UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2012

Commission file number:  000-50574

Symbion, Inc.

(Exact name of registrant as specified in its charter)

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

40 Burton Hills Boulevard, Suite 500

Nashville, Tennessee 37215

(Address of principal executive offices and zip code)

(615) 234-5900

(Registrant’s telephone number, including area code)

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

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

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

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

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  x No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x 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.  x

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

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

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

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

As of March 8, 2013, there were 1,000 shares of the registrant’s common stock outstanding.

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.

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 Item 1A. “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 national network of short stay surgical facilities in 24states.  Our surgical facilities, which include ambulatory surgery centers ("ASCs") and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics, pain management, cardiology, gastroenterology and ophthalmology.  Some of our surgical hospitals also provide acute care services such as diagnostic imaging, pharmacy, laboratory, obstetrics, physical therapy and wound care.

We own our surgical facilities in partnership with physicians and in some cases healthcare systems in the markets and communities we serve.  We apply a market-based approach in structuring our partnerships with individual market dynamics driving the structure.  We believe this approach aligns our interests with those of our partners.

As of December 31, 2012, we owned and operated51 surgical facilities, including 45ASCs and six surgical hospitals.  We also managed ten additional ASCs.  We owned a majority interest in 32of the 51 surgical facilities and consolidated 48 facilities for financial reporting purposes.  We are reporting one of the 51 surgical facilities as discontinued operations. In addition to our surgical facilities, we also manage one physician clinic in a market in which we operate an ASC and a surgical hospital.

We have benefited from both the growth in overall outpatient surgery cases as well as the migration of surgical procedures from acute care hospitals to the surgical facility setting.  Advancements in medical technology, such as lasers, arthroscopy 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 in a surgical facility setting.

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

Industry Overview

The outpatient ambulatory surgery market in the United States has grown to a $20.0 billion industry according to the Medicare Payment Advisory Commission. There are several factors leading to increased utilization of outpatient surgical facilities. We believe physicians often prefer to operate in surgical facilities, as compared to acute care hospitals, because of the efficiency and convenience surgical facilities afford.  Procedures performed at surgical facilities are typically non-emergency, allowing physicians to schedule their time more efficiently and increase the number of procedures performed in a given period.  Surgical facilities also provide physicians with more consistent nurse staffing and faster turnaround time between cases, as compared to acute care hospitals.  Many patients also prefer surgical facilities as a result of more convenient locations, shorter waiting times, and more convenient scheduling and registration than acute care hospitals.

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

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have shortened the recovery time for many patients and have reduced certain post-operative side effects.  These medical advancements have enabled more patients to undergo surgery not requiring an overnight stay and reduced the need for hospitalization following surgery. 

Surgeries performed in surgical facilities are generally less expensive than those performed in acute care hospitals because of lower facility development costs, more efficient staffing and work flow processes. We believe payors are attracted to the lower costs available at surgical facilities, as compared to acute care hospitals. With increased attention on controlling healthcare costs in the United States, we feel our facilities will benefit from their position as a low-cost alternative for delivering surgical procedures. Additionally, Medicare beneficiaries generally experience lower coinsurance as a result of lower Medicare payment rates. As patients increasingly have more input into the delivery of their healthcare, we believe these factors will be drivers of growth in ASC utilization.

Approximately 3,500 surgical procedures performed in ASCs are reimbursed by Medicare. As the Centers for Medicare and Medicaid Services ("CMS") continues to add surgical procedures to Medicare's list of approved ASC procedures, we believe this will have the effect of further expanding the market opportunity. There currently are approximately 5,300 Medicare certified ASCs operating in the United States according to the CMS. As the industry remains very fragmented, we believe there continues to be significant opportunities for consolidation.

Our Strategy

Our intent is to enhance the performance of our existing facilities by increasing revenues, profitability and return on our invested capital at all of our surgical facilities through operational focus, including recruitment and retention of surgeons and other physicians. We intend to expand our network of surgical facilities in attractive markets throughout the United States by selectively acquiring established facilities, developing new facilities, and expanding our presence in existing markets.  We also intend to continue developing strategic relationships with healthcare systems, in both existing and new markets. When attractive opportunities arise, we may acquire or develop other types of facilities.  The key components of our strategy are to:

▪ Enhance the performance of our existing facilities through operational focus, including recruitment and retention of leading surgeons and other physicians for our surgical facilities.

We have a dedicated operations team that is responsible for implementing best practices, cost controls and overall efficiencies at each of our surgical facilities.  Our facilities benefit from our network of facilities by sharing best practices and participating in group purchasing agreements designed to reduce the cost of supplies and equipment.  We also review and negotiate our managed care contracts to ensure that we are operating under the most favorable terms available to us. 

We believe that establishing and maintaining strong relationships with surgeons and other physicians is a key factor to our success in acquiring, developing and operating surgical facilities.  We identify and partner with surgeons and other physicians that we believe have established reputations for clinical excellence in their communities.  We believe that we have had success in recruiting and retaining physicians because of the ownership structure of our surgical facilities and our staffing, scheduling and clinical systems that are designed to increase physician productivity, promote physicians' professional success and enhance the quality of patient care.  We also believe that forming relationships with healthcare systems and other healthcare providers can enhance our ability to recruit physicians.  We currently have strategic relationships with eight healthcare systems. We intend to continue to recruit additional physicians and expand the range of services offered at our surgical facilities to increase the number and types of surgeries performed in our facilities, including a focus on higher acuity cases.  We are committed to enhancing programs and services for our physicians and patients by providing advanced technology, quality care, cost-effective service and convenience.

▪ Capitalize on our experienced management team to expand our network of surgical facilities in attractive markets throughout the United States by selectively acquiring established facilities, developing new facilities, and expanding our presence in existing markets.

We believe that the experience and capabilities of our senior management team provide a strategic advantage in improving the operations of our surgical facilities, attracting physicians and identifying new development and acquisition opportunities.  Our senior management team has an average of over 30 years of experience in the healthcare industry having held senior management positions at public and private healthcare companies.  Our management's broad industry experience has allowed us to establish strong relationships with participants throughout the healthcare industry.  These relationships are helpful in forming leads for acquisitions and in making decisions about expanding into new markets and services.  The experience and capabilities of our management team also enable us to pursue multiple growth strategies in the surgical facility market, including acquisitions of established surgical facilities, de novo developments in attractive markets, strategic relationships with healthcare systems and other healthcare 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.

Operations

Surgical Facility Operations

As of December 31, 2012, we owned (with physician investors or healthcare systems) and operated 51 surgical facilities and managed ten additional surgical facilities.  Six of our surgical facilities are licensed as hospitals.  Our typical ASC is a freestanding facility

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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 typical surgical hospital is larger than a typical ASC and includes inpatient hospital rooms and, in some cases, an emergency department. 

Our surgical facilities primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics, pain management, cardiology, gastroenterology and ophthalmology.  Some of our surgical hospitals also provide acute care services such as diagnostic imaging, pharmacy, laboratory, obstetrics, physical therapy and wound care. In certain markets where we believe it is appropriate, we operate surgical facilities that focus on a single specialty.

Our surgical facilities are generally located in close proximity to physicians’ offices.  Our staff at each surgical facility generally includes a facility administrator, a business manager, a medical director, registered nurses, operating room technicians and clerical workers.  At each of our surgical facilities, we have arrangements with anesthesiologists to provide anesthesiology services.  We also provide each of our surgical facilities 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 surgical facilities in developing relationships with managed care providers and negotiating managed care contracts.

All of our surgical facilities are Medicare certified.  To ensure that a high level of care is provided, we implement quality assurance procedures at each of our surgical facilities.  In addition, a majority of our surgical facilities are also independently accredited by either the Joint Commission or the Accreditation Association for Ambulatory Health Care.  Each of our surgical facilities is available for use only by licensed physicians who have met professional credentialing requirements established by the facility’s medical advisory committee.  In addition, each surgical facility’s medical director supervises and is responsible for the quality of medical care provided at the surgical facility.

Surgical Facility Ownership Structure

We own and operate our surgical facilities through partnerships or limited liability companies with physicians, physician groups, and in some cases healthcare systems. One of our wholly owned subsidiaries typically serves as the general partner or managing member of our surgical facilities.  We generally seek to own a majority interest in our surgical facilities, or otherwise have sufficient control over the facilities to be able to consolidate the financial results of operations of the facilities with ours.  In some instances, we will acquire ownership in a surgical facility with the prior owners retaining ownership, and, in some cases, we offer new ownership to other physicians or hospital partners.  We hold majority ownership in 32 of the 51 surgical facilities in which we own an interest. We typically provide a guarantee for our pro rata share of third-party debt of our non-consolidated surgical facilities.  We provide intercompany loans to our consolidated facilities which often is secured by a pledge of assets of the partnership or limited liability company.  We also have a management agreement with each of the surgical facilities, under which we provide day-to-day management services for a management fee, which is typically equal to a percentage of the revenues of the facility.

Each of the partnerships and limited liability companies through which we own and operate our surgical facilities is governed by a partnership or operating agreement.  These partnership and operating agreements typically provide, among other things, for voting rights and limited transfer of ownership.  The partnership and operating agreements also provide for the distribution of available cash to the owners.  In addition, the agreements typically restrict the physician owners from owning an interest in a competing surgical facility during the period in which the physician owns an interest in our surgical facility and for one year after that period.  The partnership and operating agreements for our surgical facilities typically provide that the facilities will purchase all of the physicians’ ownership if certain adverse regulatory events occur, such as it becoming illegal for the physicians to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility.  The purchase price that we would be required to pay for the ownership is based on pre-determined formulas, typically either a multiple of the surgical facility’s EBITDA, as defined in our partnership and operating agreements, or the fair market value of the ownership as determined by an independent 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.  In certain circumstances, we have the right to purchase a physician’s ownership, including upon a physician’s breach of the restriction on ownership provisions of a partnership or operating agreement.  In some cases, we have the right to require the physician owners to purchase our ownership in the event our management agreement with a surgical facility is terminated.  In certain surgical facilities, the physician owners have the right to purchase our ownership upon a change in our control.

Surgical Facilities

The following table sets forth information regarding each of our surgical facilities as of December 31, 2012:

Surgical Facility	City	Number of Operating Rooms	Number of Treatment Rooms	Symbion Percentage Ownership
Alabama
Birmingham Surgery Center	Birmingham	6	2	60	%	(1)
California
Specialty Surgical Center of Beverly Hills / Brighton Way	Beverly Hills	3	2	32	%	(1)
Specialty Surgical Center of Beverly Hills / Wilshire Boulevard	Beverly Hills	4	2	32	%	(1)
Specialty Surgical Center of Encino	Encino	4	2	59	%	(1)
Specialty Surgical Center of Irvine	Irvine	4	1	56	%	(1)

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Surgical Facility	City	Number of Operating Rooms	Number of Treatment Rooms	Symbion Percentage Ownership
Specialty Surgical Center of Westlake Village	Westlake Village	4	2	19	%
Colorado
Minimally Invasive Spine Institute	Boulder	2	1	40	%	(1)
Animas Surgical Hospital	Durango	4	1	63	%	(1)(2)
			12 hospital rooms
Florida
West Bay Surgery Center	Largo	4	4	51	%	(1)
Jacksonville Beach Surgery Center	Jacksonville	4	1	80	%	(1)
Cape Coral Ambulatory Surgery Center	Cape Coral	5	6	65	%	(1)
Lee Island Coast Surgery Center	Fort Myers	5	3	42	%	(1)
Tampa Bay Regional Surgery Center	Largo	0	3	57	%	(1)
The Surgery Center of Ocala	Ocala	4	2	41	%	(1)
Blue Springs Surgery Center	Orange City	3	2	34	%	(1)
Georgia
Premier Surgery Center	Brunswick	3	0	60	%	(1)
The Surgery Center	Columbus	4	2	63	%	(1)
Hawaii
Honolulu Spine Center	Honolulu	2	0	61	%	(1)
Idaho
Mountain View Hospital	Idaho Falls	10	3	48	%	(1)(2)
			43 hospital rooms
Illinois
Valley Ambulatory Surgery Center	St. Charles	6	1	40	%	(1)
Indiana
New Albany Outpatient Surgery	New Albany	3	1	79	%	(1)
Kansas
Cypress Surgery Center	Wichita	6	5	53	%	(1)
Kentucky
DuPont Surgery Center	Louisville	5	0	61	%	(1)
Louisiana
Greater New Orleans Surgery Center	Metairie	2	0	30	%	(1)(5)
Physicians Medical Center	Houma	5	3	53	%	(1)(2)
			30 hospital rooms
Massachusetts
Worcester Surgery Center	Worcester	4	1	56	%	(1)
Michigan
Novi Surgery Center	Novi	4	3	17	%	(6)
Missouri
Central Missouri Medical Park Surgical Center	Jefferson City	4	2	42	%	(1)
Timberlake Surgery Center	Chesterfield	4	1	56	%	(1)
St. Louis Spine and Orthopedic	Town and Country	3	1	56	%	(1)
St. Louis Women's Surgery Center	St. Louis			60	%	(1)
Mississippi
DeSoto Surgery Center	DeSoto	2	1	—	%	(3)
Physicians Outpatient Center	Oxford	4	2	—	%	(3)
Montana
Great Falls Clinic Surgery Center	Great Falls	3	2	100	%	(1)

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Surgical Facility	City	Number of Operating Rooms	Number of Treatment Rooms	Symbion Percentage Ownership
Great Falls Clinic Medical Center	Great Falls	3	20 hospital rooms	50	%	(2)
New York
South Shore Ambulatory Surgery Center	Lynbrook	4	1	41	%	(1)(4)
North Carolina
Orthopaedic Surgery Center of Asheville	Asheville	3	0	54	%	(1)
Wilmington SurgCare	Wilmington	7	3	75	%	(1)
Ohio
Physicians Ambulatory Surgery Center	Circleville	2	0	53	%	(1)
Valley Surgical Center	Steubenville	3	1	58	%	(1)
Pennsylvania
Village SurgiCenter	Erie	5	1	72	%	(1)
Surgery Center of Pennsylvania	Havertown	5	1	49	%	(1)
Rhode Island
Bayside Endoscopy Center	Providence	0	6	75	%	(1)
East Greenwich Endoscopy Center	East Greenwich	0	4	45	%	(1)
East Bay Endoscopy Center	Portsmouth	0	1	75	%	(1)
South Carolina
The Center for Specialty Surgery	Greenville	2	0	—	%	(3)
Tennessee
Baptist Germantown Surgery Center	Memphis	6	1	—	%	(3)
Cool Springs Surgery Center	Franklin	5	1	36	%
East Memphis Surgery Center	Memphis	6	2	—	%	(3)
Midtown Surgery Center	Memphis	4	0	—	%	(3)
Union City Surgery Center	Union City	3	1	—	%	(3)
UroCenter	Memphis	3	0	—	%	(3)
Physicians Surgery Center	Jackson	4	0	—	%	(3)
Renaissance Surgery Center	Bristol	2	1	37	%	(1)
Texas
Surgical Hospital of Austin	Austin	6	1	51	%	(1)(2)
			26 hospital rooms
Village Specialty Surgical Center	San Antonio	4	4	58	%	(1)(7)
NorthStar Surgical Center	Lubbock	6	3	46	%	(1)
Texarkana Surgery Center	Texarkana	4	3	58	%	(1)
Lubbock Heart Hospital	Lubbock	4	74 hospital rooms	58	%	(1)(2)
Washington
Bellingham Surgery Center	Bellingham	4	0	80	%	(1)
Microsurgical Spine Center	Puyallup	1	1	50	%	(1)

(1) We consolidate this surgical facility for financial reporting purposes.

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

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

(4) Due to regulatory restrictions in the State of New York, we cannot directly hold ownership in the surgical facility.  We hold 41% ownership in the limited liability company which provides administrative services to this surgical facility and consolidate the facility for financial reporting purposes.  Additionally, we manage this facility.

(5) Facility reported as discontinued operations as of December 31, 2012.

(6) We disposed of our interest in this surgical facility effective January 29, 2013.

(7) Facility ceased operations in February 2013.

Strategic Relationships

When attractive opportunities arise, we may develop, acquire or operate surgical facilities through strategic relationships with healthcare systems and other healthcare providers.  We believe that forming a relationship with a healthcare system can enhance our ability to

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attract physicians and access managed care contracts for our surgical facilities in that market.  We currently have relationships with eight healthcare systems relating to fourteen ASC's. These healthcare systems include:

▪ Adventist Health System, with which we own and operate a surgical facility in Orange City, Florida.

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

▪ Berger Health Foundation, with which we own and operate a surgical facility in Circleville, Ohio;

▪ Bon Secours St. Francis Health System, for which we manage a surgical facility in Greenville, South Carolina;

▪ Lee Health Ventures, with which we own and operate a surgical facility in Ft. Myers, Florida;

▪ Munroe Regional Health Systems, with which we own and operate a surgical facility in Ocala, Florida;

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

▪ Wellmont Health Systems, with which we own and operate a surgical facility in Bristol, Tennessee.

The strategic relationships through which we own and operate surgical facilities are governed by partnership and operating agreements that are generally comparable to the partnership and operating agreements of the other surgical facilities in which we own an interest.  The primary difference between the structure of these strategic relationships and the other surgical facilities in which we hold ownership is that, in these strategic relationships, a healthcare system holds ownership in the surgical facility, in addition to physician investors.  For a general description of the terms of our partnership and operating agreements, see “—Operations—Surgical Facility Ownership Structure.” In each of these strategic relationships, we also have entered into a management agreement under which we provide day-to-day management services for a management fee equal to a percentage of the revenues of the surgical facility.  The terms of those management agreements are comparable to the terms of our management agreements with other surgical facilities in which we own an interest.

We manage seven surgical facilities owned by Baptist Memorial under management agreements with Baptist Memorial in exchange for a management fee based on a percentage of the revenues of these surgical facilities.  The management agreements terminate in 2014 and may be terminated earlier by either party for material breach after notice and an opportunity to cure.

Acquisitions and Developments

During 2012, our significant acquisitions were as follows:

▪ 77.3% ownership interest in a surgical facility located in Bellingham, Washington, effective December 31, 2012. We merged the operations of the acquired facility with our existing surgical facility located in Bellingham, Washington.

▪ The remaining 44.0% incremental ownership interest in our consolidated Great Falls, Montana facility, effective October 4, 2012 bringing our effective ownership in the facility to 100%.

▪ 58.3% ownership interest in a surgical hospital located in Lubbock, Texas, effective June 20, 2012, which we consolidate for financial reporting purposes.

▪ 60.0% ownership interest in a surgical facility located in St. Louis, Missouri, effective June 1, 2012, which we consolidate for financial reporting purposes.

▪ Four separate urgent care and family practice facilities located in Idaho Falls, Idaho, effective February 8, 2012, which we consolidate for financial reporting purposes.

We continuously evaluate opportunities to expand our presence in the surgical facility market by making strategic acquisitions of existing surgical facilities and by developing new surgical facilities in cooperation with local physician partners and, when appropriate, with healthcare systems and other strategic partners.  We have the flexibility to structure our partnerships as two-way arrangements where either we are a majority owner partnered with physicians or we are a minority owner with buy-up rights.  These buy-up rights give us the option to own a controlling interest at some point in the future.  Alternatively, we may choose to pursue a three-way arrangement with physicians and a healthcare system partner.

Acquisition Program

We employ a dedicated acquisition team with experience in healthcare services.  Our team seeks to acquire surgical facilities 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 organization contracts.  Our team utilizes its 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 facility’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 an analysis of local market characteristics.  Our team may also identify opportunities to attract additional physicians to increase the acquired facility’s revenues and profitability.  We have acquired 56 surgical facilities since January 1999.

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Development Program

We develop surgical facilities in markets in which we identify substantial interest by physicians and payors.  We have experience in developing both single and multi-specialty surgical facilities.  When we develop a new surgical facility, 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 surgical facilities.  Before and during the development phase of a new surgical facility, 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 surgical facility and identifying appropriate equipment to purchase or lease.  After the surgical facility is developed, we generally provide startup operational support, including information systems, equipment procurement and financing.  We have developed 24 surgical facilities since January 1999.

Development of a typical ASC generally occurs over a 12 to 18 month period, depending on whether the facility is being constructed or available space improved.  Total development costs typically amount to $4.0 to $6.0 million and include improvements to existing space, equipment and other furnishing costs and working capital. We typically fund about 80% of the development costs of a new surgical facility with a combination of corporate borrowings and cash from operations, and the remainder with equity contributed by us and the other owners of the facility.  For our consolidated surgical facilities, the indebtedness typically consists of intercompany loans that we provide, and for our non-consolidated surgical facilities, the indebtedness typically consists of third-party debt for which we provide a guarantee for only our pro rata share. 

Other Services

Although our business is primarily focused on owning and operating surgical facilities, we also manage a physician clinic in a market in which we operate an ASC and a surgical hospital. 

Information Systems and Controls

Each of our surgical facilities uses a financial reporting system that provides information to our corporate office to track financial performance on a timely basis.  In addition, each of our surgical 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 systems to support all of our surgical facilities and to enable us to more easily access information about our surgical facilities on a timely basis.

The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments for eligible hospitals and professionals that implement and achieve meaningful use of certified Electronic Health Records ("EHR") technology. Several of our surgical hospitals have implemented plans to comply with the EHR meaningful use requirements of the HITECH Act in time to qualify for the maximum available incentive payments. Compliance with the meaningful use requirements has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing the Company's EHR solutions along with costs associated with the hardware and software components of the project.

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 revenues are 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 primarily non-emergency, our surgical 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 exceptions 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 surgical facilities by integrating data from our local operating systems and our financial reporting systems.  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 teams are compensated in part using performance-based incentives focused on revenue growth and improving operating income.

Marketing

We primarily direct our sales and marketing efforts at physicians who would use our surgical facilities.  Marketing activities directed at physicians and other healthcare providers are coordinated locally by the individual surgical facility and are supplemented by

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dedicated corporate personnel.  These activities generally emphasize the benefits offered by our surgical facilities compared to other facilities in the market, such as the proximity of our surgical 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 surgical facilities are important sources of recommendations to other physicians regarding the benefits of using our surgical facilities.  Each facility administrator develops a target list of physicians, and we continually review our progress in successfully recruiting additional local physicians.

We also market our surgical facilities directly to payors, such as health maintenance organizations, or HMOs, preferred provider organizations, or PPOs, and other managed care organizations and employers.  Payor marketing activities conducted by our corporate office management and facility administrators emphasize the high quality of care, cost advantages and convenience of our surgical facilities, and are focused on making each surgical facility an approved provider under local managed care plans.

Competition

In each market in which we operate a surgical facility, we compete with hospitals and operators of other surgical facilities to attract physicians and patients.  We believe that the competitive factors that affect our surgical facilities’ ability to compete for physicians are convenience of location of the surgical facilities, access to capital and participation in managed care programs.  In addition, we believe the national prominence, scale and reputation of our company are instrumental in attracting physicians.  We believe that our surgical facilities attract patients based upon our quality of care, the specialties and reputations of the physicians who operate in our surgical facilities, participation in managed care programs, ease of access and convenient scheduling and registration procedures.

In developing or acquiring existing surgical facilities, we compete with other public and private surgical facility and hospital companies.  Several large national companies own and/or manage surgical facilities, including HCA  Holdings, Inc., Surgical Care Affiliates, Inc., AmSurg Corp. and United Surgical Partners International, Inc.  We also face competition from local hospitals, physician groups and other providers who may compete with us in the ownership and operation of surgical facilities, as well as the trend of physicians choosing to perform procedures in an office-based setting rather than in a surgical facility.

Employees

At December 31, 2012, we had approximately 2,900 employees, of which about 1,700 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, adjoining properties 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 with a retention of $50,000 per occurrence and $3.0 million in annual aggregate coverage per surgical facility, including the facility and employed staff.  We also maintain business interruption insurance and property damage insurance, as well as an additional umbrella liability insurance policy in the aggregate amount of $25.0 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.  In addition, physicians who provide professional services in our surgical facilities are required to maintain separate malpractice coverage with similar minimum coverage limits.  While we believe that our insurance policies are adequate in amount and coverage for our anticipated operations, 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.

Sources of Revenue

Approximately 98% of our revenues in 2012 were obtained from facility fees related to healthcare services performed in our surgical facilities. The fee charged varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, supplies, nursing staff and medications.  Also, in a very limited number of surgical facilities, we charge for anesthesia services.  Our fees do not typically 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.  We recognize our facility fee on the date of service, net of estimated contractual adjustments and discounts for third-party payors, including Medicare and Medicaid.  Any changes in estimated contractual adjustments and discounts are recorded in the period of change.

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We are dependent upon private and government third-party sources of payment for the services we provide.  The amounts that our surgical facilities 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. Approximately 31%, 26% and 25% of our revenues were from government sources, mostly Medicare, for the years ended December 31, 2012, 2011 and 2010, respectively.

The following table sets forth by type of payor the percentage of our patient service revenues generated in the periods indicated:

	Year Ended December 31,
	2012		2011		2010
Private Insurance	62	%	66	%	68	%
Government	31		26		25
Self-pay	2		3		4
Other	5		5		3
Total	100	%	100	%	100	%

Medicare Reimbursement—Ambulatory Surgery Centers

 Payments under the Medicare program to ASCs are made under a system whereby the Secretary of the Department of Health and Human Services (the “Secretary”) determines payment amounts prospectively for various categories of medical services performed in ASCs based upon the hospital outpatient prospective payment system (“OPPS”). On November 1, 2012, CMS issued a final rule to update the Medicare program's payment policies and rates for ASCs for calendar year (“CY”) 2013. The final rule applies a 0.6% increase to the ASC payment rate for CY 2013. In CY 2012, CMS adopted a quality reporting program for ASCs for the first time that requires ASCs to report certain quality measures in order to be eligible for the full market basket update in a future calendar year. In CY 2012, ASCs were required to report five claims-based quality measures in order to be eligible for the full market basket update for the CY 2014 payment determination. To be eligible for the full market basket update for the CY 2015 payment determination, ASCs will be required to report the five claims-based measures adopted for the CY 2014 payment determination as well as two additional structural measures. Through CY 2012, our ASCs reported all quality measures required by CMS and expect to receive the full market basket update.

Medicare Reimbursement—Hospital Inpatient Services

 Six of our surgical facilities are licensed as hospitals. Most inpatient services provided by hospitals are reimbursed by Medicare under the inpatient prospective payment system (“IPPS”). Under this prospective payment system, a hospital receives a fixed amount for inpatient hospital services based on each patient's final assigned Medicare-severity diagnosis related group (“MS-DRG”). Each MS-DRG is assigned a payment rate that is prospectively set using national average resources used per case for treating a patient with a particular diagnosis. This MS-DRG assignment also affects the prospectively determined capital rate paid with each MS-DRG. MS-DRG and capital payments are adjusted by a predetermined geographic adjustment factor assigned to the geographic area in which the hospital is located. The index used to adjust the MS-DRG rates, known as the “hospital market basket index,” gives consideration to the inflation experienced by hospitals in purchasing goods and services.

On August 1, 2012, CMS issued the IPPS final rule for federal fiscal year (“FFY”) 2013, which began on October 1, 2012. Under the final rule, hospitals that report quality data under the Inpatient Quality Reporting Program will receive a 2.8% payment rate increase for inpatient hospital stays paid under the IPPS and hospitals that do not report quality data will receive a 0.8% increase in payment rates. For FFY 2012, our hospitals reported all quality measures required by CMS and received the full payment increase.

Medicare Reimbursement—Hospital Outpatient Services

Most outpatient services provided by hospitals are reimbursed by Medicare under the OPPS whereby hospital outpatient services are classified into groups called ambulatory payment classifications (“APCs”). CMS establishes a payment rate for each APC by multiplying the scaled relative weight for the APC by a conversion factor. The payment rate is further adjusted to reflect geographic wage differences. APC classifications and payment rates are reviewed and adjusted on an annual basis. If CMS' annual payment recalculations result in a decrease in APC payment rates for procedures performed in our hospitals, our revenues and profitability could be materially adversely affected.

On November 1, 2012, CMS issued the final OPPS rates for hospitals for CY 2013. Under the final rule, the market basket update for CY 2013 for hospitals under the OPPS is a 1.8 % increase. Hospitals that submit quality data in accordance with the Hospital Outpatient Quality Data Reporting Program will receive the full 1.8% market basket update, while those that do not submit quality data will instead be subject to a 0.2% decrease in reimbursement. For CY 2012, our hospitals reported all quality measures required by CMS and received the full market basket update.

Budget Control Act of 2011

On August 2, 2011, the Budget Control Act of 2011 (the “BCA”) was enacted. The BCA increased the nation's debt ceiling, while taking steps to reduce the federal deficit. The BCA requires $1.2 trillion in automatic across-the-board spending reductions for FFY 2013 through FFY 2021, split evenly between domestic and defense spending. While certain programs (including the Medicaid program) are protected from these automatic spending reductions, payments to Medicare providers may be subject to reductions of up to 2.0%. The BCA's automatic spending

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reductions were set to begin on January 2, 2013. However, the enactment of the American Taxpayer Relief Act of 2012 (“ATRA”) postponed the implementation of the automatic spending reductions required by the BCA until March 1, 2013. On March 1, 2013, President Barack Obama signed an order implementing the automatic spending reductions required by the BCA. We cannot predict whether these automatic spending reductions will be rescinded by future legislative action. If the BCA's automatic spending reductions become permanent, they could adversely affect our business, results of operations and/or financial condition.

Private Third-Party Payors

Most third-party payors pay pursuant to a written contract with our surgical facilities. These contracts generally require our hospitals and ASCs to offer discounts from their established charges. Some of our payments come from third-party payors with which our surgical facilities do not have written contracts. In those situations, commonly known as “out-of-network” services, we generally charge the patients the same co-payment or other patient responsibility amounts that we would have charged had our center had a contract with the third-party payor. We also submit a claim for the services to the third-party payor along with full disclosure that our surgical facility has charged the patient an in-network patient responsibility amount.

Annual Cost Reports

Hospitals participating in the Medicare and some Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, are required to meet certain financial reporting requirements. Federal and, where applicable, state regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.

Annual cost reports required under the Medicare and some Medicaid programs are subject to routine governmental audits. These audits may result in adjustments to the amounts ultimately determined to be payable to us under these reimbursement programs. Finalization of these audits often takes several years. Providers may appeal any final determination made in connection with an audit.

Governmental Regulation

General

The healthcare industry is highly regulated, and we cannot provide any assurance that the regulatory environment in which we operate will not significantly change in the future or that we will be able to successfully address any such changes.

Every state imposes licensing requirements on individual physicians and healthcare facilities. In addition, federal and state laws regulate HMOs and other managed care organizations. Many states require regulatory approval, including licensure, and in some cases certificates of need, before establishing certain types of healthcare facilities, including surgical hospitals and ASCs, offering certain services, including the services we offer, or making expenditures in excess of certain amounts for healthcare equipment, facilities or programs. Our ability to operate profitably will depend in part upon all of our surgical facilities obtaining and maintaining all necessary licenses, certificates of need and other approvals and operating in compliance with applicable healthcare regulations. Failure to do so could have a material adverse effect on our business.

The laws of many states prohibit physicians from splitting fees with non-physicians (i.e., sharing in a percentage of professional fees), prohibit non-physician entities (such as us) from practicing medicine and exercising control over or employing physicians and prohibit referrals to facilities in which physicians have a financial interest. We believe our activities do not violate these state laws. However, future interpretations of, or changes in, these laws might require structural and organizational modifications of our existing relationships with facilities and the physician network, 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 surgical 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 believe that hospital, outpatient surgery and diagnostic services will continue to be subject to intense regulation at the federal and state levels. 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 surgical facilities, fail to comply with applicable laws, it might have a material adverse effect on our business.

Certificates of Need and Licensure

Capital expenditures for the construction of new healthcare facilities, the addition of beds or new healthcare services or the acquisition of existing healthcare 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 healthcare facilities and the expansion of existing facilities and services. In these states, approvals, generally known as certificates of need, are required for capital expenditures exceeding certain pre-set monetary thresholds for the development, acquisition and/or expansion of certain facilities or services, including surgical facilities.

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We have a concentration of surgical facilities in certificate of need states as we believe the regulations present a competitive advantage to existing operators.

Our healthcare facilities also are subject to state licensing requirements for medical providers. Our facilities have licenses to operate as ASCs in the states in which they operate, except for one facility in Colorado, one facility in Louisiana, two facilities in Texas, one facility in Idaho and one facility in Montana, each of which is licensed as a hospital. Our surgical facilities that are licensed as ASCs must meet all applicable requirements for ASCs. In addition, even though our surgical facilities that are licensed as hospitals primarily provide surgical services, they must meet all applicable requirements for general hospital licensure. To assure continued compliance with these regulations, governmental and other authorities periodically inspect our surgical facilities. The failure to comply with these regulations could result in the suspension or revocation of a facility's license. In addition, based on the specific operations of our surgical facilities, some of these facilities maintain a pharmacy license, a controlled substance registration, a clinical laboratory certification waiver, and environmental protection permits for biohazards and/or radioactive materials, as required by applicable law.

Healthcare Reform

The Patient Protection and Affordable Care Act (the "Affordable Care Act") and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Healthcare Reform Acts”) were signed into law on March 23, 2010 and March 30, 2010, respectively, dramatically altering the U.S. healthcare system. The Healthcare Reform Acts are intended to provide coverage and access to substantially all Americans, to increase the quality of care provided, and to reduce the rate of growth in healthcare expenditures. The changes include, among other things, reducing payments to Medicare Advantage plans, expanding the Medicare program's use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, reducing Medicare and Medicaid payments, expanding Medicare and Medicaid eligibility, and expanding access to health insurance. As part of the effort to control or reduce healthcare spending, the Healthcare Reform Acts also contain a number of measures intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of recovery audit contractors in the Medicaid program and limitations on the federal physician self-referral law (“Stark Law”) exception that allows physicians to have ownership interests in hospitals (the “Whole Hospital Exception”). Among other things, the Healthcare Reform Acts prohibit hospitals from increasing the percentages of the total value of the ownership interests held in the hospital by physicians after March 23, 2010, as well as places severe restrictions on the ability of a hospital subject to the Whole Hospital Exception to add operating rooms, procedure rooms and beds. The Healthcare Reform Acts provide for additional enforcement tools, cooperation between agencies, and funding for enforcement. In addition, the Healthcare Reform Acts mandate reductions in reimbursement, such as adjustments to the hospital inpatient and outpatient prospective payment system market basket updates and productivity adjustments to Medicare's annual inflation updates, which became effective in 2010, 2011 and 2012. However, a majority of the measures contained in the Healthcare Reform Acts do not take effect until 2013 or later.

Since their enactment, the Healthcare Reform Acts have been subject to a number of challenges to their constitutionality; however, on June 28, 2012, the United States Supreme Court upheld most of the Healthcare Reform Acts, including the “individual mandate” provision, which generally requires all individuals to purchase healthcare insurance or pay a penalty. The only provision of the Healthcare Reform Acts that the Court struck down as unconstitutional was the provision that would have allowed the federal government to revoke all federal Medicaid funding to any state that did not expand its Medicaid program. In response to the ruling, a number of states have already indicated that they will not expand their Medicaid programs, which would result in the Healthcare Reform Acts not providing coverage to some low-income persons in those states. In addition, several bills have been and will likely continue to be introduced in Congress to repeal or amend all or significant provisions of the Healthcare Reform Acts. It is difficult to predict the impact the Healthcare Reform Acts will have on our operations given the delay in implementing regulations and possible amendment or repeal of elements of the Healthcare Reform Acts. However, depending on how the Healthcare Reform Acts are ultimately interpreted, amended and implemented, they could have an adverse effect on our business, financial condition and results of operations.

Quality Improvement

Quality of care and value-based purchasing also have become significant trends and competitive factors in the healthcare industry. In 2005, CMS began making public performance data relating to ten quality measures that hospitals submit in connection with their Medicare reimbursement. Since that time, CMS has on several occasions increased the number of quality measures hospitals are required to report in order to receive the full IPPS and OPPS market basket updates. In addition, the Medicare program no longer reimburses hospitals for the cost of care relating to certain preventable adverse events, and many private healthcare payers have adopted similar policies. The Healthcare Reform Acts also contain a number of provisions that are intended to improve the quality of care that is provided to Medicare and Medicaid beneficiaries. For example, the Healthcare Reform Acts prohibit Medicaid programs from using federal funds to reimburse providers for the costs of care needed to treat hospital acquired conditions (“HACs”). Beginning in FFY 2015, the Healthcare Reform Acts mandate a 1% reduction in Medicare payments for hospitals that were in the highest quartile of national risk-adjusted HAC rates for the previous FFY. Beginning in FFY 2013, the Healthcare Reform Acts require CMS to implement a value-based purchasing program for Medicare hospitals that would reduce IPPS payments by 1% in FFY 2013 (gradually increasing to 2% in FFY 2017) and to use those funds to provide additional payments to hospitals that meet certain clinical and patient experience of care quality measures.On May 6, 2011, CMS published a final rule on the value-based purchasing program, which described which measurements will be taken into consideration and how the program will be administered. If the public performance data becomes a primary factor in where patients choose to receive care, and if competing hospitals have better results than our hospitals on those measures, we would expect that our patient volumes could decline. In addition, if our hospitals have high HAC rates or are unable to meet the required quality measures, the implementation of the value-based purchasing programs potentially could have a negative effect on our revenues.

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Accountable Care Organizations

The Affordable Care Act requires the Department of Health and Human Services Office for Civil Rights (“HHS”) to establish a Medicare Shared Savings Program that promotes accountability and coordination of care through the creation of accountable care organizations (''ACOs''). The ACO program allows providers, physicians and other designated professionals and suppliers to voluntarily work together to invest in infrastructure and redesign delivery processes to achieve high quality and efficient delivery of services. The program is intended to produce savings as a result of improved quality and operational efficiency. ACOs that achieve quality performance standards established by HHS will be eligible to share in a portion of the amounts saved by the Medicare program. To date more than 250 ACOs have been established to participate in the Medicare program, and additional ACO programs are being established by private payors.

Bundled Payment Pilot Programs

The Affordable Care Act required HHS to establish a five-year, voluntary national bundled payment pilot program for Medicare services beginning no later than January 1, 2013. Under the program, providers would agree to receive one payment for services provided to Medicare patients for certain medical conditions or episodes of care. HHS will have the discretion to determine how the program will function. CMS finalized the implementation of the Medicare program's Bundled Payments for Care Improvement (''BPCI'') initiative in the IPPS final rule for FFY 2013 and announced the healthcare organizations that were selected to participate in the BPCI initiative on January 31, 2013. In addition, the Affordable Care Act provides for a five-year bundled payment pilot program for Medicaid services to begin January 1, 2012. HHS will select up to eight states to participate based on the potential to lower costs under the Medicaid program while improving care. State programs may target particular categories of beneficiaries, selected diagnoses or geographic regions of the state. The selected state programs will provide one payment for both hospital and physician services provided to Medicaid patients for certain episodes of inpatient care. For both pilot programs, HHS will determine the relationship between the programs and restrictions in certain existing laws, including the Civil Monetary Penalty Law, the Anti-kickback Statute, the Stark law, and the HIPAA privacy, security and transaction standard requirements. However, the Affordable Care Act does not authorize HHS to waive other laws that may impact the ability of eligible participants to participate in the pilot programs, such as antitrust laws.

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. To participate in the Medicare program and receive Medicare payment, our surgical facilities must comply with regulations promulgated by HHS. Among other things, these regulations, known as “conditions of coverage” or “conditions of participation,” impose numerous requirements on our facilities, their equipment, their personnel and their standards of medical care, as well as compliance with all applicable state and local laws and regulations. On April 26, 2007, CMS issued a policy memorandum that reaffirmed its prior interpretation of its conditions of participation that all hospitals (other than Critical Access Hospitals) participating in the Medicare program are required to provide basic emergency care interventions regardless of whether or not the hospital maintains an emergency department. Our six facilities licensed as hospitals are required to meet this requirement to maintain their participating provider status in the Medicare program. Three of our hospitals, which do not have an emergency room, maintain a protocol for the transfer of patients requiring emergency treatment, which protocol may be interpreted as inconsistent with the 2007 CMS policy memorandum. Our surgical facilities must also satisfy the conditions of participation to be eligible to participate in the various state Medicaid programs. 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 surgical facilities will continue to qualify for participation.

