surgery Center             |       | Memphis        |       | 6                                    |       | 1                                    |       | —                             | (3)        |
| Cool  Springs Surgery Center                   |       | Franklin       |       | 5                                    |       | 1                                    |       | 36                                 | %          |
| East  Memphis Surgery Center                   |       | Memphis        |       | 6                                    |       | 2                                    |       | —                             | (3)        |
| Midtown  Surgery Center                        |       | Memphis        |       | 4                                    |       | —                               |       | —                             | (3)        |
| Southwind  GI                                  |       | Memphis        |       | 1                                    |       | —                               |       | 100                                | %(1)       |
| Union  City Surgery Center                     |       | Union City     |       | 3                                    |       | 1                                    |       | —                             | (3)        |
| UroCenter                                      |       | Memphis        |       | 3                                    |       | —                               |       | —                             | (3)        |
| Premier  Orthopaedic Surgery Center            |       | Nashville      |       | 2                                    |       | —                               |       | 20                                 | %          |
| Renaissance  Surgery Center                    |       | Bristol        |       | 2                                    |       | 1                                    |       | 37                                 | %(1)       |
| **Texas**                                      |       |           |       |                                 |       |                                 |       |                               |       |
| Central  Park Surgery Center                   |       | Austin         |       | 5                                    |       | 1                                    |       | 44                                 | %(1)       |
| Clear  Fork Surgery Center                     |       | Fort Worth     |       | 5                                    |       | 1                                    |       | 34                                 | %(1)       |
| Northeast  Baptist Surgery Center              |       | San Antonio    |       | 4                                    |       | 5                                    |       | 57                                 | %(1)       |
| NorthStar  Surgical Center                     |       | Lubbock        |       | 6                                    |       | 3                                    |       | 45                                 | %(1)       |
| Surgery  Center of Duncanville                 |       | Duncanville    |       | 4                                    |       | 1                                    |       | 37                                 | %(1)       |
| Surgery  Center of Temple                      |       | Temple         |       | 2                                    |       | 2                                    |       | 30                                 | %          |
| Texarkana  Surgery Center                      |       | Texarkana      |       | 4                                    |       | 3                                    |       | 62                                 | %(1)       |
| **Washington**                                 |       |           |       |                                 |       |                                 |       |                               |       |
| Bellingham  Surgery Center                     |       | Bellingham     |       | 4                                    |       | —                               |       | 85                                 | %(1)       |
| Microsurgical  Spine Center                    |       | Puyallup       |       | 1                                    |       | 1                                    |       | 50                                 | %(1)       |

 

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| (1) |   | We consolidate this  surgical facility for financial reporting purposes.                                                                                                                                                                                                                                        |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | This surgical facility  is licensed as a hospital.                                                                                                                                                                                                                                                              |
| (3) |   | We manage this surgical  facility, but do not have ownership in the facility.                                                                                                                                                                                                                                   |
| (4) |   | Due to regulatory  restrictions in the State of New York, we cannot directly hold ownership in  the surgical facility. We hold 65% ownership in the limited liability company  which provides administrative services to this surgical facility and  consolidate the facility for financial reporting purposes. |
| (5) |   | We disposed of these  facilities in 2009.                                                                                                                                                                                                                                                                       |

 

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***Strategic Relationships***

 

When attractiveopportunities arise, we may develop, acquire or operate surgical facilitiesthrough strategic alliances with health care systems and other health careproviders. We believe that forming a relationship with a health care system canenhance our ability to attract physicians and access managed care contracts forour surgical facilities in that market. We currently have strategicrelationships with:

 

·                  VanderbiltHealth Services, Inc., with which we own and operate a surgical facilityin Franklin, Tennessee;

·                  VanguardHealth Systems, Inc., with which we own and operate a surgical facility inSan Antonio, Texas;

·                  BaptistMemorial Health Services, Inc. (“Baptist Memorial”), for which we manage sevensurgical facilities in Memphis, Tennessee and surrounding areas;

·                  HarrisMethodist Ft. Worth, with which we own and operate a surgical facility in FortWorth, Texas;

·                  King’sDaughters Hospital and a group of local physicians affiliated with King’sDaughters Clinic, with whom we own and operate a surgical facility in Temple,Texas; and

·                  AdventistHealth System, with which we own and operate a surgical facility in OrangeCity, Florida.

 

The strategicrelationships through which we own and operate surgical facilities are governedby partnership and operating agreements that are generally comparable to thepartnership and operating agreements of the other surgical facilities in whichwe own an interest. The primary difference between the structure of thesestrategic relationships and the other surgical facilities in which we holdownership is that, in these strategic relationships, a health care system holdsownership in the surgical facility, in addition to physician investors. For ageneral description of the terms of our partnership and operating agreements,see “—Operations—Surgical Facility Ownership Structure.” In each of thesestrategic relationships, we have also entered into a management agreement underwhich we provide day-to-day management services for a management fee equal to4% to 6% of the revenues of the surgical facility. The terms of thosemanagement agreements are comparable to the terms of our management agreementswith other surgical facilities in which we own an interest.

 

We manage sevensurgical facilities owned by Baptist Memorial under management agreements withBaptist Memorial in exchange for a management fee based on a percentage of therevenues of these surgical facilities. The management agreements terminate in2014 and may be terminated earlier by either party for material breach afternotice and an opportunity to cure.

 

***Acquisition and Development of Surgical Facilities***

 

During 2008, oursignificant acquisitions and development activity were as follows:

 

·                  Acquiredincremental ownership in our Beverly Hills, Encino, Arcadia and Irvine,California facilities.  As a result, webegan consolidating our facility in Irvine, California for financial reportingpurposes.

·                  Acquiredownership in five surgical facilities specializing in spine, orthopedic andpain management procedures located in Boulder, Colorado; Honolulu, Hawaii;Bristol and Nashville, Tennessee; and Seattle, Washington.  Four of these facilities were consolidatedfor financial reporting purposes.

·                  Openedfour of the five surgicalfacilities that were under development as of December 31, 2007.  We consolidate one of these facilities forfinancial reporting purposes and account for three as investments under theequity method.

 

We continuouslyevaluate opportunities to expand our presence in the surgical facility marketby making strategic acquisitions of existing surgical facilities and bydeveloping new surgical facilities in cooperation with local physician partnersand, when appropriate, with hospital systems and other strategic partners. Wehave the flexibility to structure our partnerships as two-way arrangementswhere either we are a majority owner partnered with physicians or we are aminority owner with buy-up rights. These buy-up rights give us the option toown a controlling interest at some point in the future. Alternatively, we maychoose to pursue a three-way arrangement with physicians and a health caresystem partner.

 

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*AcquisitionProgram*

 

We employ adedicated acquisition team with experience in health care services. Our teamseeks to acquire surgical facilities that meet our criteria, includingprominence and quality of physician partners, specialty mix, opportunities forgrowth, level of competition in the local market, level of managed carepenetration and our ability to access managed care organization contracts. Ourteam utilizes its extensive industry contacts, as well as referrals fromcurrent physician partners and other sources, to identify, contact and developpotential acquisition candidates.

 

We believe thereare numerous acquisition opportunities that would pass our general screening criteria.We carefully evaluate each of our acquisition opportunities through anextensive due diligence process to determine which facilities have the greatestpotential for growth and profitability improvements under our operatingstructure. In many cases, the acquisition team identifies specificopportunities to enhance a facility’s productivity post-acquisition. Forexample, we may renovate or construct additional operating or treatment roomsin existing facilities to meet anticipated demand for procedures based onanalysis of local market characteristics. Our team may also identifyopportunities to attract additional physicians to increase the acquiredfacility’s revenues and profitability. Once we decide to proceed with anacquisition proposal, we use a pricing strategy that targets a threshold returnon invested capital over a period of five years. We have acquired 49 surgicalfacilities since January 1999 and anticipate acquiring about one to threesurgical facilities annually during the next two to three years.

 

*DevelopmentProgram*

 

We developsurgical facilities in markets in which we identify substantial interest byphysicians and payors. We have experience in developing both single andmulti-specialty surgical facilities. When we develop a new surgical facility,we generally provide all of the services necessary to complete the project. Weoffer in-house capabilities for structuring partnerships and financingfacilities and work with architects and construction firms in the design anddevelopment of surgical facilities. Before and during the development phase ofa new surgical facility, we analyze the competitive environment in the localmarket, review market data to identify appropriate services to provide, prepareand analyze financial forecasts, evaluate regulatory and licensing issues andassist in designing the surgical facility and identifying appropriate equipmentto purchase or lease. After the surgical facility is developed, we generallyprovide startup operational support, including information systems, equipmentprocurement and financing. We have developed 23 surgical facilities since January 1999.We opened three surgical facilities in 2007 and four in 2008, and recentlyopened one surgical facility in January 2009.

 

Development of atypical ambulatory surgery center generally occurs over a 12 to 18 monthperiod, depending on whether the facility is being constructed or availablespace improved. Total development costs typically amount to $4.0 to$6.0 million. Development costs include estimated costs of$1.5 million to $2.0 million typically for improving existing spaceand equipment plus other furnishing costs of $1.5 million to$2.5 million and working capital of approximately $1.0 million to$1.5 million that is generally required to sustain operations for theinitial six to 12 months of operations. Development of a hospital with thesame operating capacity as a typical ambulatory surgery center would requireadditional capital to build and equip additional features, such as inpatienthospital rooms, and to provide other ancillary services, if required. Wetypically fund about 80% of the development costs of a new surgical facilitywith a combination of corporate borrowings and cash from operations, and theremainder with equity contributed by us and the other owners of the facility.For our consolidated surgical facilities, the indebtedness typically consistsof intercompany loans that we provide, and for our non-consolidated surgicalfacilities, of third-party debt for which we provide a guarantee for only ourpro rata share. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

 

**OtherServices**

 

Although ourbusiness is primarily focused on owning and operating surgical facilities, wealso provide other services that complement our core surgical facilitybusiness. Specifically, we currently manage large physician practices inMemphis and Johnson City, Tennessee. Each of these physician practices hasentered into an agreement with us, which provides, among other things, that wewill provide billing, financial services and other business management servicesin exchange for a management fee.

 

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**InformationSystems and Controls**

 

Each of oursurgical facilities uses a financial reporting system that provides informationto our corporate office to track financial performance on a timely basis. Inaddition, each of our surgical facilities uses an operating system to manageits business that provides critical support in areas such as scheduling,billing and collection, accounts receivable management, purchasing and otheressential operational functions. We have implemented systems to support all ofour surgical facilities and to enable us to more easily access informationabout our surgical facilities on a timely basis.

 

We calculate netrevenues through a combination of manual and system-generated processes. Ouroperating systems include insurance modules that allow us to establish profilesof insurance plans and their respective payment rates. The systems then matchthe charges with the insurance plan rates and compute a contractual adjustmentestimate for each patient account. We then manually review the reasonablenessof the systems’ contractual adjustment estimate using the insurance profiles.This estimate is adjusted, if needed, when the insurance payment is receivedand posted to the account. Net revenues are computed and reported by thesystems as a result of this activity.

 

It is our policyto collect co-payments and deductibles prior to providing services. It is alsoour policy to verify a patient’s insurance 72 hours prior to the patient’sprocedure. Because our services are primarily non-emergency, our surgicalfacilities have the ability to control these processes. We do not trackexceptions to these policies, but we believe that they occur infrequently andinvolve insignificant amounts. When exceptions do occur, we require patientswhose insurance coverage is not verified to assume full responsibility for thefees prior to services being rendered, and we seek prompt payment ofco-payments and deductibles and verification of insurance following theprocedure.

 

We manually inputeach patient’s account record and the associated billing codes. Our operatingsystems then calculate the amount of fees for that patient and the amount ofthe contractual adjustments. Claims are submitted electronically if the payoraccepts electronic claims. We use clearinghouses for electronic claims, whichclearinghouses then forward the claims to the respective payors. Payments aremanually input to the respective patient accounts.

 

We have developedproprietary measurement tools to track key operating statistics at each of oursurgical facilities by integrating data from our local operating systems andour financial reporting systems. Management uses these tools to measureoperating results against target thresholds and to identify, monitor and adjustareas such as specialty mix, staffing, operating costs, employee expenses andaccounts receivable management. Our corporate and facility-level managementteam is compensated in part using performance-based incentives focused onrevenue growth and improving operating income.

 

**Marketing**

 

We primarilydirect our sales and marketing efforts at physicians who would use our surgicalfacilities. Marketing activities directed at physicians and other health careproviders are coordinated locally by the individual surgical facility and aresupplemented by dedicated corporate personnel. These activities generallyemphasize the benefits offered by our surgical facilities compared to otherfacilities in the market, such as the proximity of our surgical facilities tophysicians’ offices, the ability to schedule consecutive cases withoutpreemption by inpatient or emergency procedures, the efficient turnaround timebetween cases, our advanced surgical equipment and our simplifiedadministrative procedures. Although the facility administrator is the primarypoint of contact, physicians who utilize our surgical facilities are importantsources of recommendations to other physicians regarding the benefits of usingour surgical facilities. Each facility administrator develops a target list ofphysicians and we continually review these marketing lists and the facilityadministrator’s progress in contacting and successfully attracting additionallocal physicians.

 

We also market oursurgical facilities directly to payors, such as health maintenanceorganizations, or HMOs, preferred provider organizations, or PPOs, and othermanaged care organizations and employers. Payor marketing activities conductedby our corporate office management and facility administrators emphasize thehigh quality of care, cost advantages and convenience of our surgicalfacilities, and are focused on making each surgical facility an approvedprovider under local managed care plans.

 

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**Competition**

 

In each market inwhich we operate a surgical facility, we compete with hospitals and operatorsof other surgical facilities to attract physicians and patients. We believethat the competitive factors that affect our surgical facilities’ ability tocompete for physicians are convenience of location of the surgical facility,access to capital and participation in managed care programs. In addition, webelieve the national prominence, scale and reputation of our company areinstrumental in attracting physicians. We believe that our surgical facilitiesattract patients based upon our quality of care, the specialties andreputations of the physicians who operate in our surgical facilities,participation in managed care programs, ease of access and convenientscheduling and registration procedures.

 

In developing oracquiring existing surgical facilities, we compete with other public andprivate surgical facility and hospital companies. Several large nationalcompanies own and/or manage surgical facilities, including HCA Inc.,Surgical Care Affiliates, Inc., AmSurg Corp. and United Surgical PartnersInternational, Inc. We also face competition from local hospitals, physiciangroups and other providers who may compete with us in the ownership andoperation of surgical facilities.

 

**Employees**

 

At December 31,2008, we had about 2,700 employees, of which about 1,600 were full-timeemployees. None of our employees are represented by a collective bargainingagreement. We believe that we have a good relationship with our employees.

 

**Environmental**

 

We are subject tovarious federal, state and local laws and regulations relating to theprotection of the environment and human health and safety, including thosegoverning the management and disposal of hazardous substances and wastes, thecleanup of contaminated sites and the maintenance of a safe workplace. Ouroperations include the use, generation and disposal of hazardous materials. Wemay, in the future, incur liability under environmental statutes andregulations with respect to contamination of sites we own or operate (includingcontamination caused by prior owners or operators of such sites, abutters orother persons) and the off-site disposal of hazardous substances. We believethat we have been and are in substantial compliance with the terms of allapplicable environmental laws and regulations and that we have no liabilitiesunder environmental requirements that we would expect to have a materialadverse effect on our business, results of operations or financial condition.

 

**Insurance**

 

We maintainliability insurance in amounts that we believe are appropriate for ouroperations. Currently, we maintain professional and general liability insurancethat provides coverage on a claims-made basis of $1.0 million peroccurrence and $3.0 million in annual aggregate coverage per surgicalfacility, including the facility and employed staff. We also maintain businessinterruption insurance and property damage insurance, as well as an additionalumbrella liability insurance policy in the aggregate amount of$20.0 million. Coverage under certain of these policies is contingent uponthe policy being in effect when a claim is made regardless of when the eventswhich caused the claim occurred. The cost and availability of such coverage hasvaried widely in recent years. In addition, physicians who provide professionalservices in our surgical facilities are required to maintain separatemalpractice coverage with similar minimum coverage limits. While we believethat our insurance policies are adequate in amount and coverage for ouranticipated operation, we cannot assure you that the insurance coverage issufficient to cover all future claims or will continue to be available inadequate amounts or at a reasonable cost.

 

**Reimbursement**

 

*Medicare—Ambulatory Surgery Centers*

 

Payments under theMedicare program to ambulatory surgery centers are made under a system wherebythe Secretary of the Department of Health and Human Services (the “Secretary”)determines payment amounts prospectively for various categories of medicalservices performed in ambulatory surgery centers, subject to an inflationadjustment. The payments are not based on a center’s costs or reasonablecharges. The various state 

 

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Medicaid programs alsopay us a fixed payment for our services, which amount varies from state tostate. About 21% of our patient service revenues during 2007 and 2008 wereattributable to Medicare and Medicaid payments.

 

The MedicarePrescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”)limited increases in Medicare reimbursement rates for ambulatory surgerycenters. Under the MMA, the 2% increase in Medicare reimbursement rates forambulatory surgery centers that became effective on October 1, 2003, waslimited beginning April 1, 2004, to an amount equal to the increase in theConsumer Price Index for all urban consumers as estimated by the Secretary forthe 12-month period ended June 30, 2003, minus 3.0 percentage points.The MMA also provided that there would be no increase in these rates during theyears 2005 through 2009. In addition, the MMA directed CMS to develop a newambulatory surgery center payment system taking into account findings in aCongressionally mandated Government Accountability Office (“GAO”) study thatwould assess the appropriateness of basing the new ambulatory surgery centersystem on Medicare’s hospital outpatient department payment system.

 

On July 16,2007, CMS issued a final rule that expanded the list of approvedambulatory surgery center procedures effective January 1, 2008 to includeall surgical procedures other than those that pose a significant safety risk orgenerally require an overnight stay, to a total of approximately 3,400procedures offered. Addendum AA to the final rule contained 3,443 coveredambulatory surgery center procedures for calendar year 2008, which includes 82procedures that are packaged with other covered procedures and therefore cannotbe separately billed. However, for surgical procedures that were added to theapproved ambulatory surgery center procedure list on or after January 1,2008 that are commonly performed in physician offices, the final rule limitsambulatory surgery center payments to the lesser of the non-facility practiceexpense payment under the Medicare physician fee schedule or the new ambulatorysurgery center payment rates for those procedures.

 

In addition, a July 16,2007 final rule implements changes to the ambulatory surgery centerpayment system that were required under the MMA. Effective January 1,2008, ambulatory surgery center payment rates are based on the ambulatorypayment classifications (“APCs”) that are used to categorize procedures underthe hospital outpatient prospective payment system. The newly added procedureswere subject to the revised ambulatory surgery center payment rates in 2008.Under the final rule, the ambulatory surgery center payment rate conversionfactor would be updated by the rate of increase in the consumer price index forurban consumers beginning in 2010.

 

On November 1, 2007,CMS released a final rule establishing the ambulatory surgery centerpayment rates and the ambulatory surgery center list of payable proceduresutilizing the ambulatory surgery center Medicare payment system announced inthe July rule. The new ambulatory surgery center payment rates will bephased in over a four-year period and apply to services provided on or after January 1,2008. Newly approved procedures are not subject to the phase-in and are paid atthe 2008 rate. For services provided on or after January 1, 2008, ambulatorysurgery centers were paid approximately 63% of the hospital outpatientdepartment rates.

 

On October 30, 2008,CMS released a final rule containing the ambulatory surgery center paymentrates for 2009.  The rule providedthat ambulatory surgery centers will be reimbursed at approximately 59% of thecorresponding hospital outpatient department rates for procedures performedduring calendar year 2009.  The final rule alsoincreased the number of procedures that are reimbursable in an ambulatorysurgery center.  As part of the October 30,2008 rule, CMS finalized the changes to the ambulatory surgery centerconditions for coverage.  In the finalrule, CMS revised the definition of “ASC” to mean an entity “providing surgicalservices to patients not requiring hospitalization and in which the expectedduration of services would not exceed twenty-four hours following admission.”  CMS did not adopt an earlier proposeddefinition of “overnight stay” that would have adversely affected manyambulatory surgery centers.  The rule alsocontains additional requirements regarding quality assurance and performanceimprovement programs and requires ambulatory surgery centers to providepatients with information regarding any physician ownership in the ambulatorysurgery center.  We intend for oursurgical facilities to comply with the Medicare requirements and certainchanges to facility operations may be required to assure compliance with thenew requirements.

 

While difficult topredict, the ultimate impact of the changes in reimbursement on our centers’performance will depend upon a number of different factors, including, but notlimited to, (i) the annual payment rates, which are subject to annualrecalculation, and (ii) each center’s case mix and ability to realize increasedvolume as the list of approved ambulatory surgery center procedures isexpanded. If the annual payment recalculations result in a further decrease inambulatory surgery center payment rates for procedures performed in ourcenters, our revenues and profitability could be materially adversely affected.In addition, legislation has and will likely continue to be 

 

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introduced in Congress tofurther adjust the new ambulatory surgery center payment system and refineMedicare’s reimbursement policies. We cannot predict the potential scope andimpact of any future legislative or regulatory changes.

 

*Medicare—Hospitals*

 

Three of our surgical facilities are licensed ashospitals. The Medicare program pays hospitals on a prospective payment systemfor acute inpatient services. Under this prospective payment system, a hospitalreceives a fixed amount for inpatient hospital services based on each patient’sfinal assigned diagnosis related group (“DRG”). These payments do not considera specific hospital’s costs, but are national rates adjusted for area wagedifferentials and case-mix index. For several years, the percentage increasesto the prospective payment rates generally have been lower than the percentageincreases in the costs of goods and services for hospitals. On August 2,2007, CMS issued a final rule that, beginning in fiscal year 2008,replaces the hospital Inpatient Prospective Payment System’s (“IPPS’s”)existing 538 DRGs with 745 Medicare Severity DRGs that are intended to betterrecognize each patient’s severity of illness. The new Medicare Severity DRGs are expected to increase payments tohospitals that treat more severely ill and costlier patients and decreasepayments to hospitals that generally treat less severely ill persons.   On July 31, 2008, CMS released thefinal 2009 IPPS rule.  In addition toproviding for a 3.6% increase in reimbursement rates, the final rule revisedthe requirements relating to disclosure to patients of physician ownership andinvestment interests in hospitals and contained other revisions to thephysician self-referral requirements with which the hospitals must comply.

 

Most outpatientservices provided by hospitals are reimbursed by Medicare under the outpatientprospective payment system. This outpatient prospective payment system is basedon a system of APCs. Each APC represents a bundle of outpatient services, andeach APC has been assigned a fully prospective reimbursement rate. The marketbasket increase for APC payment rates for calendar year 2009 is 3.6%. However,after accounting for the inflationary update and other factors, CMS expects anaverage increase in Medicare payments for outpatient services of approximately3.9% in calendar year 2009.

 

*Private Third-Party Payors*

 

In addition topaying professional fees directly to the physicians performing medicalservices, most private third-party payors also pay a facility fee to ambulatorysurgery centers for the use of the centers’ surgical facilities and reimbursehospitals for the charges associated with the facilities and services that areprovided by the hospitals to the third-party payors’ beneficiaries. Mostthird-party payors pay pursuant to a written contract with our surgicalfacilities. These contracts generally require our hospitals and ambulatorysurgery centers to offer discounts from their established charges.

 

Some of ourpayments come from third-party payors with which our surgical facilities do nothave a written contract. In those situations, commonly known as “out-of-network”services, we generally charge the patients the same co-payment or other patientresponsibility amounts that we would have charged had our center had a contractwith the third-party payor. We also submit a claim for the services to thethird-party payor along with full disclosure that our surgical facility hascharged the patient an in-network patient responsibility amount. Historically,those third-party payors who do not have contracts with our surgical facilitieshave typically paid our claims at higher than comparable contracted rates.However, there is a growing trend for third-party payors to adoptout-of-network fee schedules that are more comparable to our contracted rates,or to take other steps to discourage their enrollees from seeking treatment atout-of-network surgical facilities. In these cases, we seek to enter intocontracts with such payors. Typically, we have seen a decrease in revenues percase and an increase in volume of cases in those instances, resulting in anoverall decrease in revenues to the surgical facility where we transition fromout-of-network to in-network billing. We can provide no assurance that we willsee a sufficient increase in volume of cases to compensate for the decrease inper case revenues where we transition from out-of-network to in-networkbilling. See “Management’s Discussion and Analysis of Financial Condition andResults of Operation — Executive Overview — Operating Trends.”

 

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*Workers’ Compensation*

 

Our surgicalfacilities also provide services to injured workers and receive payment fromworkers’ compensation payors pursuant to the various state workers’compensation statutes. Historically, workers’ compensation payors have paidsurgical facilities a percentage of the surgical facilities’ charges. However,workers’ compensation payment amounts are subject to legislative, regulatory,and other payment changes over which we have no control. In recent years, therehas been a trend for states to implement workers’ compensation fee scheduleswith rates generally lower than what our surgical facilities have historicallybeen paid for the same services. With the exception of Indiana and Missouri,all of the states in which our surgical facilities operate have adopted workers’compensation fee schedules or other types of workers’ compensation paymentreforms. A reduction in workers’ compensation payment amounts could have amaterial adverse effect on the revenues of our surgical facilities.

 

Over the pastseveral years, governmental and private purchasers of health care services havebegun to actively monitor the growth in health care expenditures and have takenaffirmative steps, such as the implementation of fee schedules and themodification of existing payment methodologies, to contain health careexpenditures. The governmental and private purchasers of health care servicesare likely to continue these activities in the future. We cannot predict whatfurther legislation may be enacted or what regulations or guidelines may beestablished concerning third-party reimbursement by state, federal or privateprograms. In addition, market and cost factors affecting the fee structure,cost containment and utilization decisions of third-party payors and otherpayment factors over which we have no control could have a material adverseeffect on the revenues of our surgical facilities. See “Management’s Discussionand Analysis of Financial Condition and Results of Operation — ExecutiveOverview — Operating Trends.”

 

**GovernmentalRegulation**

 

*General*

 

The health careindustry is highly regulated, and we cannot provide any assurance that theregulatory environment in which we operate will not significantly change in thefuture or that we will be able to successfully address any such changes. Inaddition to extensive existing government health care regulation, therecontinue to be numerous and potentially far-reaching initiatives on the federaland state levels affecting the payment for and availability of health careservices. Some of the reform initiatives proposed in the past, such as furtherreductions in Medicare and Medicaid payments and additional prohibitions onphysician ownership of facilities to which they refer patients, could, ifadopted, adversely affect us and our business.

 

Every stateimposes licensing requirements on individual physicians and health carefacilities. In addition, federal and state laws regulate HMOs and other managedcare organizations. Many states require regulatory approval, includinglicensure, and in some cases certificates of need, before establishing certaintypes of health care facilities, including surgical hospitals and ambulatorysurgery centers, offering certain services, including the services we offer, ormaking expenditures in excess of certain amounts for health care equipment,facilities or programs. Our ability to operate profitably will depend in partupon all of our surgical facilities obtaining and maintaining all necessarylicenses, certificates of need and other approvals and operating in compliancewith applicable health care regulations. Failure to do so could have a materialadverse effect on our business.

 

The laws of manystates prohibit physicians from splitting fees with non-physicians(i.e., sharing in a percentage of professional fees), prohibitnon-physician entities (such as us) from practicing medicine and exercisingcontrol over or employing physicians and prohibit referrals to facilities inwhich physicians have a financial interest. We believe our activities do notviolate these state laws. However, future interpretations of, or changes in,these laws might require structural and organizational modifications of ourexisting relationships with facilities and physician networks, and we cannotassure you that we would be able to appropriately modify such relationships. Inaddition, statutes in some states could restrict our expansion into thosestates.

 

Our surgicalfacilities are subject to federal, state and local laws dealing with issuessuch as occupational safety, employment, medical leave, insurance regulations,civil rights, discrimination, building codes and medical waste and otherenvironmental issues. Federal, state and local governments are expanding theregulatory requirements on businesses. The imposition of these regulatoryrequirements may have the effect of increasing operating costs and reducing theprofitability of our operations.

 

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We believe thathospital, outpatient surgery and diagnostic services will continue to besubject to intense regulation at the federal and state levels. We are unable topredict what additional government regulations, if any, affecting our businessmay be enacted in the future or how existing or future laws and regulationsmight be interpreted. If we, or any of our surgical facilities, fail to complywith applicable laws, it might have a material adverse effect on our business.

 

*Certificates of Need and Licensure*

 

Capitalexpenditures for the construction of new health care facilities, the additionof beds or new health care services or the acquisition of existing health carefacilities may be reviewable by state regulators under statutory schemes thatare sometimes referred to as certificate of need laws. States with certificateof need laws place limits on the construction and acquisition of health carefacilities and the expansion of existing facilities and services. In thesestates, approvals, generally known as certificates of need, are required forcapital expenditures exceeding certain pre-set monetary thresholds for thedevelopment, acquisition and/or expansion of certain facilities or services,including surgical facilities. We have a concentration of surgical facilitiesin certificate of need states as we believe the regulations present acompetitive advantage to existing operators.

 

State certificateof need laws generally provide that a designated state health planning agencymust determine that a need exists prior to the construction of new health carefacilities, the introduction of new health care services or the acquisition ofany existing health care facility by a new owner. Typically, to obtain acertificate of need, the provider of services submits an application to theappropriate agency with information concerning the area and population to beserved, the anticipated demand for the facility or service to be provided, theamount of capital expenditure, the estimated annual operating costs, therelationship of the proposed facility or service to the overall state healthplan and the cost per patient day for the type of care contemplated and incases involving the proposed acquisition of an existing facility, the financialresources and operational experience of the proposed new owners of suchfacility. The issuance of a certificate of need is based upon a finding of needby the agency in accordance with criteria set forth in certificate of need lawsand state and regional health plans. If the proposed facility, service oracquisition is found to be necessary and the applicant is found to be theappropriate provider, the agency will issue a certificate of need containing amaximum amount of expenditure and a specific time period for the holder of thecertificate of need to implement the approved project.

 

Our health carefacilities are also subject to state licensing requirements for medicalproviders. Our surgical facilities have licenses to operate as ambulatorysurgery centers in the states in which they operate, except for (i) onesurgical facility in Colorado, one surgical facility in Louisiana and onesurgical facility in Oklahoma that are licensed as hospitals and (ii) onesurgical facility in the State of Washington where such state does not issuelicenses for ambulatory surgery centers. Our surgical facilities that arelicensed as ambulatory surgery centers must meet all applicable requirementsfor ambulatory surgery centers. In addition, even though our surgicalfacilities that are licensed as hospitals primarily provide surgical services,they must meet all applicable requirements for general hospital licensure. Toassure continued compliance with these regulations, governmental and otherauthorities periodically inspect our surgical facilities. The failure to complywith these regulations could result in the suspension or revocation of afacility’s license. In addition, based on the specific operations of oursurgical facilities, some of these facilities maintain a pharmacy license, acontrolled substance registration, a clinical laboratory certification waiver,and environmental protection permits for biohazards and/or radioactivematerials, as required by applicable law.

 

*Medicareand Medicaid Participation*

 

The majority of our revenues are expected to continueto be received through third-party reimbursement programs, including state andfederal programs, such as Medicare and Medicaid, and private health insuranceprograms. Medicare is a federally funded and administered health insuranceprogram, primarily for individuals who are 65 or older, and entitled to socialsecurity benefits, who have end-stage renal disease or who are disabled.Medicaid is a health insurance program jointly funded by state and federalgovernments that provides medical assistance to qualifying low income persons.Each state Medicaid program covers in-patient hospital services and has theoption to provide payment for ambulatory surgery center services. The Medicaidprograms of all of the states in which we currently operate cover ambulatorysurgery center services. However, these states may not continue to 

 

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coverambulatory surgery center services, and states into which we expand ouroperations may not cover or continue to cover ambulatory surgery centerservices.

 

To participate inthe Medicare program and receive Medicare payment, our surgical facilities mustcomply with regulations promulgated by the U.S. Department of Health and HumanServices, or HHS. Among other things, these regulations, known as “conditionsof coverage” or “conditions of participation,” impose numerous requirements onour facilities, their equipment, their personnel and their standards of medicalcare, as well as compliance with all applicable state and local laws andregulations. On April 26, 2007, CMS issued a policy memorandum thatreaffirmed its prior interpretation of its conditions of participation that allhospitals (other than Critical Access Hospitals) participating in the Medicareprogram are required to provide basic emergency care interventions regardlessof whether or not the hospital maintains an emergency department. Our threefacilities licensed as hospitals are required to meet this requirement tomaintain their participating provider status in the Medicare program. One ofour hospitals, which does not have an emergency room, maintains a protocol forthe transfer of patients requiring emergency treatment, which protocol may beinterpreted as inconsistent with a recent CMS policy memorandum. Our surgicalfacilities must also satisfy the conditions of participation to be eligible toparticipate in the various state Medicaid programs. The requirements forcertification under Medicare and Medicaid are subject to change and, in orderto remain qualified for these programs, we may have to make changes from timeto time in our facilities, equipment, personnel or services. Although we intendto continue to participate in these reimbursement programs, we cannot assureyou that our surgical facilities will continue to qualify for participation.

 

In order todevelop its strategic plan required by DRA, in its report to Congress on August 8,2006, CMS disclosed that it planned to require specialty hospitals to providecertain information to CMS on a periodic basis concerning physician investmentinterests and to require all hospitals to disclose their compensationarrangements with physicians. In connection with this strategic plan, CMSdesigned a form entitled “Disclosure of Financial Relationships Report.” CMSinitially proposed requiring 500 hospitals to report on the DFRR. On April 10,2008, CMS withdrew its request for Office of Management and Budget approval ofthe DFRR after industry representatives asserted that CMS had severelyunderestimated the time it would take for a hospital to complete the form. Inthe Final 2009 IPPS Rule, CMS announced that it is proceeding with its proposalto send the DFRR to 500 hospitals, although that number may be reduced based onfurther review and comments to the Paperwork Reduction Act packages to bepublished separately in the Federal Register. As currently proposed, hospitals will have 60 days to respond to theDFRR and will be subject to penalties for late submissions. If CMS implementsthe DFRR, we intend for our three surgical facilities that are licensed ashospitals to comply with the DFRR requests to the extent they receive any suchrequests.

 

In the Final 2009IPPS Rule, CMS also finalized its proposal to require hospitals to disclosephysician ownership to patients. Under the final rule, in such cases a hospitalis required to disclose in writing to patients that physicians and/or immediatefamily members of physicians hold ownership in the hospital and that a list ofowners may be furnished upon request of the patient. These disclosures must bemade at the time the hospital provides information regarding scheduledpreadmission testing and registration for a planned hospital admission forinpatient care or outpatient service. A hospital’s provider agreement may beterminated if it fails to provide the notice. In addition, a hospital that doesnot have a physician on site 24 hours per day and 7 days per week could haveits provider agreement terminated if it fails to provide notice of thiscircumstance.

 

CMS also mandatedthat as a condition of continued membership on the hospital medical staff, eachphysician is required at the time of a referral to the hospital to disclose inwriting to patients referred to the hospital that such physician or animmediate family member holds ownership in the hospital.

 

MMA required theSecretary to establish a Technical Advisory Group (“TAG”) to advise theSecretary on issues related to Emergency Medical Treatment and Labor Act (“EMTALA”)regulations and implementation of EMTALA. In the Final 2009 IPPS Rule, CMSnoted that the TAG submitted 55 recommendations to the Secretary, certain ofwhich have been adopted and others of which are still under study. Several ofthe recommendations concern how a hospital will satisfy its on-call listobligations. The TAG recommended that each hospital and its medical staff havean annual plan to address on-call coverage. Recognizing that certain hospitalshave difficulty attracting on-call coverage, especially for specialties where aphysician is on more than one medical staff, the TAG recommended that hospitalsbe permitted to participate in “community call,” which allows all the hospitalsin a community to be covered by one on-call physician in a specialty. In theFinal 

 

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2009 IPPS Rule, CMSoutlined the requirements for community call. A hospital participating incommunity call is still required to provide an initial screening.

 

We do not knowwhich of the remaining TAG recommendations will be implemented by CMS orwhether any further EMTALA requirements would adversely affect our ability toqualify for participation in Medicare and Medicaid.

 

*Federal Anti-Kickback Statute andMedicare Fraud and Abuse Laws*

 

The SocialSecurity Act includes provisions addressing false statements, illegalremuneration and other instances of fraud and abuse in the Medicare program.These provisions are commonly referred to as the Medicare fraud and abuse laws,and include the statute commonly known as the federal anti-kickback statute(the “Anti-Kickback Statute”). The Anti-Kickback Statute prohibits providersand others from, among other things, soliciting, receiving, offering or paying,directly or indirectly, any remuneration in return for either making a referralfor, or ordering or arranging for, or recommending the order of, any item orservice covered by a federal health care program, including, but not limitedto, the Medicare program. Violations of the Anti-Kickback Statute are criminaloffenses punishable by imprisonment and fines of up to $25,000 for eachviolation. Civil violations are punishable by fines of up to $50,000 for eachviolation, as well as damages of up to three times the total amount ofremuneration received from the government for health care claims.

 

In addition, theMedicare Patient and Program Protection Act of 1987, as amended by the HealthInsurance Portability and Accountability Act of 1996, (“HIPAA”), and theBalanced Budget Act of 1997, impose civil monetary penalties and exclusion fromstate and federal health care programs on providers who commit violations ofthe Medicare fraud and abuse laws. Pursuant to the enactment of HIPAA, as of June 1,1997, the Secretary may, and in some cases must, exclude individuals andentities that the Secretary determines have “committed an act” in violation ofthe Medicare fraud and abuse laws or improperly filed claims in violation ofthe Medicare fraud and abuse laws from participating in any federal health careprogram. HIPAA also expanded the Secretary’s authority to exclude a personinvolved in fraudulent activity from participating in a program providinghealth benefits, whether directly or indirectly, in whole or in part, by theU.S. government. Additionally, under HIPAA, individuals who hold a direct orindirect ownership or controlling interest in an entity that is found toviolate the Medicare fraud and abuse laws may also be excluded from Medicareand Medicaid and other federal and state health care programs if the individualknew or should have known, or acted with deliberate ignorance or recklessdisregard of, the truth or falsity of the information of the activity leadingto the conviction or exclusion of the entity, or where the individual is anofficer or managing employee of such entity. This standard does not requirethat specific intent to defraud be proven by the Office of the InspectorGeneral of the U.S. Department of Health and Human Services (the “OIG”). UnderHIPAA it is also a crime to defraud any commercial health care benefit program.

 

Becausephysician-investors in our surgical facilities are in a position to generatereferrals to the facilities, the distribution of available cash to thoseinvestors could come under scrutiny under the Anti-Kickback Statute. The U.S.Third Circuit Court of Appeals has held that the Anti-Kickback Statute isviolated if one purpose (as opposed to a primary or sole purpose) of a paymentto a provider is to induce referrals. Other federal circuit courts have followedthis decision. Because none of these cases involved a joint venture such asthose owning and operating our surgical facilities, it is not clear how a courtwould apply these holdings to our activities. It is clear, however, that aphysician’s investment income from a surgical facility may not vary with thenumber of his or her referrals to the surgical facility, and we comply withthis prohibition.

 

In a caseinvolving a physician-owned joint venture, the U.S. Ninth Circuit Court ofAppeals held that the Anti-Kickback Statute is violated when a person or entity(1) knows that the statute prohibits offering or paying remuneration toinduce referrals and (2) engages in prohibited conduct with the specificintent to violate the law. In that case, the joint venture was determined tohave violated the law because its agent solicited prospective limited partnersby implying that eligibility to purchase shares in the limited partnership wasdependent on an agreement to refer business to it, told prospective limitedpartners that the number of shares they would be permitted to purchase woulddepend on the volume of business they referred to the venture, and stated thatpartners who did not refer business would be pressured to leave thepartnership. The court also determined that the joint venture was vicariouslyliable for the actions of its agents, notwithstanding that the agent’s actionswere contrary to the principal’s stated policy.

 

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Under regulationsissued by the OIG, certain categories of activities are deemed not to violatethe Anti-Kickback Statute (commonly referred to as the safe harbors). Accordingto the preamble to these safe harbor regulations, the failure of a particularbusiness arrangement to comply with the regulations does not determine whetherthe arrangement violates the Anti-Kickback Statute. The safe harbor regulationsdo not make conduct illegal, but instead outline standards that, if compliedwith, protect conduct that might otherwise be deemed in violation of theAnti-Kickback Statute. Failure to meet a safe harbor does not indicate that thearrangement violates the Anti-Kickback Statute.

 

We believe thatthe ownership and operations of our surgery centers and hospitals will not fitwholly within safe harbors, but we attempt to incorporate elements of a safeharbor in all of our facilities.  OurASCs, for example, are structured to fit as closely as possible within the safeharbor designed to protect distributions to physician-investors in ambulatorysurgery centers who directly refer patients to the ambulatory surgery centerand personally perform the procedures at the center as an extension of their practice(the “ASC Safe Harbor”). The ASC Safe Harbor protects four categories ofinvestors, including facilities owned by (1) general surgeons, (2) single-specialtyphysicians, (3) multi-specialty physicians and (4) hospital/physicianventures, provided that certain requirements are satisfied. These requirementsinclude the following:

 

1.               Theambulatory surgery center must be an ambulatory surgery center certified toparticipate in the Medicare program, and its operating and recovery room spacemust be dedicated exclusively to the ambulatory surgery center and not a partof a hospital (although such space may be leased from a hospital if such leasemeets the requirements of the safe harbor for space rental);

 

2.               Eachinvestor must be either (a) a physician who derived at least one-third ofhis or her medical practice income for the previous fiscal year or 12-monthperiod from performing procedures on the list of Medicare-covered proceduresfor ambulatory surgery centers, (b) a hospital, or (c) a person or entitynot in a position to make or influence referrals to the center, nor to provideitems or services to the ambulatory surgery center, nor employed by theambulatory surgery center or any investor;

 

3.               Unlessall physician-investors are members of a single specialty, eachphysician-investor must perform at least one-third of his or her procedures atthe ambulatory surgery center each year. (This requirement is in addition tothe requirement that the physician-investor has derived at least one-third ofhis or her medical practice income for the past year from performingprocedures.);

 

4.               Physician-investorsmust have fully informed their referred patients of the physician’s investment;

 

5.               Theterms on which an investment interest is offered to an investor are not relatedto the previous or expected volume of referrals, services furnished or theamount of business otherwise generated from that investor to the entity;

 

6.               Neitherthe ambulatory surgery center nor any other investor nor any person acting ontheir behalf may loan funds to or guarantee a loan for an investor if theinvestor uses any part of such loan to obtain the investment interest’

 

7.               Theamount of payment to an investor in return for the investment interest isdirectly proportional to the amount of the capital investment (including thefair market value of any pre-operational services rendered) of that investor;

 

8.               Allphysician-investors, any hospital-investor and the center agree to treatpatients receiving benefits or assistance under a federal health care programin a non-discriminatory manner;

 

9.               Allancillary services performed at the ambulatory surgery center for beneficiariesof federal health care programs must be directly and integrally related toprimary procedures performed at the ambulatory surgery center and may not bebilled separately;

 

10.         Nohospital-investor may include on its cost report or any claim for payment froma federal health care program any costs associated with the ambulatory surgerycenter;

 

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11.         Theambulatory surgery center may not use equipment owned by or services providedby a hospital-investor unless such equipment is leased in accordance with alease that complies with the Anti-Kickback statute equipment rental safe harborand such services are provided in accordance with a contract that complies withthe Anti-Kickback Statute personal services and management contracts safeharbor; and

 

12.         Nohospital-investor may be in a position to make or influence referrals directlyor indirectly to any other investor or the ambulatory surgery center.

 

We believe thatthe ownership and operations of our surgical facilities will not satisfy thisASC Safe Harbor for investment interests in ambulatory surgery centers because,among other things, we or one of our subsidiaries will generally be an investorin and provide management services to each ambulatory surgery center. We cannotassure you that the OIG would view our activities favorably even though westrive to achieve compliance with the remaining elements of this safe harbor.

 

In addition,although we expect each physician-investor to utilize the ambulatory surgerycenter as an extension of his or her practice, we cannot assure you that allphysician-investors will derive at least one-third of their medical practiceincome from performing Medicare-covered ambulatory surgery center procedures,perform one-third of their procedures at the ambulatory surgery center orinform their referred patients of their investment interests. Interests in ourambulatory surgery center joint ventures are purchased at fair market value.Investors who purchase at a later time generally pay more for a givenpercentage interest than founding investors. The result is that while allinvestors are paid distributions in accordance with their ownership interests,for ambulatory surgery centers where there are later purchases we cannot meetthe safe harbor requirement that return on investment is directly proportionalto the amount of capital investment. Nonetheless, we believe our fair marketvalue purchase requirements and distribution policies comply with theAnti-Kickback Statute. In Advisory Opinion No 01-21 (November 16, 2001),the OIG approved an arrangement where a hospital made a later fair market valuepurchase of interests in an ambulatory surgery center where some of theexisting physicians had purchased at a later time for a higher per unit investment.In a recent Advisory Opinion, No. 07-05 (June 12, 2007), however, theOIG refused to provide protection to a proposed sale of certain interests ownedby certain founding physician investors to a would-be hospital investor. TheOIG raised three concerns: (1) the hospital was purchasing its interestsfrom physician investors, thus the ambulatory surgery center would not receivean infusion of capital, rather the physicians would realize gain on theirinvestment, (2) the hospital was purchasing from only certain of theinvestor physicians raising the possibility that the hospital’s purchase was toreward or influence the selling physicians’ referrals to the surgery center orthe hospital, and (3) for each investor, return on investment would not bedirectly proportional to the amount of capital invested. The OIG admitted thatnone of the factors alone or together necessarily indicates an Anti-KickbackStatute violation. Given the results in Advisory Opinion No. 01-21 andthat negative OIG Advisory Opinions are unusual, it appears to us that the OIG’sconclusions as stated in Advisory Opinion No. 07-05 may be limited to thefacts of the arrangement in the Advisory Opinion request.

 

We hold ownershipin one ambulatory surgery center in which a physician group that includesprimary care physicians who do not use the ambulatory surgery center also holdsownership. In OIG Advisory Opinion No. 03-5 (February 6, 2003), theOIG declined to grant a favorable opinion to a proposed ambulatory surgerycenter structure that would have been jointly owned by a hospital and amulti-specialty group practice that was composed of a substantial number ofprimary care physicians who would not personally use the ambulatory surgerycenter. In the opinion, the OIG stated that because interests in the ambulatorysurgery center would be indirectly owned by physicians who would not personallypractice at the ambulatory surgery center, the proposed structure couldpotentially generate prohibited remuneration under the Anti-Kickback Statuteand that as a result, the OIG was precluded from determining that the proposedarrangement posed a minimal risk of fraud and abuse. We believe that theownership of our ambulatory surgery center complies with the Anti-KickbackStatute because we understand that the physician group that owns an interest inour ambulatory surgery center is structured to fit within the definition of aunified group practice under the federal law prohibiting physicianself-referrals, commonly known as the Stark Law, and the income distributionsof the group practice comply with the Stark Law’s acceptable methods of incomedistribution. Although these provisions directly apply only to liability underthe Stark Law, we believe that the same principles are relevant to an analysisunder the Anti-Kickback Statute. We believe that no physician in the grouppractice receives an income distribution that is based directly on his or herreferrals to the ambulatory surgery center, and we believe that the group’sownership of the ambulatory surgery center is no different than its 

 

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ownership of otherancillary services common in physician practices. Nevertheless, there can be noassurance that the proposed arrangement will not be determined to be inviolation of the law.

 

Our hospitalscomply as closely as possible to the safe harbor for investments in smallentities.  Our hospital investments do notfit wholly within the safe harbor because more than 40% of the investmentinterests are held by investors who are either in a position to refer to thehospital or who provide services to the hospital and more than 40% of thehospital’s gross revenues last year were derived from referrals generated byinvestors.  However, we believe we complywith the remaining elements of the safe harbor.

 

In addition to thephysician ownership in our surgical facilities, other financial relationshipsof ours with potential referral sources could potentially be scrutinized underthe Anti-Kickback Statute. We have entered into management agreements to managemany of our surgical facilities, as well as two physician networks.  Most of these agreements call for oursubsidiary to be paid a percentage-based management fee. Although there is asafe harbor for personal services and management contracts (the “PersonalServices and Management Safe Harbor”), the Personal Services and ManagementSafe Harbor requires, among other things, that the amount of the aggregatecompensation paid to the manager over the term of the agreement be set inadvance. Because our management fees are generally based on a percentage ofrevenues, our management agreements do not typically meet this requirement. Wedo, however, believe that our management arrangements satisfy the otherrequirements of the Personal Services and Management Safe Harbor for personalservices and management contracts. The OIG has taken the position thatpercentage-based management agreements are not protected by a safe harbor, andconsequently, may violate the Anti-Kickback Statute. On April 15, 1998,the OIG issued Advisory Opinion No. 98-4 which reiterates thisproposition. The opinion focused on areas the OIG considers to be problematicin a physician practice management context, including financial incentives toincrease patient referrals, no safeguards against overutilization andincentives to increase the risk of abusive billing. The opinion also reiteratedthat proof of intent to violate the Anti-Kickback Statute is the central focusof the OIG. We have implemented formal compliance programs designed tosafeguard against overbilling and believe that our management agreements complywith the requirements of the Anti-Kickback Statute. However, we cannot assureyou that the OIG would find our compliance programs to be adequate or that ourmanagement agreements would be found to comply with the Anti-Kickback Statute.

 

We also typicallyguarantee a surgical facility’s third-party debt financing and certain leaseobligations as part of our obligations under a management agreement. Physicianinvestors are generally not required to enter into similar guarantees. The OIGmight take the position that the failure of the physician investors to enterinto similar guarantees represents a special benefit to the physician investorsgiven to induce patient referrals and that such failure constitutes a violationof the Anti-Kickback Statute. We believe that the management fees (and in somecases guarantee fees) are adequate compensation to us for the credit riskassociated with the guarantees and that the failure of the physician investorsto enter into similar guarantees does not create a material risk of violatingthe Anti-Kickback Statute. However, the OIG has not issued any guidance in thisregard.

 

The OIG isauthorized to issue advisory opinions regarding the interpretation andapplicability of the Anti-Kickback Statute, including whether an activityconstitutes grounds for the imposition of civil or criminal sanctions. We havenot, however, sought such an opinion regarding any of our arrangements. If itwere determined that our activities, or those of our surgical facilities,violate the Anti-Kickback Statute, we, our subsidiaries, our officers, ourdirectors and each surgical facility investor could be subject, individually,to substantial monetary liability, prison sentences and/or exclusion fromparticipation in any health care program funded in whole or in part by the U.S.government, including Medicare, TRICARE or state health care programs.

 

*Federal Physician Self-Referral Law*

 

Congress hasenacted the federal physician self-referral law (“Stark Law”) that prohibitscertain self-referrals for health care services. As currently enacted, theStark Law prohibits a practitioner, including a physician, dentist orpodiatrist, from referring patients to an entity with which the practitioner ora member of his or her immediate family has a “financial relationship” for theprovision of certain “designated health services” that are paid for in whole orin part by Medicare or Medicaid unless an exception applies. The term “financialrelationship” is broadly defined and includes most types of ownership andcompensation relationships. The Stark Law also prohibits the entity fromseeking payment from Medicare or Medicaid for services that are renderedthrough a prohibited referral. If an entity is paid for services providedthrough a prohibited referral, it may be required to refund the 

 

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payments. Violations ofthe Stark Law may also result in the imposition of damages equal to three timesthe amount improperly claimed and civil monetary penalties of up to $15,000 perprohibited claim and $100,000 per prohibited circumvention scheme and exclusionfrom participation in the Medicare and Medicaid programs. For the purposes ofthe Stark Law, the term “designated health services” is defined to include:

 

·                  clinicallaboratory services;

·                  physical therapyservices;

·                  occupationaltherapy services;

·                  radiologyservices, including magnetic resonance imaging, computerized axial tomographyscan and ultrasound services;

·                  radiationtherapy services and supplies;

·                  durable medicalequipment and supplies;

·                  parenteral andenteral nutrients, equipment and supplies;

·                  prosthetics,orthotics and prosthetic devices and supplies;

·                  home healthservices;

·                  outpatientprescription drugs; and

·                  inpatient andoutpatient hospital services.

 

The list ofdesignated health services does not, however, include surgical services thatare provided in an ambulatory surgery center. Furthermore, in final Stark Lawregulations published by HHS on January 4, 2001, the term “designatedhealth services” was specifically defined to not include services that arereimbursed by Medicare as part of a composite rate, such as services that areprovided in an ambulatory surgery center. However, if designated healthservices are provided by an ambulatory surgery center and separately billed,referrals to the ambulatory surgery center by a physician-investor would beprohibited by the Stark Law. Because our facilities that are licensed asambulatory surgery centers do not have independent laboratories and do notprovide designated health services apart from surgical services, we do notbelieve referrals to these facilities by physician-investors are prohibited. Iflegislation or regulations are implemented that prohibit physicians fromreferring patients to surgical facilities in which the physician has abeneficial interest, our business and financial results would be materiallyadversely affected.

 

Three of ourfacilities are licensed as hospitals. The Stark Law currently includes anexception relating to physician ownership of a hospital, provided that thephysician’s ownership is in the whole hospital and the physician is authorizedto perform services at the hospital (the “Whole Hospital Exception”). Physicianinvestment in our facilities licensed as hospitals meet this requirement.However, the Whole Hospital Exception has been the subject of recent regulatoryaction and legislative debate.  Thelatest attempt to amend the Stark Whole Hospital exception was introduced inthe U.S. House of Representatives’ original SCHIP Reauthorization Act.  This proposal, which was dropped from thefinal version of the SCHIP bill, would have provided:

 

·                  A prohibition onhospitals from having any physician ownership unless the hospital already hadphysician ownership and a Medicare provider agreement in effect on January 1,2009;

·                  A limitation onthe percentage of total physician ownership or investment interests in thehospital or entity whose assets include the hospital to the percentage ofphysician ownership or investment as of January 1, 2009 (unlike earlierproposed bills, there is no limitation on the ownership percentage ofindividual physicians, and no 40% aggregate physician investment limitation);

·                  A requirementthat return on investment be proportionate to the investment by each investor;

·                  Restrictions onpreferential treatment of physician versus nonphysician investors;

·                  A requirementfor written disclosures of physician ownership interests to the hospital’spatients and on the hospital’s website and in any advertising, along withannual reports to the government detailing such interests;

·                  A prohibition onthe hospital or other investors from providing financing to physicianinvestors;

·                  A requirementthat any hospital that does not have 24/7 physician coverage inform patients ofthis fact and receive signed acknowledgement from the patients of thedisclosure; and

·                  A prohibition on“grandfathered” status for any physician owned hospital that converted from anambulatory surgery center to a hospital on or after the date of the enactmentof the Stark amendment.

