**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-K**

** **

**ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**For the Fiscal Year Ended December 31, 2009**

** **

**Commission file number:  000-50574**

** **

**Symbion, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **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**

(Address of principal executive offices and zip code)

 

**(615) 234-5900**

**(Registrant’s telephone number, including area code)**

** **

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

 

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

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.Yes  o  No  x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.Yes  x  No  o

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes  o  No  x

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes  o  No  o

 

Indicateby check mark if disclosure 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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No  x

 

Noneof the registrant’s common stock is held by non-affiliates.

 

Asof March 31, 2010, 1,000 shares of the registrant’s common stock wereoutstanding.

 

 

 

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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.  All statements other than statements ofcurrent or historical fact contained in this report, including statementsregarding our future financial position, business strategy, budgets, projectedcosts and plans and objectives of management for future operations, areforward-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 allof our forward-looking statements in this 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 be affected by inaccurateassumptions we might make or by known or unknown risks, uncertainties andassumptions, including the risks, uncertainties and assumptions described inItem 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 youconsider these forward-looking statements, you should keep in mind these riskfactors and other cautionary statements in this report.

 

Ourforward-looking statements speak only as of the date made.  Other than as required by law, we undertakeno obligation to publicly update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

**PART I**

 

**Item 1.    *Business***

 

**Overview**

 

We own and operate a national network of short staysurgical facilities in 26 states.  Oursurgical facilities, which include ambulatory surgery centers and surgicalhospitals, primarily provide non-emergency surgical procedures across manyspecialties, including, among others, orthopedics, pain management,gastroenterology and ophthalmology.  Weown our surgical facilities in partnership with physicians and in some caseshealth 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.

 

As of December 31, 2009, we owned and operated 59surgical facilities, including 55 ambulatory surgery centers and four surgicalhospitals.  We also managed eightadditional ambulatory surgery centers. We owned a majority interest in 36 of the 59 surgical facilities andconsolidated 52 facilities for financial reporting purposes.  We are reporting one of the 59 surgicalfacilities as discontinued operations. In addition to our surgical facilities, we also manage two physiciannetworks, including one physician network in a market in which we operate anambulatory 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 medicaltechnology, such as lasers, arthroscopy and enhanced endoscopic techniques,have reduced the trauma of surgery and the amount of recovery time required bypatients following a surgical procedure. Improvements in anesthesia also have shortened the recovery time formany patients and have reduced post-operative side effects such as pain, nauseaand drowsiness.  These medicaladvancements have enabled more patients to undergo surgery in a surgicalfacility setting.

 

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

 

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.

 

**Industry Overview**

 

Theoutpatient ambulatory surgery market in the United States is a$15.5 billion industry that is characterized both by meaningful growth andfragmented competition according to the Medicare Payment Advisory Commission.

 

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.  We believe this creates an attractiveoperating environment for well capitalized surgical providers with scale and anational presence.  In addition, withapproximately 5,200 Medicare certified ambulatory surgery centers operating inthe United States as of 2009 according to the Centers for Medicare and MedicaidServices (“CMS”), we believe significant opportunities exist for consolidationin this industry.

 

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

 

·                  *Physician and PatientPreference for Surgical Facilities. *Physicians often prefer to operate insurgical facilities, as compared to acute care hospitals, because of theefficiency and convenience surgical facilities afford.  Procedures performed at surgical facilitiesare typically non-emergency, allowing physicians to schedule their time moreefficiently and increase the number of procedures performed in a givenperiod.  Surgical facilities also providephysicians with more consistent nurse staffing and faster turnaround timebetween cases, as compared to acute care hospitals.  Together with an opportunity to own an equityinterest in the surgical facility, these attributes meaningfully increase aphysician’s productivity and income potential. Importantly, we also believe patients often prefer surgical facilitiesbecause of the comfort of a less institutional setting, the more convenientprocess for scheduling and registration available in surgical facilities and inmany instances, a more convenient location than acute care hospitals.  As patients increasingly have more input intothe delivery of their health care, we believe this preference will be a driverof the growth in ambulatory surgery center utilization.

 

·                  *Lower CostAlternative. *Based upon our management’s experience inthe health care industry, we believe that surgeries performed in surgicalfacilities are generally less expensive than those performed in acute carehospitals because of lower facility development costs, the focus onnon-emergency procedures and more efficient staffing and work flowprocesses.  According to a studyconducted for the Ambulatory Surgery Center Association, the cost to the payorof a surgical procedure in an ambulatory surgery center setting in 2007 wasapproximately 35.0% less than the cost to the payor of performing the sameprocedure in a hospital outpatient department setting.  We believe payors are attracted to the lowercosts available at surgical facilities, as compared to acute care hospitals.

 

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·                  *Advanced Technology andImproved Anesthesia. *Advancements in medical technology suchas lasers, arthroscopy, fiber optics and enhanced endoscopic techniques havereduced the trauma of surgery and the amount of recovery time required bypatients following a surgical procedure. Improvements in anesthesia also have shortened the recovery time formany patients and have reduced certain post-operative side effects.  These medical advancements have enabled morepatients to undergo surgery not requiring an overnight stay and reduced theneed for hospitalization following surgery.

 

·                  *Expansion in MedicareReimbursed Procedures. *On October 30, 2009, CMS finalized arule that added an additional 26 surgical procedures to Medicare’s list ofapproved ambulatory surgery center procedures and six procedures subject to thelesser of the non-facility practice expense payment or ASC payment rate for thecalendar year 2010.  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 manyspecialties.  When attractiveopportunities arise, we may acquire or develop other types of facilities.  The key components of our strategy are to:

 

·                  *Identify, recruit andretain leading surgeons and other physicians for our surgical facilities.* We believe that establishing and maintaining strong relationships withsurgeons and other physicians is a key factor to our success in acquiring,developing and operating surgical facilities. We identify and partner with surgeons and other physicians that webelieve have established reputations for clinical excellence in theircommunities.  We believe that we have hadsuccess in recruiting and retaining physicians because of the ownershipstructure of our surgical facilities and our staffing, scheduling and clinicalsystems that are designed to increase physician productivity, promotephysicians’ professional success and enhance the quality of patient care.  We also believe that forming relationshipswith health care systems and other health care providers can enhance ourability to recruit physicians.  Wecurrently have strategic relationships with six health care systems.

 

·                  *Capitalize on ourexperienced management team to pursue multiple growth opportunities in thesurgical facility market.*  We believe that the experience and capabilities of our seniormanagement team provide a strategic advantage in improving the operations ofour surgical facilities, attracting physicians and identifying new developmentand acquisition opportunities.  Oursenior management team has an average of over 29 years of experience in thehealth care industry having held senior management positions at public andprivate health care companies.  Ourmanagement’s broad industry experience has allowed us to establish strongrelationships with participants throughout the health care industry.  These relationships are helpful in formingleads for acquisitions and in making decisions about expanding into new marketsand services.  The experience andcapabilities of our management team also enable us to pursue multiple growthstrategies in the surgical facility market, including acquisitions of establishedsurgical facilities, de novo developments in attractive markets, strategicrelationships with prominent hospitals and other health care providers andturnaround opportunities in connection with underperforming facilities.  We have successfully executed each of thesegrowth strategies, and intend to pursue each of them in the future.

 

·                  *Pursue a disciplinedstrategy of acquiring and developing surgical facilities.* Between January 1999 and December 31, 2009, we acquired 51surgical facilities anddeveloped 24 surgical facilities, including 16 surgical facilities that wesubsequently divested.  We anticipateacquiring one to three facilities and developing one to three facilitiesannually.  We seek to acquire and developsurgical hospitals and both single and multi-specialty ambulatory surgerycenters that meet our criteria.  Ourcriteria includes prominence and quality of physician partners, specialty mix,opportunities for growth, level of competition in the local market, level ofmanaged care penetration and our ability to access managed care organizationcontracts.  Our acquisition anddevelopment team conducts extensive due diligence and applies a financial modelthat targets a threshold return on invested capital over a period 

 

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of fiveyears.  Once we acquire a surgicalfacility, our team establishes a strategic plan to improve the facility’soperating systems and physical plant, enhance physician recruitment, andcapitalize on the facility’s competitive strengths.  We have historically targeted majorityownership in our facilities.  Majorityownership allows us to make and execute managerial decisions, which we believeprovides greater opportunity for growth and higher returns.  We also believe that by starting withmajority ownership of a facility, we can benefit by capturing a greater shareof the value we create in managing and improving the facility.  We intend to continue to target majorityownership in our facilities.  However,when attractive opportunities arise, we may acquire minority interests indeveloped surgical 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 andprofitability of existing surgical facilities through operational focus.* We seek to increase revenues, profitability and return on our investedcapital at all of our surgical facilities by focusing on operations.  We have a dedicated team that is responsiblefor implementing best practices, cost controls and overall efficiencies at eachof our surgical facilities.  Ourfacilities benefit from our network of facilities by sharing best practices andparticipating in group purchasing agreements designed to reduce the cost ofsupplies and equipment.  We intend tocontinue to recruit additional physicians and expand the range of servicesoffered at our surgical facilities to increase the number and types ofsurgeries performed in our facilities, including a focus on higher acuitycases.  We also review our managed carecontracts to ensure we are operating under the most favorable contractsavailable to us.  We are committed toenhancing programs and services for our physicians and patients by providingadvanced technology, quality care, cost-effective service and convenience.

 

**Operations**

 

***Surgical Facility Operations***

 

As of December 31,2009, we owned (with physician investors or healthcare systems) and operated 59surgical facilities and managed eight additional surgical facilities.  Four of our surgical facilities are licensedas 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 providenon-emergency surgical procedures across many specialties, including amongothers, orthopedics, gynecology, general surgery, ear, nose and throat, painmanagement, gastroenterology, plastic surgery and ophthalmology.  Our hospitals may also provide additionalservices such as diagnostic imaging, pharmacy, laboratory and obstetricalservices.  In certain markets where webelieve it is appropriate, we operate surgical facilities that focus on asingle specialty.

 

Our surgicalfacilities are generally located in close proximity to physicians’offices.  Each surgical facilitytypically employs a staff of about 30, depending on its size, the number ofcases and the type of services provided. Our staff at each surgical facility generally includes a facilityadministrator, a business manager, a medical director, registered nurses,operating room technicians and clerical workers.  At each of our surgical facilities, we havearrangements with anesthesiologists to provide anesthesiology services.  We also provide each of our surgicalfacilities with a full range of financial, marketing and operatingservices.  For example, our regionalmanaged care directors assist the local management team at each of our surgicalfacilities in developing relationships with managed care providers andnegotiating managed care contracts.

 

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The majority ofour surgical facilities are Medicare certified. To ensure that a high level of care is provided, we implement qualityassurance procedures at each of our surgical facilities.  In addition, a majority of our surgicalfacilities are also independently accredited by either the Joint Commission orthe Accreditation Association for Ambulatory Health Care.  Each of our surgical facilities is availablefor use only by licensed physicians who have met professional credentialingrequirements established by the facility’s medical advisory committee.  In addition, each surgical facility’s medicaldirector supervises and is responsible for the quality of medical care providedat the surgical facility.

 

***Surgical Facility Ownership Structure***

 

We own and operateour surgical facilities through partnerships or limited liabilitycompanies.  Local physicians or physiciangroups also own interests in most of our surgical facilities.  In some cases, a hospital system may own aninterest in our surgical facility.  Oneof our wholly owned subsidiaries typically serves as the general partner ormanaging member of our surgical facilities. We seek to own a majority interest in our surgical facilities, orotherwise have sufficient control over the facilities to be able to consolidatethe financial results of operations of the facilities with ours.  In some instances, we will acquire ownershipin a surgical facility with the prior owners retaining ownership, and, in somecases, we offer new ownership to other physicians or hospital partners.  We hold majority ownership in 36 of the 59 surgicalfacilities in which we own an interest. We typically guarantee all of the debts of these partnerships andlimited liability companies, even though we do not own all of the interests inthe surgical facilities.  We also provideintercompany debt, which usually is secured by a pledge of assets of thepartnership or limited liability company. We also have a management agreement with each of the surgicalfacilities, under which we provide day-to-day management services for amanagement fee, which is typically equal to 4% to 6% of the revenues of thefacility.

 

Each of thepartnerships and limited liability companies through which we own and operateour surgical facilities is governed by a partnership or operatingagreement.  These partnership andoperating agreements typically provide, among other things, for voting rightsand limited transfer of ownership.  Thepartnership and operating agreements also provide for the distribution ofavailable cash to the owners.  Inaddition, the agreements typically restrict the physician owners from owning aninterest 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 operatingagreements for our surgical facilities typically provide that the facilitieswill purchase all of the physicians’ ownership if certain adverse regulatoryevents occur, such as it becoming illegal for the physicians to own an interestin a surgical facility, refer patients to a surgical facility or receive cashdistributions from a surgical facility. The purchase price that we would be required to pay for the ownership isbased on pre-determined formulas, typically either a multiple of the surgicalfacility’s EBITDA, as defined in our partnership and operating agreements, orthe fair market value of the ownership as determined by an independentthird-party appraisal.  Some of theseagreements require us to make a good faith effort to restructure ourrelationships with the physician investors in a manner that preserves theeconomic terms of the relationship prior to purchasing these interests.  See “Item 1A. Risk Factors” and “—GovernmentalRegulation.” In certain circumstances, we have the right to purchase aphysician’s ownership, including upon a physician’s breach of the restrictionon ownership provisions of a partnership or operating agreement.  In some cases, we have the right to requirethe physician owners to purchase our ownership in the event our managementagreement with a surgical facility is terminated.  In one surgical facility, the physicianowners have the right to purchase our ownership 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 31,2009:

 
| **Surgical Facility**                                            | ** ** | **City**         | ** ** | **Number of  Operating  Rooms** | ** ** | **Number of  Treatment  Rooms** | ** ** | **Symbion  Percentage  Ownership** | ** ** |
|------------------------------------------------------------------|------------|------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| **Alabama**                                                      |       |             |       |                            |       |                            |       |                               |       |
| Birmingham  Surgery Center                                       |       | Birmingham       |       | 6                               |       | 2                               |       | 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                               |       | 61                                 | %(1)       |
| Specialty  Surgical Center of Irvine                             |       | Irvine           |       | 5                               |       | 1                               |       | 51                                 | %(1)       |
| Specialty  Surgical Center of Arcadia                            |       | Arcadia          |       | 3                               |       | 1                               |       | 22                                 | %          |
| Specialty  Surgical Center of Westlake Village                   |       | Westlake Village |       | 4                               |       | 2                               |       | 19                                 | %          |
| **Colorado**                                                     |       |             |       |                            |       |                            |       |                               |       |
| Minimally  Invasive Spine Institute                              |       | Boulder          |       | 2                               |       | 1                               |       | 44                                 | %(1)       |
| Animas  Surgical Hospital(2)                                     |       | Durango          |       | 4                               |       | 1                               |       | 56                                 | %(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                               |       | —                          |       | 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                               |       | 3                               |       | 53                                 | %(1)       |
|                                                             |       |             |       |                            |       | 30 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                               |       | 14                                 | %          |
| **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                                 | %          |

 

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| **Surgical Facility**                    | ** ** | **City**       | ** ** | **Number of  Operating  Rooms** | ** ** | **Number of  Treatment  Rooms** | ** ** | **Symbion  Percentage  Ownership** | ** ** |
|------------------------------------------|------------|----------------|------------|---------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| **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)(1)    |
| **North Carolina**                       |       |           |       |                            |       |                            |       |                               |       |
| Orthopaedic  Surgery Center of Asheville |       | Asheville      |       | 3                               |       | —                          |       | 56                                 | %(1)       |
| Wilmington  SurgCare                     |       | Wilmington     |       | 7                               |       | 3                               |       | 75                                 | %(1)       |
| **Ohio**                                 |       |           |       |                            |       |                            |       |                               |       |
| Physicians  Ambulatory Surgery Center    |       | Circleville    |       | 2                               |       | —                          |       | 56                                 | %(1)       |
| Valley  Surgical Center                  |       | Steubenville   |       | 3                               |       | 1                               |       | 56                                 | %(1)       |
| **Oklahoma**                             |       |           |       |                            |       |                            |       |                               |       |
| Lakeside  Women’s Hospital(2)       |       | Oklahoma City  |       | 3                               |       | 3                               |       | 43                                 | %          |
|                                     |       |           |       |                            |       | 23 hospital  rooms              |       |                               |       |
| **Oregon**                               |       |           |       |                            |       |                            |       |                               |       |
| Gresham  Station Surgery Center          |       | Gresham        |       | 5                               |       | 1                               |       | 29                                 | %          |
| **Pennsylvania**                         |       |           |       |                            |       |                            |       |                               |       |
| Village  SurgiCenter                     |       | Erie           |       | 5                               |       | 1                               |       | 72                                 | %(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 |       | 4                               |       | 2                               |       | 45                                 | %(1)       |
| East  Bay Endoscopy Center               |       | Portsmouth     |       | 1                               |       | —                          |       | 75                                 | %(1)       |
| **South Carolina**                       |       |           |       |                            |       |                            |       |                               |       |
| The Center  for Specialty Surgery        |       | Greenville     |       | 2                               |       | —                          |       | 78                                 | %(1)       |
| **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        |       | 2                               |       | —                          |       | 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**                                |       |           |       |                            |       |                            |       |                               |       |
| Surgical  Hospital of Austin(2)          |       | Austin         |       | 6                               |       | 1                               |       | 47                                 | %(1)       |
|                                     |       |           |       |                            |       | 26 hospital  rooms              |       |                               |       |
| Central  Park Surgery Center             |       | Austin         |       | 6                               |       | 1                               |       | 44                                 | %(1)       |
| Clear  Fork Surgery Center               |       | Fort Worth     |       | 4                               |       | 1                               |       | 34                                 | %(1)       |
| Village  Specialty Surgical Center       |       | San Antonio    |       | 4                               |       | 4                               |       | 57                                 | %(1)       |
| NorthStar  Surgical Center               |       | Lubbock        |       | 6                               |       | 3                               |       | 45                                 | %(1)       |
| Surgery  Center of Duncanville           |       | Duncanville    |       | 4                               |       | 1                               |       | 37                                 | %(1)       |
| 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 financialreporting purposes.

(2)          This surgical facility is licensed as a hospital.

(3)          We manage this surgical facility, but do not haveownership in the facility.

(4)          Due to regulatory restrictions in the State of NewYork, we cannot directly hold ownership in the surgical facility.  We hold 65% ownership in the limitedliability company which provides administrative services to this surgicalfacility and consolidate the facility for financial reporting purposes.  Additionally, we manage this facility.

 

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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 arelationship with a health care system can enhance our ability to attractphysicians and access managed care contracts for our surgical facilities inthat market.  We currently have strategicrelationships with:

 

·                  Vanderbilt Health Services, Inc.,with which we own and operate a surgical facility in Franklin, Tennessee;

·                  Vanguard Health Systems, Inc., withwhich we own and operate a surgical facility in San Antonio, Texas;

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

·                  Harris Methodist Ft. Worth, with which weown and operate a surgical facility in Fort Worth, Texas; and

·                  Adventist Health System, with which weown and operate a surgical facility in Orange City, 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 primarydifference between the structure of these strategic relationships and the othersurgical facilities in which we hold ownership is that, in these strategicrelationships, a health care system holds ownership in the surgical facility,in addition to physician investors.  Fora general description of the terms of our partnership and operating agreements,see “—Operations—Surgical Facility Ownership Structure.” In each of thesestrategic relationships, we also have 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 those management agreements arecomparable to the terms of our management agreements with other surgicalfacilities 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 in 2014 and may be terminatedearlier by either party for material breach after notice and an opportunity tocure.

 

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

 

During 2009, oursignificant acquisitions were as follows:

 

·                  Acquired incremental ownership in ourWestlake Village, California facility.

·                  Acquired ownership in a surgical hospitalin Austin, Texas which we consolidate for financial reporting purposes.

·                  Acquired ownership in a surgical facilitylocated in Gresham, Oregon which we account for under the equity method.

 

We continuously evaluate opportunities to expand ourpresence in the surgical facility market by making strategic acquisitions ofexisting surgical facilities and by developing new surgical facilities incooperation with local physician partners and, when appropriate, with hospitalsystems 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.  Thesebuy-up rights give us the option to own a controlling interest at some point inthe future.  Alternatively, we may chooseto pursue a three-way arrangement with physicians and a health care systempartner.

 

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*Acquisition Program*

 

We employ a dedicated acquisition team with experiencein health care services.  Our team seeksto acquire surgical facilities that meet our criteria, including prominence andquality of physician partners, specialty mix, opportunities for growth, levelof competition in the local market, level of managed care penetration and ourability to access managed care organization contracts.  Our team utilizes its extensive industrycontacts, as well as referrals from current physician partners and othersources, to identify, contact and develop potential acquisition candidates.

 

We believe thereare numerous acquisition opportunities that would pass our general screeningcriteria.  We carefully evaluate each ofour acquisition opportunities through an extensive due diligence process todetermine which facilities have the greatest potential for growth andprofitability improvements under our operating structure.  In many cases, the acquisition teamidentifies specific opportunities to enhance a facility’s productivitypost-acquisition.  For example, we mayrenovate or construct additional operating or treatment rooms in existingfacilities to meet anticipated demand for procedures based on an analysis oflocal market characteristics.  Our teammay also identify opportunities to attract additional physicians to increasethe acquired facility’s revenues and profitability.  We have acquired 51 surgical facilities sinceJanuary 1999 and anticipate acquiring about one to three surgicalfacilities annually during the next two to three years.

 

*DevelopmentProgram*

 

We developsurgical facilities in markets in which we identify substantial interest byphysicians and payors.  We haveexperience in developing both single and multi-specialty surgicalfacilities.  When we develop a newsurgical facility, we generally provide all of the services necessary tocomplete the project.  We offer in-housecapabilities for structuring partnerships and financing facilities and workwith architects and construction firms in the design and development ofsurgical facilities.  Before and duringthe development phase of a new surgical facility, we analyze the competitiveenvironment in the local market, review market data to identify appropriateservices to provide, prepare and analyze financial forecasts, evaluateregulatory and licensing issues and assist in designing the surgical facilityand identifying appropriate equipment to purchase or lease.  After the surgical facility is developed, wegenerally provide startup operational support, including information systems,equipment procurement and financing.  Wehave developed 24 surgical facilities since January 1999 and anticipateacquiring about one to three surgical facilities annually during the next twoto three years.

 

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 coststypically 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 space and equipment plusother furnishing costs of $1.5 million to $2.5 million and workingcapital of approximately $1.0 million to $1.5 million that isgenerally required to sustain operations for the initial six to 12 monthsof operations.  Development of a hospitalwith the same operating capacity as a typical ambulatory surgery center wouldrequire additional capital to build and equip additional features, such asinpatient hospital rooms, and to provide other ancillary services, ifrequired.  We typically fund about 80% ofthe development costs of a new surgical facility with a combination ofcorporate borrowings and cash from operations, and the remainder with equitycontributed by us and the other owners of the facility.  For our consolidated surgical facilities, theindebtedness typically consists of intercompany loans that we provide, and forour non-consolidated surgical facilities, of third-party debt for which weprovide a guarantee for only our pro rata share.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

 

**OtherServices**

 

Although our business isprimarily focused on owning and operating surgical facilities, we also provideother services that complement our core surgical facility business.  Throughout 2009, we managed two physicianpractices in Memphis and Johnson City, Tennessee.  Each of these physician practices has enteredinto an agreement with us, which provides, among other things, that we willprovide billing, financial services and other business management services in exchangefor a management fee.  Our agreement withthe physician practice in Johnson City, Tennessee expired January 1, 2010.

 

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**InformationSystems and Controls**

 

Each of our surgical facilities uses a financialreporting system that provides information to our corporate office to trackfinancial performance on a timely basis. In addition, each of our surgical facilities uses an operating system tomanage its business that provides critical support in areas such as scheduling,billing and collection, accounts receivable management, purchasing and otheressential operational functions.  We haveimplemented systems to support all of our surgical facilities and to enable usto more easily access information about our surgical facilities on a timelybasis.

 

We calculate netrevenues through a combination of manual and system-generated processes.  Our operating systems include insurance modulesthat allow us to establish profiles of insurance plans and their respectivepayment rates.  The systems then matchthe charges with the insurance plan rates and compute a contractual adjustmentestimate for each patient account.  Wethen manually review the reasonableness of the systems’ contractual adjustmentestimate using the insurance profiles. This estimate is adjusted, if needed, when the insurance payment isreceived and posted to the account.  Netrevenues are computed and reported by the systems as a result of this activity.

 

It is our policyto collect co-payments and deductibles prior to providing services.  It is also our policy to verify a patient’sinsurance 72 hours prior to the patient’s procedure.  Because our services are primarilynon-emergency, our surgical facilities have the ability to control theseprocesses.  We do not track exceptions tothese policies, but we believe that they occur infrequently and involveinsignificant amounts.  When exceptionsdo occur, we require patients whose insurance coverage is not verified toassume full responsibility for the fees prior to services being rendered, andwe seek prompt payment of co-payments and deductibles and verification ofinsurance following the procedure.

 

We manually inputeach patient’s account record and the associated billing codes.  Our operating systems then calculate theamount of fees for that patient and the amount of the contractualadjustments.  Claims are submittedelectronically if the payor accepts electronic claims.  We use clearinghouses for electronic claims,which then forward the claims to the respective payors.  Payments are manually input to the respectivepatient 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 measure operating results against targetthresholds and to identify, monitor and adjust areas such as specialty mix,staffing, operating costs, employee expenses and accounts receivablemanagement.  Our corporate andfacility-level management teams are compensated in part using performance-basedincentives focused on revenue growth and improving operating income.

 

**Marketing**

 

We primarilydirect our sales and marketing efforts at physicians who would use our surgicalfacilities.  Marketing activitiesdirected at physicians and other health care providers are coordinated locallyby the individual surgical facility and are supplemented by dedicated corporatepersonnel.  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 thefacility administrator is the primary point of contact, physicians who utilizeour surgical facilities are important sources of recommendations to otherphysicians regarding the benefits of using our surgical facilities.  Each facility administrator develops a targetlist of physicians and we continually review these marketing lists and thefacility administrator’s progress in contacting and successfully attractingadditional local 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 conducted by our corporate office managementand facility administrators emphasize the high quality of care, cost advantagesand convenience of our surgical facilities, and are focused on making eachsurgical facility an approved provider 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 believe that the competitive factors thataffect our surgical facilities’ ability to compete for physicians areconvenience of location of the surgical facilities, access to capital andparticipation in managed care programs. In addition, we believe the national prominence, scale and reputation ofour company are instrumental 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 national companies own and/ormanage surgical facilities, including HCA Inc., Surgical Care Affiliates, Inc.,AmSurg Corp. and United Surgical Partners International, Inc.  We also face competition from localhospitals, physician groups and other providers who may compete with us in theownership and operation of surgical facilities, as well as the recent trend ofphysicians choosing to perform procedures in an office-based setting ratherthan in a surgical facility.

 

**Employees**

 

At December 31,2009, we had approximately 3,100 employees, of which about 1,900 were full-timeemployees.  None of our employees arerepresented by a collective bargaining agreement.  We believe that we have a good relationshipwith our employees.

 

**Environmental**

 

We are subject tovarious federal, state and local laws and regulations relating to the protectionof the environment and human health and safety, including those governing themanagement and disposal of hazardous substances and wastes, the cleanup ofcontaminated sites and the maintenance of a safe workplace.  Our operations include the use, generationand 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, adjoiningproperties or other persons) and the off-site disposal of hazardoussubstances.  We believe that we have beenand are in substantial compliance with the terms of all applicableenvironmental laws and regulations and that we have no liabilities underenvironmental requirements that we would expect to have a material adverseeffect on our business, results of operations or financial condition.

 

**Insurance**

 

We maintainliability insurance in amounts that we believe are appropriate for our operations.  Currently, we maintain professional andgeneral liability insurance that provides coverage on a claims-made basis of$1.0 million per occurrence and $3.0 million in annual aggregatecoverage per surgical facility, including the facility and employed staff.  We also maintain business interruptioninsurance and property damage insurance, as well as an additional umbrellaliability insurance policy in the aggregate amount of $20.0 million.  Coverage under certain of these policies iscontingent upon the policy being in effect when a claim is made regardless ofwhen the events which caused the claim occurred.  The cost and availability of such coveragehas varied widely in recent years.  Inaddition, physicians who provide professional services in our surgicalfacilities are required to maintain separate malpractice coverage with similarminimum coverage limits.  While webelieve that our insurance policies are adequate in amount and coverage for ouranticipated operations, 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**

 

We are dependent uponprivate and government third-party sources of payment for the services weprovide.  The amounts that our surgicalfacilities and networks receive in payment for their services may be adverselyaffected by market and cost factors as well as other factors over which we haveno control, including Medicare, Medicaid, and state regulations and the costcontainment and utilization decisions and reduced reimbursement schedules ofthird-party payors.

 

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*Health Care Reform*

 

Health care reform has become the subject of muchnational attention and debate.  ThePatient Protection and Affordable Care Act and the Health Care and Education ReconciliationAct of 2010 were signed into law by President Obama on March 23, 2010 andMarch 30, 2010, respectively, dramatically altering the U.S. health care system.  The Acts are intended to provide coverage andaccess to substantially all Americans, to increase the quality of careprovided, and to reduce the rate of growth in healthcare expenditures.  The changes include, among other things,reducing payments to Medicare Advantage plans, expanding the Medicare program’suse of value-based purchasing programs, tying hospital payments to thesatisfaction of certain quality criteria, bundling payments to hospitals andother providers, reducing Medicare and Medicaid payments, includingdisproportionate share payments, expanding Medicare and Medicaid eligibility,and expanding access to health insurance. As part of the effort to control or reduce health care spending, the Actswill place a number of significant requirements and limitations on the Stark Lawexception that allows physicians to have ownership interests in hospitals (the“Whole Hospital Exception”).  Among otherthings, the Acts prohibit hospitals from increasing the percentages of thetotal value of the ownership interests held in the hospital by physicians afterMarch 23, 2010, as well as place severe restrictions on the ability of ahospital subject to the Whole Hospital Exception to add operating rooms,procedure rooms and beds.  The Acts couldhave an adverse effect on our financial condition and results of operations.

 

*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 basedon a center’s costs or reasonable charges. The various state Medicaid programs also pay us a fixed payment for ourservices, which amount varies from state to state.  About 21% and 23% of our patient servicerevenues during 2008 and 2009, respectively, were attributable to Medicare andMedicaid payments.

 

The MedicarePrescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”)limited increases in Medicare reimbursement rates for ambulatory surgerycenters.  In addition, the MMA directedCMS to develop a new ambulatory surgery center payment system taking intoaccount findings in a Congressionally mandated Government Accountability Office(“GAO”) study that would assess the appropriateness of basing the newambulatory surgery center system on Medicare’s hospital outpatient departmentpayment system.

 

A July 16, 2007final rule implemented changes to the ambulatory surgery center paymentsystem that were required under the MMA. Effective January 1, 2008, ambulatory surgery center payment ratesare now based on the ambulatory payment classifications (“APCs”) that are usedto categorize procedures under the hospital outpatient prospective paymentsystem.  Under the final rule, theambulatory surgery center payment rate conversion factor will be updated by therate of increase in the consumer price index for urban consumers beginning in2010.

 

On October 30, 2009,CMS issued a final rule to update the Medicare program’s payment policiesand rates for ASCs for 2010.  Among otherthings, the rule increases the ASC payment rate by 1.2%.  As a result of the change, ASC payment rateswill be approximately 58% of the applicable hospital outpatient departmentrate.  The rule also adds 26surgical procedures to the list of procedures for which Medicare will pay whenperformed in an ASC setting and six procedures to the list of procedures thatare subject to the lesser of the non-facility practice expense payment or theASC payment rate cap for the calendar year 2010.

 

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 realizeincreased volume as the list of approved ambulatory surgery center proceduresis expanded.  If the annual paymentrecalculations result in a further decrease in ambulatory surgery centerpayment rates for procedures performed in our centers, our revenues and 

 

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profitability could bematerially adversely affected.  Inaddition, legislation has and likely will continue to be introduced in Congressto further adjust the ambulatory surgery center payment system and refine Medicare’sreimbursement policies.  We cannotpredict the potential scope and impact of any future legislative or regulatorychanges.

 

*Medicare—Hospital Inpatient Services*

 

Four of our surgical facilities are licensed as hospitals.  The Medicare program pays hospitals on aprospective payment system for acute inpatient services.  Under this prospective payment system, ahospital receives a fixed amount for inpatient hospital services based on eachpatient’s final assigned diagnosis related group (“DRG”).  These payments do not consider a specifichospital’s costs, but are national rates adjusted for area wage differentialsand case-mix index.  For several years,the percentage increases to the prospective payment rates generally have beenlower than the percentage increases in the costs of goods and services forhospitals.  On August 2, 2007, CMSissued a final rule that, beginning in fiscal year 2008, replaced thehospital Inpatient Prospective Payment System’s (“IPPS’s”) existing 538 DRGswith 745 Medicare Severity DRGs that were intended to better recognize eachpatient’s severity of illness.  The newMedicare Severity DRGs are expected to increase payments to hospitals thattreat more severely ill and costlier patients and decrease payments tohospitals that generally treat less severely ill persons.  On July 31, 2008, CMS released the final2009 IPPS rule.  In addition to providingfor a 3.6% increase in reimbursement rates, the final rule revised therequirements 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.

 

On July 31,2009, CMS issued the IPPS final rule for federal fiscal year 2010,beginning on October 1, 2009.  Amongother things, the final rule provides for a market basket increase of 2.1%for hospitals that successfully report the 2010 quality measures included inthe Reporting Hospital Quality Date for Annual Payment Update program and 0.1%for hospitals that do not.  CMSanticipates that, when combined with the various other adjustments, Medicarepayments to hospitals for inpatient services will increase by 1.6% in federalfiscal year 2010.  In its proposed IPPS rule forfederal fiscal year 2010, CMS had proposed to reduce inpatient payments tohospitals by 1.9% to account for the increase in Medicare spending attributableto the implementation of the MS-DRG system. However, in the final rule, CMS stated that it would not impose anyfurther reductions until all of the claims information for federal fiscal year2009 was available.  CMS will considerphasing in future adjustments over an extended period of time beginning infederal fiscal year 2011 once the claims data for federal fiscal years 2008 and2009 have been fully analyzed.

 

*Medicare-Hospital Outpatient Services*

 

Mostoutpatient services provided by hospitals are reimbursed by Medicare under theoutpatient prospective payment system (“OPPS”). Under the OPPS, hospital outpatient services are classified into groupscalled ambulatory payment classifications (“APCs”).  CMS establishes a payment rate for each APC,and, depending on the services provided, a hospital may be paid for more thanone APC for each patient encounter.  On October 30,2009, CMS issued a final rule to update payment rates and policies forcalendar year 2010.  In addition toadding additional procedures pursuant to the rule, hospital outpatientdepartment payments would receive a market basket increase of 2.1%.  CMS will reduce the update by 2.0% forhospitals that did not participate in quality data reporting for outpatientservices or did not report the quality data successfully, resulting in a 0.1%update for those hospitals.  When combinedwith other adjustments, CMS projects that overall payments to hospitals underthe OPPS in 2010 will increase by 1.9%.

 

*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.  Most third-party payors pay pursuant to awritten contract with our surgical facilities. These contracts generally require our hospitals and ambulatory surgerycenters to offer discounts from their established charges.

 

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Some of ourpayments come from third-party payors with which our surgical facilities do nothave written contracts.  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 center had a contract with the third-partypayor.  We also submit a claim for theservices to the third-party payor along with full disclosure that our surgicalfacility has charged the patient an in-network patient responsibilityamount.  Historically, those third-partypayors who do not have contracts with our surgical facilities have typicallypaid our claims at higher than comparable contracted rates.  However, there is a growing trend forthird-party payors to adopt out-of-network fee schedules that are morecomparable to our contracted rates, or to take other steps to discourage theirenrollees from seeking treatment at out-of-network surgical facilities.  In these cases, we seek to enter intocontracts with such payors.  Typically,we have seen a decrease in revenues per case and an increase in volume of casesin those instances, resulting in an overall decrease in revenues to thesurgical facility where we transition from out-of-network to in-networkbilling.  We can provide no assurancethat we will see a sufficient increase in volume of cases to compensate for thedecrease in per case revenues where we transition from out-of-network toin-network billing.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operation —Executive Overview — Operating Trends.”

 

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 are typicallylower than rates paid for out-of-network services.  During the fourth quarter of 2007, in aneffort to address some of these payor issues, we cancelled contracts withcertain third-party payors in California and Missouri, effective in the firstquarter of 2008.  As a result ofcancelling contracts, we have received payments on claims at rates higher thanpreviously contracted rates.

 

*Workers’ Compensation*

 

Our surgical facilities also provide services toinjured workers and receive payment from workers’ compensation payors pursuantto the various state workers’ compensation statutes.  Historically, workers’ compensation payorshave paid surgical facilities a percentage of the surgical facilities’charges.  However, workers’ compensationpayment amounts are subject to legislative, regulatory, and other paymentchanges over which we have no control. In recent years, there has been a trend for states to implement workers’compensation fee schedules with rates generally lower than what our surgicalfacilities have historically been 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 payment reforms.  A reduction in workers’ compensation paymentamounts could have a material adverse effect on the revenues of our surgicalfacilities.

 

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 andprivate purchasers of health care services are likely to continue theseactivities in the future.  We cannotpredict what further legislation may be enacted or what regulations orguidelines may be established concerning third-party reimbursement by state,federal or private programs.  Inaddition, market and cost factors affecting the fee structure, cost containmentand utilization decisions of third-party payors and other payment factors overwhich we have no control could have a material adverse effect on the revenues ofour surgical facilities.  See “Management’sDiscussion and Analysis of Financial Condition and Results of Operation —Executive Overview — 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.  In addition to extensive, existing governmenthealth care regulation, there continue to be numerous and potentiallyfar-reaching initiatives on the federal and state levels affecting the paymentfor and availability of health care services. Some of the reform initiatives proposed, such as further reductions inMedicare 

 

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and Medicaid payments andadditional prohibitions on physician ownership of facilities to which theyrefer patients, could, if adopted, adversely affect us and our business.

 

Every stateimposes licensing requirements on individual physicians and health carefacilities.  In addition, federal andstate laws regulate HMOs and other managed care organizations.  Many states require regulatory approval,including licensure, and in some cases certificates of need, beforeestablishing certain types of health care facilities, including surgicalhospitals and ambulatory surgery centers, offering certain services, includingthe services we offer, or making expenditures in excess of certain amounts forhealth care equipment, facilities or programs. Our ability to operate profitably will depend in part upon all of oursurgical facilities obtaining and maintaining all necessary licenses,certificates of need and other approvals and operating in compliance withapplicable health care regulations. Failure to do so could have a material adverse 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 not violate these state laws.  However, future interpretations of, orchanges in, these laws might require structural and organizationalmodifications of our existing relationships with facilities and physiciannetworks, and we cannot assure you that we would be able to appropriatelymodify such relationships.  In addition,statutes in some states could restrict our expansion into those states.

 

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 andlocal governments are expanding the regulatory requirements on businesses.  The imposition of these regulatoryrequirements may have the effect of increasing operating costs and reducing theprofitability of our operations.

 

We believe thathospital, outpatient surgery and diagnostic services will continue to besubject to intense regulation at the federal and state levels.  We are unable to predict what additionalgovernment regulations, if any, affecting our business may be enacted in thefuture or how existing or future laws and regulations might beinterpreted.  If we, or any of our surgicalfacilities, fail to comply with applicable laws, it might have a materialadverse 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 certificate of need laws placelimits on the construction and acquisition of health care facilities and theexpansion of existing facilities and services. In these states, approvals, generally known as certificates of need, arerequired for capital expenditures exceeding certain pre-set monetary thresholdsfor the development, acquisition and/or expansion of certain facilities orservices, including surgical facilities. We have a concentration of surgical facilities in certificate of needstates as we believe the regulations present a competitive advantage toexisting 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 a certificate of need,the provider of services submits an application to the appropriate agency withinformation concerning the area and population to be served, the anticipateddemand for the facility or service to be provided, the amount of capitalexpenditure, the estimated annual operating costs, the relationship of theproposed facility or service to the overall state health plan and the cost perpatient day for the type of care contemplated and in cases involving theproposed acquisition of an existing facility, the financial resources andoperational experience of the proposed new owners of such facility.  The issuance of a certificate of need isbased upon a finding of need by the agency in accordance with criteria setforth in certificate of need laws and 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.

 

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Our health carefacilities are also subject to state licensing requirements for medicalproviders.  Our surgical facilities havelicenses to operate as ambulatory surgery centers in the states in which theyoperate, except for (i) one surgical facility in Colorado, one surgicalfacility in Louisiana, one surgical facility in Oklahoma and one surgicalfacility in Texas that are licensed as hospitals, and (ii) one surgicalfacility in the State of Washington where such state does not issue licensesfor ambulatory surgery centers.  Oursurgical facilities that are licensed as ambulatory surgery centers must meetall applicable requirements for 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.  To assure continued compliance with theseregulations, governmental and other authorities periodically inspect oursurgical facilities.  The failure tocomply with these regulations could result in the suspension or revocation of afacility’s license.  In addition, basedon the specific operations of our surgical facilities, some of these facilitiesmaintain a pharmacy license, a controlled substance registration, a clinicallaboratory certification waiver, and environmental protection permits forbiohazards and/or radioactive materials, 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 fundedand administered health insurance program, primarily for individuals who are 65or older, and entitled to social security benefits, who have end-stage renaldisease or who are disabled.  Medicaid isa health insurance program jointly funded by state and federal governments thatprovides medical assistance to qualifying low income persons.  Each state Medicaid program covers in-patienthospital services and has the option to provide payment for ambulatory surgerycenter services.  The Medicaid programsof all of the states in which we currently operate cover ambulatory surgerycenter services.  However, these statesmay not continue to cover ambulatory surgery center services, and states intowhich we expand our operations may not cover or continue to cover ambulatorysurgery center services.

