UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

     For the quarterly period ended March 31, 2005

OR

     For the transition period from ____________ to ____________

Commission file number: 000-50574

Symbion, Inc.

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

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     As of April 30, 2005, there were 21,229,258 shares of the registrant’s common stock outstanding.

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

SYMBION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)

See accompanying notes.

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SYMBION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

See accompanying notes.

2

SYMBION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

See accompanying notes.

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SYMBION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
March 31, 2005

1. Organization

     Symbion, Inc. (the “Company”), through its wholly-owned subsidiaries, owns interests in partnerships and limited liability companies which own and operate surgery centers in joint-ownership with physicians and physician groups, hospitals and hospital networks. As of March 31, 2005, the Company owned and operated 47 surgery centers and managed nine additional surgery centers in 21 states. The Company owns a majority interest in 36 of the 47 surgery centers and consolidates 41 of these centers for financial reporting purposes. The Company’s surgery centers include three facilities that are licensed as hospitals, two of which are owned and one of which is managed. In addition to the surgery centers, the Company also operates two diagnostic centers and manages three physician networks, including two physician networks in markets in which the Company also operates surgery centers. The Company also provides management and administrative services on a contract basis to surgery centers in which it does not own an interest.

2. Significant Accounting Policies and Practices

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments are of a normal, recurring nature. Operating results for the quarter ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Principles of Consolidation

     The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as its interest in partnerships and limited liability companies controlled by the Company through ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate’s business. The physician limited partners and minority members of the entities that we control 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 of the partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies. The accompanying unaudited condensed consolidated financial statements also include the accounts of a variable interest entity in which the Company is the primary beneficiary. The accompanying unaudited condensed consolidated balance sheets as of March 31, 2005 and December 31, 2004 include assets of $5.3 million and $5.1 million, respectively, and liabilities of approximately $130,000 as of March 31, 2005 and December 31, 2004, related to the variable interest entity. All significant intercompany balances and transactions are eliminated in consolidation.

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Cash and Cash Equivalents

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

Accounts Receivable

     Accounts receivable consist of receivables from federal and state agencies (including the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients. The Company recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there are significant credit risks associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors. Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. Accounts receivable at March 31, 2005 and December 31, 2004, respectively, were as follows (in thousands):

     The following table sets forth by type of payor the percentage of the Company’s accounts receivable as of March 31, 2005 and December 31, 2004:

Goodwill

     Goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired. Goodwill and other indefinite lived intangible assets are no longer amortized, but are tested at least annually through an impairment test using a fair value method. The Company will perform a goodwill impairment test whenever events or changes in facts or circumstances indicate that impairment may exist, or at least annually during the fourth quarter each year.

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

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Revenues

     Revenues consist of the following for the three months ended March 31, 2005 and 2004, respectively (in thousands):

     The following table sets forth by type of payor the percentage of the Company’s patient service revenues generated for the three months ended March 31, 2005 and 2004, respectively:

Stock-Based Compensation

     The Company has elected to record cost for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations thereof and, accordingly, recognizes no compensation expense for options granted when the exercise price is at least the market price of the underlying stock on the date of grant (the “intrinsic value method”). A cost for restricted stock awards is recorded based on the value of the stock on the grant date and applied over the vesting period of the award. Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at “fair value.” SFAS No. 123 permits the use of the Black-Scholes method to estimate fair value.

     Had the Company used Black-Scholes estimates to determine the fair value of options granted under SFAS No. 123, and recorded a compensation expense, net income and net income per share attributable to common stockholders would have been reduced to the following pro forma amounts (in thousands, except per share amounts):

     On January 5, 2005, the Company granted restricted stock awards of 132,500 shares with a market value per share of $19.26 on that date. The Company is amortizing the expense related to the awards according to their vesting schedule. The amount of $9,000 included above in reported net income represents the expense of the restricted stock awards, net of income taxes, from the grant date through March 31, 2005.

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     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes APB No. 25. Among other items, SFAS No. 123(R) eliminates the use of the intrinsic value method of accounting. Instead, companies will be required to recognize in financial statements the cost of employee services received in exchange for awards of equity instruments, based on the fair value of those awards. When SFAS No. 123(R) was issued, the effective date was to be the first reporting period beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission modified the effective date to be the beginning of the first fiscal year beginning after June 15, 2005, which would be January 1, 2006 for the Company. Early adoption of SFAS No. 123(R) is allowed using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized utilizing SFAS No. 123(R) beginning with the effective date for all share-based payments granted or modified after that date, but is based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123(R). The requirements are the same under the “modified retrospective” method, but companies are permitted to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS No. 123.

