** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-Q**
| **(Mark One)** |
|----------------|
| **ý**     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |

**For the quarterly period ended September 30, 2001**

**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 000-32837**

**United Surgical PartnersInternational, Inc.******(Exact name of registrant as specified in its charter)

| **Delaware**                                                    |   | **75-2749762**                       |
|-----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (IRS Employer Identification Number) |
|                                                            |   |                                 |
| **17103  Preston Road, Suite 200 North, Dallas, Texas**         |   | **75248**                            |
| (Address of principal executive offices)                        |   | (Zip Code)                           |

**(972)713-3500**(Registrant’s telephone number, including area code)

             Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 ý  No o

 

             At November 9, 2001 there were24,292,452 shares of Common Stock outstanding.

 

 

**UNITED SURGICAL PARTNERS INTERNATIONAL, INC. ANDSUBSIDIARIES**

**INDEX**
| PART  I.  | Financial  Information |
|-----------|------------------------|
|      |                   |   |
|      | Item  1.               | Financial  Statements |
|      |                   |   |
|      |                   | Consolidated Balance Sheets  as of September 30, 2001 (unaudited) and December 31, 2000 |
|      |                   |   |
|      |                   | Consolidated  Statements of Operations (unaudited) for the three months and nine months  ended September 30, 2001 and 2000 |
|      |                   |   |
|      |                   | Consolidated  Statements of Comprehensive Income (Loss) (unaudited) for the three months  and nine months ended September 30, 2001 and 2000 |
|      |                   |   |
|      |                   | Consolidated Statements of Cash Flows  (unaudited) for the nine months ended September 30, 2001 and 2000 |
|      |                   |   |
|      |                   | Notes to Consolidated Financial Statements  (unaudited) |
|      |                   |   |
|      | Item 2.                | Management’s Discussion  and Analysis of Financial Condition and Results of Operations |
|      |                   |   |
|      | Item 3.                | Quantitative and  Qualitative Disclosures About Market Risk |
|      |                   |   |
| PART II.  | Other  Information     |
|      |                   |   |
|      | Item 1.                | Legal  Proceedings |
|      |                   |   |
|      | Item 6.                | Exhibits and   Reports on Form 8-K |
|      |                   |   |
| Signature |                   |

----

Note:    Items 2, 3, 4, and 5 ofPart II are omitted because they are not applicable.

 

**PART I.  FINANCIAL INFORMATION**

**ITEM 1. * Financial Statements***
| **UNITED SURGICAL PARTNERS INTERNATIONAL, INC.**       |
|--------------------------------------------------------|
| **AND SUBSIDIARIES**                                   |
| **CONSOLIDATED BALANCE  SHEETS**                       |
| **(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)** |

 
|                                                                                                                                                                               |   | **September 30, 2001** |       | **December 31, 2000** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|------------|-----------------------|------------|
|                                                                                                                                                                               |   | **(unaudited)**        | ** ** |                  | ** ** |
| **Assets**                                                                                                                                                                         |   |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                          |   | $                      | 15,572     |                  | $          | 3,451 |   |
| Restricted cash                                                                                                                                                                    |   | -                      |       | 1,731                 |       |
| Patient receivables, net of allowance for  doubtful accounts of $4,305 and $3,666 respectively                                                                                |   | 25,113                 |       | 20,795                |       |
| Other receivables                                                                                                                                                                  |   | 37,990                 |       | 3,174                 |       |
| Inventories                                                                                                                                                                        |   | 5,681                  |       | 4,668                 |       |
| Prepaids and other current assets                                                                                                                                                  |   | 6,989                  |       | 3,081                 |       |
|                                                                                                                                                                               |   |                   |       |                  |       |
| Total current assets                                                                                                                                                               |   | $                      | 91,345     |                  | $          | 36,900 |   |
|                                                                                                                                                                               |   |                   |       |                  |       |
| Property and equipment, net                                                                                                                                                        |   | 207,006                |       | 165,195               |       |
| Investments in affiliates                                                                                                                                                          |   | 13,619                 |       | 7,278                 |       |
| Intangible assets, net                                                                                                                                                             |   | 177,444                |       | 114,424               |       |
| Other assets                                                                                                                                                                       |   | 7,117                  |       | 6,599                 |       |
|                                                                                                                                                                               |   |                   |       |                  |       |
| Total assets                                                                                                                                                                       |   | $                      | 496,531    |                  | $          | 330,396 |   |
|                                                                                                                                                                               |   |                   |       |                  |       |
| **Liabilities and  Stockholders' Equity**                                                                                                                                          |   |                   |       |                  |       |
|                                                                                                                                                                               |   |                   |       |                  |       |
| Accounts payable                                                                                                                                                                   |   | $                      | 16,689     |                  | $          | 16,351 |   |
| Accrued salaries and benefits                                                                                                                                                      |   | 12,943                 |       | 4,886                 |       |
| Due to affiliates                                                                                                                                                                  |   | 5,277                  |       | -                     |       |
| Accrued interest                                                                                                                                                                   |   | 3,578                  |       | 5,211                 |       |
| Current portion of long-term debt                                                                                                                                                  |   | 11,951                 |       | 53,915                |       |
| Other accrued expenses                                                                                                                                                             |   | 15,607                 |       | 8,674                 |       |
| Deferred tax liability, net                                                                                                                                                        |   | 5,550                  |       | 6,076                 |       |
|                                                                                                                                                                               |   |                   |       |                  |       |
| Total current liabilities                                                                                                                                                          |   | $                      | 71,595     |                  | $          | 95,113 |   |
|                                                                                                                                                                               |   |                   |       |                  |       |
| Long-term debt, less current portion                                                                                                                                               |   | 147,388                |       | 133,852               |       |
| Other long-term liabilities                                                                                                                                                        |   | 3,221                  |       | 3,461                 |       |
| Deferred tax liability, net                                                                                                                                                        |   | 6,933                  |       | 7,580                 |       |
|                                                                                                                                                                               |   |                   |       |                  |       |
| Total liabilities                                                                                                                                                                  |   | $                      | 229,137    |                  | $          | 240,006 |   |
| Minority interests                                                                                                                                                                 |   | 15,334                 |       | 8,774                 |       |
| Redeemable preferred stock:                                                                                                                                                        |   |                   |       |                  |       |
| Series A, $0.01 par value per share; 31,200  shares authorized, issued and outstanding at December 31, 2000; 31,200  shares redeemed as of September 30, 2001            |   | -                      |       | 32,819                |       |
| Series D, $0.01 par value per share; 40,000  shares authorized; 20,000  and -0- shares issued and outstanding at September 30, 2001 and December  31, 2000, respectively |   | 20,597                 |       | -                     |       |

 

 
|                                                                                                                                                                                               |   | **September 30, 2001** |    | **December 31, 2000** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
|                                                                                                                                                                                               |   | **(unaudited)**        |    |                  |   |
| Stockholders' equity:                                                                                                                                                                              |   |                   |    |                  |   |
| Series C convertible preferred stock, $0.01  par value; 20,000 shares authorized; 18,750 shares issued and  outstanding at December 31, 2000; 18,750 converted as of September 30,  2001 |   | -                      |    | 19,747                |   |
| Common stock:                                                                                                                                                                                      |   |                   |    |                  |   |
| Class A shares, $0.01 par value, 30,000,000  shares authorized; 7,785,678 shares outstanding at December  31, 2000; all shares converted to common as of September 30, 2001              |   | -                      |    | 78                    |   |
| Class B shares, $0.01 par value, 3,000,000  shares authorized; 333,333 shares outstanding at December 31, 2000;  all shares converted to common as of September 30, 2001            |   | -                      |    | 4                     |   |
| Other, $0.01 par value; 200,000,000 shares  authorized; 24,292,452 and 170,046 shares issued and outstanding at  September 30, 2001 and December 31, 2000, respectively                  |   | 243                    |    | 2                     |   |
| Additional paid-in capital                                                                                                                                                                         |   | 264,916                |    | 63,739                |   |
| Treasury stock, at cost, 136,965 shares at  September 30, 2001; 54,166 shares at December 31, 2000                                                                                            |   | (1,819                 | )       | (344                  | )      |
| Deferred compensation                                                                                                                                                                              |   | (400                   | )       | (495                  | )      |
| Receivables from sales of common stock                                                                                                                                                             |   | (2,598                 | )       | (2,973                | )      |
| Accumulated other comprehensive loss, net of  tax                                                                                                                                                  |   | (13,940                | )       | (12,026               | )      |
| Accumulated deficit                                                                                                                                                                                |   | (14,939                | )       | (18,935               | )      |
|                                                                                                                                                                                               |   |                   |    |                  |   |
| Total stockholders' equity                                                                                                                                                                         |   | 231,463                |    | 48,797                |   |
|                                                                                                                                                                                               |   |                   |    |                  |   |
| Total liabilities and stockholders' equity                                                                                                                                                         |   | $                      | 496,531 |                  | $      | 330,396 |   |
|                                                                                                                                                                                               |   |                   |    |                  |   |
|                                                                                                                                                                                               |   |                   |    |                  |   |
| See  accompanying notes to consolidated financial statements.                                                                                                                                      |   |
|                                                                                                                                                                                                    |        |                        |         |                       |        |  |  |