The Healthcare Reform Acts require a hospital to provide written disclosure of physician ownership interests to the hospital's patients and on the hospital's website and in any advertising, along with annual reports to the government detailing such interests. Additionally, hospitals that do not have 24/7 physician coverage are required to inform patients of this fact and receive signed acknowledgment from the patients of the disclosure. A hospital's provider agreement may be terminated if it fails to provide the required notices. In 2010, CMS issued a “self-referral disclosure protocol” for hospitals and other providers that wish to self-disclose potential violations of the Stark Law to CMS and to attempt to resolve those potential violations and any related overpayment liabilities at levels below the maximum penalties and amounts set forth in the statute. The disclosure requirements set forth in the Healthcare Reform Acts and the self-referral disclosure protocol reflect a move towards increasing government scrutiny of the financial relationships between hospitals and referring physicians and increasing disclosure of potential violations of the Stark Law to the government by hospitals and other healthcare providers. We intend for all of our facilities to meet their disclosure obligations.

Survey and Accreditation

Hospitals are subject to periodic inspection by federal, state and local authorities to determine their compliance with applicable regulations and requirements necessary for licensing, certification and accreditation. Our hospitals currently are licensed under appropriate state laws and are qualified to participate in the Medicare and Medicaid programs.

Utilization Review

Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by quality improvement organizations,

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which review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of MS-DRG classifications and the appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided or assess fines and also have the authority to recommend to HHS that a provider which is in substantial noncompliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. Utilization review is also a requirement of most non-governmental managed care organizations.

Value-Based Purchasing

There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require ASCs and hospitals to report certain quality data to receive full reimbursement updates.

The Affordable Care Act requires HHS to implement a value-based purchasing program for inpatient hospital services. The Affordable Care Act requires HHS to reduce inpatient hospital payments for all discharges by a percentage beginning at 1% in FFY 2013 and increasing by 0.25% each fiscal year up to 2% in FFY 2017 and subsequent years. HHS will pool the amount collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each hospital that meets or exceeds the quality performance standards will receive from the pool of dollars created by these payment reductions. Currently, Congress has not directed HHS to implement a value-based purchasing program for ASC services.

Federal Anti-Kickback Statute and Medicare Fraud and Abuse Laws

The Social Security Act includes provisions addressing false statements, illegal remuneration and other instances of fraud and abuse in the Medicare program.  These provisions are commonly referred to as the Medicare fraud and abuse laws, and include the statute commonly known as the federal anti-kickback statute (the “Anti-kickback Statute”).  The Anti-kickback Statute prohibits 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, or ordering or arranging for, or recommending the order of, any item or service covered by a federal healthcare program, including, but not limited to, the Medicare program.  Violations of the Anti-kickback Statute are criminal offenses punishable by imprisonment and fines of up to $25,000 for each violation.  Civil violations are punishable by fines of up to $50,000 for each violation, as well as damages of up to three times the total amount of remuneration received from the government for healthcare claims.

In addition, the Medicare Patient and Program Protection Act of 1987, as amended by the Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), and the Balanced Budget Act of 1997, impose civil monetary penalties and exclusion from state and federal healthcare programs on providers who commit violations of the Medicare fraud and abuse laws.  Pursuant to the enactment of HIPAA, as of June 1, 1997, the Secretary may, and in some cases must, exclude individuals and entities that the Secretary determines have “committed an act” in violation of the Medicare fraud and abuse laws or improperly filed claims in violation of the Medicare fraud and abuse laws from participating in any federal healthcare program.  HIPAA also expanded the Secretary's authority to exclude a person involved in fraudulent activity from participating in a program providing health benefits, whether directly or indirectly, in whole or in part, by the U.S. government.  Additionally, 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 Medicare and Medicaid and other federal and state healthcare programs if the individual knew or should have known, or acted with deliberate ignorance or reckless disregard of, the truth or falsity of the information of the activity leading to the conviction or exclusion of the entity, or where the individual is an officer or managing employee of such entity.  This standard does not require that specific intent to defraud be proven by the Office of the Inspector General of the U.S. Department of Health and Human Services (the “OIG”).  Under HIPAA it is also a crime to defraud any commercial healthcare benefit program.

Because physician-investors in our surgical facilities are in a position to generate referrals to the facilities, the distribution of available cash to those investors could come under scrutiny under the Anti-Kickback Statute.  The U.S. Third Circuit Court of Appeals has held that the 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.  Further, Section 6402(f)(2) of the Affordable ARE Act amends the Anti-kickback Statute by adding a provision to clarify that a person need not have actual knowledge of such section or specific intent to commit a violation of the Anti-kickback Statute. Because none of these cases involved a joint venture such as those owning and operating our surgical facilities, 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 surgical facility may not vary with the number of his or her referrals to the surgical facility, and we comply with this prohibition.

Under regulations issued by the OIG, certain categories of activities are deemed not to violate the Anti-kickback Statute (commonly referred to as the safe harbors).  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 Anti-kickback Statute.  The safe harbor regulations do not make conduct illegal, but instead outline standards that, if complied with, protect conduct that might otherwise be deemed in violation of the Anti-kickback Statute.  Failure to meet a safe harbor does not indicate that the arrangement violates the Anti-kickback Statute.

We believe the ownership and operations of our surgery centers and hospitals will not fit wholly within safe harbors, but we attempt to incorporate elements of a safe harbor in all of our facilities.  Our ASCs, for example, are structured to fit as closely as possible within the safe harbor designed to protect distributions to physician-investors in ambulatory surgery centers who directly refer patients to the ambulatory surgery center and personally perform the procedures at the center as an extension of their practice (the “ASC Safe Harbor”).  The ASC Safe Harbor protects four categories of investors, including facilities owned by (1) general surgeons, (2) single-specialty physicians, (3) multi-

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specialty physicians and (4) hospital/physician ventures, provided that certain requirements are satisfied.  These requirements include the following:

1. The ASC must be an ASC certified to participate in the Medicare program, and its operating and recovery room space must be dedicated exclusively to the ambulatory surgery center and not a part of a hospital (although such space may be leased from a hospital if such lease meets the requirements of the safe harbor for space rental);

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

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 ASC nor any other investor nor any person acting on their behalf 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 benefits or assistance under a federal healthcare program in a non-discriminatory manner;

9. All ancillary services performed at the ASC for beneficiaries of federal healthcare programs must be directly and integrally related to primary procedures performed at the ASC and may not be billed separately;

10. No hospital-investor may include on its cost report or any claim for payment from a federal healthcare program any costs associated with the ASC;

11. The ASC 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 Anti-Kickback statute equipment rental safe harbor and such services are provided in accordance with a contract that complies with the Anti-Kickback Statute personal services and management contract safe harbor; and

12. No hospital-investor may be in a position to make or influence referrals directly or indirectly to any other investor or the ASC.

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

In addition, although we expect each physician-investor to utilize the ASC as an extension of his or her practice, we cannot assure you that all physician-investors will derive at least one-third of their medical practice income from performing Medicare-covered ASC procedures, perform one-third of their procedures at the ASC or inform their referred patients of their investment interests.  Interests in our ASC joint ventures are purchased at fair market value.  Investors who purchase at a later time generally pay more for a given percentage interest than founding investors.  The result is that while all investors are paid distributions in accordance with their ownership interests, for ASCs where there are later purchases we cannot meet the safe harbor requirement that return on investment is directly proportional to the amount of capital investment.  The OIG has on several occasions reviewed investments relating to ASCs, and in Advisory Opinion No. 07-05, raised concerns that (a) purchases of interests from physicians might yield gains on investment rather than capital infusion to the ASCs, (b) such purchases could be meant to reward or influence the selling physicians' referrals to the ASC or the hospital, and (c) such returns might not be directly proportional to the amount of capital invested. Nonetheless, we believe our fair market value purchase requirements and distribution policies comply with the Anti-kickback Statute. 

We hold ownership in one ambulatory surgery center in which a physician group that includes primary care physicians who do not use the ambulatory surgery center also holds ownership. In OIG Advisory Opinion No. 03-5 (February 6, 2003), the OIG declined to grant a favorable opinion to a proposed ambulatory surgery center structure that would have been jointly owned by a hospital and a multi-specialty group practice that was composed of a substantial number of primary care physicians who would not personally use the ambulatory surgery center.  We believe that the ownership of our ambulatory surgery center complies with the Anti-kickback Statute because we understand that the physician group that owns an interest in our ambulatory surgery 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

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practice comply with the Stark Law's acceptable methods of income distribution.  Although these provisions directly apply only to liability under the Stark Law, we believe that the same principles are relevant to an analysis under the Anti-kickback Statute.  We believe that no physician in the group practice receives an income distribution that is based directly on his or her referrals to the ASC, and we believe that the group's ownership of the ASC 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.

In OIG Advisory Opinion No. 09-09 (July 29, 2009), the OIG concluded that an arrangement involving an ASC joint venture between a hospital and physicians involving the combination of their two ASCs into a single, larger ASC presented minimal risk of fraud or abuse, despite the fact that it did not fit within any applicable anti-kickback safe harbors.   Additionally, the OIG stated that fair market value should be determined based only on the tangible assets of each ASC since the physician investors are referral sources for the ASC.  The OIG stated that a cash flow-based valuation of the business contributed by the physician investors potentially would include the value of the physician investors' referrals over the time that their ASC was in existence prior to the merger with the hospital's ASC.  The OIG went on to note that a valuation involving intangible assets would not necessarily result in a violation of the Anti-kickback Statute, but would require a review of all the facts and circumstances.  It is not clear whether the OIG is concerned about using a cash flow-based valuation in most healthcare transactions involving referral sources, or just transactions, like this one, where the parties' contributions would be valued differently for contributing the same assets if only one party's contribution is valued as a going concern based on cash flow.  Also, the OIG appears to be focused on historical cash flow rather than a projected, discounted cash flow, which is a commonly used valuation methodology.  What is clear is that for the first time, the OIG addressed valuation methodologies, which could lead to increased scrutiny of all transactions involving physicians.

Our hospitals comply as closely as possible with the safe harbor for investments in small entities.  Our hospital investments do not fit wholly within the safe harbor because more than 40% of the investment interests are held by investors who are either in a position to refer to the hospital or who provide services to the hospital and more than 40% of the hospital's gross revenues last year were derived from referrals generated by investors.  However, we believe we comply with the remaining elements of the safe harbor.

In addition to the physician ownership in our surgical facilities, other financial relationships of ours with potential referral sources could potentially be scrutinized under the Anti-kickback Statute.  We have entered into management agreements to manage the majority of our surgical facilities.  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 (the “Personal Services and Management Safe Harbor”), the Personal Services and Management Safe Harbor requires, among other things, that the amount of the aggregate compensation paid to the manager over the term of the agreement be set in advance.  Because our management fees are generally based on a percentage of revenues, our management agreements do not typically meet this requirement.  We do, however, believe that our management arrangements satisfy the other requirements of the Personal Services and Management Safe Harbor for personal services and management contracts.  The OIG has taken the position in several advisory opinions that percentage-based management agreements are not protected by a safe harbor, and consequently, may violate the Anti-kickback Statute. We have implemented formal compliance programs designed to safeguard against overbilling and believe that our management agreements comply with the requirements of the Anti-kickback Statute.  However, we cannot assure you that the OIG would find our compliance programs to be adequate or that our management agreements would be found to comply with the Anti-kickback Statute.

We also typically guarantee a surgical facility's third-party debt financing and certain 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 patient referrals and that such failure constitutes a violation of the 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 guarantees and that the failure of the physician investors to enter into similar guarantees does not create a material risk of violating the 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 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 surgical facilities, violate the Anti-kickback Statute, we, our subsidiaries, our officers, our directors and each surgical facility investor could be subject, individually, to substantial monetary liability, prison sentences and/or exclusion from participation in any healthcare program funded in whole or in part by the U.S. government, including Medicare, Medicaid, TRICARE or state healthcare programs.

Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect many of our arrangements.  Law enforcement authorities, including the OIG, the courts and Congress, are increasing their scrutiny of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to exchange remuneration for patient care referrals or opportunities.  Investigators have also demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purposes of payments between healthcare providers and potential referral sources.

Federal Physician Self-Referral Law

Congress has enacted the federal physician self-referral law, or Stark Law, that prohibits certain self-referrals for healthcare services.  As currently enacted, the Stark Law prohibits a practitioner, including a physician, dentist or podiatrist, from referring patients to an entity with which the practitioner or a member of his or her immediate family has a “financial relationship” for the provision of certain “designated health services” that are paid for in whole or in part by Medicare or Medicaid unless an exception applies.  The term “financial relationship” is broadly defined and includes most types of ownership and compensation relationships.  The Stark Law also prohibits the

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entity from seeking payment from Medicare or Medicaid for services that are rendered through a prohibited referral.  If an entity is paid for services provided through a prohibited referral, it may be required to refund the payments.  Violations of the Stark Law may also result in the imposition of damages equal to three times the amount improperly claimed and civil monetary penalties of up to $15,000 per prohibited claim and $100,000 per prohibited circumvention scheme and exclusion from participation in the Medicare and Medicaid programs.  For the purposes of the Stark Law, the term “designated health services” is defined to 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 does not, however, include surgical services that are provided in an ASC.  Furthermore, in final Stark Law regulations published by HHS on January 4, 2001, the term “designated health services” was specifically defined to not include services that are reimbursed by Medicare as part of a composite rate, such as services that are provided in an ASC.  However, if designated health services are provided by an ASC and separately billed, referrals to the ASC by a physician-investor would be prohibited by the Stark Law.  Because our facilities that are licensed as ASCs 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 surgical facilities in which the physician has a beneficial interest, our business and financial results would be materially adversely affected.

Six of our facilities are licensed as hospitals.  The Stark Law currently includes the Whole Hospital Exception, which applies to physician ownership of a hospital, provided such ownership 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, changes to the Whole Hospital Exception have been the subject of recent regulatory action and legislation.  Changes in the Healthcare Reform Acts include:

▪ a prohibition on hospitals from having any physician ownership unless the hospital already had physician ownership and a Medicare provider agreement in effect as of December 31, 2010;

▪ a limitation on the percentage of total physician ownership or investment interests in the hospital or entity whose assets include the hospital to the percentage of physician ownership or investment as of March 23, 2010;

▪ a prohibition from expanding the number of beds, operating rooms, and procedure rooms for which it is licensed after March 23, 2010, unless the hospital obtains an exception from the Secretary of the Department of Health and Human Services;

▪ a requirement that return on investment be proportionate to the investment by each investor;

▪ restrictions on preferential treatment of physician versus nonphysician investors;

▪ a requirement for written disclosures of physician ownership interests to the hospital's patients and on the hospital's website and in any advertising, along with annual reports to the government detailing such interests;

▪ a prohibition on the hospital or other investors from providing financing to physician investors;

▪ a requirement that any hospital that does not have 24/7 physician coverage inform patients of this fact and receive signed acknowledgments from the patients of the disclosure; and

▪ a prohibition on “grandfathered” status for any physician owned hospital that converted from an ambulatory surgery center to a hospital on or after March 23, 2010.

We cannot predict whether other proposed amendments to the Whole Hospital Exception will be included in any future legislation or if Congress will adopt any similar provisions that would prohibit or otherwise restrict physicians from holding ownership interests in hospitals.  The Healthcare Reform Acts could have an adverse effect on our financial condition and results of operations.

In addition to the physician ownership in our surgical facilities, we have other financial relationships with potential referral sources that potentially could be scrutinized under the Stark Law. We have entered into personal service agreements, such as medical director agreements, with physicians at our hospitals. We believe that our agreements with referral sources satisfy the requirements of the personal service arrangements exception to the Stark Law and have implemented formal compliance programs designed to safeguard against overbilling. However, we cannot assure you that the OIG or CMS would find our compliance programs to be adequate or that our agreements with referral sources would be found to comply with the Stark Law.

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 or other federal and state healthcare 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, as well as penalties under the anti-fraud provisions of HIPAA.  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

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circumstances.  For example, the U.S. 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 U.S. 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 being provided was substandard.

Over the past several years, the U.S. government has accused an increasing number of healthcare providers of violating the federal 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.  The Fraud Enforcement and Recovery Act of 2009 further expanded the scope of the False Claims Act by, among other things, creating liability for knowingly and improperly avoiding or decreasing an obligation to pay money to the federal government. The Healthcare Reform Acts also created federal False Claims Act liability for the knowing failure to report and return an overpayment within 60 days of the identification of the overpayment or the date by which a corresponding cost report is due, whichever is later. The Healthcare Reform Acts also provide that claims submitted in connection with patient referrals that result from violations of the Anti-kickback Statute constitute false claims for the purposes of the federal False Claims Act, and some courts have held that a violation of the Stark Law can result in False Claims Act liability, as well. Because our surgical 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 whistleblower lawsuits and direct enforcement activity by the government have increased significantly in recent years and have increased the risk that a healthcare company, like us, will have to defend a false claims action, pay fines or be excluded from the Medicare and Medicaid programs and other federal and state healthcare 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. Providers found liable for False Claims Act violations are subject to damages of up to three times the actual damage sustained by the government plus mandatory civil monetary penalties between $5,500 and $11,000 for each separate false claim. A determination that we have violated these laws could have a material adverse effect on us.

Privacy and Security Requirements

We are subject to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was enacted as part of the American Recovery and Reinvestment Act of 2009. The HITECH Act strengthened the requirements and significantly increased the penalties for violations of the HIPAA privacy and security regulations. On January 25, 2013, HHS issued the HIPAA Omnibus Rule. The HIPAA Omnibus Rule will be effective on March 26, 2013, and covered entities and business associates must comply with the HIPAA Omnibus Rule within 180 days, or by September 23, 2013. Prior to the HIPAA Omnibus Rule, the HITECH Act required us to notify patients of any unauthorized access, acquisition, or disclosure of their unsecured protected health information that poses significant risk of financial, reputational or other harm to a patient. The HIPAA Omnibus Rule eliminates this harm threshold standard and instead we will be required to notify patients of any unauthorized access, acquisition, or disclosure of their unsecured protected health information in all situations except those in which we can demonstrate that there is a low probability that the protected health information has been compromised. We now have the burden of demonstrating through a risk assessment that a breach of protected health information has not occurred. This new more objective standard may lead to an increased number of occurrences that require breach notifications. In addition, the HIPAA Omnibus Rule also modified the following aspects of the HIPAA privacy and security regulations:

• makes our facilities' business associates directly liable for compliance with certain of the privacy and security rules' requirements;

• makes our facilities liable for violations by their business associates if HHS determines an agency relationship exists between the facility and the business associate under federal agency law;

• adds limitations on the use and disclosure of health information for marketing and fundraising purposes, and prohibits the sale of health information without individual authorization;

• expands our patients' rights to receive electronic copies of their health information and to restrict disclosures to a health plan concerning treatment for which our patient has paid out of pocket in full;

• requires modifications to, and redistribution of, our facilities' notice of privacy practices;

• adopts the additional HITECH Act provisions not previously adopted addressing enforcement of noncompliance with HIPAA due to willful neglect;

• incorporates the increased and tiered civil money penalty structure provided by the HITECH Act;

• revises the HIPAA privacy rule to increase privacy protections for genetic information as required by the Genetic Information Nondiscrimination Act of 2008.

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We cannot predict the financial impact to our facilities in implementing these new requirements under the HIPAA Omnibus Rule.

The HIPAA privacy standards apply to individually identifiable information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally. These standards impose extensive administrative requirements on us. These standards require our compliance with rules governing the use and disclosure of this health information. They create rights for patients in their health information, such as the right to amend their health information, and they require us to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on our behalf.

The HIPAA security standards require us to establish and maintain 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. Although the security standards do not reference or advocate a specific technology, and covered healthcare providers, plans and clearinghouses have the flexibility to choose their own technical solutions, the security standards have required us to implement significant new systems, business procedures and training programs. We believe that we are in material compliance with the privacy and security requirements of HIPAA.

Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties. The HITECH Act strengthened the requirements of the HIPAA privacy and security regulations and significantly increased the penalties for violations by introducing a tiered penalty system, with penalties of up to $50,000 per violation with a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement. Under the HITECH Act, HHS is required to conduct periodic compliance audits of covered entities and their business associates. The HITECH Act and the HIPAA Omnibus Rule also extend the application of certain provisions of the security and privacy regulations to business associates and subjects business associates to civil and criminal penalties for violation of the regulations.

The HITECH Act authorizes State Attorneys General to bring civil actions seeking either an injunction or damages in response to violations of HIPAA privacy and security regulations or the new data breach law that affects the privacy of their state residents. We expect vigorous enforcement of the HITECH Act's requirements by HHS and State Attorneys General. Additionally, HHS conducted a pilot audit program that concluded December 2012 in the first phase of HHS' implementation of the HITECH Act's requirements of periodic audits of covered entities and business associates to ensure their compliance with the HIPAA privacy and security regulations. We cannot predict whether our surgical facilities will be able to comply with the final rules and the financial impact to our surgical facilities in implementing the requirements under the final rules when they take effect, or whether our hospitals will be selected for an audit, or the results of such an audit.

Our facilities also remain subject to any state laws that relate to privacy or the reporting of data breaches that are more restrictive than the regulations issued under HIPAA and the requirements of the HITECH Act. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving certain personal information, such as social security numbers, dates of birth and credit card information.

Adoption of Electronic Health Records

The HITECH Act also includes provisions designed to increase the use of Electronic Health Records by both physicians and hospitals. Beginning with FFY 2011 and extending through FFY 2016, eligible hospitals may receive reimbursement incentives based upon successfully demonstrating “meaningful use” of its certified EHR technology. Beginning in FFY 2015, those hospitals that do not successfully demonstrate meaningful use of EHR technology are subject to reductions in reimbursements. On July 13, 2010, HHS released final meaningful use regulations. EHR meaningful use objectives and measures that hospitals and physicians must meet in order to qualify for incentive payments will be implemented in three stages. Stage 1 has been in effect since 2011 and on August 23, 2012, HHS released final requirements for Stage 2, which will take effect starting in 2014. We strive to comply with the EHR meaningful use requirements of the HITECH Act so as to qualify for incentive payments. Continued implementation of EHR and compliance with the HITECH Act will result in significant costs. During the year ended December 31, 2012, we satisfied the meaningful use provisions and recognized an aggregate of $1.1 million of EHR incentives at certain of our hospitals. We incurred costs including hardware, software and implementation expense of approximately $5.0 million. We do not currently know the extent of additional cost that will be associated with implementation of additional systems or the amount of future incentives that we will receive.

HIPAA Administrative Simplification Requirements

The HIPAA transaction regulations were issued to encourage electronic commerce in the healthcare industry.  These regulations include standards that healthcare providers must follow when electronically transmitting certain healthcare transactions, such as healthcare claims.  We believe that we are in compliance with these regulations.

State Regulation

Many of the states in which our surgical facilities operate have adopted statutes and/or regulations that prohibit the payment of kickbacks or any type of remuneration in exchange for patient referrals and that prohibit healthcare providers from, in certain circumstances, referring a patient to a healthcare facility in which the provider has an ownership or investment interest.  While these statutes generally mirror the federal Anti-Kickback Statute and Stark Law, they vary widely in their scope and application.  Some are specifically limited to healthcare services that are paid for in whole or in part by the Medicaid program; others apply to all healthcare services regardless of payor; and others

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apply only to state-defined designated services, which may differ from the designated health services under the Stark Law.  In addition, many states have adopted statutes that mirror the False Claims Act and that prohibit the filing of a false or fraudulent claim with a state governmental agency.  We intend to comply with all applicable state healthcare laws, rules and regulations.  However, these laws, rules and regulations have typically been the subject of limited judicial and regulatory interpretation.  As a result, we cannot assure you that our surgical facilities will not be investigated or scrutinized by the governmental authorities empowered to do so or, if challenged, that their activities would be found to be lawful.  A determination of non-compliance with the applicable state healthcare laws, rules, and regulations could subject our surgical facilities to civil and criminal penalties and could have a material adverse effect on our operations. 

Many states in which our surgical facilities are located or may be located in the future, do not permit business corporations to practice medicine, exercise control over or employ physicians, or engage in various business practices, such as fee-splitting with physicians (i.e. the sharing in a percentage of professional fees).  The existence, interpretation and enforcement of these laws vary significantly from state to state.  A determination of non-compliance with these laws could result in fines and or require us to restructure some of our existing relationships with our physicians.  We are also subject to various state insurance statutes and regulations that prohibit us from submitting inaccurate, incorrect or misleading claims.  Many state insurance laws and regulations are broadly worded and could be implicated, for example, if our surgical facilities were to waive an out-of-network co-payment or other patient responsibility amounts without fully disclosing the waiver on the claim submitted to the payor.  While some of our surgical facilities waive the out-of-network portion of patient co-payment amounts when providing services to patients whose health insurance is covered by a payor with which the surgical facilities are not contracted, our surgical facilities fully disclose waivers in the claims submitted to the payors.  We believe that our surgical facilities are in compliance with all applicable state insurance laws and regulations regarding the submission of claims.  We cannot assure you, however, that none of our surgical facilities' 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 violative practice, which could have an adverse effect on our financial position and results of operations, and we could be subject to fines and criminal penalties.

Recovery Audit Contractors and Medicaid Integrity Contractors

CMS has expanded the pilot recovery audit contractor (“RAC”) program to a permanent nationwide program. RACs are private contractors contracting with CMS to identify overpayments and underpayments for services through post-payment reviews of claims submitted by Medicare and Medicaid providers. The Healthcare Reform Acts expands the RAC program's scope to include managed Medicare and to include Medicaid claims by requiring all states to establish programs to contract with RACs. All states were required to implement Medicaid RAC programs by January 1, 2012. In addition, CMS employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. The Healthcare Reform Acts increases federal funding for the MIC program for federal fiscal year 2011 and later years. In addition to RACs and MICs, the state Medicaid agencies and other contractors have increased their review activities. MICs are assigned to five geographic regions and have commenced audits in states assigned to those regions. Our facilities continue to receive letters from RAC auditors requesting repayment of alleged overpayments for services and incur expenses associated with responding to and appealing these RAC requests, as well as the costs of repaying any overpayments. Although the repayments requested to date as a result of RAC audits have not been material to the Company, we are unable to quantify the financial impact of the RAC audits on our facilities given the pending appeals and uncertainty about the extent of future RAC audits.

Regulations Affecting Our New York Operations

We own an interest in a limited liability company which provides administrative services to a surgery center located in New York.  Laws in the State of New York require that corporations have natural persons as stockholders to be approved by the New York Department of Health as a licensed healthcare facility.  Accordingly, we are not able to own interests in a limited partnership or limited liability company that owns an interest in a healthcare facility located in New York.  Laws in the State of New York also prohibit the delegation of certain management functions by a licensed healthcare facility, including but not limited to the authority to appoint and discharge senior management, independently control the books and records of the facility, dispose of assets of the facility outside of day-to-day operations and adopt policies affecting the delivery of healthcare services.  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.  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.

Emergency Medical Treatment and Active Labor Act

Our hospitals are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital's emergency department for treatment and, if the patient is suffering from an emergency medical condition, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions or transfer exists regardless of a patient's ability to pay for treatment. Off-campus facilities such as surgery centers that lack emergency departments or otherwise do not treat emergency medical conditions generally are not subject to EMTALA. They must, however, have policies in place that explain how the location should proceed in an emergency situation, such as transferring the patient to the closest hospital with an emergency department. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient's ability to pay, including civil monetary penalties and exclusion from participation in the Medicare program. In addition, an injured patient, the patient's family or a medical facility that suffers a financial loss as a direct result of another hospital's violation of the law can bring a civil suit against that other hospital. CMS has actively enforced EMTALA and has indicated that it will continue to do so in the future. Although we believe

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that our hospitals comply with EMTALA, we cannot predict whether CMS will implement new requirements in the future and, if so, whether our hospitals will comply with any new requirements.

Regulatory Compliance Program

It is our policy to conduct our business with integrity and in compliance with the law. We have in place and continue to enhance a company-wide compliance program that focuses on all areas of regulatory compliance including billing, reimbursement, cost reporting practices and contractual arrangements with referral sources.

This regulatory compliance program is intended to help ensure that high standards of conduct are maintained in the operation of our business and that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, every employee and certain contractors involved in patient care, and coding and billing, receive initial and periodic legal compliance and ethics training. In addition, we regularly monitor our ongoing compliance efforts and develop and implement policies and procedures designed to foster compliance with the law. The program also includes a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors, designated compliance officers in our facilities, our compliance hotline or directly to our corporate compliance office. We believe our compliance program is consistent with standard industry practices. However, we cannot provide any assurances that our compliance program will detect all violations of law or protect against qui tam suits or government enforcement actions.

Available Information

Our website is www.symbion.com. We make available free of charge on this website under “Investors — SEC Filings” links to 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 1A. 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.  If any of the following risks actually occurred, our business, financial condition and operating results could suffer.

Risks Related to Our Business and Industry

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our outstanding indebtedness.

As of December 31, 2012, we had (a) total indebtedness of approximately $574.1 million and (b) $49.5 million of undrawn availability under our $50.0 million senior secured super-priority revolving credit facility (the "Credit Facility"). In addition, subject to the restrictions in our Credit Facility and the indentures governing our outstanding notes, we may incur significant additional indebtedness, which may be secured, from time to time.

The level of our indebtedness could have important consequences, including:

• making it more difficult for us to make payments on our outstanding debt obligations;

• limiting cash flow available for general corporate purposes, including capital expenditures and acquisitions, because a substantial portion of our cash flow from operations must be dedicated to servicing our debt;

• limiting our ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions;

• limiting our flexibility in reacting to competitive and other changes in our industry and economic conditions generally; and

• exposing us to risks inherent in interest rate fluctuations because some of our borrowings will be at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

In addition, the indenture governing the 11.00%/11.75% senior PIK toggle notes due 2015 (the "Toggle Notes") includes a mandatory redemption provision.  Under the mandatory redemption provisions of the Toggle Notes, $21.2 million of principal balance outstanding is due and payable on August 23, 2013.  See “Management's Discussion and Analysis of Financial Condition and Results from Operations - Liquidity and Capital Resources.”

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

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Restrictive covenants in our debt instruments may adversely affect us.

The indentures governing our Toggle Notes, our $341.0 million aggregate outstanding principal amount of 8.00% senior secured notes due 2016 (the "Senior Secured Notes"), and our 8.00% senior PIK exchangeable notes due 2017 (the "PIK Exchangeable Notes") contain various covenants that limit, among other things, our ability and the ability of our restricted subsidiaries to:

• incur additional indebtedness;

• make certain distributions, investments and other restricted payments;

• dispose of our assets;

• grant liens on our assets;

• engage in transactions with affiliates;

• merge, consolidate or transfer substantially all of our assets; and

• make payments to us (in the case of our restricted subsidiaries).

In addition, our Credit Facility contains other and more restrictive covenants, including covenants requiring us to maintain specified financial ratios and to satisfy other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will continue to meet those tests. A breach of any of these covenants could result in a default under our Credit Facility. Upon the occurrence of an event of default under our Credit Facility, the lenders could elect to declare all amounts outstanding under our Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets, other than assets of our non-guarantor subsidiaries, as security under our Credit Facility. If the lenders under our Credit Facility accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our Credit Facility and our other indebtedness.

We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated revenue growth and operating improvements will be realized or that future borrowings will be available to us under our Credit Facility in amounts sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. If we are unable to meet our debt service obligations or fund our other liquidity needs, we could attempt to restructure or refinance our indebtedness or seek additional equity capital. We cannot assure you that we will be able to accomplish those actions on satisfactory terms, if at all.

The current state of the economy and future economic conditions may adversely impact our business.

The U.S. economy continues to experience difficult conditions.  Burdened by economic constraints, patients have delayed or canceled non-emergency surgical procedures.  It is difficult to predict the degree to which our business will continue to be impacted by such conditions or the course of the economy in the future.

We depend on payments from third-party payors, including government healthcare 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 surgical facilities.  The amounts that our surgical facilities 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, Congressional changes and refinements to the Medicare ASC payment system and CMS refinements to Medicare's reimbursement policies.

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 (including state workers' compensation programs) represented about 62% and 66% of our patient service revenues for the years ended December 31, 2012 and 2011, respectively.  Most of these payments came from third-party payors with which our facilities have contracts.  Managed care companies such as health maintenance organizations, or HMOs, preferred provider organizations, 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 favorable contracts and to 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. 

Some of our payments from third-party payors come from third-party payors with which our surgical facilities do not have a contract.  In those cases, commonly known as “out-of-network” services, we generally charge the patients the same co-payment or other patient responsibility amounts that we would have charged had our center had a contract with the payor.  We also submit a claim for the services to the payor along with full disclosure that our surgical facility has charged the patient an in-network patient responsibility amount. 

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Historically, those third-party payors who do not have contracts with our surgical facilities typically have paid our claims at higher than comparable contracted rates.  However, there is a growing trend for third-party payors to adopt out-of-network fee schedules that are more comparable to our contracted rates or to take other steps to discourage their enrollees from seeking treatment at out-of-network surgical facilities.  In these cases, we seek to enter into contracts with the payors.  In certain situations, we have seen an increase in the volume of cases in those instances where we transition from out-of-network to in-network billing, although we may experience an overall decrease in revenues to the surgical facility.  We can provide no assurance that we will see a sufficient increase in volume of cases to compensate for the decrease in per case revenues where we transition from out-of-network to in-network billing.

Payments from workers' compensation payors represented approximately 11% and 10% of our patient service revenues for the years ended December 31, 2011 and 2012, respectively. Several states have recently considered or implemented workers' compensation provider fee schedules.  In some cases, the fee schedule rates contain lower rates than the rates our surgical facilities 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 financial condition and results of operations.

Our growth strategy depends in part on our ability to acquire and develop additional surgical facilities on favorable terms.  If we are unable to do so, our future growth could be limited and our operating results could be adversely affected.

Our strategy is to increase our revenues and earnings by continuing to focus on existing surgical facilities and continuing to acquire and develop additional surgical facilities.  Between January 1999 and December 31, 2012, we acquired 56 surgical facilities and developed 24 surgical facilities, including 29 surgical facilities that we subsequently divested.  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 materially adverse effect on our financial condition and results of operations, including incurring substantial debt.  Sufficient financing may not be available to us on satisfactory terms, if at all.

We may encounter numerous business risks in acquiring and developing additional surgical facilities, and may have difficulty operating and integrating those surgical facilities.

If we acquire or develop additional surgical facilities, we may be unable to successfully operate the surgical facilities, 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 surgical facilities.  Following the acquisition of a surgical facility, key physicians may cease to use the facility or we may be unable to retain key management personnel.  If we acquire the assets of a surgical facility rather than ownership in the entity that owns the surgical facility, we may be unable to assume the surgical facility's existing managed care contracts and may have to renegotiate, or risk losing, one or more of the surgical facility's managed care contracts.  We may also be unable to collect the accounts receivable of an acquired surgical facility.  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 surgical facilities with unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations.  Although we maintain professional and general liability insurance, we do not maintain insurance specifically covering any unknown or contingent liabilities that may have occurred prior to the acquisition of companies and surgical facilities.  In some cases, our right to indemnification for these liabilities may be subject to negotiated limits.

In developing new surgical facilities, we may be unable to attract physicians to use our facilities or contract with third-party payors.  In addition, our newly developed surgical facilities 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 surgical facilities.  Integrating a new surgical facility 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 facility, our business could suffer.

Efforts to regulate the construction, acquisition or expansion of healthcare facilities could prevent us from acquiring additional surgical 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 healthcare facilities or expansion of the services the facilities offer.  In giving approval, these states consider the need for additional or expanded healthcare facilities or services, as well as the financial resources and operational experience of the potential new owners of existing healthcare facilities.  In many of the 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.  The remaining 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 surgical facilities or services in the future.  In addition, at the time we acquire a surgical 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 surgical facilities, expand healthcare services we provide at these facilities or replace or expand acquired facilities.

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If we fail to maintain good relationships with the physicians who use our surgical 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 surgical facilities and the strength of our relationships with these physicians.  These physicians are not employees of our surgical facilities and are not contractually required to use our facilities.  We generally do not enter into contracts with physicians who use our surgical facilities, other than partnership and operating agreements with physicians who own interests in our surgical facilities, provider agreements with anesthesiology groups that provide anesthesiology services in our surgical facilities, medical director agreements and pain clinic agreements.  Physicians who use our surgical 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 surgical facilities.  In recent years, pain management and gastrointestinal procedures have been performed increasingly in an office-based setting.  Although physicians who own interests in our surgical facilities are subject to agreements restricting ownership of competing facilities, these agreements may not restrict procedures performed in a physician office or in other unrelated facilities.  Also, these agreements restricting ownership of competing facilities are difficult to enforce, and we may be unsuccessful in preventing physicians who own interests in our surgical facilities from acquiring interests in competing facilities.

In addition, the physicians who use our surgical facilities may choose not to accept patients who pay for services through certain third-party payors, which could reduce our revenues.  From time to time, we may have disputes with physicians who use our surgical facilities and/or own interests in our surgical facilities 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 such physicians or groups reduce their use of our surgical 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 surgical facilities could damage our reputation, subject us to liability and significantly reduce our revenues.

We cannot predict the effect that healthcare reform and other changes in government programs may have on our business, financial condition or results of operations.

The Healthcare Reform Acts dramatically alter the United States healthcare system and are intended to decrease the number of uninsured Americans and reduce overall healthcare costs. The Healthcare Reform Acts attempt to achieve these goals by, among other things, requiring most Americans to obtain health insurance, expanding Medicare and Medicaid eligibility, reducing Medicare and Medicaid payments, expanding the Medicare program's use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, and bundling payments to hospitals and other providers. The Healthcare Reform Acts also contain a number of measures that are intended to reduce fraud and abuse in the Medicare and Medicaid programs, such as requiring the use of recovery audit contractors in the Medicaid program expanding the scope of the federal False Claims Act and generally prohibiting physician-owned hospitals from adding new physician owners or increasing the number of beds and operating rooms for which they are licensed. The Healthcare Reform Acts provide for additional enforcement tools, cooperation between agencies, and funding for enforcement. Since their enactment, the Healthcare Reform Acts have been subject to a number of challenges to its constitutionality; however, on June 28, 2012, the United States Supreme Court upheld most of the Healthcare Reform Acts, including the “individual mandate” provision, which generally requires all individuals to purchase healthcare insurance or pay a penalty. The only provision of the Healthcare Reform Acts that the Court struck down as unconstitutional was the provision that would have allowed the federal government to revoke all federal Medicaid funding to any state that did not expand its Medicaid program. In response to the ruling, a number of states have already indicated that they will not expand their Medicaid programs, which would result in the Healthcare Reform Acts not providing coverage to some low-income persons in those states. In addition, several bills have been and will likely continue to be introduced in Congress to repeal or amend all or significant provisions of the Healthcare Reform Acts. It is difficult to predict the impact the Healthcare Reform Acts will have on our operations given the delay in implementing regulations and possible amendment or repeal of elements of the Healthcare Reform Acts. However, depending on how the Healthcare Reform Acts are ultimately interpreted, amended and implemented, they could have an adverse effect on our business, financial condition and results of operations.

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.

HIPAA mandates the adoption of privacy, security and integrity standards related to patient information.  HIPAA also standardizes the method for identifying providers, employers, health plans and patients.  We believe that we are in compliance with the HIPAA regulations.  However, if we fail to comply with the requirements of HIPAA, we could be subject to significant penalties under a tiered penalty system with penalties of up to $50,000 per violation with a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement.

A cyber security incident could cause a violation of HIPAA, breach of member privacy, or other negative impacts.

A cyber-attack that bypasses our information technology (“IT”) security systems causing an IT security breach, loss of protected health information or other data subject to privacy laws, loss of proprietary business information, or a material disruption of our IT business systems, could have a material adverse impact on our business and result of operations. In addition, our future results of operations, as well as our reputation, could be adversely impacted by theft, destruction, loss, or misappropriation of patient health information, other confidential data or proprietary business information.

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If we fail to comply with laws and regulations relating to the operation of our surgical 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 surgical facilities meet various licensing, certification and other requirements.

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 healthcare 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 revenues will decline if federal or state programs reduce our Medicare or Medicaid payments or if managed care companies reduce reimbursement amounts. In addition, the financial condition of payors and healthcare cost containment initiatives may limit our revenues and profitability.

