##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
   Form 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-50574   Symbion, Inc.  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    62-1625480
(I.R.S. Employer
Identification No.)40 Burton Hills Boulevard, Suite 500
Nashville, Tennessee
(Address Of Principal Executive Offices)
    
    37215
(Zip Code)
 (615) 234-5900
(Registrants Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value
(Title of Class)
    
    Preferred Stock Purchase Rights
(Title of Class)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ
  No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).
Yes o  No þ The aggregate market value of the shares of the registrants common stock (based upon the
closing price of these shares on the Nasdaq National Market on June 30, 2004) held by
non-affiliates as of June 30, 2004, was approximately $218,848,365. As of February 28, 2005, 21,101,331 shares of the registrants common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for our annual meeting of stockholders to be held
on May 10, 2005 are incorporated by reference into Part III of this report.




---



TABLE OF CONTENTS  PART IItem 1. BusinessItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6. Selected Financial DataItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPART IIIItem 10. Directors and Executive Officers of the RegistrantItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPART IVItem 15. Exhibits and Financial Statement SchedulesSIGNATURESEXHIBIT INDEXEX-2.2 PURCHASE AGREEMENT DATED NOVEMBER 11,2004EX-21.1 SUBSIDIARIES OF REGISTRANTEX-23.1  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-23.2 CONSENT OF CASUALTY ACTURIAL CONSULTANTS, INC.EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO    Table of Contents  Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K contains forward-looking statements based on our current
expectations, estimates and assumptions about future events. All statements other than statements
of current or historical fact contained in this report, including statements regarding our future
financial position, business strategy, budgets, projected costs and plans and objectives of
management for future operations, are forward-looking statements. The words anticipate,
believe, continue, estimate, expect, intend, may, plan, will, and similar
expressions are generally intended to identify forward-looking statements. In particular, these
include, among other things, statements relating to:  
    our ability to attract and maintain good relationships with physicians who use our
facilities;
    our ability to acquire and develop additional facilities on favorable terms and to
integrate their business operations;
    our ability to enter into strategic alliances with health care systems and other health
care providers that are leaders in their markets;
    our ability to negotiate favorable contracts on behalf of our facilities with managed
care organizations or other third-party payors; and
    our ability to enhance operating efficiencies. These forward-looking statements involve various risks and uncertainties, some of which are
beyond our control. Any or all of our forward-looking statements in this report may turn out to be
wrong. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our financial
condition, results of operations, business strategy and financial needs. They can be affected by
inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions,
including the risks, uncertainties and assumptions described in Managements Discussion and
Analysis of Financial Condition and Results of Operations  Risk Factors. In light of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this report may not occur and actual results could differ materially
from those anticipated or implied in the forward-looking statements. When you consider these
forward-looking statements, you should keep in mind these risk factors and other cautionary
statements in this report. Our forward-looking statements speak only as of the date made. Other than as required by law,
we undertake no obligation to publicly update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise. 
 PART I 
 Item 1.Business Overview We own and operate a network of surgery centers in 21 states. Our surgery centers provide
non-emergency surgical procedures across many specialties. We offer services designed to meet the
health care needs of the communities in which we operate and seek to develop strong relationships
with physicians and other health care providers in these markets. We believe that one of our
competitive advantages is the experience of our senior management team, with four of our executive
officers having an average of over 25 years of experience in the health care industry, including
senior management positions at public and private health care companies. The remaining six members
of our senior management team have an average of over 20 years of experience in the health care
industry. As of March 15, 2005, we owned and operated 47 surgery centers and managed nine
additional surgery centers. Our surgery centers include three facilities that are licensed as
hospitals, two of which we own and one of which we 1




---



##### Table of Contents



manage. In addition to our surgery centers, we also operate two diagnostic centers and manage
three physician networks, including two physician networks in markets in which we operate surgery
centers. On September 16, 2002, we reincorporated in Delaware. We were originally incorporated in
Tennessee in January 1996 under the name UniPhy Healthcare, Inc. and focused on the development and
management of physician networks. On June 25, 1999, we acquired Ambulatory Resource Centres, Inc.,
an owner and operator of surgery centers, and changed our name to Symbion, Inc. Since our
acquisition of Ambulatory Resource Centres, we have focused on developing, acquiring and managing
surgery centers, and have grown our operations from 14 to 56 surgery centers. During that period,
we terminated all but three of our management agreements with physician networks and transferred
our assets and liabilities relating to those terminated agreements to the physician networks in
exchange for cash and our previously issued securities. We also modified our agreements with two of
the remaining physician networks to require us to provide only management services. As a result of
these actions, we now focus our business on developing, acquiring and managing surgery centers and
it may be difficult to compare our historical operating results from period to period. Surgery Center Industry Outpatient surgery has experienced tremendous growth since 1970, when the first surgery center
opened in the United States, according to Verispan, L.L.C., an independent health care market
research and information firm. Surgery centers are facilities where physicians can perform surgical
procedures that generally do not require the patient to stay overnight. According to Verispan,
about 3,957 outpatient surgery centers were operating in the United States as of February 2004, an
increase of more than 50% since 1996. Based on data compiled by Verispan, the number of outpatient
surgery cases performed annually in U.S. outpatient surgery centers increased from an estimated 4.3
million in 1996 to an estimated 8.3 million in 2004, representing a compound annual growth rate of
about 9%. We believe that the following factors have contributed to the growth in surgery centers and
outpatient surgical procedures:  
    Physician and Patient Preference for Surgery Centers.Physicians often prefer to
operate in surgery centers, as compared to acute care hospitals, because of the efficiency
and convenience that surgery centers afford. Procedures performed at surgery centers are
typically non-emergency, so physicians can schedule their time more efficiently and
increase the number of procedures that they can perform in a given period. Surgery centers
also provide physicians with greater scheduling flexibility, more consistent nurse staffing
and faster turnaround time between cases, as compared to acute care hospitals. In addition,
we believe patients prefer the comfort of a less institutional setting and the more
convenient process for scheduling and registration available in surgery centers, as
compared to acute care hospitals.
    Lower Cost Alternative.Based upon our managements experience in the health care
industry, we believe that surgeries performed in surgery centers are generally less
expensive than those performed in acute care hospitals because of lower facility
development costs, the focus on non-emergency procedures and more efficient staffing and
work flow processes. We believe that cost-conscious payors are attracted to the lower costs
afforded by surgery centers, as compared to acute care hospitals.
    Advanced Technology and Improved Anesthesia.Advancements in medical technology such
as lasers, arthroscopy, fiber optics and enhanced endoscopic techniques have reduced the
trauma of surgery and the amount of recovery time required by patients following a surgical
procedure. Improvements in anesthesia also have shortened the recovery time for many
patients and have reduced post-operative side effects such as pain, nausea and drowsiness.
These medical advancements have enabled more patients to undergo surgery without an
overnight stay and reduced the need for hospitalization following surgery. With an estimated 3,957 outpatient surgery centers operating in the United States as of
February 2004, we believe significant opportunities exist for consolidation in this industry. The
five largest national operators of outpatient surgery centers by number of centers represented an
aggregate of less than 15% of the total number of outpatient surgery centers in the United States
as of February 2004, according to Verispan. We believe that the surgery center industry will
continue to consolidate because of the increasing complexity of the regulatory and 2




---



##### Table of Contents



managerial aspects of health care delivery, the growing influence of managed care, the rising
cost of technology and the need for capital. We believe there are many surgery centers that are
seeking to affiliate with experienced operators of facilities with access to capital, management
expertise and other resources. Our Strategy We intend to expand our network of surgery centers in attractive markets throughout the United
States by acquiring established centers and developing new centers while enhancing the performance
of our existing centers. We also seek to provide patients with high-quality surgical services
across many specialties. When attractive opportunities arise, we may acquire or develop other types
of facilities, including diagnostic centers. The key components of our strategy are to:  
    Identify, recruit and retain leading surgeons and other physicians for our surgery
centers.We believe that establishing and maintaining strong relationships with surgeons
and other physicians is a key factor to our success in acquiring, developing and operating
surgery centers. We identify and partner with surgeons and other physicians that we believe
have established reputations for clinical excellence in their communities. We believe that
we have had success in recruiting and retaining physicians because of the ownership
structure of our surgery centers and our staffing, scheduling and clinical systems that are
designed to increase physician productivity, promote physicians professional success and
enhance the quality of patient care. We also believe that forming relationships with health
care systems and other health care providers can enhance our ability to recruit physicians.
We currently have strategic relationships with six health care systems.
    Capitalize on our experienced management team to pursue multiple growth opportunities
in the surgery center market.We believe that the experience and capabilities of our
senior management team provide a strategic advantage in improving the operations of our
surgery centers, attracting physicians and identifying new development and acquisition
opportunities. Four of our executive officers have an average of over 25 years of
experience in the health care industry, including senior management positions at public and
private health care companies. The remaining six members of our senior management team have
an average of over 20 years of experience in the health care industry. Our managements
broad industry experience has allowed them to establish strong relationships with
participants throughout the health care industry. These relationships are helpful in
forming leads for acquisitions, and in making decisions about expanding into new markets
and services. The experience and capabilities of our management team also enable us to
pursue multiple growth strategies in the surgery center market, including acquisitions of
established surgery centers, de novo developments in attractive markets, strategic
relationships with prominent hospitals and other health care providers and turnaround
opportunities in connection with underperforming facilities. We have successfully executed
each of these growth strategies, and intend to pursue each of them in the future.
    Pursue a disciplined strategy of acquiring and developing surgery centers.Since
January 1999, we have acquired 35 surgery centers and developed 15 surgery centers,
including three surgery centers that we subsequently divested. We anticipate acquiring
about three to four centers and developing three to four centers annually during the next
three to five years. We seek to acquire and develop both single and multi-specialty surgery
centers that meet our criteria, including prominence and quality of physician partners,
specialty mix, opportunities for growth, level of competition in the local market, level of
managed care penetration and our ability to access managed care organizations. Our
acquisition and development team conducts extensive due diligence and applies a financial
model that targets a threshold return on invested capital over a period of five years. Once
we acquire a surgery center, our team establishes a strategic plan to improve the centers
operating systems, physician recruitment and facilities, and capitalize on the centers
competitive strengths. We have historically targeted majority ownership in our facilities
and currently hold majority ownership interests in over 74% of the surgery centers in which
we own an interest. Majority ownership allows us to make and execute managerial decisions
which we believe provides greater opportunity for growth and higher returns. We also
believe that by starting with majority ownership of a center, we can benefit by capturing a
greater share of the value we create in managing and improving the center. We intend to
continue to target majority ownership in our facilities. However, when attractive
opportunities arise, we may acquire minority interests in surgery centers. When
appropriate, we also may reduce our interest in majority owned surgery centers. 3




---



##### Table of Contents




    Increase revenues and profitability of existing surgery centers through operational
focus.We seek to increase revenues, profitability and return on our invested capital at
all of our centers by focusing on operations. We have a dedicated team that is responsible
for implementing best practices, cost controls and overall efficiencies at each of our
surgery centers. Our centers benefit from our network of facilities by sharing best
practices and participating in group purchasing agreements designed to reduce the cost of
supplies and equipment. We intend to continue to recruit additional physicians and expand
the range of services offered at our surgery centers to increase the number and types of
surgeries performed in our centers. We are committed to enhancing programs and services for
our physicians and patients by providing advanced technology, quality care, cost-effective
service and convenience. Operations Surgery Center Operations As of March 15, 2005, we owned and operated 47 surgery centers and managed nine surgery
centers. Three of our facilities are licensed as hospitals, two of which we own and one of which we
manage. Our typical surgery center is a freestanding facility with about 14,000 square feet of
space and four fully equipped operating rooms, two treatment rooms and ancillary areas for
preparation, recovery, reception and administration. Our surgery centers provide non-emergency
surgical procedures among many specialties, including orthopedic, obstetrics/gynecology, general
surgery, ear, nose and throat, pain management, gastrointestinal, plastic surgery and
ophthalmology. Our surgery centers that are licensed as hospitals may also provide additional
services such as diagnostic imaging, pharmacy, laboratory and obstetrical services. In certain
markets where we believe it is appropriate, we operate surgery centers that focus on a single
specialty. Our surgery centers are generally located in close proximity to physicians offices. Each
facility typically employs a staff of about 30, depending on its size, the number of cases and the
type of services provided. Our staff at each center generally includes a center administrator, a
business manager, a medical director, registered nurses, operating room technicians and clerical
workers. At each of our surgery centers, we have arrangements with anesthesiologists to provide
anesthesiology services. We also provide each of our surgery centers with a full range of
financial, marketing and operating services. For example, our regional managed care directors
assist the local management team at each of our centers in developing relationships with managed
care providers and negotiating managed care contracts. All of our surgery centers are Medicare certified. To ensure that a high level of care is
provided, we implement quality assurance procedures at each of our surgery centers. Each of our
surgery centers is available for use only by licensed physicians who have met professional
credentialing requirements established by the centers medical advisory committee. In addition,
each centers medical director supervises and is responsible for the quality of medical care
provided at the center. Surgery Center Ownership Structure We own and operate our surgery centers through partnerships or limited liability companies.
Local physicians or physician groups also own an interest in most of our surgery centers. In some
cases, a hospital may own an interest in our surgery center. One of our wholly-owned subsidiaries
typically serves as the general partner or majority member of our surgery centers. We generally own
a majority interest in our surgery centers, or otherwise have sufficient control over the centers
to be able to consolidate the financial results of operations of the centers with ours. In some
instances, we will acquire an ownership interest in a surgery center with the prior owners
retaining an ownership interest, and, in some cases, we offer new ownership interests to other
physicians or hospital partners. We own a majority interest in 35 of the 47 surgery centers in
which we own an interest. We typically guarantee all of the debts of these partnerships and limited
liability companies, even though we do not own all of the ownership interests in the surgery
centers. We also have a management arrangement with each of the surgery centers, under which we
provide day-to-day management services for a management fee, which is typically based on a
percentage of the revenues of the center. Each of the partnerships and limited liability companies through which we own and operate our
surgery centers is governed by a partnership or operating agreement. These partnership and
operating agreements typically provide, 4




---



##### Table of Contents



among other things, for voting rights and limited transfer of ownership interests. The
partnership and operating agreements also provide for the distribution of available cash to the
owners, in some cases on a quarterly basis. In addition, the agreements typically restrict the
physician owners from owning an interest in a competing surgery center during the period in which
the physician owns an interest in our center and for one year after that period. The partnership
and operating agreements for our centers typically provide that the centers will purchase all of
the physicians ownership interests if certain adverse regulatory events occur, such as it becoming
illegal for the physicians to own an interest in a surgery center, refer patients to a center or
receive cash distributions from a surgery center. The purchase price that we would be required to
pay for these ownership interests is based on pre-determined formulas, typically either a multiple
of the centers EBITDA (defined as operating income (loss) plus depreciation and amortization) or
the fair market value of the ownership interests as determined by a third-party appraisal. Some of
these agreements require us to make a good faith effort to restructure our relationships with the
physician investors in a manner that preserves the economic terms of the relationship prior to
purchasing these interests. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Risk Factors and  Government Regulation. In certain circumstances, we
have the right to purchase a physicians ownership interests, including upon a physicians breach
of the noncompetition provisions of a partnership or operating agreement. In some cases, we have
the right to require the physician owners to purchase our ownership interest in the event our
management agreement with a center is terminated. In one center, the physician owners have the
right to purchase our ownership interest upon a change in our control. We currently manage seven surgery centers without owning an interest in them through a
strategic alliance with a hospital system located in the Memphis, Tennessee area. We also manage a
surgery center licensed as a hospital located in Kansas City, Kansas in which we have no ownership
interest. In addition, we own an interest in a limited liability company which assisted in the
development of a surgery center in Lynbrook, New York and which provides administrative services to
the surgery center. 5




---



##### Table of Contents



Surgery Centers The following table sets forth information regarding each of our surgery centers as of
February 28, 2005: Number of
    
    
    
    SymbionOperating
    
    Number of
    
    PercentageFacility
    
    City
    
    Rooms
    
    Treatment Rooms
    
    OwnershipAlabamaBirmingham Endoscopy Center
    
    Birmingham
    
    3
    
    
    
    80%(1)North River Surgical Center
    
    Tuscaloosa
    
    2
    
    2 procedure rooms
    
    80%(1)ColoradoDry Creek Surgery Center
    
    Denver
    
    6
    
    2
    
    51%(1)FloridaDeland Surgery Center
    
    Deland
    
    3
    
    2
    
    79%(1)West Bay Surgery Center
    
    Largo
    
    4
    
    3
    
    51%(1)Jacksonville Beach Surgery Center
    
    Jacksonville
    
    4
    
    1
    
    86%(1)Lee Island Coast Surgery Center
    
    Fort Myers
    
    5
    
    3
    
    50%(1)Orlando Surgery Center
    
    Orlando
    
    5
    
    1 minor procedure room
    
    64%(1)Tampa Bay Regional Surgery Center
    
    Largo
    
    1
    
    2
    
    51%(1)The Surgery Center of Ocala
    
    Ocala
    
    4
    
    2
    
    51%(1)GeorgiaPremier Surgery Center
    
    Brunswick
    
    3
    
    1
    
    51%(1)Atlanta Center for Reconstructive Foot andAnkle Surgery Center
    
    Sandy Springs
    
    2
    
    
    
    53%(1)Roswell Center for Foot and Ankle SurgeryCenter
    
    Roswell
    
    2
    
    
    

20%Savannah Outpatient Foot and AnkleSurgery Center
    
    Savannah
    
    2
    
    
    
    80%(1)The Surgery Center
    
    Columbus
    
    4
    
    2
    
    65%(1)IllinoisValley Ambulatory Surgery Center
    
    St. Charles
    
    6
    
    1 minor procedure room
    
    40%(1)IndianaVincennes Surgery Center
    
    Vincennes
    
    3
    
    1 minor procedure room
    
    51%(1)New Albany Outpatient Surgery
    
    New Albany
    
    4
    
    
    
    68%(1)KansasHeartland Specialty Surgical Hospital(2)
    
    Kansas City
    
    7
    
    319 hospital rooms
    
    (3)KentuckyDuPont Surgery Center
    
    Louisville
    
    5
    
    
    
    61%(1)LouisianaGreater New Orleans Surgery Center
    
    Metairie
    
    2
    
    
    
    30%(1)Physicians Surgical Specialty Hospital(2)
    
    Houma
    
    4
    
    4
    
    57%(1)10 hospital roomsSurgery Center of Hammond
    
    Hammond
    
    4
    
    2 procedure rooms
    
    87%(1)MassachusettsWorcester Surgery Center
    
    Worcester
    
    4
    
    1 minor procedure room
    
    77%(1)Worcester ENT
    
    Worcester
    
    1
    
    
    
    51%(1)MissouriCentral Missouri Medical Park SurgicalCenter
    
    Jefferson City
    
    4
    
    2
    
    58%(1)The Surgery Center of Kirkwood
    
    Kirkwood
    
    3
    
    1 minor procedure room
    
    50%(1)MississippiPhysicians Outpatient Center
    
    Oxford
    
    4
    
    2
    
    (3)New YorkSouth Shore Ambulatory Surgery Center
    
    Lynbrook
    
    4
    
    1
    
    (4)
 6




---



##### Table of Contents



Number of
    
    
    
    SymbionOperating
    
    Number of

    
    PercentageFacility
    
    City
    
    Rooms
    
    Treatment Rooms
    

OwnershipNorth CarolinaOrthopaedic Surgery Center of Asheville
    
    Asheville
    
    3
    
    
    
    63
%(1)Wilmington SurgCare
    
    Wilmington
    
    6
    
    4 minor procedure rooms
    
    100
%(1)OhioPhysicians Ambulatory Surgery Center
    
    Circleville
    
    2
    
    
    
    76
%(1)Valley Surgical Center
    
    Steubenville
    
    3
    
    1 minor procedure room
    
    55
%(1)OklahomaLakeside Womens Hospital(2)
    
    Oklahoma City
    
    3
    
    16 hospital rooms
    
    42
%Surgery Center of Edmond
    
    Edmond
    
    4
    
    
    
    58
%(1)PennsylvaniaVillage SurgiCenter
    
    Erie
    
    5
    
    1
    
    73
%(1)Rhode IslandBayside Endoscopy Center
    
    Providence
    
    
    
    6
    
    75
%(1)TennesseeBaptist Germantown Surgery Center
    
    Memphis
    
    6
    
    1
    
    
(3)3 overnight roomsMaury Regional Surgery Center
    
    Columbia
    
    2
    
    1
    
    35
%Cool Springs Surgery Center
    
    Franklin
    
    4
    
    1
    
    44
%1 overnight roomDeSoto Surgery Center
    
    Memphis
    
    2
    
    1 procedure room
    
    
(3)East Memphis Surgery Center
    
    Memphis
    
    6
    
    1
    
    
(3)4 overnight roomsMidtown Surgery Center
    
    Memphis
    
    6
    
    
    
    
(3)Southwind GI
    
    Memphis
    
    1
    
    
    
    100
%(1)Union City Center
    
    Union City
    
    2
    
    1
    
    
(3)UroCenter
    
    Memphis
    
    3
    
    1
    
    
(3)University Ambulatory Surgical Center
    
    Knoxville
    
    4
    
    1
    
    25
%2 overnight roomsTexasCentral Park Surgery Center
    
    Austin
    
    5
    
    1
    
    69
%(1)3 overnight roomsClear Fork Surgery Center
    
    Fort Worth
    
    3
    
    1
    
    37
%(1)4 overnight roomsEast Houston Surgery Center
    
    Houston
    
    4
    
    2
    
    47
%(1)1 overnight roomNortheast Baptist Surgery Center
    
    San Antonio
    
    4
    
    3
    
    52
%(1)1 overnight roomNorthStar Surgical Center
    
    Lubbock
    
    5
    
    4
    
    46
%(1)2 overnight roomsPhysicians SurgiCenter of Houston
    
    Houston
    
    5
    
    2
    
    10
%3 overnight roomsSurgery Center of Duncanville
    
    Duncanville
    
    4
    
    1
    
    41
%(1)2 overnight roomsTexarkana Surgery Center
    
    Texarkana
    
    4
    
    3
    
    66
%(1)2 overnight roomsWashingtonBellingham Surgery Center
    
    Bellingham
    
    4
    
    
    
    85
%(1)
   (1)
    
    We consolidate these surgery centers for financial reporting purposes.(2)
    
    This facility is licensed as a hospital.(3)
    
    We manage these facilities, but do not have an ownership interest in them.(4)
    
    We hold a 57% ownership interest in the limited liability company which provides
administrative services to this surgery center. Due to regulatory restrictions in the State of
New York, we cannot directly own an interest in the facility. 7




---



##### Table of Contents



Case Mix The following table sets forth the percentage of cases in each specialty performed in 2004 and
2003 at surgery centers in which we owned an interest as of December 31, 2004 and December 31,
2003: Year Ended
    
    
    Year EndedDecember 31, 2004
    
    
    December 31, 2003SpecialtyEar, nose and throat
    
    
    8
    %
    
    
    8
    %Gastrointestinal
    
    
    22
    
    
    
    16General surgery
    
    
    5
    
    
    
    6Obstetrics/gynecology
    
    
    3
    
    
    
    4Ophthalmology
    
    
    13
    
    
    
    14Orthopedic
    
    
    16
    
    
    
    20Pain management
    
    
    16
    
    
    
    17Plastic surgery
    
    
    4
    
    
    
    4Other
    
    
    13
    
    
    
    11Total
    
    
    100
    %
    
    
    100
    %
 The changes in case mix from 2003 to 2004, including the increase in gastrointestinal cases as
a percentage of total cases and the decrease in orthopedic cases as a percentage of total cases,
were primarily the result of our surgery center acquisitions and developments during 2003 and 2004. Case
Growth The
following table sets forth information from facilities in which we
owned an interest and managed throughout the years ended December 31, 2004
and 2003, respectively: Year EndedDecember
31,2004
    
    
    2003Consolidated:Cases
    
    
    140,519
    
    
    
    133,811Case growth
    
    
    5.0
    %
    
    
    N/ANet patient
service revenue per case
    
    
    1,182
    
    
    
    1,143Net patient
service revenue per case growth
    
    
    3.4
    %
    
    
    N/ANumber of
same store surgery centers
    
    
    26
    
    
    
    N/AConsolidated
centers and non-consolidated centers:Cases
    
    
    144,625
    
    
    
    137,168Case growth
    
    
    5.4
    %
    
    
    N/ANet patient
service revenue per case
    
    
    1,186
    
    
    
    1,153Net patient
service revenue per case growth
    
    
    2.9
    %
    
    
    N/ANumber of
same store surgery centers
    
    
    27
    
    
    
    N/A
 The
following table sets forth information from facilities that we
consolidate for financial reporting purposes (which includes
surgery centers we have acquired or developed since January 1, 2003)
for the years
ended December 31, 2004 and 2003, respectively: Year EndedDecember
31,2004
    
    
    2003Cases
    
    
    176,483
    
    
    
    137,784Case growth
    
    
    28.1
    %
    
    
    N/ANet patient
service revenue per case
    
    
    1,148
    
    
    
    1,148Net patient
service revenue per case growth
    
    
    
    %
    
    
    N/ANumber of surgery
centers operated as of end of period (1)
    
    
    54
    
    
    
    44Number of
consolidated surgery centers
    
    
    40
    
    
    
    32
   (1)
 Payor Mix The following table sets forth by type of payor the percentage of our patient service revenues
generated in 2004 for surgery centers in which we owned an interest as of December 31, 2004: Year EndedDecember 31, 2004PayorPrivate Insurance
    
    
    76
    %Government
    
    
    20Self-pay
    
    
    3Other
    
    
    1Total
    
    
    100
    %
 Strategic Relationships When attractive opportunities arise, we may develop, acquire or operate surgery centers
through strategic alliances with health care systems and other health care providers. We believe
that forming a relationship with a medical center can enhance our ability to recruit physicians and
access managed care contracts for our facilities in that market. We currently have strategic
relationships with:  
    Vanderbilt Health Services, Inc., with which we own and operate a surgery center in Franklin, Tennessee;
    Vanguard Health Systems, Inc., with which we own and operate a surgery center in San Antonio, Texas;
    Baptist Memorial Health Services, Inc., for which we manage seven surgery centers in
Memphis, Tennessee and surrounding areas;
    University Health System, Inc., with which we own and operate a surgery center in Knoxville, Tennessee;
    Harris Methodist Ft. Worth, with which we own and operate a surgery center in Fort Worth, Texas; and
    Maury Regional Healthcare System, with which we own and operate a surgery center in
Columbia, Tennessee. 8




---



##### Table of Contents



The strategic relationships through which we own and operate surgery centers are governed by
partnership and operating agreements that are generally comparable to the partnership and operating
agreements of the other surgery centers in which we own an interest. The primary difference between
the structure of these strategic relationships and the other surgery centers in which we own an
interest is that, in the strategic relationships, a health care system holds an ownership interest
in the surgery center, in addition to physician investors. For a general description of the terms
of our partnership and operating agreements, see  Operations  Surgery Center Ownership
Structure. In each of these strategic relationships, we have also entered into a management
agreement under which we provide day-to-day management services for a management fee based on a
percentage of the revenues of the surgery center. The terms of those management agreements are
comparable to the terms of our management agreements with other surgery centers in which we own an
interest. We manage seven surgery centers owned by Baptist Memorial Health Services, Inc. under
management agreements with Baptist Memorial, in exchange for a management fee based on a percentage
of the revenues of these surgery centers. The management agreements terminate on various dates from
March 2006 to June 2008 and may be terminated earlier by either party for material breach after
notice and an opportunity to cure. We have also entered into a development agreement with Baptist
Memorial under which we are to provide development support for new surgery centers that may be
developed by Baptist Memorial in exchange for a development fee negotiated for each developed
center. Acquisition and Development of Surgery Centers We intend to expand our presence in the surgery center market by making strategic acquisitions
of existing surgery centers and by developing new surgery centers in cooperation with local
physician partners and, when appropriate, with hospitals and other strategic partners. Acquisition Program.We employ a dedicated acquisition team with experience in health care
services. Our team seeks to acquire surgery centers that meet our criteria, including prominence
and quality of physician partners, specialty mix, opportunities for growth, level of competition in
the local market, level of managed care penetration and our ability to access managed care
organizations. Our team utilizes their extensive industry contacts, as well as referrals from
current physician partners and other sources, to identify, contact and develop potential
acquisition candidates. We believe there are numerous acquisition opportunities that would pass our general screening
criteria. We carefully evaluate each of our acquisition opportunities through an extensive due
diligence process to determine which facilities have the greatest potential for growth and
profitability improvements under our operating structure. In many cases, the acquisition team
identifies specific opportunities to enhance a centers productivity post-acquisition. For example,
we may renovate or construct additional operating or treatment rooms in existing facilities to meet
anticipated demand for procedures based on analysis of local market characteristics. Our team may
also identify opportunities to recruit additional physicians to increase the acquired facilitys
revenues and profitability. Once we decide to proceed with an acquisition proposal, we use a
pricing strategy that targets a threshold return on invested capital over a period of five years.
We have acquired 35 surgery centers since January 1999 and anticipate acquiring about three to four
centers annually during the next three to five years. Development Program.We develop surgery centers in markets in which we anticipate substantial
interest by physicians and payors. We have experience in developing both single and multi-specialty
surgery centers. When we develop a new surgery center, we generally provide all of the services
necessary to complete the project. We offer in-house capabilities for structuring partnerships and
financing facilities and work with architects and construction firms in the design and development
of facilities. Before and during the development phase of a new center, we analyze the competitive
environment in the local market, review market data to identify appropriate services to provide,
prepare and analyze financial forecasts, evaluate regulatory and licensing issues and assist in
designing the center and identifying appropriate equipment to purchase or lease. After the surgery
center is developed, we generally provide startup operational support, including information
systems, equipment procurement and financing. We have developed 15 surgery centers since January
1999 and anticipate developing about three to four centers annually during the next three to five
years. 9




---



##### Table of Contents



Development and construction of a surgery center generally takes us from 12 to 18 months,
depending on whether we are building the facility or improving available space. Estimated
construction costs generally total from $1.0 million to $2.5 million for improving existing space.
Equipment and other furnishing costs generally range from $1.0 million to $3.0 million. In
addition, working capital of approximately $1.0 million to $1.5 million is generally required to
sustain operations for the initial six to 12 months of operations. We historically financed these
costs through capital contributions from investors in the center, borrowings under our facility
loan agreements and long-term facility lease agreements. We expect to finance these costs in the
future with borrowings under our senior credit facility and capital contributions from investors in
the centers. See Managements Discussion and Analysis of Financial Condition and Results of
Operations. Other Services Although our business is primarily focused on owning and operating surgery centers, we also
provide other services that complement our core surgery center business. Diagnostic Centers We operate Dry Creek Imaging Center, a diagnostic imaging center that is adjacent to our
surgery center in the Denver, Colorado market. We own a 90% interest in the diagnostic imaging
center through a joint venture with Touchstone Medical Imaging, LLC. Dry Creek Imaging Center
currently provides MRI, CT, ultrasound and mammography procedures. Touchstone and Dry Creek Imaging
Center have entered into a management agreement, under which Touchstone provides daily management
and administrative services to the diagnostic center in exchange for a percentage of the diagnostic
centers net revenues. The initial term of the management agreement expires in 2006, and may be
renewed for additional renewal terms of one year each. We believe the services provided by this
diagnostic center complement and support the services provided by our surgery center in this
market. We also operate Erie Imaging Center, a diagnostic imaging center that is adjacent to our
surgery center in Erie, Pennsylvania. We own a 51% interest in this diagnostic center through a
joint venture with Touchstone. This diagnostic imaging center opened during the third quarter of
2004. The joint venture has entered into a management agreement with Touchstone under which
Touchstone provides daily management and administrative services to the diagnostic center in
exchange for a percentage of the diagnostic centers net revenues. The initial term of the
management agreement expires on December 19, 2008 and may be renewed for additional renewal terms
of one year each. After December 19, 2005, either party to the management agreement has the right
to terminate the management agreement. In the event that we terminate the management agreement
without cause, Touchstone has the right to require us to repurchase its ownership interest in the
joint venture. We believe the services provided by this diagnostic center complement and support
the services provided by our surgery center in this market. We may explore the possibility of selectively purchasing and developing additional diagnostic
centers in the markets in which we operate surgery centers. Physician Networks We currently manage physician networks in Memphis, Tennessee, Johnson City, Tennessee and
Louisville, Kentucky. Each of these physician networks has entered into an agreement with us,
which provides, among other things, that we will provide billing, financial services and other
business management services in exchange for a management fee. One of the physician networks is an
independent practice association, or IPA, of health care providers located in the greater
Louisville, Kentucky area. We believe this network is complementary to our local surgery center by
providing the center with greater access to managed care contracts. Information Systems and Controls Each of our surgery centers uses a standard financial reporting system that provides
information to our corporate office to track financial performance on a timely basis. In addition,
each of our facilities uses an operating system to manage its
business that provides critical
support in areas such as scheduling, billing and collection, accounts receivable management,
purchasing and other essential operational functions. We have implemented a standardized 10




---



##### Table of Contents



system to support all of our facilities and to enable us to access more easily information
about our centers on a timely basis. The information system has been installed in all of our
surgery centers, except for those facilities we acquired recently. We calculate net revenues through a combination of manual and system-generated processes. Our
operating systems include insurance modules that allow us to establish profiles of insurance plans
and their respective payment rates. The systems then match the charges with the insurance plan
rates and compute a contractual adjustment estimate for each patient account. We then manually
review the reasonableness of the systems contractual adjustment estimate using the insurance
profiles. This estimate is adjusted, if needed, when the insurance payment is received and posted
to the account. Net revenue is computed and reported by the systems as a result of this activity. It is our policy to collect co-payments and deductibles prior to providing services. It is
also our policy to verify a patients insurance 72 hours prior to the patients procedure. Because
our services are non-emergency, our facilities have the ability to control these processes. We do
not track exceptions to these policies, but we believe that they occur infrequently and involve
insignificant amounts. When they do occur, we require patients whose insurance coverage is not
verified to assume full responsibility for the fees prior to services being rendered and we seek
prompt payment of co-payments and deductibles and verification of insurance following the
procedure. We manually input each patients account record and the associated billing codes. Our
operating systems then calculate the amount of fees for that patient and the amount of the
contractual adjustments. Claims are submitted electronically if the payor accepts electronic
claims. We use clearinghouses for electronic claims, which then forward the claims to the
respective payors. Payments are manually input to the respective patient accounts. We have developed proprietary measurement tools to track key operating statistics at each of
our surgery centers by integrating data from our local operating systems and our standardized
financial system. Management uses these tools to measure operating results against target
thresholds and to identify, monitor and adjust areas such as specialty mix, staffing, operating
costs, employee expenses and accounts receivable management. Our corporate and facility-level
management team is compensated in part using performance-based incentives focused on revenue growth
and improvement in operating income. Marketing Our sales and marketing efforts are directed primarily at physicians, who are responsible for
referring patients to our facilities. Marketing activities directed at physicians and other health
care providers are coordinated locally by the individual facility and are supplemented by dedicated
corporate personnel. These activities generally emphasize the benefits offered by our surgery
centers compared to other facilities in the market, such as the proximity of our facilities to
physicians offices, the ability to schedule consecutive cases without preemption by inpatient or
emergency procedures, the efficient turnaround time between cases, our advanced surgical equipment
and our simplified administrative procedures. Although the facility administrator is the primary
point of contact, physicians who utilize our surgery centers are important sources of
recommendations to other physicians regarding the benefits of using our facilities. Each facility
administrator develops a target list of physicians and we continually review these marketing lists
and the facility administrators progress in contacting and successfully attracting additional
local physicians. We also market our surgery centers directly to payors, including HMOs, PPOs and other managed
care organizations, employers and other payors. Payor marketing activities conducted by our
corporate office management and facility administrators emphasize the high quality of care, cost
advantages and convenience of our facilities, and are focused on making each facility an approved
provider under local managed care plans. Competition In each market in which we operate a surgery center, we compete with hospitals and operators
of other surgery centers to attract physicians and patients. We believe that the competitive
factors that affect our centers ability to compete for physicians are convenience of location of
the surgery center, access to capital and participation in managed care programs. We believe that
our centers attract patients based upon our quality of care, the specialties 11