 
| **UNITED SURGICAL PARTNERS INTERNATIONAL, INC.**      |
|-------------------------------------------------------|
| **AND SUBSIDIARIES**                                  |
| **CONSOLIDATED STATEMENTS OF OPERATIONS**             |
| **(UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE DATA)** |

 
|                                                                  |   | **Three months ended** |       | **Nine months ended** |       |
|-----------------------------------------------------------------------|--------|------------------------|------------|-----------------------|------------|
|                                                                  |   | **September 30,**      |       | **September 30,**     | ** ** |
|                                                                  |   | **2001**               | ** ** | **2000**              | ** ** | **2001** | ** ** | **2000** | ** ** |
| Net patient service revenue                                           |   | $                      | 51,829     |                  | $          | 35,091 |   | $ | 150,113 |   | $ | 94,575 |   |
| Management and administrative services revenue                        |   | 7,202                  |       | 531                   |       | 18,731 |   | 1,552 |   |
| Equity in earnings of unconsolidated  affiliates                      |   | 1,269                  |       | 156                   |       | 4,134 |   | 487 |   |
| Other income                                                          |   | 483                    |       | 405                   |       | 1,537 |   | 1,318 |   |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Total revenues                                                        |   | 60,783                 |       | 36,183                |       | 174,515 |   | 97,932 |   |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Salaries, benefits, and other employee costs                          |   | 16,738                 |       | 12,347                |       | 46,636 |   | 31,025 |   |
| Medical services and supplies                                         |   | 11,743                 |       | 8,802                 |       | 35,104 |   | 24,701 |   |
| Other operating expenses                                              |   | 11,596                 |       | 5,991                 |       | 32,392 |   | 16,151 |   |
| General and administrative expenses                                   |   | 5,390                  |       | 2,942                 |       | 15,571 |   | 8,134 |   |
| Provision for doubtful accounts                                       |   | 949                    |       | 446                   |       | 2,126 |   | 1,478 |   |
| Depreciation and amortization                                         |   | 7,239                  |       | 3,805                 |       | 19,190 |   | 9,866 |   |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Total operating expenses                                              |   | 53,655                 |       | 34,333                |       | 151,019 |   | 91,355 |   |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Operating income                                                      |   | 7,128                  |       | 1,850                 |       | 23,496 |   | 6,577 |   |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Interest income                                                       |   | 228                    |       | 299                   |       | 696 |   | 854 |   |
| Interest expense                                                      |   | (3,407                 | )          | (2,935                | )          | (13,734 | ) | (8,819 | ) |
| Other                                                                 |   | (39                    | )          | (614                  | )          | (49 | ) | (711 | ) |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Total other expense, net                                              |   | (3,218                 | )          | (3,250                | )          | (13,087 | ) | (8,676 | ) |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Income (loss) before minority interest                                |   | 3,910                  |       | (1,400                | )          | 10,409 |   | (2,099 | ) |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Minority interest in income of  consolidated subsidiaries        |   | (1,974                 | )          | (237                  | )          | (5,175 | ) | (1,179 | ) |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Income (loss) before income taxes                                     |   | 1,936                  |       | (1,637                | )          | 5,234 |   | (3,278 | ) |
| Income tax benefit (expense)                                          |   | (212                   | )          | 30                    |       | (1,238 | ) | (621 | ) |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Net income (loss)                                                     |   | 1,724                  |       | (1,607                | )          | 3,996 |   | (3,899 | ) |
| Preferred stock dividends                                             |   | (503                   | )          | (936                  | )          | (2,251 | ) | (5,018 | ) |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Net income (loss) attributable to common  stockholders           |   | $                      | 1,221      |                  | $          | (2,543 | ) | $ | 1,745 |   | $ | (8,917 | ) |
|                                                                  |   |                   |       |                  |       |   |   |   |   |
| Net income (loss) per share attributable  to common stockholders |   |                   |       |                  |       |   |   |   |   |
| Basic                                                                 |   | $                      | 0.05       |                  | $          | (0.32 | ) | $ | 0.11 |   | $ | (1.16 | ) |
| Diluted                                                               |   | $                      | 0.05       |                  | $          | (0.32 | ) | $ | 0.10 |   | $ | (1.16 | ) |
| Weighted average number of common shares                              |   |                   |       |                  |       |   |   |   |   |
| Basic                                                                 |   | 24,285                 |       | 7,912                 |       | 16,458 |   | 7,703 |   |
| Diluted                                                               |   | 25,480                 |       | 7,912                 |       | 17,374 |   | 7,703 |   |

See accompanying notes to consolidated financialstatements.

 
| **UNITED SURGICAL PARTNERS INTERNATIONAL, INC.**                                |
|---------------------------------------------------------------------------------|
| **AND SUBSIDIARIES**                                                            |
| **CONSOLIDATED STATEMENTS OF COMPREHENSIVE  INCOME (LOSS)**                     |
| **(UNAUDITED - IN THOUSANDS)**                                                  |
|                                                                            |
|                                                                            |   | **Three months ended** |   | **Nine months ended** |   |
|                                                                            |   | **September 30,** |   | **September 30,** | ** ** |
|                                                                            |   | **2001** |   | **2000** |   | **2001** |   | **2000** | ** ** |
| Net income (loss)                                                               |   | $ | 1,724 |   | $ | (1,607 | ) | $ | 3,996 |   | $ | (3,899 | ) |
| Other comprehensive income (loss), before  taxes:                               |   |   |   |   |   |   |   |   |   |
| Foreign currency translation adjustments                                        |   | 7,462 |   | (6,555 | ) | (2,945 | ) | (12,591 | ) |
| Income tax (expense) benefit related to  other comprehensive income (loss) |   | (2,612 | ) | 2,294 |   | 1,031 |   | 4,407 |   |
|                                                                            |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)                                               |   | 4,850 |   | (4,261 | ) | (1,914 | ) | (8,184 | ) |
|                                                                            |   |   |   |   |   |   |   |   |   |
| Comprehensive income (loss)                                                     |   | $ | 6,574 |   | $ | (5,868 | ) | $ | 2,082 |   | $ | (12,083 | ) |

See accompanying notes to consolidated financialstatements.

