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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004
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 Partners International, Inc.  Delaware
(State or other jurisdiction of incorporation or organization)
    
    75-2749762
(IRS Employer Identification Number)15305 Dallas Parkway, Suite 1600
Addison, Texas
(Address of principal executive offices)
    
    75001
(Zip Code)
 (972) 713-3500
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange
Act). Yes x No o At April 28, 2004 there were 28,113,256 shares of Common Stock
outstanding.




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UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES  PART I.
    
    Financial InformationItem 1.
    
    Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Income for the three months ended March 31, 2004 and 2003
    
    
    4Consolidated Statements of Comprehensive Income for the three months ended March 31, 2004
and 2003
    
    
    5Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003.
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    25PART II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    26Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    26Signatures
    
    
    
    
    
    
    27Certification of CEO under Section 302Certification of CFO under Section 302Certification of CEO under Section 906Certification of CFO under Section 906
  Note: Items 2, 3, 4 and 5 of Part II are omitted because they are not
applicable. 2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES 
 Consolidated Balance Sheets
 (Unauditedin thousands, except per share amounts)
 March 31, 2004
    
    December 31, 2003AssetsCash and cash equivalents
    
    $
    51,656
    
    
    $
    28,519Patient receivables, net of allowance for doubtful
accounts of $9,579 and $8,838, respectively
    
    
    62,235
    
    
    
    56,591Other receivables
    
    
    18,029
    
    
    
    20,168Inventories of supplies
    
    
    8,952
    
    
    
    9,024Deferred tax asset, net
    
    
    7,925
    
    
    
    6,747Prepaids and other current assets
    
    
    14,381
    
    
    
    12,548Total current assets
    
    
    163,178
    
    
    
    133,597Property and equipment, net
    
    
    350,910
    
    
    
    348,063Investments in affiliates
    
    
    36,786
    
    
    
    32,104Intangible assets, net
    
    
    334,440
    
    
    
    326,645Other assets
    
    
    16,975
    
    
    
    30,100Total assets
    
    $
    902,289
    
    
    $
    870,509Liabilities and Stockholders EquityAccounts payable
    
    $
    34,778
    
    
    $
    36,453Accrued salaries and benefits
    
    
    21,889
    
    
    
    19,609Due to affiliates
    
    
    7,435
    
    
    
    5,490Accrued interest
    
    
    5,664
    
    
    
    1,739Current portion of long-term debt
    
    
    19,701
    
    
    
    16,794Other accrued expenses
    
    
    30,812
    
    
    
    23,555Total current liabilities
    
    
    120,279
    
    
    
    103,640Long-term debt, less current portion
    
    
    286,530
    
    
    
    287,950Other long-term liabilities
    
    
    6,814
    
    
    
    8,327Deferred tax liability, net
    
    
    35,095
    
    
    
    33,979Total liabilities
    
    
    448,718
    
    
    
    433,896Minority interests
    
    
    50,684
    
    
    
    45,958Stockholders equity:Common stock, $0.01 par value; 200,000 shares
authorized; 28,132 and 27,705 shares issued at
March 31, 2004 and December 31, 2003, respectively
    
    
    281
    
    
    
    277Additional paid-in capital
    
    
    334,950
    
    
    
    330,519Treasury stock, at cost, 53 and 52 shares at March
31, 2004 and December 31, 2003, respectively
    
    
    (992
    )
    
    
    (986
    )Deferred compensation
    
    
    (6,027
    )
    
    
    (4,548
    )Receivables from sales of stock
    
    
    
    
    
    
    (1
    )Accumulated other comprehensive income, net of tax
    
    
    32,129
    
    
    
    32,852Retained earnings
    
    
    42,546
    
    
    
    32,542Total stockholders equity
    
    
    402,887
    
    
    
    390,655Total liabilities and stockholders equity
    
    $
    902,289
    
    
    $
    870,509
 See accompanying notes to consolidated financial statements. 3




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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES 
 Consolidated Statements of Income
 (Unauditedin thousands, except per share amounts)
 Three Months EndedMarch 31,2004
    