---



##### Table of Contents



and reputations of the physicians who operate in our centers, participation in managed care
programs, ease of access and convenient scheduling and registration procedures. In developing or acquiring existing surgery centers, we compete with other public and private
surgery center and hospital companies. Several large national companies own and/or manage surgery
centers and surgical hospitals, including HEALTHSOUTH Corporation, HCA Inc., Universal Health
Services, Inc., AmSurg Corp. and United Surgical Partners International, Inc. In general, these
companies have greater resources and access to capital than we do. We also face competition from
local hospitals, physician groups and other providers who may compete with us in the ownership and
operation of surgery centers. Employees At December 31, 2004, we had about 2,300 employees, of which about 1,450 were full-time
employees. None of our employees are represented by a collective bargaining agreement. We believe
that we have a good relationship with our employees. Environmental We are subject to various federal, state and local laws and regulations relating to the
protection of the environment and human health and safety, including those governing the management
and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the
maintenance of a safe workplace. Our operations include the use, generation and disposal of
hazardous materials. We may, in the future, incur liability under environmental statutes and
regulations with respect to contamination of sites we own or operate (including contamination
caused by prior owners or operators of such sites, abutters or other persons) and the off-site
disposal of hazardous substances. We believe that we have been and are in substantial compliance
with the terms of all applicable environmental laws and regulations and that we have no liabilities
under environmental requirements that we would expect to have a material adverse effect on our
business, results of operations or financial condition. Insurance We maintain liability insurance in amounts that we believe are appropriate for our operations.
Currently, we maintain professional and general liability insurance that provides coverage on a
claims made basis of $1.0 million per occurrence and $3.0 million in annual aggregate coverage per
facility. We also maintain business interruption insurance and property damage insurance, as well
as an additional umbrella liability insurance policy in the aggregate amount of $10.0 million.
Coverage under certain of these policies is contingent upon the policy being in effect when a claim
is made regardless of when the events which caused the claim occurred. The cost and availability of
such coverage has varied widely in recent years. While we believe that our insurance policies are
adequate in amount and coverage for our anticipated operation, we cannot assure you that the
insurance coverage is sufficient to cover all future claims or will continue to be available in
adequate amounts or at a reasonable cost. Reimbursement Payments under the Medicare program to ambulatory surgery centers are made under a system
whereby the Secretary of Health and Human Services determines payment amounts prospectively for
various categories of medical services performed in ambulatory surgery centers, subject to an
inflation adjustment. The various state Medicaid programs also pay us a fixed payment for our
services, which amount varies from state to state. About 19.1% of our patient service revenues
during 2004 were attributable to Medicare and Medicaid payments. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, commonly referred
to as the Medicare Modernization Act, limits increases in Medicare reimbursement rates for
ambulatory surgery centers. Under the Medicare Modernization Act, the 2% increase in Medicare
reimbursement rates for ambulatory surgery centers that became effective on October 1, 2003 was
limited beginning April 1, 2004 to an amount equal to the increase in the Consumer Price Index for
all urban consumers as estimated by the Secretary of the Department of Health and Human Services
for the 12-month period ended March 31, 2003, minus 3.0 percentage points. The Medicare
Modernization Act also provides that there will be no increase in these rates during the years 2005
through 2009. The Medicare Modernization Act also directs the General Accounting Office to conduct
a study comparing 12




---



##### Table of Contents



the cost of procedures in surgery centers to the cost of procedures performed in hospital
outpatient departments. The General Accounting Office was directed to submit the results of its
study to the Centers for Medicare and Medicaid Services, or CMS, by no later than January 1, 2005.
However, no report had been publicly released as of March 25, 2005. CMS is directed to develop a
new ambulatory surgery center payment system based upon the Medicare hospital outpatient department
payment system so that it is effective on or after January 1, 2006 and no later than January 1,
2008. The Medicare Modernization Act provides that, in the year that the new payment system is
implemented, it must be designed to result in the same aggregate amount of expenditures for
surgical services provided at ambulatory surgery centers as would be made if the new system were
not adopted. The rate changes mandated by the Medicare Modernization
Act could have a material adverse
effect on the revenues of our centers, but we cannot predict the full effect of the
payment rate revisions. A rule proposed by CMS would make substantial changes to the rate-setting methodology, payment
rates, payment policies and the list of covered surgical procedures for ambulatory surgery centers.
Among the proposed changes is a shift from eight payment groups to 105 ambulatory payment
classifications. To date, CMS has not
implemented this payment methodology, and in light of the payment study mandated by the Medicare
Modernization Act, it is uncertain whether this proposed surgery center payment methodology will be
implemented. If implemented in its proposed form, the change in payment methodology could reduce
our Medicare revenues, depending on the volume and type of procedures performed at a particular
facility. The proposed rule does not apply to our facilities licensed as hospitals. The Medicare Payment Advisory Commission, or MedPAC, and the Office of the Inspector General
of the Department of Health and Human Services, or OIG, have both recently recommended changes to
the Medicare payment methodology for ambulatory surgery centers. MedPAC is a congressional advisory
board charged with advising Congress on Medicare payment issues, while the OIG is a governmental
agency responsible for investigating and monitoring Medicare, Medicaid and other Department of
Health and Human Services programs. Generally, MedPAC and the OIG have recommended that
reimbursement levels for ambulatory surgery center procedures be reduced. These are recommendations
only and it is uncertain if Congress will act on either or both recommendations. If these
recommendations become effective, our revenue and profitability could be adversely affected. While
most of our existing surgery center surgical procedures are generally reimbursed at levels lower
than hospital outpatient departments, some of our existing surgical procedures are reimbursed at
higher levels. These recommended changes do not apply to our
facilities licensed as hospitals. A reduction in reimbursement levels could have a material adverse
effect on the revenues of our centers. Three of our facilities, including one managed facility, are licensed as hospitals. The
Medicare program pays hospitals on a prospective payment system for acute inpatient services. Under
this prospective payment system, a hospital receives a fixed amount for inpatient hospital services
based on each patients final diagnosis. These payments do not consider a specific hospitals
costs, but are national rates adjusted for area wage differentials and case-mix index. For several
years, the percentage increases to the prospective payment rates have been generally lower than the
percentage increases in the costs of goods and services by hospitals. Most outpatient services
provided by hospitals are reimbursed by Medicare under the outpatient prospective payment system.
The Balanced Budget Act of 1997 mandated the implementation of the prospective payment system for
Medicare outpatient services. This outpatient prospective payment system is based on a system of
Ambulatory Payment Categories. Each Ambulatory Payment Category represents a bundle of outpatient
services, and each Ambulatory Payment Category has been assigned a fully prospective reimbursement
rate. Most private third-party payors pay a facility fee to freestanding surgery centers for the use
of the facility in addition to paying professional fees directly to the physicians performing the
medical services. We received approximately 74% of our revenue in 2004 from private third-party
payors. Market and cost factors affecting the fee structure, cost containment and utilization
decisions of third-party payors and other payment factors over which we have no control may affect
the revenues of our centers. Our centers also provide services to injured workers and receive
payment from workers compensation payors pursuant to the workers compensation laws of the various
states. Workers compensation payment amounts are subject to legislative, regulatory, and other
payment changes over which we have no control. A reduction in
workers compensation payment amounts could have a material
adverse effect on the revenues of our centers. We cannot predict what further legislation may be enacted or what regulations or guidelines
may be established concerning third-party reimbursement by state, federal or private programs.
Reductions or changes in these programs could have a material adverse affect on our business. Governmental Regulation General The health care industry is highly regulated, and we cannot assure you that the regulatory
environment in which we operate will not change significantly in the future or that we will be able
to successfully address changes in the regulatory environment. In addition to extensive, existing
government health care regulation, there continues to be numerous initiatives on the federal and
state levels affecting the payment for and availability of health care services. We believe that
these health care initiatives will continue during the foreseeable future. Some of the reform
initiatives proposed in the past, such as further reductions in Medicare and Medicaid payments and
additional 13




---



##### Table of Contents



prohibitions on physician ownership of facilities to which they refer patients, could, if
adopted, adversely affect us and our business. Every state imposes licensing requirements on individual physicians and health care
facilities. In addition, federal and state laws regulate HMOs and other managed care organizations.
Many states require regulatory approval, including certificates of need, before establishing
certain types of health care facilities, including surgery centers offering services we offer, or
making expenditures in excess of statutory thresholds for health care equipment, facilities or
programs. We believe that outpatient surgery and diagnostic services will continue to be subject to
intense regulation at the federal and state levels. Our ability to operate profitably will depend in part upon all of our facilities obtaining and
maintaining all necessary licenses, certificates of need and other approvals and operating in
compliance with applicable health care regulations. If we fail to obtain any necessary licenses or
certifications or fail to maintain our existing licenses and certifications, it could have a
material adverse effect on our business. The laws of many states prohibit physicians from splitting fees with non-physicians, prohibit
non-physician entities (such as us) from practicing medicine and prohibit referrals to facilities
in which physicians have a financial interest. We believe our activities do not violate these state
laws; however, we cannot assure you that future interpretations of, or changes in, these laws might
require structural and organizational modifications of our existing relationships with our
facilities and physician networks, and we cannot assure you that we would be able to appropriately
modify such relationships. In addition, statutes in some states could restrict our expansion into
those states. Our facilities are subject to federal, state and local laws dealing with issues such as
occupational safety, employment, medical leave, insurance regulations, civil rights,
discrimination, building codes, and medical waste and other environmental issues. Federal, state
and local governments are expanding the regulatory requirements on businesses. The imposition of
these regulatory requirements may have the effect of increasing operating costs and reducing the
profitability of our operations. We are unable to predict what additional government regulations, if any, affecting our
business may be enacted in the future or how existing or future laws and regulations might be
interpreted. If we, or any of our facilities, fail to comply with applicable laws, it might have a
material adverse effect on our business. Licensure and Certificates of Need Capital expenditures for the construction of new facilities, the addition of beds or the
acquisition of existing facilities may be reviewable by state regulators under statutory schemes
that are sometimes referred to as certificate of need laws. States with certificate of need laws
place limits on the construction and acquisition of health care facilities and the expansion of
existing facilities and services. In these states, approvals are required for capital expenditures
exceeding amounts that involve certain facilities or services, including surgery centers. State certificate of need laws generally provide that, prior to the addition of new beds, the
construction of new facilities or the introduction of new services, a designated state health
planning agency must determine that a need exists for those beds, facilities or services. The
certificate of need process is intended to promote comprehensive health care planning, assist in
providing high quality health care at the lowest possible cost and avoid unnecessary duplication by
ensuring that only those health care facilities that are needed will be built. Typically, the provider of services submits an application to the appropriate agency with
information concerning the area and population to be served, the anticipated demand for the
facility or service to be provided, the amount of capital expenditure, the estimated annual
operating costs, the relationship of the proposed facility or service to the overall state health
plan and the cost per patient day for the type of care contemplated. The issuance of a certificate
of need is based upon a finding of need by the agency in accordance with criteria set forth in
certificate of need laws and state and regional health facilities plans. If the proposed facility
or service is found to be necessary and the applicant to be the appropriate provider, the agency
will issue a certificate of need containing a maximum amount of expenditure and a specific time
period for the holder of the certificate of need to implement the approved project. 14




---



##### Table of Contents



Our health care facilities are also subject to state licensing requirements for medical
providers. Our surgery centers have licenses to operate as ambulatory surgery centers in the states
in which they operate, except for one facility in Kansas, one facility in Louisiana and one
facility in Oklahoma that are licensed as hospitals. Even though these facilities licensed as
hospitals provide surgical services, they must meet all applicable requirements for general
hospital licensure. Our surgery centers that are licensed as ambulatory surgery centers must meet
all applicable requirements for ambulatory surgery centers. To assure continued compliance with
these regulations, governmental and other authorities periodically inspect our facilities. The
failure to comply with these regulations could result in the suspension or revocation of a
facilitys license. Medicare and Medicaid Participation The majority of our revenues are expected to continue to be received through third-party
reimbursement programs, including state and federal programs, such as Medicare and Medicaid, and
private health insurance programs. Medicare is a federally funded and administered health insurance
program, primarily for individuals entitled to social security benefits who are 65 or older or who
are disabled. Medicaid is a health insurance program jointly funded by state and federal
governments that provides medical assistance to qualifying low income persons. Each state Medicaid
program covers in-patient hospital services and has the option to provide payment for surgery
center services. The Medicaid programs of all of the states in which we currently operate cover
surgery center services; however, these states may not continue to cover surgery center services
and states into which we expand our operations may not cover or continue to cover surgery center
services. To participate in the Medicare program and receive Medicare payment, our facilities must
comply with regulations promulgated by the Department of Health and Human Services. Among other
things, these regulations, known as conditions of participation, relate to the type of facility,
its equipment, its personnel and its standards of medical care, as well as compliance with state
and local laws and regulations. Our facilities must also satisfy the conditions of participation in
order to be eligible to participate in the Medicaid program. The requirements for certification
under Medicare and Medicaid are subject to change and, in order to remain qualified for these
programs, we may have to make changes from time to time in our facilities, equipment, personnel or
services. Although we intend to continue to participate in these reimbursement programs, we cannot
assure you that our facilities will continue to qualify for participation. The
ambulatory surgery center Medicare conditions of participation
prohibit surgery centers from performing surgical
procedures on Medicare patients if it is anticipated that the patient
will require overnight recovery. Historically, however, CMS has
permitted ambulatory surgery centers to keep non-Medicare patients
for up to 23 hours. On March 11, 2004, CMS issued a Memorandum
to State Survey Agency Directors stating that an ambulatory surgery
center that routinely provides 23 hour recovery services to
non-Medicare patients will jeopardize the facilitys Medicare
certification. CMS is expected to clarify or revise this new
interpretation of the Medicare ambulatory surgery center regulations.
If CMS does not modify this interpretation, our centers would be
unable to routinely offer services to patients requiring extended
recovery time, and our revenues could decrease as a consequence. Antitrust Laws Federal and state antitrust laws prohibit price fixing among competitors. Independent
physicians who are not economically integrated through a group practice or some other method of
sharing substantial financial risk may be considered competitors under antitrust laws and subject
to prohibitions on price fixing. Price fixing is considered a per se violation of federal antitrust
laws. The Federal Trade Commission, or FTC, and the Department of Justice have the authority to
bring civil and criminal enforcement actions against persons and entities who violate federal
antitrust laws. Moreover, competitors and customers who are injured by activities that violate
federal antitrust laws may bring civil actions against the alleged violator. In some cases, treble
damages are available to an injured competitor or customer. Networks of physicians, such as the IPA that we manage, involve price discussions among
competitors, which create antitrust concerns. In recognition of the beneficial nature of these
entities in a changing health care 15




---



##### Table of Contents



environment, the FTC and the Department of Justice have issued several joint policy statements
regarding enforcement in the health care industry that set forth antitrust safety zones in which
a network may safely operate. The IPA that we manage may not fit within a safety zone. However, the policy statements issued
by the Department of Justice and the FTC provide that the failure of an IPA to meet all of the
requirements of a safety zone will not render the activities of the IPA per se illegal. The
government will examine IPA arrangements on a case by case or rule of reason basis to determine
if the IPA can demonstrate that its members are economically or clinically integrated and that the
pro-competitive aspects of the IPA outweigh the anti-competitive aspects. If there are sufficient
pro-competitive aspects to the IPA, it should not be held to be illegal. The FTC and the Department
of Justice will provide advisory opinions regarding the compliance of physician network
arrangements with the antitrust statutes; however, we have not sought such an opinion. Medicare Fraud and Abuse and Anti-Referral Laws The Social Security Act includes provisions addressing false statements, illegal remuneration
and other fraud. These provisions are commonly referred to as the Medicare Fraud and Abuse Laws,
and include the statute commonly referred to as the federal anti-kickback statute. The federal
anti-kickback statute prohibits providers and others from, among other things, soliciting,
receiving, offering or paying, directly or indirectly, any remuneration in return for either making
a referral for a service or item covered by a federal health care program or ordering or arranging
for or recommending the order of any covered service or item. Violations of the federal
anti-kickback statute are punishable by a fine of up to $50,000 or imprisonment for each violation,
as well as damages up to three times the total amount of remuneration. In addition, the Medicare Patient and Program Protection Act of 1987, as amended by the Health
Insurance Portability and Accountability Act of 1996, commonly referred to as HIPAA, and the
Balanced Budget Act of 1997, imposes civil monetary penalties for a violation of the Medicare Fraud
and Abuse Laws, as well as exclusion from federal health care programs. Pursuant to the enactment
of HIPAA, as of June 1, 1997, the Secretary of Health and Human Services may, and in some cases
must, exclude individuals and entities from participating in any government health care program
that the Secretary determines have committed an act in violation of the Medicare Fraud and Abuse
Laws or have improperly filed claims in violation of the Medicare Fraud and Abuse Laws. HIPAA also
expanded the Secretarys authority to exclude a person involved in fraudulent activity from
participation in a program providing health benefits, whether directly or indirectly, which is
funded directly, in whole or in part, by the U.S. government. Because physician-investors in our surgery centers are in a position to generate referrals to
the centers, the distribution of available cash to those investors could come under scrutiny under
the federal anti-kickback statute. The U.S. Court of Appeals for the Third Circuit has held that
the federal anti-kickback statute is violated if one purpose (as opposed to a primary or sole
purpose) of a payment to a provider is to induce referrals. Other federal circuit courts have
followed this decision. None of these cases involved a joint venture such as those owning and
operating our surgery centers and it is not clear how a court would apply these holdings to our
activities. It is clear, however, that a physicians investment income from a surgery center may
not vary with the number of his or her referrals to the surgery center, and we comply with this
prohibition. In a case involving a physician-owned joint venture, the U.S. Court of Appeals for the Ninth
Circuit held that the federal anti-kickback statute is violated when a person or entity (1) knows
that the statute prohibits offering or paying remuneration to induce referrals and (2) engages in
prohibited conduct with the specific intent to violate the law. In that case, the joint venture was
determined to have violated the law because its agent solicited prospective limited partners by
implying that eligibility to purchase shares in the limited partnership was dependent on an
agreement to refer business to it, told prospective limited partners that the number of shares they
would be permitted to purchase would depend on the volume of business they referred, and stated
that partners who did not refer business would be pressured to leave the partnership. The joint
venture was vicariously liable for the actions of its agents, notwithstanding that the agents
actions were contrary to the principals stated policy. Further, under HIPAA, individuals who hold a direct or indirect ownership or controlling
interest in an entity that is found to violate the Medicare Fraud and Abuse Laws may also be
excluded from the Medicare and Medicaid programs if the individual knew or should have known of the
activity leading to the conviction or exclusion of the 16




---



##### Table of Contents



entity, or where the individual is an officer or managing employee of the entity. Under HIPAA,
the term should know means that a person acts in deliberate ignorance or reckless disregard of
the truth or falsity of the information. This standard does not require that specific intent to
defraud be proven by the OIG. Under regulations issued by the OIG, certain categories of activities are deemed not to
violate the federal anti-kickback statute. According to the preamble to these safe harbor
regulations, the failure of a particular business arrangement to comply with the regulations does
not determine whether the arrangement violates the federal anti-kickback statute. The safe harbors
do not make conduct illegal, but instead outline standards that, if complied with, protect conduct
that might otherwise be deemed in violation of the federal anti-kickback statute. One earlier safe harbor protects profit distributions to investors in small entity joint
ventures, such as limited partnerships, if certain conditions are met. However, we believe that our
ownership and operation of our facilities, will not satisfy this safe harbor for small entity joint
ventures, because this safe harbor requires that no more than 40% of the value of each class of
investment interests be held by investors in a position to make or influence referrals or to
generate business for the entity, and we anticipate that our facilities will not meet this
requirement. The OIG published an expanded listing of safe harbors under the federal anti-kickback statute
on November 19, 1999. The new, expanded provisions include a safe harbor designed to protect
distributions to physician investors in ambulatory surgery centers who refer patients directly to
the center and personally perform the procedures as an extension of their practice. The safe harbor
for surgery center ownership protects four categories of investors, including facilities owned by
general surgeons, single-specialty physicians, multi-specialty physicians and hospital/physician
ventures, provided that certain requirements are satisfied. The requirements include the following: 1. The center must be an ambulatory surgery center certified to participate in the Medicare
program and its operating and recovery room space must be dedicated exclusively to the surgery
center and not a part of a hospital (although such space may be leased from a hospital if such
lease meets the requirements of the safe harbor for space rental). 2. Each investor must be either (a) a physician who derived at least one-third of his or
her medical practice income for the previous fiscal year or 12-month period from performing
procedures on the list of Medicare-covered procedures for ambulatory surgery centers, (b) a
hospital, or (c) a person or entity not in a position to make or influence referrals to the
center, nor to provide items or services to the center, nor employed by the center or any
investor. 3. Unless all physician-investors are members of a single specialty, each
physician-investor must perform at least one-third of his or her procedures at the center each
year. (This requirement is in addition to the requirement that the physician-investor has
derived at least one-third of his or her medical practice income for the past year from
performing procedures.) 4. Physician-investors must have fully informed their referred patients of the physicians
investment interest. 5. The terms on which an investment interest is offered to an investor are not related to
the previous or expected volume of referrals, services furnished or the amount of business
otherwise generated from that investor to the entity. 6. Neither the center nor any other investor may loan funds to or guarantee a loan for an
investor if the investor uses any part of such loan to obtain the investment interest. 7. The amount of payment to an investor in return for the investment interest is directly
proportional to the amount of the capital investment (including the fair market value of any
pre-operational services rendered) of that investor. 8. All physician-investors, any hospital-investor and the center agree to treat patients
receiving medical benefits or assistance under the Medicare or Medicaid programs. 17




---



##### Table of Contents



9. All ancillary services performed at the center for beneficiaries of federal health care
programs must be directly and integrally related to primary procedures performed at the center,
and may not be billed separately. 10. No hospital-investor may include on its cost report or any claim for payment from a
federal health care program any costs associated with the center. 11. The center may not use equipment owned by or services provided by a hospital-investor
unless such equipment is leased in accordance with a lease that complies with the equipment
rental safe harbor and such services are provided in accordance with a contract that complies
with the personal services and management contracts safe harbor. 12. No hospital-investor may be in a position to make or influence referrals directly or
indirectly to any other investor or the center. We believe that the ownership and operations of our surgery centers will not fully satisfy
this safe harbor for investment interests in ambulatory surgery centers because, among other
reasons, we or one of our subsidiaries generally will be an investor in each surgery center and
provide management services to the surgery center. We cannot assure you that the OIG would view our
activities favorably even though they are intended to achieve compliance with the remaining
elements of this safe harbor. In addition, although we expect each physician-investor to utilize
the surgery center as an extension of his practice, we cannot assure you that all
physician-investors will perform one-third of their procedures at the surgery center or inform
their referred patients of their investment interests. We own an interest in one surgery center in which a physician group that includes primary care
physicians who do not use the center also owns an interest. In OIG Advisory Opinion 03-5 (February
6, 2003), the OIG declined to grant a favorable opinion to a proposed ambulatory surgery center
structure that would be jointly owned by a hospital and a multi-specialty group practice composed
of a substantial number of primary care physicians who would not personally use the center.
According to the opinion, the fact that interests in the center would be indirectly owned by
physicians who would not personally practice at the center precluded the OIG from determining that
the proposed arrangement poses a minimal risk of fraud and abuse. The OIG concluded that the
proposed structure could potentially generate prohibited remuneration under the federal
anti-kickback statute. We believe that the ownership of our center complies with the federal
anti-kickback statute because the physician group that owns an interest in our center is structured
to fit within the definition of a unified group practice under the federal law prohibiting
physician self-referrals, commonly known as the Stark law, and the income distributions of the
group practice comply with the Stark laws acceptable methods of income distribution. No physician
in the group practice receives an income distribution that is based directly on his referrals to
the center. We believe that the groups ownership of the center is no different than its ownership
of other ancillary services common in physician practices. Nevertheless, there can be no assurance
that the proposed arrangement will not be determined to be in violation of the law. We have entered into management agreements to manage many of our surgery centers, as well as
three physician networks. Most of these agreements call for our subsidiary to be paid a
percentage-based management fee. Although there is a safe harbor for personal services and
management contracts, this safe harbor requires, among other things, that the aggregate
compensation paid to the manager over the term of the agreement be set in advance. Because our
management fee may be based on a percentage of revenues, it does not meet this requirement.
However, we believe that our management arrangements satisfy the other requirements of the safe
harbor for personal services and management contracts and that they comply with the federal
anti-kickback statute. The OIG has taken the position that percentage-based management agreements
are not protected by a safe harbor, and consequently, may violate the federal anti-kickback
statute. On April 15, 1998, the OIG issued Advisory Opinion 98-4 which reiterates this proposition.
This opinion focused on areas the OIG considers problematic in a physician practice management
context, including financial incentives to increase patient referrals, no safeguards against
overutilization and incentives to increase the risk of abusive billing. The opinion reiterated that
proof of intent to violate the federal anti-kickback statute is the central focus of the OIG. We
have implemented formal compliance programs designed to safeguard against overbilling and otherwise
assure compliance with the federal anti-kickback statute and other laws, but we cannot assure you
that the OIG would find our compliance programs to be adequate. 18




---



##### Table of Contents



In some cases, we guarantee a surgery centers debt financing and lease obligations as part of
our obligations under a management agreement. Physician-investors are generally not required to
enter into similar guarantees. The OIG might take the position that the failure of the physician
investors to enter into similar guarantees represents a special benefit to the physician investors
given to induce referrals and that such failure would result in a violation of the federal
anti-kickback statute. We believe that the management fees (and in some cases guarantee fees) are
adequate compensation to us for the credit risk associated with the guarantee and that the failure
of the physician investors to enter into similar guarantees does not create a material risk of
violating the federal anti-kickback statute. However, the OIG has not issued any guidance in this
regard. The OIG is authorized to issue advisory opinions regarding the interpretation and
applicability of the federal anti-kickback statute, including whether an activity constitutes
grounds for the imposition of civil or criminal sanctions. We have not, however, sought such an
opinion regarding any of our arrangements. If it were determined that our activities, or those of
our facilities, violate the federal anti-kickback statute, we, our subsidiaries, our officers, our
directors and each surgery center investor could be subject, individually, to substantial monetary
liability, prison sentences and/or exclusion from participation in any health care program funded
in whole or in part by the U.S. government, including Medicare, CHAMPUS or state health care
programs. Federal Anti-Referral Laws Physician self-referral laws have been enacted by the U.S. Congress and many states
prohibiting certain self-referrals for health care services. The federal prohibition prohibits a
practitioner, including a physician, dentist or podiatrist, from referring patients for certain
designated health services provided by an entity with which the practitioner or a member of his
immediate family has a financial relationship if those services are paid in whole or in part by
Medicare or Medicaid unless an exception exists. The term financial relationship is broadly
defined and includes most types of ownership and compensation relationships. The Stark law also
prohibits the entity from seeking payment from Medicare or Medicaid for services rendered through a
prohibited referral. If an entity is paid for services rendered through a prohibited referral, it
may be required to refund the payments. Violations of the Stark law may also result in damages of
three times the amount claimed, civil penalties of up to $15,000 per prohibited claim and $100,000
per prohibited scheme and exclusion from participating in Medicare and Medicaid. Designated health
services include:  
    clinical laboratory services;
    physical therapy services;
    occupational therapy services;
    radiology services, including magnetic resonance imaging, computerized axial tomography
scan and ultrasound services;
    radiation therapy services and supplies;
    durable medical equipment and supplies;
    parenteral and enteral nutrients, equipment and supplies;
    prosthetics, orthotics and prosthetic devices and supplies;
    home health services;
    outpatient prescription drugs; and
    inpatient and outpatient hospital services. The list of designated health services includes imaging services and other diagnostic services
provided by our diagnostic centers. However, the Stark law is implicated only if the referring
physician or a member of his 19




---



##### Table of Contents



immediate family has a financial relationship with the provider of designated health services.
There is no physician ownership (or physician family member ownership) in our diagnostic centers.
Any compensation relationships between our diagnostic centers and physicians are set forth in
writing, provide for a fair market value compensation and are otherwise structured to fit within
applicable exceptions to the Stark law. The list of designated health services does not include surgical services provided in an
ambulatory surgery center. Furthermore, in final Stark law regulations published by the Department
of Health and Human Services on January 4, 2001, the term designated health services was defined
as not including services that are reimbursed by Medicare as part of a composite rate, such as
services provided in an ambulatory surgery center. However, if designated health services are provided by an ambulatory surgery center and
separately billed, referrals to the surgery center by a physician investor would be prohibited by
the Stark law. Because our facilities that are licensed as ambulatory surgery centers do not have
independent laboratories and do not provide designated health services apart from surgical
services, we do not believe referrals to these facilities by physician investors are prohibited. If legislation or regulations are implemented that prohibit physicians from referring patients
to surgery centers in which the physician has a beneficial interest, our business and financial
results would be adversely affected. Additionally, the physician networks we manage must comply with an exception of the Stark law
allowing physicians to make referrals to in-office ancillary providers, such as laboratory or
diagnostic imaging facilities. We believe that these physician networks operate in compliance with
the language of statutory exceptions to the Stark law, including the exceptions for services
provided by physicians within a group practice or in-office ancillary services. Three of our facilities, including one managed facility, are licensed as hospitals. The Stark
law includes an exception relating to physician ownership of a hospital, provided that the
physicians ownership interest is in the whole hospital and the physician is authorized to perform
services at the hospital. Physician investment in our facilities licensed as hospitals meet this
requirement. However, the Medicare Modernization Act amended the Stark law to provide that an
exception in the Stark law relating to physician ownership in hospitals does not apply to specialty
hospitals for a period of 18 months following November 18, 2003. Specialty hospitals are defined in
the Medicare Modernization Act as hospitals that are primarily or exclusively engaged in the care
and treatment of (1) patients with a cardiac condition, (2) patients with an orthopedic condition,
(3) patients receiving a surgical procedure or (4) any other specialized category of services that
the Secretary of the Department of Health and Human Services designates as inconsistent with the
purpose of the hospital ownership exception. The 18-month moratorium does not apply to specialty
hospitals that were in existence or under development on November 18, 2003, as long as: (a) the
total number of physician investors in the hospital does not increase from the number of physician
investors on November 18, 2003; (b) the hospital does not change the type of specialty services
that it provides from the types that it provided on November 18, 2003; and (c) the hospital does
not increase its number of beds by more than 5% or five beds, whichever is greater. The Medicare
Modernization Act also directs the Department of Health and Human Services and MedPAC to conduct
studies of specialty hospitals by February 2005, and to prepare reports to Congress recommending
any needed legislative or administrative changes in the Stark laws exception for physician
ownership in hospitals. As of March 25, 2005, the Department of Health and Human Services had not
publicly released its report. MedPAC recently conducted its study and recommended to the Congress
that the 18-month moratorium on new specialty hospitals be extended for an additional 18 months.
Congress has not yet acted on MedPACs recommendations. However, the issue of specialty hospitals
continues to be a high profile issue with the Congress. Congressional committees have met to
consider MedPACs recommendation and are expected to introduce bills to implement MedPACs
recommendations. Moreover, bills have been introduced in past Congressional sessions that would
eliminate the Stark whole hospital exception altogether, and it is possible that similar bills
could be introduced in the current Congress. Two of our facilities licensed as hospitals, including the managed facility, currently fit
within the Medicare Modernization Acts definition of specialty hospital. Our other facility
licensed as a hospital, in which we own a 42% interest, primarily provides obstetrical and other
womens health services and could be designated in the future by the Secretary of the Department of
Health and Human Services as a specialty hospital. However, none of our facilities are subject to
the specialty hospital moratorium because they were in existence on November 18, 2003. 20




---



##### Table of Contents



Consequently, the current physician investors in these facilities can refer to the hospitals
and fit within the Stark laws whole hospital exception. The Medicare Modernization Act, however,
will prevent us from increasing the number of physician investors in these facilities,
significantly increasing the number of licensed beds or changing the types of specialty services
that we provide. These legal constraints on the operation of these facilities could have an adverse
financial effect. In addition, there is no guarantee that the MedPAC and Department of Health and
Human Services specialty hospital reports to Congress will be favorable, or that future legislation
will not be enacted that would prevent us from operating specialty hospitals with physician
investors. If future legislation were to be enacted that prohibits all physician referrals to
specialty hospitals in which the physicians own an interest, even if those facilities already
exist, our specialty hospitals could be materially adversely affected. False and Other Improper Claims The U.S. government is authorized to impose criminal, civil and administrative penalties on
any person or entity that files a false claim for payment from the Medicare or Medicaid programs.
Claims filed with private insurers can also lead to criminal and civil penalties, including, but
not limited to, penalties relating to violations of federal mail and wire fraud statutes. While the
criminal statutes are generally reserved for instances of fraudulent intent, the U.S. government is
applying its criminal, civil and administrative penalty statutes in an ever-expanding range of
circumstances. For example, the government has taken the position that a pattern of claiming
reimbursement for unnecessary services violates these statutes if the claimant merely should have
known the services were unnecessary, even if the government cannot demonstrate actual knowledge.
The government has also taken the position that claiming payment for low-quality services is a
violation of these statutes if the claimant should have known that the care was substandard. In
addition, some courts have held that a violation of the Stark law can result in liability under the
federal False Claims Act. Over the past several years, the U.S. government has accused an increasing number of health
care providers of violating the federal False Claims Act. The False Claims Act prohibits a person
from knowingly presenting, or causing to be presented, a false or fraudulent claim to the U.S.
government. The statute defines knowingly to include not only actual knowledge of a claims
falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a
claim. Because our facilities perform hundreds of similar procedures a year for which they are paid
by Medicare, and there is a relatively long statute of limitations, a billing error or cost
reporting error could result in significant civil or criminal penalties. Under the qui tam, or whistleblower, provisions of the False Claims Act, private parties may
bring actions on behalf of the U.S. government. These private parties, often referred to as
relators, are entitled to share in any amounts recovered by the government through trial or
settlement. Both direct enforcement activity by the government and whistleblower lawsuits have
increased significantly in recent years and have increased the risk that a health care company,
like us, will have to defend a false claims action, pay fines or be excluded from the Medicare and
Medicaid programs as a result of an investigation resulting from a whistleblower case. Although we
believe that our operations materially comply with both federal and state laws, they may
nevertheless be the subject of a whistleblower lawsuit, or may otherwise be challenged or
scrutinized by governmental authorities. A determination that we have violated these laws could
have a material adverse effect on us. We are also subject to various state insurance statutes and regulations that prohibit us from
submitting inaccurate, incorrect or misleading claims. We believe that our surgery centers are in
compliance with all state insurance laws and regulations regarding the submission of claims. We
cannot assure you, however, that none of our centers insurance claims will ever be challenged. If
we were found to be in violation of a states insurance laws or regulations, we could be forced to
discontinue the practice in violation, which could have an adverse effect on our business and
operating results, and we could be subject to fines and criminal penalties. 21




