UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2006

OR

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

For the transition period from ________to ________

Commission file number: 000-50574

Symbion, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware		62-1625480
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
40 Burton Hills Boulevard, Suite 500		37215
Nashville, Tennessee		(Zip Code)
(Address Of Principal Executive Offices)

(615) 234-5900
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of exchange on which registered
Common Stock, $0.01 par value		The NASDAQ Stock Market, LLC
Preferred Stock Purchase Rights		The NASDAQ Stock Market, LLC

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 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 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                  Accelerated filer x                   Non-accelerated filer 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

     The aggregate market value of the shares of the registrant’s common stock (based upon the closing price of these shares on the Nasdaq Global Market on June 30, 2006) held by non-affiliates as of June 30, 2006, was approximately $329,502,616.

     As of February 28, 2007, 21,670,466 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive proxy statement for our annual meeting of stockholders to be held on May 8, 2007 are incorporated by reference into Part III of this report.

 

 

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 network of short stay surgical facilities, which includes ambulatory surgery centers and surgical hospitals (collectively, “surgical facilities”), in 23 states. Our surgical facilities primarily provide non-emergency surgical procedures across many specialties. We offer services designed to meet the health care needs of the communities in which we operate and seek to develop strong relationships with physicians and other health care providers in these markets. We believe that one of our competitive advantages is the experience of our senior management team, with our executive officers having an average of over 30 years of experience in the health care industry, including senior management positions at public and private health care companies. The remaining members of our senior management team have an average of over 20 years of experience in the health care industry. As of March 10, 2007, we owned and operated 50 surgical facilities including 47 ambulatory surgery centers and three hospitals. We also managed nine additional surgical facilities including eight ambulatory surgery centers and one hospital. In addition to our surgical facilities, we also operate one diagnostic center and manage two physician networks, including one physician network in a market in which we operate a surgical facility.

     On September 16, 2002, we reincorporated in Delaware after originally incorporating in Tennessee in January 1996. On June 25, 1999, we acquired Ambulatory Resource Centres, Inc., an owner and operator of surgical facilities. Since our acquisition of Ambulatory Resource Centres, we have focused on developing, acquiring and managing surgical facilities, and have grown our operations from 14 to 59 surgical facilities. We are focused on developing, acquiring and operating surgical facilities.

Surgical Facility Industry

     Outpatient surgery has experienced tremendous growth since 1970, when the first ambulatory surgery center opened in the United States, according to the Federated Ambulatory Surgery Association (“FASA”), a nonprofit association representing the interests of ambulatory surgery centers. Ambulatory surgery centers are surgical facilities where physicians perform surgical procedures that generally do not require a patient to stay overnight.

According to FASA, about 4,600 Medicare-certified ambulatory surgery centers were operating in the United States as of September 2006.

     We believe that the following factors have contributed to the growth in surgical facilities and outpatient surgical procedures:

	•		Physician and Patient Preference for Surgical Facilities. Physicians often prefer to operate in surgical facilities, as compared to acute care hospitals, because of the efficiency and convenience that surgical facilities afford. Procedures performed at surgical facilities are typically non-emergency, so physicians can schedule their time more efficiently and increase the number of procedures that they can perform in a given period. Surgical facilities also provide physicians with greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases, as compared to acute care hospitals. In addition, we believe patients prefer the comfort of a less institutional setting and the more convenient process for scheduling and registration available in surgical facilities, as compared to acute care hospitals.
	•		Lower Cost Alternative. Based upon our management’s experience in the health care industry, we believe that surgeries performed in surgical facilities are generally less expensive than those performed in acute care hospitals because of lower facility development costs, the focus on non-emergency procedures and more efficient staffing and work flow processes. We believe that cost-conscious payors are attracted to the lower costs afforded by surgical facilities, as compared to acute care hospitals.
	•		Advanced Technology and Improved Anesthesia. Advancements in medical technology such as lasers, arthroscopy, fiber optics and enhanced endoscopic techniques have reduced the trauma of surgery and the amount of recovery time required by patients following a surgical procedure. Improvements in anesthesia also have shortened the recovery time for many patients and have reduced post-operative side effects such as pain, nausea and drowsiness. These medical advancements have enabled more patients to undergo surgery without an overnight stay and reduced the need for hospitalization following surgery.

