2013 Form 10K

10-K 1 a2013form10k.htm 10-K 2013 Form 10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________

Form 10-K

(Mark One)


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

For the year ended December 31, 2013


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

For the transition period from to

Commission file number: 000-50574

Symbion, Inc.

(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 14, 2014, there were 1,000 shares of the registrant’s common stock outstanding.

SYMBION, INC.

FORM 10-K

TABLE OF CONTENTS



		Page

PART I

Item 1.	Business	1

Item 1A.	Risk Factors	20

Item 1B.	Unresolved Staff Comments	30

Item 2.	Properties	30

Item 3.	Legal Proceedings	30

Item 4.	Mine Safety Disclosures	30

PART II

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31

Item 6.	Selected Financial Data	31

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	35

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	55

Item 8.	Financial Statements and Supplementary Data.	55

Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	55

Item 9A.	Controls and Procedures	55

Item 9B.	Other Information	56

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	57

Item 11.	Executive Compensation	59

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	68

Item 13.	Certain Relationships and Related Transactions	70

Item 14.	Principal Accountants Fees and Services	71

PART IV

Item 15.	Exhibits and Financial Statement Schedules	72

	Signatures

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 24 states. Our surgical facilities, which include ambulatory surgery centers ("ASCs") and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, cardiology, gastroenterology, ophthalmology, orthopedics and pain management. Some of our surgical hospitals also provide acute care services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, 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, 2013, we owned and operated 50 surgical facilities, including 44 ASCs and six surgical hospitals. We also managed seven additional ASCs. We owned a majority interest in 31 of the 50 surgical facilities and consolidated 46 facilities for financial reporting purposes. We are reporting one operating surgical facility 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.

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 an estimated $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 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 3,600 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 seven 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, 2013, we owned (with physician investors or healthcare systems) and operated 50 surgical facilities and managed seven additional surgical facilities. Six of our surgical facilities are licensed as hospitals. Our typical ASC is a freestanding facility with about 14,000 square feet of space and four fully equipped operating rooms, two treatment rooms and ancillary areas for preparation, recovery, reception and administration. Our 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, oncology 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 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 healthcare systems. We hold majority ownership in 31 of the 50 surgical facilities in which we own an interest. We provide intercompany loans to our consolidated facilities which often are 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 predetermined 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, 2013:



Facility / State	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	28	%	⁽¹⁾
Specialty Surgical Center of Beverly Hills / Wilshire Boulevard	Beverly Hills	4	2	29	%	⁽¹⁾
Specialty Surgical Center of Encino	Encino	4	2	53	%	⁽¹⁾
Specialty Surgical Center of Irvine	Irvine	4	1	56	%	⁽¹⁾
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	69	%	⁽¹⁾⁽²⁾
Florida
Cape Coral Ambulatory Surgery Center	Cape Coral	5	6	65	%	⁽¹⁾
Lee Island Coast Surgery Center	Fort Myers	5	3	43	%	⁽¹⁾
Jacksonville Beach Surgery Center	Jacksonville	4	1	80	%	⁽¹⁾
Tampa Bay Regional Surgery Center	Largo	0	3	57	%	⁽¹⁾
West Bay Surgery Center	Largo	4	4	51	%	⁽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	61	%	⁽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⁾



Facility / State	City	Number of Operating Rooms	Number of Treatment Rooms	Symbion Percentage Ownership

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	70	%	⁽¹⁾
Louisiana
Physicians Medical Center	Houma	5	3	54	%	⁽¹⁾⁽²⁾
			30 hospital rooms
Massachusetts
Worcester Surgery Center	Worcester	4	1	56	%	⁽¹⁾⁽⁵⁾
Missouri
Timberlake Surgery Center	Chesterfield	4	1	62	%	⁽¹⁾
Central Missouri Medical Park Surgical Center	Jefferson City	4	2	42	%	⁽¹⁾
St. Louis Women's Surgery Center	St. Louis			59	%	⁽¹⁾
St. Louis Spine and Orthopedic	Town and Country	3	1	56	%	⁽¹⁾
Mississippi
DeSoto Surgery Center	DeSoto	2	1	—	%	⁽³⁾
Physicians Outpatient Center	Oxford	4	2	—	%	⁽³⁾
Montana
Great Falls Clinic Medical Center	Great Falls	3	20 hospital rooms	50	%	⁽¹⁾⁽²⁾
Great Falls Clinic Surgery Center	Great Falls	3	2	93	%	⁽¹⁾
New York
South Shore Ambulatory Surgery Center	Lynbrook	4	1	42	%	⁽¹⁾⁽⁴⁾
North Carolina
Orthopaedic Surgery Center of Asheville	Asheville	3	0	54	%	⁽¹⁾
Wilmington SurgCare	Wilmington	7	3	72	%	⁽¹⁾
Ohio
Physicians Ambulatory Surgery Center	Circleville	2	0	53	%	⁽¹⁾
Valley Surgical Center	Steubenville	3	1	58	%	⁽¹⁾
Pennsylvania
Crozer Keystone Surgery Center	Havertown	5	1	48	%	⁽⁶⁾
Village SurgiCenter	Erie	5	1	72	%	⁽¹⁾
Rhode Island
East Greenwich Endoscopy Center	East Greenwich	0	4	45	%	⁽¹⁾
East Bay Endoscopy Center	Portsmouth	0	1	75	%	⁽¹⁾
Bayside Endoscopy Center	Providence	0	6	75	%	⁽¹⁾
Ocean State Endoscopy Center	Providence	0	2	53	%	⁽¹⁾
Tennessee
Renaissance Surgery Center	Bristol	2	1	37	%	⁽¹⁾
Cool Springs Surgery Center	Franklin	5	1	36	%
Physicians Surgery Center	Jackson	4	0	20	%
Baptist Germantown Surgery Center	Memphis	6	1	—	%	⁽³⁾
East Memphis Surgery Center	Memphis	6	2	—	%	⁽³⁾
UroCenter	Memphis	3	0	—	%	⁽³⁾
Union City Surgery Center	Union City	3	1	—	%	⁽³⁾



Facility / State	City	Number of Operating Rooms	Number of Treatment Rooms	Symbion Percentage Ownership

Texas
Arise Austin Medical Center	Austin	6	1	25	%	⁽²⁾
			26 hospital rooms
Lubbock Heart and Surgical Hospital	Lubbock	4	74 hospital rooms	58	%	⁽¹⁾⁽²⁾
NorthStar Surgical Center	Lubbock	6	3	45	%	⁽¹⁾
Texarkana Surgery Center	Texarkana	4	3	58	%	⁽¹⁾
Washington
Bellingham Surgery Center	Bellingham	4	0	79	%	⁽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 a 42% ownership interest 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, 2013.


(6)	We hold a 48% non-consolidating ownership interest in a management service company that provides various management services to this surgical facility. We also have a management services agreement with the management service company.

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 attract physicians and access managed care contracts for our surgical facilities in that market. As of December 31, 2013, we have relationships with seven healthcare systems relating to 12 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 six surgical facilities in Memphis, Tennessee and surrounding areas;


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


▪	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 six 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 2019 and may be terminated earlier by either party for material breach after notice and an opportunity to cure.

Acquisitions and Developments

During 2013, our significant acquisitions were as follows:


•	Effective December 1, 2013, we acquired a 52.5% ownership interest in a surgical facility located in Providence, Rhode Island which we consolidate for financial reporting purposes.


•	Effective December 1, 2013, the surgical hospital located in Great Falls, Montana, in which we have a 50.0% consolidating ownership interest, acquired the ancillary services performed at the physician clinic that we manage in the same market.


•	Effective July 31, 2013, we acquired a 20.0% ownership interest in a surgical facility located in Jackson, Tennessee. We entered into a management agreement with this facility in April 2012 and continue to manage this facility. We hold a minority interest in this facility and do not consolidate for financial reporting purposes.


•	Effective July 1, 2013, we acquired a 58.7% ownership interest in a surgical facility located in Irvine, California. We merged the operations of the acquired facility with our existing surgical facility in Irvine, California.

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.

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 57 surgical facilities since January 1999.

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 four to six million dollars 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 either intercompany loans that we provide or third-party debt 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 (the "ARRA") 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. Our surgical hospitals have implemented systems to comply with the EHR meaningful use requirements of the Health Information Technology for Economic and Clinical Health Act (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 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 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 ("HMOs"), preferred provider organizations ("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, 2013, we had approximately 2,100 employees, including approximately 1,300 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

The majority of our revenues in 2013 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. 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. However, in a very limited number of surgical facilities, we charge for anesthesia services. We recognize our facility fees 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.

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 as well as cost containment and utilization decisions and reduced reimbursement schedules of third-party payors. Approximately 33.5%, 30.5% and 25.6% of our patient service revenues were from government sources, mostly Medicare, for the years ended December 31, 2013, 2012 and 2011, respectively.

The following table sets forth the percentage of our total patient service revenues for our consolidated surgical facilities included in continuing operations by type of payor for the periods indicated:



	Year Ended December 31,
	2013		2012		2011

Private Insurance	59.7	%	62.5	%	66.7	%
Government	33.5	%	30.5	%	25.6	%
Self-pay	2.9	%	2.3	%	3.0	%
Other	3.9	%	4.7	%	4.7	%
Total patient service revenues	100.0	%	100.0	%	100.0	%

Medicare Reimbursement — Ambulatory Surgery Centers

Payments under the Medicare program to ASCs are made through a system whereby the Secretary of the Department of Health and Human Services ("HHS") determines payment amounts prospectively for various categories of medical services performed in ASCs based upon the hospital outpatient prospective payment system ("OPPS"). On December 10, 2013, CMS published a final rule to update the Medicare program's payment policies and rates for ASCs for calendar year ("CY") 2014. Among other things, the final rule applies a 1.2% increase to the ASC payment rate for CY 2014 for ASCs that successfully report the quality measures for the ASC Quality Reporting (“ASCQR”) Program. The payment rate increase is based on a consumer price index for all urban consumers (CPI-U) update of 1.7%, which is reduced by a multi-factor productivity adjustment of 0.5%. Those ASCs that do not successfully report quality data under the ASCQR Program will receive a payment reduction of 0.8%. The final rule also adds three new quality measures to the ASCQR Program that ASCs will need to report in order to be eligible to receive the full payment rate update for CY 2016 and subsequent years. CMS will begin collecting data for these three new quality measures in CY 2014.

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 the IPPS, 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 19, 2013, CMS published the IPPS final rule for federal fiscal year (“FFY”) 2014, which began on October 1, 2013. Under the FFY 2014 final rule, rates for inpatient stays in hospitals paid under the IPPS that successfully report certain quality data under the Hospital Inpatient Quality Reporting (“IQR”) Program will be increased by 0.7%. Those hospitals that do not successfully report quality data under the IQR Program will receive a payment rate decrease of 1.3%.

Medicare Reimbursement—Hospital Outpatient Services

On December 10, 2013, CMS published its OPPS final rule for CY 2014. Among other things, the final rule provides for a payment rate increase of 1.7% for hospitals that meet the reporting requirements of the Medicare Hospital Outpatient Quality Reporting ("OQR") Program and a payment rate decrease of 0.3% for hospitals that do not meet the requirements. The rate increase is based on a hospital market basket increase of 2.5%, which is reduced by a multi-factor productivity adjustment of 0.5% and an additional 0.3% reduction required by the Patient Protection and Affordable Care Act (the “Affordable Care Act”) and the Health Care and Education Reconciliation Act of 2010 (together with the Affordable Care Act, the “Healthcare Reform Acts”).

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 reductions were originally set to begin on January 2, 2013. However, the enactment of the American Taxpayer Relief Act of 2012 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.

On April 10, 2013, President Obama released his proposed budget for FFY 2014. The proposed budget would replace the automatic spending reductions required by the BCA in their entirety by replacing the $1.2 trillion in reductions with a combination of new revenue and spending cuts. Specifically, the budget proposes to cut Medicare spending by approximately $400 billion over 10 years.

On December 26, 2013, the Pathway for SGR Reform Act of 2013 (the “Pathway Act”) was enacted. Among other things, the Pathway Act extends the automatic across-the-board spending reductions required by the BCA through FFY 2023, and postpones a payment reduction for physicians and other practitioners who treat Medicare patients that was scheduled to take effect on January 1, 2014.

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 preset monetary thresholds for the development, acquisition and/or expansion of certain facilities or services, including surgical facilities. 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 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 Affordable Care Act, including the “individual mandate” provision, which generally requires all individuals to purchase healthcare insurance or pay a penalty. The only provision of the Affordable Care Act that the Supreme 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 Affordable Care Act 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 defund, repeal or amend all or significant provisions of the Affordable Care Act, and a number of provisions of the Affordable Care Act that were supposed to become effective in 2014, such as the provision that requires employers with 50 or more full-time employees or full-time employee equivalents to provide affordable health insurance to those employees, have been delayed until 2015 or 2016. As a result, it is difficult to predict the impact the Affordable Care Act will have on our business given the delay in implementing regulations and key provisions of the Affordable Care Act and the possible ongoing amendment, defunding or repeal of elements of the Affordable Care Act. However, depending on how the Affordable Care Act is ultimately interpreted, amended and implemented, it could have an adverse effect on our business, financial condition and results of operations.

Recovery Audit Contractors

Several years ago, CMS implemented a Recovery Audit Contractor (“RAC”) program. RACs are private contractors contracting with CMS to identify overpayments and underpayments for healthcare patient services through post-payment reviews of claims submitted by Medicare and Medicaid providers. 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 determinations, 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 our 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.

Quality Improvement

Quality of care and value-based purchasing of healthcare services have become increasingly significant trends and competitive factors in the healthcare industry. In 2005, CMS began making available to the 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, in 2012, CMS implemented the ASCQR Program for ASCs, which requires ASCs to report certain quality measures for services that are provided on or after October 1, 2012, in order to receive the full reimbursement rate increases for CY 2014 and subsequent years.

If the public performance data becomes a primary factor in determining where patients choose to receive care, and if competing hospitals and ASCs have better results than our facilities on those measures, we would expect that our patient volumes could decline. In addition, if our hospitals are in the top quartile for high hospital-acquired conditions ("HAC") for discharges beginning on October 1, 2014 or are unable to meet the required quality measures, the implementation of value-based purchasing and quality care programs potentially could have a negative impact on our revenues.

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.

As part of the VBP Program, the Affordable Care Act requires HHS to implement a Hospital Value-Based Purchasing Program ("VBP Program"). 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.

The FFY 2014 IPPS final rule updates the required measures and financial incentives available in the Hospital VBP Program. For FFY 2014, CMS is increasing the applicable reduction percentage, the portion of Medicare payments available to fund the Hospital VBP Program's incentive payments, to 1.25%, which increases the total estimated amount available for these incentive payments. The FFY 2014 IPPS final rule also adds new quality of performance measures to the VBP Program.

Hospital-Acquired Conditions Reduction Program

The promotion of quality of care has become a significant trend in the healthcare industry. In addition to setting the standards for payment for Medicare-covered inpatient services, the FFY 2014 IPPS final rule lays out a framework for implementation of the new Hospital-Acquired Conditions Reduction Program, which begins in 2015. Under this program, hospitals that rank in the lowest-performing quartile of hospital- acquired conditions will be paid 99% of what they would otherwise be paid under the IPPS beginning in FFY 2015. In general, a hospital-acquired condition is a medical condition or complication that a patient develops during a hospital stay, which was not present at the time of admission to the hospital. To determine this quartile, CMS established quality measures and a scoring methodology as well as a process for hospitals to review and correct their data.

Medicare and Medicaid Participation

The majority of our revenues are expected to continue to be received through third-party reimbursement programs, including federal and state 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 for 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 and healthcare facilities 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 and surgical facilities 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, 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.

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


•	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 ASC 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).

•

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 ASCs , (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 ASC, nor employed by the ASC or any investor.


•	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.


•	Physician-investors must have fully informed their referred patients of the physician's investment.


•	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.


•	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.


•	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.


•	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.


•	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.


•	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.


•	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.


•	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 ASC in which a physician group that includes primary care physicians who do not use the ASC also holds ownership. In OIG Advisory Opinion No. 03-5 (February 6, 2003), the OIG declined to grant a favorable opinion to a proposed ASC 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 ASC. We believe that the ownership of our ASC complies with the Anti-kickback Statute because we understand that the physician group that owns an interest in our ASC is structured to fit within the definition of a unified group practice under the federal law prohibiting physician self-referrals, commonly known as the Stark Law, and the income distributions of the group practice comply with the Stark Law's acceptable methods of income distribution. 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 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 HHS;


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


▪	restrictions on preferential treatment of physician versus non-physician 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 ASC 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 over-billing. 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

Over the past several years, the U.S. government has accused an increasing number of healthcare providers of violating the federal Act. The federal 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. This requirement has led to an increasing use of the self-disclosure protocols that have been implemented by CMS, the OIG and other governmental agencies by the healthcare industry. 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

On January 16, 2009, CMS published its 10th Edition of International Statistical Classification of Diseases and Related Health Problems (“ICD-10”) and related changes to the formats used for certain electronic transactions. ICD-10 contains significantly more diagnostic and procedural codes than the existing ICD-9 coding system, and as a result, the coding for the services provided in our surgical facilities and hospitals will require much greater specificity. ICD-10 will require a significant investment in technology and training. As a result, we may experience delays in reimbursement while our surgical facilities and the payors from which we seek reimbursement make the transition to ICD-10. While HIPAA originally required implementation of ICD-10 to be achieved by October 1, 2013, CMS extended this deadline to October 1, 2014. If any of our surgical facilities fail to implement the new ICD-10 diagnosis coding system by the deadline, the affected surgical facility will not be paid for services. We are not able to predict the overall financial impact of our transition to ICD-10.

We are subject to HIPAA and the HITECH Act, which was enacted as part of the ARRA. 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 became effective on March 26, 2013, and covered entities and business associates were required to comply with the HIPAA Omnibus Rule within 180 days, or by September 23, 2013, except that some existing agreements with business associates may qualify for an extended compliance date of September 23, 2014. 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 eliminated this harm threshold standard and instead we are now 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 fund-raising 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;


•	requires modifications to existing agreements with business associates;


•	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.

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 includes provisions designed to increase the use of EHR by both physicians and hospitals. Beginning with FFY 2011 and extending through FFY 2016, eligible hospitals may receive incentive payments 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 reduced payments from Medicare. 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 FFY 2014 for hospitals. 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. The Company initiated its meaningful use initiatives in 2012. During the years ended December 31, 2013 and 2012, we satisfied the meaningful use provisions and recognized an aggregate of $4.6 million and $1.1 million, respectively, of EHR incentives at certain of our hospitals. We incurred costs including hardware, software and implementation expense of approximately $4.1 million and $5.0 million during the years ended December 31, 2013 and 2012, respectively. 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 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 adjust an out-of-network co-payment or other patient responsibility amounts without fully disclosing the adjustment on the claim submitted to the payor. While some of our surgical facilities adjust the out-of-network costs of patient co-payment and deductible amounts to reflect in-network co-payment costs 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 adjustments 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 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 FFY 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 determinations 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 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 hot-line 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

We are subject to 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. Some of these risks and uncertainties are discussed below. If any of the following risks, or other risks and uncertainties, 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, 2013, we had total indebtedness of $560.1 million and $48.2 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 our 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 was due and paid on August 23, 2013. We made this payment with cash from operations. 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.

Restrictive covenants in our debt instruments may adversely affect us.

The indentures governing our Toggle Notes, our 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 amounts that our surgical facilities receive in payment for their services are adversely affected by any of these factors, it could have a material adverse effect on our financial condition and results of operations.

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 59.7%, 62.5% and 66.7% of our patient service revenues for the years ended December 31, 2013, 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 or 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. 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 9.2%, 10.1% and 10.9% of our patient service revenues for the years ended December 31, 2013, 2012 and 2011, 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, 2013, we acquired 57 surgical facilities and developed 24 surgical facilities. We have subsequently divested 32 of these surgical facilities. 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.

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 RACs 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, a number of provisions of the Healthcare Reform Acts that were to become effective in 2014 have been delayed until 2015 or 2016, and several bills have been and will likely continue to be introduced in Congress to defund, 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, defunding 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. In addition, State Attorneys General could bring civil actions seeking either injunction or damages of up to $25,000 for patient privacy or security violations that affect the residents of their state. Applicable state privacy and information security laws could also impose additional penalties.

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.

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.

For the years ended December 31, 2013, 2012 and 2011, we derived 33.5%, 30.5% and 25.6% of our revenues, respectively, from government payors, including 32.4%, 29.8% and 24.8% from the Medicare and Medicaid programs, respectively. 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.

The Pathway Act was enacted December 26, 2013. Among other things, the Pathway Act extends the automatic across the board spending reductions required by the BCA through FFY 2023. 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 provide incentives to 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 defunding, 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-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 unless an exception applies. 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,” which was significantly amended by the Healthcare Reform Acts. 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. Violations of the Stark Law will create liability under the Federal False Claims Act, as well. 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.

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. This requirement has led to an increasing number of healthcare providers self-reporting potential violations of law to CMS, the OIG and other governmental agencies.

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 $25.2 billion for FFY 2013 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 FFY, 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 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, 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 federal 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 company alleging 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.

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 a 42% 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.

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 14 limited partnerships and 36 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 some of our surgical facilities, indebtedness at the partnership level is funded through intercompany loans that we provide. At December 31, 2013, our intercompany loans totaled $20.4 million. Through these loans 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.

From time to time, we may 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. In most instances of these guarantees, the physicians and/or physician groups have also guaranteed their pro-rata share of the indebtedness to secure the financing. At December 31, 2013, we did not guarantee any debt of our non-consolidated surgical facilities.

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.

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, 2013, we owned and operated three consolidated surgical facilities in Texas, seven consolidated surgical facilities in Florida and four consolidated surgical facilities in Missouri. The Texas facilities represented 16.1%, 13.8% and 9.6% of our patient service revenues during the years ended December 31, 2013, 2012 and 2011, respectively. The Florida facilities represented 5.7 %, 7.1% and 9.1% of our patient service revenues during the years ended December 31, 2013, 2012 and 2011, respectively. The Missouri facilities represented 8.6%, 8.9% and 9.6% of our patient service revenues during the years ended December 31, 2013, 2012 and 2011, respectively.