---



##### Table of Contents



Health Information Practices There are currently numerous laws at the state and federal levels addressing patient privacy
concerns. Federal regulations issued pursuant to HIPAA contain, among other measures, provisions
that require many organizations, including us, to implement very significant and potentially
expensive new computer systems, employee training programs and business procedures. The federal
regulations are intended to encourage electronic commerce in the
health care industry. Among
other things, HIPAA requires health care facilities to use standard data formats and code
sets established by Department of Health and Human Services when electronically transmitting
information in connection with several transactions, including health claims and equivalent
encounter information, health care payment and remittance advice and health claim status. We have
implemented or upgraded computer systems, as appropriate, at our facilities and at our corporate
headquarters to comply with the new transaction and code set regulations and have tested these
systems with several of our payors. HIPAA also requires the Department of Health and Human Services to issue regulations
establishing standard unique health identifiers for individuals, employers, health plans and health
care providers to be used in connection with the standard electronic
transactions. All health care
providers, including our facilities, will be required to obtain a new National Provider Identifier
(NPI) to be used in standard transactions instead of other numerical identifiers beginning no
later than May 23, 2007; health care providers may begin applying for NPIs on May 23, 2005. We
cannot predict whether our facilities may experience payment delays during the transition to the
new identifier. Our facilities have fully implemented use of the Employer Identification Number as
the standard unique health identifier for employers. The Department of Health and Human Services
has not yet issued proposed rules that establish the standard for unique health identifiers for
health plans or individuals. Once these regulations are issued in final form, we expect to have
approximately two years to become fully compliant, but cannot predict the impact of such changes at
this time. HIPAA regulations also require our facilities to comply with standards to protect the
confidentiality, availability and integrity of patient health information, by establishing and
maintaining reasonable and appropriate administrative, technical and physical safeguards to ensure
the integrity, confidentiality and the availability of electronic health and related financial
information. The security standards were designed to protect electronic information against
reasonably anticipated threats or hazards to the security or integrity of the information and to
protect the information against unauthorized use or disclosure. We expect that the security
standards will require our facilities to implement significant new systems,business procedures and
training programs, though the regulations do not mandate use of a specific technology. We must
comply with these security regulations by April 21, 2005, and we expect that all our facilities
will be in compliance at that time. DHHS has also established standards for the privacy of individually identifiable health
information. These privacy standards apply to all health plans, all health care clearinghouses and
health care providers, such as our facilities, that transmit health information in an electronic
form in connection with standard transactions, and apply to individually identifiable information
held or disclosed by a covered entity in any form. These standards impose extensive administrative
requirements on our facilities and require compliance with rules governing the use and disclosure
of this health information, and they require our facilities to impose these rules, by contract, on
any business associate to whom we disclose such information in order to perform functions on their
behalf. In addition, our facilities will continue to remain subject to any state laws that are more
restrictive than the privacy regulations issued under HIPAA. These laws vary by state and could
impose additional penalties. A violation of the HIPAA regulations could result in civil money penalties of $100 per
incident, up to a maximum of $25,000 per person per year per standard. HIPAA also provides for
criminal penalties of up to $50,000 and one year in prison for knowingly and improperly obtaining
or disclosing protected health information, up to $100,000 and five years in prison for obtaining
protected health information under false pretenses, and up to $250,000 and ten years in prison for
obtaining or disclosing protected health information with the intent to sell, transfer or use such
information for commercial advantage, personal gain or malicious harm. Since there is no
significant history of enforcement efforts by the federal government at this time, it is not
possible to ascertain the likelihood of enforcement efforts in connection with the HIPAA
regulations or the potential for fines and penalties, which may result from the violation
of the regulations. 22




---



##### Table of Contents



We believe all of our facilities are in compliance with the privacy standards and we have made
significant commitment and taken action to implement the HIPAA privacy standards. We have
appointed members of our management team to direct our compliance with these standards. We have appointed a privacy officer, prepared privacy policies, trained our workforce on these
policies and entered into business associate agreements with the appropriate vendors. We expect to
have ongoing HIPAA compliance costs. In addition, because some of the HIPAA regulations are
proposed regulations, we cannot predict the total financial impact of the regulations on our
operations. Health Care Regulations Affecting Our New York Operations Laws in the State of New York require that corporations have natural persons as stockholders
in order to be approved by the New York Department of Health as a licensed health care facility.
Accordingly, we are not able to own interests in a limited partnership or limited liability company
that owns an interest in a health care facility located in New York. Laws in the State of New York
also prohibit the delegation of certain management functions by a licensed health care facility.
The law does permit a licensed facility to lease premises and obtain various services from
non-licensed entities; however, it is not clear what types of delegation constitute a violation. We
own an interest in a limited liability company which provides administrative services to a surgery
center located in New York. Although we believe that our operations and relationships in New York
are in compliance with these laws, if New York regulatory authorities or a third party asserts a
contrary position, we may be unable to continue or expand our operations in New York. Available Information Our website is www.symbion.com. We make available free of charge on this website under
Investor Relations  SEC Filings our periodic and other reports and amendments to those reports
filed with or furnished to the Securities and Exchange Commission (SEC) as soon as reasonably
practicable after we electronically file or furnish such materials. 
 Item 2.Properties Our corporate headquarters are located in Nashville, Tennessee in 43,772 square feet of leased
office space, under a ten-year lease that commenced on November 1, 2002. We sublease 1,827 square
feet of the 43,772 square feet to a third party. Typically, our surgery centers are located on real estate leased by the partnership or limited
liability company that owns the center. These leases generally have initial terms of ten years,
but range from two to 15 years. Most of the leases contain options to extend the lease period for
up to ten additional years. The surgery centers are generally responsible for property taxes,
property and casualty insurance and routine maintenance expenses. Three of our surgery centers are
located on real estate owned by the limited partnership or limited liability company that owns the
surgery center. We generally guarantee the lease obligations of the partnerships and limited
liability companies that own our surgery centers. Additional information about our surgery centers and our other properties can be found in Item
1 of this report under the caption, Business  Operations. 23




---



##### Table of Contents



Item 3.Legal Proceedings We are, from time to time, subject to claims and suits arising in the ordinary course of
business, including claims for damages for personal injuries, breach of management contracts and
employment related claims. In certain of these actions, plaintiffs request payment for damages,
including punitive damages, that may not be covered by insurance. On February 4, 2005, MediSphere Health Partners, Inc. filed a breach of contract
action against Symbion Ambulatory Resource Centres, Inc., a subsidiary of the Company, in the
Chancery Court for Davidson County, Tennessee. MediSphere seeks in the lawsuit to recover
$1,062,857 (plus attorneys fees), which it claims to be due pursuant to the terms of a Stock
Purchase Agreement between Symbion Ambulatory Resource Centres, Inc.
and MediSphere dated
November 4, 2003. On March 21, 2005, Symbion Ambulatory Resource Centres, Inc. filed an answer to the
complaint. In the answer, we denied that any amounts are due under the
terms of the Stock Purchase Agreement, and asserted a counterclaim
against MediSphere. In the counterclaim, we seek to recover in excess
of $3,000,000 in damages arising out of MediSpheres breach of
certain of the representations and warranties contained in the Stock
Purchase Agreement, and MediSpheres intentional concealment and
misrepresentation of facts material to the Stock Purchase Agreement
and the November 17, 2003 closing of the transactions
contemplated therein. We have also asserted a counterclaim against
certain of MediSpheres preferred shareholders. We dispute MediSpheres claims
that any amounts are due under the terms of the Stock Purchase Agreement and intend to defend the
case vigorously. 
 Item 4.Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of the stockholders during the fourth quarter ended
December 31, 2004. 24




---



##### Table of Contents



PART II 
 Item 5.Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities Market for Common Stock.Until February 6, 2004, there was no established public trading
market for our common stock. On February 6, 2004, our common stock commenced trading on the Nasdaq
National Market under the symbol SMBI. The following table sets forth for the periods indicating
the high and low bid prices per share of our common stock as reported on the Nasdaq National
Market. 2004
    
    High
    
    
    LowFebruary 6, 2004 to March 31, 2004
    
    $
    20.66
    
    
    $
    16.98Second Quarter
    
    
    18.01
    
    
    
    15.85Third Quarter
    
    
    19.30
    
    
    
    15.83Fourth Quarter
    
    
    21.95
    
    
    
    15.43
 On March 15, 2005, the last reported sales price for our common stock on the Nasdaq National
Market was $21.26 per share. At March 15, 2005, there were approximately 222 stockholders of
record. Dividends.We have never declared or paid dividends on our common stock. We intend to retain
future earnings to finance the growth and development of our business and, accordingly, do not
currently intend to declare or pay any dividends on our common stock. Our board of directors will
evaluate our future earnings, results of operations, financial condition and capital requirements
in determining whether to declare or pay cash dividends. Delaware law prohibits us from paying any
dividends unless we have capital surplus or net profits available for this purpose. In addition,
our credit facility imposes restrictions on our ability to pay dividends. See Managements
Discussion and Analysis of Financial Condition and Results of Operations  Liquidity and Capital
Resources. Recent Sales of Unregistered Securities.During the three months ended December 31, 2004, we
issued the following securities that were not registered under the Securities Act of 1933, as
amended. Each of the transactions described below was conducted in reliance upon the exemptions
from registration provided in Sections 3(b) and 4(2) of the Securities Act and Regulation D and the
other rules and regulations promulgated thereunder. Each of these issuances was made without the
use of an underwriter, and the certificates and other documentation evidencing the securities
issued in connection with these transactions bear a restrictive legend permitting transfer of the
securities only upon registration under the Securities Act or pursuant to an exemption from
registration.  
    On October 1, 2004, we issued 10,208 shares of our common stock to an individual who
holds an ownership interest in one of our surgery centers for an aggregate of $82,991 upon
exercise of warrants.
    On November 15, 2004, we issued 2,315 shares of our common stock to an individual who
holds an ownership interest in one of our surgery centers upon a cashless exercise of
warrants.
    On December 8, 2004, we issued 2,881 shares of our common stock to an individual who
holds an ownership interest in one of our surgery centers upon a cashless exercise of
warrants.
    On December 20, 2004, we issued 2,492 shares of our common stock to an individual who
holds an ownership interest in one of our surgery centers upon a cashless exercise of
warrants.
    On December 20, 2004, we issued 3,056 shares of our common stock to an individual who
holds an ownership interest in one of our surgery centers upon a cashless exercise of
warrants.
    On December 30, 2004, we issued 800 shares of our common stock to an individual who
holds an ownership interest in one of our surgery centers upon a cashless exercise of
warrants. 25




---



##### Table of Contents



Item 6.Selected Financial Data The following selected consolidated financial and other data should be read in conjunction
with Managements Discussion and Analysis of Financial Condition and Results of Operations and
our audited consolidated financial statements and the related notes included elsewhere in this
report. The selected consolidated statement of operations data set forth below for each of the
three years in the period ended December 31, 2004, and the selected consolidated balance sheet data
set forth below at December 31, 2004 and 2003, are derived from our audited consolidated financial
statements that are included elsewhere in this report. The selected consolidated statement of
operations data set forth below for the years ended December 31, 2001 and 2000, and the selected
consolidated balance sheet data set forth below at December 31, 2002, 2001 and 2000, are derived
from our audited consolidated financial statements that are not included in this report. The historical results presented below are not necessarily indicative of the results to be
expected for any future period. Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(dollars in thousands, except per share amounts)Consolidated Statement Of
Operations Data:Revenues
    
    $
    216,325
    
    
    $
    176,269
    
    
    $
    144,688
    
    
    $
    104,704
    
    
    $
    126,942Cost of revenues
    
    
    141,765
    
    
    
    117,305
    
    
    
    93,692
    
    
    
    75,783
    
    
    
    101,793General and administrative expense
    
    
    18,449
    
    
    
    15,874
    
    
    
    14,328
    
    
    
    12,407
    
    
    
    11,454Depreciation and amortization
    
    
    10,927
    
    
    
    9,295
    
    
    
    7,836
    
    
    
    7,743
    
    
    
    7,503Provision for doubtful accounts
    
    
    3,989
    
    
    
    2,748
    
    
    
    4,843
    
    
    
    1,055
    
    
    
    1,717Loss (income) on equity investments
    
    
    (1,272
    )
    
    
    (402
    )
    
    
    (541
    )
    
    
    192
    
    
    
    466Impairment and loss on disposal of long-lived assets
    
    
    271
    
    
    
    437
    
    
    
    492
    
    
    
    385
    
    
    
    6,043Gain on sale of long-lived assets
    
    
    (250
    )
    
    
    (571
    )
    
    
    (457
    )
    
    
    (2,346
    )
    
    
    Total operating expenses
    
    
    173,879
    
    
    
    144,686
    
    
    
    120,193
    
    
    
    95,219
    
    
    
    128,976Operating income (loss)
    
    
    42,446
    
    
    
    31,583
    
    
    
    24,495
    
    
    
    9,485
    
    
    
    (2,034
    )Minority interests in (income) loss of consolidated
subsidiaries
    
    
    (15,549
    )
    
    
    (10,447
    )
    
    
    (7,353
    )
    
    
    (1,909
    )
    
    
    526Interest expense, net
    
    
    (4,862
    )
    
    
    (5,782
    )
    
    
    (4,625
    )
    
    
    (2,600
    )
    
    
    (3,234
    )Income (loss) before income taxes
    
    
    22,035
    
    
    
    15,354
    
    
    
    12,517
    
    
    
    4,976
    
    
    
    (4,742
    )Provision (benefit) for income taxes
    
    
    8,483
    
    
    
    (2,170
    )
    
    
    215
    
    
    
    287
    
    
    
    135Net income (loss)
    
    $
    13,552
    
    
    $
    17,524
    
    
    $
    12,302
    
    
    $
    4,689
    
    
    $
    (4,877
    )Net income (loss) per share:Basic
    
    $
    0.69
    
    
    $
    1.66
    
    
    $
    1.19
    
    
    $
    0.47
    
    
    $
    (0.49
    )Diluted
    
    $
    0.67
    
    
    $
    1.38
    
    
    $
    1.01
    
    
    $
    0.45
    
    
    $
    (0.49
    )Shares used to compute net income (loss) per share:Basic
    
    
    19,736,722
    
    
    
    10,536,745
    
    
    
    10,349,568
    
    
    
    9,908,447
    
    
    
    9,912,349Diluted
    
    
    20,347,385
    
    
    
    12,658,620
    
    
    
    12,144,140
    
    
    
    10,341,085
    
    
    
    9,912,349Cash Flow Data:Net cash provided by operating activities
    
    $
    28,087
    
    
    $
    20,807
    
    
    $
    21,770
    
    
    $
    8,438
    
    
    $
    6,834Net cash used in investing activities
    
    
    (104,852
    )
    
    
    (66,974
    )
    
    
    (21,592
    )
    
    
    (5,821
    )
    
    
    (18,359
    )Net cash provided by (used in) financing activities
    
    
    82,383
    
    
    
    43,177
    
    
    
    5,235
    
    
    
    (3,423
    )
    
    
    11,654Other Data:EBITDA(1)
    
    $
    53,373
    
    
    $
    40,878
    
    
    $
    32,331
    
    
    $
    17,228
    
    
    $
    5,469EBITDA as a % of revenues
    
    
    24.7
    %
    
    
    23.2
    %
    
    
    22.3
    %
    
    
    16.5
    %
    
    
    4.3
    %EBITDA less minority interests(1)
    
    $
    37,824
    
    
    $
    30,431
    
    
    $
    24,978
    
    
    $
    15,319
    
    
    $
    5,995EBITDA less minority interests as a % of revenues
    
    
    17.5
    %
    
    
    17.3
    %
    
    
    17.3
    %
    
    
    14.6
    %
    
    
    4.7
    %Number of surgery centers operated as of the end of
period(2)
    
    
    54
    
    
    
    44
    
    
    
    34
    
    
    
    24
    
    
    
    20
 As of December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)Consolidated Balance Sheet Data:Working capital
    
    $
    41,455
    
    
    $
    25,979
    
    
    $
    24,839
    
    
    $
    21,706
    
    
    $
    35,347Total assets
    
    
    365,761
    
    
    
    252,784
    
    
    
    188,888
    
    
    
    100,799
    
    
    
    103,759Total long-term debt, less current maturities
    
    
    69,747
    
    
    
    101,037
    
    
    
    57,738
    
    
    
    39,983
    
    
    
    47,986Total stockholders equity
    
    
    237,998
    
    
    
    104,015
    
    
    
    86,677
    
    
    
    41,610
    
    
    
    37,127
   (1)
    
    When we use the term EBITDA, we are referring to operating income (loss) plus depreciation
and amortization. EBITDA less minority interests represents our portion of EBITDA, after
subtracting the 26




---



##### Table of Contents



interests of third parties, such as physicians, hospitals and other health care providers, that
own interests in surgery centers that we consolidate for financial reporting purposes. We
consolidate for financial reporting purposes the financial results of 40 of the 45 surgery
centers in which we owned an interest as of December 31, 2004. Our operating strategy involves
sharing ownership of our surgery centers with physicians, physician groups and hospitals. These
third parties own an interest in all but three of the centers in which we own an interest. We
believe that it is preferable to present EBITDA less minority interests because it excludes the
portion of EBITDA attributable to these third-party interests and clarifies for investors our
portion of EBITDA generated by our surgery centers and other operations.We use EBITDA and EBITDA less minority interests as measures of liquidity. We have included them
because we believe that they provide investors with additional information about our ability to
incur and service debt and make capital expenditures. We also use EBITDA, with some variation in
the calculation, to determine our compliance with some of the covenants under our senior credit
facility, as well as to determine the interest rate and commitment fee payable under the senior
credit facility.EBITDA and EBITDA less minority interests are not measurements of financial performance or
liquidity under generally accepted accounting principles. They should not be considered in
isolation or as a substitute for net income (loss), operating income (loss), cash flows from
operating, investing or financing activities, or any other measure calculated in accordance with
generally accepted accounting principles. The items excluded from EBITDA and EBITDA less
minority interests are significant components in understanding and evaluating financial
performance and liquidity. Our calculation of EBITDA and EBITDA less minority interests may not
be comparable to similarly titled measures reported by other companies.The following table reconciles EBITDA and EBITDA less minority interests to net cash provided by
operating activities: Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(in thousands)(unaudited)EBITDA
    
    $
    53,373
    
    
    $
    40,878
    
    
    $
    32,331
    
    
    $
    17,228
    
    
    $
    5,469Minority interests in (income) loss of consolidated subsidiaries
    
    
    (15,549
    )
    
    
    (10,447
    )
    
    
    (7,353
    )
    
    
    (1,909
    )
    
    
    526EBITDA less minority interests
    
    
    37,824
    
    
    
    30,431
    
    
    
    24,978
    
    
    
    15,319
    
    
    
    5,995Depreciation and amortization
    
    
    (10,927
    )
    
    
    (9,295
    )
    
    
    (7,836
    )
    
    
    (7,743
    )
    
    
    (7,503
    )Interest expense, net
    
    
    (4,862
    )
    
    
    (5,782
    )
    
    
    (4,625
    )
    
    
    (2,600
    )
    
    
    (3,234
    )Income taxes
    
    
    (8,483
    )
    
    
    2,170
    
    
    
    (215
    )
    
    
    (287
    )
    
    
    (135
    )Net income (loss)
    
    
    13,552
    
    
    
    17,524
    
    
    
    12,302
    
    
    
    4,689
    
    
    
    (4,877
    )Depreciation and amortization
    
    
    10,927
    
    
    
    9,295
    
    
    
    7,836
    
    
    
    7,743
    
    
    
    7,503Impairment and loss on disposal of long-lived assets
    
    
    271
    
    
    
    437
    
    
    
    492
    
    
    
    385
    
    
    
    6,043Gain on sale of long-lived assets
    
    
    (250
    )
    
    
    (571
    )
    
    
    (457
    )
    
    
    (2,346
    )
    
    
    Minority interests in (income) loss of consolidated subsidiaries
    
    
    15,549
    
    
    
    10,447
    
    
    
    7,353
    
    
    
    1,909
    
    
    
    (526
    )Distributions to minority partners
    
    
    (14,420
    )
    
    
    (10,690
    )
    
    
    (6,177
    )
    
    
    (2,186
    )
    
    
    (511
    )Loss (income) on equity investments
    
    
    (1,272
    )
    
    
    (402
    )
    
    
    (541
    )
    
    
    192
    
    
    
    466Provision for bad debts
    
    
    3,989
    
    
    
    2,748
    
    
    
    4,843
    
    
    
    1,055
    
    
    
    1,717Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:Accounts receivable
    
    
    (5,274
    )
    
    
    (3,537
    )
    
    
    (5,694
    )
    
    
    (1,052
    )
    
    
    (2,887
    )Other current assets
    
    
    1,465
    
    
    
    (7,016
    )
    
    
    (3,080
    )
    
    
    (2,424
    )
    
    
    (568
    )Other current liabilities
    
    
    3,550
    
    
    
    2,572
    
    
    
    4,893
    
    
    
    473
    
    
    
    474Net cash provided by operating activities
    
    $
    28,087
    
    
    $
    20,807
    
    
    $
    21,770
    
    
    $
    8,438
    
    
    $
    6,834
   (2)
    
    Includes surgery centers that we manage but in which we do not have an ownership interest. 27




---



##### Table of Contents



Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with Selected Financial Data and our audited consolidated financial
statements and related notes included elsewhere in this report. This discussion contains
forward-looking statements that involve risks and uncertainties. For additional information
regarding some of the risks and uncertainties that affect our business and the industry in which we
operate, please read  Risk Factors. Our actual results may differ materially from those
estimated or projected in any of these forward-looking statements. Executive Overview Our Company We own and operate a network of surgery centers in 21 states. As of March 15, 2005, we owned
and operated 47 surgery centers and managed nine additional surgery centers. We own a majority
interest in 35 of the 47 surgery centers in which we own an interest, and consolidate 41 of these
centers for financial reporting purposes. Our surgery centers include three facilities that are
licensed as hospitals, two of which we own and one of which we manage. In addition to our surgery
centers, we also operate two diagnostic centers and manage three physician networks, including two
physician networks in markets in which we operate surgery centers. We anticipate acquiring about three to four centers and developing three to four centers
annually during the next three to five years. A typical surgery center costs us between $3.0
million and $7.0 million to develop and equip, excluding costs of real estate. This cost varies
depending on the range of specialties that will be provided at the facility and the number of
operating and treatment rooms. We typically fund about 70% of the development costs of a new
surgery center with borrowings under our senior credit facility, and the remainder with equity
contributed by us and the other owners of the center. Our ownership interests in surgery centers
that we have developed range from 25% to 82%, although we anticipate that we will own primarily
majority interests in future developments. The remaining owners are typically local physicians,
physician groups or hospitals. We expect that our acquisition and development program will require
substantial capital resources, which we estimate to range from $35.0 million to $65.0 million per
year over the next three years. In addition, the operations of our existing facilities will require
ongoing capital expenditures. We expect that our capital needs will be financed through a
combination of cash flow from operations, bank debt and the issuance of debt and equity securities. We generate revenue and cash through patient service revenues, physician service revenues and
other service revenues. Patient service revenues are revenues for surgical or diagnostic
procedures performed in each of the surgery centers that we consolidate for financial reporting
purposes. The fee charged for a procedure varies depending on the procedure, but usually includes
all charges for usage of an operating room, a recovery room, special equipment, supplies, nursing
staff and medications. The fee does not include professional fees charged by the patients surgeon,
anesthesiologist or other attending physician, which are billed directly by such physicians to the
patient or third-party payor. Patient service revenues are recognized on the date of service, net
of estimated contractual adjustments and discounts for third-party payors, including Medicare and
Medicaid. Changes in estimated contractual adjustments and discounts are recorded in the period of
change. Physician service revenues are revenues from physician networks consisting of reimbursed
expenses, plus participation in the excess of revenue over expenses of the physician networks, as
provided for in our service agreements with our physician networks. Reimbursed expenses include the
costs of personnel, supplies and other expenses incurred to provide the management services to the
physician networks. We recognize physician service revenues in the period in which reimbursable
expenses are incurred and in the period in which we have the right to receive a percentage of the
amount by which a physician networks revenues exceed its expenses. Physician service revenues are
based on net billings with any changes in estimated contractual adjustments reflected in service
revenues in the subsequent period. Other service revenues consists of management and
administrative service fees derived from the non-consolidated facilities that we account for under
the equity method, management of surgery centers in which we do not own an interest and management
services we provide to physician networks for which we are not required to provide capital or
additional assets. 28




---



##### Table of Contents



The following table summarizes our revenues by service type as a percentage of revenues for
the periods indicated: Year Ended December 31,2004

    
    2003

    
    2002Patient service revenues
    
    
    94
    %
    
    
    90
    %
    
    
    90
    %Physician service revenues
    
    
    2
    
    
    
    2
    
    
    
    2Other service revenues
    
    
    4
    
    
    
    8
    
    
    
    8Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Competition In developing or acquiring existing surgery centers, we compete with other public and private
surgery center and hospital companies. Several large national companies own and/or manage surgery
centers and surgical hospitals, including HEALTHSOUTH Corporation, HCA Inc., Universal Health
Services, Inc., AmSurg Corp. and United Surgical Partners
International, Inc. Many of these
companies have greater resources and access to capital than we do. In addition, local hospitals,
physician groups and other providers may compete with us in the ownership and operation of surgery
centers. The number of physicians that perform outpatient surgeries in an office-based setting is
expected to rise in the upcoming years. Operating Trends We intend to increase revenues by increasing the number of cases performed at each surgery
center. We also intend to increase revenues by acquiring additional surgery centers and developing
new surgery centers. As a result of the increased revenues, we expect our EBITDA margin to
increase due to operating efficiencies and economies of scale as a
result of leveraged general and administrative expenses. Our success
in the future will be determined by the continued
success of our current surgery centers as well as our ability to acquire and incorporate new
facilities. Acquisitions, Developments and Divestitures  Acquisitions and Developments During
2004, we acquired six centers, developed three additional surgery centers, opened one
imaging center and entered into a management agreement for one additional surgery center. We
entered into management agreements with each of these centers. One of our newly-developed surgery
centers was developed through a partnership with one of our existing physician networks. Our
investment related to these centers was about $66.3 million. We paid for these investments using
cash from operations and funds available under our senior secured credit facility. During 2003, we acquired five centers, including one licensed as a hospital, opened five
newly-developed surgery centers and assumed a management agreement for one additional surgery
center licensed as a hospital. We entered into management agreements with each of these surgery
centers and have a majority ownership interest in four of these centers. Our investment related to
these centers was about $52.6 million. We paid for these investments using primarily funds
available under our senior credit facility. In addition, we issued warrants to purchase 14,101
shares of our common stock. In addition, during 2003, we acquired an additional 39% ownership interest in Dry Creek
Imaging Center, a diagnostic imaging center that is adjacent to our surgery center in the Denver,
Colorado market, for about $1.5 million in cash. We now own 90% of the center. We also acquired an
additional 16.4% ownership interest in Village SurgiCenter in Erie, Pennsylvania, for about $1.0
million in cash. We now own an 82% interest in the center. In April 2002, we acquired Physicians Surgical Care, Inc., which had ownership interests in
and managed seven surgery centers, including one licensed as a hospital. A subsidiary of Physicians
Surgical Care assisted in the development of an additional surgery center to which we began
providing administrative services when it opened in 29




---



##### Table of Contents



October 2002. In connection with the acquisition, we issued an aggregate of 624,919 shares of
our common stock, 4,341,726 shares of our Series A convertible preferred stock and 2,604,590 shares
of our Series B convertible preferred stock. In addition, during 2004, we issued an additional
204,500 shares of our common stock to the former stockholders of Physicians Surgical Care based on
the 2003 financial results of one of the Physicians Surgical Care surgery centers. In addition to Physicians Surgical Care, we acquired ownership interests in three additional
surgery centers and opened two newly-developed surgery centers during 2002. We entered into
management agreements with each of these surgery centers and have majority ownership interests in
four of the centers. Our total investment related to these centers was about $24.6 million,
including about $16.8 million funded with debt. Divestitures During 2004, after purchasing
the outstanding ownership interests from our prior physician and
hospital partners, we restructured our Physicians SurgiCenter of Houston partnership in Houston,
Texas, creating a joint venture with the American Institute of Gastric Banding, Ltd. a
privately-held single procedure focused surgical company based in
Dallas, Texas  (AIGB). In connection
with the restructuring, we retained a 10% ownership in the surgery center and we no longer manage
or consolidate the surgery center for financial reporting purposes.
Subsequent to December 31, 2004, we entered into discussions with
AIGB relating to the possible disposition of our 10% ownership in the
surgery center. Effective May 20, 2003, the surgery center we managed in Knoxville, Tennessee closed following
the opening of the new surgery center in this market we developed with the same organization,
University Health System, Inc. We have a 25% ownership interest in the new surgery center. Effective September 6, 2002, we sold all of our ownership interest in a surgery center and
terminated our management agreement with the surgery center. In consideration for our ownership
interest and termination of the management agreement, we received about $1.4 million in cash in
October 2002. In addition, we were released from a guaranty of about $4.6 million of debt incurred
by the center. We recorded a charge in 2002 of about $380,000 in connection with this transaction. Effective May 31, 2002, we sold all of our ownership interest in a surgery center and
terminated our management agreement with the surgery center. In consideration for our ownership
interest, we were released from a guaranty of the facility lease for the surgery center and the
purchaser assumed about $1.1 million of liabilities. We recorded a net loss in 2002 of about $8,000
in connection with this transaction. Critical Accounting Policies Our accounting policies are described in Note 2 of our consolidated financial statements
included elsewhere in this report. In preparing our consolidated financial statements in conformity
with accounting principles generally accepted in the United States, our management must make
estimates and assumptions that affect the reported amounts of assets and liabilities and related
disclosures at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Certain accounting estimates are particularly sensitive
because of their complexity and the possibility that future events affecting them may differ
materially from our current judgments and estimates. Our actual results could differ from those
estimates. We believe that the following critical accounting policies are important to the
portrayal of our financial condition and results of operations, and require our managements
subjective or complex judgment because of the sensitivity of the methods, assumptions and estimates
used. This listing of critical accounting policies is not intended to be a comprehensive list of
all of our accounting policies. In many cases, the accounting treatment of a particular transaction
is specifically dictated by generally accepted accounting principles, with no need for managements
judgment regarding accounting policy. Consolidation and Control Our consolidated financial statements include our accounts and those of our wholly-owned
subsidiaries, as well as our interests in facilities that we control through our ownership of a
majority voting interest or other rights granted to us by contract as the sole general partner or
manager to manage and control the business. The rights of the 30




---



##### Table of Contents



limited partners or minority members in these surgery centers are generally limited to those
that protect their ownership interests, including the right to approve of the issuance of new
ownership interests, and those that protect their financial interests, including the right to
approve the acquisition or divestiture of significant assets or the incurrence of debt that
physician limited partners or members are required to guarantee on a pro rata basis based upon
their respective ownership interests or that exceeds 20% of the fair market value of the centers
assets. All significant intercompany balances and transactions, including management fees from
consolidated centers, are eliminated in consolidation. We also hold non-controlling interests in some surgery centers over which we exercise
significant influence. Significant influence includes financial interests ranging from 10% to 42%
and duties, rights and responsibilities for the day-to-day management of the surgery center. These
non-controlling interests are accounted for under the equity method. In addition, on December 31, 2003, as a result of Interpretation No. 46, Consolidation of
Variable Interest Entities (VIEs), an Interpretation of Accounting Research Bulletin No. 51
(FIN 46), we consolidated for financial reporting purposes a surgery center in which we do not
own an interest. Under FIN 46, the surgery center is considered a VIE and we are the primary
beneficiary. Therefore, under FIN 46 we are required to consolidate this surgery center for
financial reporting purposes. We currently do not expect the consolidation of this surgery center
to have a material impact on our results of operations. Revenue Recognition Our revenues are comprised of patient service revenues, physician service revenues and other
service revenues. Our patient service revenues relate to fees charged for surgical or diagnostic
procedures performed at facilities that we consolidate for financial reporting purposes. These fees
are billed either to the patient or a third-party payor. Our fees vary depending on the procedure,
but usually include all charges for usage of an operating room, a recovery room, equipment,
supplies, nursing staff and medications. Our fees do not include professional fees charged by the
patients surgeon, anesthesiologist or other attending physician, which are billed directly by the
physicians to the patient or third-party payor. We recognize patient service revenues when the
related procedures are performed. Our physician service revenues relate to fees we derive from managing physician networks for
which we also have a contractual obligation to provide capital and additional assets. Currently we
have such an obligation to only one group of six physicians included in one of the three physician
networks we manage. We expect our physician service revenues to decline as a percentage of our
total revenues as we continue to focus on our surgery center business. Physician service revenues
consist of reimbursed expenses and a percentage of the amount by which each physician networks
revenues exceed its expenses, as defined by our management agreement with each physician network.
We recognize physician service revenues in the period in which reimbursable expenses are incurred
and the period in which we have rights to a percentage of the amount by which a physician networks
revenues exceed its expenses. Our other service revenues are comprised of management and administrative service fees we
derive from non-consolidated facilities that we account for under the equity method, management of
surgery centers in which we do not own an interest and management services we provide to physician
networks for which we are not required to provide capital or additional assets. The fees we derive
from these management arrangements are based on a pre-determined percentage of the revenues of each
surgery center and physician network. We recognize other service revenues in the period in which
services are rendered. Allowance for Contractual Adjustments and Doubtful Accounts Our patient service revenues are recorded net of estimated contractual allowances from
third-party payors, which we estimate based on the historical trend of our surgery centers cash
collections and contractual write-offs, accounts receivable agings, established fee schedules,
relationships with payors and procedure statistics. We estimate our allowances for bad debts using
similar information and analysis. While we believe that our allowances for contractual adjustments
and bad debts are adequate, if the actual write-offs are significantly different from our
estimates, our results of operations may, in turn, be significantly impacted. Our net accounts
receivable reflected allowances for doubtful accounts of $13.7 million and $12.5 million at
December 31, 2004 and 2003, respectively. 31