 

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 “conditions of coverage” or “conditions ofparticipation,” impose numerous requirements on our facilities, theirequipment, their personnel and their standards of medical care, as well ascompliance with all applicable state and local laws and regulations.  On April 26, 2007, CMS issued a policymemorandum that reaffirmed its prior interpretation of its conditions ofparticipation that all hospitals (other than Critical Access Hospitals)participating in the Medicare program are required to provide basic emergencycare interventions regardless of whether or not the hospital maintains anemergency department.  Our fourfacilities licensed as hospitals are required to meet this requirement tomaintain their participating provider status in the Medicare program.  One of our hospitals, which does not have anemergency room, maintains a protocol for the transfer of patients requiringemergency treatment, which protocol may be interpreted as inconsistent with arecent CMS policy memorandum.  Oursurgical facilities must also satisfy the conditions of participation to beeligible to participate in the various state Medicaid programs.  The requirements for certification underMedicare and Medicaid are subject to change and, in order to remain qualifiedfor these programs, we may have to make changes from time to time in ourfacilities, equipment, personnel or services. Although we intend to continue to participate in these reimbursementprograms, we cannot assure you that our surgical facilities will continue toqualify for participation.

 

In order todevelop its strategic plan required by the Deficit Reduction Act (“DRA”), inits report to Congress on August 8, 2006, CMS disclosed that it planned torequire specialty hospitals to provide certain information to CMS on a periodicbasis concerning physician investment interests and to require all hospitals todisclose their compensation arrangements with physicians.  In connection with this strategic plan, CMSdesigned a form entitled “Disclosure of Financial Relationships Report (DFRR).”  CMS initially proposed requiring 500hospitals 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.  In the Final 2009 IPPS Rule, CMS announcedthat it is proceeding with its proposal to send the DFRR to 500 hospitals,which number subsequently was reduced to 400 pursuant to the PaperworkReduction Act.  As currently proposed,hospitals will have 60 days to respond to the DFRR and will be subject topenalties for late submissions.  If CMSimplements the DFRR, we intend for our four surgical facilities that arelicensed as hospitals to comply with the DFRR requests to the extent theyreceive any such requests.

 

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In the Final 2009IPPS Rule, CMS also finalized its proposal to require hospitals to disclosephysician ownership to patients.  Underthe final rule, in such cases a hospital is required to disclose in writing topatients that physicians and/or immediate family members of physicians holdownership in the hospital and that a list of owners may be furnished uponrequest of the patient.  Thesedisclosures must be made at the time the hospital provides informationregarding scheduled preadmission testing and registration for a plannedhospital admission for inpatient care or outpatient service.  A hospital’s provider agreement may beterminated if it fails to provide the notice. In addition, a hospital that does not have a physician on site 24 hoursper day and 7 days per week could have its provider agreement terminated if itfails to provide notice of this circumstance.

 

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 of HHS 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, CMS noted that the TAG submitted 55 recommendationsto the Secretary, certain of which have been adopted and others of which arestill under study.  Several of therecommendations concern how a hospital will satisfy its on-call listobligations.  The TAG recommended thateach hospital and its medical staff have an annual plan to address on-callcoverage.  Recognizing that certainhospitals have difficulty attracting on-call coverage, especially forspecialties where a physician is on more than one medical staff, the TAGrecommended that hospitals be permitted to participate in “community call,”which allows all the hospitals in a community to be covered by one on-callphysician in a specialty.  In the Final2009 IPPS Rule, CMS outlined the requirements for community call.  A hospital participating in community call isstill 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 asthe Medicare fraud and abuse laws, and include the statute commonly known asthe 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 ofthe Anti-Kickback Statute are criminal offenses punishable by imprisonment andfines of up to $25,000 for each violation. 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, theSecretary may, and in some cases must, exclude individuals and entities thatthe Secretary determines have “committed an act” in violation of the Medicarefraud and abuse laws or improperly filed claims in violation of the Medicarefraud and abuse laws from participating in any federal health careprogram.  HIPAA also expanded theSecretary’s authority to exclude a person involved in fraudulent activity fromparticipating in a program providing health benefits, whether directly orindirectly, in whole or in part, by the U.S. government.  Additionally, under HIPAA, individuals whohold a direct or indirect ownership or controlling interest in an entity thatis found to violate the Medicare fraud and abuse laws may also be excluded fromMedicare and Medicaid and other federal and state health care programs if theindividual knew or should have known, or acted with deliberate ignorance orreckless disregard of, the truth or falsity of the information of the activityleading to the conviction or exclusion of the entity, or where the individualis an officer or managing employee of such entity.  This standard does not require that specificintent to defraud be 

 

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proven by the Office ofthe Inspector General of the U.S. Department of Health and Human Services (the “OIG”).  Under HIPAA it is also a crime to defraud anycommercial 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 hasheld that the Anti-Kickback Statute is violated if one purpose (as opposed to aprimary or sole purpose) of a payment to a provider is to inducereferrals.  Other federal circuit courtshave followed this decision.  Becausenone of these cases involved a joint venture such as those owning and operatingour surgical facilities, it is not clear how a court would apply these holdingsto our activities.  It is clear, however,that a physician’s investment income from a surgical facility may not vary withthe number 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 to have violated the law because its agentsolicited prospective limited partners by implying that eligibility to purchaseshares in the limited partnership was dependent on an agreement to referbusiness to it, told prospective limited partners that the number of sharesthey would be permitted to purchase would depend on the volume of business theyreferred to the venture, and stated that partners who did not refer businesswould be pressured to leave the partnership. The court also determined that the joint venture was vicariously liablefor the actions of its agents, notwithstanding that the agent’s actions werecontrary to the principal’s stated policy.

 

Under regulationsissued by the OIG, certain categories of activities are deemed not to violatethe Anti-Kickback Statute (commonly referred to as the safe harbors).  According to the preamble to these safeharbor regulations, the failure of a particular business arrangement to complywith the regulations does not determine whether the arrangement violates theAnti-Kickback Statute.  The safe harborregulations do not make conduct illegal, but instead outline standards that, ifcomplied with, protect conduct that might otherwise be deemed in violation ofthe Anti-Kickback Statute.  Failure tomeet a safe harbor does not indicate that the arrangement violates the Anti-KickbackStatute.

 

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 theirpractice (the “ASC Safe Harbor”).  TheASC Safe Harbor protects four categories of investors, including facilitiesowned by (1) general surgeons, (2) single-specialty physicians, (3) multi-specialtyphysicians and (4) hospital/physician ventures, provided that certainrequirements are satisfied.  Theserequirements include the following:

 

1.               The ambulatory surgery center must be anambulatory surgery center certified to participate in the Medicare program, andits operating and recovery room space must be dedicated exclusively to theambulatory surgery center and not a part of a hospital (although such space maybe leased from a hospital if such lease meets the requirements of the safeharbor for space rental);

 

2.               Each investor must be either (a) aphysician who derived at least one-third of his or her medical practice incomefor the previous fiscal year or 12-month period from performing procedures onthe list of Medicare-covered procedures for ambulatory surgery centers, (b) ahospital, or (c) a person or entity not in a position to make or influencereferrals to the center, nor to provide items or services to the ambulatorysurgery center, nor employed by the ambulatory surgery center or any investor;

 

3.               Unless all physician-investors aremembers of a single specialty, each physician-investor must perform at leastone-third of his or her procedures at the ambulatory surgery center eachyear.  (This requirement is in additionto the requirement that the physician-investor has derived at least one-thirdof his or her medical practice income for the past year from performingprocedures.);

 

4.               Physician-investors must have fullyinformed their referred patients of the physician’s investment;

 

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5.     The terms on which an investment interest is offeredto an investor are not related to the previous or expected volume of referrals,services furnished or the amount of business otherwise generated from thatinvestor to the entity;

 

6.     Neither the ambulatory surgery center nor any otherinvestor nor any person acting on their behalf may loan funds to or guarantee aloan for an investor if the investor uses any part of such loan to obtain theinvestment interest’

 

7.     The amount of payment to an investor in return for theinvestment interest is directly proportional to the amount of the capitalinvestment (including the fair market value of any pre-operational servicesrendered) of that investor;

 

8.     All physician-investors, any hospital-investor and thecenter agree to treat patients receiving benefits or assistance under a federalhealth care program in a non-discriminatory manner;

 

9.     All ancillary services performed at the ambulatorysurgery center for beneficiaries of federal health care programs must bedirectly and integrally related to primary procedures performed at theambulatory surgery center and may not be billed separately;

 

10.   No hospital-investor may include on its cost report orany claim for payment from a federal health care program any costs associatedwith the ambulatory surgery center;

 

11.   The ambulatory surgery center may not use equipmentowned by or services provided by a hospital-investor unless such equipment isleased in accordance with a lease that complies with the Anti-Kickback statuteequipment rental safe harbor and such services are provided in accordance witha contract that complies with the Anti-Kickback Statute personal services andmanagement contracts safe harbor; and

 

12.   No hospital-investor may be in a position to make orinfluence referrals directly or indirectly to any other investor or theambulatory 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 cannot assure you that the OIG would viewour activities favorably even though we strive to achieve compliance with theremaining 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 our ambulatory surgery centerjoint ventures are purchased at fair market value.  Investors who purchase at a later timegenerally pay more for a given percentage interest than foundinginvestors.  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 market value purchase requirements anddistribution policies comply with the Anti-Kickback Statute.  In Advisory Opinion No 01-21 (November 16,2001), the OIG approved an arrangement where a hospital made a later fairmarket value purchase of interests in an ambulatory surgery center where someof the existing physicians had purchased at a later time for a higher per unitinvestment.  In Advisory Opinion No. 07-05(June 12, 2007), however, the OIG refused to provide protection to aproposed sale of certain interests owned by certain founding physicianinvestors to a would-be hospital investor. The OIG raised three concerns: (1) the hospital was purchasing itsinterests from physician investors, thus the ambulatory surgery center wouldnot receive an infusion of capital, rather the physicians would realize gain ontheir investment, (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 

 

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amount of capitalinvested.  The OIG admitted that none ofthe factors alone or together necessarily indicates an Anti-Kickback Statuteviolation.  Given the results in AdvisoryOpinion No. 01-21 and that negative OIG Advisory Opinions are unusual, itappears to us that the OIG’s conclusions as stated in Advisory Opinion No. 07-05may be limited to the facts 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), the OIG declined to grant a favorable opinion to aproposed ambulatory surgery center structure that would have been jointly ownedby a hospital and a multi-specialty group practice that was composed of asubstantial number of primary care physicians who would not personally use theambulatory surgery center.  In the opinion,the OIG stated that because interests in the ambulatory surgery center would beindirectly owned by physicians who would not personally practice at theambulatory surgery center, the proposed structure could potentially generateprohibited remuneration under the Anti-Kickback Statute and that as a result,the OIG was precluded from determining that the proposed arrangement posed aminimal risk of fraud and abuse.  Webelieve that the ownership of our ambulatory surgery center complies with theAnti-Kickback Statute because we understand that the physician group that ownsan interest in our ambulatory surgery center is structured to fit within thedefinition of a unified group practice under the federal law prohibitingphysician self-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 provisionsdirectly apply only to liability under the Stark Law, we believe that the sameprinciples are relevant to an analysis under 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 ownershipof other ancillary services common in physician practices.  Nevertheless, there can be no assurance thatthe proposed arrangement will not be determined to be in violation of the law.

 

In OIG AdvisoryOpinion No. 09-09 (July 29, 2009), the OIG concluded that anarrangement involving an ASC joint venture between a hospital and physiciansinvolving the combination of their two ASCs into a single, larger ASC presentedminimal risk of fraud or abuse, despite the fact that it did not fit within anyapplicable anti-kickback safe harbors. In the proposed arrangement, the physicians would not invest in thejoint venture directly, but rather indirectly through the physician entity thatwas a party to the joint venture.  In thepast, the OIG has expressed concern that intermediate investment entities “couldbe used to redirect revenues to reward referrals.”  The OIG determined, however, that the use ofa “pass-through” entity in this case did not substantially increase the risk offraud and abuse based on several safeguards the hospital and physicians hadimplemented.  Additionally, the OIGstated that fair market value should be determined based only on the tangibleassets of each ASC since the physician investors are referral sources for theASC.  The OIG stated that a cashflow-based valuation of the business contributed by the physician investorspotentially would include the value of the physician investors’ referrals overthe time that their ASC was in existence prior to the merger with the hospital’sASC.  The OIG went on to note that avaluation involving intangible assets would not necessarily result in aviolation of the Anti-Kickback Statute, but would require a review of all thefacts and circumstances.  It is not clearwhether the OIG is concerned about using a cash flow-based valuation in mosthealthcare transactions involving referral sources, or just transactions, likethis one, where the parties’ contributions would be valued differently forcontributing the same assets if only one party’s contribution is valued as agoing concern based on cash flow.  Also,the OIG appears to be focused on historical cash flow rather than a projected,discounted cash flow, which is a commonly used valuation methodology.  What is clear is that for the first time, theOIG addressed valuation methodologies, which could lead to increased scrutinyof all transactions involving physicians.

 

Our hospitalscomply as closely as possible to the safe harbor for investments in smallentities.  Our hospital investments donot fit 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 haveentered into management agreements to manage many of our surgical facilities,as well as two physician networks.  Mostof these agreements call for our subsidiary to be paid a percentage-basedmanagement fee.  Although there is a safeharbor for personal services and management contracts (the “Personal Servicesand Management Safe Harbor”), the 

 

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Personal Services andManagement Safe Harbor requires, among other things, that the amount of theaggregate compensation paid to the manager over the term of the agreement beset in advance.  Because our management feesare generally based on a percentage of revenues, our management agreements donot 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.  TheOIG has taken the position that percentage-based management agreements are notprotected by a safe harbor, and consequently, may violate the Anti-KickbackStatute.  On April 15, 1998, the OIGissued Advisory Opinion No. 98-4 which reiterates this proposition.  The opinion focused on areas the OIGconsiders to be problematic in a physician practice management context,including financial incentives to increase patient referrals, no safeguardsagainst overutilization and incentives to increase the risk of abusivebilling.  The opinion also reiteratedthat proof of intent to violate the Anti-Kickback Statute is the central focusof the OIG.  We have implemented formalcompliance programs designed to safeguard against overbilling and believe thatour management agreements comply with the requirements of the Anti-KickbackStatute.  However, we cannot assure youthat 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.  Physician investors are generally notrequired to enter into similar guarantees. The OIG might take the position that the failure of the physicianinvestors to enter into similar guarantees represents a special benefit to thephysician investors given to induce patient referrals and that such failureconstitutes a violation of the Anti-Kickback Statute.  We believe that the management fees (and insome cases 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, theOIG has not issued any guidance in this regard.

 

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 have not, however, sought such an opinionregarding 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.

 

Evolving interpretationsof current, or the adoption of new, federal or state laws or regulations couldaffect many of our arrangements.  Lawenforcement authorities, including the OIG, the courts and Congress, areincreasing their scrutiny of arrangements between healthcare providers andpotential referral sources to ensure that the arrangements are not designed asa mechanism to exchange remuneration for patient care referrals oropportunities.  Investigators have alsodemonstrated a willingness to look behind the formalities of a businesstransaction to determine the underlying purposes of payments between healthcareproviders and potential referral sources.

 

*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, the Stark Law prohibitsa practitioner, including a physician, dentist or podiatrist, from referringpatients to an entity with which the practitioner or a member of his or herimmediate family has a “financial relationship” for the provision of certain “designatedhealth services” that are paid for in whole or in part by Medicare or Medicaidunless an exception applies.  The term “financialrelationship” is broadly defined and includes most types of ownership andcompensation relationships.  The StarkLaw also prohibits the entity from seeking payment from Medicare or Medicaidfor services that are rendered through a prohibited referral.  If an entity is paid for services providedthrough a prohibited referral, it may be required to refund the payments.  Violations of the Stark Law may also resultin the imposition of damages equal to three times the amount improperly claimedand civil monetary penalties of up to $15,000 per prohibited claim and $100,000per prohibited circumvention scheme and exclusion from participation in theMedicare and Medicaid programs.  For thepurposes of the Stark Law, the term “designated health services” is defined toinclude:

 

·                  clinical laboratory services;

·                  physical therapy services;

 

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·                  occupational therapy services;

·                  radiology services, including magneticresonance imaging, computerized axial tomography scan and ultrasound services;

·                  radiation therapy services and supplies;

·                  durable medical equipment and supplies;

·                  parenteral and enteral nutrients,equipment and supplies;

·                  prosthetics, orthotics and prostheticdevices and supplies;

·                  home health services;

·                  outpatient prescription drugs; and

·                  inpatient and outpatient hospitalservices.

 

The list ofdesignated health services does not, however, include surgical services thatare provided in an ambulatory surgery center. Furthermore, in final Stark Law regulations published by HHS on January 4,2001, the term “designated health services” was specifically defined to notinclude services that are reimbursed by Medicare as part of a composite rate,such as services that are provided in an ambulatory surgery center.  However, if designated health services areprovided by an ambulatory surgery center and separately billed, referrals tothe ambulatory surgery center by a physician-investor would be prohibited bythe Stark Law.  Because our facilitiesthat are licensed as ambulatory surgery centers do not have independentlaboratories and do not provide designated health services apart from surgicalservices, we do not believe referrals to these facilities byphysician-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.

 

Four of ourfacilities are licensed as hospitals. The Stark Law currently includes the Whole Hospital Exception, whichapplies to physician ownership of a hospital, provided such ownership is in thewhole hospital and the physician is authorized to perform services at thehospital.  Physician investment in ourfacilities licensed as hospitals meet this requirement.  However, changes to the Whole HospitalException have been the subject of recent regulatory action andlegislation.  See “Reimbursement — HealthCare Reform.”  Changes in the PatientProtection and Affordable Care Act and the Health Care and Education ReconciliationAct provide:

 

·      Aprohibition on hospitals from having any physician ownership unless thehospital already had physician ownership and a Medicare provider agreement ineffect as of  August 1, 2010, with aproposed change to December 31, 2010 pending in the reconciliation bill;

·      Alimitation on the percentage of total physician ownership or investmentinterests in the hospital or entity whose assets include the hospital to thepercentage of physician ownership or investment as of March 23, 2010;

·      Arequirement that return on investment be proportionate to the investment byeach investor;

·      Restrictionson preferential treatment of physician versus nonphysician investors;

·      Arequirement for written disclosures of physician ownership interests to thehospital’s patients and on the hospital’s website and in any advertising, alongwith annual reports to the government detailing such interests;

·      Aprohibition on the hospital or other investors from providing financing tophysician investors;

·      Arequirement that any hospital that does not have 24/7 physician coverage informpatients of this fact and receive signed acknowledgement from the patients ofthe disclosure; and

·      Aprohibition on “grandfathered” status for any physician owned hospital thatconverted from an ambulatory surgery center to a hospital on or after March 23,2010.

 

Wecannot predict whether other proposed amendments to the Whole Hospital Exception will be included in any future legislationor if Congress will adopt any similar provisions that would prohibit orotherwise restrict physicians from holding ownership interests inhospitals.  The Acts could have anadverse effect on our financial condition and results of operations.

 

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Additionally, thephysician networks we manage must comply with the “in-office ancillary servicesexception” of the Stark Law.  We believethat these physician networks operate in compliance with the applicablelanguage of statutory exceptions to the Stark Law, including the exceptions forservices provided by physicians within a group practice or in-office ancillaryservices.  There have been extensive discussionsand proposed changes to these exceptions. We cannot provide assurances that CMS may not propose and later adoptchanges to the in-office ancillary services exception or whether if adopted anysuch changes would not adversely affect the physician practices that we manage,and thus that portion of our business. If future revisions modify the provisions of the Stark Law regulationsthat are applicable to our business, our revenues and profitability could bematerially adversely affected and could require us to modify our relationshipswith 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 careprograms.  Claims filed with privateinsurers can also lead to criminal and civil penalties, including, but notlimited to, penalties relating to violations of federal mail and wire fraudstatutes, as well as penalties under the anti-fraud provisions of HIPAA.  While the criminal statutes are generallyreserved for instances of fraudulent intent, the U.S. government is applyingits criminal, civil and administrative penalty statutes in an ever-expandingrange of circumstances.  For example, theU.S. government has taken the position that a pattern of claiming reimbursementfor unnecessary services violates these statutes if the claimant merely shouldhave known the services were unnecessary, even if the government cannotdemonstrate actual knowledge.  The U.S.government 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 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 Act prohibits a person fromknowingly presenting, or causing to be presented, a false or fraudulent claimto the U.S. government.  The statutedefines “knowingly” to include not only actual knowledge of a claim’s falsity,but also reckless disregard for or intentional ignorance of the truth orfalsity of a claim.  Because our surgicalfacilities perform hundreds of similar procedures a year for which they arepaid by Medicare, and there is a relatively long statute of limitations, abilling error or cost reporting error could result in significant civil orcriminal penalties.  In addition, somecourts have held that a violation of the Anti-Kickback Statute or the Stark Lawcan result in liability 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 referred to as relators, are entitled toshare in any amounts recovered by the government through trial orsettlement.  Both whistleblower lawsuitsand direct enforcement activity by the government have increased significantlyin recent years and have increased the risk that a health care company, likeus, will have to defend a false claims action, pay fines or be excluded fromthe Medicare and Medicaid programs and other federal and state health careprograms as a result of an investigation resulting from a whistleblowercase.  Although we believe that ouroperations materially 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 we have violated theselaws would have a material adverse effect on us.

 

*Health Information Practices*

 

Privacy andSecurity Requirements

 

We aresubject to HIPAA and the Health Information Technology for Economic andClinical Health Act (“HITECH Act”), which was enacted as part of the AmericanRecovery and Reinvestment Act of 2009. The HITECH Act strengthened the requirements and significantly increasedthe penalties for violations of the HIPAA privacy and securityregulations.  In addition, a new breachnotification requirement was established requiring reporting of certainunauthorized access, acquisition, or disclosure of unsecured protected healthinformation that poses significant risk of financial, reputational or otherharm to a patient.  On August 24,2009, the Secretary of HHS issued regulations implementing certain of therequirements of the HITECH Act.  Althoughthese regulations were effective September 23, 2009, HHS announced theimposition of penalties pursuant to these regulations would 

 

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be delayed until February 2010.  We cannot quantify the financial impact ofcompliance with these new regulations, but could incur expenses associated withsuch compliance.

 

There arecurrently several laws at the state and federal levels addressing the privacyand security of patient health and other identifiable information.  The privacy regulations of HIPAA apply to allhealth plans, all health care clearinghouses and health care providers thattransmit health information in an electronic form in connection with HIPAAstandard transactions.  Our facilitiesare subject to the privacy regulations of HIPAA. The privacy standards apply toindividually identifiable information held or disclosed by a covered entity inany form, whether communicated electronically, on paper or orally.  These standards impose extensiveadministrative requirements on us.  Thesestandards require our compliance with rules governing the use anddisclosure of this health information. They create rights for patients in their health information, such as theright to amend their health information, and they require us to impose theserules, by contract, on any business associate to whom we disclose suchinformation in order to perform functions on our behalf.  In addition, our surgical facilities willcontinue to remain subject to any state laws that are more restrictive than theprivacy regulations issued under HIPAA. These state laws vary by state and could impose additional penalties.

 

In addition, wealso are 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.  These securitystandards require us to establish and maintain reasonable and appropriateadministrative, technical and physical safeguards to ensure the integrity,confidentiality and the availability of electronic health and related financialinformation.  The security standards weredesigned to protect electronic information against reasonably anticipatedthreats or hazards to the security or integrity of the information and toprotect the information against unauthorized use or disclosure.  Although the security standards do notreference or advocate a specific technology, and covered health care providers,plans and clearinghouses have the flexibility to choose their own technicalsolutions, the security standards have required us to implement significant newsystems, business procedures and training programs.  We believe that we are in material compliancewith the privacy and security requirements of HIPAA.

 

The HITECH Actalso creates a federal breach notification law to mirror protections that manystates have passed in recent years.  Thislaw requires us to notify patients of any unauthorized access, acquisition, ordisclosure of their unsecured protected health information that posessignificant risk of financial, reputational or other harm to a patient.  This law specifies how protected healthinformation must be secured and acceptable methods of notice and informationthat must appear in the notification to the patient.  All such breaches must be reported to theSecretary of HHS.  If a breach affects500 patients or more, it must immediately be reported to the Secretary of HHS,who, in turn, will post the name of the provider on its public website.  Finally, the law requires that breachesaffecting 500 patients or more who reside in the same area be reported to localmedia.  On August 2009, theSecretary of HHS issued interim final regulations with request for commentwhich clarify several aspects of this law.

 

Violations of theHIPAA privacy and security regulations may result in civil and criminalpenalties.  The HITECH Act strengthenedthe requirements of the HIPAA privacy and security regulations andsignificantly increased the penalties for violations by introducing a tieredpenalty system, with penalties of up to $50,000 per violation with a maximumcivil penalty of $1.5 million in a calendar year for violations of the samerequirement.  Under the HITECH Act, HHSis required to conduct periodic compliance audits of covered entities and theirbusiness associates.  The HITECH Act alsoextends the application of certain provisions of the security and privacyregulations to business associates and subjects business associates to civiland criminal penalties for violation of the regulations.  The Secretary of HHS has issued an interimfinal rule conforming HIPAA’s enforcement regulations to the HITECH Act’sstatutory revisions.  This interim final rule alsosets forth guidance on, among other things, how the tiered penalty structurewill reflect increasing levels of culpability and provides a prohibition on theimposition of penalties for any violation that is corrected within a 30-daytime period, as long as the violation was not due to willful neglect.  This interim final rule became effectiveon November 30, 2009.

 

In addition, theHITECH Act authorizes State Attorneys General to bring civil actions seekingeither an injunction or damages in response to violations of HIPAA privacy andsecurity regulations or the new data breach law that affects the privacy oftheir state residents.  In January 2010,Connecticut’s Attorney General filed suit against Health Net of Connecticut, Inc.for failing to secure member information and for failure to notify members 

 

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of a data breach in atimely fashion.  We expect vigorousenforcement of the HITECH Act’s requirements by HHS and State AttorneysGeneral.

 

Our facilitiesremain subject to any state laws that relate to privacy or the reporting ofdata breaches that are more restrictive than the regulations issued under HIPAAand the requirements of the HITECH Act. For example, various state laws and regulations may require us to notifyaffected individuals in the event of a data breach involving certain personalinformation, such as social security numbers, dates of birth and credit cardinformation.

 

In addition, theFederal Trade Commission (“FTC”) issued a final rule, known as the Red FlagsRule, in October 2007 requiring financial institutions and businesseswhich maintain accounts that permit multiple payments for primarily individualpurposes, which may include ASCs and other healthcare providers, to implement writtenidentity theft prevention programs. These identity theft programs must be designed to detect, prevent, andmitigate identity theft in connection with these accounts.  At the request of members of Congress, theFTC is delaying enforcement of the Red Flags Rule until June 1,2010.  The FTC may seek penalties forviolating the Red 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 or up to $1,000 per independent violation, plus recovering attorney’sfees from the violator.  Finally,individuals may file civil suits, in which they may seek actual damages, plusrecovering attorney’s fees 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 have appointed members of our managementteam to direct our compliance with these standards.  We have also appointed a privacy officer,prepared privacy policies, trained our workforce on these policies and enteredinto business associate agreements with the appropriate vendors.  Continued compliance with these regulationswill require us to continue these activities on an ongoing basis and mayrequire 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 that healthcare providers must follow when electronicallytransmitting certain healthcare transactions, such as healthcare claims.  We believe that we are in compliance withthese regulations.

 

In January 2009,CMS published a final rule adopting modifications to the InternationalClassification of Diseases (“ICD”), 10th Revision, or ICD-10, code sets forcertain diagnoses and inpatient hospital procedures, as well as related changesto certain formats for electronic transactions. While use of these updated code sets will not be mandatory until October 1,2013, preparation for compliance with these standards may require significantadministrative changes to our payment systems and procedures.  We do not believe costs of compliance withthese administrative simplification requirements will have a material adverseeffect on our business, 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 thesestatutes generally mirror the federal Anti-Kickback Statute and Stark Law, theyvary widely in their scope and application. Some are specifically limited to health care services that are paid forin whole or in part by the Medicaid program, others apply to all health careservices regardless of payor, while others apply only to state-defineddesignated services which may differ from the designated health services underthe Stark Law.  In addition, many stateshave adopted statutes that mirror the False Claims Act and that prohibit thefiling of a false or fraudulent claim with a state governmental agency.  We intend to comply with all applicable statehealth care laws, rules and regulations. However, these laws, rules and regulations have typically been thesubject of limited judicial and regulatory interpretation.  As a result, we cannot assure you that oursurgical facilities will not be investigated or scrutinized by the governmentalauthorities empowered to do so or, if challenged, that their activities wouldbe found to be lawful.  A determinationof non-compliance with the applicable 

 

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statehealth care laws, rules, and regulations could subject our surgical facilitiesto civil and criminal penalties and could have a material adverse effect on ouroperations.

 

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 laws vary significantly from state tostate.  A determination of non-compliancewith these laws could result in fines and or require us to restructure some ofour existing relationships with our physicians. We are also subject to various state insurance statutes and regulationsthat prohibit us from submitting inaccurate, incorrect or misleadingclaims.  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 ofour surgical facilities waive the out-of-network portion of patient co-paymentamounts when providing services to patients whose health insurance is coveredby a payor with which the surgical facilities are not contracted, our surgicalfacilities fully disclose waivers in the claims submitted to the payors.  We believe that our surgical facilities arein compliance with all applicable state insurance laws and regulationsregarding the submission of claims.  Wecannot assure you, however, that none of our surgical facilities’ insuranceclaims will ever be challenged.  If wewere found to be in violation of a state’s insurance laws or regulations, wecould be forced to discontinue the violative practice, which could have anadverse effect on our financial position and results of operations, and wecould be subject to fines and criminal penalties.

 

*Recovery Audit Contractors*

 

CMS has expanded the pilot recovery audit contractor (“RAC”)program to a permanent nationwide program. RACs are private contractors contracting with CMS to identify overpaymentand underpayments for services through post-payment reviews of Medicareproviders and suppliers.  We cannotquantify the financial impact of potential RAC audits, but could incur expensesassociated with responding to and challenging any audit, as well as costs ofrepayment of alleged overpayments.

 

*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.  Lawsin the State of New York require that corporations have natural persons asstockholders to be approved by the New York Department of Health as a licensedhealth 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 NewYork.  Laws in the State of New York alsoprohibit the delegation of certain management functions by a licensed healthcare facility, including but not limited to the authority to appoint anddischarge senior management, independently control the books and records of thefacility, dispose of assets of the facility outside of day-to-day operationsand adopt policies affecting the delivery of health care services.  The law does permit a licensed facility tolease premises and obtain various services from non-licensed entities.  However, it is not clear what types ofdelegation constitute a violation. Although we believe that our operations and relationships in New Yorkare in compliance with these laws, if New York regulatory authorities or athird-party asserts a contrary position, we may be unable to continue or expandour operations in New York.

 

**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. *RiskFactors***

** **

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 followingrisks actually occurred, our business, financial condition and operatingresults could suffer.

 

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**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, 2009, we had (a) totalindebtedness of approximately $465.2 million and (b) approximately $100.0million of revolving credit borrowings available under our senior securedcredit facility, subject to customary conditions.  In addition, subject to the restrictions inour senior secured credit facility and the indenture governing our11.00%/11.75% Senior PIK toggle notes due 2015 (the “Toggle Notes”), we mayincur significant additional indebtedness, which may be secured, from time totime.

 

The level of ourindebtedness could have important consequences, including:

 

·                  making it more difficult for us to makepayments on the Toggle Notes;

·                  limiting cash flow available for generalcorporate purposes, including capital expenditures and acquisitions, because asubstantial portion of our cash flow from operations must be dedicated toservicing our debt;

·                  limiting our ability to obtain additionaldebt financing in the future for working capital, capital expenditures oracquisitions;

·                  limiting our flexibility in reacting tocompetitive and other changes in our industry and economic conditionsgenerally; and

·                  exposing us to risks inherent in interestrate fluctuations because some of our borrowings will be at variable rates ofinterest, which could result in higher interest expense in the event ofincreases in interest rates.

 

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 wewill need to incur additional debt to fund development activities.  In 2008 and 2009, in order to preserve cashto fund potential buy-ups, developments and acquisitions, we elected to payinterest on our bridge loan and the Toggle Notes in kind.  We may also choose to do so in the futurewith respect to the Toggle Notes.  If weare unable to meet our debt service obligations or fund our other liquidityneeds, we could attempt to restructure or refinance our indebtedness or seekadditional equity capital.  We cannotassure you that we will be able to accomplish those actions on satisfactory 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 additional indebtedness;

·                  make certain distributions, investmentsand other restricted payments;

·                  dispose of our assets;

·                  grant liens on our assets;

·                  limit the ability of restrictedsubsidiaries to make payments to us;

·                  engage in transactions with affiliates;and

·                  merge or consolidate or transfersubstantially 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 to satisfy other financial conditiontests.  Our ability to meet thosefinancial ratios and tests can be affected by events beyond our control, and wecannot assure you that we will continue to meet those tests.  A breach of any of these covenants 

 

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could result in a defaultunder our senior secured credit facility and/or the indenture governing ourToggle Notes.  Upon the occurrence of anevent of default under our senior secured credit facility, the lenders couldelect to declare all amounts outstanding under our senior secured creditfacility to be immediately due and payable and terminate all commitments toextend further credit.  If we were unableto repay those amounts, the lenders could proceed against the collateralgranted to them to secure that indebtedness. We have pledged substantially all of our assets, other than assets ofour non-guarantor subsidiaries, as security under our senior secured creditfacility.  If the lenders under oursenior secured credit facility accelerate the repayment of borrowings, wecannot assure you that we will have sufficient assets to repay our seniorsecured credit facility and our other indebtedness, including the Toggle Notes.

 

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

 

The United States economycontinues to experience difficult conditions. 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 these payments are reduced or eliminated,our revenues and profitability could be adversely 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 amounts that our surgical facilities andphysician networks receive in payment for their services may be adverselyaffected by market and cost factors as well as other factors over which we haveno control, including Medicare, Medicaid and state regulations and the costcontainment and utilization decisions and reduced reimbursement schedules ofthird-party payors, Congressionalchanges and refinements to the Medicare ambulatory surgery center paymentsystem and CMS refinements 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 78%****and 77%****of our patient service revenues for the years ended December 31,2008 and 2009, respectively.  Mostof these payments came from third-party payors with which our centers havecontracts.  Managed care companies suchas HMOs and PPOs, which offer prepaid and discounted medical service packages,represent a growing segment of private third-party payors.  If we fail to enter into favorable contractsand to maintain satisfactory relationships with managed care organizations, ourrevenues may decrease.  Cost containmentmeasures, such as fixed fee schedules, capitation payment arrangements,reductions in reimbursement schedules by third-party payors and closed providernetworks, could also cause a reduction of our revenues in the future.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Executive Overview—OperatingTrends.”

 

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 patients the same co-payment or other patientresponsibility amounts that we would have charged had our center had a contractwith 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 responsibilityamount.  Historically, those third-partypayors who do not have contracts with our surgical facilities typically havepaid our claims at higher than comparable contracted rates.  However, there is a growing trend forthird-party payors to adopt out-of-network fee schedules that are morecomparable to our contracted rates or to take other steps to discourage theirenrollees from seeking treatment at out-of-network surgical facilities.  In these cases, we seek to enter intocontracts with the payors.  In certainsituations, we have seen an increase in the volume of cases in those instanceswhere we transition from out-of-network to in-network billing, although we mayexperience an overall decrease in revenues to the surgical facility.  We can provide no assurance that we will seea sufficient increase in volume of cases to compensate for the decrease in percase revenues where we transition from out-of-network to in-network billing.

 

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Payments from workers’compensation payors represented approximately 12% and 10% of our patientservice revenues for the years ended December 31, 2008 and 2009,respectively.  Several states haverecently considered or implemented workers’ compensation provider feeschedules.  In some cases, the feeschedule rates contain lower rates than the rates our surgical facilities havehistorically been paid for the same services. If the trend of states adopting lower workers’ compensation feeschedules continues, it could have a material adverse effect on our surgicalfacilities’ 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 we are unable to do so, our future growthcould be limited and our operating results 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 1999and December 31, 2009, we acquired 51 surgical facilities and developed 24surgical facilities, including 16 surgical facilities that we subsequentlydivested.  We may be unable to identifysuitable acquisition and development opportunities and to negotiate andcomplete acquisitions and new projects on favorable terms.  In addition, our acquisition and developmentprogram requires substantial capital resources, and we may need to obtainadditional capital or financing, from time to time, to fund theseactivities.  As a result, we may takeactions that could have a materially adverse effect on our financial conditionand results of operations, including incurring substantial debt.  Sufficient financing may not be available tous on satisfactory terms, if at all.

 

***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 inimplementing standard operating procedures and systems and improving existingmanaged care agreements and the mix of specialties offered at the surgicalfacilities.  Following the acquisition ofa surgical facility, key physicians may cease to use the facility or we may beunable to retain key management personnel. If we acquire the assets of a surgical facility rather than ownership inthe entity that owns the surgical facility, we may be unable to assume thesurgical facility’s existing managed care contracts and may have torenegotiate, or risk losing, one or more of the surgical facility managed carecontracts.  We may also be unable tocollect the accounts receivable of an acquired surgical facility.  We may also experience negative effects onour reported results of operations because of acquisition-related charges andpotential impairment of goodwill and other intangibles.

 

In addition, wemay acquire surgical facilities with unknown or contingent liabilities,including liabilities for failure to comply with health care laws andregulations.  Although we maintainprofessional and general liability insurance, we do not maintain insurancespecifically covering any unknown or contingent liabilities that may haveoccurred prior to the acquisition of companies and surgical facilities.  In some cases, our right to indemnificationfor these liabilities 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 newly developed surgical facilities typically incur netlosses during the initial periods of operation and, unless and until their caseloads grow, they generally experience lower total revenues and operatingmargins than established surgical facilities. Integrating a new surgical facility could be expensive and timeconsuming and could disrupt our ongoing business and distract our managementand other key personnel.  If we areunable to timely and efficiently integrate an acquired or newly developedfacility, our business could 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 giving approval, these states consider theneed for additional or expanded health care facilities or services, as well asthe financial resources and operational experience of the 

 

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potential new owners ofexisting health care facilities.  In manyof 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 in which we now or mayin the future operate may adopt similar legislation.  Our costs of obtaining a certificate of needcould be significant, and we cannot assure you that we will be able to obtainthe certificates of need or other required approvals for additional or expandedsurgical facilities or services in the future. In addition, at the time we acquire a surgical facility, we may agree toreplace or expand the acquired facility. If we are unable to obtain required approvals, we may not be able toacquire additional surgical facilities, expand health care services we provideat these facilities or replace 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 arenot employees of our surgical facilities and are not contractually required touse 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 surgical facilities also use other facilities orhospitals and may choose to perform procedures in an office-based setting thatmight otherwise be performed at our surgical facilities.  In recent years, pain management andgastrointestinal procedures have been performed increasingly in an office-basedsetting.  Although physicians who owninterests in our surgical facilities are subject to agreements restrictingownership of competing facilities, these agreements may not restrict proceduresperformed in a physician office or in other unrelated facilities.  Also, these agreements restricting ownershipof competing facilities are difficult to enforce, and we may be unsuccessful inpreventing physicians who own interests in our surgical facilities fromacquiring interests in competing facilities.

 

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 havedisputes with physicians who use our surgical facilities and/or own interestsin our surgical facilities or our company. Our revenues and profitability could be significantly reduced if we lostour relationship with one or more key physicians or groups of physicians, or ifsuch physicians or groups reduce their use of our surgical facilities.  In addition, any damage to the reputation ofa key physician or group of physicians or the failure of these physicians toprovide quality medical care or adhere to professional guidelines at oursurgical facilities could damage our reputation, subject us to liability andsignificantly 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 themethod for identifying providers, employers, health plans and patients.  We believe that we are in compliance with theHIPAA regulations.  However, if we failto comply with the requirements of HIPAA, we could be subject to significantpenalties under a tiered penalty system with penalties of up to $50,000 perviolation with a maximum civil penalty of $1.5 million in a calendar year forviolations of the same requirement.

 

***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 andregulations require that our surgical facilities 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,Medicaid and other government-sponsored health care programs.

 

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In pursuing ourgrowth strategy, we may seek to expand our presence into new geographicmarkets.  In new geographic markets, wemay encounter laws and regulations that differ from those applicable to ourcurrent 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 thefederal Anti-Kickback Statute, we could be subject to criminal and civilpenalties, loss of licenses and exclusion from the Medicare and Medicaidprograms, which may result in a substantial loss of revenues.***

 

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 broad in scope, and many of itsprovisions have not been uniformly or definitively interpreted by existing caselaw 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 Medicaidprograms.  The exclusion, if applied toour surgical facilities, could result in significant reductions in our revenuesand could have a material adverse effect on our financial condition and resultsof operations.  In addition, many of thestates in which we operate have also adopted laws, similar to the Anti-KickbackStatute, that prohibit payments to physicians in exchange for referrals, someof which apply regardless of the source of payment for care.  These statutes typically impose criminal andcivil penalties as well as loss of licenses. No state or federal regulatory actions have been taken against oursurgical facilities under anti-kickback statutes during the time we have ownedor managed the facilities.  Management isnot aware of any such actions prior to our acquisition or management of thesesurgical 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.  Business arrangements that do not meet thesafe harbor requirements do not necessarily violate the Anti-Kickback Statute,but may be subject to scrutiny by the federal government to determinecompliance.  However, the structure ofthe partnerships and limited liability companies operating our surgicalfacilities, as well as our business arrangements involving physician networks,do not satisfy all of the requirements of the safe harbor and, therefore, arenot immune from 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 of reimbursementrevenues.***

 

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 “designated health services”under the Stark Law does not include ambulatory surgery services, but it doesinclude services such as clinical laboratory services, and certain imagingservices that may be provided by an ambulatory surgery center.  Under the current Stark Law and relatedregulations, services provided at an ambulatory surgery center are not coveredby the statute, even if those services include imaging, laboratory services orother Stark designated health services, provided that (i) the ambulatorysurgery center does not bill for these services separately, or (ii) if thecenter is permitted to bill separately for these services, they arespecifically exempted from Stark Law prohibitions.  These are generally radiology and otherimaging services integral to performance of surgical procedures that meetcertain requirements and certain outpatient prescription drugs.  Services provided at our facilities licensedas hospitals are covered by the Stark Law, but referrals for such services areexempt from the Stark Law under its “whole hospital exception.”  Certain services provided by our managedphysician networks are covered by the Stark Law, but referrals for thoseservices are exempt from the Stark Law under its “in-office ancillary servicesexception,” among others.