In addition, our surgical hospital located in Idaho Falls, Idaho represented 25.0%, 26.5% and 24.8% of our patient service revenues during the years ended December 31, 2013, 2012 and 2011, respectively. Our surgical hospital located in Durango, Colorado represented 5.2%, 5.4% and 5.0% of our patient service revenues during the years ended December 31, 2013, 2012 and 2011, respectively. Our surgical hospital located in Lubbock, Texas, which we acquired in June 2012, represented 10.9% and 5.8% of our patient service revenues during the years

ended December 31, 2013 and 2012, respectively, since the acquisition date. 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 continue the implementation of new IT systems at many of our facilities during 2014. 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.

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 Holdings is 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

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. In the opinion of management, we are not currently a party to any proceedings that would have a material adverse effect on our business, financial condition or results of operations.

Item 4. Mine Safety Disclosures

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, certain affiliated funds managed by Crestview, co-investors and management. There is no public trading market for our equity securities or those of Holdings. As of March 14, 2014, there were 24 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 statements of operations data and cash flow data set forth below for the years ended December 31, 2013, 2012 and 2011 and the selected consolidated balance sheets data set forth below as of December 31, 2013 and 2012, are derived from our audited consolidated financial statements that are included elsewhere in this report. The selected consolidated statements of operations data and cash flow data set forth below for the years ended December 31, 2010 and 2009 and the selected consolidated balance sheets data set forth below as of December 31, 2011, 2010 and 2009, are derived from our audited consolidated financial statements that are not included in this report. The amounts have been adjusted for discontinued operations.

The historical results presented below are not necessarily indicative of the results to be expected for any future period (dollars in thousands):



	Year Ended December 31,
	2013			2012			2011			2010			2009

Consolidated Statements of Operations Data:
Revenues	$	535,587		$	491,804		$	422,888		$	372,387		$	299,850
Operating expenses:
Cost of revenues	397,133			351,308			298,733			262,348			210,201
General and administrative expenses	21,976			26,901			22,723			22,465			21,448
Depreciation and amortization	22,993			21,360			19,497			17,660			15,458
Provision for doubtful accounts	11,149			10,211			6,574			6,157			2,676
Income from equity investments	(4,246		)	(4,490		)	(1,876		)	(2,901		)	(2,318		)
Loss (gain) on disposal or impairment of long-lived assets, net	5,870			(6,195		)	4,824			(898		)	3,272
Loss on debt extinguishment	—			—			4,751			—			—
Electronic health record incentives	(4,553		)	(1,054		)	—			—			—
Proceeds from insurance settlements, net	(919		)	—			—			—			—
Litigation settlements, net	(233		)	(532		)	(231		)	(35		)	(398		)
Business combination re-measurement gain	—			—			—			(3,169		)	—
Total operating expenses	449,170			397,509			354,995			301,627			250,339
Operating income	86,417			94,295			67,893			70,760			49,511
Interest expense, net	(57,982		)	(57,641		)	(54,308		)	(47,628		)	(44,946		)
Income before income taxes and discontinued operations	28,435			36,654			13,585			23,132			4,565
Provision for income taxes	5,330			10,939			8,721			7,871			7,501
Income from continuing operations	23,105			25,715			4,864			15,261			(2,936		)
Income (loss) from discontinued operations, net of taxes	1,882			1,132			1,340			1,965			(1,599		)
Net income (loss)	24,987			26,847			6,204			17,226			(4,535		)
Less: Net income attributable to non-controlling interests	(37,607		)	(38,557		)	(32,791		)	(25,966		)	(17,919		)
Net loss attributable to Symbion, Inc.	$	(12,620	)	$	(11,710	)	$	(26,587	)	$	(8,740	)	$	(22,454	)

Consolidated Statements of Cash Flow Data — Continuing Operations:
Net cash provided by operating activities	$	61,493		$	66,679		$	63,853		$	57,803		$	53,072
Net cash used in investing activities	(24,788		)	(23,848		)	(17,841		)	(52,773		)	(10,296		)
Net cash (used in) provided by financing activities	(58,942		)	(40,662		)	(55,185		)	11,250			(40,689		)

Other Data:
EBITDA ⁽¹⁾	$	78,083		$	72,960		$	65,527		$	59,723		$	51,619
EBITDA as a % of revenues	14.6		%	14.8		%	15.5		%	16.0		%	17.2		%
Number of surgical facilities included in continuing operations as of the end of period ⁽²⁾	56			57			56			54			54
Number of consolidated surgical facilities included in continuing operations as of the end of period	45			44			42			41			39



	December 31,
	2013		2012		2011		2010		2009

Consolidated Balance Sheets Data:
Working capital	$	87,735	$	67,076	$	83,298	$	74,139	$	40,782
Total assets	1,006,739		1,017,203		982,127		970,397		790,727
Long-term debt, less current maturities	551,046		534,114		544,353		506,801		444,331
Total Symbion, Inc. stockholders’ equity	136,691		149,081		158,129		185,426		193,413

(1)

When we use the term “EBITDA,” we are referring to net income plus (a) income (loss) from discontinued operations, net of taxes, (b) provision for income taxes, (c) interest expense, net, (d) depreciation and amortization, (e) non-cash (gains) losses, including those related to disposal or impairment of long-lived assets and debt extinguishment, if any, and (f) non-cash stock-based compensation expense, minus (g) net income attributable to non-controlling interests. Non-controlling interests represent 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.


(2)	Includes surgical facilities that we manage but in which we have no 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 generally accepted accounting principles ("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 GAAP. 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.

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



	Year Ended December 31,
	2013			2012			2011			2010			2009

EBITDA	$	78,083		$	72,960		$	65,527		$	59,723		$	51,619
Depreciation and amortization	(22,993		)	(21,360		)	(19,497		)	(17,660		)	(15,458		)
Stock-based compensation	(410		)	(2,057		)	(1,353		)	(1,336		)	(1,297		)
(Loss) gain on disposal or impairment of long-lived assets, net	(5,870		)	6,195			(4,824		)	898			(3,272		)
Loss on debt extinguishment	—			—			(4,751		)	—			—
Business combination remeasurement gain	—			—			—			3,169			—
Interest expense, net	(57,982		)	(57,641		)	(54,308		)	(47,628		)	(44,946		)
Provision for income taxes	(5,330		)	(10,939		)	(8,721		)	(7,871		)	(7,501		)
Net income attributable to non-controlling interests	37,607			38,557			32,791			25,966			17,919
Income (loss) from discontinued operations, net of income taxes	1,882			1,132			1,340			1,965			(1,599		)
Net income (loss)	24,987			26,847			6,204			17,226			(4,535		)
(Income) loss from discontinued operations, net of taxes	(1,882		)	(1,132		)	(1,340		)	(1,965		)	1,599
Depreciation and amortization	22,993			21,360			19,497			17,660			15,458
Amortization of debt issuance costs and discounts	3,994			3,798			2,886			2,004			2,004
Payment-in-kind interest expense	8,982			8,305			22,368			26,079			23,263
Stock-based compensation	410			2,057			1,353			1,336			1,297
Recognition of interest rate swap from liability to earnings	—			—			665			2,731			2,853
Non-cash credit risk adjustment of financial instruments	—			—			—			189			1,629
Loss (gain) on disposal or impairment of long-lived assets, net	5,870			(6,195		)	4,824			(898		)	3,272
Loss on debt extinguishment	—			—			4,751			—			—
Business combination remeasurement gain	—			—			—			(3,169		)	—
Deferred income taxes	4,556			13,800			8,334			9,443			8,682
Income from equity investments, net of distributions received	(768		)	(1,931		)	106			50			(207		)
Provision for doubtful accounts	11,149			10,211			6,574			6,157			2,676
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(13,419		)	(6,198		)	(10,696		)	(14,706		)	(4,108		)
Other operating assets and liabilities	(5,379		)	(4,243		)	(1,673		)	(4,334		)	(811		)
Net cash provided by operating activities — continuing operations	$	61,493		$	66,679		$	63,853		$	57,803		$	53,072

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

As of March 14, 2014, we owned and operated 50 surgical facilities, including 44 ASCs and six surgical hospitals. We also managed seven additional ASCs. We owned a majority interest in 30 of the 50 surgical facilities and consolidated 46 facilities for financial reporting purposes. We currently report one surgical facility 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 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. 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.

During 2013, we acquired an ownership interest in three new surgical facilities and divested three facilities. In addition, we completed a transaction related to our surgical hospital located in Austin, Texas, which included an asset sale and resulted in a decrease in our ownership interest to 25.0% at this facility. We continue to focus on improving the performance of our same store facilities, selectively acquiring established facilities and developing new facilities.

Effective March 7, 2014, we acquired an incremental ownership interest of 13.5% related to our surgical hospital located in Idaho Falls, Idaho for a purchase price of $23.6 million. This transaction was financed with proceeds from our Credit Facility.

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. 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 physician clinics for which we are not required to provide capital or additional assets.

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



	Year Ended December 31,
	2013		2012		2011

Patient service revenues	99.0	%	98.5	%	97.6	%
Physician service revenues	—	%	—	%	1.1	%
Other service revenues	1.0	%	1.5	%	1.3	%
Total revenues	100.0	%	100.0	%	100.0	%

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,
	2013		2012		2011

Private insurance	59.7	%	62.5	%	66.7	%
Government	33.5	%	30.5	%	25.6	%
Self-pay	2.9	%	2.3	%	3.0	%
Other	3.9	%	4.7	%	4.7	%
Total patient service revenues	100.0	%	100.0	%	100.0	%

Case Mix

We primarily operate multi-specialty facilities where physicians perform a variety of procedures in various specialties, including orthopedics, pain management, gastroenterology and ophthalmology, among others. We believe this diversification helps to protect us from 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,
	2013		2012		2011

Cardiology	2.0	%	1.1	%	—	%
Ear, nose and throat	5.2	%	5.3	%	5.6	%
Gastrointestinal	28.1	%	29.7	%	31.0	%
General surgery	4.0	%	3.8	%	4.2	%
Obstetrics/gynecology	3.6	%	3.3	%	2.9	%
Ophthalmology	17.0	%	16.4	%	16.0	%
Orthopedic	15.9	%	16.2	%	15.9	%
Pain management	13.5	%	13.7	%	14.3	%
Plastic surgery	2.3	%	2.4	%	2.5	%
Other	8.4	%	8.1	%	7.6	%
Total patient service revenues	100.0	%	100.0	%	100.0	%

Case Growth

Same Store Information

For the three months ended December 31, 2013 and 2012, we define same store facilities as those facilities that we owned and operated since October 1, 2012. For the years ended December 31, 2013 and 2012, we define same store facilities as those facilities that we owned and operated since January 1, 2012. The following table sets forth information about both consolidated surgical facilities included in continuing operations whose revenues are included in our revenues and non-consolidated surgical facilities that are not reported in our revenues, 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,
	2013			2012		2013			2012

Cases	59,592			57,842		216,507			221,364
Case growth	3.0		%			(2.2		)%
Net patient service revenue per case	$	2,531		$	2,457	$	2,305		$	2,178
Net patient service revenue per case growth	3.0		%			5.9		%
Number of same store surgical facilities	46					44

Consolidated Information

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,
	2013			2012		2013			2012

Cases	55,958			54,890		213,609			215,083
Case growth	1.9		%			(0.7		)%
Net patient service revenue per case	$	2,484		$	2,416	$	2,476		$	2,247
Net patient service revenue per case growth	2.8		%			10.2		%
Number of surgical facilities included in continuing operations	45					45

Operating Income Margin

Our operating income margin for the year ended December 31, 2013 decreased to 16.1% from 19.2% for the year ended December 31, 2012. In 2013, we recorded a loss of $6.2 million associated with the asset sale and decrease in ownership interest related to our surgical hospital located in Austin, Texas. In 2012, we recognized a gain of $5.9 million on the disposal of our non-consolidating ownership interest in a surgical facility located in Oklahoma City, Oklahoma and a gain of $750,000 on the disposal of our non-consolidating ownership interest in a surgical facility located in Nashville, Tennessee. Excluding the impact of the disposal of surgical facilities from the respective years, our operating income margin was 17.3% in 2013 and 17.9% in 2012.

Acquisitions and Developments

Subsequent Events

Effective March 7, 2014, we acquired an incremental ownership interest of 13.6% related to our surgical hospital located in Idaho Falls, Idaho for a purchase price of $23.8 million. This transaction was financed with proceeds from the Credit Facility.

2013 Transactions

Effective December 1, 2013, we acquired a 52.5% ownership interest in a surgical facility located in Providence, Rhode Island. The purchase price of the acquisition was $2.4 million. We funded $1.8 million of the purchase price with debt and the remainder was funded with cash from operations. We consolidate this facility for financial reporting purposes.

Effective December 1, 2013, the surgical hospital located in Great Falls, Montana, in which we have a 50.0% consolidating ownership interest, acquired the ancillary services performed at the physician clinic that we manage in the same market. The transaction was structured as a contribution of services from the physician clinic to the surgical hospital. We contributed cash of $4.1 million representing 50.0% of the estimated fair value of the ancillary services as of the effective date of the transaction.

Effective July 31, 2013, we acquired a 20.0% ownership interest in a surgical facility located in Jackson, Tennessee. The purchase price of the acquisition was $1.3 million, which was funded with cash from continuing operations. We hold a minority interest ownership and do not consolidate this facility for financial reporting purposes. We entered into a management agreement with this facility in April 2012 and continue to manage the facility.

Effective July 1, 2013, we acquired a 58.7% ownership interest in a surgical facility located in Irvine, California. We merged the operations of the acquired facility with an existing surgical facility in this market which is consolidated for financial reporting purposes. The purchase price of the acquisition was $1.1 million, which was funded with cash from continuing operations.

Effective January 1, 2013, we exercised our contractual right to hold a majority of the Governor seats on the Governing Board of our surgical hospital located in Great Falls, Montana. As we now control the majority of the Governor seats on the Governing Board, we consolidate this facility for financial reporting purposes. Prior to January 1, 2013, this facility was accounted for using the equity method for financial reporting purposes.

2012 Transactions

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 continuing 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 continuing 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 $10.3 million. The acquisition was financed with cash from continuing operations. As part of the acquisition, we assumed debt of $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 $7.6 million. The acquisition was funded with cash from operations. As part of the acquisition, we assumed debt of $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 15 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. We exercised this option on July 31, 2013.

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 $5.8 million, which consisted $3.1 million of cash, $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 $1.1 million of indebtedness. Subsequent to the acquisition, the contingencies were met and the cash was released from escrow, to the sellers. The facilities are operated by our surgical hospital located in Idaho Falls, Idaho and are consolidated with our Idaho Falls, Idaho facility for financial reporting purposes.

2011 Transactions

Effective October 1, 2011, we acquired an oncology practice, which is operated within our surgical hospital located in Idaho Falls, Idaho. The purchase price of the acquisition was $3.8 million, consisting of $2.7 million of cash and $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 a line of credit at this facility.

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 consolidated the ambulatory surgery center for financial reporting purposes and accounted for the surgical hospital as an equity method investment for financial reporting purposes. In addition, we acquired the rights to manage a physician 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 $232,000 of indebtedness. This acquisition was financed with cash from operations.

Effective January 7, 2011, we acquired an incremental ownership interest of 3.5% in 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.

Discontinued Operations and Divestitures

2013 Transactions

Effective December 31, 2013, we reclassified our surgical facility located in Worcester, Massachusetts to discontinued operations. We entered into a purchase agreement effective January 2, 2014 related to the sale of this facility and expect to complete this transaction in the first half of 2014. For the years ended December 31, 2013, 2012 and 2011, the results of operations related to this facility were included in discontinued operations. This facility is consolidated for financial reporting purposes.

Effective June 30, 2013, we completed an asset sale related to our surgical hospital located in Austin, Texas. As part of the transaction, a new entity was formed to operate the surgical hospital. The new entity acquired the equipment and inventory of the surgical hospital as well as the rights to various licensing agreements, contracts and leases associated with the operations of the surgical hospital. As consideration for the transaction, we received cash proceeds of $2.7 million and a 25.0% non-consolidating ownership interest in the new entity. We continue to provide management services to the new entity. We recorded a loss of $6.2 million as a result of this transaction.

Effective April 8, 2013, we sold our ownership interest in a surgical facility located in Havertown, Pennsylvania. We recorded net proceeds of $3.2 million on this transaction and recognized a net gain on the sale of $1.3 million, which included an allocated disposal of goodwill of $2.4 million. For the years ended December 31, 2013, 2012 and 2011, the results of operations related to this facility were included in discontinued operations. Concurrent with the sale, a new management service company was created to provide various management services to this surgical facility. We acquired a 48.0% non-consolidating ownership interest in the new management service company as part of the consideration received for the sale of our interest in the surgical facility. Additionally, we entered into an agreement to manage the new management service company.

Effective February 28, 2013, we ceased operations at our surgical facility located in San Antonio, Texas. We recognized a loss on the disposal of $1.0 million. For the years ended December 31, 2013, 2012 and 2011, the results of operations related to this facility were included in discontinued operations.

Effective January 29, 2013, we sold our ownership interest in a surgical facility located in Novi, Michigan for proceeds of $310,000 and recognized a gain on the sale of $269,000. During the year ended December 31, 2011, we recorded impairment of $2.9 million related to this investment and additionally recorded a valuation allowance of $2.1 million related to a note receivable due from this facility. This facility was non-consolidating for financial reporting purposes.

2012 Transactions

Effective December 31, 2012, we ceased operations at our surgical facility located in Metairie, Louisiana. This facility was previously consolidated for financial reporting periods. In 2012, we recorded a loss on the disposal of $351,000.

Effective December 31, 2012, we divested our ownership interest and management rights in a surgical facility located in Oklahoma City, Oklahoma for net proceeds of $10.1 million. This facility was previously non-consolidating for financial reporting purposes. In 2012, we recorded a gain on the disposal of $5.9 million.

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. In 2012, we recorded a loss on the disposal of $1.6 million, which included 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 $4.4 million. Additionally, we terminated our management agreement with this facility and received cash proceeds of $2.0 million. This facility was previously consolidated for financial reporting purposes. In 2012, we recorded a net gain on the disposal of $1.1 million, which included 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 $1.1 million. In 2012, we recorded a net gain on the disposal of $78,000, which included an allocated disposal of goodwill of $1.3 million.

Effective April 30, 2012, we divested our ownership interest and management rights in a surgical facility located in Nashville, Tennessee for net proceeds of $1.3 million. This facility was previously non-consolidating for financial reporting purposes. In 2012, we recorded a gain on the disposal of $750,000.

2011 Transactions

Effective December 31, 2011, we committed to plans to divest our ownership interests in surgical facilities located in Austin and Fort Worth, Texas which were previously consolidated for financial reporting purposes.

Summary of Operating Results of Discontinued Operations

A summary of certain operating results impacting the statements of operations related to discontinued operations follows (in thousands):



	Year Ended December 31,
	2013			2012			2011

Revenues	$	7,959		$	22,471		$	33,396
Operating income	483			159			2,460
(Gain) loss on sale or disposal	(884		)	285			418
(Benefit from) provision for income taxes	(515		)	(1,258		)	702
Income from discontinued operations, net of income taxes	1,882			1,132			1,340

Critical Accounting Policies

Our significant accounting policies and practices are described in Note 2 of our audited consolidated financial statements included elsewhere in this report. In preparing our consolidated financial statements in conformity with GAAP 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 GAAP in the United States, with no need for management’s judgment regarding accounting policy.

Consolidation and Control

Our consolidated financial statements include the accounts of our company, wholly-owned or controlled subsidiaries and variable interest entities in which we are the primary beneficiary. Our controlled subsidiaries consists of wholly-owned subsidiaries and other subsidiaries that we control through our ownership of a majority voting interest or other rights granted to us by contract to function as the sole general partner or managing member of the surgical facility. The rights of limited partners or minority members at our controlled subsidiaries are generally limited to those that protect their ownership interests, including the right to approve 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 either physician limited partners or minority members are required to guarantee on a pro rata basis based upon their respective ownership, or that exceeds 20% of the fair market value of the related surgical facility’s assets. All significant intercompany balances and transactions, including management fees from consolidated surgical facilities, are eliminated in consolidation.

We 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, 2013, 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.

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 predetermined 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 $17.0 million and $11.5 million at December 31, 2013 and 2012, respectively.

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. Our days sales outstanding were 52 days, 50 days and 54 days for the years ended December 31, 2013, 2012 and 2011, respectively.

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 (dollars in thousands):



	December 31,
	2013				2012
	Amount		% of Total		Amount		% of Total

Current	$	38,602	40.5	%	$	37,741	45.4	%
31 to 60 days	15,468		16.2	%	13,751		16.5	%
61 to 90 days	8,833		9.3	%	6,437		7.7	%
91 to 120 days	5,136		5.4	%	3,995		4.8	%
121 to 150 days	7,971		8.4	%	3,813		4.6	%
Over 150 days	19,308		20.2	%	17,405		21.0	%
Total	$	95,318	100.0	%	$	83,142	100.0	%

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 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 2.9%, 2.3% and 3.0% for the years ended December 31, 2013, 2012 and 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, we were 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, 2013 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, 2013 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 December 31, 2013 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 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. In most instances of these guarantees, the physicians and/or physician groups have also guaranteed their pro-rata share of the indebtedness to secure the financing. At December 31, 2013, we did not guarantee any debt of our non-consolidated surgical facilities.

Results of Operations

The following tables summarize certain results from the statements of operations for the years ended December 31, 2013, 2012 and 2011. The tables also show the percentage relationship to revenues for the periods indicated (dollars in thousands):



	Year Ended December 31,
	2013					2012					2011
	Amount			% of Revenues		Amount			% of Revenues		Amount			% of Revenues

Revenues	$	535,587		100.0	%	$	491,804		100.0	%	$	422,888		100.0	%
Operating expenses:
Cost of revenues	397,133			74.1	%	351,308			71.4	%	298,733			70.6	%
General and administrative expenses	21,976			4.0	%	26,901			5.5	%	22,723			5.4	%
Depreciation and amortization	22,993			4.3	%	21,360			4.3	%	19,497			4.6	%
Provision for doubtful accounts	11,149			2.1	%	10,211			2.1	%	6,574			1.6	%
Income from equity investments	(4,246		)	(0.8	)%	(4,490		)	(0.9	)%	(1,876		)	(0.4	)%
Loss (gain) on disposal or impairment of long-lived assets, net	5,870			1.1	%	(6,195		)	(1.3	)%	4,824			1.1	%
Loss on debt extinguishment	—			—	%	—			—	%	4,751			1.1	%
Electronic health records incentives	(4,553		)	(0.9	)%	(1,054		)	(0.2	)%	—			—	%
Proceeds from insurance settlements, net	(919		)	(0.2	)%	—			—	%	—			—	%
Litigation settlements, net	(233		)	—	%	(532		)	(0.1	)%	(231		)	(0.1	)%
Total operating expenses	449,170			83.9	%	397,509			80.8	%	354,995			83.9	%
Operating income	86,417			16.1	%	94,295			19.2	%	67,893			16.1	%
Interest expense, net	(57,982		)	(10.8	)%	(57,641		)	(11.7	)%	(54,308		)	(12.8	)%
Income before income taxes and discontinued operations	28,435			5.3	%	36,654			7.5	%	13,585			3.3	%
Provision for income taxes	5,330			1.0	%	10,939			2.2	%	8,721			2.1	%
Income from continuing operations	23,105			4.3	%	25,715			5.3	%	4,864			1.2	%
Income (loss) from discontinued operations, net of income taxes	1,882			0.4	%	1,132			0.2	%	1,340			0.3	%
Net income	24,987			4.7	%	26,847			5.5	%	6,204			1.5	%
Less: Net income attributable to non-controlling interests	(37,607		)	(7.0	)%	(38,557		)	(7.8	)%	(32,791		)	(7.8	)%
Net loss attributable to Symbion, Inc.	$	(12,620	)	(2.3	)%	$	(11,710	)	(2.3	)%	$	(26,587	)	(6.3	)%

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Overview. In 2013, our revenues increased 8.9% to $535.6 million from $491.8 million in 2012. We incurred a net loss attributable to Symbion, Inc. of $12.6 million, in the year ended December 31, 2013 compared to a net loss of $11.7 million for the year ended December 31, 2012.