    2003Net patient service revenue
    
    $
    117,932
    
    
    $
    90,471Management and administrative services revenue
    
    
    9,505
    
    
    
    8,037Equity in earnings of unconsolidated affiliates
    
    
    5,310
    
    
    
    2,541Other income
    
    
    976
    
    
    
    1,010Total revenues
    
    
    133,723
    
    
    
    102,059Salaries, benefits, and other employee costs
    
    
    34,112
    
    
    
    25,496Medical services and supplies
    
    
    26,059
    
    
    
    19,903Other operating expenses
    
    
    22,975
    
    
    
    18,016General and administrative expenses
    
    
    7,994
    
    
    
    6,714Provision for doubtful accounts
    
    
    2,295
    
    
    
    1,548Depreciation and amortization
    
    
    8,879
    
    
    
    7,437Total operating expenses
    
    
    102,314
    
    
    
    79,114Operating income
    
    
    31,409
    
    
    
    22,945Interest income
    
    
    170
    
    
    
    316Interest expense
    
    
    (7,524
    )
    
    
    (6,874
    )Other
    
    
    7
    
    
    
    7Total other expense, net
    
    
    (7,347
    )
    
    
    (6,551
    )Income before minority interests
    
    
    24,062
    
    
    
    16,394Minority interests in income of consolidated subsidiaries
    
    
    (8,151
    )
    
    
    (5,011
    )Income before income taxes
    
    
    15,911
    
    
    
    11,383Income tax expense
    
    
    (5,909
    )
    
    
    (4,261
    )Net income
    
    $
    10,002
    
    
    $
    7,122Net income per share attributable to common stockholdersBasic
    
    $
    0.36
    
    
    $
    0.26Diluted
    
    $
    0.34
    
    
    $
    0.26Weighted average number of common sharesBasic
    
    
    27,720
    
    
    
    27,047Diluted
    
    
    29,178
    
    
    
    27,757
 See accompanying notes to consolidated financial statements. 4




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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES 
 Consolidated Statements of Comprehensive Income
 (Unauditedin thousands)
 Three Months EndedMarch 31,2004
    
    2003Net income
    
    $
    10,002
    
    
    $
    7,122Other comprehensive income, net of taxes:Foreign currency translation adjustments
    
    
    (757
    )
    
    
    2,564Net unrealized gains (losses) on securities
    
    
    34
    
    
    
    (123
    )Other comprehensive income (loss)
    
    
    (723
    )
    
    
    2,441Comprehensive income
    
    $
    9,279
    
    
    $
    9,563
 See accompanying notes to consolidated financial statements. 5




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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES 
 Consolidated
Statements of Cash Flows

(Unauditedin thousands)
 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    10,002
    
    
    $
    7,122Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts
    
    
    2,295
    
    
    
    1,548Depreciation and amortization
    
    
    8,879
    
    
    
    7,437Amortization of debt issue costs and discount
    
    
    541
    
    
    
    457Deferred income tax expense (benefit)
    
    
    (101
    )
    
    
    887Equity in earnings of unconsolidated affiliates
    
    
    (5,310
    )
    
    
    (2,541
    )Minority interests in income of consolidated subsidiaries
    
    
    8,151
    
    
    
    5,011Equity-based compensation
    
    
    730
    
    
    
    122Increases (decreases) in cash from changes in operating assets and
liabilities, net of effects from purchases of new businesses:Patient receivables
    
    
    (7,784
    )
    
    
    (6,835
    )Other receivables
    
    
    1,794
    
    
    
    1,338Inventories of supplies, prepaids and other current assets
    
    
    (633
    )
    
    
    (1,815
    )Accounts payable and other current liabilities
    
    
    12,780
    
    
    
    6,190Long-term liabilities
    
    
    685
    
    
    
    (406
    )Net cash provided by operating activities
    
    
    32,029
    
    
    
    18,515Cash flows from investing activities:Purchases of new businesses and equity interests, net of cash received
    