     With an estimated 4,600 Medicare-certified ambulatory surgery centers operating in the United States as of September 2006, we believe significant opportunities exist for consolidation in this industry. The five largest national operators of outpatient surgical facilities by number of ambulatory surgery centers represented an aggregate of less than 11% of the total number of ambulatory surgery centers in the United States as of November 2006, according to Verispan, L.L.C., an independent health care market research and information firm. We believe that the surgical facility industry will continue to consolidate because of the increasing complexity of the regulatory and managerial aspects of health care delivery, the growing influence of managed care, the rising cost of technology and the need for capital. We believe there are many surgical facility owners that are seeking to affiliate with experienced operators of facilities with access to capital, management expertise and other resources.

Our Strategy

     We intend to expand our network of surgical facilities in attractive markets throughout the United States by acquiring established facilities and developing new facilities while enhancing the performance of our existing facilities. We also seek to provide patients with high-quality surgical services across many specialties. When attractive opportunities arise, we may acquire or develop other types of facilities. The key components of our strategy are to:

•

Identify, recruit and retain leading surgeons and other physicians for our surgical facilities. 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 health care systems and other health care providers can enhance our ability to recruit physicians. We currently have strategic relationships with eight health care systems.

	•		Capitalize on our experienced management team to pursue multiple growth opportunities in the surgical facility market. 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 executive officers have an average of over 30 years of experience in the health care industry, including senior management positions at public and private health care companies. The remaining members of our senior management team have an average of over 20 years of experience in the health care industry. Our management’s broad industry experience has allowed us to establish strong relationships with participants throughout the health care industry. These relationships are helpful in forming leads for acquisitions, and in making decisions about expanding into new markets and services. The experience and capabilities of our management team also enable us to pursue multiple growth strategies in the surgical facility market, including acquisitions of established surgical facilities, de novo developments in attractive markets, strategic relationships with prominent hospitals and other health care providers and turnaround opportunities in connection with underperforming facilities. We have successfully executed each of these growth strategies, and intend to pursue each of them in the future.
	•		Pursue a disciplined strategy of acquiring and developing surgical facilities. Since January 1999, we have acquired 43 surgical facilities and developed 16 surgical facilities, including nine surgical facilities that we subsequently divested. We anticipate acquiring three to four facilities and developing four to six facilities during 2007, including the three that we announced in January 2007. We seek to acquire and develop surgical hospitals and both single and multi-specialty ambulatory surgery centers that meet our criteria. Our criteria includes 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 acquisition and development team conducts extensive due diligence and applies a financial model that targets a threshold return on invested capital over a period of five years. Once we acquire a surgical facility, our team establishes a strategic plan to improve the facility’s operating systems and physical plant, enhance physician recruitment, and capitalize on the facility’s competitive strengths. We have historically targeted majority ownership in our facilities and currently hold a fifty percent or more ownership interests in 74% of the surgical facilities in which we own an interest. Majority ownership allows us to make and execute managerial decisions which we believe provides greater opportunity for growth and higher returns. We also believe that by starting with majority ownership of a facility, we can benefit by capturing a greater share of the value we create in managing and improving the facility. We intend to continue to target majority ownership in our facilities. However, when attractive opportunities arise, we may acquire minority interests in developed surgical facilities or surgical facilities that we may purchase. In addition, we have, and will continue to, acquire and develop facilities in which we have “buy-up” rights if the opportunity is attractive to us from a long-term perspective. Buy-up rights enable us, at our option, to increase our ownership percentage after the initial acquisition. When appropriate, we also may reduce our interest in majority owned surgical facilities.
	•		Increase revenues and profitability of existing surgical facilities through operational focus. We seek to increase revenues, profitability and return on our invested capital at all of our surgical facilities by focusing on operations. We have a dedicated team that is responsible for implementing best practices, cost controls and overall efficiencies at each of our 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 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 also review our managed care contracts to ensure we are operating under the most favorable contracts available to us. We are committed to enhancing programs and services for our physicians and patients by providing advanced technology, quality care, cost-effective service and convenience.