     The Company currently does not intend to adopt SFAS No. 123(R) early, but expects that it will adopt the standard effective January 1, 2006. SFAS No. 123(R) permits the Company to measure the fair value of stock based compensation under one of three methods: a “closed” model such as Black-Scholes, a “lattice” model, or a “monte carlo” simulation. The Company has not yet determined which of these methods it will use. The Company is currently evaluating the effect of adopting SFAS No. 123(R) on the results of its operations. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on several factors, including levels of options and awards granted in the future and when option or award holders exercise these awards.

Use of Estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying unaudited condensed consolidated financial statements and notes. Actual results could differ from those estimates.

3. Reverse Stock Split and Initial Public Offering

     On February 5, 2004, the Company’s Board of Directors approved a 1-for-4.4303 reverse stock split of the Company’s common stock in connection with its initial public offering. All information related to common stock, options to purchase common stock, warrants to purchase common stock and earnings per share data presented in the accompanying unaudited condensed consolidated financial statements and related notes have been restated to reflect the effect of the reverse stock split of the Company’s common stock.

     On February 11, 2004, the Company completed an initial public offering of 8,280,000 shares of its common stock at a price of $15.00 per share, including 1,080,000 shares sold following exercise in full by the underwriters of an option granted to them by the Company to purchase the additional shares to cover over-allotments. The Company received net proceeds of $115.5 million in the offering, after deducting underwriting discounts and commissions. The Company used the net proceeds to repay indebtedness and to pay holders of the Company’s Series A and Series B convertible preferred stock. The Series A convertible preferred stock and Series B convertible preferred stock were issued in April 2002 in connection with the Physicians Surgical Care, Inc. (“PSC”) acquisition. The Series A convertible preferred stock and Series B convertible preferred stock automatically converted into shares of common stock upon the completion of the Company’s initial public offering. When converted, each share of Series A convertible preferred stock and Series B convertible preferred stock entitled the holder to receive 0.2257 of a share of common stock and a cash payment of $4.20 for the Series A holders and $5.22 for the Series B holders, for a total cash payment of $31.8 million. The cash payment of $31.8 million was reflected as additional purchase price for PSC and recorded as an addition to goodwill during the first quarter of 2004 upon completion of the initial public offering.

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4. Acquisitions

     During the first quarter of 2005, the Company acquired a majority interest in the Atlanta Center for Reconstructive Foot and Ankle Surgery, LLC and acquired a minority interest in the Roswell Center for Foot and Ankle Surgery, LLC, a de novo surgery center that opened in February 2005. The Company acquired the ownership interests in these two surgery centers for an aggregate of approximately $5.7 million, using funds from operations and funds available under the Company’s senior credit facility. The Atlanta Center for Reconstructive Foot and Ankle Surgery has two operating rooms and the Roswell Center for Foot and Ankle Surgery has two operating rooms. Both surgery centers are single-specialty surgery centers and are located in the northern suburbs of Atlanta, Georgia.

     The Company’s acquisitions were accounted for under the purchase method of accounting and, accordingly, the results of operations of these acquired surgery centers are reflected on a consolidated basis in the Company’s accompanying condensed consolidated financial statements from the respective dates of their acquisitions.

5. Long-Term Debt

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

     In March 2005, the Company amended and restated its senior credit facility with a syndicate of financial institutions led by Bank of America, N.A. The Company is the borrower under the senior credit facility and all of its active wholly-owned subsidiaries are guarantors. Under the terms of the senior credit facility, entities that become wholly-owned subsidiaries must also guarantee the debt.

     The senior credit facility provides senior secured financing of up to $150.0 million through a revolving credit line. Up to $2.0 million of the senior credit facility is available for the issuance of standby letters of credit, and up to $5.0 million of the senior credit facility is available for swing line loans. The swing line loans are made available by Bank of America as the swing line lender on a same-day basis in minimum purchase amounts of $100,000. The Company is required to repay each swing line loan in full upon the demand of the swing line lender. The senior credit facility terminates and is due and payable on March 21, 2010. At March 31, 2005 and December 31, 2004, the Company had $66.0 million and $64.0 million, respectively, of outstanding debt under the senior credit facility. At the Company’s option, loans under the senior credit facility bear interest at Bank of America’s base rate or the Eurodollar rate in effect on the applicable borrowing date, plus an applicable Eurodollar rate margin. Both the applicable base rate margin and applicable Eurodollar rate margin will vary depending upon the ratio of the Company’s consolidated funded indebtedness to consolidated EBITDA. At March 31, 2005, the interest rate on the senior credit facility ranged from 4.35% to 5.75%.