Our financial results for the year ended December 31, 2013 compared to the year ended December 31, 2012 reflect the addition of two surgical facilities that we consolidate for financial reporting purposes and one surgical facility that we account for using the equity method for financial reporting purposes. In addition, we began consolidating for financial reporting purposes our surgical hospital located in Great Falls, Montana effective January 1, 2013. This facility acquired the ancillary services of a physician clinic located in the same market in December 2013. In June 2013, we completed a transaction related to our surgical hospital located in Austin, Texas, which included an asset sale and resulted in a decrease in our ownership interest to 25.0% at this facility.

Revenues. Revenues for the year ended December 31, 2013 compared to the year ended December 31, 2012 were as follows (dollars in thousands):



	Year Ended December 31,
	2013		2012		Dollar Variance			Percent Variance

Patient service revenues	$	530,086	$	484,066	$	46,020		9.5	%
Other service revenues	5,501		7,738		(2,237		)	(28.9	)%
Total revenues	$	535,587	$	491,804	$	43,783		8.9	%

Patient service revenues increased 9.5% to $530.1 million in the year ended December 31, 2013 compared to $484.1 million in the year ended December 31, 2012. This increase in patient service revenues was primarily attributable to surgical facilities acquired since January 1, 2012 and the consolidation of our surgical hospital located in Great Falls, Montana effective January 1, 2013.

Cost of Revenues. Cost of revenues increased to $397.1 million in the year ended December 31, 2013 compared to $351.3 million for the year ended December 31, 2012. The increase is primarily driven by the related increase in revenues from surgical facilities acquired since January 1, 2012 and the consolidation of our surgical hospital located in Great Falls, Montana effective January 1, 2013. As a percentage of revenues, cost of revenues were 74.1% in 2013 and 71.4% in 2012. We incurred an increase in supply costs at our surgical hospitals due to an increase in higher acuity cases and ancillary services performed at these facilities.

General and Administrative Expenses. General and administrative expenses were $22.0 million for the year ended December 31, 2013 and $26.9 million for the year ended December 31, 2012. As a percentage of revenues, general and administrative expenses were 4.0% in 2013 compared to 5.5% in 2012. This decrease was primarily attributable to the 2013 period having $2.9 million less incentive compensation expense than the 2012 period.

Depreciation and Amortization. Depreciation and amortization expenses increased to $23.0 million in the year ended December 31, 2013 compared to $21.4 million for the year ended December 31, 2012. As a percentage of revenues, depreciation and amortization expenses were 4.3% in both 2013 and 2012.

Provision for Doubtful Accounts. The provision for doubtful accounts increased to $11.1 million in the year ended December 31, 2013 compared to $10.2 million for the year ended December 31, 2012. As a percentage of revenues, the provision for doubtful accounts was 2.1% in both 2013 and 2012.

Income from Equity Investments. Income from equity investments was $4.2 million in the year ended December 31, 2013 and $4.5 million in the year ended December 31, 2012.

Loss (Gain)on Disposal or Impairment of Long-Lived Assets. Loss on disposal or impairment of long-lived assets was $5.9 million in the year ended December 31, 2013 compared to a gain of $6.2 million for the year ended December 31, 2012. In 2013, we recorded a loss of $6.2 million on the transaction related to our surgical hospital located in Austin, Texas, which included an asset sale and resulted in a decrease in our ownership interest to 25.0% at this facility. In 2012, we recognized a gain of $5.9 million on the disposal of our non-consolidating ownership interest in a surgical facility located in Oklahoma City, Oklahoma and a gain of $750,000 on the disposal of our non-consolidating ownership interest in a surgical facility located in Nashville, Tennessee.

Electronic Health Records Incentives. Income from electronic health records incentives was $4.6 million in the year ended December 31, 2013 and $1.1 million in the year ended December 31, 2012. In 2013, we met the meaningful use requirements and received incentive payments at three of our surgical hospitals. In 2012, we met the meaningful use requirements and received incentive payments at one of our surgical hospitals.

Proceeds from Insurance Settlements, Net. Proceeds from insurance settlements, net was $919,000 in the year ended December 31, 2013. These proceeds are related to the settlement of an insurance claim for storm damage at our surgical hospital located in Lubbock, Texas.

Operating Income. Operating income was $86.4 million in the year ended December 31, 2013 compared to $94.3 million for the year ended December 31, 2012. In 2013, we recorded a loss of $6.2 million in connection with the transaction related to our surgical hospital located in Austin, Texas. In 2012, we recognized a gain of $6.7 million on the disposal of non-consolidating ownership interests related to our surgical facilities in Oklahoma City, Oklahoma and Nashville, Tennessee. Excluding the impact of the disposal of surgical facilities, our operating income margin was 17.3% in 2013 and 17.9% in 2012.

Interest Expense, Net. Interest expense, net, was $58.0 million in the year ended December 31, 2013 compared to $57.6 million for the year ended December 31, 2012.

Provision for Income Taxes. The provision for income taxes was $5.3 million in the year ended December 31, 2013 compared to $10.9 million in the year ended December 31, 2012. Income tax expense in each period was primarily attributable to non-cash deferred income tax expense related to our partnership investments.

Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests decreased to $37.6 million in the year ended December 31, 2013 compared to $38.6 million for the year ended December 31, 2012. As a percentage of revenues, net income attributable to non-controlling interests was 7.0% in 2013 and 7.8% in 2012.

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

Overview. In 2012, our revenues increased 16.3% to $491.8 million from $422.9 million in 2011. We incurred a net loss attributable to Symbion, Inc. in 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 financial results for the year ended December 31, 2012 compared to the year ended December 31, 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, 2011 were as follows (dollars in thousands):



	Year Ended December 31,
	2012		2011		Dollar Variance			Percent Variance

Patient service revenues	$	484,066	$	412,372	$	71,694		17.4	%
Physician service revenues	—		4,484		(4,484		)	(100.0	)%
Other service revenues	7,738		6,032		1,706			28.3	%
Total revenues	$	491,804	$	422,888	$	68,916		16.3	%

Patient service revenues increased 17.4% to $484.1 million in the year ended December 31, 2012 compared to $412.4 million in the year ended December 31, 2011. This increase in patient service revenues was attributable to surgical facilities acquired since January 1, 2011. In addition, this increase was 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 in the year ended December 31, 2012 was $351.3 million compared to $298.7 million for the year ended December 31, 2011. This increase was attributable to surgical facilities acquired since January 1, 2011, as well as growth at our surgical hospitals. We incurred 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 revenues, cost of revenues increased to 71.4% in 2012 compared to 70.6% for 2011.

General and Administrative Expenses. General and administrative expenses increased to $26.9 million in the year ended December 31, 2012 compared to $22.7 million for the year ended December 31, 2011. In 2012, we had $2.7 million higher incentive compensation expense. As a percentage of revenues, excluding the increase in incentive compensation expense, our general and administrative expenses decreased to 4.9% for 2012 compared to 5.4% for 2011. This decrease was primarily attributable to our leveraging of corporate overhead costs while continuing to increase revenues through recent acquisitions.

Depreciation and Amortization. Depreciation and amortization expenses increased to $21.4 million in the year ended December 31, 2012 compared to $19.5 million for the year ended December 31, 2011. This increase was attributable to surgical facilities acquired since January 1, 2011. As a percentage of revenues, depreciation and amortization expenses were 4.3% in 2012 compared to 4.6% in 2011.

Provision for Doubtful Accounts. The provision for doubtful accounts increased to $10.2 million in the year ended December 31, 2012 compared to $6.6 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 1.6% in 2011. The increase in revenues from our surgical hospitals has driven an incremental increase in our provision for doubtful accounts.

Income from Equity Investments. Income from equity investments increased to $4.5 million in the year ended December 31, 2012 from $1.9 million for the year ended December 31, 2011. This increase was attributable to ownership interests in non-consolidating surgical facilities that we acquired since January 1, 2011.

(Gain) Loss on Disposal or Impairment of Long-Lived Assets, Net. We recognized a gain on the disposal of long-lived assets of $6.2 million during the year ended December 31, 2012. We recognized a $5.9 million gain on disposal of our ownership interest in our surgical facility located in Oklahoma City, Oklahoma. Additionally, we recognized a gain of $750,000 on the disposal of our ownership interest in our surgical facility located in Nashville, Tennessee. During the year ended December 31, 2011, we recorded a loss on impairment or disposal of long-lived assets of $4.8 million. We had an impairment charge of $2.9 million related to our equity method investment in our surgical facility located in Novi, Michigan. We also recorded a valuation allowance of $2.1 million related to a note receivable due from the Novi, Michigan facility. These losses were offset by a net gain 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 loss primarily consisted of capitalized debt issuance costs written off in connection with our termination of debt instruments as part of the restructuring.

Electronic Health Record Incentives. In the year ended December 31, 2012, electronic health records incentives income was $1.1 million, In 2012, we met the meaningful use requirements and received incentive payments at one of our surgical hospitals.

Operating Income. Operating income was $94.3 million in the year ended December 31, 2012, compared to $67.9 million for the year ended December 31, 2011. In 2012, we recognized a gain of $6.7 million on the disposal of ownership interests related to our surgical facilities in Oklahoma City, Oklahoma and Nashville, Tennessee. In 2011, we recorded an impairment loss of $5.0 million related to our ownership interest in our surgical facility located in Novi, Michigan, which was subsequently divested in 2013. Excluding the impact of the disposal of surgical facilities, our operating income margin was 17.8% in 2012 and 17.2% in 2011.

Interest Expense, Net. Interest expense, net of interest income, increased to $57.6 million for the year ended December 31, 2012 compared to $54.3 million for the year ended December 31, 2011. The increase was primarily attributable to a higher interest rate on our Senior Secured Notes compared to our previous variable rate Credit Facility.

Provision for Income Taxes. The provision for income taxes was $10.9 million in the year ended December 31, 2012 compared to $8.7 million in the year ended December 31, 2011. Income tax expense in each period was primarily attributable to non-cash deferred income tax expense related to our partnership investments.

Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests increased to $38.6 million in the year ended December 31, 2012 compared to $32.8 million for the year ended December 31, 2011. As a percentage of revenues, income attributable to non-controlling interests was 7.8% for 2012 and 2011.

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 2013 and 2012. 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. The amounts have been adjusted for discontinued operations. Our quarterly operating results have varied in the past and may continue to do so. The operating results below are not necessarily indicative of results for any future period (in thousands and unaudited).



	Year Ended December 31, 2013
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total

Consolidated Statements of Operations Data:
Revenues	$	132,598		$	134,598		$	127,404		$	140,987		$	535,587
Operating expenses:
Cost of revenues	98,688			101,294			95,378			101,773			397,133
General and administrative expenses	5,840			5,285			5,722			5,129			21,976
Depreciation and amortization	6,006			5,478			5,907			5,602			22,993
Provision for doubtful accounts	2,793			2,390			3,043			2,923			11,149
Income from equity investments	(881		)	(1,039		)	(1,061		)	(1,265		)	(4,246		)
(Gain) loss on disposal or impairment of long-lived assets, net	(492		)	7,672			(1,369		)	59			5,870
Electronic health records incentives	—			—			—			(4,553		)	(4,553		)
Proceeds from insurance settlements, net	—			—			—			(919		)	(919		)
Litigation settlements, net	(163		)	(35		)	(32		)	(3		)	(233		)
Total operating expenses	111,791			121,045			107,588			108,746			449,170
Operating income	20,807			13,553			19,816			32,241			86,417
Interest expense, net	(14,752		)	(14,641		)	(14,484		)	(14,105		)	(57,982		)
Income (loss) before income taxes and discontinued operations	6,055			(1,088		)	5,332			18,136			28,435
Provision for income taxes	1,145			(499		)	1,113			3,571			5,330
Income (loss) from continuing operations	4,910			(589		)	4,219			14,565			23,105
(Loss) income from discontinued operations, net of income taxes	(713		)	2,125			93			377			1,882
Net income	4,197			1,536			4,312			14,942			24,987
Less: Net income attributable to non-controlling interests	(8,243		)	(8,714		)	(7,638		)	(13,012		)	(37,607		)
Net (loss) income attributable to Symbion, Inc.	$	(4,046	)	$	(7,178	)	$	(3,326	)	$	1,930		$	(12,620	)



	Year Ended December 31, 2012
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total

Consolidated Statements of Operations Data:
Revenues	$	116,307		$	118,221		$	122,341		$	134,935		$	491,804
Operating expenses:
Cost of revenues	81,086			82,565			91,887			95,770			351,308
General and administrative expenses	8,001			6,285			5,684			6,931			26,901
Depreciation and amortization	5,173			5,265			5,479			5,443			21,360
Provision for doubtful accounts	2,012			2,587			2,908			2,704			10,211
Income from equity investments	(464		)	(1,214		)	(1,251		)	(1,561		)	(4,490		)
Loss (gain) on disposal or impairment of long-lived assets, net	54			(607		)	66			(5,708		)	(6,195		)
Electronic health records incentives	—			—			(603		)	(451		)	(1,054		)
Litigation settlements, net	(17		)	(215		)	—			(300		)	(532		)
Total operating expenses	95,845			94,666			104,170			102,828			397,509
Operating income	20,462			23,555			18,171			32,107			94,295
Interest expense, net	(14,324		)	(14,337		)	(14,533		)	(14,447		)	(57,641		)
Income before income taxes and discontinued operations	6,138			9,218			3,638			17,660			36,654
Provision for income taxes	1,277			1,390			1,064			7,208			10,939
Income from continuing operations	4,861			7,828			2,574			10,452			25,715
Income (loss) from discontinued operations, net of income taxes	175			(209		)	(850		)	2,016			1,132
Net income	5,036			7,619			1,724			12,468			26,847
Less: Net income attributable to non-controlling interests	(9,977		)	(10,480		)	(7,173		)	(10,927		)	(38,557		)
Net (loss) income attributable to Symbion, Inc.	$	(4,941	)	$	(2,861	)	$	(5,449	)	$	1,541		$	(11,710	)

EBITDA and Consolidated Adjusted EBITDA

When we use the term “EBITDA,” we are referring to net income plus (a) income (loss) from discontinued operations, net of income taxes, (b) provision for income taxes, (c) interest expense, net, (d) depreciation and amortization, (e) non-cash (gains) losses, including those related to disposal or impairment of long-lived assets and debt extinguishment, if any, and (f) non-cash stock-based compensation expense, minus (g) net income attributable to non-controlling interests. Non-controlling interests represent 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 $78.1 million for the year ended December 31, 2013 from $73.0 million for the year ended December 31, 2012. This increase is primarily attributable to surgical facilities acquired since January 1, 2012 and the consolidation of our surgical hospital located in Great Falls, Montana effective January 1, 2013.

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 non-controlling interests previously reported. Our calculation of EBITDA and Consolidated Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

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



	Year Ended December 31, 2013
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total

EBITDA	$	18,180		$	17,992		$	16,818		$	25,093		$	78,083
Depreciation and amortization	(6,006		)	(5,478		)	(5,908		)	(5,601		)	(22,993		)
Stock-based compensation	(102		)	(1		)	(103		)	(204		)	(410		)
Gain (loss) on disposal or impairment of long-lived assets, net	492			(7,673		)	1,370			(59		)	(5,870		)
Interest expense, net	(14,752		)	(14,641		)	(14,484		)	(14,105		)	(57,982		)
Provision for income taxes	(1,145		)	499			(1,113		)	(3,571		)	(5,330		)
Net income attributable to non-controlling interests	8,243			8,714			7,638			13,012			37,607
(Loss) income from discontinued operations, net of income taxes	(713		)	2,125			93			377			1,882
Net income	4,197			1,537			4,311			14,942			24,987
(Income) loss from discontinued operations, net of income taxes	713			(2,125		)	(93		)	(377		)	(1,882		)
Depreciation and amortization	6,006			5,478			5,908			5,601			22,993
Amortization of debt issuance costs and discounts	963			965			1,067			999			3,994
Payment-in-kind interest expense	2,194			2,209			2,282			2,297			8,982
Stock-based compensation	102			1			103			204			410
(Gain) loss on disposal or impairment of long-lived assets, net	(492		)	7,673			(1,370		)	59			5,870
Deferred income taxes	1,098			(879		)	961			3,376			4,556
Income from equity investments, net of distributions received	(69		)	(272		)	(228		)	(199		)	(768		)
Provision for doubtful accounts	2,793			2,390			3,043			2,923			11,149
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(1,457		)	(4,942		)	425			(7,445		)	(13,419		)
Other operating assets and liabilities	1,256			(7,610		)	5,100			(4,125		)	(5,379		)
Net cash provided by operating activities — continuing operations	$	17,304		$	4,425		$	21,509		$	18,255		$	61,493

Other Data:
Number of surgical facilities included in continuing operations as of the end of period ⁽¹⁾	56			56			55			56			56
Number of consolidated surgical facilities included in continuing operations as of the end of period	45			44			44			45			45



	Year Ended December 31, 2012
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total

EBITDA	$	17,429		$	17,783		$	16,720		$	21,028		$	72,960
Depreciation and amortization	(5,173		)	(5,265		)	(5,479		)	(5,443		)	(21,360		)
Stock-based compensation	(1,717		)	(50		)	(177		)	(113		)	(2,057		)
(Loss) gain on disposal or impairment of long-lived assets, net	(54		)	607			(66		)	5,708			6,195
Interest expense, net	(14,324		)	(14,337		)	(14,533		)	(14,447		)	(57,641		)
Provision for income taxes	(1,277		)	(1,390		)	(1,064		)	(7,208		)	(10,939		)
Net income attributable to non-controlling interests	9,977			10,480			7,173			10,927			38,557
Income (loss) from discontinued operations, net of income taxes	175			(209		)	(850		)	2,016			1,132
Net income (loss)	5,036			7,619			1,724			12,468			26,847
(Income) loss from discontinued operations, net of income taxes	(175		)	209			850			(2,016		)	(1,132		)
Depreciation and amortization	5,173			5,265			5,479			5,443			21,360
Amortization of debt issuance costs and discounts	944			945			954			955			3,798
Payment-in-kind interest expense	2,028			2,029			2,109			2,139			8,305
Stock-based compensation	1,717			50			177			113			2,057
Loss (gain) on disposal or impairment of long-lived assets, net	54			(607		)	66			(5,708		)	(6,195		)
Deferred income taxes	1,177			1,490			4,008			7,125			13,800
Income from equity investments, net of distributions received	(139		)	(715		)	(422		)	(655		)	(1,931		)
Provision for doubtful accounts	2,012			2,588			2,907			2,704			10,211
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(3,267		)	851			(355		)	(3,427		)	(6,198		)
Other operating assets and liabilities	1,346			(3,141		)	4,572			(7,020		)	(4,243		)
Net cash provided by operating activities — continuing operations	$	15,906		$	16,583		$	22,069		$	12,121		$	66,679

Other Data:
Number of surgical facilities included in continuing operations as of the end of period ⁽¹⁾	55			57			58			57			57
Number of consolidated surgical facilities included in continuing operations as of the end of period	42			44			44			44			44


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

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



	Year Ended December 31, 2013

Consolidated Adjusted EBITDA ⁽¹⁾	$	82,555
Cash payment on facility lease obligation ⁽²⁾	5,596
Intercompany notes adjustment ⁽³⁾	(5,020		)
Pro forma transactions and other non-cash adjustments ⁽⁴⁾	(5,048		)
EBITDA	78,083
Depreciation and amortization	(22,993		)
Stock-based compensation	(410		)
Loss on disposal or impairment of long-lived assets, net	(5,870		)
Interest expense, net	(57,982		)
Provision for income taxes	(5,330		)
Net income attributable to non-controlling interests	37,607
Income from discontinued operations, net of income taxes	1,882
Net income	24,987
Income from discontinued operations, net of income taxes	(1,882		)
Depreciation and amortization	22,993
Amortization of debt issuance costs and discounts	3,994
Payment-in-kind interest expense	8,982
Stock-based compensation	410
Loss on disposal or impairment of long-lived assets, net	5,870
Deferred income taxes	4,556
Income from equity investments, net of distributions received	(768		)
Provision for doubtful accounts	11,149
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(13,419		)
Other operating assets and liabilities	(5,379		)
Net cash provided by operating activities - continuing operations	$	61,493


(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, 2013, our operating cash flow from continuing operations decreased to $61.5 million compared to $66.7 million for the year ended December 31, 2012. In 2012, we received $1.7 million of proceeds related to a lawsuit settlement at one of our surgical hospitals. Additionally, cash flows from operations in 2013 was impacted by the continued implementation of EHR technology. At December 31, 2013, we had working capital of $87.7 million compared to $67.1 million at December 31, 2012.

During the year ended December 31, 2012, our operating cash flow from continuing operations increased to $66.7 million compared to $63.9 million for the year ended December 31, 2011. This increase was primarily attributable to surgical facilities acquired since January 1, 2011 and changes in working capital.