Operations

   Surgical Facility Operations

     As of March 10, 2007, we owned and operated 50 surgical facilities and managed nine additional surgical facilities. Four of our facilities are hospitals, three of which we own and one of which we manage. Our typical ambulatory surgery center is a freestanding facility with about 14,000 square feet of space and four fully equipped operating rooms, two treatment rooms and ancillary areas for preparation, recovery, reception and administration.

Our typical surgical hospital is larger than a typical ambulatory surgery center and includes inpatient hospital rooms and, in some cases, an emergency department. Our surgical facilities primarily provide non-emergency surgical procedures among many specialties, including orthopedic, gynecology, general surgery, ear, nose and throat, pain management, gastrointestinal, plastic surgery and ophthalmology. Our hospitals may also provide additional services such as diagnostic imaging, pharmacy, laboratory and obstetrical services. In certain markets where we believe it is appropriate, we operate surgical facilities that focus on a single specialty.

     Our surgical facilities are generally located in close proximity to physicians’ offices. Each facility typically employs a staff of about 30, depending on its size, the number of cases and the type of services provided. Our staff at each 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 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. Each of our surgical facilities are available for use only by licensed physicians who have met professional credentialing requirements established by the facility’s medical advisory committee. In addition, each facility’s medical director supervises and is responsible for the quality of medical care provided at the facility.

   Surgical Facility Ownership Structure

     We own and operate our surgical facilities through partnerships or limited liability companies. Local physicians or physician groups also own an interest in most of our surgical facilities. In some cases, a hospital system may own an interest in our surgical facility. One of our wholly-owned subsidiaries typically serves as the general partner or managing member of our surgical facilities. We generally 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 an ownership interest in a surgical facility with the prior owners retaining an ownership interest, and, in some cases, we offer new ownership interests to other physicians or hospital partners. We own a fifty percent or more interest in 37 of the 50 surgical facilities in which we own an interest. We typically guarantee all of the debts of these partnerships and limited liability companies, even though we do not own all of the ownership interests in the surgical facilities. 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 based on 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 interests. 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 facility and for one year after that period. The partnership and operating agreements for our facilities typically provide that the facilities will purchase all of the physicians’ ownership interests if certain adverse regulatory events occur, such as it becoming illegal for the physicians to own an interest in a surgical facility, refer patients to a facility or receive cash distributions from a surgical facility. The purchase price that we would be required to pay for these ownership interests is based on pre-determined formulas, typically either a multiple of the facility’s EBITDA, as defined in our partnership and operating agreements, or the fair market value of the ownership interests as determined by a third-party appraisal. Some of these agreements require us to make a good faith effort to restructure our relationships with the physician investors in a manner that preserves the economic terms of the relationship prior to purchasing these interests. See Item 1A. “Risk Factors” and “— Government Regulation.” In certain circumstances, we have the right to purchase a physician’s ownership interests, including upon a physician’s breach of the noncompetition provisions of a partnership or operating agreement. In some cases, we have the right to require the physician owners to purchase our ownership interest in the event our management agreement with a facility is terminated. In one facility, the physician owners have the right to purchase our ownership interest upon a change in our control.