---



##### Table of Contents



We derive all of our physician service revenues from physician networks with which we have
service agreements. Physician service revenues from physician networks consist of reimbursable
expenses plus participation in the excess of revenue over expenses of the physician networks as
provided for in the service agreements. Reimbursed expenses include the costs of our personnel,
supplies and other expenses incurred to provide the management services to the physician networks.
We recognize physician service revenues in the period in which reimbursable expenses are incurred
and in the period in which we have rights to a percentage of the amount by which a physician
networks revenues exceed its expenses. The participation component of physician service revenues
is based on net billings of the physician network. Changes in estimated contractual adjustments
and bad debts are reflected in physician service revenues in subsequent periods. Our physician
service revenues would be impacted by changes in estimated contractual adjustments and bad debts
recorded by the physician networks. The following table summarizes our days sales outstanding as of the dates indicated: As of December 31,2004

    
    2003

    
    2002Days sales outstanding
    
    
    41
    
    
    
    45
    
    
    
    44
 Our target for days sales outstanding related to patient service revenues ranges from 40 days
to 47 days. Our days sales outstanding for the dates presented in the table above are within the
target range. Our collection policies and procedures are based on the type of payor, size of claim and
estimated collection percentage for each patient account. The operating systems used to manage our
patient accounts provide for an aging schedule in 30-day increments, by payor, physician and
patient. The operating systems generate reports that assist in the collection efforts by
prioritizing patient accounts. Collection efforts include direct contact with insurance carriers or
patients, written correspondence and the use of legal or collection agency assistance, as required. We review the standard aging schedule, by facility, to determine the appropriate provision for
doubtful accounts. This review is supported by an analysis of the actual net revenues, contractual
adjustments and cash collections received. If our internal collection efforts are unsuccessful, we
manually review patient accounts with balances of $25 or more. We then classify the accounts based
on any external collection efforts we deem appropriate. An account is written-off only after we
have pursued collection with legal or collection agency assistance or otherwise deemed an account
to be uncollectible. Typically, accounts will be outstanding a minimum of 120 days before being
written-off. Income Taxes We use the asset and liability method to account for income taxes. Under this method, deferred
income tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. If a net operating loss carryforward exists, we make a
determination as to whether that net operating loss carryforward will be utilized in the future. A
valuation allowance will be established for certain net operating loss carry forwards where their
recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets assumes
that we will be able to generate sufficient future taxable income in certain tax jurisdictions,
based on estimates and assumptions. If these estimates and related assumptions change in the
future, we will be required to adjust our deferred tax valuation allowances. Long-lived Assets, Goodwill and Intangible Assets When events, circumstances or operating results indicate that the carrying values of certain
long-lived assets and the related identifiable intangible assets might be impaired, we assess
whether the carrying value of the assets will be recovered through undiscounted future cash flows
expected to be generated from the use of the assets and their eventual disposition. If the
assessment indicates that the recorded cost will not be recoverable, that cost will be reduced to
estimated fair value. Estimated fair value will be determined based on a discounted future cash
flow analysis. During 2004, we recorded an impairment charge of $271,000 primarily related to the
write down of 32




---



##### Table of Contents



obsolete medical equipment. During 2003, we recorded an impairment charge of $275,000 related
to software that we purchased but no longer intended to use. We believe that there has been no
other impairment. Goodwill represents the excess of purchase price over fair value of net tangible and
identifiable intangible assets acquired. Goodwill and indefinite lived intangible assets are tested
for impairment at least annually using a fair value method. Impairment is measured at the
reporting unit level using a discounted cash flows model to determine the fair value of the
reporting units. We will perform a goodwill impairment test between annual impairment tests
whenever events or changes in facts or circumstances indicate that impairment may exist, or at
least annually during the fourth quarter each year. During the fourth quarter of 2004, the Company
completed its annual impairment test and there was no indication of impairment. Professional Liability Insurance Claims We are subject to claims and legal actions in the ordinary course of our business, including
claims relating to patient treatment, employment practices and personal injuries. To cover these
claims, we maintain general and professional liability insurance in excess of self-insured
retentions through a third party commercial insurance carrier in amounts we believe to be
sufficient for its operations. We expense the costs under the self-insured retention exposure for
general and professional liability claims which relate to (i) deductibles on claims made during the
policy period, and (ii) an estimate of claims incurred but not yet reported. Reserves and
provisions for professional liability are based upon actuarially determined estimates. These
balances for professional liability represent the estimated costs of all reported and unreported
losses incurred through the respective consolidated balance sheet dates. The reserves are
estimated using individual case-basis valuations and actuarial analysis. Changes to the estimated
reserve amounts are included in current operating results. 33




---



##### Table of Contents



Results of Operations The following table summarizes certain statements of operations items for each of the three
years ended December 31, 2004, 2003 and 2002. The table also shows the percentage relationship to
total revenues for the periods indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues(dollars in thousands)Revenues
    
    $
    216,325
    
    
    
    100.0
    %
    
    $
    176,269
    
    
    
    100.0
    %
    
    $
    144,688
    
    
    
    100.0
    %Cost of revenues
    
    
    141,765
    
    
    
    65.5
    
    
    
    117,305
    
    
    
    66.5
    
    
    
    93,692
    
    
    
    64.8General and administrative expense
    
    
    18,449
    
    
    
    8.5
    
    
    
    15,874
    
    
    
    9.0
    
    
    
    14,328
    
    
    
    9.9Depreciation and amortization
    
    
    10,927
    
    
    
    5.0
    
    
    
    9,295
    
    
    
    5.3
    
    
    
    7,836
    
    
    
    5.4Provision for doubtful accounts
    
    
    3,989
    
    
    
    1.8
    
    
    
    2,748
    
    
    
    1.6
    
    
    
    4,843
    
    
    
    3.3Income on equity investments
    
    
    (1,272
    )
    
    
    (0.5
    )
    
    
    (402
    )
    
    
    (0.2
    )
    
    
    (541
    )
    
    
    (0.3
    )Impairment and loss on disposal of
long-lived assets
    
    
    271
    
    
    
    0.1
    
    
    
    437
    
    
    
    0.2
    
    
    
    492
    
    
    
    0.3Gain on sale of long-lived assets
    
    
    (250
    )
    
    
    0.0
    
    
    
    (571
    )
    
    
    (0.3
    )
    
    
    (457
    )
    
    
    (0.3
    )Total operating expenses
    
    
    173,879
    
    
    
    80.4
    %
    
    
    144,686
    
    
    
    82.1
    %
    
    
    120,193
    
    
    
    83.1
    %Operating income
    
    
    42,446
    
    
    
    19.6
    
    
    
    31,583
    
    
    
    17.9
    
    
    
    24,495
    
    
    
    16.9Minority interests in income/loss
of consolidated subsidiaries
    
    
    (15,549
    )
    
    
    (7.2
    )
    
    
    (10,447
    )
    
    
    (5.9
    )
    
    
    (7,353
    )
    
    
    (5.1
    )Interest expense, net
    
    
    (4,862
    )
    
    
    (2.2
    )
    
    
    (5,782
    )
    
    
    (3.3
    )
    
    
    (4,625
    )
    
    
    (3.1
    )Income before income taxes
    
    
    22,035
    
    
    
    10.2
    
    
    
    15,354
    
    
    
    8.7
    
    
    
    12,517
    
    
    
    8.7Provision (benefit) for income taxes
    
    
    8,483
    
    
    
    3.9
    
    
    
    (2,170
    )
    
    
    (1.2
    )
    
    
    215
    
    
    
    0.2Net income
    
    $
    13,552
    
    
    
    6.3
    %
    
    $
    17,524
    
    
    
    9.9
    %
    
    $
    12,302
    
    
    
    8.5
    %Adjusted net income (1)
    
    $
    13,999
    
    
    
    6.5
    %
    
    $
    9,889
    
    
    
    5.6
    %
    
    $
    7,698
    
    
    
    5.3
    %
   (1)
    
    Adjusted net income is not a measurement of financial performance or liquidity under generally
accepted accounting principles. Adjusted net income reflects an income tax rate of 38.5% for the
years ended December 31, 2004, 2003 and 2002 and excludes the non-recurring prepayment charges
incurred during 2004 and 2003. We believe that adjusted net income provides a better measurement
of our ongoing performance and provides a more useful period-to-period comparison to investors
because it excludes non-recurring items not related to our core business operations. Adjusted net
income should not be considered in isolation or as a substitute for net income, operating income,
cash flows from operating, investing or financing activities or any other measure calculated in
accordance with generally accepted accounting principles. Our calculation of adjusted net income
may not be comparable to similarly titled measures reported by other companies. The following table reconciles adjusted net income to net income (in thousands): Year Ended December 31,2004
    
    
    2003
    
    
    2002Net income
    
    
    13,552
    
    
    
    17,524
    
    
    
    12,302Provision (benefit) for income taxes
    
    
    8,483
    
    
    
    (2,170
    )
    
    
    215Income before income taxes
    
    
    22,035
    
    
    
    15,354
    
    
    
    12,517Plus prepayment charge
    
    
    728
    
    
    
    725
    
    
    
    Adjusted income before income taxes
    
    
    22,763
    
    
    
    16,079
    
    
    
    12,517Provision for income taxes
    
    
    8,764
    
    
    
    6,190
    
    
    
    4,819Adjusted net income
    
    $
    13,999
    
    
    $
    9,889
    
    
    $
    7,698
 34




---



##### Table of Contents



Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Overview.In 2004, our revenues increased 22.7% to $216.3 million from $176.3 million for
2003. Net income decreased 22.3% to $13.6 million for 2004 from $17.5 million for 2003. Our
financial results in 2004 were driven by the addition of six newly-acquired surgery centers, three
newly-developed surgery centers and one newly-developed diagnostic center. Our results were also
impacted by the organic growth at existing centers. Results for 2003 included a benefit for income
taxes of approximately $2.2 million, which primarily related to the recognition of deferred tax
assets of approximately $3.1 million. The 2003 results also included the impact of higher interest
expense and prepayment penalties incurred in connection with the refinancing of outstanding
indebtedness, which was completed in the third quarter of 2003. We paid off the higher cost
indebtedness with the proceeds from our initial public offering completed in February 2004. Revenues. Revenues for the year ended December 31, 2004 as compared to the year ended
December 31, 2003 were as follows (dollars in thousands): Dollar
    
    
    Percent2004
    
    
    2003
    
    
    Variance
    
    
    VariancePatient service revenues:Same store revenues
    
    $
    166,093
    
    
    $
    152,946
    
    
    $
    13,147
    
    
    
    8.5
    %Revenue from surgery centers
acquired or developed
    
    
    36,585
    
    
    
    5,175
    
    
    
    31,410
    
    
    
    Total patient service revenues
    
    
    202,678
    
    
    
    158,121
    
    
    
    44,557
    
    
    
    28.2Physician service revenues
    
    
    4,040
    
    
    
    3,796
    
    
    
    244
    
    
    
    6.4Other service revenues
    
    
    9,607
    
    
    
    14,352
    
    
    
    (4,745
    )
    
    
    (33.1
    )Total revenues
    
    $
    216,325
    
    
    $
    176,269
    
    
    $
    40,056
    
    
    
    22.7
    %
 We consider same store facilities as those
centers that we consolidate for financial reporting purposes
throughout 2004 and 2003. The increase in same store revenues was primarily the result of a 5.0% increase in the number
of cases during 2004. The remaining increase in patient service revenues is related to surgery
centers acquired or developed since January 1, 2003. In
addition, the $13.1 million increase in same store patient
service revenues was also the result of
$4.8 million from the consolidation of the variable interest entity, which was recorded as other
service revenues during 2003. Other service revenues decreased $4.8 million for 2004 compared to
2003 primarily as a result of the consolidation of the variable interest entity pursuant to FIN
46(R). If we had adopted FIN 46(R) effective January 1, 2003, same store revenues would have
increased 7.6% from $154.4 million for 2003 to $166.1 million for 2004. If we had adopted FIN
46(R) effective January 1, 2003, total revenues would have increased 23.1% from $175.7 million for
2003 to $216.3 million for 2004. Cost of Revenues. Cost of revenues for the year ended December 31, 2004 as compared to the
year ended December 31, 2003 were as follows (dollars in thousands): Dollar
    
    
    Percent2004
    
    
    2003
    
    
    Variance
    
    
    VarianceSame store cost of revenues
    
    $
    119,212
    
    
    $
    114,303
    
    
    $
    4,909
    
    
    
    4.3
    %Cost of revenues from
surgery centers acquired
or developed
    
    
    22,553
    
    
    
    3,002
    
    
    
    19,551
    
    
    
    Total cost of revenues
    
    $
    141,765
    
    
    $
    117,305
    
    
    $
    24,460
    
    
    
    20.9
    %
 The increase in same store cost of revenues was primarily the result of the increase in the
number of cases performed during 2004 as compared to 2003. This increase was partially offset by
lower general and professional liability expense during 2004 as compared to 2003. The general and
professional liability expense includes reserves for an estimate of losses limited to deductibles
and self-insured retention related to claims incurred and reported in the policy period and an
estimate for unlimited losses related to claims incurred but not yet reported during the policy
period. We base our accrual for general and professional liability expense on managements analysis
of an independent actuarial study performed during 2004 and 2003 by Casualty Actuarial Consultants,
Inc. The remaining $19.6 million increase in cost of revenues was the result of surgery centers
acquired or developed since January 1, 35




---



##### Table of Contents



2003. As a percentage of revenues, total cost of revenues decreased to 65.5% for 2004 from
66.5% for 2003. If we had adopted FIN 46(R) effective January 1, 2003, total cost of revenues
would have increased 19.1% to $141.8 million for 2004 from $119.1 million for 2003. In addition, as
a percentage of revenues, cost of revenues would have decreased to 65.5% for 2004 from 67.8% for
2003. General and Administrative Expenses. General and administrative expenses increased 15.7% to
$18.4 million for 2004 from $15.9 million for 2003. The increase in general and administrative
expense was primarily related to the overall growth in the number of surgery centers. As a
percentage of revenues, general and administrative expense decreased to 8.5% for 2004 from 9.0% for
2003. This decrease was primarily the result of improved economies of scale. Depreciation and Amortization. Depreciation and amortization expense for the year ended
December 31, 2004 as compared to the year ended December 31, 2003 were as follows (dollars in
thousands): Dollar
    
    
    Percent2004
    
    
    2003
    
    
    Variance
    
    
    VarianceSame store depreciation and
amortization
    
    $
    9,410
    
    
    $
    9,051
    
    
    $
    359
    
    
    
    4.0
    %Depreciation and amortization from
surgery centers acquired or
developed
    
    
    1,517
    
    
    
    244
    
    
    
    1,273
    
    
    
    Total depreciation and amortization
    
    $
    10,927
    
    
    $
    9,295
    
    
    $
    1,632
    
    
    
    17.6
    %
 As a percentage of revenues, depreciation and amortization expense decreased to 5.0% for 2004
from 5.3% for 2003. Provision for Doubtful Accounts. Provision for doubtful accounts increased $1.3 million to
$4.0 million for 2004 from $2.7 million for 2003. This increase is primarily attributed to the
surgery centers acquired or developed since January 1, 2003. As a percentage of revenues, the
provision for doubtful accounts increased to 1.8% for 2004 from 1.6% for 2003. Income on Equity Investments.Income on equity investments represents the net income of
certain investments we have in surgery centers. These surgery centers are not consolidated for
financial reporting purposes. The increase is primarily attributable to investments we made in
surgery centers during 2004 and the fourth quarter of 2003. Operating Income. Operating income increased $10.8 million to $42.4 million for the year
ended December 31, 2004 from $31.6 million for the year ended December 31, 2003. The increase in
operating income is primarily attributable to $8.8 million from surgery centers acquired or
developed since January 1, 2003. Same store operating income increased $4.1 million for 2004 as a
result of an increase in cases and improved economies of scale. This increase in same store
operating income was partially offset by a $2.5 million increase in general and administrative
expenses during 2004. As a percentage of revenues, operating income increased to 19.6% for 2004
from 17.9% for 2003. Minority Interests in Income of Consolidated Subsidiaries. Minority interests in income of
consolidated subsidiaries for the year ended December 31, 2004 as compared to the year ended
December 31, 2003 were as follows (dollars in thousands): Dollar
    
    
    Percent2004
    
    
    2003
    
    
    Variance
    
    
    VarianceSame store minority interests
    
    $
    13,304
    
    
    $
    10,944
    
    
    $
    2,360
    
    
    
    21.6
    %Minority interests from
surgery centers acquired or
developed
    
    
    2,245
    
    
    
    (497
    )
    
    
    2,742
    
    
    
    Total minority interests
    
    $
    15,549
    
    
    $
    10,447
    
    
    $
    5,102
    
    
    
    48.8
    %
 Minority interests in income of consolidated subsidiaries for same store facilities increased
as a result of improved operations at the same store facilities and as a result of the
consolidation of the variable interest entity pursuant to FIN 46(R). Minority interest expense
represents the portion of the surgery centers net income that is 36




---



##### Table of Contents



attributable to the surgery centers minority owners. Consequently, as the net income of the
surgery centers increase, the corresponding minority interest expense will increase. As a
percentage of revenues, minority interests in income from consolidated subsidiaries increased to
7.2% for 2004 from 5.9% for 2003. Interest Expense, Net of Interest Income. Interest expense, net of interest income, decreased
15.5% to $4.9 million for 2004 from $5.8 million for 2003. The decrease in interest expense was
primarily the result of higher interest expense and prepayment penalties incurred in connection
with our senior subordinated notes we issued to refinance outstanding indebtedness during 2003. We
paid off the senior subordinated notes in the first quarter of 2004 with proceeds from our initial
public offering completed in February 2004. Provision (Benefit) for Income Taxes. The provision (benefit) for income taxes increased to a
$8.5 million provision for 2004 as compared to a $2.2 million benefit for 2003. The 2003 results
included the recognition of deferred tax assets of approximately $3.1 million. Similar to 2004, we
anticipate an effective tax rate of approximately 38.5% during 2005. Net Income. Net income decreased $3.9 million to $13.6 million for 2004 from $17.5 million
for 2003. This decrease was primarily the result of the $2.2 million benefit for income taxes
recorded during 2003. The change in the effective income tax rate in 2004 as compared to 2003 was
partially offset by the increase in net income resulting from surgery centers acquired or developed
since January 1, 2003 and an increase in cases performed in 2004 compared to 2003. As a percentage
of revenues, net income decreased to 6.3% in 2004 from 9.9% for 2003. Adjusted Net Income. Adjusted net income increased $4.1 million to $14.0 million for 2004
from $9.9 million for 2003 for the same reasons net income
increased. As a
percentage of revenues, adjusted net income increased to 6.5% in 2004 from 5.6% for 2003. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Overview.In 2003, our revenues increased 21.8% to $176.3 million from $144.7 million for
2002. Net income increased 42.3% to $17.5 million for 2003 from $12.3 million for 2002. Our
financial results in 2003 were driven by the addition of ten new centers and organic growth at
existing centers. Results for 2003 included a benefit for income taxes of approximately $2.2
million, which primarily related to the recognition of deferred tax assets of approximately $3.1
million. The 2003 results also included the impact of higher interest expense and prepayment
penalties incurred in connection with the refinancing of outstanding indebtedness, which was
completed in the third quarter of 2003. We paid off the higher cost indebtedness with the proceeds
from our initial public offering completed in February 2004. Revenues. Revenues for the year ended December 31, 2003 as compared to the year ended
December 31, 2002 were as follows (dollars in thousands): Dollar
    
    
    Percent2003
    
    
    2002
    
    
    Variance
    
    
    VariancePatient service revenues:Same store revenues
    
    $
    86,478
    
    
    $
    80,814
    
    
    $
    5,664
    
    
    
    7.0
    %Revenue from surgery centers
acquired or developed
    
    
    71,643
    
    
    
    50,128
    
    
    
    21,515
    
    
    
    Total patient service revenues
    
    
    158,121
    
    
    
    130,942
    
    
    
    27,179
    
    
    
    20.8Physician service revenues
    
    
    3,796
    
    
    
    2,563
    
    
    
    1,233
    
    
    
    48.1Other service revenues
    
    
    14,352
    
    
    
    11,183
    
    
    
    3,169
    
    
    
    28.3Total revenues
    
    $
    176,269
    
    
    $
    144,688
    
    
    $
    31,581
    
    
    
    21.8
    %
 We consider same store surgery centers as
those centers that we consolidate for financial reporting purposes
throughout 2003 and 2002. The increase in same store revenues was
primarily the result of a 5.0% increase in the number
of cases during 2003. The remaining increase in patient service revenues is related to surgery
centers acquired or developed since January 1, 2002. 37




---



##### Table of Contents



Cost of Revenues. Cost of revenues for the year ended December 31, 2003 as compared to the
year ended December 31, 2002 were as follows (dollars in thousands): Dollar
    
    
    Percent2003
    
    
    2002
    
    
    Variance
    
    
    VarianceSame store cost of revenues
    
    $
    69,624
    
    
    $
    62,326
    
    
    $
    7,298
    
    
    
    11.7
    %Cost of revenues from
surgery centers acquired
or developed
    
    
    47,681
    
    
    
    31,366
    
    
    
    16,315
    
    
    
    Total cost of revenues
    
    $
    117,305
    
    
    $
    93,692
    
    
    $
    23,613
    
    
    
    25.2
    %
 The increase in same store cost of revenues was primarily the result of the increase in the
number of cases performed during 2003 as compared to 2002 and a $1.0 million increase in general
and professional liability expense during 2003. The general and professional liability expense
includes reserves for an estimate of losses limited to deductibles and self-insured retention
related to claims incurred and reported in the policy period and an estimate for unlimited losses
related to claims incurred but not yet reported during the policy period. The accrual for general
and professional liability expense was increased during the third quarter of 2003 based on
managements analysis of an independent actuarial study performed in the third quarter of 2003 by
Casualty Actuarial Consultants, Inc. As a percentage of revenues, total cost of revenues increased
to 66.5% for 2003 from 64.8% for 2002, primarily as a result of surgery centers acquired or
developed during 2003 and the increase in general and professional liability expense. General and Administrative Expenses. General and administrative expenses increased 11.2% to
$15.9 million for 2003 from $14.3 million for 2002. The increase in general and administrative
expense was primarily related to the overall growth in the number of surgery centers. As a
percentage of revenues, general and administrative expense decreased to 9.0% for 2003 from 9.9% for
2002. This decrease was primarily the result of improved economies of scale. Depreciation and Amortization. Depreciation and amortization expense for the year ended
December 31, 2003 as compared to the year ended December 31, 2002 were as follows (dollars in
thousands): Dollar
    
    
    Percent2003
    
    
    2002
    
    
    Variance
    
    
    VarianceSame store depreciation and
amortization
    
    $
    5,359
    
    
    $
    5,525
    
    
    $
    (166
    )
    
    
    (3.0
    %)Depreciation and amortization from
surgery centers acquired or
developed
    
    
    3,936
    
    
    
    2,311
    
    
    
    1,625
    
    
    
    Total depreciation and amortization
    
    $
    9,295
    
    
    $
    7,836
    
    
    $
    1,459
    
    
    
    18.6
    %
 As a percentage of revenues, depreciation and amortization expense decreased to 5.3% for 2003
from 5.4% for 2002. Provision for Doubtful Accounts. Provision for doubtful accounts decreased $2.1 million to
$2.7 million for 2003 from $4.8 million for 2002. This decrease can be attributed to improved cash
collections primarily in the earlier months of 2003, related to the conversion of surgery centers
we acquired in 2002 to our cash collections processes and improved collections of older accounts
receivable from our same store facilities. As a percentage of revenues, the provision for doubtful
accounts decreased to 1.6% for 2003 from 3.3% for 2002. Operating Income. Operating income increased $7.1 million to $31.6 million for the year ended
December 31, 2003 from $24.5 million for the year ended December 31, 2002. The increase in
operating income is primarily attributable to an increase of $5.5 million due to surgery centers
acquired or developed and an increase of $3.2 million from our same store facilities. Operating
income also increased due to improved collections of older accounts receivables. This increase in
same store operating income was partially offset by an increase in general and administrative
expenses during 2003. As a percentage of revenues, operating income increased to 17.9% for 2003
from 16.9% for 2002. 38




---



##### Table of Contents



Minority Interests in Income of Consolidated Subsidiaries. Minority interests in income of
consolidated subsidiaries for the year ended December 31, 2003 as compared to the year ended
December 31, 2002 were as follows (dollars in thousands): Dollar
    
    
    Percent2003
    
    
    2002
    
    
    Variance
    
    
    VarianceSame store minority interests
    
    $
    4,659
    
    
    $
    3,236
    
    
    $
    1,423
    
    
    
    44.0
    %Minority interests from
surgery centers acquired or
developed
    
    
    5,788
    
    
    
    4,117
    
    
    
    1,671
    
    
    
    Total minority interests
    
    $
    10,447
    
    
    $
    7,353
    
    
    $
    3,094
    
    
    
    42.1
    %
 Minority interests in income of consolidated subsidiaries for same store facilities increased
due to improved operations at the same store facilities. Minority interest expense represents the
portion of the surgery centers net income that is attributable to the surgery centers minority
owners. Consequently, as the net income of the surgery centers increase, the corresponding
minority interest expense will increase. As a percentage of revenues, minority interests in income
from consolidated subsidiaries increased to 5.9% for 2003 from 5.1% for 2002. Interest Expense, Net of Interest Income. Interest expense, net of interest income, increased
26.1% to $5.8 million for 2003 from $4.6 million for 2002. The increase in interest expense was
primarily the result of higher interest expense and prepayment penalties incurred in connection
with the refinancing of outstanding indebtedness during 2003. Provision (Benefit) for Income Taxes. The provision (benefit) for income taxes decreased to a
$2.2 million benefit for 2003 compared to a $215,000 provision for 2002. The 2003 results included
the recognition of deferred tax assets of approximately $3.1 million. Net Income. Net income increased 42.3% to $17.5 million for 2003 from $12.3 million for 2002,
primarily as a result of surgery centers acquired or developed since January 1, 2002. The increase
is also the result of an increase in cases performed in 2003 compared to 2002, improved economies
of scale and the $3.1 million deferred tax assets recorded during 2003. As a percentage of
revenues, net income increased to 9.9% for 2003 from 8.5% for 2002. Adjusted Net Income. Adjusted net income increased $2.2 million to $9.9 million for 2003 from
$7.7 million for 2002 for the same reasons net income increased. As a percentage of
revenues, adjusted net income increased to 5.6% in 2003 from 5.3% for 2002. 39




---



##### Table of Contents



Quarterly Results of Operations The following tables present a summary of our unaudited quarterly consolidated results of
operations for each of the four quarters in 2004 and 2003. The unaudited financial statements
include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement
of such information when read in conjunction with our audited consolidated financial statements and
related notes. Our quarterly operating results have varied in the past, may continue to do so and
are not necessarily indicative of results for any future period. 2004First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(dollars in thousands)(unaudited)Consolidated Statement of Operations Data:Revenues
    
    $
    51,947
    
    
    $
    52,727
    
    
    $
    52,031
    
    
    $
    59,620Operating expenses:Salaries and benefits
    
    
    13,581
    
    
    
    13,738
    
    
    
    13,717
    
    
    
    15,359Supplies
    
    
    10,283
    
    
    
    10,563
    
    
    
    10,324
    
    
    
    11,586Professional and medical fees
    
    
    2,598
    
    
    
    2,708
    
    
    
    2,849
    
    
    
    3,338Rent and lease expense
    
    
    3,157
    
    
    
    3,282
    
    
    
    3,420
    
    
    
    3,808Other operating expenses
    
    
    4,370
    
    
    
    4,556
    
    
    
    4,378
    
    
    
    4,150Cost of revenues
    
    
    33,989
    
    
    
    34,847
    
    
    
    34,688
    
    
    
    38,241General and administrative expenses
    
    
    4,544
    
    
    
    4,633
    
    
    
    4,496
    
    
    
    4,776Depreciation and amortization
    
    
    2,712
    
    
    
    2,746
    
    
    
    2,846
    
    
    
    2,623Provision for doubtful accounts
    
    
    697
    
    
    
    832
    
    
    
    995
    
    
    
    1,465Income on equity investments
    
    
    (121
    )
    
    
    (366
    )
    
    
    (374
    )
    
    
    (411
    )Impairment and loss on disposal of long-lived assets
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    255Gain on sale of long-lived assets
    
    
    (80
    )
    
    
    (77
    )
    
    
    
    
    
    
    (93
    )Total operating expenses
    
    
    41,757
    
    
    
    42,615
    
    
    
    42,651
    
    
    
    46,856Operating income
    
    
    10,190
    
    
    
    10,112
    
    
    
    9,380
    
    
    
    12,764Minority interests in income of consolidated subsidiaries
    
    
    (3,420
    )
    
    
    (3,538
    )
    
    
    (3,246
    )
    
    
    (5,345
    )Interest expense, net
    
    
    (2,577
    )
    
    
    (696
    )
    
    
    (718
    )
    
    
    (871
    )Income before income taxes
    
    
    4,193
    
    
    
    5,878
    
    
    
    5,416
    
    
    
    6,548Provision for income taxes
    
    
    1,614
    
    
    
    2,263
    
    
    
    2,084
    
    
    
    2,522Net income
    
    $
    2,579
    
    
    $
    3,615
    
    
    $
    3,332
    
    
    $
    4,026Other Data:Number of surgery centers operated as of the end of period(1)
    
    
    44
    
    
    
    45
    
    
    
    51
    
    
    
    54
 40




---



##### Table of Contents



2003First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(dollars in thousands)(unaudited)Consolidated Statement of Operations Data:Revenues
    
    $
    41,455
    
    
    $
    44,053
    
    
    $
    43,289
    
    
    $
    47,472Operating expenses:Salaries and benefits
    
    
    10,902
    
    
    
    11,326
    
    
    
    11,740
    
    
    
    12,307Supplies
    
    
    7,619
    
    
    
    8,590
    
    
    
    8,937
    
    
    
    9,953Professional and medical fees
    
    
    2,125
    
    
    
    2,362
    
    
    
    2,553
    
    
    
    2,849Rent and lease expense
    
    
    2,661
    
    
    
    2,665
    
    
    
    2,686
    
    
    
    2,879Other operating expenses
    
    
    3,283
    
    
    
    3,519
    
    
    
    4,434
    
    
    
    3,915Cost of revenues
    
    
    26,590
    
    
    
    28,462
    
    
    
    30,350
    
    
    
    31,903General and administrative expenses
    
    
    3,911
    
    
    
    4,178
    
    
    
    3,718
    
    
    
    4,067Depreciation and amortization
    
    
    2,239
    
    
    
    2,273
    
    
    
    2,342
    
    
    
    2,441Provision for doubtful accounts
    
    
    400
    
    
    
    670
    
    
    
    756
    
    
    
    922Income on equity investments
    
    
    (103
    )
    
    
    (55
    )
    
    
    (18
    )
    
    
    (226
    )Impairment and loss on disposal of long-lived assets
    
    
    
    
    
    
    
    
    
    
    162
    
    
    
    275Gain on sale of long-lived assets
    
    
    
    
    
    
    
    
    
    
    (162
    )
    
    
    (409
    )Total operating expenses
    
    
    33,037
    
    
    
    35,528
    
    
    
    37,148
    
    
    
    38,973Operating income
    
    
    8,418
    
    
    
    8,525
    
    
    
    6,141
    
    
    
    8,499Minority interests in income of consolidated subsidiaries
    
    
    (2,894
    )
    
    
    (3,036
    )
    
    
    (1,819
    )
    
    
    (2,698
    )Interest expense, net
    
    
    (959
    )
    
    
    (1,138
    )
    
    
    (1,961
    )
    
    
    (1,724
    )Income before income taxes
    
    
    4,565
    
    
    
    4,351
    
    
    
    2,361
    
    
    
    4,077Provision (benefit) for income taxes
    
    
    184
    
    
    
    320
    
    
    
    455
    
    
    
    (3,129
    )Net income
    
    $
    4,381
    
    
    $
    4,031
    
    
    $
    1,906
    
    
    $
    7,206Other Data:Number of surgery centers operated as of the end of period(1)
    
    
    34
    
    
    
    35
    
    
    
    37
    
    
    
    44
   (1)
    
    Includes surgery centers that we manage but in which we do not have an ownership interest. Liquidity and Capital Resources Overview On February 11, 2004, we received net proceeds of $115.5 million, after deducting underwriting
discounts and commissions, from our initial public offering of 8,280,000 shares of common stock,
which included 1,080,000 shares attributable to the underwriters exercise of their over-allotment
option. We used the net proceeds to repay indebtedness and to pay holders of Series A and Series B
convertible preferred stock in connection with the conversion of those shares to common stock upon
the completion of the offering. During 2004, we acquired six centers, opened three newly-developed surgery centers, opened one
imaging center and entered into a management agreement with one additional surgery center. We
entered into management agreements with each of these centers. One of our newly-developed surgery
centers was developed through a partnership with one of our existing physician networks. Our
investment related to these centers was about $66.3 million. We paid for these investments using
cash from operations and funds available under our senior credit facility. We have used capital during the past three years primarily to acquire and develop surgery
centers. Our cash is used primarily to acquire centers, develop centers and pay operating expenses.
We anticipate acquiring about three to four centers and developing three to four centers annually
during the next three to five years. We expect that our acquisition and development program will
require substantial capital resources, which we estimate to range from $35.0 million to $65.0
million per year over the next three years. In addition, the operations of our existing facilities
will require ongoing capital expenditures. A typical surgery center costs us between $3.0 million
and $7.0 million to develop and equip, excluding costs of real estate. This cost varies depending
on the range of specialties that will be 41