 

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Wecannot predict whether similar proposed amendments to the Whole HospitalException will be included in anyfuture legislation or if Congress will adopt any similar provisions that wouldprohibit or otherwise restrict physicians from holding ownership interests inhospitals.  If legislation were to beenacted by Congress that prohibits physician referrals to hospitals in whichthe physicians own an interest, or that otherwise limits physician ownership inexisting facilities, or restricts the hospital’s ability to expand, ourfinancial condition and results of operations could be materially adverselyaffected.

 

Additionally, thephysician networks we manage must comply with the “in-office ancillary servicesexception” of the Stark Law. We believe that these physician networks operatein compliance with the applicable language of statutory exceptions to the StarkLaw, including the exceptions for services provided by physicians within agroup practice or in-office ancillary services. There have been extensive discussions and proposed changes to theseexceptions.  We cannot provide assurancesthat CMS may not propose and later adopt changes to the in-office ancillaryservices exception or whether if adopted any such changes would not adverselyaffect the physician practices that we manage, and thus that portion of ourbusiness. If future revisions modify the provisions of the Stark Lawregulations that are applicable to our business, our revenues and profitabilitycould be materially adversely affected and could require us to modify ourrelationships with our physician and health care system partners.

 

*False and Other Improper Claims*

 

The U.S.government is authorized to impose criminal, civil and administrative penaltieson any person or entity that files a false claim for payment from theMedicare or Medicaid programs or other federal and state health care programs.Claims filed with private insurers can also lead to criminal and civilpenalties, including, but not limited to, penalties relating to violations offederal mail and wire fraud statutes, as well as penalties under the anti-fraudprovisions of HIPAA. While the criminal statutes are generally reserved forinstances of fraudulent intent, the U.S. government is applying its criminal,civil and administrative penalty statutes in an ever-expanding range ofcircumstances. For example, the U.S. government has taken the position that apattern of claiming reimbursement for unnecessary services violates thesestatutes if the claimant merely should have known the services wereunnecessary, even if the government cannot demonstrate actual knowledge. TheU.S. government has also taken the position that claiming payment forlow-quality services is a violation of these statutes if the claimant shouldhave known that the care being provided was substandard.

 

Over the pastseveral years, the U.S. government has accused an increasing number of healthcare providers of violating the federal False Claims Act. The False Claims Actprohibits a person from knowingly presenting, or causing to be presented, afalse or fraudulent claim to the U.S. government. The statute defines “knowingly”to include not only actual knowledge of a claim’s falsity, but also recklessdisregard for or intentional ignorance of the truth or falsity of a claim. Becauseour surgical facilities perform hundreds of similar procedures a year for whichthey are paid by Medicare, and there is a relatively long statute oflimitations, a billing error or cost reporting error could result insignificant civil or criminal penalties. In addition, some courts have heldthat a violation of the Anti-Kickback Statute or the Stark Law can result inliability under the federal False Claims Act.

 

Under the qui tam,or whistleblower, provisions of the False Claims Act, private parties may bringactions on behalf of the U.S. government. These private parties, often referredto as relators, are entitled to share in any amounts recovered by thegovernment through trial or settlement. Both whistleblower lawsuits and directenforcement activity by the government have increased significantly in recentyears and have increased the risk that a health care company, like us, willhave to defend a false claims action, pay fines or be excluded from theMedicare and Medicaid programs and other federal and state health care programsas a result of an investigation resulting from a whistleblower case. Althoughwe believe that our operations materially comply with both federal and statelaws, they may nevertheless be the subject of a whistleblower lawsuit or mayotherwise be challenged or scrutinized by governmental authorities. Adetermination that we have violated these laws would have a material adverseeffect on us.

 

*Health Information Practices*

 

Privacy andSecurity Requirements

 

There are currentlyseveral laws at the state and federal levels addressing the privacy andsecurity of patient health and other identifiable information.   The privacy regulations of HIPAA apply toall health plans, all health 

 

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care clearinghouses andhealth care providers that transmit health information in an electronic form inconnection with HIPAA standard transactions. We are subject to the privacyregulations of HIPAA. The privacy standards apply to individually identifiableinformation held or disclosed by a covered entity in any form, whethercommunicated electronically, on paper or orally. These standards imposeextensive administrative requirements on us. They require our compliance with rules governingthe use and disclosure of this health information. They create rights forpatients in their health information, such as the right to amend their healthinformation, and they require us to impose these rules, by contract, on anybusiness associate to whom we disclose such information in order to performfunctions on our behalf. In addition, our surgical facilities will continue toremain subject to any state laws that are more restrictive than the privacyregulations issued under HIPAA. These state laws vary by state and could imposeadditional penalties.

 

In addition, weare also subject to the security regulations of HIPAA designed to protect theconfidentiality, availability and integrity of health information by healthplans, health care clearinghouses and health care providers that receive,store, maintain or transmit health and related financial information inelectronic form, regardless of format. These security standards require us toestablish and maintain reasonable and appropriate administrative, technical andphysical safeguards to ensure the integrity, confidentiality and theavailability of electronic health and related financial information. Thesecurity standards were designed to protect electronic information againstreasonably anticipated threats or hazards to the security or integrity of theinformation and to protect the information against unauthorized use ordisclosure. Although the security standards do not reference or advocate aspecific technology, and covered health care providers, plans andclearinghouses have the flexibility to choose their own technical solutions,the security standards have required us to implement significant new systems,business procedures and training programs. We believe that we are in compliancewith these regulations.

 

Violations of theHIPAA privacy and security regulations may result in civil and criminalpenalties.   Recently, the AmericanRecovery and Reinvestment Act of 2009 (“ARRA”) strengthened the requirements ofthe HIPAA privacy and security regulations and significantly increased thepenalties for violations by introducing a tiered penalty system, with penaltiesof up to $50,000 per violation with a maximum civil penalty of $1.5 million ina calendar year for violations of the same requirement. Under ARRA, HHS isrequired to conduct periodic compliance audits of covered entities and theirbusiness associates.  ARRA also extends theapplication of certain provisions of the security and privacy regulations tobusiness associates and subjects business associates to civil and criminalpenalties for violation of the regulations.  In addition, ARRA authorizes State Attorneys General to bring civilactions seeking either injunction or damages in response to violations of HIPAAprivacy and security regulations that threaten the privacy of state residents.

 

ARRA also createsa federal security breach notification law to mirror protections that manystates have passed in recent years.  ARRArequires us to notify patients of any unauthorized access, acquisition, ordisclosure of their unsecured protected health information that compromises thepatient’s privacy and security.  The ARRAspecifies both acceptable methods of notice and information that must appear inthe notification to the patient.  Allsuch breaches of security must be reported to the Secretary.  If a breach affects 500 patients or more, itmust immediately be reported to the Secretary, who, in turn, will post the nameof the provider on its public website. Finally, the law requires that breaches affecting 500 patients or morewho reside in the same area be reported to local media.   The Secretary is also required to issueregulations further clarifying ARRA’s requirements.

 

Our facilitiesremain subject to any state laws that relate to privacy or the reporting ofsecurity breaches that are more restrictive than the regulations issued underHIPAA and the requirements of the ARRA. For example, various state laws and regulationsmay require us to notify affected individuals in the event of a data breachinvolving certain individually identifiable health or financial information.

 

In addition, theFederal Trade Commission (“FTC”) issued a final rule, known as the Red Flag Rules,in October 2007 requiring financial institutions and businesses whichmaintain accounts that permit multiple payments for primarily individualpurposes, which may include ASCs and other healthcare providers, to implementwritten identity theft prevention programs.  These identity theft programs must be designed to detect, prevent, andmitigate identity theft in connection with these accounts. The compliance datefor this rule has been postponed until May 1, 2009.   The FTC may seek penalties for violating theRed Flags Rules of up to $3,500 per violation, for certainviolations.   Additionally, States mayenforce the action on behalf of their citizens either through seeking directdamages of up to $1,000 per independent violation, plus recovering attorney’sfees from the violator.  Finally, 

 

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individuals may filecivil suits, in which they may seek actual damages, plus recovering attorney’sfees from the violator, for negligent violations.  Individuals may seek actual damages of up to$1,000, plus punitive damages and attorney’s fees from the violator, forwillful noncompliance.

 

Compliance withthese standards requires significant commitment and action by us. We haveappointed members of our management team to direct our compliance with thesestandards. We have also appointed a privacy officer, prepared privacy policies,trained our workforce on these policies and entered into business associateagreements with the appropriate vendors. Continued compliance with thesesregulations will require us to continue these activities on an ongoing basisand may require us to make additional expenditures in the future.

 

HIPAAAdministrative Simplification Requirements**.**

 

The HIPAAtransaction regulations were issued to encourage electronic commerce in thehealth care industry.  These regulationsinclude standards which healthcare providers must follow when electronically transmittingcertain healthcare transactions, such as healthcare claims.  We believe that we are in compliance withthese regulations.

 

In January 2009,CMS published a final rule adopting modification to the ICD-10 code setsfor certain diagnoses and inpatient hospital procedures, as well as relatedchanges to certain formats for electronic transactions. While use of theseupdated code sets will not be mandatory until October 1, 2013, preparationfor compliance with these standards may require significant administrativechanges to our payment systems and procedures. We do not believe costs of compliance with these administrativesimplification requirements will have a material, adverse effect on ourbusiness, financial position or results of operations

 

*State Regulation*

 

Many of the states in which our surgical facilitiesoperate have adopted statutes and/or regulations that prohibit the payment ofkickbacks or any type of remuneration in exchange for patient referrals andthat prohibit health care providers from, in certain circumstances, referring apatient to a health care facility in which the provider has an ownership orinvestment interest. While these statutes generally mirror the federalAnti-Kickback Statute and Stark Law, they vary widely in their scope andapplication. Some are specifically limited to health care services that arepaid for in whole or in part by the Medicaid program, others apply to allhealth care services regardless of payor, while others apply only tostate-defined designated services which may differ from the designated healthservices under the Stark Law. In addition, many states have adopted statutesthat mirror the False Claims Act and that prohibit the filing of a false orfraudulent claim with a state governmental agency. We intend to comply with allapplicable state health care laws, rules and regulations. However, theselaws, rules and regulations have typically been the subject of limitedjudicial and regulatory interpretation. As a result, we cannot assure you thatour surgical facilities will not be investigated or scrutinized by thegovernmental authorities empowered to do so or, if challenged, that theiractivities would be found to be lawful. A determination of non-compliance withthe applicable state health care laws, rules, and regulations could subject oursurgical facilities to civil and criminal penalties and could have a materialadverse effect on our operations.

 

Many states inwhich our surgical facilities are located or may be located in the future, donot permit business corporations to practice medicine, exercise control over oremploy physicians, or engage in various business practices, such asfee-splitting with physicians (i.e. the sharing in a percentage ofprofessional fees). The existence, interpretation and enforcement of these lawsvary significantly from state to state. A determination of non-compliance withthese laws could result in fines and or require us to restructure some of ourexisting relationships with our physicians. We are also subject to variousstate insurance statutes and regulations that prohibit us from submittinginaccurate, incorrect or misleading claims. Many state insurance laws andregulations are broadly worded and could be implicated, for example, if oursurgical facilities were to waive an out-of-network co-payment or other patientresponsibility amounts without fully disclosing the waiver on the claimsubmitted to the payor. While some of our surgical facilities waive theout-of-network portion of patient co-payment amounts when providing services topatients whose health insurance is covered by a payor with which the surgicalfacilities are not contracted, our surgical facilities fully disclose waiversin the claims submitted to the payors. We believe that our surgical facilitiesare in compliance with all applicable state insurance laws and regulationsregarding the submission of claims. We cannot assure you, however, that none ofour surgical facilities’ insurance claims will ever be challenged. If we werefound to be in violation of a state’s insurance laws or regulations, we couldbe forced to 

 

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discontinue the violativepractice, which could have an adverse effect on our financial position andresults of operations, and we could be subject to fines and criminal penalties.

 

*Health Care Regulations AffectingOur New York Operations*

 

We own an interestin a limited liability company which provides administrative services to asurgery center located in New York. Laws in the State of New York require thatcorporations have natural persons as stockholders to be approved by the NewYork Department of Health as a licensed health care facility. Accordingly, weare not able to own interests in a limited partnership or limited liabilitycompany that owns an interest in a health care facility located in New York.Laws in the State of New York also prohibit the delegation of certainmanagement functions by a licensed health care facility, including but notlimited to the authority to appoint and discharge senior management,independently control the books and records of the facility, dispose of assetsof the facility outside of day-to-day operations and adopt policies affectingthe delivery of health care services. The law does permit a licensed facilityto lease premises and obtain various services from non-licensed entities.However, it is not clear what types of delegation constitute a violation. Althoughwe believe that our operations and relationships in New York are in compliancewith these laws, if New York regulatory authorities or a third-party asserts acontrary position, we may be unable to continue or expand our operations in NewYork.

 

**AvailableInformation**

 

Our website is *www.symbion.com*. We make available free ofcharge on this website under “Investors — SEC Filings” links to our periodicand other reports and amendments to those reports filed with or furnished tothe Securities and Exchange Commission (“SEC”) as soon as reasonablypracticable after we electronically file or furnish such materials.

 

**Item 1A. *Risk Factors***

** **

The following are some of the risks anduncertainties that could cause our actual financial condition, results ofoperations, business and prospects to differ materially from those contemplatedby the forward-looking statements contained in this report or our other filingswith the SEC. If any of the following risks actually occurred, our business,financial condition and operating results could suffer.

 

**Risks Related to Our Business and Industry**

** **

***Our substantial leverage could adversely affect our abilityto raise additional capital to fund our operations, limit our ability to reactto changes in the economy or our industry, expose us to interest rate risk tothe extent of our variable rate debt and prevent us from meeting ourobligations under debt instruments.***

 

We incurred a significantamount of indebtedness in connection with the Merger. As of December 31,2008, we had (a) total indebtedness of approximately $452.8 million and (b) approximately$100.0 million of revolving credit borrowings available under our seniorsecured credit facility, subject to customary conditions. In addition, subjectto the restrictions in our senior secured credit facility and the indenturegoverning our Toggle Notes, we may incur significant additional indebtedness,which may be secured, from time to time.

 

                The level of our indebtedness could have importantconsequences, including:

 

·                  making it more difficult for us tomake payments on the Toggle Notes;

·                  limiting cash flow available forgeneral corporate purposes, including capital expenditures and acquisitions,because a substantial portion of our cash flow from operations must bededicated to servicing our debt;

·                  limiting our ability to obtainadditional debt financing in the future for working capital, capitalexpenditures or acquisitions;

·                  limiting our flexibility in reactingto competitive and other changes in our industry and economic conditionsgenerally; and

·                  exposing us to risks inherent ininterest rate fluctuations because some of our borrowings will be at variablerates of interest, which could result in higher interest expense in the eventof increases in interest rates.

 

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Our ability to pay or torefinance our indebtedness will depend upon our future operating performance,which will be affected by general economic, financial, competitive,legislative, regulatory, business and other factors beyond our control.

 

We cannot assure you thatour business will generate sufficient cash flow from operations, that currentlyanticipated revenue growth and operating improvements will be realized or thatfuture borrowings will be available to us under our senior secured creditfacility in amounts sufficient to enable us to pay our indebtedness or to fundour other liquidity needs. We expect we will need to incur additional debt tofund development activities. In 2008, in order to preserve cash to fundpotential buy-ups, developments and acquisitions, we elected to pay interest onour bridge loan and the Toggle Notes in kind. We may also choose to do so inthe future with respect to the Toggle Notes. If we are unable to meet our debtservice obligations or fund our other liquidity needs, we could attempt torestructure or refinance our indebtedness or seek additional equity capital. Wecannot assure you that we will be able to accomplish those actions onsatisfactory terms, if at all.

 

***Restrictive covenants in our debt instruments may adverselyaffect us.***

 

The indenture governingour Toggle Notes contains various covenants that limit, among other things, ourability and the ability of our subsidiaries to:

 

·                  incur additionalindebtedness;

·                  make certaindistributions, investments and other restricted payments;

·                  dispose of ourassets;

·                  grant liens onour assets;

·                  limit theability of restricted subsidiaries to make payments to us;

·                  engage in transactionswith affiliates; and

·                  merge orconsolidate or transfer substantially all of our assets.

 

In addition, our seniorsecured credit facility contains other and more restrictive covenants,including requiring us to maintain specified financial ratios when we haveoutstanding revolver balances and satisfy other financial condition tests. Ourability to meet those financial ratios and tests can be affected by eventsbeyond our control, and we cannot assure you that we will continue to meetthose tests. A breach of any of these covenants could result in a default underour senior secured credit facility and/or the indenture governing our Toggle Notes.Upon the occurrence of an event of default under our senior secured creditfacility, the lenders could elect to declare all amounts outstanding under oursenior secured credit facility to be immediately due and payable and terminateall commitments to extend further credit. If we were unable to repay thoseamounts, the lenders could proceed against the collateral granted to them tosecure that indebtedness. We have pledged substantially all of our assets,other than assets of our non-guarantor subsidiaries, as security under oursenior secured credit facility. If the lenders under our senior secured creditfacility accelerate the repayment of borrowings, we cannot assure you that wewill have sufficient assets to repay our senior secured credit facility and ourother indebtedness, including the Toggle Notes.

 

***Thecurrent state of the economy and future economic conditions may adverselyimpact our business.***

 

The United States economycontinues to experience significant downturns. Although we have not seen any material trends as it relates to our casevolume or bad debts,****we cannotassure you that future economic conditions, should they fail to improve, willnot adversely affect our business. Burdened by economic constraints, patients may delay or cancelnon-emergency surgical procedures.  It isdifficult to predict the degree to which our business will be impacted by suchconditions or the course of the economy in the coming year.

 

***We depend on payments from third-party payors, includinggovernment health care programs and managed care organizations. If thesepayments are reduced or eliminated, our revenues and profitability could beadversely affected.***

 

We are dependent upon private and governmentalthird-party sources of payment for the services provided to patients in oursurgical facilities and the physician networks we manage. The amount that oursurgical facilities and physician networks receive in payment for theirservices may be adversely affected by market and cost factors as well as otherfactors over which we have no control, including Medicare, Medicaid and stateregulations and the cost containment and utilization decisions and reducedreimbursement schedules of third-party payors,

 

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Congressional changes andrefinements to the Medicare ambulatory surgery center payment system and CMSrefinements to Medicare’s reimbursement policies.  See Item 1. “Business – Reimbursement.”

 

***If we are unable to negotiate contracts or maintainsatisfactory relationships with private third-party payors, our revenues andoperating income will decrease.***

 

Payments fromprivate third-party payors (including state workers’ compensation programs)represented about 79%****and 78%****of our patient service revenues for the years ended December 31,2007 and 2008, respectively. Most of these payments came from third-partypayors with which our centers have contracts. Managed care companies such asHMOs and PPOs, which offer prepaid and discounted medical service packages,represent a growing segment of private third-party payors. If we fail to enterinto favorable contracts and maintain satisfactory relationships with managedcare organizations, our revenues may decrease. Cost containment measures, suchas fixed fee schedules, capitation payment arrangements, reductions inreimbursement schedules by third-party payors and closed provider networks,could also cause a reduction of our revenues in the future. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—ExecutiveOverview—Operating Trends.”

 

Some of ourpayments from third-party payors in the past year came from third-party payorswith which our surgical facilities did not have a contract. In those cases,commonly known as “out-of-network” services, we generally charge the patientsthe same co-payment or other patient responsibility amounts that we would havecharged had our center had a contract with the payor. We also submit a claimfor the services to the payor along with full disclosure that our surgicalfacility has charged the patient an in-network patient responsibility amount.Historically, those third-party payors who do not have contracts with oursurgical facilities have typically paid our claims at higher than comparablecontracted rates. However, there is a growing trend for third-party payors toadopt out-of-network fee schedules that are more comparable to our contractedrates, or to take other steps to discourage their enrollees from seekingtreatment at out-of-network surgical facilities. In these cases, we seek toenter into contracts with the payors. In certain situations, we have seen anincrease in the volume of cases in those instances where we transition fromout-of-network to in-network billing, although we may experience an overall decreasein revenues to the surgical facility. We can provide no assurance that we willsee a sufficient increase in volume of cases to compensate for the decrease inper case revenues where we transition from out-of-network to in-networkbilling.

 

Payments fromworkers’ compensation payors represented approximately 11% and 12% of ourpatient service revenues for the years ended December 31, 2007and 2008, respectively. Several states have recently considered orimplemented workers’ compensation provider fee schedules.  In some cases, the fee schedule rates containlower rates than the rates our surgical facilities have historically been paidfor the same services. If the trend of states adopting lower workers’compensation fee schedules continues, it could have a material adverse effecton our surgical facilities’ financial condition and results of operations.

 

***Our growth strategy depends in part on our ability toacquire and develop additional surgical facilities on favorable terms. If weare unable to do so, our future growth could be limited and our operatingresults could be adversely affected.***

 

Our strategy is toincrease our revenues and earnings by continuing to focus on existing surgicalfacilities and continuing to acquire and develop additional surgicalfacilities. Between January 1999 and December 31, 2008, we acquired49 surgical facilities and developed 23 surgical facilities, including 13surgical facilities that we subsequently divested. We may be unable to identifysuitable acquisition and development opportunities and to negotiate andcomplete acquisitions and new projects on favorable terms. In addition, ouracquisition and development program requires substantial capital resources, andwe may need to obtain additional capital or financing, from time to time, tofund these activities. As a result, we may take actions that could have amaterially adverse effect on our financial condition and results of operations,including incurring substantial debt. Sufficient financing may not be availableto us on satisfactory terms, if at all.

 

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***We may encounter numerous business risks in acquiring anddeveloping additional surgical facilities, and may have difficulty operatingand integrating those surgical facilities.***

 

If we acquire ordevelop additional surgical facilities, we may be unable to successfullyoperate the surgical facilities, and we may experience difficulty inintegrating their operations and personnel. For example, in some acquisitions,we have experienced delays in implementing standard operating procedures andsystems and improving existing managed care agreements and the mix ofspecialties offered at the surgical facilities. Following the acquisition of asurgical facility, key physicians may cease to use the facility or we may beunable to retain key management personnel. If we acquire the assets of asurgical facility rather than ownership in the entity that owns the surgicalfacility, we may be unable to assume the surgical facility’s existing managedcare contracts and may have to renegotiate, or risk losing, one or more of thesurgical facility managed care contracts. We may also be unable to collect theaccounts receivable of an acquired surgical facility. We may also experiencenegative effects on our reported results of operations because ofacquisition-related charges and potential impairment of goodwill and otherintangibles.

 

In addition, we mayacquire surgical facilities with unknown or contingent liabilities, includingliabilities for failure to comply with health care laws and regulations.Although we maintain professional and general liability insurance, we do notcurrently maintain insurance specifically covering any unknown or contingentliabilities that may have occurred prior to the acquisition of companies andsurgical facilities. In some cases, our right to indemnification for theseliabilities may be subject to negotiated limits.

 

In developing newsurgical facilities, we may be unable to attract physicians to use ourfacilities or contract with third-party payors. In addition, our newlydeveloped surgical facilities typically incur net losses during the initialperiods of operation and, unless and until their case loads grow, theygenerally experience lower total revenues and operating margins thanestablished surgical facilities. Integrating a new surgical facility could beexpensive and time consuming, and could disrupt our ongoing business anddistract our management and other key personnel. If we are unable to timely andefficiently integrate an acquired or newly developed facility our businesscould suffer.

 

***Efforts to regulate the construction, acquisition orexpansion of health care facilities could prevent us from acquiring additionalsurgical facilities, renovating our existing facilities or expanding thebreadth of services we offer.***

 

Some statesrequire prior approval for the construction, acquisition or expansion of healthcare facilities or expansion of the services the facilities offer. In givingapproval, these states consider the need for additional or expanded health carefacilities or services, as well as the financial resources and operationalexperience of the potential new owners of existing health care facilities. Inmany of the states in which we currently operate, certificates of need must beobtained for capital expenditures exceeding a prescribed amount, changes incapacity or services offered and various other matters. The remaining states inwhich we now or may in the future operate may adopt similar legislation. Ourcosts of obtaining a certificate of need could be significant, and we cannotassure you that we will be able to obtain the certificates of need or otherrequired approvals for additional or expanded surgical facilities or servicesin the future. In addition, at the time we acquire a surgical facility, we mayagree to replace or expand the acquired facility. If we are unable to obtainrequired approvals, we may not be able to acquire additional surgicalfacilities, expand health care services we provide at these facilities orreplace or expand acquired facilities.

 

***If we fail to maintain good relationships with thephysicians who use our surgical facilities, our revenues and profitabilitycould be adversely affected.***

 

Our businessdepends upon the efforts and success of the physicians who provide medicalservices at our surgical facilities and the strength of our relationships withthese physicians. These physicians are not employees of our surgical facilitiesand are not contractually required to use our facilities. We generally do notenter into contracts with physicians who use our surgical facilities, otherthan partnership and operating agreements with physicians who own interests inour surgical facilities, provider agreements with anesthesiology groups thatprovide anesthesiology services in our surgical facilities, medical directoragreements and pain clinic agreements. Physicians who use our surgicalfacilities also use other facilities or hospitals and may choose to performprocedures in an office-based setting that might otherwise be performed at oursurgical facilities. In recent years, pain management and

 

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gastrointestinalprocedures have been performed increasingly in an office-based setting.Although physicians who own an interest in our surgical facilities are subjectto agreements restricting ownership of competing facilities, these agreementsmay not restrict procedures performed in a physician office or in otherunrelated facilities. Also, these agreements restricting ownership of competingfacilities are difficult to enforce, and we may be unsuccessful in preventingphysicians who own an interest in our surgical facilities from acquiring aninterest in a competing facility.

 

In addition, thephysicians who use our surgical facilities may choose not to accept patientswho pay for services through certain third-party payors, which could reduce ourrevenues. From time to time, we may have disputes with physicians who use oursurgical facilities and/or own interests in our surgical facilities or our company.Our revenues and profitability could be significantly reduced if we lost ourrelationship with one or more key physicians or groups of physicians, or ifsuch physicians or groups reduce their use of our surgical facilities. Inaddition, any damage to the reputation of a key physician or group ofphysicians or the failure of these physicians to provide quality medical careor adhere to professional guidelines at our surgical facilities could damageour reputation, subject us to liability and significantly reduce our revenues.

 

***If we fail to comply with legislative and regulatory rules relatingto privacy and security of patient health information and standards forelectronic transactions, we may experience delays in payment of claims andincreased costs and be subject to substantial fines.***

 

HIPAA mandates theadoption of privacy, security and integrity standards related to patientinformation. HIPAA also standardizes the method for identifying providers,employers, health plans and patients. We believe that we are in compliance withthe HIPAA regulations. However, if we fail to comply with the requirements ofHIPAA, we could be subject to significant penalties under a tiered penaltysystem with penalties of up to $50,000 per violation with a maximum civilpenalty of $1.5 million in a calendar year for violations of the samerequirement.

 

***If we fail to comply with laws and regulations relating tothe operation of our surgical facilities, we could suffer penalties or berequired to make significant changes to our operations.***

 

We are subject tomany laws and regulations at the federal, state and local government levels inwhich we operate. These laws and regulations require that our surgicalfacilities meet various licensing, certification and other requirements.

 

If we fail or havefailed to comply with applicable laws and regulations, we could suffer civil orcriminal penalties, including becoming the subject of cease and desist orders,the loss of our licenses to operate and disqualification from Medicare, Medicaidand other government sponsored health care programs.

 

In pursuing ourgrowth strategy, we may seek to expand our presence into new geographicmarkets. In new geographic markets, we may encounter laws and regulations thatdiffer from those applicable to our current operations. If we are unable tocomply with these legal requirements in a cost-effective manner, we may beunable to expand geographically.

 

***Our surgical facilities do not satisfy all of therequirements for any of the safe harbors under the federal Anti-KickbackStatute. If we fail to comply with the federal Anti-Kickback Statute, we couldbe subject to criminal and civil penalties, loss of licenses and exclusion fromthe Medicare and Medicaid programs, which may result in a substantial loss ofrevenues.***

 

The Anti-KickbackStatute, prohibits the offer, payment, solicitation or receipt of any form ofremuneration in return for referring, ordering, leasing, furnishing, purchasingor arranging for or recommending or inducing the ordering, purchasing orleasing of items or services payable by Medicare, Medicaid, or any otherfederally funded health care program. The Anti-Kickback Statute is very broadin scope, and many of its provisions have not been uniformly or definitivelyinterpreted by existing case law or regulations. Violations of theAnti-Kickback Statute may result in substantial civil or criminal penalties,including criminal fines of up to $25,000 and civil penalties of up to $50,000for each violation, plus three times the remuneration involved or the amountclaimed and exclusion from participation in the Medicare and Medicaid programs.The exclusion, if applied to our surgical facilities, could result insignificant reductions in our revenues and could have a material adverse effecton our financial condition and results of operations. In addition, many of thestates in which we operate have also adopted laws, similar to the

 

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Anti-Kickback Statute,that prohibit payments to physicians in exchange for referrals, some of whichapply regardless of the source of payment for care. These statutes typicallyimpose criminal and civil penalties as well as loss of licenses. No state orfederal regulatory actions have been taken against our surgical facilitiesunder anti-kickback statutes during the time we have owned or managed thefacilities. Management is not aware of any such actions prior to our acquisitionor management of these surgical facilities.

 

As discussed inItem 1. “Business – Governmental Regulations,” regulations implement various “safeharbors” to the Anti-Kickback Statute.  Business arrangements that meet the requirements of the safe harbors aredeemed to be in compliance with the Anti-Kickback Statute. Businessarrangements that do not meet the safe harbor requirements do not necessarilyviolate the Anti-Kickback Statute, but may be subject to scrutiny by thefederal government to determine compliance. The “investment interest” safeharbor and the “personal services and management contracts” safe harbor applyto business arrangements similar to those used in connection with our surgicalfacilities. However, the structure of the partnerships and limited liabilitycompanies operating our surgical facilities, as well as our businessarrangements involving physician networks, do not satisfy all of therequirements of either safe harbor.

 

In November 1999,the Department of Health and Human Services issued final regulations creatingadditional safe harbor provisions, including a safe harbor that applies tophysician ownership of, or investment interests in, ambulatory surgery centers.These regulations do not apply to our facilities licensed as hospitals. Theambulatory surgery center safe harbor protects four types of investmentarrangements. Each category has its own requirements with regard to what typeof physician may be an investor in the ambulatory surgery center. In additionto the physician investor, the categories permit an “unrelated” investor, whois a person or entity that is not in a position to provide items or servicesrelated to the ambulatory surgery center or its investors. Our businessarrangements with our ambulatory surgery centers typically consist of one ormore of our subsidiaries being an investor in each partnership or limitedliability company that owns the ambulatory surgery center, in addition toproviding management and other services to the ambulatory surgery center. As aresult of these and other aspects of our business arrangements, including thoserelating to the composition of physician groups that own an interest in oursurgical facilities, these arrangements do not comply with all the requirementsof the ambulatory surgery center safe harbor and, therefore, are not immunefrom government review or prosecution.

 

***If we fail to comply with physician self-referral laws asthey are currently interpreted or may be interpreted in the future, or if otherlegislative restrictions are issued, we could incur a significant loss ofreimbursement revenues.***

 

The federalphysician self-referral law, commonly referred to as the Stark Law, prohibits aphysician from making a Medicare or Medicaid reimbursed referral for a “designatedhealth service” to an entity if the physician or a member of the physician’simmediate family has a “financial relationship” with the entity. The list of “designatedhealth services” under the Stark Law does not include ambulatory surgeryservices, but it does included services such as clinical laboratory services,and certain imaging services that may be provided by an ambulatory surgerycenter. Under the current Stark Law and related regulations, services providedat an ambulatory surgery center are not covered by the statute, even if thoseservices include imaging, laboratory services or other Stark designated healthservices, provided that (i) the ambulatory surgery center does not billfor these services separately, or (ii) if the center is permitted to billseparately for these services, they are specifically exempted from Stark Lawprohibitions. These are generally radiology and other imaging services integralto performance of surgical procedure that meet certain requirements, andcertain outpatient prescription drugs. Services provided at our facilitieslicensed as hospitals are covered by the Stark Law, but referrals for suchservices are exempt from the Stark Law under its “whole hospital exception.”Certain services provided by our managed physician networks are covered by theStark Law, but referrals for those services are exempt from the Stark Law underits “in-office ancillary services exception,” among others.

 

The Stark Law andsimilar state statutes are subject to different interpretations with respect tomany important provisions. Violations of these self-referral laws may result insubstantial civil or criminal penalties, including treble damages for amountsimproperly claimed, civil monetary penalties of up to $15,000 per prohibitedservice billed, up to $100,000 per prohibited circumvention scheme, andexclusion from participation in the Medicare and Medicaid and other federal andstate health care programs. Exclusion of our ambulatory surgery centers fromthese programs through future judicial or agency interpretation of existinglaws or additional legislative restrictions on physician ownership orinvestments in health care entities could result in a significant loss ofreimbursement revenues. We cannot provide assurances that CMS will notundertake other rulemaking to address

 

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additional revisions tothe Stark Law regulations. If future rules modify the provisions of theStark Law regulations that are applicable to our business, our revenues andprofitability could be materially adversely affected and could require us tomodify our relationships with our physician and health care system partners.

 

***Physician ownership of hospitals has been the subject ofrecent legislative debate, and future statutory and regulatory changes couldlimit or impair our ability to own and operate our hospitals.***

 

Three of our ownedsurgical facilities are licensed as hospitals. The Stark Law currently includesan exception relating to physician ownership of a hospital, provided that thephysician’s ownership interest is in the whole hospital and the physician isauthorized to perform services at the hospital (the “Whole Hospital Exception”).Physician investment in our facilities licensed as hospitals meets thisrequirement.

 

For the pastseveral years, the Whole Hospital Exception has been the subject of regulatoryaction and legislative debate. See Item 1. “Business – GovernmentalRegulations.” We cannot predict whether proposed amendments to the WholeHospital Exception will be included in legislation passed by Congress and, ifit is included, what the substance of the revisions will be or whether thelegislation will be signed by the president and become law.  If legislation were to be enacted by Congressthat prohibits physician referrals to hospitals in which the physicians own aninterest, or that otherwise limits physician ownership of existing facilities,or restricts the hospital’s ability to expand, our financial condition andresults of operations could be materially adversely affected.

 

***We may be subject to actions for false and other improperclaims.***

 

Federal and stategovernment agencies, as well as private payors, have heightened and coordinatedcivil and criminal enforcement efforts as part of numerous ongoinginvestigations of the cost reporting and billing practices of health careorganizations and their quality of care and financial relationships with referralsources. In addition, the Office of the Inspector General of the U.S.Department of Health and Human Services, or OIG, and the U.S. Department ofJustice have, from time to time, undertaken national enforcement initiativesthat focus on specific billing practices or other suspected areas of abuse.

 

The U.S.government is authorized to impose criminal, civil and administrative penaltieson any person or entity that files a false claim for payment from theMedicare or Medicaid programs and other federal and state health care programs.Claims filed with private insurers can also lead to criminal and civilpenalties, including, but not limited to, penalties relating to violations offederal mail and wire fraud statutes, as well as penalties under the anti-fraudprovisions of HIPAA. While the criminal statutes are generally reserved forinstances of fraudulent intent, the U.S. government is applying its criminal,civil and administrative penalty statutes in an ever-expanding range ofcircumstances. For example, the government has taken the position that apattern of claiming reimbursement for unnecessary services violates thesestatutes if the claimant merely should have known the services wereunnecessary, even if the government cannot demonstrate actual knowledge. Thegovernment has also taken the position that claiming payment for low-qualityservices is a violation of these statutes if the claimant should have knownthat the care was substandard.

 

Over the pastseveral years, the U.S. government has accused an increasing number of healthcare providers of violating the federal False Claims Act. The False Claims Actprohibits a person from knowingly presenting, or causing to be presented, afalse or fraudulent claim to the U.S. government. The statute defines “knowingly”to include not only actual knowledge of a claim’s falsity, but also recklessdisregard for or intentional ignorance of the truth or falsity of a claim.Because our surgical facilities perform hundreds of similar procedures a yearfor which they are paid by Medicare, and there is a relatively long statute oflimitations, a billing error or cost reporting error could result insignificant civil or criminal penalties. In addition, some courts have heldthat a violation of the Anti-Kickback Statute or the Stark Law can result inliability under the federal False Claims Act.

 

Under the *qui tam*, or whistleblower, provisions ofthe False Claims Act, private parties may bring actions on behalf of the U.S.government. These private parties, often referred to as relators, are entitledto share in any amounts recovered by the government through trial orsettlement. Both direct enforcement activity by the government andwhistleblower lawsuits have increased significantly in recent years and haveincreased the risk that a health care company, like us, will have to defend afalse claims action, pay fines or be excluded from the Medicare

 

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and Medicaid and otherfederal and state health care programs as a result of a conviction resultingfrom a whistleblower case.

 

We are alsosubject to various state insurance statutes and regulations that prohibit usfrom submitting inaccurate, incorrect or misleading claims. Although we believethat our operations comply with both federal and state laws, they maynevertheless be the subject of a whistleblower lawsuit or may otherwise bechallenged or scrutinized by governmental authorities. A determination that wehave violated these laws could have a material adverse effect on our financialcondition or results of operations.

 

***If a federal or state agency asserts a different position orenacts new laws or regulations regarding illegal remuneration under theMedicare, Medicaid or other governmental programs, we may be subject to civiland criminal penalties, experience a significant reduction in our revenues orbe excluded from participation in the Medicare, Medicaid or other governmentalprograms.***

 

Any change ininterpretations or enforcement of existing or new laws and regulations couldsubject our current practices to allegations of impropriety or illegality, orcould require us to make changes in our surgical facilities, equipment, personnel,services, pricing, capital expenditure programs and operating expenses, whichcould have a material adverse effect on our financial condition and results ofoperations.

 

Additionally, newfederal or state laws may be enacted that would cause our relationships withphysician investors to become illegal or result in the imposition of penaltiesagainst us or our surgical facilities. If any of our business arrangements withphysician investors were deemed to violate the Anti-Kickback Statute, the StarkLaw or similar laws, or if new federal or state laws were enacted renderingthese arrangements illegal, our financial condition and results of operationswould be materially adversely affected.

 

***If laws governing the corporate practice of medicine orfee-splitting change, we may be required to restructure some of ourrelationships, which may result in a significant loss of revenues and divertother resources.***

 

The laws ofvarious states in which we operate or may operate in the future do not permitbusiness corporations to practice medicine, to exercise control over or employphysicians who practice medicine or to engage in various business practices,such as fee-splitting with physicians (i.e., sharing in a percentage ofprofessional fees). The interpretation and enforcement of these laws varysignificantly from state to state. We provide management services to twophysician networks. If our arrangements with these networks were deemed toviolate state corporate practice of medicine, fee-splitting or similar laws, orif new laws are enacted rendering our arrangements illegal, we may be requiredto restructure these arrangements, which may result in a significant loss ofrevenues and divert other resources.

 

***We make significant loans to, and are generally liable fordebts and other obligations of, the partnerships and limited liabilitycompanies that own and operate some of our surgical facilities.***

 

We own and operateour surgical facilities through 21 limited partnerships and 38 limitedliability companies. Local physicians, physician groups and health systems alsoown an interest in all but one of these partnerships and limited liabilitycompanies. In the partnerships in which we are the general partner, we areliable for 100% of the debts and other obligations of the partnership, even ifwe do not own all of the partnership interests. For the majority of oursurgical facilities, indebtedness at the partnership level is funded throughintercompany loans that we provide. Through these loans, which totaled approximately$39.3 million as of December 31, 2008, we have a secured interest in thepartnership’s assets. However, our financial condition and results ofoperations would be materially adversely affected if our surgical facilitiesare unable to repay these intercompany loans.

 

We also guaranteethe debts and other obligations of many of the partnerships and limitedliability companies in which we own an interest. In some instances, thepartnerships or limited liability companies in which we are a minority interestholder seek financing from a third-party and the physicians and/or physiciangroups guarantee their pro-rata share of the indebtedness to secure thefinancing. As of December 31, 2008, we had approximately $3.6 millionof off-balance sheet guarantees of non-consolidated third-party debt inconnection with these surgical facilities.

 

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Our senior securedcredit facility and the indenture governing our senior notes allow us to borrowfunds that we can lend to the partnerships and limited liability companies inwhich we own an interest. Although our intercompany loans are secured by theassets of the partnership, the physicians and physician groups that own aninterest in these partnerships and limited liability companies generally do notguarantee a pro rata amount of this debt or the other obligations of thesepartnerships and limited liability companies.

 

***If our operations in New York are found not to be incompliance with New York law, we may be unable to continue or expand ouroperations in New York.***

 

We own an interest in alimited liability company which provides administrative services to anambulatory surgery center located in New York. Laws in the State of New Yorkrequire that corporations have natural persons as stockholders to be approvedby the New York Department of Health as a licensed health care facility.Accordingly, we are not able to own interests in a limited partnership orlimited liability company that owns an interest in a health care facilitylocated in New York. Laws in the State of New York also prohibit the delegationof certain management functions by a licensed health care facility. The lawdoes permit a licensed facility to lease premises and obtain various servicesfrom non-licensed entities. However, it is not clear what types of delegationconstitute a violation. Although we believe that our operations andrelationships in New York are in compliance with applicable laws, if New Yorkregulatory authorities or a third-party asserts a contrary position, we may beunable to continue or expand our operations in New York.

 

***If regulations change, we may be obligated to purchase someor all of the ownership of our physician partners or renegotiate some of ourpartnership and operating agreements with our physician partners and managementagreements with surgical facilities.***

 

Upon theoccurrence of various fundamental regulatory changes or changes in theinterpretation of existing regulations, we may be obligated to purchase all ofthe ownership of the physician investors in most of the partnerships or limitedliability companies that own and operate our surgical facilities. The purchaseprice that we would be required to pay for the ownership is typically based oneither a multiple of the surgical facility’s EBITDA, as defined in ourpartnership and operating agreements with these surgical facilities, or thefair market value of the ownership as determined by a third-party appraisal.The physician investors in some of our surgical facilities can require us topurchase their interests in exchange for cash or shares of our common stock ifthese regulatory changes occur. In addition, some of our partnership agreementswith our physician partners and management agreements with surgical facilitiesrequire us to attempt to renegotiate the agreements upon the occurrence ofvarious fundamental regulatory changes or changes in the interpretation ofexisting regulations and provide for termination of the agreements ifrenegotiations are not successful.

 

Regulatory changesthat could create purchase or renegotiation obligations include changes that:

 

·                  makeillegal the referral of Medicare or other patients to our surgical facilitiesby physician investors;

·                  createa substantial likelihood that cash distributions to physician investors fromthe partnerships or limited liability companies through which we operate oursurgical facilities would be illegal;

·                  makeillegal the ownership by the physician investors of interests in thepartnerships or limited liability companies through which we own and operateour surgical facilities; or

·                  requireus to reduce the aggregate percentage of physician investor ownership in ourhospitals.

 

We do not controlwhether or when any of these regulatory events might occur. In the event we arerequired to purchase all of the physicians’ ownership, our existing capitalresources would not be sufficient for us to meet this obligation. Theseobligations and the possible termination of our partnership and managementagreements would have a material adverse effect on our financial condition andresults of operations.

 

***If we become subject to large malpractice and related legalclaims, we could be required to pay significant damages, which may not becovered by insurance.***

 

In recent years,physicians, hospitals and other health care providers have become subject to anincreasing number of legal actions alleging malpractice, product liability orrelated legal theories. Many of these actions involve large monetary claims andsignificant defense costs. We maintain liability insurance in amounts that webelieve are appropriate for our operations. Currently, we maintain professionaland general liability insurance that

 

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provides coverage on aclaims made basis of $1.0 million per occurrence and $3.0 million inannual aggregate coverage per surgical facility. In addition, physicians whoprovide professional services in our surgical facilities are required tomaintain separate malpractice coverage with similar minimum coverage limits. Wealso maintain business interruption insurance and property damage insurance, aswell as an additional umbrella liability insurance policy in the aggregateamount of $20.0 million. However, this insurance coverage may not coverall claims against us. Insurance coverage may not continue to be available at acost allowing us to maintain adequate levels of insurance. If one or moresuccessful claims against us were not covered by or exceeded the coverage ofour insurance, our financial condition and results of operations could be adverselyaffected.

 

***We face intense competition for physicians, strategicrelationships, acquisitions and managed care contracts, which may result in adecline in our revenues, profitability and market share.***

 

The health carebusiness is highly competitive. We compete with other health care providers,primarily hospitals and other surgical facilities, in attracting physicians toutilize our surgical facilities and in contracting with managed care payors ineach of our markets. There are unaffiliated hospitals in each market in whichwe operate. These hospitals have established relationships with physicians andpayors. In addition, other companies either are currently in the same orsimilar business of developing, acquiring and operating surgical facilities ormay decide to enter our business. Many of these companies have greaterresources than we do, including financial, marketing, staff and capitalresources. We may also compete with some of these companies for entry intostrategic relationships with health care systems and health care professionals.In addition, many physician groups develop surgical facilities without acorporate partner, utilizing consultants who perform services for a fee and donot take an equity interest in the ongoing operations of the facility. Inrecent years, more physicians are choosing to perform procedures, includingpain management and gastrointestinal procedures, in an office-based settingrather than in a surgical facility. If we are unable to compete effectivelywith any of these entities or groups, we may be unable to implement ourbusiness strategies successfully and our financial position and results ofoperations could be adversely affected.

 

***Our surgical facilities are sensitive to regulatory,economic and other conditions of the states where they are located. Inaddition, four of our surgical facilities account for a significant portion ofour patient service revenues.***

 

Our revenues areparticularly sensitive to regulatory, economic and other conditions in thestates of Texas and Florida. As of December 31, 2008, we owned (withphysician investors or healthcare systems) and operated seven surgicalfacilities in Texas and eight surgical facilities in Florida. The surgicalfacilities in Texas represented about 13% of our patient service revenuesduring both 2007 and 2008, and the surgical facilities in Florida representedabout 13% of our patient service revenues during both 2007 and 2008.

 

In addition, ourfacilities in Houma, Louisiana; Durango, Colorado; Chesterfield, Missouri(Timberlake Surgery Center) and Wilmington, North Carolina generatedapproximately 7%, 6%, 5% and 5%, respectively, of our patient service revenuesduring 2007, and 6%, 6%, 5% and 4%, respectively, during 2008. If thesefacilities are adversely affected by regulatory, economic and other conditions,or if these facilities do not perform effectively, our financial condition andresults of operations will be adversely affected. None of our remainingsurgical facilities accounted for more than 5% of our revenues during 2007 or2008.

 

***We depend on our senior management and we may be adverselyaffected if we lose any member of our senior management.***

 

We are highlydependent on our senior management, including Richard E. Francis, Jr., ourchairman of the board and chief executive officer, and Clifford G. Adlerz, ourpresident and chief operating officer. We have entered into employmentagreements with Messrs. Francis and Adlerz that became effective upon theclosing of the Merger. The initial term of each of these agreements is threeyears from August 23, 2007, which is automatically extended so that theterm is three years until terminated. We may terminate each employmentagreement for cause. In addition, either party may terminate the employmentagreement at any time by giving prior written notice to the other party. We donot maintain “key man” life insurance policies on any of our officers. Becauseour senior management has contributed greatly to our growth since inception,the loss of key management personnel or our inability to attract, retain andmotivate sufficient numbers of qualified management personnel could have amaterial adverse effect on our financial condition and results of operations.

 

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***If we are unable to integrate and manage our informationsystems effectively, our operations could be disrupted.***

 

Our operationsdepend significantly on effective information systems. Our information systemsand applications require continual maintenance, upgrading and enhancement tomeet our operational needs. Moreover, our acquisition activity requiresfrequent transitions from, and the integration of, various information systems.If we experience difficulties with the transition from information systems orare unable to maintain properly or expand our information systems, we couldsuffer, among other things, operational disruptions and increases inadministrative expenses.

 

**RisksRelated to Our Corporate Structure**

 

***We may have a special legal responsibility to the holders ofownership interests in the entities through which we own our surgicalfacilities, which may conflict with the interests of our noteholders andprevent us from acting solely in our own best interests or the interests of ournoteholders.***

 

Our ownership insurgical facilities generally is held through limited partnerships or limitedliability companies in which we maintain ownership along with physicians orphysician practice groups. As general partner or manager of these entities, wemay have a special responsibility, known as a fiduciary duty, to manage theseentities in the best interests of the other interest holders. As a result, wemay encounter conflicts between our responsibility to the other interestholders and our responsibility to enhance the value of our company. Forexample, we have entered into management agreements to provide managementservices to our surgical facilities in exchange for a fee. Disputes may ariseas to the nature of the services to be provided or the amount of the fee to bepaid. In these cases, we are obligated to exercise reasonable, good faithjudgment to resolve the disputes and may not be free to act solely in our ownbest interests or the interests of the noteholders. Disputes may also arisebetween us and our physician investors with respect to a particular businessdecision or regarding the interpretation of the provisions of the applicablelimited partnership agreement or operating agreement. We seek to avoid thesedisputes but have not implemented any measures to resolve these conflicts ifthey arise. If we are unable to resolve a dispute on terms favorable orsatisfactory to us, our financial condition and results of operations may beadversely affected.

 

***We are a holding company with no operations of our own.***

 

We are a holdingcompany and our ability to service our debt is dependent upon the earnings fromthe business conducted by our subsidiaries and joint ventures. The effect ofthis structure is that we will depend on the earnings of our subsidiaries andjoint ventures, and the distribution or payment to us of a portion of theseearnings to meet our obligations, including those under our senior secured creditfacility, the senior notes and any of our other debt obligations. Thedistributions of those earnings or advances or other distributions of funds bythese entities to us, all of which are contingent upon the subsidiaries’earnings, are subject to various business considerations. In addition,distributions by our subsidiaries could be subject to statutory restrictions,including state laws requiring that such subsidiaries be solvent, orcontractual restrictions. Some of our subsidiaries and joint ventures maybecome subject to agreements that restrict the sale of assets and significantlyrestrict or prohibit the payment of dividends or the making of distributions,loans or other payments to stockholders, partners or members. The indenturegoverning the senior notes permits our subsidiaries to enter into agreementswith similar prohibitions and restrictions in the future, subject to certainlimitations.

 

***We do not have exclusive control over the distribution ofcash from our operating entities and may be unable to cause all or a portion ofthe cash of these entities to be distributed.***

 

All of thesurgical facilities in which we have ownership are held through partnerships orlimited liability companies. We typically own, directly or indirectly, thegeneral partnership or majority member interests in these entities. Thepartnership and operating agreements for these entities provide fordistribution of available cash, in some cases on a quarterly basis subject incertain cases to requirements that we obtain approval of other stockholders.Many of these agreements also impose limits on the ability of these entities tomake loans or transfer assets to us. If we are unable to cause sufficient cashto be distributed from one or more of these entities, our relationships withthe physicians who also own an interest in these entities may be damaged and wecould be adversely affected, as could our ability to make debt servicepayments. We may not be able to resolve favorably any dispute regarding cashdistribution or other matters with a health care system with which we sharecontrol of the 

 

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distributions made bythese entities. Further, the failure to resolve a dispute with these healthcare systems could cause an entity in which we own an interest to be dissolved.

 

***We are controlled by principal stockholders whose interestsmay differ from your interests.***

 

Circumstances mayoccur in which the interests of our principal stockholders could be in conflictwith your interests. In addition, these stockholders may have an interest inpursuing transactions that, in their judgment, enhance the value of theirequity investment in our company, even though those transactions may involverisks to other interest holders.

 

A majority of theoutstanding shares of common stock of our parent company are held by theCrestview funds. As a result of their stock ownership, the Crestview funds controlus and have the power to elect a majority of our directors, appoint newmanagement and approve any action requiring the approval of the holders ofcommon stock, including adopting amendments to our certificate of incorporationand approving acquisitions or sales of all or substantially all of our assets.The directors elected by the Crestview funds have the ability to controldecisions affecting our capital structure, including the issuance of additionalcapital stock, the implementation of stock repurchase programs and thedeclaration of dividends.

 

**Item1B. *Unresolved Staff Comments***

 

None.

 

**Item2.  *Properties***

 

Our corporateheadquarters are located in Nashville, Tennessee in approximately 44,000 squarefeet of leased office space, under a ten-year lease that commenced on November 1,2002.

 

Typically, oursurgical facilities are located on real estate leased by the partnership orlimited liability company that operates the facility.  These leases generally have initial terms often years, but range from two to 15 years. Most of the leases contain optionsto extend the lease period for up to ten additional years. The surgicalfacilities are generally responsible for property taxes, property and casualtyinsurance and routine maintenance expenses. Two of our surgical facilities arelocated on real estate owned by the limited partnership or limited liabilitycompany that owns the surgical facility. We generally guarantee the leaseobligations of the partnerships and limited liability companies that own our surgicalfacilities.

 

Additionalinformation about our surgical facilities and our other properties can be foundin Item 1 of this report under the caption, “Business — Operations.”

 

**Item3.  *LegalProceedings***

 

We are, from timeto time, subject to claims and suits arising in the ordinary course ofbusiness, including claims for damages for personal injuries, breach ofmanagement contracts and employment related claims. In certain of theseactions, plaintiffs request payment for damages, including punitive damages,that may not be covered by insurance.

 

**Item4.  *Submissionof Matters to a Vote of Security Holders***

 

None.

 

**PART II**

 

**Item 5. * Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities***

 

We are wholly-ownedby Symbion Holdings Corporation which is owned by Crestview and certainaffiliated funds managed by Crestview and co-investors.  There is no public trading market for ourequity securities or those of Holdings. As of March 20, 2009, there were 10 holders of Holdings commonstock.

 

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**Item 6.  *SelectedFinancial Data***

 

The following selected consolidated financial andother data should be read in conjunction with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in Item 7 and ouraudited consolidated financial statements and the related notes includedelsewhere in this report. The selected consolidated statement of operationsdata set forth below for the years ended December 31, 2008, 2007 and 2006,and the selected consolidated balance sheet data set forth below at December 31,2008 and 2007, are derived from our audited consolidated financial statementsthat are included elsewhere in this report. The selected consolidated statement of operations data set forth belowfor the years ended December 31, 2005 and 2004, and the selectedconsolidated balance sheet data set forth below at December 31, 2006, 2005and 2004, are derived from our audited consolidated financial statements thatare not included in this report.