   Surgical Facilities

     The following table sets forth information regarding each of our surgical facilities as of March 10, 2007:

						Number of								Symbion
						Operating				Number of				Percentage
Facility		City				Rooms				Treatment Rooms				Ownership
Alabama
Birmingham Endoscopy Center		Birmingham					6				3				61	%(1)
North River Surgical Center		Tuscaloosa					2				2				80	%(1)
California
Specialty Surgical Center of Beverly Hills/Brighton Way		Beverly Hills					3				1				57	%(1)
Specialty Surgical Center of Beverly Hills/Wilshire Boulevard		Beverly Hills					4				2				57	%(1)
Specialty Surgical Center of Encino		Encino					4				2				55	%(1)
Specialty Surgical Center of Irvine		Irvine					4				1				17	%
Specialty Surgical Center of Arcadia		Arcadia					3				1				18	%
Colorado
Dry Creek Surgery Center		Denver					6				2				51	%(1)
Animas Surgical Hospital(2)		Durango					4				1				56	%(1)
										12 hospital rooms
Florida
DeLand Surgery Center		DeLand					3				2				76	%(1)
West Bay Surgery Center		Largo					4				4				51	%(1)
Jacksonville Beach Surgery Center		Jacksonville					4				1				81	%(1)
Cape Coral Ambulatory Surgery Center		Cape Coral					5				2				10	%
Lee Island Coast Surgery Center		Fort Myers					5				3				50	%(1)
Orlando Surgery Center		Orlando					5				1				66	%(1)
Tampa Bay Regional Surgery Center		Largo					1				2				51	%(1)
The Surgery Center of Ocala		Ocala					4				2				51	%(1)
Georgia
Premier Surgery Center		Brunswick					3				1				58	%(1)
Savannah Outpatient Foot and Ankle Surgery Center		Savannah					1				—				76	%(1)
The Surgery Center		Columbus					4				2				65	%(1)
Illinois
Valley Ambulatory Surgery Center		St. Charles					6				1				40	%(1)
Indiana
Vincennes Surgery Center		Vincennes					3				1				52	%(1)
New Albany Outpatient Surgery		New Albany					3				1				69	%(1)
Kansas
Heartland Specialty Surgical Hospital(2)		Kansas City					7				3				—	(3)
										19 hospital rooms
Cypress Surgery Center		Wichita					6				2				53	%(1)
Kentucky
DuPont Surgery Center		Louisville					5				—				61	%(1)
Louisiana
Greater New Orleans Surgery Center		Metairie					2				—				30	%(1)
Physicians Surgical Specialty Hospital(2)		Houma					5				5				57	%(1)
										10 hospital rooms
Surgery Center of Hammond		Hammond					4				1				87	%(1)
Massachusetts
Worcester Surgery Center		Worcester					4				1				79	%(1)
Worcester ENT		Worcester					1				—				51	%(1)

						Number of								Symbion
						Operating				Number of				Percentage
Facility		City				Rooms				Treatment Rooms				Ownership
Missouri
Central Missouri Medical Park Surgical Center		Jefferson City					4				2				40	%(1)
Timberlake Surgery Center		Chesterfield					4				1				53	%(1)
Mississippi
DeSoto Surgery Center		DeSoto					2				1				—	(3)
Physicians Outpatient Center		Oxford					4				2				—	(3)
New York
South Shore Ambulatory Surgery Center		Lynbrook					4				1				—	(4)
North Carolina
Orthopaedic Surgery Center of Asheville		Asheville					3				—				61	%(1)
Wilmington SurgCare		Wilmington					7				3				87	%(1)
Ohio
Physicians Ambulatory Surgery Center		Circleville					2				—				53	%(1)
Valley Surgical Center		Steubenville					3				1				56	%(1)
Oklahoma
Lakeside Women’s Hospital(2)		Oklahoma City					3			16 hospital rooms					42	%
											1
Pennsylvania
Village SurgiCenter		Erie					5				1				73	%(1)
Rhode Island
Bayside Endoscopy Center		Providence					—				6				75	%(1)
South Carolina
The Center for Specialty Surgery		Greenville					2				1				70	%(1)
Tennessee
Baptist Germantown Surgery Center		Memphis					6				4				—	(3)
Cool Springs Surgery Center		Franklin					5				3				35	%
East Memphis Surgery Center		Memphis					6				5				—	(3)
Midtown Surgery Center		Memphis					4				—				—	(3)
Southwind GI		Memphis					1				—				100	%(1)
Union City Center		Union City					2				1				—	(3)
UroCenter		Memphis					3				1				—	(3)
University Ambulatory Surgical Center		Knoxville					6				3				25	%
Texas
Central Park Surgery Center		Austin					5				4				43	%(1)
Clear Fork Surgery Center		Fort Worth					5				5				34	%(1)
Northeast Baptist Surgery Center		San Antonio					4				4				54	%(1)
NorthStar Surgical Center		Lubbock					6				6				46	%(1)
Surgery Center of Duncanville		Duncanville					4				3				41	%(1)
Texarkana Surgery Center		Texarkana					4				5				66	%(1)
Washington
Bellingham Surgery Center		Bellingham					4				—				85	%(1)