     A subsidiary of the Company has a mortgage note payable to Synergy Bank (the “Mortgage Note”). The Mortgage Note is collateralized by the real estate owned by the surgery center to which the loan was made. The Mortgage Note matures in 2008 and bears interest at a rate of 6.7% per year. The Mortgage Note had an outstanding principal balance of $4.9 million and $5.1 million at March 31, 2005 and December 31, 2004, respectively. The Mortgage Note contains various covenants to maintain certain financial ratios and also restricts encumbrance of assets, creation of indebtedness, investing activities and payment of distributions. At March 31, 2005, the subsidiary was in compliance with all material covenants.

     At March 31, 2005, the Company was in compliance with all material covenants required by each long-term debt agreement.

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6. Earnings Per Share

     Basic and diluted income per share are based on the weighted average number of common shares outstanding and the dilutive impact of outstanding options and warrants to purchase shares (net income in thousands):

     The effect of warrants to purchase 18,708 shares of common stock for the three months ended March 31, 2004 were not included in the computation of diluted earnings per share because their effect would have been anti-dilutive.

7. Commitments and Contingencies

Professional, General and Workers’ Compensation Liability Risks

     The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. To cover these types of claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. This insurance coverage is on a claims-made basis. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that would have a material adverse affect on the Company’s business, financial condition or results of operations. The Company expenses the costs under the self-insured retention exposure for general and professional liability claims which relate to (i) deductibles on claims made during the policy period, and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. These expenses are based on various assumptions. A change in one or more of these assumptions could materially change the Company’s consolidated financial position or results of operations.

Current Operations

     Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal health care programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company’s practices. It is the Company’s current practice and future intent to cooperate fully with such inquiries. The Company is not aware of any such inquiry that would have a material adverse effect on the Company’s consolidated financial position or results of operations.

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Acquired Centers

     The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical and diagnostic centers with prior operating histories. Such centers may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company attempts to assure itself that no such liabilities exist and obtains indemnification from prospective sellers covering such matters and institutes policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.

     The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other health care providers or have materially adverse effects on its business or revenues arising from such future actions. The Company believes, however, that it will be able to adjust its operations so as to be in compliance with any regulatory or statutory provision as may be applicable.

Potential Physician Investor Liability

     Each physician investor in the partnerships and limited liability companies which operate surgery centers carries general and professional liability insurance on a claims-made basis. Each investor may, however, be liable for damages to persons or property arising from occurrences at the surgery centers. Although the various physician investors and other surgeons are required to obtain general and professional liability insurance with tail coverage, such individual may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investor will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.

8. Subsequent Events

     Subsequent to March 31, 2005, the Company completed an agreement under which the Company would develop, operate and own an interest in Cape Coral Ambulatory Surgery Center, LLC, a multi-specialty de novo center located in Cape Coral, Florida.

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Item 2. 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 the accompanying unaudited condensed consolidated financial statements and related notes included in Item 1 of this report.

Cautionary Note Regarding Forward-Looking Statements

     This report contains forward-looking statements, which are 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, effective tax rate, 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 statements involve risks, uncertainties and other factors that may cause actual results to differ from the expectations expressed in the statements. Many of these factors are beyond our ability to control or predict. These factors include, without limitation:

	•	our dependence on payments from third-party payors, including governmental health care programs and managed care organizations;
	•	our ability to acquire and develop additional surgery centers on favorable terms and to integrate their business operations successfully;
	•	our ability to enter into strategic alliances with health care systems and other health care providers that are leaders in their markets;
	•	efforts to regulate the construction, acquisition or expansion of health care facilities;
	•	our ability to attract and maintain good relationships with physicians who use our facilities;
	•	our ability to enhance operating efficiencies at our surgery centers;
	•	uncertainty associated with legislative and regulatory initiatives relating to privacy and security of patient health information and standards for electronic transactions;
	•	our ability to comply with applicable laws and regulations, including physician self-referral laws and laws relating to illegal remuneration under the Medicare, Medicaid or other governmental programs;
	•	our ability to comply with applicable corporate governance and financial reporting standards;
	•	risks related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which could restrict our ability to operate our facilities licensed as hospitals and could adversely impact our reimbursement revenues;
	•	the possibility of adverse changes in federal, state or local regulations affecting the health care industry;
	•	the risk of changes to laws governing the corporate practice of medicine that may require us to restructure some of our relationships, which could result in a significant loss of revenues and divert other resources;
	•	our significant indebtedness and our ability to incur additional indebtedness;
	•	the intense competition for physicians, strategic relationships, acquisitions and managed care contracts, which may result in a decline in our revenues, profitability and market share;

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	•	the geographic concentration of our operations in certain states, which makes us particularly sensitive to regulatory, economic and other conditions in those states;
	•	our dependence on our senior management; and
	•	other risks and uncertainties described in this report or detailed from time to time in our filings with the Securities and Exchange Commission.

     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.

     These 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.