 

The historical results presented below are notnecessarily indicative of the results to be expected for any future period.

 
| ** **                                                         | ** ** | **Year Ended December 31,**                            | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Consolidated  Statement of Operations Data:**                    |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenues                                                           |       | $                                                                     | 331,900    |   | $ | 304,305 |   | $ | 285,387 |   | $ | 241,877 |   | $ | 194,480 |   |
| Cost of revenues                                                   |       | 225,444                                                               |       | 206,652 |   | 181,950 |   | 148,214 |   | 125,143 |   |
| General and  administrative expense                                |       | 23,923                                                                |       | 31,873 |   | 24,407 |   | 21,993 |   | 18,449 |   |
| Depreciation and  amortization                                     |       | 15,175                                                                |       | 12,652 |   | 11,913 |   | 11,575 |   | 9,467 |   |
| Provision for  doubtful accounts                                   |       | 3,861                                                                 |       | 4,449 |   | 3,952 |   | 3,827 |   | 3,376 |   |
| Income on equity  investments                                      |       | (1,504                                                                | )          | (16 | ) | (2,423 | ) | (1,273 | ) | (1,272 | ) |
| Impairment and  loss on disposal of long-lived assets              |       | 1,899                                                                 |       | 372 |   | 1,162 |   | 1,541 |   | 271 |   |
| Gain on sale of  long-lived assets                                 |       | (975                                                                  | )          | (915 | ) | (1,808 | ) | (1,785 | ) | (250 | ) |
| Proceeds from  insurance settlements, net                          |       | —                                                                |       | (161 | ) | (410 | ) | — |   | — |   |
| Litigation  settlements, net                                       |       | 893                                                                   |       | — |   | (588 | ) | — |   | — |   |
| Merger  transaction expenses                                       |       | —                                                                |       | 7,522 |   | — |   | — |   | — |   |
| Total operating  expenses                                          |       | 268,716                                                               |       | 262,428 |   | 218,155 |   | 184,092 |   | 155,184 |   |
| Operating income                                                   |       | 63,184                                                                |       | 41,877 |   | 67,232 |   | 57,785 |   | 39,296 |   |
| Minority  interests in income of consolidated subsidiaries         |       | (23,657                                                               | )          | (23,341 | ) | (28,294 | ) | (24,952 | ) | (14,899 | ) |
| Interest  expense, net                                             |       | (43,426                                                               | )          | (19,991 | ) | (7,108 | ) | (4,884 | ) | (4,571 | ) |
| (Loss) income  before income taxes and discontinued operations     |       | (3,899                                                                | )          | (1,455 | ) | 31,830 |   | 27,949 |   | 19,826 |   |
| Provision for  income taxes                                        |       | 13,256                                                                |       | 3,240 |   | 12,254 |   | 10,428 |   | 7,633 |   |
| (Loss) income  from continuing operations                          |       | (17,155                                                               | )          | (4,695 | ) | 19,576 |   | 17,521 |   | 12,193 |   |
| (Loss) gain from  discontinued operations, net of taxes            |       | (3,643                                                                | )          | (707 | ) | (783 | ) | 1,534 |   | 1,359 |   |
| Net (loss)  income                                                 |       | $                                                                     | (20,798    | ) | $ | (5,402 | ) | $ | 18,793 |   | $ | 19,055 |   | $ | 13,552 |   |
| **Cash  Flow Data – continuing operations:**                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Net cash  provided by operating activities                         |       | $                                                                     | 35,200     |   | $ | 28,431 |   | $ | 30,901 |   | $ | 39,450 |   | $ | 25,395 |   |
| Net cash used in  investing activities                             |       | (32,848                                                               | )          | (38,848 | ) | (64,486 | ) | (67,921 | ) | (100,904 | ) |
| Net cash (used  in) provided by financing activities               |       | (8,267                                                                | )          | 26,953 |   | 32,413 |   | 32,033 |   | 84,875 |   |
| **Other  Data:**                                                   |       |                                                                  |       |   |   |   |   |   |   |   |   |
| EBITDA(1)                                                          |       | $                                                                     | 57,740     |   | $ | 48,913 |   | $ | 54,070 |   | $ | 44,164 |   | $ | 33,885 |   |
| EBITDA as a % of  revenues                                         |       | 17.4                                                                  | %          | 16.1 | % | 18.9 | % | 18.3 | % | 17.4 | % |
| Number of  surgical facilities operated as of the end of period(2) |       | 66                                                                    |       | 58 |   | 56 |   | 56 |   | 54 |   |

 
| ** **                                     | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **(in thousands)**               | ** ** |
| **Consolidated  Balance Sheet Data:**          |       |                                  |       |   |   |   |   |   |   |   |   |
| Working capital                                |       | $                                     | 52,272     |   | $ | 70,617 |   | $ | 56,643 |   | $ | 48,784 |   | $ | 41,455 |   |
| Total assets                                   |       | 783,564                               |       | 768,813 |   | 503,806 |   | 436,378 |   | 365,761 |   |
| Total long-term  debt, less current maturities |       | 440,612                               |       | 428,925 |   | 136,553 |   | 101,909 |   | 69,747 |   |
| Total  stockholders’ equity               |       | 211,206                               |       | 233,286 |   | 285,279 |   | 260,058 |   | 237,998 |   |
|                                                |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1) | When we use the term  “EBITDA,” we are referring to net income plus (a) (loss) gain from  discontinued operations, (b) income tax expense, (c) interest  expense, net, (d) depreciation and amortization, (e) certain  non-cash charges, and (f) Merger transaction expenses. Our operating  strategy is to apply a market-based approach in structuring our partnerships  with individual market dynamics driving the structure. We believe that it is helpful to investors to  present EBITDA as defined above 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. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes surgical  facilities that we manage but in which we do not have an ownership interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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We use EBITDA as ameasure of liquidity. We have included it because we believe that it providesinvestors with additional information about our ability to incur and servicedebt and make capital expenditures. We also use EBITDA, with some variation inthe calculation, to determine our compliance with some of the covenants underour senior credit facility, as well as to determine the interest rate andcommitment fee payable under the senior credit facility.

 

EBITDA is not ameasurement of financial performance or liquidity under GAAP. It should not beconsidered in isolation or as a substitute for net income, operating income,cash flows from operating, investing or financing activities, or any othermeasure calculated in accordance with generally accepted accounting principles.The items excluded from EBITDA are significant components in understanding andevaluating financial performance and liquidity. Our calculation of EBITDA isnot comparable to the EBITDA measure we have used in prior reports but isconsistent with the measure of EBITDA less minority interests that wepreviously reported.  Our calculation ofthese measures may not be comparable to similarly titled measures reported byother companies.

 

The followingtable reconciles EBITDA to net cash provided by operating activities –continuing operations:

 
| ** **                                                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                      | ** ** | **(in thousands)**                    | ** ** |
| EBITDA                                                                                          |       | $                                          | 57,740     |   | $ | 48,913 |   | $ | 54,070 |   | $ | 44,164 |   | $ | 33,885 |   |
| Depreciation and  amortization                                                                  |       | (15,175                                    | )          | (12,652 | ) | (11,913 | ) | (11,575 | ) | (9,467 | ) |
| Non-cash  (losses) gains                                                                        |       | (924                                       | )          | 543 |   | 646 |   | 244 |   | (21 | ) |
| Non-cash stock  option compensation expense                                                     |       | (2,114                                     | )          | (10,746 | ) | (3,865 | ) | — |   | — |   |
| Interest  expense, net                                                                          |       | (43,426                                    | )          | (19,991 | ) | (7,108 | ) | (4,884 | ) | (4,571 | ) |
| Provision for  income taxes                                                                     |       | (13,256                                    | )          | (3,240 | ) | (12,254 | ) | (10,428 | ) | (7,633 | ) |
| Merger  transaction expenses                                                                    |       | —                                     |       | (7,522 | ) | — |   | — |   | — |   |
| (Loss) gain on  discontinued operations, net of taxes                                           |       | (3,643                                     | )          | (707 | ) | (783 | ) | 1,534 |   | 1,359 |   |
| Net (loss)  income                                                                              |       | (20,798                                    | )          | (5,402 | ) | 18,793 |   | 19,055 |   | 13,552 |   |
| Depreciation and  amortization                                                                  |       | 15,175                                     |       | 12,652 |   | 11,913 |   | 11,575 |   | 9,467 |   |
| Amortization of  deferred financing costs                                                       |       | 4,477                                      |       | 2,194 |   | 506 |   | 671 |   | 21 |   |
| Non-cash  payment-in-kind interest option                                                       |       | 9,753                                      |       | — |   | — |   | — |   | — |   |
| Non-cash stock  option compensation expense                                                     |       | 2,114                                      |       | 10,746 |   | 3,865 |   | — |   | — |   |
| Non-cash losses  (gains)                                                                        |       | 924                                        |       | (543 | ) | (646 | ) | (244 | ) | 21 |   |
| Minority interests  in income of consolidated subsidiaries                                      |       | 23,657                                     |       | 23,341 |   | 28,294 |   | 24,952 |   | 14,899 |   |
| Deferred income  taxes                                                                          |       | 13,718                                     |       | 15,854 |   | (1,556 | ) | 2,836 |   | 7,633 |   |
| Distributions to  minority partners                                                             |       | (23,423                                    | )          | (24,486 | ) | (25,447 | ) | (23,049 | ) | (14,420 | ) |
| Equity in earnings  of unconsolidated affiliates, net of distributions received                 |       | 333                                        |       | (16 | ) | (2,423 | ) | (1,273 | ) | (1,272 | ) |
| Provision for  doubtful accounts                                                                |       | 3,861                                      |       | 4,449 |   | 3,952 |   | 3,827 |   | 3,376 |   |
| Changes in  operating assets and liabilities, net of effects of acquisitions and  dispositions: |       |                                       |       |   |   |   |   |   |   |   |   |
| Accounts  receivable                                                                            |       | (3,536                                     | )          | (256 | ) | (2,955 | ) | (5,353 | ) | (4,735 | ) |
| Other assets and  liabilities                                                                   |       | 8,945                                      |       | (10,102 | ) | (3,395 | ) | 6,453 |   | (3,147 | ) |
| Net cash  provided by operating activities – continuing operations                         |       | $                                          | 35,200     |   | $ | 28,431 |   | $ | 30,901 |   | $ | 39,450 |   | $ | 25,395 |   |

 

**Item 7.  *Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with “SelectedFinancial Data” and our audited consolidated financial statements and relatednotes included elsewhere in this report. This discussion containsforward-looking statements that involve risks and uncertainties. For additionalinformation regarding some of the risks and uncertainties that affect ourbusiness and the industry in which we operate, please read Item 1A. “RiskFactors” found elsewhere in this report. Our actual results may differ materially from those estimated orprojected in any of these forward-looking statements.

 

**ExecutiveOverview**

 

We own and operate a national network of short staysurgical facilities in 25 states, which includes ambulatory surgery centers andsurgical hospitals. Our surgical facilities primarily provide non-emergencysurgical procedures across many specialties, including, among others,orthopedics, pain management, gastroenterology and ophthalmology. We own oursurgical facilities in partnership with physicians and in some cases healthcare systems in the markets and communities we serve. We apply a market-basedapproach in structuring our partnerships with 

 

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individualmarket dynamics driving the structure. We believe this approach aligns ourinterests with those of our partners. As of December 31, 2008, we ownedand operated 59 surgical facilities, including 56 ambulatory surgery centersand three surgical hospitals. We also managed nine additional ambulatorysurgery centers. We owned a majority interest in 36 of the 59 surgicalfacilities and consolidated 51 of these facilities for financial reportingpurposes. We are reporting two of the 59 surgical facilities as discontinuedoperations. In addition to our surgical facilities, we also manage twophysician networks, including one physician network in a market in which weoperate an ambulatory surgery center.

 

We have benefitedfrom both the growth in overall outpatient surgery cases as well as themigration of surgical procedures from the hospital to the surgical facilitysetting. Advancements in medical technology, such as lasers, arthroscopy andenhanced endoscopic techniques, have reduced the trauma of surgery and theamount of recovery time required by patients following a surgical procedure.Improvements in anesthesia also have shortened the recovery time for manypatients and have reduced certain post-operative side effects. These medicaladvancements have enabled more patients to undergo surgery in a surgicalfacility setting.

 

We continue tofocus on increasing cases at our same store facilities and acquiring facilitiesthat we believe have favorable growth potential. We are also focused ondeveloping new facilities. As of December 31, 2008, we had one facilityunder development. This facility opened in January 2009. To execute ourgrowth strategy, we intend to target one to three surgical facilityacquisitions and one to three surgical facility developments annually.

 

**Merger Transaction**

 

On August 23, 2007, an investment group led by anaffiliate of Crestview Partners, L.P. completed its Merger with Symbion, Inc.In the Merger, our stockholdersand option holders received an aggregate of $490.5 million in cash.

 

In order toconsummate the Merger, Crestview formed Symbol Acquisition, L.L.C. (“Parent”)and Symbol Merger Sub, Inc., a wholly-owned subsidiary of Parent.  Symbol Merger Sub, Inc. merged with andinto the Company with the Company being the surviving corporation.  Parent was converted into Symbion HoldingsCorporation, which became the parent holding company of the Company by virtueof the Merger.

 

Holdings wascapitalized with a $245.0 million cash contribution by Crestview and itsaffiliated funds and co-investors.  Inaddition, certain members of Symbion’s management made a rollover equitycontribution of Symbion shares and options to purchase common stock valued atthe predecessor basis of $2,000.  Thefair value of the rollover contribution was $8.4 million.  These rollover shares were exchanged forshares and options to purchase shares of common stock of Holdings.  Following the Merger, Crestview and itsaffiliated funds and co-investors owned 96.7% of Holdings and members ofmanagement owned 3.3% of Holdings.

 

We accounted forthe Merger using the purchase method of accounting.  As a result, we recorded goodwill of $509.8million.

 

**The Exchange Offer**

 

On June 3, 2008, we completed a private offering of $179.9 millionaggregate principal amount of the 11.0%/11.75% Senior PIK Toggle Notes due2015.  We entered into a registrationrights agreement with the initial purchasers in the private offering in whichwe agreed, among other things, to file a registration statement within 180 daysof the issuance of the notes. On September 25, 2008, we filed aregistration statement under the 

 

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SecuritiesAct of 1933 to register $184.6 million aggregateprincipal amount Toggle Notes as wellas the guarantee of each wholly owned subsidiary of the Company.  On November 12, 2008, we filed anamendment to the registration statement to, among other things, register anadditional $75.4 million aggregate principal amount of Toggle Notes issuable ifwe elect to make payments of additional interest in kind by increasing theprincipal amount of the existing notes or issuing additional notes. Pursuant tothe registration statement, we exchanged our outstanding Toggle Notes for new 11.00%/11.75% Toggle Notes due 2015 with anaggregate principal amount of $184.6 million registered under theSecurities Act of 1933, as amended.  The newlyissued Toggle Notes representthe same debt as the notes that were exchanged, and we issued the Toggle Notes under the same indenturethat governed the initial notes.

 

**Revenues**

 

Our revenuesconsist of patient service revenues, physician service revenues and otherservice revenues. Physician service revenues are revenues from physiciannetworks consisting of reimbursed expenses, plus participation in the excess ofrevenues over expenses of the physician networks, as provided for in ourservice agreements with our physician networks. Other service revenues consist of management and administrative servicefees derived from the non-consolidated facilities that we account for under theequity method, management of surgical facilities in which we do not own aninterest and management services we provide to physician networks for which weare not required to provide capital or additional assets.

 

The followingtables summarize our revenues by service type as a percentage of revenues forthe periods indicated:

 
| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Patient service  revenues   |       | 95                                         | %          | 95 | % | 95 | % |
| Physician  service revenues |       | 2                                          |       | 2 |   | 1 |   |
| Other service  revenues     |       | 3                                          |       | 3 |   | 4 |   |
| Total                       |       | 100                                        | %          | 100 | % | 100 | % |

 

***Payor Mix***

 

Our patient service revenues relate to fees chargedfor surgical or diagnostic procedures performed at surgical facilities that weconsolidate for financial reporting purposes. Approximately 95% of our revenuesare patient service revenues. The following table sets forth by type of payorthe percentage of our patient service revenues generated in the periods indicated:

 
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Private  Insurance |       | 72                                         | %          | 73 | % | 76 | % |
| Government         |       | 22                                         |       | 21 |   | 19 |   |
| Self-pay           |       | 4                                          |       | 4 |   | 3 |   |
| Other              |       | 2                                          |       | 2 |   | 2 |   |
| Total              |       | 100                                        | %          | 100 | % | 100 | % |

 

***Case******Mix***

 

We primarily operate multi-specialty facilities wherephysicians perform a variety of procedures in specialties includingorthopedics, pain management, gastroenterology and ophthalmology, amongothers.  We believe this diversificationhelps to protect us from any adverse pricing and utilization trends in any individualprocedure type and results in greater consistency in our case volume.

 

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The following table sets forth the percentage of casesin each specialty performed at surgical facilities which we consolidate for financial reporting purposesfor the periods indicated:

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Ear, nose and  throat |       | 6.4                                        | %          | 7.3 | % | 7.6 | % |
| Gastroenterology      |       | 28.1                                       |       | 26.7 |   | 26.4 |   |
| General surgery       |       | 4.2                                        |       | 5.0 |   | 4.9 |   |
| Obstetrics/gynecology |       | 3.1                                        |       | 3.6 |   | 4.0 |   |
| Ophthalmology         |       | 15.1                                       |       | 14.0 |   | 13.8 |   |
| Orthopedic            |       | 16.1                                       |       | 16.5 |   | 16.6 |   |
| Pain management       |       | 15.8                                       |       | 15.4 |   | 15.6 |   |
| Plastic surgery       |       | 2.9                                        |       | 3.2 |   | 3.1 |   |
| Other                 |       | 8.3                                        |       | 8.3 |   | 8.0 |   |
| Total                 |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |

 

***Case Growth***

 

*Same**Store Information*

 

We define samestore facilities as those facilities that were operating throughout therespective years ended December 31, 2008 and 2007. For the comparison ofsame store facilities provided below, we have also included the results ofthree developed surgical facilities within markets served by other surgicalfacilities in which we own an interest. Two of these surgical facilities areconsolidated for financial reporting purposes, the other is accounted for usingthe equity method. Management believes that it is appropriate to include theresults of these surgical facilities in the same store facility informationbelow based on the following considerations: (1) the migration of casesfrom the existing surgical facilities to the new surgical facilities, (2) thewaiver of the restriction on ownership applicable to the owners of the existingfacilities that allows certain owners of the existing facilities to own an interestin the new surgical facilities and (3) the resulting enhancement of ourmarket position by leveraging management services and capacity.

 

The following samestore facility table includes both consolidated surgical facilities fromcontinuing operations that are included in revenue and non-consolidatedsurgical facilities that are not reported in our revenue, as we account forthese surgical facilities using the equity method. This same store facilitiestable is presented to allow comparability to other companies in our industryfor the periods indicated:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| Cases                                        |       | 240,947                                    |       | 241,599 |   |
| Case growth                                  |       | (0.3                                       | )%         | N/A |   |
| Net patient  service revenue per case        |       | $                                          | 1,452      |   | $ | 1,337 |   |
| Net patient  service revenue per case growth |       | 8.6                                        | %          | N/A |   |
| Number of same  store surgical facilities    |       | 48                                         |       | N/A |   |
|                                              |            |                                            |            |  |  |  |  |

 

Thefollowing same store facility table is presented for purposes of explainingchanges in our consolidated financial results. For the comparison of same storefacilities provided below, the results below for the periods presented includethe consolidation of an existing surgical facility that was previouslyaccounted for using the equity method. We acquired an incremental ownership in this facility during 2007 andbegan consolidating the facility for financial reporting purposes.  We have also included the results of two developedsurgical facilities within markets served by other surgical facilities in whichwe own an interest. Both of these recently opened surgical facilities areconsolidated for financial reporting purposes. Management believes it is appropriate to present the results of thesefacilities in the same store information because these newly opened facilitiesenhance our position in the markets served by the existing facilities.  Accordingly, the following table includessame store facility data for surgical facilities from continuing operationsthat we consolidate for financial reporting purposes for the periods indicated:

 

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| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| Cases                                        |       | 219,737                                    |       | 217,805 |   |
| Case growth                                  |       | 0.9                                        | %          | N/A |   |
| Net patient  service revenue per case        |       | $                                          | 1,343      |   | $ | 1,299 |   |
| Net patient  service revenue per case growth |       | 3.4                                        | %          | N/A |   |
| Number of same  store surgical facilities    |       | 43                                         |       | N/A |   |
|                                              |            |                                            |            |  |  |  |  |

 

*Consolidated**Information*

 

The followingtable sets forth information for all surgical facilities included in continuingoperations that we consolidate for financial reporting purposes for the periodsindicated. Accordingly, the table includes surgical facilities that we haveacquired, developed or disposed of since January 1, 2007.

 
| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| Cases                                                              |       | 235,244                                    |       | 223,539 |   |
| Case growth                                                        |       | 5.2                                        | %          | N/A |   |
| Net patient  service revenue per case                              |       | $                                          | 1,343      |   | $ | 1,294 |   |
| Net patient  service revenue per case growth                       |       | 3.8                                        | %          | N/A |   |
| Number of  surgical facilities operated as of end of the period(1) |       | 66                                         |       | 58 |   |
| Number of  consolidated surgical facilities                        |       | 49                                         |       | 43 |   |
|                                                                    |            |                                            |            |  |  |  |  |

 

----

(1)          Includessurgical facilities that we manage but in which we have no ownership.

 

**Operating****Trends**

 

We are dependentupon private and governmental third-party sources of payment for the servicesthat we provide. The amount that our surgical facilities and networks receivein payment for their services may be adversely affected by market and costfactors as well as other factors over which we have no control, includingMedicare, Medicaid and state regulations and the cost containment andutilization decisions and reduced reimbursement schedules of third-partypayors.

 

Beginning in 2008,the Center for Medicare and Medicaid Services (“CMS”) began basing Medicarepayments to surgery centers on the hospital outpatient prospective paymentsystem.  For procedures performed during2008, surgery centers were paid approximately 63% of what hospitals werereimbursed for outpatient procedures. CMS recently announced that for procedures performed in calendar year2009, surgery centers will be reimbursed at approximately 59% of thecorresponding amount that hospital outpatient departments receive.  The percentage relationship between surgerycenter reimbursement and hospital outpatient payment rates will continue tofluctuate from year to year as CMS annually recalculates the conversion factorsand makes adjustments for budget neutrality and inflation.  In addition, CMS recently has added to thelist of procedures covered by Medicare in a surgery center setting.  The ultimate impact of the changes inMedicare reimbursement will depend on a number of factors, including theprocedure mix at the centers and our ability to realize an increase inprocedure volume.

 

Some of ourpayments come from third-party payors with which our surgical facilities do nothave a written contract.  In thosesituations, commonly known as “out-of-network” services, we generally chargethe patients the same co-payment or other patient responsibility amounts thatwe would have charged had our surgical facility had a contract with thepayor.  We also submit a claim for theservices to the payor along with full disclosure that our surgical facility hascharged the patient an in-network patient responsibility amount.  Historically, those third-party payors who donot have contracts with our surgical facilities have typically paid our claimsat higher than comparable contracted rates. However, there is a growing trend for third-party payors to adoptout-of-network fee schedules that are more comparable to our contracted ratesor to take other steps to discourage their enrollees from seeking treatment atout-of-network surgical facilities.  Incertain situations, we have seen an increase in the volume of cases in thoseinstances where we transition from out-of-network to in-network billing,although we experience an overall decrease in revenues to the surgicalfacility.  We can provide no assurancethat we will see an increase in the volume of cases where we transition fromout-of-network to in-network in amounts that compensate for a decrease in percase revenues.

 

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Another recenttrend is the consolidation of third-party payors.  As a result of payor consolidation in certainmarkets, typically low volume payors with which our surgical facilities have awritten contract have allowed recently acquired payors to access theirnetwork.  As a result, payors with whichwe did not negotiate a written contract are now paying at contractedrates.  The contracted rates aretypically lower than rates paid for out-of-network services.  Additionally, we have experienced difficultyfrom some payors in adjudicating claims properly and submitting timely paymentsas a result of integration issues certain payors have experienced through theconsolidation with other payors.  We havespecifically experienced this trend at our California facilities.

 

During the fourthquarter of 2007, in an effort to address some of these payor issues, wecancelled contracts with certain third-party payors in California and Missouri,effective in the first quarter of 2008. As a result of cancelling contracts, we have received payments on claimsat rates higher than previously contracted rates.

 

Our operatingincome margin on same store facilities for the year ended December 31,2008 increased to 18.8% from 17.4% in 2007. As previously mentioned, the cancellation of contracts with certainthird-party payors in California and Missouri was effective in the firstquarter of 2008.  As a result, we havereceived payments on claims at rates higher than the previously contractedrates.  This change in reimbursement hashad a positive impact on our operating income margins.  However, this positive impact was offset bythe opening of four facilities during 2008, which we began developing in2007.  The development of a surgicalfacility has a negative impact on operating income margins until the facility isopened and completes an initial ramp-up phase.

 

**Acquisitionsand Developments**

 

***2008Activities***

 

Effective January 1,2008, we acquired incremental ownership in three of our existing surgicalfacilities located in California. We acquired incremental ownership of 10.7% ineach of our two surgical facilities located in Beverly Hills, California for anaggregate of $2.5 million and 6.4% incremental ownership in our surgicalfacility located in Encino, California for $2.0 million. Prior to theacquisition, we owned 55.1% and 57.0% of the two Beverly Hills, Californiasurgical facilities and 55.5% of the Encino, California surgical facility. Theaggregate purchase price was financed with cash from operations.

 

Effective February 21,2008, we acquired ownership in five surgical facilities specializing in spine,orthopedic and pain management procedures located in Boulder, Colorado;Honolulu, Hawaii; Bristol and Nashville, Tennessee; and Seattle, Washington foran aggregate of $5.8 million plus the assumption of $4.7 million indebt. We acquired ownership ranging from 20.0% to 50.0% in these surgicalfacilities. One of the five facilities that we acquired in 2008 was a newlydeveloped surgical facility that opened in the fourth quarter of 2007. Four ofthese surgical facilities are consolidated for financial reporting purposes.The aggregate purchase price was financed with cash from operations.  We also entered into management agreementswith each of these surgical facilities.

 

Effective May 31,2008, we acquired additional management rights and an incremental ownership intwo of our existing surgical facilities located in California for an aggregatepurchase price of $3.4 million, financed with cash from operations.  We acquired an incremental ownership of 18.0%in our surgical facility located in Arcadia, California for $304,000 and anincremental ownership of 16.7% in our surgical facility located in Irvine,California for an aggregate of $3.1 million. The aggregate purchase price was financed with cash from operations.

 

Effective August 1,2008, we acquired an incremental ownership of 18.5% in our surgical facilitylocated in Irvine, California for an aggregate of $5.1 million, financed withcash from operations.  Through thisacquisition we obtained a controlling interest in this facility, and we beganconsolidating the facility for financial reporting purposes during the thirdquarter of 2008.

 

During 2008, weopened four of the five surgical facilities that were under development as of December 31,2007. We consolidate one of these surgical facilities for financial reportingpurposes and account for three as investments under the equity method.

 

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***2007 Activities***

 

On June 30, 2007, we acquired 55.0% incrementalownership in a multi-specialty surgical facility located in Cape Coral,Florida, in which we already owned 10.0%. The purchase price was$17.0 million, including $1.7 million of assumed debt, and was financedwith additional debt under our former senior credit facility.

 

On August 24,2007, we acquired a 52.6% ownership in a multi-specialty surgical facility inHavertown, Pennsylvania for $4.1 million. On December 19, 2007, weacquired a 71.5% interest in a multi-specialty surgical facility in Columbus,Georgia for $141,000 and merged the operations of this surgical facility intoan existing surgical facility in the same market. The aggregate purchase pricewas financed with proceeds from the Merger financing. We have a majorityinterest in and consolidate for financial reporting purposes these two surgicalfacilities. We also entered into management agreements with each of thesesurgical facilities.

 

On December 27,2007, we acquired additional management rights at three of our existingsurgical facilities located in California for an aggregate of$4.8 million. The additional management rights entitle us to retain alarger percentage of the fee for management services provided to these surgicalfacilities. The purchase price was financed with proceeds from the Mergerfinancing.

 

We begandevelopment of one surgical facility during 2007 and opened three of thesurgical facilities that we began developing in 2006 during the last fourmonths of the year. Our investment related to these surgical facilities openedwas approximately $4.2 million. We financed these investments using cashfrom operations and funds available under our former senior credit facility. Weown a majority interest in one of these three surgical facilities opened in2007, and we consolidate it for financial reporting purposes.  We also entered into management agreementswith each of these surgical facilities. As of December 31, 2007, we had five surgical facilities underdevelopment, four of which opened in 2008 and one in early 2009.

 

***2006Activities***

 

During 2006, weacquired three surgical facilities and opened one additional surgical facilitythat we developed. We have a majority interest in and consolidate for financialreporting purposes three of the surgical facilities. We entered into managementagreements with each of these surgical facilities. Our investment related tothese surgical facilities was about $46.6 million. We financed theseinvestments using cash from operations and funds available under our formersenior credit facility. We also began the initial development of sevenadditional surgical facilities.

 

**DiscontinuedOperations and Divestitures**

 

From time to time,we evaluate our portfolio of surgical facilities to ensure the facilities areperforming as we expect. We have previously identified three underperformingambulatory surgery centers that we consolidate for financial reportingpurposes.  We committed to a plan todivest our interest in these facilities. During 2008, we sold our interest inone ambulatory surgery center located in Savannah, Georgia for net proceeds of$460,000.  We recognized a loss on thesale of $1.5 million that is included in earnings from discontinued operations.  In the fourth quarter of 2008, we recognizeda loss of $2.1 million on the Englewood, Colorado facility as a result ofadjusting certain property and equipment to the lesser of fair market valueless costs to sell.  In accordance withSFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*, these facilities’assets, liabilities, revenues, expenses and cash flows have been reclassifiedas discontinued operations for all periods presented.  This facility closed in February 2009.

 

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Revenues, the gainor loss on operations before income taxes, the gain or loss on operations, netof taxes, the gain or loss on the sale from discontinued operations, net oftaxes, and the total gain or loss from discontinued operations, net of taxes,for the following periods indicated, were as follows (in thousands):

 
| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                |       | $                                          | 7,463      |   | $ | 9,803 |   | $ | 19,128 |   | $ | 23,867 |   | $ | 21,845 |   |
| (Loss) gain on  operations before income taxes          |       | (792                                       | )          | (1,522 | ) | (1,094 | ) | 2,496 |   | 2,208 |   |
| Income tax  provision (benefit)                         |       | (676                                       | )          | (580 | ) | (420 | ) | 962 |   | 849 |   |
| (Loss) gain on  sale, net of taxes                      |       | (3,527                                     | )          | 235 |   | (109 | ) | — |   | — |   |
| (Loss) gain from  discontinued operations, net of taxes |       | $                                          | (3,643     | ) | $ | (707 | ) | $ | (783 | ) | $ | 1,534 |   | $ | 1,359 |   |

 

As of December 31,2008, we owned two surgical facilities that are classified as discontinuedoperations.

 

In March 2008,we sold our investment in our surgical facility in Knoxville, Tennessee, whichwas not included in discontinued operations, for a net loss of $74,000. Ourownership in this surgical facility was accounted for as an investment underthe equity method. We will provide consulting services to this surgicalfacility through 2010.  Also during 2008,we sold substantially all of the assets of our surgical facility in Deland,Florida for $1.7 million.  This facilitywas not one of the facilities classified as discontinued operations.  We recorded a loss on the sale ofapproximately $538,000.  Due to themigration of cases from this facility to our Orange City, Florida facility, theresults of operations and the loss on the sale of assets are reflected in our resultsfrom continuing operations.

 

**CriticalAccounting Policies**

 

Our significantaccounting policies and practices are described in Note 3 of ourconsolidated financial statements included elsewhere in this report. Inpreparing our consolidated financial statements in conformity with accountingprinciples generally accepted in the United States, our management must makeestimates and assumptions that affect the reported amounts of assets andliabilities and related disclosures at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Certain accounting estimates are particularly sensitive because of theircomplexity and the possibility that future events affecting them may differmaterially from our current judgments and estimates. Our actual results coulddiffer from those estimates. We believe that the following critical accountingpolicies are important to the portrayal of our financial condition and resultsof operations and require our management’s subjective or complex judgment becauseof the sensitivity of the methods, assumptions and estimates used. This listingof critical accounting policies is not intended to be a comprehensive list ofall of our accounting policies. In many cases, the accounting treatment of aparticular transaction is specifically dictated by generally acceptedaccounting principles in the United States, with no need for management’sjudgment regarding accounting policy.

 

***Consolidation and Control***

 

Our consolidatedfinancial statements include our accounts and those of our wholly-ownedsubsidiaries, as well as our interests in surgical facilities that we controlthrough our ownership of a majority voting interest or other rights granted tous by contract as the sole general partner or manager to manage and control thebusiness. The rights of the limited partners or minority members in thesesurgical facilities are generally limited to those that protect theirownership, including the right to approve of the issuance of new ownershipinterests, and those that protect their financial interests, including theright to approve the acquisition or divestiture of significant assets or theincurrence of debt that physician limited partners or members are required toguarantee on a pro rata basis based upon their respective ownership, or thatexceeds 20.0% of the fair market value of the surgical facility’s assets. Allsignificant intercompany balances and transactions, including management feesfrom consolidated surgical facilities, are eliminated in consolidation.

 

We also holdnon-controlling interests in some surgical facilities over which we exercisesignificant influence. Significant influence includes financial interests,duties, rights and responsibilities for the day-to-day management of thesurgical facility. These non-controlling interests are accounted for under theequity method.

 

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We alsoconsolidate, for financial reporting purposes, a surgical facility in which wedo not own an interest and a surgical facility in which we own a minorityinterest. Under Interpretation No. 46(R), “Consolidation of VariableInterest Entities (“VIEs”), an Interpretation of Accounting Research Bulletin No. 51”(“FIN 46(R)”), these surgical facilities are considered VIEs, and we arethe primary beneficiary. Therefore, under FIN 46(R) we are requiredto consolidate these surgical facilities for financial reporting purposes. Theconsolidation of these surgical facilities does not have a material impact onour results of operations.

 

***Revenue Recognition***

 

Our revenues arecomprised of patient service revenues, physician service revenues and otherservice revenues. Our patient service revenues relate to fees charged forsurgical or diagnostic procedures performed at surgical facilities that weconsolidate for financial reporting purposes. These fees are billed either tothe patient or a third-party payor. Our fees vary depending on the procedure,but usually include all charges for usage of an operating room, a recoveryroom, special equipment, supplies, nursing staff and medications. Also, in avery limited number of our surgical facilities, we charge for anesthesiaservices. Our fees do not normally include professional fees charged by thepatient’s surgeon, anesthesiologist or other attending physician, which arebilled directly by the physicians to the patient or third-party payor. Werecognize patient service revenues on the date of service, net of estimatedcontractual adjustments and discounts for third-party payors, includingMedicare and Medicaid. Changes in estimated contractual adjustments anddiscounts are recorded in the period of change.

 

Physician servicerevenues are revenues from physician networks consisting of reimbursedexpenses, plus participation in the excess of revenues over expenses of thephysician networks, as provided for in our service agreements with ourphysician networks. Reimbursed expenses include the costs of personnel,supplies and other expenses incurred to provide the management services to thephysician networks. We recognize physician service revenues in the period inwhich reimbursable expenses are incurred and in the period in which we have theright to receive a percentage of the amount by which a physician network’srevenues exceed its expenses. Physician service revenues are based on netbillings with any changes in estimated contractual adjustments reflected inservice revenues in the subsequent period.

 

Our other servicerevenues consist of management and administrative service fees derived fromnon-consolidated surgical facilities that we account for under the equitymethod, management of surgical facilities in which we do not own an interestand management services we provide to physician networks for which we are notrequired to provide capital or additional assets. The fees we derive from thesemanagement arrangements are based on a pre-determined percentage of therevenues of each surgical facility and physician network. We recognize otherservice revenues in the period in which services are rendered.

 

***Stock Option Compensation***

 

Effective, January 1,2006, we adopted the provisions of Statement of Financial Accounting Standards(“SFAS”) No. 123(R), “Share Based Payment.” Calculating stock-basedcompensation expense requires the input of highly subjective assumptions,including the expected term of the stock-based awards, stock price volatilityand expected forfeiture rate. We estimate the expected life of options grantedbased on historical exercise patterns, which we believe are representative offuture behavior. We estimate the volatility based on the historic and impliedvolatility of the publicly traded shares of a number of our competitors. The assumptionsused in calculating the fair value of stock-based awards represent our bestestimates, but these estimates involve inherent uncertainties and theapplication of management’s judgment. We are required to estimate the expectedforfeiture rate and only recognize expense for those shares expected to vest.We estimate the forfeiture rate based on historical experience with ourstock-based awards that are granted, exercised and cancelled. If our actualforfeiture rate is materially different from our estimate, the stock-basedcompensation expense could be significantly different.

 

***Allowance for Contractual Adjustments and Doubtful Accounts***

 

Our patient service revenues are recorded net ofestimated contractual allowances from third-party payors, which we estimatebased on the historical trend of our surgical facilities’ cash collections andcontractual write-offs, accounts receivable agings, established fee schedules,relationships with payors and procedure statistics. We use established feeschedules, historical payment rates, relationships with payors and procedurestatistics to record receivables from third-party payors. While changes inestimated reimbursement from third-party payors remain a 

 

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possibility,we expect that any such changes would be minimal and, therefore, would not havea material effect on our financial condition or results of operations.

 

We estimate ourallowances for bad debts using similar information and analysis. While webelieve that our allowances for contractual adjustments and bad debts areadequate, if the actual write-offs are significantly different from ourestimates, it could have a material adverse effect on our financial conditionand results of operations. Because we have the ability to verify a patient’sinsurance coverage before services are rendered and because we have enteredinto contracts with third-party payors which account for a majority of ourtotal revenues, the out-of-period contractual adjustments are minimal. Our netaccounts receivable reflected allowances for doubtful accounts of $14.6million, $18.2 million and $27.2 million, at December 31, 2008, 2007and 2006, respectively.

 

The followingtable summarizes our day’s sales outstanding for the periods indicated:

 
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Day’s sales  outstanding |       | 38                                         |       | 40 |   | 44 |   |

 

Our improved tradereceivable turnover is a result of improved collection efforts at several ofour larger facilities.

 

Our collectionpolicies and procedures are based on the type of payor, size of claim andestimated collection percentage for each patient account. The operating systemsused to manage our patient accounts provide for an aging schedule in 30-dayincrements, by payor, physician and patient. Each surgical facility isresponsible for analyzing accounts receivable to ensure the proper collectionand aged category. The operating systems generate reports that assist in thecollection efforts by prioritizing patient accounts. Collection efforts includedirect contact with insurance carriers or patients, written correspondence andthe use of legal or collection agency assistance, as required.

 

At a consolidatedlevel, we review the standard aging schedule, by facility, to determine theappropriate provision for doubtful accounts by monitoring changes in ourconsolidated accounts receivable by aged schedule, day’s sales outstanding andbad debt expense as a percentage of revenues. At a consolidated level, we donot review a consolidated aging by payor. Regional and local employees revieweach surgical facility’s aged accounts receivable by payor schedule. Theseemployees have a closer relationship with the payors and have a more thoroughunderstanding of the collection process for that particular surgical facility.Furthermore, this review is supported by an analysis of the actual netrevenues, contractual adjustments and cash collections received. If ourinternal collection efforts are unsuccessful, we manually review patientaccounts with balances of $25 or more. We then classify the accounts based onany external collection efforts we deem appropriate. An account is written-offonly after we have pursued collection with legal or collection agencyassistance or otherwise deemed an account to be uncollectible. Typically,accounts will be outstanding a minimum of 120 days before beingwritten-off.

 

The followingtable summarizes our accounts receivable aging, net of contractual adjustmentsbut before our allowance for doubtful accounts and certain other allowances,for consolidated surgical facilities as of the periods indicated (inthousands):

 
| ** **            | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| ** **            | ** ** | **Amount**                                 | ** ** | **% of Total** | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| Current               |       | $                                          | 18,155     |   | 35 | % | $ | 18,382 |   | 33 | % |
| 31 to  60 days   |       | 9,926                                      |       | 19 |   | 9,717 |   | 17 |   |
| 61 to  90 days   |       | 5,265                                      |       | 10 |   | 5,292 |   | 9 |   |
| 91 to  120 days  |       | 3,413                                      |       | 7 |   | 3,930 |   | 7 |   |
| 121 to  150 days |       | 2,475                                      |       | 5 |   | 2,780 |   | 5 |   |
| Over  150 days   |       | 12,235                                     |       | 24 |   | 16,568 |   | 29 |   |
| Total                 |       | $                                          | 51,469     |   | 100 | % | $ | 56,669 |   | 100 | % |

 

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We recognize thatfinal reimbursement of outstanding accounts receivable is subject to finalapproval by each third-party payor. However, because we have contracts with ourthird-party payors and we verify the insurance coverage of the patient beforeservices are rendered, the amounts that are pending approval from third-partypayors are minimal. Amounts are classified outside of self-pay if we have anagreement with the third-party payor or we have verified a patient’s coverageprior to services rendered. It is our policy to collect co-payments anddeductibles prior to providing services. It is also our policy to verify apatient’s insurance 72 hours prior to the patient’s procedure. Because ourservices are primarily non-emergency, our surgical facilities have the abilityto control these procedures. Our patient service revenues from self-pay as apercentage of total revenues for the years ended December 31, 2008, 2007and 2006 were approximately 4%, 4% and 3%, respectively.

 

***Income Taxes***

 

We use the assetand liability method to account for income taxes. Under this method, deferredincome tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled. If a net operating losscarryforward exists, we make a determination as to whether that net operatingloss carryforward will be utilized in the future. A valuation allowance will beestablished for certain net operating loss carryforwards where theirrecoverability is deemed to be uncertain. The carrying value of the net deferredtax assets assumes that we will be able to generate sufficient future taxableincome in certain tax jurisdictions, based on estimates and assumptions. Ifthese estimates and related assumptions change in the future, we will berequired to adjust our deferred tax valuation allowances.

 

***Long-Lived Assets, Goodwill and Intangible Assets***

 

Long-lived assets,including property, plant and equipment comprise a significant portion of ourtotal assets.  We evaluate the carryingvalue of long-lived assets when impairment indicators are present or whencircumstances indicate that impairment may exist under the provisions of SFASNo.144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*. When events, circumstances or operating resultsindicate that the carrying values of certain long-lived assets and the relatedidentifiable intangible assets might be impaired, we assess whether thecarrying value of the assets will be recovered through undiscounted future cashflows expected to be generated from the use of the assets and their eventualdisposition. If the assessment indicates that the recorded carrying value willnot be recoverable, that cost will be reduced to estimated fair value.Estimated fair value will be determined based on a discounted future cash flowanalysis.

 

Goodwillrepresents our single largest asset, and is a significant portion of our totalassets. We review goodwill and indefinite lived intangible assets annually, asof December 31, or more frequently if certain indicators arise under theprovisions of SFAS No.142*, Goodwill and OtherIntangible Assets*. We review goodwill at the reporting unit level,which we have determined to be the consolidated results of Symbion, Inc.We compare the carrying value of the net assets of the reporting unit to thenet present value of the estimated discounted future cash flows of thereporting unit.  If the carrying valueexceeds the net present value of the estimated discounted future cash flows, animpairment indicator exists and an estimate of the impairment loss iscalculated.  The fair value calculationincludes multiple assumptions and estimates, including the projected cash flowsand discount rates applied.  Changes inthese assumptions and estimates could result in goodwill impairment that couldmaterially adversely impact our results of operations.

 

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***Professional and General Liability Risks***

 

We are subject toclaims and legal actions in the ordinary course of our business, includingclaims relating to patient treatment, employment practices and personalinjuries. To cover these claims, we maintain general and professional liabilityinsurance in excess of self-insured retentions through a third-party commercialinsurance carrier in amounts we believe to be sufficient for its operations. Weexpense the costs under the self-insured retention exposure for general andprofessional liability claims that relate to (i) deductibles on claimsmade during the policy period and (ii) an estimate of claims incurred butnot yet reported. Reserves and provisions for professional liability are basedupon actuarially determined estimates. These estimates are based on various assumptions.Based on historical results and data currently available, we do not believe achange in one or more of these assumptions will have a material impact on ourfinancial position or results of operations. These balances for professionalliability represent the estimated costs of all reported and unreported lossesincurred through the respective consolidated balance sheet dates. The reservesare estimated using individual case-basis valuations and actuarial analysis.Changes to the estimated reserve amounts are included in current operatingresults.

 

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**Results of Operations**

 

***Year Ended December 31, 2008 Compared To Year Ended December 31,2007***

 

The following table summarizes certain statements ofoperations items for each of the three years ended December 31, 2008, 2007and 2006. The December 31, 2007 information in the table below includes,on a combined basis, the statement of operations for the predecessorperiod  prior to the Merger (January 1,2007 to August 23, 2007) and the statement of operations for the successorperiod following the Merger (August 24, 2007 to December 31, 2007.)The predecessor and successor periods have different bases of accounting and,accordingly, the presentation of the combined statement of operations of thepredecessor and successor is not in accordance with generally acceptedaccounting principles. We have presented this information on a combined basisto assist in the comparability of our financial statements and to facilitate anunderstating of our results of operations. The table also shows the percentagerelationship to revenues for the periods indicated:

 
| ** **                                                     | ** ** | **2008**                | ** ** | **2007**                | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                     | ** ** | **Amount**              | ** ** | **% of  Revenues** | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** |
| ** **                                                     | ** ** | **(in thousands)** | ** ** |
| Revenues                                                       |       | $                       | 331,900    |                    | 100.0      | %          | $          | 304,305 |   | 100.0 | % | $ | 285,387 |   | 100.0 | % |
| Cost of revenues                                               |       | 225,444                 |       | 67.9                    |       | 206,652    |       | 67.9 |   | 181,950 |   | 63.8 |   |
| General and  administrative expense                            |       | 23,923                  |       | 7.2                     |       | 31,873     |       | 10.5 |   | 24,407 |   | 8.6 |   |
| Depreciation and  amortization                                 |       | 15,175                  |       | 4.6                     |       | 12,652     |       | 4.1 |   | 11,913 |   | 4.2 |   |
| Provision for  doubtful accounts                               |       | 3,861                   |       | 1.2                     |       | 4,449      |       | 1.5 |   | 3,952 |   | 1.4 |   |
| Income on equity  investments                                  |       | (1,504                  | )          | (0.5                    | )          | (16        | )          | — |   | (2,423 | ) | (0.8 | ) |
| Impairment and  loss on disposal of long-lived assets          |       | 1,899                   |       | 0.5                     |       | 372        |       | 0.1 |   | 1,162 |   | 0.4 |   |
| Gain on sale of  long-lived assets                             |       | (975                    | )          | (0.3                    | )          | (915       | )          | (0.3 | ) | (1,808 | ) | (0.6 | ) |
| Proceeds from  insurance settlements, net                      |       | —                  |       | —                  |       | (161       | )          | (0.1 | ) | (410 | ) | (0.1 | ) |
| Litigation  settlements, net                                   |       | 893                     |       | 0.3                     |       | —     |       | — |   | (588 | ) | (0.2 | ) |
| Merger  transaction expenses                                   |       | —                  |       | —                  |       | 7,522      |       | 2.5 |   | — |   | — |   |
| Total operating  expenses                                      |       | 268,716                 |       | 80.9                    |       | 262,428    |       | 86.2 |   | 218,155 |   | 76.4 |   |
| Operating (loss)  income                                       |       | 63,184                  |       | 19.1                    |       | 41,877     |       | 13.8 |   | 67,232 |   | 23.6 |   |
| Minority  interests in income of consolidated subsidiaries     |       | (23,657                 | )          | (7.1                    | )          | (23,341    | )          | (7.7 | ) | (28,294 | ) | (9.9 | ) |
| Interest  expense, net                                         |       | (43,426                 | )          | (13.1                   | )          | (19,991    | )          | (6.6 | ) | (7,108 | ) | (2.5 | ) |
| (Loss) income  before income taxes and discontinued operations |       | (3,899                  | )          | (1.2                    | )          | (1,455     | )          | (0.5 | ) | 31,830 |   | 11.2 |   |
| Provision for  income taxes                                    |       | 13,256                  |       | 4.0                     |       | 3,240      |       | 1.1 |   | 12,254 |   | 4.3 |   |
| (Loss) income  from continuing operations                      |       | (17,155                 | )          | (5.2                    | )          | (4,695     | )          | (1.6 | ) | 19,576 |   | 6.9 |   |
| Loss on  discontinued operations                               |       | (3,643                  | )          | (1.1                    | )          | (707       | )          | (0.2 | ) | (783 | ) | (0.3 | ) |
| Net (loss)  income                                             |       | $                       | (20,798    | )                       | (6.3       | )%         | $          | (5,402 | ) | (1.8 | )% | $ | 18,793 |   | 6.6 | % |

 

*Overview. *In 2008, our revenuesincreased 9.1% to $331.9 million from $304.3 million for 2007. Weincurred a net loss for the year ended December 31, 2008 of $(20.8 million)compared to $(5.4 million) for the year ended December 31, 2007.Included in the loss for 2008 is a valuation allowance of $12.9 million againstcertain deferred tax assets.  Alsoincluded in the net loss for 2008 is an additional $14.2 million, net of tax,of interest and amortization of deferred financing costs, primarily due to ournew capital structure following the Merger. Our financial results for the yearended December 31, 2008 compared to 2007 reflect the addition of fivesurgical facilities that we consolidate for financial reporting purposes and foursurgical facilities that we do not consolidate for financial reportingpurposes.  The surgical facilities thatwe do not consolidate for financial reporting purposes are accounted for asequity investments. For purposes of this management’s discussion of ourconsolidated financial results, we consider same store facilities as thosesurgical facilities that we consolidate for financial reporting purposes forboth the years ended December 31, 2008 and 2007.

 

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*Revenues. *Revenues for the year ended December 31, 2008 compared to December 31,2007 were as follows (in thousands):

 

We define samestore facilities as those facilities that were operating throughout therespective years listed below. For the comparison of same store facilitiesprovided below, the result for the periods presented include the consolidationof an existing surgical facility that was previously accounted for using theequity method. We have also included the results of two developed surgicalfacilities within markets served by other surgical facilities in which we ownan interest. Both of these recently opened surgical facilities are consolidatedfor financial reporting purposes. Management believes that it is appropriate toinclude the results of these surgical facilities in the same store facilityinformation below based on the following considerations: (1) the migrationof cases from the existing surgical facilities to the new surgical facilities, (2) thewaiver of the restriction on ownership applicable to the owners of the existingfacilities that allows certain owners of the existing facilities to own aninterest in the new surgical facilities and (3) the resulting enhancementof our market position by leveraging management services and capacity.

 
| ** **                               | ** ** | **2008** | ** ** | **2007** | ** ** | **Dollar  Variance** | ** ** | **Percent  Variance** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------------------|------------|-----------------------|------------|
| Patient service  revenues:               |       |     |       |     |       |                 |       |                  |       |
| Same store  revenues                     |       | $        | 295,207    |     | $          | 283,019              |       | $                     | 12,188     |   | 4.3 | % |
| Revenues from  other surgical facilities |       | 20,662   |       | 6,252    |       | 14,410               |       | —                |       |
| Total patient  service revenues          |       | 315,869  |       | 289,271  |       | 26,598               |       | 9.2                   |       |
| Physician  service revenues              |       | 6,547    |       | 5,623    |       | 924                  |       | 16.4                  |       |
| Other service  revenues                  |       | 9,484    |       | 9,411    |       | 73                   |       | 0.1                   |       |
| Total revenues                           |       | $        | 331,900    |     | $          | 304,305              |       | $                     | 27,595     |   | 9.1 | % |

 

Patient servicerevenues at same store facilities increased 4.3% for the year ended December 31,2008 compared to 2007, primarily as a result of our 0.9% increase in casescombined with a 3.4% increase in net revenue per case.  Our same store volume increased as a resultof our continued focus on physician recruitment for both existing and newspecialties as well as our efforts to develop and acquire surgical facilitieswithin markets served by other surgical facilities in which we own an interest,thereby enhancing our overall market position.

 

The increase innet revenue per case is related to normal inflationary adjustments from payorswith contracted rates and the cancellationof certain payor contracts in California and Missouri. In addition, the initialphase of Medicare reimbursement increases became effective January 1, 2008for specific cases performed in ambulatory surgery centers.  The remaining increase in total revenues isrelated to surgical facilities acquired or developed since January 1,2007, partially offset by surgical facilities divested in 2007.

 

*Costof Revenues. *Cost ofrevenues for the year ended December 31, 2008 compared to 2007 were asfollows (in thousands):

 
| ** **                                       | ** ** | **2008** | ** ** | **2007** | ** ** | **Dollar  Variance** | ** ** | **Percent  Variance** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------------------|------------|-----------------------|------------|
| Same store cost  of revenues                     |       | $        | 211,340    |     | $          | 201,245              |       | $                     | 10,095     |   | 5.0 | % |
| Cost of revenues  from other surgical facilities |       | 14,104   |       | 5,407    |       | 8,697                |       | —                |       |
| Total cost of  revenues                          |       | $        | 225,444    |     | $          | 206,652              |       | $                     | 18,792     |   | 9.1 | % |

 

As a percentage ofsame store revenues, same store cost of revenues increased to 71.6% for theyear ended December 31, 2008 comparedto 71.1% for December 31, 2007.  Ona per case basis, same store cost of revenues increased 4.1% to $962 in 2008from $924 in 2007, primarily as a result of inflationary adjustments and theimpact of facilities under development. Cost of revenues from other surgical facilities increased by $8.7million.  This increase is primarilyattributable to surgical facilities acquired or developed since January 1,2007, partially offset by surgical facilities divested in 2007 and 2008.  As a percentage of revenues, total cost ofrevenues remained consistent, at 67.9% for both 2008 and 2007.

 

*Generaland Administrative Expense*. General and administrative expense increased to $23.9 million forthe year ended December 31, 2008 from $23.7 million for the yearended December 31, 2007, excluding expenses related primarily to theaccelerated vesting of stock options, restricted stock, and related payrollexpense as a result of the Merger.  As apercentage of revenues, general and administrative expenses were 7.2% for 2008and 10.5% for 

 

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2007, or 7.8% excludingexpenses related primarily to the accelerated vesting of stock options, restrictedstock, and related payroll expense as a result of the Merger.

 

*Depreciationand Amortization. *Depreciationand amortization expense for the year ended December 31, 2008 was $15.2million compared to $12.7 million for the year ended December 31, 2007.  This increase is primarily attributable todepreciation expense at facilities acquired or developed since January 1,2007.  As a percentage of revenues,depreciation and amortization expense increased to 4.6% for 2008 from 4.1% for2007.  Same store depreciation andamortization expense increased to $13.6 million for 2008 from $12.3 million in2007, primarily as a result of asset additions at certain facilities.

 

*Provisionfor Doubtful Accounts. *Provisionfor doubtful accounts decreased 11.4% to $3.9 million for the year ended December 31,2008 from $4.4 million for the year ended December 31, 2007.  As a percentage of revenues, the provisionfor doubtful accounts decreased to 1.2% for 2008 from 1.5% for 2007.  This decrease is primarily attributed to improvedcollection efforts at several of our larger facilities.  On a same store basis, the provision fordoubtful accounts decreased to 1.2% of revenue for 2008 compared to 1.5% for2007.