 

The Stark Law andsimilar state statutes are subject to different interpretations with respect tomany important provisions.  Violations ofthese self-referral laws may result in substantial civil or criminal penalties,including treble damages for amounts improperly claimed, civil monetarypenalties of up to $15,000 per prohibited service billed, up to $100,000 perprohibited circumvention scheme and exclusion from participation in the 

 

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Medicare and Medicaid andother federal and state health care programs. Exclusion of our ambulatory surgery centers or hospitals from theseprograms through future judicial or agency interpretation of existing laws oradditional legislative restrictions on physician ownership or investments inhealth care entities could result in a significant loss of reimbursementrevenues.  We cannot provide assurancesthat CMS will not undertake other rulemaking to address additional revisions tothe Stark Law regulations.  If future rules modifythe provisions of the Stark Law regulations that are applicable to ourbusiness, our revenues and profitability could be materially adversely affectedand could require us to modify our relationships with our physician and healthcare system partners.

 

***Physician ownership of hospitals has been the subject of legislation,and future statutory and regulatory changes could limit or impair our abilityto own and operate our hospitals.***

 

Four of our ownedsurgical facilities are licensed as hospitals. The Stark Law currently includes an exception relating to physicianownership of a hospital, provided that the physician’s ownership interest is inthe whole hospital and the physician is authorized to perform services at thehospital (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 legislation, and was addressed in the Patient Protection andAffordable Care Act and the Health Care and Education Reconciliation Act of2010 enacted into law on March 23, 2010 and March 30, 2010, respectively.  See Item 1. “Business — GovernmentalRegulations.”  The Acts could have anadverse effect on our financial condition and results of operations.   If future legislation prohibiting physicianreferrals to hospitals in which the physicians own an interest were enacted byCongress our financial condition and results of operations could be materiallyadversely affected.

 

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

 

As discussed inItem 1. “Business — Governmental Regulations,” federal and state governmentagencies, as well as private payors, have heightened and coordinated civil andcriminal enforcement efforts as part of numerous ongoing investigations of thecost reporting and billing practices of health care organizations and theirquality of care and financial relationships with referral sources.  In addition, the Office of the InspectorGeneral of the U.S. Department of Health and Human Services, or OIG, and theU.S. Department of Justice have, from time to time, undertaken nationalenforcement initiatives that focus on specific billing practices or othersuspected 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 careprograms.  Claims filed with privateinsurers can also lead to criminal and civil penalties, including, but notlimited to, penalties relating to violations of federal mail and wire fraudstatutes, as well as penalties under the anti-fraud provisions of HIPAA.  While the criminal statutes are generallyreserved for instances of fraudulent intent, the U.S. government is applying itscriminal, civil and administrative penalty statutes in an ever-expanding rangeof circumstances.  For example, thegovernment has taken the position that a pattern of claiming reimbursement forunnecessary services violates these statutes if the claimant merely should haveknown the services were unnecessary, even if the government cannot demonstrateactual knowledge.  The government hasalso taken the position that claiming payment for low-quality services is aviolation of these statutes if the claimant should have known that the care wassubstandard.

 

We are alsosubject to various state insurance statutes and regulations that prohibit usfrom submitting inaccurate, incorrect or misleading claims.  Although we believe that our operationscomply with both federal and state laws, they may nevertheless be the subjectof a whistleblower lawsuit or may otherwise be challenged or scrutinized bygovernmental authorities.  Adetermination that we have violated these laws could have a material adverseeffect on our financial condition or results of operations.

 

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***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 operatingexpenses, which could have a material adverse effect on our financial conditionand results of operations.

 

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 with physician investors were deemedto violate the Anti-Kickback Statute, the Stark Law or similar laws, or if newfederal or state laws were enacted rendering these arrangements illegal, ourfinancial condition and results of operations would be materially adverselyaffected.

 

***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 interpretationand enforcement of these laws vary significantly from state to state.  We provide management services to twophysician networks.  If our arrangementswith these networks were deemed to violate state corporate practice ofmedicine, fee-splitting or similar laws, or if new laws are enacted renderingour arrangements illegal, we may be required to restructure these arrangements,which may result in a significant loss of revenues and divert other resources.

 

***We make significant loans to, and are generally liable fordebts and other obligations of, the partnerships and limited liability companiesthat 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 also own an interest in all but one ofthese partnerships and limited liability companies.  In the partnerships in which we are thegeneral partner, we are liable for 100% of the debts and other obligations ofthe partnership, even if we do not own all of the partnership interests.  For the majority of our surgical facilities,indebtedness at the partnership level is funded through intercompany loans thatwe provide.  Through most of these loans,which totaled approximately $41.2 million as of December 31, 2009, we havea secured interest in the partnership’s assets. However, our financial condition and results of operations would bematerially adversely affected if our surgical facilities are unable to repaythese 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, the partnerships orlimited liability companies in which we are a minority interest holder seekfinancing from a third-party and the physicians and/or physician groupsguarantee their pro-rata share of the indebtedness to secure thefinancing.  As of December 31, 2009,we had approximately $2.2 million of off-balance sheet guarantees ofnon-consolidated third-party debt in connection with these surgical facilities.

 

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 mostof our intercompany loans are secured by the assets of the partnership, thephysicians and physician groups that own an interest in these partnerships andlimited liability companies generally do not guarantee a pro rata amount ofthis debt or the other obligations of these partnerships and limited liabilitycompanies.

 

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***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 a limited liability companywhich provides administrative services to an ambulatory surgery center locatedin New York.  Laws in the State of NewYork require that corporations have natural persons as stockholders to beapproved by the New York Department of Health as a licensed health carefacility.  Accordingly, we are not ableto own interests in a limited partnership or limited liability company thatowns an interest in a health care facility located in New York.  Laws in the State of New York also prohibitthe delegation of certain management functions by a licensed health carefacility.  The law does permit a licensedfacility to lease premises and obtain various services from non-licensed entities.  However, it is not clear what types ofdelegation constitute a violation. Although we believe that our operations and relationships in New Yorkare in compliance with applicable laws, if New York regulatory authorities or athird-party asserts a contrary position, we may be unable to continue or expandour 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 purchase price that we would be requiredto pay for the ownership is typically based on either a multiple of the surgicalfacility’s EBITDA, as defined in our partnership and operating agreements withthese surgical facilities, or the fair market value of the ownership asdetermined by a third-party appraisal. The physician investors in some of our surgical facilities can requireus to purchase their interests in exchange for cash or shares of our commonstock if these regulatory changes occur. In addition, some of our partnership agreements with our physicianpartners and management agreements with surgical facilities require us toattempt to renegotiate the agreements upon the occurrence of variousfundamental regulatory changes or changes in the interpretation of existingregulations and provide for termination of the agreements if renegotiations arenot successful.

 

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

 

·                  make illegal the referral of Medicare orother patients to our surgical facilities by physician investors;

·                  create a substantial likelihood that cashdistributions to physician investors from the partnerships or limited liabilitycompanies through which we operate our surgical facilities would be illegal;

·                  make illegal the ownership by thephysician investors of interests in the partnerships or limited liabilitycompanies through which we own and operate our surgical facilities; or

·                  require us to reduce the aggregatepercentage of physician investor ownership in our hospitals.

 

We do not controlwhether or when any of these regulatory events might occur.  In the event we are required to purchase allof the physicians’ ownership, our existing capital resources would not besufficient for us to meet this obligation. These obligations and the possible termination of our partnership andmanagement agreements would have a material adverse effect on our financialcondition and results 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 theseactions involve large monetary claims and significant defense costs.  We maintain liability insurance in amountsthat we believe are appropriate for our operations.  Currently, we maintain professional andgeneral liability insurance that provides coverage on a claims made basis of$1.0 million per occurrence and $3.0 million in annual aggregate coverageper surgical facility.  In addition,physicians who provide professional services in our surgical facilities arerequired to maintain separate malpractice coverage with similar minimumcoverage limits.  We also maintainbusiness interruption insurance and property damage insurance, as well as anadditional umbrella liability insurance policy in the aggregate amount of$20.0 million.  However, thisinsurance coverage may not cover all claims against us.  Insurance coverage may not continue to beavailable at a cost allowing us to maintain adequate levels of 

 

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insurance.  If one or more successful claims against uswere not covered by or exceeded the coverage of our insurance, our financialcondition and results of operations could be adversely affected.

 

***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.  Wecompete with other health care providers, primarily hospitals and othersurgical facilities, in attracting physicians to utilize our surgicalfacilities and in contracting with managed care payors in each of our markets.  There are unaffiliated hospitals in eachmarket in which we operate.  Thesehospitals have established relationships with physicians and payors.  In addition, other companies either arecurrently in the same or similar business of developing, acquiring andoperating surgical facilities or may 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 someof these companies for entry into strategic relationships with health caresystems 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.  In recent years, more physicians are choosingto perform procedures, including pain management and gastrointestinalprocedures, in an office-based setting rather than in a surgical facility.  If we are unable to compete effectively withany of these entities or groups, we may be unable to implement our businessstrategies successfully and our financial position and results of operationscould be adversely affected.

 

***Our surgical facilities are sensitive to regulatory,economic and other conditions of the states where they are located.  In addition, three of our surgical facilitiesaccount for a significant portion of our patient service revenues.***

 

Our revenues areparticularly sensitive to regulatory, economic and other conditions in thestates of Texas and Florida.  As of December 31,2009, we owned (with physician investors or healthcare systems) and operatedseven surgical facilities in Texas and eight surgical facilities inFlorida.  The surgical facilities inTexas represented about 17% of our patient service revenues during 2009 and 13%during 2008, and the surgical facilities in Florida represented about 12% ofour patient service revenues during 2009 and 13% during 2008.

 

In addition, ourfacilities in Houma, Louisiana; Durango, Colorado; and Chesterfield, Missouri(Timberlake Surgery Center) generated approximately 6%, 6%, and 5%,respectively, of our patient service revenues during 2008, and 6%, 5%, and 5%,respectively, during 2009.  If these facilitiesare adversely affected by regulatory, economic and other conditions, or ifthese facilities do not perform effectively, our financial condition andresults of operations will be adversely affected.  None of our remaining surgical facilitiesaccounted for more than 5% of our revenues during 2008 or 2009.

 

***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 employment agreements with Messrs. Francis andAdlerz that became effective upon the closing of the Merger.  The initial term of each of these agreementsis three years from August 23, 2007, which automatically will extend sothat the term is three years until terminated. We may terminate each employment agreement for cause.  In addition, either party may terminate theemployment agreement at any time by giving prior written notice to the otherparty.  We do not maintain “key man” lifeinsurance policies on any of our officers. Because our senior management has contributed greatly to our growthsince inception, the loss of key management personnel or our inability toattract, retain and motivate sufficient numbers of qualified managementpersonnel could have a material adverse effect on our financial condition andresults of operations.

 

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

 

Our operationssignificantly depend on effective information systems.  Our information systems and applicationsrequire continual maintenance, upgrading and enhancement to meet ouroperational needs.  Moreover, ouracquisition activity requires frequent transitions from, and the integrationof, various information systems.  If we 

 

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experience difficultieswith the transition from information systems or are unable to properly maintainor expand our information systems, we could suffer, among other things,operational disruptions and increases in administrative 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.***

 

We generally holdour ownership interests in surgical facilities through limited partnerships orlimited liability companies in which we maintain ownership along withphysicians or physician practice groups. As general partner or manager of these entities, we may have a specialresponsibility, known as a fiduciary duty, to manage these entities in the bestinterests of the other interest holders. As a result, we may encounter conflicts between our responsibility tothe other interest holders and our responsibility to enhance the value of ourcompany.  For example, we have enteredinto management agreements to provide management services to our surgicalfacilities in exchange for a fee. Disputes may arise as to the nature of the services to be provided orthe amount of the fee to be paid.  Inthese cases, we are obligated to exercise reasonable, good faith judgment toresolve the disputes and may not be free to act solely in our own bestinterests or the interests of the noteholders. Disputes may also arise between us and our physician investors withrespect to a particular business decision or regarding the interpretation ofthe provisions of the applicable limited partnership agreement or operatingagreement.  We seek to avoid thesedisputes but have not implemented any measures to resolve these conflicts ifthey arise.  If we are unable to resolvea dispute on terms favorable or satisfactory to us, our financial condition andresults of operations may be adversely 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 of this structure is that we willdepend on the earnings of our subsidiaries and joint ventures, and thedistribution or payment to us of a portion of these earnings to meet ourobligations, including those under our senior secured credit facility, thesenior notes and any of our other debt obligations.  The distributions of those earnings oradvances or other distributions of funds by these entities to us, all of whichare contingent upon the subsidiaries’ earnings, are subject to various businessconsiderations.  In addition, distributionsby our subsidiaries could be subject to statutory restrictions, including statelaws requiring that such subsidiaries be solvent, or contractualrestrictions.  Some of our subsidiariesand joint ventures may become subject to agreements that restrict the sale ofassets and significantly restrict or prohibit the payment of dividends or themaking of distributions, loans or other payments to stockholders, partners ormembers.  The indenture governing the seniornotes permits our subsidiaries to enter into agreements with similarprohibitions and restrictions in the future, subject to certain limitations.

 

***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.  Wetypically own, directly or indirectly, the general partnership or majoritymember 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 equityholders.  Many of these agreements alsoimpose limits on the ability of these entities to make loans or transfer assetsto us.  If we are unable to causesufficient cash to be distributed from one or more of these entities, our relationshipswith the physicians who also own an interest in these entities may be damagedand we could be adversely affected, as could our ability to make debt servicepayments.  We may not be able to resolvefavorably any dispute regarding cash distribution or other matters with ahealth care system with which we share control of the distributions made bythese entities.  Further, the failure toresolve a dispute with these health care systems could cause an entity in whichwe own an interest to be dissolved.

 

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

 

Circumstances may occur in which the interests of ourprincipal stockholders could be in conflict with your interests.  In addition, these stockholders may have aninterest in pursuing transactions that, in their judgment, enhance the value oftheir equity investment in our company, even though those transactions mayinvolve risks 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 theirstock ownership, the Crestview funds control us and have the power to elect amajority of our directors, appoint new management and approve any actionrequiring the approval of the holders of common stock, including adoptingamendments to our certificate of incorporation and approving acquisitions orsales of all or substantially all of our assets.  The directors elected by the Crestview fundshave the ability to control decisions affecting our capital structure,including the issuance of additional capital stock, the implementation of stockrepurchase programs and the declaration of dividends.

 

**Item 1B.*Unresolved Staff Comments***

 

None.

 

**Item 2.  *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.  Upon expiration of the initialten-year term, the lease may be renewed for two additional five-yearperiods.  To exercise the renewal option,we must give notice at least nine months prior to the expiration of the leaseterm in question.

 

Our surgicalfacilities typically 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 options to extend the lease period for up toten additional years.  The surgicalfacilities are generally responsible for property taxes, property and casualtyinsurance and routine maintenance expenses. Two of our surgical facilities are located on real estate owned by thelimited partnership or limited liability company that owns the surgical facility.  We generally guarantee the lease obligationsof 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.”

 

**Item 3.  *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 these actions, plaintiffsrequest payment for damages, including punitive damages, that may not becovered by insurance.

 

**PART II**

 

**Item 4.* Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities***

 

We are whollyowned by 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 31, 2010, there were 10 holders of Holdings commonstock.

 

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**Item 5.  *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 6 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, 2009, 2008 and 2007,and the selected consolidated balance sheet data set forth below at December 31,2009 and 2008, 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, 2006 and 2005, and the selectedconsolidated balance sheet data set forth below at December 31, 2007, 2006and 2005, 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,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                         | ** ** | **(in  thousands)**               | ** ** |
| **Consolidated Statement of Operations Data:**                     |       |                              |       |   |   |   |   |   |   |   |   |
| Revenues                                                           |       | $                                 | 346,984    |   | $ | 331,900 |   | $ | 304,305 |   | $ | 285,387 |   | $ | 241,877 |   |
| Cost  of revenues                                                  |       | 248,584                           |       | 225,444 |   | 206,652 |   | 181,950 |   | 148,214 |   |
| General  and administrative expense                                |       | 21,448                            |       | 23,923 |   | 31,873 |   | 24,407 |   | 21,993 |   |
| Depreciation  and amortization                                     |       | 17,314                            |       | 15,175 |   | 12,652 |   | 11,913 |   | 11,575 |   |
| Provision  for doubtful accounts                                   |       | 3,354                             |       | 3,861 |   | 4,449 |   | 3,952 |   | 3,827 |   |
| Income  on equity investments                                      |       | (2,318                            | )          | (1,504 | ) | (16 | ) | (2,423 | ) | (1,273 | ) |
| Impairment  and loss on disposal of long-lived assets              |       | 3,505                             |       | 1,899 |   | 372 |   | 1,162 |   | 1,541 |   |
| Gain  on sale of long-lived assets                                 |       | (250                              | )          | (975 | ) | (915 | ) | (1,808 | ) | (1,785 | ) |
| Proceeds  from insurance settlements, net                          |       | (430                              | )          | — |   | (161 | ) | (410 | ) | — |   |
| Litigation  settlements, net                                       |       | —                            |       | 893 |   | — |   | (588 | ) | — |   |
| Merger  transaction expenses                                       |       | —                            |       | — |   | 7,522 |   | — |   | — |   |
| Total  operating expenses                                          |       | 291,207                           |       | 268,716 |   | 262,428 |   | 218,155 |   | 184,092 |   |
| Operating  income                                                  |       | 55,777                            |       | 63,184 |   | 41,877 |   | 67,232 |   | 57,785 |   |
| Interest  expense, net                                             |       | (44,981                           | )          | (43,426 | ) | (19,991 | ) | (7,108 | ) | (4,884 | ) |
| Income  before income taxes and discontinued operations            |       | 10,796                            |       | 19,758 |   | 21,886 |   | 60,124 |   | 52,901 |   |
| Provision  for income taxes                                        |       | 7,766                             |       | 13,256 |   | 3,240 |   | 12,254 |   | 10,428 |   |
| Income  from continuing operations                                 |       | 3,030                             |       | 6,502 |   | 18,646 |   | 47,870 |   | 42,473 |   |
| (Loss)  income from discontinued operations, net of taxes          |       | (6,097                            | )          | (3,643 | ) | (707 | ) | (783 | ) | 1,534 |   |
| Net  (loss) income                                                 |       | (3,067                            | )          | 2,859 |   | 17,939 |   | 47,087 |   | 44,007 |   |
| Less:  Net income attributable to noncontrolling interests         |       | (19,387                           | )          | (23,657 | ) | (23,341 | ) | (28,294 | ) | (24,952 | ) |
| Net  (loss) income attributable to Symbion, Inc.              |       | $                                 | (22,454    | ) | $ | (20,798 | ) | $ | (5,402 | ) | $ | 18,793 |   | $ | 19,055 |   |
| **Cash Flow Data — continuing operations:**                   |       |                              |       |   |   |   |   |   |   |   |   |
| Net  cash provided by operating activities                         |       | $                                 | 61,439     |   | $ | 62,266 |   | $ | 53,624 |   | $ | 57,914 |   | $ | 61,636 |   |
| Net  cash used in investing activities                             |       | (11,405                           | )          | (32,848 | ) | (38,848 | ) | (64,486 | ) | (68,592 | ) |
| Net  cash (used in) provided by financing activities               |       | (42,870                           | )          | (31,690 | ) | 2,467 |   | 6,966 |   | 8,984 |   |
| **Other Data:**                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| EBITDA(1)                                                          |       | $                                 | 57,826     |   | $ | 57,740 |   | $ | 48,913 |   | $ | 54,070 |   | $ | 44,164 |   |
| EBITDA  as a % of revenues                                         |       | 16.7                              | %          | 17.4 | % | 16.1 | % | 18.9 | % | 18.3 | % |
| Number  of surgical facilities operated as of the end of period(2) |       | 67                                |       | 66 |   | 58 |   | 56 |   | 56 |   |

 
| ** **                                          | ** ** | **As of  December 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                          | ** ** | **(in thousands)**           | ** ** |
| **Consolidated  Balance Sheet Data:**               |       |                         |       |   |   |   |   |   |   |   |   |
| Working  capital                                    |       | $                            | 40,781     |   | $ | 52,272 |   | $ | 70,617 |   | $ | 56,643 |   | $ | 48,784 |   |
| Total  assets                                       |       | 790,726                      |       | 783,564 |   | 768,813 |   | 503,806 |   | 436,378 |   |
| Total  long-term debt, less current maturities      |       | 445,008                      |       | 440,612 |   | 428,925 |   | 136,553 |   | 101,909 |   |
| Total  Symbion, Inc. stockholders’ equity |       | 193,413                      |       | 211,206 |   | 233,286 |   | 285,279 |   | 260,058 |   |
|                                                     |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| (1) | When we use the term  “EBITDA,” we are referring to net (loss) income plus (a) income (loss)  from discontinued operations, net of taxes (b) income tax expense  (benefit), (c) net interest expense, (d) depreciation and  amortization, (e) net income attributable to noncontrolling interests,  (f) non-cash (losses) gains, and (g) non-cash stock option  compensation. Noncontrolling interest represents the interest of third  parties, such as physicians and in some cases, health care systems that own  an interest in surgical facilities that we consolidate for financial  reporting purposes. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

39

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We use EBITDA as ameasure of liquidity.  We have includedit because we believe that it provides investors with additional informationabout our ability to incur and service debt and make capital expenditures.  We also use EBITDA, with some variation in thecalculation, to determine compliance with some of the covenants under thesenior secured credit facility, as well as to determine the interest rate andcommitment fee payable under the senior secured credit facility.

 

EBITDA is not ameasurement of financial performance or liquidity under GAAP.  It should not be considered in isolation oras a substitute for net income, operating income, cash flows from operating,investing or financing activities, or any other measure calculated inaccordance with generally accepted accounting principles.  The items excluded from EBITDA are significant components inunderstanding and evaluating financial performance and liquidity.  Our calculation of EBITDA may not becomparable to similarly titled measures reported by other companies.

 

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

 
| ** **                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                     | ** ** | **(in thousands)**               | ** ** |
| EBITDA                                                                                         |       | $                                | 57,826     |   | $ | 57,740 |   | $ | 48,913 |   | $ | 54,070 |   | $ | 44,164 |   |
| Depreciation and  amortization                                                                 |       | (17,314                          | )          | (15,175 | ) | (12,652 | ) | (11,913 | ) | (11,575 | ) |
| Non-cash  (losses) gains                                                                       |       | (2,825                           | )          | (924 | ) | 543 |   | 646 |   | 244 |   |
| Non-cash stock  option compensation expense                                                    |       | (1,297                           | )          | (2,114 | ) | (10,746 | ) | (3,865 | ) | — |   |
| Interest  expense, net                                                                         |       | (44,981                          | )          | (43,426 | ) | (19,991 | ) | (7,108 | ) | (4,884 | ) |
| Provision for  income taxes                                                                    |       | (7,766                           | )          | (13,256 | ) | (3,240 | ) | (12,254 | ) | (10,428 | ) |
| Merger  transaction expenses                                                                   |       | —                           |       | — |   | (7,522 | ) | — |   | — |   |
| Net income  attributable to noncontrolling interests                                           |       | 19,387                           |       | 23,657 |   | 23,341 |   | 28,294 |   | 24,952 |   |
| (Loss) gain on  discontinued operations, net of taxes                                          |       | (6,097                           | )          | (3,643 | ) | (707 | ) | (783 | ) | 1,534 |   |
| Net (loss)  income                                                                             |       | (3,067                           | )          | 2,859 |   | 17,939 |   | 47,087 |   | 44,007 |   |
| Loss (income)  from discontinued operations                                                    |       | 6,097                            |       | 3,643 |   | 707 |   | 783 |   | (1,534 | ) |
| Depreciation and  amortization                                                                 |       | 17,314                           |       | 15,175 |   | 12,652 |   | 11,913 |   | 11,575 |   |
| Amortization of  deferred financing costs                                                      |       | 2,004                            |       | 4,477 |   | 2,194 |   | 506 |   | 671 |   |
| Non-cash  payment-in-kind interest option                                                      |       | 23,263                           |       | 17,616 |   | — |   | — |   | — |   |
| Non-cash  recognition of other comprehensive loss into earnings                                |       | 2,853                            |       | — |   | — |   | — |   | — |   |
| Non-cash credit  risk adjustment of financial instruments                                      |       | 1,629                            |       | — |   | — |   | — |   | — |   |
| Non-cash stock  option compensation expense                                                    |       | 1,297                            |       | 2,114 |   | 10,746 |   | 3,865 |   | — |   |
| Non-cash losses  (gains)                                                                       |       | 2,825                            |       | 924 |   | (274 | ) | (646 | ) | (244 | ) |
| Deferred income  taxes                                                                         |       | 8,682                            |       | 13,718 |   | 15,854 |   | (1,556 | ) | 2,836 |   |
| Equity in  earnings of unconsolidated affiliates, net of distributions received                |       | (207                             | )          | 333 |   | (16 | ) | (2,423 | ) | (1,273 | ) |
| Provision for  doubtful accounts                                                               |       | 3,354                            |       | 3,861 |   | 4,449 |   | 3,952 |   | 3,827 |   |
| Changes in operating  assets and liabilities, net of effects of acquisitions and dispositions: |       |                             |       |   |   |   |   |   |   |   |   |
| Accounts  receivable                                                                           |       | (4,142                           | )          | (3,536 | ) | (256 | ) | (2,955 | ) | (5,353 | ) |
| Other assets and  liabilities                                                                  |       | (463                             | )          | 1,082 |   | (10,371 | ) | (3,395 | ) | 6,453 |   |
| Net cash provided  by operating activities — continuing operations                        |       | $                                | 61,439     |   | $ | 62,266 |   | $ | 53,624 |   | $ | 57,131 |   | $ | 60,965 |   |

 

40

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**Item 6.  *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 Item 5. “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 additional information regarding some ofthe risks and uncertainties that affect our business and the industry in whichwe operate, please read Item 1A. “Risk Factors” found elsewhere in thisreport.  Our actual results may differmaterially from those estimated or projected in any of these forward-lookingstatements.

 

**ExecutiveOverview**

 

We own and operate anational network of short stay surgical facilities in 26 states.  Our surgical facilities, which includeambulatory surgery centers and surgical hospitals, primarily providenon-emergency surgical procedures across many specialties, including, amongothers, orthopedics, pain management, gastroenterology and ophthalmology.  We own our surgical facilities in partnershipwith physicians and in some cases health care systems in the markets andcommunities we serve.  We apply amarket-based approach in structuring our partnerships with individual marketdynamics driving the structure.  Webelieve this approach aligns our interests with those of our partners.  As of December 31, 2009, we owned andoperated 59 surgical facilities, including 55 ambulatory surgery centers andfour surgical hospitals.  We also managedeight additional ambulatory surgery centers. We owned a majority interest in 36 of the 59 surgical facilities andconsolidated 52 of these facilities for financial reporting purposes.  We are reporting one of the 59 surgicalfacilities as discontinued operations.  Inaddition to our surgical facilities, we also managed two physician networksthroughout 2009, including one physician network in a market in which weoperate an ambulatory surgery center. Each of these physician networks has entered into an agreement with us,which provides, among other things, that we will provide billing, financialservices and other business management services in exchange for a managementfee.  Our agreement with one of thesephysician networks expired January 1, 2010.

 

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 medicaltechnology, such as lasers, arthroscopy and enhanced endoscopic techniques,have reduced the trauma of surgery and the amount of recovery time required bypatients following a surgical procedure. Improvements in anesthesia also have shortened the recovery time formany patients and have reduced post-operative side effects such as pain, nauseaand drowsiness.  These medicaladvancements have enabled more patients to undergo surgery in a surgicalfacility setting.

 

We continue tofocus on improving the performance of our same store facilities and acquiringfacilities that we believe have favorable growth potential.  During the year ended December 31, 2009,we acquired an ownership interest in a surgical facility located in Gresham,Oregon.  We account for this facility asan equity investment.  Also, we acquiredan ownership interest in a surgical hospital in Austin, Texas, an existingmarket for the Company.  This acquisitionprovides us with the opportunity to expand our market presence.  In addition, favorable growth potentialexists if we are successful in leveraging our physician relationships at ourexisting ambulatory surgery center.  Thesurgical facility we acquired in Austin, Texas has historically experiencedfinancial difficulties and represents an opportunity for the Company to improvethe financial position of this facility through operational efficiencies.

 

**Revenues**

 

Our revenues consist of patient service revenues,physician service revenues and other service revenues.  Our patient service revenues relate to feescharged for surgical or diagnostic procedures performed at surgical facilitiesthat we consolidate for financial reporting purposes.  Physician service revenues are revenues fromphysician networks consisting of reimbursed expenses, plus participation in theexcess of revenues over expenses of the physician networks, as provided for inour service agreements with our physician networks.  Other service revenues consist of managementand administrative service fees derived from the non-consolidated facilitiesthat we account for under the equity method, management of surgical facilitiesin which we do not own an interest, and management services we provide tophysician networks for which we are not required to provide capital oradditional assets.

 

41

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The following tables summarize our revenues by servicetype as a percentage of total revenues for the periods indicated:

 
| ** **                  | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Patient service revenues    |       | 96                                | %          | 95 | % | 95 | % |
| Physician  service revenues |       | 2                                 |       | 2 |   | 2 |   |
| Other  service revenues     |       | 2                                 |       | 3 |   | 3 |   |
| Total                       |       | 100                               | %          | 100 | % | 100 | % |

 

***Payor Mix***

 

Approximately 96% of our revenues are patient servicerevenues.  The following table sets forthby type of payor the percentage of our patient service revenues generated inthe periods indicated:

 
| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|----------------------------------|------------|
| ** **         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Private  Insurance |       | 71                               | %          | 72 | % | 73 | % |
| Government         |       | 24                               |       | 22 |   | 21 |   |
| Self-pay           |       | 4                                |       | 4 |   | 4 |   |
| Other              |       | 1                                |       | 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 anyindividual procedure type and results in greater consistency in our casevolume.

 

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,** | ** ** |
|-----------------------|------------|-----------------------------------|------------|
| ** **            | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Ear, nose and throat  |       | 5.8                               | %          | 6.4 | % | 7.3 | % |
| Gastrointestinal      |       | 28.1                              |       | 28.1 |   | 26.7 |   |
| General surgery       |       | 4.6                               |       | 4.2 |   | 5.0 |   |
| Obstetrics/gynecology |       | 2.9                               |       | 3.1 |   | 3.6 |   |
| Ophthalmology         |       | 16.6                              |       | 15.1 |   | 14.0 |   |
| Orthopedic            |       | 16.2                              |       | 16.1 |   | 16.5 |   |
| Pain management       |       | 15.3                              |       | 15.8 |   | 15.4 |   |
| Plastic surgery       |       | 2.7                               |       | 2.9 |   | 3.2 |   |
| Other                 |       | 7.8                               |       | 8.3 |   | 8.3 |   |
| Total                 |       | 100.0                             | %          | 100.0 | % | 100.0 | % |

 

***Case Growth***

 

*Same**Store**Information*

 

We define samestore facilities as those facilities that were operating throughout the respectiveyears ended December 31, 2009 and 2008. For the comparison of same store facilities provided below, we have alsoincluded the results of one developed surgical facility within a market servedby another surgical facility in which we previously owned an interest.  This surgical facility is consolidated forfinancial reporting purposes.  Managementbelieves that it is appropriate to include the results of this surgical facilityin the same store facility information below based on the following considerations:(1) the migration of cases from the previously owned surgical facility 

 

42

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to the new surgicalfacility; (2) the waiver of the restriction on ownership applicable to theowners of the previously owned facility that allows certain owners of thepreviously owned facility to own an interest in the new surgical facility; and (3) theresulting enhancement of our market position by leveraging management servicesand capacity.

 

The following same store facility table includes bothconsolidated surgical facilities included in continuing operations that areincluded in our revenue and non-consolidated surgical facilities that are notreported in our revenue, as we account for these surgical facilities using theequity method.  This same storefacilities table is presented to allow comparability to other companies in ourindustry for the periods indicated:

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Cases                                        |       | 247,566                          |       | 247,986 |   |
| Case growth                                  |       | (0.2                             | )%         | N/A |   |
| Net patient  service revenue per case        |       | $                                | 1,450      |   | $ | 1,434 |   |
| Net patient  service revenue per case growth |       | 1.1                              | %          | N/A |   |
| Number of same  store surgical facilities    |       | 49                               |       | N/A |   |
|                                              |            |                                  |            |  |  |  |  |

 

The following samestore facility table is presented for purposes of explaining changes in our condensedconsolidated financial results and accordingly excludes non-consolidatedsurgical facilities that are not reported in our revenue.  For the comparison of same store facilitiesprovided below, the results for the periods presented include the results of adeveloped surgical facility within a market served by another surgical facilityin which we previously owned an interest. This surgical facility is consolidated for financial reporting purposes.  Management believes it is appropriate topresent the results of this facility in the same store information based on thefollowing considerations: (1) the migration of cases from the previouslyowned surgical facility to the new surgical facility; (2) the waiver ofthe restriction on ownership applicable to the owners of the previously ownedfacility that allows certain owners of the previously owned facility to own aninterest in the new surgical facility; and (3) the resulting enhancementof our market position by leveraging management services and capacity:

 
| ** **                                  | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Cases                                       |       | 225,630                           |       | 226,776 |   |
| Case growth                                 |       | (0.5                              | )%         | N/A |   |
| Net patient service revenue per case        |       | $                                 | 1,324      |   | $ | 1,327 |   |
| Net patient service revenue per case growth |       | (0.2                              | )%         | N/A |   |
| Number of same store surgical facilities    |       | 44                                |       | 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 tableincludes surgical facilities that we have acquired, developed or disposed ofsince January 1, 2008.

 
| ** **                                                         | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                         | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Cases                                                              |       | 240,153                           |       | 235,244 |   |
| Case  growth                                                       |       | 2.1                               | %          | N/A |   |
| Net  patient service revenue per case                              |       | $                                 | 1,386      |   | $ | 1,343 |   |
| Net  patient service revenue per case growth                       |       | 3.2                               | %          | N/A |   |
| Number  of surgical facilities operated as of end of the period(1) |       | 66                                |       | 66 |   |
| Number  of consolidated surgical facilities                        |       | 51                                |       | 49 |   |
|                                                                    |            |                                   |            |  |  |  |  |

 

----

(1)          Includes surgical facilities that wemanage but in which we have no ownership.

 

43

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**Operating****Trends**

 

We are dependent uponprivate and government third-party sources of payment for the services weprovide.  The amounts that our surgicalfacilities and networks receive in payment for their services may be adverselyaffected by market and cost factors as well as other factors over which we haveno control, including Medicare, Medicaid, and state regulations and the costcontainment and utilization decisions and reduced reimbursement schedules ofthird-party payors.  See Item 1. “Business— Reimbursement”.

 

Our operating income margin for the year ended December 31,2009 decreased to 16.1% from 19.0% during the year ended December 31,2008.  The margin in 2009 reflects, amongother things, $2.4 million of impairment charge related to our equity methodinvestment located in Arcadia, California. Excluding the impairment charge, our operating income margin decreasedto 16.9% for 2009.  The acquisition ofthe surgical hospital in Austin, Texas negatively impacted our operating incomemargins by 1.3% during the year ended December 31, 2009.  The surgical hospital has historicallyexperienced financial difficulties and represents an opportunity for theCompany to improve the financial position of this facility through operationalefficiencies.  In addition, same storecost of revenues increased 1.7% as a percentage of same store revenue primarilyas a result of an increase in supplies expense related to an increase inophthalmology cases which are predominantly reimbursed by Medicare and involvehigher cost lenses.

 

**Acquisitionsand Developments**

 

***2009Activities***

 

Effective February 28,2009, we acquired an incremental ownership of 18.0% in our surgical facilitylocated in Westlake Village, California, for a purchase price of $416,000,financed with cash from operations.  Weaccount for this investment under the equity method.  Prior to the acquisition, we owned 1.0% of thisfacility.

 

Effective May 1,2009, we acquired a 91.8% ownership interest in a surgical hospital in Austin,Texas for $350,000 plus the assumption of $2.6 million of debt.  Subsequently, we reduced our ownership inthis facility to 47.0%.  Austin, Texas isan existing market for the Company and this acquisition provides the opportunityto expand our market presence.  Inaddition, favorable growth potential exists if we are successful in leveragingour physician relationships at the existing ambulatory surgery center.  The surgical hospital has historicallyexperienced financial difficulties and represents an opportunity for us toimprove the financial position of this facility. The purchase price wasfinanced with cash from operations.  Weconsolidate this surgical facility for financial reporting purposes.  We also entered into a management agreementwith this facility.

 

Effective September 1,2009, we acquired an ownership of 28.8% in a surgical facility located inGresham, Oregon for $525,000.  Thepurchase price was financed with cash from operations.  We account for this investment under theequity method.  We also entered into amanagement agreement with this facility.

 

Also during thefirst quarter of 2009, we opened one surgical facility that was underdevelopment as of December 31, 2008. We consolidate this surgical facility for financial reporting purposes.

 

***2008Activities***

 

Effective January 1,2008, we acquired incremental ownership in three of our existing surgicalfacilities located in California.  Weacquired incremental ownership of 10.7% in each of our two surgical facilitieslocated in Beverly Hills, California for an aggregate of $2.5 million and6.4% incremental ownership in our surgical facility located in Encino,California for $2.0 million.  Priorto the acquisition, we owned 55.1% and 57.0% of the two Beverly Hills,California surgical facilities and 55.5% of the Encino, California surgicalfacility.  The aggregate purchase pricewas financed with cash from operations.

 

44

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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 from20.0% to 50.0% in these surgical facilities. One of the five facilities that we acquired in 2008 was a newlydeveloped surgical facility that opened in the fourth quarter of 2007.  Four of these surgical facilities areconsolidated for financial reporting purposes. The aggregate purchase price was financed with cash fromoperations.  We also entered intomanagement agreements with 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 a purchase price of $5.1 million, financedwith cash 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 thesesurgical facilities for financial reporting purposes and account for three asinvestments under the equity method.

 

***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 millionof assumed debt, and was financed with additional debt under our former seniorcredit 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, we acquired a 71.5% interest in amulti-specialty surgical facility in Columbus, Georgia for $141,000 and mergedthe operations of this surgical facility into an existing surgical facility inthe same market.  The aggregate purchaseprice was financed with proceeds from the Merger financing.  We have a majority interest in andconsolidate for financial reporting purposes these two surgicalfacilities.  We also entered intomanagement agreements with each of these surgical 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 additionalmanagement rights entitle us to retain a larger percentage of the fee formanagement services provided to these surgical facilities.  The purchase price was financed with proceedsfrom the Merger financing.

 

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 investmentrelated to these surgical facilities opened was approximately $4.2 million.  We financed these investments using cash fromoperations and funds available under our former senior credit facility.  We own a majority interest in one of thesethree surgical facilities opened in 2007, and we consolidate it for financialreporting purposes.  We also entered intomanagement agreements with each of these surgical facilities.  As of December 31, 2007, we had fivesurgical facilities under development, four of which opened in 2008 and one inearly 2009.

 

**DiscontinuedOperations and Divestitures**

 

In February 2009,we ceased operations at our surgical facility located in Englewood,Colorado.  We recorded a loss on thedisposal of $5.9 million, which includes an accrual of $4.6 million for futurecontractual obligations under a facility operating lease. As of December 31,2009, this lease liability was $3.9 million. As of December 31, 2009, we owned one surgical facility that isclassified as discontinued operations. This facility’s assets, liabilities, revenues, expenses and cash flows havebeen reclassified as discontinued operations for all periods presented.

 

45

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Revenues, (loss)gain on operations before income taxes, the income tax provision (benefit), the(loss) gain on the sale from discontinued operations, net of taxes, and theincome (loss) from discontinued operations, net of taxes, for the followingperiods indicated, were as follows (in thousands):

 
| ** **                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                  |       | $                                | 4,508      |   | $ | 7,463 |   | $ | 9,803 |   | $ | 19,128 |   | $ | 23,867 |   |
| (Loss) gain on operations before income taxes             |       | (240                             | )          | (792 | ) | (1,522 | ) | (1,094 | ) | 2,496 |   |
| Income tax provision (benefit)                            |       | 17                               |       | (676 | ) | (580 | ) | (420 | ) | 962 |   |
| (Loss) gain on sale, net of taxes                         |       | (5,840                           | )          | (3,527 | ) | 235 |   | (109 | ) | — |   |
| (Loss) income from discontinued operations, net of  taxes |       | $                                | (6,097     | ) | $ | (3,643 | ) | $ | (707 | ) | $ | (783 | ) | $ | 1,534 |   |

 

Effective February 1,2010, we disposed of our ownership interest in our surgical facility located inArcadia, California.  We recorded animpairment charge related to this equity method investment of $2.4 million in2009.  Effective July 10, 2009, wedisposed of our ownership interest in our surgical facility located in Temple,Texas.  A loss of $273,000 was recordedin the quarter ended June 30, 2009.

 

Because both ofthese investments were accounted for under the equity method, the results ofoperations for these facilities are not reported as discontinuedoperations.  The loss on disposal ofthese facilities is included in impairment and loss on disposal of long-livedassets.