---



##### Table of Contents



provided at the facility and the number of operating and treatment rooms. We typically fund
about 70% of the development costs of a new surgery center with borrowings under our senior credit
facility and cash from operations, and the remainder with equity contributed by us and the other
owners of the center. In the past, our ownership interests in surgery centers that we have
developed range from 25% to 86%, although we anticipate that we will own primarily majority
interests in future developments. We expect that our capital needs will be financed through a
combination of cash flow from operations, bank debt and the issuance of debt and equity securities. Cash Flow Statement Information During 2004, we generated operating cash flow of $28.1 million. Net cash used in investing
activities during 2004 was $104.9 million, including $106.3 million of payments related to capital
expenditures which consisted of payments for facilities acquired and developed and the acquisition
of additional ownership interests in existing centers. The $106.3 million includes $31.8 million
related to our Series A convertible preferred stock and Series B convertible preferred stock which
converted into common stock and the right to receive cash upon the completion of our initial public
offering. Our net cash provided by financing activities during 2004 was $82.4 million, primarily
related to $115.5 million of net proceeds from our initial public offering and $83.0 million of
proceeds from borrowings under our senior credit facility. The proceeds from our initial public
offering and long-term borrowing were partially offset by $118.8 million of principal payments on
long-term debt. During 2003, we generated operating cash flow of $20.8 million. Net cash used in investing
activities during 2003 was $67.0 million, including $62.8 million of payments related to capital
expenditures, which consisted of facilities acquired and developed and the acquisition of
additional ownership interests in existing centers. Our net cash provided by financing activities
during 2003 was $43.2 million, primarily related to $100.4 million of proceeds from borrowings
under our senior credit facility and debt issuances for facilities acquired or developed. The
proceeds for long-term debt were partially offset by $62.1 million of principal payments on
long-term debt. Long-Term Debt In March 2005, we amended and restated our senior credit facility to allow us to borrow up to
$150.0 million from a group of lenders for acquisitions, developments of new centers and working
capital. The amendment and restatement of the senior credit facility has also lowered our interest
costs and extended the maturity date of the senior credit facility until 2010. At December 31,
2004, we had outstanding indebtedness under our predecessor senior credit facility of $64.0
million. At our option, loans under the senior credit facility bear interest at Bank of Americas
base rate or the Eurodollar rate in effect on the applicable borrowing date, plus an applicable
margin. The applicable margin will vary depending upon the ratio of our consolidated funded
indebtedness to consolidated EBITDA. As of December 31, 2004, the interest rate for this debt
ranged from 4.28% to 4.41% per year based on the borrowing date. The senior credit facility
contains various financial and non-financial covenants and restrictions. We believe that we are in
compliance with these covenants and restrictions. The obligations under the senior credit facility
and the related documents are secured by a first priority lien upon substantially all of our
wholly-owned subsidiaries real and personal property, a pledge of all the capital stock or other
ownership interests in each of our wholly-owned subsidiaries, and a pledge of our ownership
interests in substantially all of our majority-owned subsidiaries. Our obligations under the senior
credit facility are guaranteed by all of our wholly-owned subsidiaries with assets with a fair
market value of greater than $100,000. In July 2003, we entered into a purchase agreement through which DLJ Investment Partners II,
L.P. and its affiliates agreed to purchase our 14 3/4% Senior Subordinated Notes due 2008 in the
aggregate principal amount of up to $40.0 million. As of December 31, 2003, we had issued notes in
the aggregate principal amount of about $29.1 million. The $29.1 million in proceeds from the
issuance of these notes were used for acquisitions and to refinance outstanding indebtedness. We
used a portion of the net proceeds of our initial public offering to repay all indebtedness under
the outstanding notes, including about $727,500 of redemption premiums and about $688,000 of
accrued interest. As of December 31, 2004, we had no amounts outstanding under the Senior
Subordinated Notes. A commitment fee of 0.5% of the outstanding commitment is payable
semi-annually, so long as the commitment is outstanding. The notes are our unsecured obligations
and contain various financial and non-financial covenants and restrictions. We believe that we are
in compliance with these covenants and restrictions. The commitment of the purchasers of the notes
to purchase up to an additional $10.9 million of notes in the future remains outstanding. 42




---



##### Table of Contents



Pursuant to the amended and restated senior credit facility, we have agreed with the lenders
of the amended and restated senior credit facility not to issue additional Senior Subordinated
Notes. In connection with our acquisition of Physicians Surgical Care, we issued subordinated
convertible debentures to various persons in exchange for their ownership interests in certain of
Physician Surgical Cares surgery centers. These debentures automatically converted into shares of
our common stock at $13.87 per share upon completion of the initial public offering. At December
31, 2004, we had no amounts outstanding related to the subordinated convertible debentures. As of December 31, 2004, we had outstanding indebtedness to Synergy Bank in an aggregate
amount of about $4.6 million in connection with the financing of a surgery center located in Houma,
Louisiana. This debt, which consists of two loans, bears interest at 6.7% per year and matures on
January 1, 2008 and April 28, 2009. These loans are secured by a first priority lien in the real
estate and certain personal property owned by the surgery center. Upon completion of our initial public offering on February 11, 2004, all of the outstanding
shares of our Series A convertible preferred stock and Series B convertible preferred stock, which
were issued in connection with our acquisition of Physicians Surgical Care, automatically converted
into shares of our common stock and the right to receive cash payments in the aggregate amount of
about $31.8 million. A portion of the net proceeds from the
initial public offering was used to fund these cash payments. We believe that existing funds, cash flows from operations and borrowings under our senior
credit facility will provide sufficient liquidity for the next 12 to 18 months. We will need to
incur additional debt or issue additional equity or debt securities in the future to fund our
acquisitions and development projects. We cannot assure you that capital will be available on
acceptable terms, if at all. If we are unable to obtain funds when needed or on acceptable terms,
we will be required to curtail our acquisition and development program. Our ability to meet our
funding needs could be adversely affected if we suffer adverse results from our operations, or if
we violate the covenants and restrictions to which we are subject under our senior credit facility
and senior subordinated notes. Contractual Obligations and Commercial Commitments The following table summarizes our contractual obligations by period as of December 31, 2004
on a historical basis: Payments Due by PeriodLess than
    
    
    1-3
    
    
    4-5
    
    
    After 5Contractual Obligation
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    Years(in thousands)Long-term debt
    
    $
    72,637
    
    
    $
    1,012
    
    
    $
    68,430
    
    
    $
    3,024
    
    
    $
    171Capital lease obligations
    
    
    1,676
    
    
    
    678
    
    
    
    790
    
    
    
    208
    
    
    
    Operating leases
    
    
    115,097
    
    
    
    12,855
    
    
    
    24,576
    
    
    
    22,999
    
    
    
    54,667Other long-term obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    189,410
    
    
    $
    14,545
    
    
    $
    93,796
    
    
    $
    26,231
    
    
    $
    54,838
 The following table summarizes our other commercial commitments related to unconsolidated
entities by period as of December 31, 2004 on a historical basis: Amount of Commitment Expiration Per PeriodTotalOther Commercial Commitments
    
    Amounts
    
    
    Less than
    
    
    1-3
    
    
    4-5
    
    
    After 5Related to Unconsolidated Entities
    
    Committed
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    Years(in thousands)Operating lease guarantees
    
    $
    1,286
    
    
    $
    256
    
    
    $
    535
    
    
    $
    495
    
    
    $
    
 43




---



##### Table of Contents



Inflation Inflation and changing prices have not significantly affected our operating results or the
markets in which we operate. Recently Issued Accounting Pronouncements In
December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 123(R), Share-Based Payment. SFAS No. 123(R) is
a revision of SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB No. 25.
Among other items, SFAS No. 123(R) eliminates the use of the intrinsic value method of accounting
allowed under APB No. 25, and requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments, based on the fair value of those awards on
the grant date, in the financial statements. The effective date of SFAS No. 123(R) is the first
reporting period beginning after June 15, 2005, which is the third quarter of 2005 for calendar
year companies. Early adoption of SFAS No. 123(R) is allowed. SFAS No. 123(R) permits companies
to adopt its requirements using either a modified prospective method, or a modified
retrospective method. Under the modified prospective method, compensation cost is recognized in
the financial statements beginning with the effective date, based on the requirements of SFAS No.
123(R) for all share-based payments granted or modified after that date, and based on the
requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS
No. 123(R). Under the modified retrospective method, the requirements are the same as under the
modified prospective method, but also permit entities to restate financial statements of previous
periods based on proforma disclosures made in accordance with SFAS No. 123. We have not yet
determined which of the adoption methods we will use. In connection with evaluating the impact of
adopting SFAS No. 123(R), we are also considering the potential implementation of different
valuation models to determine the fair value of stock-based compensation, although no decision has
been made. We currently determine the fair value of the stock options granted by using the
Black-Scholes option pricing model. While SFAS No. 123(R) permits entities to continue to use such
a model, the standard also permits the use of a lattice model. We currently expect to adopt
SFAS No. 123(R) effective July 1, 2005. We are currently evaluating the effect of adopting SFAS No.
123(R) on our results of operations. The impact of adoption of SFAS
No. 123(R) cannot be
predicted at this time because it will depend on several factors, including levels of options and
awards granted in the future and when option or award holders exercise these awards. Risk Factors The following are some of the risks and uncertainties that could cause our actual financial
condition, results of operations, business and prospects to differ materially from those
contemplated by the forward-looking statements contained in this report or our other filings with
the SEC. These risks and uncertainties are also factors that you should consider before investing
in our common stock. If any of the following risks actually occurred, our business, financial
condition and operating results could suffer, and the trading price of our common stock could
decline. Risks Related to Our Business and Industry We depend on payments from third-party payors, including government health care programs and
managed care organizations. If these payments are reduced or eliminated, our revenues and
profitability could be adversely affected. We are dependent upon private and governmental third-party sources of payment for the services
provided to patients in our surgery centers and other facilities and the physician networks we
manage. The amount that our centers, facilities and networks receive in payment for their services
may be adversely affected by market and cost factors as well as other factors over which we have no
control, including Medicare, Medicaid and state regulations and the cost containment and
utilization decisions and reduced reimbursement schedules of third-party payors. For the year ended
December 31, 2004, payments from government payors represented about 19.7% of our patient service
revenues from surgery centers that we consolidate for financial reporting purposes. Medicares system of paying for covered procedures performed in a surgery center or its rates
for surgery center procedures may change in the near future. The Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, commonly referred to as the Medicare Modernization Act,
limits increases in Medicare reimbursement rates 44




---



##### Table of Contents



for ambulatory surgery centers. Under the Medicare Modernization Act, the 2% increase in
Medicare reimbursement rates for ambulatory surgery centers that became effective October 1, 2003
is limited to an amount equal to the increase in the Consumer Price Index for all urban consumers
as estimated by the Secretary of the Department of Health and Human Services for the 12-month
period ended March 31, 2003, minus 3.0 percentage points. The Medicare Modernization Act also
provides that there will be no increase in these rates during the years 2005 through 2009. The
Medicare Modernization Act also directs the General Accounting Office to conduct a study comparing
the cost of procedures in surgery centers to the cost of procedures performed in hospital
outpatient departments. The General Accounting Office was directed to submit the results of its
study to the Centers for Medicare and Medicaid Services, or CMS, by no later than January 1, 2005.
However, no report had been publicly released as of March 25, 2005. CMS is directed to develop a
new ambulatory surgery center payment system based upon the Medicare hospital outpatient department
payment system so that it is effective on or after January 1, 2006 and no later than January 1,
2008. The Medicare Modernization Act provides that, in the year that the new payment system is
implemented, it must be designed to result in the same aggregate amount of expenditures for
surgical services provided at ambulatory surgery centers as would be made if the new system were
not adopted. The rate changes mandated by the Medicare Modernization Act could have an adverse
effect on the revenues of our centers, but we cannot predict at this time the full effect of the
payment rate revisions. Previously, the Department of Health and Human Services proposed a rule which would increase
the number of surgical procedure payment groups from eight to 105 and the number of surgical
procedures covered by the Medicare program to about 2,500. All of the procedures paid at a
particular rate would constitute a payment group. Each of the procedures would be paid at one of
the 105 prospectively determined payment rates. To date, CMS has not implemented the proposed
surgery center methodology, and in light of the payment study mandated by the Medicare
Modernization Act, it is uncertain whether this proposed surgery center payment methodology will be
implemented. If implemented in its proposed form, the change in payment methodology could reduce
our Medicare revenues, depending on the volume and type of procedures performed at a particular
facility. States in which we perform Medicaid procedures could also change their payment
methodology in the future, and these changes may reduce the payments we receive for our services
from state Medicaid programs. In addition, the Medicare Payment Advisory Commission, or MedPAC, and
the Office of the Inspector General of the Department of Health and Human Services, or OIG, have
both recently recommended changes to the Medicare payment methodology for surgery centers. MedPAC
is a congressional advisory board charged with advising Congress on Medicare payment issues, while
the OIG is a governmental agency responsible for investigating and monitoring Medicare, Medicaid
and other Department of Health and Human Services programs. Generally, MedPAC and the OIG have
recommended that reimbursement levels for surgery center procedures be reduced. These are
recommendations only and it is uncertain if Congress will act on either or both recommendations. If
these recommendations become effective, our revenues and profitability could be adversely affected.
While most of our existing surgery center surgical procedures are generally reimbursed at levels
lower than hospital outpatient departments, some of our existing surgical procedures are reimbursed
at higher levels. These proposed changes do not apply to our facilities licensed as hospitals. If future government regulatory interpretations prohibit our centers from providing 23 hour stay
services, our revenues could decrease. Medicare regulations prohibit ambulatory surgery centers from performing surgical procedures
on Medicare patients if it is anticipated that the patient will require overnight recovery.
Historically, however, CMS has permitted ambulatory surgery centers to keep non-Medicare patients
for up to 23 hours. On March 11, 2004, CMS issued a Memorandum to State Survey Agency Directors
stating that an ambulatory surgery center that routinely provides 23 hour recovery services to
non-Medicare patients will jeopardize the facilitys Medicare certification. CMS is expected to
clarify or revise this new interpretation of the Medicare ambulatory surgery center regulations.
If CMS does not modify this interpretation, our centers would be unable to routinely offer services
to patients requiring extended recovery time, and it could have a
material adverse effect on our revenues. If we are unable to negotiate contracts or maintain satisfactory relationships with private
third-party payors, our revenues and operating income will decrease. Payments from private third-party payors represented about 75.7% of our patient service
revenues in 2004. Managed care companies such as health maintenance organizations, or HMOs, and
preferred provider organizations, 45




---



##### Table of Contents



or PPOs, which offer prepaid and discounted medical service packages, represent a growing
segment of private third-party payors. If we fail to enter into contracts and maintain satisfactory
relationships with managed care organizations, our revenues may decrease. Cost containment
measures, such as fixed fee schedules, capitation payment arrangements, reductions in reimbursement
schedules by third party payors and closed provider networks, could also cause a reduction of our
revenues in the future and cause our profit margins to decline. Payments
from workers compensation payors represented approximately 12.9% of our private
third-party payor patient service revenues in 2004. Traditionally, workers compensation payors
have paid surgery centers a percentage of the surgery centers charges. Several states have recently implemented workers
compensation provider fee schedules, and other states have considered or have begun the process of
developing a state workers compensation fee schedule for providers. In some cases, the fee
schedule rates contain lower rates than our surgery centers have historically been paid for the
same services. If the trend of states adopting lower workers compensation fee schedules continues,
it could have a material adverse effect on our centers revenues. Our growth strategy depends in part on our ability to acquire and develop additional surgery
centers on favorable terms. If we are unable to do so, our future growth could be limited and our
operating results could be adversely affected. Our strategy is to increase our revenues and earnings by continuing to focus on existing
facilities and continuing to acquire and develop additional surgery centers. Since January 1999, we
have acquired or developed 50 surgery centers, including three centers that we no longer own. We
may be unable to identify suitable acquisition and development opportunities and to negotiate and
complete acquisitions and new projects on favorable terms. In addition, our acquisition and
development program requires substantial capital resources, and we may need to obtain additional
capital or financing, from time to time, to fund these activities. As a result, we may take actions
that could have a detrimental effect on our results of operations or the price of our common stock,
including incurring substantial debt or issuing equity securities or convertible debt securities
that would dilute our existing stockholders ownership percentage. Sufficient capital or financing
may not be available to us on satisfactory terms, if at all. We may encounter numerous business risks in acquiring and developing additional surgery centers,
and may have difficulty operating and integrating those surgery centers. If we acquire or develop additional surgery centers, we may be unable to successfully operate
the centers and we may experience difficulty in integrating their operations and personnel. For
example, in some acquisitions, we have experienced delays in implementing standard operating
procedures and systems and improving existing managed care agreements and the mix of specialties
offered at the centers. Following the acquisition of a surgery center, key physicians may cease to
use the facility or we may be unable to retain key management personnel. In some acquisitions, we
may have to renegotiate, or risk losing, one or more of the surgery centers managed care contracts
if the contracts are between the third-party payor and the seller of the center rather than the
center itself. In addition, if we acquire the assets of a center rather than ownership interests in
the entity that owns the center, we may be unable to assume the centers existing managed care
contracts. We may also be unable to collect the accounts receivable of an acquired center. We may
also experience negative effects on our reported results of operations because of
acquisition-related charges and potential impairment of goodwill and other intangibles. In addition, we may acquire surgery centers with unknown or contingent liabilities, including
liabilities for failure to comply with health care laws and regulations. Although we maintain
professional and general liability insurance, we do not currently maintain insurance specifically
covering any unknown or contingent liabilities that may have occurred prior to the acquisition of
companies and surgery centers. In some cases, our right to indemnification for these liabilities
may be subject to negotiated limits. In developing new surgery centers, we may be unable to attract physicians to use our
facilities or contract with third-party payors. In addition, our newly-developed surgery centers
typically incur net losses during the initial periods of operation and, unless and until their case
loads grow, they generally experience lower total revenues and operating margins than established
surgery centers. Integrating a new surgery center could be expensive and time consuming, and could
disrupt our ongoing business and distract our management and other key personnel. If we are unable
to timely and efficiently integrate an acquired or newly-developed center, our business could
suffer. 46




---



##### Table of Contents



Efforts to regulate the construction, acquisition or expansion of health care facilities could
prevent us from acquiring additional surgery centers or other facilities, renovating our existing
facilities or expanding the breadth of services we offer. Some states require prior approval for the construction, acquisition or expansion of health
care facilities or expansion of the services the facilities offer. In giving approval, these states
consider the need for additional or expanded health care facilities or services. In 11 states in
which we currently operate, certificates of need must be obtained for capital expenditures
exceeding a prescribed amount, changes in capacity or services offered and various other matters.
Other states in which we now or may in the future operate may adopt similar legislation. Our costs
of obtaining a certificate of need could be significant and we cannot assure you that we will be
able to obtain the certificates of need or other required approvals for additional or expanded
facilities or services in the future. In addition, at the time we acquire a facility, we may agree
to replace or expand the acquired facility. If we are unable to obtain required approvals, we may
not be able to acquire additional surgery centers or other facilities, expand health care services
we provide at these facilities or replace or expand acquired facilities. If we fail to maintain good relationships with the physicians who use our facilities, our revenues
and profitability could be adversely affected. Our business depends upon the efforts and success of the physicians who provide medical
services at our facilities and the strength of our relationships with these physicians. These
physicians are not employees of our facilities and are not contractually required to use our
facilities. We generally do not enter into contracts with physicians who use our facilities, other
than partnership and operating agreements with physicians who own interests in our surgery centers,
provider agreements with anesthesiology groups that provide anesthesiology services in our surgery
centers, medical director agreements and pain clinic agreements. Physicians who use our facilities
also use other facilities or hospitals and may choose to perform procedures in an office-based
setting that might otherwise be performed at our surgery centers. In recent years, pain management
and gastrointestinal procedures have been performed increasingly in an office-based setting.
Although physicians who own an interest in our centers are subject to non-competition agreements,
these non-competition agreements may not restrict procedures performed in a physician office.
Also, because non-competition agreements are difficult to enforce, we may be unsuccessful in
preventing physicians who own an interest in our centers from acquiring an interest in a competing
facility. In addition, the physicians who use our facilities may choose not to accept patients who pay
for services through certain third-party payors, which could reduce our revenues. In 11 of the
surgery centers in which we own an interest, a single physician performed over 25% of the total
number of cases performed at the center during 2004. From time to time, we may have disputes with
physicians who use our facilities and/or own interests in our centers or our company. Our revenues
and profitability could be significantly reduced if we lost our relationship with one or more key
physicians or groups of physicians or if a key physician or group ceased or reduced his or its use
of our facilities. In addition, any damage to the reputation of a key physician or group of
physicians or the failure of these physicians to provide quality medical care or adhere to
professional guidelines at our facilities could damage our reputation, subject us to liability and
significantly reduce our revenues. We also manage three physician networks that accounted for about
1.9% of our revenues during the year ended December 31, 2004. The termination of any of our
contracts to manage our physician networks would have an adverse effect on our revenues. We have a limited history operating many of our centers. Since January 1999, we have acquired 35 surgery centers and developed 15 surgery centers,
including three surgery centers that we subsequently divested. Several of these centers have been
acquired or developed in the past few years and we have limited experience in operating the
facilities. As a result, we have a limited history of operations upon which you can evaluate us or
our prospects. Forecasts of our future revenues, expenses and operating results may not be as
accurate as they would be if we had a longer history of operations. 47




---



##### Table of Contents



If we fail to comply with legislative and regulatory rules relating to privacy and security of
patient health information and standards for electronic transactions, we may experience delays in
payment of claims and increased costs and be subject
to substantial fines. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, mandates the
adoption of security and integrity standards related to patient information. HIPAA also
standardizes the method for identifying providers, employers, health plans and patients. Final
rules implementing the security and integrity portion of HIPAA were adopted February 20, 2003 with
a mandatory implementation date of April 20, 2005. We believe that we are in compliance with the
privacy portions of HIPAA, and that we will be in compliance with the security and integrity
portions of HIPAA by the implementation date. We have and will continue to use substantial
resources in the implementation of the privacy and security portions of HIPAA, and we believe that
the cost of continued compliance with HIPAA will be significant. However, if we fail to comply
with the requirements of HIPAA, we could be subject to civil penalties of up to $25,000 per
calendar year for each provision contained in the privacy, security and transaction regulations
that is violated and criminal penalties of up to $250,000 per violation for certain other
violations. Since there is no significant history of enforcement efforts by the federal government
at this time, it is not possible to ascertain the likelihood of enforcement efforts in connection
with these regulations or the potential for fines and penalties which may result from the violation
of the regulations. If we fail to comply with laws and regulations relating to the operation of our facilities, we
could suffer penalties or be required to make significant changes to our operations. We are subject to many laws and regulations at the federal, state and local government levels
in which we operate. These laws and regulations require that our facilities meet various licensing,
certification and other requirements, including those relating to:  
    qualification of medical and support persons;
    pricing of services by health care providers;
    the adequacy of medical care, equipment, personnel, operating policies and procedures;
    maintenance and protection of records; and
    environmental protection, health and safety. If we fail or have failed to comply with applicable laws and regulations, we could suffer
civil or criminal penalties, including becoming the subject of cease and desist orders, the loss of
our licenses to operate and disqualification from Medicare, Medicaid and other government
sponsored health care programs. In pursuing our growth strategy, we may seek to expand our presence into new geographic
markets. In new geographic markets, we may encounter laws and regulations that differ from those
applicable to our current operations. If we are unable to comply with these legal requirements in a
cost-effective manner, we may be unable to expand geographically. Our facilities do not satisfy all of the requirements for any of the safe harbors under the federal
anti-kickback statute. If we fail to comply with the federal anti-kickback statute, we could be
subject to criminal and civil penalties, loss of licenses and exclusion from the Medicare and
Medicaid programs, which may result in a substantial loss of revenues. A provision of the Social Security Act, commonly referred to as the federal anti-kickback
statute, prohibits the offer, payment, solicitation or receipt of any form of remuneration in
return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering,
purchasing or leasing of items or services payable by Medicare, Medicaid, or any other federally
funded health care program. The federal anti-kickback statute is very broad in scope and many of
its provisions have not been uniformly or definitively interpreted by existing case law or
regulations. Violations of the federal anti-kickback statute may result in substantial civil or
criminal penalties, including criminal fines of up to $25,000 and civil penalties of up to $50,000
for each violation, plus three times the 48




---



##### Table of Contents



remuneration involved or the amount claimed and exclusion from participation in the Medicare
and Medicaid programs. The exclusion, if applied to our facilities, could result in significant
reductions in our revenues and could have a material adverse effect on our business. In addition,
many of the states in which we operate have also adopted laws, similar to the federal anti-kickback
statute, that prohibit payments to physicians in exchange for referrals, some of which apply
regardless of the source of payment for care. These statutes typically impose criminal and civil
penalties as well as loss of licenses. No state or federal regulatory actions have been taken
against our facilities under anti-kickback or self-referral statutes during the time we have owned
or managed the facilities. Management is not aware of any such actions prior to our acquisition or
management of these facilities. In July 1991, the Department of Health and Human Services issued final regulations defining
various safe harbors. Business arrangements that meet the requirements of the safe harbors are
deemed to be in compliance with the federal anti-kickback statute. Business arrangements that do
not meet the safe harbor requirements do not necessarily violate the federal anti-kickback statute,
but may be subject to scrutiny by the federal government to determine compliance. Two of the safe
harbors issued in 1991 apply to business arrangements similar to those used in connection with our
surgery centers: the investment interest safe harbor and the personal services and management
contracts safe harbor. However, the structure of the partnerships and limited liability companies
operating our facilities, as well as our business arrangements involving physician networks, do not
satisfy all of the requirements of either safe harbor. On November 19, 1999, the Department of Health and Human Services issued final regulations
creating additional safe harbor provisions, including a safe harbor that applies to physician
ownership of, or investment interests in, surgery centers. These regulations do not apply to our
facilities licensed as hospitals. The surgery center safe harbor protects four types of investment
arrangements. Each category has its own requirements with regard to what type of physician may be
an investor in the surgery center. In addition to the physician investor, the categories permit an
unrelated investor, who is a person or entity that is not in a position to provide items or
services related to the surgery center or its investors. Our business arrangements with our surgery
centers typically consist of one or more of our subsidiaries being an investor in each partnership or limited liability company that owns the surgery center, in addition to providing
management and other services to the surgery center. As a result of these and other aspects of our
business arrangements, including those relating to the composition of physician groups that own an
interest in our facilities, these arrangements do not comply with all the requirements of the
surgery center safe harbor and, therefore, are not immune from government review or prosecution. If a federal or state agency asserts a different position or enacts new laws or regulations
regarding illegal remuneration under the Medicare, Medicaid or other governmental programs, we may
be subject to civil and criminal penalties, experience a significant reduction in our revenues or
be excluded from participation in the Medicare, Medicaid or other governmental programs. Any change in interpretations or enforcement of existing or new laws and regulations could
subject our current practices to allegations of impropriety or illegality, or could require us to
make changes in our facilities, equipment, personnel, services, pricing, capital expenditure
programs and operating expenses, which could have a material adverse effect on our operations or
reduce the demand for or profitability of our services. Additionally, new federal or state laws may be enacted that would cause our relationships with
physician investors to become illegal or result in the imposition of penalties against us or our
facilities. If any of our business arrangements with physician investors were deemed to violate the
federal anti-kickback statute or similar laws, or if new federal or state laws were enacted
rendering these arrangements illegal, our business could be adversely affected. If we fail to comply with physician self-referral laws as they are currently interpreted or may be
interpreted in the future, or if other legislative restrictions are issued, we could incur a
significant loss of reimbursement revenues. The federal physician self-referral law, commonly referred to as the Stark law, prohibits a
physician from making a Medicare or Medicaid reimbursed referral for a designated health service
to an entity if the physician or a member of the physicians immediate family has a financial
relationship with the entity. Designated health services include a number of services, including
clinical laboratory services, radiology and certain other imaging services and inpatient and
outpatient hospital services. Under the current Stark law and related regulations, services 49




---



##### Table of Contents



provided at a surgery center are not covered by Stark, even if those services include imaging,
laboratory services or other Stark designated health services, provided that the surgery center
does not bill for these services separately. However, services provided at our facilities licensed
as hospitals are covered by the Stark law. The Stark law and similar state statutes are subject to different interpretations with respect
to many important provisions. Violations of these self-referral laws may result in substantial
civil or criminal penalties, including large civil monetary penalties and exclusion from
participation in the Medicare and Medicaid programs. Exclusion of our surgery centers from these
programs through future judicial or agency interpretation of existing laws or additional
legislative restrictions on physician ownership or investments in health care entities could result
in a significant loss of reimbursement revenues. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 could restrict our
ability to operate our facilities licensed as hospitals and could adversely impact our
reimbursement revenues. The Medicare Modernization Act was signed into law on December 8, 2003. Among other things,
the Medicare Modernization Act amended the Stark law to provide that an exception in the Stark law
relating to physician ownership in hospitals does not apply to specialty hospitals for a period of
18 months following November 18, 2003. Specialty hospitals are defined in the Medicare
Modernization Act as hospitals that are primarily or exclusively engaged in the care and treatment
of (1) patients with a cardiac condition, (2) patients with an orthopedic condition, (3) patients
receiving a surgical procedure or (4) any other specialized category of services that the Secretary
of the Department of Health and Human Services designates as inconsistent with the purpose of the
hospital ownership exception. The 18-month moratorium does not apply to specialty hospitals that
were in existence or under development on November 18, 2003, as long as: (a) the total number of
physician investors in the hospital does not increase from the number of physician investors on
November 18, 2003; (b) the hospital does not change the type of specialty services that it provides
from the types that it provided on November 18, 2003; and (c) the hospital does not increase its
number of beds by more than 50% or five beds, whichever is greater. The Medicare Modernization Act
also directs the Department of Health and Human Services and MedPAC to conduct studies of specialty
hospitals by February 2005, and to prepare reports to Congress recommending any needed legislative
or administrative changes in the Stark laws exception for physician ownership in hospitals. As of
March 25, 2005, the Department of Health and Human Services had not completed its study. MedPAC recently recommended
to the Congress that the 18-month moratorium on new specialty hospitals be extended for an
additional 18 months. Congress has not yet acted on that recommendation. Three of our facilities, including one managed facility, are licensed as hospitals. We may
acquire additional facilities licensed as hospitals in the future. Two of our facilities licensed
as hospitals, including the managed facility, currently fit within the Medicare Modernization Acts
definition of specialty hospital. Our other facility licensed as a hospital, in which we own a
42% interest, primarily provides obstetrical and other womens health services and could be
designated in the future by the Secretary of the Department of Health and Human Services as a
specialty hospital. We are not able to increase the number of physician investors, significantly
increase the number of licensed beds or change the type of specialty services that we provide in
any of our specialty hospitals. These legal constraints on the operation of these facilities could
have an adverse financial effect on these facilities. Moreover, the studies and recommendations by
MedPAC and the Department of Health and Human Services may not be favorable to specialty hospitals.
If future legislation is enacted that prohibits all physician referrals to specialty hospitals in
which the physicians own an interest, even if those facilities already exist, our specialty
hospitals could be materially adversely affected. The Medicare Modernization Act also limits increases in Medicare reimbursement rates for
ambulatory surgery centers. Under the Medicare Modernization Act, the 2% increase in Medicare
reimbursement rates for ambulatory surgery centers that became effective on October 1, 2003 is
limited to an amount equal to the increase in the Consumer Price Index for all urban consumers as
estimated by the Secretary of the Department of Health and Human Services for the 12-month period
ended March 31, 2003, minus 3.0 percentage points. The Medicare Modernization Act also provides
that there will be no increase in these rates during the years 2005 through 2009. The Medicare
Modernization Act also directs the General Accounting Office to conduct a study comparing the cost
of procedures in surgery centers to the cost of procedures performed in hospital outpatient
departments. The General Accounting Office was directed to submit the results of its study to CMS
by no later than January 1, 2005. However, no report has been publicly released to date. CMS is
directed to develop a new ambulatory surgery center payment 50




---



##### Table of Contents



system based upon the Medicare hospital outpatient department payment system so that it is
effective on or after January 1, 2006 and no later than January 1, 2008. The Medicare Modernization
Act provides that, in the year that the new payment system is implemented, it must be designed to
result in the same aggregate amount of expenditures for surgical services provided at ambulatory
surgery centers as would be made if the new system were not adopted. The rate changes mandated by
the Medicare Modernization Act could have an adverse effect on the revenues of our centers, but we
cannot predict at this time the full effect of the payment rate revisions. We may be subject to actions for false and other improper claims. Federal and state government agencies, as well as private payors, have heightened and
coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of
the cost reporting and billing practices of health care organizations and their quality of care and
financial relationships with referral sources. In addition, the OIG and the U.S. Department of
Justice have, from time to time, undertaken national enforcement initiatives that focus on specific
billing practices or other suspected areas of abuse. The U.S. government is authorized to impose criminal, civil and administrative penalties on
any person or entity that files a false claim for payment from the Medicare or Medicaid programs.
Claims filed with private insurers can also lead to criminal and civil penalties, including, but
not limited to, penalties relating to violations of federal mail and wire fraud statutes. While the
criminal statutes are generally reserved for instances of fraudulent intent, the U.S. government is
applying its criminal, civil and administrative penalty statutes in an ever-expanding range of
circumstances. For example, the government has taken the position that a pattern of claiming
reimbursement for unnecessary services violates these statutes if the claimant merely should have
known the services were unnecessary, even if the government cannot demonstrate actual knowledge.
The government has also taken the position that claiming payment for low-quality services is a
violation of these statutes if the claimant should have known that the care was substandard. In
addition, some courts have held that a violation of the Stark law can result in liability under the
federal False Claims Act. Over the past several years, the U.S. government has accused an increasing number of health
care providers of violating the federal False Claims Act. The False Claims Act prohibits a person
from knowingly presenting, or causing to be presented, a false or fraudulent claim to the U.S.
government. The statute defines knowingly to include not only actual knowledge of a claims
falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a
claim. Because our facilities perform hundreds of similar procedures a year for which they are paid
by Medicare, and there is a relatively long statute of limitations, a billing error or cost
reporting error could result in significant civil or criminal penalties. Under the qui tam, or whistleblower, provisions of the False Claims Act, private parties may
bring actions on behalf of the U.S. government. These private parties, often referred to as
relators, are entitled to share in any amounts recovered by the government through trial or
settlement. Both direct enforcement activity by the government and whistleblower lawsuits have
increased significantly in recent years and have increased the risk that a health care company,
like us, will have to defend a false claims action, pay fines or be excluded from the Medicare and
Medicaid programs as a result of an investigation resulting from a whistleblower case. Although we
believe that our operations comply with both federal and state laws, they may nevertheless be the
subject of a whistleblower lawsuit, or may otherwise be challenged or scrutinized by governmental
authorities. A determination that we have violated these laws could have a material adverse effect
on us. We are also subject to various state insurance statutes and regulations that prohibit us from
submitting inaccurate, incorrect or misleading claims. We believe that our surgery centers are in
material compliance with all state insurance laws and regulations regarding the submission of
claims. We cannot assure you, however, that none of our centers insurance claims will ever be
challenged. If we were found to be in violation of a states insurance laws or regulations, we
could be forced to discontinue the practice in violation, which could have an adverse effect on our
business and operating results, and we could be subject to fines and criminal penalties. 51