Investing Activities

Net cash used in investing activities of continuing operations during the year ended December 31, 2013 was $24.8 million. We paid $19.0 million related to purchases of property and equipment, which included $3.5 million of EHR technology implementation costs. We made payments of $4.8 million related to our acquisitions of consolidating ownership interests in surgical facilities located in Irvine, California and Providence, Rhode Island and a non-consolidating ownership interest in a surgical facility located in Jackson, Tennessee. We contributed

cash of $4.1 million in connection with the acquisition of ancillary service at our surgical hospital located in Great Falls, Montana. We received proceeds of $2.7 million associated with the asset sale and decrease in our ownership interest to 25.0% related to our surgical hospital located in Austin, Texas. We received net proceeds from discontinued operations of $3.7 million, net of distributions to non-controlling interests holders, associated with the sale of our surgical facility located in Havertown, Pennsylvania. We acquired a 48.0% non-consolidating ownership interest in a new management service company that provides management services to this facility as part of the consideration for the sale and this investment is reflected in continuing operations.

Net cash used in investing activities of continuing operations during the year ended December 31, 2012 was $23.8 million which included $21.1 million of payments for acquisitions, net of $2.3 million of cash acquired, and proceeds from divestitures of $11.5 million. Our acquisition activity was funded with cash from continuing operations. We also invested $14.1 million related to purchases of property and equipment, which included $2.0 million of EHR technology implementation costs.

Net cash used in investing activities of continuing operations during the year ended December 31, 2011 was $17.8 million, which included $7.8 million of payments for acquisitions, net of $491,000 of cash acquired. Our acquisition activity was funded with cash from continuing operations. We also invested $9.4 million related to purchases of property and equipment.

Financing Activities

Net cash used in financing activities of continuing operations during the year ended December 31, 2013 was $58.9 million. During 2013, we made distributions to non-controlling interests partners of $32.6 million. Under the mandatory redemption provisions of the Toggle Notes, we repaid $21.2 million of the principal outstanding balance on August 23, 2013. We funded this payment with cash from operations. In March 2013, we refinanced the debt of our surgical hospital located in Idaho Falls, Idaho facility. This refinancing transaction resulted in $6.1 million of borrowings from a new lender, $7.5 million of repayments to the previous lenders and $427,000 of debt issuance cost payments. The $5.0 million of restricted invested assets associated with the previous lenders at our Idaho Falls facility became unrestricted cash in connection with the refinancing transaction. In September 2013, we repaid the $6.1 million of borrowings from the new lender with cash from continuing operations. In December 2013, our surgical facilities located in East Greenwich and East Bay, Rhode Island borrowed $2.0 million to replace intercompany debt at these facilities. In addition, the Company borrowed $1.8 million in December 2013 to partially fund the acquisition of a surgical facility located in Providence, Rhode Island. We also made scheduled repayments on our long-term debt of $10.5 million.

Net cash used in financing activities of continuing operations during the year ended December 31, 2012 was $40.7 million. During 2012, we made distributions to non-controlling interests partners of $39.4 million.

Net cash used in financing activities of continuing operations during the year ended December 31, 2011 was $55.2 million. During 2011, we made distributions to non-controlling interests partners of $32.7 million. The following table summarizes our financing activities related to the issuance of our Senior Secured Notes and simultaneous extinguishment of other debt which was completed in 2011 (in thousands):



	Cash provided by (used in) debt issuance and extinguishment

Issuance of Senior Secured Notes, net of 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	)

Long-Term Debt

A summary of our long-term debt follows (in thousands):



	December 31,
	2013			2012

Credit Facility	$	—		$	—
Senior Secured Notes, net of debt issuance discount of $2,858 and $3,868 at December 31, 2013 and 31, 2012, respectively	338,142			337,132
PIK Exchangeable Notes	118,639			109,688
Toggle Notes	73,475			94,724
Notes payable and secured loans	24,970			28,168
Capital lease obligations	4,922			3,864
Total debt	560,148			573,576
Less: Current maturities	(9,102		)	(39,462		)
Total long-term debt	$	551,046		$	534,114

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 "Offering."). 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 canceled $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.

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.

We had letters of credit outstanding under the Credit Facility of $1.8 million at December 31, 2013 related to our self-insured workers compensation coverage and the operating lease on our surgical hospital in Lubbock, Texas. As of December 31, 2013, $48.2 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, 2013, 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 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 are senior secured obligations of our company and the guarantors. The Senior Secured Notes rank equal in right of payment with any of our or the guarantors' existing and future senior indebtedness and pari passu with our 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, 2013, we had not redeemed any of our Senior Secured Notes.

Effective September 9, 2011, we canceled $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, 2013, 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 follows (in thousands):



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	580
Total discount on Senior Secured Notes	$	2,858

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 canceled $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 mature on June 15, 2017. Interest accrues on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on June 15 and December 15 of each year. We 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 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 interest, we increased the principal amount of the PIK Exchangeable Notes by $9.0 million, $8.3 million and $3.8 million during the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, we had accrued interest of $422,000 on the PIK Exchangeable Notes.

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.

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, 2013, we were in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.

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 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, 2013. Beginning with our February 2012 interest payment, all interest under our Toggle Notes is required to be paid in cash. As of December 31, 2013, we had accrued interest of $2.9 million on the Toggle Notes.

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, 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 was due and paid 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, 2013, we were in compliance with all material covenants contained in the indenture governing the Toggle 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.

In March 2013, we refinanced the debt of our surgical hospital located in Idaho Falls, Idaho. This refinancing transaction resulted in $6.1 million of borrowings from a new lender, $7.5 million of repayments to the previous lenders and $427,000 of debt issuance cost payments. In September 2013, we repaid the $6.1 million of borrowings from the new lender with cash from continuing operations. In December 2013, our surgical facilities located in East Greenwich and East Bay, Rhode Island borrowed $2.0 million to replace intercompany debt at these facilities. In addition, we borrowed $1.8 million in December 2013 to partially fund the acquisition of a surgical facility located in Providence, Rhode Island.

Capital Lease Obligations

We are liable to various vendors for several equipment leases. The carrying value of the leased assets was $4.6 million and $5.3 million as of December 31, 2013 and December 31, 2012, 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, 2013 (in thousands):



	Payments Due by Period
	Total		2014		2015 - 2016		2017 - 2018		Thereafter

Long-term debt, including current maturities	$	558,084	$	7,349	$	427,438	$	123,244	$	53
Cash interest obligations	87,099		37,429		48,929		741		—
Capital lease obligations	4,922		1,753		2,465		704		—
Operating lease obligations	151,053		23,526		39,051		25,835		62,641
Other financing obligations⁽¹⁾	104,252		5,764		12,052		12,787		73,649
Total contractual obligations	$	905,410	$	75,821	$	529,935	$	163,311	$	136,343


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

Inflation

Inflation and changing prices have not significantly affected our operating results or the markets in which we operate.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2013-02, which requires additional disclosures on the effect of significant reclassifications out of accumulated other comprehensive income. The ASU requires a company that reports other comprehensive income to present (either on the face of the statement where net income is presented or in the notes to the financial statements) the effects on the line items of net income of the significant amounts reclassified out of accumulated other comprehensive income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, a company is required to cross-reference to other required disclosures that provide additional details about those amounts. This ASU is effective for fiscal years beginning after December 15, 2012, and was adopted by us on January 1, 2013. As it only requires additional disclosure, the adoption of this ASU had no impact on our consolidated financial position, results of operations or cash flows.

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, 2013, $0.8 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, 2013, the fair value of our total debt, based on quoted market prices as of this date was approximately $579.6 million.

Item 8. Financial Statements and Supplementary Data

Information with respect to this item is contained in our audited consolidated financial statements and related notes 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) 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’s Report 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.

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) (1992 Framework). Based on management’s assessment and those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2013.


(c)	Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the fourth quarter of 2013 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

Symbion is a wholly-owned subsidiary of Symbion Holdings Corporation. The same individuals serve on Holding’s Board of Directors and our company's Board of Directors (collectively and separately, the "Board of Directors" or "Board"). The following table summarizes the name, age and position(s) of our executive officers, key employees and the members of the Board of Directors:



Name	Age	Position

Richard E. Francis, Jr.	59	Chairman of the Board, Chief Executive Officer and Director
Clifford G. Adlerz	60	President, Chief Operating Officer and Director
Teresa F. Sparks	45	Senior Vice President and Chief Financial Officer
Robert V. Delaney	56	Director
Quentin Chu	37	Director
Kurt E. Bolin	55	Director
Craig R. Callen	58	Director
Daniel G. Kilpatrick	33	Director

All of our capital stock is owned by Holdings. Directors are re-elected annually by Holdings shareholders pursuant to a written consent in lieu of annual meeting. Each director shall hold office on the Board of Directors until a successor is elected or until the director's death or resignation. Our current directors are as follows:

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 Senior Vice President and Chief Financial Officer 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, Inc., Ms. Sparks was a senior healthcare auditor for Deloitte & Touche LLP, in 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. 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, Synergy Energy, and Texoma Transportation & Crude Marketing, LLC. He also serves as a trustee of Hamilton College. Mr. Delaney received an M.B.A. 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 NEBCO Insurance Services, 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. Currently, Mr. Callen serves on the board of directors for both Omega Healthcare Investors and HMS Holdings, Inc. 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. He is also on the board of NYDJ Apparel. 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

The Board of Directors is currently composed of seven members. We do not currently pay our directors any fees as compensation for their service on the Board.

Audit Committee Financial Expert

The Board of Directors has an appointed Audit and Compliance Committee, currently composed of Quentin Chu, Kurt E. Bolin and Daniel G. Kilpatrick. In light of our company's status as a closely held and non-publicly traded company, the Board has not designated any member of the Audit and Compliance Committee as an audit committee financial expert.

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 our in-house legal counsel at the following address: Symbion, Inc., Attention: Jennifer Baldock, General Counsel and Chief Compliance Officer, 40 Burton Hills Boulevard, Suite 500, Nashville, Tennessee 37215.

Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

The Compensation Committee of Holdings also serves as the Compensation Committee of our company (collectively and separately, the "Compensation Committee") and is responsible for establishing and administering executive compensation policies and programs within the framework of the committee’s compensation philosophy. The current Compensation Committee was established by Holdings in February 2008. The Board of Directors served as the Compensation Committee between the consummation of the Merger on August 23, 2007 and the appointment of the Compensation Committee in February 2008. Senior management is employed by our company but has previously acquired and is currently eligible to receive equity awards in Holdings.

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


▪	Link compensation paid to executive officers to corporate and individual performance;


▪	Provide incentive opportunities that will motivate executive officers to achieve our company's long-term business objectives;


▪	Be competitive within the industry and community as well as responsive to the needs of executive officers;


▪	Attract, retain, motivate and reward individuals of the highest quality in the industry who have the experience, skills and integrity necessary to promote achievement of our business objectives; 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 bonus of cash or non-equity incentive compensation, (iii) equity-based compensation, and (iv) other benefits, including 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 of the 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 (the "NEOs") are the individuals included in the Summary Compensation Table in the Executive Compensation section below. Salaries and other compensation for all other executive officers and employees are determined by senior management in accordance with our compensation policies and current business objectives.

Currently, the Compensation Committee is appointed by Holdings’ Board of Directors, which is controlled by Crestview. Accordingly, the Compensation Committee represents the interests of Holdings’ stockholders and makes decisions independent from the executive officers of our company. The Compensation Committee has not utilized the services of a consulting firm in connection with compensation decisions it has made since 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, overall company performance and the performance of the individual executive officer as well as the executive officer's experience and tenure with us. Messrs. Francis and Adlerz were entitled to an increase 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. 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, which were put into effect on this date. Messrs. Francis and Adlerz and Ms. Sparks received the 2% cost of living salary increase that all other employees received in 2013. The base salaries for 2013 for our Named Executive Officers were as follows: $571,200 for Mr. Francis, $428,400 for Mr. Adlerz, $249,900 for Ms. Sparks.

Non-Equity Incentive Compensation

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

In February 2013, the Compensation Committee established the 2013 Corporate Key Management Incentive Plan for key management employees, including our executive officers . This 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 the 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 actual 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 Ms. Sparks, the aggregate cash and equity target bonus is 50% of base salary upon achievement of applicable budgeted EBITDA.

Upon review of the Company's 2013 financial performance, the Committee determined that Company EBITDA performance for the year ended December 31, 2013 did not exceed threshold levels. Accordingly, no cash or equity bonuses were earned by our Named Executive Officers for 2013 under this plan. See the "Executive Compensation-Summary Compensation Table."

In January 2014, the Compensation Committee established the 2014 Corporate Key Management Incentive Plan for key management employees, including our executive officers. The 2014 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 and 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 with those of our and Holdings' stockholders. The Compensation Committee believes that equity awards provide our executive officers a stake in the long-term performance of our company and also align the financial interests of our other senior management with the 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.

In connection with the Merger, Holdings established the 2007 Equity Incentive Plan, which permits grants of stock options and other equity-based awards to purchase Holdings common stock. On August 31, 2007, the Compensation Committee made an initial grant of options under this plan to the executive officers and certain of our 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 either a time-based or performance-based vesting component. The time-based vesting component of the options is accelerated in the event of a change in control of our company. The performance-based vesting component of the options is accelerated if certain conditions are satisfied in connection with a liquidity event of our company. 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, Holdings Board of Directors adopted an amendment to the 2007 Equity Incentive Plan. The amendment increased the shares authorized for future grant under this plan by 2,400,000 shares and expanded 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 to the 2007 Equity Incentive Plan, the Compensation Committee amended the terms for vesting and exercise of certain options previously issued under this 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 and outstanding as of March 3, 2012 was reduced to $3.00 per share and the expiration date of such options was extended to January 23, 2022. Outstanding performance-based vesting options were amended to provide that they will vest upon a liquidity event of our company and based on the extent to which Crestview and certain affiliated investors receive a target share price for their equity.

On May 23, 2012, the Compensation Committee approved a grant of new options to purchase 2,238,231 shares of Holdings common stock that were issued to certain employees, including the Named Executive Officers, under the 2007 Equity Incentive Plan. 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 these options was $3.50 per share, which the Compensation 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. Of the total options granted, 50% have a time-based vesting component and the other 50% have a performance-based vesting component.

Other Benefits

In January 2005 and prior to the Merger, the former Compensation Committee adopted the SERP. The SERP is a non-qualified deferred compensation plan for executive 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 annual bonus. For participating employees who defer at least 2% of their base salary, our company will separately contribute 2% of the employee's base salary to the SERP. The Compensation Committee, at its discretion, may make additional contributions to the SERP based on achievement of performance goals or other company objectives. Employee contributions to the SERP are immediately 100% vested. Company contributions vest one year after

contribution, and immediately upon death, disability or a change in control of our company. Participating employees direct the investment of their accounts in mutual funds or other investment channels pursuant to the investment options available under the plan. Assets of the SERP are designated to pay SERP benefits but are the property of our company and are subject to the claims of our creditors.

The Named Executive Officers of our company are also eligible to participate in the Symbion, Inc. 401(k) Plan (the "401(k) Plan"). The 401(k) Plan allows eligible employees to contribute a portion of their base salary up to the maximum limits imposed by the Internal Revenue Code. Pursuant to the 401(k) Plan, our company can make a discretionary matching contribution to this plan on behalf of each participating 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 the overall compensation process for our executive officers 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 provides certain information on compensation paid or accrued for the years ended December 31, 2013, 2012 and 2011 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.	2013	$	571,200	$	—	$	—	$	—	$	14,398	$	585,598
Chairman of the Board and Chief Executive Officer	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

Clifford G. Adlerz	2013	428,400		—		—		—		11,766		440,166
President and Chief Operating Officer	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

Teresa F. Sparks	2013	249,900		—		—		—		7,088		256,988
Senior Vice President and Chief Financial Officer	2012	241,874		12,500		221,105		122,500		13,602		611,581
Senior Vice President and Chief Financial Officer	2011	227,929		—		—		—		6,950		234,879


(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 2013, 2012 and 2011 Corporate Key Management Incentive Plans. See “Grants of Plan-Based Awards” below for additional information on the 2013 awards.


(3)	Represents the following:


(a)	Company contributions to the Supplemental Executive Retirement Plan for Mr. Francis of $11,200 for 2013, $24, 645 for 2012 and $9,455 for 2011; Mr. Adlerz of $8,568 for 2013, $19,465 for 2012 and $6,829 for 2011; and Ms. Sparks of $4,998 for 2013, $11,059 for 2012 and $4,469 for 2011.


(b)	Company contributions to the Symbion, Inc. 401(k) Plan for Mr. Francis of $1,875 for 2013, $1,871 for 2012 and $1,837 for 2011; Mr. Adlerz of $1,875 for 2013, $1,838 for 2012 and $1,837 for 2011; and Ms. Sparks of $1,190 for 2013, $1,704 for 2012 and $1,679 for 2011.


(c)	Premiums we paid for term life insurance on behalf of Mr. Francis of $1,323 for 2013, $1,323 for 2012 and $1,323 for 2011; Mr. Adlerz of $1,323 for 2013, $1,273 for 2012 and $1,225 for 2011; and Ms. Sparks of $900 for 2013, $839 for 2012 and $802 for 2011.

Grants of Plan-Based Awards

The following table provides information regarding equity awards and incentive awards granted during the year ended December 31, 2013 to our Named Executive Officers under the 2013 Corporate Key Management Incentive Plan, subject to achievement of applicable performance targets:



Name	Grant Date	Estimated Possible Payouts Under Non-Equity Incentive Plan Awards
		Threshold ⁽¹⁾		Target ⁽²⁾		Maximum

Richard E. Francis, Jr.	—	$	228,480	$	571,200	$	571,200


Clifford G. Adlerz	—	171,360		428,400		428,400


Teresa F. Sparks	—	49,980		124,950		124,950


(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 regarding outstanding equity awards held by our Named Executive Officers as of December 31, 2013:



	Option Awards
Name	Number of Securities Underlying Unexercised Options		Number of Securities Underlying Unexercised Options		Option Exercise Price		Option Expiration Date
	(# Exercisable)		(# Unexerciseable)

Richard E. Francis, Jr.	24,941	⁽¹⁾	—		$	1.50	12/10/2014
	29,082	⁽¹⁾	—		1.50		1/5/2015
	430,302	⁽²⁾	462,195	⁽²⁾	3.00		1/23/2022
	57,600		518,400	⁽⁵⁾	3.50		5/23/2022

Clifford G. Adlerz	15,588	⁽¹⁾	—		$	1.50	12/10/2014
	18,176	⁽¹⁾	—		1.50		1/5/2015
	286,868	⁽³⁾	318,762	⁽³⁾	3.00		1/23/2022
	43,200		388,800	⁽⁶⁾	3.50		5/23/2022

Teresa F. Sparks	6,361	⁽¹⁾	—		$	1.50	1/5/2015
	51,521	⁽⁴⁾	83,415	⁽⁴⁾	3.00		1/23/2022
	14,625		131,803	⁽⁷⁾	3.50		5/23/2022


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


(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. The 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. The 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. The 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. The 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. The 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. The 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 2013, Messrs. Francis and Adlerz exercised 97,217 options and 75,676 options, respectively, to purchase shares of Holdings common stock, respectively, that were rolled over in connection with the Merger and Ms. Sparks exercised 4,711 options to purchase shares of Holdings common stock that were rolled over in connection with the Merger.

The following table provides information on the exercise of stock options during the year ended December 31, 2013 related to the Named Executive Officers:



	Option Awards
Name	Number of Shares Acquired on Exercise	Value Realized on Exercise

Richard E. Francis	97,216	$	284,846
Clifford G. Adlerz	75,676	221,731
Teresa F. Sparks	4,711	13,803

Non-Qualified Deferred Compensation

The following table provides information on the contribution activity during the year ended December 31, 2013 and the aggregate balances held by each of the Named Executive Officers at December 31, 2013 under the 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.	$	45,696	$	11,200	$	84,859	$	402,140
Clifford G. Adlerz	8,568		8,568		11,595		204,873
Teresa F. Sparks	12,496		4,998		37,058		227,330

(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 was three years, which is 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, gross negligence or internal misconduct in the performance of his 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 employment 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 our company 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 management 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 our 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 her current base salary and incentive 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 the following occurs:

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 the company contributions that were made less than one year prior to the date of termination.

Symbion, Inc. 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 each of these executive 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 of our company, the 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 NEO, 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 our 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,” we have 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 performance vesting options.

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 certain affiliated investors 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.

Change in Control or Liquidity Event Rights on Termination of Employment - Termination of an executive officer's employment by our 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 our company of any material provision of his 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 company or Holdings (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, 2013:



Name	Cash Compensation			Accelerated Vesting of Stock Options			Benefits			Total

Richard E. Francis, Jr.
Termination for cause, voluntary termination or retirement	$	—		$	—		$	43,938	⁽¹⁾	$	43,938
Death	—			—			43,938		⁽¹⁾	43,938
Disability	925,200		⁽²⁾	—			52,452		⁽³⁾	977,652
Termination without cause or resignation by the NEO for Good Reason	3,427,200		⁽⁴⁾	—			52,452		⁽³⁾	3,479,652
Change in Control	4,805,371		⁽⁵⁾	214,272		⁽⁶⁾	52,452		⁽³⁾	5,072,095

Clifford G. Adlerz
Termination for cause, voluntary termination or retirement	—			—			32,954		⁽¹⁾	32,954
Death	—			—			32,954		⁽¹⁾	32,954
Disability	603,900		⁽²⁾	—			41,467		⁽³⁾	645,367
Termination without cause or resignation by the NEO for Good Reason	2,570,400		⁽⁴⁾	—			41,467		⁽³⁾	2,611,867
Change in Control	3,583,747		⁽⁵⁾	160,704		⁽⁶⁾	41,467		⁽³⁾	3,785,918

Teresa F. Sparks
Termination for cause, voluntary termination or retirement	—			—			19,223		⁽¹⁾	19,223
Death	—			—			19,223		⁽¹⁾	19,223
Disability	—		⁽²⁾	—			19,223		⁽¹⁾	19,223
Termination without cause or resignation by the NEO for Good Reason	—			—			19,223		⁽¹⁾	19,223
Change in Control	374,850		⁽⁷⁾	54,404		⁽⁶⁾	27,313		⁽³⁾	456,567


(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 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 2013 in accordance with the Named Executive Officer's employment agreement.

(5)

Includes the amount described in footnote 4 above plus a “gross up” payment of all excise taxes imposed under Section 4999 of the Code and any federal income and excise taxes that are payable as a result of any reimbursements for Section 4999 excise taxes in accordance with the Named Executive Officer's employment agreement. The gross up amount is $1,378,171 for Mr. Francis and $1,013,347 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 2013 and the bonus payable to each individual pursuant to the 2013 Corporate Key Management Incentive Plan upon achievement of applicable targets.