 

**CriticalAccounting Policies**

 

Our significantaccounting policies and practices are described in Note 3 of ourconsolidated financial statements included elsewhere in this report.  In preparing our consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates, our management must make estimates and assumptions that affect thereported amounts of assets and liabilities and related disclosures at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Certainaccounting estimates are particularly sensitive because of their complexity andthe possibility that future events affecting them may differ materially fromour current judgments and estimates.  Ouractual results could differ from those estimates.  We believe that the following criticalaccounting policies are important to the portrayal of our financial conditionand results of operations and require our management’s subjective or complexjudgment because of the sensitivity of the methods, assumptions and estimatesused.  This listing of criticalaccounting policies is not intended to be a comprehensive list of all of ouraccounting policies.  In many cases, theaccounting treatment of a particular transaction is specifically dictated bygenerally accepted accounting principles in the United States, with no need formanagement’s judgment 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 limitedpartners or minority members in these surgical facilities are generally limitedto those that protect their ownership, including the right to approve of theissuance of new ownership interests, and those that protect their financialinterests, including the right to approve the acquisition or divestiture ofsignificant assets or the incurrence of debt that physician limited partners ormembers are required to guarantee on a pro rata basis based upon theirrespective ownership, or that exceeds 20.0% of the fair market value of thesurgical 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.  Significantinfluence includes financial interests, duties, rights and responsibilities forthe day-to-day management of the surgical facility.  These non-controlling interests are accountedfor under the equity method.

 

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We also considerthe relevant sections of the Financial Accounting Standards Board’s *Accounting Standards Codification*, Topic 810, *Consolidation*, to determine if we are the primarybeneficiary of (and therefore should consolidate) any entity whose operationswe do not control with voting rights.  AtDecember 31, 2009, we consolidate two entities because we are the primarybeneficiary.

 

***Revenue Recognition***

 

Our revenues arecomprised of patient service revenues, physician service revenues and otherservice revenues.  Our patient servicerevenues relate to fees charged for surgical or diagnostic procedures performedat surgical facilities that we consolidate for financial reportingpurposes.  These fees are billed eitherto the patient or a third-party payor. Our fees vary depending on the procedure, but usually include allcharges for usage of an operating room, a recovery room, special equipment,supplies, nursing staff and medications. Also, in a very limited number of our surgical facilities, we charge foranesthesia services.  Our fees normallydo not include professional fees charged by the patient’s surgeon,anesthesiologist or other attending physician, which are billed directly by thephysicians to the patient or third-party payor. We recognize patient service revenues on the date of service, net ofestimated contractual adjustments and discounts for third-party payors,including Medicare and Medicaid.  Changesin estimated contractual adjustments and discounts are recorded in the periodof 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 expensesinclude the costs of personnel, supplies and other expenses incurred to providethe management services to the physician networks.  We recognize physician service revenues inthe period in which reimbursable expenses are incurred and in the period inwhich we have the right to receive a percentage of the amount by which aphysician network’s revenues 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 these managementarrangements are based on a pre-determined percentage of the revenues of eachsurgical facility and physician network. We recognize other service revenues in the period in which services arerendered.

 

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

 

Our patient service revenues and receivables fromthird-party payors are recorded net of estimated contractual adjustments and allowancesfrom third-party payors, which we estimate based on the historical trend of oursurgical facilities’ cash collections and contractual write-offs, accountsreceivable agings, established fee schedules, relationships with payors andprocedure statistics.  While changes inestimated reimbursement from third-party payors remain a possibility, we expectthat any such changes would be minimal and, therefore, would not have amaterial effect on our financial condition or results of operations.

 

We estimate ourallowances for bad debts using similar information and analysis.  While we believe that our allowances forcontractual adjustments and bad debts are adequate, if the actual write-offsare significantly different from our estimates, it could have a materialadverse effect on our financial condition and results of operations.  Because we have the ability to verify apatient’s insurance coverage before services are rendered and because we haveentered into contracts with third-party payors which account for a majority ofour total revenues, the out-of-period contractual adjustments have beenminimal.  Our net accounts receivablereflected allowances for doubtful accounts of $9.9 million, $12.0 million and$15.6 million, at December 31, 2009, 2008 and 2007, respectively.

 

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The following tablesummarizes our day’s sales outstanding for the periods indicated:

 
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Day’s  sales outstanding |       | 38                               |       | 38 |   | 40 |   |

 

Our collectionpolicies and procedures are based on the type of payor, size of claim andestimated collection percentage for each patient account.  The operating systems used to manage ourpatient accounts provide for an aging schedule in 30-day increments, by payor,physician and patient.  Each surgicalfacility is responsible for analyzing accounts receivable to ensure the propercollection and aged category.  Theoperating systems generate reports that assist in the collection efforts byprioritizing patient accounts. Collection efforts include direct contact with insurance carriers orpatients, written correspondence and the use of legal or collection agencyassistance, 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 do not review a consolidated aging bypayor.  Regional and local employees revieweach surgical facility’s aged accounts receivable by payor schedule.  These employees have a closer relationshipwith the payors and have a more thorough understanding of the collectionprocess for that particular surgical facility. Furthermore, this review is supported by an analysis of the actual netrevenues, contractual adjustments and cash collections received.  If our internal collection efforts areunsuccessful, we further review patient accounts with balances of $25 ormore.  We then classify the accountsbased on any external collection efforts we deem appropriate.  An account is written-off only after we havepursued collection with legal or collection agency assistance or otherwisedeemed an account to be uncollectible. Typically, accounts will be outstanding a minimum of 120 daysbefore being written-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,** | ** ** |
|----------------------|------------|-----------------------------------|------------|
| ** **           | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| ** **           | ** ** | **Amount**                        | ** ** | **% of Total** | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| Current              |       | $                                 | 20,627     |   | 41 | % | $ | 18,155 |   | 35 | % |
| 31 to 60 days   |       | 9,188                             |       | 18 |   | 9,926 |   | 19 |   |
| 61 to 90 days   |       | 4,170                             |       | 8 |   | 5,265 |   | 10 |   |
| 91 to 120 days  |       | 2,589                             |       | 5 |   | 3,413 |   | 7 |   |
| 121 to 150 days |       | 1,787                             |       | 4 |   | 2,475 |   | 5 |   |
| Over 150 days   |       | 11,950                            |       | 24 |   | 12,235 |   | 24 |   |
| Total                |       | $                                 | 50,311     |   | 100 | % | $ | 51,469 |   | 100 | % |

 

We recognize thatfinal reimbursement of outstanding accounts receivable is subject to finalapproval by each third-party payor. However, because we have contracts with our third-party payors and weverify the insurance coverage of the patient before services are rendered, theamounts that are pending approval from third-party payors are minimal.  Amounts are classified outside of self-pay ifwe have an agreement with the third-party payor or we have verified a patient’scoverage prior to services rendered.  Itis our policy to collect co-payments and deductibles prior to providingservices.  It is also our policy toverify a patient’s insurance 72 hours prior to the patient’sprocedure.  Because our services areprimarily non-emergency, our surgical facilities have the ability to controlthese procedures.  Our patient servicerevenues from self-pay as a percentage of total revenues for the years ended December 31,2009, 2008 and 2007 were approximately 4% in each respective period.

 

***Income Taxes***

 

We use the assetand liability method to account for income taxes.  Under this method, deferred income tax assetsand liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax ratesexpected to apply to taxable income in the years in which those 

 

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temporary differences areexpected to be recovered or settled.  Ifa net operating loss carryforward exists, we make a determination as to whetherthat net operating loss carryforward will be utilized in the future.  A valuation allowance will be established forcertain net operating loss carryforwards where their recoverability is deemedto be uncertain.  The carrying value ofthe net deferred tax assets assumes that we will be able to generate sufficientfuture taxable income in certain tax jurisdictions, based on estimates andassumptions.  If these estimates and relatedassumptions change in the future, we will be required to adjust our deferredtax 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. When events, circumstances oroperating results indicate that the carrying values of certain long-livedassets and the related identifiable intangible assets might be impaired, weassess whether the carrying value of the assets will be recovered throughundiscounted future cash flows expected to be generated from the use of theassets and their eventual disposition. If the assessment indicates that the recorded carrying value will not berecoverable, that cost will be reduced to estimated fair value.  Estimated fair value will be determined basedon a discounted future cash flow analysis.

 

Goodwillrepresents our single largest asset, and is a significant portion of our totalassets.  We review goodwill andindefinite lived intangible assets annually, as of December 31, or morefrequently if certain indicators arise. We review goodwill at the reporting unit level, which we have determinedto be the consolidated results of Symbion, Inc.  We compare the carrying value of the netassets of the reporting unit to the net present value of the estimateddiscounted future cash flows of the reporting unit.  If the carrying value exceeds the net presentvalue of the estimated discounted future cash flows, an impairment indicatorexists and an estimate of the impairment loss is calculated.  The fair value calculation includes multipleassumptions and estimates, including the projected cash flows and discountrates applied.  Changes in theseassumptions and estimates could result in goodwill impairment that couldmaterially adversely impact our financial position and results of operations.

 

As previously discussed, the Company was acquired in aleveraged buy-out transaction on August 23, 2007.  We accounted for the Merger using thepurchase method of accounting.  As aresult, we recorded goodwill of $509.8 million.

 

We performed our annual goodwill impairment assessmentby developing a fair value estimate of the business enterprise as of December 31,2009 using a discounted cash flows approach. We corroborated the results of our fair value estimate using amarket-based approach.  As we do not havepublicly traded equity from which to derive a market value, an assessment ofpeer-company trading data was performed, whereby management selected comparablepeers based on growth and leverage ratios, as well as industry specificcharacteristics.  Based on the comparablepeer market trading data, management identified a reasonable estimate for themarket trading price of the Company as of December 31, 2009.  This market-based approach was then used toassess the reasonableness of the discounted cash flows approach.  The result of our annual goodwill impairmenttest at December 31, 2009 indicated no potential impairment.

 

Due to the sensitivity of the business enterprisevalue model, and the potential for further deterioration in the market, morespecifically the surgical facility and healthcare industries, we willcontinually monitor the trading market of our peers, as well as our discretefuture cash flow forecast.  While we donot anticipate such a change, if projected future cash flows become lessfavorable than those projected by management, an assessment of possibleimpairments may become necessary that could have a material non-cash impact onour financial position and results of operations.

 

**Results of Operations**

 

***Year Ended December 31, 2009 Compared To Year Ended December 31,2008***

 

The following table summarizes certain statements ofoperations items for each of the three years ended December 31, 2009, 2008and 2007.  The December 31, 2007information in the table below includes, on a combined basis, the statement ofoperations for the predecessor period prior to the Merger (January 1, 2007to August 23, 2007) and the statement of operations for the successorperiod following the Merger (August 24, 2007 to 

 

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December 31,2007.) The predecessor and successor periods have different bases of accountingand, accordingly, the presentation of the combined statement of operations ofthe predecessor and successor is not in accordance with generally acceptedaccounting principles.  We have presentedthis information on a combined basis to assist in the comparability of ourfinancial statements and to facilitate an understating of our results ofoperations.  The table also shows thepercentage relationship to revenues for the periods indicated:

 
| ** **                                                 | ** ** | **2009**            | ** ** | **2008**           | ** ** | **2007**   | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|--------------------|------------|------------|------------|
| ** **                                                 | ** ** | **Amount**          | ** ** | **% of  Revenues** | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** | **Amount** | ** ** | **% of  Revenues** | ** ** |
| ** **                                                 | ** ** | **(in  thousands)** | ** ** |
| Revenues                                                   |       | $                   | 346,984    |               | 100.0      | %          | $          | 331,900 |   | 100.0 | % | $ | 304,305 |   | 100.0 | % |
| Cost  of revenues                                          |       | 248,584             |       | 71.6               |       | 225,444    |       | 67.9 |   | 206,652 |   | 67.9 |   |
| General  and administrative expense                        |       | 21,448              |       | 6.2                |       | 23,923     |       | 7.2 |   | 31,873 |   | 10.5 |   |
| Depreciation  and amortization                             |       | 17,314              |       | 5.0                |       | 15,175     |       | 4.6 |   | 12,652 |   | 4.1 |   |
| Provision  for doubtful accounts                           |       | 3,354               |       | 1.0                |       | 3,861      |       | 1.2 |   | 4,449 |   | 1.5 |   |
| Income  on equity investments                              |       | (2,318              | )          | (0.7               | )          | (1,504     | )          | (0.5 | ) | (16 | ) | — |   |
| Impairment  and loss on disposal of long-lived assets      |       | 3,505               |       | 1.0                |       | 1,899      |       | 0.6 |   | 372 |   | 0.1 |   |
| Gain  on sale of long-lived assets                         |       | (250                | )          | (0.1               | )          | (975       | )          | (0.3 | ) | (915 | ) | (0.3 | ) |
| Proceeds  from insurance settlements, net                  |       | (430                | )          | (0.1               | )          | —     |       | — |   | (161 | ) | (0.1 | ) |
| Litigation  settlements, net                               |       | —              |       | —             |       | 893        |       | 0.3 |   | — |   | — |   |
| Merger  transaction expenses                               |       | —              |       | —             |       | —     |       | — |   | 7,522 |   | 2.5 |   |
| Total  operating expenses                                  |       | 291,207             |       | 83.9               |       | 268,716    |       | 81.0 |   | 262,428 |   | 86.2 |   |
| Operating  income                                          |       | 55,777              |       | 16.1               |       | 63,184     |       | 19.0 |   | 41,877 |   | 13.8 |   |
| Interest  expense, net                                     |       | (44,981             | )          | (13.0              | )          | (43,426    | )          | (13.1 | ) | (19,991 | ) | (6.6 | ) |
| Income  before income taxes and discontinued operations    |       | 10,796              |       | 3.1                |       | 19,758     |       | 5.9 |   | 21,886 |   | 7.2 |   |
| Provision  for income taxes                                |       | 7,766               |       | 2.2                |       | 13,256     |       | 4.0 |   | 3,240 |   | 1.1 |   |
| Income  from continuing operations                         |       | 3,030               |       | 0.9                |       | 6,502      |       | 1.9 |   | 18,646 |   | 6.1 |   |
| Loss  from discontinued operations, net of taxes           |       | (6,097              | )          | (1.8               | )          | (3,643     | )          | (1.1 | ) | (707 | ) | (0.2 | ) |
| Net  (loss) income                                         |       | (3,067              | )          | (0.9               | )          | 2,859      |       | 0.8 |   | 17,939 |   | 5.9 |   |
| Less:  Net income attributable to noncontrolling interests |       | (19,387             | )          | (5.5               | )          | (23,657    | )          | (7.1 | ) | (23,341 | ) | (7.7 | ) |
| Net  loss attributable to Symbion, Inc.                    |       | $                   | (22,454    | )                  | (6.4       | )%         | $          | (20,798 | ) | (6.3 | )% | $ | (5,402 | ) | (1.8 | )% |

 

*Overview. *In 2009, our revenues increased 4.5% to$347.0 million from $331.9 million for 2008.  We incurred a net loss attributable toSymbion, Inc. for the year ended December 31, 2009 of $(22.5 million)compared to $(20.8 million) for the year ended December 31,2008.  Our financial results for 2009compared to 2008 reflect the addition of one surgical facility which weconsolidate for financial reporting purposes and one surgical facility weaccount for using the equity method. Additionally, we disposed of two surgical facilities which we accountedfor using the equity method and one facility reported as discontinuedoperations as of December 31, 2008. The acquisition of the surgical hospital in Austin, Texas negativelyimpacted our operating margins by 1.3%. The surgical hospital has historically experienced financialdifficulties and represents an opportunity for us to improve the financialposition of this facility through operational efficiencies.

 

We define samestore facilities as those facilities that were operating throughout therespective periods listed below.  For thecomparison of same store facilities provided below, we have also included theresults of one developed surgical facility within a market served by anothersurgical facility in which we previously owned an interest. This surgicalfacility is consolidated for financial reporting purposes. Management believesit is appropriate to present the results of this facility in the same storeinformation based on the following considerations: (1) the migration ofcases from the previously owned surgical facility to the new surgical facility;(2) the waiver of the restriction on ownership applicable to the owners ofthe previously owned facility that allows certain owners of the previouslyowned facility to own an interest in the new surgical facility; and (3) theresulting enhancement of our market position by leveraging management servicesand capacity.

 

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*Revenues. *Revenues for the year ended December 31,2009 compared to December 31, 2008 were as follows (in thousands):

 
| ** **                               | ** ** | **2009** | ** ** | **2008** | ** ** | **Dollar  Variance** | ** ** | **Percent  Variance** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------------------|------------|-----------------------|------------|
| Patient service revenues:                |       |     |       |     |       |                 |       |                  |       |
| Same  store revenues                     |       | $        | 298,720    |     | $          | 300,875              |       | $                     | (2,155     | ) | (0.7 | )% |
| Revenues  from other surgical facilities |       | 34,107   |       | 14,994   |       | 19,113               |       | —                |       |
| Total  patient service revenues          |       | 332,827  |       | 315,869  |       | 16,958               |       | 5.4                   |       |
| Physician  service revenues              |       | 6,464    |       | 6,547    |       | (83                  | )          | (1.3                  | )          |
| Other  service revenues                  |       | 7,693    |       | 9,484    |       | (1,791               | )          | (1.9                  | )          |
| Total  revenues                          |       | $        | 346,984    |     | $          | 331,900              |       | $                     | 15,084     |   | 4.5 | % |

 

Patient servicerevenues at same store facilities decreased 0.7% for the year ended December 31,2009 compared to 2008, primarily as a result of a 0.5% decrease in casescombined with a 0.2% decrease in net revenue per case.  The decrease in other service revenuesresults from a scheduled reduction in management fees from one of our physiciannetworks.

 

*Costof Revenues. *Cost of revenues for the year ended December 31,2009 compared to 2008 were as follows (in thousands):

 
| ** **                                       | ** ** | **2009** | ** ** | **2008** | ** ** | **Dollar********Variance** | ** ** | **Percent********Variance** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------------------------|------------|-----------------------------|------------|
| Same  store cost of revenues                     |       | $        | 218,529    |     | $          | 215,248                    |       | $                           | 3,281      |   | 1.5 | % |
| Cost  of revenues from other surgical facilities |       | 30,055   |       | 10,196   |       | 19,859                     |       | —                      |       |
| Total  cost of revenues                          |       | $        | 248,584    |     | $          | 225,444                    |       | $                           | 23,140     |   | 10.3 | % |

 

As a percentage ofsame store revenues, same store cost of revenues increased to 73.2% for theyear ended December 31, 2009 comparedto 71.5% for the year ended December 31, 2008. This increase is primarilythe result of an increase in supplies expense related to an increase inophthalmology cases which are predominantly reimbursed by Medicare and involvehigher cost lenses.

 

Cost of revenuesfrom other surgical facilities increased by $19.9 million.  This increase is primarily attributable tosurgical facilities acquired or developed since January 1, 2008.  The acquisition of the surgical hospital inAustin, Texas negatively impacted our operating margins by 1.3%.  The surgical hospital has historicallyexperienced financial difficulties and represents an opportunity for theCompany to improve the financial position of this facility through operationalefficiencies.  As a percentage ofrevenues, total cost of revenues increased to 71.6% for 2009 compared to 67.9%for 2008.

 

*Generaland Administrative Expense*.  General andadministrative expense decreased to $21.4 million for the year ended December 31,2009 from $23.9 million for the year ended December 31, 2008.  As a percentage of revenues, general andadministrative expenses were 6.2% for 2009 and 7.2% for 2008.  This decrease is attributable to a reductionin incentive compensation and other employee benefits.

 

*Depreciationand Amortization. *Depreciation and amortization expense forthe year ended December 31, 2009 was $17.3 million compared to $15.2million for the year ended December 31, 2008.  This increase is primarily attributable todepreciation expense at facilities acquired or developed since January 1,2008.  As a percentage of revenues,depreciation and amortization expense increased to 5.0% for 2009 from 4.6% for2008.  Same store depreciation andamortization expense increased to $14.7 million for 2009 from $13.5 million in2008, primarily as a result of asset additions at certain facilities.

 

*Provisionfor Doubtful Accounts. *Provision for doubtful accounts decreased12.8% to $3.4 million for the year ended December 31, 2009 from $3.9million for the year ended December 31, 2008.  As a percentage of revenues, the provisionfor doubtful accounts decreased to 1.0% for 2009 from 1.2% for 2008.  On a same store basis, the provision fordoubtful accounts decreased to 0.9% of revenue for 2009 compared to 1.2% for2008.

 

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*Incomeon Equity Investments. *Income on equity investments representsthe net income of certain investments we have in surgical facilities.  These surgical facilities are notconsolidated for financial reporting purposes. Income on equity investments increased to $2.3 million for the yearended December 31, 2009 from $1.5 million for the year ended December 31,2008.  The increase in income on equityinvestments for 2009 compared to 2008 is primarily attributable to facilitiesacquired and developed since January 1, 2008.

 

*Impairmentand Loss on Disposal of Long-Lived Assets.*  During thethird quarter of 2009, we recorded an impairment charge of $2.4 million relatedto our equity method investment located in Arcadia, California.  Also included in 2009 is a loss of $273,000related to the disposal of our ownership interest in our surgical facilitylocated in Temple, Texas.  The remainingloss is attributable to asset disposals at various facilities.

 

*Gainon Sale of Long-Lived Assets*.  We recognizeda gain on the sale of long-lived assets for the year ended December 31,2009 of $250,000.  For the year ended December 31,2008, our gain of $975,000 primarily represented the gain we recognized on thesale of a portion of our ownership in certain surgical facilities to physicianinvestors.  In accordance with theguidance of ASC 810,*Consolidation*,these gains and losses are no longer reflected in the statement of operationsbut are considered equity transactions.  During 2009, we recorded $511,000 inadditional paid-in-capital as a result of the sale of a portion of ourownership in certain consolidated surgical facilities to physician investors.

 

*OperatingIncome*.  Operating income decreased to $55.8 millionfor the year ended December 31, 2009 from $63.2 million for the year endedDecember 31, 2008.  This decrease ispartially attributable to a $2.4 million impairment charge related to ourequity method investment located in Arcadia, California.  Excluding the impairment charge, operatingincome decreased to 16.8% for the 2009 period from 19.0% for the 2008period.  This decrease is alsoattributable to a negative operating margin impact of 1.3% related to theacquisition of the surgical hospital in Austin, Texas.  In addition, same store cost of revenuesincreased 1.7% as a percentage of same store revenue primarily as a result ofan increase in supplies expense related to an increase in ophthalmology caseswhich are predominantly reimbursed by Medicare and involve higher cost lenses.

 

*InterestExpense, Net of Interest Income*.  Interestexpense, net of interest income, increased to $45.0 million for the yearended December 31, 2009 from $43.4 million for the year ended December 31,2008.  Included in interest expense forthe year ended December 31, 2009 is $1.9 million of net additionalinterest as a result of discontinuing hedge accounting treatment related to ourinterest rate swap in January 2009 and the mark-to-market adjustment of theinterest rate swap instrument to fair market value.  Interest expense also increased as a resultof our election of the PIK option related to the Toggle Notes, whereby theoutstanding principal amount of debt has increased $22.3 million since December 31,2008.  The increase in interest expenseis offset by a reduction in amortization of deferred financing costs of $2.5million in 2009 compared to 2008, which was a result of the acceleratedamortization of costs as a result of the bridge facility repayment.

 

*Provisionfor Income Taxes*. The provision for income taxes decreased to $7.7 million for the year ended December 31,2009 from $13.3 million for the year ended December 31, 2008.  Tax expense in 2009 is primarily due to therecording of non-cash deferred income tax expense related to our partnershipinvestments.

 

*Loss from Discontinued Operations, Net of Taxes.* Loss from discontinued operations for the year ended December 31,2009 of $6.1 million includes a loss on the disposal of the Englewood, Coloradofacility of $5.9 million.  Included inthis loss is $4.6 million accrued for future contractual obligations under afacility operating lease.

 

*Income Attributable toNoncontrolling Interests*.  Net income attributable tononcontrolling interests decreased to $19.4 million for the year ended December 31,2009 compared to $23.7 million for the year ended December 31, 2008.  As a percentage of revenues, net incomeattributable to noncontrolling interests decreased to 5.5% for 2009 from 7.1%for 2008.  A decrease of $1.4 million isattributable to our acquisition of the surgical facility in Austin, Texas.  The remaining decrease is attributable to ouroverall decrease in operating income.

 

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

 

*Overview. *In 2008, our revenues increased 9.1% to$331.9 million from $304.3 million for 2007.  We incurred a net loss for the year ended December 31,2008 of $(20.8 million) compared to $(5.4 million) for the year endedDecember 31, 2007.  Included in theloss for 2008 is a valuation allowance of $12.9 million against certaindeferred tax assets.  Also included inthe net loss for 2008 is an additional $14.2 million, net of tax, of interestand amortization of deferred financing costs, primarily due to our new capitalstructure following the Merger.  Ourfinancial results for the year ended December 31, 2008 compared to 2007reflect the addition of five surgical facilities that we consolidate forfinancial reporting purposes and four surgical facilities that we do notconsolidate for financial reporting purposes. The surgical facilities that we do not consolidate for financialreporting purposes are accounted for as equity investments.  For purposes of this management’s discussionof our consolidated financial results, we consider same store facilities asthose surgical facilities that we consolidate for financial reporting purposesand were operating throughout the years ended December 31, 2008 and 2007.

 

For the comparisonof same store facilities provided below, the results of the periods presentedinclude the consolidation of an existing surgical facility that was previouslyaccounted for using the equity method. We have also included the results of two developed surgical facilitieswithin markets served by other surgical facilities in which we own aninterest.  Both of these recently openedsurgical facilities are consolidated for 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.

 

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

 
| ** **                               | ** ** | **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 facilities withinmarkets 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 initial phase of Medicarereimbursement increases became effective January 1, 2008 for specificcases performed in ambulatory surgery centers. The remaining increase in total revenues is related to surgical facilitiesacquired or developed since January 1, 2007, partially offset by surgicalfacilities divested in 2007 and 2008.

 

53

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*Costof Revenues. *Cost of revenues for the year ended December 31,2008 compared to 2007 were as follows (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 $8.7 million.  This increase is primarily attributable tosurgical facilities acquired or developed since January 1, 2007, partiallyoffset 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 andadministrative expense increased to $23.9 million for the year ended December 31,2008 from $23.7 million for the year ended December 31, 2007,excluding expenses related primarily to the accelerated vesting of stockoptions, restricted stock, and related payroll expense as a result of theMerger.  As a percentage of revenues,general and administrative expenses were 7.2% for 2008 and 10.5% for 2007, or7.8% excluding expenses related primarily to the accelerated vesting of stockoptions, restricted stock, and related payroll expense as a result of theMerger.

 

*Depreciationand Amortization. *Depreciation and amortization expense forthe year ended December 31, 2008 was $15.2 million compared to $12.7million 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. *Provision for doubtful accounts decreased11.4% to $3.9 million for the year ended December 31, 2008 from $4.4million 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 toimproved collection 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. *Income on equity investments representsthe net income of certain investments we have in surgical facilities.  These surgical facilities are notconsolidated for financial reporting purposes. Income on equity investments increased to $1.5 million for the year endedDecember 31, 2008 from $16,000 for the year ended December 31,2007.  The increase in income on equityinvestments for 2008 compared to 2007 is primarily attributable to acquiredfacilities and developed facilities opened during 2008.

 

*Impairmentand Loss on Disposal of Long-Lived Assets.*  During 2008,we recorded a loss of $550,000 related to the sale of assets at the Deland, Florida facility.  The remainder of the impairment representsthe loss related to the sale of a portion of our ownership interest in certainsurgical facilities to physician investors and a health care system.

 

*Gainon Sale of Long-Lived Assets*.  Gain on saleof long-lived assets for the year ended December 31, 2008 of $975,000 andfor the year ended December 31, 2007 of $915,000 primarily represents thegain we recognized on the sale of a portion of our ownership in certainsurgical facilities to physician investors.

 

54

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*LitigationSettlements, net.*  In 2007 and 2008, the Office of the New YorkState Comptroller conducted a series of audits of claims submitted to the NewYork State Health Insurance Program Empire Plan for services provided on anout-of-network basis to plan members at various ambulatory surgery centers,including the surgical facility to which we provide administrative services inLynbrook, 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, weincurred $7.5 million of costs directly attributable to the Merger.  These costs were primarily legal andaccounting fees that were expensed in the period incurred.

 

*OperatingIncome*.  Operating income increased to $63.2 millionfor the year ended December 31, 2008 from $58.3 million, excluding costsrelated to the Merger, for the year ended December 31, 2007.  As a percentage of revenues, operating incomeremained consistent at 19.1% for 2008 and 2007, excluding costs related to theMerger.  Operating margins on same storefacilities increased to 18.8% for 2008 from 17.4% for 2007.  This increase is primarily a result ofcancelling certain payor contracts in California and Missouri.

 

*Interest Expense, Net of InterestIncome*.  Interest expense, net of interest income,increased to $43.4 million for the year ended December 31, 2008 from$20.0 million for the year ended December 31, 2007.  Included in interest expense in 2008 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 taxes increased to $13.3 million for the year ended December 31,2008 from $3.2 million for the year ended December 31, 2007.  Tax expense in 2008 is primarily the resultof a valuation allowance of approximately $12.9 million recorded againstcertain federal and state net operating losses, capital losses, and otherdeferred tax assets.  We expect to fullyutilize the net operating losses within the 20-year carry-forward period.  However, because ASC 740 generally does notallow a company to consider more than two to three years of future taxableincome when evaluating the ability to utilize net operating losses, it isunlikely that we will be able to utilize these net operating losscarry-forwards or realize the deferred tax assets within this two to three yearperiod, we have established a valuation allowance against them.

 

*Income from Continuing Operations.* Income from continuing operations was $6.5million for the year ended December 31, 2008 compared to $18.6 million forthe year ended December 31, 2007. The 2008 period includes a valuation allowance on certain deferred taxassets of $12.9 million, and additional interest expense and amortization ofdeferred financing costs totaling approximately $14.2 million, net of tax.

 

*Net Income Attributable toNoncontrolling Interests*.  Noncontrolling interests inincome of consolidated subsidiaries increased to $23.7 million for the yearended December 31, 2008 compared to $23.3 million for the year ended December 31,2007.  As a percentage of revenues,noncontrolling interests in income of consolidated subsidiaries decreased to7.1% for 2008 from 7.7% for 2007.

 

55

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**Quarterly Results of Operations**

 

The following tablespresent a summary of our unaudited quarterly consolidated results of operationsfor each of the four quarters in 2009 and 2008. The unaudited financial statements include all adjustments, consisting ofnormal recurring adjustments, necessary for a fair statement of suchinformation when read in conjunction with our audited consolidated financialstatements and related notes.  Ourquarterly operating results have varied in the past, may continue to do so andare not necessarily indicative of results for any future period.

 
| ** **                                                 | ** ** | **2009**                         | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **First  Quarter**               | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** **                                                 | ** ** | **(in  thousands)  (unaudited)** | ** ** |
| **Consolidated Statement of Operations Data:**             |       |                             |       |   |   |   |   |   |   |
|                                                       |       |                             |       |   |   |   |   |   |   |
| Revenues                                                   |       | $                                | 84,171     |   | $ | 88,461 |   | $ | 86,766 |   | $ | 87,586 |   |
| Operating  expenses:                                       |       |                             |       |   |   |   |   |   |   |
| Salaries  and benefits                                     |       | 23,026                           |       | 23,974 |   | 25,167 |   | 24,677 |   |
| Supplies                                                   |       | 16,924                           |       | 19,349 |   | 19,275 |   | 19,357 |   |
| Professional  and medical fees                             |       | 4,831                            |       | 6,481 |   | 5,790 |   | 6,060 |   |
| Rent  and lease expense                                    |       | 5,896                            |       | 6,260 |   | 6,484 |   | 6,963 |   |
| Other  operating expenses                                  |       | 6,739                            |       | 6,692 |   | 7,434 |   | 7,205 |   |
| Cost  of revenues                                          |       | 57,416                           |       | 62,756 |   | 64,150 |   | 64,262 |   |
| General  and administrative expense                        |       | 5,876                            |       | 5,469 |   | 4,698 |   | 5,405 |   |
| Depreciation  and amortization                             |       | 4,352                            |       | 4,226 |   | 4,362 |   | 4,374 |   |
| Provision  for doubtful accounts                           |       | 935                              |       | 1,047 |   | 1,168 |   | 204 |   |
| Income  on equity investments                              |       | (186                             | )          | (466 | ) | (712 | ) | (954 | ) |
| Impairment  and loss on disposal of long-lived assets      |       | 52                               |       | 388 |   | 2,593 |   | 472 |   |
| Gain  on sale of long-lived assets                         |       | (297                             | )          | (380 | ) | (30 | ) | 457 |   |
| Proceeds  from insurance settlements, net                  |       | (88                              | )          | (178 | ) | (150 | ) | (14 | ) |
| Total  operating expenses                                  |       | 68,060                           |       | 72,862 |   | 76,079 |   | 74,206 |   |
| Operating  income                                          |       | 16,111                           |       | 15,599 |   | 10,687 |   | 13,380 |   |
| Interest  expense, net                                     |       | (11,046                          | )          | (10,896 | ) | (11,958 | ) | (11,081 | ) |
| Income  (loss) before income taxes                         |       | 5,065                            |       | 4,703 |   | (1,271 | ) | 2,299 |   |
| Provision  for income taxes                                |       | 1,327                            |       | 1,393 |   | 1,936 |   | 3,110 |   |
| Income  (loss) from continuing operations                  |       | 3,738                            |       | 3,310 |   | (3,207 | ) | (811 | ) |
| (Loss)  income on discontinued operations, net of taxes    |       | (6,232                           | )          | 97 |   | 177 |   | (139 | ) |
| Net  (loss) income                                         |       | (2,494                           | )          | 3,407 |   | (3,030 | ) | (950 | ) |
| Less:  Net income attributable to noncontrolling interests |       | (6,519                           | )          | (5,305 | ) | (4,013 | ) | (3,550 | ) |
| Net  loss attributable to Symbion, Inc.                    |       | $                                | (9,013     | ) | $ | (1,898 | ) | $ | (7,043 | ) | $ | (4,500 | ) |

 

56

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

 
| ** **                                                                                      | ** ** | **2009**                         | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                      | ** ** | **First  Quarter**               | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** **                                                                                      | ** ** | **(in  thousands)  (unaudited)** | ** ** |
| EBITDA                                                                                          |       | $                                | 14,023     |   | $ | 14,853 |   | $ | 13,347 |   | $ | 15,603 |   |
| Depreciation  and amortization                                                                  |       | (4,352                           | )          | (4,226 | ) | (4,362 | ) | (4,374 | ) |
| Non-cash  gains (losses)                                                                        |       | 245                              |       | (9 | ) | (2,562 | ) | (499 | ) |
| Non-cash  stock option compensation expense                                                     |       | (324                             | )          | (324 | ) | (326 | ) | (323 | ) |
| Interest  expense, net                                                                          |       | (11,046                          | )          | (10,896 | ) | (11,381 | ) | (11,658 | ) |
| Provision  for income taxes                                                                     |       | (1,327                           | )          | (1,393 | ) | (1,936 | ) | (3,110 | ) |
| Net  income attributable to noncontrolling interests                                            |       | 6,519                            |       | 5,305 |   | 4,013 |   | 3,550 |   |
| (Income)  loss on discontinued operations, net of taxes                                         |       | (6,232                           | )          | 97 |   | 177 |   | (139 | ) |
| Net  (loss) income                                                                              |       | (2,494                           | )          | 3,407 |   | (3,030 | ) | (950 | ) |
| Income  (loss) from discontinued operations                                                     |       | 6,232                            |       | (97 | ) | (177 | ) | 139 |   |
| Depreciation  and amortization                                                                  |       | 4,352                            |       | 4,226 |   | 4,362 |   | 4,374 |   |
| Amortization  of deferred financing costs                                                       |       | 499                              |       | 501 |   | 501 |   | 503 |   |
| Non-cash  payment-in-kind interest option                                                       |       | 5,556                            |       | 5,743 |   | 5,884 |   | 6,080 |   |
| Non-cash  stock option compensation expense                                                     |       | 324                              |       | 324 |   | 326 |   | 323 |   |
| Non-cash  recognition of other comprehensive loss into earnings                                 |       | 732                              |       | 650 |   | 484 |   | 987 |   |
| Non-cash  credit risk adjustment of financial instruments                                       |       | —                           |       | 709 |   | 812 |   | 108 |   |
| Non-cash  (gains) losses                                                                        |       | (245                             | )          | 9 |   | 2,562 |   | 499 |   |
| Deferred  income taxes                                                                          |       | 1,876                            |       | 1,643 |   | 2,107 |   | 3,056 |   |
| Equity  in earnings of unconsolidated affiliates, net of distributions received                 |       | 125                              |       | (167 | ) | (175 | ) | 10 |   |
| Provision  for doubtful accounts                                                                |       | 935                              |       | 1,047 |   | 1,168 |   | 204 |   |
| Changes  in operating assets and liabilities, net of effects of acquisitions and  dispositions: |       |                             |       |   |   |   |   |   |   |
| Accounts  receivable                                                                            |       | (998                             | )          | (78 | ) | (794 | ) | (2,272 | ) |
| Other  assets and liabilities                                                                   |       | 1,639                            |       | 1,387 |   | (2,020 | ) | (1,469 | ) |
| Net  cash provided by operating activities — continuing operations                         |       | $                                | 18,533     |   | $ | 19,304 |   | $ | 12,010 |   | $ | 11,592 |   |
| ** **                                                                                      |       |                             |       |   |   |   |   |   |   |
| **Other Data:**                                                                                 |       |                             |       |   |   |   |   |   |   |
| Number  of surgical facilities included in continuing operations, as of the end of  period(1)   |       | 65                               |       | 66 |   | 66 |   | 66 |   |

 

57

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| ** **                                                 | ** ** | **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 |   |
| Interest  expense, net                                     |       | (10,084                         | )          | (11,120 | ) | (11,293 | ) | (10,929 | ) |
| Income  before income taxes                                |       | 4,594                           |       | 7,283 |   | 3,030 |   | 4,851 |   |
| (Benefit)  provision for income taxes                      |       | (428                            | )          | 529 |   | (1,053 | ) | 14,208 |   |
| Income  (loss) from continuing operations                  |       | 5,022                           |       | 6,754 |   | 4,083 |   | (9,357 | ) |
| Loss  on discontinued operations, net of taxes             |       | (214                            | )          | (1,809 | ) | (468 | ) | (1,152 | ) |
| Net  income (loss)                                         |       | 4,808                           |       | 4,945 |   | 3,615 |   | (10,509 | ) |
| Less:  Net income attributable to noncontrolling interests |       | (5,889                          | )          | (6,956 | ) | (5,444 | ) | (5,368 | ) |
| Net  loss attributable to Symbion, Inc.                    |       | $                               | (1,081     | ) | $ | (2,011 | ) | $ | (1,829 | ) | $ | (15,877 | ) |

 

58

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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                                                                                                      |       | $                                | 13,485     |   | $ | 15,265 |   | $ | 13,349 |   | $ | 15,641 |   |
| Depreciation  and amortization                                                                              |       | (3,516                           | )          | (3,706 | ) | (3,947 | ) | (4,006 | ) |
| Non-cash  (losses) gains                                                                                    |       | (36                              | )          | 211 |   | (200 | ) | (899 | ) |
| Non-cash  stock option compensation expense                                                                 |       | (1,144                           | )          | (323 | ) | (323 | ) | (324 | ) |
| Interest  expense, net                                                                                      |       | (10,084                          | )          | (11,120 | ) | (11,293 | ) | (10,929 | ) |
| Provision  for income taxes                                                                                 |       | 428                              |       | (529 | ) | 1,053 |   | (14,208 | ) |
| Net  income attributable to noncontrolling interests                                                        |       | 5,889                            |       | 6,956 |   | 5,444 |   | 5,368 |   |
| Loss  on discontinued operations, net of taxes                                                              |       | (214                             | )          | (1,809 | ) | (468 | ) | (1,152 | ) |
| Net  income (loss)                                                                                          |       | 4,808                            |       | 4,945 |   | 3,615 |   | (10,509 | ) |
| Income  from discontinued operations                                                                        |       | 214                              |       | 1,809 |   | 468 |   | 1,152 |   |
| 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 |   | 7,863 |   |
| Non-cash  stock option compensation expense                                                                 |       | 1,144                            |       | 323 |   | 323 |   | 324 |   |
| Non-cash  losses (gains)                                                                                    |       | 36                               |       | (211 | ) | 200 |   | 899 |   |
| Deferred  income taxes                                                                                      |       | (2,629                           | )          | 300 |   | (541 | ) | 16,588 |   |
| 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                              |       | 7,917 |   | (2,245 | ) | (5,357 | ) |
| Net  cash provided by operating activities — continuing operations                                     |       | $                                | 12,241     |   | $ | 21,907 |   | $ | 12,323 |   | $ | 15,795 |   |
| ** **                                                                                                  |       |                             |       |   |   |   |   |   |   |
| **Other Data:**                                                                                             |       |                             |       |   |   |   |   |   |   |
| Number  of consolidated surgical facilities included in continuing operations, as of  the end of period (1) |       | 64                               |       | 65 |   | 65 |   | 66 |   |

 

----

(1)          Includes surgical facilities that wemanage but in which have no ownership.

 

**Liquidityand Capital Resources**

 

***Operating Activities***

 

The principal source ofour operating cash flows is the collection of patient receivables.  Collection efforts for patient receivablesare conducted by our personnel at each facility or in centralized serviceoffices for areas in which there are multiple facilities.  Each of our surgical facilities bill forservices as performed, usually within several days following theprocedure.  Bad debt reserves areestablished in increasing percentages by aging category based on historicalcollection experience.  Generally, theentire balance of all accounts remaining uncollected 180 days after thedate of service are written off as bad debt and sent to an outside collectionagency.  Net amounts received fromcollection agencies are recorded as recoveries of bad debts.  Our operating cash flows, including changesin accounts payable and other current liabilities, are impacted by the timingof payments to our vendors.  In 2009,2008 and 2007, we did not make any significant changes to the timing of ourpayments to vendors.

 

During the year ended December 31,2009, we generated operating cash flow from continuing operations of$61.4 million compared to $62.3 million for the year ended December 31,2008.  The $61.4 million of operatingcash generated in the year ended December 31, 2009 includes approximately$2.2 million of tax refunds, compared 

 

59

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to $4.0 million of taxrefunds in 2008.  During 2007, wegenerated operating cash flow from continuing operations of $53.6 million.

 

At December 31,2009, we had working capital of $40.8 million compared to $52.3 million at December 31,2008.  This decrease is primarily relatedto an increase in the current portion of our senior secured creditfacility.  Our available cash, along withour expected future operating cash flows, is sufficient to service our currentobligations.