Case Mix

     The following table sets forth the percentage of cases in each specialty performed in 2006 and 2005 at surgical facilities in which we owned an interest as of December 31, 2006 and December 31, 2005:

		Year Ended				Year Ended
		December 31, 2006				December 31, 2005
Specialty
Ear, nose and throat			8	%			8	%
Gastrointestinal			25				25
General surgery			5				5
Obstetrics/gynecology			4				4
Ophthalmology			13				12
Orthopedic			17				17
Pain management			16				16
Plastic surgery			4				4
Other			8				9
Total			100	%			100	%

Case Growth

Same Store Information

     We define same store facilities as those facilities that we owned an interest in and managed throughout the years ended December 31, 2006 and 2005. For the comparison of same store facilities provided below, we have also included the results of a surgical facility in which we own an interest that opened in February 2006, within the market served by another surgical facility in which we own an interest. The definition of same store facilities includes non-consolidated facilities and allows for comparability to other companies in our industry. The following table sets forth information from facilities in which we owned an interest and managed throughout the years ended December 31, 2006 and 2005, respectively:

		Year Ended				Year Ended
		December 31, 2006				December 31, 2005
Cases			203,037				190,605
Cases growth			6.5	%			N/A
Net patient service revenue per case		$	1,340			$	1,326
Net patient service revenue per case growth			1.1	%			N/A
Number of same store surgical facilities			42				N/A

     For purposes of explaining changes in our consolidated financial results in Management’s Discussion and Analysis of Financial Condition and Results of Operations, we refer to same store facilities excluding non-consolidated facilities because the results of these facilities are not included in revenues and other items in our consolidated financial results. Accordingly, the following table sets forth information from same store facilities of continuing operations excluding non-consolidated facilities for the years ended December 31, 2006 and 2005, respectively:

		Year Ended				Year Ended
		December 31, 2006				December 31, 2005
Cases			185,272				179,960
Cases growth			3.0	%			N/A
Net patient service revenue per case		$	1,283			$	1,270
Net patient service revenue per case growth			1.0	%			N/A
Number of same store surgical facilities			38				N/A

Consolidated Information

     The following table sets forth information from facilities that we consolidate for financial reporting purposes (which includes surgical facilities we have acquired or developed since January 1, 2005 which are not included in the same store information provided above but excludes the two surgical facilities reported as discontinued operations) for the years ended December 31, 2006 and 2005, respectively:

		Year Ended				Year Ended
		December 31, 2006				December 31, 2005
Cases			219,832				191,534
Cases growth			14.8	%			N/A
Net patient service revenue per case		$	1,301			$	1,297
Net patient service revenue per case growth			0.3	%			N/A
Number of surgical facilities operated as of end of the period (1)			59				59
Number of consolidated surgical facilities			44				41