The table above does not include information about vesting of Company contributions under the 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 “Non-Qualified Deferred Compensation.”

Director Compensation

No directors received compensation for service as a member of the Board of Directors of our company, the Board of Directors of Holdings or any related board committees during 2013. Directors are reimbursed for out-of-pocket 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 of Holdings 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 for the year ended December 31, 2013.



Compensation Committee of Symbion, Inc.

	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 14, 2014 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 of shares outstanding for each beneficial owner is based on 25,183,188 shares of Holdings common stock plus shares issuable upon conversion of PIK Exchangeable Notes, par value $0.01 per share, through March 14, 2014.



Name of Beneficial Holder	Number of Shares ⁽¹⁾	Percentage of Shares

Crestview Funds ⁽²⁾	42,286,502	79.8	%
The Northwestern Mutual Life Insurance Company ⁽³⁾	9,494,926	31.0
Trident IV, L.P. ⁽⁴⁾	3,000,000	11.9
Banc of America Capital Investors V, L.P. ⁽⁵⁾	2,500,000	9.9
Richard E. Francis, Jr. ⁽⁶⁾⁽⁷⁾	915,405	3.6
Clifford G. Adlerz ⁽⁶⁾⁽⁸⁾	569,338	2.2
Teresa F. Sparks ⁽⁶⁾⁽⁹⁾	77,236	*
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⁾	1,561,979	6.0	%


*	Less than one percent.

(1)

Beneficial ownership includes voting or investment control with respect to securities and includes the shares issuable pursuant to options that are exercisable within 60 days of March 14, 2014 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”) and 27,786,502 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 and 5,494,926 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 KY 19002, 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 541,925 shares which were exercisable as of March 14, 2014 or become exercisable within 60 days following March 14, 2014.


(8)	Includes options to purchase 363,872 shares which were exercisable as of March 14, 2014 or become exercisable within 60 days following March 14, 2014.


(9)	Represents options to purchase 72,525 shares which were exercisable as of March 14, 2014 or become exercisable within 60 days following March 14, 2014.


(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 978,322 shares which were exercisable as of March 14, 2014 or become exercisable within 60 days following March 14, 2014.

Equity Compensation Plan Information

The following table provides information as of March 14, 2014 with respect to compensation plans (including individual compensation arrangements) under which shares of the common stock of Holdings are authorized for issuance.



Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in second column)

Equity compensation plans approved by security holders ⁽¹⁾	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 was approximately $6.3 million, plus out-of-pocket expenses. In connection with the Merger, we entered into a Management and Advisory Services Agreement with Crestview under which we agreed to pay an affiliate of Crestview an annual advisory fee of $1.0 million and will reimburse such affiliate for all related disbursements and out-of-pocket expenses. This agreement also provides that we will pay an affiliate of Crestview a fee in connection with certain subsequent financing, acquisition, disposition and change in control transactions based on a percentage of the gross transaction value of any such transaction. This agreement includes customary exculpation and indemnification provisions in favor of Crestview 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").

The Shareholders Agreement provides that Messrs. Francis and Adlerz have the right to be appointed as directors of Holdings (with Mr. Francis as Chairman of the Board) so long as they are employed in their current positions with our company. The Shareholders Agreement also provides that Stone Point, which serves as the 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 including acquisitions, investments and the incurrence of debt.

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. The Shareholders Agreement grants certain tag-along, drag-along, preemptive rights and rights of first offer upon certain sales to the shareholders and also grants Holdings the right to purchase equity from management shareholders upon their departure from our company at the lesser of either fair market value and cost if the shareholder has been terminated for cause or at fair market value in other cases.

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

Stockholders' Notes

On December 10, 2013, certain employees of Holdings, including the Named Executive Officers, borrowed funds from Holdings to pay the exercise price and applicable taxes payable in connection with the exercise of options to purchase Holdings common stock that were to expire in December 2013 and January 2014. Richard E. Francis, Jr., Clifford G. Adlerz and Teresa F. Sparks borrowed approximately $223,731 $174,157 and $10,842, respectively, in connection with option exercises. Each loan is represented by a full recourse promissory note executed by the officer and bearing interest at a rate of 0.25% per annum (the applicable federal rate). Principal and interest on the notes is payable in three equal annual installments beginning December 10, 2014, with payment in full due on December 10, 2016. Payment and performance under the notes is secured by the shares of Holdings common stock received upon exercise of the options exercised on December 10, 2013. The total amount of stockholders' notes outstanding at December 31, 2013 was $485,000, which was included in stockholders' equity on the consolidated balance sheet.

PIK Exchangeable Note Exchanges

On June 14, 2011, we completed the Offering of $350.0 million aggregate principal amount of Senior Secured Notes. 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. Due to the required payment-in-kind interest, the Company increased the principal amount of the PIK Exchangeable Notes by $9.0 million, $8.3 million and $3.8 million during the years ended December 31, 2013, 2012 and 2011, respectively.

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 provides information on the fees for professional services rendered by Ernst & Young LLP for the audit of our consolidated financial statements for the years ended December 31, 2013 and 2012 and all other fees billed for additional services rendered by Ernst & Young LLP for 2013 and 2012:



	Year Ended December 31,
	2013		2012

Audit fees	$	892,000	$	840,000
Audit related fees	32,671		50,000
Tax fees	141,145		192,358
Total fees	$	1,065,816	$	1,082,358

Audit Fees. These fees were related to professional services rendered by Ernst & Young LLP in connection with the audit of our consolidated financial statements. The fees also include services related to our SEC filings.

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

Tax Fees. These fees were related to services rendered by Ernst & Young LLP for compliance associated with tax filings, tax planning services 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 our independent auditors prior to the commencement of work. Unless the specific service has been pre-approved with respect to the current year of service, the Audit and Compliance Committee must approve the permitted service before the independent auditors can be engaged. For the years ended December 31, 2013 and 2012, all services provided by Ernst & Young LLP were pre-approved by the Audit and Compliance Committee.

Non-audit services provided by Ernst & Young LLP, consisting of audit related services and tax services as described above, were reviewed by the Audit and Compliance Committee and determined to be compatible with the maintenance of the accounting firm’s independence in the conduct of its auditing function.

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 and related notes required to be included in Part II, Item 8. Financial Statements and Supplementary Data are indexed on Page F-1 and included 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 and related notes in this report.


3)	Exhibits: An index to the exhibits is included in the table that follows:

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)
4.12		Assignment and Assumption, dated as of February 11, 2013, by and among Symbion, Inc., Symbion Holdings Corporation, the lenders party thereto, and Morgan Stanley Senior Funding, Inc.^(k)
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.^(g)
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



No.		Description

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, 2011 (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)

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


(k)	Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (File No. 000-50574).

SYMBION, INC.

FORM 10-K

INDEX TO FINANCIAL STATEMENTS



		Page

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, 2013 and 2012 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, 2013. 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, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Nashville, Tennessee

March 14, 2014

F- 2

SYMBION, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except shares and per share amounts)



	December 31,
	2013			2012

ASSETS
Current assets:
Cash and cash equivalents	$	56,026		$	73,470
Accounts receivable, less allowance for doubtful accounts of $17,028 and $11,496 at December 31, 2013 and 2012, respectively	78,290			71,646
Inventories	17,229			14,393
Prepaid expenses and other current assets	9,775			9,950
Current assets of discontinued operations	1,356			3,636
Total current assets	162,676			173,095
Property and equipment, net	129,732			130,106
Intangible assets, net	22,516			24,151
Goodwill	661,758			656,058
Investments in and advances to affiliates	14,088			12,132
Restricted invested assets	177			5,169
Other long-term assets	13,961			14,044
Long-term assets of discontinued operations	1,831			2,448
Total assets	$	1,006,739		$	1,017,203

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	19,514		$	22,786
Accrued payroll and benefits	12,269			12,718
Other current liabilities	33,731			29,020
Current maturities of long-term debt	9,102			39,462
Current liabilities of discontinued operations	325			2,033
Total current liabilities	74,941			106,019
Long-term debt, less current maturities	551,046			534,114
Long-term deferred tax liabilities	76,020			71,781
Other long-term liabilities	61,424			62,802
Long-term liabilities of discontinued operations	169			325

Non-controlling interests—redeemable	35,150			33,634

Stockholders' equity:
Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding at December 31, 2013 and 2012	—			—
Additional paid-in-capital	243,312			242,597
Stockholders' notes	(485		)	—
Retained deficit	(106,136		)	(93,516		)
Total Symbion, Inc. stockholders' equity	136,691			149,081
Non-controlling interests—non-redeemable	71,298			59,447
Total equity	207,989			208,528
Total liabilities and stockholders' equity	$	1,006,739		$	1,017,203

See notes to consolidated financial statements.

F- 3

SYMBION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)



	Year Ended December 31,
	2013			2012			2011

Revenues	$	535,587		$	491,804		$	422,888
Operating expenses:
Salaries and benefits	148,793			134,360			115,090
Supplies	143,287			124,357			100,890
Professional and medical fees	41,179			36,624			31,319
Lease expense	27,237			23,652			22,050
Other operating expenses	36,637			32,315			29,384
Cost of revenues	397,133			351,308			298,733
General and administrative expenses	21,976			26,901			22,723
Depreciation and amortization	22,993			21,360			19,497
Provision for doubtful accounts	11,149			10,211			6,574
Income from equity investments	(4,246		)	(4,490		)	(1,876		)
Loss (gain) on disposal or impairment of long-lived assets, net	5,870			(6,195		)	4,824
Loss on debt extinguishment	—			—			4,751
Electronic health records incentives	(4,553		)	(1,054		)	—
Proceeds from insurance settlements, net	(919		)	—			—
Litigation settlements, net	(233		)	(532		)	(231		)
Total operating expenses	449,170			397,509			354,995
Operating income	86,417			94,295			67,893
Interest expense, net	(57,982		)	(57,641		)	(54,308		)
Income before income taxes and discontinued operations	28,435			36,654			13,585
Provision for income taxes	5,330			10,939			8,721
Income from continuing operations	23,105			25,715			4,864
Income from discontinued operations, net of income taxes	1,882			1,132			1,340
Net income	24,987			26,847			6,204
Less: Net income attributable to non-controlling interests	(37,607		)	(38,557		)	(32,791		)
Net loss attributable to Symbion, Inc.	$	(12,620	)	$	(11,710	)	$	(26,587	)

See notes to consolidated financial statements.

F- 4

SYMBION, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)



	Year Ended December 31,
	2013			2012			2011

Net income	$	24,987		$	26,847		$	6,204

Other comprehensive income, net of income taxes:
Recognition of interest rate swap from liability to earnings	—			—			314
Other comprehensive income	—			—			314
Comprehensive income	24,987			26,847			6,518
Less: Comprehensive income attributable to non-controlling interests	(37,607		)	(38,557		)	(32,791		)
Comprehensive loss attributable to Symbion, Inc.	$	(12,620	)	$	(11,710	)	$	(26,273	)

See notes to consolidated financial statements.

F- 5

SYMBION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except shares)



	Symbion, Inc. Common Stock			Additional Paid-in Capital			Stockholders' Notes			Accumulated Other Comprehensive Loss			Retained Deficit			Non-Controlling Interests - Non-Redeemable			Total
	Shares	Amount		Additional Paid-in Capital			Stockholders' Notes			Accumulated Other Comprehensive Loss			Retained Deficit			Non-Controlling Interests - Non-Redeemable			Total

Balance at December 31, 2010	1,000	$	—	$	240,959		$	—		$	(314	)	$	(55,219	)	$	40,867		$	226,293
Net (loss) income													(26,587		)	15,449			(11,138		)
Recognition of interest rate swap liability into earnings										314									314
Stock-based compensation				1,353															1,353
Acquisition and disposal of shares of non-controlling interests, net				(2,377		)										3,558			1,181
Distributions to non-controlling interests—non-redeemable holders																(14,541		)	(14,541		)
Balance at December 31, 2011	1,000	$	—	$	239,935		$	—		$	—		$	(81,806	)	$	45,333		203,462
Net (loss) income													(11,710		)	20,033			8,323
Stock-based compensation				2,057															2,057
Acquisition and disposal of shares of non-controlling interests, net				605												13,616			14,221
Distributions to non-controlling interests—non-redeemable holders																(19,535		)	(19,535		)
Balance at December 31, 2012	1,000	$	—	$	242,597		$	—		$	—		$	(93,516	)	$	59,447		208,528
Net (loss) income													(12,620		)	21,784			9,164
Stock-based compensation				410															410
Exercise of stock options				201															201
Acquisition and disposal of shares of non-controlling interests, net				104												7,092			7,196
Issuance of stockholders' notes							(485		)										(485		)
Distributions to non-controlling interests—non-redeemable holders																(17,025		)	(17,025		)
Balance at December 31, 2013	1,000	$	—	$	243,312		$	(485	)	$	—		$	(106,136	)	$	71,298		$	207,989

See notes to consolidated financial statements.

F- 6

SYMBION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



	Year Ended December 31,
	2013			2012			2011

Cash flows from operating activities:
Net income	$	24,987		$	26,847		$	6,204
Adjustments to reconcile net income to net cash from operating activities:
Income from discontinued operations, net of income taxes	(1,882		)	(1,132		)	(1,340		)
Depreciation and amortization	22,993			21,360			19,497
Amortization of debt issuance costs and discount	3,994			3,798			2,886
Payment-in-kind interest expense	8,982			8,305			22,368
Stock-based compensation	410			2,057			1,353
Recognition of interest rate swap from liability to earnings	—			—			665
Loss (gain) on disposal or impairment of long-lived assets, net	5,870			(6,195		)	4,824
Loss on debt extinguishment	—			—			4,751
Deferred income taxes	4,556			13,800			8,334
Income from equity investments, net of distributions received	(768		)	(1,931		)	106
Provision for doubtful accounts	11,149			10,211			6,574
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(13,419		)	(6,198		)	(10,696		)
Other operating assets and liabilities	(5,379		)	(4,243		)	(1,673		)
Net cash provided by operating activities - continuing operations	61,493			66,679			63,853
Net cash provided by operating activities - discontinued operations	2,148			3,679			5,126
Net cash provided by operating activities	63,641			70,358			68,979

Cash flows from investing activities:
Purchases of property and equipment, net	(19,047		)	(14,107		)	(9,415		)
Payments for acquisitions, net of cash acquired	(9,090		)	(21,142		)	(7,836		)
Proceeds from divestitures	3,349			11,465			—
Other investing activities	—			(64		)	(590		)
Net cash used in investing activities - continuing operations	(24,788		)	(23,848		)	(17,841		)
Net cash provided by (used in) investing activities - discontinued operations	3,102			6,888			(278		)
Net cash used in investing activities	(21,686		)	(16,960		)	(18,119		)

Cash flows from financing activities:
Principal payments on long-term debt	(45,283		)	(8,743		)	(355,415		)
Borrowings of long-term debt	13,350			10,471			348,784
Payments of debt issuance costs	(469		)	—			(11,891		)
Change in restricted invested assets	4,992			(7		)	(2,000		)
Distributions to non-controlling interests holders	(32,563		)	(39,353		)	(32,700		)
Proceeds from (payments related to) ownership transactions with consolidated affiliates	1,148			(3,079		)	(2,155		)
Other financing activities	(117		)	49			192
Net cash used in financing activities - continuing operations	(58,942		)	(40,662		)	(55,185		)
Net cash used in financing activities - discontinued operations	(457		)	(1,306		)	(1,441		)
Net cash used in financing activities	(59,399		)	(41,968		)	(56,626		)
Net (decrease) increase in cash and cash equivalents	(17,444		)	11,430			(5,766		)
Cash and cash equivalents at beginning of year	73,470			62,040			67,806
Cash and cash equivalents at end of year	$	56,026		$	73,470		$	62,040

See notes to consolidated financial statements.

F- 7

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 in some cases healthcare systems. As of December 31, 2013, the Company owned and operated 50 surgical facilities, including 44 ambulatory surgery centers ("ASCs") and six surgical hospitals. The Company also managed seven additional ambulatory surgery centers and one physician clinic in a market in which the Company operates an ASC and a surgical hospital. The Company owns a majority ownership interest in 31 of the 50 surgical facilities and consolidates 46 surgical facilities for financial reporting purposes. The Company reported one operating surgical facility as discontinued operations at December 31, 2013.

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

Principles of Consolidation

The 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 its ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate's business. All significant intercompany balances and transactions are eliminated in consolidation.

Non-Controlling Interests

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.

Non-Controlling Interests — Non-Redeemable. The consolidated financial statements of the Company 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 non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership 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 the non-controlling interests. The cash flow effect of these transactions is classified within financing activities in the consolidated statements of cash flows.

Non-Controlling 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. The non-controlling interests - redeemable are reported outside of stockholders' equity in the consolidated balance sheets.

A summary of activity related to the non-controlling interests—redeemable follows (in thousands):



Balance at December 31, 2010	$	34,595
Net income attributable to non-controlling interests—redeemable	17,342
Acquisition and disposal of shares of non-controlling interests—redeemable	458
Distributions to non-controlling interests —redeemable holders	(18,159		)
Balance at December 31, 2011	34,236
Net income attributable to non-controlling interests—redeemable	18,524
Acquisition and disposal of shares of non-controlling interests—redeemable	692
Distributions to non-controlling interests —redeemable holders	(19,818		)
Balance at December 31, 2012	33,634
Net income attributable to non-controlling interests—redeemable	15,823
Acquisition and disposal of shares of non-controlling interests—redeemable	1,231
Distributions to non-controlling interests —redeemable holders	(15,538		)
Balance at December 31, 2013	$	35,150

F- 8

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Variable Interest Entities

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 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 losses. As of December 31, 2013 and 2012, the consolidated balance sheets of the Company included total assets of $17.3 million and $17.7 million, respectively, and total liabilities of $3.0 million and $3.7 million, respectively, related to the Company's variable interest entities.

Equity Method Investments

The Company has non-consolidating investments in surgical facilities and management companies that own or manage surgical facilities and hospitals. These investments are accounted for using the equity method of accounting. The total amount of these investments included in investments in and advances to affiliates in the consolidated balance sheets was $13.5 million and $11.4 million as of December 31, 2013 and 2012, respectively.

Use of Estimates

The 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.

Reclassifications

Certain reclassifications have been made to the comparative period's financial statements to conform to the year ended December 31, 2013 presentation. The reclassifications primarily related to the presentation of discontinued operations and non-controlling interests and had no impact on the Company's consolidated financial position, results of operations or cash flows.

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 consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values.

A summary of the carrying amounts and fair values of the Company's long term debt follows (in thousands):



	Carrying Amount				Fair Value
	December 31,				December 31,
	2013		2012		2013		2012

Senior Secured Notes, net of debt issuance discount	$	338,142	$	337,132	$	357,585	$	348,088
PIK Exchangeable Notes	118,639		109,688		118,639		109,688
Toggle Notes	73,475		94,724		73,475		94,724

The fair values of the Senior Secured Notes and Toggle Notes, as defined in Note 8 on Long-Term Debt, were based on a Level 1 computation using quoted prices at December 31, 2013 and 2012, as applicable. The fair value of the PIK Exchangeable Notes, also defined in Note 8 on Long-Term Debt, was based on a Level 3 computation, using a Company-specific discounted cash flow analysis. The carrying amounts related to the Company's other long-term debt obligations approximate their fair values.

The Company maintains a supplemental executive retirement savings plan (the "SERP"). The SERP is a non-qualified deferred compensation plan for eligible executive officers and other key employees of the Company that allows participants to defer portions of their compensation. The fair value of the SERP asset and liability was based on a quoted market price, or a Level 1 computation. As of December

F- 9

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

31, 2013 and 2012, the fair values of the assets in the SERP were $1.8 million and $1.3 million, respectively, which were included in other long-term assets in the consolidated balance sheets. The Company had liabilities of $1.8 million and $1.3 million related to the SERP, which were included in other long-term liabilities as of December 31, 2013 and 2012, respectively.

Revenue Recognition

The Company recognizes revenues in the period in which the services are performed. Patient services revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances from third-party payors, which the Company estimates based on the historical trend of its surgical facilities’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, relationships with payors and procedure statistics.

A summary of revenues by service type as a percentage of total revenues follows:



	Year Ended December 31,
	2013		2012		2011

Patient service revenues	99.0	%	98.5	%	97.6	%
Physician service revenues	—	%	—	%	1.1	%
Other service revenues	1.0	%	1.5	%	1.3	%
Total revenues	100.0	%	100.0	%	100.0	%

Patient service revenues. Patient service revenues are revenues from healthcare procedures performed in 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, medical supplies, nursing staff and medications. 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. However, in a very limited number of surgical facilities, the Company charges for anesthesia services. Patient service revenues are recognized on the date of service, net of estimated contractual adjustments and discounts from third-party payors, including Medicare and Medicaid. Changes in estimated contractual adjustments and discounts are recorded in the period of change. During the years ended December 31, 2013, 2012 and 2011, the Company recognized $76,000, $1.1 million and $248,000 as a reduction to patient service revenues as a result of changes in estimates to third-party settlements related to prior periods.

The following table sets forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities included in continuing operations (dollars in thousands):



	Year Ended December 31,
	2013				2012				2011
	Amount		%		Amount		%		Amount		%

Private insurance	$	316,376	59.7	%	$	302,464	62.5	%	$	275,003	66.7	%
Government	177,338		33.5	%	147,568		30.5	%	105,636		25.6	%
Self-pay	15,198		2.9	%	11,113		2.3	%	12,490		3.0	%
Other	21,174		3.9	%	22,921		4.7	%	19,243		4.7	%
Total patient service revenues	$	530,086	100.0	%	$	484,066	100.0	%	$	412,372	100.0	%

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.

Other service revenues. Other service revenues consists of management and administrative services fees derived from the non-consolidated surgical facilities that the Company accounts for either under the equity method or does not own an interest. The fees derived from these management arrangements are based on a predetermined percentage of the revenues of each surgical facility and are recognized in the period in which services are rendered.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.

F- 10

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts

Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients. Management recognizes that revenues and receivables from government agencies are significant to the Company's 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. As of December 31, 2013 and 2012, the Company had third-party Medicaid settlements of $10.0 million and $7.0 million, respectively, in other current liabilities and $1.9 million and $3.9 million, respectively, in other long-term liabilities in the consolidated balance sheets.