 

***InvestingActivities***

 

Net cash used ininvesting activities from continuing operations during the year ended December 31,2009 was $11.4 million, including $9.9 million related to purchases of propertyand equipment.  During 2009, we acquired$224,000 of cash through acquisitions which were consolidated for financialreporting purposes.  Cash used ininvesting activities in 2009 was funded primarily from cash from operations.

 

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 propertyand equipment purchases includes $8.2 million for expansion and developmentrelated projects.  During 2008, weacquired $1.6 million of cash through acquisitions which were consolidated forfinancial reporting purposes.  Cash usedin investing activities in 2008 was funded primarily from cash fromoperations.  Certain expansion anddevelopment related projects were funded using facility level third-party debt.

 

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.  Cash used ininvesting activities in 2007 was funded primarily from cash from operations andproceeds from the Merger financing.

 

***FinancingActivities***

 

Net cash used infinancing activities from continuing operations during the year ended December 31,2009 was $42.9 million.  During2009, we made scheduled principal payments on our senior secured creditfacility totaling $3.8 million.  Alsoduring 2009, we elected to exercise the PIK option by increasing the principalamount in lieu of making scheduled interest payments of $23.3 million onour Toggle Notes.  We also madedistributions to noncontrolling interest holders of $25.0 million during2009.

 

Net cash used infinancing activities from continuing operations during the year ended December 31,2008 was $31.7 million.  During2008, we made scheduled principal payments on our senior secured creditfacility totaling $2.5 million and voluntary principal payments of$11.0 million.  Also during 2008, weelected to exercise the PIK option by increasing the principal amount in lieuof making scheduled interest payments of $4.9 million on our Toggle Notes,as well as $4.9 million on our retired bridge facility.  Additionally, we incurred $4.7 million ofdeferred finance cost related to the issuance of the Toggle Notes.  We also made distributions to noncontrollinginterest holders of $23.4 million during the year ended December 31,2008.

 

Our net cashprovided by financing activities from continuing operations during the yearended December 31, 2007 was $2.5 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 payments ondebt totaling $163.0 million and received proceeds from debt totaling $458.6million.

 

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***Long-Term Debt***

 

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

 
| ** **                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Senior secured credit facility |       | $        | 232,125    |     | $          | 235,875 |   |
| Senior PIK toggle notes        |       | 206,967  |       | 184,635  |       |
| Notes payable to banks         |       | 14,433   |       | 17,636   |       |
| Secured term loans             |       | 2,628    |       | 3,213    |       |
| Capital lease obligations      |       | 9,067    |       | 11,458   |       |
|                           |       | 465,220  |       | 452,817  |       |
| Less current maturities        |       | (20,212  | )          | (12,205  | )          |
|                           |       | $        | 445,008    |     | $          | 440,612 |   |

 

*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 secured credit facility extendscredit 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 “Revolving Facility”).  Theswingline facility is limited to $10.0 million and the swingline loans areavailable on a same-day basis.  Theletter of credit facility is limited to $10.0 million.  We are the borrower under the senior securedcredit facility, and all of our wholly owned subsidiaries are guarantors.  Under the terms of the senior secured creditfacility, entities that become wholly owned subsidiaries must also guaranteethe 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 Loanrequires quarterly principal payments of $1.6 million through September 30,2010, quarterly payments of $4.7 million from December 31, 2010through September 30, 2011, quarterly payments of $6.3 million from December 31,2011 through September 30, 2012, quarterly payments of $18.1 millionfrom 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.

 

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 theapplicable alternate base rate margin and applicable Eurodollar rate marginwill vary depending upon the ratio of our total indebtedness to consolidatedEBITDA.

 

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 thecredit agreement, may declare and pay dividends ratably with respect to theircapital stock.  We may declare and paycash dividends or make other distributions to Holdings provided the proceedsare used by Holdings to (i) purchase or redeem equity interest of Holdingsacquired by former or current employees, consultants or directors of Holdings,the Company or any restricted subsidiary or (ii) pay principal or intereston promissory notes that were issued in lieu of cash payments for therepurchase or redemption of such equity instruments, provided that theaggregate amount of such dividends or other distributions shall not exceed$3.0 million in any fiscal year. Any unused amounts that are permitted to be paid under this provisionare available to be carried over to subsequent fiscal years provided thatcertain conditions are met.  We may alsomake payments to Holdings to pay franchise taxes and other fees required tomaintain its corporate existence provided such payments do not exceed$3.0 million in any calendar year and also make payments in the amountnecessary to enable Holdings to pay income taxes directly attributable to theoperations of the Company and to make $1.0 million in annual advisory andmanagement agreement payments.  We mayalso make additional payments to Holdings in the aggregate amount of$5.0 million throughout the term of the senior secured credit facility.

 

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As of December 31,2009, the amount outstanding under the senior secured credit facility was$232.1 million with an interest rate on the borrowings of 3.5%.  The $100.0 million Revolving Facilityincludes a non-use fee of 0.5% of the portion of the facility not used.  We pay this fee quarterly.  As of December 31, 2009, the amountavailable under the Revolving Facility was $100.0 million.

 

*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 date of the interest rate swapwas October 31, 2007, and it is scheduled to expire on October 31,2010.  The interest rate swap effectivelyfixes our LIBOR interest rate on the $150.0 million of variable debt at arate of 4.7%.  We have recognized thefair value of the interest rate swap as a current liability of approximately$5.0 million at December 31, 2009. Due to the dramatic decrease in LIBOR rates, we elected an interest termfor the January 2009 interest election period under the terms of the debtagreement which differs from that of the swap instrument.  As a result, we discontinued hedge accountingtreatment for our interest rate swap in 2009. In January 2009, we began recognizing a ratable portion of the $7.0million in accumulated other comprehensive income as additional interestexpense over the remaining life of the swap instrument.  Also beginning in January 2009, we beganrecording into earnings the mark-to-market adjustment to reflect the fair valueof the hedging instrument.  Our mark tomarket adjustment for 2009 resulted in a reduction of interest expense of $3.6million.  We recognized $3.8 million ofinterest expense related to the ratable reduction of the balance in accumulatedother comprehensive income during 2009.

 

*SeniorPIK Toggle Notes*

 

On June 3, 2008, we completed a private offeringof $179.9 million aggregate principal amount of the Toggle Notes.  The notes issued in the private offering weresubsequently exchanged for Toggle Notes registered under the Securities Act of1933, as amended, in an exchange offer. Interest on the Toggle Notes is due on February 23 and August 23of each year.  The Toggle Notes willmature on August 23, 2015.  For anyinterest period through August 23, 2011, we may elect to pay interest onthe Toggle Notes (i) in cash, (ii) in kind, by increasing theprincipal 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 accrues at the rate of 11.0% per annum.  PIK interest on the Toggle Notes accrues atthe rate of 11.75% per annum.  We electto pay cash interest or to exercise the PIK option in advance of the interestperiod.

 

Upon issuance of the Toggle Notes, we elected toexercise the PIK option by increasing the principal amount of the Toggle Notesin lieu of making scheduled interest payments of $4.7 million for the interestperiod through August 23, 2008.  On August 23,2008, we elected the PIK option of the Toggle Notes in lieu of making scheduledinterest payments for the interest period from August 23, 2008 to February 23,2009.  This election increased theprincipal due on the Toggle Notes by $10.8 million in the first quarter of2009.  On February 23, 2009, we electedthe PIK option of the Toggle Notes in lieu of making scheduled interestpayments for the interest period from February 23, 2009 to August 23,2009.  This election increased theprincipal due on the Toggle Notes by $11.5 million in the third quarter of2009.  On August 23, 2009, weelected the PIK option of the Toggle Notes in lieu of making scheduled interestpayments for the interest period from August 23, 2009 to February 23,2010.  We have accrued $8.6 million ininterest in other accrued expenses as of December 31, 2009 and willreclassify the total accrued interest to the principal balance of the ToggleNotes on February 23, 2010.

 

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 our future subsidiaries guarantee the Toggle Notes ona senior basis.  Each guarantee isunsecured and ranks equally with senior indebtedness of the guarantor, seniorto all of the guarantor’s subordinated indebtedness and effectively junior toits secured indebtedness to the extent of the value of the collateral securingsuch indebtedness.

 

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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.

 

At December 31, 2009, we were in compliance withall material covenants required by each of the senior secured credit facilityand the Toggle Notes.

 

*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 indebtednessas of December 31, 2009 and December 31, 2008 was $14.4 million and$24.0 million, respectively.  The variousbank indebtedness agreements contain covenants to maintain certain financialratios and also restrict encumbrance of assets, creation of indebtedness,investing activities and payment of distributions.  We have guaranteed $9.4 million of this debt.

 

*Capital Lease Obligations*

 

We are liable to various vendors for several equipmentleases.  The outstanding balance relatedto these capital leases at December 31, 2009 and December 31, 2008was $9.1 million and $5.1 million, respectively.

 

***Summary***

 

We believe we havesufficient liquidity in the next 12 to 18 months as described above. Nevertheless,we continue to monitor the state of the financial and credit markets and ourcurrent and expected liquidity and capital resource needs, and intend tocontinue to explore various financing alternatives to improve our capitalstructure, including by reducing debt, extending maturities or relaxingfinancial covenants.  These may includenew equity or debt financings or exchange offers with our existing securityholders (including exchanges of debt for debt or equity) and other transactionsinvolving our outstanding securities, given their secondary market tradingprices.  We cannot assure you, if wepursue any of these transactions, that we will be successful in completing atransaction on attractive terms, or at all.

 

**ContractualObligations and Commercial Commitments**

 

The following tablesummarizes our contractual obligations by period as of December 31, 2009on a historical basis (in thousands):

 
| ** **                   | ** ** | **Payments  Due by Period** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **Total**                   | ** ** | **Less  Than********1 Year** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **After  5********Years** | ** ** |
| **Contractual Obligations:** |       |                        |       |   |   |   |   |   |   |   |   |
| Long-term  debt              |       | $                           | 456,153    |   | $ | 16,036 |   | $ | 65,823 |   | $ | 166,564 |   | $ | 207,730 |   |
| Capital  lease obligations   |       | 9,067                       |       | 4,176 |   | 4,029 |   | 676 |   | 186 |   |
| Operating  lease obligations |       | 147,514                     |       | 23,498 |   | 44,330 |   | 31,384 |   | 48,302 |   |
| Total                        |       | $                           | 612,734    |   | $ | 43,710 |   | $ | 114,182 |   | $ | 198,624 |   | $ | 256,218 |   |

 

**Inflation**

 

For the past threeyears, inflation and changing prices have not significantly affected ouroperating results or the markets in which we operate.

 

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**Recently Adopted and Recently Issued AccountingGuidelines**

 

***Adopted***

 

On September 30,2009, we adopted changes issued by the Financial Accounting Standards Board (“FASB”)to the authoritative hierarchy of generally accepted accounting principles (“GAAP”).  These changes establish the FASB AccountingStandards CodificationTM (“Codification”)as the source of authoritative accounting principles recognized by the FASB tobe applied by nongovernmental entities in the preparation of financialstatements in conformity with GAAP.  Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants.  The FASB will no longerissue new standards in the form of Statements, FASB Staff Positions, orEmerging Issues Task Force Abstracts; instead the FASB will issue AccountingStandards Updates.  Accounting StandardsUpdates will not be authoritative in their own right as they will only serve toupdate the Codification.  These changesand the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced,the adoption of these changes had no impact on the financial statements.

 

On January 1, 2009, we adopted changes issued bythe FASB to noncontrolling interests in consolidated financial statements.  These changes require, among other items,that a noncontrolling interest be included within equity separate from theparent’s equity; consolidated net income be reported at amounts inclusive ofboth the parent’s and noncontrolling interest’s shares; and, separately, theamounts of consolidated net income attributable to the parent andnoncontrolling interest all be reported on the consolidated statement ofoperations.  The implementation of thesechanges also results in the cash flow impact of certain transactions withnoncontrolling interests being classified within financing activities.  Those changes to the statement of cash flowsinclude: a) distributions to noncontrolling interest partners were previouslyrecorded as an operating activity and are now included in the financingactivities section; and b) acquisitions or sales of equity interests inconsolidated subsidiaries in which there were no changes of control werepreviously recorded in the investing section and are now presented as financingactivities.

 

We could be obligated,under the terms of the partnership and operating agreements governing many ofour joint ventures, upon the occurrence of various fundamental regulatorychanges, to purchase some or all of the noncontrolling interests related to ourconsolidated subsidiaries.  Theserepurchase requirements are limited to the portions of our facilities that areowned by physicians who perform surgery at our facilities and would betriggered by regulatory changes making the existing ownership structureillegal.  While we are not aware ofevents that would make the occurrence of such a change probable, regulatorychanges are outside of our control. Accordingly, the noncontrolling interests subject to these repurchaseprovisions, and the income attributable to those interests, have beenclassified outside of equity on our consolidated balance sheets.

 

Effective January 1, 2009, we adopted changesissued by the FASB to accounting for business combinations.  These changes retain the purchase method ofaccounting for acquisitions, but require a number of changes, including changesin the way assets and liabilities are recognized in the purchase accounting aswell as requiring the expensing of acquisition-related costs as incurred.  Furthermore, these changes provideguidance for recognizing and measuring the goodwill acquired in the businesscombination and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination.  We have appliedthese changes to the acquisitions completed during the year ended December 31,2009.

 

Effective January 1, 2009, we adopted changesissued by the FASB to the method of determination of the useful life ofintangible assets.  This guidance amendsthe factors that should be considered in determining the useful life of arecognized intangible asset.  The intentof this guidance is to improve consistency between the useful life of arecognized intangible asset and the period of expected cash flows used tomeasure the fair value of the asset.  Theadoption of this guidance did not have a material impact on our consolidatedresults of operations or financial position.

 

Effective January 1,2009, we adopted changes issued by the FASB to**equity method investmentaccounting.  These changes clarifythe accounting for certain transactions and impairment considerations involvingequity method investments.  The adoptionof this guidance did not have a material impact on our consolidated financialposition, results of operations, or cash flows.

 

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Effective January 1,2009, we adopted changes issued by the FASB to disclosures about derivativeinstruments and hedging activities.  Thisguidance requires enhanced disclosures about an entity’s derivative and hedgingactivities and thereby improves the transparency of financial reporting.  The objective of the guidance is to provideusers of the financial statements with an enhanced understanding of how and whyan entity uses derivative instruments, how derivative instruments and relatedhedged items are accounted for, and how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows.  We are adhering to theenhanced disclosure requirements regarding derivative instruments and hedgingactivities.

 

In April 2009, weadopted changes issued by the FASB to interim disclosures about fair value offinancial instruments, which require an entity to provide interim disclosuresabout the fair value of all financial instruments within the scope of theguidance, and to include disclosures related to the methods and significantassumptions used in estimating those instruments.  Other than the required disclosures, thesechanges had no impact on the financial statements.

 

On June 30, 2009, we adopted changes issued bythe FASB to subsequent events*. *This guidance establishes generalstandards of accounting and disclosures of events that occur after the balancesheet date but before the financial statements are issued.  We evaluated all subsequent events thatoccurred after the balance sheet date through the date the Form 10-K isissued.

 

***Issued***

 

In June 2009,the FASB issued changes to the accounting for variable interest entities.  These changes require an enterprise: (i) toperform an analysis to determine whether the enterprise’s variable interest orinterests give it a controlling financial interest in a variable interestentity; (ii) to require ongoing reassessments of whether an enterprise isthe primary beneficiary of a variable interest entity; (iii) to eliminatethe quantitative approach previously required for determining the primarybeneficiary of a variable interest entity; (iv) to add an additionalreconsideration event for determining whether an entity is a variable interestentity when any changes in facts and circumstances occur such that holders ofthe equity investment at risk, as a group, lose the power from voting rights orsimilar rights of those investments to direct the activities of the entity thatmost significantly impact the entity’s economic performance; and (v) torequire enhanced disclosures that will provide users of financial statementswith more transparent information about an enterprise’s involvement in avariable interest entity.  These changesbecome effective for us on January 1, 2010.  Management is currently evaluating thepotential impact of these changes on the financial statements.

 

**Item6A. *Quantitative and Qualitative Disclosures AboutMarket Risk***

 

We are exposed to market risk related to changes inprevailing interest rates.  Historically,we have not held or issued derivative financial instruments other than the useof a variable-to-fixed interest rate swap for a portion of our senior creditfacility.  We do not use derivativeinstruments for speculative purposes. Our outstanding debt to commercial lenders is generally based on apredetermined percentage above LIBOR or the lenders’ prime rate.  At December 31, 2009,$232.1 million of our total long-term debt was subject to variable ratesof interest, while the remaining $233.1 million of our total long-termdebt was subject to fixed rates of interest. A hypothetical 100 basis point increase in market interest rates wouldresult in additional annual interest expense of approximately$1.6 million.  The fair value of ourtotal long-term debt, based on quoted market prices as of December 31,2009, is approximately $363.6 million.

 

**Item 7.  *Financial Statements and Supplementary Data***

** **

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

 

**Item 8.  *Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure***

 

None.

 

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**Item 8A(T). *Controls and Procedures***

 

(a)***         ******Evaluationof Disclosure Controls and Procedures.***  We carried outan evaluation, under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as of the end of theperiod 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******onInternal Control over Financial Reporting. ***Managementis responsible 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.

 

Management has assessedthe effectiveness of our internal control over financial reporting using thecriteria set forth in “Internal Control - Integrated Framework” issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on management’s assessment and thosecriteria, management concluded that our internal control over financialreporting was effective as of December 31, 2009.

 

This annual report doesnot include an attestation report of our registered public accounting firmregarding 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 Over Financial Reporting.***  There has beenno change in our internal control over financial reporting that occurred duringthe fourth quarter of 2009 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**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 designof a control system must reflect the fact that there are resource constraints,and the benefits of controls must be considered 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 includethe realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more people or bymanagement override of controls.  Forthese reasons, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

**Item 8B.  *OtherInformation***

 

None.

 

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** **

**PART III**

 

**Item 9.  *Directors,Executive Officers and Corporate Governance***

 

**Directorsand Executive Officers**

 

**MANAGEMENT**

 

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

 
| **Name**                      | ** ** | **Age** | ** ** | **Position**                                                 |
|-------------------------------|------------|---------|------------|--------------------------------------------------------------|
| Richard E.  Francis, Jr. |       | 56      |       | Chairman of the Board,  Chief Executive Officer and Director |
| Clifford G. Adlerz            |       | 56      |       | President, Chief  Operating Officer and Director             |
| Teresa F. Sparks              |       | 41      |       | Senior Vice President  of Finance, Chief Financial Officer   |
| Kenneth C. Mitchell           |       | 60      |       | Senior Vice President  of Mergers and Acquisitions           |
| R. Dale Kennedy               |       | 62      |       | Senior Vice President  of Management Services and Secretary  |
| Thomas S.  Murphy, Jr.   |       | 50      |       | Director                                                     |
| Robert V. Delaney             |       | 52      |       | Director                                                     |
| Quentin Chu                   |       | 33      |       | Director                                                     |
| Kurt E. Bolin                 |       | 51      |       | Director                                                     |
| Craig R. Callen               |       | 54      |       | 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 Board since May 2002 and as ChiefExecutive Officer and a director since 1996. Mr. Francis also served as President from 1996 to May 2002.  Mr. Francis served from 1992 to 1995 asSenior Vice President, Development of HealthTrust, Inc. From 1990 to 1992,Mr. Francis served as Regional Vice President, Southern Region forHealthTrust, where he oversaw operations of 11 hospitals.  Mr. Francis’ experience in the healthcare industry as well as his leadership of the Company and his role as adirector since its founding in 1996 provides the Board with a unique and deeperinsight into our business, challenges and opportunities.

 

*CliffordG. Adlerz* hasserved as President since May 2002 and as Chief Operating Officer and adirector since 1996.  Mr. Adlerzalso served as Secretary from 1996 to May 2002.  Mr. Adlerz served as Regional Vice President,Midsouth Region for HealthTrust, Inc. from 1992 until its merger withHCA Inc. in May 1995, at which time he became Division Vice Presidentof HCA and served in that position until September 1995.  Mr. Adlerz served as Chief ExecutiveOfficer of South Bay Hospital in Sun City, Florida from 1987 to 1992.  Mr. Adlerz’s experience in the healthcare industry as well as his leadership of the Company and his role as adirector since its founding in 1996 provides the Board with a unique and deeperinsight into our business, challenges and opportunities.

 

*TeresaF. Sparks* hasserved as Chief Financial Officer and Senior Vice President of Finance since August 2007.  Ms. Sparks served as CorporateController from the Company’s inception in 1996 to August 2007 and wasnamed Vice President in December 2002. Previously, she served as Assistant Controller for HealthWise of America, Inc.,a managed care organization.  Prior tojoining HealthWise of America, Ms. Sparks was a senior healthcare auditorfor Deloitte & Touche LLP, Nashville, Tennessee.

 

*KennethC. Mitchell* hasserved as Senior Vice President of Mergers and Acquisitions since August 2007.  Mr. Mitchell served as Vice President ofFinance from 1996 to December 2002 and as Chief Financial Officer from May 2002to August 2007.  Mr. Mitchellserved as Chief Financial Officer of American HealthMark, Inc. from 1989to 1995 and as Vice President—Controller for HCA Management Company Inc.from 1988 to 1989.  Prior to that time, Mr. Mitchellserved as Assistant Vice President-Development and Regional Controller for HCAManagement Company Inc.

 

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*R.Dale Kennedy* hasserved as Secretary since May 2002 and Senior Vice President of ManagementServices since December 2002.  Mr. Kennedyserved as Vice President of Management Services from 1996 to December 2002.  Mr. Kennedy served as Chief OperationsOfficer for IPN Network, LLC, a company that managed the business officefunctions of health care entities, from 1991 until 1995.  Prior to that time, Mr. Kennedy servedin regional financial roles for HealthTrust, Inc. and HCA Inc.

 

*ThomasS. Murphy, Jr.*co-founded Crestview Partners in 2004 and has served as a director of theCompany since August 2007.  Heretired from Goldman, Sachs & Co. in 2003 where he was aPartner/Managing Director.  Mr. Murphyspent sixteen years in the Investment Banking Division of Goldman, Sachs & Co.  Mr. Murphy brings to the board hisextensive experience with acquisitions, divestitures, recapitalizations,initial public offerings, bank and high yield financings and private equityinvestments.  In addition to hischaritable activities, Mr. Murphy serves on the Board of Directors of FBRCapital Markets Co. and Key Safety Systems, Inc.

 

*RobertV. Delaney* joinedCrestview as a partner in 2007 and has served as a director of the Companysince 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 bringsto the board his extensive experience in high yield debt, leveraged loans,restructuring, mergers and acquisitions and principal investing.

 

*QuentinChu* is aPrincipal at Crestview Partners and has been with the firm since July 2005,after graduating from Harvard Business School. Mr. Chu has 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 to joining Carlyle, Mr. Chu was ananalyst in the health care investment banking team at Goldman, Sachs & Co.,where he completed a range of mergers and acquisitions and financingassignments for both early stage and Fortune 500 companies. Mr. Chu’sexperience in health care transactions and finance provides the Board greaterinsight into the health care industry and financial strategy.

 

*Kurt E.Bolin* is aPrincipal of Stone Point Capital LLC and has been with the firm since1997.  Mr. Bolin has served as adirector of the 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 equity investing, Mr. Bolin’sactivities at GE Capital, Inc. included leading the acquisitions ofvarious insurance companies.  Mr. Bolinis also a director of Edgewood Partners Holdings, LLC, GENEX Services, Inc.and Wilton Re Holdings Limited.  TheBoard benefits from Mr. Bolin’s experience as a private equity investorand the knowledge he has gained as a board member of various companies.

 

*Craig R.Callen* has been aSenior Advisor at Crestview since October 2009 and became a director ofthe Company in March 2010.  From2004 to 2007, Mr. Callen served as Senior Vice President of StrategicPlanning and Business Development and a member of the Executive Committee forAetna, Inc., responsible for oversight and development of Aetna’scorporate strategy, including mergers and acquisitions.  Prior to joining Aetna in 2004, Mr. Callenwas a Managing Director and Head of U.S. healthcare investment banking atCredit Suisse First Boston and co-head of health care investment banking atDonaldson Lufkin & Jenrette prior to its acquisition by Credit SuisseFirst Boston.  During his 20 year careeras an investment banker in the healthcare practice, Mr. Callensuccessfully completed over 100 transactions for clients and contributed as anadvisor to the board of directors and managements of many leading healthcarecompanies in the United States. Currently, Mr. Callen serves on the Board of Directors of KineticConcepts, Inc., and previously served on the Board of Directors of SunriseSenior Living, Inc.  Mr. Callen,through his lengthy and broad focus on the healthcare industry, offers theBoard greater insight into industry dynamics as well as investment andacquisitions strategies.

 

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**BoardStructure and Compensation**

 

Our board iscurrently composed of 7 members.  We donot currently pay our directors any fees.

 

**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.

 

**Item 10.  *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 policiesare designed 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 officersalso receive benefits that our other employees receive including medical, lifeand 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, arethe individuals included in the Summary Compensation Table on page72 of thisfiling.  Salaries and other compensationfor all other officers and employees are determined by management in accordancewith our compensation policies and plans.

 

69

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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.  Currently, ourCompensation Committee is appointed by Holdings’ Board of Directors, which iscontrolled by Crestview. Accordingly, our Compensation Committee represents theinterests of our shareholders and makes decisions independent from ourexecutive officers. During 2008 and 2009, our current Compensation Committeegenerally continued the levels of compensation that were in place at the timeof the Merger with cost of living adjustments it has deemed appropriate. OurCompensation Committee has not otherwise utilized the services of a consultingfirm in connection with compensation decisions it has made after the Merger.

 

The Compensation Committee may delegate to the ChiefExecutive Officer the authority to make, within the framework of theCompensation Committee’s philosophy or objectives that it has adopted from timeto time, compensation decisions with respect to our non-executive employees.

 

**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 theperformance of the particular officer, and the officer’s experience and tenurewith us. The base salaries for 2009 for our Named Executive Officers were asfollows: $463,500 for Mr. Francis, $334,750 for Mr. Adlerz, $219,078for Ms. Sparks, $219,078 for Mr. Mitchell, and $207,930 for Mr. Kennedy**. **Messrs. Francisand Adlerz were 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 and 2009.  Messrs. Francisand Adlerz received the 3% cost of living salary increase that all otheremployees received in 2008 and received no salary increase for 2009.

 

Non-Equity IncentiveCompensation

 

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

 

In February 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 paid under the plan depends on the level ofachievement. The 2009 plan also provides for an additional cashbonus in the event that 2009 EBITDA for the Company exceeded a target that ismaterially higher than budgeted EBITDA.  The potential additionalbonus payments for 2009 range from 38% to 152% of base salary if the EBITDAtarget is met or exceeded.

 

For Messrs. Francis and Adlerz, the target bonus was100% of base salary upon achievement of applicable budgeted EBITDA for theCompany.  For our other Named ExecutiveOfficers, the potential bonus payments for 2009 ranged from 45% to 50% of basesalary upon achievement of applicable budgeted EBITDA for the Company.  A portion of Mr. Kennedy’s potentialbonus payment was contingent upon achievement of applicable divisional budgetedEBITDA of $19.3 million. Based on 2009 performance, no bonuses were paid to Messrs. Francis,Adlerz or Mitchell or to Ms. Sparks. Mr. Kennedy was paid a bonus of $20,592.   The bonus paid to Mr. Kennedy was basedon the achievement of applicable divisional budgeted EBITDA.  See “Executive Compensation — Grants ofPlan-Based Awards” for additional information on these awards.

 

In March 2010, the Compensation Committee establishedthe 2010 Corporate Key Management Incentive Plan for key management employees,including our executive officers.  The2010 plan provides for a  bonus in cashor equity securities with a value 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 of theaward under the plan depends on the level of achievement.  

 

70

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For Messrs. Francis and Adlerz, the target bonus is 100%of base salary upon achievement of applicable budgeted EBITDA for theCompany.  For our other Named ExecutiveOfficers, the potential bonus payments for 2010 range from 45% to 50% of basesalary.

 

Equity-Based Compensation

 

Equity-based compensation is intended to align the financialinterests of our executive officers’ interests with those of our stockholders.The Compensation Committee believes that equity awards give our executives astake in our long-term performance and align senior management with our achievementof longer-term financial objectives that enhance stockholder value.  The Compensation Committee considers thenumber of available shares, but has no fixed formula for determining the awardsto be granted.

 

Holdings maintains the 2007 Equity Incentive Plan, whichpermits grants of stock options and other equity-based awards.  On August 31, 2007, the CompensationCommittee made an initial award of options to purchase Holdings common stockunder this plan 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.  Vesting of thetime vesting portion of the award is accelerated in the event of a change incontrol. Vesting of performance vesting options is accelerated if certainconditions are satisfied in connection with a liquidity event.  See “Executive Compensation — PotentialPayments Upon Termination or Change in Control — Other Effects of Terminationof Employment or Change in Control.”

 

In 2009, options to purchase 42,933 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 2009.

 

Other Benefits

 

In January 2005, our former Compensation Committeeadopted****the SERP. The SERP is a nonqualifieddeferred compensation program for officers and other key employees designatedby the Compensation Committee. The SERP is designed and administered inaccordance with the requirements of the Internal Revenue Code to defer thetaxation on compensation earned by participating employees. Participatingemployees can elect to defer up to 25% of their base salary and up to 50% oftheir year-end bonus. For employees who defer at least 2% of their base salary,we will contribute 2% of the employee’s base salary to the SERP. TheCompensation Committee in its discretion may make additional contributionsbased on achievement of performance goals or other company objectives. Employeecontributions pursuant to the SERP are 100% vested at all times. Companycontributions vest one year after contribution, and immediately upon death,disability or change in control of the Company. Participating employees directthe investment of their accounts in mutual funds or other appropriateinvestment media that we select. Assets invested pursuant to the SERP aredesignated for paying SERP benefits but are the property of Symbion and aresubject 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****matchingcontribution to the plan on behalf of each employee. Typically, our match ofemployee contributions has been equal to 25% of the first 6% of an employee’sbase 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 information concerningcompensation paid or accrued for the last three years with respect to our NamedExecutive Officers — the Chief Executive Officer, the Chief Financial Officerand our three other most highly compensated executive officers:

 
| **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.                                                          |       |             |       |                      |       |                   |       |                    |       |                      |       |                                            |       |                           |       |                        |       |
| *Chairman of****the Board*                                                             |       | 2009             |       | $                         | 463,500    |                   | $          | —                  |       | $                         | —     |                                            | $          | —                         |       | $                           | —     |   | $ | 13,405 |   | $ | 476,905 |   |
| *and Chief  Executive*                                                                 |       | 2008             |       | 463,500                   |       | —                 |       | —                  |       | —                    |       | 231,750                                         |       | 14,193                         |       | 709,443                     |       |
| *Officer*                                                                              |       | 2007             |       | 450,000                   |       | —                 |       | 307,355                 |       | 4,689,655                 |       | —                                          |       | 14,131                         |       | 5,461,141                   |       |
|                                                                                   |       |             |       |                      |       |                   |       |                    |       |                      |       |                                            |       |                           |       |                        |       |
| Clifford  G. Adlerz

*President  and Chief Operating Officer*                          |       | 2009

2008

2007 |       | 334,750

334,750

325,000 |       | —  —  — |       | —

—

221,012 |       | —

—

3,194,763 |       | —

167,375

—                         |       | 10,664

11,414

11,228         |       | 345,414

513,539

3,752,003 |       |
|                                                                                   |       |             |       |                      |       |                   |       |                    |       |                      |       |                                            |       |                           |       |                        |       |
| Teresa  F. Sparks (4)

*Senior Vice  President of Finance and Chief Financial Officer* |       | 2009

2008

2007 |       | 219,078

219,078

195,674 |       | —  —  — |       | —

—

43,437  |       | —

—

706,000   |       | —

54,769

—                          |       | 7,755

8,325

7,666            |       | 226,833

282,172

952,777   |       |
|                                                                                   |       |             |       |                      |       |                   |       |                    |       |                      |       |                                            |       |                           |       |                        |       |
| Kenneth  C. Mitchell*Senior Vice President of Mergers and Acquisitions*                |       | 2009

2008

2007 |       | 219,078

219,078

212,697 |       | —  28,017  — |       | —

—

69,066  |       | —

—

731,636   |       | —

—

—                          |       | 7,771

8,636

8,599            |       | 226,849

255,731

1,021,998 |       |
|                                                                                   |       |             |       |                      |       |                   |       |                    |       |                      |       |                                            |       |                           |       |                        |       |
| R. Dale  Kennedy*Senior Vice President of Management Services and Secretary*           |       | 2009

2008

2007 |       | 207,930

207,930

201,874 |       | —  —  — |       | —

—

65,622  |       | —

—

728,181   |       | 20,592

64,978

—                          |       | 7,385

8,368

8,330            |       | 235,907

281,276

1,004,007 |       |
|                                                                                        |            |                  |            |                           |            |                        |            |                         |            |                           |            |                                                 |            |                                |            |                             |            |  |  |  |  |  |  |  |

 

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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 accounting guidance for stock-basedcompensation, under which the cost of equity awards to employees is measured bythe fair value of the awards on their grant date, whether or not the awards hadany intrinsic value. Amounts shown in the table above reflect the fair valuemeasured on their grant date of awards under the Long Term Incentive Plan andthe 2007 Equity Incentive Plan calculated in accordance with accountingguidance for stock-based compensation.  The value of all Long Term Incentive Planawards was based on the determined market price of our common stock on the dateof grant using general valuation principles. The 2007 Equity Incentive Planawards were based on the value of $10 per share, the same as the value on thedate of the Merger, which was determined to be the market value of our commonstock based on general valuation principles. No forfeitures occurred with respect to our Named Executive Officers during2007, 2008 or 2009. See note 10 to the consolidated financial statements forfurther information regarding significant assumptions used to determinestock-based compensation expense.  Inaddition to the time-vesting stock options reflected in the table above, performance-vestingstock options were granted to the Named Executive Officers in 2007, However theCompany has not assigned any value to the performance-vesting stock optionawards because it is considered unlikely that the performance requirementswill be met given current and foreseeable market conditions.  Inthe event such performance requirements are met, the maximum grant datefair value of such performance-vesting stock option awards would increasethe amounts set forth in the table above by an additional $2.7 million for Mr. Francis,$1.6 million for Mr. Adlerz, $410,000 for Ms. Sparks, $410,000 for Mr. Mitchelland $410,000 for Mr. Kennedy.

(2)          Represents awards under the 2008 and 2009 Corporate KeyManagement Incentive Plans.  See “Grantsof Plan-Based Awards” below for additional information on the 2009 awards.

(3)          Represents:

(a)          Company contributions to the Supplemental ExecutiveRetirement Plan for Mr. Francis of $9,001 for 2007, and $9,270 for each of2008 and 2009, Mr. Adlerz of $6,500 for 2007 and $6,695 for each of 2008and 2009; Ms. Sparks of $3,914 for 2007 and $4,382 for each of 2008 and2009; Mr. Mitchell of $4,255 for 2007 and $4,382 for each of 2008 and2009; and Mr. Kennedy of $4,038 for 2007 and $4,159 for each of 2008 and2009.

(b)         Companycontributions to the 401(k) plan for Mr. Francis of $3,375 for 2007,$3,375 for 2008 and $2,587 for 2009; Mr. Adlerz of $3,375 for 2007, $3,375for 2008 and $2,587 for 2009; Ms. Sparks of $3,034 for 2007, $3,064 for2008 and $2,469 for 2009; Mr. Mitchell of $3,375 for 2007, $3,375 for 2008and $2,485 for 2009; and Mr. Kennedy of $3,375 for 2007, $3,375 for 2008and $2,368 for 2009.

(c)          Premiums we paid for term life insurance on behalf of eachNamed Executive Officer of $1,755 for 2007 and $1,548 for each of 2008 and2009, for Mr. Francis; $1,353 for 2007, $1,344 for 2008 and $1,382 for2009 for Mr. Adlerz; $718 for 2007, $879 for 2008 and $904 for 2009 for Ms. Sparks;$969 for 2007, $879 for 2008 and $904 for 2009 for Mr. Mitchell; and $917for 2007, $834 for 2008 and $858 for 2009 for Mr. Kennedy.

 

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

 

**Grants of Plan-Based Awards**

 

The following table provides information regarding non-equityincentive awards granted during 2009 to our Named Executive Officers under the2009 Corporate Key Management Incentive Plan, conditioned on achievement ofapplicable performance targets:

 
| ** **                      | ** ** | **Estimated  Payouts Under Non-Equity********Incentive  Plan Awards****(3)** | ** ** |
|---------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Threshold****(1)**                                                         | ** ** | **Target****(2)** | ** ** | **Maximum** | ** ** |
| Richard E. Francis, Jr.(4) |       | $                                                                            | 76,385     |   | $ | 381,924 |   | $ | 1,203,274 |   |
| Clifford G. Adlerz(4)           |       | 55,167                                                                       |       | 275,834 |   | 869,032 |   |
| Teresa F. Sparks(4)             |       | 18,052                                                                       |       | 90,260 |   | 284,370 |   |
| Kenneth C. Mitchell(4)          |       | 16,247                                                                       |       | 81,234 |   | 269,899 |   |
| R. Dale Kennedy                 |       | 11,479                                                                       |       | 85,667 |   | 255,933 |   |
|                                 |            |                                                                              |            |  |  |  |  |  |  |  |

 

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(1)   Thresholdis based upon minimum level of bonus payout assuming base level of performanceis achieved. If base level is not reached, no bonus would be paid under theplan.

(2)   Targetis based upon the expectation of the potential payout of non-equity incentiveawards when the incentive plan was established.

(3)   Actualawards made under the plan for performance in 2009 are included in the SummaryCompensation Table under “Non-Equity Incentive Plan Compensation”.

(4)   Thebase level of performance was not achieved for Messrs. Francis, Adlerz orMitchell or Ms. Sparks.

 

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

 

The following table provides certain information with respectto the Named Executive Officers regarding outstanding equity awards as of December 31,2009:

 
| ** **                    | ** ** | **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 |   |
|                          |       | 258,181                                                                        | (2)        | 634,316 | (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 |   |
|                          |       | 172,121                                                                        | (3)        | 433,509 | (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 |   |
|                          |       | 30,913                                                                         | (4)        | 104,023 | (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 |   |
|                          |       | 30,913                                                                         | (4)        | 104,023 | (4) | $ | 10.00 |   | 8/31/17 |   |
|                          |       |                                                                           |       |   |   |   |   |   |   |
| R. Dale  Kennedy              |       | 9,066                                                                          | (1)        | — |   | $ | 1.50 |   | 5/16/12 |   |
|                          |       | 30,913                                                                         | (4)        | 104,023 | (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)          EffectiveAugust 31, 2007, Mr. Francis received a grant of options to purchase892,497 shares of Holdings common stock, including 430,302 time vesting optionsand 462,195 performance vesting options. The time vesting options vest 20% peryear on December 31 beginning December 31, 2007. Performance vestingoptions vest upon a liquidity event based on the extent to which an internalrate 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 theextent to 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 a liquidity event based on theextent to which an indicated IRR is achieved by Crestview.

 

**Option Exercises and Stock Vested**

 

During 2009, the Named Executive Officers did not exerciseany stock options.  In addition, norestricted stock or similar awards were outstanding during 2009.

 

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**Nonqualified Deferred Compensation**

 

The following table shows the activity during 2009 and theaggregate balances held by each of the Named Executive Officers at December 31,2009 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. |       | $                                                | 9,270      |                                                 | $          | 9,270                                                 |       | $                                              | 34,152     |   | $ | 139,460 |   |
| Clifford G. Adlerz           |       | 6,695                                            |       | 6,695                                                |       | 16,959                                                |       | 81,515                                         |       |
| Teresa F. Sparks             |       | 17,526                                           |       | 17,526                                               |       | 22,899                                                |       | 94,817                                         |       |
| Kenneth C. Mitchell          |       | 4,381                                            |       | 4,382                                                |       | 14,310                                                |       | 60,504                                         |       |
| R. Dale Kennedy              |       | 8,317                                            |       | 8,317                                                |       | 15,973                                                |       | 58,837                                         |       |
|                              |            |                                                  |            |                                                      |            |                                                       |            |                                                |            |  |  |  |  |

 

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

 

See “Compensation Discussion and Analysis — Components ofExecutive Compensation — Other Benefits” for additional information about theSERP.

 

**Potential Payments UponTermination or Change in Control**

 

***Employment Agreements****.* Messrs. Francisand Adlerz entered into new employment agreements with us which becameeffective on August 23, 2007 upon the consummation of the Merger. Theinitial term of each of the employment agreements is three years, which isautomatically extended so that the term will be three years until terminated. Weare able to terminate each employment agreement for cause, including (but notlimited to) the executive’s conviction of a felony or gross negligence orinternal misconduct in the performance of the executive’s duties to the extentit causes demonstrable harm to us. In addition, either party is able toterminate the employment agreement at any time by giving prior written noticeto the other party. However, we would be obligated to pay the executive aseverance benefit if we terminated the executive’s employment without cause orif the executive terminated his employment upon the occurrence of certainevents specified in the agreement, including (but not limited to) a change incontrol or our material breach of the agreement which is not cured promptly. Theseverance benefit is generally equal to three times the executive’s highestbase salary and the incentive bonus amount that would be paid for the currentyear as if the incentive bonus performance goals were fully achieved. Upon atermination of employment as a result of the executive’s disability, we willpay the executive contractual disability benefits. If the executive receivesseverance payments following a change in control of Symbion that are subject totax under Section 4999 of the Internal Revenue Code, we will payadditional amounts to offset the effect of such taxes on the executive. Each ofthe employment agreements also includes a covenant not to compete in which theexecutive agrees that, during the term of the employment agreement and for a periodof one 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 anExecutive Change 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 Officers arecash compensation equal to base pay and bonus for 12 months and participationin medical, 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 Employment orChange in Control****.* In addition to payments pursuant to the employmentagreements and the Executive Change in Control Severance Plan described above,upon a termination of employment or change in control:

 

75

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*Supplemental Executive Retirement Plan* — Under the SERP,deferrals made by an executive officer are fully vested and nonforfeitable atall times. If the executive officer’s employment ends due to disability, death,retirement or a change in control, the executive officer’s entire account,including earnings, will be fully vested. If the executive officer’s employmentends due to some event other than disability, death, retirement or change incontrol, the executive officer forfeits all Company contributions that weremade less than one year prior to the date of termination.