---



##### Table of Contents



If laws governing the corporate practice of medicine change, we may be required to restructure some
of our relationships, which may result in a significant loss of revenues and divert other
resources. The laws of various states in which we operate or may operate in the future do not permit
business corporations to practice medicine, to exercise control over or employ physicians who
practice medicine or to engage in various business practices, such as fee-splitting with
physicians. The interpretation and enforcement of these laws vary significantly from state to
state. We provide management services to three physician networks. If our arrangements with these
networks were deemed to violate state corporate practice of medicine, fee-splitting or similar
laws, or if new laws are enacted rendering our arrangements illegal, we may be required to
restructure these arrangements, which may result in a significant loss of revenues and divert other
resources. We are liable for debts and other obligations of the partnerships and limited liability companies
that own and operate some of our surgery centers. We own and operate our surgery centers through 23 limited partnerships, 23 limited liability
companies and one general partnership. Local physicians, physician
groups and hospitals also own an interest in all but three of these partnerships and limited liability companies. In the
partnerships in which we are the general partner, we are liable for 100% of the debts and other
obligations of the partnership, even if we do not own all of the partnership interests. We also
guarantee the debts and other obligations of many of the partnerships and limited liability
companies in which we own an interest. Our senior credit facility allows us to borrow up to $150.0
million, including funds that we can lend to the partnerships and limited liability companies in
which we own an interest. The physicians and physician groups that own an interest in these
partnerships and limited liability companies do not guarantee a pro rata amount of this debt or the
other obligations of these partnerships and limited liability companies. If our operations in New York are found not to be in compliance with New York law, we may be unable
to continue or expand our operations in New York. We own an interest in a limited liability company which provides administrative services to a
surgery center located in New York. New York law requires that, in order to be approved by the New
York Department of Health as licensed health care facilities, corporations must have natural
persons as stockholders. Accordingly, we are not able to own interests in a partnership or limited
liability company that owns an interest in a New York health care facility. New York law also
prohibits the delegation of certain management functions by a licensed health care facility. The
law does permit a licensed facility to obtain various services from non-licensed entities; however,
it is not clear what types of delegation constitute a violation. Although we believe that our
operations and relationships in New York are in compliance with these laws, if New York regulatory
authorities or a third party asserts a contrary position we may be unable to continue or expand our
operations in New York. If regulations change, we may be obligated to purchase some or all of the ownership interests of
our physician partners or renegotiate some of our partnership agreements with our physician
partners and management agreements with surgery centers. Upon the occurrence of various fundamental regulatory changes or changes in the interpretation
of existing regulations, we may be obligated to purchase all of the ownership interests of the
physician investors in most of the partnerships or limited liability companies that own and operate
our surgery centers. The purchase price that we would be required to pay for these ownership
interests is typically based on either a multiple of the centers EBITDA or the fair market value
of the ownership interests as determined by a third-party appraisal. The physician investors in
some of our surgery centers can require us to purchase their interests in exchange for cash or
shares of our common stock if these regulatory changes occur. In addition, some of our partnership
agreements with our physician partners and management agreements with surgery centers require us to
attempt to renegotiate the agreements upon the occurrence of various fundamental regulatory changes
or changes in the interpretation of existing regulations and provide for termination of the
agreements if renegotiations are not successful. Regulatory changes that could create purchase or renegotiation obligations include changes
that:  
    make illegal the referral of Medicare or other patients to our surgery centers by
physician investors; 52




---



##### Table of Contents




    create a substantial likelihood that cash distributions to physician investors from the
partnerships or limited liability companies through which we operate our surgery centers
would be illegal; or
    make illegal the ownership by the physician investors of interests in the partnerships
or limited liability companies through which we own and operate our surgery centers. We do not control whether or when any of these regulatory events might occur. In the event we
are required to purchase all of the physicians ownership interests, our existing capital resources
would not be sufficient for us to meet this obligation. These obligations and the possible
termination of our partnership and management agreements would have a material adverse effect on
us. If we become subject to malpractice and related legal claims, we could be required to pay
significant damages, which may not be covered by insurance. In recent years, physicians, hospitals and other health care providers have become subject to
an increasing number of legal actions alleging malpractice, product liability or related legal
theories. Many of these actions involve large monetary claims and significant defense costs. We
maintain liability insurance in amounts that we believe are appropriate for our operations.
Currently, we maintain professional and general liability insurance that provides coverage on a
claims made basis of $1.0 million per occurrence and $3.0 million in annual aggregate coverage per
facility. We also maintain business interruption insurance and property damage insurance, as well
as an additional umbrella liability insurance policy in the aggregate amount of $10.0 million.
However, this insurance coverage may not cover all claims against us. Insurance coverage may not
continue to be available at a cost allowing us to maintain adequate levels of insurance. If one or
more successful claims against us were not covered by or exceeded the coverage of our insurance,
our financial condition could be adversely affected. Significant indebtedness could limit our ability to operate our business and pursue business
opportunities. As of February 28, 2005, we had outstanding debt of about $62.5 million that we incurred to
finance our acquisitions and developments and for other general corporate purposes. Our senior
credit facility allows us to borrow up to $150.0 million. Our significant indebtedness could have
important consequences, including the following:  
    we may be required to dedicate a substantial portion of our cash flows from operations to the payment of principal and
interest on our indebtedness, reducing the funds available to fund working capital, capital expenditures and other general
corporate purposes;
    the majority of our borrowings are at variable rates of
interest and we are vulnerable to increases in interest rates;
    our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited;
    we may be at a disadvantage to our competitors who are less leveraged;
    we may be more vulnerable to a downturn in our business or the economy generally;
    our senior credit facility contains numerous financial and other restrictive covenants, including restrictions
on paying dividends, incurring additional indebtedness and buying or selling assets; and
    our senior credit facility requires us to pledge the capital stock or other equity interests of our
subsidiaries to the bank group as collateral security. 53




---



##### Table of Contents



We face intense competition for physicians, strategic relationships, acquisitions and managed care
contracts, which may result in a decline in our revenues, profitability and market share. The health care business is highly competitive. We compete with other health care providers,
primarily hospitals and other surgery centers, in recruiting physicians to utilize our facilities
and in contracting with managed care payors in each of our markets. There are unaffiliated
hospitals in each market in which we operate. These hospitals have established relationships with
physicians and payors. In addition, other companies either are currently in the same or similar
business of developing, acquiring and operating surgery centers and other facilities or may decide
to enter our business. Many of these companies have greater resources than we do, including
financial, marketing, staff and capital resources. We may also compete with some of these companies
for entry into strategic relationships with health care systems and health care professionals. In
addition, many physician groups develop surgery centers without a corporate partner, utilizing
consultants who perform services for a fee and do not take an equity interest in the ongoing
operations of the center. In recent years, more physicians are choosing to perform procedures,
including pain management and gastrointestinal procedures, in an office-based setting rather than
in a surgery center or hospital. If we are unable to compete effectively with any of these
entities or groups, we may be unable to implement our business strategies successfully and our
business could be adversely affected. A large number of our surgery centers are located in Texas and Florida, which makes us particularly
sensitive to regulatory, economic and other conditions in those states. In addition, three of our
surgery centers account for a significant portion of our revenues. Our revenues are particularly sensitive to regulatory, economic and other conditions in the
states of Texas and Florida. As of March 15, 2005, we operated seven surgery centers in Texas and
seven surgery centers in Florida. The surgery centers in Texas represented about 22.4% of our
revenues during 2004 and the surgery centers in Florida represented about 16.1% of our revenues
during 2004. In addition, Wilmington SurgCare in Wilmington, North Carolina, Physicians Surgical
Specialty Hospital in Houma, Louisiana and NorthStar Surgical Center in Lubbock, Texas generated
about 6.6%, 6.7% and 6.8%, respectively, of our revenues during 2004. If these facilities are
adversely affected by regulatory, economic and other conditions, or if these facilities do not
perform effectively, our operating results will be adversely affected. None of our remaining
surgery centers accounted for more than 5.0% of our revenues during 2004. We depend on our senior management and we may be adversely affected if we lose any member of our
senior management. We are highly dependent on our senior management, including Richard E. Francis, Jr., our
chairman of the board and chief executive officer, and Clifford G. Adlerz, our president and chief
operating officer. We have entered into employment agreements with Messrs. Francis and Adlerz and
William V. B. Webb, our chief development officer. The initial term of each of these agreements is
three years, which is automatically extended so that the term is three years until terminated. We
may terminate each employment agreement for cause. In addition, either party may terminate the
employment agreement at any time by giving prior written notice to the other party. We do not
maintain key man life insurance policies on any of our officers. Because our senior management
has contributed greatly to our growth since inception, the loss of key management personnel or our
inability to attract, retain and motivate sufficient numbers of qualified management personnel
could have a material adverse effect on us. We face risks related to compliance with corporate governance laws and financial reporting
standards. The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by
the Securities and Exchange Commission, Nasdaq and the Public Company Accounting Oversight Board,
required changes in the corporate governance practices and financial reporting standards for public
companies. These new laws, rules and regulations, including compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 relating to internal control over
financial reporting (Section 404), have materially increased our legal and financial
compliance costs and made some activities more time-consuming and more burdensome. We became a
public company in February 2004 and we are required to
comply with the provisions of Section 404 commencing with our fiscal year ending December 31, 2005.
Despite our intent to be fully compliant with Section 404 by that time, we run the risk of
non-compliance which could materially adversely affect our financial condition
and results of operations. 54




---



##### Table of Contents



If we are unable to integrate and manage our information systems effectively, our operations could
be disrupted. Our operations depend significantly on effective information systems. Our information systems
and applications require continual maintenance, upgrading and enhancement to meet our operational
needs. Moreover, our acquisition activity requires frequent transitions from, and the integration
of, various information systems. If we experience difficulties with the transition from information
systems or are unable to maintain properly or expand our information systems, we could suffer,
among other things, operational disruptions and increases in administrative expenses. Risks Related to Our Corporate Structure We may have a special legal responsibility to the holders of ownership interests in the entities
through which we own our surgery centers, which may conflict with the interests of our stockholders
and prevent us from acting solely in our own best interests or the interests of our stockholders. Our ownership interests in surgery centers generally are held through limited partnerships or
limited liability companies in which we maintain an ownership interest along with physicians or
physician practice groups. As general partner or manager of these entities, we may have a special
responsibility, known as a fiduciary duty, to manage these entities in the best interests of the
other interest holders. We also have a duty to operate our business for the benefit of our
stockholders. As a result, we may encounter conflicts between our responsibility to the other
interest holders and our responsibility to our stockholders. For example, we have entered into
management agreements to provide management services to our surgery centers in exchange for a fee.
Disputes may arise as to the nature of the services to be provided or the amount of the fee to be
paid. In these cases, we are obligated to exercise reasonable, good faith judgment to resolve the
disputes and may not be free to act solely in our own best interests or the interests of our
stockholders. Disputes may also arise between us and our physician investors with respect to a
particular business decision or regarding the interpretation of the provisions of the applicable
limited partnership agreement or operating agreement. We seek to avoid these disputes but have not
implemented any measures to resolve these conflicts if they arise. If we are unable to resolve a
dispute on terms favorable or satisfactory to us, our business may be adversely affected. We are a holding company with no operations of our own. We are a holding company and our ability to service our debt and pay dividends, if any, is
dependent upon the earnings from the business conducted by our subsidiaries. The distributions of
those earnings or advances or other distributions of funds by these subsidiaries to us, all of
which are contingent upon the subsidiaries earnings, are subject to various business
considerations. In addition, distributions by subsidiaries could be subject to statutory
restrictions, including state laws requiring that the subsidiary be solvent, or contractual
restrictions. We do not have exclusive control over the distribution of cash from our operating entities and may
be unable to cause all or a portion of the cash of these entities to be distributed. All of the surgery centers in which we have ownership interests are held through partnerships
or limited liability companies. We typically own, directly or indirectly, the general partnership
or majority member interests in these entities. The partnership and operating agreements
for these entities provide for distribution of available cash, in some cases on a quarterly basis.
If we are unable to cause sufficient revenues to be distributed from one or more of these entities,
our relationships with the physicians who also own an interest in these entities may be damaged and
we could be adversely affected. We may not be able to resolve favorably any dispute regarding
revenue distribution or other matters with a health care system with which we share control of the
distributions made by these entities. Further, the failure to resolve a dispute with these health
care systems could cause an entity in which we own an interest to be dissolved. 55




---



##### Table of Contents



Our stockholder rights plan, provisions of our certificate of incorporation and bylaws and Delaware
law could prevent or discourage a change in our management or a takeover you may consider
favorable. We have adopted a stockholder rights plan. The rights plan may discourage, delay or prevent a
merger or acquisition that you may consider favorable. The rights plan may also entrench our
management by making it more difficult for a potential acquirer to replace or remove our management
or board of directors. In addition, some of the provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that you may consider favorable or the removal
of our current management. These provisions:  
    authorize the issuance of blank check preferred stock;
    provide for a classified board of directors with staggered, three-year terms;
    prohibit cumulative voting in the election of directors;
    prohibit our stockholders from acting by written consent without the approval of our board of directors;
    limit the persons who may call special meetings of stockholders; and
    establish advance notice requirements for nominations for election to the board of
directors or for proposing matters to be approved at meetings of stockholders. Our certificate of incorporation and bylaws also prohibit the amendment of many of the
provisions in the certificate of incorporation and bylaws by our stockholders unless the amendment
is approved by the holders of at least 67% of our shares of common stock. In addition, Delaware law
may discourage, delay or prevent a change in our control by prohibiting us from engaging in a
business combination with an interested stockholder for a period of three years after the person
becomes an interested stockholder. Because our management and their affiliates together own a large percentage of our common stock,
they will be able to exert significant influence over all matters submitted to our stockholders for
approval, regardless of the preferences of our other stockholders. As of February 28, 2005, our officers, directors and their affiliates together beneficially
owned about 33.7% of our outstanding common stock. Accordingly, these stockholders are able to
exert significant influence over:  
    the election of our board of directors;
    our management and policies; and
    the outcome of any corporate transaction or other matter submitted to our stockholders
for approval, including mergers, consolidations and the sale of all or substantially all of
our assets. Our officers, directors and their affiliates are also able to exert significant influence over
a change in our control or an amendment to our certificate of incorporation or bylaws. In addition,
we granted registration rights to these stockholders covering all shares of our stock that they
own. Their interests may conflict with the interests of other holders of common stock and they may
take actions affecting us with which you disagree. Risks Related to Our Common Stock Because we have not paid dividends and do not anticipate paying dividends on our common stock in
the foreseeable future, you should not expect to receive dividends on shares of our common stock. We currently anticipate that we will retain all future earnings, if any, to finance the growth
and development of our business and do not anticipate paying cash dividends on our common stock in
the foreseeable future. Any 56




---



##### Table of Contents



payment of cash dividends will depend upon our financial condition, capital requirements,
earnings and other factors deemed relevant by our board of directors. Further, under the terms of
our senior credit facility, we are restricted from paying cash dividends and making other
distributions to our stockholders. Our stock price is likely to be highly volatile. Before February 6, 2004, there was no public market for our common stock. The stock market
has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause
the market price for our common stock to decline, perhaps substantially, including:  
    our failure or delay in meeting our development and acquisition plans;
    our revenues and operating results failing to meet the expectations of securities
analysts or investors in any quarter;
    changes in laws and regulations governing health care and the surgery center industry;
    proposed or enacted changes in reimbursement by governmental and other third-party payors;
    changes in securities analysts financial estimates or recommendations;
    investor perception of our industry or our prospects; and
    general economic trends and market conditions, including factors unrelated to our operating performance. In the past, other companies in the health care industry have experienced volatility in the
market price of their stock and have been the subject of securities class action litigation. We may
be involved in securities class action litigation in the future which could divert our managements
attention and resources and could have a material adverse effect on our business, operations and
financial condition. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk related to changes in prevailing interest rates. Historically,
we have not held or issued derivative financial instruments, including interest rate swaps. Our
outstanding debt to commercial lenders is generally based on a predetermined percentage above LIBOR
or the lenders prime rate. At December 31, 2004, $64.0 million of our total long-term debt was
subject to variable rates of interest, while the remaining $7.4 million of our total long-term debt
was subject to fixed rates of interest. A hypothetical 100 basis point increase in market interest
rates would result in additional annual interest expense of $640,000. The fair value of our
long-term debt, based on a discounted cash flow analysis, approximates its carrying value as of
December 31, 2004. 
 Item 8.Financial
Statements and Supplementary Data Information with respect to this Item is contained in our consolidated financial statements
beginning with the Index on Page F-1 of this report. 
 Item 9. Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure None. 57




---



##### Table of Contents



Item 9A.Controls
and Procedures  (a)
    Evaluation of Disclosure Controls and Procedures.We carried out an evaluation, under
the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report pursuant to Exchange Act Rule
13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective in ensuring
that information required to be disclosed by us (including our consolidated subsidiaries)
in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported in a timely basis.(b)
    Changes in Internal Control Over Financial Reporting.There has been no change in our
internal control over financial reporting that occurred during the fourth quarter of 2004
that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. 
 Item 9B.Other
Information None. 58




---



##### Table of Contents



PART III 
 Item 10.Directors
and Executive Officers of the Registrant Directors and Executive Officers Information about our directors and executive officers is incorporated by reference to the
information contained under the captions Election of Directors, Corporate Governance and
Executive Officers included in our proxy statement relating to our annual meeting of stockholders
to be held on May 10, 2005. Code of Business Conduct and Ethics We have adopted a Code of Business Conduct and Ethics. This code of ethics is posted on our
website located at www.symbion.comunder the heading Corporate Governance  Code of Business
Conduct and Ethics. Compliance with Section 16(a) of the Exchange Act Information with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934 is incorporated by reference to the information contained under the caption Security
Ownership of Certain Beneficial Owners and Management  Section 16(a) Beneficial Ownership
Reporting Compliance included in our proxy statement relating to our annual meeting of
stockholders to be held on May 10, 2005. 
 Item 11. Executive
Compensation This information is incorporated by reference to the information contained under the captions
Corporate Governance  Compensation of Directors and Executive Compensation included in our
proxy statement relating to our annual meeting of stockholders to be held on May 10, 2005. The
Comparative Performance Graph and the Compensation Committee Report on Executive Compensation also
included in the proxy statement are expressly not incorporated herein by reference. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters Information about the security ownership of certain beneficial owners and management is
incorporated by reference to the information contained under the captions Security Ownership of
Certain Beneficial Owners and Management and Executive
Compensation  Equity Compensation Plan
Information included in our proxy statement relating to our annual meeting of stockholders to be
held on May 10, 2005. 
 Item 13.Certain
Relationships and Related Transactions This information is incorporated by reference to the information contained under the caption
Executive Compensation  Certain Transactions included in our proxy statement relating to our
annual meeting of stockholders to be held on May 10, 2005. 
 Item 14. Principal Accountant Fees and Services This information is incorporated by reference to the information contained under the caption
Ratification of Appointment of Auditors included in our proxy statement relating to our annual
meeting of stockholders to be held on May 10, 2005. 59




---



##### Table of Contents



PART IV 
 Item 15. Exhibits
and Financial Statement Schedules (a) Index to Consolidated Financial Statements, Financial Statement Schedules and Exhibits (1) Consolidated Financial Statements The consolidated financial statements required to be included in Part II, Item 8, are
indexed on Page F-1 and submitted as a separate section of this report. (2) Consolidated Financial Statement Schedules All schedules are omitted because they are not applicable or not required, or because the
required information is included in the consolidated financial statements or notes in this
report. (3) Exhibits No.


    
    
    Description2.1

    
    
    
    Agreement and Plan of Merger, dated as of March 7, 2002, among Symbion, Inc., Symbion
Acquisition Sub, Inc. and Physicians Surgical Care, Inc. (a)2.2

    
    
    
    Purchase Agreement, dated as of November 11, 2004, by and among the members of Surgery
Center Partners, L.L.C., Symbion Ambulatory Resource Centres, Inc. and SMBIMS Kirkwood,
Inc.3.1

    
    
    
    Certificate of Incorporation (b)3.2

    
    
    
    Certificate of Amendment to Certificate of Incorporation (c)3.3

    
    
    
    Certificate of Retirement of Stock (d)3.4

    
    
    
    Certificate of Designation of Rights and Preferences of Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock (b)3.5

    
    
    
    Certificate of Designation of Series A Junior Participating Preferred Stock (c)3.6

    
    
    
    Bylaws (b)4.1

    
    
    
    Form of Common Stock Certificate (b)4.2

    
    
    
    Amended and Restated Investors Rights Agreement, dated as of June 25, 1999, among Symbion,
Inc. and the security holders named therein (a)4.3

    
    
    
    Amendment No. 1 to Amended and Restated Investors Rights Agreement, dated as of August 11,
1999, among Symbion, Inc. and the security holders named therein (a)4.4

    
    
    
    Amendment No. 2 to Amended and Restated Investors Rights Agreement, dated as of April 1,
2002, among Symbion, Inc. and the security holders named therein (a)4.5

    
    
    
    Form of Warrant for the purchase of shares of Symbion, Inc. common stock (a)4.6

    
    
    
    Rights Agreement, dated as of February 6, 2004, between Symbion, Inc. and SunTrust Bank (e)
 60




---



##### Table of Contents



No.


    
    
    Description10.1
    

    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion,
Inc. and Richard E. Francis, Jr. (a) (f)10.2
    

    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion,
Inc. and Clifford G. Adlerz (a) (f)10.3
    

    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion,
Inc. and William V. B. Webb (a) (f)10.4
    

    
    
    Employee Stock Purchase Agreement, dated as of March 13, 1996, between Symbion, Inc. and
Richard E. Francis, Jr. (a) (f)10.5
    

    
    
    Employee Stock Purchase Agreement, dated as of December 30, 1996, between Symbion, Inc. and
Richard E. Francis, Jr. (a) (f)10.6
    

    
    
    Employee Stock Purchase Agreement, dated as of March 13, 1996, between Symbion, Inc. and
Clifford G. Adlerz (a) (f)10.7
    

    
    
    Employee Stock Purchase Agreement, dated as of December 30, 1996, between Symbion, Inc. and
Clifford G. Adlerz (a) (f)10.8
    

    
    
    Employee Stock Purchase Agreement, dated as of March 13, 1996, between Symbion, Inc. and
Kenneth C. Mitchell (a) (f)10.9
    

    
    
    Employee Stock Purchase Agreement, dated as of December 30, 1996, between Symbion, Inc. and
R. Dale Kennedy (a) (f)10.10
    

    
    
    Employee Stock Purchase Agreement, dated as of March 13, 1996, between Symbion, Inc. and R.
Dale Kennedy (a) (f)10.11
    

    
    
    Employee Stock Purchase Agreement, dated as of June 1, 1999, between Symbion, Inc. and R.
Dale Kennedy (a) (f)10.12
    

    
    
    Securities Purchase Agreement, dated as of July 18, 2003, among Symbion, Inc. and DLJ
Investment Partners II, L.P. and its affiliates (b)10.13
    

    
    
    Form of 14 3/4% Senior Subordinated Note due 2008 (b)10.14
    

    
    
    Credit Agreement, dated as of July 18, 2003, among Symbion, Inc., various lenders party
thereto, Bank of America, N.A., as Administrative Agent and as Issuing Bank, Credit Suisse
First Boston as Syndication Agent, Key Corporate Capital, Inc. as Documentation Agent, and
Banc of America Securities, LLC, as sole Lead Arranger and Sole Book Manager (b)10.15
    

    
    
    First Amendment to Credit Agreement, dated January 30, 2004, among Symbion, Inc., various
lenders party thereto and Bank of America, N.A., as Administrative Agent and as Issuing
Bank (b)10.16
    

    
    
    Amended and Restated Credit Agreement, dated as of March 21, 2005, among Symbion, Inc., the
subsidiaries of Symbion identified therein, Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, Credit Suisse First Boston, as
Syndication Agent, KeyBank National Association, as Documentation
Agent and the other lenders party thereto (g)10.17
    

    
    
    Lease Agreement, dated June 26, 2001, between Burton Hills IV Partners and Symbion, Inc. (a)10.18
    

    
    
    First Amendment to Lease Agreement, dated February 9, 2004, between Burton Hills IV
Partners and Symbion, Inc. (d)
 61




---



##### Table of Contents



No.
    
    
    
    Description10.19
    
    
    
    Amended and Restated Ambulatory Resource Centres, Inc. 1997 Stock Option Plan (a) (f)10.20
    
    
    
    Ambulatory Resource Centres, Inc. Nonqualified Initial Option Plan (a) (f)10.21
    
    
    
    Symbion Stock Incentive Plan (a) (f)10.22
    
    
    
    Form of Incentive Stock Option
Agreement under the Stock Incentive Plan (f) (h)10.23
    
    
    
    Form of Nonqualified Stock Option
Agreement under the Stock Incentive Plan (f) (h)10.24
    
    
    
    Form of Restricted Stock Agreement
under the Stock Incentive Plan (f) (i)10.25
    
    
    
    Symbion Non-Employee Directors Stock Option Plan (a) (f)10.26
    
    
    
    Form of Nonqualified Stock Option Agreement under the Non-Employee Directors Stock Option
Plan (f) (h)10.27
    
    
    
    Symbion Employee Stock Purchase Plan (a) (f)10.28
    
    
    
    First Amendment to Symbion Employee Stock Purchase Plan (a) (f)10.29
    
    
    
    Executive Change in Control Severance Plan, dated December 11, 1997 (a) (f)21.1
    
    
    
    Subsidiaries of Registrant23.1
    
    
    
    Consent of Ernst & Young LLP23.2
    
    
    
    Consent of Casualty Actuarial
Consultants, Inc. (2004 report)23.3
    
    
    
    Consent of Casualty Actuarial
Consultants, Inc. (2003 report) (d)31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 200231.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1
    
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   (a)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-1 (Registration No. 333-89554).(b)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-1 (Registration No. 333-110555).(c)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-8 (Registration No. 333-113272).(d)
    
    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).(e)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on February 6, 2004 (Registration
No. 000-50574).(f)
    
    Compensation plan or arrangement.(g)
    
    Incorporated by reference to exhibits filed with
the Registrant's Current Report on Form 8-K filed March 25, 2005
(File No. 000-50574).(h)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed December 14, 2004 (File No. 000-50574).(i)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed January 11, 2005 (File No. 000-50574). 62




---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders of Symbion, Inc. We have audited the accompanying consolidated balance sheets of Symbion, Inc. as of December 31,
2004 and 2003, and the related consolidated statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. We were not engaged to perform an audit of
the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Symbion, Inc. at December 31, 2004 and 2003, and
the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Nashville, Tennessee
February 21, 2005 F-2




---



##### Table of Contents



SYMBION, INC. CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts) December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,276
    
    
    $
    17,658Accounts receivable, less allowance for
doubtful accounts $13,738 and $12,532,
respectively
    
    
    28,893
    
    
    
    21,673Inventories
    
    
    6,068
    
    
    
    5,371Prepaid expenses and other current assets
    
    
    7,246
    
    
    
    4,380Total current assets
    
    
    65,483
    
    
    
    49,082Property and equipment:Land
    
    
    1,694
    
    
    
    1,276Buildings and improvements
    
    
    35,881
    
    
    
    32,845Furniture and equipment
    
    
    59,764
    
    
    
    48,854Computers and software
    
    
    7,041
    
    
    
    6,645104,380
    
    
    
    89,620Less accumulated depreciation
    
    
    (36,587
    )
    
    
    (26,906
    )Property and equipment, net
    
    
    67,793
    
    
    
    62,714Goodwill
    
    
    215,533
    
    
    
    116,654Other intangible assets, net
    
    
    950
    
    
    
    1,022Investments in and advances to affiliates
    
    
    12,927
    
    
    
    13,778Other assets
    
    
    3,075
    
    
    
    9,534Total assets
    
    $
    365,761
    
    
    $
    252,784LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,237
    
    
    $
    3,800Accrued payroll and benefits
    
    
    7,985
    
    
    
    6,533Other accrued expenses
    
    
    9,186
    
    
    
    9,139Current maturities of long-term debt
    
    
    1,620
    
    
    
    3,631Total current liabilities
    
    
    24,028
    
    
    
    23,103Long-term debt, less current maturities
    
    
    69,747
    
    
    
    101,037Other liabilities
    
    
    10,350
    
    
    
    4,609Convertible debentures
    
    
    
    
    
    
    3,071Minority interests
    
    
    23,638
    
    
    
    16,949Stockholders equity:Preferred stock, $0.01 par value;
10,000,000 shares authorized and
16,946,316 shares authorized at December
31, 2004 and at December 31, 2003,
respectively:Series A convertible preferred stock,
no shares designated, issued and
outstanding at December 31, 2004 and
4,341,726 shares designated, issued
and outstanding at December 31, 2003
    
    
    
    
    
    
    13,590Series B convertible preferred stock,
no shares designated, issued and
outstanding at December 31, 2004 and
2,604,590 shares designated, issued
and outstanding at December 31, 2003
    
    
    
    
    
    
    8,152Common stock, 225,000,000 shares, $0.01
par value, authorized at December 31,
2004 and at December 31, 2003;
21,032,777 shares issued and outstanding
at December 31, 2004, 10,612,687 shares
issued and outstanding at December 31,
2003
    
    
    210
    
    
    
    106Additional paid-in-capital
    
    
    203,797
    
    
    
    61,746Stockholder notes receivable
    
    
    (287
    )
    
    
    (305
    )Retained earnings
    
    
    34,278
    
    
    
    20,726Total stockholders equity
    
    
    237,998
    
    
    
    104,015Total liabilities and stockholders equity
    
    $
    365,761
    
    
    $
    252,784
 See accompanying notes. F-3




---



##### Table of Contents



SYMBION, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts) Year Ended December 31,2004
    
    
    2003
    
    
    2002Revenues
    
    $
    216,325
    
    
    $
    176,269
    
    
    $
    144,688Operating expenses:Salaries and benefits
    
    
    56,395
    
    
    
    46,275
    
    
    
    37,541Supplies
    
    
    42,756
    
    
    
    35,099
    
    
    
    28,338Professional and medical fees
    
    
    11,493
    
    
    
    9,889
    
    
    
    7,356Rent and lease expense
    
    
    13,667
    
    
    
    10,891
    
    
    
    9,146Other operating expenses
    
    
    17,454
    
    
    
    15,151
    
    
    
    11,311Cost of revenues
    
    
    141,765
    
    
    
    117,305
    
    
    
    93,692General and administrative expense
    
    
    18,449
    
    
    
    15,874
    
    
    
    14,328Depreciation and amortization
    
    
    10,927
    
    
    
    9,295
    
    
    
    7,836Provision for doubtful accounts
    
    
    3,989
    
    
    
    2,748
    
    
    
    4,843Income on equity investments
    
    
    (1,272
    )
    
    
    (402
    )
    
    
    (541
    )Impairment and loss on disposal of long-lived assets
    
    
    271
    
    
    
    437
    
    
    
    492Gain on sale of long-lived assets
    
    
    (250
    )
    
    
    (571
    )
    
    
    (457
    )Total operating expenses
    
    
    173,879
    
    
    
    144,686
    
    
    
    120,193Operating income
    
    
    42,446
    
    
    
    31,583
    
    
    
    24,495Minority interests in income of consolidated
subsidiaries
    
    
    (15,549
    )
    
    
    (10,447
    )
    
    
    (7,353
    )Interest expense, net
    
    
    (4,862
    )
    
    
    (5,782
    )
    
    
    (4,625
    )Income before income taxes
    
    
    22,035
    
    
    
    15,354
    
    
    
    12,517Provision (benefit) for income taxes
    
    
    8,483
    
    
    
    (2,170
    )
    
    
    215Net income
    
    $
    13,552
    
    
    $
    17,524
    
    
    $
    12,302Net income per share:Basic:
    
    $
    0.69
    
    
    $
    1.66
    
    
    $
    1.19Diluted:
    
    $
    0.67
    
    
    $
    1.38
    
    
    $
    1.01Weighted average number of common shares
outstanding and common equivalent shares:Basic:
    
    
    19,736,722
    
    
    
    10,536,745
    
    
    
    10,349,568Diluted:
    
    
    20,347,385
    
    
    
    12,658,620
    
    
    
    12,144,140
 See accompanying notes. F-4




---



##### Table of Contents



SYMBION, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(dollars in thousands, except per share amounts) Symbion, Inc.
    
    
    Symbion, Inc.Series A Convertible
    
    
    Series B Convertible
    
    
    Symbion, Inc.
    
    
    Additional
    
    
    Stockholder
    
    
    Retained
    
    
    TotalPreferred Stock
    
    
    Preferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Notes
    
    
    Earnings
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Receivable
    
    
    (Deficit)
    
    
    EquityBalance at January 1, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,911,836
    
    
    
    51,107
    
    
    
    
    
    
    
    (397
    )
    
    
    (9,100
    )
    
    
    41,610Issuance of common stock in acquisition of
Physicians Surgical Care, Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    624,919
    
    
    
    8,672
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,672Issuance of Series A convertible preferred stock in
acquisition of Physicians Surgical Care, Inc.
    
    
    4,341,726
    
    
    
    13,590
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,590Issuance of Series B convertible preferred stock in
acquisition of Physicians Surgical Care, Inc.
    