A summary of accounts receivable, net, by type of payor follows (in thousands):



	December 31,
	2013		2012

Private insurance	47.9	%	49.0	%
Government	27.4	%	25.9	%
Self-pay	8.5	%	7.7	%
Other	16.2	%	17.4	%
Total accounts receivable, net	100.0	%	100.0	%

The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor. However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are minimal. The Company's policy is to collect co-payments and deductibles prior to providing medical services. It is also the Company's policy to verify a patient’s insurance 72 hours prior to the patient’s procedure. Patient services of the Company are primarily non-emergency which allows the surgical facilities to have an ability to control the procedures related to seeking and obtaining third-party reimbursements. The Company does not require collateral from self-pay patients.

Each surgical facility is responsible for analyzing accounts receivable to ensure proper collection. At a consolidated level, the Company's policy is to review accounts receivables aging, 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. An account balance is written off only after the Company has pursued collection with legal or collection agency assistance or otherwise deemed an account to be uncollectible.

A summary of the changes in the allowance for doubtful accounts receivable follows (in thousands):



Balance at December 31, 2010	$	9,513
Provision for doubtful accounts	6,574
Accounts written off, net of recoveries	(6,345		)
Balance at December 31, 2011	9,742
Provision for doubtful accounts	10,211
Accounts written off, net of recoveries	(8,457		)
Balance at December 31, 2012	11,496
Provision for doubtful accounts	11,149
Accounts written off, net of recoveries	(5,617		)
Balance at December 31, 2013	$	17,028

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.

F- 11

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Prepaid Expenses and Other Current Assets

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



	December 31,
	2013		2012

Prepaid expenses	$	5,325	$	5,722
Other current assets	4,450		4,228
Total	$	9,775	$	9,950

Property and Equipment

Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally three to five years for computers and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are expensed as incurred, while expenditures that increase capacities or extend useful lives are capitalized.

The Company also leases certain facilities and equipment under capital leases. These assets are depreciated on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset.

Goodwill and Intangible Assets

Goodwill represents the fair value of the consideration provided in an acquisition over the fair value of net assets acquired and is not amortized. The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements and a management rights agreement. Physician income guarantees are amortized into salaries and benefits costs in the consolidated statements of operations over the commitment period of the contract, generally three to four years. Non-compete agreements and the management rights agreement are amortized into depreciation and amortization expense in the consolidated statements of operations over the service lives of the agreements, ranging from three years to five years for non-compete agreements and 15 years for the management rights agreement.

Impairment of Long-Lived Assets, Goodwill and Intangible Assets

The Company evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value. The cash flow projection and discount rate applied represents management’s best estimate, using appropriate and customary assumptions and projections, at the date of evaluation. During the year ended December 31, 2011, the Company recorded an impairment charge of $2.9 million related to its non-consolidating surgical facility located in Novi, Michigan. The Company additionally recorded a valuation allowance of $2.1 million related to a note receivable due from this facility.

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 Symbion, Inc, as the Company has only one operating segment. In performing the test, the Company compares the carrying value of the net assets of the Company as of December 31, or additionally if impairment indicators are present, to the net present value of the estimated discounted future cash flows of the reporting unit, or the Company. The Company corroborates the results of the discounted cash flow analysis with 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 is performed whereby the Company selects comparable peers based on growth and leverage ratios, as well as healthcare industry specific characteristics. Management estimates a reasonable market value of the Company based on earnings multiples and trading data of the Company's peers. The Company completed its required annual impairment testing and determined no impairment existed in the years ended December 31, 2013, 2012 and 2011.

Restricted Invested Assets

The Company is required to maintain $10.0 million in letters of credit as a requirement of the lease agreement related to its Idaho Falls, Idaho facility. At December 31, 2012, these letters of credit were secured by restricted invested assets of $5.0 million, in the form of certificates of deposit. In March 2013, the Company refinanced its debt at the Idaho Falls, Idaho facility with a new lender. As a result of this refinancing, the Company is no longer required to maintain this restricted invested assets balance. The Company reclassified these investments to short-term investments and ultimately to cash and cash equivalents upon the maturity of the underlying certificates of deposit during the year ended December 31, 2013. There were no borrowings against the letters of credit as of December 31, 2013 and December 31, 2012. The other

F- 12

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

restricted invested assets balances of $177,000 and $169,000 at December 31, 2013 and 2012, respectively were related to a requirement under the operating lease agreement at the Company's Chesterfield, Missouri facility.

Other Long-Term Assets

A summary of other long-term assets follows (in thousands):



	December 31,
	2013		2012

Deferred loan costs	$	6,809	$	9,324
Medical malpractice recoveries	2,193		925
Assets of SERP	1,783		1,256
Other	3,176		2,539
Total	$	13,961	$	14,044

Deferred loan costs are amortized into interest expense over the maturity period of the related debt obligation. As of December 31, 2013 and 2012, accumulated amortization of deferred loan costs was $9.0 million and $6.0 million, respectively. Other long-term assets, not separately disclosed, generally includes security deposits, notes receivable and other miscellaneous deferred costs.

Other Current Liabilities

A summary of other current liabilities follows (in thousands):



	December 31,
	2013		2012

Interest payable	$	4,434	$	5,265
Current taxes payable	1,975		2,235
Insurance liabilities	3,733		3,268
Third-party settlements	10,015		6,987
Accounts receivable credit balances	3,484		3,475
Other accrued expenses	10,090		7,790
Total	$	33,731	$	29,020

Other Long-Term Liabilities

A summary of other long-term liabilities follows (in thousands):



	December 31,
	2013		2012

Facility lease obligation	$	48,044	$	48,352
Third-party settlements	1,910		3,914
Medical malpractice liability	4,083		3,765
Deferred rent	3,324		4,270
Liability of SERP	1,783		1,256
Other long-term liabilities	2,280		1,245
Total long-term liabilities	$	61,424	$	62,802

The Company has a facility lease obligation which was assumed in connection with the Company's acquisition of the surgical hospital located in Idaho Falls, Idaho. This obligation is payable to the lessor of this facility for the land, building and improvements. The current portion of the lease obligation was $308,000 and $117,000 at December 31, 2013 and 2012, respectively, and was included in other current liabilities in the consolidated balance sheets. The total lease obligation was $48.4 million and $48.5 million at December 31, 2013 and 2012, respectively.

F- 13

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Stockholders' Notes

In December 2013, certain employees of the Company exercised stock options and borrowed funds from Holdings to pay the exercise price and applicable taxes payable. Each loan is represented by a full recourse promissory note bearing interest and payable in three equal annual installments beginning December 10, 2014. Payment and performance under the notes is secured by the shares of Holdings common stock received upon exercise of the stock options exercised on December 10, 2013. The total amount of stockholders' notes outstanding at December 31, 2013 was $485,000, which was included in stockholders' equity on the consolidated balance sheet.

Stock-Based Compensation

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 stock 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’s policy is to recognize compensation expense over the straight line method. 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.

Professional, General and Workers' Compensation Insurance

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.

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 on the consolidated balance sheets separately from the liabilities. At December 31, 2013 and 2012, $1.9 million and $1.4 million, respectively, are included in other current liabilities and $4.1 million and $3.8 million, respectively, are included in other long-term liabilities on the consolidated balance sheets. Expected insurance recoveries of $1.1 million and $611,000 are included in prepaid expenses and other current assets and $2.2 million and $925,000 are included in other long-term assets on the consolidated balance sheets at December 31, 2013 and 2012, respectively.

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 Health Information Technology for Economic and Clinical Health Act ("HITECH") 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 currently estimates that total costs incurred to comply will be recovered through the total EHR incentive payments over the projected life cycle of this initiative. The Company incurs both capital expenditures and operating expenses in connection with the implementation of its various EHR initiatives. 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. The Company initiated its meaningful use initiatives in 2012. During the years ended December 31, 2013 and 2012, the Company spent $4.1 million and $5.0 million, respectively, on hardware, software and implementation costs, including $3.5 million and $4.8 million, respectively, of capitalized costs, related to its EHR initiatives at its surgical hospitals. The Company received incentive payments and recognized revenue of $4.6 million and $1.1 million during the years ended December 31, 2013 and 2012, respectively, upon the completion of the EHR meaningful use requirements at its surgical hospitals.

Income Taxes

The Company uses 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

F- 14

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

taxable income in the years in which those temporary differences are expected to be recovered or settled. If a net operating loss carryforward exists, the Company makes a determination as to whether that net operating loss carryforward will be utilized in the future. A valuation allowance is established for certain net operating loss carryforwards when their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets assumes that the Company 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, the Company may be required to adjust our deferred tax valuation allowances.

Comprehensive Income

The change in other comprehensive loss of the Company during the year ended December 31, 2011 resulted from the derecognition of an interest rate swap as a cash flow hedge as a result of the Company's debt extinguishment in the second quarter of 2011. Upon extinguishment of the Company's previous senior secured credit facility, which was the underlying hedged instrument, the Company discontinued hedge accounting and charged the amount previously recorded to other comprehensive income to earnings.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2013-02, which requires additional disclosures on the effect of significant reclassifications out of accumulated other comprehensive income. The ASU requires a company that reports other comprehensive income to present (either on the face of the statement where net income is presented or in the notes to the financial statements) the effects on the line items of net income of the significant amounts reclassified out of accumulated other comprehensive income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, a company is required to cross-reference to other required disclosures that provide additional details about those amounts. This ASU is effective for fiscal years beginning after December 15, 2012, and was adopted by the Company on January 1, 2013. As it only requires additional disclosure, the adoption of this ASU had no impact on the Company's consolidated financial position, results of operations or cash flows.

3. Acquisitions and Developments

2013 Transactions

Effective December 1, 2013, the Company acquired a 52.5% ownership interest in a surgical facility located in Providence, Rhode Island. The purchase price of the acquisition was $2.4 million. The Company funded $1.8 million of the purchase price with debt and the remainder was funded with cash from operations. The Company consolidates this facility for financial reporting purposes.

Effective December 1, 2013, the surgical hospital located in Great Falls, Montana, in which the Company has a 50.0% consolidating ownership interest, acquired the ancillary services performed at the physician clinic that the Company manages in the same market. The transaction was structured as a contribution of services from the physician clinic to the surgical hospital. The Company contributed cash of $4.1 million representing 50.0% of the estimated fair value of the ancillary services as of the effective date of the transaction.

Effective July 31, 2013, the Company acquired a 20.0% ownership interest in a surgical facility located in Jackson, Tennessee. The purchase price of the acquisition was $1.3 million, which was funded with cash from continuing operations. The Company holds a minority interest ownership and does not consolidate this facility for financial reporting purposes. We entered into a management agreement with this facility in April 2012 and continue to manage the facility.

Effective July 1, 2013, the Company acquired a 58.7% ownership interest in a surgical facility located in Irvine, California. The Company merged the operations of the acquired facility with an existing surgical facility in this market, which is consolidated for financial reporting purposes. The purchase price of the acquisition was $1.1 million, which was funded with cash from continuing operations.

Effective January 1, 2013, the Company exercised its contractual right to hold a majority of the Governor seats on the Governing Board of its surgical hospital located in Great Falls, Montana. As the Company now controls the majority of the Governor seats on the Governing Board, the Company consolidates this facility for financial reporting purposes. Prior to January 1, 2013, this facility was accounted for using the equity method for financial reporting purposes.

2012 Transactions

Effective December 31, 2012, the Company acquired a 77.3% ownership interest in a surgical facility located in Bellingham, Washington. 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 continuing operations. The Company consolidates this facility for financial reporting purposes with the results of operations from its existing facility located in Bellingham, Washington.

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 continuing operations. The Company previously held a 56.0% ownership interest in this surgical facility and continues to consolidate this facility for financial reporting purposes.

F- 15

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 $10.3 million. The acquisition was financed with cash from continuing operations. As part of the acquisition, the Company assumed debt of $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 $7.6 million. The acquisition was funded with cash from continuing operations. As part of the acquisition, the Company assumed debt of $419,000. The Company consolidates the facility for financial reporting purposes.

Effective April 1, 2012, the Company 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. The Company also received an option to purchase up to a 20.0% ownership interest in the facility. The Company exercised this option on July 31, 2013.

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 $5.8 million, consisting of $3.1 million of cash, $1.1 million in the form of equity ownership in the surgical facility located in Idaho Falls, Idaho, approximately $470,000 of contingent consideration and the assumption of debt of $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 the Company's existing facility located in Idaho Falls, Idaho and are consolidated with this facility for financial reporting purposes.

2011 Transactions

Effective October 1, 2011, the Company acquired an oncology practice, which is operated within its 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 $1.1 million in the form of equity ownership in the Company's 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, 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. The Company consolidates the ambulatory surgery center for financial reporting purposes and accounts for the surgical hospital as an equity method investment for financial reporting purposes. In addition, the Company acquired the rights to manage a physician 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 $232,000. The acquisition was financed with cash from continuing operations.

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 continuing operations.

4. Discontinued Operations and Divestitures

2013 Transactions

Effective December 31, 2013, the Company reclassified its surgical facility located in Worcester, Massachusetts to discontinued operations. The Company entered into a purchase agreement effective January 2, 2014 related to the sale of this facility and expects to complete this transaction in the first half of 2014. For the years ended December 31, 2013, 2012 and 2011, the results of operations related to this facility have been included in discontinued operations. This facility is consolidated for financial reporting purposes.

Effective June 30, 2013, the Company completed an asset sale related to its surgical hospital located in Austin, Texas. As part of the transaction, a new entity was formed to operate the surgical hospital. The new entity acquired the equipment and inventory as well as the rights to various licensing agreements, contracts and leases associated with the operations of the surgical hospital. As consideration for the transaction, the Company received cash proceeds of $2.7 million and a 25.0% non-consolidating ownership interest in the new entity. The Company continues to provide management services to the new entity. The Company recorded a loss of $6.2 million as a result of this transaction.

Effective April 8, 2013, the Company sold its ownership interest in its surgical facility located in Havertown, Pennsylvania. The Company received net proceeds of $3.2 million on this transaction and recognized a net gain on the sale of $1.3 million, which included an allocated disposal of goodwill of $2.4 million. For the years ended December 31, 2013, 2012 and 2011, the results of operations related to this facility were included in discontinued operations. Concurrent with the sale, a new management service company was created to provide various management services to this surgical facility. The Company acquired a 48.0% non-consolidating ownership interest in the new management service company as part of the consideration received for the sale of its interest in the surgical facility. Additionally, the Company entered into an agreement to manage the new management service company.

Effective February 28, 2013, the Company ceased operations at its surgical facility located in San Antonio, Texas. The Company recognized a loss on the disposal of $1.0 million. For the years ended December 31, 2013, 2012 and 2011, the results of operations related to this facility were included in discontinued operations.

F- 16

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Effective January 29, 2013, the Company sold its ownership interest in a surgical facility located in Novi, Michigan for proceeds of $310,000 and recognized a gain on the sale of $269,000. During the year ended December 31, 2011, the Company recorded impairment of $2.9 million related to this investment and additionally recorded a valuation allowance of $2.1 million related to a note receivable due from this facility . This facility was non-consolidating for financial reporting purposes.

2012 Transactions

Effective December 31, 2012, the Company ceased operations at its surgical facility located in Metairie, Louisiana. This facility was previously non-consolidating for financial reporting purposes. During the year ended December 31, 2012, the Company recorded a loss on the disposal of $351,000.

Effective December 31, 2012, the Company divested its ownership interest and management rights in a surgical facility located in Oklahoma City, Oklahoma for net proceeds of $10.1 million. This facility was previously non-consolidating for financial reporting purposes. During the year ended December 31, 2012, the Company recorded a gain on the disposal of $5.9 million.

Effective August 31, 2012, the Company divested its 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. During the year ended December 31, 2012, the Company recorded a loss on the disposal of $1.6 million, which included an allocated disposal of goodwill of $239,000.

Effective July 1, 2012, the Company, along with its physician investors in the facility, divested its interest 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. During the year ended December 31, 2012, the Company recorded a gain on the disposal of $1.1 million, which included an allocated disposal of goodwill of $3.7 million.

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 $1.1 million. During the year ended December 31, 2012, the Company recorded a net gain on the disposal of $78,000 , which included an allocated disposal of goodwill of $1.3 million.

Effective April 30, 2012, the Company divested its ownership interest in a surgical facility located in Nashville, Tennessee for net proceeds of $1.3 million. This facility was previously non-consolidating for financial reporting purposes. During the year ended December 31, 2012, the Company recorded a gain on the disposal of $750,000.

2011 Transactions

Effective December 31, 2011, the Company committed to plans to divest its ownership interests in surgical facilities located in Austin and Fort Worth, Texas which were previously consolidated for financial reporting purposes.

Summary of Operating Results of Discontinued Operations

A summary of certain operating results impacting the statements of operations related to discontinued operations follows (in thousands):



	Year Ended December 31,
	2013			2012			2011

Revenues	$	7,959		$	22,471		$	33,396
Operating income	483			159			2,460
(Gain) loss on sale or disposal	(884		)	285			418
(Benefit from) provision for income taxes	(515		)	(1,258		)	702
Income from discontinued operations, net of income taxes	1,882			1,132			1,340

F- 17

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

5. Property and Equipment

A summary of property and equipment, net, follows (in thousands):



	December 31,
	2013			2012

Land	$	5,713		$	5,713
Buildings and improvements	107,655			103,923
Furniture and equipment	13,707			17,646
Computer and software	12,747			6,702
Medical equipment	81,730			69,368
Construction in progress	3,000			4,932
Property and equipment, at cost	224,552			208,284
Less: Accumulated depreciation	(94,820		)	(78,178		)
Property and equipment, net	$	129,732		$	130,106

The Company is liable to various vendors for equipment leases. The carrying values of assets under capital lease were $4.6 million and $5.3 million as of December 31, 2013 and 2012, respectively, which included accumulated depreciation of $2.7 million and $11.8 million, respectively. The Company disposed of $1.1 million carrying value of medical equipment under capital lease, which included $9.7 million of accumulated depreciation, in connection with the asset sale at its surgical hospital located in Austin, Texas during the year ended December 31, 2013.

6. Intangible Assets

A summary of changes in intangible assets follows (in thousands):



	Physician Guarantees			Management Rights			Non-Compete Agreements			Certificates of Need		Total Intangible Assets

Balance at December 31, 2010	$	632		$	—		$	2,337		$	17,740	$	20,709
Additions	800			2,300			3,632			—		6,732
Recruitment expense	(325		)	—			—			—		(325		)
Amortization	—			(64		)	(765		)	—		(829		)
Balance at December 31, 2011	1,107			2,236			5,204			17,740		26,287
Additions	—			—			—			—		—
Recruitment expense	(288		)	—			—			—		(288		)
Amortization	—			(153		)	(1,695		)	—		(1,848		)
Balance at December 31, 2012	819			2,083			3,509			17,740		24,151
Additions	800			—			—			—		800
Recruitment expense	(587		)	—			—			—		(587		)
Amortization	—			(153		)	(1,695		)	—		(1,848		)
Balance at December 31, 2013	$	1,032		$	1,930		$	1,814		$	17,740	$	22,516

F- 18

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

A summary of cost and accumulated amortization related to the Company's finite-lived intangible assets follows (in thousands):



	December 31,
	2013			2012

Management rights agreements	$	2,300		$	2,300
Non-compete agreements	5,969			5,969
Finite-lived intangible assets, at cost	8,269			8,269
Less: Accumulated amortization	(4,525		)	(2,677		)
Finite-lived intangible assets, net	$	3,744		$	5,592

During the years ended December 31, 2013, 2012 and 2011, the Company had amortization expense of $1.8 million, $1.8 million and $829,000, respectively.

A summary of the scheduled amortization related to the Company's finite-lived intangible assets as of December 31, 2013 follows (in thousands):



	Management Rights and Non-Compete Agreements

2014	$	1,550
2015	621
2016	153
2017	153
2018	153
Thereafter	1,114
Total	$	3,744

As of December 31, 2013 and 2012, physician income guarantees consisted of recruitment costs of $2.3 million and $1.5 million, respectively, and accumulated amortization of these recruitment costs into salaries and benefits costs of $1.3 million and $682,000, respectively.

7. Goodwill

A summary of changes in goodwill follows (in thousands):



Balance at December 31, 2010	$	624,737
Acquisitions	4,941
Divestitures	(359		)
Purchase price adjustments	825
Balance at December 31, 2011	630,144
Acquisitions	31,243
Divestitures	(5,329		)
Balance at December 31, 2012	656,058
Acquisitions	13,383
Divestitures	(2,373		)
Purchase price adjustments	(5,310		)
Balance at December 31, 2013	$	661,758

Additions to goodwill include new business combination acquisitions and incremental ownership acquired in the Company's subsidiaries. A summary of the Company's acquisitions for the years ended December 31, 2013, 2012 and 2011 is included in Note 3 on Acquisitions and Developments.

F- 19

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

8. Long-Term Debt

A summary of long-term debt follows (in thousands):



	December 31,
	2013			2012

Credit Facility	$	—		$	—
Senior Secured Notes, net of debt issuance discount of $2,858 and $3,868 at December 31, 2013 and 31, 2012, respectively	338,142			337,132
PIK Exchangeable Notes	118,639			109,688
Toggle Notes	73,475			94,724
Notes payable and secured loans	24,970			28,168
Capital lease obligations	4,922			3,864
Total debt	560,148			573,576
Less: Current maturities	(9,102		)	(39,462		)
Total long-term debt	$	551,046		$	534,114

The Company modified its long-term debt structure during the second quarter of 2011. On June 14, 2011, the Company completed the offering of $350.0 million aggregate principal amount of Senior Secured Notes (the "Offering"). The proceeds of the Offering were used to retire the Company's then existing senior secured credit facility and a portion of its Toggle Notes. In connection with the Offering, the Company 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, 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 termination of debt instruments as part of the restructuring.

On September 9, 2011, the Company canceled $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.

Credit Facility

The Company has letters of credit outstanding under the Credit Facility of $1.8 million at December 31, 2013 related to our self-insured workers compensation coverage and the operating lease on our surgical hospital in Lubbock, Texas. As of December 31, 2013, $48.2 million was available under the Credit Facility.

Loans under the Credit Facility bear interest, at our option, at the reserve adjusted LIBOR 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 under 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, 2013, 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 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 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

F- 20

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

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, 2013, the Company had not redeemed any of its Senior Secured Notes.

Effective September 9, 2011, the Company canceled $9.0 million aggregate principal amount of our Senior Secured Notes held by certain holders, plus accrued and unpaid interest, in exchange for its 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, 2013, 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 follows (in thousands):



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	580
Total discount on Senior Secured Notes	$	2,858

PIK Exchangeable Notes

Concurrent with the Offering, the Company 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, the Company canceled $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 mature on June 15, 2017. Interest accrues on the PIK Exchangeable Notes at a rate of 8.00% per year, compounding semi-annually on June 15 and December 15 of each year. The Company pays 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 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 interest, the Company increased the principal amount of the PIK Exchangeable Notes by $9.0 million, $8.3 million and $3.8 million during the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, the Company had $422,000 of accrued interest on the PIK Exchangeable Notes, which was included in other current liabilities in the consolidated balance sheet.