 

*401(k) Plan* — Under our 401(k) plan,contributions made by an executive officer are fully vested and nonforfeitableat all times. Matching contributions that we make for the benefit of anexecutive officer vest based on the years of service of the executive officer.Each of our current executive officers has been an employee for at least fiveyears and, therefore, all company contributions under our 401(k) plan onbehalf of such officers is fully vested and nonforfeitable. There is noprovision for additional benefits on a change in control.

 

*Stock Option Awards* — Options may be subject to forfeituredepending on the nature of the terminating event.  In no event shall an option be exercisableafter the expiration date of the option. Upon a change in control or liquidityevent, Named Executive Officers have special exercise and vesting rights. Thesespecial rights also apply to other option holders.

 

Death or Disability.  In the event ofdeath or disability of a Named Executive Officer, the executive officer has 12months to exercise any vested options.

 

Termination With Cause.  If a NamedExecutive Officer’s employment is terminated with cause, then all options heldby such officer shall immediately be forfeited and cancelled without anypayment or consideration being payable to such officer.

 

Other Termination by the Company orResignation. Exceptin the event of death or disability, an executive officer will have the rightto exercise all options for three months following resignation or terminationof employment by the Company that is not for cause. The right to exercise islimited to the options that have become vested as of the date of termination.

 

Change in Control and LiquidityEvents. As described above under “CompensationDiscussion and Analysis — Components of Executive Compensation — Equity-BasedCompensation,” the Company has awarded stock options to executive officers thatbecome vested over a period of time provided that the executive officercontinues to be employed by us and stock options that become vested uponachievement of performance goals. The effect of a change in control varies fortime vesting options and options that vest upon performance.

 

*Time Vesting Options*.  In the event of aChange in Control (as defined below) that occurs prior to termination ofemployment, whether or not the vesting requirements set forth in any form oftime vesting option agreement have been satisfied, all such time vestingoptions that are outstanding at the time of the Change in Control shall becomefully vested and exercisable immediately 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.

 

*Change in Control or Liquidity Event Rights onTermination of Employment.*Termination of anexecutive officer’s employment by the Company without cause or upon aresignation for Good Reason will result in the right to exercise options asfollows: (i) if termination occurs within 12 months following a Change inControl, the executive officer will be able to fully exercise the time vestingoptions and, to the extent that the performance conditions are satisfied,performance vesting options for three months following the date of the event;and (ii) if termination occurs within 12 months prior to the execution ofan agreement that results in a liquidity event, the 

 

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executive officer will be able to exercise the time vesting options tothe extent that they were vested as of the termination of employment and, tothe extent that the performance conditions are satisfied, performance vestingoptions for three months following the date of a liquidity event; provided,however, that the number of shares that can be acquired on exercise of theperformance vesting option will be reduced by one-half if termination ofemployment is more than six months prior to execution 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 basesalary or target bonus opportunity; (c) a material diminution in title orlevel of responsibility, or change in office or reporting relationship; (d) atransfer of the executive’s primary workplace by more than 35 miles; (e) thefailure of the executive to be elected or the executive ceases be a member ofour board or the board of Symbion (except for cause); or (g) the executive’sresignation for any reason 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) a reduction in basesalary or target bonus opportunity in effect immediately prior to the Change inControl; (b) a material diminution in level of responsibility or, withrespect to Ms. Sparks, a material diminution in title in effectimmediately 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.

 

***PotentialPayments***. The following tableshows the amounts that each Named Executive Officer would have received if theNamed Executive Officer’s employment had been terminated for the reasonsindicated effective December 31, 2009:

 

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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                                                              |       | 208,575                | (2)        | —                                     |       | 43,033       | (3)        | 251,608   |       |
| Termination by the  Company without cause or by the NEO for Good Reason |       | 2,781,000              | (4)        | —                                     |       | 43,033       | (3)        | 2,824,033 |       |
| Change in Control                                                       |       | 3,431,794              | (5)        | —                                     | (6)        | 43,033       | (3)        | 3,474,827 |       |
|                                                                    |       |                   |       |                                       |       |         |       |      |       |
| **Clifford G. Adlerz**                                                  |       |                   |       |                                       |       |         |       |      |       |
| Termination for cause, voluntary  termination or retirement             |       | —                 |       | —                                     |       | 25,750       | (1)        | 25,750    |       |
| Death                                                                   |       | —                 |       | —                                     |       | 25,750       | (1)        | 25,750    |       |
| Disability                                                              |       | 150,649                | (2)        | —                                     |       | 32,963       | (3)        | 183,612   |       |
| Termination by the  Company without cause or by the NEO for Good Reason |       | 2,008,500              | (4)        | —                                     |       | 32,963       | (3)        | 2,041,463 |       |
| Change in Control                                                       |       | 2,452,473              | (5)        | —                                     | (6)        | 32,963       | (3)        | 2,485,436 |       |
|                                                                    |       |                   |       |                                       |       |         |       |      |       |
| **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)        | 23,588       | (3)        | 352,205   |       |
|                                                                    |       |                   |       |                                       |       |         |       |      |       |
| **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)        | 23,588       | (3)        | 341,251   |       |
|                                                                    |       |                   |       |                                       |       |         |       |      |       |
| **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)        | 22,684       | (3)        | 334,579   |       |
|                                                                         |            |                        |            |                                            |            |              |            |           |            |  |  |  |  |

 

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(1)          Represents accrued vacation only.

(2)          For Messrs. Francis and Adlerz, this represents a disabilitybenefit annual payment equal to 75% of base salary for a maximum period of 36months, less the amount that is provided under our disability plan that isgenerally available to all salaried employees. Our other Named ExecutiveOfficers are only eligible for disability benefits under our plan available toall salaried employees.

(3)          Includes accrued vacation and the premiums for medical, life anddisability insurance benefits for the period of time the Named ExecutiveOfficer is eligible for continuation coverage under the Consolidated OmnibusBudget Reconciliation Act of 1985 (COBRA) in accordance with the NamedExecutive Officer’s employment agreement or the Executive Change in ControlSeverance Plan, as applicable.

(4)          Represents a severance payment equal to (a) three times the NamedExecutive Officer’s base salary plus (b) three times the target cash bonusamount for 2009 in accordance with the Named Executive Officer’s employmentagreement.

(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 anyfederal income and excise taxes that are payable as a result of anyreimbursements for Section 4999 excise taxes in accordance with the NamedExecutive Officer’s employment agreement. The gross up amount is $877,200 for Mr. Francisand $620,721 for Mr. Adlerz.  Thiscalculation assumes termination of employment.

(6)          As discussed above, all unvested time vesting options held by anexecutive officer vest upon a Change in Control. In addition, if specifiedinternal rates of return are achieved upon a liquidity event, then performancevesting options held by executive officers would vest in connection. The fairmarket value of Holdings common stock on December 31, 2009, as determinedunder general valuation principles, was less than the exercise price of theunvested options. Therefore, for purposes of this table, no value would havebeen realized for accelerated vesting of options upon a Change in Control.

(7)          Represents payment under the Executive Change in Control Severance Planof one year of annual pay, which includes base pay and targeted bonus of 50% ofbase pay for Ms. Sparks and Mr. Kennedy and 45% for Mr. Mitchell.

 

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The table above doesnot include information about vesting of Company contributions under our 401(k) planor the SERP. Information about such plans can be found under “Other Effects ofTermination of Employment or Change in Control” and “Nonqualified DeferredCompensation.”

 

**Director Compensation**

 

Noneof our directors received compensation for service as a member of our (orHoldings) board or board committees for 2009. They are reimbursed for anyexpenses 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 11.  *SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters***

 

All of our capitalstock is owned by our parent company, Holdings. The following table presents information with respect to the beneficialownership of Holdings’ common stock as of March 31, 2010 by (a) anyperson or group who beneficially owns more than five percent of Holdings commonstock, (b) each of our directors and Named Executive Officers and (c) alldirectors and executive officers as a group. The percentage shares outstanding provided in the table are based on24,816,623 shares of our common stock, par value $0.01 per share, outstandingas of March 31, 2010.

 
| **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)                                |       | 771,140                  |       | 3.0                   |       |
| Clifford  G. Adlerz(6)(8)                                          |       | 479,755                  |       | 1.9                   |       |
| Teresa  F. Sparks(6)(9)                                            |       | 41,985                   |       | *                     |       |
| Kenneth  C. Mitchell(6)(10)                                        |       | 55,911                   |       | *                     |       |
| R.  Dale Kennedy(6)(11)                                            |       | 39,979                   |       | *                     |       |
| Thomas  S. Murphy, Jr.(12)                                    |       | 0                        |       | *                     |       |
| Robert  V. Delaney(12)                                             |       | 0                        |       | *                     |       |
| Quentin  Chu(12)                                                   |       | 0                        |       | *                     |       |
| Craig  R. Callen(12)                                               |       | 0                        |       | *                     |       |
| Kurt  E. Bolin(4)                                                  |       | 0                        |       | *                     |       |
| All  directors and executive officers as a group (10 persons) (13) |       | 1,388,770                |       | 5.4                   | %          |

 

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*           Less than one percent.

 

(1)   Beneficialownership includes voting or investment power with respect to securities andincludes the shares issuable pursuant to options that are exercisable within60 days of March 31, 2010. Shares issuable pursuant to options aredeemed outstanding in computing the percentage held by the person holding theoptions but are not deemed outstanding in computing the percentage held by anyother person.

(2)   Consists ofshares held directly by Crestview Partners, L.P. and certain relatedinvestors (the “Crestview Funds”).  Theinvestment committee of Crestview Partners GP, L.P., the generalpartner of each fund, makes investment decisions on behalf of the investmentfunds and Barry S. Volpert serves as the chairman of the investmentcommittee.  Mr. Volpert has theright to designate, in his discretion, additional persons to serve on theinvestment committee of Crestview Partners GP, L.P. and, therefore,could be deemed to have beneficial ownership of all the shares of common stockheld by the Crestview Funds.  However, Mr. Volpertdisclaims beneficial ownership of all such shares.  The composition of the investment committeeof Crestview Partners GP, L.P. changes from time to time.  See “Certain Relationships and Related PartyTransactions — Shareholder Agreement.” The address of Crestview Partners GP, L.P. is 667 MadisonAvenue, New York, New York 10021.

(3)   Includes sharesheld directly by The Northwestern Mutual Life Insurance Company and anaffiliated fund.  The address of TheNorthwestern Mutual Life Insurance Company is 720 East Wisconsin Avenue,Milwaukee, WI 53202.

(4)   Includes sharesheld directly by Trident IV, L.P. and an affiliated fund (the “Trident IVFunds”).  Mr. Bolin is a principalof Stone Point Capital LLC, which serves as the investment manager of theTrident IV Funds.  Mr. Bolindisclaims beneficial ownership of all such shares, except to the extent of anypecuniary interest therein.  Theprincipal address for the Trident IV Funds is c/o Walkers SPV Limited, atWalker House, 87 Mary Street, George Town, Grand Cayman KY1-9002, CaymanIslands.  The principal address for StonePoint Capital LLC is 20 Horseneck Lane, Greenwich, Connecticut 06830.

(5)   The address ofBanc of America Capital Investors V, L.P. is 100 North Tyron Street, Charlotte,North Carolina, 28255.

(6)   The address ofeach of Messrs. Francis, Adlerz, Mitchell and Kennedy and Ms. Sparksis 40 Burton Hills Boulevard, Suite 500, Nashville, Tennessee 37215.

(7)   Includes optionsto purchase 544,583 shares which were exercisable as of March 31, 2010 orbecome exercisable within 60 days following March 31, 2010.

(8)   Includes optionsto purchase 389,689 shares which were exercisable as of March 31, 2010 orbecome exercisable within 60 days following March 31, 2010.

(9)   Representsoptions to purchase 41,985 shares which were exercisable as of March 31,2010 or become exercisable within 60 days following March 31, 2010.

(10)Represents options topurchase 55,911 shares which were exercisable as of March 31, 2010 orbecome exercisable within 60 days following March 31, 2010.

(11)Representsoptions to purchase 39,979 shares which were exercisable as of March 31,2010 or become exercisable within 60 days following March 31, 2010.

(12)The address ofeach of Messrs. Murphy, Delaney, Chu and Callen is 667 Madison Avenue, NewYork, New York 10021.

(13)Includes optionsto purchase 1,072,147 shares which were exercisable as of March 31, 2010or become exercisable within 60 days following March 31, 2010.

 

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**Equity Compensation Plan Information**

 

The following table provides information as of December 31,2009 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) |       | 3,372,586                                                                                           |       | $                                                                                  | 7.98       |                                                                                                                                                           | 183,817    |   |
| Equity  compensation plans not approved by security holders | ** ** | **—**                                                                                          | ** ** | **—**                                                                         | ** ** | **—**                                                                                                                                                     | ** ** |
| Total                                                       |       | 3,372,586                                                                                           |       | $                                                                                  | 7.98       |                                                                                                                                                           | 183,817    |   |

 

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(1)          Represents stock options granted or issuable underthe Holdings 2007 Equity Incentive Plan. See additional disclosure at Item 7. “Financial Statements andSupplementary Data - Note 10. Stock Options”.

 

**Item 12.  *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 amountof all fees payable to the Crestview funds and their affiliates in connectionwith the Merger and the related financing is approximately $6.3 million,plus out-of-pocket expenses.  We havealso agreed to pay an affiliate of the Crestview Funds an annual advisory feeof $1.0 million and will reimburse such affiliate for all relateddisbursements and out-of-pocket expenses pursuant to a managementagreement.  The agreement also providesthat we will pay an affiliate of the Crestview Funds a fee in connection withcertain subsequent financing, acquisition, disposition and change of controltransactions based on a percentage of the gross transaction value of any suchtransaction.  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 of theco-investors, is able to appoint one of our directors and the Crestview Fundshave the right to select all of the remaining members of the board of directorsof Holdings.  In addition, Holdings isrequired to obtain the consent of the Crestview Funds before taking certainsignificant actions.

 

The shareholdersagreement restricts transfers of shares of Holdings common stock by the shareholderswho are party to the agreement, except to permitted transferees and subject tovarious other exceptions, and also grants certain tag-along, drag-along andpre-emptive rights, as well as rights of first offer upon certain sales, to theshareholders.  The agreement also grantsHoldings the right to purchase equity from management shareholders upon theirdeparture from the company at the lesser of fair market value and cost, if theshareholder has been terminated for cause, or at fair market value in othercases.

 

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

 

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**Policies and Procedures with Respect to RelatedParty Transactions**

 

The charter of the Auditand Compliance Committee requires that the Audit and Compliance Committeeapprove any proposed related-party transactions and review with management anydisclosure relating to related party transactions and potential conflicts ofinterest.  “Related-party transactions”include, but are not limited to, those transactions described in Item 404(a) ofRegulation S-K under the federal securities laws.

 

**DirectorIndependence**

 

Wedo not have securities listed on a national securities exchange or in an automatedinter-dealer quotation system of a national securities association and, assuch, are not subject to the director independence requirements of such anexchange or association.  In addition, based on the listing standardsof The NASDAQ Stock Market, the national securities exchange upon which ourcommon stock was traded prior to the Merger, we would be a “controlled company”within the meaning of Rule 5615(c)(1) of the Nasdaq Listing rules because Crestviewand its affiliates own a majority of the equity of Holdings,and Holdings owns all of our common stock.  As a controlledcompany, we would qualify for exemptions from certain NASDAQ corporategovernance rules, including the requirement that the board of directors becomposed of a majority of independent directors.

 

**Item 13.  *PrincipalAccountant Fees and Services***

 

Thefollowing table presents fees for professional services rendered by Ernst &Young LLP for the audit of our annual financial statements for 2009 and 2008,and fees billed for other services rendered by Ernst & Young LLP for2009 and 2008:

 
| ** **          | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit  Fees         |       | $        | 780,642    |     | $          | 1,056,523 |   |
| Audit-Related  Fees |       | —   |       | 28,500   |       |
| Tax  Fees           |       | 186,393  |       | 602,540  |       |
| All  Other Fees     |       | —   |       | —   |       |
| Total               |       | $        | 967,035    |     | $          | 1,687,563 |   |

 

***Audit Fees. ***These fees were primarily forprofessional services rendered by Ernst & Young LLP in connection withthe audit of our consolidated annual financial statements.  The fees also include services related toSecurities and Exchange Commission filings.

 

***Audit-Related Fees****. *For 2008, these fees were for services rendered byErnst & Young LLP related to our Toggle Note offering and  a subscription to online accounting services.

 

***Tax Fees. ***These fees were for services rendered byErnst & Young LLP for compliance regarding tax filings and for othertax planning and tax advice services.

 

***All Other Fees. ***For 2009 and 2008, Ernst & YoungLLP did not render any other professional services or bill any fees for otherservices not included within Audit 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.  For2009, 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 14.  *Exhibitsand Financial Statement Schedules***

 

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

 

***(1)******        ******ConsolidatedFinancial Statements***

 

The consolidatedfinancial statements required to be included in Part II, Item 7. are indexedon 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 (c) |
| 10.4    |       | Lease  Agreement, dated June 26, 2001, between Burton Hills IV Partners and  Symbion, Inc. (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5    |       | First  Amendment to Lease Agreement, dated February 9, 2004, between Burton  Hills IV Partners and Symbion, Inc. (e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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 (f) (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. (c)                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14   |       | Interest  Rate Swap Agreement, dated October 31, 2007, between Symbion, Inc and  Merrill Lynch Capital Services, Inc. (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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’s Current Report on  Form 8-K filed April 24, 2007 (File No. 000-50574)                              |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | Incorporated  by reference to exhibits filed with the Registrant’s Registration Statement  on Form S-4 (Registration No. 333-153678)                                       |
| (c) | Incorporated  by reference to exhibits filed with the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 2008, as amended (File  No. 000-50574) |
| (d) | Incorporated  by reference to exhibits filed with the Registrant’s Registration Statement  on Form S-1 (Registration No. 333-89554)                                        |
| (e) | Incorporated  by reference to exhibits filed with the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 2003 (File  No. 000-50574)             |
| (f) | Incorporated  by reference to exhibits filed with the Registrant’s Quarterly Report on  Form 10-Q for the quarter ended March 31, 2005 (File  No. 000-50574)          |
| (g) | Compensation  plan or arrangement                                                                                                                                                         |

 

83

----

 

**Index toFinancials**

 
| 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 |

 

F-1

----

 

**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, 2009 and 2008 and therelated consolidated statements of operations, stockholders’ equity and cashflows for the years ended December 31, 2009 and 2008 and the period from August 24,2007 to December 31, 2007, and the period from January 1, 2007 to August 23,2007 (Predecessor). These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. We were not engaged to perform an audit of theCompany’s internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis for designingaudit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no such opinion. Anaudit also includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Symbion, Inc. atDecember 31, 2009 and 2008, and the consolidated results of its operationsand its cash flows for the years ended December 31, 2009 and 2008 and theperiod from August 24, 2007 to December 31, 2007, and the period from January1, 2007 to August 23, 2007 (Predecessor), in conformity with U.S. generallyaccepted accounting principles.

 

Asdiscussed in Note 3 to the consolidated financial statements, the Companychanged its accounting and disclosure for noncontrolling interests with theadoption of the guidance originally issued in FASB Statement No. 160, *Noncontrolling Interests in Consolidated FinancialStatements*(codified in FASB ASC Topic 810, *Consolidation*) effective January 1,2009.

 

/s/ Ernst &Young LLP

 

Nashville, Tennessee

March 31, 2010

 

F-2

----

 

**SYMBION,INC.**

**CONSOLIDATEDBALANCE SHEETS**

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

*** ***
| ** **                                                                                                                             | ** ** | **December 31,  2009** | ** ** | **December 31,  2008********(As Adjusted)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------|------------|
| **ASSETS**                                                                                                                             | * *   | * *                    |       |                                             |       |
| Current  assets:                                                                                                                       | * *   | * *                    |       |                                             |       |
| Cash  and cash equivalents                                                                                                             |       | $                           | 47,920     |                                             | $          | 41,833 |   |
| Accounts  receivable, less allowance for doubtful accounts of $9,859 and $11,993,  respectively                                        |       | 36,636                      |       | 34,707                                           |       |
| Inventories                                                                                                                            |       | 9,730                       |       | 9,050                                            |       |
| Prepaid  expenses and other current assets                                                                                             |       | 12,511                      |       | 12,719                                           |       |
| Deferred  tax asset                                                                                                                    |       | 432                         |       | 825                                              |       |
| Current  assets of discontinued operations                                                                                             |       | 530                         |       | 1,104                                            |       |
| Total  current assets                                                                                                                  |       | 107,759                     |       | 100,238                                          |       |
| Land                                                                                                                                   |       | 2,938                       |       | 2,938                                            |       |
| Buildings  and improvements                                                                                                            |       | 53,726                      |       | 53,847                                           |       |
| Furniture  and equipment                                                                                                               |       | 57,201                      |       | 49,093                                           |       |
| Computers  and software                                                                                                                |       | 4,022                       |       | 2,864                                            |       |
|                                                                                                                                   |       | 117,887                     |       | 108,742                                          |       |
| Less  accumulated depreciation                                                                                                         |       | (28,628                     | )          | (14,057                                          | )          |
| Property  and equipment, net                                                                                                           |       | 89,259                      |       | 94,685                                           |       |
| Intangible  assets                                                                                                                     |       | 19,480                      |       | 19,570                                           |       |
| Goodwill                                                                                                                               |       | 545,238                     |       | 541,831                                          |       |
| Investments  in and advances to affiliates                                                                                             |       | 17,652                      |       | 14,532                                           |       |
| Other  assets                                                                                                                          |       | 10,687                      |       | 11,875                                           |       |
| Long-term  assets of discontinued operations                                                                                           |       | 651                         |       | 833                                              |       |
| Total  assets                                                                                                                          |       | $                           | 790,726    |                                             | $          | 783,564 |   |
|                                                                                                                                   |       |                        |       |                                             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                          |       |                        |       |                                             |       |
| Current  liabilities:                                                                                                                  |       |                        |       |                                             |       |
| Accounts  payable                                                                                                                      |       | $                           | 8,306      |                                             | $          | 5,392 |   |
| Accrued  payroll and benefits                                                                                                          |       | 5,922                       |       | 7,500                                            |       |
| Other  accrued expenses                                                                                                                |       | 31,352                      |       | 22,240                                           |       |
| Current  maturities of long-term debt                                                                                                  |       | 20,212                      |       | 12,205                                           |       |
| Current  liabilities of discontinued operations                                                                                        |       | 1,186                       |       | 629                                              |       |
| Total  current liabilities                                                                                                             |       | 66,978                      |       | 47,966                                           |       |
| Long-term  debt, less current maturities                                                                                               |       | 445,008                     |       | 440,612                                          |       |
| Deferred  income tax payable                                                                                                           |       | 40,776                      |       | 33,008                                           |       |
| Other  liabilities                                                                                                                     |       | 6,279                       |       | 12,526                                           |       |
| Long-term  liabilities of discontinued operations                                                                                      |       | 3,330                       |       | 236                                              |       |
|                                                                                                                                   |       |                        |       |                                             |       |
| Noncontrolling  interests — redeemable                                                                                            |       | 31,546                      |       | 32,645                                           |       |
|                                                                                                                                   |       |                        |       |                                             |       |
| Stockholders’  equity:                                                                                                            |       |                        |       |                                             |       |
| Common  stock, 1,000 shares, $0.01 par value, authorized, issued and outstanding at  December 31, 2009 and December 31, 2008 |       | —                      |       | —                                           |       |
| Additional  paid-in-capital                                                                                                            |       | 242,623                     |       | 240,815                                          |       |
| Accumulated  other comprehensive loss                                                                                                  |       | (2,731                      | )          | (5,584                                           | )          |
| Retained  deficit                                                                                                                      |       | (46,479                     | )          | (24,025                                          | )          |
| Total  Symbion, Inc. stockholders’ equity                                                                                    |       | 193,413                     |       | 211,206                                          |       |
| Noncontrolling  interests — non-redeemable                                                                                        |       | 3,396                       |       | 5,365                                            |       |
| Total  equity                                                                                                                          |       | 196,809                     |       | 216,571                                          |       |
| Total  liabilities and stockholders’ equity                                                                                       |       | $                           | 790,726    |                                             | $          | 783,564 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

F-3

----

 

**SYMBION,INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

***(in thousands)***

 
| ** **                                                 | ** ** | **Year  Ended  December 31,  2009** | ** ** | **Year  Ended  December 31,  2008  (As Adjusted)** | ** ** | **August 24,  2007 to  December 31,  2007  (As Adjusted)** | ** ** | **January 1,  2007 to  August 23,  2007  (Predecessor,  As Adjusted)** | ** ** | **Year  Ended  December 31,  2007  (Combined,  As Adjusted)** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| Revenues                                                   |       | $                                        | 346,984    |                                                    | $          | 331,900                                                                   |       | $                                                                                     | 106,640    |                                                               | $          | 197,665 |   | $ | 304,305 |   |
| Operating  expenses:                                       |       |                                     |       |                                                    |       |                                                                      |       |                                                                                  |       |                                                               |       |
| Salaries  and benefits                                     |       | 96,844                                   |       | 90,510                                                  |       | 29,763                                                                    |       | 54,048                                                                                |       | 83,811                                                             |       |
| Supplies                                                   |       | 74,905                                   |       | 67,562                                                  |       | 21,932                                                                    |       | 39,103                                                                                |       | 61,035                                                             |       |
| Professional  and medical fees                             |       | 23,162                                   |       | 19,021                                                  |       | 6,468                                                                     |       | 12,120                                                                                |       | 18,588                                                             |       |
| Rent  and lease expense                                    |       | 25,603                                   |       | 22,307                                                  |       | 7,038                                                                     |       | 12,297                                                                                |       | 19,335                                                             |       |
| Other  operating expenses                                  |       | 28,070                                   |       | 26,044                                                  |       | 8,610                                                                     |       | 15,273                                                                                |       | 23,883                                                             |       |
| Cost  of revenues                                          |       | 248,584                                  |       | 225,444                                                 |       | 73,811                                                                    |       | 132,841                                                                               |       | 206,652                                                            |       |
| General  and administrative expense                        |       | 21,448                                   |       | 23,923                                                  |       | 7,912                                                                     |       | 23,961                                                                                |       | 31,873                                                             |       |
| Depreciation  and amortization                             |       | 17,314                                   |       | 15,175                                                  |       | 4,732                                                                     |       | 7,920                                                                                 |       | 12,652                                                             |       |
| Provision  for doubtful accounts                           |       | 3,354                                    |       | 3,861                                                   |       | 1,758                                                                     |       | 2,691                                                                                 |       | 4,449                                                              |       |
| (Income)  loss on equity investments                       |       | (2,318                                   | )          | (1,504                                                  | )          | (21                                                                       | )          | 5                                                                                     |       | (16                                                                | )          |
| Impairment  and loss on disposal of long-lived assets      |       | 3,505                                    |       | 1,899                                                   |       | 53                                                                        |       | 319                                                                                   |       | 372                                                                |       |
| Gain  on sale of long-lived assets                         |       | (250                                     | )          | (975                                                    | )          | (319                                                                      | )          | (596                                                                                  | )          | (915                                                               | )          |
| Proceeds  from insurance settlements, net                  |       | (430                                     | )          | —                                                  |       | —                                                                    |       | (161                                                                                  | )          | (161                                                               | )          |
| Litigation  settlements, net                               |       | —                                   |       | 893                                                     |       | —                                                                    |       | —                                                                                |       | —                                                             |       |
| Merger  transaction expenses                               |       | —                                   |       | —                                                  |       | —                                                                    |       | 7,522                                                                                 |       | 7,522                                                              |       |
| Total  operating expenses                                  |       | 291,207                                  |       | 268,716                                                 |       | 87,926                                                                    |       | 174,502                                                                               |       | 262,428                                                            |       |
| Operating  income                                          |       | 55,777                                   |       | 63,184                                                  |       | 18,714                                                                    |       | 23,163                                                                                |       | 41,877                                                             |       |
| Interest  expense, net                                     |       | (44,981                                  | )          | (43,426                                                 | )          | (14,763                                                                   | )          | (5,228                                                                                | )          | (19,991                                                            | )          |
| Income  before income taxes and discontinued operations    |       | 10,796                                   |       | 19,758                                                  |       | 3,951                                                                     |       | 17,935                                                                                |       | 21,886                                                             |       |
| Provision  (benefit) for income taxes                      |       | 7,766                                    |       | 13,256                                                  |       | (776                                                                      | )          | 4,016                                                                                 |       | 3,240                                                              |       |
| Income  from continuing operations                         |       | 3,030                                    |       | 6,502                                                   |       | 4,727                                                                     |       | 13,919                                                                                |       | 18,646                                                             |       |
| Loss  from discontinued operations, net of taxes           |       | (6,097                                   | )          | (3,643                                                  | )          | (269                                                                      | )          | (438                                                                                  | )          | (707                                                               | )          |
| Net  (loss) income                                         |       | (3,067                                   | )          | 2,859                                                   |       | 4,458                                                                     |       | 13,481                                                                                |       | 17,939                                                             |       |
| Less:  Net income attributable to noncontrolling interests |       | (19,387                                  | )          | (23,657                                                 | )          | (7,685                                                                    | )          | (15,656                                                                               | )          | (23,341                                                            | )          |
| Net  loss attributable to Symbion, Inc.                    |       | $                                        | (22,454    | )                                                       | $          | (20,798                                                                   | )          | $                                                                                     | (3,227     | )                                                                  | $          | (2,175 | ) | $ | (5,402 | ) |

 

See Notes to ConsolidatedFinancial Statements.

 

F-4

----

 

**SYMBION,INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

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

 
| ** **                                                                    | ** ** | **Symbion, Inc.  Common Stock** | ** ** | **Additional** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained  Earnings** | ** ** | **Noncontrolling  Interests-Non-** | ** ** | **Total  Shareholders’** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------|------------|---------------------------------------|------------|------------------------|------------|------------------------------------|------------|-------------------------------|------------|
| ** **                                                                    | ** ** | **Shares**                           | ** ** | **Amount**     | ** ** | **Paid-in  Capital**                  | ** ** | **Income (Loss)**      | ** ** | **(Deficit)**                      | ** ** | **redeemable**                | ** ** | **Equity** | ** ** |
| Balance at  December 31, 2006 (Predecessor, as audited)                  |       | 21,643,291                           |       | $              | 216        |                                  | $          | 212,452                |       | $                                  | 485        |                          | $          | 72,126 |   | $ | 5,244 |   | $ | 290,523 |   |
| 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                             | )          | 849                           |       | (1,326 | ) |
| Distributions to  noncontrolling interest holders                             |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | (870                          | )          | (870 | ) |
| Acquisitions and  disposal of shares of noncontrolling interests              |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | 712                           |       | 712 |   |
| Other                                                                         |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | (277                          | )          | (277 | ) |
| Elimination of retained  earnings as of merger date                           |       | —                               |       | —         |       | —                                |       | —                 |       | (69,951                            | )          | —                        |       | (69,951 | ) |
| Balance at  August 23, 2007 (Predecessor, as adjusted)                   |       | —                               |       | $              | —     |                                  | $          | —                 |       | $                                  | —     |                          | $          | — |   | $ | 5,658 |   | $ | 5,658 |   |
| 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 | ) |
| Distributions to  noncontrolling interest holders                             |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | (2,164                        | )          | (2,164 | ) |
| Acquisitions and  disposal of shares of noncontrolling interests              |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | 715                           |       | 715 |   |
| Other                                                                         |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | 279                           |       | 279 |   |
| Net loss,  August 24, 2007 to December 31, 2007 (as adjusted)       |       | —                               |       | —         |       | —                                |       | —                 |       | (3,227                             | )          | 1,447                         |       | (1,780 | ) |
| Balance at  December 31, 2007 (as adjusted)                              |       | 1,000                                |       | $              | —     |                                  | $          | 238,701                |       | $                                  | (2,188     | )                             | $          | (3,227 | ) | $ | 5,935 |   | $ | 239,221 |   |
| Amortized compensation  expense related to stock options                      |       | —                               |       | —         |       | 2,114                                 |       | —                 |       | —                             |       | —                        |       | 2,114 |   |
| Unrealized loss on  interest rate swap, net of taxes                          |       | —                               |       | —         |       | —                                |       | (3,396                 | )          | —                             |       | —                        |       | (3,396 | ) |
| Distributions to  noncontrolling interest holders                             |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | (3,555                        | )          | (3,555 | ) |
| Acquisitions and  disposal of shares of noncontrolling interests              |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | (356                          | )          | (356 | ) |
| Other                                                                         |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | 160                           |       | 160 |   |
| Net loss                                                                      |       | —                               |       | —         |       | —                                |       | —                 |       | (20,798                            | )          | 3,181                         |       | (17,617 | ) |
| Balance at  December 31, 2008 (as adjusted)                              |       | 1,000                                |       | $              | —     |                                  | $          | 240,815                |       | $                                  | (5,584     | )                             | $          | (24,025 | ) | $ | 5,365 |   | $ | 216,571 |   |
| Amortized compensation  expense related to stock options                      |       | —                               |       | —         |       | 1,297                                 |       | —                 |       | —                             |       | —                        |       | 1,297 |   |
| Unrealized loss on  interest rate swap, net of taxes                          |       | —                               |       | —         |       | —                                |       | 2,853                  |       | —                             |       | —                        |       | 2,853 |   |
| Distributions to  noncontrolling interest holders                             |       | —                               |       | —         |       | —                                |       | —                 |       | —                             |       | (2,966                        | )          | (2,966 | ) |
| Acquisitions and  disposal of shares of noncontrolling interests              |       | —                               |       | —         |       | 511                                   |       | —                 |       | —                             |       | 220                           |       | 731 |   |
| Net loss                                                                      |       | —                               |       | —         |       | —                                |       | —                 |       | (22,454                            | )          | 777                           |       | (21,677 | ) |
|                                                                          |       |                                 |       |           |       |                                  |       |                   |       |                               |       |                          |       |   |   |
| Balance at  December 31, 2009                                            |       | 1,000                                |       | $              | —     |                                  | $          | 242,623                |       | $                                  | (2,731     | )                             | $          | (46,479 | ) | $ | 3,396 |   | $ | 196,809 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

F-5

----

 

**SYMBION,INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

***(in thousands)***

 
| ** **                                                                                     | ** ** | **Year  Ended  December 31,  2009** | ** ** | **Year  Ended  December 31,  2008********(As Adjusted)** | ** ** | **August 24,  2007 to  December 31,  2007********(As Adjusted)** | ** ** | **January 1,  2007 to  August 23,  2007****(Predecessor,  As Adjusted)** | ** ** | **Year  Ended  December 31,  2007  (****Combined, As  Adjusted****)** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| **Cash flows from operating  activities:**                                                     |       |                                     |       |                                                          |       |                                                                            |       |                                                                                    |       |                                                                       |       |
| Net (loss) income                                                                              |       | $                                        | (3,067     | )                                                             | $          | 2,859                                                                           |       | $                                                                                       | 4,458      |                                                                       | $          | 13,481 |   | $ | 17,939 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities:      |       |                                     |       |                                                          |       |                                                                            |       |                                                                                    |       |                                                                       |       |
| Loss from discontinued operations                                                              |       | 6,097                                    |       | 3,643                                                         |       | 269                                                                             |       | 438                                                                                     |       | 707                                                                        |       |
| Depreciation and amortization                                                                  |       | 17,314                                   |       | 15,175                                                        |       | 4,732                                                                           |       | 7,920                                                                                   |       | 12,652                                                                     |       |
| Amortization of deferred financing costs                                                       |       | 2,004                                    |       | 4,477                                                         |       | 1,872                                                                           |       | 322                                                                                     |       | 2,194                                                                      |       |
| Non-cash payment-in-kind interest option                                                       |       | 23,263                                   |       | 17,616                                                        |       | —                                                                          |       | —                                                                                  |       | —                                                                     |       |
| Non-cash stock option compensation expense                                                     |       | 1,297                                    |       | 2,114                                                         |       | 409                                                                             |       | 10,337                                                                                  |       | 10,746                                                                     |       |
| Non–cash recognition of other comprehensive loss  into earnings                           |       | 2,853                                    |       | —                                                        |       | —                                                                          |       | —                                                                                  |       | —                                                                     |       |
| Non–cash credit risk adjustment of financial  instruments                                 |       | 1,629                                    |       | —                                                        |       | —                                                                          |       | —                                                                                  |       | —                                                                     |       |
| Non–cash losses (gains)                                                                   |       | 2,825                                    |       | 924                                                           |       | 31                                                                              |       | (305                                                                                    | )          | (274                                                                       | )          |
| Deferred income taxes                                                                          |       | 8,682                                    |       | 13,718                                                        |       | 2,217                                                                           |       | 13,637                                                                                  |       | 15,854                                                                     |       |
| Equity in earnings of unconsolidated affiliates,  net of distributions received                |       | (207                                     | )          | 333                                                           |       | (21                                                                             | )          | 5                                                                                       |       | (16                                                                        | )          |
| Provision for doubtful accounts                                                                |       | 3,354                                    |       | 3,861                                                         |       | 1,758                                                                           |       | 2,691                                                                                   |       | 4,449                                                                      |       |
| Changes in operating assets and liabilities, net of  effects of acquisitions and dispositions: |       |                                     |       |                                                          |       |                                                                            |       |                                                                                    |       |                                                                       |       |
| Accounts receivable                                                                            |       | (4,142                                   | )          | (3,536                                                        | )          | (90                                                                             | )          | (166                                                                                    | )          | (256                                                                       | )          |
| Income taxes payable                                                                           |       | 1,762                                    |       | 1,959                                                         |       | 6,096                                                                           |       | (10,402                                                                                 | )          | (11,899                                                                    | )          |
| Other assets and liabilities                                                                   |       | (2,225                                   | )          | (877                                                          | )          | (979                                                                            | )          | (5,086                                                                                  | )          | 1,528                                                                      |       |
| Net cash provided by operating activities —  continuing operations                        |       | 61,439                                   |       | 62,266                                                        |       | 20,752                                                                          |       | 32,872                                                                                  |       | 53,624                                                                     |       |
| Net cash (used in) provided by operating activities  — discontinued operations            |       | (1,021                                   | )          | (43                                                           | )          | 580                                                                             |       | 24                                                                                      |       | 604                                                                        |       |
| Net cash provided by operating activities                                                      |       | 60,418                                   |       | 62,223                                                        |       | 21,332                                                                          |       | 32,896                                                                                  |       | 54,228                                                                     |       |
| **Cash flows from investing  activities:**                                                     |       |                                     |       |                                                          |       |                                                                            |       |                                                                                    |       |                                                                       |       |
| Payments for acquisitions, net of cash acquired                                                |       | (126                                     | )          | (15,695                                                       | )          | (9,815                                                                          | )          | (14,981                                                                                 | )          | (24,796                                                                    | )          |
| Purchases of property and equipment, net                                                       |       | (9,861                                   | )          | (15,649                                                       | )          | (6,948                                                                          | )          | (7,664                                                                                  | )          | (14,612                                                                    | )          |
| Payments from unit activity of unconsolidated  facilities                                      |       | (724                                     | )          | —                                                        |       | —                                                                          |       | —                                                                                  |       | —                                                                     |       |
| Change in other assets                                                                         |       | (694                                     | )          | (1,504                                                        | )          | (841                                                                            | )          | 1,401                                                                                   |       | 560                                                                        |       |
| Net cash used in investing activities — continuing  operations                            |       | (11,405                                  | )          | (32,848                                                       | )          | (17,604                                                                         | )          | (21,244                                                                                 | )          | (38,848                                                                    | )          |
| Net cash used in investing activities —  discontinued operations                          |       | (40                                      | )          | (358                                                          | )          | (24                                                                             | )          | (36                                                                                     | )          | (60                                                                        | )          |
| Net cash used in investing activities                                                          |       | (11,445                                  | )          | (33,206                                                       | )          | (17,628                                                                         | )          | (21,280                                                                                 | )          | (38,908                                                                    | )          |
| **Cash flows from financing  activities:**                                                     |       |                                     |       |                                                          |       |                                                                            |       |                                                                                    |       |                                                                       |       |
| Principal payments on long-term debt                                                           |       | (13,741                                  | )          | (18,675                                                       | )          | (1,492                                                                          | )          | (161,555                                                                                | )          | (163,047                                                                   | )          |
| Repayment of bridge facility                                                                   |       | —                                   |       | (179,937                                                      | )          | —                                                                          |       | —                                                                                  |       | —                                                                     |       |
| Proceeds from debt issuances                                                                   |       | 678                                      |       | 13,491                                                        |       | 50                                                                              |       | 458,597                                                                                 |       | 458,647                                                                    |       |
| Proceeds from issuance of Toggle Notes                                                         |       | —                                   |       | 179,937                                                       |       | —                                                                          |       | —                                                                                  |       | —                                                                     |       |
| Payment of debt issuance costs                                                                 |       | (203                                     | )          | (4,739                                                        | )          | —                                                                          |       | (12,544                                                                                 | )          | (12,544                                                                    | )          |
| Distributions to noncontrolling interests                                                      |       | (24,971                                  | )          | (23,423                                                       | )          | (7,301                                                                          | )          | (17,185                                                                                 | )          | (24,486                                                                    | )          |
| Proceeds from unit activity of consolidated  facilities                                        |       | 307                                      |       | 219                                                           |       | 756                                                                             |       | 2,241                                                                                   |       | 2,997                                                                      |       |
| 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                                                                    |       |
| Other financing activities                                                                     |       | (4,940                                   | )          | 1,437                                                         |       | (952                                                                            | )          | 250                                                                                     |       | (702                                                                       | )          |
| Net cash (used in) provided by financing activities  — continuing operations              |       | (42,870                                  | )          | (31,690                                                       | )          | (9,384                                                                          | )          | 11,851                                                                                  |       | 2,467                                                                      |       |
| Net cash used in financing activities —  discontinued operations                          |       | (16                                      | )          | (150                                                          | )          | (11                                                                             | )          | (29                                                                                     | )          | (40                                                                        | )          |
| Net cash (used in) provided by financing activities                                            |       | (42,886                                  | )          | (31,840                                                       | )          | (9,395                                                                          | )          | 11,822                                                                                  |       | 2,427                                                                      |       |
| Net increase (decrease) in cash and cash  equivalents                                          |       | 6,087                                    |       | (2,823                                                        | )          | (5,691                                                                          | )          | 23,438                                                                                  |       | 17,747                                                                     |       |
| Cash and cash equivalents at beginning of period                                               |       | 41,833                                   |       | 44,656                                                        |       | 50,347                                                                          |       | 26,909                                                                                  |       | 26,909                                                                     |       |
| Cash and cash equivalents at end of period                                                     |       | $                                        | 47,920     |                                                          | $          | 41,833                                                                          |       | $                                                                                       | 44,656     |                                                                       | $          | 50,347 |   | $ | 44,656 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

F-6

----

 

**SYMBION,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**December 31,2009**

 

**1.  Organization**

 

Symbion, Inc. (the “Company”), through its whollyowned subsidiaries, owns interests in partnerships and limited liabilitycompanies and operates a national network of short stay surgical facilities injoint ownership with physicians and physician groups, hospitals and hospitalsystems.  As of December 31, 2009,the Company owned and operated 59 surgical facilities, including 55 ambulatorysurgery centers and four surgical hospitals, and managed eight additionalambulatory surgery centers and two physician networks.  The Company owns a majority ownershipinterest in 36 of the 59 surgical facilities and consolidates 52 of thesesurgical facilities for financial reporting purposes, of which 51 are includedin 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 publicly 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 combined 2007financial statements are for comparison purposes only as they represent thecombination of different bases 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 equity contribution by Crestview Symbion Holdings,L.L.C.;

·                  $40.0 million cash equity contribution by The Northwestern Mutual LifeInsurance Company;

·                  $60.0 million cash equity contribution by other co-investors;

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

 

F-7

----

 

·                  Senior secured credit facility totaling $350.0 million, of which $250.0million was drawn at the closing of the Merger; and

·                  $175.0 million bridge loan credit facility that was drawn at theclosing of the Merger.