During 2012, we derived 31% of our revenues from government payors, including 30% from the Medicare and Medicaid programs. During 2011, we derived 26% of our revenues from government payors, including 25% from the Medicare and Medicaid programs. The Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the timing of payments to our facilities. Additionally, the BCA of 2011 requires $1.2 trillion in automatic across-the-board spending reductions for FFY 2013 through FFY 2021, split evenly between domestic and defense spending. While certain programs (including the Medicaid program) are protected from these automatic spending reductions, Medicare reimbursement rates may be reduced by up to 2%. The BCA's automatic spending reductions were set to begin on January 2, 2013. However, the enactment of the ATRA postponed the implementation of the automatic spending reductions required by the BCA until March 1, 2013. On March 1, 2013, President Barack Obama signed an order implementing the automatic spending reductions required by the BCA. We cannot predict whether these automatic spending reductions will be rescinded by future legislative action. If the BCA's automatic spending reductions become permanent, they could adversely affect our business, results of operations and/or financial condition.

We are unable to predict the effect of future government healthcare funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited or if we, or one or more of our surgical facilities, are excluded from participation in the Medicare, Medicaid or other government-sponsored healthcare programs, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.

During the past several years, healthcare payors, such as federal and state governments, insurance companies and employers, have undertaken initiatives to revise payment methodologies and monitor healthcare costs. As part of their efforts to contain healthcare costs, payors increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk relating to paying for care provided, often in exchange for exclusive or preferred participation in their benefit plans. We expect efforts to impose greater discounts and more stringent cost controls by government and other payors to continue, thereby reducing the payments we receive for our services. In addition, these payors have instituted policies and procedures to substantially reduce or limit the use of inpatient services.

The amount of our provision for doubtful accounts is based on our assessments of historical collection trends, business and economic conditions, trends in federal and state governmental and private employer health coverage and other collection indicators. A continuation in trends that results in increasing the proportion of accounts receivable being comprised of uninsured accounts and deterioration in the collectability of these accounts could adversely affect our collections of accounts receivable, results of operations and cash flows. As enacted, the Healthcare Reform Acts seek to decrease, over time, the number of uninsured individuals. Among other things, the Healthcare Reform Acts will, beginning in 2014, expand Medicaid and incentivize employers to offer, and require individuals to carry, health insurance or be subject to penalties. However, it is difficult to predict the full impact of the Healthcare Reform Acts due to the Supreme Court's 2012 decision, their complexity, lack of implementing regulations and interpretive guidance, gradual and potentially delayed implementation, uncertainty as to how many states will elect to implement the Medicaid expansion and when that expansion will occur, and possible repeal and/or amendment, as well as our inability to foresee how individuals and businesses will respond to the choices afforded them by the Healthcare Reform Acts.

Our surgical 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.

The Anti-kickback Statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, furnishing, purchasing or arranging for or recommending or inducing the ordering, purchasing or leasing of items or services payable by Medicare, Medicaid, or any other federally funded healthcare program.  The 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 Anti-

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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 remuneration involved or the amount claimed and exclusion from participation in the Medicare and Medicaid programs.  The exclusion, if applied to our surgical facilities, could result in significant reductions in our revenues and could have a material adverse effect on our financial condition and results of operations.  In addition, many of the states in which we operate have also adopted laws, similar to the 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 surgical facilities under anti-kickback statutes during the time we have owned or operated the facilities.  Management is not aware of any such actions prior to our acquisition or management of these surgical facilities.

Regulations implement various “safe harbors” to the Anti-kickback Statute.  Business arrangements that meet the requirements of the safe harbors are deemed to be in compliance with the Anti-kickback Statute.  Business arrangements that do not meet the safe harbor requirements do not necessarily violate the Anti-kickback Statute, but may be subject to scrutiny by the federal government to determine compliance.  However, the structure of the partnerships and limited liability companies operating our surgical facilities, as well as our business arrangement involving a physician network, do not satisfy all of the requirements of the safe harbor and, therefore, are not immune from government review or prosecution.

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.  The list of “designated health services” under the Stark Law does not include ambulatory surgery services, but it does include services such as clinical laboratory services, and certain imaging services that may be provided by an ASC.  Under the current Stark Law and related regulations, services provided at an ASC are not covered by the statute, even if those services include imaging, laboratory services or other Stark designated health services, provided that (i) the ASC does not bill for these services separately, or (ii) if the center is permitted to bill separately for these services, they are specifically exempted from Stark Law prohibitions.  These are generally radiology and other imaging services integral to performance of surgical procedures that meet certain requirements and certain outpatient prescription drugs.  Services provided at our facilities licensed as hospitals are covered by the Stark Law, but referrals for such services are exempt from the Stark Law under its “whole hospital exception.”  Certain services provided by our managed physician network are covered by the Stark Law, but referrals for those services are exempt from the Stark Law under its “in-office ancillary services exception,” among others.

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 treble damages for amounts improperly claimed, civil monetary penalties of up to $15,000 per prohibited service billed, up to $100,000 per prohibited circumvention scheme and exclusion from participation in the Medicare and Medicaid and other federal and state healthcare programs.  Exclusion of our ASCs or hospitals from these programs through future judicial or agency interpretation of existing laws or additional legislative restrictions on physician ownership or investments in healthcare entities could result in a significant loss of reimbursement revenues.  We cannot provide assurances that CMS will not undertake other rulemaking to address additional revisions to the Stark Law regulations.  If future rules modify the provisions of the Stark Law regulations that are applicable to our business, our revenues and profitability could be materially adversely affected and could require us to modify our relationships with our physician and healthcare system partners.

Healthcare reform has limited our ability to own and operate our hospitals.

Six of our owned surgical facilities are licensed as hospitals.  As discussed herein, the Stark Law currently 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 known as the Whole Hospital Exception.  Physician investment in our facilities licensed as hospitals currently meets this requirement. The Whole Hospital Exception was addressed in the Healthcare Reform Acts, which provide, among other things: (i) a prohibition on hospitals from having any physician ownership unless the hospital already had physician ownership as of March 23, 2010 and a Medicare provider agreement in effect on December 31, 2010; (ii) a limitation on the percentage of the total value of the physician ownership in the hospital to such percentage as of March 23, 2010; (iii) a requirement for written disclosures of physician ownership interests, along with an annual report to the government detailing such ownership; and (iv) severe restrictions on the ability of a hospital subject to the whole hospital exception to add operating rooms, procedure rooms and beds.  While our hospitals were grandfathered at the dates of enactment of the Healthcare Reform Acts, they are subject to the above restrictions, which could have an adverse effect on our financial condition and results of operations.   If future legislation prohibiting physician referrals to hospitals in which the physicians own an interest were enacted by the U.S. Congress, our financial condition and results of operations could be materially adversely affected.

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 healthcare 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.

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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 and other federal and state healthcare 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, as well as penalties under the anti-fraud provisions of HIPAA.  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. The Fraud Enforcement and Recovery Act of 2009 further expanded the scope of the False Claims Act to create liability for knowingly and improperly avoiding or decreasing an obligation to pay money to the federal government and the Healthcare Reform Acts created federal False Claims Act liability for the knowing failure to report and return an overpayment within 60 days of the identification of the overpayment or the date by which a corresponding cost report is due, whichever is later.

We are also subject to various state insurance statutes and regulations that prohibit us from submitting inaccurate, incorrect or misleading claims.  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 our financial condition or results of operations.

We are subject to increasingly stringent governmental regulation, and may be subjected to allegations that we have failed to comply with governmental regulations which could result in sanctions and even greater scrutiny that reduce our revenues and profitability.

All participants in the healthcare industry are required to comply with many laws and regulations at the federal, state and local government levels. These laws and regulations require that our facilities meet various requirements, including those relating to our relationships with physicians and other referral sources, the adequacy and quality of medical care, equipment, personnel, operating policies and procedures, billing and cost reports, payment for services and supplies, maintenance of adequate records, privacy, compliance with building codes and environmental protection, among other matters. Many of the laws and regulations applicable to the healthcare are complex, and, in public statements, governmental authorities have taken positions on issues for which little official interpretation was previously available. Some of these positions appear to be inconsistent with common practices within the industry but have not previously been challenged. Moreover, some government investigations that have in the past been conducted under the civil provisions of federal law are now being conducted as criminal investigations under the Medicare fraud and abuse laws.

The healthcare industry has seen a number of ongoing investigations related to patient referrals, physician recruiting practices, cost reporting and billing practices, laboratory and home healthcare services, physician ownership of hospitals and other healthcare providers, and joint ventures involving hospitals and physicians. The Healthcare Reform Acts provide for additional enforcement tools, cooperation between agencies, and funding for enforcement. Federal and state government agencies have announced heightened and coordinated civil and criminal enforcement efforts. In addition, the OIG (which is responsible for investigating fraud and abuse activities in government programs) and the U.S. Department of Justice periodically establish targeted enforcement initiatives that focus on specific billing practices or other areas that are highly susceptible to fraud and abuse. The OIG reported expected savings and recoveries for federal healthcare programs of more than $15.4 billion for FFY 2012 as a result of its enforcement activities.

Hospitals continue to be one of the primary focal areas of the OIG and other governmental fraud and abuse programs. In January 2005, the OIG issued Supplemental Compliance Program Guidance for Hospitals that focuses on hospital compliance risk areas. Some of the risk areas highlighted by the OIG include correct outpatient procedure coding, revising admission and discharge policies to reflect current CMS rules, submitting appropriate claims for supplemental payments such as pass-through costs and outlier payments and a general discussion of the fraud and abuse risks related to financial relationships with referral sources. Each federal fiscal year, the OIG also publishes a General Work Plan that provides a brief description of the activities that the OIG plans to initiate or continue with respect to the programs and operations of HHS and details the areas that the OIG believes are prone to fraud and abuse. In addition, the claims review strategies used by Recovery Audit Contractors, or RACs, generally include a review of high dollar claims, including inpatient hospital claims. As a result, during the three year RAC demonstration program, a large majority of the total amounts recovered by RACs came from hospitals.

The laws and regulations with which we must comply are complex and subject to change. In the future, different interpretations or enforcement of these laws and regulations could subject our practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate our hospitals and our ability to participate in the Medicare, Medicaid and other federal and state healthcare programs.

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 government-sponsored healthcare 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 surgical facilities, equipment, personnel, services, pricing,

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capital expenditure programs and operating expenses, which could have a material adverse effect on our financial condition and results of operations.

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 surgical facilities.  If any of our business arrangements with physician investors were deemed to violate the Anti-kickback Statute, the Stark Law or similar laws, or if new federal or state laws were enacted rendering these arrangements illegal, our financial condition and results of operations would be materially adversely affected.

We are subject to increasing scrutiny and risk of false claims allegations by governmental authorities and under the qui tam, or whistleblower, provisions of the False Claims Act that we have failed to comply with governmental regulations which could result in significant penalties and a reduction in our revenues and profitability.

ASCs and hospitals are facing increased scrutiny under the qui tam, or whistleblower, provisions of the False Claims Act as well as by government authorities. Under 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 whistleblower lawsuits and direct enforcement activity by the government have increased significantly in recent years and have increased the risk that a healthcare company, like us, will have to defend a false claims action, pay fines or be excluded from the Medicare and Medicaid programs and other federal and state healthcare programs as a result of an investigation resulting from a whistleblower case.

Historically there has been relatively little enforcement focus on the typical physician-ownership model used by many ASCs, and unlike hospitals, there have been relatively few qui tam lawsuits involving ASCs. Recently, however, a relator filed a qui tam lawsuit against an ASC companyalleging that several aspects of the ASC company's ownership and operations constituted federal anti-kickback violations and, as a result, the ASC company's Medicare reimbursement claims were false claims. Although the federal government has declined to intervene in the case at this time, and the relator's allegations appear to have little merit, this case may indicate an increased effort on the part of qui tam relators to target ASCs.

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 qui tam relators or governmental authorities. Providers found liable for False Claims Act violations are subject to damages of up to three times the actual damage sustained by the government plus mandatory civil monetary penalties between $5,500 and $11,000 for each separate false claim. A determination that we have violated these laws could have a material adverse effect on us.

If laws governing the corporate practice of medicine or fee-splitting 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 (i.e., sharing in a percentage of professional fees).  The interpretation and enforcement of these laws vary significantly from state to state.  We provide management services to a physician network.  If our arrangements with this network 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.

The loss of certain physicians can have a disproportionate impact on certain of our facilities.

Generally, the top referring physicians within each of our facilities represent a large share of our revenues and admissions. The loss of one or more of these physicians, even if temporary, could cause a material reduction in our revenues, which could take significant time to replace given the difficulty and cost associated with recruiting and retaining physicians.

We make significant loans to, and are generally liable for debts and other obligations of, the partnerships and limited liability companies that own and operate some of our surgical facilities.

We own and operate our surgical facilities through 17 limited partnerships and 34 limited liability companies.  Local physicians, physician groups and healthcare systems also own an interest in all but one 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.  For many of our surgical facilities, indebtedness at the partnership level is funded through intercompany loans that we provide.  Through many of these loans, which totaled approximately $44.9 million as of December 31, 2012, we have a security interest in the partnership's or limited liability company's assets.  However, our financial condition and results of operations would be materially adversely affected if our surgical facilities are unable to repay these intercompany loans.

Our Credit Facility and the indentures governing our outstanding notes allow us to borrow funds that we can lend to the partnerships and limited liability companies in which we own an interest.  Although most of our intercompany loans are secured by the assets of the partnership or limited liability company, the physicians and physician groups that own an interest in these partnerships and limited liability companies generally do not guarantee a pro rata amount of this debt or the other obligations of these partnerships and limited liability companies.

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We also guarantee our pro-rata share of the third-party debts and other obligations of many of the non-consolidated partnerships and limited liability companies in which we own an interest.  As of December 31, 2012, we had approximately $181,000 of off-balance sheet guarantees of non-consolidated third-party debt in connection with these surgical facilities. In most instances, the physicians and/or physician groups have also guaranteed their pro-rata share of the indebtedness to secure the financing. 

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 an ASC located in New York.  Laws in the State of New York require that corporations have natural persons as stockholders to be approved by the New York Department of Health as a licensed healthcare facility.  Accordingly, we are not able to own interests in a limited partnership or limited liability company that owns an interest in a healthcare facility located in New York.  Laws in the State of New York also prohibit the delegation of certain management functions by a licensed healthcare 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.  Although we believe that our operations and relationships in New York are in compliance with applicable 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 of our physician partners or renegotiate some of our partnership and operating agreements with our physician partners and management agreements with surgical facilities.

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 of the physician investors in most of the partnerships or limited liability companies that own and operate our surgical facilities.  The purchase price that we would be required to pay for the ownership is typically based on either a multiple of the surgical facility's EBITDA, as defined in our partnership and operating agreements with these surgical facilities, or the fair market value of the ownership as determined by a third-party appraisal.  The physician investors in some of our surgical facilities 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 surgical facilities 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 surgical facilities by physician investors;

• create a substantial likelihood that cash distributions to physician investors from the partnerships or limited liability companies through which we operate our surgical facilities would be illegal;

• make illegal the ownership by the physician investors of interests in the partnerships or limited liability companies through which we own and operate our surgical facilities; or

• require us to reduce the aggregate percentage of physician investor ownership in our hospitals.

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, 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 our financial condition and results of operations. 

If we become subject to large malpractice or other legal claims, we could be required to pay significant damages, which may not be covered by insurance.

In recent years, physicians, hospitals and other healthcare 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 with a retention of $50,000 per occurrence and $3.0 million in annual aggregate coverage per surgical facility.  In addition, physicians who provide professional services in our surgical facilities are required to maintain separate malpractice coverage with similar minimum coverage limits.  We also maintain business interruption insurance and property damage insurance, as well as an additional umbrella liability insurance policy in the aggregate amount of $25.0 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 and results of operations could be adversely affected.

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We face intense competition for physicians, nurses, strategic relationships, acquisitions and managed care contracts, which may result in a decline in our revenues, profitability and market share.

The healthcare business is highly competitive.  We compete with other healthcare providers, primarily hospitals and other surgical facilities, in attracting physicians to utilize our surgical facilities, nurses and medical staff to support our surgical 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 currently are in the same or similar business of developing, acquiring and operating surgical 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 also may compete with some of these companies for entry into strategic relationships with healthcare systems and healthcare professionals.  In addition, many physician groups develop surgical facilities 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 facility.  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 surgical facility.  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 financial position and results of operations could be adversely affected.

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

Our revenues are particularly sensitive to regulatory, economic and other conditions in the states of Texas, Florida and Missouri.  As of December 31, 2012, we owned and operated five surgical facilities in Texas, seven surgical facilities in Florida and four surgical facilities in Missouri.  The Texas facilities represented about 14% of our patient service revenues during 2012 and 10% during 2011, the surgical facilities in Florida represented about 7% of our patient service revenues during 2012 and 9% during 2011 and the Missouri facilities represented about 9% of our patient service revenues during both 2012 and 2011.

In addition, our surgical facilities in Idaho Falls, Idaho, Durango, Colorado and Lubbock, Texas each generated approximately 26%, 5% and 6% of our patient service revenues during 2012, and 24%, 5%, and 0% respectively, of our patient service revenues during 2011.  We acquired our facility in Lubbock, Texas during 2012. If these facilities are adversely affected by regulatory, economic and other conditions, or if these facilities do not perform effectively, our financial condition and results of operations will be adversely affected. 

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.  Our employment agreements with Messrs. Francis and Adlerz have three-year terms which automatically extend 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 our financial condition and results of operations.

If we are unable to integrate and operate our information systems effectively, our operations could be disrupted.

Our operations significantly depend on effective information systems.  Our information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs.  We plan to implement new IT systems at many of our facilities during 2013. 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 properly maintain 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 surgical facilities, which may conflict with the interests of our noteholders and prevent us from acting solely in our own best interests or the interests of our noteholders.

We generally hold our ownership interests in surgical facilities through limited partnerships or limited liability companies in which we maintain ownership 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. As a result, we may encounter conflicts between our responsibility to the other interest holders and our responsibility to enhance the value of our company. For example, we have entered into management agreements to provide management services to our surgical facilities 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 the noteholders. 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 financial condition and results of operations may be adversely affected.

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

We are a holding company, and our ability to service our debt is dependent upon the earnings from the business conducted by our subsidiaries that operate the surgical facilities. The effect of this structure is that we depend on the earnings of our subsidiaries, and the distribution or payment to us of a portion of these earnings to meet our obligations, including those under our Credit Facility and outstanding notes and any of our other debt obligations. The distributions of those earnings or advances or other distributions of funds by these entities to us, all of which are contingent upon our subsidiaries' earnings, are subject to various business considerations. In addition, distributions by our subsidiaries could be subject to statutory restrictions, including state laws requiring that such subsidiaries be solvent, or contractual restrictions. Some of our subsidiaries may become subject to agreements that restrict the sale of assets and significantly restrict or prohibit the payment of dividends or the making of distributions, loans or other payments to stockholders, partners or members.

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 surgical facilities in which we have ownership 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 subject in certain cases to requirements that we obtain approval of other equity holders. Many of these agreements also impose limits on the ability of these entities to make loans or transfer assets to us. If we are unable to cause sufficient cash 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, as could our ability to make debt service payments. We may not be able to resolve favorably any dispute regarding cash distribution or other matters with a healthcare system with which we share control of the distributions made by these entities. Further, the failure to resolve a dispute with these healthcare systems could cause an entity in which we own an interest to be dissolved.

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

Circumstances may occur in which the interests of our principal stockholders could be in conflict with the interests of the holders of our notes. In addition, these stockholders may have an interest in pursuing transactions that, in their judgment, enhance the value of their equity investment in our company, even though those transactions may involve risks to other interest holders.

A majority of the outstanding shares of common stock of our parent company are held by Crestview and certain affiliated investors (the “Crestview Funds”). As a result of their stock ownership, the Crestview Funds control us and have the power to elect a majority of our directors, appoint new management and approve any action requiring the approval of the holders of common stock, including adopting amendments to our certificate of incorporation and approving acquisitions or sales of all or substantially all of our assets. The directors elected by the Crestview Funds have the ability to control decisions affecting our capital structure, including the issuance of additional capital stock, the implementation of stock repurchase programs and the declaration of dividends.

Item 1B. Unresolved Staff Comments

None.

Item 2.  Properties

Our corporate headquarters are located in Nashville, Tennessee in approximately 44,000 square feet of leased office space, under a ten-year lease that commenced on November 1, 2002.  Effective January 27, 2012, we amended our lease agreement to extend our lease term to December 31, 2017. This lease may be renewed for one additional five-year period. To exercise the renewal option, we must give notice at least nine months prior to the expiration of the lease term.

Our surgical facilities typically are located on real estate leased by the partnership or limited liability company that operates the facility.  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 surgical facilities are generally responsible for property taxes, property and casualty insurance and routine maintenance expenses.  Two of our surgical facilities are located on real estate owned by the limited partnership or limited liability company that owns the surgical facility.  We generally guarantee the lease obligations of the partnerships and limited liability companies that own our surgical facilities. 

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

Item 3.  Legal Proceedings

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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.

Item 4. Mine Safety Disclosure —Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

We are wholly owned by Symbion Holdings Corporation which is owned by Crestview and certain affiliated funds managed by Crestview and co-investors.  There is no public trading market for our equity securities or those of Holdings.  As of March 8, 2013, there were 13 holders of Holdings common stock.

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” in Item 7 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 the years ended December 31, 2012, 2011 and 2010, and the selected consolidated balance sheet data set forth below at December 31, 2012 and 2011, 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, 2009 and 2008, and the selected consolidated balance sheet data set forth below at December 31, 2010, 2009 and 2008, 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,
	2012		2011		2010		2009		2008
	(in thousands)
Consolidated Statement of Operations Data:
Revenues	507,993		439,278		389,104		317,421		295,884
Cost of revenues	365,270		312,908		276,775		225,028		198,767
General and administrative expense	26,901		22,723		22,465		21,448		23,923
Depreciation and amortization	21,923		20,098		18,219		16,056		13,612
Provision for doubtful accounts	10,536		6,801		6,489		2,617		3,393
Income on equity investments	(4,490	)	(1,876	)	(2,901	)	(2,318	)	(1,504	)
(Gain) loss on disposal and impairment of long-lived assets, net	(6,209	)	4,822		(901	)	3,244		(264	)
Loss on debt extinguishment	—		4,751		—		—		—
Electronic health record incentives	(1,054	)	—		—		—		—
Litigation settlements, net	(532	)	(231	)	(35	)	(398	)	900
Business combination remeasurement gains	—		—		(3,169	)	—		—
Total operating expenses	412,345		369,996		316,942		265,677		238,827
Operating income	95,648		69,282		72,162		51,744		57,057
Interest expense, net	(57,658	)	(54,324	)	(48,032	)	(44,957	)	(43,456	)
Income before income taxes and discontinued operations	37,990		14,958		24,130		6,787		13,601
Provision for income taxes	11,024		8,832		7,890		7,518		12,833
Income from continuing operations	26,966		6,126		16,240		(731	)	768
Income (loss) from discontinued operations, net of taxes	122		344		1,065		(3,259	)	60
Net income (loss)	27,088		6,470		17,305		(3,990	)	828
Less: Net income attributable to noncontrolling interests	(38,798	)	(33,057	)	(26,045	)	(18,464	)	(21,626	)
Net loss attributable to Symbion, Inc.	(11,710	)	(26,587	)	(8,740	)	(22,454	)	(20,798	)
Cash Flow Data — continuing operations:
Net cash provided by operating activities	68,779		65,887		60,437		55,401		54,809
Net cash used in investing activities	(24,198	)	(18,103	)	(52,802	)	(11,193	)	(32,719	)
Net cash (used in) provided by financing activities	(41,329	)	(55,759	)	10,541		(41,417	)	(30,600	)
Other Data:
EBITDA(1)	74,621		67,249		61,602		53,877		51,421
EBITDA as a % of revenues	14.7	%	15.3	%	15.8	%	17.0	%	17.4	%
Number of surgical facilities operated as of end of period (2)	61		63		62		67		68

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	As of December 31,
	2012		2011		2010		2009		2008
	(in thousands)
Consolidated Balance Sheet Data:
Working capital	$	67,076	$	83,298	$	74,144	$	40,782	$	52,271
Total assets	1,017,203		982,127		970,397		790,727		783,563
Total long-term debt, less current maturities	534,424		544,672		507,174		444,834		440,258
Total Symbion, Inc. stockholders’ equity	149,081		158,129		185,426		193,413		211,206

(1) When we use the term “EBITDA,” we are referring to net income (loss) plus (a) income (loss) from discontinued operations, net of taxes (b) income tax expense, (c) interest expense, net, (d) depreciation and amortization, (e) non-cash (gains) losses, including our loss on debt extinguishment, and (f) non-cash stock option compensation expense, and less (g) net income attributable to noncontrolling interests. Noncontrolling interest represents the interest of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that we consolidate for financial reporting purposes. Our operating strategy is to apply a market-based approach in structuring our partnerships with individual market dynamics driving the structure. We believe that it is helpful to investors to present EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors our portion of EBITDA generated by our surgical facilities and other operations.

(2) Includes surgical facilities that we manage but in which we do not have an ownership interest.

We use EBITDA as a measure of liquidity.  We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures.  We also use EBITDA, with some variation in the calculation, to determine compliance with some of the covenants under the Credit Facility, as well as to determine the interest rate and commitment fee payable under the Credit Facility.  See "Management's Discussion and Analysis of Financial Condition and Results of Operations - EBITDA and Consolidated Adjusted EBITDA".

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

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

	Year Ended December 31,
	2012			2011			2010			2009			2008
	(in thousands)
EBITDA	$	74,621		$	67,249		$	61,602		$	53,877		$	51,421
Depreciation and amortization	(21,923		)	(20,098		)	(18,219		)	(16,056		)	(13,612		)
Non-cash gains (losses), net of noncontrolling interests	6,209			(9,573		)	4,070			(3,244		)	(264		)
Non-cash stock option compensation expense	(2,057		)	(1,353		)	(1,336		)	(1,297		)	(2,114		)
Interest expense, net	(57,658		)	(54,324		)	(48,032		)	(44,957		)	(43,456		)
Provision for income taxes	(11,024		)	(8,832		)	(7,890		)	(7,518		)	(12,833		)
Net income attributable to noncontrolling interests	38,798			33,057			26,045			18,464			21,626
Income (loss) from discontinued operations, net of taxes	122			344			1,065			(3,259		)	60
Net income (loss)	27,088			6,470			17,305			(3,990		)	828
(Income) loss from discontinued operations	(122		)	(344		)	(1,065		)	3,259			(60		)
Depreciation and amortization	21,923			20,098			18,219			16,056			13,612
Amortization of deferred financing costs	3,798			2,886			2,004			2,004			4,477
Non-cash payment-in-kind interest option	8,305			22,368			26,079			23,263			17,616
Non-cash recognition of other comprehensive loss into earnings	—			665			2,731			2,853			—
Non-cash credit risk adjustment of financial instruments	—			—			189			1,629			—
Non-cash stock option compensation expense	2,057			1,353			1,336			1,297			2,114
Non-cash (gains) losses	(6,209		)	4,822			(4,070		)	3,244			(264		)
Loss on debt extinguishment	—			4,751			—			—			—
Deferred income tax provision	13,887			8,431			9,443			8,682			13,718
Equity in earnings of unconsolidated affiliates, net of distributions received	(1,931		)	106			50			(207		)	333
Provision for doubtful accounts	10,536			6,801			6,489			2,617			3,393
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable	(6,458		)	(11,013		)	(15,217		)	(4,214		)	(3,078		)
Other assets and liabilities	(4,095		)	(1,507		)	(3,056		)	(1,092		)	2,120
Net cash provided by operating activities—continuing operations	$	68,779		$	65,887		$	60,437		$	55,401		$	54,809

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 Item 6. “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 Item 1A. “Risk Factors” found elsewhere in this report.  Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.

Executive Overview

We own and operate a national network of short stay surgical facilities in 24 states.  Our surgical facilities, which include ASCs and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics, pain management, cardiology, gastroenterology and ophthalmology.  Some of our surgical hospitals also provide acute care services, such as diagnostic imaging, pharmacy, laboratory, obstetrics, physical therapy and wound care. We own our surgical facilities in partnership with physicians and in some cases healthcare systems in the markets and communities we serve.  We apply a market-based approach in structuring our partnerships with individual market dynamics driving the structure.  We believe this approach aligns our interests with those of our partners.  As ofMarch 8, 2013, we owned and operated 48surgical facilities, including 42 ASC's and six surgical hospitals. We also managed ten additional ASCs.  We owned a majority interest in 32 of the 48 surgical facilities and consolidated 47 of these facilities for financial reporting purposes.  In addition to our surgical facilities, we also manage one physician clinic in a market in which we operate an ASC and a surgical hospital. 

We have benefited from both the growth in overall outpatient surgery cases as well as the migration of surgical procedures from the hospital to the surgical facility setting.  Advancements in medical technology, such as lasers, arthroscopy and enhanced endoscopic techniques, have reduced the trauma of surgery and the amount of recovery time required by patients following a surgical procedure. 

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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 in a surgical facility setting. 

On June 14, 2011, we issued $350.0 million aggregate principal amount of 8.00% Senior Secured Notes due 2016 at a price of 98.492% (the "Offering"). We used the net proceeds from the sale of the Senior Secured Notes, together with cash on our balance sheet, to repay in full, all outstanding borrowings under our $350.0 million existing senior secured credit facilities and to repurchase $70.8 million aggregate principal amount of our Toggle Notes, at par plus accrued and unpaid interest, from certain holders of Toggle Notes. Simultaneous with the closing of the Offering, we entered into a new $50.0 million senior secured super-priority revolving credit facility and issued $88.5 million aggregate principal amount of 8.00% senior PIK Exchangeable Notes due 2017 to affiliates of Crestview and certain other holders of Toggle Notes in exchange for $85.4 million aggregate principal amount of our existing Toggle Notes, at par plus accrued and unpaid interest. Effective September 9, 2011, we cancelled $9.0 million aggregate principal amount of our Senior Secured Notes held by certain holders of such notes, plus accrued and unpaid interest, in exchange for our issuance to such parties of an additional $9.2 million aggregate principal amount of our PIK Exchangeable Notes.

We continue to focus on improving the performance of our same store facilities, selectively acquiring established facilities and developing new facilities.

Effective December 31, 2012, we acquired a 77.3% ownership interest in a surgical facility located in Bellingham, Washington. We merged the operations of the acquired facility with our existing surgical facility in this market. The purchase price of the acquisition was $1.5 million. The acquisition was financed with cash from operations. We consolidate this facility for financial reporting purposes with the results of operations from our existing facility located in Bellingham, Washington.

Effective October 4, 2012, we acquired the remaining 44.0% incremental ownership interest at our surgical facility located in Great Falls, Montana for $4.0 million. The acquisition was financed with cash from operations. We previously held a 56.0% ownership interest in this surgical facility and continue to consolidate this facility for financial reporting purposes.

Effective June 20, 2012, we acquired a 58.3% ownership interest in a surgical hospital located in Lubbock, Texas. The purchase price of the acquisition was approximately $10.3 million. The acquisition was financed with cash from operations. As part of the acquisition, we assumed debt of approximately $1.3 million. We consolidate the facility for financial reporting purposes.

Effective June 1, 2012, we acquired a 60.0% ownership interest in a surgical facility located in St. Louis, Missouri. The purchase price of the acquisition was approximately $7.6 million. The acquisition was funded with cash from operations. As part of the acquisition, we assumed debt of approximately $419,000. We consolidate the facility for financial reporting purposes.

Effective April 1, 2012, we entered into a management agreement with a surgical facility located in Jackson, Tennessee. The management agreement has a term of fifteen years, with two optional five-year renewal terms. We also received an option to purchase up to a 20.0% ownership interest in the facility. The option is exercisable after April 1, 2013 and is effective for a six-month period.

Effective February 8, 2012, we completed the acquisition of four separate urgent care and family practice facilities located in Idaho Falls, Idaho. The purchase price of the acquisition was approximately $5.8 million, consisting of $3.1 million of cash, approximately $1.1 million in the form of equity ownership in our facility located in Idaho Falls, Idaho, $470,000 of contingent consideration and the assumption of debt of approximately $1.1 million. Subsequent to the acquisition, the contingencies were met and the cash was released from escrow to the sellers. The facilities are operated by our existing facility located in Idaho Falls, Idaho and are consolidated with our Idaho Falls, Idaho facility for financial reporting purposes.

Revenues

Our revenues consist of patient service revenues and other service revenues.  Our patient service revenues relate to fees charged for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes.  Physician service revenues are revenues from our recently divested physician network consisting of reimbursed expenses, plus participation in the excess of revenues over expenses of the physician networks, as provided for in our service agreements with our physician networks.  Other service revenues consist of management and administrative service fees derived from the non-consolidated facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest, and management services we provide to a physician clinic for which we are not required to provide capital or additional assets.

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

	Year Ended December 31,
	2012		2011		2010
Patient service revenues	98	%	98	%	97	%
Physician service revenues	—		1		1
Other service revenues	2		1		2
Total	100	%	100	%	100	%

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Payor Mix

The following table sets forth by type of payor the percentage of our patient service revenues generated in the periods indicated:

	Year Ended December 31,
	2012		2011		2010
Private Insurance	62	%	66	%	68	%
Government	31		26		25
Self-pay	2		3		4
Other	5		5		3
Total	100	%	100	%	100	%

CaseMix

We primarily operate multi-specialty facilities where physicians perform a variety of procedures in specialties, including orthopedics, pain management, cardiology, gastroenterology and ophthalmology, among others.  We believe this diversification provides us protection from any adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume. 

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

	Year Ended December 31,
	2012		2011		2010
Cardiology	1.0	%	—	%	—	%
Ear, nose and throat	5.6		5.9		5.9
Gastrointestinal	29.3		30.4		30.6
General surgery	3.5		3.9		3.9
Obstetrics/gynecology	3.3		2.9		2.8
Ophthalmology	16.3		15.9		16.4
Orthopedic	16.5		17.1		16.9
Pain management	13.5		14.0		13.7
Plastic surgery	2.7		2.7		2.7
Other	8.3		7.2		7.1
Total	100	%	100	%	100	%

Case Growth

SameStore Information

We define same store facilities as those facilities that were operating throughout the respective years ended December 31, 2012 and December 31, 2011.  The following same store facility table includes both consolidated surgical facilities included in continuing operations that are included in our revenue and non-consolidated surgical facilities that are not reported in our revenue, as we account for these surgical facilities using the equity method.  This same store facilities table is presented to allow comparability to other companies in our industry for the periods indicated:

	Three Months Ended December 31,					Year Ended December 31,
	2012			2011		2012			2011
Cases	61,569			63,634		238,708			241,199
Case growth	(3.2		)%	N/A		(1.0		)%	N/A
Net patient service revenue per case	$	2,212		$	2,017	$	2,092		$	1,876
Net patient service revenue per case growth	9.7		%	N/A		11.5		%	N/A
Number of same store surgical facilities	49			N/A		47			N/A

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ConsolidatedInformation

The following table sets forth information for all surgical facilities included in continuing operations that we consolidate for financial reporting purposes for the periods indicated.  Accordingly, the table includes surgical facilities that we have acquired or developed since January 1, 2011:

	Three Months Ended December 31,					Year Ended  December 31,
	2012			2011		2012			2011
Cases	59,098			59,378		232,716			229,209
Case growth	(0.5		)%	N/A		1.5		%	N/A
Net patient service revenue per case	$	2,317		$	1,991	$	2,150		$	1,870
Net patient service revenue per case growth	16.5		%	N/A		15.1		%	N/A
Number of consolidated surgical facilities, included in continuing operations	47			45		47			45

OperatingIncome Margins

Our operating income margin, excluding non-recurring gains and losses decreased to 17.4% for the year ended December 31, 2012 from 17.9% during the year ended December 31, 2011. This decrease is primarily attributable to an increase in supply costs at our surgical hospitals, due to an increase in higher acuity cases and ancillary services performed at these facilities. Additionally, the increase in our revenue at our surgical hospitals has driven an increase in our provision for doubtful accounts.

Acquisitions and Developments

2012 Activities

Effective December 31, 2012, we acquired a 77.3% ownership interest in a surgical facility located in Bellingham, Washington. We merged the operations of the acquired facility with our existing surgical facility in this market. The purchase price of the acquisition was $1.5 million. The acquisition was financed with cash from operations. We consolidate this facility for financial reporting purposes with the results of operations from our existing facility located in Bellingham, Washington.

Effective October 4, 2012, we acquired the remaining 44.0% incremental ownership interest at our surgical facility located in Great Falls, Montana for $4.0 million. The acquisition was financed with cash from operations. We previously held a 56.0% ownership interest in this surgical facility and continue to consolidate this facility for financial reporting purposes.

Effective June 20, 2012, we acquired a 58.3% ownership interest in a surgical hospital located in Lubbock, Texas. The purchase price of the acquisition was approximately $10.3 million. The acquisition was financed with cash from operations. As part of the acquisition, we assumed debt of approximately $1.4 million. We consolidate the facility for financial reporting purposes.

Effective June 1, 2012, we acquired a 60.0% ownership interest in a surgical facility located in St. Louis, Missouri. The purchase price of the acquisition was approximately $7.6 million. The acquisition was funded with cash from operations. As part of the acquisition, we assumed debt of approximately $419,000. We consolidate the facility for financial reporting purposes.

Effective April 1, 2012, we entered into a management agreement with a surgical facility located in Jackson, Tennessee. The management agreement has a term of fifteen years, with two optional five-year renewal terms. We also received an option to purchase up to a 20.0% ownership interest in the facility. The option is exercisable after April 1, 2013 and is effective for a six-month period.

Effective February 8, 2012, we completed the acquisition of four separate urgent care and family practice facilities located in Idaho Falls, Idaho. The purchase price of the acquisition was approximately $5.8 million, consisting of $3.1 million of cash, approximately $1.1 million in the form of equity ownership in our facility located in Idaho Falls, Idaho, $470,000 of contingent consideration and the assumption of debt of approximately $1.1 million. Subsequent to the acquisition, the contingencies were met and the cash was released from escrow, to the sellers. The facilities are operated by our existing facility located in Idaho Falls, Idaho and are consolidated with our Idaho Falls, Idaho facility for financial reporting purposes.

2011 Activities

Effective October 1, 2011, we acquired an oncology practice, which is operated within our existing facility located in Idaho Falls, Idaho. The purchase price of the acquisition was $3.8 million, consisting of $2.7 million of cash and approximately $1.1 million in the form of equity ownership in our facility located in Idaho Falls, Idaho. This transaction was financed with cash borrowings under an available facility level line of credit.

Effective August 1, 2011, we acquired a 56.0% ownership interest in an ambulatory surgery center and a 50.0% ownership interest in a 20-bed surgical hospital located in Great Falls, Montana. We consolidate the ambulatory surgery center for financial reporting purposes and account for the surgical hospital as an equity method investment for financial reporting purposes. In addition, we acquired the rights to manage a medical clinic in Great Falls, Montana consisting of multi-specialty physicians who are partners in the surgical facilities acquired.

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The aggregate purchase price was $5.2 million plus the assumption of debt of approximately $232,000. The acquisition was financed with cash from operations.

Effective January 7, 2011, we acquired an incremental ownership interest of 3.5% at our surgical facility located in Chesterfield, Missouri for a purchase price of $1.8 million. Additionally, on July 1, 2011, we acquired an additional incremental ownership interest of 2.0% in this facility for a purchase price of $1.0 million. Both transactions were financed with cash from operations.

2010 Activities

Effective July 1, 2010, we acquired an incremental, controlling ownership interest of 37.0% in one of our surgical facilities located in Chesterfield, Missouri for $18.8 million. Subsequent to the acquisition, we held a 50.0% ownership interest in the facility. As part of the acquisition, we consolidated $4.8 million of third-party facility debt on our balance sheet. We subsequently restructured this debt using borrowings from our former Revolving Facility. As a result of this acquisition, we hold a controlling interest in this facility. The acquisition was treated as a business combination, and we began consolidating the facility for financial reporting purposes in the third quarter of 2010. We financed the aggregate purchase price with proceeds from our former Revolving Facility.

Effective April 9, 2010, we acquired an ownership of 54.5% in a surgical hospital located in Idaho Falls, Idaho for approximately $31.9 million plus the assumption of approximately $6.1 million of debt and other obligations of $48.0 million, which we consolidate on our balance sheet. The other obligations include a financing obligation of $48.0 million payable to the hospital facility lessor for the land, buildings and improvements of the facility. We financed the acquisition with borrowings from our former Revolving Facility. We consolidate this facility for financial reporting purposes.