** **
| **UNITED SURGICAL PARTNERS INTERNATIONAL, INC.**                                                                                   |
|------------------------------------------------------------------------------------------------------------------------------------|
| **AND SUBSIDIARIES**                                                                                                               |
| **CONSOLIDATED STATEMENTS OF CASH FLOWS**                                                                                          |
| **(UNAUDITED)**                                                                                                                    |
|                                                                                                                               |
|                                                                                                                               |   | **Nine months ended** |   |
|                                                                                                                               |   | **September 30,** |   |
|                                                                                                                               |   | **2001** |   | **2000** | ** ** |
|                                                                                                                               |   |   |   |   |   |
| Cash flows from operating activities:                                                                                              |   |   |   |   |   |
| Net income (loss)                                                                                                                  |   | $ | 3,996 |   | (3,899 | ) |
| Adjustments to reconcile net income (loss) to  net cash provided by operating activities:                                     |   |   |   |   |   |
| Provision for doubtful accounts                                                                                                    |   | 2,126 |   | 1,478 |   |
| Depreciation and amortization                                                                                                      |   | 19,190 |   | 9,866 |   |
| Amortization of discount on debt                                                                                                   |   | 236 |   | 184 |   |
| Equity in earnings of unconsolidated  affiliates                                                                                   |   | (4,134 | ) | (487 | ) |
| Minority interest in income of  consolidated subsidiaries                                                                     |   | 5,175 |   | 1,179 |   |
| Amortization of deferred compensation                                                                                              |   | 95 |   | — |   |
| Increases (decreases) in cash from changes in  operating assets and liabilities, net of effects from purchases of new  businesses: |   |   |   |   |   |
| Patient receivables                                                                                                                |   | (3,667 | ) | (2,972 | ) |
| Other receivables                                                                                                                  |   | 2,032 |   | (1,499 | ) |
| Inventories of supplies, prepaids and  other current assets                                                                   |   | (454 | ) | (2,053 | ) |
| Accounts payable and accrued expenses                                                                                              |   | (1,740 | ) | 3,316 |   |
| Other long-term liabilities                                                                                                        |   | (332 | ) | 713 |   |
|                                                                                                                               |   |   |   |   |   |
| Net cash provided by operating activities                                                                                          |   | 22,523 |   | 5,826 |   |
|                                                                                                                               |   |   |   |   |   |
| Cash flows from investing activities:                                                                                              |   |   |   |   |   |
| Purchases of new businesses, net of cash  received                                                                                 |   | (26,132 | ) | (72,139 | ) |
| Purchases of property and equipment                                                                                                |   | (15,706 | ) | (12,241 | ) |
| Sales of property                                                                                                                  |   | — |   | 17,379 |   |
| Increase in deposits                                                                                                               |   | (826 | ) | (3,704 | ) |
| Increase in long-term note receivable                                                                                              |   | — |   |   |   |
| Cash released from escrow                                                                                                          |   | 1,664 |   | 11,436 |   |
|                                                                                                                               |   |   | ** ** |   | ** ** |
| Net cash used in investing activities                                                                                              |   | (41,000 | ) | (59,269 | ) |
|                                                                                                                               |   |   |   |   |   |
| Cash flows from financing activities:                                                                                              |   |   |   |   |   |
| Proceeds from long-term debt                                                                                                       |   | 42,056 |   | 60,374 |   |
| Payments on long-term debt                                                                                                         |   | (108,949 | ) | (24,210 | ) |
| Proceeds from issuances of common stock                                                                                            |   | 131,465 |   | 5,747 |   |
| Payments to repurchase common stock                                                                                                |   | (104 | ) | — |   |
| Proceeds from issuance of preferred stock                                                                                          |   | — |   | 18,743 |   |
| Payments to redeem preferred stock and  dividends                                                                                  |   | (33,878 | ) | (5,235 | ) |
| Distributions on investments in affiliates                                                                                         |   | (6 | ) | 1,066 |   |
|                                                                                                                               |   |   | ** ** |   | ** ** |
| Net cash provided by financing activities                                                                                          |   | 30,584 |   | 56,485 |   |
|                                                                                                                               |   |   | ** ** |   | ** ** |
| Effect of exchange rate changes on cash                                                                                            |   | 14 |   | (336 | ) |
|                                                                                                                               |   |   | ** ** |   | ** ** |
| Net increase in cash and cash equivalents                                                                                          |   | 12,121 |   | 2,706 |   |
| Cash and cash equivalents at beginning of  period                                                                                  |   | 3,451 |   | 3,716 |   |
|                                                                                                                               |   |   | ** ** |   | ** ** |
| Cash and cash equivalents at end of period                                                                                         |   | $ | 15,572 |   | 6,422 |   |
|                                                                                                                               |   |   |   |   |   |
| Supplemental information:                                                                                                          |   |   |   |   |   |
| Interest paid                                                                                                                      |   | 15,702 |   | 6,128 |   |
| Non-cash transactions:                                                                                                             |   |   |   |   |   |
| Debt issued for purchases of new businesses                                                                                        |   | — |   | 54,012 |   |
| Sale of common stock for notes receivable  from employees, net                                                                |   | 315 |   | 1,076 |   |
| Common stock issued for purchases of new  businesses                                                                               |   | 48,301 |   | — |   |
| Conversion of Series C convertible preferred  stock to common stock                                                           |   | 20,341 |   | — |   |
| Accrued dividends on preferred stock                                                                                               |   | 1,510 |   | 5,018 |   |
| Conversion of Series B redeemable preferred  stock to Class A common                                                               |   | — |   | 70 |   |
| Assets acquired under capital lease obligations                                                                                    |   | 562 |   | 18,128 |   |
| Conversion of subordinated notes to Series D  preferred stock                                                                      |   | 20,000 |   | — |   |
| Conversion of subordinated note to common  stock                                                                                   |   | 3,287 |   | — |   |

See accompanying notes to consolidated financialstatements.

 

**UNITED SURGICAL PARTNERSINTERNATIONAL, INC.AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**(1)        Basis of Presentation**

United SurgicalPartners International, Inc. and subsidiaries (USPI or the Company), a Delawarecompany, was formed in February 1998 for the primary purpose of ownership andoperation of surgery centers, private surgical hospitals and related businessesin the United States and Western Europe. At September 30, 2001, USPI, headquartered in Dallas, Texas, operatedthirty-five surgical facilities in the United States.  Of these thirty-five facilities, USPI consolidates the results ofseventeen, owns a minority equity interest in sixteen, which are accounted forunder the equity method, and holds no ownership interest in the remaining twocenters, which are operated by USPI under management contracts.  In addition, United Surgical PartnersEurope, S.L. (USPE), a company incorporated in Spain and wholly-owned by USPI,managed and owned a majority interest in six private surgical hospitals, twosurgery centers, and one diagnostic facility in Spain at September 30,2001.  Global Healthcare PartnersLimited (Global), a company incorporated in England and majority-owned by USPI,managed two wholly-owned private surgical hospitals in the United Kingdom atSeptember 30, 2001.

USPI is subject tochanges in government legislation that could impact Medicare, Medicaid, andforeign government reimbursement levels and is also subject to increased levelsof managed care penetration and changes in payor patterns that may impact thelevel and timing of payments for services rendered.

USPI maintains itsbooks and records on the accrual basis of accounting, and the consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America.  The accompanying consolidated financial statements and notesshould be read in conjunction with the Company's Form 8-A which incorporates byreference the Company's Registration Statement on Form S-1.  In addition, the accompanying financialstatements reflect the consolidated results of Day-Op Center of Long Island,Inc., which was not consolidated in the Company's previously publishedconsolidated financial statements for the periods from January 1, 2000 throughJune 30, 2001.  On September 27, 2001,the Company filed a Form 8-K reflecting the restatement of its consolidatedresults for periods from January 1, 2000 through June 30, 2001 upon receiving acommunication from the Securities and Exchange Commission indicating that, basedon the facts and circumstances presented by the Company, Day-Op Center of LongIsland, Inc. must be consolidated pursuant to an interpretation of EITF 97-2.

It is management'sopinion that the accompanying consolidated financial statements reflect all adjustments(which are normal recurring adjustments) necessary for a fair presentation ofthe results for the interim period and the comparable period presented. Theresults of operations for any interim period are not necessarily indicative ofresults for the full year.

**(2)        Acquisitions**

On February 12, 2001,the Company completed a merger with OrthoLink Physicians Corporation.  The transaction was funded through theissuance of 3,390,939 shares of common stock to OrthoLink stockholders.  As of February 12, 2001, OrthoLink held adirect or indirect ownership interest in eight surgery centers.  The Company also held an ownership interestin and managed one of these centers. OrthoLink managed six of the eight surgery centers in which it held anownership interest and managed two additional surgery centers in which it hadno ownership interest.  As a result ofthis merger, the Company also provides specialized management services forhospitals and has service agreements with fourteen physician groups in six states.  The Company's physician practice managementoperations are not, and are not expected to be in the future, a material partof its business.

During July 2001, theCompany invested additional cash in THVG/HealthFirst, L.L.C. (THVG 2), one ofthe Company's two joint ventures with the Baylor Health System.  Effective July 1, 2001 THVG 2 acquired a58.05% interest in an outpatient surgery center in Fort Worth, Texas, forapproximately $14.0 million in cash.  Inaccordance with SFAS 142 (note 8), the goodwill related to this acquisition isnot being amortized.  THVG 2 hadpreviously held no ownership but had operated the Fort Worth surgery centerunder a management contract.  TheCompany consolidates the financial results of THVG 2.