 

*Incomeon Equity Investments. *Incomeon equity investments represents the net income of certain investments we havein surgical facilities.  These surgicalfacilities are not consolidated for financial reporting purposes.  Income on equity investments increased to$1.5 million for the year ended December 31, 2008 from $16,000 for theyear ended December 31, 2007.  Theincrease in income on equity investments for 2008 compared to 2007 is primarilyattributable to acquired facilities and developed facilities opened during2008.

 

*Impairmentand Loss on Disposal of Long-Lived Assets.*  During 2008, we recorded a loss of $550,000related to the sale of assets at theDeland, Florida facility.  The remainderof the impairment represents the loss related to the sale of a portionof our ownership interest in certain surgical facilities to physician investorsand a health care system.

 

*Gainon Sale of Long-Lived Assets*. Gain on sale of long-lived assets for the year ended December 31,2008 of $975,000 and for the year ended December 31, 2007 of $915,000primarily represents the gain we recognized on the sale of a portion of ourownership in certain surgical facilities to physician investors.

 

*LitigationSettlements, net.*  In2007 and 2008, the Office of the New York State Comptroller conducted a seriesof audits of claims submitted to the New York State Health Insurance ProgramEmpire Plan for services provided on an out-of-network basis to plan members atvarious ambulatory surgery centers, including the surgical facility to which weprovide administrative services in Lynbrook, New York. We have reached atentative settlement on the matter and have recorded an estimated expense of$820,000 for the year ended December 31, 2008.

 

*Merger Transaction Expenses. *During the year ended December 31,2007, we incurred $7.5 million of costs directly attributable to theMerger.  These costs were primarily legaland accounting fees that were expensed in the period incurred.

 

*OperatingIncome*.  Operating incomeincreased to $63.2 million for the year ended December 31, 2008 from $58.3million, excluding costs related to the Merger, for the year ended December 31,2007.  As a percentage of revenues,operating income remained consistent at 19.1% for 2008 and 2007, excludingcosts related to the Merger. Operating margins on same store facilities increasedto 18.8% for 2008 from 17.4% for 2007. This increase is primarily a result of cancelling certain payorcontracts in California and Missouri.

 

*Minority Interests in Income ofConsolidated Subsidiaries*. Minority interests in income of consolidated subsidiaries increased to$23.7 million for the year ended December 31, 2008 compared to $23.3million for the year ended December 31, 2007. As a percentage of revenues,minority interests in income from consolidated subsidiaries decreased to 7.1%for 2008 from 7.7% for 2007.

 

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*Interest Expense, Net of InterestIncome*.  Interestexpense, net of interest income, increased to $43.4 million for the yearended December 31, 2008 from $20.0 million for the year ended December 31,2007.  Included in interest expense is anadditional $2.3 million of amortization expense related to deferred financingcosts.  The increase in interest expensein 2008 was primarily due to our new capital structure following the Merger.

 

*Provisionfor Income Taxes*.  The provision for income taxesincreased to $13.3 million for the year ended December 31, 2008 from $3.2million for the year ended December 31, 2007. Tax expense in 2008 isprimarily the result of a valuation allowance of approximately $12.9 millionrecorded against certain federal and state net operating losses, capitallosses, and other deferred tax assets. We expect to fully utilize these net operating losses within the 20-yearcarry-forward period.  However, becauseSFAS 109 generally does not allow a company to consider more than two to threeyears of future taxable income when evaluating the ability to utilize netoperating losses, it is unlikely that we will be able to utilize these netoperating loss carry-forwards or realize the deferred tax assets within thistwo to three year period; therefore we have established a valuation allowanceagainst these losses.

 

*Loss from Continuing Operations.* Loss from continuing operations was $17.2million for the year ended December 31, 2008 compared to a loss of $4.7million for the year ended December 31, 2007.  The loss from continuing operations includesa valuation allowance on certain deferred tax assets of $12.9 million, andadditional interest expense and amortization of deferred financing coststotaling approximately $14.2 million, net of tax.

 

***Year Ended December 31,2007 Compared to Year Ended December 31, 2006***

 

*Overview.*  In 2007, our revenues increased 6.6% to$304.3 million from $285.4 million for 2006. We incurred a net lossfor the year ended December 31, 2007 of $(5.4 million) compared tonet income of $18.8 million for the year ended December 31, 2006. Thecomparability of our results with the corresponding prior year periods has beenimpacted by the expenses incurred in the Merger. Included in the net loss for2007 was $13.0 million, net of tax, of Merger transaction expenses andapproximately $4.7 million, net of tax, of additional interest expense asa result of the Merger and our new capital structure. Our financial results forthe year ended December 31, 2007 compared to the year ended December 31,2006 reflect the addition of three surgical facilities that we consolidate forfinancial reporting purposes and three surgical facilities that we developedthat we do not consolidate for financial reporting purposes. The surgicalfacilities that we do not consolidate for financial reporting purposes areaccounted for as equity investments.

 

We define samestore facilities as those facilities that were operating throughout therespective year ended periods listed below in 2007 and 2006. For the comparisonof same store facilities provided below, we have also included the results ofthree developed surgical facilities within markets served by other surgicalfacilities in which we own an interest. Two of the developed surgicalfacilities are consolidated for financial reporting purposes, the other isaccounted for using the equity method. Management believes that it isappropriate to include the results of these surgical facilities in the samestore facility information below based on the following considerations: (1) themigration of cases from the existing surgical facilities to the new surgicalfacilities, (2) the waiver of the restriction on ownership applicable tothe owners of the existing facilities that allows certain owners of theexisting facilities to own an interest in the new surgical facilities and (3) theresulting enhancement of our market position by leveraging management servicesand capacity.

 

*Revenues.*  Revenues for the year ended December 31,2007 compared to the year ended December 31, 2006 were as follows (inthousands):

 
| ** **                               | ** ** | **2007** | ** ** | **2006** | ** ** | **Dollar  Variance** | ** ** | **Percent  Variance** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------------------|------------|-----------------------|------------|
| Patient service  revenues:               |       |     |       |     |       |                 |       |                  |       |
| Same store  revenues                     |       | $        | 251,116    |     | $          | 254,542              |       | $                     | (3,426     | ) | (1.3 | )% |
| Revenues from  other surgical facilities |       | 38,155   |       | 15,382   |       | 22,773               |       | —                |       |
| Total patient  service revenues          |       | 289,271  |       | 269,924  |       | 19,347               |       | 7.2                   |       |
| Physician  service revenues              |       | 5,623    |       | 4,525    |       | 1,098                |       | 24.3                  |       |
| Other service  revenues                  |       | 9,411    |       | 10,938   |       | (1,527               | )          | (14.0                 | )          |
| Total revenues                           |       | $        | 304,305    |     | $          | 285,387              |       | $                     | 18,918     |   | 6.6 | % |

 

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Patient servicerevenues at same store facilities decreased 1.3% for the year ended December 31,2007 compared to the year ended December 31, 2006, primarily as a resultof third-party payors adopting out-of-network fee schedules that are morecomparable to our contracted rates and the impact of payor consolidation incertain markets resulting in access to contracted rates for payors with whichwe did not negotiate a written contract. The contracted rates are typicallylower than rates paid for out-of-network services. These changes resulted in adecrease of 2.4% in net revenue per case at same store facilities, partiallyoffset by an increase in cases of 1.1% during 2007. The remaining increase in patientservice revenues is related to surgical facilities acquired or developed since January 1,2006, partially offset by surgical facilities divested in 2007 and 2006.

 

*Costof Revenues.*  Cost ofrevenues for the year ended December 31, 2007 compared to the year ended December 31,2006 were as follows (in thousands):

 
| ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** | **Dollar  Variance** | ** ** | **Percent  Variance** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------------------|------------|-----------------------|------------|
| Same store cost  of revenues                     |       | $        | 173,955    |     | $          | 165,419              |       | $                     | 8,536      |   | 5.2 | % |
| Cost of revenues  from other surgical facilities |       | 32,697   |       | 16,531   |       | 16,166               |       | —                |       |
| Total cost of  revenues                          |       | $        | 206,652    |     | $          | 181,950              |       | $                     | 24,702     |   | 13.6 | % |

 

The increase insame store cost of revenues was primarily the result of an increase in salaryand benefit expense of $3.1 million and medical supplies of$2.5 million. Salary and benefits increased due to an increase in thenumber of cases performed at these surgical facilities and a $710,000 increasein compensation expense resulting from the acceleration of vesting of stockoptions held by employees at our surgical facilities as a result of the Merger.As a percentage of same store revenues, same store cost of revenues was 69.3%for 2007 compared to 65.0% for 2006. As a percentage of revenues, same storecost of revenues increased primarily as a result of a decrease in revenue percase as previously discussed. Cost of revenues from other surgical facilities,which primarily includes surgical facilities acquired or developed since January 1,2006, increased by $16.2 million. As a percentage of revenues, total costof revenues increased to 67.9% for 2007 from 63.8% for 2006.

 

*Generaland Administrative Expense.* General and administrative expense increased 30.7% to $31.9 millionfor the year ended December 31, 2007 from $24.4 million for the yearended December 31, 2006. General and administrative expense in 2007included $8.1 million of expenses related primarily to the acceleratedvesting of stock options, restricted stock, and related payroll expense as aresult of the Merger. As a percentage of revenues, general and administrativeexpense increased to 10.5% for 2007 from 8.6% for 2006. Excluding expensesrelated primarily to the accelerated vesting of stock options, restrictedstock, and related payroll expense as a result of the Merger, general andadministrative expense as a percentage of revenues was 7.8% in 2007. We believethat presenting general and administrative expense, as a percentage ofrevenues, excluding the impact of the accelerated vesting of stock options,restricted stock and related payroll expense, is useful to investors becausethe Merger was a one-time event making comparability of results from year toyear difficult.

 

*Depreciationand Amortization.* Depreciation and amortization expense for the year ended December 31,2007 was $12.7 million compared to $11.9 million for the year ended December 31,2006. As a percentage of revenues, depreciation and amortization expensedecreased to 4.1% for 2007 from 4.2% for 2006. Same store depreciation andamortization expense increased $991,000 in 2007 from 2006.

 

*Provisionfor Doubtful Accounts.* Provision for doubtful accounts increased 10.0% to $4.4 million forthe year ended December 31, 2007 from $4.0 million for the year endedDecember 31, 2006. As a percentage of revenues, the provision for doubtfulaccounts increased to 1.5% for 2007 from 1.4% for 2006. This increase isprimarily attributed to the surgical facilities acquired or developed since January 1,2006. On a same store basis, the provision for doubtful accounts decreased to1.4% of revenue for 2007 from 1.7% for 2006.

 

*Incomeon Equity Investments.* Income on equity investments represents the net income of certaininvestments we have in surgical facilities. These surgical facilities are notconsolidated for financial reporting purposes. Income on equity investmentsdecreased to $16,000 for the year ended December 31, 2007 from$2.4 million for the year ended December 31, 2006. The decrease inincome on equity investments for 2007 compared to 2006 is primarilyattributable to the surgical facilities that were under development.

 

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*Impairmentand Loss on Disposal of Long-Lived Assets.*  Loss on disposal of long-lived assets for theyear ended December 31, 2007 primarily represents the loss related to thesale of our diagnostic center in Englewood, Colorado that was classified asdiscontinued operations. Impairment and loss on disposal of long-lived assetsfor the year ended December 31, 2006 primarily represents our divestitureof surgical facilities that we had recorded as equity investments.

 

*Gainon Sale of Long-Lived Assets.* Gain on sale of long-lived assets for the year ended December 31,2007 and the year ended December 31, 2006 primarily represents the gain werecognized on the sale of a portion of our ownership in certain surgicalfacilities to physician investors.

 

*Proceedsfrom Insurance Settlement.* During the year ended December 31, 2006, we received insuranceproceeds of $410,000 related to the hurricanes that temporarily closed ouraffected surgical facilities and interrupted the surgical facilities’ businessduring the third and fourth quarter of 2005. We recorded these proceeds net ofrelated costs. In the year ended December 31, 2007, we received $161,000representing the final insurance settlement payment.

 

*Proceedsfrom Litigation Settlement.* During the year ended December 31, 2006, we were awarded alitigation settlement of $588,000 related to the construction of one of oursurgical facilities. We recorded this settlement net of related costs.

 

*OperatingIncome.*  Operatingincome decreased 37.6% to $41.9 million for the year ended December 31,2007 from $67.2 million for the year ended December 31, 2006.Operating income for 2007 included transaction costs related to the Mergertotaling $16.1 million. As a percentage of revenues, operating incomedecreased to 13.8% for 2007 from 23.6% for 2006. Excluding transaction costsrelated to the Merger, operating income was 19.0% of revenue for 2007.Operating income margins declined primarily as a result of the transition fromout-of-network to in-network billing in California and Missouri.

 

*MinorityInterests in Income of Consolidated Subsidiaries.*  Minority interests in income of consolidatedsubsidiaries decreased 17.7% to $23.3 million for the year ended December 31,2007 from $28.3 million for the year ended December 31, 2006.Minority interest in income of consolidated subsidiaries for same storefacilities decreased primarily as a result of the transition fromout-of-network to in-network billing in California and Missouri. As apercentage of revenues, minority interests in income from consolidatedsubsidiaries decreased to 7.7% for 2007 from 9.9% for 2006.

 

*InterestExpense, Net of Interest Income.*  Interest expense, net of interest income,increased to $20.0 million for the year ended December 31, 2007 from$7.1 million for the year ended December 31, 2006. Interest expenseincreased in 2007 primarily because of a net increase of $296.0 million ofdebt and additional amortization of deferred financing costs as a result ofcapitalizing $12.1 million of costs as a result of our new capitalstructure.

 

*Provisionfor Income Taxes.*  Theprovision for income taxes decreased 74.0% to $3.2 million for the yearended December 31, 2007 from $12.3 million for the year ended December 31,2006. This decrease in the provision for income taxes was due to the decreasein income before income taxes. The effective tax rate for 2007 was (222.7%)compared to an effective tax rate of 38.5% for 2006. Our effective tax rate for2007 was impacted by the transaction costs incurred related to the Merger.

 

*Loss(Income) from Continuing Operations.*  Loss from continuing operations was$1.5 million for the year ended December 31, 2007 compared to incomefrom continuing operations of $31.8 million for the year ended December 31,2006, a decrease of $33.3 million. Income from continuing operationsdecreased as a result of transaction costs related to the Merger ofapproximately $13.0 million, net of tax, an increase in interest expenseof approximately $4.7 million, net of tax, the transition fromout-of-network to in-network billing in California and Missouri, decreases inproceeds from insurance and litigation settlements and a decrease in income onequity investments.

 

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**QuarterlyResults of Operations**

 

The followingtables present a summary of our unaudited quarterly consolidated results ofoperations for each of the four quarters in 2008 and 2007. The unauditedfinancial statements include all adjustments, consisting of normal recurringadjustments, necessary for a fair statement of such information when read inconjunction with our audited consolidated financial statements and relatednotes. Our quarterly operating results have varied in the past, may continue todo so and are not necessarily indicative of results for any future period.

 
| ** **                                                 | ** ** | **2008**                             | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                 | ** ** | **First  Quarter**                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** **                                                 | ** ** | **(in thousands)  (unaudited)** | ** ** |
| **Consolidated  Statement of Operations Data:**            |       |                                 |       |   |   |   |   |   |   |
| Revenues                                                   |       | $                                    | 79,253     |   | $ | 84,361 |   | $ | 83,570 |   | $ | 84,716 |   |
| Operating  expenses:                                       |       |                                 |       |   |   |   |   |   |   |
| Salaries and  benefits                                     |       | 21,876                               |       | 22,558 |   | 23,389 |   | 22,687 |   |
| Supplies                                                   |       | 16,153                               |       | 16,850 |   | 16,919 |   | 17,640 |   |
| Professional and  medical fees                             |       | 4,616                                |       | 4,525 |   | 4,908 |   | 4,972 |   |
| Rent and lease  expense                                    |       | 5,435                                |       | 5,608 |   | 5,573 |   | 5,691 |   |
| Other operating  expenses                                  |       | 6,300                                |       | 6,470 |   | 6,750 |   | 6,524 |   |
| Cost of revenues                                           |       | 54,380                               |       | 56,011 |   | 57,539 |   | 57,514 |   |
| General and  administrative expense                        |       | 6,701                                |       | 5,940 |   | 6,175 |   | 5,107 |   |
| Depreciation and  amortization                             |       | 3,516                                |       | 3,706 |   | 3,947 |   | 4,006 |   |
| Provision for  doubtful accounts                           |       | 127                                  |       | 1,049 |   | 1,403 |   | 1,282 |   |
| Income on equity  investments                              |       | (185                                 | )          | (517 | ) | (450 | ) | (352 | ) |
| Impairment and  loss on disposal of long-lived assets      |       | 194                                  |       | 279 |   | 675 |   | 751 |   |
| Gain on sale of  long-lived assets                         |       | (158                                 | )          | (510 | ) | (42 | ) | (265 | ) |
| Litigation  settlements, net                               |       | —                               |       | — |   | — |   | 893 |   |
| Total operating expenses                                   |       | 64,575                               |       | 65,958 |   | 69,247 |   | 68,936 |   |
| Operating income                                           |       | 14,678                               |       | 18,403 |   | 14,323 |   | 15,780 |   |
| Minority  interests in income of consolidated subsidiaries |       | (5,889                               | )          | (6,956 | ) | (5,444 | ) | (5,368 | ) |
| Interest  expense, net                                     |       | (10,084                              | )          | (11,120 | ) | (11,293 | ) | (10,929 | ) |
| (Loss) income  before income taxes                         |       | (1,295                               | )          | 327 |   | (2,414 | ) | (517 | ) |
| (Benefit)  provision for income taxes                      |       | (428                                 | )          | 529 |   | (1,053 | ) | 14,208 |   |
| Loss from  continuing operations                           |       | (867                                 | )          | (202 | ) | (1,361 | ) | (14,725 | ) |
| Loss on  discontinued operations, net of taxes             |       | (214                                 | )          | (1,809 | ) | (468 | ) | (1,152 | ) |
| Net loss                                                   |       | $                                    | (1,081     | ) | $ | (2,011 | ) | $ | (1,829 | ) | $ | (15,877 | ) |

 

The following table reconciles EBITDA to net cashprovided by operating activities – continuing operations:

 
| ** **                                                                                                 | ** ** | **2008**                             | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                 | ** ** | **First  Quarter**                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** **                                                                                                 | ** ** | **(in thousands)  (unaudited)** | ** ** |
| EBITDA(1)                                                                                                  |       | $                                    | 13,485     |   | $ | 15,245 |   | $ | 13,782 |   | $ | 15,228 |   |
| Depreciation and  amortization                                                                             |       | (3,516                               | )          | (3,706 | ) | (3,947 | ) | (4,006 | ) |
| Non-cash  (losses) gains                                                                                   |       | (36                                  | )          | 231 |   | (633 | ) | (486 | ) |
| Non-cash stock  option compensation expense                                                                |       | (1,144                               | )          | (323 | ) | (323 | ) | (324 | ) |
| Interest  expense, net                                                                                     |       | (10,084                              | )          | (11,120 | ) | (11,293 | ) | (10,929 | ) |
| Benefit  (provision) for income taxes                                                                      |       | 428                                  |       | (529 | ) | 1,053 |   | (14,208 | ) |
| Loss on  discontinued operations, net of taxes                                                             |       | (214                                 | )          | (1,809 | ) | (468 | ) | (1,152 | ) |
| Net loss                                                                                                   |       | (1,081                               | )          | (2,011 | ) | (1,829 | ) | (15,877 | ) |
| Depreciation and  amortization                                                                             |       | 3,516                                |       | 3,706 |   | 3,947 |   | 4,006 |   |
| Amortization of  deferred financing costs                                                                  |       | 1,313                                |       | 2,153 |   | 519 |   | 492 |   |
| Non-cash  payment-in-kind interest option                                                                  |       | 2,535                                |       | 2,402 |   | 4,816 |   | — |   |
| Non-cash stock  option compensation expense                                                                |       | 1,144                                |       | 323 |   | 323 |   | 324 |   |
| Non-cash losses  (gains)                                                                                   |       | 36                                   |       | (231 | ) | 633 |   | 486 |   |
| Minority  interests in income of consolidated subsidiaries                                                 |       | 5,889                                |       | 6,956 |   | 5,398 |   | 5,414 |   |
| Deferred income  taxes                                                                                     |       | (2,629                               | )          | 300 |   | (541 | ) | 16,588 |   |
| Distributions to  minority partners                                                                        |       | (5,272                               | )          | (5,308 | ) | (5,877 | ) | (6,966 | ) |
| Equity in  earnings of unconsolidated affiliates, net of distributions received                            |       | (185                                 | )          | 434 |   | (12 | ) | 96 |   |
| Provision for  doubtful accounts                                                                           |       | 127                                  |       | 1,049 |   | 1,403 |   | 1,282 |   |
| Changes in  operating assets and liabilities, net of effects of acquisitions and  dispositions             |       |                                 |       |   |   |   |   |   |   |
| Accounts  receivable                                                                                       |       | 595                                  |       | (2,920 | ) | (170 | ) | (1,041 | ) |
| Other assets and  liabilities                                                                              |       | 767                                  |       | 7,915 |   | (2,241 | ) | 2,504 |   |
| Net cash  provided by operating activities – continuing operations                                    |       | $                                    | 6,755      |   | $ | 14,768 |   | $ | 6,369 |   | $ | 7,308 |   |
| ** **                                                                                                 |       |                                 |       |   |   |   |   |   |   |
| **Other  Data:**                                                                                           |       |                                 |       |   |   |   |   |   |   |
| Number of  consolidated surgical facilities included in continuing operations, as of the  end of period(2) |       | 64                                   |       | 65 |   | 65 |   | 66 |   |

 

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| ** **                                                 | ** ** | **2007**                             | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                 | ** ** | **First  Quarter**                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** **                                                 | ** ** | **(in thousands)  (unaudited)** | ** ** |
| **Consolidated  Statement of Operations Data:**            |       |                                 |       |   |   |   |   |   |   |
| Revenues                                                   |       | $                                    | 77,220     |   | $ | 76,670 |   | $ | 73,074 |   | $ | 77,341 |   |
| Operating  expenses:                                       |       |                                 |       |   |   |   |   |   |   |
| Salaries and  benefits                                     |       | 20,838                               |       | 20,289 |   | 21,385 |   | 21,299 |   |
| Supplies                                                   |       | 14,946                               |       | 15,350 |   | 14,948 |   | 15,791 |   |
| Professional and  medical fees                             |       | 4,699                                |       | 4,703 |   | 4,724 |   | 4,462 |   |
| Rent and lease  expense                                    |       | 4,690                                |       | 4,711 |   | 4,967 |   | 4,967 |   |
| Other operating  expenses                                  |       | 5,779                                |       | 5,950 |   | 6,109 |   | 6,045 |   |
| Cost of revenues                                           |       | 50,952                               |       | 51,003 |   | 52,133 |   | 52,564 |   |
| General and  administrative expense                        |       | 6,453                                |       | 5,957 |   | 13,679 |   | 5,784 |   |
| Depreciation and  amortization                             |       | 3,098                                |       | 2,904 |   | 3,277 |   | 3,373 |   |
| Provision for  doubtful accounts                           |       | 894                                  |       | 1,300 |   | 715 |   | 1,540 |   |
| Income on equity  investments                              |       | 36                                   |       | (236 | ) | 278 |   | (94 | ) |
| Impairment and  loss on disposal of long-lived assets      |       | 16                                   |       | 229 |   | 94 |   | 33 |   |
| Gain on sale of  long-lived assets                         |       | (28                                  | )          | (478 | ) | (90 | ) | (319 | ) |
| Merger  transaction expenses                               |       | —                               |       | 1,262 |   | 6,499 |   | (239 | ) |
| Proceeds from  insurance settlements, net                  |       | (161                                 | )          | — |   | — |   | — |   |
| Total operating  expenses                                  |       | 61,260                               |       | 61,941 |   | 76,585 |   | 62,642 |   |
| Operating income  (loss)                                   |       | 15,960                               |       | 14,729 |   | (3,511 | ) | 14,699 |   |
| Minority  interests in income of consolidated subsidiaries |       | (6,733                               | )          | (6,020 | ) | (4,490 | ) | (6,098 | ) |
| Interest  expense, net                                     |       | (1,967                               | )          | (1,959 | ) | (5,964 | ) | (10,101 | ) |
| Income (loss)  before income taxes                         |       | 7,260                                |       | 6,750 |   | (13,965 | ) | (1,500 | ) |
| Provision  (benefit) for income taxes                      |       | 2,831                                |       | 2,832 |   | (2,478 | ) | 55 |   |
| Income (loss)  from continuing operations                  |       | 4,429                                |       | 3,918 |   | (11,487 | ) | (1,555 | ) |
| (Loss) gain on  discontinued operations, net of taxes      |       | (399                                 | )          | 25 |   | (170 | ) | (163 | ) |
| Net income  (loss)                                         |       | $                                    | 4,030      |   | $ | 3,943 |   | $ | (11,657 | ) | $ | (1,718 | ) |

 

The followingtable reconciles EBITDA to net cash provided by operating activities –continuing operations:

 
| ** **                                                                                                  | ** ** | **2007**                             | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                  | ** ** | **First  Quarter**                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** **                                                                                                  | ** ** | **(in thousands)  (unaudited)** | ** ** |
| EBITDA(1)                                                                                                   |       | $                                    | 13,162     |   | $ | 13,564 |   | $ | 10,513 |   | $ | 11,674 |   |
| Depreciation and  amortization                                                                              |       | (3,098                               | )          | (2,904 | ) | (3,277 | ) | (3,373 | ) |
| Non-cash  (losses) gains                                                                                    |       | 12                                   |       | 249 |   | (4 | ) | 286 |   |
| Non-cash stock  option compensation expense                                                                 |       | (849                                 | )          | (938 | ) | (8,734 | ) | (225 | ) |
| Interest  expense, net                                                                                      |       | (1,967                               | )          | (1,959 | ) | (5,964 | ) | (10,101 | ) |
| Benefit  (provision) for income taxes                                                                       |       | (2,831                               | )          | (2,832 | ) | 2,478 |   | (55 | ) |
| Merger  transaction expenses                                                                                |       | —                               |       | (1,262 | ) | (6,499 | ) | 239 |   |
| Loss (gain) on  discontinued operations, net of taxes                                                       |       | (399                                 | )          | 25 |   | (170 | ) | (163 | ) |
| Net gain (loss)                                                                                             |       | 4,030                                |       | 3,943 |   | (11,657 | ) | (1,718 | ) |
| Depreciation and  amortization                                                                              |       | 3,098                                |       | 2,904 |   | 3,277 |   | 3,373 |   |
| Amortization of  deferred financing costs                                                                   |       | —                               |       | 498 |   | 382 |   | 1,314 |   |
| Non-cash  payment-in-kind interest option                                                                   |       | —                               |       | — |   | — |   | — |   |
| Non-cash stock  option compensation expense                                                                 |       | 849                                  |       | 938 |   | 8,734 |   | 225 |   |
| Non-cash losses  (gains)                                                                                    |       | (12                                  | )          | (249 | ) | 4 |   | (286 | ) |
| Minority  interests in income of consolidated subsidiaries                                                  |       | 6,733                                |       | 6,020 |   | 4,490 |   | 6,098 |   |
| Deferred income  taxes                                                                                      |       | 2,831                                |       | 435 |   | 10,400 |   | 2,188 |   |
| Distributions to  minority partners                                                                         |       | (6,399                               | )          | (6,201 | ) | (5,608 | ) | (6,278 | ) |
| Equity in  earnings of unconsolidated affiliates, net of distributions received                             |       | 36                                   |       | 619 |   | (577 | ) | (94 | ) |
| Provision for  doubtful accounts                                                                            |       | 894                                  |       | 1,301 |   | 715 |   | 1,539 |   |
| Changes in  operating assets and liabilities, net of effects of acquisitions and  dispositions              |       |                                 |       |   |   |   |   |   |   |
| Accounts  receivable                                                                                        |       | 694                                  |       | (2,003 | ) | 2,337 |   | (1,284 | ) |
| Other assets and  liabilities                                                                               |       | (6,404                               | )          | 181 |   | (10,858 | ) | 6,979 |   |
| Net cash  provided by operating activities – continuing operations                                     |       | $                                    | 6,350      |   | $ | 8,386 |   | $ | 1,639 |   | $ | 12,056 |   |
| ** **                                                                                                  |       |                                 |       |   |   |   |   |   |   |
| **Other  Data:**                                                                                            |       |                                 |       |   |   |   |   |   |   |
| Number of  consolidated surgical facilities included in continuing operations, as of the  end of period (2) |       | 56                                   |       | 54 |   | 55 |   | 58 |   |

 

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(1)   See Item 6.“Selected Financial Data” for a discussion of our definition of EBITDA and whywe present it in this Annual Report on Form 10K.

(2)   Includes surgicalfacilities that we manage but in which have no ownership.

 

**Liquidityand Capital Resources**

 

***Operating Activities***

 

                The principal source of our operating cash flows isthe collection of patient receivables. Collection efforts for patient receivables are conducted by ourpersonnel at each facility or in centralized service offices for areas in whichthere are multiple facilities.  Each ofour surgical facilities bill for services as performed, usually within severaldays following the procedure.  Bad debtreserves are established in increasing percentages by aging category based onhistorical collection experience. Generally, the entire balance of all accountsremaining uncollected 180 days after the date of service are written offas bad debt and sent to an outside collection agency. Net amounts received fromcollection agencies are recorded as recoveries of bad debts. Our operating cashflows, including changes in accounts payable and other current liabilities, areimpacted by the timing of payments to our vendors. In 2008, 2007 and 2006, wedid not make any significant changes to the timing of our payments to vendors.

 

During the year ended December 31,2008, we generated operating cash flow from continuing operations of$35.2 million compared to $28.4 million for the year ended December 31,2007. The $35.2 million in the year ended December 31, 2008 includesdistributions to minority interest holders of $23.4 million compared to$24.5 million for the year ended December 31, 2007.  In addition, we received approximately $4.0million of tax refunds in 2008.  During2006, we generated operating cash flow from continuing operations of$30.9 million.

 

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At December 31,2008, we had working capital of $52.3 million compared to $70.6 million at December 31,2007.  This decrease is primarily relatedto voluntary principal payments of $11.0 million and development relatedactivities.  Our available cash, alongwith our expected future operating cash flows, is sufficient to service ourcurrent obligations.

 

***InvestingActivities***

 

Net cash used ininvesting activities from continuing operations during the year ended December 31,2008 was $32.8 million, including $15.7 million of payments relatedto acquisitions and $15.6 million related to purchases of property andequipment. The $15.6 million of property and equipment purchases includes $8.2million for expansion and development related projects.  Cash used in investing activities in 2008 and2007 was funded primarily from cash from operations and proceeds from theMerger financing.  Certain expansion anddevelopment related projects were funded using facility level third-party debt.

 

*Summaryof Acquisitions*

 

·                  Weacquired incremental ownership in each of our two surgical facilities locatedin Beverly Hills, California for an aggregate of $2.5 million. We alsoacquired an incremental ownership in our surgical facility located in Encino,California for $2.0 million.

·                  Weacquired ownership in five surgical facilities specializing in spine,orthopedic and pain management procedures located in Boulder, Colorado;Honolulu, Hawaii; Bristol and Nashville, Tennessee; and Seattle, Washington foran aggregate of $5.8 million plus the assumption of $4.7 million indebt.

·                  Weacquired additional management rights and an incremental ownership in one ofour existing surgical facilities located in Arcadia, California for anaggregate purchase price of $304,000. We also acquired an incremental ownershipand additional management rights in our surgical facility located in Irvine,California for $3.1 million.

·                  Ina separate transaction, we acquired an additional incremental ownership in oursurgical facility located in Irvine, California for an aggregate of $5.1million.  Through this acquisition weobtained a controlling interest in this facility.  We began consolidating this facility forfinancial reporting purposes.

·                  Throughoutthe year ended December 31, 2008, we completed various immaterialfacility-level buy ups for an approximate aggregate of $727,000.

 

Cash used inacquisition related investing activity is net of cash acquired as a result ofconsolidation, as well as cash received from the sale of ownershipinterests.  During 2008, we acquired $1.6million of cash through acquisitions which were consolidated for financialreporting purposes.  We received cash of$2.2 million related to the sale of ownership interests during 2008.

 

Net cash used ininvesting activities from continuing operations during the year ended December 31,2007 was $38.8 million, including $24.8 million of payments related toacquisitions and $14.6 million related to purchases of property andequipment.  The $14.6 million of propertyand equipment purchases includes construction projects at several of oursurgical facilities.

 

Net cash used ininvesting activities from continuing operations during the year ended December 31,2006 was $64.5 million, including $47.1 million of payments relatedto acquisitions and $14.2 million related to purchases of property andequipment. The $14.2 million of property and equipment purchases includesconstruction projects at several of our surgical facilities, costs associatedwith moving one of our surgical facilities to a replacement facility and costsassociated with converting another surgical facility from a single-specialtyfacility to a multi-specialty facility.

 

***FinancingActivities***

 

Net cash used infinancing activities from continuing operations during the year ended December 31,2008 was $8.3 million. During 2008, we made scheduled principal paymentson our senior secured credit facility totaling $2.5 million and voluntaryprincipal payments of $11.0 million. Also during 2008, we elected toexercise the PIK option by increasing the principal amount in lieu of makingscheduled interest payments of $4.9 million on our

 

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Toggle Notes, as well as$4.9 million on our retired bridge facility. Additionally, we incurred $4.7 million of deferred finance cost relatedto the issuance of the Toggle Notes.

 

Our net cashprovided by financing activities from continuing operations during the yearended December 31, 2007 was $27.0 million.  On August 23, 2007, we completed theMerger and Holdings received net proceeds on the issuance of common stocktotaling $239.1 million and $425.0 million in proceeds from borrowings underour new senior secured credit and bridge loan credit facilities.  We paid a sponsor fee of $7.0 million uponcompletion of the Merger on August 23, 2007 to Crestview and TheNorthwestern Mutual Life Insurance Company. This payment is presented in the statement of cash flows as a reductionto the net proceeds received from the sale of common stock.  We paid $490.5 million to our stockholders toretire all of the outstanding stock and options and repaid $129.0 millionrepresenting the outstanding principal balance as of August 23, 2007 ofour former credit facility.  We also paidapproximately $7.5 million in Merger transaction expenses.  During 2007, we made principal payment ondebt totaling $163.0 million and received proceeds from debt totaling $458.6million.

 

Our net cashprovided by financing activities from continuing operations during the yearended December 31, 2006 was $32.4 million, primarily related to$85.6 million of proceeds from borrowings under our former creditfacility. The proceeds from our borrowing were partially offset by$54.7 million of principal payments on long-term debt under our seniorcredit facility.

 

***Long-Term Debt***

 

The Company’slong-term debt is summarized as follows (in thousands):

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------|------------|
| ** **                      | ** ** | **2008**         | ** ** | **2007** | ** ** |
| Senior secured  credit facility |       | $                | 235,875    |   | $ | 249,375 |   |
| Senior PIK  toggle notes        |       | 184,635          |       | — |   |
| Bridge facility                 |       | —           |       | 175,000 |   |
| Notes payable to  banks         |       | 24,030           |       | 8,817 |   |
| Secured term  loans             |       | 3,213            |       | 504 |   |
| Capital lease  obligations      |       | 5,064            |       | 3,258 |   |
|                            |       | 452,817          |       | 436,954 |   |
| Less current  maturities        |       | (12,205          | )          | (8,029 | ) |
|                            |       | $                | 440,612    |   | $ | 428,925 |   |

 

*Senior Secured Credit Facility*

 

On August 23,2007, in conjunction with the Merger, we entered into a new $350.0 millionsenior secured credit facility with a syndicate of banks. The senior securedcredit facility extends credit in the form of two term loans of$125.0 million each (the first, the “Tranche A Term Loan” and thesecond, the “Tranche B Term Loan”) and a $100.0 million revolving,swingline and letter of credit facility (the “Revolving Facility”). Theswingline facility is limited to $10.0 million and the swingline loans areavailable on a same-day basis. The letter of credit facility is limited to$10.0 million. We are the borrower under the senior secured creditfacility, and all of our wholly-owned subsidiaries are guarantors. Under theterms of the senior secured credit facility, entities that become wholly-ownedsubsidiaries must also guarantee the debt.

 

The Tranche ATerm Loan matures on August 23, 2013, the Tranche B Term Loan matureson August 23, 2014 and the Revolving Facility matures on August 23,2013. The Tranche A Term Loan requires quarterly principal payments of$312,500 through September 30, 2009, quarterly payments of$1.6 million from December 31, 2009 through September 30, 2010,quarterly payments of $4.7 million from December 31, 2010 through September 30,2011, quarterly payments of $6.3 million from December 31, 2011through September 30, 2012, quarterly payments of $18.1 million from December 31,2012 through June 30, 2013 and a balloon payment of $12.6 million on August 23,2013. The Tranche B Term Loan requires quarterly principal payments of$312,500 through June 30, 2014 and a balloon payment of$111.1 million on August 23, 2014.

 

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At our option, theterm loans bear interest at the lender’s alternate base rate in effect on theapplicable borrowing date plus an applicable alternate base rate margin, orEurodollar rate in effect on the applicable borrowing date, plus an applicableEurodollar rate margin. Both the applicable alternate base rate margin andapplicable Eurodollar rate margin will vary depending upon the ratio of ourtotal indebtedness to consolidated EBITDA.

 

The senior securedcredit facility permits us to declare and pay dividends only in additionalshares of stock, except for the following exceptions. Restricted subsidiaries,as defined in the credit agreement, may declare and pay dividends ratably withrespect to their capital stock. We may declare and pay cash dividends or makeother distributions to Holdings provided the proceeds are used by Holdings to (i) purchaseor redeem equity interest of Holdings acquired by former or current employees,consultants or directors of Holdings, the Company or any restricted subsidiaryor (ii) pay principal or interest on promissory notes that were issued inlieu of cash payments for the repurchase or redemption of such equityinstruments, provided that the aggregate amount of such dividends or otherdistributions shall not exceed $3.0 million in any fiscal year. Any unusedamounts that are permitted to be paid under this provision are available to becarried over to subsequent fiscal years provided that certain conditions aremet. We may also make payments to Holdings to pay franchise taxes and otherfees required to maintain its corporate existence provided such payments do notexceed $3.0 million in any calendar year and also make payments in theamount necessary to enable Holdings to pay income taxes directly attributableto the operations of the Company and to make $1.0 million in annualadvisory and management agreement payments. We may also make additionalpayments to Holdings in the aggregate amount of $5.0 million throughoutthe term of the senior secured credit facility.

 

As of December 31,2008, the amount outstanding under the senior secured credit facility was$235.9 million with an interest rate on the borrowings of 3.7%. The$100.0 million Revolving Facility includes a non-use fee of 0.5% of theportion of the facility not used. We pay this fee quarterly. As of December 31,2008, the amount available under the Revolving Facility was$100.0 million. In addition, we made voluntary principal payments of$11.0 million under our senior secured credit facility during 2008.

 

*InterestRate Swap*

 

In October 2007,we entered into an interest rate swap agreement to protect against certaininterest rate fluctuations of the LIBOR rate on $150.0 million of ourvariable rate debt under the senior secured credit facility. The effective dateof the interest rate swap was October 31, 2007, and it is scheduled toexpire on October 31, 2010. The interest rate swap effectively fixes ourLIBOR interest rate on the $150.0 million of variable debt at a rate of4.7%. We have recognized the fair value of the interest rate swap as along-term liability of approximately $7.0 million at December 31,2008.  Due to the significant changes inLIBOR rates, we elected an interest term for the January 2009 interestelection period under the terms of the debt agreement which differs from thatof the swap instrument.  We expect torealize a significant cash savings from the reduced interest due during thisinterest period.  As a result, we havediscontinued hedge accounting treatment for our interest rate swap as of December 31,2008.  In January 2009, we beganrecognizing a ratable portion of the $7.0 million in accumulated othercomprehensive income as additional interest expense over the remaining life ofthe swap instrument.  Also beginning in January 2009,we began recording into earnings the mark-to-market adjustment to reflect thefair value of the hedging instrument.

 

*Senior PIK Toggle Notes*

 

On June 3,2008, we completed a private offering of $179.9 million aggregate principalamount of the 11.00%/11.75% Senior PIK Toggle Notes due 2015.  Interest on the Toggle Notes is due February 23and August 23 of each year.  TheToggle Notes will mature on August 23, 2015.  For any interest period through August 23,2011, we may elect to pay interest on the Toggle Notes (i) in cash, (ii) inkind, by increasing the principal amount of the notes or issuing new notes forthe entire amount of the interest payment or (iii) by paying interest on50% of the principal amount of the Toggle Notes in cash and 50% in PIKinterest.  Cash interest on the ToggleNotes will accrue at the rate of 11.0% per annum.  PIK interest on the Toggle Notes will accrueat the rate of 11.75% per annum.  Theproceeds from the issuance of the Toggle Notes were used exclusively to repaythe bridge facility.  We elect to paycash interest or to exercise the PIK option in advance of the interestperiod.  Upon issuance of the ToggleNotes, we elected to exercise the PIK option by increasing the principal amountof the Toggle Notes in lieu of making scheduled interest payments of $4.7million for the interest period through August 23, 2008.  On August

 

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23, 2008, we elected the PIK option of the ToggleNotes in lieu of making scheduled interest payments of $10.8 million for theinterest period from August 23, 2008 to February 23, 2009.

 

The indenture governing the Toggle Notes containsvarious restrictive covenants, including financial covenants that limit ourability and the ability of the subsidiaries to borrow money or guarantee otherindebtedness, grant liens, make investments, sell assets, pay dividends orengage in transactions with affiliates.

 

As part of the private offering of Toggle Notes, we entered into a registration rightsagreement with the initial purchasers in the private offering in which weagreed, among other things, to file a registration statement within 180 days ofthe issuance of the notes. On September 25, 2008, we filed aregistration statement under the Securities Act of 1933, as amended, toregister $184.6 million aggregateprincipal amount of Toggle Notes aswell as the guarantee of each wholly owned subsidiary of the Company.  On November 12, 2008, we filed anamendment to the registration statement to, among other things, register anadditional $75.4 million aggregate principal amount of Toggle Notes issuable ifwe elect to make payments of additional interest in kind by increasing theprincipal amount of the existing notes or issuing additional notes.  Pursuant to the registration statement, we exchangedthe outstanding Toggle Notes fornew 11.00%/11.75% Toggle Notes due 2015with an aggregate principal amount of $184.6 million registered underthe Securities Act of 1933, as amended. The newly issued Toggle Notes represent the same debt as the notes thatwere exchanged, and we issued the Toggle Notes under the same indenture thatgoverned the initial notes.

 

At December 31, 2008, we were in compliance withall material covenants required by each of the senior secured credit facilityand the indenture.

 

*Bridge Facility*

 

We entered into aninterim $175.0 million bridge loan credit agreement on August 23,2007.  The loan was to mature on August 23,2008 and bear interest at the bank’s base rate plus a margin of 3.0% or theEurodollar rate plus an initial margin of 4.0%. The margin increased by 0.5% per annum at the end of the interest periodending February 23, 2008.  All ofour wholly-owned subsidiaries were guarantors of the bridge facility.  During the first six months of 2008, prior tothe retirement of the bridge facility, we elected to increase the principalamount of the bridge facility in lieu of making scheduled interest payments of$4.9 million.  As a result of thiselection, the interest rate increased by 75 basis points for those interestperiods.  On June 3, 2008, we repaidthe $179.9 million bridge facility with proceeds from the sale of the ToggleNotes.

 

*Notes Payable to Banks*

 

Certain of our subsidiaries have outstanding bankindebtedness, which is collateralized by the real estate and equipment owned bythe surgical facilities to which the loans were made.  The outstanding balance of this indebtedness asof December 31, 2008 and December 31, 2007 was $24.0 million and $8.8million.  The various bank indebtednessagreements contain covenants to maintain certain financial ratios and alsorestrict encumbrance of assets, creation of indebtedness, investing activitiesand payment of distributions. We have guaranteed substantially all of thisdebt.

 

*Capital Lease Obligations*

 

We are liable to various vendors for several equipmentleases.  The outstanding balance relatedto these capital leases at December 31, 2008 and December 31, 2007was $5.1 million and $3.3 million, respectively.

 

***Summary***

 

We believe thatexisting funds, cash flows from operations and borrowings under our seniorsecured credit facility will provide sufficient liquidity for the next 12 to18 months. However, we may need to incur additional debt or issueadditional equity or debt securities in the future. We cannot be assured thatcapital will be available on acceptable terms, if at all. Our ability to meet ourfunding needs could be adversely affected if we suffer adverse results from ouroperations, or if we violate the covenants and restrictions to which we aresubject under our senior secured credit facility or indenture governing theToggle Notes.

 

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**ContractualObligations and Commercial Commitments**

 

The following table summarizes our contractualobligations by period as of December 31, 2008 on a historical basis (inthousands):

 
| ** **                    | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5  Years** | ** ** |
| **Contractual  Obligations:** |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                |       | $                                         | 447,753    |   | $ | 13,233 |   | $ | 43,336 |   | $ | 93,537 |   | $ | 297,647 |   |
| Capital lease  obligations    |       | 5,064                                     |       | 1,862 |   | 2,084 |   | 1,118 |   | — |   |
| Operating lease  obligations  |       | 117,475                                   |       | 18,524 |   | 34,829 |   | 26,188 |   | 37,934 |   |
| Total                         |       | $                                         | 570,292    |   | $ | 33,619 |   | $ | 80,249 |   | $ | 120,843 |   | $ | 335,581 |   |

 

**Inflation**

 

Inflation andchanging prices have not significantly affected our operating results or themarkets in which we operate.

 

**RecentlyIssued Accounting Pronouncements**

 

In December 2007, the FASB issued SFAS No. 141(R),*“Business Combinations” (“SFAS No. 141(R)”*).  SFAS No. 141(R) retains thepurchase method of accounting for acquisitions, but requires a number ofchanges, including changes in the way assets and liabilities are recognized inthe purchase accounting as well as requiring the expensing ofacquisition-related costs as incurred. Furthermore, SFAS No. 141(R) provides guidance for recognizingand measuring the goodwill acquired in the business combination and determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination.  SFAS No. 141(R) is effective forfiscal years beginning on or after December 15, 2008.  SFAS No. 141(R) will apply to allof our acquisitions closed on or after January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160,*“Non-controlling Interests in ConsolidatedFinancial Statements — An Amendment of ARB No. 51”* (“SFAS No. 160”).  SFAS No. 160 amends Accounting ResearchBulletin (“ARB”) No. 51, “Consolidated Financial Statements” (“ARB No. 51”)to establish accounting and reporting standards for the non-controllinginterest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 clarifies that anon-controlling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements.  Additionally, SFASNo. 160 changes the method by which the consolidated income statement ispresented by requiring consolidated net income to be reported at amounts thatinclude the amounts attributable to both the parent and the non-controllinginterest.

 

SFAS No. 160 requires expanded disclosures in theconsolidated financial statements that clearly identify and distinguish betweenthe interests of the parent’s owners and the interests of the non-controllingowners of a subsidiary, including a reconciliation of the beginning and endingbalances of the equity attributable to the parent and the non-controllingowners and a schedule showing the effects of changes in a parent’s ownershipinterest in a subsidiary on the equity attributable to the parent.  SFAS No. 160 does not change ARB No. 51’sprovisions related to consolidation purposes or consolidation policy, or therequirement that a parent consolidate all entities in which it has acontrolling financial interest.  SFAS No. 160does, however, amend certain of ARB No. 51’s consolidation procedures tomake them consistent with the requirements of SFAS No. 141(R) as wellas to provide definitions for certain terms and to clarify someterminology.  SFAS No. 160 iseffective for fiscal years beginning on or after December 15, 2008.  SFAS No. 160 must be appliedprospectively as of the beginning of the fiscal year in which it is initiallyapplied, except for the presentation and disclosure requirements, which must beapplied retrospectively for all periods presented.  SFAS No. 160 will apply to our minorityinterests beginning on January 1, 2009.

 

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In April 2008, the FASB issued FASB StaffPosition (FSP) No. 142-3, “*Determination of theUseful Life of Intangible Assets*”. FSP 142-3 amends the factors thatshould be considered in determining the useful life of a recognized intangibleasset under SFAS No. 142, *“Goodwill and OtherIntangible Assets”.*  Theintent of FSP 142-3 is to improve consistency between the useful life of arecognized intangible asset under SFAS No. 142 and the period of expectedcash flows used to measure the fair value of the asset under SFAS No. 141(R) *“Business Combinations”,* and other U.S. generally acceptedaccounting principles.  FSP 142-3 iseffective for financial statements issued for fiscal years beginning after December 15,2008 and interim periods within those fiscal years.  The adoption of FSP 142-3 is not expected tohave a material impact on our consolidated results of operations or financialposition.

 

In November 2008,the FASB ratified EITF No. 08-6,*EquityMethod Investment Accounting Considerations*  (EITF 08-6). EITF 08-6 clarifiesthe accounting for certain transactions and impairment considerations involvingequity method investments. EITF 08-6 is effective for fiscal yearsbeginning after December 15, 2008, with early adoption prohibited. Theadoption of EITF 08-6 is not expected to have a material impact on ourconsolidated financial position, results of operations, or cash flows.

 

**Item 7A. *Quantitativeand Qualitative Disclosures About Market Risk***

 

We are exposed to market risk related to changes inprevailing interest rates. Historically, we have not held or issued derivativefinancial instruments other than the use of a variable-to-fixed interest rateswap for a portion of our senior credit facility. We do not use derivativeinstruments for speculative purposes. Our outstanding debt to commerciallenders is generally based on a predetermined percentage above LIBOR or thelenders’ prime rate. At December 31, 2008, $235.9 million of ourtotal long-term debt was subject to variable rates of interest, while theremaining $216.9 million of our total long-term debt was subject to fixedrates of interest. A hypothetical 100 basis point increase in market interestrates would result in additional annual interest expense of approximately$1.6 million. The fair value of our total long-term debt, based on quotedmarket prices as of December 31, 2008 is approximately $247.7 million.

 

**Item 8.  *Financial Statements and Supplementary Data***

 

Information with respect to this Item is contained inour consolidated financial statements beginning with the Index on page F-1 ofthis report.

 

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**Item 9.    *Changes in andDisagreements with Accountants on Accounting and Financial Disclosure***

 

     None.

 

**Item 9A(T).*Controls and Procedures***

 

(a)***          Evaluationof Disclosure Controls and Procedures.*** We carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls and proceduresas of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective in ensuring that information required tobe disclosed by us (included in our consolidated subsidiaries) in reports thatwe file or submit under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported in a timely basis.

 

(b)         ***Management’s******Report on Internal Control over FinancialReporting. ***Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as defined in Exchange Act Rule 13a-15(f).  Our internal control system was designed toprovide reasonable assurance to our management and Board of Directors regardingthe preparation and fair presentation of published financial statements.

 

                        Managementhas assessed the effectiveness of our internal control over financial reportingusing the criteria set forth in “Internal Control - Integrated Framework”issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  Based on management’s assessmentand those criteria, management concluded that our internal control overfinancial reporting was effective as of December 31, 2008.

 

                        Thisannual report does not include an attestation report of our registered publicaccounting firm regarding internal control over financing reporting.  Management’s report was not subject toattestation by our registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit us to provide onlymanagement’s report in this annual report.

 

 (c)       ***Changes in******Internal Control OverFinancial Reporting.*** There has been no change in our internal control over financialreporting that occurred during the fourth quarter of 2008 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**Limitationson the Effectiveness of Controls**

 

Our management, includingthe Chief Executive Officer and the Chief Financial Officer, recognizes thatany set of controls and procedures, no matter how well-designed and operated,can provide only reasonable, not absolute, assurance of achieving the desiredcontrol objectives. Further, the design of a control system must reflect thefact that there are resource constraints, and the benefits of controls must beconsidered relative to their costs. Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, with the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people or by managementoverride of controls. For these reasons, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

**Item 9B.  *OtherInformation***

 

None.

 

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**PART III**

** **

**Item 10.  *Directors,Executive Officers and Corporate Governance***

 

**Directorsand Executive Officers**

 

The following listidentifies the name, age and position(s) of our executive officers, keyemployees and directors:

 
| **Name**                      | ** ** | **Age** | ** ** | **Position**                                                 |
|-------------------------------|------------|---------|------------|--------------------------------------------------------------|
| Richard E.  Francis, Jr. |       | 55      |       | Chairman of the Board,  Chief Executive Officer and Director |
| Clifford G. Adlerz            |       | 55      |       | President, Chief  Operating Officer and Director             |
| Teresa F. Sparks              |       | 40      |       | Senior Vice President  of Finance, Chief Financial Officer   |
| Kenneth C. Mitchell           |       | 59      |       | Senior Vice President  of Mergers and Acquisitions           |
| R. Dale Kennedy               |       | 61      |       | Senior Vice President  of Management Services and Secretary  |
| George M. Goodwin             |       | 48      |       | Senior Vice President  and Chief Development Officer         |
| Thomas S.  Murphy, Jr.   |       | 49      |       | Director                                                     |
| Robert V. Delaney             |       | 51      |       | Director                                                     |
| Quentin Chu                   |       | 32      |       | Director                                                     |
| Kurt E. Bolin                 |       | 50      |       | Director                                                     |

 

Each director shall hold office until a successor is elected or untilthe directors death or resignation.

 

*RichardE. Francis, Jr.* has served as the Chairman of the Boardsince May 2002 and as Chief Executive Officer and a director since 1996. Mr. Francisalso served as President from 1996 to May 2002. Mr. Francis servedfrom 1992 to 1995 as Senior Vice President, Development of HealthTrust, Inc.From 1990 to 1992, Mr. Francis served as Regional Vice President, SouthernRegion for HealthTrust, where he oversaw operations of 11 hospitals.

 

*CliffordG. Adlerz* has served as President since May 2002 and asChief Operating Officer and a director since 1996. Mr. Adlerz also servedas Secretary from 1996 to May 2002. Mr. Adlerz served as RegionalVice President, Midsouth Region for HealthTrust, Inc. from 1992 until itsmerger with HCA Inc. in May 1995, at which time he became DivisionVice President of HCA and served in that position until September 1995. Mr. Adlerzserved as Chief Executive Officer of South Bay Hospital in Sun City, Floridafrom 1987 to 1992.

 

*TeresaF. Sparks* has served as Chief Financial Officer and SeniorVice President of Finance since August 2007. Ms. Sparks served asCorporate Controller of Symbion, Inc. since the Company’s inception  in 1996 to August 2007 and was namedVice President in December 2002. Previously, she served as AssistantController for HealthWise of America, Inc., a managed care organization.Prior to joining HealthWise of America, Ms. Sparks was a senior healthcareauditor for Deloitte & Touche LLP, Nashville, Tennessee.