Executive Overview

     Our Company

     As of March 31, 2005, we owned and operated 47 surgery centers and managed nine additional surgery centers in 21 states. We own a majority interest in 36 of the 47 surgery centers and consolidate 41 of these centers for financial reporting purposes. Our surgery centers include three facilities that are licensed as hospitals, two of which we own and one of which we manage. In addition to our surgery centers, we also operate two diagnostic centers and manage three physician networks, including two physician networks in markets in which we operate surgery centers.

     On February 11, 2004, we received net proceeds of $115.5 million, after deducting underwriting discounts and commissions, from our initial public offering of 8,280,000 shares of common stock, which included 1,080,000 shares attributable to the underwriters’ exercise of their over-allotment option. We used the net proceeds to repay indebtedness and to pay holders of Series A and Series B convertible preferred stock in connection with the conversion of those shares to common stock upon the completion of the offering.

     We generate revenues and cash primarily through patient service revenues. We also generate revenues and cash through physician service revenues and other service revenues. Patient service revenues are revenues from surgical or diagnostic procedures performed in each of the centers that we consolidate for financial reporting purposes. The fee charged for a procedure varies depending on the procedure, but usually includes all charges for usage of an operating room, a recovery room, special equipment, supplies, nursing staff and medications. The fee does not include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor. Patient service revenues are recognized on the date of service, net of estimated contractual adjustments and discounts for third-party payors, including Medicare and Medicaid. Changes in estimated contractual adjustments and discounts are recorded in the period of change.

     Physician service revenues are revenues from physician networks for which we have a contractual obligation to provide capital and additional assets in addition to management services. Physician service revenues consist of reimbursed expenses, plus participation in the excess of revenues over expenses of the physician networks, as provided for in our service agreements with our physician networks. Reimbursed expenses include the costs of personnel, supplies and other expenses incurred to provide the management services to the physician networks. We recognize physician service revenues in the period in which reimbursable expenses are incurred and in the period in which we have the right to receive a percentage of the amount by which a physician network’s revenues exceed its expenses. Physician service revenues are based on net billings with any changes in estimated contractual adjustments reflected in service revenues in the subsequent period.

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     Other service revenues consists of management and administrative service fees derived from the non-consolidated facilities that we account for under the equity method, management of surgery centers in which we do not own an interest and management services we provide to physician networks for which we are not required to provide capital or additional assets.

  Revenues

     Revenues consist of the following for the three months ended March 31, 2005 and 2004, respectively (in thousands):

  Case Mix

     The following table sets forth the percentage of cases in each specialty performed at surgery centers during the three months ended March 31, 2005 and 2004, respectively:

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   Case Growth

   Same Store Information

     We define same store facilities as those centers that we owned an interest in and managed throughout both the three months ended March 31, 2005 and 2004. This definition of same store facilities includes non-consolidated centers and allows for comparability to other companies in our industry. The following table sets forth information from same store facilities including non-consolidated centers for the three months ended March 31, 2005 and 2004, respectively:

     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 centers because the results of these centers are not included in revenues and other items in our consolidated financial results. Accordingly, the following table sets forth information from same store facilities excluding non-consolidated centers for the three months ended March 31, 2005 and 2004, respectively:

  Consolidated Information

     The following table sets forth information from facilities that we consolidate for financial reporting purposes (which includes surgery centers we have acquired or developed since January 1, 2004 and are therefore not included in the same store information provided above) for the three months ended March 31, 2005 and 2004, respectively:

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Payor Mix

The following table sets forth by type of payor the percentage of our patient service revenues generated during the three months ended March 31, 2005 and 2004, respectively:

Acquisitions, Developments and Divestitures

     During the second quarter of 2004, we acquired a minority interest in Valley Ambulatory Surgery Center, L.P. for approximately $6.5 million, using cash from operations. During the fourth quarter of 2004, we purchased the capital stock of the general partner of the center for an additional $7.0 million. Subsequent to the investment during the fourth quarter of 2004, our total ownership of this center was 40.0% and we began consolidating this facility for financial reporting purposes. The center has six operating suites and one minor procedure room. The center is a multi-specialty surgery center located in a suburb of Chicago, Illinois.

     During the third quarter of 2004, we acquired a majority ownership in four additional surgery centers for a total of approximately $12.6 million, using cash from operations and funds available under our senior credit facility. We acquired a single-specialty surgery center located in Savannah, Georgia with one operating suite. We plan to develop this facility through syndication, renovation and expansion. We also acquired a multi-specialty surgery center located in Steubenville, Ohio with three operating suites and one minor procedure room. In addition, we acquired a multi-specialty surgery center located in New Albany, Indiana with four operating suites and one minor procedure room. Finally, we acquired a multi-specialty surgery center located in Hammond, Louisiana with four operating suites and two minor procedure rooms. We entered into management agreements with all four of these centers.