Discontinued Operations and Divestitures

From time to time, we evaluate our portfolio of surgical facilities to ensure the facilities are performing as expected. The following summary presents those facilities classified as, and/or divested, in 2012 which we report as discontinued operations (in thousands):

Facility	Period in which facility identified for disposal (reclassified to discontinued operations)	Sale or disposal date	Loss (gain) recorded in discontinued operations
Metairie, Louisiana	December 31, 2012	December 31, 2012	$	351
Greenville, South Carolina	March 31, 2012	August 31, 2012	$	1,642
Austin, Texas	December 31, 2011	July 1, 2012	$	(1,075	)
Fort Worth, Texas	December 31, 2011	February 29, 2012	$	(78	)

Effective December 31, 2012, we ceased operations at our surgical facility located in Metairie, Louisiana. We recognized a loss of $351,000 on the disposal. We consolidate this facility for financial reporting periods.

Effective August 31, 2012, we divested our ownership interest in a surgical facility located in Greenville, South Carolina for net proceeds of $348,000. This facility was previously consolidated for financial reporting purposes. Concurrent with the disposal, we entered into a management agreement with the buyer. The management agreement has a term of one year. We recorded a loss on the disposal of approximately $1.6 million during 2012. Included in this loss is an allocated disposal of goodwill of $239,000.

Effective July 1, 2012, we, along with our physician investors in the facility, divested our ownership interests in a surgical facility located in Austin, Texas for aggregate net proceeds of approximately $4.4 million. Additionally, we terminated our management agreement with this facility and received cash proceeds of approximately $2.0 million. This facility was previously consolidated for financial reporting purposes. We recorded a gain on the disposal of approximately $1.1 million during 2012. Included in this gain is an allocated disposal of goodwill of $3.7 million.

Effective February 29, 2012, we, along with our physician investors in the facility, divested our ownership interest in a surgical facility located in Fort Worth, Texas for aggregate net proceeds of $1.9 million. Additionally, we terminated our management agreement with this facility and received cash proceeds of approximately $1.1 million. We recorded a gain, net of income attributable to noncontrolling interests, of $78,000 which is included in the loss from discontinued operations. Included in this gain is an allocated disposal of goodwill of $1.3 million.

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

	Year Ended December 31,
	2012			2011		2010
Revenues	$	6,282		$	17,005	$	25,642
(Loss) income from operations, before income taxes	(936		)	1,302		522
Income tax (benefit) provision	(1,343		)	540		(165		)
Loss (gain) on sale, net of taxes	285			418		(378		)
Income from discontinued operations, net of taxes	$	122		$	344	$	1,065

Effective December 31, 2012, we divested our interest and management rights in a surgical facility located in Oklahoma City, Oklahoma for net proceeds of $10.1 million. This facility was previously accounted for as an equity method investment for financial reporting purposes. We recorded a gain on the disposal of $5.9 million during the fourth quarter of 2012.

Effective April 30, 2012, we divested our interest and management rights in a surgical facility located in Nashville, Tennessee for net proceeds of $1.3 million. This facility was previously accounted for as an equity method investment for financial reporting purposes. We recorded a gain on the disposal of approximately $750,000 during the second quarter of 2012.

Critical Accounting Policies

Our significant accounting policies and practices are described in Note 3 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 in the United States, 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 surgical 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 limited partners or minority members in these surgical facilities are generally limited to those that protect their ownership, 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, or that exceeds 20.0% of the fair market value of the surgical facility’s assets.  All significant intercompany balances and transactions, including management fees from consolidated surgical facilities, are eliminated in consolidation.

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

We also consider the relevant sections of the Financial Accounting Standards Board’s Accounting Standards Codification, Topic 810, Consolidation, to determine if we have the power to direct the activities and are the primary beneficiary of (and therefore should consolidate) any entity whose operations we do not control with voting rights.  At December 31, 2012, we consolidate two entities because we are the primary beneficiary.

Revenue Recognition

Our revenues are comprised of patient service revenues and other service revenues.  Our patient service revenues relate to fees charged for surgical or diagnostic procedures performed at surgical 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, special equipment, supplies, nursing staff and medications.  Also, in a very limited number of our surgical facilities, we charge for anesthesia services.  Our fees normally 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 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.

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Physician service revenues are revenues from a physician network, which we no longer operate, consisting of reimbursed expenses, plus participation in the excess of revenues over expenses of the physician network, as provided for in our service agreements with our physician networks. 

Our other service revenues consist of management and administrative service fees derived from non-consolidated surgical facilities that we account for under the equity method, management of surgical facilities 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 surgical facility 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 and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances from third-party payors, which we estimate based on the historical trend of our surgical facilities’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, relationships with payors and procedure statistics.  While changes in estimated reimbursement from third-party payors remain a possibility, we expect that any such changes would be minimal and, therefore, would not have a material effect on our financial condition or results of operations.

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, it could have a material adverse effect on our financial condition and results of operations.  Because in most cases, we have the ability to verify a patient’s insurance coverage before services are rendered and because we have entered into contracts with third-party payors which account for a majority of our total revenues, the out-of-period contractual adjustments have been minimal.  Our net accounts receivable reflected allowances for doubtful accounts of $11.9 million, $10.1 million and $9.9 million at December 31, 2012, 2011 and 2010, respectively.

The following table summarizes our days sales outstanding for the periods indicated:

	Year Ended December 31,
	2012	2011	2010
Days sales outstanding	46	51	48

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.  Each surgical facility is responsible for analyzing accounts receivable to ensure the proper collection and aged category.  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.

At a consolidated level, we review the standard aging schedule, by facility, to determine the appropriate provision for doubtful accounts by monitoring changes in our consolidated accounts receivable by aged schedule, day’s sales outstanding and bad debt expense as a percentage of revenues.  At a consolidated level, we do not review a consolidated aging by payor.  Regional and local employees review each surgical facility’s aged accounts receivable by payor schedule.  These employees have a closer relationship with the payors and have a more thorough understanding of the collection process for that particular surgical facility.  Furthermore, 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 further 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.

The following table summarizes our accounts receivable aging, net of contractual adjustments but before our allowance for doubtful accounts and certain other allowances, for consolidated surgical facilities as of the periods indicated (in thousands):

	Year Ended December 31,
	2012				2011
	Amount		% of Total		Amount		% of Total
Current	$	38,618	45	%	$	34,060	43	%
31 to 60 days	14,178		17		14,091		18
61 to 90 days	6,579		8		7,174		9
91 to 120 days	4,091		5		3,907		5
121 to 150 days	3,857		4		3,787		5
Over 150 days	17,775		21		15,725		20
Total	$	85,098	100	%	$	78,744	100	%

We recognize that final reimbursement of outstanding accounts receivable is subject to final approval by each third-party payor.  However, because we have contracts with our third-party payors and we verify the insurance coverage of the patient before services are

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rendered, the amounts that are pending approval from third-party payors are minimal.  Amounts are classified outside of self-pay if we have an agreement with the third-party payor or we have verified a patient’s coverage prior to services rendered.  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 primarily non-emergency, our surgical facilities have the ability to control these procedures.  Our patient service revenues from self-pay as a percentage of total revenues were approximately 2% for the year ended December 31, 2012and approximately 3% for December 31, 2011.

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 carryforwards 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

Long-lived assets, including property, plant and equipment, comprise a significant portion of our total assets.  We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. 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 carrying value 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.

Goodwill represents our single largest asset, and is a significant portion of our total assets.  We review goodwill and indefinite lived intangible assets annually, as of December 31, or more frequently if certain indicators arise.  We review goodwill at the reporting unit level, which we have determined to be the consolidated results of Symbion, Inc.  We compare the carrying value of the net assets of the reporting unit to the net present value of the estimated discounted future cash flows of the reporting unit.  If the carrying value exceeds the net present value of the estimated discounted future cash flows, an impairment indicator exists and an estimate of the impairment loss is calculated.  The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied.  Changes in these assumptions and estimates could result in goodwill impairment that could materially adversely impact our financial position and results of operations.

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

We performed our annual goodwill impairment assessment by developing a fair value estimate of the business enterprise as of December 31, 2012 using a discounted cash flows approach.  We corroborated the results of our fair value estimate using a market-based approach.  As we do not have publicly traded equity from which to derive a market value, an assessment of peer-company trading data was performed, whereby management selected comparable peers based on growth and leverage ratios, as well as industry specific characteristics.  Management estimated a reasonable market value of the Company as of December 31, 2012 based on earnings multiples and trading data of the Company's peers. This market-based approach was then used to assess the reasonableness of the discounted cash flows approach.  The result of our annual goodwill impairment test at indicated no potential impairment.

Due to the sensitivity of the business enterprise value model, and the potential for further deterioration in the market, more specifically the surgical facility and healthcare industries, we will continually monitor the trading market of our peers, as well as our discrete future cash flow forecast.  While we do not anticipate such a change, if projected future cash flows become less favorable than those projected by management, an assessment of possible impairments may become necessary that could have a material non-cash impact on our financial position and results of operations.

Off-Balance Sheet Arrangements

We guarantee our pro-rata share of the third-party debts and other obligations of many of the non-consolidated partnerships and limited liability companies in which we own an interest.  As of December 31, 2012, we had approximately $181,000 of off-balance sheet guarantees of non-consolidated third-party debt in connection with these surgical facilities. In most instances, the physicians and/or physician groups have also guaranteed their pro-rata share of the indebtedness to secure the financing. 

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Results of Operations

The following table summarizes certain statements of operations items for each of the three years ended December 31, 2012, 2011 and 2010.  The table also shows the percentage relationship to revenues for the periods indicated:

	2012					2011					2010
	Amount			% of Revenues		Amount			% of Revenues		Amount			% of Revenues
	(in thousands)
Revenues	$	507,993		100	%	$	439,278		100	%	$	389,104		100	%
Cost of revenues	365,270			71.9		312,908			71.2		276,775			71.1
General and administrative expense	26,901			5.3		22,723			5.2		22,465			5.8
Depreciation and amortization	21,923			4.3		20,098			4.6		18,219			4.7
Provision for doubtful accounts	10,536			2.1		6,801			1.5		6,489			1.7
Income on equity investments	(4,490		)	(0.9	)	(1,876		)	(0.4	)	(2,901		)	(0.7	)
(Gain) loss on disposal and impairment of long-lived assets, net	(6,209		)	(1.2	)	4,822			1.1		(901		)	(0.2	)
Loss on debt extinguishments	—			—		4,751			1.1		—			—
Electronic health record incentives	(1,054		)	(0.2	)	—			—		—			—
Litigation settlements, net	(532		)	(0.1	)	(231		)	(0.1	)	(35		)	—
Business combination remeasurement gains	—			—		—			—		(3,169		)	(0.8	)
Total operating expenses	412,345			81.2		369,996			84.2		316,942			81.6
Operating income	95,648			18.8		69,282			15.8		72,162			18.4
Interest expense, net	(57,658		)	(11.4	)	(54,324		)	(12.4	)	(48,032		)	(12.3	)
Income before income taxes and discontinued operations	37,990			7.4		14,958			3.4		24,130			6.1
Provision for income taxes	11,024			2.2		8,832			2.0		7,890			2.0
Income from continuing operations	26,966			5.2		6,126			1.4		16,240			4.1
Income from discontinued operations, net of taxes	122			—		344			0.1		1,065			0.3
Net income	27,088			5.3		6,470			1.5		17,305			4.4
Less: Net income attributable to noncontrolling interests	(38,798		)	(7.6	)	(33,057		)	(7.5	)	(26,045		)	(6.7	)
Net loss attributable to Symbion, Inc.	$	(11,710	)	(2.3	)%	$	(26,587	)	(6.0	)%	$	(8,740	)	(2.3	)%

Year Ended December 31, 2012 Compared To Year Ended December 31, 2011

Overview.  In 2012, our revenues increased 15.6% to $508.0 million from $439.3 million in 2011.  We incurred a net loss attributable to Symbion, Inc. for the year ended December 31, 2012 of $11.7 million compared to a net loss of $26.6 million for the year ended December 31, 2011. Our net loss for 2012 includes $6.2 million of net gains related to the disposal of our ownership interests in two surgical facilities. Also, we received $1.1 million of electronic health record incentives during the year ended December 31, 2012. Included in our net loss for 2011 was a $4.8 million loss on debt extinguishment, a loss of $2.9 million related to the impairment of one of our equity method investments located in Novi, Michigan and an additional valuation allowance of $2.1 million related to a note receivable from this facility offset by gains on disposal of various long-lived assets. Excluding these items, we incurred a net loss attributable to Symbion, Inc. for 2012 of $19.0 million, compared to a net loss attributable to Symbion, Inc. of $17.0 million for 2011.

Our financial results for 2012 compared to 2011 reflect the addition of two surgical facilities that we consolidate for financial reporting purposes, the disposition of three surgical facilities which we account for using the equity method and the addition of one surgical facility which we manage.

Revenues.  Revenues for the year ended December 31, 2012 compared to December 31, 2011were as follows (in thousands):

	2012		2011		Dollar Variance			Percent Variance
Patient service revenues	$	500,255	$	428,566	$	71,689		16.7	%
Other service revenues	7,738		6,229		1,509			24.2
Physician service revenues	—		4,483		(4,483		)	(100.0	)
Total revenues	$	507,993	$	439,278	$	68,715		15.6	%

Patient service revenues increased 16.7% for the year ended December 31, 2012 compared to the year ended December 31, 2011. This increase in patient service revenues is attributable to surgical facilities acquired since January 1, 2011. In addition, this increase is

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attributable to growth at our surgical hospitals, including an increase in net patient revenue per case due to an increase in higher acuity cases and ancillary services performed at these facilities. Effective September 30, 2011, we completed a scheduled termination of our physician network agreements.

Cost of Revenues.  Cost of revenues for the year ended December 31, 2012 was $365.3 million compared to $312.9 million for the year ended December 31, 2011. This increase is attributable to surgical facilities acquired since January 1, 2011, as well as growth at our surgical hospitals. We have experienced an increase in supply costs at our surgical hospitals, due to an increase in higher acuity cases and ancillary services performed at these facilities. As a percentage of total revenues, cost of revenues increased to 71.9% for 2012 compared to 71.2% for 2011.

General and Administrative Expense.  General and administrative expense increased to $26.9 million for the year ended December 31, 2012 compared to $22.7 million for the year ended December 31, 2011. Included in the expense for 2012 is a $2.7 million increase in incentive compensation expense. As a percentage of revenues, excluding the increase in incentive compensation expense, our general and administrative expense decreased to 4.8% for 2012 compared to 5.2% for 2011. This decrease is primarily attributable to our leveraging of corporate overhead costs while continuing to increase revenues through recent acquisitions.

Depreciation and Amortization.  Depreciation and amortization expense increased to $21.9 million for the year ended December 31, 2012 compared to $20.1 million for the year ended December 31, 2011. This increase is attributable to surgical facilities acquired since January 1, 2011. As a percentage of revenues, depreciation and amortization expense decreased to 4.3% for 2012 compared to 4.6% for 2011.

Provision for Doubtful Accounts.  The provision for doubtful accounts increased to $10.5 million for the year ended December 31, 2012 compared to $6.8 million for the year ended December 31, 2011. As a percentage of revenues, the provision for doubtful accounts increased to 2.1% for 2012 compared to 1.5% for 2011. We have experienced an increase in higher acuity cases and ancillary services performed at our surgical hospitals. The increase in revenues from our surgical hospitals has driven an incremental increase in our provision for doubtful accounts.  

Income on Equity Investments.  Income on equity investments represents the net income of certain investments we have in surgical facilities.  These surgical facilities are not consolidated for financial reporting purposes.  Income on equity investments increased to $4.4 million for the year ended December 31, 2012 from $1.9 million for the year ended December 31, 2011.  This increase is attributable to ownership interests acquired since January 1, 2011.

(Gain) Loss on Disposal and Impairment of Long-Lived Assets, net.  We recognized a gain on the impairment and disposal of long-lived assets of $6.2 million during the year ended December 31, 2012. We recognized a $5.9 million gain on the disposal of our equity interest in our surgical facility located in Oklahoma City, Oklahoma. Additionally, we recognized a gain of $750,000 on the disposal of our equity interest in our surgical facility located in Nashville, Tennessee. These gains were offset by a loss on disposal of $423,000 on the disposal of various equipment and other long-lived assets. During the year ended December 31, 2011, we recorded a loss on the impairment and disposal of long-lived assets of $4.8 million. Included in this loss was an impairment charge of $2.9 million related to one of our equity method investments located in Novi, Michigan. The Company also recorded a valuation allowance of $2.1 million related to a note receivable due from this facility. These impairment charges were offset by gains on disposal of various long-lived assets.

Loss on Debt Extinguishment. As a result of our debt restructuring during the second quarter of 2011, we incurred a loss on debt extinguishment of $4.8 million. This charge is comprised primarily of capitalized debt issuance costs written off in connection with our termination of debt instruments as part of the restructuring.

Electronic Health Record Incentives. During the year ended December 31, 2012, we satisfied the meaningful use provisions of the Affordable Care Act and recognized an aggregate of $1.1 million of income from EHR incentives at certain of our surgical hospitals.

Operating Income.  For the year ended December 31, 2012, operating income excluding non-cash gains and losses and electronic health record incentives increased to $86.6 million from $78.9 million for the year ended December 31, 2011. This increase is primarily attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2011.

Interest Expense, Net of Interest Income.  Interest expense, net of interest income, increased to $57.7 million for the year ended December 31, 2012 compared to $54.3 million for the year ended December 31, 2011. The increase is primarily attributable to a higher interest rate on our Senior Secured Notes compared to our previous variable rate Credit Facility.

Provision for Income Taxes.  Tax expense of $11.0 million for the year ended December 31, 2012 and $8.8 million for the year ended December 31, 2011, is primarily due to the recording of non-cash deferred income tax expense related to our partnership investments.

Net Income Attributable to Noncontrolling Interests.  Income attributable to noncontrolling interests increased to $38.8 million for the year ended December 31, 2012 compared to $33.1 million for the year ended December 31, 2011. As a percentage of revenues, income attributable to noncontrolling interests increased to 7.6% for 2012 compared to 7.5% for 2011.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Overview.  In 2011, our revenues increased 12.9% to $439.3 million from $389.1 million in 2010.  We incurred a net loss attributable to Symbion, Inc. for the year ended December 31, 2011 of $26.6 million compared to a net loss of $8.7 million for the year ended December 31, 2010. Included in our net loss for 2011 was a $4.8 million loss on debt extinguishment and a loss of $2.9 million related to the

44

impairment of one of our equity method investments located in Novi, Michigan and an additional valuation allowance of $2.1 related to a note receivable from this facility offset by gains on disposal of various long-lived assets. During the year ended December 31, 2010, we recognized a $3.2 million business combination remeasurement gain. Excluding these items, we incurred a net loss attributable to Symbion, Inc. for 2011 of $16.8 million, compared to a net loss attributable to Symbion, Inc. of $11.9 million for 2010.

Our financial results for 2011 compared to 2010 reflect the addition of two surgical facilities that we consolidate for financial reporting purposes, one surgical facility which we account for using the equity method, and a controlling interest in a surgical facility which was previously recorded as an equity method investment. We began consolidating this facility during the third quarter of 2010.

Revenues.  Revenues for the year ended December 31, 2011 compared to December 31, 2010 were as follows (in thousands):

	2011		2010		Dollar Variance			Percent Variance
Patient service revenues	$	428,566	$	376,877	$	51,689		13.7	%
Other service revenues	6,229		6,427		(198		)	(3.1	)
Physician service revenues	4,483		5,800		(1,317		)	(22.7	)
Total revenues	$	439,278	$	389,104	$	50,174		12.9	%

Patient service revenues increased 13.7% for the year ended December 31, 2011 compared to the year ended December 31, 2010. This increase in patient service revenues, including a 0.5% increase in case volume, is attributable to surgical facilities and additional incremental, controlling ownership acquired since January 1, 2010. In addition, this increase is attributable to growth at our surgical hospitals, including an increase in net patient revenue per case due to an increase in higher acuity cases performed at these facilities. However, we experienced volume weakness across our system, primarily in our ASCs. Consistent with the overall volume decrease experienced by our industry, our comparable same store cases reflect a decline of 3.0% for 2011 compared to 2010. Our case volume was impacted by a scheduled termination of an agreement with a health plan to utilize one of our facilities for a specified period of time.

Cost of Revenues.  Cost of revenues for the year ended December 31, 2011 was $312.9 million compared to $276.8 million for the year ended December 31, 2010. This increase is attributable to surgical facilities and additional incremental, controlling ownership acquired since January 1, 2010. In addition, this increase is attributable to growth at our surgical hospitals. As a percentage of total revenues, cost of revenues increased to 71.2% for 2011 compared to 71.1% for 2010.

General and Administrative Expense.  General and administrative expense increased to $22.7 million for the year ended December 31, 2011 compared to $22.5 million for the year ended December 31, 2010. As a percentage of revenues, general and administrative expense decreased to 5.2% for 2011 compared to 5.8% for 2010. This decrease is primarily attributable to our leveraging of corporate overhead costs while continuing to increase revenue through recent acquisitions.

Depreciation and Amortization.  Depreciation and amortization expense increased to $20.1 million for the year ended December 31, 2011 compared to $18.2 million for the year ended December 31, 2010. This increase is attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010. As a percentage of revenues, depreciation and amortization expense decreased to 4.6% for 2011 compared to 4.7% for 2010.

Provision for Doubtful Accounts.  The provision for doubtful accounts increased to $6.8 million for the year ended December 31, 2011 compared to $6.5 million for the year ended December 31, 2010. As a percentage of revenues, the provision for doubtful accounts decreased to 1.5% for 2011 from 1.7% for 2010.

Income on Equity Investments.  Income on equity investments represents the net income of certain investments we have in surgical facilities.  These surgical facilities are not consolidated for financial reporting purposes.  Income on equity investments decreased to $1.9 million for the year ended December 31, 2011 from $2.9 million for the year ended December 31, 2010.  This decrease is attributable to the acquisition of an additional incremental, controlling ownership interest at one of our facilities previously held as an equity method investment.

(Gain) Loss on Disposal and Impairment of Long-Lived Assets, net.  We recognized a loss on the impairment and disposal of long-lived assets of $4.8 million during the year ended December 31, 2011. Included in this loss is an impairment charge of $2.9 million related to one of our equity method investments located in Novi, Michigan. The Company also recorded a valuation allowance of $2.1 million related to a note receivable due from this facility. These impairment charges are offset by gains on disposal of various long-lived assets.

Loss on Debt Extinguishment. As a result of our debt restructuring during the second quarter of 2011, we incurred a loss on debt extinguishment of $4.8 million. This charge is comprised primarily of capitalized debt issuance costs written off in connection with our termination of debt instruments as part of the restructuring.

Business Combination Remeasurement Gains.  Effective July 1, 2010, we acquired an incremental, controlling ownership of 37.0% in one of our surgical facilities located in Chesterfield, Missouri for $18.8 million. We recognized a gain of $3.2 million as a result of remeasuring our existing equity ownership interest in this facility held before the incremental acquisition of controlling ownership interests as required under generally accepted accounting principles.

45

Operating Income.  For the year ended December 31, 2011, operating income excluding non-cash gains and losses increased to $78.9 million from $68.1 million for the year ended December 31, 2010. This increase is primarily attributable to surgical facilities and additional incremental, controlling ownership interests acquired since January 1, 2010.

Interest Expense, Net of Interest Income.  Interest expense, net of interest income, increased to $54.3 million for the year ended December 31, 2011 compared to $48.0 million for the year ended December 31, 2010. The increase is primarily attributable to the increase in long-term debt due to our PIK elections and a higher interest rate on our Senior Secured Notes compared to our previous variable rate senior secured credit facility.

Provision for Income Taxes.  Tax expense of $8.8 million for the year ended December 31, 2011 and $7.9 million for the year ended December 31, 2010 is primarily due to the recording of non-cash deferred income tax expense related to our partnership investments. The increase in tax expense compared to the prior year relates to an increase in our valuation allowance recorded against certain deferred tax assets, primarily due to our impairment charge of $2.9 million related to our equity method investment located in Novi, Michigan as well as a valuation allowance of $2.1 million related to a note receivable due from this facility.

Net Income Attributable to Noncontrolling Interests.  Income attributable to noncontrolling interests increased to $33.1 million for the year ended December 31, 2011 compared to $26.0 million for the year ended December 31, 2010. As a percentage of revenues, income attributable to noncontrolling interests increased to 7.5% for 2011 compared to 6.7% for 2010. This increase is primarily attributable to an increase in operating income at one of our surgical hospitals in which we do not hold a majority ownership but consolidate for financial reporting purposes.

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 2012 and 2011.  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.

	2012
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Year Ended
	(in thousands) (unaudited)
Consolidated Statement of Operations Data:
Revenues	$	120,623		$	122,440		$	125,951		$	138,979		$	507,993
Operating expenses:
Salaries and benefits	32,482			33,146			36,871			38,486			140,985
Supplies	29,289			30,404			32,392			35,916			128,001
Professional and medical fees	8,980			8,218			9,890			10,429			37,517
Rent and lease expense	5,927			6,177			7,002			5,944			25,050
Other operating expenses	8,066			8,129			8,981			8,541			33,717
Cost of revenues	84,744			86,074			95,136			99,316			365,270
General and administrative expense	8,001			6,285			5,684			6,931			26,901
Depreciation and amortization	5,314			5,402			5,621			5,586			21,923
Provision for doubtful accounts	2,108			2,669			3,018			2,741			10,536
Income on equity investments	(464		)	(1,214		)	(1,251		)	(1,561		)	(4,490		)
Loss (gain) on disposal and impairment of long-lived assets, net	48			(596		)	51			(5,712		)	(6,209		)
Electronic health records incentives	—			—			(603		)	(451		)	(1,054		)
Litigation settlements, net	(17		)	(215		)	—			(300		)	(532		)
Total operating expenses	99,734			98,405			107,656			106,550			412,345
Operating income	20,889			24,035			18,295			32,429			95,648
Interest expense, net	(14,328		)	(14,345		)	(14,536		)	(14,449		)	(57,658		)
Income before income taxes and discontinued operations	6,561			9,690			3,759			17,980			37,990
Provision for income taxes	1,352			1,481			1,222			6,969			11,024
Income from continuing operations	5,209			8,209			2,537			11,011			26,966
(Loss) income from discontinued operations, net of taxes	(72		)	(474		)	(851		)	1,519			122
Net income	5,137			7,735			1,686			12,530			27,088
Less: Net income attributable to noncontrolling interests	(10,078		)	(10,597		)	(7,134		)	(10,989		)	(38,798		)
Net (loss) income attributable to Symbion, Inc.	$	(4,941	)	$	(2,862	)	$	(5,448	)	$	1,541		$	(11,710	)

46

	2011
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Year Ended
	(in thousands) (unaudited)
Consolidated Statement of Operations Data:
Revenues	$	105,264		$	107,087		$	106,815		$	120,112		$	439,278
Operating expenses:
Salaries and benefits	29,573			30,288			30,628			31,074			121,563
Supplies	23,812			26,003			24,337			30,603			104,755
Professional and medical fees	7,651			8,433			8,137			8,125			32,346
Rent and lease expense	5,623			5,920			5,903			5,946			23,392
Other operating expenses	7,632			7,591			8,026			7,603			30,852
Cost of revenues	74,291			78,235			77,031			83,351			312,908
General and administrative expense	5,869			5,544			5,399			5,911			22,723
Depreciation and amortization	4,986			5,016			4,977			5,119			20,098
Provision for doubtful accounts	1,496			1,498			2,614			1,193			6,801
Income on equity investments	(269		)	(387		)	(515		)	(705		)	(1,876		)
(Gain) loss on disposal and impairment of long-lived assets, net	(78		)	108			177			4,615			4,822
Loss on debt extinguishment	—			4,751			—			—			4,751
Litigation settlements, net	—			—			(15		)	(216		)	(231		)
Total operating expenses	86,295			94,765			89,668			99,268			369,996
Operating income	18,969			12,322			17,147			20,844			69,282
Interest expense, net	(11,975		)	(13,430		)	(14,309		)	(14,610		)	(54,324		)
Income (loss) before income taxes and discontinued operations	6,994			(1,108		)	2,838			6,234			14,958
Provision for income taxes	1,619			1,332			1,906			3,975			8,832
Income (loss) from continuing operations	5,375			(2,440		)	932			2,259			6,126
Income (loss) from discontinued operations, net of taxes	249			302			(215		)	8			344
Net income (loss)	5,624			(2,138		)	717			2,267			6,470
Less: Net income attributable to noncontrolling interests	(8,043		)	(6,535		)	(7,085		)	(11,394		)	(33,057		)
Net loss attributable to Symbion, Inc.	$	(2,419	)	$	(8,673	)	$	(6,368	)	$	(9,127	)	$	(26,587	)

EBITDA and Consolidated Adjusted EBITDA

When we use the term “EBITDA,” we are referring to net income (loss) plus (a) income (loss) from discontinued operations, net of taxes, (b) income tax expense, (c) interest expense, net, (d) depreciation and amortization, (e) non-cash (gains) losses, including our loss on debt extinguishment, and (f) non-cash stock option compensation expense, and less (g) net income attributable to noncontrolling interests. Noncontrolling interest represents the interests of third parties, such as physicians and, in some cases, healthcare systems that own an interest in surgical facilities that we consolidate for financial reporting purposes. Our operating strategy is to apply a market-based approach in structuring our partnerships, with individual market dynamics driving the structure. We believe that it is helpful to investors to present EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors our portion of EBITDA generated by our surgical facilities and other operations.

EBITDA increased to $74.6 million for the year ended December 31, 2012 from $67.2 million for the year ended December 31, 2011. This increase is attributable to surgical facilities acquired since January 1, 2011. In addition, this increase is attributable to an increase in net patient services revenue per case primarily driven by higher acuity cases at our surgical hospitals.

We use EBITDA as a measure of liquidity. We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures. We use "Consolidated Adjusted EBITDA" to determine compliance with some of the covenants under the Credit Facility, as well as to determine the interest rate and commitment fee payable under our Credit Facility. When we use the term "Consolidated Adjusted EBITDA", we are referring to EBITDA, as defined above, adjusted for cash payments on our Idaho Falls facility lease, intercompany notes and pro forma acquisition and other non-cash adjustments.

EBITDA and Consolidated Adjusted EBITDA are not measurements of financial performance or liquidity under GAAP. They should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from EBITDA and Consolidated Adjusted EBITDA are significant components in understanding and evaluating financial performance and liquidity. Our calculation of EBITDA is not comparable to the EBITDA measure we have used in certain prior periods but our EBITDA measure is consistent with the measure of EBITDA less income attributable to noncontrolling interests previously reported. Our calculation of EBITDA and Consolidated Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

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The following table reconciles EBITDA to net cash provided by operating activities - continuing operations (in thousands):

	December 31, 2012
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Year Ended
	(unaudited)
EBITDA	$	17,890		$	18,294		$	17,010		$	21,427		$	74,621
Depreciation and amortization	(5,314		)	(5,402		)	(5,621		)	(5,586		)	(21,923		)
Non-cash (losses) gains	(48		)	596			(51		)	5,712			6,209
Non-cash stock option compensation expense	(1,717		)	(50		)	(177		)	(113		)	(2,057		)
Interest expense, net	(14,328		)	(14,345		)	(14,536		)	(14,449		)	(57,658		)
Provision for income taxes	(1,352		)	(1,481		)	(1,222		)	(6,969		)	(11,024		)
Net income attributable to noncontrolling interests	10,078			10,597			7,134			10,989			38,798
Loss on discontinued operations, net of taxes	(72		)	(474		)	(851		)	1,519			122
Net income	5,137			7,735			1,686			12,530			27,088
Income from discontinued operations	72			474			851			(1,519		)	(122		)
Depreciation and amortization	5,314			5,402			5,621			5,586			21,923
Amortization of deferred financing costs and debt issuance discount	944			945			954			955			3,798
Non-cash payment-in-kind interest option	2,028			2,029			2,109			2,139			8,305
Non-cash stock option compensation expense	1,717			50			177			113			2,057
(Gain) loss on disposal and impairment of long-lived assets, net	48			(596		)	51			(5,712		)	(6,209		)
Deferred income taxes	1,129			1,421			4,298			7,039			13,887
Equity in earnings of unconsolidated affiliates, net of distributions received	(139		)	(715		)	(422		)	(655		)	(1,931		)
Provision for doubtful accounts	2,108			2,669			3,018			2,741			10,536
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable	(3,496		)	879			(184		)	(3,657		)	(6,458		)
Other assets and liabilities	984			(3,074		)	4,532			(6,537		)	(4,095		)
Net cash provided by operating activities — continuing operations	$	15,846		$	17,219		$	22,691		$	13,023		$	68,779
Other Data:
Number of surgical facilities included in continuing operations, as of the end of period (1)	57			60			61			61
Number of consolidated surgical facilities included in continuing operations, as of the end of the period	45			47			47			47

________________________________________

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

48

	2011
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Year Ended
	(unaudited)
EBITDA	$	16,168		$	15,996		$	15,550		$	19,535		$	67,249
Depreciation and amortization	(4,986		)	(5,016		)	(4,977		)	(5,119		)	(20,098		)
Non-cash (losses) gains	78			(4,859		)	(177		)	(4,615		)	(9,573		)
Non-cash stock option compensation expense	(334		)	(334		)	(334		)	(351		)	(1,353		)
Interest expense, net	(11,975		)	(13,430		)	(14,309		)	(14,610		)	(54,324		)
Provision for income taxes	(1,619		)	(1,332		)	(1,906		)	(3,975		)	(8,832		)
Net income attributable to noncontrolling interests	8,043			6,535			7,085			11,394			33,057
Loss on discontinued operations, net of taxes	249			302			(215		)	8			344
Net income	5,624			(2,138		)	717			2,267			6,470
Income from discontinued operations	(249		)	(302		)	215			(8		)	(344		)
Depreciation and amortization	4,986			5,016			4,977			5,119			20,098
Amortization of deferred financing costs and debt issuance discount	501			360			1,042			983			2,886
Non-cash payment-in-kind interest option	6,984			6,382			4,431			4,571			22,368
Non-cash stock option compensation expense	334			334			334			351			1,353
Non-cash recognition of other comprehensive loss into earnings	—			665			—			—			665
(Gain) loss on disposal and impairment of long-lived assets, net	(78		)	4,859			177			4,615			9,573
Deferred income taxes	1,534			1,190			1,852			3,855			8,431
Equity in earnings of unconsolidated affiliates, net of distributions received	341			60			(59		)	(236		)	106
Provision for doubtful accounts	1,496			1,498			2,614			1,193			6,801
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable	(551		)	(1,652		)	(796		)	(8,014		)	(11,013		)
Other assets and liabilities	699			(938		)	5,778			(7,046		)	(1,507		)
Net cash provided by operating activities — continuing operations	$	21,621		$	15,334		$	21,282		$	7,650		$	65,887
Other Data:
Number of surgical facilities included in continuing operations, as of the end of period (1)	56			56			57			57
Number of consolidated surgical facilities included in continuing operations, as of the end of the period	44			44			45			45

________________________________________

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

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The following table reconciles Consolidated Adjusted EBITDA to EBITDA and EBITDA to net cash provided by operating activities—continuing operations:

	Year Ended December 31, 2012
	(in thousands)
Consolidated Adjusted EBITDA (1)	$	80,435
Cash payment on Idaho Falls lease (2)	5,433
Intercompany notes adjustment (3)	(7,192		)
Pro forma acquisition and other non-cash adjustments (4)	(4,055		)
EBITDA	74,621
Depreciation and amortization	(21,923		)
Non-cash losses, net of noncontrolling interests	6,209
Non-cash stock option compensation expense	(2,057		)
Interest expense, net	(57,658		)
Provision for income taxes	(11,024		)
Net income attributable to noncontrolling interests	38,798
Income from discontinued operations, net of taxes	122
Net income	27,088
Income from discontinued operations	(122		)
Depreciation and amortization	21,923
Amortization of deferred financing costs and debt issuance discount	3,798
Non-cash payment-in-kind interest option	8,305
Non-cash stock option compensation expense	2,057
Non-cash losses	(6,209		)
Deferred income taxes	13,887
Equity in earnings of unconsolidated affiliates, net of distributions received	(1,931		)
Provision for doubtful accounts	10,536
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable	(6,458		)
Other assets and liabilities	(4,095		)
Net cash provided by operating activities—continuing operations	$	68,779

________________________________________

(1) When we use the term Consolidated Adjusted EBITDA, we are referring to EBITDA as reported adjusted for covenant related items per our Credit Facility.

(2) Represents the cash lease payment adjustment for our facility located in Idaho Falls, Idaho as contemplated by our Credit Facility.

(3) Adjustments related to outstanding balances on intercompany notes issued by our restricted subsidiaries as contemplated by our Credit Facility.

(4) Includes the pro forma effect of acquisitions and other non-cash adjustments as contemplated by our Credit Facility.

Liquidity and Capital Resources

Operating Activities

During the year ended December 31, 2012, our operating cash flow from continuing operations increased to $68.8 million compared to $65.9 million for the year ended December 31, 2011. This increase is primarily attributable to surgical facilities and incremental, controlling interests acquired since January 1, 2011 and changes in working capital.

During the year ended December 31, 2011, we generated operating cash flow from continuing operations of $65.9 million compared to $60.4 million for the year ended December 31, 2010.  The increase is primarily due to surgical facilities acquired and incremental, controlling ownership interests acquired since January 1, 2010. 

Investing Activities

Net cash used in investing activities from continuing operations during the year ended December 31, 2012 was $24.2 million which included $21.1 million of payments for acquisitions, net of $2.3 million of cash acquired, as well as proceeds from divestitures of $11.5 million. Our acquisition activity was funded with cash from continuing operations. Additionally, we invested $14.5 million related to purchases of property and equipment which was funded with cash from continuing operations in 2012.

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Net cash used in investing activities from continuing operations during the year ended December 31, 2011 was $18.1 million which included $7.8 million of payments for acquisitions, net of cash acquired. Our acquisition activity was funded with cash from continuing operations. Additionally, we invested $9.7 million related to purchases of property and equipment which was funded with cash from continuing operations in 2011.

Net cash used in investing activities from continuing operations during the year ended December 31, 2010 was $52.8 million, including $44.1 million for acquisitions, net of cash acquired.  Also during 2010, purchases of property and equipment totaled $8.5 million. Cash used in investing activities in 2010 was funded with borrowings under our Revolving Facility and cash from operations.

Financing Activities

Net cash used in financing activities from continuing operations during the year ended December 31, 2012 was $41.3 million. During 2012, we made distributions to noncontrolling interest partners of $39.9 million.

Net cash used in financing activities from continuing operations during the year ended December 31, 2011 was $55.8 million. During 2011, we made distributions to noncontrolling interest partners of $33.2 million. The following table summarizes our financing activities related to the issuance of our Senior Secured Notes and simultaneous extinguishment of debts during the year ended December 31, 2011 (in thousands):

	Cash provided by (used in) debt issuance and extinguishment
Issuance of Senior Secured Notes, net of unamortized debt issuance discount of $5,278	$	344,722
Debt extinguishment, plus accrued and unpaid interest:
Credit Facility	(273,121		)
Toggle Notes	(73,330		)
Payment of debt issuance costs	(11,891		)
Net cash used in debt issuance and extinguishment	$	(13,620	)

Net cash provided by financing activities from continuing operations during the year ended December 31, 2010 was $10.5 million.  During 2010, we made scheduled principal payments on our former Senior Secured Credit Facility totaling $10.6 million.  Also during 2010, we elected to exercise the PIK option by increasing the principal amount in lieu of making scheduled interest payments of $25.0 million on our Toggle Notes.  We also made distributions to noncontrolling interest holders of $25.7 million during 2010. To fund our acquisition activity during 2010, we utilized $56.0 million of our available borrowings under our former Revolving Facility.