Following are theunaudited pro forma results for the nine months ended September 30, 2001 and2000 as if the acquisitions of OrthoLink and the surgery center in Fort Worthoccurred on January 1, 2000 (in thousands, except per share amounts):
|                                                   |   | **Nine  months ended****September****30,** |       |
|--------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                   |   | **2001**                                   |       | **2000** |   |
|                                                   |   |                                       | ** ** |   | ** ** |
| Net operating  revenues                                |   | $                                          | 182,329    |   | $ | 129,370 |   |
| Net income (loss)                                      |   | 5,234                                      |       | (1,633 | ) |
| Net income (loss)  attributable to common stockholders |   | 2,983                                      |       | (6,651 | ) |
| Basic earnings  (loss) per share                       |   | 0.18                                       |       | (0.60 | ) |
| Diluted earnings  (loss) per share                     |   | 0.17                                       |       | (0.60 | ) |
|                                                        |        |                                            |            |  |  |  |  |

**(3)        Initial Public Offering of Common Stock**

In June 2001, theCompany received, after offering costs of $14.2 million, net proceeds of $130.7million from an initial public offering (IPO) of 10,350,000 shares of itscommon stock, which included 1,350,000 shares attributable to the underwriters’exercise of their over-allotment option. Net proceeds of the offering were used to redeem $33.7 million ofredeemable preferred stock, including accrued dividends, and to repay $91.3million of bank indebtedness.  Theremaining $5.7 million, together with borrowings under the Company’s U.S.credit agreement, was used to acquire the controlling interest in the surgerycenter in Fort Worth.

**(4)        Long-term Debt**

The Company used aportion of the proceeds of its IPO to repay all amounts outstanding under theCompany's credit agreements with commercial lenders in the United States.  Concurrent with these repayments, theexisting agreements were terminated and the Company reached an agreement withanother group of lenders, providing the Company with the ability to borrow upto $55 million at variable interest rates tied to Prime and LIBOR, based on theCompany's existing debt levels.  The newcredit agreement matures June 13, 2004; interest is due at intervals rangingfrom one to six months from the date amounts are drawn under theagreement.  At September 30, 2001, $14.8million was outstanding under the agreement at an average interest rate of6.99%.

Baylor HealthServices, which held a convertible subordinated note in the amount ofapproximately $3.3 million, converted the note to 313,069 shares of theCompany's common stock immediately prior to the completion of the IPO.  The Company's primary private investorswaived their right to the mandatory prepayment of subordinated notes uponcompletion of an IPO, instead exchanging $20 million of 7% Senior SubordinatedNotes for preferred stock (note 5).

**(5)        Redeemable Preferred Stock, Series A andD**

The Company used aportion of the proceeds of its IPO to redeem all 31,200 outstanding shares ofSeries A redeemable preferred stock, including all accrued but unpaiddividends.  USPI has authorized 40,000shares of Series D redeemable preferred stock, 20,000 of which were issued uponthe completion of the IPO in exchange for $20 million in principal amount of 7%Senior Subordinated Notes held by the Company's primary private investors.  The Series D shares have a par value of$0.01, a stated liquidation preference of $1,000 per share plus accrueddividends, and are senior to all common shares. Dividends are paid-in-kind on aquarterly basis at an annual rate of 10% and accrue daily whether or notdeclared and whether or not funds are legally available for payment.

**(6)        Earnings Per Share**

Basic earnings pershare is computed on the basis of the weighted average number of common sharesoutstanding.  Diluted earnings per shareis computed on the basis of the weighted average number of common sharesoutstanding plus the effect of convertible preferred stock, convertible debt,and outstanding options and warrants, except where such effect would beantidilutive.  Net income or lossattributable to common stockholders and net income or loss per common shareinclude preferred stock dividends for purposes of this computation.  The following table sets forth thecomputation of basic and diluted earnings per share for the quarters and ninemonths ended September 30, 2001 and 2000 (in thousands, except per shareamounts):
|                                                   |   | **Three  months ended****September****30,** |   | **Nine  months ended  September 30,** |   |
|--------------------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------|--------|
|                                                   |   | **2001**                                    |   | **2000**                              |   | **2001** |   | **2000** |   |
| Net income (loss)  attributable to common shareholders |   | $                                           | 1,221  |                                  | $      | (2,543 | ) | $ | 1,745 |   | $ | (8,917 | ) |
| Weighted average  common shares outstanding            |   | 24,285                                      |   | 7,912                                 |   | 16,458 |   | 7,703 |   |
| Effect of dilutive  securities:                        |   |                                        |   |                                  |   |   |   |   |   |
| Stock options                                          |   | 914                                         |   | (A                                    | )      | 640 |   | (A | ) |
| Warrants                                               |   | 281                                         |   | (A                                    | )      | 276 |   | (A | ) |
| Convertible subordinated debt                          |   | (B                                          | )      | (A                                    | )      | (A | ) | (A | ) |
| Series C convertible preferred stock                   |   | (B                                          | )      | (A                                    | )      | (A | ) | (A | ) |
| Shares used for  diluted earnings (loss) per share     |   | 25,480                                      |   | 7,912                                 |   | 17,374 |   | 7,703 |   |
|                                                   |   |                                        |   |                                  |   |   |   |   |   |
| Basic earnings  (loss) per share                       |   | $                                           | 0.05   |                                  | $      | (0.32 | ) | $ | 0.11 |   | $ | (1.16 | ) |
| Diluted earnings  (loss) per share                     |   | $                                           | 0.05   |                                  | $      | (0.32 | ) | $ | 0.10 |   | $ | (1.16 | ) |

----

(A)      No incremental shares areincluded because the effect would be antidilutive.

(B)       Securities were settled for cash or stockduring the quarter ended June 30, 2001.

The potential commonstock amounts listed below represent securities that could potentially dilutebasic earnings per share in the future that were not included in thecomputation of diluted earnings per share because to do so would have beenantidilutive for the periods presented:
|                                  |   | **Three  months ended September 30, 2000** |   | **Nine  months ended****September****30, 2000** |   |
|---------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|
| Stock options                         |   | 3,008,300                                       |   | 3,008,300                                       |   |
| Warrants                              |   | 300,000                                         |   | 300,000                                         |   |
| Convertible  subordinated debt        |   | 313,069                                         |   | 313,069                                         |   |
| Series C  convertible preferred stock |   | 1,848,214                                       |   | 1,848,214                                       |   |