     During the third quarter of 2004, we also opened a newly-developed surgery center located in Memphis, Tennessee, in which we own a majority interest. The Memphis surgery center was developed through a partnership with one of our existing physician networks. In addition, during the third quarter of 2004, we signed an agreement to manage the DeSoto Surgery Center, located in Southhaven, Mississippi. The DeSoto Surgery Center is an affiliate of Baptist Memorial Health Services, Inc. Also during the third quarter of 2004, we opened the newly-developed Erie Imaging Center in Erie, Pennsylvania, in which we have a majority interest. Erie Imaging Center is a diagnostic imaging center and is located in a market in which we own and operate a surgery center.

     During the third quarter of 2004, after purchasing the outstanding ownership interests from our prior physician and hospital partners, we restructured our Physicians SurgiCenter of Houston partnership in Houston, Texas, creating a joint venture with the American Institute of Gastric Banding, Ltd., a privately-held single procedure focused surgical company based in Dallas, Texas (“AIGB”). In connection with the restructuring, we retained a 10% ownership in the surgery center. We no longer manage or consolidate this surgery center for financial reporting purposes. During the first quarter of 2005, we entered into discussions with AIGB relating to the possible disposition of our 10% ownership in the surgery center.

     During the fourth quarter of 2004, the Company acquired a majority ownership interest in two surgery centers in Alabama and one surgery center in Missouri. The Birmingham Endoscopy Center, located in Birmingham, Alabama, was a single-specialty surgery center with three operating rooms. During the first quarter of 2005, the Company began converting the Birmingham surgery center to a multi-specialty surgery center and syndicated ownership interests of the center. The North River Surgical Center, located in Tuscaloosa, Alabama, is a multi-specialty surgery center with two operating rooms, and the Company plans to develop this facility through syndication, renovation and expansion. The Surgery Center of Kirkwood, located in Kirkwood, Missouri, is a multi-specialty surgery center with three operating rooms and one minor procedure room. The Company acquired

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ownership interests in these three centers for an aggregate of approximately $40.2 million in cash, using funds from operations and funds available under the Company’s senior credit facility.

     During the first quarter of 2005, we acquired a majority interest in the Atlanta Center for Reconstructive Foot and Ankle Surgery, LLC and acquired a minority interest in the Roswell Center for Foot and Ankle Surgery, LLC, a de novo surgery center that opened in February 2005. The Company acquired the ownership interests in these two surgery centers for an aggregate of approximately $5.7 million, using funds from operations and funds available under the Company’s senior credit facility. The Atlanta Center for Reconstructive Foot and Ankle Surgery has two operating rooms and the Roswell Center for Foot and Ankle Surgery has two operating rooms. Both surgery centers are single-specialty surgery centers and are located in the northern suburbs of Atlanta, Georgia.

     All of our acquisitions were accounted for under the purchase method of accounting and, accordingly, the results of operations of these acquired surgery centers are reflected on a consolidated basis in our consolidated financial statements from the respective dates of their acquisitions.

Results of Operations

     The following table contains unaudited summary statements of operations for each of the three months ended March 31, 2005 and 2004. The table also shows the percentage relationship to total revenues for the periods indicated (dollars in thousands):

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

     During the three months ended March 31, 2005, our revenues increased 19.8% to $62.2 million from $51.9 million for the three months ended March 31, 2004. Net income increased to $4.4 million for the three months ended March 31, 2005 from $2.6 million for the three months ended March 31, 2004. Our financial results for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 reflect the addition of eleven surgery centers in which we own an interest, one surgery center we manage without owning an interest and one diagnostic imaging center. Our financial results for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 also reflect revenue growth at our existing centers primarily as a result of increased case volume.

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     Revenues. Revenues for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 were as follows (in thousands):

     For purposes of this management’s discussion of our consolidated financial results, we consider same store facilities as those centers that we consolidate for financial reporting purposes for both the three months ended March 31, 2005 and March 31, 2004. The increase in patient service revenues includes an increase in same store revenues primarily resulting from a 4.6% increase in cases during the three months ended March 31, 2005 compared to the three months ended March 31, 2004. Patient service revenues from other centers, which primarily includes surgery centers acquired or developed since January 1, 2004, increased by $7.8 million.

     Cost of Revenues. Cost of revenues for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 was as follows (in thousands):

     Same store cost of revenues increased primarily due to an increase in cases. The increase in same store cost of revenues was partially offset by a decrease in general and professional liability expense for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The decrease in the same store general and professional liability expense is primarily attributable to our more favorable claims history. The general and professional liability expense relates to deductibles on claims made during the policy period, and an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Cost of revenues from other centers, which primarily includes surgery centers acquired or developed since January 1, 2004, increased by $4.5 million. As a percentage of revenues, total cost of revenues decreased to 63.0% for the three months ended March 31, 2005 from 65.4% for the three months ended March 31, 2004.