Long-Term Debt

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

	Year Ended December 31,
	2012			2011
Senior Secured Notes, net of debt issuance discount of $3,868 and $4,799, respectively	337,132			336,201
Toggle Notes	94,724			94,724
PIK Exchangeable Notes	109,688			101,413
Notes Payable and Secured Loans	28,247			21,627
Capital lease obligations	4,278			4,257
	574,069			558,222
Less current maturities	(39,645		)	(13,550		)
Total	$	534,424		$	544,672

As described in the following sections, we modified our long-term debt structure during the second quarter of 2011. On June 14, 2011, we completed the Offering of $350.0 million aggregate principal amount of Senior Secured Notes. The proceeds of the Offering were used to retire our then existing senior secured credit facility and a portion of our Toggle Notes. In connection with the Offering, we entered into the Credit Facility as well as exchanged outstanding Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest, for $88.5 million initial aggregate principal amount of PIK Exchangeable Notes. As a result of the debt restructuring, we recorded a loss on debt extinguishment of $4.8 million. This loss is comprised primarily of capitalized debt issuance costs written off in connection with our termination of debt instruments as part of the restructuring.

On September 9, 2011, we cancelled $9.0 million aggregate principal amount of outstanding Senior Secured Notes held by certain holders, plus accrued and unpaid interest, in exchange for the issuance to such holders of $9.2 million aggregate principal amount of PIK Exchangeable Notes which resulted in no significant gain or loss to the Company.

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Credit Facility

The Credit Facility provides the ability to borrow under revolving credit loans and swingline loans. Letters of credit may also be issued under the Credit Facility. The Credit Facility matures on December 15, 2015. The Credit Facility is subject to a potential, although uncommitted, increase of up to $25.0 million at our request at any time prior to maturity of the facility, subject to certain conditions, including compliance with a maximum net senior secured leverage ratio and a minimum cash interest coverage ratio. The increase is only available if one or more financial institutions agree to provide it.

During the third quarter of 2012, we obtained a letter of credit under the Credit Facility for $465,000. This letter of credit was required as part of our workers' compensation insurance coverage. The issuance of this letter of credit reduced our available borrowings under the Credit Facility. As of December 31, 2012, $49.5 million was available under the Credit Facility.

Loans under the Credit Facility bear interest, at our option, at the reserve adjusted LIBOR rate plus 4.50% or at the alternate base rate plus 3.50%. We are required to pay a commitment fee at a rate equal to 0.50% per annum on the undrawn portion of commitments in respect of the Credit Facility. This fee is payable quarterly in arrears and on the date of termination or expiration of the commitments.

The Credit Facility contains financial covenants requiring us not to exceed a maximum net senior secured leverage ratio or fall below a minimum cash interest coverage ratio, in each case tested quarterly. Borrowings under the Credit Facility are subject to significant conditions, including the absence of any material adverse change. At December 31, 2012, we were in compliance with all material covenants contained in the Credit Facility.

Senior Secured Notes

On June 14, 2011, we completed the private offering of $350.0 million aggregate principal amount of our Senior Secured Notes. The Senior Secured Notes were issued at a 1.51% discount, yielding proceeds of approximately $344.7 million. Interest on the Senior Secured Notes is due June 15 and December 15 of each year and will accrue at the rate of 8.00% per annum. The Senior Secured Notes will mature on June 15, 2016.

The Senior Secured Notes are guaranteed by substantially all of our existing and future material wholly-owned domestic restricted subsidiaries. The Senior Secured Notes and the guarantees are the Company's and the guarantors' senior secured obligations and rank equal in right of payment with any of the Company's or the guarantors' existing and future senior indebtedness and pari passu with the Company's and the guarantors' first priority liens, except to the extent that the property and assets securing the notes also secure the obligations under the Credit Facility, which is entitled to proceeds of the collateral prior to the Senior Secured Notes, in the event of a foreclosure or any insolvency proceedings.

We may redeem all or any portion of the Senior Secured Notes on or after June 15, 2014 at the redemption price set forth in the indenture governing the Senior Secured Notes, plus accrued interest. Prior to June 15, 2014, in each of 2011, 2012 and 2013, we may redeem up to 10% of the original aggregate principal amount of the Senior Secured Notes at a price equal to 103% of the aggregate principal amount thereof, plus accrued and unpaid interest. We may also redeem all or any portion of the Senior Secured Notes at any time prior to June 15, 2014 at a price equal to 100% of the aggregate principal amount thereof plus a make-whole premium and accrued and unpaid interest. In addition, we may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with proceeds of certain equity offerings at any time prior to June 15, 2014. At December 31, 2012, we had not redeemed any of our Senior Secured Notes.

Effective September 9, 2011, we cancelled $9.0 million aggregate principal amount of our Senior Secured Notes held by certain holders, plus accrued and unpaid interest, in exchange for our issuance to such parties of $9.2 million aggregate principal amount of our PIK Exchangeable Notes. As a result of that exchange, we currently have $341.0 million aggregate principal amount of Senior Secured Notes outstanding.

At December 31, 2012, we were in compliance with all material covenants contained in the indenture governing the Senior Secured Notes.

Scheduled amortization of the discount recorded in connection with the Senior Secured Notes is as follows (in thousands):     

	Discount attributable to Senior Secured Notes
January 1, 2013 through December 31, 2013	1,006
January 1, 2014 through December 31, 2014	1,092
January 1, 2015 through December 31, 2015	1,186
January 1, 2016 through June 15, 2016	584
Total	$	3,868

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Toggle Notes

On June 3, 2008, we completed the private offering of $179.9 million aggregate principal amount of our Toggle Notes.  Interest on the Toggle Notes is due February 23 and August 23 of each year.  The Toggle Notes will mature on August 23, 2015.  For any interest period through August 23, 2011, we were able to elect to pay interest on the Toggle Notes (i) in cash, (ii) in kind, by increasing the principal amount of the notes or issuing new notes (referred to as “PIK interest”) for the entire amount of the interest payment or (iii) by paying interest on 50% of the principal amount of the Toggle Notes in cash and 50% in PIK interest.  Cash interest on the Toggle Notes accrues at the rate of 11.0% per annum.  PIK interest on the Toggle Notes accrued at the rate of 11.75% per annum. 

Between August 23, 2008 and August 23, 2011, we elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for various interest periods. As a result, the principal due on the Toggle Notes increased by $71.0 million from the issuance of the Toggle Notes to December 31, 2012. Beginning with our February 2012 interest payment, all interest under our Toggle Notes is required to be paid in cash. We have accrued $3.7 million in interest on the Toggle Notes in other accrued expenses as of December 31, 2012.

In connection with the Offering, we repurchased $70.8 million aggregate principal amount of the Toggle Notes, at par plus accrued and unpaid interest of $2.6 million, and exchanged $85.4 million aggregate principal amount of Toggle Notes, at par plus accrued interest of $3.1 million, for $88.5 million aggregate principal amount of PIK Exchangeable Notes.

The indenture governing the Toggle Notes includes a mandatory redemption provision. Under this provision, if the Toggle Notes would otherwise constitute applicable high yield discount obligations ("AHYDO"), within the meaning of Section 163(i)(1) of the Tax Code, we are required to redeem, for cash, a portion of the Toggle Notes then outstanding, equal to the mandatory principal redemption amount. Under the mandatory redemption provisions of the Toggle Notes, $21.2 million of principal balance outstanding is due and payable on August 23, 2013.

The Toggle Notes are unsecured senior obligations and rank equally with other existing and future senior indebtedness, senior to all future subordinated indebtedness and effectively junior to all secured indebtedness to the extent of the value of the collateral securing such indebtedness.  Certain of our subsidiaries have guaranteed the Toggle Notes on a senior basis, as required by the indenture governing the Toggle Notes.  The indenture also requires that certain of our future subsidiaries guarantee the Toggle Notes on a senior basis.  Each guarantee is unsecured and ranks equally with senior indebtedness of the guarantor, senior to all of the guarantor's subordinated indebtedness and effectively junior to its secured indebtedness to the extent of the value of the collateral securing such indebtedness.

The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates. At December 31, 2012, we were in compliance with all material covenants contained in the indenture governing the Toggle Notes.

PIK Exchangeable Notes

Concurrent with the Offering, we exchanged with certain holders of our outstanding Toggle Notes, Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest, for $88.5 million initial aggregate principal amount of our PIK Exchangeable Notes. Effective September 9, 2011, we cancelled $9.0 million aggregate principal amount of our Senior Secured Notes held by certain holders, plus accrued and unpaid interest, in exchange for our issuance to such parties of $9.2 million aggregate principal amount of our PIK Exchangeable Notes.

The PIK Exchangeable Notes will mature on June 15, 2017. Interest accrues on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on each June 15 and December 15 of each year, commencing on December 15, 2011. We will not pay interest in cash on the PIK Exchangeable Notes. Instead, we will pay interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest. We have accrued $400,000 in interest on the PIK Exchangeable Notes in other accrued expenses as of December 31, 2012. We record this accrued interest in other current liabilities until the interest payment date. On June 15 and December 15 of each year, we reclassify the accrued interest to long-term debt. Due to the required payment-in-kind, we increased the principal amount of the PIK Exchangeable Notes by $3.8 million during 2011 and $8.3 million during 2012.

The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.

The PIK Exchangeable Notes are unsecured senior obligations and rank equally with other existing and future senior indebtedness, senior to all future subordinated indebtedness and effectively junior to all secured indebtedness to the extent of the value of the collateral securing such indebtedness. Holdings and substantially all of our material wholly owned domestic subsidiaries have guaranteed the PIK Exchangeable Notes on a senior basis, as required by the indenture governing the PIK Exchangeable Notes. Each guarantee is unsecured and ranks equally with senior indebtedness of the guarantor, senior to all of the guarantor's subordinated indebtedness and effectively junior to its secured indebtedness to the extent of the value of the collateral securing such indebtedness.

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We may not redeem the PIK Exchangeable Notes prior to June 15, 2014. On or after June 15, 2014, we may redeem some or all of the PIK Exchangeable Notes for cash at a redemption price equal to a specified percentage of the accreted principal amount of the PIK Exchangeable Notes to be redeemed, plus accrued and non-capitalized interest. The specific percentage for such redemptions will be 104% for redemptions during the year commencing on June 15, 2014, 102% for redemptions during the year commencing on June 15, 2015, and 100% for redemptions during the year commencing on June 15, 2016.

We recorded the PIK Exchangeable Notes in accordance with ASC Topic 470, Debt. In the exchange, the new PIK Exchangeable Notes were recorded at fair value. At December 31, 2012, we were in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.

Notes Payable to Banks

Certain of our subsidiaries have outstanding bank indebtedness, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made.  The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions. 

Capital Lease Obligations

We are liable to various vendors for several equipment leases.  The carrying value of the leased assets was $6.3 million and $5.2 million as of December 31, 2012 and December 31, 2011, respectively.

Summary

We believe we have sufficient liquidity in the next 12 to 18 months as described above. Nevertheless, we continue to monitor the state of the financial and credit markets and our current and expected liquidity and capital resource needs, and intend to continue to explore various financing alternatives to improve our capital structure, including by reducing debt, extending maturities or relaxing financial covenants.  These may include new equity or debt financings or exchange offers with our existing security holders (including exchanges of debt for debt or equity) and other transactions involving our outstanding securities, given their secondary market trading prices.  We cannot assure you, if we pursue any of these transactions, that we will be successful in completing a transaction on attractive terms, or at all.

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations by period as of December 31, 2012 (in thousands):

	Payments Due by Period
	Total		2013		2014- 2015		2016- 2017		Thereafter
Contractual Obligations:
Long-term debt	$	573,659	$	37,592	$	81,927	$	453,867	$	273
Cash interest obligations	122,513		39,079		71,931		11,500		3
Capital lease obligations	4,278		2,053		1,946		279		—
Operating lease obligations	146,193		23,491		38,735		26,611		57,356
Other financing obligations(1)	109,848		5,596		11,701		12,414		80,137
Total	$	956,491	$	107,811	$	206,240	$	504,671	$	137,769

________________________________________

(1) Other financing obligations are payable to the hospital facility lessor at our facility located in Idaho Falls, Idaho relating to the land, building and improvements.

Inflation

For the past three years, inflation and changing prices have not significantly affected our operating results or the markets in which we operate.

Recent Accounting Pronouncements

ASU 2011-08, Intangibles - Goodwill and Other

In September 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-08. Previously, entities were required to test goodwill for impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including the carrying value of the goodwill. If the resulting fair value of a reporting unit was less than its carrying amount, then the second step of the test would be performed to measure the amount of the impairment loss, if any. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If, after assessing the totality of events or

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circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary.

In accordance with ASU 2011-08, we had the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. Additionally, ASU 2011-08 permits us to resume performing the qualitative assessment in any subsequent period. We adopted the provisions of ASU 2011-08 during the first quarter of 2012. The adoption of ASU 2011-08 did not impact our financial position, results of operations or cash flows.

ASU 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities

In July 2011, the FASB issued ASU 2011-07. ASU 2011-07 requires healthcare entities that recognize significant amounts of patient service revenues at the time services are rendered, to present the provision for doubtful accounts related to patient service revenues as a deduction from patient service revenues (net of contractual allowances and discounts) on their statement of operations if they do not assess the patient's ability to pay. We have evaluated ASU 2011-07 and has determined that the requirements of this ASU are not applicable to the Company as the ultimate collection of patient service revenues is generally determinable at the time of service. This ASU had no impact on our consolidated financial position, results of operations or cash flows.

ASU 2011-05, Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, which eliminated the Company's ability to present components of other comprehensive income as part of the statement of changes in stockholders' equity. Instead, ASU 2011-05 requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted the provisions of ASU 2011-05 during the first quarter of 2012 and retrospectively for all periods presented with the inclusion of a separate, consecutive consolidated statement of comprehensive income. Through December 31, 2012, our only component of other comprehensive income related to changes in the fair value of its interest rate swap derivative instrument in previous periods. During the second quarter of 2011, we discontinued hedge accounting treatment as a result of the Company's extinguishment of the underlying senior secured credit facility. The adoption of ASU 2011-05 did not impact our financial position, results of operations or cash flows.

ASU 2013-02, Comprehensive Income (ASC Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In January 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (ASC Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The update is effective for financial statement periods beginning after December 15, 2012 with early adoption permitted. We will adopt this standard beginning January 1, 2013.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Historically, we have not held or issued derivative financial instruments other than the use of a variable-to-fixed interest rate swap for a portion of our senior credit facility.  We do not use derivative instruments for speculative purposes.  Our outstanding debt to commercial lenders is generally based on a predetermined percentage above LIBOR or the lenders’ prime rate.  At December 31, 2012, $1.0 million of our long-term debt was subject to variable rates of interest. Additionally, future borrowings under our Credit Facility would subject us to LIBOR fluctuations. At December 31, 2012,  the fair value of our total long-term debt, based on quoted market prices as of December 31, 2012, is approximately $585.0 million.

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.

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)

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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) Management’sReport on Internal Control over Financial Reporting.  Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f).  Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

During 2012, we acquired an ownership interest in an ASC located in St. Louis, Missouri and a surgical hospital located in Lubbock, Texas. Related to these acquisitions, our consolidated balance sheet as of December 31, 2012 includes $21.2 million of total assets, excluding goodwill, and our consolidated statement of operations for the year ended December 31, 2012 includes $35.5 million and $2.7 million of net revenues and net income, respectively. We have excluded these acquisitions from management's assessment of internal control over financial reporting.

Management has assessed the effectiveness of our internal control over financial reporting using the criteria set forth in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on management’s assessment and those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2012.

(c) Changes inInternal Control Over Financial Reporting.  There has been no change in our internal control over financial reporting that occurred during the fourth quarter of that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.  For these reasons, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Item 9B.     Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

MANAGEMENT

The following list identifies the name, age and position(s) of our executive officers, key employees and directors:

Name	Age	Position
Richard E. Francis, Jr.	59	Chairman of the Board, Chief Executive Officer and Director
Clifford G. Adlerz	59	President, Chief Operating Officer and Director
Teresa F. Sparks	44	Senior Vice President of Finance, Chief Financial Officer
Robert V. Delaney	55	Director
Quentin Chu	36	Director
Kurt E. Bolin	54	Director
Craig R. Callen	57	Director
Daniel G. Kilpatrick	32	Director

Directors are re-elected annually by the shareholders of the Company (most recently as of March 6, 2013) pursuant to a written consent in lieu of annual meeting. Each director shall hold office until a successor is elected or until the directors death or resignation.

Richard E. Francis, Jr. has served as the Chairman of the Board since May 2002 and as Chief Executive Officer and a director since 1996.  Mr. Francis also served as President from 1996 to May 2002.  Mr. Francis served from 1992 to 1995 as Senior Vice President, Development of HealthTrust, Inc. From 1990 to 1992, Mr. Francis served as Regional Vice President, Southern Region for HealthTrust, where he oversaw operations of 11 hospitals.  Mr. Francis’ experience in the healthcare industry as well as his leadership of the Company and his role as a director since its founding in 1996 provides the Board with a unique and deeper insight into our business, challenges and opportunities.

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

Teresa F. Sparks has served as Chief Financial Officer and Senior Vice President of Finance since August 2007.  Ms. Sparks served as Corporate Controller from the Company’s inception in 1996 to August 2007 and was named Vice President in December 2002.  Previously, she served as Assistant Controller for HealthWise of America, Inc., a managed care organization.  Prior to joining HealthWise of America, Ms. Sparks was a senior healthcare auditor for Deloitte & Touche LLP, Nashville, Tennessee.

Robert V. Delaney joined Crestview as a Partner in 2007 and is a member of the investment committee. Prior to joining Crestview, Mr. Delaney was a partner at Goldman Sachs where he served in a variety of leadership positions, including head of the private equity business in Asia and head of the global leveraged finance group. Mr. Delaney also led the firm's workout advisory and restructuring business. In addition to his role on the Symbion board, Mr. Delaney is currently a director of Samson Resources Corporation, Select Energy Services, Silver Creek Oil & Gas and Synergy Energy. He also serves as a trustee of Hamilton College. Mr. Delaney received an MBA from Harvard Business School, an M.S. in Accounting from NYU Stern School of Business and a B.A. in Economics from Hamilton College.

Quentin Chu is a Partner at Crestview Partners and has been with the firm since July 2005, after graduating from Harvard Business School.  Mr. Chu has served as a director of the Company since August 2007.  Prior to attending business school, Mr. Chu was an associate at The Carlyle Group, where he evaluated and executed transactions in the healthcare industry, including pharmaceuticals, medical devices, facility-based providers, managed care and outsourcing.  Prior to joining Carlyle, Mr. Chu was an analyst in the healthcare investment banking team at Goldman, Sachs & Co., where he completed a range of mergers and acquisitions and financing assignments for both early stage and Fortune 500 companies. Mr. Chu's experience in healthcare transactions and finance provides the board greater insight into the healthcare industry and financial strategy.

Kurt E. Bolin is a Principal of Stone Point Capital LLC and has been with the firm since 1997.  Mr. Bolin has served as a director of the Company since August 2007.  Prior to joining Stone Point Capital, Mr. Bolin was with GE Capital, Inc., where he held various private equity positions from 1986 to 1997, most recently as Managing Director of the Equity Capital Group.  In addition to private equity investing, Mr. Bolin’s activities at GE Capital, Inc. included leading the acquisitions of various insurance companies.  Mr. Bolin is also a director of Edgewood Partners Holdings, LLC, GENEX Services, Inc. and Wilton Re Holdings Limited.  The Board benefits from Mr. Bolin’s experience as a private equity investor and the knowledge he has gained as a board member of various companies.

Craig R. Callen has been a Senior Advisor at Crestview Partners since October 2009 and became a director of the Company in March 2010.  From 2004 to 2007, Mr. Callen served as Senior Vice President of Strategic Planning and Business Development and a member of the Executive Committee for Aetna, Inc., responsible for oversight and development of Aetna's corporate strategy, including mergers and acquisitions.  Prior to joining Aetna in 2004, Mr. Callen was a Managing Director and head of U.S. healthcare investment banking at Credit Suisse First Boston and co-head of healthcare investment banking at Donaldson Lufkin & Jenrette prior to its acquisition by Credit Suisse First Boston.  Previously Mr. Callen served on the board of directors of Kinetic Concepts, Inc. and Sunrise Senior Living, Inc.  Mr. Callen, through his 20 years in investment banking and broad experience in the healthcare industry, offers the board greater insight into industry dynamics as well as investment and acquisitions strategies.

Daniel G. Kilpatrick is a Principal at Crestview Partners and has been with the firm since August 2009, after graduating from Stanford Graduate School of Business. Mr. Kilpatrick has been a director of the Company since August 2012. Prior to attending business school, Mr. Kilpatrick worked as a senior financial analyst for the Yale Investments Office where he identified and led the due diligence on investment managers in private equity and other asset classes and monitored existing relationships for the university's endowment. Mr. Kilpatrick's experience in finance provides the Board greater insight into financial strategy.

Board Structure and Compensation

Our board is currently composed of seven members.  We do not currently pay our directors any fees.

Audit Committee Financial Expert

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

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Code of Business Conduct and Ethics

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

Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Symbion is a wholly-owned subsidiary of Symbion Holdings Corporation. The same individuals serve on both Holding’s Board of Directors and our Board of Directors. Senior management is employed by us but has acquired and is eligible to receive equity awards in Holdings.

The Holdings Compensation Committee serves as our Compensation Committee and is responsible for establishing and administering executive compensation policies and programs within the framework of the committee’s compensation philosophy. Our current Compensation Committee was established by Holdings in February 2008.  Our board served as the compensation committee between the consummation of the Merger on August 23, 2007 and the appointment of the committee in February 2008.

Our executive compensation policies are designed to complement and contribute to the achievement of our business objectives. The Compensation Committee’s general philosophy is that executive compensation should:

▪ Link compensation paid to executives to corporate and individual performance;

▪ Provide incentive opportunities that will motivate executives to achieve our long-term objectives;

▪ Be competitive within our industry and community and responsive to the needs of our executives;

▪ Attract, retain, motivate and reward individuals of the highest quality in the industry with the experience, skills and integrity necessary to promote our success; and

▪ Comply with all applicable laws, and be appropriate in light of reasonable and sensible standards of good corporate governance.

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

Compensation Process

The Compensation Committee approves salaries and other compensation for our executive officers. The Compensation Committee also reviews and approves, in advance, employment and similar arrangements or payments to be made to any executive officer.  For purposes of this discussion, the Named Executive Officers, or NEOs, are the individuals included in the Summary Compensation Table in this filing.  Salaries and other compensation for all other officers and employees are determined by management in accordance with our compensation policies and plans.

Prior to the Merger, our compensation procedures were similar to those of other similarly situated companies. Our former Compensation Committee retained an independent compensation consultant for advice with respect to specific compensation decisions.  Currently, our Compensation Committee is appointed by Holdings’ Board of Directors, which is controlled by Crestview. Accordingly, our Compensation Committee represents the interests of our stockholders and makes decisions independent from our executive officers. Our Compensation Committee has not utilized the services of a consulting firm in connection with compensation decisions it has made after the Merger.

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

Components of Executive Compensation

Base Salaries

The Compensation Committee reviews the base salaries of our executive officers on an annual basis. Salaries are determined based on a subjective assessment of the nature and responsibilities of the position involved, our performance and the performance of the particular officer, and the officer's experience and tenure with us. Messrs. Francis and Adlerz were entitled to increases in salary effective January 1, 2008, to $525,000 and $375,000, respectively, under the terms of their employment agreements but elected to delay implementing this increase to their base salary. Messrs. Francis and Adlerz received no salary increase for 2009 and received the 2% cost of living salary increase that all other employees received in 2010 and 2011. Effective April 1, 2012, the Compensation Committee approved a base salary increase for Ms. Sparks to $245,000. Effective May 1, 2012, the Compensation Committee approved base salary increases for Messrs. Francis and Adlerz to $560,000 and $420,000, respectively.

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Non-Equity Incentive Compensation

Non-equity incentive compensation is intended to motivate executive officers to achieve pre-determined financial or other goals appropriate to each executive officer's area of responsibility set by the Compensation Committee, consistent with our overall business strategies.

In February 2012, the Compensation Committee established the 2012 Corporate Key Management Incentive Plan for key management employees, including our executive officers.  The 2012 plan provides for a cash bonus equal to a percentage of base salary upon achievement of financial indicators selected by our Compensation Committee, including achievement of applicable budgeted EBITDA, development and division performance targets. The amount paid under the plan depends on the level of achievement; provided, however, that no bonus based on Company EBITDA will be paid unless a minimum of 95% of budgeted EBITDA is achieved.

For Messrs. Francis and Adlerz, the aggregate cash and equity target bonus was 100% of base salary upon achievement of applicable budgeted EBITDA for the Company.  For Ms. Sparks, the aggregate cash and equity target bonus for 2012 was 50% of base salary upon achievement of applicable budgeted EBITDA for the Company.  Upon review of the Company's 2012 financial performance, the Committee determined that Company EBITDA performance for the year ended December 31, 2012 exceeded threshold levels.  Accordingly, cash bonuses were earned by our Named Executive Officers for 2012 under this plan. In addition, the Committee awarded a discretionary bonus to the Named Executive Officers. See "Executive Compensation—Summary Compensation Table".

In February 2013, the Compensation Committee established the 2013 Corporate Key Management Incentive Plan for key management employees, including our executive officers.  The 2013 plan provides for a  bonus in cash or equity securities with a value equal to a percentage of base salary upon achievement of financial indicators selected by our Compensation Committee, including achievement of applicable budgeted EBITDA, development and division performance targets.  The amount of the award under the plan depends on the level of achievement; provided, however, that no bonus based on Company EBITDA will be paid unless a minimum of 95% of budgeted EBITDA is achieved. For Messrs. Francis and Adlerz, the aggregate cash and equity target bonus is 100% of base salary upon achievement of applicable budgeted EBITDA for the Company.  For Ms. Sparks, the aggregate cash and equity target bonus is 50% of base salary upon achievement of applicable budgeted EBITDA for the Company.

Equity-Based Compensation

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

Holdings maintains the 2007 Equity Incentive Plan, which permits grants of stock options and other equity-based awards.  On August 31, 2007, the Compensation Committee made an initial award of options to purchase Holdings common stock under this plan to our executive officers and certain other employees.  The exercise price of the options equaled the fair market value of Holdings common stock on the date of the grant.  The options contain both time and performance based vesting components.  Vesting of the time vesting portion of the award is accelerated in the event of a change in control. Vesting of performance vesting options is accelerated if certain conditions are satisfied in connection with a liquidity event.  See “Executive Compensation—Potential Payments Upon Termination or Change in Control—Other Effects of Termination of Employment or Change in Control.”

Effective January 23, 2012, the Board of Directors of Holdings adopted an amendment to the 2007 Equity Incentive Plan. The amendment increases the shares authorized for future grant under the plan by 2,400,000 shares and expands the authority of the Compensation Committee to amend the terms of outstanding awards under the plan without impairing the rights of any affected plan participant or the holder or beneficiary of any award.

After the adoption of the amendment, the Compensation Committee amended the terms for vesting and exercise of certain options previously issued under the plan and held by persons employed as of March 3, 2012, including options held by the Named Executive Officers. The exercise price of all options originally issued on and after August 31, 2007 was reduced to $3.00 per share and the expiration date of such options was extended to January 23, 2022.Outstanding performance vesting options were amended to provide that they will vest upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity.

On May 23, 2012, the Compensation Committee approved grants of new options to purchase 2,238,231 shares of Holdings common stock to certain of our employees under the 2007 Equity Incentive Plan, including our Named Executive Officers.  Options were granted to Messrs. Francis and Adlerz and Ms. Sparks to purchase 576,000, 432,000 and 146,427 shares of Holdings common stock, respectively. The exercise price of all such options was $3.50 per share, which the Committee determined was equal to or greater than the fair market value of Holdings common stock on the date of the grant.  These options expire on May 23, 2022 or, if sooner, following termination of employment. Additionally, 50% of the options granted to each Named Executive Officer are time vesting options and 50% are performance vesting options.

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Other Benefits

In January 2005, our former Compensation Committee adopted the SERP. The SERP is a nonqualified deferred compensation program for officers and other key employees designated by the Compensation Committee. The SERP is designed and administered in accordance with the requirements of the Internal Revenue Code to defer the taxation on compensation earned by participating employees. Participating employees can elect to defer up to 25% of their base salary and up to 50% of their year-end bonus. For employees who defer at least 2% of their base salary, we will contribute 2% of the employee's base salary to the SERP. The Compensation Committee in its discretion may make additional contributions based on achievement of performance goals or other company objectives. Employee contributions pursuant to the SERP are 100% vested at all times. Company contributions vest one year after contribution, and immediately upon death, disability or change in control of the Company. Participating employees direct the investment of their accounts in mutual funds or other appropriate investment media that we select. Assets invested pursuant to the SERP are designated for paying SERP benefits but are the property of Symbion and are subject to the claims of our creditors.

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

Perquisites

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

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth certain information concerning compensation paid or accrued for the last three years with respect to our Named Executive Officers:

Name and Principal Position	Year	Salary		Bonus		Option Awards (1)		Non-Equity Incentive Plan Compensation (2)		All Other Compensation(3)		Total
Richard E. Francis, Jr.	2012	$	536,767	$	28,000	$	869,760	$	560,000	$	27,838	$	2,022,365
Chairman of the Board and Chief Executive Officer	2011	482,225		—		—		—		12,615		494,840
	2010	472,816		—		—		189,108		10,818		672,742
Clifford G. Adlerz	2012	397,917		21,000		652,320		420,000		22,576		1,513,813
President and Chief Operating Officer	2011	348,274		—		—		—		9,891		358,165
	2010	341,485		—		—		136,579		9,015		487,079
Teresa F. Sparks	2012	241,874		12,500		221,105		122,500		13,602		611,581
Senior Vice President of Finance and Chief Financial Officer	2011	227,929		—		—		—		6,950		234,879
	2010	223,466		—		—		44,693		6,218		274,377

___________________________________

(1) Represents awards under the 2007 Equity Incentive Plan, as amended, granted May 23, 2012. See “Grants of Plan-Based Awards” below for additional information on the 2012 awards.

(2) Represents awards under the 2010, 2011, and 2012 Corporate Key Management Incentive Plans.  See “Grants of Plan-Based Awards” below for additional information on the 2012 awards.

(3) Represents:

(a) Company contributions to the Supplemental Executive Retirement Plan for Mr. Francis of $9,270 for 2010, $9,455 for 2011 and $24,645 for 2012, Mr. Adlerz of $6,695 for 2010, $6,829 for 2011 and $19,465 for 2012; and Ms. Sparks of $4,382 for 2010, $4,469 for 2011 and $11,059 for 2012.

(b) Company contributions to the 401(k) plan for Mr. Francis of $0 for 2010, $1,837 for 2011 and $1,871 for 2012; Mr. Adlerz of $919 for 2010, $1,837 for 2011 and $1,838 for 2012; and Ms. Sparks of $919 for 2010, $1,679 for 2011 and $1,704 for 2012.

(c)Premiums we paid for term life insurance on behalf of Mr. Francis of $1,548 for 2010, $1,323 for 2011 and $1,323 for 2012; Mr. Adlerz of $1,401 for 2010, $1,225 for 2011 and $1,273 for; Ms. Sparks of $917 for 2010, $802 for 2011 and $839 for 2012.

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Grants of Plan-Based Awards

The following table provides information regarding equity awards and incentive awards granted during 2012 to our Named Executive Officers under the 2012 Corporate Key Management Incentive Plan, conditioned on achievement of applicable performance targets: 

	Grant Date	Potential Payouts Under Non-Equity Incentive Plan Awards			All Other Option Awards: Number of Securities Underlying Options (#)	Exercise or Base Price of Option Awards ($/Sh)		Grant Date Fair Value of Stock and Option Awards ($)
		Threshold(1)	Target(2)	Maximum
Richard E. Francis, Jr.	N/A	224,000	560,000	560,000	—	$	—	$	—
	5/23/2012				576,000	3.50		869,760
Clifford G. Adlerz	N/A	168,000	420,000	420,000	—	—		—
	5/23/2012				432,000	3.50		652,320
Teresa F. Sparks	N/A	49,000	122,500	122,500	—	—		—
	5/23/2012				146,427	3.50		221,105

___________________________________

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

(2) Target is based upon the expectation of the potential payout of incentive awards when the incentive plan was established.

Outstanding Equity Awards at Fiscal Year-End

The following table provides certain information with respect to the Named Executive Officers regarding outstanding equity awards as of December 31, 2012:

	Option Awards
Name	Number of Securities Underlying Unexercised Options (#) (Exercisable)		Number of Securities Underlying Unexercised Options (#) (Unexercisable)		Option Exercise Price ($)		Option Expiration Date
Richard E. Francis, Jr.	76,119	(1)	—		$	1.50	12/10/2013
	24,941	(1)	—		$	1.50	12/10/2014
	29,082	(1)	—		$	1.50	1/5/2015
	21,098	(1)	—		$	1.50	1/18/2014
	430,302	(2)	462,195	(2)	$	3.00	1/23/2022
	—		576,000	(5)	$	3.50	5/23/2022
Clifford G. Adlerz	60,505	(1)	—		$	1.50	12/10/2013
	15,588	(1)	—		$	1.50	12/10/2014
	18,176	(1)	—		$	1.50	1/5/2015
	15,171	(1)	—		$	1.50	1/18/2014
	286,868	(3)	318,762	(3)	$	3.00	1/23/2022
	—		432,000	(6)	$	3.50	5/23/2022
Teresa F. Sparks	6,361	(1)	—		$	1.50	1/5/2015
	2,982	(1)	—		$	1.50	1/18/2014
	51,521	(4)	83,415	(4)	$	3.00	1/23/2022
	—		146,427	(7)	$	3.50	5/23/2022

_____________________________________

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

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(2) Effective August 31, 2007, Mr. Francis received a grant of options to purchase 892,497 shares of Holdings common stock, including 430,302 time vesting options and 462,195 performance vesting options. The time vesting options vested 20% per year on December 31 beginning December 31, 2007. Performance vesting options vest upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity.

(3) Effective August 31, 2007, Mr. Adlerz received a grant of options to purchase 605,630 shares of Holdings common stock, including 286,868 time vesting options and 318,762 performance vesting options. The time vesting options vested 20% per year on December 31 beginning December 31, 2007. Performance vesting options vest upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity.

(4) Effective August 31, 2007, Ms. Sparks received a grant of options to purchase 134,936 shares of Holdings common stock, including 51,521 time vesting options and 83,415 performance vesting options. The time vesting options vested 20% per year on December 31 beginning December 31, 2007.  Performance vesting options vest upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity.

(5) Effective May 23, 2012, Mr. Francis received a grant of options to purchase 576,000 shares of Holdings common stock, including 288,000 time vesting options and 288,000 performance vesting options. The time vesting options vest 20% per year on May 23 beginning May 23, 2013. Performance vesting options vest upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity.

(6) Effective May 23, 2012, Mr. Adlerz received a grant of options to purchase 432,000 shares of Holdings common stock, including 216,000 time vesting options and 216,000 performance vesting options. The time vesting options vest 20% per year on May 23 beginning May 23, 2013. Performance vesting options vest upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity.

(7) Effective May 23, 2012, Ms. Sparks received a grant of options to purchase 146,247 shares of Holdings common stock, including 73,124 time vesting options and 73,123 performance vesting options. The time vesting options vest 20% per year on May 23 beginning May 23, 2013. Performance vesting options vest upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity.

See “Compensation Discussion and Analysis—Components of Executive Compensation — Equity Based Compensation ” for additional information about the 2012 amendment to the 2007 Equity Incentive Plan.

Option Exercises and Stock Vested

During 2012, Messrs. Francis and Adlerz exercised 135,162 and 108,128 options to purchase Holdings common stock, respectively, that were rolled over in connection with the Merger. Ms. Sparks did not exercise any stock options during 2012. Additionally, no restricted stock or similar awards vested during 2012.

The following table shows the activity during 2012 related to Named Executive Officer exercises:

	Option Awards
Name	Number of Shares Acquired on Exercise (#)	Value Realized on Exercise ($)
Richard E. Francis	49,706	$	74,559
Clifford G. Adlerz	39,764	$	59,646

Nonqualified Deferred Compensation

The following table shows the activity during 2012 and the aggregate balances held by each of the Named Executive Officers at December 31, 2012 under our SERP:

Name	Executive Contributions in Last Fiscal Year		Registrant Contributions in Last Fiscal Year(1)		Aggregate Earnings (Losses) in Last Fiscal Year		Aggregate Balance at Last Fiscal Year End
Richard E. Francis, Jr.	$	10,735	$	24,645	$	32,076	$	260,386
Clifford G. Adlerz	7,958		19,465		17,283		164,177
Teresa F. Sparks	19,350		11,059		20,770		172,777

________________________________________

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

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

Potential Payments Upon Termination or Change in Control

Employment Agreements. Messrs. Francis and Adlerz entered into new employment agreements with us which became effective on August 23, 2007 upon the consummation of the Merger. The initial term of each of the employment agreements is three years, which is

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automatically extended so that the term will be three years until terminated. We are able to terminate each employment agreement for cause, including (but not limited to) the executive's conviction of a felony or gross negligence or internal misconduct in the performance of the executive's duties to the extent it causes demonstrable harm to us. In addition, either party is able to terminate the employment agreement at any time by giving prior written notice to the other party. However, we would be obligated to pay the executive a severance benefit if we terminated the executive's employment without cause or if the executive terminated his employment upon the occurrence of certain events specified in the agreement, including (but not limited to) a change in control or our material breach of the agreement which is not cured promptly. The severance benefit is generally equal to three times the executive's highest base salary and the incentive bonus amount that would be paid for the current year as if the incentive bonus performance goals were fully achieved. Upon a termination of employment as a result of the executive's disability, we will pay the executive contractual disability benefits. If the executive receives severance payments following a change in control of Symbion that are subject to tax under Section 4999 of the Internal Revenue Code, we will pay additional amounts to offset the effect of such taxes on the executive. Each of the employment agreements also includes a covenant not to compete in which the executive agrees that, during the term of the employment agreement and for a period of one year thereafter, he will not own or work for any other company that is predominantly engaged in the ownership and management of surgery centers. 

Severance Plan. We adopted an Executive Change in Control Severance Plan in December 1997, which currently provides for severance benefits for certain senior level employees, including Ms. Sparks. Eligible individuals are those identified in the severance plan and whose employment is terminated in connection with a change in the control of the Company, as defined in the severance plan, and who are not offered employment by us or a successor employer that is substantially equivalent to or better than the position held with us immediately prior to the change in control or such position is not maintained for at least 12 months thereafter. The benefits provided to Ms. Sparks are cash compensation equal to base pay and bonus for 12 months and participation in medical, life, disability and similar benefit plans that are offered to our active employees or those of its successor for a period of 12 months. Cash benefits are paid in a single lump sum within 30 days following termination. 

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

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

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

Stock Option Awards - Options may be subject to forfeiture depending on the nature of the terminating event.  In no event shall an option be exercisable after the expiration date of the option. Upon a change in control or liquidity event, Named Executive Officers have special exercise and vesting rights. These special rights also apply to other option holders. 

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

Termination With Cause.  If a Named Executive Officer's employment is terminated with cause, then all options held by such officer shall immediately be forfeited and cancelled without any payment or consideration being payable to such officer. 

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

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

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

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

Performance Options. Options that vest upon Crestview and certain affiliated investors receiving a target stock price upon a liquidity event become vested only upon a liquidity event that occurs prior to termination of employment.

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Change in Control or Liquidity Event Rights on Termination of Employment. Termination of an executive officer's employment by the Company without cause or upon a resignation for Good Reason will result in the right to exercise options as follows: (i) if termination occurs within 12 months following a Change in Control, the executive officer will be able to fully exercise the time vesting options and, to the extent that the performance conditions are satisfied, performance vesting options for three months following the date of the event; and (ii) if termination occurs within 12 months prior to the execution of an agreement that results in a liquidity event, the executive officer will be able to exercise the time vesting options to the extent that they were vested as of the termination of employment and, to the extent that the performance conditions are satisfied, performance vesting options for three months following the date of a liquidity event; provided, however, that the number of shares that can be acquired on exercise of the performance vesting option will be reduced by one-half if termination of employment is more than six months prior to execution of such agreement. 

As it relates to Messrs. Francis and Adlerz, a termination of employment by the executive officer for “Good Reason” occurs following (a) any material breach by the Company of any material provision of the employment agreement; (b) a reduction in base salary or target bonus opportunity; (c) a material diminution in title or level of responsibility, or change in office or reporting relationship; (d) a transfer of the executive's primary workplace by more than 35 miles; (e) the failure of the executive to be elected or the executive ceases to be a member of our board or the board of Symbion (except for cause); or (g) the executive's resignation for any reason within 120 days following a Change in Control. 