**(7)        Segment Disclosure**

USPI has adoptedStatement of Financial Accounting Standards No. 131, *Disclosures About Segments of an Enterpriseand Related Information* (SFAS 131). SFAS 131 establishes standards for reporting information about operatingsegments in financial statements. USPI's business is the operation of surgery centers, private surgicalhospitals and related businesses in the United States and Western Europe.  USPI's chief operating decision maker, asthat term is defined in the accounting standard, regularly reviews financialinformation about its surgery centers and private surgical hospitals forassessing performance and allocating resources both domestically andabroad.  Accordingly, USPI's reportablesegments consist of (1) U.S. based facilities and (2) Western Europe basedfacilities, including those in Spain and the United Kingdom (beginning withUSPI's April 2000 acquisition of Aspen Healthcare Holdings, Limited in theUnited Kingdom).
|                                                      |   |     |       | **Western  Europe** |       |                |       |
|-----------------------------------------------------------|--------|----------|------------|---------------------|------------|---------------------|------------|
| **Three  months ended September 30, 2001 (unaudited)**    |   | **U.S.** |       | **Spain**           |       | **United  Kingdom** |       | **Western  Europe Total** |   | **Total** |   |
| Net patient service  revenue                              |   | $        | 27,440     |                | $          | 14,799              |       | $ | 9,590 |   | $ | 24,389 |   | $ | 51,829 |   |
| Other revenue                                             |   | 8,498    |       | 456                 |       | -                   |       | 456 |   | 8,954 |   |
| Total revenues                                            |   | $        | 35,938     |                | $          | 15,255              |       | $ | 9,590 |   | $ | 24,845 |   | $ | 60,783 |   |
| Depreciation and  amortization                            |   | $        | 4,088      |                | $          | 2,228               |       | $ | 923 |   | $ | 3,151 |   | $ | 7,239 |   |
| Operating income  (loss)                                  |   | 7,691    |       | (1,965              | )          | 1,402               |       | (563 | ) | 7,128 |   |
| Net interest  expense                                     |   | (1,811   | )          | (681                | )          | (687                | )          | (1,368 | ) | (3,179 | ) |
| Total assets                                              |   | 319,732  |       | 117,142             |       | 59,657              |       | 176,799 |   | 496,531 |   |
| Capital  expenditures                                     |   | 2,894    |       | 417                 |       | 1,366               |       | 1,783 |   | 4,677 |   |
| **Three months ended****September  30, 2000 (unaudited)** |   |     | ** ** |                | ** ** |                | ** ** |   | ** ** |   | ** ** |
| Net patient service  revenue                              |   | $        | 13,368     |                | $          | 13,226              |       | $ | 8,497 |   | $ | 21,723 |   | $ | 35,091 |   |
| Other revenue                                             |   | 754      |       | 338                 |       | -                   |       | 338 |   | 1,092 |   |
| Total revenues                                            |   | $        | 14,122     |                | $          | 13,564              |       | $ | 8,497 |   | $ | 22,061 |   | $ | 36,183 |   |
| Depreciation and  amortization                            |   | $        | 1,474      |                | $          | 1,496               |       | $ | 835 |   | $ | 2,331 |   | $ | 3,805 |   |
| Operating income  (loss)                                  |   | 1,594    |       | (879                | )          | 1,135               |       | 256 |   | 1,850 |   |
| Net interest income  (expense)                            |   | (2,216   | )          | 552                 |       | (972                | )          | (420 | ) | (2,636 | ) |
| Total assets                                              |   | 113,398  |       | 88,472              |       | 90,885              |       | 179,357 |   | 292,755 |   |
| Capital  expenditures                                     |   | 2,771    |       | 12,218              |       | 631                 |       | 12,849 |   | 15,620 |   |
| **Nine months ended****September  30, 2001 (unaudited)**  |   |     | ** ** |                | ** ** |                | ** ** |   | ** ** |   | ** ** |
| Net patient service  revenue                              |   | $        | 69,817     |                | $          | 51,479              |       | $ | 28,817 |   | $ | 80,296 |   | $ | 150,113 |   |
| Other revenue                                             |   | 23,055   |       | 1,347               |       | -                   |       | 1,347 |   | 24,402 |   |
| Total revenues                                            |   | $        | 92,872     |                | $          | 52,826              |       | $ | 28,817 |   | $ | 81,643 |   | $ | 174,515 |   |
| Depreciation and  amortization                            |   | $        | 10,536     |                | $          | 6,046               |       | $ | 2,608 |   | $ | 8,654 |   | $ | 19,190 |   |
| Operating income                                          |   | 17,962   |       | 651                 |       | 4,883               |       | 5,534 |   | 23,496 |   |
| Net interest expense                                      |   | (8,441   | )          | (2,191              | )          | (2,406              | )          | (4,597 | ) | (13,038 | ) |
| Total assets                                              |   | 319,732  |       | 117,142             |       | 59,657              |       | 176,799 |   | 496,531 |   |
| Capital  expenditures                                     |   | 8,353    |       | 2,015               |       | 5,900               |       | 7,915 |   | 16,268 |   |
| **Nine months ended****September  30, 2000 (unaudited)**  |   |     | ** ** |                | ** ** |                | ** ** |   | ** ** |   | ** ** |
| Net patient service  revenue                              |   | $        | 36,364     |                | $          | 40,998              |       | $ | 17,213 |   | $ | 58,211 |   | $ | 94,575 |   |
| Other revenue                                             |   | 2,326    |       | 1,031               |       | -                   |       | 1,031 |   | 3,357 |   |
| Total revenues                                            |   | $        | 38,690     |                | $          | 42,029              |       | $ | 17,213 |   | $ | 59,242 |   | $ | 97,932 |   |
| Depreciation and  amortization                            |   | $        | 3,872      |                | $          | 4,333               |       | $ | 1,661 |   | $ | 5,994 |   | $ | 9,866 |   |
| Operating income                                          |   | 3,568    |       | 412                 |       | 2,597               |       | 3,009 |   | 6,577 |   |
| Net interest  expense                                     |   | (5,320   | )          | (719                | )          | (1,926              | )          | (2,645 | ) | (7,965 | ) |
| Total assets                                              |   | 113,398  |       | 88,472              |       | 90,885              |       | 179,357 |   | 292,755 |   |
| Capital  expenditures                                     |   | 5,340    |       | 23,813              |       | 1,216               |       | 25,029 |   | 30,369 |   |

 

** (8)       NewAccounting Pronouncements**

On July 20, 2001 theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 141, *Business Combinations* (SFAS 141), and No.142, *Accountingfor Goodwill and Other Intangible Assets* (SFAS 142).  Under SFAS 141, all business combinationsinitiated after June 30, 2001 will be accounted for using the purchase methodof accounting; the use of the pooling-of-interests method of accounting will beprohibited.  The adoption of thisstandard is not expected to have a material effect on the Company's financialposition or future results of operations.

SFAS 142 eliminatesthe amortization of goodwill.  UnderSFAS 142, the carrying amount of goodwill should be tested for impairment atleast annually at the reporting unit level, as defined, and will be reducedonly if it is found to be impaired or is associated with assets sold orotherwise disposed of.  SFAS 142 iseffective for fiscal years beginning after December 15, 2001 except that SFAS142 requires the cessation of goodwill amortization resulting from acquisitionsconsummated subsequent to June 30, 2001. The table below shows the Company’s net income (loss) for the quarters endedSeptember 30, 2001 and 2000 on a pro forma basis as if the cessation ofgoodwill amortization required by the new standard had occurred July 1, 2000(in thousands, except per share amounts):
|                                                                |   | **Three  months ended**** September****30,** |   | **Nine  months ended   September 30,** |   |
|---------------------------------------------------------------------|--------|---------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                |   | **2001**                                          |   | **2000**                                    |   | **2001** |   | **2000** |   |
| Net income (loss)  attributable to common shareholders, as reported |   | $                                                 | 1,221  |                                        | $      | (2,543 | ) | $ | 1,745 |   | $ | (8,917 | ) |
| Goodwill  amortization, net of applicable income tax benefits       |   | 1,309                                             |   | 926                                         |   | 3,763 |   | 2,562 |   |
| Pro forma net  income (loss) attributable to common shareholders    |   | $                                                 | 2,530  |                                        | $      | (1,617 | ) | $ | 5,508 |   | $ | (6,355 | ) |
|                                                                |   |                                              |   |                                        |   |   |   |   |   |
| Diluted earnings  (loss) per share, as reported                     |   | $                                                 | 0.05   |                                        | $      | (0.32 | ) | $ | 0.10 |   | $ | (1.16 | ) |
| Goodwill  amortization, net of applicable income tax benefits       |   | 0.05                                              |   | 0.12                                        |   | 0.22 |   | 0.33 |   |
| Pro forma diluted  earnings (loss) per share                        |   | $                                                 | 0.10   |                                        | $      | (0.20 | ) | $ | 0.32 |   | $ | (0.83 | ) |

 

In June 2001, theFASB issued SFAS No. 143, *Accounting for Asset Retirement Obligations*(SFAS143).  SFAS 143 applies to legalobligations associated with the retirement of tangible, long-lived assets.  SFAS 143 requires that all entitiesrecognized the estimated fair value of an asset retirement obligation as aliability in the period in which it is incurred, if a reasonable estimate offair value can be made.  SFAS 143 alsorequires that all entities capitalized the associated asset retirement costs aspart of the carrying amount of the long-lived asset.  The Company must adopt SFAS 143 as of January 1, 2003.  The Company does not believe that thisstandard will have a material effect on the Company's future financial positionor results of operations.