    
    
    
    
    
    
    
    
    
    2,604,590
    
    
    
    8,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,152Issuance of warrants and stock options in acquisition of
Physicians Surgical Care, Inc.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,274
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,274Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,810
    
    
    
    61
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    77Designation of common stock as $0.01 par value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,008
    )
    
    
    62,008
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,302
    
    
    
    12,302Balance at December 31, 2002
    
    
    4,341,726
    
    
    
    13,590
    
    
    
    2,604,590
    
    
    
    8,152
    
    
    
    10,570,565
    
    
    
    106
    
    
    
    62,008
    
    
    
    (381
    )
    
    
    3,202
    
    
    
    86,677Issuance of warrants and common stock, net of repurchases,
and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,122
    
    
    
    
    
    
    
    (262
    )
    
    
    76
    
    
    
    
    
    
    
    (186
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,524
    
    
    
    17,524Balance at December 31, 2003
    
    
    4,341,726
    
    
    $
    13,590
    
    
    
    2,604,590
    
    
    $
    8,152
    
    
    
    10,612,687
    
    
    $
    106
    
    
    $
    61,746
    
    
    $
    (305
    )
    
    $
    20,726
    
    
    $
    104,015Public offering of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,280,000
    
    
    
    83
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83Conversion of Preferred Stock at time of public offering
    
    
    (4,341,726
    )
    
    
    (13,590
    )
    
    
    (2,604,590
    )
    
    
    (8,152
    )
    
    
    1,789,341
    
    
    
    18
    
    
    
    24,795
    
    
    
    
    
    
    
    
    
    
    
    3,071Other initial public offering activity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,764
    
    
    
    
    
    
    
    
    
    
    
    111,764Issuance of warrants and common stock, net of repurchases,
and other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350,749
    
    
    
    3
    
    
    
    5,492
    
    
    
    18
    
    
    
    
    
    
    
    5,513Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,552
    
    
    
    13,552Balance at December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    21,032,777
    
    
    $
    210
    
    
    $
    203,797
    
    
    $
    (287
    )
    
    $
    34,278
    
    
    $
    237,998
 See accompanying notes. F-5




---



##### Table of Contents



SYMBION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands) Year Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    13,552
    
    
    $
    17,524
    
    
    $
    12,302Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    10,927
    
    
    
    9,295
    
    
    
    7,836Impairment and loss on disposal of long-lived assets
    
    
    271
    
    
    
    437
    
    
    
    492Gain on sale of long-lived assets
    
    
    (250
    )
    
    
    (571
    )
    
    
    (457
    )Minority interests
    
    
    15,549
    
    
    
    10,447
    
    
    
    7,353Distributions to minority partners
    
    
    (14,420
    )
    
    
    (10,690
    )
    
    
    (6,177
    )Income on equity investments
    
    
    (1,272
    )
    
    
    (402
    )
    
    
    (541
    )Provision for doubtful accounts
    
    
    3,989
    
    
    
    2,748
    
    
    
    4,843Changes in operating assets and liabilities, net of
effects of acquisitions and dispositions:Accounts receivable
    
    
    (5,274
    )
    
    
    (3,537
    )
    
    
    (5,694
    )Other assets
    
    
    1,465
    
    
    
    (7,016
    )
    
    
    (3,080
    )Other liabilities
    
    
    3,550
    
    
    
    2,572
    
    
    
    4,893Net cash provided by operating activities
    
    
    28,087
    
    
    
    20,807
    
    
    
    21,770Cash flows from investing activities:Payments for acquisitions, net of cash acquired
    
    
    (95,198
    )
    
    
    (48,940
    )
    
    
    (13,916
    )Purchases of property and equipment, net
    
    
    (11,086
    )
    
    
    (13,826
    )
    
    
    (10,461
    )Proceeds from sale of clinic operations
    
    
    
    
    
    
    
    
    
    
    4,585Change in other assets
    
    
    1,432
    
    
    
    (4,208
    )
    
    
    (1,800
    )Net cash used in investing activities
    
    
    (104,852
    )
    
    
    (66,974
    )
    
    
    (21,592
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (118,820
    )
    
    
    (62,106
    )
    
    
    (8,157
    )Proceeds from debt issuances
    
    
    83,000
    
    
    
    100,419
    
    
    
    11,350Proceeds from capital contributions by minority partners
    
    
    1,364
    
    
    
    3,348
    
    
    
    981Proceeds from initial public offering, net
    
    
    115,506
    
    
    
    
    
    
    
    Change in other long-term liabilities
    
    
    432
    
    
    
    1,516
    
    
    
    977Net proceeds from issuance of common stock
    
    
    901
    
    
    
    
    
    
    
    84Net cash provided by financing activities
    
    
    82,383
    
    
    
    43,177
    
    
    
    5,235Net increase (decrease) in cash and cash equivalents
    
    
    5,618
    
    
    
    (2,990
    )
    
    
    5,413Cash and cash equivalents at beginning of period
    
    
    17,658
    
    
    
    20,648
    
    
    
    15,235Cash and cash equivalents at end of period
    
    $
    23,276
    
    
    $
    17,658
    
    
    $
    20,648Supplemental cash flow information:Cash paid for interest
    
    $
    6,436
    
    
    $
    5,442
    
    
    $
    4,974
 See accompanying notes. F-6




---



##### Table of Contents



SYMBION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
(dollars in thousands, except per share amounts) 1. Organization Symbion, Inc. (the Company), through its wholly-owned subsidiaries, owns interests in
partnerships and limited liability companies which own and operate surgery centers in
joint-ownership with physicians and physician groups, hospitals and hospital networks. As of
December 31, 2004, the Company owned and operated 45 surgery centers and managed nine additional
surgery centers in 21 states. The Company owns a majority interest in 34 of the 45 surgery centers
and consolidates 40 of these centers for financial reporting purposes. The Companys surgery
centers include three facilities that are licensed as hospitals, two of which are owned and one of
which is managed. The Company also owns two diagnostic imaging centers which are located in
markets the Company currently owns and operates surgery centers. In addition to the surgery
centers and the two diagnostic centers, the Company manages three physician networks, including two
physician networks in markets in which the Company also operates surgery centers. The Company also
provides management and administrative services on a contract basis to surgery
centers in which it does not own an interest. 2. Significant Accounting Policies and Practices Basis of Presentation and Use of Estimates The accompanying consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the accompanying consolidated financial statements
and notes. Examples include, but are not limited to, estimates of accounts receivable allowances,
professional and general liability and the estimate of deferred tax assets or liabilities. In the
opinion of management, all adjustments considered necessary for a fair presentation have been
included. All adjustments are of a normal, recurring nature. Actual results could differ from
those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries, as well as its interest in partnerships and limited liability companies controlled by
the Company through ownership of a majority voting interest or other rights granted to the Company
by contract as the sole general partner to manage and control the ordinary course of the
affiliates business. The consolidated financial statements also include the accounts of a
variable interest entity in which the Company is the primary beneficiary. The variable interest
entity is a surgery center. The accompanying consolidated balance sheet
as of December 31, 2004 includes assets of $5,137 and
liabilities of $132 related to the variable interest entity. The limited partner or minority member
responsibilities are to supervise the delivery of medical services with their rights being
restricted to those that protect their financial interests. Under certain of the partnership and
operating agreements governing these partnerships and limited liability companies, the Company
could be removed as the sole general partner or managing member for certain events such as material
breach, gross negligence or bankruptcy. These protective rights do not preclude consolidation of
the respective partnerships and limited liability companies. All significant intercompany balances
and transactions are eliminated in consolidation. Fair Value of Financial Instruments In estimating fair value disclosures for cash, accounts receivable and accounts payable, the
carrying amounts reported in the accompanying consolidated balance sheets approximate fair value
because of their short-term nature. For long-term debt and capitalized leases, the carrying amounts
reported in the accompanying consolidated balance sheets approximate fair value based upon the
borrowing rates available to the Company. F-7




---



##### Table of Contents



Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. The Company maintains its cash and cash equivalent balances
at high credit quality financial institutions. Accounts Receivable Accounts receivable consist of receivables from federal and state agencies (under the Medicare
and Medicaid programs), managed care health plans, commercial insurance companies, employers and
patients. The Company recognizes that revenues and receivables from government agencies are
significant to its operations, but it does not believe that there are significant credit risks
associated with these government agencies. Concentration of credit risk with respect to other
payors is limited because of the large number of such payors. Accounts receivable are recorded net
of allowances for doubtful accounts to reflect accounts receivable at net realizable value.
Accounts receivable at December 31 were as follows: 2004
    
    
    2003Surgery centers
    
    $
    28,393
    
    
    $
    20,922Physician networks
    
    
    500
    
    
    
    751$
    28,893
    
    
    $
    21,673
 The following table sets forth by type of payor the percentage of the Companys accounts
receivable for consolidated surgery centers as of December 31: Payor
    
    2004
    
    
    2003Private insurance
    
    
    63.1
    %
    
    
    63.2
    %Medicare and Medicaid
    
    
    13.9
    
    
    
    14.9Other government
    
    
    0.4
    
    
    
    0.3Self-pay
    
    
    17.1
    
    
    
    19.1Other
    
    
    5.5
    
    
    
    2.5Total
    
    
    100.0
    %
    
    
    100.0
    %
 Collection periods vary by payor class. During the year ended December 31, 2004, the
collection period for private insurance payors generally ranged from 21 to 45 days, the collection
period for government payors generally ranged from 21 to 35 days and the collection period for
self-pay generally ranged from 75 to 80 days. The Companys policy is to review the standard aging schedule, by facility, to determine the
appropriate provision for doubtful accounts. This review is supported by an analysis of the actual
net revenues, contractual adjustments and cash collections received. If the Companys internal
collection efforts are unsuccessful, the Company manually reviews the patient accounts. An account
is written-off only after the Company has pursued collection with legal or collection agency assistance or
otherwise deemed an account to be uncollectible. Allowance for Doubtful Accounts The amount of the provision for doubtful accounts is based upon managements assessment of
historical and expected net collections. Management reviews the results of detailed analysis of
historical write-offs and recoveries at the surgery centers as a primary source of information in
estimating the collectability of accounts receivable. F-8




---



##### Table of Contents



Changes in the allowance for doubtful accounts and the amounts charged to revenues, costs and
expenses were as follows: Allowance
    
    
    Charged toBalance at
    
    
    Revenues,
    
    
    Charged to
    
    
    
    
    
    
    AllowanceBeginning of
    
    
    Costs and
    
    
    Other
    
    
    
    
    
    
    Balance atPeriod
    
    
    Expenses
    
    
    Accounts(1)
    
    
    Write-offs
    
    
    End of PeriodYear ended December 31:2002
    
    $
    4,778
    
    
    $
    4,843
    
    
    $
    3,570
    
    
    $
    1,559
    
    
    $
    11,6322003
    
    
    11,632
    
    
    
    2,748
    
    
    
    1,362
    
    
    
    3,210
    
    
    
    12,5322004
    
    
    12,532
    
    
    
    3,989
    
    
    
    437
    
    
    
    3,220
    
    
    
    13,738
   (1)
    
    Relates to allowances for doubtful accounts recorded under the purchase method of accounting
for acquired entities. Inventories Inventories, which consist primarily of medical and drug supplies, are stated at the lower of
cost or market value. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment are stated at cost or, if obtained through acquisition, at fair value
determined on the date of acquisition, and depreciated on a straight-line basis over the useful
lives of the assets, generally three to five years for computers and software and five to seven
years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis
over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance
and repairs are charged to expenses as incurred, while expenditures that increase capacities or
extend useful lives are capitalized. When events or circumstances indicate that the carrying value
of certain property and equipment might be impaired, the Company prepares an expected undiscounted
cash flow projection. If the projection indicates that the recorded amounts of the property and
equipment are not expected to be recovered, these amounts are reduced to estimated fair value. The
cash flow estimates and discount rates incorporate managements best estimates, using appropriate
and customary assumptions and projections at the date of evaluation. For the year ended December
31, 2004, the Company recorded impairment charges of $271 primarily related to a charge for
obsolete medical equipment. For the year ended December 31, 2003, the Company recorded impairment
charges of $275 related to software that the Company purchased but no
longer intended to use. For
the year ended December 31, 2002 there was no impairment. Depreciation expense, including the amortization of assets under capital leases, was $10,855,
$9,224 and $7,765 for the years ended December 31, 2004, 2003 and 2002, respectively. Goodwill and Indefinite Lived Intangible Assets Goodwill represents the excess of purchase price over fair value of net tangible and
identifiable intangible assets acquired. Goodwill and other indefinite lived intangible assets are
no longer amortized, but are tested at least annually through an impairment test using a fair value
method. Impairment is tested using a discounted cash flows model to determine fair value. The
Company will perform a goodwill impairment test whenever events or changes in facts or
circumstances indicate that impairment may exist, or at least annually during the fourth quarter
each year. Goodwill resulting from acquisitions is deductible for tax purposes over a 15-year
period. There was no impairment related to goodwill for the years ended December 31, 2004, 2003
and 2002. See Note 6 for further disclosure on goodwill. Service Agreement Rights Service agreement rights represent the exclusive right to operate the Louisville, Kentucky
physician network during the 20-year term of the agreement. The service agreement right is
amortized over 20 years. Service agreement rights are recorded as other intangible assets on the
accompanying consolidated balance sheets and had F-9




---



##### Table of Contents



unamortized balances of $950 and $1,022 at December 31, 2004 and December 31, 2003,
respectively. Amortization expense was $72 for each of the three years ended December 31, 2004,
2003 and 2002. See Note 6 for further disclosure on service agreement rights. Minority Interests The consolidated financial statements include all assets, liabilities, revenues and expenses
of surgery centers in which the Company has a majority ownership interest or has other rights
sufficient to allow the Company to consolidate the center. The Company has recorded
minority interests in the earnings (losses) of such surgery centers. Investments in and Advances to Affiliates Investments in and advances to affiliates at December 31, 2004 and 2003 include approximately
$4,835 and $6,768, respectively, of advances to, net investments in and a note receivable from a
surgery center that the Company manages which are secured by substantially all of the assets of the
related surgery center. The Company holds non-controlling interests in certain surgery centers
where it exercises significant influence. The Company accounts for such investments under the
equity method. Other Assets Other assets at December 31, 2004 and 2003 included approximately $2,081 and $3,003,
respectively, related to deferred financing costs. Deferred financing costs consist of prepaid
interest, loan fees and other costs of financing that are amortized over the term of the related
financing agreements. In addition, approximately $3,108 is included in other assets at December
31, 2003 related to the Companys deferred tax assets discussed in Note 11. Other assets at December 31, 2004 and 2003 also included approximately $0 and $2,724,
respectively, of costs associated with the Companys initial public offering. These costs were
reclassified to equity upon the completion of the initial public offering discussed in Note 3. Revenues Revenues consist of the following for the years ended December 31: 2004
    
    
    2003
    
    
    2002Patient service revenues
    
    $
    202,678
    
    
    $
    158,121
    
    
    $
    130,942Physician service revenues
    
    
    4,040
    
    
    
    3,796
    
    
    
    2,563Other service revenues
    
    
    9,607
    
    
    
    14,352
    
    
    
    11,183Total revenues
    
    $
    216,325
    
    
    $
    176,269
    
    
    $
    144,688
 Patient Service Revenues Patient service revenues are recorded at the time health care services are provided at
estimated amounts due from patients and third-party payors. A fee is charged for surgical
procedures performed in each of the Companys surgery centers. The fee varies depending on the
procedure, but usually includes all charges for usage of an operating room, a recovery room,
special equipment, supplies, nursing staff and medications. The fee does not include professional
fees charged by the patients surgeon, anesthesiologist or other attending physician, which are
billed directly by such physicians to the patient or third-party payor. The Medicare program and
most other payors pay surgery centers in accordance with a fee schedule that is prospectively
determined. Accordingly, there is no retroactive cost report settlement process. Revenues from
surgery centers are recognized on the date of service, net of estimated contractual adjustments and
discounts from third-party payors, including Medicare and Medicaid. Changes in estimated
contractual adjustments and discounts are recorded in the period of change. F-10




---



##### Table of Contents



The following table sets forth by type of payor the percentage of our patient service revenues
generated in 2004, 2003 and 2002 for surgery centers in which we owned an interest as of December
31: Payor
    
    2004
    
    
    2003
    
    
    2002Private insurance
    
    
    75.7
    %
    
    
    76.4
    %
    
    
    76.0
    %Medicare and Medicaid
    
    
    19.1
    
    
    
    18.4
    
    
    
    18.2Other government
    
    
    0.6
    
    
    
    0.6
    
    
    
    0.3Self-pay
    
    
    3.0
    
    
    
    2.8
    
    
    
    2.7Other
    
    
    1.6
    
    
    
    1.8
    
    
    
    2.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Physician Service Revenues The Company derives all of its physician service revenues from physician networks with which
it has service agreements. Physician service revenues from physician networks consist of
reimbursable expenses, plus participation in the excess of revenue over expenses of the physician
networks, as provided for in the service agreements. Reimbursed expenses include the costs of
personnel, supplies and other expenses incurred to provide the management services to the physician
networks. The Company recognizes physician service revenues in the period in which reimbursable
expenses are incurred and in the period in which the Company has the right to receive a percentage
of the amount by which a physician networks revenues exceed its expenses. The participation
component of physician service revenues is based on net billings. Changes in estimated contractual
adjustments and bad debts are reflected in service revenues in subsequent periods. The Companys
physician service revenues would be impacted by changes in estimated contractual adjustments and
bad debts recorded by the physician networks. As required by the service agreements, the Company
purchases patient accounts receivable on a monthly basis from the physician networks at estimated
net realizable value (i.e., net of estimated contractual adjustments and bad debts) to provide
liquidity to the physician networks and collects amounts from the responsible payor as described
under Accounts Receivable in Note 2. As of December 31, 2004, the Company had such an obligation to
only one group of three physicians included in one of the three physician networks the Company
manages (see Note 5). Such activity is reflected as cash flows from operating activities in the
accompanying consolidated statements of cash flows. Accounts receivable are a function of clinic
revenues generated by the physician networks, rather than physician service revenues of the
Company. Physician service revenues consist of the following amounts for the years ended December 31: 2004
    
    
    2003
    
    
    2002Professional services revenues
    
    $
    11,028
    
    
    $
    10,028
    
    
    $
    7,047Contractual adjustments and bad debt expense
    
    
    (4,924
    )
    
    
    (4,235
    )
    
    
    (2,900
    )Clinic revenue
    
    
    6,104
    
    
    
    5,793
    
    
    
    4,147Medical group retainage
    
    
    (2,064
    )
    
    
    (1,997
    )
    
    
    (1,584
    )Physician service revenues
    
    $
    4,040
    
    
    $
    3,796
    
    
    $
    2,563
 No management agreement accounted for more than 10% of the Companys revenues for the years
ended December 31, 2004, 2003 and 2002. Other Service Revenues Other service revenues consist of management and administrative service fees derived from the
non-consolidated facilities that the Company accounts for under the equity method, management of surgery
centers in which the Company does not own an interest and management
services the Company provides to physician networks
for which the Company is not required to provide capital or additional assets. Stock-Based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has elected to record stock
options in accordance with Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock
Issued to Employees and related interpretations thereof and, F-11




---



##### Table of Contents



accordingly, recognizes no compensation expense for options granted when the exercise price
equals, or is greater than, the market price of the underlying stock on the date of grant (the
intrinsic value method). Had the Company used the Black-Scholes estimates to determine compensation expense for options
granted, net income and net income per share attributable to common stockholders would have been
reduced to the following pro forma amounts: Year Ended December 31,2004
    
    
    2003
    
    
    2002Net income as reported
    
    $
    13,552
    
    
    $
    17,524
    
    
    $
    12,302Pro forma compensation expense for stock option grants
    
    
    (1,842
    )
    
    
    (2,122
    )
    
    
    (1,460
    )Pro forma net income
    
    $
    11,710
    
    
    $
    15,402
    
    
    $
    10,842Basic earnings per share:As reported
    
    $
    0.69
    
    
    $
    1.66
    
    
    $
    1.19Pro forma
    
    
    0.59
    
    
    
    1.46
    
    
    
    1.05Diluted earnings per share:As reported
    
    $
    0.67
    
    
    $
    1.38
    
    
    $
    1.01Pro forma
    
    
    0.58
    
    
    
    1.22
    
    
    
    0.89
 The effect of applying SFAS No. 123 for providing pro forma disclosure is not likely to be
representative of the effect on reported net income for future years. The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock
price volatility and the expected exercise patterns of the option holders. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R),
Share-Based Payment. SFAS No. 123(R) is a revision of SFAS No. 123, Accounting for Stock Based
Compensation, and supersedes APB No. 25. Among other items, SFAS No. 123(R) eliminates the use of
the intrinsic value method of accounting allowed under APB No. 25, and requires companies to
recognize the cost of employee services received in exchange for awards of equity instruments,
based on the grant date fair value of those awards, in the financial statements. The effective
date of SFAS No. 123(R) is the first reporting period beginning after June 15, 2005, which is third
quarter 2005 for calendar year companies. Early adoption of SFAS No. 123(R) is allowed. SFAS No.
123(R) permits companies to adopt its requirements using either a modified prospective method, or
a modified retrospective method. Under the modified prospective method, compensation cost is
recognized in the financial statements beginning with the effective date, based on the requirements
of SFAS No. 123(R) for all share-based payments granted or modified after that date, and based on
the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of
SFAS No. 123(R). Under the modified retrospective method, the requirements are the same as under
the modified prospective method, but also permits entities to restate financial statements of
previous periods based on proforma disclosures made in accordance with SFAS No. 123. The Company
has not yet determined which of the adoption methods it will use. The Company currently uses the Black-Scholes standard option pricing model to measure the fair
value of stock options granted to employees and directors of the Company. While SFAS No. 123(R)
permits entities to continue to use such a model, the standard also permits the use of a lattice
model. The Company has not yet determined which model it will use to measure the fair value of
employee stock options upon the adoption of SFAS No. 123(R). See Note 9 for further information on
stock options. The Company currently expects to adopt SFAS No. 123(R) effective July 1, 2005. We are
currently evaluating the effect of adopting SFAS No. 123(R) on our results of operations. The
impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on
several factors, including levels of options and awards granted in the future and when option or
award holders exercise these awards. F-12




---



##### Table of Contents



Income Taxes Income taxes are computed based on the liability method of accounting whereby deferred tax
assets and liabilities are determined based upon differences between the financial reporting and
tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. See Note 11 for further information on
income taxes. Non-Cash Investing Activities During 2004, the Company recorded $3,652 related to 204,500 shares of the Companys common
stock that were issued to the former stockholders of Physicians Surgical Care, Inc. The earn-out
was based on the 2003 financial results of one of the surgery centers the Company acquired from
Physicians Surgical Care, Inc. in April 2002. Reclassifications Certain reclassifications have been made to the prior year financial statements to conform to
the 2004 presentation. The reclassifications had no impact on the Companys financial position or
results of operations. 3. Reverse Stock Split and Initial Public Offering On February 5, 2004, the Companys Board of Directors approved a 1-for-4.4303 reverse stock
split of the Companys common stock in connection with its initial public offering. All information
related to common stock, options to purchase common stock, warrants to purchase common stock and
earnings per share data presented in the accompanying consolidated financial statements and related
notes have been restated to reflect the effect of the reverse stock split of the Companys common
stock. On February 11, 2004, the Company completed an initial public offering of 8,280,000 shares of
its common stock at a price of $15.00 per share, including 1,080,000 shares sold following exercise
in full by the underwriters of an option granted to them by the Company to purchase the additional
shares to cover over-allotments. The Company received net proceeds of approximately $115,506 in the
offering, after deducting underwriting discounts and commissions. The Company used the net proceeds
to repay indebtedness and to pay holders of the Companys Series A and Series B convertible
preferred stock in connection with the conversion of those shares to common stock upon the
completion of the offering. 4. Acquisitions and Developments During
2004, the Company acquired six surgery centers and two other surgery
centers the Company intends to develop, through syndication,
renovation and expansion. During 2003, the Company acquired five
surgery centers. During 2002, the Company acquired Physicians Surgical Care, Inc. (PSC). In
addition to its acquisition of seven surgery centers in its transaction with PSC, the Company
purchased an interest in three additional surgery centers during 2002 in separate transactions.
The following table summarizes the allocation of the aggregate purchase price of acquisitions for
the years ended December 31: 2004
    
    
    2003
    
    
    2002Fair value of assets acquired
    
    $
    77,582
    
    
    $
    49,925
    
    
    $
    81,628Liabilities assumed
    
    
    (11,271
    )
    
    
    (4,284
    )
    
    
    (35,287
    )Common stock, preferred stock and warrants issued
    
    
    
    
    
    
    (49
    )
    
    
    (32,688
    )Net cash used for acquisitions
    
    $
    66,311
    
    
    $
    45,592
    
    
    $
    13,653
 The cash for the acquisitions was funded primarily through bank loans with the remainder
funded from the operations of the Company. These acquisitions were accounted for under the purchase method of accounting and,
accordingly, the results of operations of the acquired businesses are included in the accompanying
consolidated financial statements from their respective dates of acquisitions. These acquisitions
placed the Company in new markets or expanded the Companys presence in current markets. F-13




---



##### Table of Contents



During 2004, the Company issued 204,500 shares of the Companys common stock to the former
stockholders of PSC pursuant to an earn-out provision in the Companys merger agreement with PSC.
The earn-out was based on the 2003 financial results of one of the surgery centers acquired from
PSC in April 2002. The earn-out is reflected in goodwill in the accompanying 2004 consolidated
balance sheet in the amount of $3,652, which represents the fair value of the shares issued. The
Company paid $263 during 2003 in additional consideration related to surgery centers acquired in
2002, which are reflected as additions to goodwill in the accompanying consolidated balance sheets. Included in the acquisitions discussed above were the following individually significant
transactions: 2004 Significant Acquisitions In May 2004, the Company acquired a minority interest in Valley Ambulatory Surgery Center,
L.P. for approximately $6,480, using cash from operations. In November 2004, the Company purchased
the capital stock of the general partner of the center for an additional $7,028. Subsequent to the
investment during the fourth quarter, the Companys total ownership of this center was 40.0% and
the Company began consolidating this facility. The center has six operating suites and one minor
procedure room. The center is a multi-specialty ambulatory surgery center located in a suburb of
Chicago, Illinois. During the third quarter of 2004, the Company acquired a majority ownership in four additional
surgery centers for a total of approximately $12,648, using cash from operations and funds
available under the Companys senior secured credit facility (the Senior Credit Facility). The
Company acquired a surgery center located in Savannah, Georgia. The Savannah surgery center is a
single-specialty surgery center with one operating suite, and the Company plans to develop this
facility through syndication, renovation and expansion. The Savannah
surgery center is a newly-developed facility that began operations in the months before the Company purchased the surgery
center. The Company also acquired a surgery center located in Steubenville, Ohio. The
Steubenville surgery center is a multi-specialty surgery center with three operating suites and one
minor procedure room. In addition, the Company acquired a surgery center located in New Albany,
Indiana. The New Albany surgery center is a multi-specialty surgery center with four operating
suites and one minor procedure room. Finally, the Company acquired a surgery center located in
Hammond, Louisiana. The Hammond surgery center is a multi-specialty surgery center with four
operating suites and two minor procedure rooms. The Company entered into management agreements
with all four of these centers. During the fourth quarter of 2004, the Company acquired a majority ownership interest in two
surgery centers in Alabama and one surgery center in Missouri. The Birmingham Endoscopy Center,
located in Birmingham, Alabama, is a single-specialty surgery center with three operating rooms.
The Company intends to convert this center into a multi-specialty
surgery center and syndicate ownership interests to
additional physicians. The North River Surgical Center, located in Tuscaloosa, Alabama, is a
multi-specialty surgery center with two operating rooms, and the Company plans to develop this
facility through syndication, renovation and expansion. The Surgery Center of Kirkwood, located in
Kirkwood, Missouri, is a multi-specialty surgery center with three operating rooms and one minor
procedure room. The Company acquired ownership interests in these three centers for an aggregate
of approximately $40,155 in cash. The following represents the unaudited pro forma results of consolidated operations as if the
2004 acquisitions discussed above had occurred on January 1, 2004, after the effects of certain pro
forma adjustments: Year EndedDecember 31, 2004Revenues
    
    $
    248,397Income before income taxes
    
    
    24,150Earnings per share:Basic
    
    $
    0.75Diluted
    
    $
    0.73
 F-14




---



##### Table of Contents



2003 Significant Acquisitions On November 17, 2003, the Company acquired three surgery centers from MediSphere Health
Partners, Inc. One of these facilities is licensed as a hospital. The Company paid approximately
$7,938 in cash, issued $49 in warrants and incurred $422 in acquisition costs in connection with
the acquisition of these centers. The purchase price was also subject to additional settlements
related to working capital and indemnification holdbacks that were finalized in 2004. On December
1, 2003, in separate transactions, the Company purchased two additional surgery centers for $37,402
in cash. The Company incurred $227 in acquisition costs related to these centers. The purchase
price of each transaction was subject to additional settlements related to working capital and
other adjustments that were finalized during 2004. During 2004, as a result of these settlements,
the Company recorded an additional amount of $1,308 to goodwill. The purchase price allocated to
the acquired assets and liabilities assumed on the purchase dates is as follows: Working capital
    
    $
    3,253Property and equipment
    
    
    4,050Goodwill
    
    
    37,563Other long-term assets
    
    
    4,544Long-term debt
    
    
    (1,748
    )Minority interests
    
    
    (1,624
    )Total purchase price
    
    $
    46,038
 In 2003, the Company also made individually insignificant acquisitions of additional ownership
interests in certain of its consolidated surgery centers in exchange for $3,348 in cash, which
resulted in additions to goodwill of $1,594 and additions to investments in and advances to
affiliates of $750. The pro forma effect of the Companys 2003 acquisitions on its results of operations for the
periods prior to the respective acquisition dates was not significant. 2002 Significant Acquisitions On March 7, 2002, the Company entered into an agreement and plan of merger with PSC, pursuant
to which a subsidiary of the Company was to merge with and into PSC in a stock-for-stock merger.
The merger was approved by the respective shareholders of the Company and PSC on March 28, 2002 and
was effective April 1, 2002. In the merger, the outstanding shares of PSCs capital stock converted
into shares of the Companys capital stock, and all options, warrants or other rights to acquire
shares of PSCs capital stock converted into comparable rights to acquire shares of the Companys
capital stock, with the number of shares and rights representing, in the aggregate, 19.1% of the
Companys capital stock on a fully diluted basis, subject to certain adjustments specified in the
merger agreement. Under the terms of the merger agreement with PSC, the Company issued 624,919
shares of its common stock, 4,341,726 shares of its Series A convertible preferred stock, 2,604,590
shares of its Series B convertible preferred stock, options to purchase 64,078 shares of its common
stock and warrants to purchase 28,998 shares of its common stock to PSC stockholders. The fair
market value, as determined by the Companys board of directors with the assistance of financial
advisors, of the shares of common stock issued in connection with the merger was $13.87 per share.
The fair market value, as determined by the Companys board of directors with the assistance of
financial advisors calculated using the Black-Scholes option-pricing model, of the shares of
Series A convertible preferred stock and Series B convertible preferred stock issued in connection
with the merger was $13.87 per share. The exercise price of the options and warrants issued in
connection with the merger range from $0.09 to $26.76 per share (with fair values ranging from
$1.51 to $13.78 per share) based on the conversion ratio applied to the PSC options and warrants.
In conjunction with the merger, the Company acquired additional ownership interests and certain
physician owners terminated their rights to acquire additional interests in certain PSC surgery
centers. The Company issued warrants to purchase 251,166 shares of common stock, paid $2,122 in
cash, issued convertible debentures in the aggregate principal amount of $3,171 and issued
promissory notes in the aggregate principal amount of $595 as consideration. The exercise price of
the warrants issued in connection with these transactions range from $11.08 to $13.87 per shares
(with fair values ranging from $4.87 to $7.09 per share). F-15




---



##### Table of Contents



The purchase price, comprised of common and preferred stock, stock options and warrants issued
($32,688), cash, notes payable and convertible debentures issued ($5,888) and acquisition costs
incurred ($3,681), allocated to the acquired assets and liabilities assumed at April 1, 2002 is as
follows: Working capital
    
    $
    7,983Property and equipment
    
    
    14,601Goodwill
    
    
    34,647Other long-term assets
    
    
    5,724Long-term debt
    
    
    (15,323
    )Minority interests
    
    
    (5,375
    )Total purchase price
    
    $
    42,257
 In addition, the Company agreed to issue up to an additional 494,297 shares of its common
stock, which would be recorded as an addition to goodwill, to the former stockholders of PSC based
on the 2003 financial results of one of the acquired PSC surgery centers. During 2004, the Company
issued 204,500 shares of the Companys common stock to the former stockholders of PSC pursuant to
the earn-out provision in the Companys purchase agreement with PSC. The earn-out was based on the
2003 financial results of one of the surgery centers acquired from PSC in April 2002. The Series A
convertible preferred stock and Series B convertible preferred stock have certain conversion rights
upon certain events. One of these events is an initial public offering by the Company. As a result
of the initial public offering as discussed in Note 3, the Company was required to make an
additional cash payment of $31,831. The Company used proceeds from the initial public offering to
make the $31,831 payment. This amount is reflected as additional purchase price and recorded as an
addition to goodwill. See Note 9 for additional information related to the Series A convertible
preferred stock and Series B convertible preferred stock. The Company also made individually insignificant acquisitions of majority interests in three
surgery centers for approximately $12,017 in cash. The fair value of tangible net assets acquired
was approximately $626 with approximately $11,391 recorded as goodwill. Developments and Other During 2004, the Company opened a newly-developed surgery center in Memphis, Tennessee. The
Memphis surgery center is a single-specialty surgery center with one minor procedure room. The
Memphis surgery center was developed through a partnership with one of our existing physician
networks. Also, during 2004, the Company opened the newly-developed Erie Imaging Center in Erie,
Pennsylvania. Erie Imaging Center is a diagnostic imaging center and is located in a market in
which the Company owns and operates a surgery center. In addition, the Company signed an agreement
to manage the DeSoto Surgery Center in DeSoto, Mississippi. The DeSoto Surgery Center is an
affiliate of Baptist Memorial Health Services, Inc.. During 2003, the Company opened a newly-developed surgery center located in Columbia,
Tennessee. The Columbia surgery center is a multi-specialty surgery center with two operating
rooms and one treatment room. 5. Dispositions During
2004, after purchasing
the outstanding ownership interests from the Companys prior physician and hospital partners, the Company restructured its Physicians SurgiCenter of Houston partnership in
Houston, Texas, creating a joint venture with the American Institute of Gastric Banding, Ltd., a
privately-held single procedure focused surgical company based in
Dallas, Texas (AIGB). In
connection with the restructuring, the Company retained a 10% ownership in the surgery center. The
Company no longer manages or consolidates the surgery center for
financial reporting purposes. Subsequent to December 31, 2004, the
Company entered into discussions with AIGB relating to the possible
disposition of the Companys 10% ownership in the surgery center. During 2003, the Company sold ownership interests in certain consolidated surgery centers for
$1,659 in cash. The Company recorded an impairment and loss on disposal of long-lived assets of
$162 and a gain on sale of long-lived assets of $571 in connection with these transactions. Effective
December 6, 2002, the Company sold all of its ownership
interest in a surgery center and terminated its management agreement
with the surgery center. In consideration for its ownership interest
and termination of the management agreement, the Company received
approximately $1,400 in cash in October 2002. In addition, the
Company was released from a guaranty of approximately $4,600 of debt
incurred by the center. The Company recorded a charge in 2002 of
approximately $380 in connection with this transaction. Effective
May 31, 2002, the Company sold all of its ownership interest in
a surgery center and terminated its management agreement with the
surgery center. In consideration for its ownership interest, the
Company was released from a guaranty of the facility lease for the
surgery center and the purchaser assumed approximately $1,100 of
liabilities. The Company recorded a net loss in 2002 of about $8 in
connection with this transaction. During 2001, the Company amended its management agreements with two additional physician
networks (Restructured Physician Networks) to delete provisions that required the Company to
provide the networks with F-16




---



##### Table of Contents



capital and additional assets, in addition to management services, and transferred certain
related accounts receivable, prepaid expenses and liabilities to the networks. The Company also
agreed to transfer to the Restructured Physician Networks its existing equipment and other assets
relating to the networks for no additional consideration, on an annual basis beginning in January
2006, for one of the networks, and September 2007, for the other network, as the assets become
fully depreciated. In the fourth quarter of 2001, the Company initiated a plan to terminate its management
agreement with another physician network and to transfer its related assets and liabilities to the
network. The Company recorded an impairment and loss on disposal charge for these assets of $255.
The net assets held were sold in January 2002. 6. Goodwill and Intangible Assets Changes in the carrying amount of goodwill are as follows: Balance at December 31, 2002
    
    $
    77,942Purchase price allocations
    
    
    39,157Finalized purchase price allocations
    
    
    (445
    )Balance at December 31, 2003
    
    
    116,654Purchase price allocations
    
    
    97,433Finalized purchase price allocations
    
    
    1,446Balance at December 31, 2004
    
    $
    215,533
 The purchase price allocation of $97,433 for 2004 includes approximately $31,800
related to the Companys Series A convertible preferred stock and Series B convertible
preferred stock which converted into common stock and the right to receive cash upon
completion of the Companys initial public offering. The purchase price allocation of
$97,433 also includes $3,652 of goodwill related to 204,500 shares of the Companys common
stock that were issued to the former stockholders of PSC pursuant to an earn-out provision
in the Companys purchase agreement with PSC. The earn-out was based on the 2003 financial
results of one of the surgery centers acquired from PSC in March 2002. In addition, the
purchase price allocation of $97,433 includes approximately $62,112 primarily related to
new surgery centers the Company acquired during 2004. The finalized purchase price
allocation of $1,446 for 2004 includes settlements related to working capital and other
adjustments that were made during 2004 Information regarding the Companys other intangible assets is as follows: Gross Carrying
    