For all other Named Executive Officers, “Good Reason” means, during the 12 months following a Change in Control, (a) a reduction in base salary or target bonus opportunity in effect immediately prior to the Change in Control; (b) a material diminution in level of responsibility or, with respect to Ms. Sparks, a material diminution in title in effect immediately prior to the Change in Control; (c) a material reduction in the aggregate value of deferred compensation and health and welfare benefits that were provided immediately prior to the Change in Control; or (d) a transfer of the executive officer's primary workplace by more than 50 miles.

Potential Payments. The following table shows the amounts that each Named Executive Officer would have received if the Named Executive Officer’s employment had been terminated for the reasons indicated effective December 31, 2012:

Name	Cash Compensation			Accelerated Vesting of Stock Options			Benefits				Total
Richard E. Francis, Jr.
Termination for cause, voluntary termination or retirement	$	—		$	—		$	43,077	(1	)	$	43,077
Death	—			—			43,077		(1	)	43,077
Disability	900,000		(2)	—			51,261		(3	)	951,261
Termination by the Company without cause or by the NEO for Good Reason	3,360,000		(4)	—			51,261		(3	)	3,411,261
Change in Control	4,757,026		(5)	267,840		(6)	51,261		(3	)	5,076,127
Clifford G. Adlerz
Termination for cause, voluntary termination or retirement	—			—			32,308		(1	)	32,308
Death	—			—			32,308		(1	)	32,308
Disability	585,000		(2)	—			40,442		(3	)	625,442
Termination by the Company without cause or by the NEO for Good Reason	2,520,000		(4)	—			40,442		(3	)	2,560,442
Change in Control	3,550,801		(5)	200,880		(6)	40,442		(3	)	3,792,123
Teresa F. Sparks
Termination for cause, voluntary termination or retirement	—			—			18,846		(1	)	18,846
Death	—			—			18,846		(1	)	18,846
Disability	—		(2)	—			18,846		(1	)	18,846
Termination by the Company without cause or by the NEO for Good Reason	—			—			18,846		(1	)	18,846
Change in Control	367,500		(7)	68,089		(6)	26,546		(3	)	462,135

________________________________________

(1) Represents accrued vacation only.

(2) For Messrs. Francis and Adlerz, this represents a disability benefit annual payment equal to 75% of base salary for a maximum period of 36 months, less the amount that is provided under our disability plan that is generally available to all salaried employees. Ms. Sparks is only eligible for disability benefits under our plan available to all salaried employees.

(3) Includes accrued vacation and the premiums for medical, life and disability insurance benefits for the period of time the Named Executive Officer is eligible for continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) in accordance with the Named Executive Officer's employment agreement or the Executive Change in Control Severance Plan, as applicable.

(4) Represents a severance payment equal to (a) three times the Named Executive Officer's base salary plus (b) three times the target cash bonus amount for 2012 in accordance with the Named Executive Officer's employment agreement.

64

(5) Includes the amount described in footnote 4 above plus a “gross up” payment of all excise taxes imposed under Section 4999 of the Code and any federal income and excise taxes that are payable as a result of any reimbursements for Section 4999 excise taxes in accordance with the Named Executive Officer's employment agreement. The gross up amount is $1,376,808 for Mr. Francis and $1,030,801 for Mr. Adlerz.  This calculation assumes termination of employment.

(6) Represents the value of time vesting options which would vest upon a liquidity event.

(7) Represents payment under the Executive Change in Control Severance Plan of one year of annual pay, which includes for each individual, the base pay for 2012 and the bonus payable to each individual pursuant to the 2012 Corporate Key Management Incentive Plan upon achievement of applicable targets.

The table above does not include information about vesting of Company contributions under our 401(k) plan or the SERP. Information about such plans can be found under “Other Effects of Termination of Employment or Change in Control” and “Nonqualified Deferred Compensation.” 

Director Compensation

None of our directors received compensation for service as a member of our (or Holdings) board or board committees for 2012. They are reimbursed for any expenses incurred in connection with their service. 

Compensation Committee Interlocks and Insider Participation

Following the Merger, the Board of Directors of Holdings acted as our Compensation Committee.  Beginning in February 2008, the Board of Directors of Holdings appointed Robert V. Delaney and Thomas S. Murphy, Jr., Board representatives of Crestview, as the Compensation Committee. Effective August 2012, Mr. Murphy resigned from the Board of Directors and was replaced on the Compensation Committee by Craig R. Callen. 

None of the members of the Compensation Committee have at any time been our officer or employee nor have any of the members had any relationship with us requiring disclosure except for the transactions with Crestview described in Item 13. “Certain Relationships and Related Transactions, and Director Independence.”

Compensation Committee Report

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

Compensation Committee

Robert V. Delaney

Craig R. Callen

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

All of our capital stock is owned by our parent company, Holdings.  The following table presents information with respect to the beneficial ownership of Holdings’ common stock as of March 8, 2013 by (a) any person or group who beneficially owns more than five percent of Holdings common stock, (b) each of our directors and Named Executive Officers and (c) all directors and executive officers as a group.  The percentage shares outstanding provided in the table are based on 24,972,492 shares of our common stock plus shares resulting from conversion of the PIK Exchangeable Notes, par value $0.01 per share, outstanding as of March 8, 2013.

65

Name of Beneficial Holder	Number of Shares(1)	Percent of Class
Crestview Funds(2)	40,190,143	79.3	%
The Northwestern Mutual Life Insurance Company(3)	9,080,408	30.2
Trident IV, L.P.(4)	3,000,000	12.0
Banc of America Capital Investors V, L.P.(5)	2,500,000	10.0
Richard E. Francis, Jr.(6)(7)	950,007	3.7
Clifford G. Adlerz(6)(8)	601,631	2.4
Teresa F. Sparks(6)(9)	60,932	*
Kurt E. Bolin(4)	—	*
Craig R. Callen(10)	—	*
Quentin Chu(10)	—	*
Robert V. Delaney(10)	—	*
Daniel G. Kilpatrick.(10)	—	*
All directors and executive officers as a group (8 persons) (11)	1,612,570	6.2	%

________________________________________

*  Less than one percent.

(1) Beneficial ownership includes voting or investment power with respect to securities and includes the shares issuable pursuant to options that are exercisable within 60 days of March 8, 2012 and shares issuable upon the exchange of PIK Exchangeable Notes for Holdings common stock. Shares issuable pursuant to options or PIK Exchangeable Notes are deemed outstanding in computing the percentage held by the person holding the options or PIK Exchangeable Notes but are not deemed outstanding in computing the percentage held by any other person.

(2) Consists of shares held directly by Crestview and certain related investors (the “Crestview Funds”) as well as as well as 25,690,143 shares issuable upon exchange of PIK Exchangeable Notes. Crestview Partners GP, L.P. has voting and investment control over all such shares. Decisions by Crestview Partners GP, L.P. to vote or dispose of such shares require the approval of a majority of the eight members of its investment committee, which is composed of the following individuals: Barry S. Volpert, Thomas S. Murphy, Jr., Jeffrey A. Marcus, Robert J. Hurst, Richard M. DeMartini, Robert V. Delaney, Brian Cassidy and Quentin Chu. None of the foregoing persons has the power individually to vote or dispose of any shares. Each of the foregoing individuals disclaims beneficial ownership of all such shares, except to the extent of his pecuniary interest. The address of each of the foregoing is c/o Crestview Partners, 667 Madison Avenue, 10th Floor, New York, New York 10065.

(3) Includes shares held directly by The Northwestern Mutual Life Insurance Company and an affiliated fund as well as 5,080,408 shares issuable upon exchange of PIK Exchangeable Notes.  The address of The Northwestern Mutual Life Insurance Company is 720 East Wisconsin Avenue, Milwaukee, WI 53202.

(4) Includes shares held directly by Trident IV, L.P. and an affiliated fund (the “Trident IV Funds”).  Mr. Bolin is a principal of Stone Point Capital LLC ("Stone Point"), which serves as the investment manager of the Trident IV Funds.  Mr. Bolin disclaims beneficial ownership of all such shares, except to the extent of any pecuniary interest therein.  The principal address for the Trident IV Funds is c/o Walkers SPV Limited, at Walker House, 87 Mary Street, George Town, Grand Cayman KY1-9002, Cayman Islands.  The principal address for Stone Point Capital LLC is 20 Horseneck Lane, Greenwich, Connecticut 06830.

(5) The address of Banc of America Capital Investors V, L.P. is 150 North College Street, Suite 2500, Charlotte, North Carolina, 28202.

(6) The address of each of Messrs. Francis and Adlerz and Ms. Sparks is 40 Burton Hills Boulevard, Suite 500, Nashville, Tennessee 37215.

(7) Includes options to purchase 538,582 shares which were exercisable as of March 8, 2013 or become exercisable within 60 days following March 8, 2013.

(8) Includes options to purchase 363,673 shares which were exercisable as of March 8, 2013or become exercisable within 60 days following March 8, 2013.

(9) Represents options to purchase 60,932 shares which were exercisable as of March 8, 2013or become exercisable within 60 days following March 8, 2013.

(10) The address of each of Messrs. Kilpatrick, Delaney, Chu and Callen is 667 Madison Avenue, New York, New York 10065.

(11) Includes options to purchase 963,187 shares which were exercisable as of March 8, 2013or become exercisable within 60 days following March 8, 2013.

Equity Compensation Plan Information

The following table provides information as of March 8, 2013 with respect to compensation plans (including individual compensation arrangements) under which shares of the common stock of Holdings are authorized for issuance.

66

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in second column)
Equity compensation plans approved by security holders (1)	5,355,175	$	3.08	553,207
Equity compensation plans not approved by security holders	—	—		—
Total	5,355,175	$	3.08	553,207

________________________________________

(1) Represents stock options granted or issuable under the Holdings 2007 Equity Incentive Plan.  See additional disclosure at Item 8. “Financial Statements and Supplementary Data—Note 9. Stock Options”.

Effective January 23, 2012, the Board of Directors of Holdings adopted an amendment to the 2007 Equity Incentive Plan. The amendment increases the shares authorized for future grant under the plan by 2,400,000 shares and expands the authority of the Compensation Committee to amend the terms of outstanding awards under the plan without impairing the rights of any affected plan participant or the holder or beneficiary of any award.

After the adoption of the amendment, the Compensation Committee amended the terms for vesting and exercise of certain options previously issued under the plan and held by persons employed as of March 3, 2012, including options held by the Named Executive Officers. The exercise price of all options originally issued on and after August 31, 2007 was reduced to $3.00 per share and the expiration date of such options was extended to January 23, 2022.Outstanding performance vesting options were amended to provide that they will vest upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Financial Advisory Fees and Agreements

Holdings paid all fees and expenses of the Crestview Funds in connection with the Merger and the related financings.  The aggregate amount of all fees payable to the Crestview funds and their affiliates in connection with the Merger and the related financing is approximately $6.3 million, plus out-of-pocket expenses.  We have also agreed to pay an affiliate of the Crestview Funds an annual advisory fee of $1.0 million and will reimburse such affiliate for all related disbursements and out-of-pocket expenses pursuant to a management agreement.  The agreement also provides that we will pay an affiliate of the Crestview Funds a fee in connection with certain subsequent financing, acquisition, disposition and change of control transactions based on a percentage of the gross transaction value of any such transaction.  The management agreement includes customary exculpation and indemnification provisions in favor of the Crestview Funds and their affiliates.

Shareholders Agreement

Holdings, the Crestview Funds, the other co-investors and each of our management shareholders entered into a shareholders’ agreement at the closing of the Merger. 

The shareholders agreement provides that Messrs. Francis and Adlerz have the right to be appointed as directors of Holdings (with Mr. Francis as chairman) so long as they are employed in their current positions.  Stone Point, which serves as investment manager of one of the co-investors, is able to appoint one of our directors and the Crestview Funds have the right to select all of the remaining members of the board of directors of Holdings.  In addition, Holdings is required to obtain the consent of the Crestview Funds before taking certain significant actions.

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

Finally, the agreement provides customary demand and piggy-back registration rights to the shareholders.

PIK Exchangeable Note Exchanges

Contemporaneous with the closing of the Offering, we entered into our Credit Facility and issued our PIK Exchangeable Notes to affiliates of Crestview and certain other holders of Toggle Notes in exchange for $85.4 million aggregate principal amount of our existing Toggle Notes, at par plus accrued and unpaid interest. Effective September 9, 2011, we cancelled $9.0 million aggregate principal amount of our Senior Secured Notes held by affiliates of the Northwestern Mutual Life Insurance Company, plus accrued and unpaid interest, in exchange for our issuance to such parties of an additional $9.2 million aggregate principal amount of our PIK Exchangeable Notes. Effective December 15, 2011, the Company reclassified $3.8 million of accrued PIK interest to long-term debt.

67

Policies and Procedures with Respect to Related Party Transactions

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

Director Independence

We do not have securities listed on a national securities exchange or in an automated inter-dealer quotation system of a national securities association and, as such, are not subject to the director independence requirements of such an exchange or association.  In addition, based on the listing standards of The NASDAQ Stock Market, the national securities exchange upon which our common stock was traded prior to the Merger, we would be a “controlled company” within the meaning of Rule 5615(c)(1) of the Nasdaq listing rules because Crestview and its affiliates own a majority of the equity of Holdings, and Holdings owns all of our common stock.  As a controlled company, we would qualify for exemptions from certain NASDAQ corporate governance rules, including the requirement that the board of directors be composed of a majority of independent directors.

Item 14. Principal Accountant Fees and Services

The following table presents fees for professional services rendered by Ernst & Young LLP for the audit of our annual financial statements for 2012 and 2011, and all other fees billed for any additional services rendered by Ernst & Young LLP for 2012 and 2011:

	2012		2011
Audit Fees	$	840,000	$	970,651
Audit-Related Fees	32,955		26,955
Tax Fees	177,128		157,907
Total	$	1,050,083	$	1,155,513

Audit Fees.  These fee were for professional services rendered by Ernst & Young LLP in connection with the audit of our consolidated annual financial statements.  The fees also include services related to Securities and Exchange Commission filings.

Audit-Related Fees.  These fees were for services rendered by Ernst & Young LLP related to accounting consultation services and a subscription to online accounting services.

Tax Fees.  These fees were for services rendered by Ernst & Young LLP for compliance regarding tax filings and for other tax planning and tax advice services.

Pre-approval of Auditor Services

The charter of the Audit and Compliance Committee provides that the Audit and Compliance Committee must pre-approve all services to be provided by the independent auditors prior to the commencement of work.  Unless the specific service has been pre-approved with respect to that year, the Audit and Compliance Committee must approve the permitted service before the independent auditors are engaged to perform it.  For 2012 and 2011, all services provided by Ernst & Young LLP were pre-approved by the Audit and Compliance Committee.

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

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this report:

(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:

68

No.	Description
3.1	Amended Certificate of Incorporation of Symbion, Inc. (a)
3.2	Amended and Restated Bylaws of Symbion, Inc. (a)
4.1	Indenture, dated as of June 3, 2008, among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (a)
4.2	Form of 11.00%/11.75% Senior PIK Toggle Notes due 2015 (included in Exhibit 4.1) (a)
4.3	Registration Rights Agreement, dated as of June 3, 2007, among Symbion, Inc., the subsidiaries of Symbion, Inc. party thereto as guarantors, and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Greenwich Capital Markets, Inc. (a)
4.4	First Supplemental Indenture, dated as of September 18, 2008 among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (a)
4.5	Indenture, dated as of June 14, 2011, among Symbion, Inc., the guarantors party thereto, and U.S. Bank National Association, as trustee, relating to the 8.00% Senior Secured Notes Due 2016 (b)
4.6	Form of 8.00% Senior Secured Notes Due 2016 (included in Exhibit 4.5) (b)
4.7	Registration Rights Agreement, dated as of June 14, 2011, among Symbion, Inc., the guarantors party thereto, and Morgan Stanley & Co. LLC, Barclays Capital Inc. and Jefferies & Company, Inc (b)
4.8	Indenture, dated as of June 14, 2011, among Symbion, Inc., the guarantors party thereto, and U.S. Bank National Association, as trustee, relating to the 8.00% Senior PIK Exchangeable Notes Due 2017 (b)
4.9	Form of 8.00% Senior PIK Exchangeable Notes Due 2017 (included in Exhibit 4.8) (b)
4.10	Form of Registration Rights Agreement, dated as of June 14, 2011, among Symbion, Inc., Symbion Holdings Corporation, the subsidiary guarantors party thereto, and the initial holders named therein (b)
4.11	Amendment to Registration Rights Agreement, dated as of September 9, 2011, among Symbion, Inc., Symbion Holdings Corporation, the subsidiary guarantors party thereto, and the initial holders named therein (h)
10.1	Intercreditor Agreement, dated as of June 14, 2011, among Symbion Holdings Corporation, Symbion, Inc., the other grantors party thereto, Morgan Stanley Senior Funding, Inc., as credit agreement collateral agent, and U.S. Bank National Association, as notes collateral agent (b)
10.2	Employment Agreement, dated August 23, 2007, between Symbion, Inc. and Richard E. Francis, Jr. (a)
10.3	Employment Agreement, dated August 23, 2007, between Symbion, Inc. and Clifford G. Adlerz (a)
10.4	Credit Agreement, dated as of June 14, 2011, among Symbion Holdings Corporation, Symbion, Inc., the lenders party thereto from time to time, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, Morgan Stanley Bank, N.A., as swing line lender and issuing bank, and Barclays Capital and Jefferies Finance LLC, as co-syndication agents. (b)
10.5	Lease Agreement, dated June 26, 2001, between Burton Hills IV Partners and Symbion, Inc. (c)
10.6	First Amendment to Lease Agreement, dated February 9, 2004, between Burton Hills IV Partners and Symbion, Inc. (d)
10.7	Second Amendment to Lease Agreement, dated January 22, 2012, between Burton Hills IV Partners and Symbion, Inc.
10.8	Symbion Holdings Corporation 2007 Equity Incentive Plan (a)
10.9	First Amendment to 2007 Equity Incentive Plan (i)
10.10	Symbion, Inc. Executive Change in Control Severance Plan (a)
10.11	Symbion Holdings Corporation Compensatory Equity Participation Plan (a)
10.12	Shareholders Agreement, dated as of August 23, 2007, among Symbion Holdings Corporation and the stockholders of Symbion Holdings Corporation and other persons named therein (a)
10.13	Advisory Services and Monitoring Agreement, dated as of August 23, 2007, among Symbion, Inc., Symbion Holdings Corporation and Crestview Advisors, L.L.C. (a)
10.14	Form of Employee Contribution Agreement (a)
10.15	Symbion, Inc. Supplemental Executive Retirement Plan (e)
10.16	Management Rights Purchase Agreement, dated as of July 27, 2005, by and among Parthenon Management Partners, LLC, Andrew A. Brooks, M.D., Randhir S. Tuli and SymbionARC Management Services, Inc. (g)
21	Subsidiaries of Registrant
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document (j)
101.SCH	XBRL Taxonomy Extension Schema Document (j)
101.CAL	XBRL Taxonomy Calculation Linkbase Document (j)
101.DEF	XBRL Taxonomy Definition Linkbase Document (j)
101.LAB	XBRL Taxonomy Label Linkbase Document (j)
101.PRE	XBRL Taxonomy Presentation Linkbase Document (j)

69

___________________________________________

(a)	Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 filed September 26, 2008 (Registration No. 333-153678).
(b)	Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K filed June 20, 2011 (File No. 000-50574).
(c)	Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 (Registration No. 333-89554).
(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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 000-50574).
(f)	Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K filed August 2, 2005 (File No. 000-50574).
(g)	Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008, as amended (File No. 000-50574).
(h)	Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 filed October 11, 2011(Registration No. 333-153678).
(i)	Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K filed January 27, 2012 (File No. 000-50574)
(j)	Furnished electronically herewith.

70

Index to Financials

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2
CONSOLIDATED BALANCE SHEETS	F-3
CONSOLIDATED STATEMENTS OF OPERATIONS	F-4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)	F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY	F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS	F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Symbion, Inc.

We have audited the accompanying consolidated balance sheets of Symbion, Inc. as of December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2012. 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 audits 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, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Nashville, Tennessee

March 8, 2013

F-2

SYMBION, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

	December 31, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	74,582		$	62,949
Accounts receivable, less allowance for doubtful accounts of $11,887 and $10,128, respectively	73,211			68,616
Inventories	14,944			12,510
Prepaid expenses and other current assets	10,168			8,781
Current assets of discontinued operations	190			4,767
Total current assets	173,095			157,623
Property and equipment, net	132,154			129,213
Intangible assets, net	24,551			26,687
Goodwill	656,058			630,144
Investments in and advances to affiliates	12,132			14,628
Restricted invested assets	5,169			5,162
Other assets	14,044			15,081
Long-term assets of discontinued operations	—			3,589
Total assets	$	1,017,203		$	982,127
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	23,225		$	14,523
Accrued payroll and benefits	13,096			9,514
Other accrued expenses	29,408			34,839
Current maturities of long-term debt	39,645			13,550
Current liabilities of discontinued operations	645			1,899
Total current liabilities	106,019			74,325
Long-term debt, less current maturities	534,424			544,672
Deferred income tax payable	71,781			60,926
Other liabilities	62,912			61,420
Long-term liabilities of discontinued operations	—			2,936
Noncontrolling interests — redeemable	33,686			34,131
Stockholders' equity:
Common stock, 1,000 shares, $0.01 par value, authorized, issued and outstanding at December 31, 2012 and at December 31, 2011	—			—
Additional paid-in-capital	242,597			239,935
Retained deficit	(93,516		)	(81,806		)
Total Symbion, Inc. stockholders' equity	149,081			158,129
Noncontrolling interests — non-redeemable	59,300			45,588
Total equity	208,381			203,717
Total liabilities and stockholders' equity	$	1,017,203		$	982,127

See Notes To Consolidated Financial Statements.

F-3

SYMBION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

	Year Ended December 31,
	2012			2011			2010
Revenues	$	507,993		$	439,278		$	389,104
Operating expenses:
Salaries and benefits	140,985			121,563			110,631
Supplies	128,001			104,755			87,981
Professional and medical fees	37,517			32,346			26,787
Rent and lease expense	25,050			23,392			22,926
Other operating expenses	33,717			30,852			28,450
Cost of revenues	365,270			312,908			276,775
General and administrative expense	26,901			22,723			22,465
Depreciation and amortization	21,923			20,098			18,219
Provision for doubtful accounts	10,536			6,801			6,489
Income on equity investments	(4,490		)	(1,876		)	(2,901		)
(Gain) loss on disposal and impairment of long-lived assets, net	(6,209		)	4,822			(901		)
Loss on debt extinguishment	—			4,751			—
Electronic health record incentives	(1,054		)	—			—
Litigation settlements, net	(532		)	(231		)	(35		)
Business combination remeasurement gains	—			—			(3,169		)
Total operating expenses	412,345			369,996			316,942
Operating income	95,648			69,282			72,162
Interest expense, net	(57,658		)	(54,324		)	(48,032		)
Income before income taxes and discontinued operations	37,990			14,958			24,130
Provision for income taxes	11,024			8,832			7,890
Income from continuing operations	26,966			6,126			16,240
Income from discontinued operations, net of taxes	122			344			1,065
Net income	27,088			6,470			17,305
Less: Net income attributable to noncontrolling interests	(38,798		)	(33,057		)	(26,045		)
Net loss attributable to Symbion, Inc.	$	(11,710	)	$	(26,587	)	$	(8,740	)

See Notes To Consolidated Financial Statements.

F-4

SYMBION, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

	Year Ended December 31,
	2012			2011			2010
Net Income	$	27,088		$	6,470		$	17,305
Other comprehensive income, net of income taxes:
Recognition of interest rate swap liability to earnings	—			314			2,417
Comprehensive income	27,088			6,784			19,722
Less: Comprehensive income attributable to noncontrolling interests	(38,798		)	(33,057		)	(26,045		)
Comprehensive loss attributable to Symbion, Inc.	$	(11,710	)	$	(26,273	)	$	(6,323	)

See Notes To Consolidated Financial Statements.

F-5

SYMBION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

	Symbion, Inc. Common Stock			Additional Paid-in Capital			Retained Earnings (Deficit)			Noncontrolling Interests-Non-redeemable			Total Shareholders’ Equity
	Shares	Amount
Balance at December 31, 2009	1,000	$	—	$	242,623		$	(46,479	)	$	1,675		$	197,819
Amortized compensation expense related to stock options	—	—		1,336			—			—			1,336
Acquisitions and disposal of shares of noncontrolling interests	—	—		(3,000		)	—			39,734			36,734
Distributions to noncontrolling interest holders	—	—		—			—			(6,646		)	(6,646		)
Net (loss) income	—	—		—			(8,740		)	6,623			(2,117		)
Balance at December 31, 2010	1,000	$	—	$	240,959		$	(55,219	)	$	41,386		$	227,126
Amortized compensation expense related to stock options	—	—		1,353			—			—			1,353
Acquisitions and disposal of shares of noncontrolling interests	—	—		(2,377		)	—			3,558			1,181
Distributions to noncontrolling interest holders	—	—		—			—			(15,032		)	(15,032		)
Net (loss) income	—	—		—			(26,587		)	15,676			(10,911		)
Balance at December 31, 2011	1,000	$	—	$	239,935		$	(81,806	)	$	45,588		$	203,717
Amortized compensation expense related to stock options	—	—		2,057			—			—			2,057
Acquisitions and disposal of shares of noncontrolling interests	—	—		605			—			13,627			14,232
Distributions to noncontrolling interest holders	—	—		—			—			(20,035		)	(20,035		)
Net (loss) income	—	—		—			(11,710		)	20,120			8,410
Balance at December 31, 2012	1,000	$	—	$	242,597		$	(93,516	)	$	59,300		$	208,381

See Notes To Consolidated Financial Statements.

F-6

SYMBION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended December 31,
	2012			2011			2010
Cash flows from operating activities:
Net income	$	27,088		$	6,470		$	17,305
Adjustments to reconcile net income to net cash provided by operating activities:
Income from discontinued operations	(122		)	(344		)	(1,065		)
Depreciation and amortization	21,923			20,098			18,219
Amortization of deferred financing costs and debt issuance discount	3,798			2,886			2,004
Non-cash payment-in-kind interest option	8,305			22,368			26,079
Non-cash stock option compensation expense	2,057			1,353			1,336
Non-cash recognition of other comprehensive loss into earnings	—			665			2,731
Non-cash credit risk adjustment of financial instruments	—			—			189
(Gain) loss on disposal and impairment of long-lived assets, net	(6,209		)	4,822			(4,070		)
Loss on debt extinguishment	—			4,751			—
Deferred income taxes	13,887			8,431			9,443
Equity in earnings of unconsolidated affiliates, net of distributions received	(1,931		)	106			50
Provision for doubtful accounts	10,536			6,801			6,489
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions:
Accounts receivable	(6,458		)	(11,013		)	(15,217		)
Other assets and liabilities	(4,095		)	(1,507		)	(3,056		)
Net cash provided by operating activities - continuing operations	68,779			65,887			60,437
Net cash provided by operating activities - discontinued operations	1,782			3,060			5,535
Net cash provided by operating activities	70,561			68,947			65,972
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired	(21,142		)	(7,836		)	(44,105		)
Proceeds from divestitures	11,465			—			—
Purchases of property and equipment, net	(14,457		)	(9,677		)	(8,469		)
Proceeds from unit activity of unconsolidated facilities	—			—			50
Change in other assets	(64		)	(590		)	(278		)
Net cash used in investing activities - continuing operations	(24,198		)	(18,103		)	(52,802		)
Net cash provided by (used in) investing activities - discontinued operations	7,238			(16		)	(367		)
Net cash used in investing activities	(16,960		)	(18,119		)	(53,169		)
Cash flows from financing activities:
Principal payments on long-term debt	(8,923		)	(355,554		)	(22,414		)
Proceeds from debt issuances	10,471			348,880			56,876
Change in restricted invested assets	(7		)	(2,000		)	(3,162		)
Payment of debt issuance costs	—			(11,891		)	—
Distributions to noncontrolling interest partners	(39,853		)	(33,231		)	(25,692		)
Payments and proceeds from unit activity of consolidated facilities	(3,066		)	(2,155		)	4,708
Other financing activities	49			192			225
Net cash (used in) provided by financing activities - continuing operations	(41,329		)	(55,759		)	10,541
Net cash (used in) provided by financing activities - discontinued operations	(639		)	(867		)	483
Net cash (used in) provided by financing activities	(41,968		)	(56,626		)	11,024
Net increase (decrease) in cash and cash equivalents	11,633			(5,798		)	23,827
Cash and cash equivalents at beginning of period	62,949			68,747			44,920
Cash and cash equivalents at end of period	$	74,582		$	62,949		$	68,747

See Notes To Consolidated Financial Statements.

F-7

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

(Unaudited)

1. Organization

Symbion, Inc. (the “Company”), through its wholly owned subsidiaries, owns interests in partnerships and limited liability companies that own and operate a national network of short stay surgical facilities in joint ownership with physicians and physician groups, hospitals and hospital systems. As of December 31, 2012, the Company owned and operated 51 surgical facilities, including 45 ambulatory surgery centers ("ASCs") and six surgical hospitals. The Company also managed ten additional ambulatory surgery centers and one physician clinic in a market in which it operates an ASC and a surgical hospital. The Company owns a majority ownership interest in 32 of the 51 surgical facilities and consolidates 48 surgical facilities for financial reporting purposes.

The Company is a wholly owned subsidiary of Symbion Holdings Corporation (“Holdings”), which is owned by an investor group that includes affiliates of Crestview Partners, L.P. ("Crestview"), members of the Company's management and other investors.

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, ("GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and accompanying footnotes. Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities 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 accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, as well as interests 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 to manage and control the affiliate's business. The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain 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 of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies. The consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary, under the provisions of Accounting Standards Codification ("ASC") Topic 810, Consolidation. The variable interest entities are surgical facilities located in the states of Florida and New York. With regard to the New York facility, the Company is the primary beneficiary due to the power to direct the activities of the facility and the level of variability within the management service agreement as well as the obligation and likelihood of absorbing the majority of expected gains and losses. Regarding the Florida facility, the Company has the power to direct the activities of the facility and has fully guaranteed the facility's debt obligations. The debt obligations are subordinated to such a level that the Company absorbs the majority of the expected gains and losses. The accompanying consolidated balance sheets at December 31, 2012 and December 31, 2011 include assets of $17.7 million and $18.2 million, respectively, and liabilities of $3.7 million and $3.9 million, respectively, related to the variable interest entities. All significant intercompany balances and transactions are eliminated in consolidation.

Fair Value of Financial Instruments

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

The carrying amounts reported in the accompanying consolidated balance sheets for cash, accounts receivable and accounts payable approximate fair value because of their short-term nature.

F-8

The carrying amount and fair value of the Company's long term debt obligations as of December 31, 2012 and December 31, 2011 were as follows (in thousands):

	Carrying Amount				Fair Value
	2012		2011		2012		2011
Senior Secured Notes, net of note issuance discount of $3,868	$	337,132	$	336,201	$	348,088	$	310,566
PIK Exchangeable Notes	109,688		101,413		109,688		101,413
Toggle Notes	94,724		94,724		94,724		94,487

The fair value of the Senior Secured Notes and Toggle Notes (as defined in Note 7) was based on a Level 1 computation using quoted prices at December 31, 2012 and December 31, 2011, as applicable. The fair value of the PIK Exchangeable Notes (as defined in Note 7) was based on a Level 3 computation, using a Company-specific discounted cash flow analysis. The Company's long-term debt instruments are discussed further in Note 7.

The Company maintains a supplemental retirement savings plan (the “SERP”).  The SERP provides supplemental retirement alternatives to eligible officers and key employees of the Company by allowing participants to defer portions of their compensation.  As of December 31, 2012, the fair value of the assets in the SERP plan was $1.3 million, which is included in other assets. The Company has recorded a liability of $1.3 million for the SERP plan value in other long term liabilities.

Cash and Cash Equivalents

The Company considers all highly liquid investments with 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.

Restricted Invested Assets

As of both December 31, 2012 and December 31, 2011, the Company maintained $10.0 million of performance letters of credit, as a requirement of the lease agreement related to its facility located in Idaho Falls, Idaho.  These letters of credit are secured by restricted cash balances of $5.0 million, in the form of certificates of deposit.  Additionally, the Company maintains a secured letter of credit at its Chesterfield, Missouri facility which is secured by $169,000 and $162,000 of cash deposits in the form of certificates of deposit as of 2012 and 2011, respectively. There have not been any borrowings against the letters of credit. 

As disclosed in the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2012, the Company determined that its certificates of deposit which are contractually required as collateral under certain lease agreements, are restricted to the extent of use. The Company has adjusted the cash and restricted invested assets for the period ended December 31, 2011 in the consolidated balance sheets and for the periods ended December 31, 2011 and 2010 in the consolidated statements of cash flows. The Company considers the adjustments an immaterial correction of an error. See footnote 13 for further discussion regarding the quarterly impact of the adjustment.

The effect of these adjustments on the consolidated balance sheet as of December 31, 2011 and the consolidated statements of cash flows for the years ended December 31, 2011 and 2010, as previously reported, is as follows:

	December 31, 2011
	Previously Reported		Adjustments			Adjusted
Cash and cash equivalents	$	68,441	$	(5,162	)	$	63,279
Restricted invested assets	—		5,162			5,162

	Year Ended December 31, 2011									Year Ended December 31, 2010
	Previously Reported			Adjustments			Adjusted			Previously Reported		Adjustments			Adjusted
Cash flows (used in) provided by financing activities	$	(54,363	)	$	(2,000	)	$	(56,363	)	$	10,663	$	(3,162	)	$	7,501

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 is significant credit risk 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 contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. The Company does not require collateral for private pay patients. Also, the Company has recorded third-party settlements payable of $10.9 million and $13.9 million as of December 31, 2012 and December 31, 2011, respectively. As of December 31, 2012 and

F-9

December 31, 2011, $7.0 million and $10.0 million related to the settlements are recorded in other accrued expenses, respectively, and $3.9 million are recorded in other long-term liabilities.

The following table sets forth by type of payor the percentage of the Company’s accounts receivable for consolidated surgical facilities as of December 31, 2012 and December 31, 2011:    

	Year Ended December 31,
	2012		2011
Private insurance	50	%	56	%
Government	27		19
Self-pay	8		7
Other	15		18
Total patient services revenues	100	%	100	%

The Company's policy is to review the standard aging schedule, by surgical facility, to determine the appropriate allowance for doubtful accounts. Patient account balances are reviewed for delinquency based on contractual terms. This review is supported by an analysis of the actual 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.

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

	Allowance Balance at Beginning of Period		Charged to Revenues, Costs and Expenses		Receivables written off and other adjustments			Allowance Balance at End of Period
Year ended December 31:
2010	$	8,794	$	6,489	$	(5,369	)	$	9,914
2011	9,914		6,801		(6,587		)	10,128
2012	10,128		10,536		(8,777		)	11,887

Electronic Health Record Incentives

The American Recovery and Reinvestment Act of 2009 provides for Medicare and Medicaid incentive payments beginning in calendar year 2011 for eligible hospitals and professionals that implement and achieve meaningful use of certified Electronic Health Records ("EHR") technology. Several of the Company's surgical hospitals have implemented plans to comply with the EHR meaningful use requirements of the HITECH Act in time to qualify for the maximum available incentive payments.

Compliance with the meaningful use requirements has and will continue to result in significant costs including business process changes, professional services focused on successfully designing and implementing the Company's EHR solutions along with costs associated with the hardware and software components of the project. The Company recognized approximately $1.1 million of EHR incentives during the year ended December 31, 2012. The Company incurs both capital expenditures and operating expenses in connection with the implementation of its various EHR initiatives. We incurred costs including hardware, software and implementation expense of approximately $5.0 million. The amount and timing of these expenditures do not directly correlate with the timing of the Company's cash receipts or recognition of the EHR incentives as other income.

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.

Prepaid and Other Current Assets

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

	December 31,
	2012		2011
Prepaid expenses	$	5,929	$	4,865
Other current assets	4,239		3,916
Total	$	10,168	$	8,781

F-10

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 three 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. A summary of property and equipment is as follows (in thousands):

	December 31,
	2012			2011
Land	$	5,713		$	5,713
Buildings and improvements	104,133			103,096
Furniture and equipment	90,300			78,084
Computer and software	6,614			5,785
CIP	4,997			64
	211,757			192,742
Less accumulated depreciation	(79,603		)	(63,529		)
Property and equipment, net	$	132,154		$	129,213

Impairment of Long-Lived Assets

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.  In 2011, the Company recorded an impairment charge of $2.9 million related to its equity method investment located in Novi, Michigan. The Company additionally recorded a valuation allowance of $2.1 million related to a note receivable due from this facility.

Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of purchase price over the fair value of net tangible and identifiable intangible assets acquired. The Company tests for impairment annually as of December 31, or more frequently if certain indicators are encountered. See Note 5 for further discussion of our goodwill impairment valuation.    

Other Intangible Assets

The Company has other intangible assets of $18.1 million related to the certificates of need for certain of its facilities. These indefinite-lived assets are not amortized, but are assessed for possible impairment under the Company's impairment policy. The net value of the non-compete intangible assets as of December, 31, 2012 is $3.5 million. The net value of the Company's management rights as of December 31, 2012 is $2.1 million.

Unfavorable leasehold rights arising from the Merger were $870,000. Amortization of $83,520 was recorded in both 2012 and 2011. The unamortized balance at December 31, 2012 totaled $424,560. The unfavorable leasehold rights are amortized on a straight-line basis over the life of the applicable lease and reflected as a component of cost of revenues from continuing operations. Scheduled amortization expense for the five years ending December 31, 2012 to 2016 is $83,520 per year.

Other Accrued Expenses

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

	December 31,
	2012		2011
Interest payable	$	5,265	$	5,384
Current taxes payable	2,285		6,669
Insurance liabilities	3,233		3,088
Third-party settlements	6,987		9,967
Accounts receivable credit balances	3,627		2,435
Other accrued expenses	8,011		7,296
Total	$	29,408	$	34,839

F-11

Other Liabilities

Other liabilities at December 31, 2012 and December 31, 2011 included an obligation which was assumed in connection with the acquisition of our surgical hospital located in Idaho Falls, Idaho. This obligation is payable to the hospital facility lessor for the land, building and improvements at the facility in Idaho Falls, Idaho. As of December 31, 2012 and December 31, 2011, the balance on the obligation was $48.4 million and $48.5 million, respectively. Additionally, included in other liabilities as of both December 31, 2012 and December 31, 2011 are third-party settlements of $3.9 million.

Noncontrolling Interests — Non-redeemable

The consolidated financial statements include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in unconsolidated affiliates, the Company regularly engages in the purchase and sale of equity interests with respect to its consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions, as they are undertaken among the Company, its consolidated subsidiaries, and noncontrolling interests, and their cash flow effect is classified within financing activities.

Noncontrolling Interests — Redeemable

Each of the partnerships and limited liability companies through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement.  In certain circumstances, the partnership and operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physicians’ ownership if certain adverse regulatory events occur, such as it becoming illegal for the physicians to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility.  This redeemable noncontrolling interest is reported outside of stockholders' equity. The following table sets forth the activity of the noncontrolling interests—redeemable for the year ended December 31, 2012 and as of December 31, 2011:

	Noncontrolling Interests—Redeemable
Balance at December 31, 2009	$	30,033
Net income attributable to noncontrolling interests—redeemable	19,422
Distributions to noncontrolling interest—redeemable holders	(19,046		)
Acquisitions and disposal of shares of noncontrolling interests—redeemable	4,086
Balance at December 31, 2010	34,495
Net income attributable to noncontrolling interests—redeemable	17,381
Distributions to noncontrolling interest—redeemable holders	(18,199		)
Acquisitions and disposal of shares of noncontrolling interests—redeemable	454
Balance at December 31, 2011	34,131
Net income attributable to noncontrolling interests—redeemable	18,678
Distributions to noncontrolling interest—redeemable holders	(19,818		)
Acquisitions and disposal of shares of noncontrolling interests—redeemable	695
Balance at December 31, 2012	$	33,686

Revenues

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

	Year Ended December 31,
	2012		2011		2010
Patient service revenues	$	500,255	$	428,763	$	376,877
Physician service revenues	—		4,483		5,800
Other service revenues	7,738		6,032		6,427
Total revenues	$	507,993	$	439,278	$	389,104

F-12

Patient Service Revenues

Approximately 98% of the Company’s revenues in 2012 are patient service revenues.  Patient service revenues are revenues from healthcare procedures performed in each of the facilities that the Company consolidates for financial reporting purposes.  The fee charged varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, supplies, nursing staff and medications.  Also, in a very limited number of surgical facilities, the Company charges for anesthesia services.  The fee does not normally 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. Additionally, the Company recognized $2.1 million of patient service revenue as a result of changes in estimates to third-party settlements.