In August 2001, theFASB issued SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* (SFAS 144). SFAS 144 replaces SFAS No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed Of*, and amends theaccounting and reporting provisions of Accounting Principles Board Opinion No.30, *Reportingthe Results of Operations -- Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual, and Infrequently Occurring Events andTransactions*.  The Companymust adopt SFAS 144 as of January 1, 2002. The following highlights the major changes:

**•           Assetsto be held and used** -- no longer required to allocate goodwill to theassets.

**•           Assetsto disposed of by abandonment** -- requires therevision of the depreciable life of the assets.

**•           Assetsto be disposed of either by exchange for similar productive assets ordistribution to owners in a spinoff** -- requires therecognition of an impairment loss if the carrying amounts of the assets exceedtheir fair value.

**•           Assetsto be disposed of by sale** -- requires the remeasurement of the assets ateither the carrying amount or the fair value, whichever is lower, with no furtherdepreciation or amortization of the assets.

**•           Discontinuedoperations** -- excludes future operating losses untilrealized; now includes discontinued "components of an entity," whichhas a broader definition than a segment.

This standard mayhave a material effect on the Company's future financial position or results ofoperations.

**ITEM 2.  *Management**’s Discussion and Analysis of Financial Condition andResults of Operations***

             The followingdiscussion should be read in conjunction with the Company’s unauditedConsolidated Financial Statements and the notes thereto included in Item 1 ofthis Quarterly Report on Form 10-Q.

**Forward-LookingStatements**

             Certain statementscontained or incorporated by reference in this Quarterly Report on Form 10-Q,including without limitation statements containing the words “believes,”“anticipates,” “continue,” “estimate,” “expects,” “intend,” “may,” “plan,”“will,” “projects” and words of similar import, are forward looking statementswithin the meaning of the federal securities laws. Such forward-lookingstatements involve known and unknown risks, uncertainties and other matterswhich may cause the actual results, performance or achievements of the Companyor industry results to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Such risks, uncertainties and other matters include, but are notlimited to, (i) the Company’s ability to attract and retain top qualityphysicians, (ii) the Company’s ability to grow through selective acquisitionsand development, (iii) the Company’s ability to pursue strategic relationshipswith healthcare systems, (iv) the Company’s ability to expand, and (v) theCompany’s ability to enhance operating efficiencies.  In addition, the Company’s ability to achieve certain anticipatedresults will be subject to other factors affecting the Company’s business thatare beyond the Company’s control, including but not limited to general economicconditions and the effect of government regulation on the conduct of theCompany’s business. Given these uncertainties, readers are cautioned not toplace undue reliance on such forward-looking statements. The Company disclaimsany obligation to update any such statements or publicly announce any updatesor revisions to any of the forward-looking statements contained herein toreflect any change in the Company’s expectation with regard thereto or anychange in events, conditions, circumstances or assumptions underlying suchstatements. Reference is hereby made to the disclosures contained under theheading “Risk Factors” in the Company’s Form 8-A which incorporates byreference the Company's Registration Statement on Form S-1, as amended,initially filed with the Securities and Exchange Commission onFebruary 12, 2001.

**Overview**

             The Company operatessurgery centers and private surgical hospitals in the United States and WesternEurope.  As of September 30, 2001, theCompany had ownership in 32 surgery centers and one private surgical hospitaland managed two additional surgery centers in the United States.  Also, in the United States, the Company ownsinterests in and will operate three surgery centers and one private surgicalhospital that are currently under construction.  In Western Europe, the Company owns and operates six privatesurgical hospitals, two surgery centers and one diagnostic facility in Spainand owns and operates two private surgical hospitals in the UnitedKingdom.  Additionally, the Company iscurrently developing a cancer center in the United Kingdom.

             During July 2001, theCompany acquired a controlling interest in an outpatient surgery center in FortWorth, Texas, for approximately $14.0 million in cash. The Company previouslyhad held no ownership but had operated the surgery center under a managementcontract.

          On February 12, 2001,the Company completed a merger with OrthoLink Physicians Corporation.  The transaction was funded through theissuance of 3,390,939 shares of common stock to OrthoLink stockholders.  As of February 12, 2001, OrthoLink held adirect or indirect ownership interest in eight surgery centers.  The Company also held an ownership interestin and managed one of these centers. OrthoLink managed six of the eight surgery centers in which it held an ownershipinterest and managed two additional surgery centers in which it had noownership interest.  As a result of thismerger, the Company also provides specialized management services for hospitalsand has service agreements with 14 physician groups in six states.  The Company’s physician practice managementoperations are not, and are not expected to be in the future, a material partof its business.

**Sourcesof Revenue**

Revenues include:

•            net patient services revenues forthe facilities that are consolidated for financial reporting purposes, whichare typically those in which the Company has ownership interests of greaterthan 50%, and

•            management and administrativeservice fees earned from, and the Company’s share of net income of, thenon-consolidated facilities that are accounted for under the equity method ofaccounting. These amounts are included in revenues as these operations arecentral to the Company’s business strategy.

For the three months ended September 30, 2001 net revenue from patientservices represented approximately 85% of the Company's total revenues ascompared to 97% for the same period in 2000, and management and administrativeservice fees from, and the Company's share of net income of, thenon-consolidated facilities accounted for under the equity method together withother income represented approximately 15% and 3% of the Company's totalrevenues for the three months ended September 30, 2001 and 2000,respectively.  For the nine months endedSeptember 30, net revenue from patient services represented approximately 86%of the Company's total revenues in 2001 as compared to 97% for the same periodin 2000, and management and administrative service fees from, and the Company'sshare of net income of, the non-consolidated facilities accounted for under theequity method together with other income represented approximately 14% and 3%of the Company's total revenues for the nine months ended September 30, 2001and 2000, respectively.

For the three months ended September 30, 2001, approximately 59% of theCompany's revenues were generated from operations in the United States and 41%from Western Europe.  For the ninemonths ended September 30, 2001, approximately 53% of the Company's revenueswere generated from operations in the United States and 47% from WesternEurope.  For the three and nine monthsended September 30, 2000, respectively, these percentages were 39% and 40% forthe United States, 61% and 60% for Western Europe.

**Resultsof Operations**

             The following tablesummarizes certain statements of operations items expressed as a percentage ofrevenues for the periods indicated:
|                                                         |   | **For  the three months ended September 30,** |   | **For  the nine months ended September 30,** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------------------------------------|--------|
|                                                         |   | **2001**                                      |   | **2000**                                     |   | **2001** |   | **2000** |   |
| Total revenues                                               |   | 100.0                                         | %      | 100.0                                        | %      | 100.0 | % | 100.0 | % |
| Operating expenses,  excluding depreciation and amortization |   | 76.4                                          |   | 84.4                                         |   | 75.5 |   | 83.2 |   |
| EBITDA                                                       |   | 23.6                                          |   | 15.6                                         |   | 24.5 |   | 16.8 |   |
| Minority interests  in income of consolidated entities       |   | 3.2                                           |   | 0.7                                          |   | 3.0 |   | 1.2 |   |
| EBITDA less  minority interest                               |   | 20.4                                          |   | 14.9                                         |   | 21.5 |   | 15.6 |   |
| Depreciation and  amortization                               |   | 11.9                                          |   | 10.5                                         |   | 11.0 |   | 10.1 |   |
| Interest and other  expense, net                             |   | 5.3                                           |   | 8.9                                          |   | 7.5 |   | 8.8 |   |
| Income (loss)  before income taxes                           |   | 3.2                                           |   | (4.5                                         | )      | 3.0 |   | (3.3 | ) |
| Income tax benefit  (expense)                                |   | (0.3                                          | )      | 0.1                                          |   | (0.7 | ) | (0.6 | ) |
| Net income (loss)                                            |   | 2.9                                           |   | (4.4                                         | )      | 2.3 |   | (3.9 | ) |

 

**ThreeMonths Ended September 30, 2001 Compared to Three Months Ended September 30,2000**

             Revenues increased by$24.6 million, or 68% to $60.8 million for the three months ended September 30,2001 from $36.2 million for the three months ended September 30, 2000.  Of this increase in revenues, $17.5 millionwas contributed by facilities acquired since September 30, 2000, of which $14.1million was contributed by OrthoLink. The exchange rate of the European currencies to the U.S. dollar waslower in the three months ended September 30, 2001 as compared to the sameperiod in the prior year, resulting in a negative impact of $0.5 million onyear over year revenues for the facilities in Western Europe that were owned inboth 2001 and 2000 (“same store” facilities). Absent this foreign exchange impact, same store facilities in WesternEurope contributed $2.3 million more to consolidated revenue in the threemonths ended September 30, 2001 as compared to the same period in 2000.  The remaining increase in revenues wascontributed by same store U.S. facilities, which performed approximately 21.1%more cases in the three months ended September 30, 2001 as compared to thethree months ended September 30, 2000.