     General and Administrative Expense. General and administrative expense increased 20.0% to $5.4 million for the three months ended March 31, 2005 from $4.5 million for the three months ended March 31, 2004. The increase was primarily related to the overall growth in the number of surgery centers. As a percentage of revenues, general and administrative expense remained constant at 8.7% for the three months ended March 31, 2005 and March 31, 2004.

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     Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 were as follows (in thousands):

     As a percentage of revenues, depreciation and amortization expense decreased to 5.1% for the three months ended March 31, 2005 from 5.2% for the three months ended March 31, 2004.

     Provision for Doubtful Accounts. Provision for doubtful accounts increased to $714,000 for the three months ended March 31, 2005 from $697,000 for the three months ended March 31, 2004. This increase is primarily attributed to the surgery centers acquired or developed since January 1, 2004. As a percentage of revenues, the provision for doubtful accounts decreased to 1.1% for the three months ended March 31, 2005 from 1.3% for the three months ended March 31, 2004.

     Income on Equity Investments. Income on equity investments represents the net income of certain investments we have in surgery centers that we do not consolidate for financial reporting purposes. The increase is primarily attributable to increased profitability of these centers primarily as a result of increased case volume.

     Operating Income. Operating income increased 38.2% to $14.1 million for the three months ended March 31, 2005 from $10.2 million for the three months ended March 31, 2004. This increase was primarily the result of an increase in operating income from surgery centers acquired or developed since January 1, 2004 and increased profitability from same store facilities. As a percentage of revenues, operating income increased to 22.7% for the three months ended March 31, 2005 from 19.6% for the three months ended March 31, 2004.

     Minority Interests in Income of Consolidated Subsidiaries. Minority interests in income of consolidated subsidiaries for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 were as follows (in thousands):

     Minority interests in income of consolidated subsidiaries for same store facilities increased as a result of improved operations at the same store facilities. Minority interest expense represents the portion of the center’s net income that is attributable to the center’s minority owners. Consequently, as the net income of a center increases, the corresponding minority interest expense will increase. As a percentage of revenues, minority interests in income from consolidated subsidiaries increased to 9.6% for the three months ended March 31, 2005 from 6.6% for the three months ended March 31, 2004.

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     Interest Expense, Net of Interest Income. Interest expense, net of interest income, decreased to $1.0 million for the three months ended March 31, 2005 from $2.6 million for the three months ended March 31, 2004. Interest expense was higher for the three months ended March 31, 2004 because we paid $778,000 of prepayment penalties related to our senior subordinated notes.

     Provision for Income Taxes. The provision for income taxes increased to $2.7 million for the three months ended March 31, 2005 from $1.6 million for the three months ended March 31, 2004. Our effective tax rate remained constant at 38.5% for the three months ended March 31, 2005 and 2004.

     Net Income. Net income increased to $4.4 million for the three months ended March 31, 2005 from $2.6 million for the three months ended March 31, 2004. Net income increased primarily as a result of surgery centers acquired or developed since January 1, 2004 and increased case growth at same store facilities.

Liquidity and Capital Resources

     On February 11, 2004, we received net proceeds of $115.5 million, after deducting underwriting discounts and commissions, from our initial public offering of 8,280,000 shares of common stock, which included 1,080,000 shares attributable to the underwriters’ exercise of their over-allotment option. We used the net proceeds to repay indebtedness and to pay holders of Series A and Series B convertible preferred stock in connection with the conversion of those shares to common stock upon the completion of the offering.

Cash Flow Statement Information

     During the three months ended March 31, 2005, we generated operating cash flow of $6.7 million. Net cash used in investing activities during the three months ended March 31, 2005 was $8.4 million, including $6.9 million paid in connection with acquisitions. Also, the $8.4 million used in investing activities includes $1.7 million used for purchase of property and equipment. Our net cash provided by financing activities during the three months ended March 31, 2005 was $2.1 million, primarily related to $9.5 million borrowed under our senior credit facility which was partially offset by $8.0 million of payments on long-term debt.

Long-Term Debt

     In March 2005, we amended and restated our senior credit facility with a syndicate of financial institutions led by Bank of America, N.A. We are the borrower under the senior credit facility and all of our active wholly-owned subsidiaries are guarantors. Under the terms of the senior credit facility, entities that become wholly-owned subsidiaries must also guarantee the debt.