    
    (1,347
    )
    
    
    (9,307
    )Purchases of property and equipment
    
    
    (8,917
    )
    
    
    (9,476
    )Decrease in deposits and notes receivable
    
    
    1,776
    
    
    
    Cash placed in escrow
    
    
    
    
    
    
    (3,145
    )Net cash used in investing activities
    
    
    (8,488
    )
    
    
    (21,928
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    3,004
    
    
    
    10,228Payments on long-term debt
    
    
    (3,664
    )
    
    
    (8,388
    )Proceeds from issuances of common stock
    
    
    1,895
    
    
    
    159Distributions on investments in affiliates
    
    
    (1,597
    )
    
    
    (1,468
    )Net cash provided by (used in) financing activities
    
    
    (362
    )
    
    
    531Effect of exchange rate changes on cash
    
    
    (42
    )
    
    
    (299
    )Net increase (decrease) in cash and cash equivalents
    
    
    23,137
    
    
    
    (3,181
    )Cash and cash equivalents at beginning of period
    
    
    28,519
    
    
    
    47,571Cash and cash equivalents at end of period
    
    $
    51,656
    
    
    $
    44,390Supplemental information:Interest paid
    
    $
    3,139
    
    
    $
    2,645Income taxes paid
    
    
    262
    
    
    
    1,236Non-cash transactions:Assets acquired under capital lease obligations
    
    $
    177
    
    
    $
    1,456Issuance of common stock for service contracts
    
    
    
    
    
    
    63Issuance of common stock to employees
    
    
    1,846
    
    
    
    
 See accompanying notes to consolidated financial statements 6




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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES 
 Notes to Consolidated Financial Statements (Unaudited)  (1)
    
    Basis of Presentation  (a)
    
    Description of Business  United Surgical Partners International, Inc., a Delaware Corporation, and
subsidiaries (USPI or the Company) was formed in February 1998 for the
primary purpose of ownership and operation of surgery centers, private
surgical hospitals and related businesses in the United States and Europe.
At March 31, 2004, USPI, headquartered in Addison, Texas, operated 74
short-stay surgical facilities. Of these 74 facilities, USPI consolidates
the results of 41, accounts for 32 under the equity method, and holds no
ownership in the remaining facility, which is operated by USPI under a
management contract. USPI operates in three countries, with 62 of its 74
facilities located in the United States of America. Most of the Companys
U.S. facilities are jointly owned with local physicians and a
not-for-profit healthcare system that has other healthcare businesses in
the region. At March 31, 2004, the Company had agreements with 16
not-for-profit healthcare systems providing for the joint ownership of 35
of the Companys 62 U.S. facilities and also providing a framework for the
planning and construction of additional facilities in the future. All of
the Companys U.S. facilities include physician owners.The Company operates 12 facilities in Spain and the United Kingdom.
USPIs majority-owned subsidiary, United Surgical Partners Europe, S.L.
(USPE), a Spanish corporation, managed and owned a majority interest in
eight private surgical hospitals and one ambulatory surgery center at
March 31, 2004. Global Healthcare Partners Limited (Global), incorporated
in England and majority-owned by USPI, managed and wholly owned three
private surgical hospitals in the greater London area at March 31, 2004.USPI is subject to changes in government legislation that could impact
Medicare, Medicaid, and foreign government reimbursement levels and is
also subject to increased levels of managed care penetration and changes
in payor patterns that may impact the level and timing of payments for
services rendered.USPI maintains its books and records on the accrual basis of accounting,
and the consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements and notes should be
read in conjunction with the Companys Form 10-K. It is managements
opinion that the accompanying consolidated financial statements reflect
all adjustments (which are normal recurring adjustments) necessary for a
fair presentation of the results for the interim period and the comparable
period presented. The results of operations for any interim period are not
necessarily indicative of results for the full year.  (b)
    