 

*KennethC. Mitchell* has served as Senior Vice President of Mergersand Acquisitions since August 2007. Mr. Mitchell served as VicePresident of Finance from 1996 to December 2002 and as Chief FinancialOfficer from May 2002 to August 2007. Mr. Mitchell served asChief Financial Officer of American HealthMark, Inc. from 1989 to 1995 andas Vice President—Controller for HCA Management Company Inc. from 1988 to1989. Prior to that time, Mr. Mitchell served as Assistant VicePresident-Development and Regional Controller for HCA ManagementCompany Inc.

 

*R.Dale Kennedy* has served as Secretary since May 2002 andSenior Vice President of Management Services since December 2002. Mr. Kennedyserved as Vice President of Management Services from 1996 to December 2002.Mr. Kennedy served as Chief Operations Officer for IPN Network, LLC,a company that managed the business office functions of health care entities,from 1991 until 1995. Prior to that time, Mr. Kennedy served in regionalfinancial roles for HealthTrust, Inc. and HCA Inc.

 

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*GeorgeM. Goodwin* has served as Senior Vice President and ChiefDevelopment Officer since September 2007 having previously served as VicePresident, Mergers and Acquisitions. Prior to joining us in 1998, Mr. Goodwinserved as President and Chief Executive Officer for American PathologyResources, Inc., a single specialty physician practice management company.Prior to assuming this position, Mr. Goodwin managed the homecareoperations for the Tennessee Division of HCA consisting of 22 hospitals inTennessee and Kentucky.

 

*ThomasS. Murphy, Jr.* co-founded Crestview Partners in 2004 andhas served as a director of the Company since August 2007. He retired fromGoldman, Sachs & Co. in 2003 where he was a Partner/ManagingDirector. Mr. Murphy spent sixteen years in the Investment BankingDivision of Goldman, Sachs & Co. While at Goldman, Sachs & Co.,Mr. Murphy had extensive experience with acquisitions, divestitures,recapitalizations, initial public offerings, bank and high yield financings andprivate equity investments. In addition to his charitable activities, Mr. Murphyserves on the Board of Directors of FBR Capital Markets Co. and Key SafetySystems, Inc.

 

*RobertV. Delaney* joined Crestview as a partner in 2007 and hasserved as a director of the Company since October 2007. He retired fromGoldman, Sachs & Co. in 2003 where he served in a variety ofleadership positions including head of the Principal Investment Area in Asia,head of the Principal Investment Area in Japan and head of the LeveragedFinance Group. Mr. Delaney has extensive experience in high yield debt,leveraged loans, restructuring, mergers and acquisitions and principalinvesting.

 

*QuentinChu* is a Principal at Crestview Partners and has been withthe firm since July 2005, after graduating from Harvard Business School. Mr. Chuhas served as a director of the Company since August 2007.  Prior to attending business school, Mr. Chuwas an associate at The Carlyle Group, where he evaluated and executedtransactions in the health care industry, including pharmaceuticals, medicaldevices, facility-based providers, managed care and outsourcing. Prior tojoining Carlyle, Mr. Chu was an analyst in the health care investmentbanking team at Goldman, Sachs & Co., where he completed a rangeof M&A and financing assignments for both early stage and Fortune 500companies.

 

*KurtE. Bolin* is a Principal of Stone Point Capital LLC andhas been with the firm since 1997. Mr. Bolin has served as a director ofthe Company since August 2007. Prior to joining Stone Point Capital, Mr. Bolin was with GE Capital, Inc.,where he held various private equity positions from 1986 to 1997, most recentlyas Managing Director of the Equity Capital Group. In addition to private equityinvesting, Mr. Bolin’s activities at GE Capital, Inc. includedleading the acquisitions of various insurance companies. Mr. Bolin is alsoa director of Edgewood Partners Holdings, LLC, GENEX Services, Inc., StoneRiver Holdings, Inc. and Wilton Re Holdings Limited.

 

**BoardStructure and Compensation**

 

Our board iscurrently composed of 6 members. We do not currently pay our directors anyfees.

 

**AuditCommittee Financial Expert**

 

Our Audit and ComplianceCommittee is composed of Quentin Chu and Kurt Bolin.  In light of our status as a closely heldcompany and the absence of a public trading market for our common stock, ourBoard has not designated any member of the Audit and Compliance Committee as an“audit committee financial expert.”

 

**Code ofBusiness Conduct and Ethics**

 

We have adopted a Code ofBusiness Conduct and Ethics.  Copies ofthe Code of Business Conduct and Ethics may be obtained, free of charge, bywriting to the Secretary of the Company at: Symbion, Inc., 40 Burton HillsBoulevard, Suite 500, Nashville, Tennessee 37215.

 

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**Item 11.  *ExecutiveCompensation***

 

**COMPENSATION DISCUSSION AND ANALYSIS**

 

Symbion is a wholly-ownedsubsidiary of Symbion Holdings Corporation. The same individuals serve on bothHolding’s Board of Directors and our Board of Directors. Senior management isemployed by us but has acquired and is eligible to receive equity awards inHoldings.

 

The Compensation Committee of ourBoard of Directors is responsible for establishing and administering executivecompensation policies and programs within the framework of the committee’scompensation philosophy. Our current Compensation Committee was established byHoldings in February 2008.  Ourboard served as the compensation committee between the consummation of theMerger on August 23, 2007 and the appointment of the committee in February 2008.

 

 Our executive compensation policies aredesigned to complement and contribute to the achievement of our businessobjectives. The Compensation Committee’s general philosophy is that executivecompensation should:

 

·                  Link compensation paid to executives tocorporate and individual performance;

·                  Provide incentive opportunities that willmotivate executives to achieve our long-term objectives;

·                  Be competitive within our industry andcommunity and responsive to the needs of our executives;

·                  Attract, retain, motivate and rewardindividuals of the highest quality in the industry with the experience, skillsand integrity necessary to promote our success; and

·                  Comply with all applicable laws, and beappropriate in light of reasonable and sensible standards of good corporategovernance.

 

The elements of our executive compensation program include (i) basesalary, (ii) annual cash bonus or non-equity incentive compensation, (iii) equity-basedcompensation, and (iv) other benefits such as participation in our 401(k) planand the Supplemental Executive Retirement Plan****(the“SERP”). Executive officers also receive benefits that our other employeesreceive including medical, life and disability insurance.

 

**Compensation Process**

 

The Compensation Committee approves salaries and othercompensation for our executive officers. The Compensation Committee alsoreviews and approves, in advance, employment and similar arrangements orpayments to be made to any executive officer. For purposes of this discussion, the Named Executive Officers, or NEOs**,**are the individuals included in the Summary CompensationTable on page 73 of this filing. Salaries and other compensation for all other officers and employees aredetermined by management in accordance with our compensation policies andplans.

 

Prior tothe Merger, our compensation procedures were similar to those of othersimilarly situated companies. Our former Compensation Committee retained anindependent compensation consultant for advice with respect to specificcompensation decisions.  During 2008, ourcurrent Compensation Committee generally continued the levels of compensationthat were in place at the time of the Merger with adjustments it has deemedappropriate. Our Compensation Committee has not otherwise utilized the servicesof a consulting firm in connection with compensation decisions it has madeafter the Merger.

 

The Compensation Committee relies on the input of our ChiefExecutive Officer concerning the performance of our executive officers inmaking its compensation decisions; however, the Chief Executive Officer is notpresent during the deliberation and voting by the Compensation Committee oncompensation for the Chief Executive Officer. Additionally, the CompensationCommittee may delegate to the Chief Executive Officer the authority to make,within the framework of the Compensation Committee’s philosophy or objectivesthat it has adopted from time to time, compensation decisions with respect toour non-executive employees.

 

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**Components of ExecutiveCompensation**

 

Base Salaries

 

The CompensationCommittee reviews the base salaries of our executive officers on an annualbasis. Salaries are determined based on a subjective assessment of the natureand responsibilities of the position involved, our performance and the performanceof the particular officer, and the officer’s experience and tenure with us. Aswith other elements of compensation, the Compensation Committee compares basesalary with base salaries paid to persons with similar positions in similarcompanies.  As of February 2008,base salaries for 2008 for our Named Executive Officers were as follows:$463,500 for Mr. Francis, $334,750 for Mr. Adlerz, $219,078 for Ms. Sparks,$219,078 for Mr. Mitchell, and $207,930 for Mr. Kennedy**.**** **Messrs. Francis and Adlerzwere entitled to increases in salary effective January 1, 2008, to$525,000 and $375,000, respectively, under the terms of their employmentagreements but elected to delay implementing this increase to their base salaryfor 2008. Messrs. Francis and Adlerz received the 3% cost of living salaryincrease that all other employees received in 2008.

 

Non-Equity IncentiveCompensation

 

Non-equity incentive compensation is intended to motivateexecutive officers to achieve pre-determined financial or other goals appropriateto each executive officer’s area of responsibility set by the CompensationCommittee, consistent with our overall business strategies.

 

In February 2008, the Compensation Committee establishedthe 2008 Corporate Key Management Incentive Plan for key management employees,including our executive officers.  The2008 plan provides for a cash bonus equal to a percentage of base salary uponachievement of financial indicators selected by our Compensation Committee, includingachievement of applicable budgeted EBITDA, development and division performancetargets. The amount paid under the plan depends on the level of achievement.For Messrs. Francis and Adlerz, the target bonus was 100% of base salaryupon achievement of financial indicators. For our other Named Executive Officers, the potential bonus payments for2008 ranged from 45% to 50% of base salary. With respect to the Named Executive Officers, bonuses paid for 2008performance under this plan are as follows: $231,750 for Mr. Francis, $167,375 for Mr. Adlerz, $54,769 forMs. Sparks, and $64,978 for Mr. Kennedy. Although the CompensationCommittee determined that the performance targets under the plan for Mr.Mitchell had not been achieved, the committee in its sole discretion awardedMr. Mitchell a bonus of $28,017 for 2008. See “Executive Compensation — Grantsof Plan-Based Awards” for additional information on these awards.

 

In March 2009, the Compensation Committee establishedthe 2009 Corporate Key Management Incentive Plan for key management employees,including our executive officers.  The2009 plan provides for a cash bonus equal to a percentage of base salary uponachievement of financial indicators selected by our Compensation Committee,including achievement of applicable budgeted EBITDA, development and divisionperformance targets.  The amount paidunder the plan depends on the level of achievement.  For Messrs. Francis and Adlerz, thetarget bonus is 100% of base salary upon achievement of financialindicators.  For our other Named ExecutiveOfficers, the potential bonus payments for 2009 range from 45% to 50% of basesalary. The 2009 plan also provides for an additional cash bonus in the eventthat EBITDA for 2009 exceeds budgeted EBITDA. The potential additional bonuspayments for the Named Executive Officers for 2009 range up to a maximum of 68%to 152% of base salary.

 

Equity-Based Compensation

 

Equity-based compensation is intended to align the financialinterests of our executive officers with those of our stockholders. TheCompensation Committee believes that equity awards give our executives a stakein our long-term performance and align senior management with our achievementof longer-term financial objectives that enhance stockholder value.  The Compensation Committee considers the availablenumber of shares, but has no fixed formula for determining the awards to begranted.

 

Holdings maintains the 2007 Equity Incentive Plan, whichpermits grants of stock options and other equity-based awards.  On August 31, 2007, the Compensation Committeemade an initial award of options to purchase Holdings common stock under thisplan to our executive officers and certain other employees.  The exercise price of the options equaled thefair market value of Holdings common stock on the date of the grant.  The options contain both time and performancebased vesting components.  

 

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Vesting of the time vesting portion of the award isaccelerated in the event of a change in control. Vesting of performance vestingoptions is accelerated if certain conditions are satisfied in connection with aliquidity event.  See “ExecutiveCompensation — Potential Payments Upon Termination or Change in Control — OtherEffects of Termination of Employment or Change in Control.”

 

In 2008, options to purchase 87,386 shares of Holdings commonstock were granted to employees under the 2007 Equity Incentive Plan.  No options or other equity-based awards,however, were granted to our Named Executive Officers in 2008.

 

Other Benefits

 

In January 2005, our former Compensation Committeeadopted the SERP. The SERP is a nonqualified deferred compensation program forofficers and other key employees designated by the Compensation Committee. TheSERP is designed and administered in accordance with the requirements of theInternal Revenue Code to defer the taxation on compensation earned byparticipating employees. Participating employees can elect to defer up to 25%of their base salary and up to 50% of their year-end bonus. For employees whodefer at least 2% of their base salary, we will contribute 2% of the employee’sbase salary to the SERP. The Compensation Committee in its discretion may makeadditional contributions based on achievement of performance goals or othercompany objectives. Employee contributions pursuant to the SERP are 100% vestedat all times. Company contributions vest one year after contribution, andimmediately upon death, disability or change in control of the Company.Participating employees direct the investment of their accounts in mutual fundsor other appropriate investment media that we select. Assets invested pursuantto the SERP are designated for paying SERP benefits but are the property ofSymbion and are subject to the claims of our creditors.

 

The Named Executive Officers are also eligible to participatein our 401(k) plan. The 401(k) plan allows employees to contribute upto the limits imposed by the Internal Revenue Code. Pursuant to the 401(k) plan,we can make a discretionary matching contribution to the plan on behalf of eachemployee. Typically, our match of employee contributions has been equal to 25%of the first 6% of an employee’s base salary contributed to the plan.

 

Perquisites

 

We provide our executive officers with perquisites that webelieve are reasonable, competitive and consistent with our overall executivecompensation program and that are generally available to our other employees.These perquisites include medical, life and disability insurance.

 

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**EXECUTIVE COMPENSATION**

 

**SummaryCompensation Table**

 

The following table sets forth certain informationconcerning compensation paid or accrued for the last three years with respectto our Named Executive Officers — the Chief Executive Officer, the ChiefFinancial Officer and our three other most highly compensated executiveofficers:

 
| **Name and Principal Position** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Stock  Awards(1)** | ** ** | **Option  Awards(1)** | ** ** | **Non-Equity  Incentive Plan  Compensation(2)** | ** ** | **All Other   Compensation(3)** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|----------|------------|------------|------------|-----------|------------|----------------------|------------|-----------------------|------------|------------------------------------------------------|------------|-------------------------------------------|------------|-----------|------------|
| Richard E.  Francis, Jr.                  |       | 2008     |       | $          | 463,500    |      | $          | —               |       | —                |       | —                                               |       | $                                         | 231,750    |      | $          | 14,193 |   | $ | 709,443 |   |
| *Chairman of  the Board*                       |       | 2007     |       | 450,000    |       | —    |       | 641,404              |       | 1,691,893             |       | —                                               |       | 14,131                                    |       | 2,797,428 |       |
| *and Chief  Executive Officer*                 |       | 2006     |       | 377,640    |       | 112,557   |       | 152,233              |       | 829,353               |       | —                                               |       | 30,588                                    |       | 1,502,371 |       |
|                                           |       |     |       |       |       |      |       |                 |       |                  |       |                                                 |       |                                      |       |      |       |
| Clifford G. Adlerz                             |       | 2008     |       | 334,750    |       | —    |       | —               |       | —                |       | 167,375                                              |       | 11,414                                    |       | 513,539   |       |
| *President  and Chief*                         |       | 2007     |       | 325,000    |       | —    |       | 422,921              |       | 1,119,318             |       | —                                               |       | 11,228                                    |       | 1,878,467 |       |
| *Operating Officer*                            |       | 2006     |       | 288,648    |       | 86,032    |       | 95,146               |       | 575,487               |       | —                                               |       | 24,205                                    |       | 1,069,518 |       |
|                                           |       |     |       |       |       |      |       |                 |       |                  |       |                                                 |       |                                      |       |      |       |
| Teresa F. Sparks (4)                           |       |     |       |       |       |      |       |                 |       |                  |       |                                                 |       |                                      |       |      |       |
| *Senior Vice  President of*                    |       |     |       |       |       |      |       |                 |       |                  |       |                                                 |       |                                      |       |      |       |
| *Finance and  Chief*                           |       | 2008     |       | 219,078    |       | —    |       | —               |       | —                |       | 54,769                                               |       | 8,325                                     |       | 282,172   |       |
| *Financial Officer*                            |       | 2007     |       | 195,674    |       | —    |       | 84,000               |       | 260,896               |       | —                                               |       | 7,666                                     |       | 548,236   |       |
|                                           |       |     |       |       |       |      |       |                 |       |                  |       |                                                 |       |                                      |       |      |       |
| Kenneth C. Mitchell                            |       |     |       |       |       |      |       |                 |       |                  |       |                                                 |       |                                      |       |      |       |
| *Senior Vice  President of*                    |       |     |       |       |       |      |       |                 |       |                  |       |                                                 |       |                                      |       |      |       |
| *Mergers and  Acquisitions*                    |       | 2008     |       | 219,078    |       | 28,017    |       | —               |       | —                |       | —                                               |       | 8,636                                     |       | 255,731   |       |
| *and former  Chief Financial*                  |       | 2007     |       | 212,697    |       | —    |       | 205,313              |       | 511,756               |       | —                                               |       | 8,326                                     |       | 938,092   |       |
| *Officer*                                      |       | 2006     |       | 206,502    |       | 27,697    |       | 57,087               |       | 256,884               |       | —                                               |       | 20,043                                    |       | 568,213   |       |
|                                           |       |     |       |       |       |      |       |                 |       |                  |       |                                                 |       |                                      |       |      |       |
| R. Dale Kennedy                                |       |     |       |       |       |      |       |                 |       |                  |       |                                                 |       |                                      |       |      |       |
| *Senior Vice  President of*                    |       | 2008     |       | 207,930    |       | —    |       | —               |       | —                |       | 64,978                                               |       | 8,368                                     |       | 281,276   |       |
| *Management  Services and*                     |       | 2007     |       | 201,874    |       | —    |       | 151,800              |       | 366,940               |       | —                                               |       | 8,330                                     |       | 728,944   |       |
| *Secretary*                                    |       | 2006     |       | 195,994    |       | 20,446    |       | 38,058               |       | 169,156               |       | —                                               |       | 19,486                                    |       | 443,140   |       |
|                                                |            |          |            |            |            |           |            |                      |            |                       |            |                                                      |            |                                           |            |           |            |  |  |  |  |  |

 

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(1)          We account for the cost of stock-based compensation awardedunder the Symbion Long Term Incentive Plan and the Holdings 2007 EquityIncentive Plan in accordance with the Financial Accounting Standards BoardStatement of Financial Accounting Standards No. 123 (revised 2004) ShareBased Payment (“SFAS 123R”), under which the cost of equity awards to employeesis measured by the fair value of the awards on their grant date and is recognizedover the vesting periods of the awards, whether or not the awards had anyintrinsic value during that period. Amounts shown in the table above reflectthe dollar amount recognized for financial statement reporting purposes inaccordance with SFAS 123R of awards granted under the Long Term Incentive Planand the 2007 Equity Incentive Plan and thus may include amounts from awardsgranted in prior years.  However, becauseall awards under the Long Term Incentive Plan were vested and the plan was cancelledin connection with the Merger, amounts shown for 2008 reflect only amountsrecognized under the 2007 Equity Incentive Plan. The value of all Long TermIncentive Plan awards was based on the closing market price of our common stockon the date of grant. The 2007 Equity Incentive Plan awards were based on thevalue of $10 per share, the same as the value on the date of the Merger, whichwas determined to be the market value of our common stock based on generalvaluation principles.  No forfeituresoccurred with respect to our Named Executive Officers during 2006, 2007 or2008.

(2)          Represents awards under the 2008 Corporate Key ManagementIncentive Plan**.** See “Grants of Plan-Based Awards” below for additional information onthese awards.

(3)          Represents:

(a)          Company contributions to the Supplemental ExecutiveRetirement Plan for Mr. Francis of $22,658 for 2006, $9,001 for 2007 and$9,270 for 2008; Mr. Adlerz of $17,319 for 2006, $6,500 for 2007 and$6,695 for 2008; Ms. Sparks of $3,914 for 2007 and $4,382 for 2008; Mr. Mitchellof $12,390 for 2006, $4,255 for 2007 and $4,382 for 2008; and Mr. Kennedyof $11,760 for 2006, $4,038 for 2007 and $4,159 for 2008;;

(b)         Companycontributions to the 401(k) plan for Mr. Francis of $3,750 for 2006,$3,375 for 2007 and $3,375 for 2008; Mr. Adlerz of $3,750 for 2006, $3,375for 2007 and $3,375 for 2008; Ms. Sparks of $3,034 for 2007 and $3,064 for2008; Mr. Mitchell of $3,322 for 2006, $3,375 for 2007 and $3,375 for2008; and Mr. Kennedy of $3,611 for 2006, $3,375 for 2007 and $3,375 for2008;

(c)          Premiums we paid for term life insurance on behalf of eachNamed Executive Officer of $4,180****for 2006,$1,755 for 2007 and $1,548 for 2008 for Mr. Francis; $3,136****for 2006, $1,353 for 2007 and $1,344 for 2008 for Mr. Adlerz;$718 for 2007 and $879 for 2008 for Ms. Sparks; $4,331 for 2006, $969 for2007 and $879 for 2008 for Mr. Mitchell; and $4,115 for 2006, $917 for2007 and $834 for 2008 for Mr. Kennedy.

 

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(4)          Ms. Sparks was appointed Senior Vice President ofFinance and Chief Financial Officer effective August 23, 2007.  She replaced Mr. Mitchell on that date.

 

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**Grants ofPlan-Based Awards**

 

Thefollowing table provides information regarding non-equity incentive awardsgranted during 2008 to our Named Executive Officers under the 2008 CorporateKey Management Incentive Plan:

 
| ** **                   | ** ** | **Estimated Payouts Under Non-Equity  Incentive Plan Awards****(3)** | ** ** |
|------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **Threshold****(1)**                                                                          | ** ** | **Target****(2)** | ** ** | **Maximum** | ** ** |
| Richard E. Francis, Jr. |       | $                                                                                             | 231,750    |   | $ | 463,500 |   | $ | 463,500 |   |
| Clifford G. Adlerz           |       | 167,375                                                                                       |       | 334,750 |   | 334,750 |   |
| Teresa F. Sparks             |       | 54,769                                                                                        |       | 109,539 |   | 109,539 |   |
| Kenneth C. Mitchell (4)      |       | 49,293                                                                                        |       | 98,585 |   | 98,585 |   |
| R. Dale Kennedy              |       | 51,983                                                                                        |       | 103,965 |   | 103,965 |   |
|                              |            |                                                                                               |            |  |  |  |  |  |  |  |

 

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(1)          Threshold is based upon minimum level of bonus payout assumingbase level of performance is achieved. If base level is not reached, no bonuswould be paid under the plan.

(2)          Target is based upon the expectation of the potentialpayout of non-equity incentive awards when the incentive plan was established.

(3)          Actual awards made under the plan for performance in 2008are included in the Summary Compensation Table under “Non-Equity Incentive PlanCompensation”.

(4)          The Compensation Committee awarded Mr. Mitchell adiscretionary bonus outside of the 2008 Corporate Key Management Incentive Planthat was lower than the threshold amount under the plan.

 

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**Outstanding Equity Awards at Fiscal Year-End**

 

Thefollowing table provides certain information with respect to the NamedExecutive Officers regarding outstanding equity awards as of December 31,2008:

 
| ** **                   | ** ** | **Option Awards**                                                                       | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| **Name**                     | ** ** | **Number of  Securities  Underlying  Unexercised Options  (#) (Exercisable)** | ** ** | **Number of  Securities  Underlying  Unexercised Options  (#) (Unexercisable)** | ** ** | **Option Exercise   Price ($)** | ** ** | **Option Expiration  Date** | ** ** |
| Richard E. Francis, Jr. |       | 135,162                                                                                      | (1)        | — |   | $ | 1.50 |   | 5/16/12 |   |
|                         |       | 76,119                                                                                       | (1)        | — |   | $ | 1.50 |   | 12/10/13 |   |
|                         |       | 24,941                                                                                       | (1)        | — |   | $ | 1.50 |   | 12/10/14 |   |
|                         |       | 29,082                                                                                       | (1)        | — |   | $ | 1.50 |   | 1/05/15 |   |
|                         |       | 21,098                                                                                       | (1)        | — |   | $ | 1.50 |   | 1/18/14 |   |
|                         |       | 172,120                                                                                      | (2)        | 720,377 | (2) | $ | 10.00 |   | 8/31/17 |   |
|                         |       |                                                                                         |       |   |   |   |   |   |   |
| Clifford G. Adlerz           |       | 108,128                                                                                      | (1)        | — |   | $ | 1.50 |   | 5/16/12 |   |
|                         |       | 60,505                                                                                       | (1)        | — |   | $ | 1.50 |   | 12/10/13 |   |
|                         |       | 15,588                                                                                       | (1)        | — |   | $ | 1.50 |   | 12/10/14 |   |
|                         |       | 18,176                                                                                       | (1)        | — |   | $ | 1.50 |   | 1/05/15 |   |
|                         |       | 15,171                                                                                       | (1)        | — |   | $ | 1.50 |   | 1/18/14 |   |
|                         |       | 114,747                                                                                      | (3)        | 490,883 | (3) | $ | 10.00 |   | 8/31/17 |   |
|                         |       |                                                                                         |       |   |   |   |   |   |   |
| Teresa F. Sparks             |       | 1,729                                                                                        | (1)        | — |   | $ | 1.50 |   | 12/10/13 |   |
|                         |       | 6,361                                                                                        | (1)        | — |   | $ | 1.50 |   | 1/05/15 |   |
|                         |       | 2,982                                                                                        | (1)        | — |   | $ | 1.50 |   | 1/18/14 |   |
|                         |       | 20,608                                                                                       | (4)        | 114,328 | (4) | $ | 10.00 |   | 8/31/17 |   |
|                         |       |                                                                                         |       |   |   |   |   |   |   |
| Kenneth C. Mitchell          |       | 9,352                                                                                        | (1)        | — |   | $ | 1.50 |   | 12/10/14 |   |
|                         |       | 10,905                                                                                       | (1)        | — |   | $ | 1.50 |   | 1/05/15 |   |
|                         |       | 4,741                                                                                        | (1)        | — |   | $ | 1.50 |   | 1/18/14 |   |
|                         |       | 20,608                                                                                       | (4)        | 114,328 | (4) | $ | 10.00 |   | 8/31/17 |   |
|                         |       |                                                                                         |       |   |   |   |   |   |   |
| R. Dale Kennedy              |       | 9,066                                                                                        | (1)        | — |   | $ | 1.50 |   | 5/16/12 |   |
|                         |       | 20,608                                                                                       | (4)        | 114,328 | (4) | $ | 10.00 |   | 8/31/17 |   |

 

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(1)          Options to purchase Holdings common stock that werereceived by the Named Executive Officers in exchange for Symbion options thatwere rolled over in connection with the Merger.

(2)          Effective August 31, 2007, Mr. Francis received agrant of options to purchase 892,497 shares of Holdings common stock, including430,302 time vesting options and 462,195 performance vesting options. The timevesting options vest 20% per year on December 31 beginning December 31,2007. Performance vesting options vest upon a liquidity event based on the extentto which an internal rate of return (“IRR”) is achieved by Crestview.

(3)          Effective August 31, 2007, Mr. Adlerz received agrant of options to purchase 605,630 shares of Holdings common stock, including286,868 time vesting options and 318,762 performance vesting options. The timevesting options vest 20% per year on December 31 beginning December 31,2007. Performance vesting options vest upon a liquidity event based on the extentto which an indicated IRR is achieved by Crestview.

(4)          Effective August 31, 2007, the Named Executive Officerreceived a grant of options to purchase 134,936 shares of Holdings commonstock, including 51,521 time vesting options and 83,415 performance vestingoptions. The time vesting options vest 20% per year on December 31beginning December 31, 2007.Performance vesting options vest upon aliquidity event based on the****extent towhich an indicated IRR is achieved by Crestview.

 

**Option Exercises and Stock Vested**

 

During 2008, the Named Executive Officers did not exerciseany stock options.  In addition, norestricted stock or similar awards were outstanding during 2008.

 

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**Nonqualified Deferred Compensation**

 

Thefollowing table shows the activity during 2008 and the aggregate balances heldby each of the Named Executive Officers at December 31, 2008 under our SERP:

** **
| **Name**                     | ** ** | **Executive Contributions  in Last Fiscal Year** | ** ** | **Registrant Contributions  in Last Fiscal Year****(1)** | ** ** | **Aggregate Earnings  (Losses)in Last Fiscal  Year** | ** ** | **Aggregate Balance at  Last Fiscal Year End** | ** ** |
|------------------------------|------------|----------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Richard E. Francis, Jr. |       | $                                                                    | 12,512     |                                                                         | $          | 9,270                                                               |       | $                                                                       | (64,432    | ) | $ | 86,768 |   |
| Clifford G. Adlerz           |       | 6,695                                                                |       | 6,695                                                                        |       | (17,438                                                             | )          | 51,166                                                                  |       |
| Teresa F. Sparks             |       | 25,150                                                               |       | 4,382                                                                        |       | (27,421                                                             | )          | 50,010                                                                  |       |
| Kenneth C. Mitchell          |       | 4,382                                                                |       | 4,382                                                                        |       | (23,192                                                             | )          | 37,430                                                                  |       |
| R. Dale Kennedy              |       | 9,405                                                                |       | 4,159                                                                        |       | (23,590                                                             | )          | 30,388                                                                  |       |
|                              |            |                                                                      |            |                                                                              |            |                                                                     |            |                                                                         |            |  |  |  |  |

 

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(1)          Amounts in this column are also reported in the “All OtherCompensation” column of the Summary Compensation Table.

 

See “CompensationDiscussion and Analysis — Components of Executive Compensation — Other Benefits”for additional information about the SERP.

 

**Potential Payments UponTermination or Change in Control**

 

***Employment Agreements.*** Messrs. Francis andAdlerz entered into new employment agreements with us which became effective onAugust 23, 2007 upon the consummation of the Merger. The initial term ofeach of the employment agreements is three years, which is automaticallyextended so that the term will be three years until terminated. We are able toterminate each employment agreement for cause, including (but not limited to)the executive’s conviction of a felony and gross negligence or internalmisconduct in the performance of executive’s duties to the extent it causesdemonstrable harm to us. In addition, either party is able to terminate theemployment agreement at any time by giving prior written notice to the otherparty. However, we would be obligated to pay the executive a severance benefitif we terminated the executive’s employment without cause or if the executiveterminated his employment upon the occurrence of certain events specified inthe agreement, including (but not limited to) a change in control or ourmaterial breach of the agreement which is not cured promptly. The severancebenefit is generally equal to three times the executive’s highest base salaryand the incentive bonus amount that would be paid for the current year as ifthe incentive bonus performance goals were fully achieved. Upon a terminationof employment as a result of the executive’s disability, we will pay theexecutive contractual disability benefits. If the executive receives severancepayments following a change in control of Symbion that are subject to tax underSection 4999 of the Internal Revenue Code, we will pay additional amountsto offset the effect of such taxes on the executive. Each of the employmentagreements also includes a covenant not to compete in which the executiveagrees that, during the term of the employment agreement and for a period ofone year thereafter, he will not own or work for any other company that ispredominantly engaged in the ownership and management of surgery centers.

 

***Severance Plan****.*We adopted an ExecutiveChange in Control Severance Plan in December 1997, which currentlyprovides for severance benefits for certain senior level employees, includingthree of the Named Executive Officers, Teresa F. Sparks, Kenneth C. Mitchelland R. Dale Kennedy. Eligible individuals are those identified in the severanceplan and whose employment is terminated in connection with a change in thecontrol of the Company, as defined in the severance plan, and who are notoffered employment by us or a successor employer that is substantiallyequivalent to or better than the position held with us immediately prior to thechange in control or such position is not maintained for at least 12 monthsthereafter. The benefits provided to our eligible Named Executive 

 

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Officers are cashcompensation equal to base pay and bonus for 12 months and participation inmedical, life, disability and similar benefit plans that are offered to ouractive employees or those of its successor for a period of 12 months. Cashbenefits are paid in a single lump sum within 30 days following termination.

 

***Other Effects of Termination of Employmentor Change in Control****.*In addition to payments pursuant to the employment agreements and the ExecutiveChange in Control Severance Plan described above, upon a termination ofemployment or change in control:

 

*Supplemental Executive Retirement Plan* — Under the SERP, deferralsmade by an executive officer are fully vested and nonforfeitable at all times.If the executive officer’s employment ends due to disability, death, retirementor a change in control, the executive officer’s entire account, includingearnings, will be fully vested. If the executive officer’s employment ends dueto some event other than disability, death, retirement or change in control,the executive officer forfeits all Company contributions that were made lessthan one year prior to the date of termination.

 

*401(k) Plan* — Under our 401(k) plan, contributions made by anexecutive officer are fully vested and nonforfeitable at all times. Matchingcontributions that we make for the benefit of an executive officer vest basedon the years of service of the executive officer. Each of our current executiveofficers has been an employee for at least five years and, therefore, allcompany contributions under our 401(k) plan on behalf of such officers isfully vested and nonforfeitable. There is no provision for additional benefitson a change in control.

 

*Stock Option Awards* — Options may be subject to forfeiture depending on thenature of the terminating event.  In noevent shall an option be exercisable after the expiration date of the option.Upon a change in control or liquidity event, Named Executive Officers havespecial exercise and vesting rights. These special rights also apply to otheroption holders.

 

Death or Disability.  In the event of death or disability of aNamed Executive Officer, the executive officer has 12 months to exercise anyvested options.

 

Termination With Cause.  If a Named Executive Officer’s employment isterminated with cause, then all options held by such officer shall immediatelybe forfeited and cancelled without any payment or consideration being payableto such officer.

 

Other Termination by the Company orResignation. Except in the event of death or disability, an executiveofficer will have the right to exercise all options for three months followingresignation or termination of employment by the Company that is not for cause.The right to exercise is limited to the options that have become vested as ofthe date of termination.

 

Change in Control and LiquidityEvents. As described above under “Compensation Discussion andAnalysis — Components of Executive Compensation — Equity-Based Compensation,”the Company has awarded stock options to executive officers that become vestedover a period of time provided that the executive officer continues to beemployed by us and options that become vested upon achievement of performancegoals. The effect of a change in control varies for time-vesting options andoptions that vest upon performance.

 

*Time Vesting Options*.  In the event of a Change in Control (asdefined below) that occurs prior to termination of employment, whether or notthe vesting requirements set forth in any form of time vesting option agreementhave been satisfied, all such time vesting options that are outstanding at thetime of the Change in Control shall become fully vested and exercisableimmediately prior to the Change in Control event.

 

A “Change in Control” is deemed tohave occurred (i) in the event that any person, entity or group other thanCrestview and its related funds holds (other than pursuant to a registeredinitial public offering) Holdings stock representing at least 50% of thecombined voting power of all outstanding voting equity securities and (ii) inthe event of an asset sale by or liquidation or dissolution of Holdings.

 

*Performance Options*. Options thatvest upon performance become vested only upon a liquidity event that occursprior to termination of employment. Executive officers have been awarded both “standard”performance vesting options and additional “alternative” performance vestingoptions.

 

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*Change in Control or Liquidity Event Rights onTermination of Employment.*Termination of an executive officer’s employment by the Company withoutcause or upon a resignation for Good Reason will result in the right toexercise options as follows: (i) if termination occurs within 12 monthsfollowing a Change in Control, the executive officer will be able to fullyexercise the time-vesting options and, to the extent that the performanceconditions are satisfied, performance vesting options for three monthsfollowing the date of  event; and (ii) iftermination occurs within 12 months prior to the execution of an agreement thatresults in a liquidity event, the executive officer will be able to exercisethe time vesting options to the extent that they were vested as of thetermination of employment and, to the extent that the performance conditionsare satisfied, performance vesting options for three months following the dateof a liquidity event; provided, however, that the number of shares that can beacquired on exercise of the performance vesting option will be reduced byone-half if termination of employment is more than six months prior toexecution of such agreement.

 

As it relates to Messrs. Francisand Adlerz, a termination of employment by the executive officer for “GoodReason” occurs following (a) any material breach by the Company of anymaterial provision of the****employment agreement;(b) a reduction in base salary or target bonus opportunity; (c) amaterial diminution in title or level of responsibility, or change in office orreporting relationship; (d) a transfer of the executive’s primaryworkplace by more than 35 miles; (e) the failure of the executive to beelected or the executive****ceases to be amember of the board of Holdings****or the boardof Symbion (except for cause); or (g) the executive’s resignation for anyreason within 120 days following a Change in Control.

 

For all other NamedExecutive Officers, “Good Reason” means, during the 12 months following aChange in Control,****(a) areduction in base salary or target bonus opportunity in effect immediatelyprior to the Change in Control; (b) a material diminution in level ofresponsibility or, with respect to Ms. Sparks, a material diminution intitle in effect immediately prior to the Change in Control;**(c) amaterial reduction in the aggregate value of deferred compensation and healthand welfare benefits that were provided immediately prior to the Change inControl; or (d) a transfer of the executive officer’s primary workplace bymore than 50 miles.

 

***Potential Payments***. The following table shows the amountsthat each Named Executive Officer would have received if the Named ExecutiveOfficer’s employment had been terminated for the reasons indicated effective December 31,2008:

 

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| **Name**                                                                | ** ** | **Cash  Compensation** | ** ** | **Accelerated  Vesting of  Stock Options** | ** ** | **Benefits** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|--------------|------------|-----------|------------|
| **Richard E. Francis, Jr.**                                        |       |                   |       |                                                 |       |         |       |      |       |
| Termination for cause, voluntary termination or retirement              |       | $                      | —     |                                                 | $          | —       |       | $         | 35,654     | (1) | $ | 35,654 |   |
| Death                                                                   |       | —                 |       | —                                               |       | 35,654       | (1)        | 35,654    |       |
| Disability                                                              |       | 682,875                | (2)        | —                                               |       | 50,674       | (3)        | 733,549   |       |
| Termination by the Company without cause or by the NEO for Good  Reason |       | 2,781,000              | (4)        | —                                               |       | 50,674       | (3)        | 2,831,674 |       |
| Change in Control                                                       |       | 3,668,343              | (5)        | —                                               | (6)        | 50,674       | (3)        | 3,791,017 |       |
|                                                                    |       |                   |       |                                                 |       |         |       |      |       |
| **Clifford G. Adlerz**                                                  |       |                   |       |                                                 |       |         |       |      |       |
| Termination for cause, voluntary termination or retirement              |       | —                 |       | —                                               |       | 25,750       | (1)        | 25,750    |       |
| Death                                                                   |       | —                 |       | —                                               |       | 25,750       | (1)        | 25,750    |       |
| Disability                                                              |       | 393,188                | (2)        | —                                               |       | 40,566       | (3)        | 433,754   |       |
| Termination by the Company without cause or by the NEO for Good  Reason |       | 2,008,500              | (4)        | —                                               |       | 40,566       | (3)        | 2,049,066 |       |
| Change in Control                                                       |       | 2,642,427              | (5)        | —                                               | (6)        | 40,566       | (3)        | 2,682,993 |       |
|                                                                    |       |                   |       |                                                 |       |         |       |      |       |
| **Teresa F. Sparks**                                                    |       |                   |       |                                                 |       |         |       |      |       |
| Termination for cause, voluntary termination or retirement              |       | —                 |       | —                                               |       | 16,853       | (1)        | 16,853    |       |
| Death                                                                   |       | —                 |       | —                                               |       | 16,853       | (1)        | 16,853    |       |
| Disability                                                              |       | —                 | (2)        | —                                               |       | 16,853       | (1)        | 16,853    |       |
| Termination by the Company without cause or by the NEO for Good  Reason |       | —                 |       | —                                               |       | 16,853       | (1)        | 16,853    |       |
| Change in Control                                                       |       | 328,617                | (7)        | —                                               | (6)        | 31,204       | (3)        | 359,821   |       |
|                                                                    |       |                   |       |                                                 |       |         |       |      |       |
| **Kenneth C. Mitchell**                                                 |       |                   |       |                                                 |       |         |       |      |       |
| Termination for cause, voluntary termination or retirement              |       | —                 |       | —                                               |       | 16,853       | (1)        | 16,853    |       |
| Death                                                                   |       | —                 |       | —                                               |       | 16,853       | (1)        | 16,853    |       |
| Disability                                                              |       | —                 | (2)        | —                                               |       | 16,853       | (1)        | 16,853    |       |
| Termination by the Company without cause or by the NEO for Good  Reason |       | —                 |       | —                                               |       | 16,853       | (1)        | 16,853    |       |
| Change in Control                                                       |       | 317,663                | (7)        | —                                               | (6)        | 31,204       | (3)        | 348,867   |       |
|                                                                    |       |                   |       |                                                 |       |         |       |      |       |
| **R. Dale Kennedy**                                                     |       |                   |       |                                                 |       |         |       |      |       |
| Termination for cause, voluntary termination or retirement              |       | —                 |       | —                                               |       | 15,995       | (1)        | 15,995    |       |
| Death                                                                   |       | —                 |       | —                                               |       | 15,995       | (1)        | 15,995    |       |
| Disability                                                              |       | —                 | (2)        | —                                               |       | 15,995       | (1)        | 15,995    |       |
| Termination by the Company without cause or by the NEO for Good  Reason |       | —                 |       | —                                               |       | 15,995       | (1)        | 15,995    |       |
| Change in Control                                                       |       | 311,895                | (7)        | —                                               | (6)        | 26,493       | (3)        | 338,388   |       |
|                                                                         |            |                        |            |                                                      |            |              |            |           |            |  |  |  |  |

 

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| (1) |   | Represents accrued vacation only.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | For Messrs. Francis and Adlerz, this  represents a disability benefit annual payment equal to 75% of base salary  for a maximum period of 36 months, less the amount that is provided under our  disability plan that is generally available to all salaried employees. Our  other Named Executive Officers are only eligible for disability benefits  under our plan that are available to all salaried employees.                                                                                                                                                                                                          |
| (3) |   | Includes accrued vacation and the premiums  for medical, life and disability insurance benefits for the period of time  the Named Executive Officer is eligible for continuation coverage under the  Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) in accordance  with the Named Executive Officer’s employment agreement.                                                                                                                                                                                                                                                                                  |
| (4) |   | Represents a severance payment equal to  (a) three times the Named Executive Officer’s base salary plus  (b) three times the target cash bonus amount for 2008 in accordance with  the Named Executive Officer’s employment agreement.                                                                                                                                                                                                                                                                                                                                                                        |
| (5) |   | Includes the amount described in footnote 4  above plus a “gross up” payment of all excise taxes imposed under  Section 4999 of the Code and any federal income and excise taxes that  are payable as a result of any reimbursements for Section 4999 excise  taxes in accordance with the Named Executive Officer’s employment agreement.  The gross up amount is $887,343 for Mr. Francis and $633,927 for  Mr. Adlerz. This calculation assumes termination of employment.                                                                                                                  |
| (6) |   | As discussed above, all unvested time vesting  options held by executive officers vest upon a Change in Control. In  addition, if specified internal rates of return are achieved upon a liquidity  event, then performance vesting options held by executive officers would vest  in connection. The fair market value of Holdings common stock on  December 31, 2008, as determined under general valuation principles, was  less than the exercise price of the unvested options. Therefore, for purposes  of this table, no value would have been realized for accelerated vesting of  options upon a Change in Control. |
| (7) |   | Represents payment under the Executive Change  in Control Severance Plan of one year of annual pay, which includes base pay  and targeted bonus of 50% of base pay for Ms. Sparks and  Mr. Kennedy and 45% for Mr. Mitchell.                                                                                                                                                                                                                                                                                                                                                                                       |

 

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Thetable above does not include information about vesting of Company contributionsunder our 401(k) plan or SERP. Information about such plans can be foundunder “Other Effects of Termination of Employment or Change in Control” and “NonqualifiedDeferred Compensation.”

 

**Director Compensation**

 

None of our directors received compensation for service as amember of our (or Holdings) board or board committees for 2008. They arereimbursed for any expenses incurred in connection with their service.

 

**CompensationCommittee Interlocks and Insider Participation**

 

Following the Merger, the Board of Directors of Holdings acted as ourCompensation Committee.  Beginning in February 2008,the Board of Directors of Holdings appointed Robert V. Delaney and Thomas S.Murphy, Jr., Board representatives of Crestview, as the CompensationCommittee.  None of the members of theCompensation Committee have at any time been our officer or employee nor haveany of the members had any relationship with us requiring disclosure except forthe transactions with Crestview described in Item 13. “Certain Relationshipsand Related Transactions, and Director Independence.”

 

**CompensationCommittee Report**

 

The CompensationCommittee has reviewed and discussed the Compensation Discussion and Analysiswith management.  Based on our review anddiscussion with management, we have recommended to the Board of Directors thatthe Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

 

Compensation Committee

 

Robert V. Delaney

Thomas S. Murphy, Jr.

 

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**Item 12.  *SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters***

 

All of our capitalstock is owned by our parent company, Holdings. The following table presentsinformation with respect to the beneficial ownership of Holdings’ common stockas of March 20, 2009 by (a) any person or group who beneficially ownsmore than five percent of Holdings common stock, (b) each of our directorsand named Executive Officers and (c) all directors and executive officersas a group.  The percentage sharesoutstanding provided in the table are based on 24,816,623 shares of Holdings’common stock, par value $0.01 per share, outstanding as of March 20, 2009.

 
| **Name of Beneficial Holder**                     | ** ** | **Number of  Shares(1)** | ** ** | **Percent of  Class** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| Crestview  Funds(2)                                              |       | 14,500,000                    |       | 58.4                       | %          |
| The Northwestern  Mutual Life Insurance Company(3)               |       | 4,000,000                     |       | 16.1                       |       |
| Trident IV,  L.P.(4)                                             |       | 3,000,000                     |       | 12.1                       |       |
| Banc of America  Capital Investors V, L.P.(5)               |       | 2,500,000                     |       | 10.1                       |       |
| Richard E.  Francis, Jr.(6)(7)                              |       | 685,081                       |       | 2.7                        |       |
| Clifford G.  Adlerz(6)(8)                                        |       | 422,381                       |       | 1.7                        |       |
| Teresa F.  Sparks(6)(9)                                          |       | 31,680                        |       | *                          |       |
| Kenneth C.  Mitchell(6)(10)                                      |       | 45,606                        |       | *                          |       |
| R. Dale  Kennedy(6)(11)                                          |       | 29,674                        |       | *                          |       |
| Thomas S.  Murphy, Jr.(12)                                  |       | 0                             |       | *                          |       |
| Robert V.  Delaney(12)                                           |       | 0                             |       | *                          |       |
| Quentin Chu(12)                                                  |       | 0                             |       | *                          |       |
| Kurt E. Bolin(4)                                                 |       | 0                             |       | *                          |       |
| All directors  and executive officers as a group (9 persons)(13) |       | 1,214,422                     |       | 4.7                        | %          |

 

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*           Lessthan one percent.

 
| (1)  |   | Beneficial  ownership includes voting or investment power with respect to securities and  includes the shares issuable pursuant to options that are exercisable within  60 days of March 20, 2009. Shares issuable pursuant to options are  deemed outstanding in computing the percentage held by the person holding the  options but are not deemed outstanding in computing the percentage held by  any other person.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Consists  of shares held directly by Crestview Partners, L.P. and certain related  investors (the “Crestview Funds”). The investment committee of Crestview  Partners GP, L.P., the general partner of each fund, makes  investment decisions on behalf of the investment funds and Barry S. Volpert  serves as the chairman of the investment committee. Mr. Volpert has the  right to designate, in his discretion, additional persons to serve on the  investment committee of Crestview Partners GP, L.P. and, therefore,  could be deemed to have beneficial ownership of all the shares of common  stock held by the Crestview Funds. However, Mr. Volpert disclaims  beneficial ownership of all such shares. The composition of the investment  committee of Crestview Partners GP, L.P. changes from time to time.  See “Certain Relationships and Related Party Transactions — Shareholder Agreement.”  The address of Crestview Partners GP, L.P. is 667 Madison Avenue,  New York, New York 10021. |
| (3)  |   | Includes  shares held directly by The Northwestern Mutual Life Insurance Company and an  affiliated fund. The address of The Northwestern Mutual Life Insurance  Company is 720 East Wisconsin Avenue, Milwaukee, WI 53202.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)  |   | Includes  shares held directly by Trident IV, L.P. and an affiliated fund (the  “Trident IV Funds”). Mr. Bolin is a principal of Stone Point  Capital LLC, which serves as the investment manager of the Trident IV  Funds. Mr. Bolin disclaims beneficial ownership of all such shares,  except to the extent of any pecuniary interest therein. The principal address  for the Trident IV Funds is c/o Walkers SPV Limited, at Walker House,  87 Mary Street, George Town, Grand Cayman KY1-9002, Cayman Islands. The  principal address for Stone Point Capital LLC is 20 Horseneck Lane,  Greenwich, Connecticut 06830.                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (5)  |   | The  address of Banc of America Capital Investors V, L.P. is 100 North Tyron  Street, Charlotte, North Carolina, 28255.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (6)  |   | The  address of each of Messrs. Francis, Adlerz, Mitchell and Kennedy and  Ms. Sparks is 40 Burton Hills Boulevard, Suite 500, Nashville,  Tennessee 37215.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (7)  |   | Includes  options to purchase 458,524 shares which were exercisable as of  March 20, 2009 or become exercisable within 60 days following  March 20, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (8)  |   | Includes  options to purchase 332,315 shares which were exercisable as of  March 20, 2009 or become exercisable within 60 days following  March 20, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (9)  |   | Includes  options to purchase 31,680 shares which were exercisable as of March 20,  2009 or become exercisable within 60 days following March 20, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (10) |   | Includes  options to purchase 45,606 shares which were exercisable as of March 20,  2009 or become exercisable within 60 days following March 20, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (11) |   | Includes  options to purchase 29,674 shares which were exercisable as of March 20,  2009 or become exercisable within 60 days following March 20, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (12) |   | The  address of each of Messrs. Murphy, Delaney and Chu is 667 Madison  Avenue, New York, New York 10021.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (13) |   | Includes  options to purchase 897,799 shares which were exercisable as of  March 20, 2009 or become exercisable within 60 days following  March 20, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

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**Equity Compensation Plan Information**

 

The following table provides information as of December 31,2008 with respect to compensation plans (including individual compensationarrangements) under which shares of the common stock of Holdings****are authorized for issuance.

 
| **Plan category**                                      | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average exercise  price of outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities reflected  in second column)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                                                                                                                           | ** ** | ** **                                                                                                      | ** ** | ** **                                                                                                                                                                                                          | ** ** |
| Equity  compensation plans approved by security holders (1) |       | 3,442,124                                                                                                                                            |       | $                                                                                                               | 8.49       |                                                                                                                                                                                                                | 261,426    |   |
| Equity  compensation plans not approved by security holders |       | —                                                                                                                                               |       | —                                                                                                          |       | —                                                                                                                                                                                                              |       |
|                                                        |       |                                                                                                                                                 |       |                                                                                                            |       |                                                                                                                                                                                                                |       |
| Total                                                       |       | 3,442,124                                                                                                                                            |       | $                                                                                                               | 8.49       |                                                                                                                                                                                                                | 261,426    |   |

 

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| (1) |   | Represents stock options  granted or issuable under the Holdings 2007 Equity Incentive Plan. See  additional disclosure at Item 8. “Financial Statements and Supplementary Data  - Note 10. Stock Options.” |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Item 13.  *CertainRelationships and Related Transactions, and Director Independence***

 

**FinancialAdvisory Fees and Agreements**

 

Holdings paid allfees and expenses of the Crestview funds in connection with the Merger and therelated financings. The aggregate amount of all fees payable to the Crestviewfunds and their affiliates in connection with the Merger and the relatedfinancing is approximately $6.3 million, plus out-of-pocket expenses. Wehave also agreed to pay an affiliate of the Crestview funds an annual advisoryfee of $1.0 million and will reimburse such affiliate for all relateddisbursements and out-of-pocket expenses pursuant to a management agreement.The agreement also provides that we will pay an affiliate of the Crestviewfunds a fee in connection with certain subsequent financing, acquisition,disposition and change of control transactions based on a percentage of thegross transaction value of any such transaction. The management agreementincludes customary exculpation and indemnification provisions in favor of theCrestview funds and their affiliates.

 

**ShareholdersAgreement**

 

Holdings, theCrestview funds, the other co-investors and each of our management shareholdersentered into a shareholders agreement at the closing of the Merger.

 

The shareholdersagreement provides that Messrs. Francis and Adlerz have the right to beappointed as directors of Holdings (with Mr. Francis as chairman) so longas they are employed in their current positions. Stone Point, which is one ofthe co-investors, is able to appoint one of our directors and the Crestviewfunds have the right to select all of the remaining members of the board ofdirectors of Holdings. In addition, Holdings is required to obtain the consentof the Crestview funds before taking certain significant actions.

 

The shareholdersagreement restricts transfers of shares of Holdings common stock by theshareholders who are party to the agreement, except to permitted transfereesand subject to various other exceptions, and also grants certain tag-along,drag-along and pre-emptive rights, as well as rights of first offer uponcertain sales, to the shareholders. The agreement also grants Holdings theright to purchase equity from management shareholders upon their departure fromthe company at the lesser of fair market value and cost, if the shareholder hasbeen terminated for cause, or at fair market value in other cases.

 

Finally, theagreement provides customary demand and piggy-back registration rights to theshareholders.

 

**Policiesand Procedures with Respect to Related Party Transactions**

 

The charter of the Audit and Compliance Committeerequires that the Audit and Compliance Committee approve any proposed related-partytransactions and review with management any disclosure relating to related

 

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party transactions and potential conflicts ofinterest. “Related-party transactions” include, but are not limited to, thosetransactions described in Item 404(a) of Regulation S-K under the federalsecurities laws.

 

**Director Independence**

 

Wedo not have securities listed on a national securities exchange or in anautomated inter-dealer quotation system of a national securities associationand, as such, are not subject to the director independence requirements of suchan exchange or association.  In addition, based on the listingstandards of The NASDAQ Stock Market, the national securities exchange uponwhich our common stock was traded prior to the Merger, we would be a “controlledcompany” within the meaning of Rule 4350(c)(5) of the NasdaqMarketplace rules because Crestview and its affiliates own amajority of the equity of Holdings, and Holdings owns allof our common stock.  As a controlled company, we would qualify forexemptions from certain NASDAQ corporate governance rules, including therequirement that the board of directors be composed of a majority ofindependent directors.

 

**Item 14.  *PrincipalAccountant Fees and Services***

 

The following tablepresents fees for professional services rendered by Ernst & Young LLPfor the audit of our annual financial statements for 2008 and 2007, and feesbilled for other services rendered by Ernst & Young LLP for 2008 and2007:

 
| ** **          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit Fees          |       | $        | 1,056,523  |     | $          | 1,207,576 |   |
| Audit-Related  Fees |       | 28,500   |       | 21,646   |       |
| Tax Fees            |       | 602,540  |       | 634,636  |       |
| All Other Fees      |       | —   |       | —   |       |
| Total               |       | $        | 1,687,563  |     | $          | 1,863,858 |   |

 

***Audit Fees. ***Thesefees were primarily for professional services rendered by Ernst &Young LLP in connection with the audit of our consolidated annual financialstatements.  The fees also include anaudit of and report on internal control over financial reporting, as well asservices related to Securities and Exchange Commission filings.