Physician Service Revenues

Physician service revenues were revenues from a physician network consisting of reimbursed expenses, plus participation in the excess of revenue over expenses of the physician networks, as provided for in the Company’s service agreements with the Company’s former physician networks.  Effective September 30, 2011, the Company completed a scheduled termination of its physician network agreements. Reimbursed expenses include the costs of personnel, supplies and other expenses incurred to provide the management services to the physician networks.  The Company recognized physician service revenues in the period in which reimbursable expenses were incurred and in the period in which the Company had the right to receive a percentage of the amount by which a physician network’s revenues exceeded its expenses.  Physician service revenues were based on net billings with any changes in estimated contractual adjustments reflected in service revenues in the subsequent period.

Physician service revenues consisted of the following for the periods indicated (in thousands):

	Year Ended December 31,
	2012		2011			2010
Professional services revenues	$	—	$	13,278		$	17,948
Contractual adjustments	—		(6,604		)	(9,183		)
Clinic revenue	—		6,674			8,765
Medical group retainage	—		(2,191		)	(2,965		)
Physician service revenues	$	—	$	4,483		$	5,800

Other Service Revenues

Other service revenues consists of management and administrative service fees derived from the non-consolidated surgical facilities that the Company accounts for under the equity method, management of surgical facilities in which the Company does not own an interest and management services the Company provides to physician clinics for which the Company is not required to provide capital or additional assets.  The Company recognizes other service revenues in the period in which services are rendered.

The following table sets forth by type of payor the percentage of the Company’s patient service revenues generated for the periods indicated:

	Year Ended December 31,
	2012		2011		2010
Private Insurance	62	%	66	%	68	%
Government	31		26		25
Self-pay	2		3		4
Other	5		5		3
Total	100	%	100	%	100	%

Supplemental Cash Flow Information

The Company made cash income tax payments of $394,000, $396,000 and $474,000 for the years ended December 31, 2012, 2011 and 2010, respectively.  The Company made cash interest payments of $39.1 million, $28.1 million and $22.9 million for the years ended December 31, 2012, 2011 and 2010 respectively.  The Company made non-cash, in kind interest payments on its PIK Exchangeable Notes and Toggle Notes of $8.3 million, $22.4 million and $26.1 million as of December 31, 2012, 2011 and 2010, respectively. The Company entered into capital leases for $2.3 million, $2.1 million and $516,000 of equipment for the years ended December 31, 2012, 2011 and 2010, respectively.

F-13

Recent Accounting Pronouncements

ASU 2011-08, Intangibles - Goodwill and Other

In September 2011, the Financial Accounting Standards Board ("FASB") issued ASU 2011-08. Previously, entities were required to test goodwill for impairment, on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount, including the carrying value of the goodwill. If the resulting fair value of a reporting unit was less than its carrying amount, then the second step of the test would be performed to measure the amount of the impairment loss, if any. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary.

In accordance with ASU 2011-08, the Company has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. Additionally, ASU 2011-08 permits the Company to resume performing the qualitative assessment in any subsequent period. The Company adopted the provisions of ASU 2011-08 during the first quarter of 2012. The adoption of ASU 2011-08 did not impact the Company's financial position, results of operations or cash flows.

ASU 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities

In July 2011, the FASB issued ASU 2011-07. ASU 2011-07 requires healthcare entities that recognize significant amounts of patient service revenues at the time services are rendered, to present the provision for doubtful accounts related to patient service revenues as a deduction from patient service revenues (net of contractual allowances and discounts) on their statement of operations if they do not assess the patient's ability to pay. The Company has evaluated ASU 2011-07 and has determined that the requirements of this ASU are not applicable to the Company as the ultimate collection of patient service revenues is generally determinable at the time of service. This ASU had no impact on the Company's consolidated financial position, results of operations or cash flows.

ASU 2011-05, Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, which eliminated the Company's ability to present components of other comprehensive income as part of the statement of changes in stockholders' equity. Instead, ASU 2011-05 requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company adopted the provisions of ASU 2011-05 during the first quarter of 2012 and retrospectively for all periods presented with the inclusion of a separate, consecutive consolidated statement of comprehensive income. Through December 31, 2012, the Company's only component of other comprehensive income related to changes in the fair value of its interest rate swap derivative instrument in previous periods. During the second quarter of 2011, the Company discontinued hedge accounting treatment as a result of the Company's extinguishment of the underlying senior secured credit facility. The adoption of ASU 2011-05 did not impact the Company's financial position, results of operations or cash flows.    

ASU 2013-02, Comprehensive Income (ASC Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income

In January 2013, the FASB issued ASU No. 2013-02, Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The update is effective for financial statement periods beginning after December 15, 2012 with early adoption permitted. The Company will adopt this standard beginning January 1, 2013.

Reclassifications

Certain reclassifications have been made to the comparative period's financial statements to conform to the 2012 presentation. The reclassifications primarily related to the presentation of restricted invested assets, discontinued operations and noncontrolling interests and had no impact on the Company's financial position or results of operations.

3. Acquisitions

Effective December 31, 2012, the Company acquired a 77.3% ownership interest in a surgical facility located in Bellingham, Washington, which included net assets of $229,000. The Company merged the operations of the acquired facility with its existing surgical facility in this market. The purchase price of the acquisition was $1.5 million. The acquisition was financed with cash from operations. This facility is consolidated for financial reporting purposes with the results of operations from the Company's existing facility located in Bellingham, Washington.

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Effective October 4, 2012, the Company acquired the remaining 44.0% incremental ownership interest at its surgical facility located in Great Falls, Montana for $4.0 million. The acquisition was financed with cash from operations. The Company previously held a 56.0% ownership interest in this surgical facility and continues to consolidate this facility for financial reporting purposes.

Effective June 20, 2012, the Company acquired a 58.3% ownership interest in a surgical hospital located in Lubbock, Texas. The purchase price of the acquisition was approximately $10.3 million. The acquisition was financed with cash from operations. In allocating the purchase price, the Company recorded $12.1 million of goodwill, $1.8 million of cash, $4.8 million of accounts receivable, $2.0 million of inventory and other assets, $5.7 million of property and equipment and $5.0 million of accounts payable and other liabilities. As part of the acquisition, we assumed debt of approximately $1.4 million. The Company consolidates the facility for financial reporting purposes.

Effective June 1, 2012, the Company acquired a 60.0% ownership interest in a surgical facility located in St. Louis, Missouri. The purchase price of the acquisition was approximately $7.6 million. The acquisition was financed with cash from operations. In allocating the purchase price, the Company recorded $10.6 million of goodwill, $373,000 of accounts receivable, $316,000 of property and equipment, $282,000 of other assets and $529,000 of accrued expenses and other liabilities. Additionally, as part of the acquisition, we assumed debt of approximately $419,000. The Company consolidates the facility for financial reporting purposes. Both the Lubbock, Texas and St. Louis, Missouri acquisitions were financed with cash from operations.

Effective February 8, 2012, the Company completed the acquisition of four separate urgent care and family practice facilities located in Idaho Falls, Idaho. The purchase price of the acquisition was approximately $5.8 million, consisting of $3.1 million of cash, approximately $1.1 million in the form of equity ownership in our facility located in Idaho Falls, Idaho, $470,000 of contingent consideration, which was subsequently paid in June 2012, and the assumption of debt of approximately $1.1 million. Assets acquired included accounts receivable, net of $868,000 and cash of $138,000. The facilities are operated by the Company's existing facility located in Idaho Falls, Idaho and are consolidated with its Idaho Falls, Idaho facility for financial reporting purposes.

The Company has accounted for these acquisitions under the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price is allocated to the net tangible and intangible assets acquired and liabilities assumed in connection with the acquisition based on their estimated fair values. The preliminary allocation of the purchase price was based upon management's preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, and such valuation is subject to change.

The Lubbock, Texas and St. Louis, Missouri facilities' results of operations, subsequent to the acquisition dates, are included in the consolidated results of the Company. Included in the Company's operating results for the year ended December 31, 2012 are net revenues of $31.0 million, net income of $1.4 million and net income attributable to Symbion, Inc. of $1.3 million. Following are the results for the years ended December 31, 2012 and 2011, as if the acquisitions had occurred on January 1, of the respective periods (in thousands):

	Year Ended December 31,
	2012			2011
Revenues	$	538,390		$	504,429
Net income	29,318			14,750
Net loss attributable to Symbion, Inc	$	(10,211	)	$	(21,291	)

Effective October 1, 2011, the Company acquired an oncology practice, which is operated within an existing facility located in Idaho Falls, Idaho. The purchase price of the acquisition was $3.8 million, consisting of $2.7 million of cash from operations and approximately $1.1 million in the form of equity ownership in our facility located in Idaho Falls, Idaho. The Company consolidates this surgical facility for financial reporting purposes.

Effective August 1, 2011 the Company acquired a 56.0% ownership interest in an ASC and a 50.0% ownership interest in a 20-bed surgical hospital located in Great Falls, Montana. For periods subsequent to the acquisition, the Company consolidates the ASC for financial reporting purposes and accounts for the surgical hospital as an equity method for financial reporting purposes. In addition, the Company acquired the rights to manage a medical clinic in Great Falls, Montana consisting of multi-specialty physicians who are partners in the surgical facilities acquired. The aggregate purchase price was $5.2 million plus the assumption of debt of approximately $232,000.

Effective January 7, 2011, the Company acquired an incremental ownership interest of 3.5% at its surgical facility located in Chesterfield, Missouri for a purchase price of $1.8 million. Additionally, on July 1, 2011, the Company acquired an additional incremental ownership interest of 2.0% in this facility for a purchase price of $1.0 million. Both transactions were financed with cash from operations.

Effective July 1, 2010, the Company acquired an incremental, controlling ownership interest of 37.0% in one of its surgical facilities located in Chesterfield, Missouri for $18.8 million. Subsequent to the acquisition, the Company held a 50.0% ownership interest in the facility. As part of the acquisition, the Company consolidated $4.8 million of third-party facility debt on its balance sheet. We subsequently restructured this debt using borrowings from our Revolving Facility. As a result of this acquisition, the Company holds a controlling interest in this facility. The acquisition was treated as a business combination, and the Company began consolidating the facility for financial reporting purposes in the third quarter of 2010. The aggregate purchase price was financed with proceeds from the Company's Revolving Facility.

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Effective April 9, 2010, the Company acquired an ownership of 54.5% in a surgical hospital located in Idaho Falls, Idaho for approximately $31.9 million plus the assumption of approximately $6.1 million of debt and other obligations of $48.0 million, which the Company consolidates on its balance sheet. The other obligations include a financing obligation of $48.0 million payable to the hospital facility lessor for the land, buildings and improvements of the facility. The acquisition was financed with borrowings from the Company's Revolving Facility. The Company consolidates this facility for financial reporting purposes.

4. Discontinued Operations and Divestitures

From time to time, the Company evaluates its portfolio of surgical facilities to ensure the facilities are performing as expected. The following summary presents those facilities divested in 2012, which the Company reports as discontinued operations:

Facility	Period in which facility identified for disposal (reclassified to discontinued operations)	Sale or disposal date	Loss (gain) recorded in discontinued operations
			(in thousands)
Metairie, Louisiana	December 31, 2012	December 31, 2012	$	351
Greenville, South Carolina	March 31, 2012	August 31, 2012	$	1,642
Austin, Texas	December 31, 2011	July 1, 2012	$	(1,075	)
Fort Worth, Texas	December 31, 2011	February 29, 2012	$	(78	)

Effective December 31, 2012, the Company ceased operations at its surgical facility located in Metairie, Louisiana. The Company recognized a loss of $351,000 on the disposal.

Effective August 31, 2012, the Company divested its interest in a surgical facility located in Greenville, South Carolina for net proceeds of $348,000. This facility was previously consolidated for financial reporting purposes. Concurrent with the disposal, the Company entered into a management agreement with the buyer. The management agreement has a term of one year. The Company recorded a loss on the disposal of approximately $1.6 million during 2012.

Effective July 1, 2012, the Company, along with its physician investors in the facility, divested our interests in a surgical facility located in Austin, Texas for aggregate net proceeds of approximately $4.4 million. Additionally, the Company terminated its management agreement with this facility and received cash proceeds of approximately $2.0 million This facility was previously consolidated for financial reporting purposes. The Company recorded a gain on the disposal of approximately $1.1 million during 2012.

Effective February 29, 2012, the Company, along with its physician investors in the facility, divested our interests in a surgical facility located in Fort Worth, Texas for aggregate net proceeds of $1.9 million. Additionally, the Company terminated its management agreement with this facility and received cash proceeds of approximately $1.1 million. The Company recorded a gain, net of income attributable to noncontrolling interests, of $78,000 which is included in the loss from discontinued operations. Included in this gain is an allocated disposal of goodwill of $1.3 million.

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

	Year Ended December 31,
	2012			2011		2010
Revenues	$	6,282		$	17,005	$	25,642
(Loss) income from operations, before taxes	$	(936	)	$	1,302	$	522
Income tax (benefit) provision	$	(1,343	)	$	540	$	(165	)
Loss (gain) on sale, net of taxes	$	285		$	418	$	(378	)
Income from discontinued operations, net of taxes	$	122		$	344	$	1,065

Effective December 31, 2012, the Company divested its interest and management rights in a surgical facility located in Oklahoma City, Oklahoma for net proceeds of $10.1 million. This facility was previously accounted for as an equity method investment for financial reporting purposes. The Company recorded a gain on the disposal of $5.9 million during the fourth quarter of 2012.

Effective April 30, 2012, the Company divested its interest in a surgical facility located in Nashville, Tennessee for net proceeds of $1.3 million. This facility was previously accounted for as an equity method investment for financial reporting purposes. The Company recorded a gain on the disposal of approximately $750,000 during the second quarter of 2012.

5.  Goodwill and Intangible Assets

The Company tests its goodwill and intangible assets for impairment at least annually, or more frequently if certain indicators arise.  The Company tests goodwill at the reporting unit level, which the Company has concluded to be the consolidated operating results of

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Symbion, Inc, as the Company has only one operating segment.  The Company completed the required annual impairment testing as of December 31, 2012, 2011 and 2010.

During 2012, the Company performed its impairment test by developing a fair value estimate of the business enterprise as of December 31, 2012 using a discounted cash flow approach and corroborated this analysis using a market-based approach.  As the Company does not have publicly traded equity from which to derive a market value, an assessment of peer company data was performed whereby the Company selected comparable peers based on growth and leverage ratios, as well as industry specific characteristics.  Management estimated a reasonable market value of the Company as of December 31, 2012based on earnings multiples and trading data of the Company's peers. This market-based approach was then used to corroborate the results of the discounted cash flows approach.  No impairment was indicated as of December 31, 2012.

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

Balance at December 31, 2010	$	624,737
Acquisitions	4,941
Purchase price allocations	825
Disposals	(359		)
Balance at December 31, 2011	630,144
Acquisitions	31,243
Disposals	(5,329		)
Balance at December 31, 2012	$	656,058

The Company has intangible assets of $18.1 million related to the certificates of need for certain of its facilities. These indefinite-lived assets are not amortized, but are assessed for possible impairment under the Company's impairment policy. The Company also has intangible assets related to various non-compete agreements and a management rights agreement, which are amortized over the service life of the agreements.

Changes in the carrying amount of intangible assets are as follows (in thousands):

	Physician Guarantees			Management Rights			Non-Compete Assets			Certificates of Need			Total Intangible Assets
Balance at December 31, 2010	$	632		$	—		$	2,337		$	19,480		$	22,449
Acquisitions	800			2,300			3,632			—			6,732
Movement to discontinued operations	—			—			—			(1,340		)	(1,340		)
Amortization	(325		)	(64		)	(765		)	—			(1,154		)
Balance at December 31, 2011	1,107			2,236			5,204			18,140			26,687
Acquisitions	—			—			—			—			—
Amortization	(288		)	(153		)	(1,695		)	—			(2,136		)
Balance at December 31, 2012	$	819		$	2,083		$	3,509		$	18,140		$	24,551

As described in Footnote 3 — Acquisitions, the Company acquired ownership interest in various surgical facilities during the year ended December 31, 2012. The following table summarizes the goodwill recorded under the acquisition method of accounting for each transaction:

Facility	Acquisition Period	Total Goodwill Recorded
Bellingham, Washington	December 31, 2012	$	1,625
Lubbock, Texas	June 20, 2012	12,076
St. Louis, Missouri	June 1, 2012	10,600
Idaho Falls, Idaho	February 8, 2012	6,942
Total		$	31,243

6.  Operating Leases

The Company leases office space and equipment for its surgical facilities, including surgical facilities under development.  The lease agreements generally require the lessee to pay all maintenance, property taxes, utilities and insurance costs.  The Company accounts for operating lease obligations and sublease income on a straight-line basis.  Contingent obligations of the Company are recognized when specific contractual measures have been met, which is typically the result of an increase in the Consumer Price Index.  Lease obligations paid

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in advance are included in prepaid rent.  The difference between actual lease payments and straight-line lease expense over the original lease term, excluding optional renewal periods, is included in deferred rent.

The future minimum lease payments under non-cancelable operating leases, net of sub-lease agreements at December 31, 2012, are as follows (in thousands):

2013	$	23,491
2014	20,717
2015	18,018
2016	14,989
2017	11,622
Thereafter	57,356
Total minimum lease payments	$	146,193

Total rent and lease expense was $25.1 million, $23.4 million and $22.9 million for the periods ended December 31, 2012, 2011 and 2010, respectively.  Additionally, the Company has various sub-lease arrangements at its surgical hospital located in Idaho Falls, Idaho. Future minimum lease payments under these non-cancellable sub-lease arrangements are, $718,000, $740,000, $762,000, $785,000 and $809,000 for the years ended December 31, 2013, 2014, 2015, 2016 and 2017 and $4.1 million for the period thereafter. The Company incurred rental expense of $7.7 million, $8.0 million and $5.6 million under operating leases with physician investors and an entity that is an affiliate of one of the Company’s former directors for the periods ended December 31, 2012, 2011 and 2010, respectively.

7. Long-Term Debt

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

	December 31, 2012			December 31, 2011
Senior Secured Notes, net of debt issuance discount of $3,868 and $4,799, respectively	$	337,132		$	336,201
Toggle Notes	94,724			94,724
PIK Exchangeable Notes	109,688			101,413
Notes Payable and Secured Loans	28,247			21,627
Capital lease obligations	4,278			4,257
	574,069			558,222
Less current maturities	(39,645		)	(13,550		)
Total	$	534,424		$	544,672

As described in the following sections, the Company modified its long-term debt structure during the second quarter of 2011. On June 14, 2011, the Company completed a private offering (the "Offering") of $350.0 million aggregate principal amount of 8.00% senior secured notes due 2016 (the "Senior Secured Notes"). The proceeds of the Offering were used to retire the Company's then existing senior secured credit facility and a portion of the Company's 11.00%/11.75% senior PIK toggle notes due 2015 (the "Toggle Notes"). In connection with the Offering, the Company entered into a new senior secured super-priority revolving credit facility (the "Credit Facility") as well as exchanged outstanding Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest, for $88.5 million initial aggregate principal amount of 8.00% senior PIK exchangeable notes due 2017 (the "PIK Exchangeable Notes"). As a result of the debt restructuring, the Company recorded a loss on debt extinguishment of $4.8 million. This loss is comprised primarily of capitalized debt issuance costs written off in connection with the Company's termination of debt instruments as part of the restructuring.

On September 9, 2011, the Company cancelled $9.0 million aggregate principal amount of outstanding Senior Secured Notes held by certain holders, plus accrued and unpaid interest, in exchange for the issuance to such holders of $9.2 million aggregate principal amount of PIK Exchangeable Notes which resulted in no significant gain or loss to the Company.

Credit Facility

The Credit Facility provides the ability to borrow under revolving credit loans and swingline loans. Letters of credit may also be issued under the Credit Facility. The Credit Facility matures on December 15, 2015. The Credit Facility is subject to a potential, although uncommitted, increase of up to $25.0 million at the Company's request at any time prior to maturity of the facility, subject to certain conditions, including compliance with a maximum net senior secured leverage ratio and a minimum cash interest coverage ratio. The increase is only available if one or more financial institutions agree to provide it.

During the third quarter of 2012, the Company obtained a letter of credit under the Credit Facility for $465,000. This letter of credit was required as part of the Company's workers' compensation insurance coverage. The issuance of this letter of credit reduced the Company's available borrowings under the Credit Facility. As of December 31, 2012, $49.5 million was available under the Credit Facility.

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Loans under the Credit Facility bear interest, at the Company's option, at the reserve adjusted LIBOR rate plus 4.50% or at the alternate base rate plus 3.50%. The Company is required to pay a commitment fee at a rate equal to 0.50% per annum on the undrawn portion of commitments in respect of the Credit Facility. This fee is payable quarterly in arrears and on the date of termination or expiration of the commitments.

The Credit Facility contains financial covenants requiring the Company not to exceed a maximum net senior secured leverage ratio or fall below a minimum cash interest coverage ratio, in each case tested quarterly. Borrowings under the Credit Facility are subject to significant conditions, including the absence of any material adverse change. At December 31, 2012, the Company was in compliance with all material covenants contained in the Credit Facility.

Senior Secured Notes

On June 14, 2011, the Company completed the private offering of $350.0 million aggregate principal amount of its Senior Secured Notes. The Senior Secured Notes were issued at a 1.51% discount, yielding proceeds of approximately $344.7 million. Interest on the Senior Secured Notes is due June 15 and December 15 of each year and will accrue at the rate of 8.00% per annum. The Senior Secured Notes will mature on June 15, 2016.

The Senior Secured Notes are guaranteed by substantially all of the Company's existing and future material wholly-owned domestic restricted subsidiaries. The Senior Secured Notes and the guarantees are the Company's and the guarantors' senior secured obligations and rank equal in right of payment with any of the Company's or the guarantors' existing and future senior indebtedness and pari passu with the Company's and the guarantors' first priority liens, except to the extent that the property and assets securing the notes also secure the obligations under the Credit Facility, which is entitled to proceeds of the collateral prior to the Senior Secured Notes, in the event of a foreclosure or any insolvency proceedings.

The Company may redeem all or any portion of the Senior Secured Notes on or after June 15, 2014 at the redemption price set forth in the indenture governing the Senior Secured Notes, plus accrued interest. Prior to June 15, 2014, in each of 2011, 2012 and 2013, the Company may redeem up to 10% of the original aggregate principal amount of the Senior Secured Notes at a price equal to 103% of the aggregate principal amount thereof, plus accrued and unpaid interest. The Company may also redeem all or any portion of the Senior Secured Notes at any time prior to June 15, 2014 at a price equal to 100% of the aggregate principal amount thereof plus a make-whole premium and accrued and unpaid interest. In addition, the Company may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with proceeds of certain equity offerings at any time prior to June 15, 2014. At December 31, 2012, the Company had not redeemed any of its Senior Secured Notes.

Effective September 9, 2011, the Company cancelled $9.0 million aggregate principal amount of its Senior Secured Notes held by certain holders, plus accrued and unpaid interest, in exchange for the Company's issuance to such parties of $9.2 million aggregate principal amount of its PIK Exchangeable Notes. As a result of that exchange, the Company currently has $341.0 million aggregate principal amount of Senior Secured Notes outstanding.

At December 31, 2012, the Company was in compliance with all material covenants contained in the indenture governing the Senior Secured Notes.

Scheduled amortization of the discount recorded in connection with the Senior Secured Notes is as follows (in thousands):     

	Discount Attributable to Senior Secured Notes
January 1, 2013 through December 31, 2013	$	1,006
January 1, 2014 through December 31, 2014	1,092
January 1, 2015 through December 31, 2015	1,186
January 1, 2016 through June 15, 2016	584
Total	$	3,868

Toggle Notes

On June 3, 2008, the Company completed the private offering of $179.9 million aggregate principal amount of its Toggle Notes.  Interest on the Toggle Notes is due February 23 and August 23 of each year.  The Toggle Notes will mature on August 23, 2015.  For any interest period through August 23, 2011, the Company was able to elect to pay interest on the Toggle Notes (i) in cash, (ii) in kind, by increasing the principal amount of the notes or issuing new notes (referred to as “PIK interest”) for the entire amount of the interest payment or (iii) by paying interest on 50% of the principal amount of the Toggle Notes in cash and 50% in PIK interest.  Cash interest on the Toggle Notes accrues at the rate of 11.0% per annum. 

Between August 23, 2008 and August 23, 2011, the Company elected the PIK option of the Toggle Notes in lieu of making scheduled interest payments for various interest periods. As a result, the principal due on the Toggle Notes increased by $71.0 million from the issuance of the Toggle Notes to December 31, 2012. Beginning with the February 2012 interest payment, all interest under the

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Company's Toggle Notes is required to be paid in cash. The Company has accrued $3.7 million in interest on the Toggle Notes in other accrued expenses as of December 31, 2012.

In connection with the Offering, the Company repurchased $70.8 million aggregate principal amount of Toggle Notes, at par plus accrued and unpaid interest of $2.6 million, and exchanged $85.4 million aggregate principal amount of Toggle Notes, at par plus accrued interest of $3.1 million, for $88.5 million aggregate principal amount of PIK Exchangeable Notes.

The indenture governing the Toggle Notes includes a mandatory redemption provision. Under this provision, if the Toggle Notes would otherwise constitute applicable high yield discount obligations ("AHYDO"), within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended (the "Tax Code"), the Company is required to redeem, for cash, a portion of the Toggle Notes then outstanding, equal to the mandatory principal redemption amount. Under the mandatory redemption provisions of the Toggle Notes, $21.2 million of the principal balance outstanding is due and payable on August 23, 2013.

The Toggle Notes are unsecured senior obligations and rank equally with other existing and future senior indebtedness, senior to all future subordinated indebtedness and effectively junior to all secured indebtedness to the extent of the value of the collateral securing such indebtedness.  Certain of the Company's subsidiaries have guaranteed the Toggle Notes on a senior basis, as required by the indenture governing the Toggle Notes.  The indenture also requires that certain of the Company's future subsidiaries guarantee the Toggle Notes on a senior basis.  Each guarantee is unsecured and ranks equally with senior indebtedness of the guarantor, senior to all of the guarantor's subordinated indebtedness and effectively junior to its secured indebtedness to the extent of the value of the collateral securing such indebtedness.

The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit the Company's ability and the ability of the subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends or engage in transactions with affiliates. At December 31, 2012, the Company was in compliance with all material covenants contained in the indenture governing the Toggle Notes.

PIK Exchangeable Notes

Concurrent with the Offering, the Company exchanged with certain holders of the Company's outstanding Toggle Notes, Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest, for $88.5 million initial aggregate principal amount of the Company's PIK Exchangeable Notes. Effective September 9, 2011, the Company cancelled $9.0 million aggregate principal amount of its Senior Secured Notes held by certain holders of such notes, plus accrued and unpaid interest, in exchange for the Company's issuance to such parties of $9.2 million aggregate principal amount of its PIK Exchangeable Notes.

The PIK Exchangeable Notes will mature on June 15, 2017. Interest accrues on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on each June 15 and December 15 of each year, commencing on December 15, 2011. The Company will not pay interest in cash on the PIK Exchangeable Notes. Instead, the Company will pay interest on the PIK Exchangeable Notes in kind by increasing the principal amount of the PIK Exchangeable Notes on each interest accrual date by an amount equal to the entire amount of the accrued interest. The Company has accrued $390,000 in interest on the PIK Exchangeable Notes in other accrued expenses as of December 31, 2012. The Company records this accrued interest in other current liabilities until the interest payment date. On June 15 and December 15 of each year, the Company reclassifies the accrued interest to long-term debt. Due to the required payment-in-kind, the Company increased the principal amount of the PIK Exchangeable Notes by $3.8 million during 2011 and $8.3 million during 2012.

The PIK Exchangeable Notes are exchangeable into shares of common stock of Holdings at any time prior to the close of business on the business day immediately preceding the maturity date of the PIK Exchangeable Notes at a per share exchange price of $3.50. Upon exchange, holders of the PIK Exchangeable Notes will receive a number of shares of common stock of Holdings equal to (i) the accreted principal amount of the PIK Exchangeable Notes to be exchanged, plus accrued and non-capitalized interest, divided by (ii) the exchange price. The exchange price in effect at any time will be subject to customary adjustments.

The PIK Exchangeable Notes are unsecured senior obligations and rank equally with other existing and future senior indebtedness, senior to all future subordinated indebtedness and effectively junior to all secured indebtedness to the extent of the value of the collateral securing such indebtedness. Holdings and substantially all of the Company's material wholly owned domestic subsidiaries have guaranteed the PIK Exchangeable Notes on a senior basis, as required by the indenture governing the PIK Exchangeable Notes. Each guarantee is unsecured and ranks equally with senior indebtedness of the guarantor, senior to all of the guarantor's subordinated indebtedness and effectively junior to its secured indebtedness to the extent of the value of the collateral securing such indebtedness.

The Company may not redeem the PIK Exchangeable Notes prior to June 15, 2014. On or after June 15, 2014, the Company may redeem some or all of the PIK Exchangeable Notes for cash at a redemption price equal to a specified percentage of the accreted principal amount of the PIK Exchangeable Notes to be redeemed, plus accrued and non-capitalized interest. The specific percentage for such redemptions will be 104% for redemptions during the year commencing on June 15, 2014, 102% for redemptions during the year commencing on June 15, 2015, and 100% for redemptions during the year commencing on June 15, 2016.

The Company recorded the PIK Exchangeable Notes in accordance with ASC Topic 470, Debt. In the exchange, the new PIK Exchangeable Notes were recorded at fair value. At December 31, 2012, the Company was in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.

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Notes Payable to Banks

Certain subsidiaries of the Company have outstanding bank indebtedness which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made. The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions.

Capital Lease Obligations

The Company is liable to various vendors for several equipment leases. The carrying value of the leased assets was $6.3 million and $5.2 million as of December 31, 2012 and December 31, 2011, respectively.

Other Long-Term Debt Information

Scheduled maturities of obligations as of December 31, 2012 are as follows (in thousands):

	Long-term Debt		Capital Lease Obligations		Total
2013	$	37,592	$	2,053	$	39,645
2014	4,820		1,158		5,978
2015	77,107		788		77,895
2016	343,241		259		343,500
2017	110,626		20		110,646
Thereafter	273		—		273
	$	573,659	$	4,278	$	577,937

8.  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 other owners.  The Company made income tax payments of $394,000 and $396,000 for the periods ended December 31, 2012 and 2011, respectively.

Income tax expense from continuing operations is comprised of the following (in thousands):

	Year Ended December 31,
	2012			2011		2010
Current:
Federal	$	(3,527	)	$	240	$	(1,763	)
State	664			161		210
Deferred	13,887			8,431		9,443
Income tax expense	$	11,024		$	8,832	$	7,890

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

	Year Ended December 31,
	2012			2011			2010
Tax at U.S. statutory rates	$	13,297		$	5,236		$	8,445
State income taxes, net of federal tax benefit	355			181			1,232
Change in valuation allowance	9,410			11,409			4,593
Expiration of capital loss carryforwards	—			590			2,666
Net income attributable to noncontrolling interests	(13,579		)	(11,570		)	(9,116		)
Changes in measurement of uncertain tax positions	(3,169		)	3,885			(18		)
Write-off of nondeductible goodwill	1,581			133			(417		)
Partnership basis tax return reconciling differences	2,757			(1,302		)	328
Other	372			270			177
	$	11,024		$	8,832		$	7,890

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 (in thousands):

	2012			2011
Deferred tax assets:
Accrued malpractice reserve	$	745		$	343
Accrued vacation and bonus	514			323
Net operating loss carryforwards	50,167			45,774
Amortization of intangible assets	1,632			1,707
Basis differences of partnership and joint ventures	6,879			2,360
Deferred rent	—			145
SERP liability	511			—
Capital loss carryforward	1,879			5,119
Stock option compensation	4,508			3,956
Other deferred assets	1,591			1,455
Total gross deferred tax assets	68,426			61,182
Less: Valuation allowance	(66,325		)	(57,986		)
Total deferred tax assets	2,101			3,196
Deferred tax liabilities:
Depreciation on property and equipment	(271		)	(352		)
Amortization of intangible assets	(854		)	(645		)
Basis differences of partnerships and joint ventures	(71,130		)	(60,475		)
Deferred financing costs and original issuance discount	(1,389		)	(2,610		)
Other liabilities	(378		)	(169		)
Total deferred tax liabilities	(74,022		)	(64,251		)
Net deferred tax liability	$	(71,921	)	$	(61,055	)

As of December 31, 2012, the Company has recorded current deferred tax liabilities and net non-current deferred tax liabilities of $140,000 and $71.8 million, respectively.  The Company had federal net operating loss carryforwards of $113.9 million as of December 31, 2012, which expire between 2027 and 2032.  The Company had state net operating loss carryforwards of $241.8 million as of December 31, 2012, which expire between 2012 and 2032.  The Company had capital loss carryforwards of $5.4 million as of December 31, 2012, which expire between 2015 and 2016.

The Company recorded a valuation allowance against deferred tax assets at December 31, 2012 and December 31, 2011 totaling $66.3 million and $58.0 million, respectively, which represents an increase of approximately $8.3 million.  The valuation allowance has been provided for certain deferred tax assets, for which the Company believes it is more likely than not that the assets will not be realized.  Included in the increase in the valuation allowance was a decrease of approximately $1.0 million recorded to additional paid in capital as the result of the tax effect of the disposals of shares of noncontrolling interests. Finally, approximately $1.9 million of the valuation allowance at December 31, 2012 is recorded against deferred tax assets, that if subsequently recognized, will be credited directly to contributed capital.

F-22

For the year ended December 31, 2012, the Company recorded income tax benefit of $1.3 million related to discontinued operations.

A reconciliation of the beginning and ending liability for gross unrecognized tax benefits at December 31, 2012 and 2011 is as follows (in thousands):

	2012			2011
Unrecognized tax benefits balance at January 1	$	7,962		$	3,578
Additions based on tax provisions related to the current year	899			—
Additions for tax positions of prior years	1,356			4,426
Reductions for settlements with taxing authorities	(3,077		)	—
Reductions for the expiration of statutes of limitations	(31		)	(42		)
Unrecognized tax benefits balance at December 31	$	7,109		$	7,962

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.  As of December 31, 2012 and 2011, the Company had approximately $150,000 and $398,000 of accrued interest and penalties related to uncertain tax positions, respectively.

During 2012, the Company settled the Internal Revenue Service audit of the Company's federal income tax returns for the years ended December 31, 2006 through 2009. The Company's U.S. federal income tax returns for tax years 2009 and beyond remain subject to examination. The Company's state income tax returns for tax years 2009 and beyond remain subject to examination. 

The reserve for uncertain tax positions will be reduced by approximately $5.6 million in the coming twelve months principally as a result of the IRS approval of accounting method changes that was received in February 2013.  The changes are related to the Company's net operating loss and related interest expense deductions. Approximately $428,000 of the changes will affect the effective tax rate. The reserves are included in noncurrent income tax payable in the consolidated balance sheet as of December 31, 2012

Total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate if recognized is $634,000 as of December 31, 2012 and $3.5 million as of December 31, 2011.

9.  Stock Options

Overview

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

The Company uses the Black-Scholes option pricing model to value any options awarded subsequent to adoption of ASC 718, Compensation, Stock Compensation.  The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  All option pricing models require the input of highly subjective assumptions including the expected stock price volatility and the expected exercise patterns of the option holders.

The Company is a participant in the Symbion Holdings Corporation 2007 Equity Incentive Plan (the “2007 Plan”).  In connection with the Merger, certain members of Predecessor’s management rolled over 974,396 predecessor options into the 2007 Plan.  The rollover options were exchanged for 611,799 options under the 2007 Plan.  The conversion ratio was determined by the difference between $22.35, the share price paid to stockholders on the merger date, less the exercise price of each option, ignoring options with an exercise price greater than $22.35.  The aggregate sum of the difference for each option was divided by $8.50 to determine the number of rollover options.  The exercise price of each rollover option is $1.50 per share and the options expire on the expiration date of the original grants.

The Company’s stock option compensation expense estimate can vary in the future depending on many factors, including levels of options and awards granted in the future, forfeitures and when option or award holders exercise these awards and depending on whether performance targets are met and a liquidity event occurs.

On August 31, 2007, Holdings granted 1,302,317 time vesting options and 1,606,535 performance vesting options to certain employees of the Company.  The maximum contractual term of the options is ten years, or earlier if the employee terminates employment before that time.  The time vesting options vest over a five-year period with 20% of the options vesting each year.  The Company’s policy is to recognize compensation expense over the straight line method.  The performance vesting options shall vest and become exercisable upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity. No expense has been recorded in the statement of operations for the performance based shares as the conditions for vesting are not probable.

Effective January 23, 2012, Holdings amended its 2007 Equity Incentive Plan. The amendment increased the shares authorized for future grant under the plan by 2,400,000 shares. Additionally, the exercise price of certain options originally issued on and after August 31, 2007 was reduced from $10.00 per share to $3.00 per share, and the expiration date of such options was extended to January 23, 2022. As a result of this stock option plan modification, the Company recorded a non-cash charge of $1.7 million during the first quarter of 2012, of which $1.6 million is recorded in general and administrative expense and $83,000 is recorded in salaries and benefits.

F-23

Effective May 23, 2012, Holdings granted 947,828 time vesting options and 947,828 performance vesting options to certain employees of the Company. The maximum contractual term of the options is ten years, or earlier if the employee terminates employment before that time. The time vesting options vest over a five-year period with 20% of the options vesting each anniversary period of the option issuance.  The Company’s policy is to recognize compensation expense over the straight line method.  The performance vesting options shall vest and become exercisable upon a liquidity event based on the extent to which Crestview Partners, L.P. and certain affiliated investors receive a target share price for their equity. No expense has been recorded in the statement of operations for the performance based shares as the conditions for vesting are not probable.

During 2012, the Company issued to certain employees 152,888 options to purchase shares of common stock issued pursuant to the amended 2007 Equity Incentive Plan, which were reserved for issuance for positions to be filled after the initial grant. During 2011, the Company issued to certain employees 153,392 options included in the August 31, 2007 grant. The Company began recognizing expense related to these options during the requisite service period.

Valuation Methodology

The fair values of the options were derived using the Black-Scholes option pricing model.  In applying the Black-Scholes option pricing model, the Company used the following assumptions:

▪ Weightedaverage risk-free interest rate.  The risk-free interest rate is used as a component of the fair value of stock options to take into account the time value of money.  For the risk-free interest rate, the Company uses the implied yield on United States Treasury zero-coupon issues with a remaining term equal to the expected life, in years, of the options granted.

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

▪ Expected life, in years.  A clear distinction is made between the expected life of the option and the contractual term of the option.  The expected life of the option is considered the amount of time, in years, that the option is expected to be outstanding before it is exercised.  Whereas, the contractual term of the stock option is the term the option is valid before it expires.

▪ Expected dividend yield.  Since issuing dividends will affect the fair value of a stock option, GAAP requires companies to estimate future dividend yields or payments.  The Company has not historically issued dividends and does not intend to issue dividends in the future.

▪ Expected forfeiture rate.  The Company uses an estimated forfeiture rate based on historical experience for the respective position held by the option holder.  The Company reviews the forfeiture estimate annually in comparison to the actual forfeiture rate experienced.

The following table summarizes the assumptions used by the Company in the valuation of the time-vested options for the various periods:

	Weighted average fair value per option		Weighted average risk-free interest rate		Expected volatility		Expected life, in years	Expected dividend yield		Expected forfeiture rate
December 31, 2010	$	2.13	2.7	%	42.0	%	6.5	—	%	4.0	%
December 31, 2011	$	0.59	2.0	%	42.0	%	6.5	—	%	4.0	%
December 31, 2012	$	1.53	2.0	%	42.0	%	6.5	—	%	4.0	%

Supplemental Information - Net Income

The Company recorded non-cash compensation expense of $2.1 million for December 31, 2012 and $1.3 million for each of the years ended December 31, 2011 and 2010.  After noncontrolling interests and the related tax benefit, the Company recorded a net impact of approximately $2.1 million for 2012, $825,000 for 2011 and $818,000 for 2010.