    Equity-Based Compensation  USPI applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
grants to employees. Accordingly, USPI generally does not record
compensation expense related to stock option grants because USPI generally
issues options for which the option exercise price equals the current
market price of the underlying stock on the date of grant. SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure,
established accounting and disclosure requirements using a fair value
based method of accounting for stock-based employee compensation plans.
As permitted under SFAS No. 123, the Company has elected to continue to
apply the intrinsic value based method of accounting described above, and
has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148.
Had USPI determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, USPIs net income would
have been the pro forma amounts indicated below (in thousands, except per
share amounts): 7




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Three Months EndedMarch 31,2004
    
    2003Net incomeAs reported
    
    $
    10,002
    
    
    $
    7,122Add: Total stock-based employee compensation
expense included in reported net income, net of taxes
    
    
    474
    
    
    
    308Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of taxes
    
    
    (1,555
    )
    
    
    (1,310
    )Pro forma
    
    $
    8,921
    
    
    $
    6,120Basic earnings per shareAs reported
    
    $
    0.36
    
    
    $
    0.26Pro forma
    
    
    0.32
    
    
    
    0.23Diluted earnings per shareAs reported
    
    
    0.34
    
    
    
    0.26Pro forma
    
    
    0.31
    
    
    
    0.22
  The fair values in the table above were estimated at the date of grant
using the Black-Scholes valuation model with the following assumptions:
risk-free interest rates ranging from 2.1% to 6.3%, expected dividend
yield of zero, expected volatility of the market price of the Companys
common stock of 40%, and an expected life of the option ranging from three
to five years.Total stock-based employee compensation expense included in net income, as
reported, primarily consists of expense related to grants to employees of
the Companys common stock and a December 2000 grant of stock options at a
price lower than the current market price at the date of grant. The
compensation amounts related to these grants are being amortized into
expense over the estimated service periods.The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Task Force
(EITF) Issue No. 96-18, Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.(2)
    
    Acquisitions and Equity Method Investments  Effective January 1, 2004, the Company acquired a controlling interest in
an ambulatory surgery center in Torrance, California in which the Company
had previously owned a noncontrolling interest. The $9.8 million cost was
paid in cash in December 2003.Following are the unaudited pro forma results for the three months ended
March 31, 2003 as if the acquisition discussed above had occurred on
January 1, 2003 (in thousands, except per share amounts): Total revenues
    
    $
    103,634Net income
    
    
    7,489Diluted earnings per share
    
    $
    0.27
 8




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The Company also engages in investing transactions that are not business
combinations. These transactions primarily consist of acquisitions and
sales of noncontrolling equity interests in surgical facilities and the
investment of additional cash in surgical facilities under development.
During the three months ended March 31, 2004, these transactions resulted
in a net cash outflow from USPI of $1.3 million.The Company controls a significant number of its investees and therefore
consolidates their results. Additionally, the Company invests in a
significant number of facilities in which the Company has significant
influence but does not have control; the Company uses the equity method to
account for these investments. The majority of these investees are
partnerships or limited liability companies, which require the associated
tax benefit or expense to be recorded by the partners or members.
Summarized financial information for the Companys equity method investees
on a combined basis was as follows (income statement amounts are in
thousands and reflect 100% of the investees results on an aggregated
basis): Three Months EndedMarch 31,2004
    
    2003Unconsolidated facilities operated at period end
    
    
    32
    
    
    
    26Income statement informationTotal revenues
    
    $
    78,877
    
    
    $
    46,537Operating income
    
    
    27,823
    
    
    
    13,152Net income
    
    
    25,530
    
    
    
    11,056
  (3)
    
    Earnings Per ShareBasic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding options, warrants and
restricted stock, except where such effect would be antidilutive. The
following table sets forth the computation of basic and diluted earnings
per share for the three months ended March 31, 2004 and 2003 (in
thousands, except per share amounts): Three Months EndedMarch 31,2004
    
    2003Net income attributable to common shareholders
    
    $
    10,002
    
    
    $
    7,122Weighted average common shares outstanding
    
    
    27,720
    
    
    
    27,047Effect of dilutive securities:Stock options
    
    
    1,328
    
    
    