 

***Audit-Related Fees****. *For 2008, these fees were forservices rendered by Ernst & Young LLP related to our Toggle Noteoffering and a subscription to online accounting services. For 2007, these feeswere for services rendered by Ernst & Young LLP for assistance withimplementing requirements under FASB Interpretation No. 48, as well as theMerger.  Also in 2007, these fees relatedto a subscription to online accounting services.

 

***Tax Fees. ***Thesefees were for services rendered by Ernst & Young LLP for complianceregarding tax filings and for other tax planning and tax advice services.

 

***All Other Fees. ***For2008 and 2007, Ernst & Young LLP did not render any other professionalservices or bill any fees for other services not included within Audit Fees,Audit-Related Fees or Tax Fees.

 

**Pre-approvalof Auditor Services**

 

The charter of the Auditand Compliance Committee provides that the Audit and Compliance Committee mustpre-approve all services to be provided by the independent auditors prior tothe commencement of work.  Unless thespecific service has been pre-approved with respect to that year, the Audit andCompliance Committee must approve the permitted service before the independentauditors are engaged to perform it.  For2008, all services provided by Ernst & Young LLP were pre-approved bythe Audit and Compliance Committee.

 

All non-audit serviceswere reviewed with the Audit and Compliance Committee, which concluded that theprovision of such services by Ernst & Young LLP was compatible withthe maintenance of the accounting firm’s independence in the conduct of itsauditing functions.

 

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**PART IV**

 

**Item 15.  *Exhibitsand Financial Statement Schedules***

 

**(a) The following documents arefiled as part of this report:**

 

***(1)******         Consolidated Financial Statements***

 

The consolidatedfinancial statements required to be included in Part II, Item 8, areindexed on Page F-1 and submitted as a separate section of this report.

 

***(2)******         ConsolidatedFinancial Statement Schedules***

 

All schedules are omittedbecause they are not applicable or not required, or because the requiredinformation is included in the consolidated financial statements or notes inthis report.

 

***(3)******         Exhibits***:

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2       |       | Agreement  and Plan of Merger, dated as of April 24, 2007, by and among Symbol Acquisition,  L.L.C., Symbol Merger Sub, Inc. and Symbion, Inc. (a)                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1     |       | Amended  Certificate of Incorporation of Symbion, Inc. (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2     |       | Amended  and Restated Bylaws of Symbion, Inc. (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1     |       | Indenture,  dated as of June 3, 2008, among Symbion, Inc., the Guarantors named  therein and U.S. Bank National Association, as Trustee (b)                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2     |       | Form of  Notes (included in Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.3     |       | Registration  Rights Agreement, dated as of June 3, 2007, among Symbion, Inc.,  the subsidiaries of Symbion, Inc. party thereto as guarantors, and  Merrill, Lynch, Pierce, Fenner & Smith Incorporated, Banc of America  Securities LLC and Greenwich Capital Markets, Inc. (b)                                                                                                                                                                                                                                                                            |
| 4.4     |       | First  Supplemental Indenture, dated as of September 18, 2008 among  Symbion, Inc., the Guarantors named therein and U.S. Bank National  Association, as Trustee (b)                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1    |       | Employment  Agreement, dated August 23, 2007, between Symbion, Inc. and Richard  E. Francis, Jr.(b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2    |       | Employment  Agreement, dated August 23, 2007, between Symbion, Inc. and  Clifford G. Adlerz (b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3    |       | Credit  Agreement, dated as of August 23, 2007, among Symbol Holdings  Corporation, Symbol Merger Sub, Inc., the Lenders party thereto from  time to time, Merrill Lynch Capital Corporation as Administrative Agent and  Collateral Agent, Bank of America, N.A. as Syndication Agent, The Royal Bank  of Scotland PLC and Fifth Third Bank as Co-Documentation Agents, and  Merrill Lynch & Co., Merrill, Lynch, Pierce, Fenner &  Smith Incorporated and Banc of America Securities LLC as Joint Lead  Arrangers and Joint Lead Bookrunners (b) |
| 10.4    |       | Lease  Agreement, dated June 26, 2001, between Burton Hills IV Partners and  Symbion, Inc. (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5    |       | First  Amendment to Lease Agreement, dated February 9, 2004, between Burton  Hills IV Partners and Symbion, Inc. (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6    |       | Symbion  Holdings Corporation 2007 Equity Incentive Plan (b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7    |       | Symbion, Inc.  Executive Change in Control Severance Plan (b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8    |       | Symbion  Holdings Corporation Compensatory Equity Participation Plan (b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.9    |       | Shareholders  Agreement, dated as of August 23, 2007, among Symbion Holdings  Corporation and the stockholders of Symbion Holdings Corporation and other  persons named therein (b)                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.10   |       | Advisory  Services and Monitoring Agreement, dated as of August 23, 2007, among  Symbion, Inc., Symbion Holdings Corporation and Crestview Advisors,  L.L.C. (b)                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.11   |       | Form of  Employee Contribution Agreement (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12   |       | Symbion, Inc.  Supplemental Executive Retirement Plan (e) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.13   |       | 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. (f)                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14   |       | Interest  Rate Swap Agreement, dated October 31, 2007, between Symbion, Inc.  and Merrill Lynch Capital Services, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 21      |       | Subsidiaries  of Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1    |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2    |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1    |       | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2    |       | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

----

(a)          Incorporated by reference to exhibits filed with the Registrant’sCurrent Report on Form 8-K filed April 24, 2007 (File No. 000-50574)

(b)         Incorporated by reference to exhibits filed with the Registrant’sRegistration Statement on Form S-4 (Registration No. 333-153678)

(c)          Incorporated by reference to exhibits filed with the Registrant’sRegistration Statement on Form S-1 (Registration No. 333-89554)

(d)         Incorporated by reference to exhibits filed with the Registrant’s AnnualReport on Form 10-K for the year ended December 31, 2003 (File No. 000-50574)

(e)          Incorporated by reference to exhibits filed with the Registrant’sQuarterly Report on Form 10-Q for the quarter ended March 31, 2005(File No. 000-50574)

(f)            Incorporated by reference to exhibits filedwith the Registrant’s Current Report on Form 8-K filed August 2, 2005(File No. 000-50574)

(g)         Compensation plan or arrangement

 

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** **

**Index To Financials**

 
| **REPORT  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** | F-2 |
|--------------------------------------------------------------|-----|
| **CONSOLIDATED BALANCE SHEETS**                              | F-3 |
| **CONSOLIDATED STATEMENTS OF OPERATIONS**                    | F-4 |
| **CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**     | F-5 |
| **CONSOLIDATED STATEMENTS OF CASH FLOWS**                    | F-6 |
| **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**               | F-7 |

 

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors

Symbion, Inc.

 

We have audited the accompanying consolidated balancesheets of Symbion, Inc. as of December 31, 2008 and 2007 and therelated consolidated statements of operations, stockholders’ equity and cashflows for the year ended December 31, 2008, the period from August 24,2007 to December 31, 2007, the period from January 1, 2007 to August 23,2007 (Predecessor) and the year ended December 31, 2006 (Predecessor).These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

As discussed in Note 9 tothe consolidated financial statements, the Company adopted FASB Interpretation No. 48,*Accounting for Uncertainty in IncomeTaxes-An Interpretation of FASB Statement No. 109*, effective January 1,2007.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Symbion, Inc. atDecember 31, 2008 and 2007, and the consolidated results of its operationsand its cash flows for the year ended December 31, 2008, the period from August 24,2007 to December 31, 2007, the period from January 1, 2007 to August 23,2007 (Predecessor) and for the year ended December 31, 2006 (Predecessor)in conformity with U.S. generally accepted accounting principles.

 

 

/s/ Ernst &Young LLP

Nashville, Tennessee

March 30, 2009

 

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**SYMBION,INC.**

**CONSOLIDATEDBALANCE SHEETS**

***(in thousands,except per share amounts)***

*** ***
| ** **                                                                                                                                                                                                      | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Current assets:                                                                                                                                                                                                 |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                      |       | $                           | 41,833     |                        | $          | 44,656 |   |
| Accounts  receivable, less allowance for doubtful accounts of $14,587 and $18,202,  respectively                                                                                                                |       | 34,707                      |       | 33,958                      |       |
| Inventories                                                                                                                                                                                                     |       | 9,050                       |       | 8,479                       |       |
| Prepaid expenses  and other current assets                                                                                                                                                                      |       | 12,719                      |       | 14,989                      |       |
| Income tax receivable                                                                                                                                                                                           |       | 825                         |       | 4,053                       |       |
| Current assets  of discontinued operations                                                                                                                                                                      |       | 1,104                       |       | 1,064                       |       |
| Total current  assets                                                                                                                                                                                           |       | 100,238                     |       | 107,199                     |       |
| Land                                                                                                                                                                                                            |       | 2,938                       |       | 3,556                       |       |
| Buildings and  improvements                                                                                                                                                                                     |       | 53,847                      |       | 42,097                      |       |
| Furniture and  equipment                                                                                                                                                                                        |       | 49,093                      |       | 39,157                      |       |
| Computers and  software                                                                                                                                                                                         |       | 2,864                       |       | 1,574                       |       |
|                                                                                                                                                                                                            |       | 108,742                     |       | 86,384                      |       |
| Less accumulated  depreciation                                                                                                                                                                                  |       | (14,057                     | )          | (4,890                      | )          |
| Property and  equipment, net                                                                                                                                                                                    |       | 94,685                      |       | 81,494                      |       |
| Intangible  assets, net                                                                                                                                                                                         |       | 19,570                      |       | —                      |       |
| Goodwill                                                                                                                                                                                                        |       | 541,831                     |       | 548,136                     |       |
| Investments in  and advances to affiliates                                                                                                                                                                      |       | 14,532                      |       | 17,082                      |       |
| Other assets                                                                                                                                                                                                    |       | 11,875                      |       | 10,804                      |       |
| Long-term assets  of discontinued operations                                                                                                                                                                    |       | 833                         |       | 4,098                       |       |
| Total assets                                                                                                                                                                                                    |       | $                           | 783,564    |                        | $          | 768,813 |   |
|                                                                                                                                                                                                            |       |                        |       |                        |       |
| Current  liabilities:                                                                                                                                                                                           |       |                        |       |                        |       |
| Accounts payable                                                                                                                                                                                                |       | $                           | 5,392      |                        | $          | 5,324 |   |
| Accrued payroll  and benefits                                                                                                                                                                                   |       | 7,500                       |       | 7,269                       |       |
| Other accrued  expenses                                                                                                                                                                                         |       | 22,240                      |       | 14,683                      |       |
| Deferred income  tax payable                                                                                                                                                                                    |       | —                      |       | 170                         |       |
| Current  maturities of long-term debt                                                                                                                                                                           |       | 12,205                      |       | 8,029                       |       |
| Current  liabilities of discontinued operations                                                                                                                                                                 |       | 629                         |       | 1,107                       |       |
| Total current  liabilities                                                                                                                                                                                      |       | 47,966                      |       | 36,582                      |       |
| Long-term debt,  less current maturities                                                                                                                                                                        |       | 440,612                     |       | 428,925                     |       |
| Deferred income  tax payable                                                                                                                                                                                    |       | 33,008                      |       | 24,042                      |       |
| Other  liabilities                                                                                                                                                                                              |       | 12,526                      |       | 10,930                      |       |
| Long-term  liabilities of discontinued operations                                                                                                                                                               |       | 236                         |       | 146                         |       |
| Minority  interests                                                                                                                                                                                             |       | 38,010                      |       | 34,902                      |       |
|                                                                                                                                                                                                            |       |                        |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                     |       |                        |       |                        |       |
| Common stock,  1,000 shares, $0.01 par value, authorized at December 31, 2008 and at  December 31, 2007; 1,000 shares issued and outstanding at  December 31, 2008 and at December 31, 2007 |       | —                      |       | —                      |       |
| Additional paid-in-capital                                                                                                                                                                                      |       | 240,815                     |       | 238,701                     |       |
| Accumulated  other comprehensive loss                                                                                                                                                                           |       | (5,584                      | )          | (2,188                      | )          |
| Retained deficit                                                                                                                                                                                                |       | (24,025                     | )          | (3,227                      | )          |
| Total  stockholders’ equity                                                                                                                                                                                |       | 211,206                     |       | 233,286                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                |       | $                           | 783,564    |                        | $          | 768,813 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

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**SYMBION,INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

***(in thousands)***

** **
| ** **                                                     | ** ** | **Year  Ended  December 31,  2008** | ** ** | **August 24,  2007 to  December 31,  2007** | ** ** | **January 1,  2007 to  August 23,  2007  (Predecessor)** | ** ** | **Year  Ended  December 31,  2007  (Combined)** | ** ** | **Year  Ended  December 31,  2006** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|
| Revenues                                                       |       | $                                        | 331,900    |                                                       | $          | 106,640                                                                 |       | $                                                    | 197,665    |                                     | $          | 304,305 |   | $ | 285,387 |   |
| Operating  expenses:                                           |       |                                     |       |                                                       |       |                                                                    |       |                                                 |       |                                     |       |
| Salaries and  benefits                                         |       | 90,510                                   |       | 29,763                                                     |       | 54,048                                                                  |       | 83,811                                               |       | 74,949                                   |       |
| Supplies                                                       |       | 67,562                                   |       | 21,932                                                     |       | 39,103                                                                  |       | 61,035                                               |       | 54,974                                   |       |
| Professional and  medical fees                                 |       | 19,021                                   |       | 6,468                                                      |       | 12,120                                                                  |       | 18,588                                               |       | 14,504                                   |       |
| Rent and lease  expense                                        |       | 22,307                                   |       | 7,038                                                      |       | 12,297                                                                  |       | 19,335                                               |       | 17,673                                   |       |
| Other operating  expenses                                      |       | 26,044                                   |       | 8,610                                                      |       | 15,273                                                                  |       | 23,883                                               |       | 19,850                                   |       |
| Cost of revenues                                               |       | 225,444                                  |       | 73,811                                                     |       | 132,841                                                                 |       | 206,652                                              |       | 181,950                                  |       |
| General and  administrative expense                            |       | 23,923                                   |       | 7,912                                                      |       | 23,961                                                                  |       | 31,873                                               |       | 24,407                                   |       |
| Depreciation and  amortization                                 |       | 15,175                                   |       | 4,732                                                      |       | 7,920                                                                   |       | 12,652                                               |       | 11,913                                   |       |
| Provision for  doubtful accounts                               |       | 3,861                                    |       | 1,758                                                      |       | 2,691                                                                   |       | 4,449                                                |       | 3,952                                    |       |
| (Income) loss on  equity investments                           |       | (1,504                                   | )          | (21                                                        | )          | 5                                                                       |       | (16                                                  | )          | (2,423                                   | )          |
| Impairment and  loss on disposal of long-lived assets          |       | 1,899                                    |       | 53                                                         |       | 319                                                                     |       | 372                                                  |       | 1,162                                    |       |
| Gain on sale of  long-lived assets                             |       | (975                                     | )          | (319                                                       | )          | (596                                                                    | )          | (915                                                 | )          | (1,808                                   | )          |
| Proceeds from  insurance settlements, net                      |       | —                                   |       | —                                                     |       | (161                                                                    | )          | (161                                                 | )          | (410                                     | )          |
| Litigation  settlements, net                                   |       | 893                                      |       | —                                                     |       | —                                                                  |       | —                                               |       | (588                                     | )          |
| Merger  transaction expenses                                   |       | —                                   |       | —                                                     |       | 7,522                                                                   |       | 7,522                                                |       | —                                   |       |
| Total operating  expenses                                      |       | 268,716                                  |       | 87,926                                                     |       | 174,502                                                                 |       | 262,428                                              |       | 218,155                                  |       |
| Operating income                                               |       | 63,184                                   |       | 18,714                                                     |       | 23,163                                                                  |       | 41,877                                               |       | 67,232                                   |       |
| Minority  interests in income of consolidated subsidiaries     |       | (23,657                                  | )          | (7,685                                                     | )          | (15,656                                                                 | )          | (23,341                                              | )          | (28,294                                  | )          |
| Interest  expense, net                                         |       | (43,426                                  | )          | (14,763                                                    | )          | (5,228                                                                  | )          | (19,991                                              | )          | (7,108                                   | )          |
| (Loss) income  before income taxes and discontinued operations |       | (3,899                                   | )          | (3,734                                                     | )          | 2,279                                                                   |       | (1,455                                               | )          | 31,830                                   |       |
| Provision  (benefit) for income taxes                          |       | 13,256                                   |       | (776                                                       | )          | 4,016                                                                   |       | 3,240                                                |       | 12,254                                   |       |
| (Loss) income  from continuing operations                      |       | (17,155                                  | )          | (2,958                                                     | )          | (1,737                                                                  | )          | (4,695                                               | )          | 19,576                                   |       |
| Loss from  discontinued operations, net of taxes               |       | (3,643                                   | )          | (269                                                       | )          | (438                                                                    | )          | (707                                                 | )          | (783                                     | )          |
| Net (loss)  income                                             |       | $                                        | (20,798    | )                                                          | $          | (3,227                                                                  | )          | $                                                    | (2,175     | )                                        | $          | (5,402 | ) | $ | 18,793 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

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**SYMBION,INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

***(in thousands,except per share amounts)***

 
| ** **                                                                    | ** ** | **Symbion, Inc.  Common Stock** | ** ** | **Additional** | ** ** | **Stockholder  Notes**   | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained** | ** **   | **Total  Stockholders’** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------|------------|----------------|------------|--------------------------|------------|---------------------------------------|------------|--------------|--------------|-------------------------------|------------|
| ** **                                                                    | ** ** | **Shares**                                | ** ** | **Amount**     | ** ** | **Paid-in Capital** | ** ** | **Receivable**                        | ** ** | **Income**   | ** **   | **Earnings**                  | ** ** | **Equity** | ** ** |
| Balance at  December 31, 2005 (Predecessor)                              |       | 21,444,463                                |       | $              | 214        |                     | $          | 206,418                               |       | $            | (228         | )                             | $          | 321 |   | $ | 53,333 |   | $ | 260,058 |   |
| Issuance of  warrants and common stock, net of repurchases, and other         |       | 198,828                                   |       | 2              |       | 1,516                    |       | 228                                   |       | —       |         | —                        |       | 1,746 |   |
| Amortized  compensation expense related to restricted stock and stock options |       | —                                    |       | —         |       | 4,518                    |       | —                                |       | —       |         | —                        |       | 4,518 |   |
| Unrealized gain  on interest rate swap, net of taxes                          |       | —                                    |       | —         |       | —                   |       | —                                |       | 164          |         | —                        |       | 164 |   |
| Net income                                                                    |       | —                                    |       | —         |       | —                   |       | —                                |       | —       |         | 18,793                        |       | 18,793 |   |
| Balance at  December 31, 2006 (Predecessor)                              |       | 21,643,291                                |       | $              | 216        |                     | $          | 212,452                               |       | $            | —       |                          | $          | 485 |   | $ | 72,126 |   | $ | 285,279 |   |
| Issuance of  warrants and common stock, net of repurchases, and other         |       | 89,367                                    |       | 1              |       | 959                      |       | —                                |       | —       |         | —                        |       | 960 |   |
| Amortized  compensation expense related to stock options and restricted stock |       | —                                    |       | —         |       | 10,337                   |       | —                                |       | —       |         | —                        |       | 10,337 |   |
| Unrealized gain  on interest rate swap, net of taxes                          |       | —                                    |       | —         |       | —                   |       | —                                |       | (485         | )            | —                        |       | (485 | ) |
| Retirement of  common stock in connection with Merger                         |       | (21,590,992                               | )          | (216           | )          | (223,747                 | )          | —                                |       | —       |         | —                        |       | (223,963 | ) |
| Common stock  rolled over                                                     |       | (141,666                                  | )          | (1             | )          | (1                       | )          | —                                |       | —       |         | —                        |       | (2 | ) |
| Net loss,  January 1, 2007, through August 23, 2007                 |       | —                                    |       | —         |       | —                   |       | —                                |       | —       |         | (2,175                        | )          | (2,175 | ) |
| Elimination of  retained earnings as of merger date                           |       | —                                    |       | —         |       | —                   |       | —                                |       | —       |         | (69,951                       | )          | (69,951 | ) |
| Balance at  August 23, 2007 (Predecessor)                                |       | —                                    |       | $              | —     |                     | $          | —                                |       | $            | —       |                          | $          | — |   | $ | — |   | $ | — |   |
| Issuance of  common stock, net of issuance costs of $60                       |       | 1,000                                     |       | —         |       | 244,942                  |       | —                                |       | —       |         | —                        |       | 244,942 |   |
| Payment of  sponsor fee                                                       |       | —                                    |       | —         |       | (6,650                   | )          | —                                |       | —       |         | —                        |       | (6,650 | ) |
| Amortized  compensation expense related to stock options                      |       | —                                    |       | —         |       | 409                      |       | —                                |       | —       |         | —                        |       | 409 |   |
| Unrealized loss  on interest rate swap, net of taxes                          |       | —                                    |       | —         |       | —                   |       | —                                |       | (2,188       | )            | —                        |       | (2,188 | ) |
| Net loss,  August 24, 2007 to December 31, 2007                     |       | —                                    |       | —         |       | —                   |       | —                                |       | —       |         | (3,227                        | )          | (3,227 | ) |
| Balance at  December 31, 2007                                                 |       | 1,000                                     |       | $              | —     |                     | $          | 238,701                               |       | $            | —       |                          | $          | (2,188 | ) | $ | (3,227 | ) | $ | 233,286 |   |
| Amortized  compensation expense related to stock options                      |       | —                                    |       | —         |       | 2,114                    |       | —                                |       | —       |         | —                        |       | 2,114 |   |
| Unrealized loss  on interest rate swap, net of taxes                          |       | —                                    |       | —         |       | —                   |       | —                                |       | (3,396       | )            | —                        |       | (3,396 | ) |
| Net loss                                                                      |       | —                                    |       | —         |       | —                   |       | —                                |       | —       |         | (20,798                       | )          | (20,798 | ) |
| Balance at  December 31, 2008                                                 |       | 1,000                                     |       | $              | —     |                     | $          | 240,815                               |       | $            |  — |                          | $          | (5,584 | ) | $ | (24,025 | ) | $ | 211,206 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

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**SYMBION,INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

***(in thousands)***

 
| ** **                                                                                      | ** ** | **Year  Ended  December 31,  2008** | ** ** | **August 24,  2007 to  December 31,  2007** | ** ** | **January 1,  2007 to  August 23,  2007  (Predecessor)** | ** ** | **Year  Ended  December 31,  2007  (Combined)** | ** ** | **Year  Ended  December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------|------------|
| **Cash  flows from operating activities:**                                                      |       |                                     |       |                                                       |       |                                                                    |       |                                                 |       |                                     |       |
| Net (loss)  income                                                                              |       | $                                        | (20,798    | )                                                          | $          | (3,227                                                                  | )          | $                                                    | (2,175     | )                                        | $          | (5,402 | ) | $ | 18,793 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities:       |       |                                     |       |                                                       |       |                                                                    |       |                                                 |       |                                     |       |
| Depreciation and  amortization                                                                  |       | 15,175                                   |       | 4,732                                                      |       | 7,920                                                                   |       | 12,652                                               |       | 11,913                                   |       |
| Amortization of  deferred financing costs                                                       |       | 4,477                                    |       | 1,872                                                      |       | 322                                                                     |       | 2,194                                                |       | 506                                      |       |
| Non-cash  payment-in-kind interest option                                                       |       | 9,753                                    |       | —                                                     |       | —                                                                  |       | —                                               |       | —                                   |       |
| Non-cash stock  option compensation expense                                                     |       | 2,114                                    |       | 409                                                        |       | 10,337                                                                  |       | 10,746                                               |       | 3,865                                    |       |
| Non—cash losses  (gains)                                                                   |       | 924                                      |       | 31                                                         |       | (305                                                                    | )          | (274                                                 | )          | (646                                     | )          |
| Minority  interests in income of consolidated subsidiaries                                      |       | 23,657                                   |       | 7,685                                                      |       | 15,656                                                                  |       | 23,341                                               |       | 28,294                                   |       |
| Deferred income  taxes                                                                          |       | 13,718                                   |       | 2,217                                                      |       | 13,637                                                                  |       | 15,854                                               |       | (1,556                                   | )          |
| Distributions to  minority partners                                                             |       | (23,423                                  | )          | (7,301                                                     | )          | (17,185                                                                 | )          | (24,486                                              | )          | (25,447                                  | )          |
| Equity in  earnings of unconsolidated affiliates, net of distributions received                 |       | 333                                      |       | (21                                                        | )          | 5                                                                       |       | (16                                                  | )          | (2,423                                   | )          |
| Provision for  doubtful accounts                                                                |       | 3,861                                    |       | 1,758                                                      |       | 2,691                                                                   |       | 4,449                                                |       | 3,952                                    |       |
| Changes in  operating assets and liabilities, net of effects of acquisitions and  dispositions: |       |                                     |       |                                                       |       |                                                                    |       |                                                 |       |                                     |       |
| Accounts  receivable                                                                            |       | (3,536                                   | )          | (90                                                        | )          | (166                                                                    | )          | (256                                                 | )          | (2,955                                   | )          |
| Income taxes  payable                                                                           |       | 1,959                                    |       | 6,096                                                      |       | (17,995                                                                 | )          | (11,899                                              | )          | 2,861                                    |       |
| Other assets and  liabilities                                                                   |       | 6,986                                    |       | (979                                                       | )          | 2,507                                                                   |       | 1,528                                                |       | (6,256                                   | )          |
| Net cash  provided by operating activities — continuing operations                         |       | 35,200                                   |       | 13,182                                                     |       | 15,249                                                                  |       | 28,431                                               |       | 30,901                                   |       |
| Net cash  provided by operating activities — discontinued operations                       |       | 3,600                                    |       | 849                                                        |       | 462                                                                     |       | 1,311                                                |       | 2,423                                    |       |
| Net cash  provided by operating activities                                                      |       | 38,800                                   |       | 14,031                                                     |       | 15,711                                                                  |       | 29,742                                               |       | 33,324                                   |       |
| **Cash  flows from investing activities:**                                                      |       |                                     |       |                                                       |       |                                                                    |       |                                                 |       |                                     |       |
| Payments for  acquisitions, net of cash acquired                                                |       | (15,695                                  | )          | (9,815                                                     | )          | (14,981                                                                 | )          | (24,796                                              | )          | (47,094                                  | )          |
| Purchases of  property and equipment, net                                                       |       | (15,649                                  | )          | (6,948                                                     | )          | (7,664                                                                  | )          | (14,612                                              | )          | (14,178                                  | )          |
| Change in other  assets                                                                         |       | (1,504                                   | )          | (841                                                       | )          | 1,401                                                                   |       | 560                                                  |       | (3,214                                   | )          |
| Net cash used in  investing activities — continuing operations                             |       | (32,848                                  | )          | (17,604                                                    | )          | (21,244                                                                 | )          | (38,848                                              | )          | (64,486                                  | )          |
| Net cash used in  investing activities — discontinued operations                           |       | (358                                     | )          | (24                                                        | )          | (36                                                                     | )          | (60                                                  | )          | (1,601                                   | )          |
| Net cash used in  investing activities                                                          |       | (33,206                                  | )          | (17,628                                                    | )          | (21,280                                                                 | )          | (38,908                                              | )          | (66,087                                  | )          |
| **Cash  flows from financing activities:**                                                      |       |                                     |       |                                                       |       |                                                                    |       |                                                 |       |                                     |       |
| Principal  payments on long-term debt                                                           |       | (18,675                                  | )          | (1,492                                                     | )          | (161,555                                                                | )          | (163,047                                             | )          | (54,732                                  | )          |
| Proceeds from  debt issuances                                                                   |       | 13,491                                   |       | 50                                                         |       | 458,597                                                                 |       | 458,647                                              |       | 85,601                                   |       |
| Repayment of  bridge facility                                                                   |       | (179,937                                 | )          | —                                                     |       | —                                                                  |       | —                                               |       | —                                   |       |
| Payment of debt  issuance costs                                                                 |       | (4,739                                   | )          | —                                                     |       | (12,544                                                                 | )          | (12,544                                              | )          | —                                   |       |
| Proceeds from  issuance of toggle notes                                                         |       | 179,937                                  |       | —                                                     |       | —                                                                  |       | —                                               |       | —                                   |       |
| Proceeds from  capital contributions by minority partners                                       |       | —                                   |       | 756                                                        |       | 2,241                                                                   |       | 2,997                                                |       | 1,488                                    |       |
| Payment of  merger costs incurred by Symbion Holdings Corporation                               |       | —                                   |       | (445                                                       | )          | (6,528                                                                  | )          | (6,973                                               | )          | —                                   |       |
| Cash paid to shareholders                                                                       |       | —                                   |       | —                                                     |       | (490,510                                                                | )          | (490,510                                             | )          | —                                   |       |
| Proceeds from  issuance of common stock, net of issuance costs                                  |       | —                                   |       | —                                                     |       | 239,085                                                                 |       | 239,085                                              |       | 1,347                                    |       |
| Proceeds from  sale of units                                                                    |       | 219                                      |       | —                                                     |       | —                                                                  |       | —                                               |       | —                                   |       |
| Other financing  activities                                                                     |       | 1,437                                    |       | (952                                                       | )          | 250                                                                     |       | (702                                                 | )          | (1,291                                   | )          |
| Net cash (used  in) provided by financing activities — continuing operations               |       | (8,267                                   | )          | (2,083                                                     | )          | 29,036                                                                  |       | 26,953                                               |       | 32,413                                   |       |
| Net cash used in  financing activities — discontinued operations                           |       | (150                                     | )          | (11                                                        | )          | (29                                                                     | )          | (40                                                  | )          | (54                                      | )          |
| Net cash (used  in) provided by financing activities                                            |       | (8,417                                   | )          | (2,094                                                     | )          | 29,007                                                                  |       | 26,913                                               |       | 32,359                                   |       |
| Net (decrease)  increase in cash and cash equivalents                                           |       | (2,823                                   | )          | (5,691                                                     | )          | 23,438                                                                  |       | 17,747                                               |       | (404                                     | )          |
| Cash and cash  equivalents at beginning of period                                               |       | 44,656                                   |       | 50,347                                                     |       | 26,909                                                                  |       | 26,909                                               |       | 27,313                                   |       |
| Cash and cash  equivalents at end of period                                                     |       | $                                        | 41,833     |                                                       | $          | 44,656                                                                  |       | $                                                    | 50,347     |                                     | $          | 44,656 |   | $ | 26,909 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

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**SYMBION,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31,2008**

 

**1.  Organization**

 

Symbion, Inc. (the “Company”),  through its wholly owned subsidiaries, ownsinterests in partnerships and limited liability companies that own and operatea national network of short stay surgical facilities in joint ownership withphysicians and physician groups, hospitals and hospital systems.  As of December 31, 2008, the Companyowned and operated 59 surgical facilities, including 56 ambulatory surgerycenters and three surgical hospitals, and managed nine additional ambulatorysurgery centers and two physician networks. The Company owned a majority ownership interest in 36 of the 59 surgicalfacilities and consolidated 51 of these surgical facilities for financialreporting purposes, of which 49 are included in continuing operations.

 

On August 23, 2007, the Company was acquired byan investment group led by an affiliate of Crestview Partners, L.P. (“Crestview”).  As a result of this merger (the “Merger”),the Company no longer has publically traded equity securities.  The Company is a wholly owned subsidiary ofSymbion Holdings Corporation (“Holdings”), which is owned by an investor groupthat includes affiliates of Crestview, members of the Company’s management andother investors.  The Company’s financialposition and the results of operations prior to the Merger are presentedseparately in the consolidated financial statements as “Predecessor” financialstatements.  Symbion, Inc. isreferred to as the “Predecessor” for all periods and dates through August 23,2007 and Symbion, Inc. is referred to as the “Company” for all periods anddates subsequent to August 23, 2007. References made herein to the “Company,” unless indicated otherwise orthe context requires, include the Predecessor. As a result of the Merger, which substantially increased the Company’sdebt and interest expense, and the revaluation of assets and liabilities as aresult of purchase accounting associated with the Merger, the pre-Mergerfinancial statements are for comparison purposes only as they representcombining of a different basis of accounting.

 

**2.  Merger Transaction**

 

In the Merger, the stockholders and option holders ofthe Predecessor (as defined above) received an aggregate of $490.5 million incash.  In order to consummate the Merger,Crestview formed Symbol Acquisition, L.L.C. (“Parent”) and Symbol Merger Sub, Inc.,a wholly-owned subsidiary of Parent. Symbol Merger Sub, Inc. merged with and into the Company with theCompany being the surviving corporation. Parent was converted into Holdings, which became the parent holdingcompany of the Company by virtue of the Merger.

 

Holdings was capitalized with a $245.0 million cashcontribution by Crestview and its affiliated funds and co-investors.  In addition, certain members of Symbion’smanagement made a rollover equity contribution of Symbion shares and options topurchase common stock valued at the predecessor basis of $2,000.  These rollover shares were exchanged forshares and options to purchase shares of common stock of Holdings.  Following the Merger, Crestview and itsaffiliated funds and co-investors owned 96.7% of Holdings and members ofmanagement owned 3.3% of Holdings.

 

The Company accounted for the Merger as a purchaseunder the guidance set forth in Emerging Issues Task Force No. 88-16, “Basisin Leveraged Buyout Transactions” (“EITF 88-16”).  Under EITF 88-16, the transaction was deemedto be a purchase by new controlling investors for which equity interests werevalued using a partial change in accounting basis.  In effect, the common stock owned by membersof management was valued using the predecessor basis, while the common stockowned by Crestview, its affiliated funds and co-investors were recorded at fairvalue.

 

The following equity capitalization and financingtransactions occurred in connection with the Merger:

 

·                  $145.0 million cash equitycontribution by Crestview Symbion Holdings, L.L.C.;

·                  $40.0 millioncash equity contribution by The Northwestern Mutual Life Insurance Company;

·                  $60.0 millioncash equity contribution by other co-investors;

·                  $2,000 rolloverequity contribution by certain members of management of the Company(representing a fair value of $8.4 million);

 

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·                  Senior securedcredit facility totaling $350.0 million, of which $250.0 million was drawn atthe closing of the Merger; and

·                  $175.0 millionbridge loan credit facility that was drawn at the closing of the Merger.

 

The proceeds from the equity capitalization andfinancing transactions were used to:

 

·                  Pay stockholdersof the Company for shares of common stock not rolled over under the terms ofthe merger agreement;

·                  Pay optionholders of the Company for outstanding options not rolled over, whether vestedor unvested, the difference between $22.35 per share and the per share exerciseprice of the option;

·                  Pay holders ofrestricted stock of the Company for shares of restricted stock, whether vestedor unvested, at $22.35 per share;

·                  Pay warrantholders of the Company for outstanding warrants, whether vested or unvested,the difference between $22.35 per share and the per share exercise price of thewarrant;

·                  Repay alloutstanding debt (totaling $129.0 million) under the former senior securedcredit agreement for which the maturity date accelerated as a result of theMerger; and

·                  Pay the fees andexpenses related to the Merger and the financing transactions.

 

As a result of the Merger, the vesting of stockoptions and restricted stock was accelerated, which resulted in $8.0 million instock compensation expense, of which $710,000 is included in cost of revenuesand $7.3 million is included in general and administrative expenses in 2007,following the Merger.  The Companycapitalized $12.1 million of fees and expenses related to the execution of thenew credit facilities on the closing date of the Merger.  As a result of the Merger, the Companyrecorded goodwill of $509.8 million.

 

The accompanying consolidated financial statements asof the dates and for all periods prior to August 24, 2007, reflect thefinancial position, results of operations and cash flows of thePredecessor.  The consolidated financialstatements as of the dates and for the periods on and after August 24,2007, reflect the financial position, results of operations and cash flows ofthe Company.

 

The expenses incurred as a result of the Merger areclassified as follows in the accompanying statements of operations (inthousands):

 
| ** **                                                 | ** ** | **January 1,  2007 to  August 23,  2007** | ** ** | **Year Ended  December 31,  2007** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                 | ** ** | **(Predecessor)**                                        | ** ** | **(Combined)**                               | ** ** |
| Cost of revenues                                           |       | $                                                        | 710        |                                         | $          | 710 |   |
| General and  administrative expense                        |       | 8,152                                                    |       | 8,152                                        |       |
| Merger  transaction expenses                               |       | 7,522                                                    |       | 7,522                                        |       |
| Minority  interests in income of consolidated subsidiaries |       | (329                                                     | )          | (329                                         | )          |
| Total                                                      |       | $                                                        | 16,055     |                                         | $          | 16,055 |   |

 

Additionally, the Company paid $7.0 million in costsincurred by Crestview in connection with the Merger.  These costs were recorded as additionalpurchase price under the provisions set forth by SFAS No. 141.

 

**3.  Significant Accounting Policies and Practices**

 

**Basis of Presentation and Use ofEstimates**

 

The accompanying consolidated financial statementshave been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the amounts reportedin the accompanying consolidated financial statements and accompanyingfootnotes.  Examples include, but are notlimited to, estimates of accounts receivable allowances, professional andgeneral liabilities and the estimate of deferred tax assets orliabilities.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included.  All adjustments are of anormal, recurring nature.  Actual resultscould differ from those estimates.

 

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**Principles of Consolidation**

 

The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries, as well as interestsin partnerships and limited liability companies controlled by the Companythrough ownership of a majority voting interest or other rights granted to theCompany by contract to manage and control the affiliate’s business.  The physician limited partners and physicianminority members of the entities that the Company controls are responsible forthe supervision and delivery of medical services.  The governance rights of limited partners andminority members are restricted to those that protect their financialinterests.  Under certain partnership andoperating agreements governing these partnerships and limited liabilitycompanies, the Company could be removed as the sole general partner or managingmember for certain events such as material breach of the partnership oroperating agreement, gross negligence or bankruptcy.  These protective rights do not precludeconsolidation of the respective partnerships and limited liability companies.  The consolidated financial statements includethe accounts of variable interest entities in which the Company is the primarybeneficiary, under the provisions of FASB Interpretation No. 46, *Consolidation of Variable Interest Entities (as amended)*(FIN 46R).  The variable interestentities are surgical facilities located in the states of Florida and NewYork.  With regard to the New Yorkfacility, the Company is the primary beneficiary due to the level ofvariability within the management service agreement, as well as the obligationand likelihood of absorbing the majority of expected gains and losses.   Regarding the Florida facility, the Companyhas fully guaranteed debt obligations. The debt obligations are subordinated to such a level that the Companyabsorbs the majority of the expected gains and losses.  The accompanying consolidated balance sheetsas of December 31, 2008 and December 31, 2007 include assets of $17.6million and $14.1 million, respectively, and liabilities of $8.3 million and$3.9 million, respectively, related to the variable interest entities.  All significant intercompany balances andtransactions are eliminated in consolidation.

 

**FairValue of Financial Instruments**

 

On January 1, 2008, the Company adopted theprovisions of FASB Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”),with respect to the valuation of its interest rate swap agreement. The Companydid not adopt the provisions of SFAS No. 157 as it relates tononfinancial assets pursuant to FSP FAS 157-2, “Effective Date of FASBStatement No. 157”. SFAS No. 157 clarifies how companies arerequired to use a fair value measure for recognition and disclosure byestablishing a common definition of fair value, a framework for measuring fairvalue, and expanding disclosures about fair value measurements.

 

SFAS No. 157 establishes a three-tier fairvalue hierarchy, which prioritizes the inputs used in measuring fair value.These tiers include: Level 1, defined as observable inputs such as quotedprices in active markets; Level 2, defined as inputs other than quotedprices in active markets that are either directly or indirectly observable; andLevel 3, defined as unobservable inputs in which little or no market dataexists, therefore requiring an entity to develop its own assumptions.

 

In estimating fair value disclosures for cash,accounts receivable and accounts payable, the carrying amounts reported in theaccompanying consolidated balance sheets approximate fair value because oftheir short-term nature.

 

The carrying amount and fair value of the Company’sterm loans under its senior secured credit facility, and the Toggle Notes as ofDecember 31, 2008 and 2007 were as follows (in thousands):

 
| ** **               | ** ** | **Carrying Amount   December 31,** | ** ** | **Fair Value   December 31,** | ** ** |
|--------------------------|------------|---------------------------------------------------|------------|----------------------------------------------|------------|
| ** **               | ** ** | **2008**                                          | ** ** | **2007**                                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| Tranche A, term  loan    |       | $                                                 | 117,938    |                                         | $          | 124,688 |   | $ | 70,763 |   | $ | 124,688 |   |
| Tranche B, term  loan    |       | 117,938                                           |       | 124,688                                      |       | 70,763 |   | 124,688 |   |
| Bridge facility          |       | —                                            |       | 175,000                                      |       | — |   | 175,000 |   |
| Senior PIK  Toggle Notes |       | 184,635                                           |       | —                                       |       | 73,854 |   | — |   |
|                          |            |                                                   |            |                                              |            |  |  |  |  |  |  |  |  |

 

The fair value of the term loans and Toggle Notes werebased on quoted prices at December 31, 2008.  During 2007, the fair value of the Company’slong-term debt approximated carrying value. The Company’s long-term debt instruments are discussed further in Note8.

 

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The Company determines the fair value of its interestrate swap based on the amount at which it could be settled, which is referredto in SFAS No. 157 as the exit price. This price is based upon observablemarket assumptions and appropriate valuation adjustments for credit risk. TheCompany has categorized its interest rate swap as Level 2 under SFAS No. 157.  See Note 8 for further discussion regardingthe interest rate swap.

 

**Cash and Cash Equivalents**

 

The Company considers all highly liquid investmentswith maturity of three months or less when purchased to be cashequivalents.  The Company maintains itscash and cash equivalent balances at high credit quality financialinstitutions.

 

**Accounts Receivable**

 

Accounts receivable consist of receivables fromfederal and state agencies (under the Medicare and Medicaid programs), managedcare health plans, commercial insurance companies, employers and patients.  The Company recognizes that revenues andreceivables from government agencies are significant to its operations, but itdoes not believe that there are significant credit risks associated with thesegovernment agencies.  Concentration ofcredit risk with respect to other payors is limited because of the large numberof such payors.  Accounts receivable arerecorded net of contractual adjustments and allowances for doubtful accounts toreflect accounts receivable at net realizable value.  The Company does not require collateral forprivate pay patients.  Accountsreceivable at December 31, 2008 and December 31, 2007 were as follows(in thousands):

 
| ** **           | ** ** | **December 31,** | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Surgical  facilities |       | $                     | 34,053     |   | $ | 33,083 |   |
| Physician  networks  |       | 654                   |       | 875 |   |
| Total                |       | $                     | 34,707     |   | $ | 33,958 |   |

 

The following table sets forth by type of payor thepercentage of the Company’s accounts receivable for consolidated surgicalfacilities as of December 31, 2008 and December 31, 2007:

 
| ** **         | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Private  insurance |       | 59                    | %          | 59 | % |
| Government         |       | 15                    |       | 13 |   |
| Self-pay           |       | 15                    |       | 17 |   |
| Other              |       | 11                    |       | 11 |   |
| Total              |       | 100                   | %          | 100 | % |

 

The Company’s policy is to review the standard agingschedule, by surgical facility, to determine the appropriate provision fordoubtful accounts.  Patient account balancesare reviewed for delinquency based on contractual terms.  This review is supported by an analysis ofthe actual net revenues, contractual adjustments and cash collections received.  If the Company’s internal collection effortsare unsuccessful, the Company manually reviews the patient accounts.  An account is written off only after theCompany has pursued collection with legal or collection agency assistance orotherwise deemed an account to be uncollectible.

 

**Allowance for Doubtful Accounts**

 

The amount of the provision for doubtful accounts isbased upon management’s assessment of historical and expected netcollections.  Management reviews theresults of detailed analysis of historical write-offs and recoveries at thesurgical facilities as a primary source of information in estimating thecollectability of accounts receivable.

 

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Changes in the allowance for doubtful accounts and theamounts charged to revenues, costs and expenses were as follows (in thousands):

 
| ** **                    | ** ** | **Allowance  Balance at  Beginning of  Period** | ** ** | **Charged to  Revenues,  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts (1)** | ** ** | **Other** | ** ** | **Allowance  Balance  at End  of Period** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------|------------|-----------|------------|-----------------------------------------------------|------------|
| Year ended  December 31: |       |                                                      |       |                                                     |       |                                          |       |      |       |                                                |       |
| 2006                          |       | $                                                         | 18,922     |                                                     | $          | 3,952                                         |       | $         | 1,458      |                                                | $          | 2,838 |   | $ | 27,170 |   |
| 2007                          |       | 27,170                                                    |       | 4,449                                                    |       | 938                                           |       | (14,355   | )          | 18,202                                              |       |
| 2008                          |       | 18,202                                                    |       | 3,861                                                    |       | 152                                           |       | (7,628    | )          | 14,587                                              |       |
|                               |            |                                                           |            |                                                          |            |                                               |            |           |            |                                                     |            |  |  |  |  |  |

 

----

(1)          Relates to allowances for doubtful accountsrecorded under the purchase method of accounting for acquired entities.

 

**Inventories**

 

Inventories, which consist primarily of medical anddrug supplies, are stated at the lower of cost or market value.  Cost is determined using the first-in,first-out method.

 

**Prepaid and Other Current Assets**

 

A summary of prepaid and other current assets is asfollows (in thousands):

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Advances to  subsidiaries |       | $        | —     |     | $          | 7,253 |   |
| Prepaid expenses          |       | 4,947    |       | 4,618    |       |
| Other  receivables        |       | 7,772    |       | 3,118    |       |
|                      |       | $        | 12,719     |     | $          | 14,989 |   |

 

Advances to subsidiaries represent funds advanced tofacilities under development that we do not consolidate for financial statementpurposes.  The advances were repaid withproceeds from facility level bank debt.

 

**Property and Equipment**

 

Property and equipment are stated at cost, or ifobtained through acquisition, at fair value determined on the date ofacquisition and depreciated on a straight-line basis over the useful lives ofthe assets, generally three to five years for computers and software and fiveto seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over theshorter of the lease term or the estimated useful life of the assets.  Routine maintenance and repairs are chargedto expenses as incurred, while expenditures that increase capacities or extenduseful lives are capitalized.

 

Depreciation expense, including the amortization ofassets under capital leases, was $15.2 million, $12.7 million and $11.9 millionfor the periods ended December 31, 2008, 2007 and 2006, respectively.

 

*Impairment of Long-Lived Assets*

 

In accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, when events orcircumstances indicate that the carrying value of certain property andequipment might be impaired, the Company prepares an expected undiscounted cashflow projection.  If the projectionindicates that the recorded amounts of the property and equipment are notexpected to be recovered, these amounts are reduced to estimated fairvalue.  The cash flow estimates anddiscount rates incorporate management’s best estimates, using appropriate andcustomary assumptions and projections at the date of evaluation.  The Company recorded no impairment chargesfor 2008 and 2007.  In 2006, the Companyrecorded an impairment charge of $218,000 within loss on disposal of long-livedassets.

 

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**Goodwill and Other Intangible Assets**

 

*Goodwill*

 

Goodwill represents the excess of purchase price overthe fair value of net tangible and identifiable intangible assetsacquired.  The Company applies theprovisions of SFAS No. 142, *Goodwill and Other IntangibleAssets,* which requires that goodwill be evaluated at least on anannual basis and impairment of carrying value be evaluated more frequently ifcertain indicators are encountered.  TheCompany tests for impairment annually, as of December 31.  See Note 6 for further discussion of ourgoodwill impairment valuation.

 

*Other Intangible Assets*

 

The Company recorded intangible assets of $19.6million as a result of the purchase price allocation related to thecertificates of need for certain of its facilities.  These indefinite lived assets are notamortized, but will be assessed for possible impairment as part of the Company’sannual impairment analysis in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets.*

 

Unfavorable leasehold rights arising from the Mergerof $869,000 are reflected in other liabilities on the accompanying consolidatedbalance sheet.  Amortization of $83,468was recorded in 2008.  The unamortizedbalance at December 31, 2008 totaled $758,165. The unfavorable leasehold rightsare amortized on a straight-line basis over the life of the applicable leaseand reflected as a component of cost of revenues, from continuingoperations.  Scheduled amortizationexpense for the five years ending December 31, 2009 to 2013 is $83,468 peryear.

 

**Minority Interests**

 

The consolidated financial statements include allassets, liabilities, revenues and expenses of surgical facilities in which theCompany has sufficient ownership and rights to allow the Company to consolidatethe surgical facilities.  The Company hasrecorded minority interests in the earnings (losses) of such surgicalfacilities.

 

**Investments in and Advances toAffiliates**

 

As of December 31, 2008 and 2007, the Companyheld non-controlling interests in nine and eight surgical facilities,respectively, in which it exercised significant influence.  The Company accounts for such investmentsunder the equity method.  As of December 31,2008 and 2007, the Company owned less than 20% of three and one of thesesurgical facilities, respectively, but exerted significant influence throughboard of director representation, as well as an agreement to manage thesurgical facilities.

 

**Other Assets (Liabilities)**

 

Other assets at December 31, 2008 and 2007included approximately $11.3 million and $10.3 million, respectively, relatedto deferred financing costs.  Deferredfinancing costs primarily relate to the Company’s senior secured creditfacility and the Toggle Notes as of December 31, 2008, and the formerbridge facility as of December 31, 2007. Deferred financing costs consist of prepaid interest, loan fees andother costs of financing that are amortized over the term of the relatedfinancing agreements.  The deferredfinancing costs are amortized as interest expense on the accompanying consolidatedstatements of operations.

 

Other liabilities at December 31, 2008 and 2007included approximately $7.0 million and $3.6 million, respectively, related tothe fair value of the Company’s interest rate swaps in effect at thosedates.  The Company’s interest rate swapagreements were entered into to reduce the interest rate risk associated withthe interest rate on the Company’s senior secured credit facility.

 

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**OtherAccrued Expenses**

 

A summary of other accrued expenses is as follows (inthousands):

 
| ** **                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
| Interest payable            |       | $        | 9,787      |     | $          | 7,253 |   |
| Current taxes  payable      |       | 2,284    |       | —   |       |
| Self-insurance  liabilities |       | 2,325    |       | 2,619    |       |
| Other accrued  expenses     |       | 7,844    |       | 4,811    |       |
|                        |       | $        | 22,240     |     | $          | 14,683 |   |

 

**ComprehensiveIncome**

 

The Company reports other comprehensive income as ameasure of changes in stockholders’ equity that result from recognizedtransactions.  Other comprehensive incomeof the Company results from adjustments due to the fluctuation of the value ofthe Company’s interest rate swap accounted for under Statement of SFAS No. 133,“*Accounting for Derivative Instruments andHedging Activities*,” as amended (“SFAS No. 133”).  The Company entered into an interest rateswap agreement on October 31, 2007. The value of the interest rate swap was recorded as a long-termliability of $7.0 million at December 31, 2008.  The Company records the value of the interestrate swap as accumulated other comprehensive loss in the accompanyingconsolidated balance sheets as of December 31, 2008.

 

**Revenues**

 

Revenues by service type consist of the following forthe periods indicated (in thousands):

 
| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Patient service  revenues   |       | $                                          | 315,869    |   | $ | 289,271 |   | $ | 269,924 |   |
| Physician  service revenues |       | 6,548                                      |       | 5,623 |   | 4,525 |   |
| Other service  revenues     |       | 9,483                                      |       | 9,411 |   | 10,938 |   |
| Total revenues              |       | $                                          | 331,900    |   | $ | 304,305 |   | $ | 285,387 |   |

 

*Patient Service Revenues*

 

Approximately 95% of the Company’s revenues arepatient service revenues.  Patientservice revenues are revenues from surgical or diagnostic procedures performedin each of the facilities that the Company consolidates for financial reportingpurposes.  The fee charged for aprocedure varies depending on the procedure, but usually includes all chargesfor usage of an operating room, a recovery room, special equipment, supplies,nursing staff and medications.  Also, ina very limited number of surgical facilities, the Company charges foranesthesia services.  The fee does notnormally include professional fees charged by the patient’s surgeon,anesthesiologist or other attending physician, which are billed directly bysuch physicians to the patient or third-party payor.  Patient service revenues are recognized onthe date of service, net of estimated contractual adjustments and discounts forthird-party payors, including Medicare and Medicaid.  Changes in estimated contractual adjustmentsand discounts are recorded in the period of change.

 

*Physician Service Revenues*

 

Physician service revenues are revenues from physiciannetworks consisting of reimbursed expenses, plus participation in the excess ofrevenue over expenses of the physician networks, as provided for in the Company’sservice agreements with the Company’s physician networks.  Reimbursed expenses include the costs ofpersonnel, supplies and other expenses incurred to provide the managementservices to the physician networks.  TheCompany recognizes physician service revenues in the period in whichreimbursable expenses are incurred and in the period in which the Company hasthe right to receive a percentage of the amount by which a physician network’srevenues exceed its expenses.  Physician service revenues are based on netbillings with any changes in estimated contractual adjustments reflected inservice revenues in the subsequent period.

 

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Physician service revenues consist of the followingfor the periods indicated (in thousands):

 
| ** **                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Professional  services revenues |       | $                                          | 18,623     |   | $ | 16,243 |   | $ | 13,281 |   |
| Contractual  adjustments        |       | (9,294                                     | )          | (7,685 | ) | (6,145 | ) |
| Clinic revenue                  |       | 9,329                                      |       | 8,558 |   | 7,136 |   |
| Medical group  retainage        |       | (2,781                                     | )          | (2,935 | ) | (2,611 | ) |
| Physician  service revenues     |       | $                                          | 6,548      |   | $ | 5,623 |   | $ | 4,525 |   |

 

*Other Service Revenues*

 

Other service revenues consists of management andadministrative service fees derived from the non-consolidated surgicalfacilities that the Company accounts for under the equity method, management ofsurgical facilities in which the Company does not own an interest and managementservices the Company provides to physician networks for which the Company isnot required to provide capital or additional assets.  The fees the Company derives from thesemanagement arrangements are based on a pre-determined percentage of therevenues of each surgical facility and physician network.  The Company recognizes other service revenuesin the period in which services are rendered.

 

The following table sets forth by type of payor thepercentage of the Company’s patient service revenues generated for the periodsindicated (in thousands):

 
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Private  Insurance |       | 72                                         | %          | 73 | % | 76 | % |
| Government         |       | 22                                         |       | 21 |   | 19 |   |
| Self-pay           |       | 4                                          |       | 4 |   | 3 |   |
| Other              |       | 2                                          |       | 2 |   | 2 |   |
| Total              |       | 100                                        | %          | 100 | % | 100 | % |

 

**SupplementalCash Flow Information**

 

The Company made income tax payments of $409,000, $8.3million and $9.6 million for the periods ended December 31, 2008, 2007 and2006, respectively.  The Company madeinterest payments of $33.8 million, $17.0 million and $7.7 million for theperiods ended December 31, 2008, 2007 and 2006 respectively.  The Company entered into capital leases of$1.9 million, $908,000 and $889,000 of equipment for the periods ended December 31,2008, 2007 and 2006, respectively.