     The senior credit facility provides senior secured financing of up to $150.0 million through a revolving credit line. Up to $2.0 million of the senior credit facility is available for the issuance of standby letters of credit, and up to $5.0 million of the senior credit facility is available for swing line loans. The swing line loans are made available by Bank of America as the swing line lender on a same-day basis in minimum purchase amounts of $100,000. We are required to repay each swing line loan in full upon the demand of the swing line lender. The senior credit facility terminates and is due and payable on March 21, 2010. At March 31, 2005 and December 31, 2004, we had $66.0 million and $64.0 million, respectively, of outstanding debt under the senior credit facility. At our option, loans under the senior credit facility bear interest at Bank of America’s base rate or the Eurodollar rate in effect on the applicable borrowing date, plus an applicable Eurodollar rate margin. Both the applicable base rate margin and applicable Eurodollar rate margin will vary depending upon the ratio of our consolidated funded indebtedness to consolidated EBITDA. At March 31, 2005, the interest rate on the senior credit facility ranged from 4.35% to 5.75%.

     One of our subsidiaries has a mortgage note payable to Synergy Bank (the “Mortgage Note”). The Mortgage Note is collateralized by the real estate owned by the surgery center to which the loan was made. The Mortgage Note matures in 2008 and bears interest at a rate of 6.7% per year. The Mortgage Note had an outstanding principal balance of $4.9 million and $5.1 million at March 31, 2005 and December 31, 2004, respectively. The Mortgage Note contains various covenants to maintain certain financial ratios and also restricts encumbrance of assets, creation of indebtedness, investing activities and payment of distributions.

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Earnings Before Interest, Taxes, Depreciation and Amortization Less Minority Interests

     EBITDA less minority interests increased 18.9% to $11.3 million for the three months ended March 31, 2005 from $9.5 million for the three months ended March 31, 2004. This increase in EBITDA less minority interests was the result of surgery centers acquired or developed since January 1, 2004 and increased profitability from same store facilities.

     When the term EBITDA is used, it refers to operating income plus depreciation and amortization. EBITDA less minority interests represents our portion of EBITDA, after subtracting the interests of third-parties that own interests in surgery centers that we consolidate for financial reporting purposes. Our operating strategy involves sharing ownership of our surgery centers with physicians, physician groups and hospitals, and these third-parties own an interest in all but two of our centers. We believe that it is preferable to present EBITDA less minority interests because it excludes the portion of EBITDA attributable to these third-party interests and clarifies for investors our portion of EBITDA generated by our surgery centers and other operations.

     We use EBITDA and EBITDA less minority interests as measures of liquidity. We have included them in this report because we believe that they provide investors with additional information about our ability to incur and service debt and make capital expenditures. We also use EBITDA, with some variation in the calculation, to determine compliance with some of the covenants under our senior credit facility, as well as to determine the interest rate and commitment fee payable under the senior credit facility. EBITDA and EBITDA less minority interests are not measurements of financial performance or liquidity under generally accepted accounting principles. They should not be considered in isolation or as a substitute for net income, 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 EBITDA less minority interests are significant components in understanding and evaluating financial performance and liquidity. Our calculation of EBITDA and EBITDA less minority interests may not be comparable to similarly titled measures reported by other companies.

     The following table reconciles EBITDA and EBITDA less minority interests to net cash provided by operating activities (in thousands):

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Summary

     We believe that existing funds, cash flows from operations and borrowings under our senior credit facility will provide sufficient liquidity for the next 12 to 18 months. We will need to incur additional debt or issue additional equity or debt securities in the future to fund our acquisitions and development projects. We cannot assure that capital will be available on acceptable terms, if at all. If we are unable to obtain funds when needed or on acceptable terms, we will be required to curtail our acquisition and development program. Our ability to meet our funding needs could be adversely affected if we suffer adverse results from our operations, or if we violate the covenants and restrictions to which we are subject under our senior credit facility.

Inflation

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

Recently Issued Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes APB No. 25. Among other items, SFAS No. 123(R) eliminates the use of the intrinsic value method of accounting. Instead, companies will be required to recognize in financial statements the cost of employee services received in exchange for awards of equity instruments, based on the fair value of those awards. When SFAS No. 123(R) was issued, the effective date was to be the first reporting period beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission modified the effective date to be the beginning of the first fiscal year beginning after June 15, 2005, which would be January 1, 2006 for us. Early adoption of SFAS No. 123(R) is allowed using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized utilizing SFAS No. 123(R) beginning with the effective date for all share-based payments granted or modified after that date, but is based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123(R). The requirements are the same under the “modified retrospective” method, but companies are permitted to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS No. 123.