    431Warrants and restricted stock
    
    
    130
    
    
    
    279Shares used for diluted earnings per share
    
    
    29,178
    
    
    
    27,757Basic earnings per share
    
    $
    0.36
    
    
    $
    0.26Diluted earnings per share
    
    $
    0.34
    
    
    $
    0.26
  (4)
    
    Segment DisclosuresStatement of Financial Accounting Standards No. 131, Disclosures About
Segments of an Enterprise and Related Information,establishes standards
for reporting information about operating segments in financial
statements. USPIs business is the operation of surgery centers, private
surgical hospitals and related businesses in the United States and Western
Europe. USPIs chief operating decision maker, as that term is defined in
the accounting standard, regularly reviews financial information about its
surgical facilities for assessing performance and allocating resources
both domestically and abroad. Accordingly, USPIs reportable segments
consist of (1) U.S. based facilities and (2) Western Europe based
facilities, including those in Spain and the United Kingdom. 9




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Western EuropeWesternThree Months Ended
    
    
    
    
    
    
    
    
    
    United
    
    EuropeMarch 31, 2004 (in thousands)
    
    U.S.
    
    Spain
    
    Kingdom
    
    Total
    
    TotalNet patient service revenue
    
    $
    59,569
    
    
    $
    37,278
    
    
    $
    21,085
    
    
    $
    58,363
    
    
    $
    117,932Other revenue
    
    
    15,028
    
    
    
    763
    
    
    
    
    
    
    
    763
    
    
    
    15,791Total revenues
    
    $
    74,597
    
    
    $
    38,041
    
    
    $
    21,085
    
    
    $
    59,126
    
    
    $
    133,723Depreciation and amortization
    
    $
    4,686
    
    
    $
    2,530
    
    
    $
    1,663
    
    
    $
    4,193
    
    
    $
    8,879Operating income
    
    
    22,791
    
    
    
    4,677
    
    
    
    3,941
    
    
    
    8,618
    
    
    
    31,409Net interest expense
    
    
    (5,198
    )
    
    
    (1,114
    )
    
    
    (1,042
    )
    
    
    (2,156
    )
    
    
    (7,354
    )Income tax expense
    
    
    (4,334
    )
    
    
    (767
    )
    
    
    (808
    )
    
    
    (1,575
    )
    
    
    (5,909
    )Total assets
    
    
    491,400
    
    
    
    240,294
    
    
    
    170,595
    
    
    
    410,889
    
    
    
    902,289Capital expenditures
    
    
    3,240
    
    
    
    3,807
    
    
    
    2,047
    
    
    
    5,854
    
    
    
    9,094
 Western EuropeWesternThree Months Ended
    
    
    
    
    
    
    
    
    
    United
    
    EuropeMarch 31, 2003 (in thousands)
    
    U.S.
    
    Spain
    
    Kingdom
    
    Total
    
    TotalNet patient service revenue
    
    $
    49,006
    
    
    $
    27,615
    
    
    $
    13,850
    
    
    $
    41,465
    
    
    $
    90,471Other revenue
    
    
    10,887
    
    
    
    701
    
    
    
    
    
    
    
    701
    
    
    
    11,588Total revenues
    
    $
    59,893
    
    
    $
    28,316
    
    
    $
    13,850
    
    
    $
    42,166
    
    
    $
    102,059Depreciation and amortization
    
    $
    4,239
    
    
    $
    2,158
    
    
    $
    1,040
    
    
    $
    3,198
    
    
    $
    7,437Operating income
    
    
    16,348
    
    
    
    3,332
    
    
    
    3,265
    
    
    
    6,597
    
    
    
    22,945Net interest expense
    
    
    (5,148
    )
    
    
    (781
    )
    
    
    (629
    )
    
    
    (1,410
    )
    
    
    (6,558
    )Income tax expense
    
    
    (3,078
    )
    
    
    (504
    )
    
    
    (679
    )
    
    
    (1,183
    )
    
    
    (4,261
    )Total assets
    
    
    424,848
    
    
    
    197,044
    
    
    