    
    AccumulatedAmount
    
    
    AmortizationAmortized intangible assets:As of December 31, 2003Service agreement rights
    
    $
    1,370
    
    
    $
    (348
    )As of December 31, 2004Service agreement rights
    
    
    1,370
    
    
    
    (420
    )
 Amortization expense for the year ended December 31, 2004 and 2003 was $72 and $71,
respectively. Subsequent to December 31, 2004, the Company renegotiated the service agreement
rights. As a result of this renegotiation, estimated annual amortization expense for 2005, 2006
and 2007 is expected to be approximately $317 each year. The Company is not anticipating
amortization expense for the years ended 2008 and 2009. 7. Operating Leases The Company leases office space and equipment for its surgery centers, including surgery
centers under development. The lease agreements generally require the lessee to pay all
maintenance, property taxes, utilities, and insurance costs. F-17




---



##### Table of Contents



The future minimum lease payments under non-cancelable operating leases at December 31, 2004
are as follows: 2005
    
    $
    12,8552006
    
    
    12,5412007
    
    
    12,0352008
    
    
    12,0302009
    
    
    10,969Thereafter
    
    
    54,667Total minimum lease payments
    
    $
    115,097
 Total rent and lease expense was $15,055, $12,089 and $9,906 for the years ended December 31,
2004, 2003 and 2002, respectively. The Company incurred rental expense of $4,019, $3,143 and $3,007
under operating leases with physician investors and an entity that is an affiliate of one of the
Companys directors for the years ended December 31, 2004, 2003 and 2002, respectively. 8. Long-Term Debt and Convertible Debentures The Companys long-term debt is summarized as follows: December 31,2004
    
    
    2003Senior credit facility
    
    $
    64,000
    
    
    $
    63,600Notes payable to banks
    
    
    5,055
    
    
    
    4,800Secured term loans
    
    
    788
    
    
    
    6,241Senior subordinated notes payable
    
    
    
    
    
    
    29,106Capital lease obligations
    
    
    1,524
    
    
    
    92171,367
    
    
    
    104,668Less current maturities
    
    
    (1,620
    )
    
    
    (3,631
    )$
    69,747
    
    
    $
    101,037
 Senior Credit Facility In March 2005, the Company amended and restated its Senior Credit Facility with a
syndicate of financial institutions led by Bank of America, N.A. The Company is the borrower under
the Senior Credit Facility and all of its active and existing wholly-owned subsidiaries are
guarantors. Under the terms of the Senior Credit Facility, entities that become wholly-owned
subsidiaries must also guarantee the debt. The Senior Credit Facility provides senior secured financing of up to $150,000 through a
revolving credit line. Up to $2,000 of the Senior Credit Facility is available for the issuance of
standby letters of credit, and up to $5,000 of the Senior Credit Facility is available for swing
line loans. The swing line loans are made available by Bank of America as the swing line lender on
a same-day basis in minimum purchase amounts of $100. The Company is required to repay each swing
line loan in full upon the demand of the swing line lender. The Senior Credit Facility terminates
and is due and payable on March 21, 2010. At December 31, 2004 and 2003, the Company had $64,000
and $63,600, respectively, of outstanding debt under the Senior Credit Facility. At the Companys
option, loans under the Senior Credit Facility bear interest at Bank of Americas base rate or the
Eurodollar rate in effect on the applicable borrowing date, plus an applicable Eurodollar rate
margin. Both the applicable base rate margin and applicable Eurodollar rate margin will vary
depending upon the ratio of our consolidated funded indebtedness to consolidated EBITDA. At
December 31, 2004, the interest rate on the Senior Credit Facility ranged from 4.28% to 4.41%. As
discussed in Note 3, the Company used proceeds in the amount of approximately $63,600 from the
initial public offering to pay down the Senior Credit Facility. The Company primarily uses
proceeds from the Senior Credit Facility, along with cash from operations, to finance acquisitions. Notes Payable to Banks A subsidiary of the Company has a mortgage note payable to Synergy Bank (the Mortgage Note).
The Mortgage Note is collateralized by the real estate owned by the surgery center to which the
loan was made. The Company refinanced the Mortgage Note during 2004 and used proceeds of the
refinancing to payoff the Southwest F-18




---



##### Table of Contents



Bank of Texas note discussed below. As a result of the refinancing, the Mortgage Note matures
in 2008 and bears interest at a rate of 6.7% per year. The Mortgage Note had an outstanding
principal balance of approximately $4,553 and $2,564 at December 31, 2004 and 2003, respectively.
The Mortgage Note contains various covenants to maintain certain financial ratios and also
restricts encumbrance of assets, creation of indebtedness, investing activities and payment of
distributions. At December 31, 2004, the subsidiary and the Company were in compliance with all
such covenants. The Company had an outstanding loan agreement with Southwest Bank of Texas (SWBT Note) used
to finance the acquisition and development of a certain surgery center. As of December 31, 2003,
the outstanding principal balance under the SWBT Note was $780. This note was paid off in 2004
with proceeds received as a result of the refinancing of the Mortgage Note. The Company had an outstanding principal balance on notes payable to other banks of $1,456 at
December 31, 2003. During 2004, the Company paid off all but one of these notes payable to other
banks. At December 31, 2004, the outstanding principal balance of the remaining promissory note
was $502. The note bears interest at a rate of 6.5% per year and matures in 2009. Secured Term Loans At December 31, 2003, the Company had outstanding loan and security agreements with DVI
Financial Services, Inc. (the DVI Loans). The proceeds of the DVI Loans were used to finance
tenant improvements, medical, surgical and office equipment, and working capital. The DVI Loans
bore interest ranging from 8.5% to 11.5% per year. At December 31, 2003, the DVI Loans had an
outstanding principal balance of $5,416. During 2004, the Company used cash from operations to pay
off the outstanding DVI Loans. There was no outstanding balance under the DVI Loans at December
31, 2004. The Company had principal balances on other secured term loans of $788 and $825 at December
31, 2004 and 2003, respectively. Senior Subordinated Notes Payable In July 2003, the Company entered into an agreement through which DLJ Investment Partners II,
L.P. and its affiliates agreed to purchase the Companys 14 3/4% Senior Subordinated Notes due 2008 in
the aggregate principal amount of up to $40,000. During 2003, the Company issued notes in the
aggregate principal amount of about $29,106, and may issue additional notes at any time before July
18, 2005 as long as we are permitted under the agreement. On August 15, 2003, the initial
purchasers of the notes sold a portion of the notes and a portion of the outstanding commitment to
affiliates of the Company. As discussed in Note 3, the Company used a portion of the proceeds from
the initial public offering to redeem the notes at the redemption price of 102.5% of the principal
amount outstanding. The outstanding principal balance under the Senior Subordinated Notes Payable
was $0 and $29,106 at December 31, 2004 and 2003, respectively. Capital Lease Obligations The Company is liable to various vendors for equipment leases. During 2004, the Company
entered into lease agreements with an interest rate of approximately 5% per year and mature in
2009. At December 31, 2004, a balance of $1,116 was outstanding that related to the capital leases
the Company entered into in 2004. Leases entered into prior to 2004 had a balance of $408 at
December 31, 2004 and have interest rates ranging from 6% to 11% per year and mature through 2007.
The carrying value of property and equipment under capital leases at December 31, 2004 and 2003 was
$2,029 and $1,274, respectively. F-19




---



##### Table of Contents



Other Long-Term Debt Information Scheduled maturities of obligations as of December 31, 2004 are as follows: Long-term
    
    
    Capital LeaseDebt
    
    
    Obligations
    
    
    Total2005
    
    $
    972
    
    
    $
    678
    
    
    $
    1,6502006
    
    
    65,018
    
    
    
    463
    
    
    
    65,4812007
    
    
    780
    
    
    
    327
    
    
    
    1,1072008
    
    
    707
    
    
    
    116
    
    
    
    8232009
    
    
    2,201
    
    
    
    92
    
    
    
    2,293Thereafter
    
    
    164
    
    
    
    
    
    
    
    16469,842
    
    
    
    1,676
    
    
    
    71,518Less current maturities
    
    
    (972
    )
    
    
    (648
    )
    
    
    (1,620
    )Amounts representing interest
    
    
    
    
    
    
    (151
    )
    
    
    (151
    )$
    68,870
    
    
    $
    877
    
    
    $
    69,747
 Convertible Debentures In connection with the acquisition of PSC, the Company issued subordinated convertible
debentures totaling $3,171 to various persons in exchange for additional ownership interests in
certain of PSCs surgery centers. The debentures carried an interest rate of 4.0% per year, and
were scheduled to mature on April 1, 2005. The subordinated convertible debentures automatically
converted at $13.87 per share upon the Companys completion of the initial public offering
discussed in Note 3. 9. Stockholders Equity Capital In March 2002, the Board of Directors approved the Amended and Restated Charter of Symbion,
Inc., increasing authorized capital stock to 225,000,000 shares of common stock, $0.01 par value,
and 16,946,322 shares of preferred stock, $0.01 par value. During 2004, the Board of Directors
reduced the number of authorized preferred stock to 10,000,000. At December 31, 2004, the
10,000,000 shares of preferred stock are undesignated. The holders of common stock are entitled to one vote per share on all matters on which
stockholders are entitled to vote and do not have cumulative voting rights. The holders of common
stock have no preemptive, conversion, redemption or sinking fund rights. The Company issued Series A convertible preferred stock and Series B convertible preferred
stock in April 2002 in conjunction with the PSC merger. The Series A convertible preferred stock
and Series B convertible preferred stock automatically converted into shares of common stock upon
the completion of the Companys initial public offering in February 2004. When converted, each
share of Series A convertible preferred stock and Series B convertible preferred stock entitled the
holder to receive 0.2257 of a share of common stock and a cash payment of $4.20 for the Series A
holders and $5.22 for the Series B holders, for a total cash payment of $31,831. The cash payment
of $31,831 was reflected as additional purchase price for PSC and recorded as an addition to
goodwill during 2004 upon completion of the initial public offering. As of December 31, 2004, the Company had outstanding warrants to purchase 293,029 shares of
common stock of the Company at exercise prices ranging from $6.77 to $13.87 per share. As of
December 31, 2004, the warrants remained issued and outstanding and were currently exercisable. As
a result of the Companys initial public offering in February 2004, 195,219 of the 293,029 warrants
expired in February 2005. The remaining 97,810 warrants expire beginning in 2008 through 2009. Stock Options The aggregate maximum number of shares of the Companys common stock authorized for issuance
pursuant to the Stock Incentive Plan, the Non-Employee Directors Stock Option Plan, the Ambulatory
Resource Centres Non- F-20




---



##### Table of Contents



Qualified Initial Plan and the Ambulatory Resource Centres 1997 Stock Option Plan was
3,444,892 as of December 31, 2004. The maximum number of shares is calculated as the lesser of (i)
6,348,328 or 12.5% of common stock outstanding on a fully diluted basis for the Stock Incentive
Plan, (ii) the lesser of 380,899 or 0.75% of common stock outstanding on a fully diluted basis for
the Non-Employee Directors Stock Option Plan, (iii) 168,192 shares of common stock for the
Ambulatory Resource Centres Non-Qualified Initial Plan and (iv) 29,601 shares of common stock for
the Ambulatory Resource Centres 1997 Stock Option Plan. All options have been granted at exercise
prices that equaled the fair value of the stock on the date of grant and vest over a one year to
four year period. The exercise periods for the three stock option plans are ten years. The estimated weighted average fair values of the options at the date of grant using the
Black-Scholes option-pricing model as promulgated by SFAS No. 123 in 2004, 2003 and 2002 were
$6.75, $9.48 and $9.61 per share, respectively. In applying the Black-Scholes model, the Company
assumed the following: Year Ended December 31,2004
    
    
    2003
    
    
    2002Weighted Average risk-free interest rate
    
    
    3.8
    %
    
    
    4.1
    %
    
    
    4.1
    %Expected volatility
    
    
    31.8
    %
    
    
    70
    %
    
    
    70
    %Expected life, in years
    
    
    5
    
    
    
    7
    
    
    
    7Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected forfeiture rate
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %
 For purposes of pro forma disclosure, the estimated fair value of the options is amortized to
expense over the options vesting period. The following is a summary of option transactions: WeightedAverage ExerciseNumber of Shares
    
    
    PriceDecember 31, 2001
    
    
    660,011
    
    
    $
    5.49Granted
    
    
    821,250
    
    
    
    12.89Exercised
    
    
    (35,807
    )
    
    
    5.94Expired
    
    
    (11,071
    )
    
    
    12.80December 31, 2002
    
    
    1,434,383
    
    
    $
    10.06Granted
    
    
    476,322
    
    
    
    14.96Exercised
    
    
    (84,627
    )
    
    
    0.66Expired
    
    
    (107,603
    )
    
    
    10.35December 31, 2003
    
    
    1,718,475
    
    
    $
    11.87Granted
    
    
    305,000
    
    
    
    19.37Exercised
    
    
    (101,788
    )
    
    
    9.85Expired
    
    
    (59,137
    )
    
    
    12.82December 31, 2004
    
    
    1,862,550
    
    
    $
    13.17
 At December 31, 2004, options to purchase 1,582,342 shares of common stock were available for
grant. At December 31, 2004, 2003 and 2002, options to purchase 911,087 shares, 761,978 shares and
582,911 shares of common stock, respectively, were exercisable. F-21




---



##### Table of Contents



The following table summarizes information regarding the options outstanding at December 31,
2004: Options Outstanding
    
    Options ExercisableWeighted-Outstanding
    
    Average
    
    Weighted-
    
    Exercisable
    
    Weighted-as of
    
    Remaining
    
    Average
    
    as of
    
    AverageRange of
    
    December 31,
    
    Contractual
    
    Exercise
    
    December 31,
    
    ExerciseExercise Prices
    
    2004
    
    Life
    
    Price
    
    2004
    
    Price$
 0.00  $  7.58
    
    
    138,704
    
    
    
    2.5
    
    
    $
    0.54
    
    
    
    138,704
    
    
    $
    0.54$
 7.58  $10.10
    
    
    285,839
    
    
    
    5.2
    
    
    $
    8.22
    
    
    
    285,839
    
    
    $
    8.22$10.10  $12.63
    
    
    2,801
    
    
    
    0.9
    
    
    $
    10.69
    
    
    
    2,801
    
    
    $
    10.69$12.63  $15.15
    
    
    1,130,206
    
    
    
    8.4
    
    
    $
    14.30
    
    
    
    483,743
    
    
    $
    14.12$15.15  $19.70
    
    
    305,000
    
    
    
    9.9
    
    
    $
    19.37
    
    
    
    
    
    
    $
    1,862,550
    
    
    
    8.0
    
    
    $
    13.17
    
    
    
    911,087
    
    
    $
    10.19
 10. Earnings Per Share Basic and diluted income per share are based on the weighted average number of common
shares outstanding and the dilutive impact of outstanding options and warrants to purchase
shares. Year Ended December 31,2004
    
    
    2003
    
    
    2002Numerator for basic and diluted income per share:Net income
    
    $
    13,552
    
    
    $
    17,524
    
    
    $
    12,302Denominator:Denominator for basic income per share
weighted-average shares outstanding
    
    
    19,736,722
    
    
    
    10,536,745
    
    
    
    10,349,568Effect of dilutive securities:Employee stock options
    
    
    353,432
    
    
    
    301,903
    
    
    
    392,959Warrants
    
    
    109,514
    
    
    
    189,527
    
    
    
    178,776Preferred stock
    
    
    140,712
    
    
    
    1,567,910
    
    
    
    1,175,935Common stock held in escrow
    
    
    7,005
    
    
    
    62,535
    
    
    
    46,902Denominator for diluted income per share 
adjusted weighted-average shares outstanding
    
    
    20,347,385
    
    
    
    12,658,620
    
    
    
    12,144,140Basic net income per share
    
    $
    0.69
    
    
    $
    1.66
    
    
    $
    1.19Diluted net income per share
    
    $
    0.67
    
    
    $
    1.38
    
    
    $
    1.01
 The effects of 265,000 and 450,928 employee stock options for 2004 and 2003, respectively, and
19,568 and 19,643 warrants for 2003 and 2002, respectively, were not included in the computation of
diluted earnings per share because their effects would have been anti-dilutive. The decrease in
preferred stock outstanding is a result of those shares converting to common shares at the date of
the initial public offering as discussed in Note 3. 11. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. The
partnerships and limited liability companies file separate income tax returns. The Companys
allocable portion of each partnerships and limited liability companys income or loss is included
in the taxable income of the Company. The remaining income or loss of each partnership and limited
liability company is allocated to the limited partners. F-22




---



##### Table of Contents



Income tax expense is comprised of the following for the years ended December 31: 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    337
    
    
    $
    272
    
    
    $
    State
    
    
    582
    
    
    
    666
    
    
    
    215Deferred
    
    
    7,564
    
    
    
    (3,108
    )
    
    
    Income tax expense (benefit)
    
    $
    8,483
    
    
    $
    (2,170
    )
    
    $
    215
 The effective income tax rate differed from the federal statutory rate as follows for
the years ended December 31: 2004
    
    
    2003
    
    
    2002Tax at U.S. statutory rates
    
    $
    7,712
    
    
    $
    5,374
    
    
    $
    4,222State income taxes, net of federal tax benefit
    
    
    225
    
    
    
    249
    
    
    
    142Change in valuation allowance
    
    
    261
    
    
    
    (8,207
    )
    
    
    (4,183
    )Other
    
    
    285
    
    
    
    414
    
    
    
    34$
    8,483
    
    
    $
    (2,170
    )
    
    $
    215
 The components of temporary differences and the approximate tax effects that give rise to the
Companys net deferred tax liability are as follows at December 31: 2004
    
    
    2003Deferred tax assets:Amortization
    
    $
    5,264
    
    
    $
    6,417Accrued vacation
    
    
    391
    
    
    
    350Net operating loss carryforward
    
    
    2,887
    
    
    
    3,745Deferred project costs
    
    
    194
    
    
    
    89Other deferred assets
    
    
    2,304
    
    
    
    2,711Total gross deferred tax assets
    
    
    11,040
    
    
    
    13,312Less: Valuation allowance
    
    
    (3,162
    )
    
    
    (1,484
    )Total deferred tax assets
    
    
    7,878
    
    
    
    11,828Deferred tax liabilities:Depreciation on property and equipment
    
    
    (5,951
    )
    
    
    (6,116
    )Basis differences of partnerships and joint ventures
    
    
    (5,658
    )
    
    
    (2,373
    )Other liabilities
    
    
    (725
    )
    
    
    (231
    )Total deferred tax liabilities
    
    
    (12,334
    )
    
    
    (8,720
    )Net deferred tax asset (liability)
    
    $
    (4,456
    )
    
    $
    3,108
 The Company has state net operating losses of $49,695 at December 31, 2004. These losses
expire from December 31, 2011 through 2023. During 2004, the valuation allowance increased by
$1,678, including the $261 increase presented above, as a result of changes in net operating and
net capital loss carryforwards. The Company has credited the benefit for stock option exercises to
stockholders equity, totaling $230 for 2004 and $318 for 2003. 12. Employee Benefit Plans Symbion, Inc. 401(k) Plan The Symbion, Inc. 401(k) Plan (the Symbion Plan) is a defined contribution plan whereby
employees who have completed six months of service in which they have worked a minimum of 1,000
hours and are age 21 or older are eligible to participate. Employees may enroll in the plan on
either January 1 or July 1 of each year. The Symbion Plan allows eligible employees to make
contributions of varying percentages of their annual compensation, up to the maximum allowed
amounts by the Internal Revenue Service. Eligible employees may or may not receive a match of their
contributions. The match varies by surgery center and is determined 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 fully vested. The Companys matching expense for 2004, 2003 and 2002 was $804,
$513 and $521, respectively. F-23




---



##### Table of Contents



Employee Stock Purchase Plan Effective March 2002, the Company adopted an Employee Stock Purchase Plan (Stock Purchase
Plan) to provide substantially all the Companys full-time and part-time employees an opportunity
to purchase shares of its common stock in amounts not to exceed 10% of eligible compensation, 5,642
shares of common stock or $25 of common stock each calendar year. To be eligible to enroll in the
Stock Purchase Plan, employees must: (i) have been employed six consecutive months by the Company,
(ii) be scheduled to work at least twenty hours per week, (iii) be regularly scheduled to work more
than five months during the year and (iv) not own at 5% or more of the Companys common stock.
Annually, the participants September 30 account balance is used to purchase shares of stock at the
lesser of 85% of the fair market value of shares at the beginning of the plan year or September 30.
At December 31, 2004, the Company had recorded a $231 commitment related to the Stock Purchase
Plan in accrued payroll and benefits in the accompanying consolidated balance sheets. A total of
372,435 shares are available for purchase under the plan. The Stock Purchase Plan became effective
on the date of the Companys completion of its initial public offering as discussed in Note 3. 13. Commitments and Contingencies Debt and Lease Guaranty on Unconsolidated Entities The Company has guaranteed $1,286 of operating lease payments of a surgery center in which it
owns a 44% interest. The lease expires in 2009. Professional, General and Workers Compensation Liability Risks The Company is subject to claims and legal actions in the ordinary course of business,
including claims relating to patient treatment, employment practices and personal injuries. To
cover these types of claims, the Company maintains general liability and professional liability
insurance in excess of self-insured retentions through a commercial insurance carrier in amounts
that the Company believes to be sufficient for its operations, although, potentially, some claims
may exceed the scope of coverage in effect. This insurance coverage is on a claims-made basis.
Plaintiffs in these matters may request punitive or other damages that may not be covered by
insurance. In the opinion of management, the ultimate resolution of such proceedings will not have
a material adverse effect on the Companys business, financial condition or results of operations.
The Company expenses the costs under the self-insured retention exposure for general and
professional liability claims which relate to (i) deductibles on claims made during the policy
period, and (ii) an estimate of claims incurred but not yet reported that are expected to be
reported after the policy period expires. These expenses are based on various assumptions. A
change in one or more of these assumptions could materially change the Companys consolidated
financial position or results of operations. As of December 31, 2004 and 2003, the Companys
professional and general liability accrual for the estimate of self-insured retentions was $3,774
and $3,209, respectively, and is included in other liabilities in the accompanying consolidated
balance sheets as of December 31, 2004 and 2003, respectively. Current Operations Laws and regulations governing the Medicare and Medicaid programs are complex and subject to
interpretation. Compliance with such laws and regulations can be subject to future government
review and interpretation as well as significant regulatory action including fines, penalties, and
exclusion from the Medicare, Medicaid and other federal health care programs. From time to time,
governmental regulatory agencies will conduct inquiries of the Companys practices. It is the
Companys current practice and future intent to cooperate fully with such inquiries. The Company is
not aware of any such inquiry that would have a material adverse effect on the Companys
consolidated financial position or results of operations. Acquired Centers The Company, through its wholly-owned subsidiaries or controlled partnerships and limited
liability companies, has acquired and will continue to acquire surgical and diagnostic centers with
prior operating histories. Such centers may have unknown or contingent liabilities, including
liabilities for failure to comply with healthcare laws and F-24




---



##### Table of Contents



regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral
laws. Although the Company attempts to assure itself that no such liabilities exist and obtains
indemnification from prospective sellers covering such matters and institutes policies designed to
conform centers to its standards following completion of acquisitions, there can be no assurance
that the Company will not become liable for past activities that may later be asserted to be
improper by private plaintiffs or government agencies. There can be no assurance that any such
matter will be covered by indemnification or, if covered, that the liability sustained will not
exceed contractual limits or the financial capacity of the indemnifying party. The Company cannot predict whether federal or state statutory or regulatory provisions will be
enacted that would prohibit or otherwise regulate relationships which the Company has established
or may establish with other health care providers or have materially adverse effects on its
business or revenues arising from such future actions. The Company believes, however, that it will
be able to adjust its operations so as to be in compliance with any regulatory or statutory
provision as may be applicable. Potential Physician Investor Liability Each physician investor in the partnerships and limited liability companies which operate
surgery centers carries general and professional liability insurance on a claims-made basis. Each
investee may, however, be liable for damages to persons or property arising from occurrences at the
surgery centers. Although the various physician investors and other surgeons are required to obtain
general and professional liability insurance with tail coverage, such individual may not be able to
obtain coverage in amounts sufficient to cover all potential liability. Since most insurance
policies contain exclusions, the physician investor will not be insured against all possible
occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the
partnership interests or limited liability company membership units and the amount of distributions
could be adversely affected. 14. Selected Quarterly Financial Data (Unaudited) The following is selected quarterly financial data for each of the four quarters in 2004 and
2003. Quarterly results are not necessarily representative of operations for a full year. The sum
of the quarterly per share amounts may not equal the annual totals due to rounding. 2004First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(unaudited)Revenues
    
    $
    51,947
    
    
    $
    52,727
    
    
    $
    52,031
    
    
    $
    59,620Cost of Revenues
    
    
    33,989
    
    
    
    34,847
    
    
    
    34,688
    
    
    
    38,241Net Income
    
    
    2,579
    
    
    
    3,615
    
    
    
    3,332
    
    
    
    4,026Net income per share:Basic
    
    
    0.16
    
    
    
    0.17
    
    
    
    0.16
    
    
    
    0.19Diluted
    
    
    0.15
    
    
    
    0.17
    
    
    
    0.16
    
    
    
    0.19
 2003First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(unaudited)Revenues
    
    $
    41,455
    
    
    $
    44,053
    
    
    $
    43,289
    
    
    $
    47,472Cost of Revenues
    
    
    26,590
    
    
    
    28,462
    
    
    
    30,350
    
    
    
    31,903Net Income
    
    
    4,381
    
    
    
    4,031
    
    
    
    1,906
    
    
    
    7,206Net income per share:Basic
    
    
    0.42
    
    
    
    0.38
    
    
    
    0.18
    
    
    
    0.68Diluted
    
    
    0.34
    
    
    
    0.32
    
    
    
    0.15
    
    
    
    0.57
 The fourth quarter 2003 results included a benefit for income taxes of $3,129, which
primarily related to the recognition of deferred tax assets of approximately $3,108. The
fourth quarter of 2003 was also impacted by higher interest expense incurred in connection
with the refinancing of outstanding indebtedness. F-25




---



##### Table of Contents



15. 2005 Subsequent Event On February 11, 2005, the Company acquired a majority interest in the Atlanta Center for
Reconstructive Foot and Ankle Surgery, LLC and acquired a minority interest in the Roswell Center
for Foot and Ankle Surgery, LLC, a de novosurgery center that opened in February 2005. The
Atlanta Center for Reconstructive Foot and Ankle Surgery has 2 operating rooms and the Roswell
Center for Foot and Ankle Surgery has 2 surgery rooms. Both surgery centers are located in
the northern suburbs of Atlanta, Georgia. F-26




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Nashville, State of Tennessee, on March 28, 2005. SYMBION, INC.By:
    /s/ Richard E. Francis, Jr.Richard E. Francis, Jr.Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the capacities and on the date
indicated. Signature
    
    Title
    
    Date/s/ Richard E. Francis, Jr.
    
    Chairman of the Board, Chief Executive Officer,
    
    March 28, 2005Director (principal executive officer)Richard E. Francis, Jr./s/ Kenneth C. Mitchell
    
    Chief Financial Officer, Senior Vice President of
    
    March 28, 2005FinanceKenneth C. Mitchell
    
    (principal financial and accounting officer)/s/ Clifford G. Alderz
    
    President, Chief Operating Officer,
    
    March 28, 2005DirectorClifford G. Adlerz/s/ William V. B. Webb
    
    Chief Development Officer,
    
    March 28, 2005DirectorWilliam V. B. Webb/s/ Frederick L. BryantDirector
    
    March 28, 2005Frederick L. Bryant/s/ Donald W. BurtonDirector
    
    March 28, 2005Donald W. Burton/s/ Eve M. KurtinDirector
    
    March 28, 2005Eve M. Kurtin/s/ Jack TyrrellDirector
    
    March 28, 2005Jack Tyrrell/s/ David M. WildsDirector
    
    March 28, 2005David M. Wilds




---



##### Table of Contents



EXHIBIT INDEX No.
    
    
    
    Description2.1
    
    
    
    Agreement and Plan of Merger, dated as of March 7, 2002, among Symbion, Inc., Symbion
Acquisition Sub, Inc. and Physicians Surgical Care, Inc. (a)2.2
    
    
    
    Purchase Agreement, dated as of November 11, 2004, by and among the members of Surgery
Center Partners, L.L.C., Symbion Ambulatory Resource Centres, Inc. and SMBIMS Kirkwood,
Inc.3.1
    
    
    
    Certificate of Incorporation (b)3.2
    
    
    
    Certificate of Amendment to Certificate of Incorporation (c)3.3
    
    
    
    Certificate of Retirement of Stock (d)3.4
    
    
    
    Certificate of Designation of Rights and Preferences of Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock (b)3.5
    
    
    
    Certificate of Designation of Series A Junior Participating Preferred Stock (c)3.6
    
    
    
    Bylaws (b)4.1
    
    
    
    Form of Common Stock Certificate (b)4.2
    
    
    
    Amended and Restated Investors Rights Agreement, dated as of June 25, 1999, among Symbion,
Inc. and the security holders named therein (a)4.3
    
    
    
    Amendment No. 1 to Amended and Restated Investors Rights Agreement, dated as of August 11,
1999, among Symbion, Inc. and the security holders named therein (a)4.4
    
    
    
    Amendment No. 2 to Amended and Restated Investors Rights Agreement, dated as of April 1,
2002, among Symbion, Inc. and the security holders named therein (a)4.5
    
    
    
    Form of Warrant for the purchase of shares of Symbion, Inc. common stock (a)4.6
    
    
    
    Rights Agreement, dated as of February 6, 2004, between Symbion, Inc. and SunTrust Bank (e)10.1
    
    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion,
Inc. and Richard E. Francis, Jr. (a) (f)10.2
    
    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion,
Inc. and Clifford G. Adlerz (a) (f)10.3
    
    
    
    Amended and Restated Executive Employment Agreement, dated May 16, 2002, between Symbion,
Inc. and William V. B. Webb (a) (f)10.4
    
    
    
    Employee Stock Purchase Agreement, dated as of March 13, 1996, between Symbion, Inc. and
Richard E. Francis, Jr. (a) (f)10.5
    
    
    
    Employee Stock Purchase Agreement, dated as of December 30, 1996, between Symbion, Inc. and
Richard E. Francis, Jr. (a) (f)10.6
    
    
    
    Employee Stock Purchase Agreement, dated as of March 13, 1996, between Symbion, Inc. and
Clifford G. Adlerz (a) (f)




---



##### Table of Contents



No.
    
    
    
    Description10.7
    
    
    
    Employee Stock Purchase Agreement, dated as of December 30, 1996, between Symbion, Inc. and
Clifford G. Adlerz (a) (f)10.8
    
    
    
    Employee Stock Purchase Agreement, dated as of March 13, 1996, between Symbion, Inc. and
Kenneth C. Mitchell (a) (f)10.9
    
    
    
    Employee Stock Purchase Agreement, dated as of December 30, 1996, between Symbion, Inc. and
R. Dale Kennedy (a) (f)10.10
    
    
    
    Employee Stock Purchase Agreement, dated as of March 13, 1996, between Symbion, Inc. and R.
Dale Kennedy (a) (f)10.11
    
    
    
    Employee Stock Purchase Agreement, dated as of June 1, 1999, between Symbion, Inc. and R.
Dale Kennedy (a) (f)10.12
    
    
    
    Securities Purchase Agreement, dated as of July 18, 2003, among Symbion, Inc. and DLJ
Investment Partners II, L.P. and its affiliates (b)10.13
    
    
    
    Form of 14 3/4% Senior Subordinated Note due 2008 (b)10.14
    
    
    
    Credit Agreement, dated as of July 18, 2003, among Symbion, Inc., various lenders party
thereto, Bank of America, N.A., as Administrative Agent and as Issuing Bank, Credit Suisse
First Boston as Syndication Agent, Key Corporate Capital, Inc. as Documentation Agent, and
Banc of America Securities, LLC, as sole Lead Arranger and Sole Book Manager (b)10.15
    
    
    
    First Amendment to Credit Agreement, dated January 30, 2004, among Symbion, Inc., various
lenders party thereto and Bank of America, N.A., as Administrative Agent and as Issuing
Bank (b)10.16
    
    
    
    Amended and Restated Credit Agreement, dated as of March 21, 2005, among Symbion, Inc., the
subsidiaries of Symbion identified therein, Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, Credit Suisse First Boston, as
Syndication Agent, KeyBank National Association, as Documentation
Agent and the other lenders party thereto
(g)10.17
    
    
    
    Lease Agreement, dated June 26, 2001, between Burton Hills IV Partners and Symbion, Inc. (a)10.18
    
    
    
    First Amendment to Lease Agreement, dated February 9, 2004, between Burton Hills IV
Partners and Symbion, Inc. (d)10.19
    
    
    
    Amended and Restated Ambulatory Resource Centres, Inc. 1997 Stock Option Plan (a) (f)10.20
    
    
    
    Ambulatory Resource Centres, Inc. Nonqualified Initial Option Plan (a) (f)10.21
    
    
    
    Symbion Stock Incentive Plan (a) (f)10.22
    
    
    
    Form of Incentive Stock Option
Agreement under the Stock Incentive Plan (f) (h)10.23
    
    
    
    Form of Nonqualified Stock Option
Agreement under the Stock Incentive Plan (f) (h)10.24
    
    
    
    Form of Restricted Stock Agreement
under the Stock Incentive Plan (f) (i)10.25
    
    
    
    Symbion Non-Employee Directors Stock Option Plan (a) (f)10.26
    
    
    
    Form of Nonqualified Stock Option Agreement under the Non-Employee Directors Stock Option
Plan (f) (h)10.27
    
    
    
    Symbion Employee Stock Purchase Plan (a) (f)




---



##### Table of Contents



No.
    
    
    
    Description10.28
    
    
    
    First Amendment to Symbion Employee Stock Purchase Plan (a) (f)10.29
    
    
    
    Executive Change in Control Severance Plan, dated December 11, 1997 (a) (f)21.1
    
    
    
    Subsidiaries of Registrant23.1
    
    
    
    Consent of Ernst & Young LLP23.2
    
    
    
    Consent of Casualty Actuarial
Consultants, Inc. (2004 report)23.3
    
    
    
    Consent of Casualty Actuarial
Consultants, Inc. (2003 report) (d)31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 200231.2
    
    
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1
    
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   (a)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-1 (Registration No. 333-89554).(b)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-1 (Registration No. 333-110555).(c)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form S-8 (Registration No. 333-113272).(d)
    
    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).(e)
    
    Incorporated by reference to exhibits filed with the Registrants Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on February 6, 2004 (Registration
No. 000-50574).(f)
    
    Compensation plan or arrangement.(g)
    
    Incorporated by reference to exhibits filed with
the Registrants Current Report on Form 8-K filed March 25,
2005 (File No. 000-50574).(h)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed December 14, 2004 (File No. 000-50574).(i)
    
    Incorporated by reference to exhibits filed with the Registrants Current Report on Form 8-K
filed January 11, 2005 (File No. 000-50574).