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.

F- 21

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

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, 2013, the Company was in compliance with all material covenants contained in the indenture governing the PIK Exchangeable Notes.

Toggle Notes

On June 3, 2008, the Company completed the private offering of $179.9 million aggregate principal amount of 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. PIK interest on the Toggle Notes accrued at the rate of 11.75% 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 has increased by $71.0 million from the issuance of the Toggle Notes to December 31, 2013. Beginning with the February 2012 interest payment, all interest under the Toggle Notes is required to be paid in cash. As of December 31, 2013, the Company had $2.9 million of accrued interest on the Toggle Notes in other current liabilities on the consolidated balance sheet.

In connection with the Offering, the Company 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, within the meaning of Section 163(i)(1) of 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 principal balance outstanding was paid on August 23, 2013.

The indenture governing the Toggle Notes contains various restrictive covenants, including financial covenants that limit the Company's ability and the ability of its 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, 2013, the Company was in compliance with all material covenants contained in the indenture governing the Toggle Notes.

Notes Payable to Banks

Certain of the Company's 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.

In March 2013, the Company refinanced the debt of its surgical hospital located in Idaho Falls, Idaho. This refinancing transaction resulted in $6.1 million of borrowings from a new lender, $7.5 million of repayments to the previous lenders and $427,000 of debt issuance cost payments. In September 2013, the Company repaid the $6.1 million of borrowings from the new lender with cash from continuing operations. In December 2013, the Company had new borrowings of $2.0 million at its surgical facilities in East Greenwich and East Bay, Rhode Island. In addition, the Company borrowed $1.8 million in December 2013 to partially fund the acquisition of a surgical facility in Providence, Rhode Island.

F- 22

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Maturities

A summary of the scheduled maturities of our debt obligations as of December 31, 2013 follows (in thousands):



	Capital Lease Obligations		Other Long-Term Debt		Total

2014	$	1,753	$	7,349	$	9,102
2015	1,426		81,399		82,825
2016	1,039		346,039		347,078
2017	446		121,177		121,623
2018	258		2,067		2,325
Thereafter	—		53		53
Total debt	$	4,922	$	558,084	$	563,006

9. 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, typically the result of an increase in the Consumer Price Index. Lease obligations paid in advance are included in prepaid rent. The difference between actual lease payments and straight-line lease expense over the initial lease term, excluding optional renewal periods, is included in deferred rent.

The future minimum lease payments under non-cancellable operating leases, net of sub-lease income, follows (in thousands):



2014	$	23,526
2015	21,340
2016	17,711
2017	13,921
2018	11,914
Thereafter	62,641
Total minimum operating lease payments	$	151,053

Total operating lease expense was $27.2 million, $23.7 million and $22.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. Included in these amounts, the Company incurred lease expense of $7.1 million, $7.1 million and $6.7 million for years ended December 31, 2013, 2012 and 2011, respectively, under operating lease agreements with physician investors and an entity that is an affiliate of one of the Company’s former directors.

The Company has various sub-lease arrangements at its surgical hospital located in Idaho Falls, Idaho. Future minimum lease payments to be received at this facility under these non-cancellable sub-lease arrangements follows (in thousands):



2014	$	740
2015	762
2016	785
2017	809
2018	833
Thereafter	3,267
Total non-cancellable sub-lease income	$	7,196

10. Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return. The partnerships and limited liability companies in which the Company has ownership each file separate income tax returns. The Company's allocated share of income or loss based on its percentage

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SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

ownership in each partnership and limited liability company is included in taxable income of the Company. The remaining income or loss of each partnership and limited liability company is allocated to the other owners as taxable income.

The provision for income taxes from continuing operations follows (in thousands):



	Year Ended December 31,
	2013		2012			2011

Current:
Federal	$	—	$	(3,527	)	$	240
State	774		666			147
Deferred	4,556		13,800			8,334
Total income tax expense from continuing operations	$	5,330	$	10,939		$	8,721

Income from discontinued operations is reported net of income taxes in the consolidated statements of operations. For the years ended December 31, 2013, 2012 and 2011, the Company had income tax expense (benefit) related to discontinued operations of $(515,000), $(1.3) million and $702,000, respectively.

A reconciliation of the provision for income taxes from continuing operations as reported in the consolidated statements of operations and the amount of income tax expense (benefit) computed by multiplying consolidated income (loss) before discontinued operations and income taxes in each year by the U.S. federal statutory rate of 35% follows (in thousands):



	Year Ended December 31,
	2013			2012			2011

Tax at U.S.federal statutory rate	$	9,953		$	12,829		$	4,755
State income tax, net of U.S. federal tax benefit	878			290			127
Change in valuation allowance	12,123			9,774			11,740
Expiration of capital loss carryforwards	445			170			722
Net income attributable to non-controlling interests	(13,163		)	(13,495		)	(11,477		)
Changes in measurement of uncertain tax positions	(2,976		)	(3,169		)	3,885
Write-off of non-deductible goodwill	(1,031		)	1,581			133
Partnership basis tax return reconciling differences	(1,174		)	2,757			(1,302		)
Other	275			202			138
Total income tax expense from continuing operations	$	5,330		$	10,939		$	8,721

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SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The components of temporary differences and the approximate tax effects that give rise to the Company’s net deferred tax liabilities follows (in thousands):



	December 31,
	2013			2012

Deferred tax assets:
Medical malpractice liability	$	669		$	745
Accrued vacation and incentive compensation	447			514
Net operating loss carryforwards	61,281			50,167
Amortization of intangible assets	1,407			1,632
Basis differences of partnerships and joint ventures	8,662			6,879
SERP liability	723			511
Capital loss carryforwards	2,782			1,879
Stock-based compensation	3,935			4,508
Other deferred assets	1,520			1,591
Total gross deferred tax assets	81,426			68,426
Less: Valuation allowance	(80,389		)	(66,325		)
Total deferred tax assets	1,037			2,101
Deferred tax liabilities:
Depreciation on property and equipment	(520		)	(271		)
Amortization of intangible assets	(952		)	(854		)
Basis differences of partnerships and joint ventures	(75,261		)	(71,130		)
Debt issuance costs and discounts	(79		)	(1,389		)
Other deferred liabilities	(398		)	(378		)
Total deferred tax liabilities	(77,210		)	(74,022		)
Net deferred tax liabilities	$	(76,173	)	$	(71,921	)

As of December 31, 2013 and 2012, the Company had net current deferred tax liabilities of $153,000 and $140,000, respectively, and net long-term deferred tax liabilities of $76.0 million and $71.8 million, respectively. The Company had federal net operating loss carryforwards of $140.5 million as of December 31, 2013, which expire between 2027 and 2033. The Company had state net operating loss carryforwards of $285.0 million as of December 31, 2013, which expire between 2013 and 2033. The Company had capital loss carryforwards of $7.9 million as of December 31, 2013, which expire between 2015 and 2017.

The Company has recorded a valuation allowance against its deferred tax assets at December 31, 2013 and 2012 of $80.4 million and $66.3 million, respectively, which represented an increase of $14.1 million for the year ended December 31, 2013. The valuation allowance has been provided for certain deferred tax assets that management believes it is more likely than not that the tax benefits will not be realized. Included in the increase in the valuation allowance for the year ended December 31, 2013 was an increase of $0.9 million recorded to additional paid-in-capital as a result of the tax effect of disposals of shares of non-controlling interests. As of December 31, 2013, $2.8 million of valuation allowance was recorded against deferred tax assets, that if subsequently recognized, will be credited directly to additional paid-in-capital.

A reconciliation of the beginning and ending liability for gross unrecognized income tax benefit for the years ended December 31, 2013, 2012 and 2011 follows (in thousands):



	Year Ended December 31,
	2013			2012			2011

Unrecognized tax benefits at beginning of year	$	7,109		$	7,962		$	3,578
Additions based on tax provisions related to the current year	293			899			—
Additions for tax positions of prior years	165			1,356			4,426
Reductions for settlements with taxing authorities	(5,611		)	(3,077		)	—
Reductions for the expiration of statutes of limitations	(27		)	(31		)	(42		)
Unrecognized tax benefits at end of year	$	1,929		$	7,109		$	7,962

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SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes in the consolidated statements of operations. For the years ended December 31, 2013 and 2012, the Company had approximately $109,000 and $150,000, respectively, of accrued interest and penalties related to uncertain tax positions.

The Company's U.S. federal and state income tax returns for tax years 2010 and beyond remain subject to examination. The total amount of accrued liabilities related to uncertain tax positions that would affect the Company's effective tax rate if recognized was $435,000 and $634,000 at December 31, 2013 and 2012, respectively. It is possible the amount of unrecognized tax benefit could change in the next 12 months as a result of the lapse of the statute of limitations and settlements with tax authorities; however, the Company does not anticipate the change will have a material adverse impact on its consolidated financial statements.

11. Supplemental Cash Flow Information

A summary of additional information related to cash flows from continuing operations follows (in thousands):



	Year Ended December 31,
	2013		2012		2011

Non-cash transactions:
Increase in debt for paid-in-kind interest expense	$	8,951	$	8,275	$	22,369
Increase in debt related to new capital lease obligations	2,667		2,097		2,100

Cash payments:
Interest paid, net of interest income received	38,527		39,055		28,072
Income taxes paid, net of refunds received	882		78		271

12. Stock Options

Overview

The Company is a participant in the Symbion Holdings Corporation 2007 Equity Incentive Plan (the "2007 Plan"), which permits grants of stock options and other equity-based awards to purchase Holdings common stock.

In connection with the Merger, certain members of the Company's predecessor management were permitted to roll over options into the 2007 Plan. The rollover options were exchanged for 611,799 options under the 2007 Plan. The exercise price of each rollover option is $1.50 per share and the options expire on the expiration date of the original grants.

Effective January 23, 2012, Holdings amended the 2007 Plan. The amendment increased the shares authorized for future grant under the 2007 Plan by 2,400,000 shares to 5,627,263 shares. Additionally, the exercise price of options originally issued on and after August 31, 2007, or the Merger effective date, was reduced to $3.00 per share from $10.00 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 non-cash stock compensation expense of $1.7 million during the year ended December 31, 2012, consisting of $1.6 million in general and administrative expenses and $83,000 in salaries and benefits in the consolidated statements of operations.

The Company's outstanding stock option awards include a time-vesting or performance-vesting component. Under the amended plan, the maximum contractual term of the options is ten years, or earlier if the employee terminates employment before that time. Time-vesting options vest over a five-year period with 20% of the options vesting each anniversary period as of the option issuance date. Performance-vesting options vest and become exercisable upon a liquidity event based on the extent to which Crestview and certain affiliated investors receive a target share price for their equity. No stock-based compensation expense has been recorded in the consolidated statements of operations since inception of the 2007 Plan for the performance-vesting options as the conditions for vesting are not probable.

The Company recorded stock-based compensation expense of $410,000, $2.1 million and $1.3 million for the years ended December 31, 2013, 2012 and 2011, respectively. After non-controlling interests and the related income tax benefit, the Company recorded a net impact to Symbion, Inc. net loss related to stock-based compensation expense of $410,000, $2.1 million and $825,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

During the years ended December 31, 2013, 2012 and 2011, the Company issued 21,987 options, 1,024,842 options and 62,268 options with a time-vesting component and 21,987 options, 1,024,842 options and 94,763 options with a performance-vesting component, respectively. As of December 31, 2013, the Company had 2,356,289 shares of time-vesting options and 2,494,404 shares of performance-vesting options outstanding. In addition, Holdings had 818,684 shares of unissued stock options reserved for future grants under the 2007 Plan as of December 31, 2013.

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SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Valuation Methodology

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


▪	Weighted average risk-free interest rate. The weighted average 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.

▪

Expected volatility. 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 have a limited public stock trading history, use average volatilities of similar entities. As a result, the Company uses 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 an option and the contractual term of the option. The expected life of an option is considered the amount of time, in years, that an option is expected to be outstanding before it is exercised. Whereas, the contractual term of the stock option is the term an 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. As a result, the Company does not apply a dividend yield component to its valuation.


▪	Expected forfeiture rate. The Company uses an estimated forfeiture rate based on historical experience of number of years employed 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 sets forth the assumptions used by the Company to estimate the fair value of time-vesting options:



	Year Ended December 31,
	2013			2012			2011

Weighted-average fair value per option	$	2.05		$	1.53		$	0.59
Weighted-average risk-free interest rate	0.8		%	2.0		%	2.0		%
Expected volatility	42.0		%	42.0		%	42.0		%
Expected life, in years	6.5			6.5			6.5
Expected dividend yield	—		%	—		%	—		%
Expected forfeiture rate	4.0		%	4.0		%	4.0		%

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SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Stock Option Activity

A summary of stock option activity for the years ended December 31, 2013, 2012 and 2011 follows:



	Number of Options		Weighted-Average Exercise Price		Weighted-Average Fair Value	Total Fair Value		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Term (in Years)

Outstanding at December 31, 2010	3,766,149		$	3.92	2.78	$	10,469,894	$	—	5.7
Granted	153,392		3.00		1.63	250,029		—		8.2
Exercised	—
Forfeited	(104,525	)
Outstanding at December 31, 2011	3,815,016		2.72		2.72	10,376,844		—		4.3
Granted	2,201,432		3.43		1.53	3,368,191		—		9.2
Exercised	(258,962	)
Forfeited	(402,311	)
Outstanding at December 31, 2012	5,355,175		3.08		2.04	10,924,557		—		8.5
Granted	43,974		4.00		2.05	90,147		—		9.1
Exercised	(221,000	)
Forfeited	(327,456	)
Outstanding at December 31, 2013	4,850,693		3.18		1.77	8,585,727		—		8.1

Exercisable at December 31, 2013	1,462,128		2.94		2.21	3,231,303		—		7.5

Unvested at December 31, 2013	3,160,057		3.26		1.58	4,992,890		—		8.2

As of December 31, 2013 and 2012, the Company had 3,160,057 and 3,490,170 of unvested stock options outstanding. Total stock-based compensation expense related to unvested time-vesting options not yet recognized was $1.0 million as of December 31, 2013. Substantially all of this expense will be recognized over the next four years.

A summary of information about stock options outstanding as of December 31, 2013 follows:



Options Outstanding				Options Exercisable
Number of Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (in Years)	Number of Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (in Years)

121,944	$	1.50	0.1	121,944	$	1.50	0.1
2,789,119	3.00		8.1	1,150,618	3.00		8.1
1,895,656	3.50		8.4	189,566	3.50		8.4
43,974	4.00		9.1	—	4.00		9.1
4,850,693	3.18		8.1	1,462,128	2.94		7.5

13. 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 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 allowable amounts by the Internal Revenue Service. Eligible employees may or may not receive a match by the Company of their contributions. The Company match varies depending on location and is determined prior to the start of each plan year. Generally, employer contributions vest

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SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

20% after two years of service and continue vesting at 20% per year until fully vested. The Company’s matching contribution expense for the years ended December 31, 2013, 2012 and 2011 was $795,000, $1.5 million and $864,000, respectively.

Supplemental Executive Retirement Savings Plan

The Company adopted the supplemental executive retirement plan in May 2005. The SERP provides supplemental retirement savings 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 $67,000, $64,000 and $50,000 for the years ended December 31, 2013, 2012 and 2011, respectively. See Note 2 on Significant Accounting Policies for information about the fair value of the assets and liabilities in the SERP.

14. Related Party Transactions

On August 23, 2007, the Company entered into a ten-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 prepaid this annual management fee in each of the years ended December 31, 2013, 2012 and 2011 and had a prepaid asset of $645,000 as of December 31, 2013 that was included in prepaid expenses and other current assets on the consolidated balance sheet.

Affiliates of Crestview and affiliates of the Northwestern Mutual Insurance Company hold the majority of the PIK Exchangeable Notes which entitle them to additional ownership in Holdings upon exchange. 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 is subject to customary adjustments.

The PIK Exchangeable Notes mature on June 15, 2017, subject to certain redemption provisions. The Company pays 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. As of December 31, 2013, the Company had $118.6 million of aggregate principal amount of PIK Exchangeable Notes outstanding and had accrued interest of $422,000 on the PIK Exchangeable Notes, which was included in other current liabilities on the consolidated balance sheet. See Note 8 on Long-Term Debt for further discussion of the PIK Exchangeable Notes.

In December 2013, certain employees of the Company exercised stock options and borrowed funds from Holdings to pay the exercise price and applicable taxes payable. Each loan is represented by a full recourse promissory note executed by the employee and bearing interest at a rate of 0.25% per annum (the applicable federal rate). Principal and interest on the notes is payable in three equal annual installments beginning December 10, 2014, with payment in full due on December 10, 2016. Payment and performance under the notes is secured by the shares of Holdings common stock received upon exercise of the options exercised on December 10, 2013. The total amount of stockholders' notes outstanding at December 31, 2013 was $485,000, which was included in stockholders' equity on the consolidated balance sheet.

15. Commitments and Contingencies

Lease and Debt Guarantees of Non-Consolidated Facilities

As of December 31, 2013 and 2012, the Company had guaranteed $950,000 and $1.3 million, respectively, of operating lease payments for certain non-consolidated surgical facilities. These operating leases typically have ten-year terms, with optional renewal periods. At December 31, 2012, the Company guaranteed $181,000 of debt at its non-consolidated surgical facility located in Novi, Michigan. In January 2013, the Company sold its ownership interest in this facility and no longer has any debt guarantees.

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.

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SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Laws and Regulations

Laws and regulations governing our business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how our surgical facilities conduct their operations, from licensing requirements to how and whether our facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians. 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 business, results of operations or financial condition.

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 healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute 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 healthcare providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory 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 partnership or limited liability company 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 that extends beyond the period of any claims-made policies, 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.

16. Subsequent Events

Effective March 7, 2014, the Company acquired an incremental ownership interest of 13.6% related to its surgical hospital located in Idaho Falls, Idaho for a purchase price of $23.8 million. This transaction was financed with proceeds from the Credit Facility.

17. Quarterly Financial Information (Unaudited)

The following tables include a summary of certain information related to the Company's quarterly consolidated results of operations for each of the four quarters in the years ended December 31, 2013 and 2012. The amounts have been adjusted for discontinued operations (in thousands and unaudited):



	Year Ended December 31, 2013
	First Quarter		Second Quarter			Third Quarter		Fourth Quarter		Total

Revenues	$	132,598	$	134,598		$	127,404	$	140,987	$	535,587
Cost of revenues	98,688		101,294			95,378		101,773		397,133
Income (loss) from continuing operations	4,910		(589		)	4,219		14,565		23,105
Net income	4,197		1,536			4,312		14,942		24,987

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SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED



	Year Ended December 31, 2012
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total

Revenues	$	116,307	$	118,221	$	122,341	$	134,935	$	491,804
Cost of revenues	81,086		82,565		91,887		95,770		351,308
Income from continuing operations	4,861		7,828		2,574		10,452		25,715
Net income	5,036		7,619		1,724		12,468		26,847

18. Financial Information for the Company and Its Subsidiaries

The Company conducts substantially all of its business through its subsidiaries. The following tables present 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- 31

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed Consolidating Balance Sheet as of December 31, 2013

(In thousands)



	Parent Issuer		Guarantor Subsidiaries		Combined Non-Guarantors		Eliminations			Total Consolidated

ASSETS
Current assets:
Cash and cash equivalents	$	6,415	$	4,788	$	44,823	$	—		$	56,026
Accounts receivable, net	—		—		78,290		—			78,290
Inventories	—		—		17,229		—			17,229
Prepaid expenses and other current assets	1,476		1,301		6,998		—			9,775
Due from related parties	3,050		23,579		—		(26,629		)	—
Current assets of discontinued operations	—		—		1,356		—			1,356
Total current assets	10,941		29,668		148,696		(26,629		)	162,676
Property and equipment, net	1,422		2,100		126,210		—			129,732
Intangible assets, net	1,929		—		20,587		—			22,516
Goodwill	661,758		—		—		—			661,758
Investments in and advances to affiliates	69,558		40,384		563		(96,417		)	14,088
Restricted invested assets	—		—		177		—			177
Other long-term assets	9,419		—		4,542		—			13,961
Long-term assets of discontinued operations	—		—		1,831		—			1,831
Total assets	$	755,027	$	72,152	$	302,606	$	(123,046	)	$	1,006,739

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	269	$	—	$	19,245	$	—		$	19,514
Accrued payroll and benefits	1,151		—		11,118		—			12,269
Due to related parties	—		—		26,629		(26,629		)	—
Other current liabilities	8,348		3		25,380		—			33,731
Current maturities of long-term debt	344		859		7,899		—			9,102
Current liabilities of discontinued operations	—		—		325		—			325
Total current liabilities	10,112		862		90,596		(26,629		)	74,941
Long-term debt, less current maturities	529,912		1,732		19,402		—			551,046
Long-term deferred tax liabilities	76,020		—		—		—			76,020
Other long-term liabilities	2,292		—		59,132		—			61,424
Long-term liabilities of discontinued operations	—		—		169		—			169
Non-controlling interests—redeemable	—		—		35,150		—			35,150
Total Symbion, Inc. stockholders' equity	136,691		69,558		26,859		(96,417		)	136,691
Non-controlling interests—non-redeemable	—		—		71,298		—			71,298
Total equity	136,691		69,558		98,157		(96,417		)	207,989
Total liabilities and stockholders' equity	$	755,027	$	72,152	$	302,606	$	(123,046	)	$	1,006,739

F- 32

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed Consolidating Balance Sheet as of 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	$	38,791	$	—		$	73,470
Accounts receivable, net	—		—		71,646		—			71,646
Inventories	—		167		14,226		—			14,393
Prepaid expenses and other current assets	1,794		3		8,153		—			9,950
Due from related parties	1,878		44,895		—		(46,773		)	—
Current assets of discontinued operations	—		—		3,636		—			3,636
Total current assets	12,177		71,239		136,452		(46,773		)	173,095
Property and equipment, net	918		2,100		127,088		—			130,106
Intangible assets, net	2,083		—		22,068		—			24,151
Goodwill	656,058		—		—		—			656,058
Investments in and advances to affiliates	91,614		18,344		423		(98,249		)	12,132
Restricted invested assets	—		—		5,169		—			5,169
Other long-term assets	12,847		—		1,197		—			14,044
Long-term assets of discontinued operations	—		—		2,448		—			2,448
Total assets	$	775,697	$	91,683	$	294,845	$	(145,022	)	$	1,017,203