    136,711
    
    
    
    333,755
    
    
    
    758,603Capital expenditures
    
    
    4,016
    
    
    
    2,692
    
    
    
    4,224
    
    
    
    6,916
    
    
    
    10,932
  (5)
    
    Condensed Consolidating Financial StatementsThe following information is presented as required by regulations of the
Securities and Exchange Commission in connection with the Companys
publicly traded Senior Subordinated Notes. This information is not
routinely prepared for use by management. The operating and investing
activities of the separate legal entities included in the consolidated
financial statements are fully interdependent and integrated. Accordingly,
the operating results of the separate legal entities are not
representative of what the operating results would be on a stand-alone
basis. Revenues and operating expenses of the separate legal entities
include intercompany charges for management and other services. The $150
million 10% Senior Subordinated Notes due 2011 were issued in a private
offering on December 19, 2001 and subsequently registered as publicly
traded securities through a Form S-4 effective January 15, 2002 by USPIs
wholly owned finance subsidiary, United Surgical Partners Holdings, Inc.
(USPH), which was formed in 2001. The notes are guaranteed by USPI, which
does not have independent assets or operations, and USPIs wholly owned
subsidiaries domiciled in the United States. USPIs investees in Spain and
the United Kingdom are not guarantors of the obligation. USPIs investees
in the United States in which USPI owns less than 100% are not guarantors
of the obligation. The financial positions and results of operations
(below, in thousands) of the respective guarantors are based upon the
guarantor relationship at the end of the period presented. 10




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##### Table of Contents



Non-Participating
    
    Consolidation
    
    ConsolidatedAs of March 31, 2004
    
    Guarantors
    
    Investees
    
    Adjustments
    
    TotalAssets:Current assets:Cash and cash equivalents
    
    $
    36,107
    
    
    $
    15,549
    
    
    $
    
    
    
    $
    51,656Patient receivables, net
    
    
    12
    
    
    
    62,255
    
    
    
    (32
    )
    
    
    62,235Other receivables
    
    
    (3,573
    )
    
    
    27,664
    
    
    
    (6,062
    )
    
    
    18,029Inventories of supplies
    
    
    212
    
    
    
    8,740
    
    
    
    
    
    
    
    8,952Other
    
    
    12,713
    
    
    
    9,593
    
    
    
    
    
    
    
    22,306Total current assets
    
    
    45,471
    
    
    
    123,801
    
    
    
    (6,094
    )
    
    
    163,178Property and equipment, net
    
    
    34,529
    
    
    
    316,943
    
    
    
    (562
    )
    
    
    350,910Investments in affiliates
    
    
    213,697
    
    
    
    13,681
    
    
    
    (190,592
    )
    
    
    36,786Intangible assets, net
    
    
    192,937
    
    
    
    157,551
    
    
    
    (16,048
    )
    
    
    334,440Other
    
    
    110,943
    
    
    
    10,106
    
    
    
    (104,074
    )
    
    
    16,975Total assets
    
    $
    597,577
    
    
    $
    622,082
    
    
    $
    (317,370
    )
    
    $
    902,289Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    954
    
    
    $
    34,172
    
    
    $
    (348
    )
    
    $
    34,778Accrued expenses
    
    
    35,562
    
    
    
    29,259
    
    
    
    979
    
    
    
    65,800Current portion of long-term debt
    
    
    2,303
    
    
    
    18,536
    
    
    
    (1,138
    )
    
    
    19,701Total current liabilities
    
    
    38,819
    
    
    
    81,967
    
    
    
    (507
    )
    
    
    120,279Long-term debt
    
    
    155,741
    
    
    
    236,104
    
    
    
    (105,315
    )
    
    
    286,530Other liabilities
    
    
    20,234
    
    
    
    21,675
    
    
    
    
    
    
    
    41,909Minority interests
    
    
    
    
    
    
    12,535
    
    
    
    38,149
    
    
    
    50,684Stockholders equity
    
    
    382,783
    
    
    
    269,801
    
    
    
    (249,697
    )
    