     We currently do not intend to adopt SFAS No. 123(R) early, but expect that we will adopt the standard effective January 1, 2006. SFAS No. 123(R) permits us to measure the fair value of stock based compensation under one of three methods: a “closed” model such as Black-Scholes, a “lattice” model, or a “monte carlo” simulation. We have not yet determined which of these methods we will use. We are currently evaluating the effect of adopting SFAS No. 123(R) on the results of our operations. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on several factors, including levels of options and awards granted in the future and when option or award holders exercise these awards.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

     We are exposed to market risk related to changes in prevailing interest rates. Historically, we have not held or issued derivative financial instruments, including interest rate swaps. Our outstanding debt to commercial lenders is generally based on a predetermined percentage above LIBOR or the lenders’ prime rate. At March 31, 2005, $66.0 million of our total long-term debt was subject to variable rates of interest, while the remaining $6.3 million of our total long-term debt was subject to fixed rates of interest. A hypothetical 100 basis point increase in market interest rates would result in additional annual interest expense of approximately $660,000. The fair value of our long-term debt, based on a discounted cash flow analysis, approximates its carrying value as of March 31, 2005.

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Item 4. 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 Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 Exchange Act is recorded, processed, summarized and reported in a timely manner.
	(b)	Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the first quarter of 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     As disclosed in our Annual Report on Form 10-K filed March 28, 2005, MediSphere Health Partners, Inc. filed a breach of contract action against Symbion Ambulatory Resource Centres, Inc., one of our subsidiaries, in the Chancery Court for Davidson County, Tennessee on February 4, 2005. MediSphere seeks in the lawsuit to recover $1,062,857 (plus attorneys’ fees), which it claims to be due pursuant to the terms of a Stock Purchase Agreement between Symbion Ambulatory Resource Centres, Inc. and MediSphere dated November 4, 2003. On March 21, 2005, Symbion Ambulatory Resource Centres, Inc. filed an answer to the complaint. In the answer, we denied that any amounts are due under the terms of the Stock Purchase Agreement, and asserted a counterclaim against MediSphere. In the counterclaim, we seek to recover in excess of $3,000,000 in damages out of MediSphere’s breach of certain of the representations and warranties contained in the Stock Purchase Agreement, and MediSphere’s intentional concealment and misrepresentation of facts material to the Stock Purchase Agreement and the November 17, 2003 closing of the transactions contemplated therein. We have also asserted a counterclaim against certain of MediSphere’s preferred shareholders. We dispute MediSphere’s claims that any amounts are due under the terms of the Stock Purchase Agreement and intend to defend the case vigorously. There have been no material developments in this matter since the filing of our Annual Report on Form 10-K on March 28, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

     For the three months ended March 31, 2005, we issued the following securities that were not registered under the Securities Act of 1933, as amended. Each of the transactions described below was conducted in reliance upon the exemptions from registration provided in Sections 3(b) and 4(2) of the Securities Act and Regulation D and the other rules and regulations promulgated thereunder. Each of these issuances was made without the use of an underwriter, and the certificates and other documentation evidencing the securities issued in connection with these transactions bear a restrictive legend permitting transfer of the securities only upon registration under the Securities Act or pursuant to an exemption from registration.

	•	On January 7, 2005, we issued 635 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On January 7, 2005, we issued 1,086 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for $8,832 upon exercise of warrants.
	•	On January 7, 2005, we issued 2,257 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for $31,305 upon exercise of warrants.
	•	On January 19, 2005, we issued 650 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On January 19, 2005, we issued 215 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On January 20, 2005, we issued 2,257 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for $31,305 upon exercise of warrants.
	•	On January 20, 2005, we issued 393 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On January 20, 2005, we issued 192 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.

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	•	On January 25, 2005, we issued 605 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On January 26, 2005, we issued 1,489 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for an aggregate of $20,652 upon exercise of warrants.
	•	On January 27, 2005, we issued 6,649 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for an aggregate of $73,671 upon exercise of warrants.
	•	On January 27, 2005, we issued 2,257 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for an aggregate of $31,305 upon exercise of warrants.
	•	On January 28, 2005, we issued 232 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On January 28, 2005, we issued 704 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On January 28, 2005, we issued 704 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On January 28, 2005, we issued 2,993 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On January 31, 2005, we issued 2,257 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for an aggregate of $31,305 upon exercise of warrants.
	•	On February 1, 2005, we issued 865 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On February 2, 2005, we issued 462 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On February 3, 2005, we issued 2,257 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for an aggregate of $31,305 upon exercise of warrants.
	•	On February 3, 2005, we issued 662 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On February 3, 2005, we issued 662 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On February 3, 2005, we issued 744 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for an aggregate of $10,319 upon exercise of warrants.
	•	On February 4, 2005, we issued 207 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On February 8, 2005, we issued 219 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.
	•	On February 8, 2005, we issued 219 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers in a cashless exercise of warrants.

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•

On March 5, 2005, we issued 7,773 shares of our common stock to an individual who holds an ownership interest in one of our surgery centers for an aggregate of $63,194 upon exercise of warrants.

Issuer Purchases of Equity Securities

     The following table provides information relating to our repurchase of common stock during the first quarter of 2005:

Item 6. Exhibits.

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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.

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EXHIBIT INDEX