F-24

Outstanding Option Information

The following is a summary of option transactions since December 31, 2010:

Stock Options	Number of Shares		Weighted Average Exercise Price		Weighted Average Fair Value		Total Fair Value		Aggregate Intrinsic Value		Weighted Average Remaining Contractual term (in years)
2010 Activity
Granted	186,964		$	3.00	$	1.63	$	304,751	$	—	7.2
Exercised	(19,009	)	—		—		—		—		—
Forfeited	16,307		—		—		—		—		—
Vested	303,351		3.00		1.63		494,462		—		6.9
Outstanding as of December 31, 2010	3,766,149		3.92		2.78		10,469,894		—		5.7
Exercisable at December 31, 2010	1,716,472		$	2.50	$	4.21	$	7,226,347	$	1.71	5.3
2011 Activity
Granted	153,392		$	3.00	1.63		$	250,029	$	—	8.2
Exercised	—		—		—		—		—		—
Forfeited	104,525		—		—		—		—		—
Vested	318,690		3.00		1.63		519,465		—		5.9
Outstanding as of December 31, 2011	3,815,016		2.72		2.72		10,376,844		—		4.3
Exercisable at December 31, 2011	2,035,162		$	2.57	$	3.80	$	7,733,616	$	1.23	4.7
2012 Activity
Granted	2,201,432		$	3.43	$	1.53	$	3,368,191	$	—	9.2
Exercised	(258,962	)	—		—		—		—		—
Forfeited	402,311		—		—		—		—		—
Vested	88,805		3.00		1.63		144,752		—		8.1
Outstanding as of December 31, 2012	5,355,175		3.08		2.04		10,924,557		—		8.5
Exercisable at December 31, 2012	1,865,005		$	2.96	$	3.23	$	6,023,966	$	0.27	3.2

As of December 31, 2012, the total compensation expense related to non-vested time based awards not yet recognized was $1.5 million.  Substantially all of this expense will be recognized over the next four years.

The following table summarizes information regarding the options outstanding at December 31, 2012:

Options Outstanding						Options Exercisable
Exercise Prices		Outstanding as of December 31, 2012	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Exercisable as of December 31, 2012	Weighted-Average Exercise Price
$	1.50	333,828	1.07	$	1.50	333,828	$	1.50
3.00		2,819,915	8.89	3.00		1,500,599	3.00
3.00		305,776	9.16	3.00		30,578	3.00
3.50		1,895,656	9.16	3.50		—	3.50
		5,355,175	8.54	$	3.08	1,865,005	$	2.96

F-25

Total unvested share awards as of December 31, 2012 are summarized as follows:

Stock Options	Number of Shares	Weighted Average Exercise Price		Weighted Average Fair Value		Total Fair Value		Aggregate Intrinsic Value	Weighted Average Remaining Contractual term (in years)
Unvested at January 1, 2012	1,779,854	$	3.00	$	1.58	$	2,812,169	—	8.0
Granted	2,201,432	3.43		1.53		3,368,191		—	9.2
Forfeited	402,311	—		—		—		—	—
Vested	88,805	3.00		1.63		144,752		—	8.1
Unvested at December 31, 2012	3,490,170	3.15		1.63		$	5,688,977	—	8.5

10.  Employee Benefit Plans

Symbion, Inc. 401(k) Plan

The Symbion, Inc. 401(k) Plan (the “401(k) Plan”) is a defined contribution plan whereby employees who have completed six 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 401(k) 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 by the Company of their contributions.  The match varies depending on location 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 the years ended 2012, 2011 and 2010 was $1.5 million, $864,000 and $665,000, respectively.

Supplemental Retirement Savings Plan

The Company adopted the supplemental retirement savings plan (the “SERP”) in May 2005.  The SERP provides supplemental retirement alternatives to eligible officers and key employees of the Company by allowing participants to defer portions of their compensation.  Under the SERP, eligible employees may enroll in the plan before December 31 to be entered in the plan the following year.  Eligible employees may defer into the SERP up to 25% of their normal period payroll and up to 50% of their annual bonus.  If the enrolled employee contributes a minimum of 2% of his or her base salary into the SERP, the Company will contribute 2% of the enrolled employee’s base salary to the plan and has the option of contributing additional amounts.  Periodically, the enrolled employee’s deferred amounts are transferred to a plan administrator.  The plan administrator maintains separate non-qualified accounts for each enrolled employee to track deferred amounts.  On May 1 of each year, the Company is required to make its contribution to each enrolled employee’s account.  Compensation expense recorded by the Company related to the Company’s contribution to the SERP was $64,000, $50,000 and $44,000, for years ended 2012, 2011 and 2010, respectively. As of December 31, 2012, the fair value of the assets in the SERP plan was $1.3 million, which is included in other assets. The Company has recorded a liability of $1.3 million for the SERP plan value in other long term liabilities.

11. Commitments and Contingencies

Debt and Lease Guaranty on Non-consolidated Entities

The Company has guaranteed $1.3 million of operating lease payments of certain non-consolidating surgical facilities. These operating leases typically have 10-year terms, with optional renewal periods. As of December 31, 2012, the Company has also guaranteed $181,000 of debt of one non-consolidating surgical facility. In the event that the Company meets certain financial and debt service benchmarks, the guarantee at this surgical facility will expire in 2017.

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 claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. The workers compensation insurance is on an occurrence basis. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that would 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 and workers compensation 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. Reserves and provisions are based upon actuarially determined estimates. The reserves are estimated using individual case-basis valuations and actuarial analysis. Based on historical results and data currently available, management does not believe a change in one or more of the underlying assumptions will have a material impact on the Company's consolidated financial position or results of operations. Reserves for professional, general and workers' compensation claim liabilities are determined with no regard for expected insurance recoveries and are presented gross on the consolidated balance sheets. Expected insurance recoveries are presented

F-26

separately.  Gross reserves of $5.2 million and $4.0. million at December 31, 2012 and 2011, respectively, are included in other accrued expenses and other liabilities in the accompanying consolidated balance sheets.  Expected insurance recoveries of $1.5 million and $1.6 million at December 31, 2012 and 2011, respectively, are included in other assets in the accompanying consolidated balance sheets. The gross presentation had no impact on the Company's results of operations or cash flows.

Laws and Regulations

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 Facilities

The Company, through its wholly owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and 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

A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry 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 surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors 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.

12. Related Party Transactions

On August 23, 2007, the Company entered into a 10-year advisory services and management agreement with Crestview Advisors, L.L.C.  The annual management fee is $1.0 million and is payable on August 23 of each year.  The Company has prepaid this annual management fee and, as of December 31, 2012, had an asset of $645,000 that is included in prepaid expenses and other current assets. 

Concurrent with the Offering, the Company exchanged with affiliates of Crestview, affiliates of The Northwestern Mutual Insurance Company and certain other holders of the Company's outstanding Toggle Notes, Toggle Notes having an aggregate principal amount of $85.4 million, at par plus accrued and unpaid interest of $3.1 million, for $88.5 million initial aggregate principal amount of the Company's PIK Exchangeable Notes. Effective September 9, 2011, the Company cancelled $9.0 million aggregate principal amount of its Senior Secured Notes held by affiliates of The Northwestern Mutual Insurance Company, plus accrued and unpaid interest, in exchange for the Company's issuance to such parties of $9.2 million aggregate principal amount of its PIK Exchangeable Notes. The Company currently has $109.7 million aggregate principal amount of PIK Exchangeable Notes outstanding. As of December 31, 2012, the Company has accrued $390,000 in interest on the PIK Exchangeable Notes in other accrued expenses. See Note 7 for further discussion of the PIK Exchangeable Notes.

13.  Selected Quarterly Financial Data (Unaudited)

The following is selected quarterly financial data for each of the four quarters in 2012 and 2011.  Quarterly results are not necessarily representative of operations for a full year:

F-27

	2012
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(unaudited and in thousands)
Revenues	$	120,623		$	122,440		$	125,951		$	138,979
Cost of revenues	84,744			86,074			95,136			99,316
(Loss) income from continuing operations	5,209			8,209			2,537			11,011
Net (loss) income	(4,941		)	(2,862		)	(5,448		)	1,541
	2011
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(unaudited and in thousands)
Revenues	$	105,264		$	107,087		$	106,815		$	120,112
Cost of revenues	74,291			78,235			77,031			83,351
Income (loss) from continuing operations	5,375			(2,440		)	932			2,259
Net (loss) income	(2,419		)	(8,673		)	(6,368		)	(9,127		)

As discussed in Note 2, the consolidated balance sheet at December 31, 2011 was adjusted to classify $5.2 million, previously classified as cash and cash equivalents, as noncurrent restricted invested assets. The consolidated statements of cash flows for the years ended December 31, 2011 and 2010 were adjusted to reflect $2.0 million and $3.2 million, respectively, as cash used in financing activities.

In addition, the unaudited consolidated balance sheets as of March 31, 2012, June 30, 2012 and September 30, 2012 were adjusted to classify $5.2 million, previously classified as cash and cash equivalents, as non-current restricted invested assets. These errors had no impact on the unaudited consolidated statements of cash flows for the three months ended March 31, 2012 and 2011, the six months ended June 30, 2012 and 2011, and the nine months ended September 30, 2012. The unaudited consolidated statement of cash flows for the nine months ended September 30, 2011 was adjusted to reflect $2.2 million as cash used in financing activities.  The Company considers the adjustments an immaterial correction of an error.  

The effect of these adjustments on the unaudited consolidated balance sheets as of March 31, 2012, June 30, 2012 and September 30, 2012, as previously reported, is as follows (in thousands):

	Previously reported		Adjustment			Adjusted
March 31, 2012	$	71,547	$	(5,162	)	$	66,385
June 30, 2012	64,559		(5,162		)	59,397
September 30, 2012	77,167		(5,162		)	72,005

The effect of these adjustments on the unaudited consolidated statement of cash flows for the nine months ended September 30, 2011, as previously reported, is as follows (in thousands):

	Previously reported			Adjustment			Adjusted
Cash used in financing activities	$	(46,273	)	$	(2,200	)	$	(48,473	)

14. Financial Information for the Company and Its Subsidiaries

The Company conducts substantially all of its business through its subsidiaries. Presented below is consolidating financial information for the Company and its subsidiaries as required by regulations of the Securities and Exchange Commission (“SEC”) in connection with the Company's Senior Secured Notes and Toggle Notes that have been registered with the SEC. The information segregates the parent company issuer, the combined wholly-owned subsidiary guarantors, the combined non-guarantors, and consolidating adjustments. The operating and investing activities of the separate legal entities are fully interdependent and integrated. Accordingly, the results of the separate legal entities are not representative of what the operating results would be on a stand-alone basis. All of the subsidiary guarantees are both full and unconditional and joint and several.

F-28

SYMBION, INC.

CONSOLIDATING BALANCE SHEET

December 31, 2012

(In thousands)

	Parent Issuer		Guarantor Subsidiaries		Combined Non-Guarantors		Eliminations			Total Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	8,505	$	26,174	$	39,903	$	—		$	74,582
Accounts receivable, net	—		—		73,211		—			73,211
Inventories	—		167		14,777		—			14,944
Prepaid expenses and other current assets	1,794		3		8,371		—			10,168
Due from related parties	1,878		44,895		—		(46,773		)	—
Current assets of discontinued operations	—		—		190		—			190
Total current assets	12,177		71,239		136,452		(46,773		)	173,095
Property and equipment, net	—		3,018		129,136		—			132,154
Goodwill and intangible assets	658,141		—		22,468		—			680,609
Investments in and advances to affiliates	92,532		18,344		—		(98,744		)	12,132
Restricted invested assets	—		—		5,169		—			5,169
Other assets	12,847		—		1,197		—			14,044
Long-term assets of discontinued operations	—		—		—		—			—
Total assets	$	775,697	$	92,601	$	294,422	$	(145,517	)	$	1,017,203
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	161	$	2	$	23,062	$	—		$	23,225
Accrued payroll and benefits	1,429		62		11,605		—			13,096
Due to related parties	—		—		46,773		(46,773		)	—
Other accrued expenses	9,063		5		20,340		—			29,408
Current maturities of long-term debt	21,232		—		18,413		—			39,645
Current liabilities of discontinued operations	—		—		645		—			645
Total current liabilities	31,885		69		120,838		(46,773		)	106,019
Long-term debt, less current maturities	520,316		—		14,108		—			534,424
Deferred income tax payable	71,781		—		—		—			71,781
Other liabilities	2,634		—		60,278		—			62,912
Long-term liabilities of discontinued operations	—		—		—		—			—
Noncontrolling interests - redeemable	—		—		33,686		—			33,686
Total Symbion, Inc. stockholders' equity	149,081		92,532		6,212		(98,744		)	149,081
Noncontrolling interests - non-redeemable	—		—		59,300		—			59,300
Total equity	149,081		92,532		65,512		(98,744		)	208,381
Total liabilities and stockholders' equity	$	775,697	$	92,601	$	294,422	$	(145,517	)	$	1,017,203

F-29

SYMBION, INC.

CONSOLIDATING BALANCE SHEET

December 31, 2011

(In thousands)

	Parent Issuer			Guarantor Subsidiaries		Combined Non-Guarantors		Eliminations			Total Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	5,509		$	27,617	$	29,823	$	—		$	62,949
Accounts receivable, net	—			—		68,616		—			68,616
Inventories	—			—		12,510		—			12,510
Prepaid expenses and other current assets	2,077			227		6,477		—			8,781
Due from related parties	2,163			45,288		—		(47,451		)	—
Current assets of discontinued operations	—			—		4,767		—			4,767
Total current assets	9,749			73,132		122,193		(47,451		)	157,623
Property and equipment, net	502			2,108		126,603		—			129,213
Goodwill and intangible assets	633,487			—		23,344		—			656,831
Investments in and advances to affiliates	107,793			33,153		—		(126,318		)	14,628
Restricted invested assets	—			—		5,162		—			5,162
Other assets	13,558			—		1,523		—			15,081
Long-term assets of discontinued operations	—			—		3,589		—			3,589
Total assets	$	765,089		$	108,393	$	282,414	$	(173,769	)	$	982,127
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5		$	8	$	14,510	$	—		$	14,523
Accrued payroll and benefits	763			233		8,518		—			9,514
Due to related parties	—			—		47,451		(47,451		)	—
Other accrued expenses	12,960			15		21,864		—			34,839
Current maturities of long-term debt	57			—		13,493		—			13,550
Current liabilities of discontinued operations	—			—		1,899		—			1,899
Total current liabilities	13,785			256		107,735		(47,451		)	74,325
Long-term debt, less current maturities	532,337			—		12,335		—			544,672
Deferred income tax payable	60,926			—		—		—			60,926
Other liabilities	(88		)	344		61,164		—			61,420
Long-term liabilities of discontinued operations	—			—		2,936		—			2,936
Noncontrolling interest - redeemable	—			—		34,131		—			34,131
Total Symbion, Inc. stockholders’ equity	158,129			107,793		18,525		(126,318		)	158,129
Noncontrolling interests - nonredeemable	—			—		45,588		—			45,588
Total equity	158,129			107,793		64,113		(126,318		)	203,717
Total liabilities and stockholders’ equity	$	765,089		$	108,393	$	282,414	$	(173,769	)	$	982,127

F-30

SYMBION, INC.

CONSOLIDATING STATEMENT OF OPERATIONS

For the Year Ended December 31, 2012

(In thousands)

	Parent Issuer			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
Revenues	$	36,706		$	1,732		$	485,259		$	(15,704	)	$	507,993
Operating expenses:
Salaries and benefits	—			1,339			139,646			—			140,985
Supplies	—			33			127,968			—			128,001
Professional and medical fees	—			56			37,461			—			37,517
Rent and lease expense	—			141			24,909			—			25,050
Other operating expenses	—			83			33,634			—			33,717
Cost of revenues	—			1,652			363,618			—			365,270
General and administrative expense	26,901			—			—			—			26,901
Depreciation and amortization	374			87			21,462			—			21,923
Provision for doubtful accounts	—			—			10,536			—			10,536
Income on equity investments	—			(4,490		)	—			—			(4,490		)
Gain (loss) on disposal and impairment of long-lived assets, net	(6,632		)	—			423			—			(6,209		)
Electronic health record incentives	—			—			(1,054		)	—			(1,054		)
Litigation settlements, net	—			—			(532		)	—			(532		)
Management fees	—			—			15,704			(15,704		)	—
Equity in earnings of affiliates	(35,490		)	(31,007		)	—			66,497			—
Total operating expenses	(14,847		)	(33,758		)	410,157			50,793			412,345
Operating income	51,553			35,490			75,102			(66,497		)	95,648
Interest expense, net	(53,948		)	—			(3,710		)	—			(57,658		)
(Loss) income before taxes and discontinued operations	(2,395		)	35,490			71,392			(66,497		)	37,990
Provision for income taxes	9,315			—			1,709			—			11,024
(Loss) income from continuing operations	(11,710		)	35,490			69,683			(66,497		)	26,966
Income from discontinued operations, net of taxes	—			—			122			—			122
Net (loss) income	(11,710		)	35,490			69,805			(66,497		)	27,088
Net income attributable to noncontrolling interests	—			—			(38,798		)	—			(38,798		)
Net (loss) income attributable to Symbion, Inc.	$	(11,710	)	$	35,490		$	31,007		$	(66,497	)	$	(11,710	)

F-31

SYMBION, INC.

CONSOLIDATING STATEMENT OF OPERATIONS

For the Year Ended December 31, 2011

(In thousands)

	Parent Issuer			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
Revenues	$	34,473		$	6,655		$	413,473		$	(15,323	)	$	439,278
Operating expenses:
Salaries and benefits	—			3,763			117,800			—			121,563
Supplies	—			761			103,994			—			104,755
Professional and medical fees	—			577			31,769			—			32,346
Rent and lease expense	—			601			22,791			—			23,392
Other operating expenses	—			331			30,521			—			30,852
Cost of revenues	—			6,033			306,875			—			312,908
General and administrative expense	22,723			—			—			—			22,723
Depreciation and amortization	668			213			19,217			—			20,098
Provision for doubtful accounts	—			106			6,695			—			6,801
Income on equity investments	—			(1,876		)	—			—			(1,876		)
Loss on disposal and impairment of long-lived assets, net	4,822			—			—			—			4,822
Loss on debt extinguishment	4,751			—			—			—			4,751
Litigation settlements, net	—			—			(231		)	—			(231		)
Management fees	—			—			15,323			(15,323		)	—
Equity in earnings of affiliates	(33,478		)	(31,505		)	—			64,983			—
Total operating expenses	(514		)	(27,029		)	347,879			49,660			369,996
Operating income	34,987			33,684			65,594			(64,983		)	69,282
Interest expense, net	(52,735		)	(206		)	(1,383		)	—			(54,324		)
(Loss) income before taxes and discontinued operations	(17,748		)	33,478			64,211			(64,983		)	14,958
Provision for income taxes	8,839			—			(7		)	—			8,832
(Loss) income from continuing operations	(26,587		)	33,478			64,218			(64,983		)	6,126
Income from discontinued operations, net of taxes	—			—			344			—			344
Net (loss) income	(26,587		)	33,478			64,562			(64,983		)	6,470
Net income attributable to noncontrolling interests	—			—			(33,057		)	—			(33,057		)
Net (loss) income attributable to Symbion, Inc.	$	(26,587	)	$	33,478		$	31,505		$	(64,983	)	$	(26,587	)

F-32

SYMBION, INC.

CONSOLIDATING STATEMENT OF OPERATIONS

For the Year Ended December 31, 2010

(In thousands)

	Parent Issuer			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
Revenues	$	35,101		$	9,846		$	359,773		$	(15,616	)	$	389,104
Operating expenses:
Salaries and benefits	—			4,558			106,073			—			110,631
Supplies	—			833			87,148			—			87,981
Professional and medical fees	—			1,064			25,723			—			26,787
Rent and lease expense	—			748			22,178			—			22,926
Other operating expenses	—			434			28,016			—			28,450
Cost of revenues	—			7,637			269,138			—			276,775
General and administrative expense	22,464			—			1			—			22,465
Depreciation and amortization	680			301			17,238			—			18,219
Provision for doubtful accounts	—			176			6,313			—			6,489
Income on equity investments	—			(2,901		)	—			—			(2,901		)
Gain on disposal and impairment of long-lived assets, net	(900		)	—			(1		)	—			(901		)
Litigation settlements, net	(35		)	—			—			—			(35		)
Business combination remeasurement gains	(3,169		)	—			—			—			(3,169		)
Management fees	—			—			15,616			(15,616		)	—
Equity in earnings of affiliates	(22,088		)	(17,454		)	—			39,542			—
Total operating expenses	(3,048		)	(12,241		)	308,305			23,926			316,942
Operating income (loss)	38,149			22,087			51,468			(39,542		)	72,162
Interest expense, net	(39,202		)	1			(8,831		)	—			(48,032		)
(Loss) income before taxes and discontinued operations	(1,053		)	22,088			42,637			(39,542		)	24,130
Provision for income taxes	7,687			—			203			—			7,890
(Loss) income from continuing operations	(8,740		)	22,088			42,434			(39,542		)	16,240
Income from discontinued operations, net of taxes	—			—			1,065			—			1,065
Net (loss) income	(8,740		)	22,088			43,499			(39,542		)	17,305
Net income attributable to noncontrolling interests	—			—			(26,045		)	—			(26,045		)
Net (loss) income attributable to Symbion, Inc.	$	(8,740	)	$	22,088		$	17,454		$	(39,542	)	$	(8,740	)

F-33

SYMBION, INC.

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Year Ended December 31, 2012

(In thousands)

	Parent Issuer			Guarantor Subsidiaries		Combined Non-Guarantors			Eliminations			Total Consolidated
Net (loss) income	$	(11,710	)	$	35,490	$	69,805		$	(66,497	)	$	27,088
Comprehensive income	(11,710		)	35,490		69,805			(66,497		)	27,088
Less: Comprehensive income attributable to noncontrolling interests	—			—		(38,798		)	—			(38,798		)
Comprehensive (loss) income attributable to Symbion, Inc.	$	(11,710	)	$	35,490	$	31,007		$	(66,497	)	$	(11,710	)

F-34

SYMBION, INC.

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Year Ended December 31, 2011

(In thousands)

	Parent Issuer			Guarantor Subsidiaries		Combined Non-Guarantors			Eliminations			Total Consolidated
Net (loss) income	$	(26,587	)	$	33,478	$	64,562		$	(64,983	)	$	6,470
Other comprehensive income, net of income taxes:
Recognition of interest rate swap liability to earnings	314			—		—			—			314
Comprehensive income	(26,273		)	33,478		64,562			(64,983		)	6,784
Less: Comprehensive income attributable to noncontrolling interests	—			—		(33,057		)	—			(33,057		)
Comprehensive (loss) income attributable to Symbion, Inc.	$	(26,273	)	$	33,478	$	31,505		$	(64,983	)	$	(26,273	)

F-35

SYMBION, INC.

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Year Ended December 31, 2010

(In thousands)

	Parent Issuer			Guarantor Subsidiaries		Combined Non-Guarantors			Eliminations			Total Consolidated
Net (loss) income	$	(8,740	)	$	22,088	$	43,499		$	(39,542	)	$	17,305
Other comprehensive income, net of income taxes:
Recognition of interest rate swap liability to earnings	2,417			—		—			—			2,417
Comprehensive income	(6,323		)	22,088		43,499			(39,542		)	19,722
Less: Comprehensive income attributable to noncontrolling interests	—			—		(26,045		)	—			(26,045		)
Comprehensive (loss) income attributable to Symbion, Inc.	$	(6,323	)	$	22,088	$	17,454		$	(39,542	)	$	(6,323	)

F-36

SYMBION, INC.

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2012

(In thousands)

	Parent Issuer			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
Cash flows from operating activities:
Net (loss) income	$	(11,710	)	$	35,490		$	69,805		$	(66,497	)	$	27,088
Adjustments to reconcile net (loss) income to net cash from operating activities:
Income from discontinued operations	—			—			(122		)	—			(122		)
Depreciation and amortization	374			87			21,462			—			21,923
Amortization of deferred financing costs and debt issuance discount	3,798			—			—			—			3,798
Non-cash payment-in-kind interest option	8,305			—			—			—			8,305
Non-cash stock option compensation expense	2,057			—			—			—			2,057
(Gain) loss on disposal and impairment of long-lived assets, net	(6,632		)	—			423			—			(6,209		)
Deferred income taxes	13,887			—			—			—			13,887
Equity in earnings of affiliates	(35,490		)	(31,007		)	—			66,497			—
Equity in earnings of unconsolidated affiliates, net of distributions received	—			(1,931		)	—			—			(1,931		)
Provision for doubtful accounts	—			—			10,536			—			10,536
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
Accounts receivable	—			—			(6,458		)	—			(6,458		)
Other assets and liabilities	31,764			5,595			(41,454		)	—			(4,095		)
Net cash provided by operating activities - continuing operations	6,353			8,234			54,192			—			68,779
Net cash provided by operating activities - discontinued operations	—			—			1,782			—			1,782
Net cash provided by operating activities	6,353			8,234			55,974			—			70,561
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired	—			(21,142		)	—			—			(21,142		)
Proceeds from divestitures	—			11,465			—			—			11,465
Purchases of property and equipment, net	(291		)	—			(14,166		)	—			(14,457		)
Change in other assets	—			—			(64		)	—			(64		)
Net cash used in investing activities - continuing operations	(291		)	(9,677		)	(14,230		)	—			(24,198		)
Net cash provided by investing activities - discontinued operations	—			—			7,238			—			7,238
Net cash used in investing activities	(291		)	(9,677		)	(6,992		)	—			(16,960		)
Cash flows from financing activities:
Principal payments on long-term debt	—			—			(8,923		)	—			(8,923		)
Proceeds from debt issuances	—			—			10,471			—			10,471
Change in restricted invested assets	—			—			(7		)	—			(7		)
Distributions to noncontrolling interest partners	—			—			(39,853		)	—			(39,853		)
Payments for unit activities	(3,066		)	—			—			—			(3,066		)
Other financing activities	—			—			49			—			49
Net cash used in financing activities - continuing operations	(3,066		)	—			(38,263		)	—			(41,329		)
Net cash used in financing activities - discontinued operations	—			—			(639		)	—			(639		)
Net cash used in financing activities	(3,066		)	—			(38,902		)	—			(41,968		)
Net increase (decrease) in cash and cash equivalents	2,996			(1,443		)	10,080			—			11,633
Cash and cash equivalents at beginning of period	5,509			27,617			29,823			—			62,949
Cash and cash equivalents at end of period	$	8,505		$	26,174		$	39,903		$	—		$	74,582

F-37

SYMBION, INC.

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2011

(In thousands)

	Parent Issuer				Guarantor Subsidiaries				Combined Non-Guarantors			Eliminations			Total Consolidated
Cash flows from operating activities:
Net (loss) income	$	(26,587	)		$	33,478			$	64,562		$	(64,983	)	$	6,470
Adjustments to reconcile net (loss) income to net cash from operating activities:
Income from discontinued operations	—				—				(344		)	—			(344		)
Depreciation and amortization	668				213				19,217			—			20,098
Amortization of deferred financing costs and debt issuance discount	2,886				—				—			—			2,886
Non-cash payment-in-kind interest option	22,368				—				—			—			22,368
Non-cash stock option compensation expense	1,353				—				—			—			1,353
Non-cash recognition of other comprehensive income into earnings	665				—				—			—			665
Loss (gain) on disposal and impairment of long-lived assets, net	4,830				—				(8		)	—			4,822
Loss on debt extinguishment	4,751				—				—			—			4,751
Deferred income taxes	8,431				—				—			—			8,431
Equity in earnings of affiliates	(33,478		)		(31,505		)		—			64,983			—
Equity in earnings of unconsolidated affiliates, net of distributions received	—				106				—			—			106
Provision for doubtful accounts	—				106				6,695			—			6,801
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
Accounts receivable	—				—				(11,013		)	—			(11,013		)
Other assets and liabilities	22,442			*	5,355			*	(29,304		)	—			(1,507		)
Net cash provided by (used in) operating activities - continuing operations	8,329				7,753				49,805			—			65,887
Net cash provided by operating activities - discontinued operations	—				—				3,060			—			3,060
Net cash provided by (used in) operating activities	8,329				7,753				52,865			—			68,947
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired	—			*	(7,836		)	*	—			—			(7,836		)
Purchases of property and equipment, net	(78		)		—				(9,599		)	—			(9,677		)
Change in other assets	—				—				(590		)	—			(590		)
Net cash used in investing activities - continuing operations	(78		)		(7,836		)		(10,189		)	—			(18,103		)
Net cash used in investing activities - discontinued operations	—				—				(16		)	—			(16		)
Net cash used in investing activities	(78		)		(7,836		)		(10,205		)	—			(18,119		)
Cash flows from financing activities:
Principal payments on long-term debt	(348,267		)		—				(7,287		)	—			(355,554		)
Proceeds from debt issuances	344,722				—				4,158			—			348,880
Change in restricted invested assets	—				—				(2,000		)	—			(2,000		)
Payment for debt issuance costs	(11,891		)		—				—			—			(11,891		)
Distributions to noncontrolling interest partners	—				—				(33,231		)	—			(33,231		)
Payments for unit activities	(2,155		)		—				—			—			(2,155		)
Other financing activities	—				—				192			—			192
Net cash used in financing activities - continuing operations	(17,591		)		—				(38,168		)	—			(55,759		)
Net cash used in financing activities - discontinued operations	—				—				(867		)	—			(867		)
Net cash used in financing activities	(17,591		)		—				(39,035		)	—			(56,626		)
Net (decrease) increase in cash and cash equivalents	(9,340		)		(83		)		3,625			—			(5,798		)
Cash and cash equivalents at beginning of period	14,849				27,700				26,198			—			68,747
Cash and cash equivalents at end of period	$	5,509			$	27,617			$	29,823		$	—		$	62,949

* Payments for acquisitions, net of cash acquired of $7,836 and other assets and liabilities of $7,836, previously classified under the Parent Issuer column, were classified under the Guarantor Subsidiaries column for the year ended December 31, 2011.

F-38

SYMBION, INC.

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2010

(In thousands)

	Parent Issuer			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated
Cash flows from operating activities:
Net (loss) income	$	(8,740	)	$	22,088		$	43,499		$	(39,542	)	$	17,305
Adjustments to reconcile net (loss) income to net cash from operating activities:
Income from discontinued operations	—			—			(1,065		)	—			(1,065		)
Depreciation and amortization	680			301			17,238			—			18,219
Amortization of deferred financing costs and debt issuance discount	2,004			—			—			—			2,004
Non-cash payment-in-kind interest option	26,079			—			—			—			26,079
Non-cash stock option compensation expense	1,336			—			—			—			1,336
Non-cash recognition of other comprehensive income into earnings	2,731			—			—			—			2,731
Gain on disposal and impairment of long-lived assets, net	(4,070		)	—			—			—			(4,070		)
Non-cash credit risk adjustment of financial instruments	189			—			—			—			189
Deferred income taxes	9,443			—			—			—			9,443
Equity in earnings of affiliates	(22,088		)	(17,454		)	—			39,542			—
Equity in earnings of unconsolidated affiliates, net of distributions received	—			50			—			—			50
Provision for doubtful accounts	—			176			6,313			—			6,489
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
Accounts receivable	—			—			(15,217		)	—			(15,217		)
Other assets and liabilities	(55,463		)	51,652			755			—			(3,056		)
Net cash (used in) provided by operating activities - continuing operations	(47,899		)	56,813			51,523			—			60,437
Net cash provided by operating activities - discontinued operations	—			—			5,535			—			5,535
Net cash (used in) provided by operating activities	(47,899		)	56,813			57,058			—			65,972
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired	—			(44,105		)	—			—			(44,105		)
Purchases of property and equipment, net	(196		)	—			(8,273		)	—			(8,469		)
Proceeds from unit activity of unconsolidated facilities	(55		)	—			105			—			50
Change in other assets	—			—			(278		)	—			(278		)
Net cash used in investing activities - continuing operations	(251		)	(44,105		)	(8,446		)	—			(52,802		)
Net cash used in investing activities - discontinued operations	—			—			(367		)	—			(367		)
Net cash used in investing activities	(251		)	(44,105		)	(8,813		)	—			(53,169		)
Cash flows from financing activities:
Principal payments on long-term debt	(11,204		)	—			(11,210		)	—			(22,414		)
Proceeds from debt issuances	56,423			—			453			—			56,876
Change in restricted invested assets	—			—			(3,162		)	—			(3,162		)
Distributions to noncontrolling interest partners	—			—			(25,692		)	—			(25,692		)
Payments for unit activities	4,708			—			—			—			4,708
Other financing activities	1,800			—			(1,575		)	—			225
Net cash provided by (used in) financing activities - continuing operations	51,727			—			(41,186		)	—			10,541
Net cash provided by financing activities - discontinued operations	—			—			483			—			483
Net cash provided by (used in) financing activities	51,727			—			(40,703		)	—			11,024
Net increase in cash and cash equivalents	3,577			12,708			7,542			—			23,827
Cash and cash equivalents at beginning of period	11,272			14,992			18,656			—			44,920
Cash and cash equivalents at end of period	$	14,849		$	27,700		$	26,198		$	—		$	68,747

F-39

15. Subsequent Events

Effective January 1, 2013, the Company exercised its right to hold a majority voting interest on the Board of Directors at its surgical facility located in Great Falls, Montana and began consolidating this surgical hospital for financial reporting purposes.

Effective January 29, 2013, the Company disposed of its ownership interest in its surgical facility located in Novi, Michigan, for proceeds of approximately $310,000. This facility was previously accounted for as an equity method investment. Additionally, the Company previously recorded an impairment loss of $2.9 million at December 31, 2011.

Effective February 28, 2013, the Company ceased operations at its surgical facility located in San Antonio, Texas. This facility was consolidated for financial reporting purposes. The Company expects to record a loss on the disposal of approximately $1.6 million during the first quarter of 2013.

F-40

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.

	SYMBION, INC.
March 8, 2013	By:	/s/ Richard E. Francis, Jr.
		Richard E. Francis, Jr.
		Chairman of the Board 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 and in capacities and on the dates indicated.

Signature	Title	Date
/s/ Richard E. Francis, Jr.	Chairman of the Board, Chief Executive Officer and Director
Richard E. Francis, Jr.	(Principal Executive Officer)	March 8, 2013
/s/ Teresa F. Sparks	Senior Vice President of Financial and Chief Financial Officer
Teresa F. Sparks	(Principal Financial and Accounting Officer)	March 8, 2013
/s/ Clifford G. Adlerz
Clifford G. Adlerz	President, Chief Operating Officer and Director	March 8, 2013
/s/ Robert V. Delaney
Robert V. Delaney	Director	March 8, 2013
/s/ Quentin Chu
Quentin Chu	Director	March 8, 2013
/s/ Kurt E. Bolin
Kurt E. Bolin	Director	March 8, 2013
/s/ Craig R. Callen
Craig R. Callen	Director	March 8, 2013
/s/ Daniel G. Kilpatrick
Daniel G. Kilpatrick	Director	March 8, 2013

Exhibit Index

No.	Description
3.1	Amended Certificate of Incorporation of Symbion, Inc. (a)
3.2	Amended and Restated Bylaws of Symbion, Inc. (a)
4.1	Indenture, dated as of June 3, 2008, among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (a)
4.2	Form of 11.00%/11.75% Senior PIK Toggle Notes due 2015 (included in Exhibit 4.1) (a)
4.3	Registration Rights Agreement, dated as of June 3, 2007, among Symbion, Inc., the subsidiaries of Symbion, Inc. party thereto as guarantors, and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Greenwich Capital Markets, Inc. (a)
4.4	First Supplemental Indenture, dated as of September 18, 2008 among Symbion, Inc., the Guarantors named therein and U.S. Bank National Association, as Trustee (a)
4.5	Indenture, dated as of June 14, 2011, among Symbion, Inc., the guarantors party thereto, and U.S. Bank National Association, as trustee, relating to the 8.00% Senior Secured Notes Due 2016 (b)
4.6	Form of 8.00% Senior Secured Notes Due 2016 (included in Exhibit 4.5) (b)
4.7	Registration Rights Agreement, dated as of June 14, 2011, among Symbion, Inc., the guarantors party thereto, and Morgan Stanley & Co. LLC, Barclays Capital Inc. and Jefferies & Company, Inc (b)
4.8	Indenture, dated as of June 14, 2011, among Symbion, Inc., the guarantors party thereto, and U.S. Bank National Association, as trustee, relating to the 8.00% Senior PIK Exchangeable Notes Due 2017 (b)
4.9	Form of 8.00% Senior PIK Exchangeable Notes Due 2017 (included in Exhibit 4.8) (b)
4.10	Form of Registration Rights Agreement, dated as of June 14, 2011, among Symbion, Inc., Symbion Holdings Corporation, the subsidiary guarantors party thereto, and the initial holders named therein (b)
4.11	Amendment to Registration Rights Agreement, dated as of September 9, 2011, among Symbion, Inc., Symbion Holdings Corporation, the subsidiary guarantors party thereto, and the initial holders named therein (h)
10.1	Intercreditor Agreement, dated as of June 14, 2011, among Symbion Holdings Corporation, Symbion, Inc., the other grantors party thereto, Morgan Stanley Senior Funding, Inc., as credit agreement collateral agent, and U.S. Bank National Association, as notes collateral agent (b)
10.2	Employment Agreement, dated August 23, 2007, between Symbion, Inc. and Richard E. Francis, Jr. (a)
10.3	Employment Agreement, dated August 23, 2007, between Symbion, Inc. and Clifford G. Adlerz (a)
10.4	Credit Agreement, dated as of June 14, 2011, among Symbion Holdings Corporation, Symbion, Inc., the lenders party thereto from time to time, Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent, Morgan Stanley Bank, N.A., as swing line lender and issuing bank, and Barclays Capital and Jefferies Finance LLC, as co-syndication agents. (b)
10.5	Lease Agreement, dated June 26, 2001, between Burton Hills IV Partners and Symbion, Inc. (c)
10.6	First Amendment to Lease Agreement, dated February 9, 2004, between Burton Hills IV Partners and Symbion, Inc. (d)
10.7	Second Amendment to Lease Agreement, dated January 22, 2012, between Burton Hills IV Partners and Symbion, Inc.
10.8	Symbion Holdings Corporation 2007 Equity Incentive Plan (a)
10.9	First Amendment to 2007 Equity Incentive Plan (i)
10.10	Symbion, Inc. Executive Change in Control Severance Plan (a)
10.11	Symbion Holdings Corporation Compensatory Equity Participation Plan (a)
10.12	Shareholders Agreement, dated as of August 23, 2007, among Symbion Holdings Corporation and the stockholders of Symbion Holdings Corporation and other persons named therein (a)
10.13	Advisory Services and Monitoring Agreement, dated as of August 23, 2007, among Symbion, Inc., Symbion Holdings Corporation and Crestview Advisors, L.L.C. (a)
10.14	Form of Employee Contribution Agreement (a)
10.15	Symbion, Inc. Supplemental Executive Retirement Plan (e)
10.16	Management Rights Purchase Agreement, dated as of July 27, 2005, by and among Parthenon Management Partners, LLC, Andrew A. Brooks, M.D., Randhir S. Tuli and SymbionARC Management Services, Inc. (g)
21	Subsidiaries of Registrant
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document (j)
101.SCH	XBRL Taxonomy Extension Schema Document (j)
101.CAL	XBRL Taxonomy Calculation Linkbase Document (j)

101.DEF	XBRL Taxonomy Definition Linkbase Document (j)
101.LAB	XBRL Taxonomy Label Linkbase Document (j)
101.PRE	XBRL Taxonomy Presentation Linkbase Document (j)

___________________________________________

(a)	Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 filed September 26, 2008 (Registration No. 333-153678).
(b)	Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K filed June 20, 2011 (File No. 000-50574).
(c)	Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-1 (Registration No. 333-89554).
(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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 000-50574).
(f)	Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K filed August 2, 2005 (File No. 000-50574).
(g)	Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008, as amended (File No. 000-50574).
(h)	Incorporated by reference to exhibits filed with the Registrant's Registration Statement on Form S-4 filed October 11, 2011(Registration No. 333-153678).
(i)	Incorporated by reference to exhibits filed with the Registrant's Current Report on Form 8-K filed January 27, 2012 (File No. 000-50574)
(j)	Furnished electronically herewith.