    
    402,887Total liabilities and stockholders equity
    
    $
    597,577
    
    
    $
    622,082
    
    
    $
    (317,370
    )
    
    $
    902,289
 11




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##### Table of Contents



Non-Participating
    
    Consolidation
    
    ConsolidatedAs of December 31, 2003
    
    Guarantors
    
    Investees
    
    Adjustments
    
    TotalAssets:Current assets:Cash and cash equivalents
    
    $
    15,147
    
    
    $
    13,372
    
    
    $
    
    
    
    $
    28,519Patient receivables, net
    
    
    127
    
    
    
    56,464
    
    
    
    
    
    
    
    56,591Other receivables
    
    
    37,980
    
    
    
    21,183
    
    
    
    (38,995
    )
    
    
    20,168Inventories of supplies
    
    
    279
    
    
    
    8,745
    
    
    
    
    
    
    
    9,024Other
    
    
    11,781
    
    
    
    7,514
    
    
    
    
    
    
    
    19,295Total current assets
    
    
    65,314
    
    
    
    107,278
    
    
    
    (38,995
    )
    
    
    133,597Property and equipment, net
    
    
    36,044
    
    
    
    312,587
    
    
    
    (568
    )
    
    
    348,063Investments in affiliates
    
    
    175,504
    
    
    
    14,344
    
    
    
    (157,744
    )
    
    
    32,104Intangible assets, net
    
    
    184,314
    
    
    
    158,378
    
    
    
    (16,047
    )
    
    
    326,645Other
    
    
    120,142
    
    
    
    11,521
    
    
    
    (101,563
    )
    
    
    30,100Total assets
    
    $
    581,318
    
    
    $
    604,108
    
    
    $
    (314,917
    )
    
    $
    870,509Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    1,396
    
    
    $
    35,994
    
    
    
    (937
    )
    
    $
    36,453Accrued expenses
    
    
    27,138
    
    
    
    24,500
    
    
    
    (1,245
    )
    
    
    50,393Current portion of long-term debt
    
    
    1,763
    
    
    
    16,146
    
    
    
    (1,115
    )
    
    
    16,794Total current liabilities
    
    
    30,297
    
    
    
    76,640
    
    
    
    (3,297
    )
    
    
    103,640Long-term debt
    
    
    156,963
    
    
    
    264,020
    
    
    
    (133,033
    )
    
    
    287,950Other liabilities
    
    
    18,998
    
    
    
    23,308
    
    
    
    
    
    
    
    42,306Minority interests
    
    
    
    
    
    
    11,403
    
    
    
    34,555
    
    
    
    45,958Stockholders equity
    
    
    375,060
    
    
    
    228,737
    
    
    
    (213,142
    )
    
    
    390,655Total liabilities and stockholders equity
    
    $
    581,318
    
    
    $
    604,108
    
    
    $
    (314,917
    )
    
    $
    870,509
 12




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##### Table of Contents



Condensed Consolidating Statements of Income: Non-Participating
    
    Consolidation
    
    ConsolidatedThree months ended March 31, 2004
    
    Guarantors
    
    Investees
    
    Adjustments
    
    TotalRevenues
    
    $
    22,769
    
    
    $
    115,999
    
    
    $
    (5,045
    )
    
    $
    133,723Operating expenses, excluding
depreciation and amortization
    
    
    14,439
    
    
    
    84,000
    
    
    
    (5,004
    )
    
    
    93,435Depreciation and amortization
    
    
    2,696
    
    
    
    6,189
    
    
    
    (6
    )
    
    
    8,879Operating income (loss)
    
    
    5,634
    
    
    
    25,810
    
    
    
    (35
    )
    
    
    31,409Interest expense, net
    
    
    (2,898
    )
    
    
    (4,456
    )
    
    
    
    
    
    
    (7,354
    )Other
    
    
    78
    
    
    
    7
    
    
    
    (78
    )
    
    
    7Income (loss) before minority interests
    
    
    2,814
    
    
    
    21,361
    
    
    
    (113
    )
    