 

**Reclassifications**

 

Certain reclassifications have been made to thecomparative period’s financial statements to conform to the 2008presentation.  The reclassificationsprimarily related to the presentation of discontinued operations and had noimpact on the Company’s financial position or results of operations.

 

**4. Acquisitions and Equity Method Investments**

 

Effective February 21,2008, the Company acquired ownership in five surgical facilities specializingin spine, orthopedic and pain management procedures located in Boulder,Colorado; Honolulu, Hawaii; Bristol and Nashville, Tennessee; and Seattle,Washington for an aggregate of $5.8 million and the assumption of $4.7 millionof debt.  The Company acquired anownership ranging from 20.0% to 50.0% in these surgical facilities.  Four of these facilities are consolidated forfinancial reporting purposes.

 

These acquisitions were accounted for under thepurchase method of accounting, and accordingly, the results of operations ofthe acquired consolidated businesses are included in the accompanyingconsolidated financial statements from their respective dates ofacquisitions.  These acquisitions placedthe Company in new markets or expanded the Company’s presence in currentmarkets.

 

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The following table summarizes the allocation of theaggregate purchase price of acquisitions recorded using the purchase method ofaccounting for the year ended December 31, 2008:

 
| ** **                     | ** ** | **Year Ended  December 31,  2008** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|
| Fair value of  assets acquired |       | $                                            | 10,265     |   |
| Liabilities  assumed           |       | (6,341                                       | )          |
| Net assets  acquired           |       | $                                            | 3,924      |   |

 

Following are the pro forma results for the year endedDecember 31, 2008 as if the acquisitions had occurred on January 1,2008 (in thousands):

 
| ** **   | ** ** | **Year Ended December 31,** | ** ** |
|--------------|------------|--------------------------------------------|------------|
| ** **   | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
| Net revenues |       | $                                          | 333,098    |   | $ | 311,253 |   |
| Net loss     |       | $                                          | (137,913   | ) | $ | (5,418 | ) |

 

The Company engages in investing transactions that arenot business combinations.  Thesetransactions primarily consist of acquisitions and sales of non-controllingequity interests in surgical facilities and the investment of additional cashin surgical facilities under development. During the second quarter of 2008, the Company acquired an incrementalownership of 16.7% in its surgical facility located in Irvine, California for$3.1 million and an incremental ownership of 18.0% in its surgical facilitylocated in Arcadia, California for $304,000. Prior to the acquisitions, the Company owned 15.3% of the Irvine,California surgical facility and 19.2% of the Arcadia, California surgicalfacility.

 

During the third quarter of 2008, the Company acquiredan incremental ownership of 18.5% in its surgical facility located in Irvine,California for $5.1 million.  Throughthis acquisition, the Company obtained a controlling interest in thefacility.  The acquisition was treated asa business combination and the Company began consolidating the facility forfinancial reporting purposes in the third quarter of 2008.  Additionally during the first quarter of2008, the Company acquired an incremental ownership in three other of itsexisting surgical facilities located in California.  The Company acquired an incremental ownershipof 10.7% in two surgical facilities located in Beverly Hills, California for anaggregate of $2.5 million and a 6.4% incremental ownership in a surgicalfacility located in Encino, California for $2.0 million.  Prior to the acquisitions, the Company owned55.1% and 57.0% of the two Beverly Hills, California surgical facilities and55.5% of the Encino, California surgical facility.  The adjustments to arrive at pro formaoperating results for these acquisitions are not material.

 

**5. Discontinued Operations**

 

During the first quarter of 2007, the Companycommitted to a plan to divest its interest in three ambulatory surgerycenters.  During the second quarter of2008, the Company sold its interest in one ambulatory surgery center located inSavannah, Georgia for net proceeds of $460,000. The Company recognized a loss on the sale of $1.5 million during thequarter that is included in earnings from discontinued operations.  In the fourth quarter of 2008, the Companyrecognized a loss of $2.1 million on the Englewood, Colorado facility as aresult of adjusting certain property and equipment to fair market value lesscosts to sell.  The results of operationsin these centers are presented net of income taxes in the accompanyingconsolidated financial statements as discontinued operations in accordance withSFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*.  The accompanying consolidated financialstatements have been reclassified to conform to this presentation for allperiods presented.  These requiredreclassifications of prior period consolidated financial statements did notimpact total assets, liabilities, stockholders’ equity, net income or cashflows.  Revenues, the loss on operationsbefore income taxes, income tax provision (benefit), and the loss fromdiscontinued operations net of tax for the years ended December 31, 2008,2007 and 2006 related to discontinued operations were as follows (inthousands):

 

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| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net Revenue                                    |       | $                                          | 7,463      |   | $ | 9,803 |   | $ | 19,128 |   |
| Loss on  operations, before tax                |       | $                                          | (792       | ) | $ | (1,522 | ) | $ | (1,094 | ) |
| Income tax  provision (benefit)                |       | $                                          | (676       | ) | $ | (580 | ) | $ | (420 | ) |
| (Loss) gain on  sale, net of tax               |       | $                                          | (3,527     | ) | $ | 235 |   | $ | (109 | ) |
| Loss from  discontinued operations, net of tax |       | $                                          | (3,643     | ) | $ | (707 | ) | $ | (783 | ) |

 

As of December 31, 2008, the Company owned twosurgical facilities that are classified as discontinued operations.

 

**6. Goodwill and Intangible Assets**

 

In accordance with SFAS No. 142, *Accounting for Goodwill and Intangible Assets*, the Companytests its goodwill and intangible assets for impairment at least annually, ormore frequently if certain indicators arise. The Company tests goodwill at the reporting unit level, which theCompany concludes is the consolidated results of Symbion, Inc.  The Company completed the required annualimpairment testing as of December 31, 2008, 2007 and 2006.

 

During 2008, the Company performed its impairment testby developing a fair value estimate of the business enterprise as of December 31,2008 using a discounted cash flows approach and a market-based approach.  As the Company does not have publicly tradedequity from which to derive a market value, an extensive assessment of peercompany data was performed, whereby the Company selected comparable peers basedon growth and leverage ratios, as well as industry specificcharacteristics.  Based on the comparablepeer market trading data, the Company identified a reasonable estimate for themarket trading price of the Company as of December 31, 2008.  This market-based approach was then comparedto the discounted cash flows approach. The result of the Company’s annualgoodwill impairment test at December 31, 2008 indicated no impairment.

 

Changes in the carrying amount of goodwill are asfollows (in thousands):

 
| Balance at  December 31, 2007 |   | $       | 548,136 |   |
|------------------------------------|--------|---------|---------|--------|
| Purchase price  allocations        |   | 13,581  |    |
| Identified  intangible assets      |   | (19,570 | )       |
| Disposals                          |   | (316    | )       |
| Balance  December 31, 2008    |   | $       | 541,831 |   |

 

The purchase price allocations of $13.6 million relateto the Company’s purchase of ownership interest in various surgical facilitiesduring the year ended December 31, 2008, as well as a reduction ofgoodwill of $1.7 million related to the Merger, due to the adjustment of netassets acquired based on the valuation performed as of the date of theacquisition.  Disposals of goodwillrelates to the Company’s sale of its interest in one surgery center during2008.

 

The Company recorded intangible assets as a result ofthe Merger related to the certificates of need for certain of its facilities of$19.6 million, as of the date of the Merger. These indefinite lived assets are not amortized, but have been assessedfor possible impairment as part of the Company’s annual impairment analysis inaccordance with SFAS No. 142, *Goodwill and OtherIntangible Assets*.

 

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**7. Operating Leases**

 

The Company leases office space and equipment for itssurgical facilities, including surgical facilities under development.  The lease agreements generally require thelessee to pay all maintenance, property taxes, utilities and insurancecosts.  The Company accounts foroperating lease obligations and sublease income on a straight-line basis.  Contingent obligations of the Company arerecognized when specific contractual measures have been met, which is typicallythe result of an increase in the Consumer Price Index.  Lease obligations paid in advance areincluded in prepaid rent.  The differencebetween actual lease payments and straight-line lease expense over the originallease term, excluding optional renewal periods, is included in deferred rent.

 

The future minimum lease payments under non-cancelable operating leases at December 31,2008 are as follows (in thousands):

 
| 2009                          |   | $      | 18,524  |   |
|-------------------------------|--------|--------|---------|--------|
| 2010                          |   | 17,796 |    |
| 2011                          |   | 17,033 |    |
| 2012                          |   | 15,765 |    |
| 2013                          |   | 10,423 |    |
| Thereafter                    |   | 37,934 |    |
| Total minimum  lease payments |   | $      | 117,475 |   |

 

Total rent and lease expense was $22.3 million, $19.3 million and $17.7 million for theperiods ended December 31, 2008, 2007 and 2006, respectively.  The Company incurred rental expense of $4.6million, $4.7 million and $4.5 million under operating leases with physicianinvestors and an entity that is an affiliate of one of the Company’s formerdirectors for the periods ended December 31, 2008, 2007 and 2006,respectively.

 

**8. Long-Term Debt**

 

The Company’s long-term debt is summarized as follows(in thousands):

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Senior secured  credit facility |       | $                     | 235,875    |   | $ | 249,375 |   |
| Senior PIK  toggle notes        |       | 184,635               |       | — |   |
| Bridge facility                 |       | —                |       | 175,000 |   |
| Notes payable to  banks         |       | 24,030                |       | 8,817 |   |
| Secured term  loans             |       | 3,213                 |       | 504 |   |
| Capital lease  obligations      |       | 5,064                 |       | 3,258 |   |
|                            |       | 452,817               |       | 436,954 |   |
| Less current  maturities        |       | (12,205               | )          | (8,029 | ) |
|                            |       | $                     | 440,612    |   | $ | 428,925 |   |

 

*Senior Secured Credit Facility*

 

On August 23, 2007, the Company entered into anew $350.0 million senior secured credit facility with a syndicate ofbanks.  The senior secured creditfacility extends credit in the form of two term loans of $125.0 million each(the first, the “Tranche A Term Loan” and the second, the “Tranche B Term Loan”)and a $100.0 million revolving, swingline and letter of credit facility (the “RevolvingFacility”).  The swingline facility islimited to $10.0 million and the swingline loans are available on a same-daybasis.  The letter of credit facility islimited to $10.0 million.  The Company isthe borrower under the senior secured credit facility, and all of its whollyowned subsidiaries are guarantors.  Underthe terms of the senior secured credit facility, entities that become whollyowned subsidiaries must also guarantee the debt.

 

The Tranche A Term Loan matures on August 23,2013, the Tranche B Term Loan matures on August 23, 2014 and the RevolvingFacility matures on August 23, 2013. The Tranche A Term Loan requires quarterly principal payments of$312,500 through September 30, 2009, quarterly payments of $1.6 millionfrom December 31, 2009 through September 30, 2010, quarterly paymentsof $4.7 million from December 31, 2010 through September 30, 2011,quarterly payments of $6.3 million from December 31, 2011 through September 30,

 

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2012, quarterly payments of $18.1 million from December 31,2012 through June 30, 2013 and a balloon payment of $12.6 million on August 23,2013.  The Tranche B Term Loan requiresquarterly principal payments of $312,500 through June 30, 2014 and a balloonpayment of $111.1 million on August 23, 2014.

 

At the Company’s option, the term loans bear interest at the lender’s alternate base ratein affect on the applicable borrowing date plus an applicable alternate baserate margin, or Eurodollar rate in effect on the applicable borrowing date,plus an applicable Eurodollar rate margin. Both the applicable alternate base rate margin and applicable Eurodollarrate margin will vary depending upon the ratio of the Company’s totalindebtedness to consolidated EBITDA.

 

The senior secured credit facility permits the Companyto declare and pay dividends only in additional shares of its stock except forthe following exceptions.  RestrictedSubsidiaries, as defined in the credit agreement, may declare and pay dividendsratably with respect to their capital stock. The Company may declare and pay cash dividends or make otherdistributions to Holdings provided the proceeds are used by Holdings to (i) purchaseor redeem equity interest of Holdings acquired by former or current employees,consultants or directors of Holdings, the Company or any Restricted Subsidiaryor (ii) pay principal or interest on promissory notes that were issued inlieu of cash payments for the repurchase or redemption of such EquityInstruments, provided that the aggregate amount of such dividends or otherdistributions shall not exceed $3.0 million in any fiscal year.  Any unused amounts that are permitted to bepaid under this provision are available to be carried over to subsequent fiscalyears provided that certain conditions are met. The Company may also make payments to Holdings to pay franchise taxesand other fees required to maintain its corporate existence provided suchpayments do not exceed $3.0 million in any calendar year and also make paymentsin the amount necessary to enable Holdings to pay income taxes directlyattributable to the operations of the Company and to make $1.0 million inannual advisory and management agreement payments.  The Company may also make additional paymentsto Holdings in the aggregate amount of $5.0 million throughout the term of thesenior secured credit facility.

 

As of December 31, 2008, the amount outstandingunder the senior secured credit facility was $235.9 million with an interestrate on the borrowings of 3.7%.  The$100.0 million Revolving Facility includes a non-use fee of 0.5% of the portionof the facility not used.  The Companypays this fee quarterly.  As of December 31,2008, the amount available under the Revolving Facility was $100.0 million.

 

*Interest Rate Swap*

 

In October 2007, the Company entered into aninterest rate swap agreement to protect the Company against certain interestrate fluctuations of the LIBOR rate on $150.0 million of the Company’s variablerate debt under the senior secured credit facility, with Merrill Lynch CapitalService, Inc., as counterparty. The effective date of the interest rateswap was October 31, 2007, and it is scheduled to expire on October 31,2010.  The interest rate swap effectivelyfixes the Company’s LIBOR interest rate on the $150.0 million of variable debtat a rate of 4.7%.

 

On January 1, 2008, the Company adopted theprovisions of FASB Statement No. 157, *Fair Value Measurements*(“SFAS No. 157”),with respect to the valuation of its interest rate swap agreement. The Companydid not adopt the provisions of SFAS No. 157 as it relates tononfinancial assets pursuant to FSP FAS 157-2, “Effective Date of FASBStatement No. 157”. SFAS No. 157 clarifies how companies arerequired to use a fair value measure for recognition and disclosure byestablishing a common definition of fair value, a framework for measuring fairvalue, and expanding disclosures about fair value measurements.

 

SFAS No. 157 establishes a three-tier fairvalue hierarchy, which prioritizes the inputs used in measuring fair value.These tiers include: Level 1, defined as observable inputs such as quotedprices in active markets; Level 2, defined as inputs other than quotedprices in active markets that are either directly or indirectly observable; andLevel 3, defined as unobservable inputs in which little or no market dataexists, therefore requiring an entity to develop its own assumptions.

 

The Company determines the fair value of its interestrate swap based on the amount at which it could be settled, which is referredto in SFAS No. 157 as the exit price. This price is based upon observablemarket assumptions and appropriate valuation adjustments for credit risk. TheCompany has categorized its interest rate swap as Level 2 under SFAS No. 157.

 

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The interest rate swap agreement exposes both partiesof the swap instrument to credit risk in the event of non-performance by thecounter-party.   As of December 31,2008, the Company recorded a credit risk adjustment of $1.8 million to reducethe carrying value of the swap liability, reflecting the liability at fairvalue under SFAS No.157.

 

The Company does not hold or issue derivativefinancial instruments for trading purposes. The fair value of the Company’sinterest rate swap at December 31, 2008 and December 31, 2007reflected a liability of approximately $7.0 million and $3.6 million,respectively, and is included in other liabilities in the accompanyingconsolidated balance sheets. The interest rate swap reflects a liabilitybalance as of December 31, 2008 and 2007 because of decreases in marketinterest rates since inception.

 

At inception, the Company designated the interest rateswap as a cash flow hedge instrument. The Company assesses the effectiveness ofthis cash flow hedge instrument on a quarterly basis.  Due to the significant changes in benchmarkinterest rates, the Company has elected, as of January 28, 2009, aninterest term under the provisions of the hedged term debt agreement, differentthan the terms of the hedging instrument. In accordance with SFAS No. 133, *“Accountingfor Derivative Instruments and Hedging Activities”* (“SFAS No. 133”),the Company has determined that this benchmark interest rate swap would nolonger result in effectiveness within an acceptable range under the guidance inSFAS No.133, on a prospective basis.  Asof December 31, 2008 the Company determined the hedge instrument to beineffective, and discontinued hedge accounting treatment.   As the hedging instrument and hedged debthad perfect terms match through December 31, 2008, no component of theswap value which is currently recorded in accumulated other comprehensiveincome (“AOCI”), was recognized into earnings during 2008.  In January 2009, the Company will beginrecognizing a ratable portion of the $7.0 million in AOCI as additionalinterest expense, over the remaining life of the hedging instrument which expiresOctober 31, 2010.  Also in January 2009,the Company will begin recording into earnings, the mark-to-market adjustmentto reflect the fair value of the hedging instrument.

 

*Senior PIK Toggle Notes*

 

On June 3,2008, the Company completed aprivate offering of $179.9 million aggregate principal amount of the11.00%/11.75% Senior PIK Toggle Notes due 2015. Interest on the Toggle Notes is due February 23 and August 23of each year.  The Toggle Notes willmature on August 23, 2015.  For anyinterest period through August 23, 2011, the Company may elect to payinterest on the Toggle Notes (i) in cash, (ii) in kind, by increasingthe principal amount of the notes or issuing new notes (referred to as “PIKinterest”) for the entire amount of the interest payment or (iii) bypaying interest on 50% of the principal amount of the Toggle Notes in cash and50% in PIK interest.  Cash interest onthe Toggle Notes will accrue at the rate of 11.0% per annum.  PIK interest on the Toggle Notes will accrueat the rate of 11.75% per annum.  Theproceeds from the issuance of the Toggle Notes were used exclusively to repaythe bridge facility.  The Company electsto pay cash interest or to exercise the PIK option in advance of the interestperiod.  Upon issuance of the Toggle Notes,the Company elected to exercise the PIK option by increasing the principalamount of the Toggle Notes in lieu of making scheduled interest payments of$4.7 million for the interest period through August 23, 2008.  On August 23, 2008, the Company electedthe PIK option of the Toggle Notes in lieu of making scheduled interestpayments for the interest period from August 23, 2008 to February 23,2009.  The Company has accrued theinterest in other accrued expenses as of December 31, 2008.

 

The Toggle Notes are unsecured senior obligations andrank equally with other existing and future senior indebtedness, senior to allfuture subordinated indebtedness and effectively junior to all securedindebtedness to the extent of the value of the collateral securing suchindebtedness.  Certain existingsubsidiaries have guaranteed the Toggle Notes on a senior basis, as required bythe indenture.  The indenture alsorequires that certain of the Company’s future subsidiaries guarantee the ToggleNotes on a senior basis.  Each guaranteeis unsecured and ranks equally with senior indebtedness of the guarantor,senior to all of the guarantor’s subordinated indebtedness and effectivelyjunior to its secured indebtedness to the extent of the value of the collateralsecuring such indebtedness.

 

The indenture governing the Toggle Notes containsvarious restrictive covenants, including financial covenants that limit theCompany’s ability and the ability of the subsidiaries to borrow money orguarantee other indebtedness, grant liens, make investments, sell assets, paydividends or engage in transactions with affiliates.

 

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As part of the private offering, the Company entered into a registrationrights agreement with the initial purchasers in the private offering of ToggleNotes in which the Company agreed, among other things, to file a registrationstatement within 180 days of the issuance of the notes. On September 25,2008, the Company filed a registration statement under the Securities Act of1933, as amended, to register $184.6million aggregate principal amount of Toggle Notes as well as the guarantee of each wholly owned subsidiary ofthe Company.  On November 12, 2008,the Company filed an amendment to the registration statement to, among otherthings, register an additional $75.4 million aggregate principal amount ofToggle Notes issuable if the Company elects to make payments of additionalinterest in kind by increasing the principal amount of the existing notes orissuing additional notes.  Pursuant tothe registration statement, the Company exchanged its outstanding Toggle Notes for new 11.00%/11.75% Senior PIK Toggle Notes due 2015with an aggregate principal amount of $184.6 million registered underthe Securities Act of 1933, as amended. The newly issued Toggle Notes representthe same debt as the notes that were exchanged, and the Company issued the newToggle Notes under the same indenture that governed the initial notes.

 

At December 31, 2008, the Company was incompliance with all covenants required by each long-term debt agreement.

 

*Bridge Facility*

 

The Company entered into an interim $175.0 millionbridge loan credit agreement on August 23, 2007.  The loan was to mature on August 23,2008 and bear interest at the bank’s base rate plus a margin of 3.0% or theEurodollar rate plus an initial margin of 4.0%. The margin increased by 0.5% per annum at the end of the interest periodending February 23, 2008.  All ofthe Company’s wholly owned subsidiaries were guarantors of the bridgefacility.  During the first six months of2008, prior to the retirement of the bridge facility, the Company elected toincrease the principal amount of the bridge facility in lieu of makingscheduled interest payments of $4.9 million. As a result of this election, the interest rate increased by 75 basispoints for those interest periods.  On June 3,2008, the Company repaid the $179.9 million bridge facility with proceeds fromthe sale of the Toggle Notes (as defined above).

 

*Notes Payable to Banks*

 

Certain subsidiaries of the Company have outstandingbank indebtedness of $24.0 million which is collateralized by the real estateand equipment owned by the surgical facilities to which the loans weremade.  The various bank indebtednessagreements contain covenants to maintain certain financial ratios and alsorestrict encumbrance of assets, creation of indebtedness, investing activitiesand payment of distributions.  TheCompany has guaranteed substantially all of this debt.

 

*Capital Lease Obligations*

 

The Company is liable to various vendors for severalequipment leases.  The outstandingbalance related to these capital leases at December 31, 2008 and 2007 was$5.1 million and $3.3 million, respectively. The carrying value of the assets was $4.5 million and $4.1 million as ofDecember 31, 2008 and 2007, respectively.

 

**Other Long-Term Debt Information**

 

Scheduledmaturities of obligations as of December 31, 2008 are as follows (inthousands):

 
| ** ** | ** ** | **Long-term   Debt** | ** ** | **Capital Lease   Obligations** | ** ** | **Total** | ** ** |
|------------|------------|---------------------------|------------|-------------------------------------------|------------|-----------|------------|
| 2009       |       | $                         | 13,233     |                                      | $          | 1,862     |       | $ | 15,095 |   |
| 2010       |       | 16,782                    |       | 1,099                                     |       | 17,881    |       |
| 2011       |       | 26,554                    |       | 985                                       |       | 27,539    |       |
| 2012       |       | 42,578                    |       | 886                                       |       | 43,464    |       |
| 2013       |       | 50,959                    |       | 232                                       |       | 51,191    |       |
| Thereafter |       | 297,647                   |       | —                                    |       | 297,647   |       |
|       |       | $                         | 447,753    |                                      | $          | 5,064     |       | $ | 452,817 |   |

 

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**9. Income Taxes**

 

The Company and its subsidiaries file a consolidatedfederal income tax return.  Thepartnerships and limited liability companies file separate income taxreturns.  The Company’s allocable portionof each partnership’s and limited liability company’s income or loss isincluded in the taxable income of the Company. The remaining income or loss of each partnership and limited liabilitycompany is allocated to the other owners. The Company made income tax payments of $409,000 and $8.3 million forthe periods ended December 31, 2008 and 2007, respectively.

 

Income tax (benefit) expense from continuingoperations is comprised of the following (in thousands):

 
| ** **                    | ** ** | **Year Ended   December 31,   2008** | ** ** | **August 24,   2007 to   December 31,   2007** | ** ** | **January 1,   2007 to   August 23,   2007   (Predecessor)** | ** ** | **January 1,   2007 to   December 31,   2007   (Combined)** | ** ** | **Year Ended   December 31,   2006   (Predecessor)** | ** ** |
|-------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| Current:                      |       |                                                     |       |                                                                         |       |                                                                                            |       |                                                                                           |       |                                                                          |       |
| Federal                       |       | $                                                        | (1,756     | )                                                                            | $          | (3,347                                                                                          | )          | $                                                                                              | 1,199      |                                                                          | $          | (2,148 | ) | $ | 12,576 |   |
| State                         |       | 453                                                      |       | 354                                                                          |       | 348                                                                                             |       | 702                                                                                            |       | 1,163                                                                         |       |
| Deferred                      |       | 14,559                                                   |       | 2,217                                                                        |       | 2,469                                                                                           |       | 4,686                                                                                          |       | (1,485                                                                        | )          |
| Income tax  (benefit) expense |       | $                                                        | 13,256     |                                                                         | $          | (776                                                                                            | )          | $                                                                                              | 4,016      |                                                                          | $          | 3,240 |   | $ | 12,254 |   |

 

A reconciliation of the provision for income taxes asreported and the amount computed by multiplying the income (loss) before taxesby the U.S. federal statutory rate of 35% was as follows (in thousands):

 
| ** **                                      | ** ** | **Year Ended   December 31,   2008** | ** ** | **August 24,   2007 to   December 31,   2007** | ** ** | **January 1,   2007 to   August 23,   2007   (Predecessor)** | ** ** | **January 1,   2007 to   December 31,   2007   (Combined)** | ** ** | **Year Ended   December 31,   2006   (Predecessor)** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| Tax at U.S.  statutory rates                    |       | $                                                        | (1,365     | )                                                                            | $          | (1,307                                                                                          | )          | $                                                                                              | 798        |                                                                          | $          | (509 | ) | $ | 11,153 |   |
| State income  taxes, net of federal tax benefit |       | 993                                                      |       | (171                                                                         | )          | 90                                                                                              |       | (81                                                                                            | )          | 227                                                                           |       |
| Change in  valuation allowance                  |       | 14,137                                                   |       | 402                                                                          |       | 193                                                                                             |       | 595                                                                                            |       | 887                                                                           |       |
| Non-deductible  transaction costs               |       | —                                                   |       | —                                                                       |       | 2,947                                                                                           |       | 2,947                                                                                          |       | —                                                                        |       |
| Other                                           |       | (509                                                     | )          | 300                                                                          |       | (12                                                                                             | )          | 288                                                                                            |       | (13                                                                           | )          |
|                                            |       | $                                                        | 13,256     |                                                                         | $          | (776                                                                                            | )          | $                                                                                              | 4,016      |                                                                          | $          | 3,240 |   | $ | 12,254 |   |

 

The components of temporary differences and theapproximate tax effects that give rise to the Company’s net deferred taxliability are as follows at December 31 (in thousands):

 
| ** **                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                 |       |     |       |     |       |
| Depreciation                                          |       | $        | —     |     | $          | 281 |   |
| Accrued vacation  and bonus                           |       | 798      |       | 184      |       |
| Net operating  loss carryforwards                     |       | 14,801   |       | 5,013    |       |
| Deferred project  costs                               |       | 317      |       | 226      |       |
| Deferred rent                                         |       | —   |       | 452      |       |
| Interest rate  swap                                   |       | 2,518    |       | 1,399    |       |
| Capital loss  carryforward                            |       | 5,729    |       | 2,994    |       |
| SFAS123R                                              |       | 2,771    |       | 1,791    |       |
| Other deferred  assets                                |       | 401      |       | 173      |       |
| Total gross  deferred tax assets                      |       | 27,335   |       | 12,513   |       |
| Less: Valuation  allowance                            |       | (24,481  | )          | (8,009   | )          |
| Total deferred  tax assets                            |       | 2,854    |       | 4,504    |       |
| Deferred tax  liabilities:                            |       |     |       |     |       |
| Depreciation on  property and equipment               |       | (723     | )          | —   |       |
| Amortization of  intangible assets                    |       | (2,364   | )          | (2,575   | )          |
| Basis differences  of partnerships and joint ventures |       | (31,350  | )          | (25,455  | )          |
| Other  liabilities                                    |       | (600     | )          | (686     | )          |
| Total deferred  tax liabilities                       |       | (35,037  | )          | (28,716  | )          |
| Net deferred tax  liability                           |       | $        | (32,183    | )        | $          | (24,212 | ) |

 

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As of December 31, 2008, the Company has recordedcurrent deferred tax assets and net non-current deferred tax liabilities of$825,000 and $33.0 million, respectively. The Company had federal net operating loss carryforwards of $28.1million as of December 31, 2008, which expire between 2027 and 2028.  The Company had state net operating losscarryforwards of $120.8 million as of December 31, 2008, which expire between2009 and 2028.  The Company had capitalloss carryforwards of $16.4 million as of December 31, 2008, which expirebetween 2009 and 2013.

 

The Company recorded a valuation allowance againstdeferred tax assets at December 31, 2008 and December 31, 2007 totaling$24.5 and $8.0 million, respectively, which represents an increase ofapproximately $16.5 million.  Thevaluation allowance has been provided for certain deferred tax assets, forwhich the Company believes it is more likely than not that the assets will notbe realized.  During 2008, goodwill wasreduced by approximately $122,000 as a result of the utilization of state netoperating losses that relate to the predecessor and for which a valuationallowance was previously recorded.

 

The benefit for income taxes for the period ended August 23,2007 includes approximately $8.1 million of transactions costs incurred relatedto the Merger that may not be deductible for tax purposes.  The treatment of these costs asnon-deductible reduced the Company’s tax benefit and increased the tax expensefor the period ended August 23, 2007.

 

For the year ended December 31,2008, the Company recorded an income tax benefit of $677,000 related todiscontinued operations.

 

The Company adopted FIN 48, “Accounting for Uncertaintyin Income Taxes” (“FIN 48”) on January 1, 2007.  As a result of the implementation of FIN 48,the Company recognized no material adjustment in the liability for unrecognizedincome tax benefits.  A reconciliation ofthe beginning and ending liability for gross unrecognized tax benefits at December 31,2008 and 2007 is as follows (in thousands).

 
| ** **                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrecognized tax  benefits balance at January 1   |       | $        | 86         |     | $          | 43 |   |
| Additions for  tax positions of prior years            |       | 6        |       | 43       |       |
| Reductions for  settlements with taxing authorities    |       | (48      | )          | —   |       |
| Unrecognized tax  benefits balance at December 31 |       | $        | 44         |     | $          | 86 |   |

 

The Company recognizes interest and penalties relatedto uncertain tax positions in income tax expense.  As of December 31, 2008 and 2007, theCompany had approximately $6,000 and $19,000 of accrued interest related touncertain tax positions, respectively.

 

Total amount of unrecognized tax benefits that wouldaffect the Company’s effective tax rate if recognized is $44,000 as of December 31,2008 and $86,000 as of December 31, 2007. The tax years 2005 through 2008 remain open to examination by majortaxing jurisdictions to which the Company is subject.

 

**10. Stock Options**

 

*Overview*

 

SFAS No. 123(R) requires the Company torecognize, in the financial statements, the cost of employee services receivedin exchange for awards of equity instruments based on the fair value of thoseawards.  Prior to January 1, 2006,the Predecessor used the intrinsic value method prescribed in AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for theseequity instruments.  Under the intrinsicvalue method, the Predecessor recognized no compensation expense for optionsgranted when the exercise price was equal to the market price of the underlyingstock on the date of grant.  The exerciseprice of all of the options granted by the Predecessor has been equal to thefair market value of the Predecessor’s common stock on the date of grant.  Therefore, the Predecessor did not recognizeany expense related to stock option grants in its financial statements prior toJanuary 1, 2006.

 

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The Predecessor used the modified prospective methodof adoption, and the Company uses the Black-Scholes option pricing model tovalue any options awarded subsequent to adoption of SFAS No. 123(R).  Under the modified prospective method,compensation cost is recognized under SFAS No. 123(R) for allshare-based payments granted or modified after January 1, 2006, but isbased on the requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” for all unvestedawards granted prior to the effective date of SFAS No. 123(R).  The Black-Scholes option pricing model wasdeveloped for use in estimating the fair value of traded options, which have novesting restrictions and are fully transferable.  All option pricing models require the inputof highly subjective assumptions including the expected stock price volatilityand the expected exercise patterns of the option holders.

 

The Company is a participant in the Symbion HoldingsCorporation 2007 Equity Incentive Plan (the “2007 Plan”).  In connection with the Merger, certainmembers of Predecessor’s management rolled over 974,396 predecessor optionsinto the 2007 Plan.  The rollover optionswere exchanged for 611,799 options under the 2007 Plan.  The conversion ratio was determined by thedifference between $22.35, the share price paid to stockholders on the mergerdate, less the exercise price of each option, ignoring options with an exerciseprice greater than $22.35.  The aggregatesum of the difference for each option was divided by $8.50 to determine the numberof rollover options.  The exercise priceof each rollover option is $1.50 per share and the options expire on theexpiration date of the original grants.

 

The Company’s stock option compensation expenseestimate can vary in the future depending on many factors, including levels ofoptions and awards granted in the future, forfeitures and when option or awardholders exercise these awards and depending on whether performance targets aremet and a liquidity event occurs.

 

There were no options granted during the year ended December 31,2008, however 87,386 options included in the August 31, 2007 grant were issuedto certain employees of the Company during the first quarter of 2008.  The estimated weighted average fair value ofthe time-vested options issued during the first quarter of 2008 was $4.78 andthose issued during the period of 2007 after the Merger was $4.91, determinedusing the Black-Scholes option pricing model with the following assumptions:weighted average dividend yield based on historic dividend rates at the date ofthe grant which was deemed to be zero, weighted average volatility of 42% forthe options issued during the first quarter of 2008 as well as the optionsvalued in the Successor period of 2007, and a weighted average risk freeinterest rate of 4.4% for both periods based on the implied yield on the UnitedStates Treasury zero-coupon issues with an expected life of 6.5 years.  The Company used an expected forfeiture rateof approximately 4% for both the options valued during 2008 and the optionsissued during the period of 2007 after the Merger.

 

On August 31, 2007, Holdings granted 1,302,317time-vested options and 1,606,535 performance vested options to certainemployees of the Company.  The maximumcontractual term of the options is ten years, or earlier if the employeeterminates employment before that time. The time-vested options vest over a five-year period with 20% of theoptions vesting each year.  The Company’spolicy is to recognize compensation expense over the straight line method.  The performance vested options shall vest andbecome exercisable upon a liquidity event and the obtainment of internal rateof return targets as defined in the 2007 Plan. In accordance with SFAS No. 123 (R), no expense has been recorded inthe statement of operations for the performance based shares as the conditionsfor vesting are not probable.

 

The Predecessor’s stock options vested over therelated requisite service period, which was generally four years.  The maximum contractual term of thePredecessor’s options was either seven or ten years depending on the grant, orearlier if the employee terminates employment before that time.  The Predecessor historically granted stockoptions with an exercise price equal to the fair market value of thePredecessor’s common stock on the date of grant. As of August 23, 2007,all of the Predecessor options were either paid out as the result of the Mergeror were rolled over and exchanged for new options of Holdings on August 23,2007.  Additionally, all of the shares ofrestricted stock were paid out as the result of the Merger.

 

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*Valuation Methodology*

 

The estimated weighted average fair value per share ofthe time-vested options at the date of grant for the periods from August 24to December 31, 2007 was $4.91 and $6.91 from January 1 to August 23,2007.  The estimated weighted averagefair values of the options at the date of grant in 2006 and 2005 were $10.65and $7.25 per share, respectively.  Thefair values of the options were derived using the Black-Scholes option pricingmodel and requirements discussed in SFAS No. 123(R) and SFAS No. 123.  In applying the Black-Scholes option pricingmodel, the Company used the following assumptions:

 

·                  *Weighted averagerisk-free interest rate.*  Therisk-free interest rate is used as a component of the fair value of stockoptions to take into account the time value of money.  For the risk-free interest rate, the Companyuses the implied yield on United States Treasury zero-coupon issues with aremaining term equal to the expected life, in years, of the options granted.  The Company used a weighted average risk-freeinterest rate of 4.4% and 5.1% for the stock options valued during the periodfrom August 24 to December 31, 2007 and the period January 1 to August 2007,respectively, and 4.6% for the year ended December 31, 2006.

 

·                  *Expected volatility**. *Volatility, for thepurpose of stock-based compensation, is a measurement of the amount that ashare price has fluctuated.  Expectedvolatility involves reviewing historical volatility and determining what, ifany, change the share price will have in the future.  SFAS No. 123(R) recommended thatcompanies such as Holdings, whose common stock is not publicly traded or had alimited public stock trading history, use average volatilities of similarentities.  As a result, the Company hasused the average volatilities of some of its competitors as an estimate indetermining stock option fair values. The Company used an expected volatility of 42.0% for the period August 24to December 31, 2007 and 32.6% for the period January 1 to August 23,2007, and 35.8% for the stock options valued during the year ended December 31,2006.

 

·                  *Expected life, inyears. *SFAS No. 123(R) requiresthat companies incorporate the expected life of the stock option.  A clear distinction is made between the expectedlife of the option and the contractual term of the option.  The expected life of the option is consideredthe amount of time, in years, that the option is expected to be outstandingbefore it is exercised.  Whereas, thecontractual term of the stock option is the term the option is valid before itexpires.  The Company used an expectedlife of 6.5 years for the August 31, 2007 grant and seven years for theperiod January 1 to August 23, 2007 and 6.5 years for the year ended December 31,2006.

 

·                  *Expected dividendyield. *Since issuingdividends will affect the fair value of a stock option, SFAS No. 123(R) requirescompanies to estimate future dividend yields or payments.  The Company has not historically issueddividends and does not intend to issue dividends in the future.  Therefore, the Company has used an expecteddividend yield of zero for the years ended December 31, 2008, 2007 and2006.

 

·                  *Expected forfeiturerate. *The Company used anexpected forfeiture rate of approximately 4% for the August 31, 2007 grantand 5% for the period January 1 to August 23, 2007 and approximately3% for the year ended December 31, 2006.

 

*Pro Forma Net Income*

 

The Company recorded non-cash compensation expense of$2.1 million for the year ended December 31, 2008 and $409,000 for theperiod August 24, 2007 to December 31, 2007.  Non-cash compensation expense for thePredecessor was $10.4 million for the period January 1, 2007 to August 23,2007 and $3.9 million for the year ended December 31, 2006.  After minority interest and the related taxbenefit, the Company recorded a net impact of approximately $2.1 million for2008, $250,000 for the period August 24, 2007 to December 31, 2007and the Predecessor recorded a net impact of approximately $6.3 million for theperiod January 1, 2007 to August 23, 2007 and $2.3 million for theyear ended December 31, 2006.  ThePredecessor recorded a tax benefit of approximately $1.4 million related to itsnon-cash stock option compensation expense during 2006.

 

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*OutstandingOption Information*

 

The following is a summary of option transactions fromDecember 31, 2005 to the date of the Merger:

 
| ** **              | ** ** | **Predecessor**                  | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Exercise   Price** | ** ** |
| December 31,  2005 |       | 1,953,216                        |       | $ | 15.19 |   |
| Granted                 |       | 450,875                          |       | 23.74 |   |
| Exercised               |       | (347,703                         | )          | 8.64 |   |
| Expired                 |       | (108,602                         | )          | 17.97 |   |
| December 31,  2006 |       | 1,947,786                        |       | 18.18 |   |
| Granted                 |       | 265,430                          |       | 18.32 |   |
| Exercised               |       | (730,042                         | )          | 16.60 |   |
| Expired                 |       | (508,778                         | )          | 22.75 |   |
| Rolled over             |       | (974,396                         | )          | 17.41 |   |
| August 23,  2007   | ** ** | **—**                       |       | — |   |
|                         |            |                                  |            |  |  |  |

 

For the year ended December 31, 2006, the Companyreceived approximately $1.3 million from the exercise of stock options.  During 2006, stock options with an aggregateintrinsic value of approximately $3.9 million were exercised.  The intrinsic value represents the differencebetween the underlying estimated fair market value and the stock option’sexercise price.  At December 31,2006, total non-cash compensation cost related to non-vested stock options wasapproximately $4.4 million, net of taxes. The aggregate intrinsic value of options exercised for the period ended August 23,2007 was $4.6 million.

 

The following is a summary of option transactionssince the Merger on August 23, 2007:

 
| **Stock Options**                    | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Weighted   Average   Fair Value** | ** ** | **Total Fair   Value** | ** ** | **Aggregate   Intrinsic   Value** | ** ** | **Weighted   Average   Remaining   Contractual   term** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                | ** ** | ** **                       | ** ** | ** **                                               | ** ** | ** **                                         | ** ** | **(in thousands)**          | ** ** | ** **                                  | ** ** | **(in years)**                                                         | ** ** |
| Outstanding as  of August 23, 2007   |       | —                           |       | $                                                        | —     |                                               | $          | —                           |       | $                                           | —     |                                                                        | $          | — |   |   | — |   |
| Rolled over                               |       | 611,799                          |       | 1.50                                                     |       | 8.81                                               |       | 5,390                            |       | 7.31                                        |       | 6.1                                                                         |       |
| Granted                                   |       | 2,908,852                        |       | 10.00                                                    |       | 4.91                                               |       | 14,282                           |       | —                                      |       | 9.6                                                                         |       |
| Exercised                                 |       | —                           |       | —                                                   |       | —                                             |       | —                           |       | —                                      |       | —                                                                      |       |
| Forfeited                                 |       | —                           |       | —                                                   |       | —                                             |       | —                           |       | —                                      |       | —                                                                      |       |
| Expired                                   |       | —                           |       | —                                                   |       | —                                             |       | —                           |       | —                                      |       | —                                                                      |       |
| Outstanding as  of December 31, 2007 |       | 3,520,651                        |       | 8.52                                                     |       | 5.59                                               |       | 19,672                           |       | —                                      |       | 8.5                                                                         |       |
| Exercisable at  December 31, 2007    |       | 872,262                          |       | 4.04                                                     |       | 7.65                                               |       | 6,669                            |       | 3.61                                        |       | 7.1                                                                         |       |
| **2008  Activity**                        |       |                             |       |                                                     |       |                                               |       |                             |       |                                        |       |                                                                        |       |
| Granted                                   |       | —                           |       | —                                                   |       | —                                             |       | —                           |       | —                                      |       | —                                                                      |       |
| Exercised                                 |       | —                           |       | —                                                   |       | —                                             |       | —                           |       | —                                      |       | —                                                                      |       |
| Forfeited                                 |       | 78,527                           |       | —                                                   |       | —                                             |       | —                           |       | —                                      |       | —                                                                      |       |
| Vested                                    |       | 275,213                          |       | 10.00                                                    |       | 4.90                                               |       | 1,349                            |       | —                                      |       | 8.6                                                                         |       |
| Expired                                   |       | —                           |       | —                                                   |       | —                                             |       | —                           |       | —                                      |       | —                                                                      |       |
| Outstanding as  of December 31, 2008 |       | 3,442,124                        |       | 8.49                                                     |       | 5.60                                               |       | 19,287                           |       | —                                      |       | 7.8                                                                         |       |
| Exercisable at  December 31, 2008    |       | 1,147,475                        |       | 5.47                                                     |       | 6.99                                               |       | 8,017                            |       | 1.52                                        |       | 6.6                                                                         |       |
|                                           |            |                                  |            |                                                          |            |                                                    |            |                                  |            |                                             |            |                                                                             |            |  |  |  |  |  |

 

As of December 31, 2008, the total compensationexpense related to non-vested awards not yet recognized was $3.9 million.  This expense will be recognized over 3 years.

 

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The following table summarizes information regardingthe options outstanding at December 31, 2008:

** **
| **Options Outstanding** | ** ** | **Options Exercisable**                                           | ** ** |
|------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                   | ** ** | ** **                                                             | ** ** | **Weighted- ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Exercise Prices**     | ** ** | **Outstanding   as of   December 31,   2008** | ** ** | **Average   Remaining   Contractual   Life** | ** ** | **Weighted-   Average   Exercise   Price** | ** ** | **Exercisable   as of   December 31,   2008** | ** ** | **Weighted-   Average   Exercise   Price** | ** ** |
| $                            | 1.50       |                                                                   | 611,799    |   | 5.10 |   | $ | 1.50 |   | 611,799 |   | $ | 1.50 |   |
| 10.00                        |       | 2,830,325                                                              |       | 8.60 |   | 10.00 |   | 535,676 |   | 10.00 |   |
|                         |       | 3,442,124                                                              |       | 8.49 |   | 5.60 |   | 1,147,475 |   | 5.47 |   |
|                              |            |                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total unvested share awards as of December 31,2008 are summarized as follows:

 
| **Stock Options**              | ** ** | **Number of   Shares** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Weighted   Average   Fair Value** | ** ** | **Total Fair   Value** | ** ** | **Aggregate   Intrinsic   Value** | ** ** | **Weighted   Average   Remaining   Contractual   term** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                       | ** ** | ** **                                               | ** ** | ** **                                         | ** ** | **(in thousands)**          | ** ** | ** **                                  | ** ** | **(in years)**                                                         | ** ** |
| Unvested at  January 1, 2008   |       | 2,648,389                        |       | $                                                        | 10.00      |                                               | $          | 4.91                             |       | $                                           | 13,004     |                                                                        | —     |   | 9.6 |   |
| Forfeited                           |       | 78,527                           |       | —                                                   |       | —                                             |       | —                           |       | —                                      |       | —                                                                      |       |
| Vested                              |       | 275,213                          |       | 10.00                                                    |       | 4.90                                               |       | 1,349                            |       | —                                      |       | 8.6                                                                         |       |
| Unvested at  December 31, 2008 |       | 2,294,649                        |       | 10.00                                                    |       | 4.91                                               |       | 11,267                           |       | —                                      |       | 8.6                                                                         |       |
|                                     |            |                                  |            |                                                          |            |                                                    |            |                                  |            |                                             |            |                                                                             |            |  |  |  |

 

**11. Employee Benefit Plans**

 

**Symbion, Inc. 401(k) Plan**

 

TheSymbion, Inc. 401(k) Plan (the “401(k) Plan”) is a definedcontribution plan whereby employees who have completed six months of service inwhich they have worked a minimum of 1,000 hours and are age 21 or older areeligible to participate.  Employees mayenroll in the plan on either January 1 or July 1 of each year.  The 401(k) Plan allows eligibleemployees to make contributions of varying percentages of their annual compensation,up to the maximum allowed amounts by the Internal Revenue Service.  Eligible employees may or may not receive amatch by the Company of their contributions. The match varies depending on location and is determined prior to thestart of each plan year.  Generally,employer contributions vest 20% after two years of service and continue vestingat 20% per year until fully vested.  TheCompany’s matching expense for the periods ended December 31, 2008, 2007and 2006 was $1.1 million, $892,000 and $894,000, respectively.

 

##### **Supplemental RetirementSavings Plan**

##### ** **

TheCompany adopted the supplemental retirement savings plan (the “SERP”) in May 2005.  The SERP provides supplemental retirementalternatives to eligible officers and key employees of the Company by allowingparticipants to defer portions of their compensation.  Under the SERP, eligible employees may enrollin the plan before December 31 to be entered in the plan the followingyear.  Eligible employees may defer intothe SERP up to 25% of their normal period payroll and up to 50% of their annualbonus.  If the enrolled employeecontributes a minimum of 2% of his or her base salary into the SERP, theCompany will contribute 2% of the enrolled employee’s base salary to the planand has the option of contributing additional amounts.  Periodically, the enrolled employee’sdeferred amounts are transferred to a plan administrator.  The plan administrator maintains separatenon-qualified accounts for each enrolled employee to track deferredamounts.  On May 1 of each year, theCompany is required to make its contribution to each enrolled employee’saccount.  Compensation expense recordedby the Company related to the Company’s contribution to the SERP was $54,000,$46,000 and $53,000, for periods ended December 31, 2008, 2007 and 2006,respectively.

 

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##### **12.  Recently Issued Accounting Pronouncements**

##### ** **

In December 2007, the FASB issued SFAS No. 141(R),*“Business Combinations” (“SFAS No. 141(R)”*).  SFAS No. 141(R) retains thepurchase method of accounting for acquisitions, but requires a number ofchanges, including changes in the way assets and liabilities are recognized inthe purchase accounting as well as requiring the expensing ofacquisition-related costs as incurred. Furthermore, SFAS No. 141(R) provides guidance for recognizingand measuring the goodwill acquired in the business combination and determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination.  SFAS No. 141(R) is effective forfiscal years beginning on or after December 15, 2008.  SFAS No. 141(R) will apply to allof the Company’s acquisitions closed on or after January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160,*“Non-controlling Interests in ConsolidatedFinancial Statements — An Amendment of ARB No. 51”* (“SFAS No. 160”).  SFAS No. 160 amends Accounting ResearchBulletin (“ARB”) No. 51, “Consolidated Financial Statements” (“ARB No. 51”)to establish accounting and reporting standards for the non-controllinginterest in a subsidiary and for the deconsolidation of a subsidiary.  SFAS No. 160 clarifies that anon-controlling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements.  Additionally, SFASNo. 160 changes the method by which the consolidated income statement ispresented by requiring consolidated net income to be reported at amounts thatinclude the amounts attributable to both the parent and the non-controllinginterest.

 

SFAS No. 160 requires expanded disclosures in theconsolidated financial statements that clearly identify and distinguish betweenthe interests of the parent’s owners and the interests of the non-controllingowners of a subsidiary, including a reconciliation of the beginning and endingbalances of the equity attributable to the parent and the non-controllingowners and a schedule showing the effects of changes in a parent’s ownershipinterest in a subsidiary on the equity attributable to the parent.  SFAS No. 160 does not change ARB No. 51’sprovisions related to consolidation purposes or consolidation policy, or therequirement that a parent consolidate all entities in which it has acontrolling financial interest.  SFAS No. 160does, however, amend certain of ARB No. 51’s consolidation procedures tomake them consistent with the requirements of SFAS No. 141(R) as wellas to provide definitions for certain terms and to clarify someterminology.  SFAS No. 160 iseffective for fiscal years beginning on or after December 15, 2008.  SFAS No. 160 must be appliedprospectively as of the beginning of the fiscal year in which it is initiallyapplied, except for the presentation and disclosure requirements, which must beapplied retrospectively for all periods presented.  SFAS No. 160 will apply to the Company’sminority interests beginning on January 1, 2009.

 

In April 2008, the FASB issued FASB StaffPosition (FSP) No. 142-3, “*Determination of theUseful Life of Intangible Assets*”.  FSP 142-3 amends the factors that should beconsidered in determining the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill and Other Intangible Assets”.  The intent of FSP 142-3 is to improveconsistency between the useful life of a recognized intangible asset under SFASNo. 142 and the period of expected cash flows used to measure the fairvalue of the asset under SFAS No. 141(R) “Business Combinations”, andother U.S. generally accepted accounting principles.  FSP 142-3 is effective for financialstatements issued for fiscal years beginning after December 15, 2008 andinterim periods within those fiscal years. The adoption of FSP 142-3 is not expected to have a material impact onthe Company’s consolidated results of operations or financial position.

 

In November 2008,the FASB ratified EITF No. 08-6,*EquityMethod Investment Accounting Considerations*  (EITF 08-6). EITF 08-6 clarifiesthe accounting for certain transactions and impairment considerations involvingequity method investments. EITF 08-6 is effective for fiscal yearsbeginning after December 15, 2008, with early adoption prohibited. Theadoption of EITF 08-6 is not expected to have a material impact on theCompany’s consolidated financial position, results of operations, or cashflows.

 

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**13. Commitments and Contingencies**

 

***Debt and Lease Guaranty onNon-consolidated Entities***

 

The Company has guaranteed $3.0 million of operatinglease payments of certain surgical facilities. These operating leases typically have 10 year terms, with optionalrenewal periods.  As of December 31,2008, the Company has also guaranteed $3.6 million of debt of sixnon-consolidating surgical facilities. In the event that the Company meets certain financial and debt servicebenchmarks, the guarantees at these surgical facilities will expire between2010 and 2012.

 

***Professional,General and Workers’ Compensation Liability Risks***

 

The Company is subject to claims and legal actions inthe ordinary course of business, including claims relating to patienttreatment, employment practices and personal injuries.  To cover these claims, the Company maintainsgeneral liability and professional liability insurance in excess of self-insuredretentions through a third party commercial insurance carrier in amounts thatmanagement believes is sufficient for the Company’s operations, although,potentially, some claims may exceed the scope of coverage in effect.  This insurance coverage is on a claims-madebasis.  Plaintiffs in these matters mayrequest punitive or other damages that may not be covered by insurance.  The Company is not aware of any suchproceedings that would have a material adverse effect on the Company’sbusiness, financial condition or results of operations.  The Company expenses the costs under theself-insured retention exposure for general and professional liability claimswhich relate to (i) deductibles on claims made during the policy period,and (ii) an estimate of claims incurred but not yet reported that areexpected to be reported after the policy period expires.  Reserves and provisions for professionalliability are based upon actuarially determined estimates.  The reserves are estimated using individualcase-basis valuations and actuarial analysis. Based on historical results and data currently available, managementdoes not believe a change in one or more of these assumptions will have amaterial impact on the Company’s consolidated financial position or results ofoperations.

 

***Laws andRegulations***

 

Laws and regulations governing the Medicare andMedicaid programs are complex and subject to interpretation.  Compliance with such laws and regulations canbe subject to future government review and interpretation as well assignificant regulatory action including fines, penalties, and exclusion fromthe Medicare, Medicaid and other federal health care programs.  From time to time, governmental regulatoryagencies will conduct inquiries of the Company’s practices.  It is the Company’s current practice and futureintent to cooperate fully with such inquiries. The Company is not aware of any such inquiry that would have a materialadverse effect on the Company’s consolidated financial position or results ofoperations.

 

***AcquiredFacilities***

 

The Company, through its wholly owned subsidiaries orcontrolled partnerships and limited liability companies, has acquired and willcontinue to acquire surgical and diagnostic facilities with prior operatinghistories.  Such facilities may haveunknown or contingent liabilities, including liabilities for failure to complywith health care laws and regulations, such as billing and reimbursement, fraudand abuse and similar anti-referral laws. Although the Company attempts to assure itself that no such liabilitiesexist and obtains indemnification from prospective sellers covering suchmatters and institutes policies designed to conform centers to its standardsfollowing completion of acquisitions, there can be no assurance that theCompany will not become liable for past activities that may later be assertedto be improper by private plaintiffs or government agencies.  There can be no assurance that any suchmatter will be covered by indemnification or, if covered, that the liabilitysustained will not exceed contractual limits or the financial capacity of theindemnifying party.

 

The Company cannot predict whether federal or statestatutory or regulatory provisions will be enacted that would prohibit orotherwise regulate relationships which the Company has established or may establishwith other health care providers or have materially adverse effects on itsbusiness or revenues arising from such future actions.  The Company believes, however, that it willbe able to adjust its operations so as to be in compliance with any regulatoryor statutory provision as may be applicable.

 

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***PotentialPhysician Investor Liability***

 

A majority of the physician investors in thepartnerships and limited liability companies which operate the Company’ssurgical facilities carry general and professional liability insurance on aclaims-made basis.  Each investee may,however, be liable for damages to persons or property arising from occurrencesat the surgical facilities.  Although thevarious physician investors and other surgeons generally are required to obtaingeneral and professional liability insurance with tail coverage, suchindividual may not be able to obtain coverage in amounts sufficient to coverall potential liability.  Since mostinsurance policies contain exclusions, the physician investor will not beinsured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of aninvestment in the partnership interests or limited liability company membershipunits and the amount of distributions could be adversely affected.