   Payor Mix

     Our revenues are comprised of patient service revenues, physician service revenues and other service revenues. Our patient service revenues relate to fees charged for surgical or diagnostic procedures performed at facilities that we consolidate for financial reporting purposes. Approximately 95% of our revenues are patient service revenues. The following table sets forth by type of payor the percentage of our patient service revenues generated in 2006 and 2005 for surgical facilities in which we owned an interest as of December 31, 2006 and 2005:

		Year Ended				Year Ended
		December 31, 2006				December 31, 2005
Payor
Private Insurance			76	%			76	%
Government			19				18
Self-pay			4				4
Other			1				2
Total			100	%			100	%

   Strategic Relationships

     When attractive opportunities arise, we may develop, acquire or operate surgical facilities through strategic alliances with health care systems and other health care providers. We believe that forming a relationship with a health care system can enhance our ability to recruit physicians and access managed care contracts for our facilities in that market. Included in the relationships listed below are agreements entered into during January 2007 with three separate health care systems for the development of surgical facilities. We currently have strategic relationships with:

	•		Vanderbilt Health Services, Inc., with which we own and operate a surgical facility in Franklin, Tennessee;
	•		Vanguard Health Systems, Inc., with which we own and operate a surgical facility in San Antonio, Texas;
	•		Baptist Memorial Health Services, Inc., for which we manage seven surgical facilities in Memphis, Tennessee and surrounding areas;
	•		University Health System, Inc., with which we own and operate a surgical facility in Knoxville, Tennessee;
	•		Harris Methodist Ft. Worth, with which we own and operate a surgical facility in Fort Worth, Texas;
	•		Fairview Health System, with which we are developing a surgical facility with local physicians in Minneapolis, Minnesota;
	•		King’s Daughters Hospital and a group of local physicians affiliated with King’s Daughters Clinic, with whom we are developing a surgical facility in Temple, Texas; and
	•		Adventist Health System, with which we are developing a surgical facility in Orange City, Florida.

     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 own an interest is that, in the strategic relationships, a health care system holds an ownership interest 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 have also entered into a management agreement under which we provide day-to-day management services for a management fee based on a percentage of the revenues of the surgical facility. The terms of those management agreements are comparable to the terms of our management agreements with other surgical facilities in which we own an interest.

     We manage seven surgical facilities owned by Baptist Memorial Health Services, Inc. (“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 on various dates from September 2007 to March 2009 and may be terminated earlier by either party for material breach after notice and an opportunity to cure. We intend to renew the management agreement that expires in September 2007. We have also entered into a development agreement with Baptist Memorial under which we are to provide development support for new surgical facilities that may be developed by Baptist Memorial in exchange for a development fee negotiated for each developed facility.

   Acquisition and Development of Surgical Facilities

     We intend 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 hospital systems and other strategic partners.

     Acquisition Program. We employ a dedicated acquisition team with experience in health care 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 analysis of local market characteristics. Our team may also identify opportunities to recruit additional physicians to increase the acquired facility’s revenues and profitability. Once we decide to proceed with an acquisition proposal, we use a pricing strategy that targets a threshold return on invested capital over a period of five years. We have acquired 43 surgical facilities since January 1999 and anticipate acquiring about three to four facilities annually during the next three to five years.

     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 facilities. Before and during the development phase of a new 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 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 16 surgical facilities since January 1999 and anticipate developing four to six facilities during 2007, including the three that we announced in January 2007, and three to four facilities annually during the two to four years subsequent to 2007.