             Operating expenses,excluding depreciation and amortization, increased by $15.9 million, or 52%, to$46.4 million for the three months ended September 30, 2001 from $30.5 millionfor the three months ended September 30, 2000. Operating expenses, excluding depreciation and amortization, as apercentage of revenues, decreased to 76.4% for the three months ended September30, 2001 from 84.4% for the three months ended September 30, 2000, primarily asa result of improved economies of scale as the Company expanded.

             EBITDA less minorityinterest increased $7.0 million, or 128%, to $12.4 million for the three monthsended September 30, 2001 from $5.4 million for the three months ended September30, 2000.  Of this increase in EBITDAless minority interest, $5.9 million was contributed by facilities acquiredsince September 30, 2000.  EBITDA lessminority interest, as a percentage of revenues, increased to 20.4% for thethree months ended September 30, 2001 from 14.9% for the three months endedSeptember 30, 2000, primarily as a result of leveraging our operationalmanagement and corporate overhead expenses over the increased revenue.

             Depreciationand amortization increased $3.4 million, or 90%, to $7.2 million for the threemonths ended September 30, 2001 from $3.8 million for the three months endedSeptember 30, 2000 as a result of amortization of the goodwill and otherintangibles and depreciation of the additional property and equipmentassociated with the acquisitions completed since September 30, 2000.  Depreciation and amortization, as apercentage of revenues, increased to 11.9% for the three months ended September30, 2001 from 10.5% for the three months ended September 30, 2000.

             Interest expense, netof interest income, increased 21% to $3.2 million for the three months endedSeptember 30, 2001 from $2.6 million for the three months ended September 30,2000 as a result of additional borrowings to finance acquisitions.

             Provision for incometaxes was $0.2 million for the three months ended September 30, 2001 comparedto a benefit of less than $0.1 million for the three months ended September 30,2000.  The U.S. operations continue tohave no federal tax provision as existing net operating loss carryforwards(“NOLs”) are utilized to offset current taxable income.  The Company expects to utilize substantiallyall of its remaining U.S. NOLs during 2001. Subsequently, the Company’s overall effective tax rate is expected toincrease to a rate closer to statutory tax rates.  The Company’s tax provision moved from a benefit of 1.8% ofpretax income to a provision of 11.0% of pretax income primarily as a result ofimproved profitability in the United Kingdom, where there are no NOLs availableto offset current income.

             Net income was $1.7million for the three months ended September 30, 2001 compared to a net loss of$1.6 million for the three months ended September 30, 2000.  This $3.3 million improvement primarilyresults from the increased revenues and improved economies of scale related toexpenses discussed above.

**NineMonths Ended September 30, 2001 Compared to Nine Months Ended September 30,2000**

             Revenues increased by$76.6 million, or 78% to $174.5 million for the nine months ended September 30,2001 from $97.9 million for the nine months ended September 30, 2000.  Of this increase in revenues, $40.7 millionwas contributed by facilities acquired since September 30, 2000, of which $34.7million was contributed by OrthoLink. An additional $10.2 million was attributable to revenue generated in thefirst quarter of fiscal 2001 by the two hospitals in the United Kingdom.  These hospitals were acquired on April 6,2000, subsequent to the end of the comparable first quarter of fiscal2000.  The exchange rate of the Europeancurrencies to the U.S. dollar was lower in the nine months ended September 30,2001 as compared to the same period in the prior year, resulting in a negativeimpact of $2.7 million on year over year revenues for the facilities in WesternEurope that were owned in both 2001 and 2000 (“same store” facilities).  Absent this foreign exchange impact, samestore facilities in Western Europe contributed $7.2 million more toconsolidated revenue in the nine months ended September 30, 2001 as compared tothe same period in 2000.  The remainingincrease in revenues was contributed by same store U.S. facilities, whichperformed approximately 16% more cases in the nine months ended September 30,2001 as compared to the nine months ended September 30, 2000.

             Operating expenses,excluding depreciation and amortization, increased by $50.3 million, or 62%, to$131.8 million for the nine months ended September 30, 2001 from $81.5 millionfor the nine months ended September 30, 2000. Operating expenses, excluding depreciation and amortization, as apercentage of revenues, decreased to 75.5% for the nine months ended September30, 2001 from 83.2% for the nine months ended September 30, 2000, primarily asa result of improved economies of scale as the Company expanded.

             EBITDA lessminority interest increased $22.2 million, or 146%, to $37.5 million for thenine months ended September 30, 2001 from $15.3 million for the nine monthsended September 30, 2000.  Of thisincrease in EBITDA less minority interest, $14.1 million was contributed by facilitiesacquired since September 30, 2000. EBITDA less minority interest, as a percentage of revenues, increased to21.5% for the nine months ended September 30, 2001 from 15.6% for the ninemonths ended September 30, 2000, primarily as a result of leveraging ouroperational management and corporate overhead expenses over the increasedrevenue.

             Depreciation andamortization increased $9.3 million, or 95%, to $19.2 million for the ninemonths ended September 30, 2001 from $9.9 million for the nine months endedSeptember 30, 2000 as a result of amortization of the goodwill and otherintangibles and depreciation of the additional property and equipmentassociated with the acquisitions completed during 2000 and the first ninemonths of 2001.  Depreciation and amortization,as a percentage of revenues, increased to 11.0% for the nine months endedSeptember 30, 2001 from 10.1% for the nine months ended September 30, 2000.

             Interest expense, netof interest income, increased 64% to $13.0 million for the nine months endedSeptember 30, 2001 from $8.0 million for the nine months ended September 30,2000 as a result of additional borrowings to finance acquisitions.

             Provision for incometaxes was $1.2 million for the nine months ended September 30, 2001 and $0.6million for the nine months ended September 30, 2000.  The Company’s results for the nine months ended September 30,2001 include a full nine months of results of its United Kingdom subsidiaries,which were acquired in April 2000.  TheCompany’s United Kingdom operations have a higher effective tax rate than theU.S. operations because of NOLs utilized to offset current U.S. taxable income.

             Net income was $4.0million for the nine months ended September 30, 2001 compared to a net loss of$3.9 million for the nine months ended September 30, 2000.  This $7.9 million improvement primarilyresults from the increased revenues and improved economies of scale related toexpenses discussed above.

**Liquidityand Capital Resources**

             On June 13, 2001, theCompany received net proceeds of $130.7 million from an initial public offeringof 10,350,000 shares of its common stock, which included 1,350,000 sharesattributable to the underwriters’ exercise of their over-allotment option.  Net proceeds of the offering were used toredeem $33.7 million of redeemable preferred stock and repay $91.3 million ofbank indebtedness.  The remaining $5.7million, together with borrowings under the Company’s U.S. credit agreement,was used during the third quarter of 2001 to acquire the controlling interestin the surgery center in Fort Worth. Working capital was $19.7 million at September 30, 2001.  During the nine months ended September 30,2001, the Company generated $22.5 million of cash flows from operations ascompared to $5.8 million during the nine months ended September 30, 2000.

             During the nine monthsended September 30, 2001, the Company’s net cash required for investingactivities was $41.0 million, consisting of $26.1 million for the purchase ofbusinesses, $15.7 million for the purchase of property and equipment, and net inflowsfrom other investing activities of $0.8 million.  The $26.1 million primarily represents purchases of newbusinesses, net of cash acquired, and incremental investments in unconsolidatedaffiliates.  Most of these transactionsare individually insignificant; the most significant amount is the $14.0million paid for the surgery center in Fort Worth.  Approximately $3.8 million of the property and equipmentpurchases related to ongoing development projects.  The $41.0 million of cash required for investing activities wasfunded primarily with the cash flows from operations noted above and netborrowings under credit agreements with banks. Net cash provided during the nine months ended September 30, 2001 byfinancing activities totaled $30.6 million.

