**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-K/A**

**(Amendment No. 1)**

 

**(Mark One)**

 

**x****      ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

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

 

**or**

 

**o****         TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from             to             **

 

**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 andzip code)

 

**(615) 234-5900**

(Registrant’s telephone number, includingarea code)

 

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

 

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

 

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

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes  x  No o

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes o  No x

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.   x

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

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

 

As of March 31, 2010,1,000 shares of the registrant’s common stock were outstanding.

 

 

 

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**EXPLANATORY NOTE**

 

Symbion, Inc. (the “Company”) is filing thisAmendment No. 1 to its Annual Report on Form 10-K for the year ended December 31,2009, filed with the Securities and Exchange Commission on March 31, 2010(the “Form 10-K”), solely for the purpose of filing an amended report ofthe Company’s independent auditor that includes a reference that the engagementwas performed in accordance with the standards of the Public Company AccountingOversight Board (“PCAOB”) in accordance with PCAOB Auditing Standard No. 1.

 

This amendment sets forth the complete text of Item7 and Item 14 of the Form 10-K, as amended.  The Company is including as exhibitscurrently dated certifications of the Company’s Chief Executive Officer andChief Financial Officer.  This amendmentshould be read in conjunction with the Form 10-K, continues to speak as ofthe date of the Form 10-K, and does not modify or update disclosures inthe Form 10-K except as noted above. Accordingly, this amendment does not reflect events occurring after thefiling of the Form 10-K or modify or update any related disclosures.

 

1

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**PART II**

 

**Item7.  *Financial Statements andSupplementary Data***

 

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

 

**PART IV**

 

**Item14.  *Exhibitsand Financial Statement Schedules***

 

**(a) The following documents are filed as part of thisreport:**

 

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

 

The consolidated financial statements required to be included in Part II, Item7. are indexed on Page F-1 and submitted as a separate section of thisreport.

 

***(2)******        ******Consolidated Financial Statement Schedules***

 

All schedules are omitted because they are not applicable or notrequired, or because the required information is included in the consolidatedfinancial statements or notes in this 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

2

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| 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. (h) |
| 10.14 |   | Interest Rate Swap Agreement, dated October 31, 2007, between  Symbion, Inc and Merrill Lynch Capital Services, Inc. (c)                                                                                 |
| 21    |   | Subsidiaries of Registrant (i)                                                                                                                                                                                          |
| 31.1  |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (i)                                                                                                            |
| 31.2  |   | Certification of Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (i)                                                                                                            |
| 31.3  |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                |
| 31.4  |   | 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 (i)                                                                                                            |
| 32.2  |   | Certification of Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (i)                                                                                                            |
| 32.3  |   | Certification of Chief Executive Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                |
| 32.4  |   | Certification of Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                |

 

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| (a) | Incorporated by reference to exhibits filed with the Registrant’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                                                                                                                                                         |
| (h) | Incorporated by reference to exhibit filed with the Registrant’s  Current Report on Form 8-K filed August 2, 2005.                                                        |
| (i) | Previously filed as an exhibit to the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 2009 filed March 31,  2010 (File No. 000-50574)  |

 

3

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**Index to Financials**

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

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

Board of Directors

Symbion, Inc.

 

We have audited theaccompanying consolidated balance sheets of Symbion, Inc. as of December 31,2009 and 2008 and the related consolidated statements of operations,stockholders’ equity and cash flows for the years ended December 31, 2009and 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 the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. We were not engaged toperform an audit of the Company’s internal control over financial reporting.Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

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 fromJanuary 1, 2007 to August 23, 2007 (Predecessor), in conformity withU.S. generally accepted 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

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**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

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**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

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**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

----

 

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

----

 

**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 the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|     | SYMBION, INC. |
|----------|--------------------|
|     |               |   |
|     | By:                | /s/ Richard E.  Francis, Jr. |
|     |               | Richard E.  Francis, Jr. |
| * * | * *           | *Chairman  of the Board and* |
|     | * *           | *Chief  Executive Officer* |

 

Dated:October 5, 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 (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1    |       | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.2    |       | Certification of Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.3    |       | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.4    |       | 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 (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.2    |       | Certification of Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.3    |       | Certification of Chief Executive Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.4    |       | 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                                                                                                                                                         |
| (i) | Previously filed as an exhibit to the Registrant’s Annual Report on  Form 10-K for the year ended December 31, 2009 filed March 31,  2010 (File No. 000-50574)  |

 

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