     Development and construction of a typical ambulatory surgery center generally takes us from 12 to 18 months, depending on whether we are building the facility or improving available space. Estimated construction costs generally total from $1.0 million to $2.5 million for improving existing space. Equipment and other furnishing costs generally range from $1.0 million to $3.0 million. In addition, working capital of approximately $1.0 million to $1.5 million is generally required to sustain operations for the initial six to 12 months of operations. Development of a hospital with the same operating capacity as a typical ambulatory surgery center would require additional capital to build and equip additional features, such as inpatient hospital rooms, and to provide other ancillary services, if required. We historically financed these costs through capital contributions from investors in the facility, borrowings under our facility loan agreements and long-term facility lease agreements. We expect to finance these costs in the future with borrowings under our senior credit facility and capital contributions from investors in the facilities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Other Services

     Although our business is primarily focused on owning and operating surgical facilities, we also provide other services that complement our core surgical facility business.

   Diagnostic Center

     We own a 90% interest in Dry Creek Imaging Center, a diagnostic imaging center that is adjacent to our surgical facility in the Denver, Colorado market. The diagnostic imaging center is a joint venture with Touchstone Medical Imaging, LLC. Dry Creek Imaging Center currently provides MRI, CT, ultrasound and mammography procedures. Touchstone and Dry Creek Imaging Center have entered into a management agreement, under which Touchstone provides daily management and administrative services to the diagnostic center in exchange for a percentage of the diagnostic center’s net revenues. The initial term of the management agreement expired in 2006 and was renewed for one year. The management agreement may be renewed for additional renewal terms of one year each. We believe the services provided by this diagnostic center complement and support the services provided by our surgical facility in this market.

   Physician Networks

     We currently manage physician networks in Memphis, Tennessee and Johnson City, Tennessee. Each of these physician networks has entered into an agreement with us, which provides, among other things, that we will provide billing, financial services and other business management services in exchange for a management fee.

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 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 facilities and to enable us to access more easily information about our facilities on a timely basis.

     We calculate net revenues through a combination of manual and system-generated processes. Our operating systems include insurance modules that allow us to establish profiles of insurance plans and their respective payment rates. The systems then match the charges with the insurance plan rates and compute a contractual adjustment estimate for each patient account. We then manually review the reasonableness of the systems’ contractual adjustment estimate using the insurance profiles. This estimate is adjusted, if needed, when the insurance payment is received and posted to the account. Net revenue is computed and reported by the systems as a result of this activity.

     It is our policy to collect co-payments and deductibles prior to providing services. It is also our policy to verify a patient’s insurance 72 hours prior to the patient’s procedure. Because our services are primarily non-emergency, our facilities have the ability to control these processes. We do not track exceptions to these policies, but we believe that they occur infrequently and involve insignificant amounts. When they do occur, we require patients whose insurance coverage is not verified to assume full responsibility for the fees prior to services being rendered and we seek prompt payment of co-payments and deductibles and verification of insurance following the procedure.

     We manually input each patient’s account record and the associated billing codes. Our operating systems then calculate the amount of fees for that patient and the amount of the contractual adjustments. Claims are submitted electronically if the payor accepts electronic claims. We use clearinghouses for electronic claims, which then forward the claims to the respective payors. Payments are manually input to the respective patient accounts.

     We have developed proprietary measurement tools to track key operating statistics at each of our 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 team is compensated in part using performance-based incentives focused on revenue growth and improvement in operating income.

Marketing

     Our sales and marketing efforts are directed primarily at physicians, who are responsible for referring patients to our facilities. Marketing activities directed at physicians and other health care providers are coordinated locally by the individual facility and are supplemented by dedicated corporate personnel. These activities generally emphasize the benefits offered by our surgical facilities compared to other facilities in the market, such as the proximity of our facilities to physicians’ offices, the ability to schedule consecutive cases without preemption by inpatient or emergency procedures, the efficient turnaround time between cases, our advanced surgical equipment and our simplified administrative procedures. Although the facility administrator is the primary point of contact, physicians who utilize our surgical facilities are important sources of recommendations to other physicians regarding the benefits of using our facilities. Each facility administrator develops a target list of physicians and we continually review these marketing lists and the facility administrator’s progress in contacting and successfully attracting additional local physicians.

     We also market our surgical facilities directly to payors, such as HMOs, PPOs and