             In connectionwith the initial public offering of common stock, the Company repaid allborrowings under its existing credit agreements in the United States andentered into a new credit agreement with a group of commercial lendersproviding the Company with the ability to borrow up to $55 million to be usedfor acquisitions and general corporate purposes.  Borrowings under this agreement bear interest at variable ratestied to Prime and LIBOR and mature on June 13, 2004.  At September 30, 2001, approximately $14.8 million wasoutstanding under this agreement.

             Additionally, theCompany has credit agreements with commercial lenders in each of the twocountries in Western Europe in which it operates.  In Spain, the credit agreement provides for borrowings of up to100 million Euros (approximately $90.1 million as of September 30, 2001) withborrowing availability calculated quarterly based on trailing EBITDA, includinghistorical EBITDA of acquired entities. Borrowings under this agreement may beused for acquisitions of healthcare facilities in Spain or Portugal and workingcapital purposes, bear interest at rates ranging from 0.75% to 2.25% overEuribor and mature on December 31, 2007. At September 30, 2001, approximately $24.9 million was outstanding underthis agreement, and approximately $4.7 million was available for borrowing. Thecredit agreement in the United Kingdom provides for total borrowings of £42.0million (approximately $61.7 million as of September 30, 2001) under threeseparate facilities.  At September 30,2001, total outstanding borrowings under this term facility were approximately$36.3 million and approximately $18.1 million was available for borrowings. Thecredit agreement specifies that of this available amount, $10.3 million be usednot later than September 30, 2003 to retire demand notes payable to the formerowners of the Company's two hospitals in the United Kingdom.  Borrowings under this agreement bearinterest at rates of 1.50% to 2.00% over LIBOR and mature in April 2010. TheCompany  pledged the capital stock ofits U.K. subsidiaries to secure borrowings under this agreement.  The Company was in compliance with allcovenants under its credit agreements as of September 30, 2001.

             The Company believesthat existing funds, cash flows from operations and borrowings under its creditfacilities will provide sufficient liquidity for the next twelve months.  The Company intends to acquire and developadditional facilities in the future and may require additional debt or equityfinancing for these acquisitions and development projects.  There are no assurances that needed capitalwill be available on acceptable terms, if at all.  If the Company is unable to obtain funds when needed or onacceptable terms, it will be required to curtail its acquisition anddevelopment program.

**ITEM 3.  *Quantitative**and Qualitative Disclosures About Market Risk***

             The Company hasexposure to interest rate risk related to its financing, investing, and cashmanagement activities.  The Company'sfinancing arrangements with banks are based on the spread over Prime, LIBOR orEuribor.  The Company's financingarrangements with private equity firms are based on fixed rates.  Inflation and changing prices have notsignificantly affected the Company's operating results or the markets in whichthe Company performs services.

             The Company'sinternational revenues are a significant portion of its total revenues.  The Company is exposed to risks associatedwith operating internationally, including:

             •            foreigncurrency exchange risk; and

             •            taxes and regulatory changes.

             Historically, theCompany has not held or issued derivative financial instruments.  The Company does not use derivativefinancial instruments for speculative purposes.  The Company's international operations in some instances operateas a natural hedge because both expenses and revenues are denominated in localcurrency.

**PART II – OTHER INFORMATION**

**ITEM 1. *Legal Proceedings***

             From time to time, theCompany is involved in litigation incidental to its business. In the Company'sopinion, no litigation to which the Company is currently a party is likely tohave a material adverse effect on the Company's results of operations, cashflows or financial condition.

**ITEM 6.  *Exhibits**and Reports on Form 8-K***

                           
| (a)       |   | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                   |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                        |
|      |   | 2.1                                                                                                                                                                                                                                                                                                                                                                                         | Agreement and Plan  of Merger, dated as of December 6, 2000, among United Surgical Partners  International, Inc., OPC Acquisition Corporation and OrthoLink Physicians  Corporation (incorporated by reference to Exhibit 2.1 to the Company’s  Registration Statement on Form S-1 initially filed with the SEC on February  12, 2001, No. 333-55442) |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                        |
|      |   | 2.2                                                                                                                                                                                                                                                                                                                                                                                         | Agreement for the  Sale and Purchase of Shares and Loan Notes in Aspen Healthcare Holdings  Limited, dated April 6, 2000, between Electra Private Equity Partners 1995  and others and Global Healthcare Partners Limited (incorporated by reference  to Exhibit 2.2 to the Company’s Registration Statement on Form S-1 initially  filed with the SEC on February 12, 2001, No. 333-55442) |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                        |
|      |   | 3.1.1                                                                                                                                                                                                                                                                                                                                                                                       | Second Amended and  Restated Certificate of Incorporation (incorporated by reference to Exhibit  3.1.1 to the Company’s Registration Statement on Form S-1 initially filed  with the SEC on February 12, 2001, No. 333-55442) |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                        |
|      |   | 3.1.2                                                                                                                                                                                                                                                                                                                                                                                       | Series D Redeemable  Preferred Certificate of Designation (incorporated by reference to Exhibit  3.1.2 to the Company’s Registration Statement on Form S-1 initially filed  with the SEC on February 12, 2001, No. 333-55442) |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                        |
|      |   | 3.2                                                                                                                                                                                                                                                                                                                                                                                         | Amended and  Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s  Registration Statement on Form S-1 initially filed with the SEC on February  12, 2001, No. 333-55442) |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|  (b) |   | Reports on Form  8-K:                                                                                                                                                                                                                                                                                                                                                                       |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|      |   | The Company filed a  report on Form 8-K, dated September 27, 2001, to report restated financial statements  arising from the receipt of a communication from the Securities and Exchange  Commission, indicating that, based on the facts and circumstances presented  by the Company, Day-Op Center of Long Island, Inc. must be consolidated  pursuant to an interpretation of EITF 97-2. |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                        |   |
|      |   | The Company filed a  report on Form 8-K, dated September 28, 2001, to furnish, pursuant to  Regulation FD, a copy of materials dated September 28, 2001 prepared with  respect to presentations to investors and others that may be made by senior  officers of the Company.                                                                                                                |

 

**SIGNATURE**

             Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                          | United Surgical Partners  International, Inc. |
|-------------------------------|-----------------------------------------------|
|                          |                                          |   |
|                          |                                          |   |
|                          | By:                                           | /s/ Mark A. Kopser |
|                          |                                          | Mark A. Kopser |
|                          |                                          | *Senior  Vice President and* |
|                          |                                          | *Chief  Financial Officer* |
|                          |                                          | *(Principal  Financial Officer and duly authorized to sign this report on behalf of the  Registrant)* |
|                          |                                          |   |
|                          |                                          |   |
|                          | By:                                           | /s/ John J. Wellik |
|                          |                                          | John J. Wellik |
|                          |                                          | *Vice  President and Controller* |
|                          |                                          | *(Principal  Accounting Officer)* |
| Date:  November 14, 2001 |                                          |   |

 

 

EXHIBIT INDEX

 
| Exhibit Number |   | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                           |
|----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1            |   | Agreement and Plan  of Merger, dated as of December 6, 2000, among United Surgical Partners  International, Inc., OPC Acquisition Corporation and OrthoLink Physicians  Corporation (incorporated by reference to Exhibit 2.1 to the Company’s  Registration Statement on Form S-1 initially filed with the SEC on February  12, 2001, No. 333-55442)                                       |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.2            |   | Agreement for the  Sale and Purchase of Shares and Loan Notes in Aspen Healthcare Holdings  Limited, dated April 6, 2000, between Electra Private Equity Partners 1995  and others and Global Healthcare Partners Limited (incorporated by reference  to Exhibit 2.2 to the Company’s Registration Statement on Form S-1 initially  filed with the SEC on February 12, 2001, No. 333-55442) |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1.1          |   | Second Amended and  Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1.1  to the Company’s Registration Statement on Form S-1 initially filed with the  SEC on February 12, 2001, No. 333-55442)                                                                                                                                                               |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1.2          |   | Series D Redeemable  Preferred Certificate of Designation (incorporated by reference to Exhibit  3.1.2 to the Company’s Registration Statement on Form S-1 initially filed  with the SEC on February 12, 2001, No. 333-55442)                                                                                                                                                               |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2            |   | Amended and  Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s  Registration Statement on Form S-1 initially filed with the SEC on February  12, 2001, No. 333-55442)                                                                                                                                                                                              |
|           |   |                                                                                                                                                                                                                                                                                                                                                                                             |