 

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

 

·                  Pay stockholders of the Company for shares of common stock not rolledover under the terms of the merger agreement;

·                  Pay option holders of the Company for outstanding options not rolledover, whether vested or unvested, the difference between $22.35 per share andthe per share exercise price of the option;

·                  Pay holders of restricted stock of the Company for shares of restrictedstock, whether vested or unvested, at $22.35 per share;

·                  Pay warrant holders of the Company for outstanding warrants, whethervested or unvested, the difference between $22.35 per share and the per shareexercise price of the warrant;

·                  Repay all outstanding debt (totaling $129.0 million) under the formersenior secured credit agreement for which the maturity date accelerated as aresult of the Merger; and

·                  Pay the fees and expenses related to the Merger and the financingtransactions.

 

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********(Predecessor)** | ** ** | **Year  Ended  December 31,  2007  (Combined)** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Cost  of revenues                                    |       | $                                                                              | 710        |                                                 | $          | 710 |   |
| General  and administrative expense                  |       | 8,152                                                                          |       | 8,152                                                |       |
| Merger  transaction expenses                         |       | 7,522                                                                          |       | 7,522                                                |       |
| Net  income attributable to noncontrolling interests |       | (329                                                                           | )          | (329                                                 | )          |
| Total                                                |       | $                                                                              | 16,055     |                                                 | $          | 16,055 |   |

 

Additionally, the Company paid $7.0 million in costsincurred by Crestview in connection with the Merger which were recorded asadditional purchase price.

 

**3.  Significant Accounting Policies and Practices**

 

**Basis of Presentation and Use ofEstimates**

 

The accompanying consolidated financial statementshave been prepared in accordance with generally accepted accounting principles(“GAAP”).  The preparation of financialstatements in conformity with U.S. GAAP requires management to make estimatesand assumptions that affect the amounts reported in the accompanyingconsolidated financial statements and accompanying footnotes.  Examples include, but are not limited to,estimates of accounts receivable allowances, professional and generalliabilities and the estimate of deferred tax assets or liabilities.  In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been included.  All adjustments are of a normal, recurringnature.  Actual results could differ fromthose estimates.

 

F-8

----

 

**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 liabilitycompanies.  The consolidated financialstatements include the accounts of variable interest entities in which theCompany is the primary beneficiary, under the provisions of ASC Topic 810, *Consolidation*.  The variableinterest entities are surgical facilities located in the states of Florida andNew York.  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, 2009 and December 31, 2008 include assets of $14.5million and $17.6 million, respectively, and liabilities of $4.4 million and$8.3 million, respectively, related to the variable interest entities.  All significant intercompany balances andtransactions are eliminated in consolidation.

 

**FairValue of Financial Instruments**

 

The fair value of a financial instrument is the amountat which the instrument could be exchanged in an orderly transaction betweenmarket participants to sell the asset or transfer the liability. The Companyuses fair value measurements based on quoted prices in active markets foridentical assets or liabilities (Level 1), or inputs other than quotedprices in active markets that are either directly or indirectly observable(Level 2), or unobservable inputs in which little or no market data exists,therefore requiring an entity to develop its own assumptions (Level 3),depending on the Nature of the item being valued.

 

The carrying amounts reported in the accompanyingconsolidated balance sheets for cash, accounts receivable and accounts payableapproximate fair value because of their 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 of December 31,2009 and 2008 were as follows:

 
| ** **               | ** ** | **Carrying Amount  December 31,** | ** ** | **Fair Value  December 31,** | ** ** |
|--------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **2009**                               | ** ** | **2008**                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Tranche  A, term loan    |       | $                                      | 115,438    |                              | $          | 117,939 |   | $ | 103,120 |   | $ | 70,763 |   |
| Tranche  B, term loan    |       | 116,687                                |       | 117,938                           |       | 104,237 |   | 70,763 |   |
| Senior  PIK Toggle Notes |       | 206,967                                |       | 184,635                           |       | 156,260 |   | 73,854 |   |
|                          |            |                                        |            |                                   |            |  |  |  |  |  |  |  |  |

 

The fair value of the term loans and Toggle Notes werebased on quoted prices at December 31, 2009 and 2008.  The Company’s long-term debt instruments arediscussed further in Note 8.

 

The Company determines the fair value of its interestrate swap based on the amount at which it could be settled, which is consideredto be the exit price.  This price isbased upon observable market assumptions and appropriate valuation adjustmentsfor credit risk.  The Company hascategorized its interest rate swap as a Level 2 financial instrument.  See Note 8 for further discussion regardingthe interest rate swap.

 

F-9

----

 

**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, 2009 and December 31, 2008 were as follows(in thousands):

 
| ** **           | ** ** | **December 31,** | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Surgical  facilities |       | $                     | 36,039     |   | $ | 34,053 |   |
| Physician  networks  |       | 597                   |       | 654 |   |
| Total                |       | $                     | 36,636     |   | $ | 34,707 |   |

 

The following table sets forth by type of payor thepercentage of the Company’s accounts receivable for consolidated surgicalfacilities as of December 31, 2009 and December 31, 2008:

 
| ** **         | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Private  insurance |       | 59                    | %          | 59 | % |
| Government         |       | 15                    |       | 15 |   |
| Self-pay           |       | 13                    |       | 15 |   |
| Other              |       | 13                    |       | 11 |   |
| Total              |       | 100                   | %          | 100 | % |

 

**Allowance for Doubtful Accounts**

 

The Company’s policy is to review the standard agingschedule, by surgical facility, to determine the appropriate allowance fordoubtful accounts.  Patient accountbalances are reviewed for delinquency based on contractual terms.  This review is supported by an analysis of theactual 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.

 

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: |       |                                                        |       |                                                          |       |                                             |       |      |       |                                                        |       |
| 2007                          |       | $                                                           | 24,576     |                                                          | $          | 4,449                                            |       | $         | 938        |                                                        | $          | (14,355 | ) | $ | 15,608 |   |
| 2008                          |       | 15,608                                                      |       | 3,861                                                         |       | 152                                              |       | (7,628    | )          | 11,993                                                      |       |
| 2009                          |       | 11,993                                                      |       | 3,354                                                         |       | —                                           |       | (5,488    | )          | 9,859                                                       |       |
|                               |            |                                                             |            |                                                               |            |                                                  |            |           |            |                                                             |            |  |  |  |  |  |

 

----

(1)          Relates toallowances for doubtful accounts recorded under the purchase method ofaccounting for acquired entities.

 

F-10

----

 

**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):

 
| ** **        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Prepaid expenses  |       | $        | 5,072      |     | $          | 4,947 |   |
| Other receivables |       | 7,439    |       | 7,772    |       |
|              |       | $        | 12,511     |     | $          | 12,719 |   |

 

**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 $17.3 million, $15.2 million and $12.7 millionfor the periods ended December 31, 2009, 2008 and 2007, respectively.

 

*Impairment of Long-Lived Assets*

 

When events or circumstances indicate that thecarrying value of certain property and equipment might be impaired, the Companyprepares an expected undiscounted cash flow projection.  If the projection indicates that the recordedamounts of the property and equipment are not expected to be recovered, theseamounts are reduced to estimated fair value. The cash flow estimates and discount rates incorporate management’s bestestimates, using appropriate and customary assumptions and projections at thedate of evaluation.  In 2009, the Companyrecorded an impairment of $2.4 million related to its equity method investmentlocated in Arcadia, California.   Thisimpairment charge is included in the impairment and loss on disposal oflong-lived assets.  The Company recordedno impairment charges for 2008 and 2007.

 

**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 tests forimpairment annually as of December 31, or more frequently if certainindicators are encountered.  See Note 6for further discussion of our goodwill impairment valuation.

 

*Other Intangible Assets*

 

The Company recorded intangible assets of $19.5million 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.

 

Unfavorable leasehold rights arising from the Merger were$869,000.  Amortization of $83,468 and$110,835 was recorded in 2009 and 2008, respectively.  The unamortized balance at December 31,2009 totaled $674,697.  The unfavorableleasehold rights are amortized on a straight-line basis over the life of theapplicable lease and reflected as a component of cost of revenues fromcontinuing operations.  Scheduledamortization expense for the five years ending December 31, 2010 to 2014is $83,468 per year.

 

F-11

----

 

**Noncontrolling 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 noncontrolling interests in the earnings (losses) of such surgicalfacilities.

 

**Investments in and Advances toAffiliates**

 

As of December 31, 2009 and 2008, the Companyheld interests in eight and nine surgical facilities, respectively, in which itexercised significant influence. However, the Company does not consolidatethese facilities because of a lack of control. The Company accounts for such investments under the equity method.  As of both December 31, 2009 and 2008,the Company owned less than 20% of three of these surgical facilities, butexerted significant influence through board of director representation, as wellas an agreement to manage the surgical facilities.

 

**Other Assets (Liabilities)**

 

Other assets at December 31, 2009 and 2008included approximately $9.5 million and $11.3 million, respectively, related todeferred financing costs.  Deferredfinancing costs primarily relate to the Company’s senior secured creditfacility and the issuance of the Toggle Notes. Deferred financing costs consistof prepaid interest, loan fees and other costs of financing that are amortizedover the term of the related financing agreements.  The deferred financing costs are amortized asinterest expense on the accompanying consolidated statements of operations.

 

Other liabilities at 2008 included approximately $7.0million related to the fair value of the Company’s interest rate swap.  The Company’s interest rate swap agreementwas entered into to reduce the interest rate risk associated with the interestrate on the Company’s senior secured credit facility.  In 2009, the interest rate swap liability isconsidered a current liability, as it expires in October 2010.  As such, the liability is included in otheraccrued expenses as of December 31, 2009.

 

**OtherAccrued Expenses**

 

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

 
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Interest payable              |       | $        | 9,945      |     | $          | 9,787 |   |
| Current taxes payable         |       | 5,782    |       | 2,284    |       |
| Self-insurance  liabilities   |       | 2,651    |       | 2,325    |       |
| Interest rate swap  liability |       | 5,045    |       | —   |       |
| Other accrued expenses        |       | 7,929    |       | 7,844    |       |
|                          |       | $        | 31,352     |     | $          | 22,240 |   |

 

**ComprehensiveIncome**

 

The Company reports other comprehensive income as ameasure of changes in stockholders’ equity that result from recognizedtransactions.  The Company entered intoan interest rate swap agreement on October 31, 2007.  The value of the interest rate swap wasrecorded as a current liability of $5.0 million at December 31, 2009.  Prior to 2009, the change in the fair valueof the interest rate swap was recorded to comprehensive income, net oftaxes.  Effective in 2009, the Companyrecords the current market value of the interest rate swap as an adjustment tointerest expense in the accompanying consolidated statement of operations.

 

F-12

----

 

**Revenues**

 

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

 
| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Patient  service revenues   |       | $                                     | 332,708    |   | $ | 315,869 |   | $ | 289,271 |   |
| Physician  service revenues |       | 6,464                                 |       | 6,548 |   | 5,623 |   |
| Other  service revenues     |       | 7,812                                 |       | 9,483 |   | 9,411 |   |
| Total  revenues             |       | $                                     | 346,984    |   | $ | 331,900 |   | $ | 304,305 |   |

 

*Patient Service Revenues*

 

Approximately 96% 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.

 

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

 
| ** **                      | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2009**                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| Professional services  revenues |       | $                                      | 18,736     |   | $ | 18,623 |   | $ | 16,243 |   |
| Contractual adjustments         |       | (9,414                                 | )          | (9,294 | ) | (7,685 | ) |
| Clinic revenue                  |       | 9,322                                  |       | 9,329 |   | 8,558 |   |
| Medical group retainage         |       | (2,858                                 | )          | (2,781 | ) | (2,935 | ) |
| Physician service  revenues     |       | $                                      | 6,464      |   | $ | 6,548 |   | $ | 5,623 |   |

 

*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 andmanagement services the Company provides to physician networks for which theCompany is not 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.

 

F-13

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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,** | ** ** |
|--------------------|------------|---------------------------------------|------------|
| ** **         | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Private  Insurance |       | 71                                    | %          | 72 | % | 73 | % |
| Government         |       | 24                                    |       | 22 |   | 21 |   |
| Self-pay           |       | 4                                     |       | 4 |   | 4 |   |
| Other              |       | 1                                     |       | 2 |   | 2 |   |
| Total              |       | 100                                   | %          | 100 | % | 100 | % |

 

**SupplementalCash Flow Information**

 

The Company made cash income tax payments of $288,000,$409,000 and $8.3 million for the years ended December 31, 2009, 2008 and2007, respectively.  The Company madeinterest payments of $18.2 million, $33.8 million and $17.0 million for the yearsended December 31, 2009, 2008 and 2007 respectively.  The Company entered into capital leases for$408,000, $1.9 million and $908,000 of equipment for the years ended December 31,2009, 2008 and 2007, respectively.

 

**Recently Adopted Accounting Guidelines**

 

On September 30,2009, we adopted changes issued by the Financial Accounting Standards Board (“FASB”)to the authoritative hierarchy of GAAP. These changes establish the FASB Accounting Standards CodificationTM (“Codification”)as the source of authoritative accounting principles recognized by the FASB tobe applied by nongovernmental entities in the preparation of financialstatements in conformity with GAAP.  Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants.  The FASB will no longerissue new standards in the form of Statements, FASB Staff Positions, orEmerging Issues Task Force Abstracts; instead the FASB will issue AccountingStandards Updates.  Accounting StandardsUpdates will not be authoritative in their own right as they will only serve toupdate the Codification.  These changesand the Codification itself do not change GAAP. Other than the manner in which new accounting guidance is referenced,the adoption of these changes had no impact on the financial statements.

 

On January 1, 2009, we adopted changes issued bythe FASB to noncontrolling interests in consolidated financial statements.  These changes require, among other items,that a noncontrolling interest be included within equity separate from theparent’s equity; consolidated net income be reported at amounts inclusive ofboth the parent’s and noncontrolling interest’s shares; and, separately, theamounts of consolidated net income attributable to the parent andnoncontrolling interest all be reported on the consolidated statement ofoperations.  The implementation of thesechanges also results in the cash flow impact of certain transactions withnoncontrolling interests being classified within financing activities.  Those changes to the statement of cash flowsinclude: a) distributions to noncontrolling interest partners were previouslyrecorded as an operating activity and are now included in the financingactivities section; and b) acquisitions or sales of equity interests inconsolidated subsidiaries in which there were no changes of control werepreviously recorded in the investing section and are now presented as financingactivities.

 

We could be obligated,under the terms of the partnership and operating agreements governing our jointventures, upon the occurrence of various fundamental regulatory changes, topurchase some or all of the noncontrolling interests related to ourconsolidated subsidiaries.  Theserepurchase requirements are limited to the portions of our facilities that areowned by physicians who perform surgery at our facilities and would betriggered by regulatory changes making the existing ownership structureillegal.  While we are not aware ofevents that would make the occurrence of such a change probable, regulatorychanges are outside of our control. Accordingly, the noncontrolling interests subject to these repurchaseprovisions, and the income attributable to those interests, have beenclassified outside of equity on our consolidated balance sheets.

 

F-14

----

 

Effective January 1, 2009, we adopted changesissued by the FASB to accounting for business combinations.  These changes retain the purchase method ofaccounting for acquisitions, but require a number of changes, including changesin the way assets and liabilities are recognized in the purchase accounting aswell as requiring the expensing of acquisition-related costs as incurred.  Furthermore, these changes provideguidance for recognizing and measuring the goodwill acquired in the businesscombination and determining what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination.  We have appliedthese changes to the acquisitions completed during the year ended December 31,2009.

 

Effective January 1, 2009, we adopted changesissued by the FASB to the method of determination of the useful life of intangibleassets.  This guidance amends the factorsthat should be considered in determining the useful life of a recognizedintangible asset.  The intent of thisguidance is to improve consistency between the useful life of a recognizedintangible asset and the period of expected cash flows used to measure the fairvalue of the asset.  The adoption of thisguidance did not have a material impact on our consolidated results ofoperations or financial position.

 

Effective January 1,2009, we adopted changes issued by the FASB to**equity method investmentaccounting.  These changes clarifythe accounting for certain transactions and impairment considerations involvingequity method investments.  The adoptionof this guidance did not have a material impact on our consolidated financialposition, results of operations, or cash flows.

 

Effective January 1,2009, we adopted changes issued by the FASB to disclosures about derivativeinstruments and hedging activities.  Thisguidance requires enhanced disclosures about an entity’s derivative and hedgingactivities and thereby improves the transparency of financial reporting.  The objective of the guidance is to provideusers of the financial statements with an enhanced understanding of how and whyan entity uses derivative instruments, how derivative instruments and relatedhedged items are accounted for, and how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows.  We are adhering to theenhanced disclosure requirements regarding derivative instruments and hedgingactivities.

 

In April 2009, weadopted changes issued by the FASB to interim disclosures about fair value offinancial instruments, which require an entity to provide interim disclosuresabout the fair value of all financial instruments within the scope of theguidance, and to include disclosures related to the methods and significantassumptions used in estimating those instruments.  Other than the required disclosures, thesechanges had no impact on the financial statements.

 

On June 30, 2009, we adopted changes issued bythe FASB to subsequent events*. *This guidance establishes generalstandards of accounting and disclosures of events that occur after the balancesheet date but before the financial statements are issued.  We evaluated all subsequent events thatoccurred after the balance sheet date through the filing of this Annual Reporton Form 10-K on March 31, 2010.

 

**Reclassifications**

 

Certain reclassifications have been made to the comparativeperiods’ financial statements to conform to the 2009 presentation.  The reclassifications primarily related tothe presentation of discontinued operations and noncontrolling interests andhad no impact on the Company’s financial position or results of operations.

 

**4. Acquisitions and Equity Method Investments**

 

Effective May 1, 2009, the Company acquired a49.8% ownership interest in a surgical hospital in Austin, Texas for $350,000plus the assumption of $2.6 million of debt. The acquisition included gross accounts receivable of $7.1 million.  The Company recorded the receivables at $1.8million, which was deemed to be fair value of the receivables at the date ofthe acquisition.  This fair valueestimate was assumed by the Company to be fully collectible as of theacquisition date.  The acquisition wasfinanced with cash from operations.  TheCompany, as general partner, has the ability to direct the financial affairs ofthe facility, and as such, this facility is consolidated for financial reportingpurposes.

 

F-15

----

 

EffectiveFebruary 21, 2008, the Company acquired ownership in five surgicalfacilities specializing in spine, orthopedic and pain management procedureslocated in Boulder, Colorado; Honolulu, Hawaii; Bristol and Nashville,Tennessee; and Seattle, Washington for an aggregate of $5.8 million and theassumption of $4.7 million of debt.  TheCompany acquired an ownership ranging from 20.0% to 50.0% in these surgicalfacilities.  Four of these facilities areconsolidated for financial 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 ofacquisition.  These acquisitions placedthe Company in new markets or expanded the Company’s presence in currentmarkets.

 

The Company also engages in investing transactionsthat are not business combinations. These transactions primarily consist of acquisitions and sales ofnon-controlling equity interests in surgical facilities and the investment ofadditional cash in surgical facilities under development.  During the first quarter of 2009, the Companyacquired an incremental ownership of 18.0% in its surgical facility located inWestlake Village, California for $416,000.  Prior to the acquisition, the Company owned 1.0% of this facility.  The acquisition was financed with cash fromoperations.

 

Effective September 1,2009, the Company acquired an ownership of 28.8% in a surgical facility locatedin Gresham, Oregon for $525,000.  Theacquisition was financed with cash from operations.  The Company accounts for this investmentunder the equity method.

 

During 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.

 

Additionallyduring 2008, the Company acquired an incremental ownership of 18.5% in itssurgical facility located in Irvine, California for $5.1 million.  Through this acquisition, the Companyobtained a controlling interest in the facility.  The acquisition was treated as a businesscombination and the Company began consolidating the facility for financialreporting purposes in 2008.  The Companyalso acquired an incremental ownership in three other of its existing surgicalfacilities located in California.  TheCompany acquired an incremental ownership of 10.7% in two surgical facilitieslocated in Beverly Hills, California for an aggregate of $2.5 million and a6.4% incremental ownership in a surgical facility located in Encino, Californiafor $2.0 million.  Prior to theacquisitions, the Company owned 55.1% and 57.0% of the two Beverly Hills,California surgical facilities and 55.5% of the Encino, California surgicalfacility.

 

**5. Discontinued Operations**

 

In February 2009, the Company completed itsshutdown of the Englewood, Colorado facility. The Company recorded a loss on the disposal of $5.9 million, whichincludes an accrual of $4.6 million for future contractual obligations under afacility operating lease.  As of December 31,2009, this lease liability was $3.9 million. As of December 31, 2009, theCompany owned one surgical facility that is classified as discontinuedoperations.  The results of operations inthese centers are presented net of income taxes in the accompanyingconsolidated financial statements as discontinued operations.  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 loss or cash flows.

 

Revenues, the loss on operations before income taxes,income tax provision (benefit), loss (gain) on sale, net of tax and the lossfrom discontinued operations net of tax for the years ended December 31,2009, 2008 and 2007 related to discontinued operations were as follows (inthousands):

 
| ** **                                       | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2009**                              | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  revenues                                    |       | $                                     | 4,508      |   | $ | 7,463 |   | $ | 9,803 |   |
| Loss  on operations, before tax                  |       | $                                     | (240       | ) | $ | (792 | ) | $ | (1,522 | ) |
| Income  tax provision (benefit)                  |       | $                                     | 17         |   | $ | (676 | ) | $ | (580 | ) |
| (Loss)  gain on sale, net of tax                 |       | $                                     | (5,840     | ) | $ | (3,527 | ) | $ | 235 |   |
| Loss  from discontinued operations, net of taxes |       | $                                     | (6,097     | ) | $ | (3,643 | ) | $ | (707 | ) |

 

**6. Goodwill and Intangible Assets**

 

The Company tests its goodwill and intangible assetsfor impairment at least annually, or more frequently if certain indicatorsarise.  The Company tests goodwill at thereporting unit level, which the Company concludes is the consolidated resultsof Symbion, Inc.  The Companycompleted the required annual impairment testing as of December 31, 2009,2008 and 2007.

 

During 2009, the Company performed its impairment testby developing a fair value estimate of the business enterprise as of December 31,2009 using a discounted cash flow approach and corroborated this analysis usinga market-based approach.  As the Companydoes not have publicly traded equity from which to derive a market value, anassessment of peer company data was performed whereby the Company selectedcomparable peers based on growth and leverage ratios, as well as industryspecific characteristics.  Based on thecomparable peer market trading data, the Company identified a reasonableestimate for the market trading price of the Company as of December 31,2009.  This market-based approach wasthen used to corroborate the results of the discounted cash flowsapproach.  No impairment was indicated asof December 31, 2009.

 

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

 
| Balance  at December 31, 2008 |   | $     | 541,831 |   |
|------------------------------------|--------|-------|---------|--------|
| Purchase  price allocations        |   | 3,583 |    |
| Disposals                          |   | (176  | )       |
| Balance  at December 31, 2009 |   | $     | 545,238 |   |

 

F-16

----

 

As a result of the acquisition of a surgical hospitalin Austin, Texas during the second quarter of 2009, the Company recordedgoodwill of $4.2 million.  The Company isin the process of performing a valuation of certain assets of the facility todetermine the final purchase price allocation. Disposals of goodwill relate to ceasing operations at the Englewood,Colorado surgical facility in February 2009.

 

The Company has intangible assets related to thecertificates of need for certain of its facilities of $19.5 million.  These indefinite-lived assets are notamortized but are assessed for possible impairment as part of the Company’simpairment analysis.

 

**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 31,2009 are as follows (in thousands):

 
| 2010                          |   | $      | 23,498  |   |
|-------------------------------|--------|--------|---------|--------|
| 2011                          |   | 22,575 |    |
| 2012                          |   | 21,755 |    |
| 2013                          |   | 18,287 |    |
| 2014                          |   | 13,097 |    |
| Thereafter                    |   | 48,302 |    |
| Total minimum  lease payments |   | $      | 147,514 |   |

 

Total rent and lease expense was $25.6 million, $22.3 million and $19.3 million for theperiods ended December 31, 2009, 2008 and 2007, respectively.  The Company incurred rental expense of $5.6million, $4.6 million and $4.7 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, 2009, 2008 and 2007,respectively.

 

**8.  Long-Term Debt**

 

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

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Senior secured credit facility |       | $                     | 232,125    |   | $ | 235,875 |   |
| Senior PIK toggle notes        |       | 206,967               |       | 184,635 |   |
| Notes payable to banks         |       | 14,433                |       | 17,636 |   |
| Secured term loans             |       | 2,628                 |       | 3,213 |   |
| Capital lease obligations      |       | 9,067                 |       | 11,458 |   |
|                           |       | 465,220               |       | 452,817 |   |
| Less current maturities        |       | (20,212               | )          | (12,205 | ) |
|                           |       | $                     | 445,008    |   | $ | 440,612 |   |

 

*SeniorSecured 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 

 

F-17

----

 

million.  TheCompany is the borrower under the senior secured credit facility, and all ofits wholly owned subsidiaries are guarantors. Under the terms of the senior secured credit facility, entities thatbecome wholly owned 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 $1.6million through September 30, 2010, quarterly payments of $4.7 millionfrom December 31, 2010 through September 30, 2011, quarterly paymentsof $6.3 million from December 31, 2011 through 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 quarterlyprincipal payments of $312,500 through June 30, 2014 and a balloon paymentof $111.1 million on August 23, 2014.

 

At the Company’s option, the term loans bear interest at the lender’s alternate base ratein effect 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 in annualadvisory and management agreement payments. The Company may also make additional payments to Holdings in theaggregate amount of $5.0 million throughout the term of the senior securedcredit facility.

 

As of December 31, 2009, the amount outstandingunder the senior secured credit facility was $232.1 million with an interestrate on the borrowings of 3.5%.  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 31,2009, 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.  Theeffective date of the interest rate swap was October 31, 2007, and it is scheduledto expire on October 31, 2010.  Theinterest rate swap effectively fixes the Company’s LIBOR interest rate on the$150.0 million of variable debt at a rate of 4.7%.

 

The FASB established a three-tier fair valuehierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined asobservable inputs such as quoted prices in active markets; Level 2,defined as inputs other than quoted prices in active markets that are eitherdirectly or indirectly observable; and Level 3, defined as unobservableinputs in which little or no market data exists, therefore requiring an entityto 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 as the exit price.  This price isbased upon observable market assumptions and appropriate valuation adjustmentsfor credit risk.  The Company has categorizedits interest rate swap as Level 2.

 

F-18

----

 

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 31,2009, the Company recorded a credit risk adjustment of $189,000 to reduce thecarrying value of the swap liability, reflecting the liability at fair value.

 

The Company does not hold or issue derivativefinancial instruments for trading purposes. The fair value of the Company’s interest rate swap at December 31,2009 and December 31, 2008 reflected a liability of approximately$5.0 million and $7.0 million, respectively, and is included in otheraccrued expenses and other liabilities in the accompanying consolidated balancesheets as of December 31, 2009 and 2008, respectively.  The interest rate swap reflects a liabilitybalance as of December 31, 2009 and 2008 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 of this cash flow hedgeinstrument on a quarterly basis.  Due tothe significant decline in benchmark interest rates, the Company elected, as ofJanuary 28, 2009, an interest term under the provisions of the hedged termdebt agreement, different than the terms of the hedging instrument.  The Company has determined that thisbenchmark interest rate swap would no longer result in effectiveness within anacceptable range under the authoritative guidance, on a prospective basis.  As of December 31, 2008, the Companydetermined the hedge instrument to be ineffective and discontinued hedgeaccounting treatment.  In January 2009,the Company began recognizing a ratable portion of the $7.0 million inaccumulated other comprehensive income as additional interest expense, over theremaining life of the hedging instrument which expires October 31,2010.  Also in January 2009, theCompany began recording into earnings the mark-to-market adjustment to reflectthe fair value of the hedging instrument. During 2009, the Company recorded a mark-to-market adjustment of $3.6million as a reduction of interest expense and additional interest expense of $3.8million related to the amortization of the interest rate swap balance inaccumulated other comprehensive income.

 

*SeniorPIK 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.

 

Upon issuance of the Toggle Notes, the Company electedto exercise the PIK option by increasing the principal amount of the ToggleNotes in lieu of making scheduled interest payments of $4.7 million for theinterest period through August 23, 2008. On August 23, 2008, the Company elected the PIK option of theToggle Notes in lieu of making scheduled interest payments for the interestperiod from August 23, 2008 to February 23, 2009.  This election increased the principal due onthe Toggle Notes by $10.8 million in the first quarter of 2009.  On February 23, 2009, the Companyelected the PIK option of the Toggle Notes in lieu of making scheduled interestpayments for the interest period from February 23, 2009 to August 23,2009.  This election increased theprincipal due on the Toggle Notes by $11.5 million in the third quarter of2009.  On August 23, 2009, theCompany elected the PIK option of the Toggle Notes in lieu of making scheduledinterest payments for the interest period from August 23, 2009 to February 23,2010.  The Company has accrued $8.6million in interest in other accrued expenses as of December 31, 2009 andwill reclassify the total accrued interest to the principal balance of theToggle Notes on February 23, 2010.

 

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 existing subsidiarieshave guaranteed the Toggle Notes on a senior basis, as required by theindenture.  The indenture also requiresthat certain of the Company’s future subsidiaries guarantee the Toggle Notes ona senior basis.  Each guarantee isunsecured and ranks equally with senior indebtedness of the guarantor, seniorto all of the guarantor’s subordinated indebtedness and effectively junior toits secured indebtedness to the extent of the value of the collateral securingsuch indebtedness.

 

F-19

----

 

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.

 

At December 31, 2009, the Company was incompliance with all material covenants required by each of the senior securedcredit facility and the Toggle Notes.

 

*NotesPayable to Banks*

 

Certain subsidiaries of the Company have outstandingbank indebtedness of $14.4 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 $9.4 million of this debt.

 

*CapitalLease Obligations*

 

The Company is liable to various vendors for severalequipment leases.  The outstandingbalance related to these capital leases at December 31, 2009 and 2008 was$9.1 million and $11.5 million, respectively. The carrying value of the assets was $5.9 million and $4.5 million as ofDecember 31, 2009 and 2008, respectively.

 

**Other Long-Term Debt Information**

 

Scheduled maturities of obligations as of December 31,2009 are as follows (in thousands):

 
| ** ** | ** ** | **Long-term  Debt** | ** ** | **Capital  Lease********Obligations** | ** ** | **Total** | ** ** |
|------------|------------|---------------------|------------|---------------------------------------|------------|-----------|------------|
| 2010       |       | $                   | 16,036     |                                  | $          | 4,176     |       | $ | 20,212 |   |
| 2011       |       | 24,047              |       | 2,441                                 |       | 26,488    |       |
| 2012       |       | 41,776              |       | 1,588                                 |       | 43,364    |       |
| 2013       |       | 54,174              |       | 624                                   |       | 54,798    |       |
| 2014       |       | 112,390             |       | 52                                    |       | 112,442   |       |
| Thereafter |       | 207,730             |       | 186                                   |       | 207,916   |       |
|       |       | $                   | 456,153    |                                  | $          | 9,067     |       | $ | 465,220 |   |

 

**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 $288,000 and $409,000 for theperiods ended December 31, 2009 and 2008, respectively.

 

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

 
| ** **                    | ** ** | **Year  Ended  December 31,  2009** | ** ** | **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)** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Current:                      |       |                                     |       |                                    |       |                                                  |       |                                                                     |       |                                                              |       |
| Federal                       |       | $                                        | (111       | )                                       | $          | (1,756                                                | )          | $                                                                        | (3,347     | )                                                                 | $          | 1,199 |   | $ | (2,148 | ) |
| State                         |       | 673                                      |       | 453                                     |       | 354                                                   |       | 348                                                                      |       | 702                                                               |       |
| Deferred                      |       | 7,204                                    |       | 14,559                                  |       | 2,217                                                 |       | 2,469                                                                    |       | 4,686                                                             |       |
| Income tax  (benefit) expense |       | $                                        | 7,766      |                                    | $          | 13,256                                                |       | $                                                                        | (776       | )                                                                 | $          | 4,016 |   | $ | 3,240 |   |

 

F-20

----

 

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,  2009** | ** ** | **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)** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Tax at U.S.  statutory rates                         |       | $                                        | 3,810      |                                     | $          | 6,915                                                 |       | $                                                                        | 1,383      |                                                              | $          | 6,277 |   | $ | 7,660 |   |
| State income  taxes, net of federal tax benefit      |       | 565                                      |       | 993                                      |       | (171                                                  | )          | 90                                                                       |       | (81                                                               | )          |
| Change in valuation  allowance                       |       | 10,192                                   |       | 14,137                                   |       | 402                                                   |       | 193                                                                      |       | 595                                                               |       |
| Non-deductible  transaction costs                    |       | —                                   |       | —                                   |       | —                                                |       | 2,947                                                                    |       | 2,947                                                             |       |
| Net income  attributable to noncontrolling interests |       | (6,786                                   | )          | (8,280                                   | )          | (2,690                                                | )          | (5,479                                                                   | )          | (8,169                                                            | )          |
| Other                                                |       | (15                                      | )          | (509                                     | )          | 300                                                   |       | (12                                                                      | )          | 288                                                               |       |
|                                                 |       | $                                        | 7,766      |                                     | $          | 13,256                                                |       | $                                                                        | (776       | )                                                                 | $          | 4,016 |   | $ | 3,240 |   |

 

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):

 
| ** **                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                 |       |     |       |     |       |
| Depreciation                                          |       | $        | —     |     | $          | — |   |
| Accrued vacation  and bonus                           |       | 296      |       | 798      |       |
| Net operating  loss carryforwards                     |       | 26,116   |       | 14,801   |       |
| Deferred project  costs                               |       | 84       |       | 317      |       |
| Deferred rent                                         |       | 979      |       | —   |       |
| Interest rate  swap                                   |       | 1,964    |       | 2,518    |       |
| Capital loss  carryforward                            |       | 5,619    |       | 5,729    |       |
| Stock option  compensation                            |       | 3,139    |       | 2,771    |       |
| Other deferred  assets                                |       | 1,084    |       | 401      |       |
| Total gross  deferred tax assets                      |       | 39,281   |       | 27,335   |       |
| Less: Valuation  allowance                            |       | (37,371  | )          | (24,481  | )          |
| Total deferred  tax assets                            |       | 1,910    |       | 2,854    |       |
| Deferred tax  liabilities:                            |       |     |       |     |       |
| Depreciation on  property and equipment               |       | (193     | )          | (723     | )          |
| Amortization of  intangible assets                    |       | (2,241   | )          | (2,364   | )          |
| Basis  differences of partnerships and joint ventures |       | (39,150  | )          | (31,350  | )          |
| Other  liabilities                                    |       | (670     | )          | (600     | )          |
| Total deferred  tax liabilities                       |       | (42,254  | )          | (35,037  | )          |
| Net deferred tax  liability                           |       | $        | (40,344    | )        | $          | (32,183 | ) |

 

As of December 31, 2009, the Company has recordedcurrent deferred tax assets and net non-current deferred tax liabilities of$432,000 and $40.8 million, respectively. The Company had federal net operating loss carryforwards of $56.0million as of December 31, 2009, which expire between 2027 and 2029.  The Company had state net operating losscarryforwards of $150.7 million as of December 31, 2009, which expirebetween 2009 and 2029.  The Company hadcapital loss carryforwards of $16.1 million as of December 31, 2009, whichexpire between 2009 and 2013.

 

The Company recorded a valuation allowance againstdeferred tax assets at December 31, 2009 and December 31, 2008totaling $37.4 and $24.5 million, respectively, which represents an increase ofapproximately $12.9 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.

 

F-21

----

 

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.

 

Forthe year ended December 31, 2009, the Company recorded income tax expenseof $16,961 related to discontinued operations.

 

A reconciliation of the beginning and ending liabilityfor gross unrecognized tax benefits at December 31, 2009 and 2008 is asfollows (in thousands).

 
| ** **                                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Unrecognized tax benefits balance at January 1            |       | $        | 44         |     | $          | 86 |   |
| Additions based on tax provisions related to the  current year |       | 3,094    |       | —   |       |
| Additions for tax positions of prior years                     |       | 190      |       | 6        |       |
| Reductions for settlements with taxing authorities             |       | (13      | )          | (48      | )          |
| Unrecognized tax benefits balance at  December 31         |       | $        | 3,315      |     | $          | 44 |   |

 

The Company recognizes interest and penalties relatedto uncertain tax positions in income tax expense.  As of December 31, 2009 and 2008, theCompany had approximately $96,000 and $20,000 of accrued interest and penaltiesrelated to uncertain tax positions, respectively.

 

Total amount of accrued liabilities related touncertain tax positions that would affect the Company’s effective tax rate ifrecognized is $3.3 million as of December 31, 2009 and $44,000 as of December 31,2008.  The tax years 2006 through 2009remain open to examination by major taxing jurisdictions to which the Companyis subject.

 

**10. Stock Options**

 

*Overview*

 

The Company recognizes in the financial statements thecost of employee services received in exchange for awards of equity instrumentsbased on the fair value of those awards.

 

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 ASC 718, *Compensation, Stock Compensation.*  Under the modified prospective method,compensation cost is recognized for all share-based payments granted ormodified after January 1, 2006 for all unvested awards granted prior tothe effective date of ASC 718.  TheBlack-Scholes option pricing model was developed for use in estimating the fairvalue of traded options, which have no vesting restrictions and are fullytransferable.  All option pricing modelsrequire the input of highly subjective assumptions including the expected stockprice volatility and 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 thenumber of rollover options.  The exerciseprice of 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.

 

F-22

----

 

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. No expense has been recorded in the statement of operations for theperformance based shares as the conditions for vesting are not probable.

 

During 2009, 94,417 options to purchase shares ofcommon stock included in the August 31, 2007 grant, which were reservedfor issuance for positions to be filled after the initial grant, were issued tocertain employees of the Company.  During2008, 87,386 options included in the August 31, 2007 grant were issued tocertain employees of the Company.  TheCompany began expensing these options during the requisite service period.

 

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

 

*ValuationMethodology*

 

The fair values of the options were derived using theBlack-Scholes option pricing model.  Inapplying the Black-Scholes option pricing model, the Company used the followingassumptions:

 

·                  *Weighted**average**risk-free interest rate.*  The risk-freeinterest rate is used as a component of the fair value of stock options to takeinto account the time value of money. For the risk-free interest rate, the Company uses the implied yield onUnited States Treasury zero-coupon issues with a remaining term equal to theexpected life, in years, of the options granted.

 

·                  *Expected**volatility**. *Volatility,for the purpose of stock-based compensation, is a measurement of the amountthat a share price has fluctuated. Expected volatility involves reviewing historical volatility anddetermining what, if any, change the share price will have in the future.  FASB recommended that companies such asHoldings, whose common stock is not publicly traded or had a limited publicstock trading history, use average volatilities of similar entities.  As a result, the Company has used the averagevolatilities of some of its competitors as an estimate in determining stockoption fair values.

 

·                  *Expectedlife, in years. *A clear distinction is made between theexpected life 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.

 

·                  *Expecteddividend yield. *Since issuing dividends will affect thefair value of a stock option, GAAP requires companies to estimate futuredividend yields or payments.  The Companyhas not historically issued dividends and does not intend to issue dividends inthe future.

 

·                  *Expectedforfeiture rate. *The Company uses an estimated forfeiturerate based on historical experience for the respective position held by theoption holder.  The Company reviews theforfeiture estimate annually in comparison to the actual forfeiture rateexperienced.