 

**14. Related Party Transactions**

 

In addition to related party transactions discussedelsewhere in the notes to the accompanying consolidated financial statements,the consolidated financial statements include the following related partytransactions.  On August 23, 2007,the Company entered into a ten year advisory services and management agreementwith Crestview Advisors, L.L.C.  Theannual management fee is $1.0 million and is payable on August 23 of eachyear.  The Company has prepaid thisannual management fee and, for the year ended December 31, 2008, has anasset of $649,650 that is included in prepaid expenses and other currentassets.

 

As of December 31, 2008 and 2007, the Company has$560,000 and $905,000, respectively payable to physicians at one of ourphysician networks as a result of cash receipts in excess of expenditures forthe related facilities.  These amountsare included in other accrued expenses.

 

**15. Selected Quarterly Financial Data (Unaudited)**

 

Thefollowing is selected quarterly financial data for each of the four quarters in2008 and 2007.  Quarterly results are notnecessarily representative of operations for a full year.

 
| ** **                       | ** ** | **2008**                                        | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **First   Quarter**                        | ** ** | **Second   Quarter** | ** ** | **Third   Quarter** | ** ** | **Fourth   Quarter** | ** ** |
| ** **                       | ** ** | **(unaudited and in thousands)** | ** ** |
| Revenues                         |       | $                                               | 79,253     |   | $ | 84,361 |   | $ | 83,570 |   | $ | 84,716 |   |
| Cost of revenues                 |       | 54,380                                          |       | 56,011 |   | 57,539 |   | 57,514 |   |
| Loss from  continuing operations |       | (867                                            | )          | (202 | ) | (1,361 | ) | (14,725 | ) |
| Net loss                         |       | (1,081                                          | )          | (2,011 | ) | (1,829 | ) | (15,877 | ) |
|                                  |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **2007**                                        | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                | ** ** | **First   Quarter**                        | ** ** | **Second   Quarter** | ** ** | **Third   Quarter** | ** ** | **Fourth **

**Quarter** | ** ** |
| ** **                                | ** ** | **(unaudited and in thousands)** | ** ** |
| Revenues                                  |       | $                                               | 77,220     |   | $ | 76,670 |   | $ | 73,074 |   | $ | 77,341 |   |
| Cost of revenues                          |       | 50,952                                          |       | 51,003 |   | 52,133 |   | 52,564 |   |
| Income (loss)  from continuing operations |       | 4,429                                           |       | 3,918 |   | (11,487 | ) | (1,555 | ) |
| Net income  (loss)                        |       | 4,030                                           |       | 3,943 |   | (11,657 | ) | (1,718 | ) |
|                                           |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |

 

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**16.  FinancialInformation for the Company and Its Subsidiaries**

 

The Company conductssubstantially all of its business through its subsidiaries.  Presented below is condensed consolidatingfinancial information for the Company and its subsidiaries as required byregulations of the Securities and Exchange Commission (“SEC”) in connectionwith the Company’s Toggle Notes that have been registered with the SEC.  The information segregates the parent companyissuer, the combined wholly-owned subsidiary guarantors, the combinednon-guarantors, and consolidating adjustments. The operating and investing activities of the separate legal entitiesare fully interdependent and integrated. Accordingly, the results of the separate legal entities are notrepresentative of what the operating results would be on a stand-alonebasis.  All of the subsidiary guaranteesare both full and unconditional and joint and several.

 

**SYMBION, INC.**

**CONSOLIDATING BALANCE SHEET**

**December 31, 2008**

 
| ** **                                        | ** ** | **Parent Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| **ASSETS**                                        |       |                   |       |                        |       |                           |       |             |       |                    |       |
| Current assets:                                   |       |                   |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents                        |       | $                      | 4,369      |                        | $          | 9,801                          |       | $                | 27,663     |                    | $          | — |   | $ | 41,833 |   |
| Accounts  receivable, net                         |       | —                 |       | 654                         |       | 34,053                         |       | —           |       | 34,707                  |       |
| Inventories                                       |       | —                 |       | —                      |       | 9,050                          |       | —           |       | 9,050                   |       |
| Prepaid expenses  and other current assets        |       | 6,481                  |       | 585                         |       | 5,653                          |       | —           |       | 12,719                  |       |
| Due from related  parties                         |       | 78,735                 |       | —                      |       | —                         |       | (78,735          | )          | —                  |       |
| Deferred Tax  Asset - Current                     |       | 825                    |       | —                      |       | —                         |       | —           |       | 825                     |       |
| Current assets  of discontinued operations        |       | —                 |       | —                      |       | 1,104                          |       | —           |       | 1,104                   |       |
| Total current  assets                             |       | 90,410                 |       | 11,040                      |       | 77,523                         |       | (78,735          | )          | 100,238                 |       |
| Property and  equipment, net                      |       | 3,900                  |       | 878                         |       | 89,907                         |       | —           |       | 94,685                  |       |
| Goodwill and  intangibles                         |       | 561,401                |       | —                      |       | —                         |       | —           |       | 561,401                 |       |
| Investments in  and advances to affiliates        |       | 143,630                |       | 115,577                     |       | 1,019                          |       | (245,694         | )          | 14,532                  |       |
| Other assets                                      |       | 11,345                 |       | 85                          |       | 445                            |       | —           |       | 11,875                  |       |
| Long-term assets  of discontinued operations      |       | —                 |       | —                      |       | 833                            |       | —           |       | 833                     |       |
| Total assets                                      |       | $                      | 810,686    |                        | $          | 127,580                        |       | $                | 169,727    |                    | $          | (324,429 | ) | $ | 783,564 |   |
|                                              |       |                   |       |                        |       |                           |       |             |       |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**    |       |                   |       |                        |       |                           |       |             |       |                    |       |
| Current  liabilities:                             |       |                   |       |                        |       |                           |       |             |       |                    |       |
| Accounts payable                                  |       | $                      | 1          |                        | $          | 53                             |       | $                | 5,338      |                    | $          | — |   | $ | 5,392 |   |
| Accrued payroll  and benefits                     |       | 1,822                  |       | 678                         |       | 5,000                          |       | —           |       | 7,500                   |       |
| Due to related  parties                           |       | —                 |       | 27,030                      |       | 51,705                         |       | (78,735          | )          | —                  |       |
| Other accrued  expenses                           |       | 15,373                 |       | 77                          |       | 6,790                          |       | —           |       | 22,240                  |       |
| Current  maturities of long-term debt             |       | 3,918                  |       | 97                          |       | 8,190                          |       | —           |       | 12,205                  |       |
| Current  liabilities of discontinued operations   |       | —                 |       | —                      |       | 629                            |       | —           |       | 629                     |       |
| Total current  liabilities                        |       | 21,114                 |       | 27,935                      |       | 77,652                         |       | (78,735          | )          | 47,966                  |       |
| Long-term debt,  less current maturities          |       | 417,137                |       | 80                          |       | 23,395                         |       | —           |       | 440,612                 |       |
| Other  liabilities                                |       | 9,927                  |       | 121                         |       | 22,960                         |       | —           |       | 33,008                  |       |
| Deferred income  tax payable                      |       | 12,526                 |       | —                      |       | —                         |       | —           |       | 12,526                  |       |
| Long-term  liabilities of discontinued operations |       | —                 |       | —                      |       | 236                            |       | —           |       | 236                     |       |
| Minority  interest                                |       | 38,010                 |       | —                      |       | —                         |       | —           |       | 38,010                  |       |
| Stockholders’  equity                        |       | 311,972                |       | 99,444                      |       | 45,484                         |       | (245,694         | )          | 211,206                 |       |
| Total  liabilities and stockholders’ equity  |       | $                      | 810,686    |                        | $          | 127,580                        |       | $                | 169,727    |                    | $          | (324,429 | ) | $ | 783,564 |   |

 

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**SYMBION, INC.**

**CONSOLIDATING BALANCE SHEET**

**December 31, 2007**

 
| ** **                                        | ** ** | **Parent Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| **ASSETS**                                        |       |                   |       |                        |       |                           |       |             |       |                    |       |
| Current assets:                                   |       |                   |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash  equivalents                        |       | $                      | 13,019     |                        | $          | 7,063                          |       | $                | 24,574     |                    | $          | — |   | $ | 44,656 |   |
| Accounts  receivable, net                         |       | —                 |       | 1,162                       |       | 32,796                         |       | —           |       | 33,958                  |       |
| Inventories                                       |       | —                 |       | —                      |       | 8,479                          |       | —           |       | 8,479                   |       |
| Prepaid expenses  and other current assets        |       | 8,692                  |       | 1,096                       |       | 5,201                          |       | —           |       | 14,989                  |       |
| Due from related  parties                         |       | 60,646                 |       | —                      |       | —                         |       | (60,646          | )          | —                  |       |
| Income tax  receivable                            |       | 4,053                  |       | —                      |       | —                         |       | —           |       | 4,053                   |       |
| Current assets  of discontinued operations        |       | —                 |       | —                      |       | 1,064                          |       | —           |       | 1,064                   |       |
| Total current  assets                             |       | 86,410                 |       | 9,321                       |       | 72,114                         |       | (60,646          | )          | 107,199                 |       |
| Property and  equipment, net                      |       | 856                    |       | 3,032                       |       | 77,606                         |       | —           |       | 81,494                  |       |
| Goodwill                                          |       | 548,136                |       | —                      |       | —                         |       | —           |       | 548,136                 |       |
| Investments in  and advances to affiliates        |       | 227,397                |       | 139,565                     |       | 2,627                          |       | (352,507         | )          | 17,082                  |       |
| Other assets                                      |       | 9,795                  |       | 144                         |       | 865                            |       | —           |       | 10,804                  |       |
| Long-term assets  of discontinued operations      |       | —                 |       | —                      |       | 4,098                          |       | —           |       | 4,098                   |       |
| Total assets                                      |       | $                      | 872,594    |                        | $          | 152,062                        |       | $                | 157,310    |                    | $          | (413,153 | ) | $ | 768,813 |   |
|                                              |       |                   |       |                        |       |                           |       |             |       |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**    |       |                   |       |                        |       |                           |       |             |       |                    |       |
| Current  liabilities:                             |       |                   |       |                        |       |                           |       |             |       |                    |       |
| Accounts payable                                  |       | $                      | 75         |                        | $          | 47                             |       | $                | 5,202      |                    | $          | — |   | $ | 5,324 |   |
| Accrued payroll  and benefits                     |       | 554                    |       | 590                         |       | 6,125                          |       | —           |       | 7,269                   |       |
| Due to related  parties                           |       | —                 |       | 28,712                      |       | 31,934                         |       | (60,646          | )          | —                  |       |
| Other accrued  expenses                           |       | 8,258                  |       | 1,580                       |       | 4,845                          |       | —           |       | 14,683                  |       |
| Deferred income  tax payable                      |       | 170                    |       | —                      |       | —                         |       | —           |       | 170                     |       |
| Federal and  state income tax payable             |       | —                 |       | —                      |       | —                         |       | —           |       | —                  |       |
| Current  maturities of long-term debt             |       | —                 |       | —                      |       | 8,029                          |       | —           |       | 8,029                   |       |
| Current  liabilities of discontinued operations   |       | —                 |       | —                      |       | 1,107                          |       | —           |       | 1,107                   |       |
| Total current  liabilities                        |       | 9,057                  |       | 30,929                      |       | 57,242                         |       | (60,646          | )          | 36,582                  |       |
| Long-term debt,  less current maturities          |       | 424,375                |       | 15                          |       | 4,535                          |       | —           |       | 428,925                 |       |
| Non current  deferred income tax payable          |       | 24,042                 |       | —                      |       | —                         |       | —           |       | 24,042                  |       |
| Other  liabilities                                |       | 4,740                  |       | 915                         |       | 5,275                          |       | —           |       | 10,930                  |       |
| Long-term  liabilities of discontinued operations |       | —                 |       | —                      |       | 146                            |       | —           |       | 146                     |       |
| Minority  interest                                |       | 34,902                 |       | —                      |       | —                         |       | —           |       | 34,902                  |       |
| Stockholders’  equity                        |       | 375,478                |       | 120,203                     |       | 90,112                         |       | (352,507         | )          | 233,286                 |       |
| Total  liabilities and stockholders’ equity  |       | $                      | 872,594    |                        | $          | 152,062                        |       | $                | 157,310    |                    | $          | (413,153 | ) | $ | 768,813 |   |

 

F-31

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Table of Contents

 

**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**For the year ended December 31,2008**

 
| ** **                                              | ** ** | **Parent  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| Revenues                                                |       | $                  | 19,448     |                        | $          | 10,685                         |       | $                | 317,441    |                    | $          | (15,674 | ) | $ | 331,900 |   |
| Operating  expenses:                                    |       |               |       |                        |       |                           |       |             |       |                    |       |
| Salaries and  benefits                                  |       | —             |       | 17,229                      |       | 73,281                         |       | —           |       | 90,510                  |       |
| Supplies                                                |       | —             |       | 923                         |       | 66,639                         |       | —           |       | 67,562                  |       |
| Professional and  medical fees                          |       | —             |       | 5,416                       |       | 13,605                         |       | —           |       | 19,021                  |       |
| Rent and lease  expense                                 |       | —             |       | 2,032                       |       | 20,275                         |       | —           |       | 22,307                  |       |
| Other operating  expenses                               |       | —             |       | 3,658                       |       | 22,386                         |       | —           |       | 26,044                  |       |
| Cost of revenues                                        |       | —             |       | 29,258                      |       | 196,186                        |       | —           |       | 225,444                 |       |
| General and  administrative expense                     |       | 23,923             |       | —                      |       | —                         |       | —           |       | 23,923                  |       |
| Depreciation and  amortization                          |       | 280                |       | 492                         |       | 14,403                         |       |             |       | 15,175                  |       |
| Provision for  doubtful accounts                        |       | —             |       | 262                         |       | 3,599                          |       | —           |       | 3,861                   |       |
| Income on equity  investments                           |       | —             |       | (1,504                      | )          | —                         |       | —           |       | (1,504                  | )          |
| Impairment and  loss on disposal of long-lived assets   |       | —             |       | —                      |       | 924                            |       | —           |       | 924                     |       |
| Litigation  Settlements, net                            |       | —             |       | —                      |       | 893                            |       |             |       | 893                     |       |
| Management fees                                         |       | —             |       | —                      |       | 15,674                         |       | (15,674          | )          | —                  |       |
| Equity in  earnings of affiliates                       |       | 38,274             |       | —                      |       | —                         |       | (38,274          | )          | —                  |       |
| Total operating  expenses                               |       | 62,477             |       | 28,508                      |       | 231,679                        |       | (53,948          | )          | 268,716                 |       |
| Operating (loss)  income                                |       | (43,029            | )          | (17,823                     | )          | 85,762                         |       | 38,274           |       | 63,184                  |       |
| Minority  interest in loss of consolidated subsidiaries |       | —             |       | —                      |       | (23,657                        | )          | —           |       | (23,657                 | )          |
| Interest  (expense) income, net                         |       | (42,265            | )          | 294                         |       | (1,455                         | )          | —           |       | (43,426                 | )          |
| (Loss) income  before taxes and discontinued operations |       | (85,294            | )          | (17,529                     | )          | 60,650                         |       | 38,274           |       | (3,899                  | )          |
| Provision for  income taxes                             |       | 12,052             |       | —                      |       | 1,204                          |       | —           |       | 13,256                  |       |
| Loss (Income)  from continuing operations               |       | (97,346            | )          | (17,529                     | )          | 59,446                         |       | 38,274           |       | (17,155                 | )          |
| Loss from  discontinued operations, net of taxes        |       | —             |       | —                      |       | (3,643                         | )          | —           |       | (3,643                  | )          |
| Net (loss)  income                                      |       | $                  | (97,346    | )                           | $          | (17,529                        | )          | $                | 55,803     |                    | $          | 38,274 |   | $ | (20,798 | ) |

 

F-32

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Tableof Contents

 

**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**For the period August 24, 2007to December 31, 2007**

 
| ** **                                                   | ** ** | **Parent  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| Revenues                                                     |       | $                  | 5,932      |                        | $          | 3,590                          |       | $                | 101,941    |                    | $          | (4,823 | ) | $ | 106,640 |   |
| Operating  expenses:                                         |       |               |       |                        |       |                           |       |             |       |                    |       |
| Salaries and  benefits                                       |       | —             |       | 1,560                       |       | 28,203                         |       | —           |       | 29,763                  |       |
| Supplies                                                     |       | —             |       | 299                         |       | 21,633                         |       | —           |       | 21,932                  |       |
| Professional and  medical fees                               |       | —             |       | 304                         |       | 6,164                          |       | —           |       | 6,468                   |       |
| Rent and lease  expense                                      |       | —             |       | 215                         |       | 6,823                          |       | —           |       | 7,038                   |       |
| Other operating  expenses                                    |       | —             |       | 143                         |       | 8,467                          |       | —           |       | 8,610                   |       |
| Cost of revenues                                             |       | —             |       | 2,521                       |       | 71,290                         |       | —           |       | 73,811                  |       |
| General and  administrative expense                          |       | 7,912              |       | —                      |       | —                         |       | —           |       | 7,912                   |       |
| Depreciation and  amortization                               |       | 184                |       | 360                         |       | 4,188                          |       | —           |       | 4,732                   |       |
| Provision for  doubtful accounts                             |       | —             |       | 63                          |       | 1,695                          |       | —           |       | 1,758                   |       |
| Income on equity  investments                                |       | —             |       | (21                         | )          | —                         |       | —           |       | (21                     | )          |
| Impairment and  (gain) loss on disposal of long-lived assets |       | 2                  |       | (275                        | )          | 7                              |       | —           |       | (266                    | )          |
| Management fees                                              |       | —             |       | —                      |       | 4,823                          |       | (4,823           | )          | —                  |       |
| Equity in  earnings of affiliates                            |       | (11,218            | )          | —                      |       | —                         |       | 11,218           |       | —                  |       |
| Total operating  expenses                                    |       | (3,120             | )          | 2,648                       |       | 82,003                         |       | 6,395            |       | 87,926                  |       |
| Operating income  (loss)                                     |       | 9,052              |       | 942                         |       | 19,938                         |       | (11,218          | )          | 18,714                  |       |
| Minority  interest in loss of consolidated subsidiaries      |       | —             |       | —                      |       | (7,685                         | )          | —           |       | (7,685                  | )          |
| Interest  (expense) income, net                              |       | (14,006            | )          | 1,486                       |       | (2,243                         | )          | —           |       | (14,763                 | )          |
| (Loss) income  before taxes and discontinued operations      |       | (4,954             | )          | 2,428                       |       | 10,010                         |       | (11,218          | )          | (3,734                  | )          |
| (Benefit)  provision for income taxes                        |       | (1,727             | )          | —                      |       | 951                            |       | —           |       | (776                    | )          |
| (Loss) income  from continuing operations                    |       | (3,227             | )          | 2,428                       |       | 9,059                          |       | (11,218          | )          | (2,958                  | )          |
| Loss from  discontinued operations, net of taxes             |       | —             |       | —                      |       | (269                           | )          | —           |       | (269                    | )          |
| Net (loss)  income                                           |       | $                  | (3,227     | )                           | $          | 2,428                          |       | $                | 8,790      |                    | $          | (11,218 | ) | $ | (3,227 | ) |

 

F-33

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Tableof Contents

 

**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**For the period January 1, 2007to August 23, 2007**

 
| ** **                                                   | ** ** | **PREDECESSOR**    | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                   | ** ** | **Parent  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
| Revenues                                                     |       | $                  | 10,984     |   | $ | 6,673 |   | $ | 188,874 |   | $ | (8,866 | ) | $ | 197,665 |   |
| Operating  expenses:                                         |       |               |       |   |   |   |   |   |   |   |   |
| Salaries and  benefits                                       |       | —             |       | 2,792 |   | 51,256 |   | — |   | 54,048 |   |
| Supplies                                                     |       | —             |       | 411 |   | 38,692 |   | — |   | 39,103 |   |
| Professional and  medical fees                               |       | —             |       | 267 |   | 11,853 |   | — |   | 12,120 |   |
| Rent and lease  expense                                      |       | —             |       | 347 |   | 11,950 |   | — |   | 12,297 |   |
| Other operating  expenses                                    |       | —             |       | 245 |   | 15,028 |   | — |   | 15,273 |   |
| Cost of revenues                                             |       | —             |       | 4,062 |   | 128,779 |   | — |   | 132,841 |   |
| General and administrative  expense                          |       | 23,961             |       | — |   | — |   | — |   | 23,961 |   |
| Depreciation and  amortization                               |       | 396                |       | 211 |   | 7,313 |   | — |   | 7,920 |   |
| Provision for  doubtful accounts                             |       | —             |       | 98 |   | 2,593 |   | — |   | 2,691 |   |
| Loss on equity  investments                                  |       | —             |       | 5 |   | — |   | — |   | 5 |   |
| Impairment and  (gain) loss on disposal of long-lived assets |       | (1,453             | )          | (113 | ) | 1,289 |   | — |   | (277 | ) |
| Management fees                                              |       | —             |       | — |   | 8,866 |   | (8,866 | ) | — |   |
| Equity in  earnings of affiliates                            |       | (28,272            | )          | — |   | — |   | 28,272 |   | — |   |
| Proceeds from  insurance and litigation settlements, net     |       | —             |       | — |   | (161 | ) | — |   | (161 | ) |
| Merger  transaction expenses                                 |       | 7,522              |       | — |   | — |   | — |   | 7,522 |   |
| Total operating  expenses                                    |       | 2,154              |       | 4,263 |   | 148,679 |   | 19,406 |   | 174,502 |   |
| Operating (loss)  income                                     |       | 8,830              |       | 2,410 |   | 40,195 |   | (28,272 | ) | 23,163 |   |
| Minority  interest in loss of consolidated subsidiaries      |       | —             |       | — |   | (15,656 | ) | — |   | (15,656 | ) |
| Interest  (expense) income, net                              |       | (6,322             | )          | 2,589 |   | (1,495 | ) | — |   | (5,228 | ) |
| Income (loss)  before taxes and discontinued operations      |       | 2,508              |       | 4,999 |   | 23,044 |   | (28,272 | ) | 2,279 |   |
| Provision  (benefit) for income taxes                        |       | 4,683              |       | — |   | (667 | ) | — |   | 4,016 |   |
| (Loss) income  from continuing operations                    |       | (2,175             | )          | 4,999 |   | 23,711 |   | (28,272 | ) | (1,737 | ) |
| Loss from  discontinued operations, net of taxes             |       | —             |       | — |   | (438 | ) | — |   | (438 | ) |
| Net (loss)  income                                           |       | $                  | (2,175     | ) | $ | 4,999 |   | $ | 23,273 |   | $ | (28,272 | ) | $ | (2,175 | ) |

 

F-34

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Table of Contents

 

**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**For the year ended December 31,2006**

 
| ** **                                                   | ** ** | **Predecessor**    | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                   | ** ** | **Parent  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
| Revenues                                                     |       | $                  | 17,175     |   | $ | 9,407 |   | $ | 272,420 |   | $ | (13,615 | ) | $ | 285,387 |   |
| Operating  expenses:                                         |       |               |       |   |   |   |   |   |   |   |   |
| Salaries and  benefits                                       |       | —             |       | 3,862 |   | 71,087 |   | — |   | 74,949 |   |
| Supplies                                                     |       | —             |       | 545 |   | 54,429 |   | — |   | 54,974 |   |
| Professional and  medical fees                               |       | —             |       | 405 |   | 14,099 |   | — |   | 14,504 |   |
| Rent and lease  expense                                      |       | —             |       | 412 |   | 17,261 |   | — |   | 17,673 |   |
| Other operating  expenses                                    |       | —             |       | 302 |   | 19,548 |   | — |   | 19,850 |   |
| Cost of revenues                                             |       | —             |       | 5,526 |   | 176,424 |   | — |   | 181,950 |   |
| General and  administrative expense                          |       | 24,407             |       | — |   | — |   | — |   | 24,407 |   |
| Depreciation and  amortization                               |       | 746                |       | 917 |   | 10,250 |   | — |   | 11,913 |   |
| Provision for  doubtful accounts                             |       | —             |       | 213 |   | 3,739 |   | — |   | 3,952 |   |
| Income on equity  investments                                |       | —             |       | (2,423 | ) | — |   | — |   | (2,423 | ) |
| Impairment and  (gain) loss on disposal of long-lived assets |       | 48                 |       | 160 |   | (854 | ) | — |   | (646 | ) |
| Management fees                                              |       | —             |       | — |   | 13,615 |   | (13,615 | ) | — |   |
| Equity in  earnings of affiliates                            |       | (46,055            | )          | — |   | — |   | 46,055 |   | — |   |
| Proceeds from  insurance and litigation settlements, net     |       | —             |       | — |   | (998 | ) | — |   | (998 | ) |
| Total operating  expenses                                    |       | (20,854            | )          | 4,393 |   | 202,176 |   | 32,440 |   | 218,155 |   |
| Operating income  (loss)                                     |       | 38,029             |       | 5,014 |   | 70,244 |   | (46,055 | ) | 67,232 |   |
| Minority  interest in loss of consolidated subsidiaries      |       | —             |       | (22 | ) | (28,272 | ) | — |   | (28,294 | ) |
| Interest  (expense) income, net                              |       | (7,558             | )          | 6 |   | 444 |   | — |   | (7,108 | ) |
| Income (loss)  before taxes and discontinued operations      |       | 30,471             |       | 4,998 |   | 42,416 |   | (46,055 | ) | 31,830 |   |
| Provision for  income taxes                                  |       | 11,678             |       | — |   | 576 |   | — |   | 12,254 |   |
| Income (loss)  from continuing operations                    |       | 18,793             |       | 4,998 |   | 41,840 |   | (46,055 | ) | 19,576 |   |
| Loss from  discontinued operations, net of taxes             |       | —             |       | — |   | (783 | ) | — |   | (783 | ) |
| Net income  (loss)                                           |       | $                  | 18,793     |   | $ | 4,998 |   | $ | 41,057 |   | $ | (46,055 | ) | $ | 18,793 |   |

 

F-35

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Tableof Contents

 

**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the year ended December 31,2008**

 
| ** **                                                                                     | ** ** | **Parent  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| Cash flows from  operating activities:                                                         |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (loss)  income                                                                             |       | $                  | (97,346    | )                           | $          | (17,529                        | )          | $                | 55,803     |                    | $          | 38,274 |   | $ | (20,798 | ) |
| Adjustments to  reconcile net (loss) income to net cash from operating activities:             |       |               |       |                        |       |                           |       |             |       |                    |       |
| Depreciation and  amortization                                                                 |       | 280                |       | 492                         |       | 14,403                         |       | —           |       | 15,175                  |       |
| Amortization of  deferred financing costs                                                      |       | 4,477              |       | —                      |       | —                         |       | —           |       | 4,477                   |       |
| Non-cash  payment-in-kind interest option                                                      |       | 9,753              |       | —                      |       | —                         |       | —           |       | 9,753                   |       |
| Non-cash stock  option compensation expense                                                    |       | 2,114              |       | —                      |       | —                         |       | —           |       | 2,114                   |       |
| Non-cash losses                                                                                |       | —             |       | —                      |       | 924                            |       | —           |       | 924                     |       |
| Minority  interests in income of consolidated subsidiaries                                     |       | —             |       | —                      |       | 23,657                         |       | —           |       | 23,657                  |       |
| Deferred income  taxes                                                                         |       | 13,718             |       | —                      |       | —                         |       | —           |       | 13,718                  |       |
| Distributions to  minority partners                                                            |       | —             |       | —                      |       | (23,423                        | )          | —           |       | (23,423                 | )          |
| Equity in  earnings of affiliates, net of distributions received                               |       | 38,274             |       | —                      |       | —                         |       | (38,274          | )          | —                  |       |
| Income on equity  investments                                                                  |       | —             |       | 333                         |       | —                         |       | —           |       | 333                     |       |
| Provision for  doubtful accounts                                                               |       | —             |       | 262                         |       | 3,599                          |       | —           |       | 3,861                   |       |
| Changes in  operating assets and liabilities, net of effect of acquisitions and  dispositions: |       |               |       |                        |       |                           |       |             |       |                    |       |
| Accounts  receivable                                                                           |       | —             |       | —                      |       | (3,536                         | )          | —           |       | (3,536                  | )          |
| Income taxes  payable                                                                          |       | 1,959              |       | —                      |       | —                         |       | —           |       | 1,959                   |       |
| Other assets and  liabilities                                                                  |       | 24,203             |       | 19,180                      |       | (36,397                        | )          | —           |       | 6,986                   |       |
| Net cash (used  in) provided by operating activities — continuing operations              |       | (2,568             | )          | 2,738                       |       | 35,030                         |       | —           |       | 35,200                  |       |
| Net cash  provided by operating activities —discontinued operations                       |       | —             |       | —                      |       | 3,600                          |       | —           |       | 3,600                   |       |
| Net cash (used  in) provided by operating activities                                           |       | (2,568             | )          | 2,738                       |       | 38,630                         |       | —           |       | 38,800                  |       |
| Cash flows from  investing activities:                                                         |       |               |       |                        |       |                           |       |             |       |                    |       |
| Payments for  acquisitions, net of cash acquired                                               |       | —             |       | —                      |       | (15,695                        | )          | —           |       | (15,695                 | )          |
| Purchases of  property and equipment, net                                                      |       | (580               | )          | —                      |       | (15,069                        | )          | —           |       | (15,649                 | )          |
| Change in other  assets                                                                        |       | (1,504             | )          | —                      |       | —                         |       | —           |       | (1,504                  | )          |
| Net cash used in  investing activities —continuing operations                             |       | (2,084             | )          | —                      |       | (30,764                        | )          | —           |       | (32,848                 | )          |
| Net cash used in  investing activities —discontinued operations                           |       | —             |       | —                      |       | (358                           | )          | —           |       | (358                    | )          |
| Net cash used in  investing activities                                                         |       | (2,084             | )          |                        |       | (31,122                        | )          | —           |       | (33,206                 | )          |
| Cash flows from  financing activities:                                                         |       |               |       |                        |       |                           |       |             |       |                    |       |
| Principal  payments on long-term debt                                                          |       | (13,513            | )          | —                      |       | (5,162                         | )          | —           |       | (18,675                 | )          |
| Proceeds from  debt issuances                                                                  |       | 12,639             |       | —                      |       | 852                            |       | —           |       | 13,491                  |       |
| Repayment of  bridge facility                                                                  |       | (179,937           | )          | —                      |       | —                         |       | —           |       | (179,937                | )          |
| Payment of debt  issuance costs                                                                |       | (4,739             | )          | —                      |       | —                         |       | —           |       | (4,739                  | )          |
| Proceeds from  issuance of Toggle Notes                                                        |       | 179,937            |       | —                      |       | —                         |       | —           |       | 179,937                 |       |
| Change in other  long-term liabilities                                                         |       | 1,615              |       | —                      |       | 41                             |       | —           |       | 1,656                   |       |
| Net cash used in  financing activities — continuing operations                            |       | (3,998             | )          | —                      |       | (4,269                         | )          | —           |       | (8,267                  | )          |
| Net cash used in  financing activities —discontinued operations                           |       | —             |       | —                      |       | (150                           | )          | —           |       | (150                    | )          |
| Net cash used in  financing activities                                                         |       | (3,998             | )          | —                      |       | (4,419                         | )          | —           |       | (8,417                  | )          |
| Net (decrease)  increase in cash and cash equivalents                                          |       | (8,650             | )          | 2,738                       |       | 3,089                          |       | —           |       | (2,823                  | )          |
| Cash and cash  equivalents at beginning of period                                              |       | 13,019             |       | 7,063                       |       | 24,574                         |       | —           |       | 44,656                  |       |
| Cash and cash  equivalents at end of period                                                    |       | $                  | 4,369      |                        | $          | 9,801                          |       | $                | 27,663     |                    | $          | — |   | $ | 41,833 |   |

 

F-36

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Tableof Contents

 

**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the period from August 24,2007 through December 31, 2007**

 
| ** **                                                                                    | ** ** | **Parent  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| Cash flows from  operating activities:                                                        |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (loss)  income                                                                            |       | $                  | (3,227     | )                           | $          | 2,428                          |       | $                | 8,790      |                    | $          | (11,218 | ) | $ | (3,227 | ) |
| Adjustments to  reconcile net (loss) income to net cash from operating activities:            |       |               |       |                        |       |                           |       |             |       |                    |       |
| Depreciation and  amortization                                                                |       | 184                |       | 360                         |       | 4,188                          |       | —           |       | 4,732                   |       |
| Non-cash stock  option compensation expense                                                   |       | 409                |       | —                      |       | —                         |       | —           |       | 409                     |       |
| Amortization of  deferred financing costs                                                     |       | 1,872              |       | —                      |       | —                         |       | —           |       | 1,872                   |       |
| Non-cash gains  and losses                                                                    |       | 2                  |       | (275                        | )          | 304                            |       | —           |       | 31                      |       |
| Minority  interests                                                                           |       | —             |       | —                      |       | 7,685                          |       | —           |       | 7,685                   |       |
| Deferred income  taxes                                                                        |       | 2,217              |       | —                      |       | —                         |       | —           |       | 2,217                   |       |
| Distributions to  minority partners                                                           |       | —             |       | —                      |       | (7,301                         | )          | —           |       | (7,301                  | )          |
| Equity in  earnings of affiliates                                                             |       | (11,218            | )          | —                      |       | —                         |       | 11,218           |       | —                  |       |
| Income on equity  investments                                                                 |       | —             |       | (21                         | )          | —                         |       | —           |       | (21                     | )          |
| Provision for  doubtful accounts                                                              |       | —             |       | 63                          |       | 1,695                          |       | —           |       | 1,758                   |       |
| Changes in operating  assets and liabilities, net of effect of acquisitions and dispositions: |       |               |       |                        |       |                           |       |             |       |                    |       |
| Accounts  receivable                                                                          |       | —             |       | —                      |       | (90                            | )          | —           |       | (90                     | )          |
| Income tax  receivable                                                                        |       | 7,018              |       | —                      |       | —                         |       | —           |       | 7,018                   |       |
| Other assets and  liabilities                                                                 |       | (5,421             | )          | 1,808                       |       | 1,712                          |       | —           |       | (1,901                  | )          |
| Net cash (used  in) provided by operating activities — continuing operations             |       | (8,164             | )          | 4,363                       |       | 16,983                         |       | —           |       | 13,182                  |       |
| Net cash  provided by operating activities — discontinued operations                     |       | —             |       | —                      |       | 849                            |       | —           |       | 849                     |       |
| Net cash (used  in) provided by operating activities                                          |       | (8,164             | )          | 4,363                       |       | 17,832                         |       | —           |       | 14,031                  |       |
| Cash flows from  investing activities:                                                        |       |               |       |                        |       |                           |       |             |       |                    |       |
| Payments for  acquisitions, net of cash acquired                                              |       | —             |       | —                      |       | (9,815                         | )          | —           |       | (9,815                  | )          |
| Purchases of  property and equipment, net                                                     |       | (306               | )          | —                      |       | (6,642                         | )          | —           |       | (6,948                  | )          |
| Change in other  assets                                                                       |       | —             |       | (661                        | )          | (180                           | )          | —           |       | (841                    | )          |
| Net cash used in  investing activities — continuing operations                           |       | (306               | )          | (661                        | )          | (16,637                        | )          | —           |       | (17,604                 | )          |
| Net cash used in  investing activities — discontinued operations                         |       | —             |       | —                      |       | (24                            | )          | —           |       | (24                     | )          |
| Net cash used in  investing activities                                                        |       | (306               | )          | (661                        | )          | (16,661                        | )          | —           |       | (17,628                 | )          |
| Cash flows from  financing activities:                                                        |       |               |       |                        |       |                           |       |             |       |                    |       |
| Principal  payments on long-term debt                                                         |       | (625               | )          | —                      |       | (867                           | )          | —           |       | (1,492                  | )          |
| Proceeds from  debt issuances                                                                 |       | —             |       | —                      |       | 50                             |       | —           |       | 50                      |       |
| Proceeds from  capital contributions by minority partners                                     |       | —             |       | —                      |       | 756                            |       | —           |       | 756                     |       |
| Payment of  merger costs incurred by Symbion Holdings, LLC                               |       | (445               | )          | —                      |       | —                         |       | —           |       | (445                    | )          |
| Change in other  long-term liabilities                                                        |       | (513               | )          | —                      |       | (439                           | )          | —           |       | (952                    | )          |
| Net cash used in  financing activities — continuing operations                           |       | (1,583             | )          | —                      |       | (500                           | )          | —           |       | (2,083                  | )          |
| Net cash used in  financing activities — discontinued operations                         |       | —             |       | —                      |       | (11                            | )          | —           |       | (11                     | )          |
| Net cash used in  financing activities                                                        |       | (1,583             | )          | —                      |       | (511                           | )          | —           |       | (2,094                  | )          |
| Net (decrease)  increase in cash and cash equivalents                                         |       | (10,053            | )          | 3,702                       |       | 660                            |       | —           |       | (5,691                  | )          |
| Cash and cash  equivalents at beginning of period                                             |       | 23,072             |       | 3,361                       |       | 23,914                         |       | —           |       | 50,347                  |       |
| Cash and cash  equivalents at end of period                                                   |       | $                  | 13,019     |                        | $          | 7,063                          |       | $                | 24,574     |                    | $          | — |   | $ | 44,656 |   |

 

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**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the period from January 1 toAugust 23, 2007**

 
| ** **                                                                                     | ** ** | **Predecessor**        | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                     | ** ** | **Parent Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
| Cash flows from  operating activities:                                                         |       |                   |       |   |   |   |   |   |   |   |   |
| Net (loss)  income                                                                             |       | $                      | (2,175     | ) | $ | 4,999 |   | $ | 23,273 |   | $ | (28,272 | ) | $ | (2,175 | ) |
| Adjustments to  reconcile net (loss) income to net cash from operating activities:             |       |                   |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                                 |       | 396                    |       | 211 |   | 7,313 |   | — |   | 7,920 |   |
| Non-cash stock  option compensation expense                                                    |       | 9,367                  |       | — |   | 970 |   | — |   | 10,337 |   |
| Amortization of  deferred financing costs                                                      |       | 322                    |       | — |   | — |   | — |   | 322 |   |
| Non-cash gains  and losses                                                                     |       | (1,453                 | )          | (6,008 | ) | 7,156 |   | — |   | (305 | ) |
| Minority  interests                                                                            |       | —                 |       | — |   | 15,656 |   | — |   | 15,656 |   |
| Deferred income  taxes                                                                         |       | 13,637                 |       | — |   | — |   | — |   | 13,637 |   |
| Distributions to  minority partners                                                            |       | —                 |       | — |   | (17,185 | ) | — |   | (17,185 | ) |
| Equity in  earnings of affiliates                                                              |       | (28,272                | )          | — |   | — |   | 28,272 |   | — |   |
| Loss on equity  investments                                                                    |       | —                 |       | 5 |   | — |   | — |   | 5 |   |
| Provision for  doubtful accounts                                                               |       | —                 |       | 98 |   | 2,593 |   | — |   | 2,691 |   |
| Changes in  operating assets and liabilities, net of effect of acquisitions and  dispositions: |       |                   |       |   |   |   |   |   |   |   |   |
| Accounts  receivable                                                                           |       | —                 |       | — |   | (166 | ) | — |   | (166 | ) |
| Income tax  receivable                                                                         |       | (10,402                | )          | — |   | — |   | — |   | (10,402 | ) |
| Other assets and  liabilities                                                                  |       | (1,977                 | )          | — |   | (3,109 | ) | — |   | (5,086 | ) |
| Net cash (used  in) provided by operating activities — continuing operations              |       | (20,557                | )          | (695 | ) | 36,501 |   | — |   | 15,249 |   |
| Net cash  provided by operating activities — discontinued operations                      |       | —                 |       | — |   | 462 |   | — |   | 462 |   |
| Net cash (used  in) provided by operating activities                                           |       | (20,557                | )          | (695 | ) | 36,963 |   | — |   | 15,711 |   |
| Cash flows from  investing activities:                                                         |       |                   |       |   |   |   |   |   |   |   |   |
| Payments for  acquisitions, net of cash acquired                                               |       | —                 |       | — |   | (14,981 | ) | — |   | (14,981 | ) |
| Purchases of  property and equipment, net                                                      |       | —                 |       | — |   | (7,664 | ) | — |   | (7,664 | ) |
| Change in other  assets                                                                        |       | —                 |       | — |   | 1,401 |   | — |   | 1,401 |   |
| Net cash used in  investing activities — continuing operations                            |       | —                 |       | — |   | (21,244 | ) | — |   | (21,244 | ) |
| Net cash used in  investing activities — discontinued operations                          |       | —                 |       | — |   | (36 | ) | — |   | (36 | ) |
| Net cash used in  investing activities                                                         |       | —                 |       | — |   | (21,280 | ) | — |   | (21,280 | ) |
| Cash flows from  financing activities:                                                         |       |                   |       |   |   |   |   |   |   |   |   |
| Principal  payments on long-term debt                                                          |       | (159,500               | )          | — |   | (2,055 | ) | — |   | (161,555 | ) |
| Proceeds from  debt issuances                                                                  |       | 455,500                |       | — |   | 3,097 |   | — |   | 458,597 |   |
| Payment of debt issuance  costs                                                                |       | (12,544                | )          | — |   | — |   | — |   | (12,544 | ) |
| Proceeds from  capital contributions by minority partners                                      |       | —                 |       | — |   | 2,241 |   | — |   | 2,241 |   |
| Payment of  merger costs incurred by Symbion Holdings, LLC                                |       | (6,528                 | )          | — |   | — |   | — |   | (6,528 | ) |
| Cash paid to  shareholders                                                                     |       | (490,510               | )          | — |   | — |   | — |   | (490,510 | ) |
| Change in other  long-term liabilities                                                         |       | 17,786                 |       | 2,592 |   | (20,128 | ) | — |   | 250 |   |
| Net proceeds  from issuance of common stock                                                    |       | 239,085                |       | — |   | — |   | — |   | 239,085 |   |
| Net cash  provided by (used in) financing activities — continuing operations              |       | 43,289                 |       | 2,592 |   | (16,845 | ) | — |   | 29,036 |   |
| Net cash used in  financing activities — discontinued operations                          |       |                   |       | — |   | (29 | ) | — |   | (29 | ) |
| Net cash  provided by (used in) financing activities                                           |       | 43,289                 |       | 2,592 |   | (16,874 | ) | — |   | 29,007 |   |
| Net increase  (decrease) in cash and cash equivalents                                          |       | 22,732                 |       | 1,897 |   | (1,191 | ) | — |   | 23,438 |   |
| Cash and cash  equivalents at beginning of period                                              |       | 340                    |       | 1,464 |   | 25,105 |   | — |   | 26,909 |   |
| Cash and cash  equivalents at end of period                                                    |       | $                      | 23,072     |   | $ | 3,361 |   | $ | 23,914 |   | $ | — |   | $ | 50,347 |   |

 

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**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the year ended December 31,2006**

 
| ** **                                                                                        | ** ** | **Predecessor**        | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                        | ** ** | **Parent Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
| Cash flows from  operating activities:                                                            |       |                   |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                 |       | $                      | 18,793     |   | $ | 4,998 |   | $ | 41,057 |   | $ | (46,055 | ) | $ | 18,793 |   |
| Adjustments to  reconcile net income (loss) net cash from operating activities:                   |       |                   |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                                    |       | 746                    |       | 917 |   | 10,250 |   | — |   | 11,913 |   |
| Non-cash stock  option compensation expense                                                       |       | 3,533                  |       | — |   | 332 |   | — |   | 3,865 |   |
| Amortization of  deferred financing costs                                                         |       | 506                    |       | — |   | — |   | — |   | 506 |   |
| Non-cash gains  and losses                                                                        |       | 48                     |       | (533 | ) | (160 | ) | — |   | (645 | ) |
| Minority  interests                                                                               |       | 28,294                 |       | — |   | — |   | — |   | 28,294 |   |
| Deferred income  taxes                                                                            |       | (1,556                 | )          | — |   | — |   | — |   | (1,556 | ) |
| Distributions to  minority partners                                                               |       | (25,447                | )          | — |   | — |   | — |   | (25,447 | ) |
| Equity in  earnings of affiliates                                                                 |       | (46,055                | )          | — |   | — |   | 46,055 |   | — |   |
| Income on equity  investments                                                                     |       | —                 |       | (2,423 | ) | — |   | — |   | (2,423 | ) |
| Provision for  doubtful accounts                                                                  |       | —                 |       | 213 |   | 3,739 |   | — |   | 3,952 |   |
| Excess tax  benefit from share-based compensation                                                 |       | (201                   | )          | — |   | — |   | — |   | (201 | ) |
| Changes in operating  assets and liabilities, net of effect of acquisitions and dispositions:     |       |                   |       |   |   |   |   |   |   |   |   |
| Accounts  receivable                                                                              |       | —                 |       | 1,863 |   | (4,818 | ) | — |   | (2,955 | ) |
| Other assets and  liabilities                                                                     |       | (34,181                | )          | (5,446 | ) | 36,432 |   | — |   | (3,195 | ) |
| Net cash (used  in) provided by operating activities — continuing operations                 |       | (55,520                | )          | (411 | ) | 86,832 |   | — |   | 30,901 |   |
| Net cash  provided by operating activities — discontinued operations                         |       | —                 |       | — |   | 2,423 |   | — |   | 2,423 |   |
| Net cash (used  in) provided by operating activities                                              |       | (55,520                | )          | (411 | ) | 89,255 |   | — |   | 33,324 |   |
| Cash flows from  investing activities:                                                            |       |                   |       |   |   |   |   |   |   |   |   |
| Payments for  acquisitions, net of cash acquired                                                  |       | —                 |       | — |   | (47,094 | ) | — |   | (47,094 | ) |
| Purchases of  property and equipment, net                                                         |       | (5,858                 | )          | — |   | (8,320 | ) | — |   | (14,178 | ) |
| Change in other  assets                                                                           |       | (2,376                 | )          | (949 | ) | 111 |   | — |   | (3,214 | ) |
| Net cash used in  investing activities — continuing operations                               |       | (8,234                 | )          | (949 | ) | (55,303 | ) | — |   | (64,486 | ) |
| Net cash used in  investing activities — discontinued operations                             |       | —                 |       | — |   | (1,601 | ) | — |   | (1,601 | ) |
| Net cash used in  investing activities                                                            |       | (8,234                 | )          | (949 | ) | (56,904 | ) | — |   | (66,087 | ) |
| Cash flows from  financing activities:                                                            |       |                   |       |   |   |   |   |   |   |   |   |
| Principal  payments on long-term debt                                                             |       | (52,500                | )          | — |   | (2,232 | ) | — |   | (54,732 | ) |
| Proceeds from  debt issuances                                                                     |       | 85,500                 |       | — |   | 101 |   | — |   | 85,601 |   |
| Proceeds from  capital contributions by minority partners                                         |       | —                 |       | — |   | 1,488 |   | — |   | 1,488 |   |
| Change in other  long-term liabilities                                                            |       | 29,067                 |       | (2,048 | ) | (28,310 | ) | — |   | (1,291 | ) |
| Proceeds from  issuance of common stock                                                           |       | 1,347                  |       | — |   | — |   | — |   | 1,347 |   |
| Net cash provided  by (used in) financing activities — continuing operations                 |       | 63,414                 |       | (2,048 | ) | (28,953 | ) | — |   | 32,413 |   |
| Net cash used in  financing activities — discontinued operations                             |       | —                 |       | — |   | (54 | ) | — |   | (54 | ) |
| Net cash  provided by (used in) financing activities                                              |       | 63,414                 |       | (2,048 | ) | (29,007 | ) | — |   | 32,359 |   |
| Net should read  net cash provided by (used in) (decrease) increase in cash and cash  equivalents |       | (340                   | )          | (3,408 | ) | 3,344 |   | — |   | (404 | ) |
| Cash and cash  equivalents at beginning of year                                                   |       | 680                    |       | 4,872 |   | 21,761 |   | — |   | 27,313 |   |
| Cash and cash  equivalents at end of year                                                         |       | $                      | 340        |   | $ | 1,464 |   | $ | 25,105 |   | $ | — |   | $ | 26,909 |   |

 

**16.  Subsequent Events**

** **

In January 2009, weopened the surgical facility under development as of December 31, 2008.

 

In February 2009, we closed our facility inEnglewood, Colorado.  We have recorded aliability of $4.0 million related to certain shut-down costs including the netfuture contractual obligations under our operating lease agreement at thissurgical facility, before consideration of potential sublease income.  These charges have been recorded in the firstquarter of 2009.

 

Effective February 28, 2009, we entered into aseparation agreement and disposed of our investment in our Fairview Maple GroveSurgery Center (Maple Grove, Minnesota). This disposal had no impact on our results of operations.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
| March  30, 2009 | SYMBION, INC. |
|----------------------|--------------------|
|                 |               |   |
|                 | By:                | /s/ Richard E.  Francis, Jr. |
|                 |               | Richard E.  Francis, Jr.*Chairman of the Board and Chief Executive  Officer* |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and incapacities and on the dates indicated.

 
| **Signature**                     | ** ** | **Title**                                                       | ** ** | **Date**             |
|-----------------------------------|------------|-----------------------------------------------------------------|------------|----------------------|
| ** **                        | ** ** | ** **                                                      | ** ** | ** **           |
| /s/ Richard E.  Francis, Jr. |       | Chairman of the Board,  Chief Executive Officer and Director    |       |                 |
| Richard E.  Francis, Jr.     |       | (Principal Executive  Officer)                                  |       | March 30,  2009 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Teresa F.  Sparks             |       | Senior Vice President  of Financial and Chief Financial Officer |       |                 |
| Teresa F. Sparks                  |       | (Principal Financial  and Accounting Officer)                   |       | March 30,  2009 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Clifford G.  Adlerz           |       |                                                            |       |                 |
| Clifford G.  Adlerz               |       | President, Chief  Operating Officer and Director                |       | March 30,  2009 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Thomas S.  Murphy, Jr.   |       |                                                            |       |                 |
| Thomas S.  Murphy, Jr.       |       | Director                                                        |       | March 30,  2009 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Robert V.  Delaney            |       |                                                            |       |                 |
| Robert V.  Delaney                |       | Director                                                        |       | March 30,  2009 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Quentin Chu                   |       |                                                            |       |                 |
| Quentin Chu                       |       | Director                                                        |       | March 30,  2009 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Kurt E. Bolin                 |       |                                                            |       |                 |
| Kurt E. Bolin                     |       | Director                                                        |       | March 30,  2009 |

 

**Supplemental Information to be Furnished WithReports Filed Pursuant to Section 15(d) of the Act by RegistrantsWhich Have Not Registered Securities Pursuant to Section 12 of the Act.**

 

No annual report covering the last fiscal year orproxy statement, form of proxy or other proxy soliciting material has beensent, or will be furnished subsequent to the filing of this Annual Report on Form 10-K,to the registrant’s security holders.

 

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**Exhibit Index**

 
| **No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|---------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2       |       | Agreement  and Plan of Merger, dated as of April 24, 2007, by and among Symbol  Acquisition, L.L.C., Symbol Merger Sub, Inc. and Symbion, Inc. (a)                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1     |       | Amended  Certificate of Incorporation of Symbion, Inc. (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2     |       | Amended  and Restated Bylaws of Symbion, Inc. (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1     |       | Indenture,  dated as of June 3, 2008, among Symbion, Inc., the Guarantors named  therein and U.S. Bank National Association, as Trustee (b)                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2     |       | Form of  Notes (included in Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.3     |       | Registration  Rights Agreement, dated as of June 3, 2007, among Symbion, Inc.,  the subsidiaries of Symbion, Inc. party thereto as guarantors, and  Merrill, Lynch, Pierce, Fenner & Smith Incorporated, Banc of America  Securities LLC and Greenwich Capital Markets, Inc. (b)                                                                                                                                                                                                                                                                            |
| 4.4     |       | First  Supplemental Indenture, dated as of September 18, 2008 among  Symbion, Inc., the Guarantors named therein and U.S. Bank National  Association, as Trustee (b)                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1    |       | Employment  Agreement, dated August 23, 2007, between Symbion, Inc. and Richard  E. Francis, Jr.(b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2    |       | Employment  Agreement, dated August 23, 2007, between Symbion, Inc. and  Clifford G. Adlerz (b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3    |       | Credit  Agreement, dated as of August 23, 2007, among Symbol Holdings  Corporation, Symbol Merger Sub, Inc., the Lenders party thereto from  time to time, Merrill Lynch Capital Corporation as Administrative Agent and  Collateral Agent, Bank of America, N.A. as Syndication Agent, The Royal Bank  of Scotland PLC and Fifth Third Bank as Co-Documentation Agents, and  Merrill Lynch & Co., Merrill, Lynch, Pierce, Fenner &  Smith Incorporated and Banc of America Securities LLC as Joint Lead  Arrangers and Joint Lead Bookrunners (b) |
| 10.4    |       | Lease  Agreement, dated June 26, 2001, between Burton Hills IV Partners and  Symbion, Inc. (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5    |       | First  Amendment to Lease Agreement, dated February 9, 2004, between Burton  Hills IV Partners and Symbion, Inc. (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6    |       | Symbion  Holdings Corporation 2007 Equity Incentive Plan (b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7    |       | Symbion, Inc.  Executive Change in Control Severance Plan (b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8    |       | Symbion  Holdings Corporation Compensatory Equity Participation Plan (b) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.9    |       | Shareholders  Agreement, dated as of August 23, 2007, among Symbion Holdings  Corporation and the stockholders of Symbion Holdings Corporation and other  persons named therein (b)                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.10   |       | Advisory  Services and Monitoring Agreement, dated as of August 23, 2007, among  Symbion, Inc., Symbion Holdings Corporation and Crestview Advisors,  L.L.C. (b)                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.11   |       | Form of  Employee Contribution Agreement (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12   |       | Symbion, Inc.  Supplemental Executive Retirement Plan (e) (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.13   |       | 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. (f)                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14   |       | Interest  Rate Swap Agreement, dated October 31, 2007, between Symbion, Inc. and  Merrill Lynch Capital Services, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 21      |       | Subsidiaries  of Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1    |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2    |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1    |       | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2    |       | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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(a)          Incorporated by reference to exhibits filed with the Registrant’sCurrent Report on Form 8-K filed April 24, 2007 (File No. 000-50574)

(b)         Incorporated by reference to exhibits filed with the Registrant’sRegistration Statement on Form S-4 (Registration No. 333-153678)

(c)          Incorporated by reference to exhibits filed with the Registrant’sRegistration Statement on Form S-1 (Registration No. 333-89554)

(d)         Incorporated by reference to exhibits filed with the Registrant’s AnnualReport on Form 10-K for the year ended December 31, 2003 (File No. 000-50574)

(e)          Incorporated by reference to exhibits filed with the Registrant’s QuarterlyReport on Form 10-Q for the quarter ended March 31, 2005 (File No. 000-50574)

(f)            Incorporated by reference to exhibits filedwith the Registrant’s Current Report on Form 8-K filed August 2, 2005(File No. 000-50574)

(g)         Compensation plan or arrangement

 

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