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	161	$	2	$	22,623	$	—		$	22,786
Accrued payroll and benefits	1,429		62		11,227		—			12,718
Due to related parties	—		—		46,773		(46,773		)	—
Other current liabilities	9,063		5		19,952		—			29,020
Current maturities of long-term debt	21,232		—		18,230		—			39,462
Current liabilities of discontinued operations	—		—		2,033		—			2,033
Total current liabilities	31,885		69		120,838		(46,773		)	106,019
Long-term debt, less current maturities	520,316		—		13,798		—			534,114
Long-term deferred tax liabilities	71,781		—		—		—			71,781
Other long-term liabilities	2,634		—		60,168		—			62,802
Long-term liabilities of discontinued operations	—		—		325		—			325
Non-controlling interests—redeemable	—		—		33,634		—			33,634
Total Symbion, Inc. stockholders' equity	149,081		91,614		6,635		(98,249		)	149,081
Non-controlling interests—non-redeemable	—		—		59,447		—			59,447
Total equity	149,081		91,614		66,082		(98,249		)	208,528
Total liabilities and stockholders' equity	$	775,697	$	91,683	$	294,845	$	(145,022	)	$	1,017,203

F- 33

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed Consolidating Statement of Operations for the Year Ended December 31, 2013

(In thousands)



	Parent Issuer			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated

Revenues	$	21,143		$	—		$	530,787		$	(16,343	)	$	535,587
Operating expenses:
Salaries and benefits	—			—			148,793			—			148,793
Supplies	—			—			143,287			—			143,287
Professional and medical fees	—			—			41,179			—			41,179
Lease expense	—			—			27,237			—			27,237
Other operating expenses	—			—			36,637			—			36,637
Cost of revenues	—			—			397,133			—			397,133
General and administrative expenses	21,976			—			—			—			21,976
Depreciation and amortization	631			—			22,362			—			22,993
Provision for doubtful accounts	—			—			11,149			—			11,149
Income from equity investments	—			(4,104		)	(142		)	—			(4,246		)
(Gain) loss on disposal or impairment of long-lived assets, net	(1,000		)	20,823			(13,953		)	—			5,870
Management fees	—			—			16,343			(16,343		)	—
Equity in earnings of affiliates	(43,225		)	(57,901		)	—			101,126			—
Electronic health records incentives	—			—			(4,553		)	—			(4,553		)
Proceeds from insurance settlements, net	—			—			(919		)	—			(919		)
Litigation settlements, net	—			—			(233		)	—			(233		)
Total operating expenses	(21,618		)	(41,182		)	427,187			84,783			449,170
Operating income	42,761			41,182			103,600			(101,126		)	86,417
Interest (expense) income, net	(51,226		)	1,877			(8,633		)	—			(57,982		)
(Loss) income before income taxes and discontinued operations	(8,465		)	43,059			94,967			(101,126		)	28,435
Provision for income taxes	4,414			—			916			—			5,330
(Loss) income from continuing operations	(12,879		)	43,059			94,051			(101,126		)	23,105
Income from discontinued operations, net of income taxes	259			166			1,457			—			1,882
Net (loss) income	(12,620		)	43,225			95,508			(101,126		)	24,987
Less: Net income attributable to non-controlling interests	—			—			(37,607		)	—			(37,607		)
Net (loss) income attributable to Symbion, Inc.	$	(12,620	)	$	43,225		$	57,901		$	(101,126	)	$	(12,620	)

F- 34

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed Consolidating Statement of Operations for the Year Ended December 31, 2012

(In thousands)



	Parent Issuer				Guarantor Subsidiaries				Combined Non-Guarantors				Eliminations			Total Consolidated

Revenues	$	20,116		*	$	1,732			$	484,774		*	$	(14,818	)	$	491,804
Operating expenses:
Salaries and benefits	—				1,339				133,021				—			134,360
Supplies	—				33				124,324				—			124,357
Professional and medical fees	—				56				36,568				—			36,624
Lease expense	—				141				23,511				—			23,652
Other operating expenses	—				83				32,232				—			32,315
Cost of revenues	—				1,652				349,656				—			351,308
General and administrative expenses	26,901				—				—				—			26,901
Depreciation and amortization	614				—				20,746				—			21,360
Provision for doubtful accounts	—				—				10,211				—			10,211
Income from equity investments	—				(4,490		)		—				—			(4,490		)
Loss (gain) on disposal or impairment of long-lived assets, net	(6,632		)		—				437				—			(6,195		)
Management fees	—				—				14,818				(14,818		)	—
Equity in earnings of affiliates	(48,649		)	*	(41,253		)	*	—				89,902			—
Electronic health records incentives	—				—				(1,054		)		—			(1,054		)
Litigation settlements, net	(45		)		—				(487		)		—			(532		)
Total operating expenses	(27,811		)		(44,091		)		394,327				75,084			397,509
Operating income	47,927				45,823				90,447				(89,902		)	94,295
Interest (expense) income, net	(51,208		)		2,488				(8,921		)		—			(57,641		)
(Loss) income before income taxes and discontinued operations	(3,281		)		48,311				81,526				(89,902		)	36,654
Provision for income taxes	9,315				—				1,624				—			10,939
(Loss) income from continuing operations	(12,596		)		48,311				79,902				(89,902		)	25,715
Income (loss) from discontinued operations, net of income taxes	886			*	338				(92		)	*	—			1,132
Net (loss) income	(11,710		)	*	48,649			*	79,810			*	(89,902		)	26,847
Less: Net income attributable to non-controlling interests	—				—				(38,557		)		—			(38,557		)
Net (loss) income attributable to Symbion, Inc.	$	(11,710	)		$	48,649			$	41,253			$	(89,902	)	$	(11,710	)


*	Revenues of $15,704 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the year ended December 31, 2012. This adjustment impacted equity in earnings of affiliates and net (loss) income on the condensed consolidating statement of operations and is deemed by the Company to be an immaterial correction of an error.

F- 35

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed Consolidating Statement of Operations for the Year Ended December 31, 2011

(In thousands)



	Parent Issuer				Guarantor Subsidiaries				Combined Non-Guarantors				Eliminations			Total Consolidated

Revenues	$	17,763		*	$	6,655			$	412,406		*	$	(13,936	)	$	422,888
Operating expenses:
Salaries and benefits	—				3,763				111,327				—			115,090
Supplies	—				761				100,129				—			100,890
Professional and medical fees	—				577				30,742				—			31,319
Lease expense	—				601				21,449				—			22,050
Other operating expenses	—				331				29,053				—			29,384
Cost of revenues	—				6,033				292,700				—			298,733
General and administrative expense	22,723				—				—				—			22,723
Depreciation and amortization	945				—				18,552				—			19,497
Provision for doubtful accounts	—				106				6,468				—			6,574
Income from equity investments	—				(1,876		)		—				—			(1,876		)
Loss on disposal or impairment of long-lived assets, net	4,824				—				—				—			4,824
Loss on debt extinguishment	4,751				—				—				—			4,751
Management fees	—				—				13,936				(13,936		)	—
Equity in earnings of affiliates	(44,347		)	*	(39,267		)	*	—				83,614			—
Litigation settlements, net	—				—				(231		)		—			(231		)
Total operating expenses	(11,104		)		(35,004		)		331,425				69,678			354,995
Operating income	28,867				41,659				80,981				(83,614		)	67,893
Interest (expense) income, net	(48,002		)		2,379				(8,685		)		—			(54,308		)
(Loss) income before income taxes and discontinued operations	(19,135		)		44,038				72,296				(83,614		)	13,585
Provision for income taxes	8,839				—				(118		)		—			8,721
(Loss) income from continuing operations	(27,974		)		44,038				72,414				(83,614		)	4,864
Income (loss) from discontinued operations, net of income taxes	1,387			*	309				(356		)	*	—			1,340
Net (loss) income	(26,587		)	*	44,347			*	72,058			*	(83,614		)	6,204
Less: Net income attributable to non-controlling interests	—				—				(32,791		)		—			(32,791		)
Net (loss) income attributable to Symbion, Inc.	$	(26,587	)		$	44,347			$	39,267			$	(83,614	)	$	(26,587	)


*	Revenues of $15,323 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the year ended December 31, 2011. This adjustment impacted equity in earnings of affiliates and net (loss) income on the condensed consolidating statement of operations and is deemed by the Company to be an immaterial correction of an error.

F- 36

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed Consolidating Statement of Comprehensive Income for the Year Ended December 31, 2013

(In thousands)



	Parent Issuer			Guarantor Subsidiaries		Combined Non-Guarantors			Eliminations			Total Consolidated

Net (loss) income	$	(12,620	)	$	43,225	$	95,508		$	(101,126	)	$	24,987

Comprehensive (loss) income	$	(12,620	)	$	43,225	$	95,508		$	(101,126	)	$	24,987
Less: Comprehensive income attributable to non-controlling interests	—			—		(37,607		)	—			(37,607		)
Comprehensive (loss) income attributable to Symbion, Inc.	$	(12,620	)	$	43,225	$	57,901		$	(101,126	)	$	(12,620	)

Condensed Consolidating Statement of Comprehensive Income for the Year Ended December 31, 2012

(In thousands)



	Parent Issuer				Guarantor Subsidiaries			Combined Non-Guarantors				Eliminations			Total Consolidated

Net (loss) income	$	(11,710	)	*	$	48,649	*	$	79,810		*	$	(89,902	)	$	26,847

Comprehensive (loss) income	$	(11,710	)		$	48,649		$	79,810			$	(89,902	)	$	26,847
Less: Comprehensive income attributable to non-controlling interests	—				—			(38,557		)		—			(38,557		)
Comprehensive (loss) income attributable to Symbion, Inc.	$	(11,710	)		$	48,649		$	41,253			$	(89,902	)	$	(11,710	)


*	Revenues of $15,704 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the year ended December 31, 2012 on the condensed consolidating statement of operations. This adjustment impacted net (loss) income on the condensed consolidating statement of comprehensive income and is deemed by the Company to be an immaterial correction of an error.

F- 37

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed Consolidating Statement of Comprehensive Income for the Year Ended December 31, 2011

(In thousands)



	Parent Issuer				Guarantor Subsidiaries			Combined Non-Guarantors				Eliminations			Total Consolidated

Net (loss) income	$	(26,587	)	*	$	44,347	*	$	72,058		*	$	(83,614	)	$	6,204

Other comprehensive income, net of income taxes:
Recognition of interest rate swap from liability to earnings	314				—			—				—			314
Other comprehensive income	314				—			—				—			314
Comprehensive (loss) income	(26,273		)		44,347			72,058				(83,614		)	6,518
Less: Comprehensive income attributable to non-controlling interests	—				—			(32,791		)		—			(32,791		)
Comprehensive (loss) income attributable to Symbion, Inc.	$	(26,273	)		$	44,347		$	39,267			$	(83,614	)	$	(26,273	)


*	Revenues of $15,323 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the year ended December 31, 2011 on the condensed consolidating statement of operations. This adjustment impacted net (loss) income on the condensed consolidating statement of comprehensive income and is deemed by the Company to be an immaterial correction of an error.

F- 38

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2013

(In thousands)



	Parent Issuer			Guarantor Subsidiaries			Combined Non-Guarantors			Eliminations			Total Consolidated

Cash flows from operating activities:
Net (loss) income	$	(12,620	)	$	43,225		$	95,508		$	(101,126	)	$	24,987
Adjustments to reconcile net (loss) income to net cash from operating activities:
Loss from discontinued operations, net of income taxes	(259		)	(166		)	(1,457		)	—			(1,882		)
Depreciation and amortization	631			—			22,362			—			22,993
Amortization of debt issuance costs and discounts	3,878			—			116			—			3,994
Payment-in-kind interest expense	8,982			—			—			—			8,982
Stock-based compensation	410			—			—			—			410
(Gain) loss on disposal or impairment of long-lived assets, net	(1,000		)	20,823			(13,953		)	—			5,870
Deferred income taxes	4,556			—			—			—			4,556
Equity in earnings of affiliates	(43,225		)	(57,901		)	—			101,126			—
Income from equity investments, net of distributions received	—			(626		)	(142		)	—			(768		)
Provision for doubtful accounts	—			—			11,149			—			11,149
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	—			—			(13,419		)	—			(13,419		)
Other operating assets and liabilities	59,294			(22,148		)	(42,525		)	—			(5,379		)
Net cash (used in) provided by operating activities - continuing operations	20,647			(16,793		)	57,639			—			61,493
Net cash provided by operating activities - discontinued operations	—			—			2,148			—			2,148
Net cash (used in) provided by operating activities	20,647			(16,793		)	59,787			—			63,641
Cash flows from investing activities:
Purchases of property and equipment, net	(1,488		)	—			(17,559		)	—			(19,047		)
Payments for acquisitions, net of cash acquired	—			(9,090		)	—			—			(9,090		)
Proceeds from divestitures	—			3,349			—			—			3,349
Other investing activities	—			—			—			—			—
Net cash provided by (used in) investing activities - continuing operations	(1,488		)	(5,741		)	(17,559		)	—			(24,788		)
Net cash provided by investing activities - discontinued operations	—			—			3,102			—			3,102
Net cash used in investing activities	(1,488		)	(5,741		)	(14,457		)	—			(21,686		)
Cash flows from financing activities:
Principal payments on long-term debt	(21,249		)	—			(24,034		)	—			(45,283		)
Borrowings of long-term debt	—			—			13,350			—			13,350
Payments of debt issuance costs	—			—			(469		)	—			(469		)
Change in restricted invested assets	—			—			4,992			—			4,992
Distributions to non-controlling interest holders	—			—			(32,563		)	—			(32,563		)
Proceeds from ownership transactions with consolidated affiliates	—			1,148			—			—			1,148
Other financing activities	—			—			(117		)	—			(117		)
Net cash provided by (used in) financing activities - continuing operations	(21,249		)	1,148			(38,841		)	—			(58,942		)
Net cash used in financing activities - discontinued operations	—			—			(457		)	—			(457		)
Net cash provided by (used in) financing activities	(21,249		)	1,148			(39,298		)	—			(59,399		)
Net (decrease) increase in cash and cash equivalents	(2,090		)	(21,386		)	6,032			—			(17,444		)
Cash and cash equivalents at beginning of period	8,505			26,174			38,791			—			73,470
Cash and cash equivalents at end of period	$	6,415		$	4,788		$	44,823		$	—		$	56,026

F- 39

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed 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	)	*	$	48,649		*	$	79,810		*	$	(89,902	)	$	26,847
Adjustments to reconcile net (loss) income to net cash from operating activities:
Loss (income) from discontinued operations, net of income taxes	(886		)	*	(338		)		92			*	—			(1,132		)
Depreciation and amortization	614				—				20,746				—			21,360
Amortization of debt issuance costs and discounts	3,798				—				—				—			3,798
Payment-in-kind interest expense	8,305				—				—				—			8,305
Stock-based compensation	2,057				—				—				—			2,057
(Gain) loss on disposal or impairment of long-lived assets, net	(6,632		)		—				437				—			(6,195		)
Deferred income taxes	13,800				—				—				—			13,800
Equity in earnings of affiliates	(48,649		)	*	(41,253		)	*	—				89,902			—
Income from equity investments, net of distributions received	—				(1,931		)		—				—			(1,931		)
Provision for doubtful accounts	—				—				10,211				—			10,211
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	—				—				(6,198		)		—			(6,198		)
Other operating assets and liabilities	42,590				6,186				(53,019		)		—			(4,243		)
Net cash provided by operating activities - continuing operations	3,287				11,313				52,079				—			66,679
Net cash provided by operating activities - discontinued operations	—				—				3,679				—			3,679
Net cash provided by operating activities	3,287				11,313				55,758				—			70,358
Cash flows from investing activities:
Purchases of property and equipment, net	(291		)		—				(13,816		)		—			(14,107		)
Payments for acquisitions, net of cash acquired	—				(21,142		)		—				—			(21,142		)
Proceeds from divestitures	—				11,465				—				—			11,465
Other investing activities	—				—				(64		)		—			(64		)
Net cash used in investing activities - continuing operations	(291		)		(9,677		)		(13,880		)		—			(23,848		)
Net cash provided by investing activities - discontinued operations	—				—				6,888				—			6,888
Net cash used in investing activities	(291		)		(9,677		)		(6,992		)		—			(16,960		)
Cash flows from financing activities:
Principal payments on long-term debt	—				—				(8,743		)		—			(8,743		)
Borrowings of long-term debt	—				—				10,471				—			10,471
Payment of debt issuance costs	—				—				—				—			—
Change in restricted invested assets	—				—				(7		)		—			(7		)
Distributions to non-controlling interest holders	—				—				(39,353		)		—			(39,353		)
Payments related to ownership transactions with consolidated affiliates	—				(3,079		)		—				—			(3,079		)
Other financing activities	—				—				49				—			49
Net cash used in financing activities - continuing operations	—				(3,079		)		(37,583		)		—			(40,662		)
Net cash used in financing activities - discontinued operations	—				—				(1,306		)		—			(1,306		)
Net cash used in financing activities	—				(3,079		)		(38,889		)		—			(41,968		)
Net increase (decrease) in cash and cash equivalents	2,996				(1,443		)		9,877				—			11,430
Cash and cash equivalents at beginning of period	5,509				27,617				28,914				—			62,040
Cash and cash equivalents at end of period	$	8,505			$	26,174			$	38,791			$	—		$	73,470

Revenues of $15,704 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the year ended December 31, 2012 on the condensed consolidating statement of operations. This adjustment impacted net (loss) income, equity in earnings of affiliates and changes in other operating assets and liabilities on the condensed consolidating statement of cash flows and is deemed by the Company to be an immaterial correction of an error.

F- 40

SYMBION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED

Condensed 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	)	*	$	44,347		*	$	72,058		*	$	(83,614	)	$	6,204
Adjustments to reconcile net (loss) income to net cash from operating activities:
(Income) loss from discontinued operations, net of income taxes	(1,387		)	*	(309		)		356			*	—			(1,340		)
Depreciation and amortization	945				—				18,552				—			19,497
Amortization of debt issuance costs and discounts	2,886				—				—				—			2,886
Payment-in-kind interest expense	22,368				—				—				—			22,368
Stock-based compensation	1,353				—				—				—			1,353
Recognition of interest rate swap from liability to earnings	665				—				—				—			665
Loss (gain) on disposal or impairment of long-lived assets, net	4,824				—				—				—			4,824
Loss on debt extinguishment	4,751				—				—				—			4,751
Deferred income taxes	8,334				—				—				—			8,334
Equity in earnings of affiliates	(44,347		)	*	(39,267		)	*	—				83,614			—
Income from equity investments, net of distributions received	—				106				—				—			106
Provision for doubtful accounts	—				106				6,468				—			6,574
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	—				—				(10,696		)		—			(10,696		)
Other operating assets and liabilities	32,369				4,925				(38,967		)		—			(1,673		)
Net cash provided by operating activities - continuing operations	6,174				9,908				47,771				—			63,853
Net cash provided by operating activities - discontinued operations	—				—				5,126				—			5,126
Net cash provided by operating activities	6,174				9,908				52,897				—			68,979
Cash flows from investing activities:
Purchases of property and equipment, net	(78		)		—				(9,337		)		—			(9,415		)
Payments for acquisitions, net of cash	—				(7,836		)		—				—			(7,836		)
Other investing activities	—				—				(590		)		—			(590		)
Net cash used in investing activities - continuing operations	(78		)		(7,836		)		(9,927		)		—			(17,841		)
Net cash provided by investing activities - discontinued operations	—				—				(278		)		—			(278		)
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		)		—				(7,148		)		—			(355,415		)
Borrowings of long-term debt	344,722				—				4,062				—			348,784
Payment of debt issuance costs	(11,891		)		—				—				—			(11,891		)
Change in restricted invested assets	—				—				(2,000		)		—			(2,000		)
Distributions to non-controlling interest holders	—				—				(32,700		)		—			(32,700		)
Payments related to ownership transactions with consolidated affiliates	—				(2,155		)		—				—			(2,155		)
Other financing activities	—				—				192				—			192
Net cash used in financing activities - continuing operations	(15,436		)		(2,155		)		(37,594		)		—			(55,185		)
Net cash used in financing activities - discontinued operations	—				—				(1,441		)		—			(1,441		)
Net cash used in financing activities	(15,436		)		(2,155		)		(39,035		)		—			(56,626		)
Net increase (decrease) in cash and cash equivalents	(9,340		)		(83		)		3,657				—			(5,766		)
Cash and cash equivalents at beginning of period	14,849				27,700				25,257				—			67,806
Cash and cash equivalents at end of period	$	5,509			$	27,617			$	28,914			$	—		$	62,040

Revenues of $15,323 previously reported in the Parent Issuer column have been included in the Combined Non-Guarantor column for the year ended December 31, 2012 on the condensed consolidating statement of operations. This adjustment impacted net (loss) income, equity in earnings of affiliates and changes in other operating assets and liabilities on the condensed consolidating statement of cash flows and is deemed by the Company to be an immaterial correction of an error.

F- 41

SIGNATURES

Pursuant to the requirements 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.

By:	/s/ RICHARD E. FRANCIS, JR. Richard E. Francis, Jr. Chairman of the Board and Chief Executive Officer

Date: March 14, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person 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 14, 2014

/s/ TERESA F. SPARKS	Senior Vice President and Chief Financial Officer
Teresa F. Sparks	(Principal Financial and Accounting Officer)	March 14, 2014

/s/ CLIFFORD G. ADLERZ
Clifford G. Adlerz	President, Chief Operating Officer and Director	March 14, 2014

/s/ ROBERT V. DELANEY
Robert V. Delaney	Director	March 14, 2014

/s/ QUENTIN CHU
Quentin Chu	Director	March 14, 2014

/s/ KURT E. BOLIN
Kurt E. Bolin	Director	March 14, 2014

/s/ CRAIG R. CALLEN
Craig R. Callen	Director	March 14, 2014

/s/ DANIEL G. KILPATRICK
Daniel G. Kilpatrick	Director	March 14, 2014

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)
4.12		Assignment and Assumption, dated as of February 11, 2013, by and among Symbion, Inc., Symbion Holdings Corporation, the lenders party thereto, and Morgan Stanley Senior Funding, Inc.^(k)
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.^(g)
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



No.		Description

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, 2011 (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)


(k)	Incorporated by reference to exhibits filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (File No. 000-50574).