 

F-23

----

 

The following table summarizes the assumptions used bythe Company in the valuation of the time-vested options for the variousperiods:

 
| ** **           | ** ** | **Weighted  average fair   value per  share** | ** ** | **Weighted  average risk-  free interest  rate** | ** ** | **Expected  volatility** | ** ** | **Expected life,  in years** | ** ** | **Expected  dividend  yield** | ** ** | **Expected  forfeiture  rate** | ** ** |
|----------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| August 31, 2007 |       | $                                             | 4.91       |                                             | 4.4        | %                        | 42.0       | %                            | 6.5        |                          | 0.0        | %                              | 4.0        | % |
| March 31, 2008  |       | $                                             | 4.72       |                                             | 4.4        | %                        | 42.0       | %                            | 6.5        |                          | 0.0        | %                              | 4.0        | % |
| March 31, 2009  |       | $                                             | 0.70       |                                             | 0.5        | %                        | 42.0       | %                            | 6.5        |                          | 0.0        | %                              | 4.0        | % |

 

*Pro FormaNet Income*

 

The Company recorded non-cash compensation expense of$1.3 million for the year ended December 31, 2009 and $2.1 million for theyear ended December 31, 2008. Non-cash compensation expense of $409,000 was recorded for the Successorperiod of 2007 from August 24, 2007 to December 31, 2007.  After noncontrolling interests and therelated tax benefit, the Company recorded a net impact of approximately$793,000 for 2009, $1.3 million for 2008 and $250,000 for the period August 24,2007 to December 31, 2007.

 

*Outstanding Option Information*

 

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 |   |
|                                     |       |                  |       |                                   |       |                              |       |                    |       |                            |       |                                                |       |   |   |   |   |
| **2009 Activity**                        |       |                  |       |                                   |       |                              |       |                    |       |                            |       |                                                |       |
| Granted                                  |       | —                |       | $                                      | —     |                              | $          | —                  |       | $                               | —     |                                                | $          | — |   | — |   |
| Exercised                                |       | —                |       | —                                 |       | —                            |       | —                  |       | —                          |       | —                                              |       |
| Forfeited                                |       | 69,538                |       | —                                 |       | —                            |       | —                  |       | —                          |       | —                                              |       |
| Vested                                   |       | 284,655               |       | 10.00                                  |       | 4.76                              |       | 1,355                   |       | —                          |       | 7.7                                                 |       |
| Expired                                  |       | —                |       | —                                 |       | —                            |       | —                  |       | —                          |       | —                                              |       |
| Outstanding as of December 31, 2009 |       | 3,372,586             |       | 8.46                                   |       | 5.62                              |       | 18,945                  |       | —                          |       | 6.5                                                 |       |
| Exercisable at December 31, 2009    |       | 1,432,129             |       | $                                      | 6.37       |                              | $          | 6.54                    |       | $                               | 9,372      |                                                | $          | 0.18 |   | 6.1 |   |

 

As of December 31, 2009, the total compensationexpense related to non-vested time-based awards not yet recognized was $2.7million.  This expense will be recognizedover 3 years.

 

F-24

----

 

The following table summarizes information regardingthe options outstanding at December 31, 2009:

 
| **Options Outstanding** | ** ** | **Options Exercisable**                                           | ** ** |
|-------------------------|------------|-------------------------------------------------------------------|------------|
| **Exercise  Prices**    | ** ** | **Outstanding********as of********December 31,********2009** | ** ** | **Weighted-********Average********Remaining********Contractual********Life** | ** ** | **Weighted-********Average********Exercise********Price** | ** ** | **Exercisable********as of********December 31,********2009** | ** ** | **Weighted-********Average********Exercise********Price** | ** ** |
| $                       | 1.50       |                                                              | 611,799    |   | 4.07 |   | $ | 1.50 |   | 611,799 |   | $ | 1.50 |   |
| 10.00                   |       | 2,760,787                                                         |       | 7.77 |   | 10.00 |   | 820,330 |   | 10.00 |   |
|                    |       | 3,372,586                                                         |       | 6.54 |   | 7.98 |   | 1,432,129 |   | 6.37 |   |
|                         |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

Total unvested shareawards as of December 31, 2009 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, 2009   |       | 2,294,649                  |       | $                                      | 10.00      |                                   | $          | 4.73                       |       | $                               | 10,858     |                                                | —     |   | 8.7 |   |
| Forfeited                          |       | 69,538                     |       | —                                 |       | —                                 |       | —                     |       | —                          |       | —                                              |       |
| Vested                             |       | 284,655                    |       | 10.00                                  |       | 4.76                                   |       | 1,355                      |       | —                          |       | 7.8                                                 |       |
| Unvested at December 31, 2009 |       | 1,940,456                  |       | 10.00                                  |       | 4.93                                   |       | 9,569                      |       | —                          |       | 7.8                                                 |       |
|                                    |            |                            |            |                                        |            |                                        |            |                            |            |                                 |            |                                                     |            |  |  |  |

 

**11. Employee Benefit Plans**

 

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

 

The Symbion, Inc. 401(k) Plan (the “401(k) Plan”)is a defined contribution plan whereby employees who have completed six monthsof service in which they have worked a minimum of 1,000 hours and are age 21 orolder are eligible to participate. Employees may enroll in the plan on either January 1 or July 1of each year.  The 401(k) Planallows eligible employees to make contributions of varying percentages of theirannual compensation, up to the maximum allowed amounts by the Internal RevenueService.  Eligible employees may or maynot receive a match by the Company of their contributions.  The match varies depending on location and isdetermined prior to the start of each plan year.  Generally, employer contributions vest 20%after two years of service and continue vesting at 20% per year until fullyvested.  The Company’s matching expensefor the periods ended December 31, 2009, 2008 and 2007 was $326,000, $1.1million and $892,000, respectively.

 

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

##### ** **

The Company adopted the supplemental retirementsavings plan (the “SERP”) in May 2005. The SERP provides supplemental retirement alternatives to eligibleofficers and key employees of the Company by allowing participants to deferportions of their compensation.  Underthe SERP, eligible employees may enroll in the plan before December 31 tobe entered in the plan the following year. Eligible employees may defer into the SERP up to 25% of their normalperiod payroll and up to 50% of their annual bonus.  If the enrolled employee contributes aminimum of 2% of his or her base salary into the SERP, the Company willcontribute 2% of the enrolled employee’s base salary to the plan and has theoption of contributing additional amounts. Periodically, the enrolled employee’s deferred amounts are transferredto a plan administrator.  The planadministrator maintains separate non-qualified accounts for each enrolledemployee to track deferred amounts.  On May 1of each year, the Company is required to make its contribution to each enrolledemployee’s account.  Compensation expenserecorded by the Company related to the Company’s contribution to the SERP was$53,000, $54,000 and $46,000, for years ended December 31, 2009, 2008 and2007, respectively.

 

F-25

----

 

##### **12.  Recently Issued Accounting Guidelines**

 

In June 2009,the FASB issued Accounting Standards Update No. 2009-17,*Improvements to Financial Reporting by EnterprisesInvolved with Variable Interest Entities* (ASU 2009-17). ASU 2009-17changes how a reporting entity determines when an entity that is insufficientlycapitalized or is not controlled through voting (or similar) interests shouldbe consolidated. The determination of whether a reporting entity is required toconsolidate another entity is based on, among other things, the other entity’spurpose and design and the reporting entity’s ability to direct the activitiesthat most significantly impact the other entity’s economic performance. ASU2009-17 requires a number of additional disclosures about an entity’sinvolvement with variable interest entities and any significant changes in riskexposure due to that involvement. ASU 2009-17 became applicable to the Companyon January 1, 2010. The Company is in the process of evaluating thepotential impact of these changes on the financial statements.

 

**13. Commitments and Contingencies**

 

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

 

The Company has guaranteed $1.4 million of operatinglease payments of certain surgical facilities. These operating leases typically have 10 year terms, with optionalrenewal periods.  As of December 31,2009, the Company has also guaranteed $2.2 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 2017.

 

***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 and Regulations***

 

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 regulatory agencieswill conduct inquiries of the Company’s practices.  It is the Company’s current practice andfuture intent to cooperate fully with such inquiries.  The Company is not aware of any such inquirythat would have a material adverse effect on the Company’s consolidatedfinancial position or results of operations.

 

F-26

----

 

***Acquired Facilities***

 

The Company, through its wholly owned subsidiaries orcontrolled partnerships and limited liability companies, has acquired and willcontinue to acquire surgical facilities with prior operating histories.  Such facilities may have unknown orcontingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuseand similar anti-referral laws.  Althoughthe Company attempts to assure itself that no such liabilities exist andobtains indemnification from prospective sellers covering such matters andinstitutes policies designed to conform centers to its standards followingcompletion of acquisitions, there can be no assurance that the Company will notbecome liable for past activities that may later be asserted to be improper byprivate plaintiffs or government agencies. There can be no assurance that any such matter will be covered byindemnification or, if covered, that the liability sustained will not exceedcontractual limits or the financial capacity of the indemnifying 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 mayestablish with other health care providers or have materially adverse effectson its business 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.

 

***Potential Physician 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, 2009, has anasset of $643,845 that is included in prepaid expenses and other currentassets.

 

As of December 31, 2009 and 2008, the Company has$545,000 and $560,000, 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.

 

F-27

----

 

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

 

The following is selected quarterly financial data foreach of the four quarters in 2009 and 2008. Quarterly results are not necessarily representative of operations for afull year.

 
| ** **                               | ** ** | **2009**                                        | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **First********Quarter**                        | ** ** | **Second********Quarter** | ** ** | **Third********Quarter** | ** ** | **Fourth********Quarter** | ** ** |
| ** **                               | ** ** | **(unaudited and in thousands)** | ** ** |
| Revenues                                 |       | $                                               | 84,171     |   | $ | 88,461 |   | $ | 86,766 |   | $ | 87,586 |   |
| Cost of revenues                         |       | 57,416                                          |       | 62,756 |   | 64,150 |   | 64,262 |   |
| Income (loss) from continuing operations |       | 3,738                                           |       | 3,310 |   | (3,207 | ) | (811 | ) |
| Net (loss) income                        |       | (2,494                                          | )          | 3,407 |   | (3,030 | ) | (950 | ) |
|                                     |       |                                            |       |   |   |   |   |   |   |
| ** **                               | ** ** | **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 |   |
| Income (loss) from continuing operations |       | 5,022                                           |       | 6,754 |   | 4,083 |   | (9,357 | ) |
| Net income (loss)                        |       | 4,808                                           |       | 4,945 |   | 3,615 |   | (10,509 | ) |

 

F-28

----

 

**16. Financial Information for the Company and Its Subsidiaries**

 

The Company conducts substantially all of its businessthrough its subsidiaries.  Presentedbelow is condensed consolidating financial information for the Company and itssubsidiaries as required by regulations of the Securities and ExchangeCommission (“SEC”) in connection with the Company’s Toggle Notes that have beenregistered with the SEC.  The informationsegregates the parent company issuer, the combined wholly-owned subsidiaryguarantors, the combined non-guarantors, and consolidating adjustments.  The operating and investing activities of theseparate legal entities are fully interdependent and integrated.  Accordingly, the results of the separate legalentities are not representative of what the operating results would be on astand-alone basis.  All of the subsidiaryguarantees are both full and unconditional and joint and several.

 

**SYMBION, INC.**

**CONSOLIDATINGBALANCE SHEET**

**December 31,2009**

 
| ** **                                         | ** ** | **Parent Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| **ASSETS**                                         |       |              |       |                        |       |                           |       |             |       |                    |       |
| Current assets:                                    |       |              |       |                        |       |                           |       |             |       |                    |       |
| Cash and cash equivalents                          |       | $                 | 11,272     |                        | $          | 14,992                         |       | $                | 21,656     |                    | $          | — |   | $ | 47,920 |   |
| Accounts receivable, net                           |       | —            |       | 586                         |       | 36,050                         |       | —           |       | 36,636                  |       |
| Inventories                                        |       | —            |       | —                      |       | 9,730                          |       | —           |       | 9,730                   |       |
| Prepaid expenses and other current assets          |       | 4,234             |       | 416                         |       | 7,861                          |       | —           |       | 12,511                  |       |
| Due from related parties                           |       | 106,061           |       | —                      |       | —                         |       | (106,061         | )          | —                  |       |
| Deferred Tax Asset - Current                       |       | 432               |       | —                      |       | —                         |       | —           |       | 432                     |       |
| Current assets of discontinued operations          |       | —            |       | —                      |       | 530                            |       | —           |       | 530                     |       |
| Total current assets                               |       | 121,999           |       | 15,994                      |       | 75,827                         |       | (106,061         | )          | 107,759                 |       |
| Property and equipment, net                        |       | 1,331             |       | 433                         |       | 87,495                         |       | —           |       | 89,259                  |       |
| Goodwill and intangibles                           |       | 564,718           |       | —                      |       | —                         |       | —           |       | 564,718                 |       |
| Investments in and advances to affiliates          |       | 990               |       | 46,821                      |       | 4,193                          |       | (34,352          | )          | 17,652                  |       |
| Other assets                                       |       | 9,790             |       | 44                          |       | 853                            |       | —           |       | 10,687                  |       |
| Long-term assets of discontinued operations        |       | —            |       | —                      |       | 651                            |       | —           |       | 651                     |       |
| Total assets                                       |       | $                 | 698,828    |                        | $          | 63,292                         |       | $                | 169,019    |                    | $          | (140,413 | ) | $ | 790,726 |   |
| ** **                                         |       |              |       |                        |       |                           |       |             |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**     |       |              |       |                        |       |                           |       |             |       |                    |       |
| Current liabilities:                               |       |              |       |                        |       |                           |       |             |       |                    |       |
| Accounts payable                                   |       | $                 | 15         |                        | $          | 136                            |       | $                | 8,155      |                    | $          | — |   | $ | 8,306 |   |
| Accrued payroll and benefits                       |       | 464               |       | 593                         |       | 4,865                          |       | —           |       | 5,922                   |       |
| Due to related parties                             |       | —            |       | 61,080                      |       | 44,981                         |       | (106,061         | )          | —                  |       |
| Other accrued expenses                             |       | 17,296            |       | 390                         |       | 13,666                         |       | —           |       | 31,352                  |       |
| Current maturities of long-term debt               |       | 10,865            |       | —                      |       | 9,347                          |       | —           |       | 20,212                  |       |
| Current liabilities of discontinued operations     |       | —            |       | —                      |       | 1,186                          |       | —           |       | 1,186                   |       |
| Total current liabilities                          |       | 28,640            |       | 62,199                      |       | 82,200                         |       | (106,061         | )          | 66,978                  |       |
| Long-term debt, less current maturities            |       | 428,655           |       | —                      |       | 16,353                         |       | —           |       | 445,008                 |       |
| Deferred income tax payable                        |       | 40,424            |       | —                      |       | 352                            |       | —           |       | 40,776                  |       |
| Other liabilities                                  |       | 3,503             |       | 103                         |       | 2,673                          |       | —           |       | 6,279                   |       |
| Long-term liabilities of discontinued operations   |       | —            |       | —                      |       | 3,330                          |       | —           |       | 3,330                   |       |
| Noncontrolling interest - redeemable               |       | —            |       | —                      |       | 31,546                         |       | —           |       | 31,546                  |       |
| Total Symbion, Inc. stockholders’ equity |       | 197,606           |       | 990                         |       | 29,169                         |       | (34,352          | )          | 193,413                 |       |
| Noncontrolling interests - nonredeemable           |       | —            |       | —                      |       | 3,396                          |       | —           |       | 3,396                   |       |
| Total equity                                       |       | 197,606           |       | 990                         |       | 32,565                         |       | (34,352          | )          | 196,809                 |       |
| Total liabilities and stockholders’ equity    |       | $                 | 698,828    |                        | $          | 63,292                         |       | $                | 169,019    |                    | $          | (140,413 | ) | $ | 790,726 |   |

 

F-29

----

 

**SYMBION, INC.**

**CONSOLIDATINGBALANCE 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          |       | 6,033             |       | 22,006                      |       | 1,019                          |       | (14,526          | )          | 14,532                  |       |
| Other assets                                       |       | 11,345            |       | 85                          |       | 445                            |       | —           |       | 11,875                  |       |
| Long-term assets of discontinued operations        |       | —            |       | —                      |       | 833                            |       | —           |       | 833                     |       |
| Total assets                                       |       | $                 | 673,089    |                        | $          | 34,009                         |       | $                | 169,727    |                    | $          | (93,261 | ) | $ | 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               |       | 3,998             |       | 17                          |       | 8,190                          |       | —           |       | 12,205                  |       |
| Current liabilities of discontinued operations     |       | —            |       | —                      |       | 629                            |       | —           |       | 629                     |       |
| Total current liabilities                          |       | 21,194            |       | 27,855                      |       | 77,652                         |       | (78,735          | )          | 47,966                  |       |
| Long-term debt, less current maturities            |       | 417,217           |       | —                      |       | 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                     |       |
| Noncontrolling interest - redeemable               |       | —            |       | —                      |       | 32,645                         |       | —           |       | 32,645                  |       |
| Total Symbion, Inc. stockholders’ equity |       | 212,225           |       | 6,033                       |       | 7,474                          |       | (14,526          | )          | 211,206                 |       |
| Noncontrolling interests - nonredeemable           |       | —            |       | —                      |       | 5,365                          |       | —           |       | 5,365                   |       |
| Total equity                                       |       | 212,225           |       | 6,033                       |       | 12,839                         |       | (14,526          | )          | 216,571                 |       |
| Total liabilities and stockholders’ equity    |       | $                 | 673,089    |                        | $          | 34,009                         |       | $                | 169,727    |                    | $          | (93,261 | ) | $ | 783,564 |   |

 

F-30

----

 

**SYMBION, INC.**

**CONSOLIDATINGSTATEMENT OF OPERATIONS**

**For theyear ended December 31, 2009**

 
| ** **                                                   | ** ** | **Parent  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| Revenues                                                     |       | $                  | 35,064     |                        | $          | 9,299                          |       | $                | 317,997    |                    | $          | (15,376 | ) | $ | 346,984 |   |
| Operating expenses:                                          |       |               |       |                        |       |                           |       |             |       |                    |       |
| Salaries and benefits                                        |       | —             |       | 4,751                       |       | 92,093                         |       | —           |       | 96,844                  |       |
| Supplies                                                     |       | —             |       | 698                         |       | 74,207                         |       | —           |       | 74,905                  |       |
| Professional and medical fees                                |       | —             |       | 1,153                       |       | 22,009                         |       | —           |       | 23,162                  |       |
| Rent and lease expense                                       |       | —             |       | 772                         |       | 24,831                         |       | —           |       | 25,603                  |       |
| Other operating expenses                                     |       | —             |       | 507                         |       | 27,563                         |       | —           |       | 28,070                  |       |
| Cost of revenues                                             |       | —             |       | 7,881                       |       | 240,703                        |       | —           |       | 248,584                 |       |
| General and administrative expense                           |       | 21,448             |       | —                      |       | —                         |       | —           |       | 21,448                  |       |
| Depreciation and amortization                                |       | 696                |       | 270                         |       | 16,348                         |       |             |       | 17,314                  |       |
| Provision for doubtful accounts                              |       | —             |       | 198                         |       | 3,156                          |       | —           |       | 3,354                   |       |
| Income on equity investments                                 |       | —             |       | (2,318                      | )          | —                         |       | —           |       | (2,318                  | )          |
| Impairment and (gain) loss on disposal of long-lived  assets |       | 835                |       | 2,420                       |       | —                         |       | —           |       | 3,255                   |       |
| Proceeds from insurance settlements, net                     |       | —             |       | (430                        | )          | —                         |       |             |       | (430                    | )          |
| Management fees                                              |       | —             |       | —                      |       | 15,376                         |       | (15,376          | )          | —                  |       |
| Equity in earnings of affiliates                             |       | (23,814            | )          | (22,542                     | )          | —                         |       | 46,356           |       | —                  |       |
| Total operating expenses                                     |       | (835               | )          | (14,521                     | )          | 275,583                        |       | 30,980           |       | 291,207                 |       |
| Operating income (loss)                                      |       | 35,899             |       | 23,820                      |       | 42,414                         |       | (46,356          | )          | 55,777                  |       |
| Interest (expense) income, net                               |       | (51,134            | )          | (6                          | )          | 6,159                          |       | —           |       | (44,981                 | )          |
| (Loss) income before taxes and discontinued  operations      |       | (15,235            | )          | 23,814                      |       | 48,573                         |       | (46,356          | )          | 10,796                  |       |
| Provision for income taxes                                   |       | 7,219              |       | —                      |       | 547                            |       | —           |       | 7,766                   |       |
| (Loss) income from continuing operations                     |       | (22,454            | )          | 23,814                      |       | 48,026                         |       | (46,356          | )          | 3,030                   |       |
| Loss from discontinued operations, net of taxes              |       | —             |       | —                      |       | (6,097                         | )          | —           |       | (6,097                  | )          |
| Net (loss) income                                            |       | (22,454            | )          | 23,814                      |       | 41,929                         |       | (46,356          | )          | (3,067                  | )          |
| Net (loss) income attributable to noncontrolling  interests  |       | —             |       | —                      |       | (19,387                        | )          | —           |       | (19,387                 | )          |
| Net (loss) income attributable to Symbion, Inc.         |       | $                  | (22,454    | )                           | $          | 23,814                         |       | $                | 22,542     |                    | $          | (46,356 | ) | $ | (22,454 | ) |

 

F-31

----

** **

**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF OPERATIONS**

**For the year ended December 31,2008**

 
| ** **                                                   | ** ** | **Parent  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| Revenues                                                     |       | $                  | 35,122     |                        | $          | 10,685                         |       | $                | 301,767    |                    | $          | (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 (gain) 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                            |       | (22,312            | )          | (39,841                     | )          | —                         |       | 62,153           |       | —                  |       |
| Total  operating expenses                                    |       | 1,891              |       | (11,333                     | )          | 231,679                        |       | 46,479           |       | 268,716                 |       |
| Operating  income (loss)                                     |       | 33,231             |       | 22,018                      |       | 70,088                         |       | (62,153          | )          | 63,184                  |       |
| Interest  (expense) income, net                              |       | (41,977            | )          | 294                         |       | (1,743                         | )          | —           |       | (43,426                 | )          |
| (Loss)  income before taxes and discontinued operations      |       | (8,746             | )          | 22,312                      |       | 68,345                         |       | (62,153          | )          | 19,758                  |       |
| Provision  for income taxes                                  |       | 12,052             |       | —                      |       | 1,204                          |       | —           |       | 13,256                  |       |
| Income  (loss) from continuing operations                    |       | (20,798            | )          | 22,312                      |       | 67,141                         |       | (62,153          | )          | 6,502                   |       |
| Loss  from discontinued operations, net of taxes             |       | —             |       | —                      |       | (3,643                         | )          | —           |       | (3,643                  | )          |
| Net  (loss) income                                           |       | (20,798            | )          | 22,312                      |       | 63,498                         |       | (62,153          | )          | 2,859                   |       |
| Net  loss attributable to noncontrolling interests           |       | —             |       | —                      |       | (23,657                        | )          | —           |       | (23,657                 | )          |
| Net  (loss) income attributable to Symbion, Inc.        |       | $                  | (20,798    | )                           | $          | 22,312                         |       | $                | 39,841     |                    | $          | (62,153 | ) | $ | (20,798 | ) |

 

F-32

----

 

**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            | )          | (8,790                      | )          | —                         |       | 20,008           |       | —                  |       |
| Total  operating expenses                                    |       | (3,120             | )          | (6,142                      | )          | 82,003                         |       | 15,185           |       | 87,926                  |       |
| Operating  income (loss)                                     |       | 9,052              |       | 9,732                       |       | 19,938                         |       | (20,008          | )          | 18,714                  |       |
| Interest  (expense) income, net                              |       | (14,006            | )          | 1,486                       |       | (2,243                         | )          | —           |       | (14,763                 | )          |
| (Loss)  income before taxes and discontinued operations      |       | (4,954             | )          | 11,218                      |       | 17,695                         |       | (20,008          | )          | 3,951                   |       |
| Provision  for income taxes                                  |       | (1,727             | )          | —                      |       | 951                            |       | —           |       | (776                    | )          |
| Income  (loss) from continuing operations                    |       | (3,227             | )          | 11,218                      |       | 16,744                         |       | (20,008          | )          | 4,727                   |       |
| Loss  from discontinued operations, net of taxes             |       | —             |       | —                      |       | (269                           | )          | —           |       | (269                    | )          |
| Net  income (loss)                                           |       | (3,227             | )          | 11,218                      |       | 16,475                         |       | (20,008          | )          | 4,458                   |       |
| Net  income attributable to noncontrolling interests         |       | —             |       | —                      |       | (7,685                         | )          | —           |       | (7,685                  | )          |
| Net  income (loss) attributable to Symbion, Inc.        |       | $                  | (3,227     | )                           | $          | 11,218                         |       | $                | 8,790      |                    | $          | (20,008 | ) | $ | (3,227 | ) |

 

F-33

----

 

**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            | )          | (23,273 | ) | — |   | 51,545 |   | — |   |
| Proceeds  from insurance and litigation settlements, net     |       | —             |       | — |   | (161 | ) | — |   | (161 | ) |
| Merger  transaction expenses                                 |       | 7,522              |       | — |   | — |   | — |   | 7,522 |   |
| Total  operating expenses                                    |       | 2,154              |       | (19,010 | ) | 148,679 |   | 42,679 |   | 174,502 |   |
| Operating  income (loss)                                     |       | 8,830              |       | 25,683 |   | 40,195 |   | (51,545 | ) | 23,163 |   |
| Interest  (expense) income, net                              |       | (6,322             | )          | 2,589 |   | (1,495 | ) | — |   | (5,228 | ) |
| (Loss)  income before taxes and discontinued operations      |       | 2,508              |       | 28,272 |   | 38,700 |   | (51,545 | ) | 17,935 |   |
| Provision  (benefit) for income taxes                        |       | 4,683              |       | — |   | (667 | ) | — |   | 4,016 |   |
| Income  (loss) from continuing operations                    |       | (2,175             | )          | 28,272 |   | 39,367 |   | (51,545 | ) | 13,919 |   |
| Loss  from discontinued operations, net of taxes             |       | —             |       | — |   | (438 | ) | — |   | (438 | ) |
| Net  (loss) income                                           |       | (2,175             | )          | 28,272 |   | 38,929 |   | (51,545 | ) | 13,481 |   |
| Net  loss attributable to noncontrolling interests           |       | —             |       | — |   | (15,656 | ) | — |   | (15,656 | ) |
| Net  (loss) income attributable to Symbion, Inc.        |       | $                  | (2,175     | ) | $ | 28,272 |   | $ | 23,273 |   | $ | (51,545 | ) | $ | (2,175 | ) |

 

F-34

----

 

**SYMBION, INC.**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**For the year ended December 31,2009**

 
| ** **                                                                                    | ** ** | **Parent  Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Combined  Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Total  Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
| Cash flows from operating activities:                                                         |       |               |       |                        |       |                           |       |             |       |                    |       |
| Net (loss) income                                                                             |       | $                  | (22,454    | )                           | $          | 23,814                         |       | $                | 41,929     |                    | $          | (46,356 | ) | $ | (3,067 | ) |
| Adjustments to reconcile net (loss) income to net  cash from operating activities:            |       |               |       |                        |       |                           |       |             |       |                    |       |
| Loss from discontinued operations                                                             |       | —             |       | —                      |       | 6,097                          |       | —           |       | 6,097                   |       |
| Depreciation and amortization                                                                 |       | 696                |       | 270                         |       | 16,348                         |       | —           |       | 17,314                  |       |
| Amortization of deferred financing costs                                                      |       | 2,004              |       | —                      |       | —                         |       | —           |       | 2,004                   |       |
| Non-cash payment-in-kind interest option                                                      |       | 23,263             |       | —                      |       | —                         |       | —           |       | 23,263                  |       |
| Non-cash stock option compensation expense                                                    |       | 1,297              |       | —                      |       | —                         |       | —           |       | 1,297                   |       |
| Non-cash recognition of other comprehensive loss  into earnings                               |       | 2,853              |       | —                      |       | —                         |       | —           |       | 2,853                   |       |
| Non-cash credit risk adjustment of financial instruments                                      |       | 1,629              |       | —                      |       | —                         |       | —           |       | 1,629                   |       |
| Non-cash losses                                                                               |       | 835                |       | 1,990                       |       | —                         |       | —           |       | 2,825                   |       |
| Deferred income taxes                                                                         |       | 8,682              |       | —                      |       | —                         |       | —           |       | 8,682                   |       |
| Equity in earnings of consolidated affiliates                                                 |       | (23,814            | )          | (22,542                     | )          | —                         |       | 46,356           |       | —                  |       |
| Equity in earnings of unconsolidated affiliates,  net of distributions received               |       | —             |       | (207                        | )          | —                         |       | —           |       | (207                    | )          |
| Provision for doubtful accounts                                                               |       | —             |       | 198                         |       | 3,156                          |       | —           |       | 3,354                   |       |
| Changes in operating assets and liabilities, net of  effect of acquisitions and dispositions: |       |               |       |                        |       |                           |       |             |       |                    |       |
| Accounts receivable                                                                           |       | —             |       | —                      |       | (4,142                         | )          | —           |       | (4,142                  | )          |
| Income taxes receivable                                                                       |       | 1,762              |       | —                      |       | —                         |       | —           |       | 1,762                   |       |
| Other assets and liabilities                                                                  |       | 20,108             |       | 1,668                       |       | (24,001                        | )          | —           |       | (2,225                  | )          |
| Net cash provided by operating activities —  continuing operations                       |       | 16,861             |       | 5,191                       |       | 39,387                         |       | —           |       | 61,439                  |       |
| Net cash used in operating activities —discontinued  operations                          |       | —             |       | —                      |       | (1,021                         | )          | —           |       | (1,021                  | )          |
| Net cash provided by operating activities                                                     |       | 16,861             |       | 5,191                       |       | 38,366                         |       | —           |       | 60,418                  |       |
| Cash flows from investing activities:                                                         |       |               |       |                        |       |                           |       |             |       |                    |       |
| Payments for acquisitions, net of cash acquired                                               |       | (126               | )          | —                      |       | —                         |       | —           |       | (126                    | )          |
| Purchases of property and equipment, net                                                      |       | (226               | )          | —                      |       | (9,635                         | )          | —           |       | (9,861                  | )          |
| Change in other assets                                                                        |       | (724               | )          | —                      |       | (694                           | )          | —           |       | (1,418                  | )          |
| Net cash used in investing activities —continuing operations                             |       | (1,076             | )          | —                      |       | (10,329                        | )          | —           |       | (11,405                 | )          |
| Net cash used in investing activities —discontinued operations                           |       | —             |       | —                      |       | (40                            | )          | —           |       | (40                     | )          |
| Net cash used in investing activities                                                         |       | (1,076             | )          | —                      |       | (10,369                        | )          | —           |       | (11,445                 | )          |
| Cash flows from financing activities:                                                         |       |               |       |                        |       |                           |       |             |       |                    |       |
| Principal payments on long-term debt                                                          |       | (4,046             | )          | —                      |       | (9,695                         | )          | —           |       | (13,741                 | )          |
| Proceeds from debt issuances                                                                  |       | —             |       | —                      |       | 678                            |       | —           |       | 678                     |       |
| Payment of debt issuance costs                                                                |       | (203               | )          | —                      |       |                           |       | —           |       | (203                    | )          |
| Distributions to noncontrolling interests                                                     |       | —             |       | —                      |       | (24,971                        | )          | —           |       | (24,971                 | )          |
| Proceeds from unit activity of consolidated  facilities                                       |       | 307                |       | —                      |       | —                         |       | —           |       | 307                     |       |
| Change in other long-term liabilities                                                         |       | (4,940             | )          | —                      |       | —                         |       | —           |       | (4,940                  | )          |
| Net cash used in financing activities —continuing operations                             |       | (8,882             | )          | —                      |       | (33,988                        | )          | —           |       | (42,870                 | )          |
| Net cash used in financing activities —discontinued operations                           |       | —             |       | —                      |       | (16                            | )          | —           |       | (16                     | )          |
| Net cash used in financing activities                                                         |       | (8,882             | )          | —                      |       | (34,004                        | )          | —           |       | (42,886                 | )          |
| Net (decrease) increase in cash and cash  equivalents                                         |       | 6,903              |       | 5,191                       |       | (6,007                         | )          | —           |       | 6,087                   |       |
| Cash and cash equivalents at beginning of period                                              |       | 4,369              |       | 9,801                       |       | 27,663                         |       | —           |       | 41,833                  |       |
| Cash and cash equivalents at end of period                                                    |       | $                  | 11,272     |                        | $          | 14,992                         |       | $                | 21,656     |                    | $          | — |   | $ | 47,920 |   |

 

F-35

----

 

**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                                                                             |       | $                  | (20,798    | )                           | $          | 22,312                         |       | $                | 63,498     |                    | $          | (62,153 | ) | $ | 2,859 |   |
| Adjustments to reconcile net (loss) income to net cash  from operating activities:            |       |               |       |                        |       |                           |       |             |       |                    |       |
| Loss from discontinued operations                                                             |       | —             |       | —                      |       | 3,643                          |       | —           |       | 3,643                   |       |
| 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                                                      |       | 17,616             |       | —                      |       | —                         |       | —           |       | 17,616                  |       |
| Non-cash stock option compensation expense                                                    |       | 2,114              |       | —                      |       | —                         |       | —           |       | 2,114                   |       |
| Non-cash losses                                                                               |       | —             |       | —                      |       | 924                            |       | —           |       | 924                     |       |
| Deferred income taxes                                                                         |       | 13,718             |       | —                      |       | —                         |       | —           |       | 13,718                  |       |
| Equity in earnings of consolidated affiliates                                                 |       | (22,312            | )          | (39,841                     | )          | —                         |       | 62,153           |       | —                  |       |
| Equity in earnings of affiliates, net of  distributions received                              |       | —             |       | 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                      |       | (44,260                        | )          | —           |       | (877                    | )          |
| Net cash provided by operating activities —  continuing operations                       |       | 21,257             |       | 2,738                       |       | 38,271                         |       | —           |       | 62,266                  |       |
| Net cash used in operating activities —discontinued  operations                          |       | —             |       | —                      |       | (43                            | )          | —           |       | (43                     | )          |
| Net cash provided by operating activities                                                     |       | 21,257             |       | 2,738                       |       | 38,228                         |       | —           |       | 62,223                  |       |
| 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                 | )          |
| Repayment of bridge facility                                                                  |       | (179,937           | )          | —                      |       |                           |       | —           |       | (179,937                | )          |
| Proceeds from debt issuances                                                                  |       | 12,639             |       | —                      |       | 852                            |       | —           |       | 13,491                  |       |
| Proceeds from issuance of Toggle Notes                                                        |       | 179,937            |       | —                      |       |                           |       | —           |       | 179,937                 |       |
| Payment of debt issuance costs                                                                |       | (4,739             | )          | —                      |       |                           |       | —           |       | (4,739                  | )          |
| Distributions to noncontrolling interests                                                     |       | —             |       | —                      |       | (23,423                        | )          | —           |       | (23,423                 | )          |
| Proceeds from unit activity of consolidated  facilities                                       |       | 219                |       | —                      |       | —                         |       | —           |       | 219                     |       |
| Change in other long-term liabilities                                                         |       | (22,429            | )          | —                      |       | 23,866                         |       | —           |       | 1,437                   |       |
| Net cash used in financing activities —continuing operations                             |       | (27,823            | )          | —                      |       | (3,867                         | )          | —           |       | (31,690                 | )          |
| Net cash used in financing activities —discontinued operations                           |       | —             |       | —                      |       | (150                           | )          | —           |       | (150                    | )          |
| Net cash used in financing activities                                                         |       | (27,823            | )          | —                      |       | (4,017                         | )          | —           |       | (31,840                 | )          |
| 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

----

 

**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     | )                           | $          | 11,218                         |       | $                | 16,475     |                    | $          | (20,008 | ) | $ | 4,458 |   |
| Adjustments to reconcile net (loss) income to net  cash from operating activities:            |       |               |       |                        |       |                           |       |             |       |                    |       |
| Loss from discontinued operations                                                             |       | —             |       | —                      |       | 269                            |       | —           |       | 269                     |       |
| 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                      |       |
| Deferred income taxes                                                                         |       | 2,217              |       | —                      |       | —                         |       | —           |       | 2,217                   |       |
| Equity in earnings of affiliates                                                              |       | (11,218            | )          | (8,790                      | )          | —                         |       | 20,008           |       | —                  |       |
| Equity in earnings of unconsolidated affiliates,  net of distributions received               |       | —             |       | (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                                                                         |       | 6,096              |       | —                      |       | —                         |       | —           |       | 6,096                   |       |
| Other assets and liabilities                                                                  |       | (5,421             | )          | 1,808                       |       | 2,634                          |       | —           |       | (979                    | )          |
| Net cash (used in) provided by operating activities  — continuing operations             |       | (9,086             | )          | 4,363                       |       | 25,475                         |       | —           |       | 20,752                  |       |
| Net cash provided by operating activities —  discontinued operations                     |       | —             |       | —                      |       | 580                            |       | —           |       | 580                     |       |
| Net cash (used in) provided by operating activities                                           |       | (9,086             | )          | 4,363                       |       | 26,055                         |       | —           |       | 21,332                  |       |
| 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                      |       |
| Distributions to noncontrolling interests                                                     |       | —             |       | —                      |       | (7,301                         | )          | —           |       | (7,301                  | )          |
| 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                                                         |       | 409                |       | —                      |       | (1,361                         | )          | —           |       | (952                    | )          |
| Net cash used in financing activities —continuing operations                             |       | (661               | )          | —                      |       | (8,723                         | )          | —           |       | (9,384                  | )          |
| Net cash used in financing activities —  discontinued operations                         |       | —             |       | —                      |       | (11                            | )          | —           |       | (11                     | )          |
| Net cash used in financing activities                                                         |       | (661               | )          | —                      |       | (8,734                         | )          | —           |       | (9,395                  | )          |
| 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 |   |

 

F-37

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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     | ) | $ | 28,272 |   | $ | 38,929 |   | $ | (51,545 | ) | $ | 13,481 |   |
| Adjustments to reconcile net (loss) income to net  cash from operating activities:            |       |               |       |   |   |   |   |   |   |   |   |
| Loss from discontinued operations                                                             |       | —             |       | — |   | 438 |   | — |   | 438 |   |
| 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 | ) |
| Deferred income taxes                                                                         |       | 13,637             |       | — |   | — |   | — |   | 13,637 |   |
| Equity in earnings of consolidated affiliates                                                 |       | (28,272            | )          | (23,273 | ) | — |   | 51,545 |   | — |   |
| Equity in earnings of unconsolidated affiliates,net of distributions  received                |       | —             |       | 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 | ) | 54,124 |   | — |   | 32,872 |   |
| Net cash provided by operating activities —  discontinued operations                     |       | —             |       | — |   | 24 |   | — |   | 24 |   |
| Net cash (used in) provided by operating activities                                           |       | (20,557            | )          | (695 | ) | 54,148 |   | — |   | 32,896 |   |
| 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 | ) |
| Distributions to noncontrolling interests                                                     |       | —             |       | — |   | (17,185 | ) | — |   | (17,185 | ) |
| 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 | ) |
| Net proceeds from issuance of common stock                                                    |       | 239,085            |       | — |   | — |   | — |   | 239,085 |   |
| Change in other long-term liabilities                                                         |       | 17,786             |       | 2,592 |   | (20,128 | ) | — |   | 250 |   |
| Net cash provided by (used in) financing activities  — continuing operations             |       | 43,289             |       | 2,592 |   | (34,030 | ) | — |   | 11,851 |   |
| Net cash used in financing activities —discontinued operations                           |       |               |       | — |   | (29 | ) | — |   | (29 | ) |
| Net cash provided by (used in) financing activities                                           |       | 43,289             |       | 2,592 |   | (34,059 | ) | — |   | 11,822 |   |
| 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 |   |

 

F-38

----

 

**17.  Subsequent Events**

** **

The Company has evaluated subsequent events throughthe date that the Consolidated Financial Statements were issued, and concludedthere are no material subsequent events.

 

F-39

----

 

**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.

 

 
|                             | SYMBION, INC. |
|----------------------------------|--------------------|
|                             |               |   |
|   March 31,  2010 | 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 31,  2010 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Teresa F.  Sparks             |       | Senior Vice President  of Financial and Chief Financial Officer |       |                 |
| Teresa F. Sparks                  |       | (Principal Financial  and Accounting Officer)                   |       | March 31,  2010 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Clifford G.  Adlerz           |       |                                                            |       |                 |
| Clifford G.  Adlerz               |       | President, Chief  Operating Officer and Director                |       | March 31,  2010 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Thomas S.  Murphy, Jr.   |       |                                                            |       |                 |
| Thomas S.  Murphy, Jr.       |       | Director                                                        |       | March 31,  2010 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Robert V.  Delaney            |       |                                                            |       |                 |
| Robert V.  Delaney                |       | Director                                                        |       | March 31,  2010 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Quentin Chu                   |       |                                                            |       |                 |
| Quentin Chu                       |       | Director                                                        |       | March 31,  2010 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Kurt E.  Bolin                |       |                                                            |       |                 |
| Kurt E. Bolin                     |       | Director                                                        |       | March 31,  2010 |
|                              |       |                                                            |       |                 |
|                              |       |                                                            |       |                 |
| /s/ Craig R.  Callen              |       |                                                            |       |                 |
| Craig R. Callen                   |       | Director                                                        |       | March 31,  2010 |

 

----

 

**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 (c) |
| 10.4    |       | Lease  Agreement, dated June 26, 2001, between Burton Hills IV Partners and  Symbion, Inc. (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5    |       | First  Amendment to Lease Agreement, dated February 9, 2004, between Burton  Hills IV Partners and Symbion, Inc. (e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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 (f) (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. (c)                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14   |       | Interest  Rate Swap Agreement, dated October 31, 2007, between Symbion, Inc and  Merrill Lynch Capital Services, Inc. (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 toexhibits filed with the Registrant’s Current Report on Form 8-K filed April 24,2007 (File No. 000-50574)

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

(c)         Incorporated by reference toexhibits filed with the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 2008, as amended (File No. 000-50574)

(d)        Incorporated by reference toexhibits filed with the Registrant’s Registration Statement on Form S-1(Registration No. 333-89554)

(e)         Incorporated by reference toexhibits filed with the Registrant’s Annual Report on Form 10-K for theyear ended December 31, 2003 (File No. 000-50574)

(f)           Incorporated by reference toexhibits filed with the Registrant’s Quarterly Report on Form 10-Q for thequarter ended March 31, 2005 (File No. 000-50574)

(g)        Compensation plan or arrangement

 

----