    
    24,062Minority interests in income of
consolidated subsidiaries
    
    
    
    
    
    
    (3,062
    )
    
    
    (5,089
    )
    
    
    (8,151
    )Income (loss) before income taxes
    
    
    2,814
    
    
    
    18,299
    
    
    
    (5,202
    )
    
    
    15,911Income tax expense
    
    
    (4,281
    )
    
    
    (1,628
    )
    
    
    
    
    
    
    (5,909
    )Net income (loss)
    
    $
    (1,467
    )
    
    $
    16,671
    
    
    $
    (5,202
    )
    
    $
    10,002
 Non-Participating
    
    Consolidation
    
    ConsolidatedThree months ended March 31, 2003
    
    Guarantors
    
    Investees
    
    Adjustments
    
    TotalRevenues
    
    $
    18,293
    
    
    $
    86,770
    
    
    $
    (3,004
    )
    
    $
    102,059Operating expenses, excluding depreciation and amortization
    
    
    12,320
    
    
    
    62,689
    
    
    
    (3,332
    )
    
    
    71,677Depreciation and amortization
    
    
    2,413
    
    
    
    5,028
    
    
    
    (4
    )
    
    
    7,437Operating income
    
    
    3,560
    
    
    
    19,053
    
    
    
    332
    
    
    
    22,945Interest expense, net
    
    
    (2,869
    )
    
    
    (3,689
    )
    
    
    
    
    
    
    (6,558
    )Other
    
    
    78
    
    
    
    7
    
    
    
    (78
    )
    
    
    7Income before minority interests
    
    
    769
    
    
    
    15,371
    
    
    
    254
    
    
    
    16,394Minority interests in income of consolidated
subsidiaries
    
    
    
    
    
    
    (2,352
    )
    
    
    (2,659
    )
    
    
    (5,011
    )Income (loss) before income taxes
    
    
    769
    
    
    
    13,019
    
    
    
    (2,405
    )
    
    
    11,383Income tax expense
    
    
    (2,994
    )
    
    
    (1,267
    )
    
    
    
    
    
    
    (4,261
    )Net income (loss)
    
    $
    (2,225
    )
    
    $
    11,752
    
    
    $
    (2,405
    )
    
    $
    7,122
 13




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##### Table of Contents



Condensed Consolidating Statements of Cash Flows: Non-Participating
    
    Consolidation
    
    ConsolidatedThree months ended March 31, 2004
    
    Guarantors
    
    Investees
    
    Adjustments
    
    TotalCash flows from operating activities:Net income (loss)
    
    $
    (1,467
    )
    
    $
    16,671
    
    
    $
    (5,202
    )
    
    $
    10,002Changes in operating and intercompany assets and liabilities and noncash items included in net
income(loss)
    
    
    22,848
    
    
    
    (7,385
    )
    
    
    6,564
    
    
    
    22,027Net cash provided by operating activities
    
    
    21,381
    
    
    
    9,286
    
    
    
    1,362
    
    
    
    32,029Cash flows from investing activities:Purchases of property and equipment, net
    
    
    (530
    )
    
    
    (8,387
    )
    
    
    
    
    
    
    (8,917
    )Purchases of new businesses
    
    
    (1,264
    )
    
    
    (83
    )
    
    
    
    
    
    
    (1,347
    )Other items
    
    
    1,771
    
    
    
    5
    
    
    
    
    
    
    
    1,776Net cash used in investing activities
    
    
    (23
    )
    
    
    (8,465
    )
    
    
    
    
    
    
    (8,488
    )Cash flows from financing activities:Long-term borrowings, net
    
    
    (696
    )
    
    
    36
    
    
    
    
    
    
    
    (660
    )Proceeds from issuance of common stock
    
    
    1,895
    
    
    
    
    
    
    
    
    
    
    
    1,895Other items
    
    
    (1,599
    )
    
    
    1,364
    
    
    
    (1,362
    )
    
    
    (1,597
    )Net cash provided by (used in) financing activities
    
    
    (400
    )
    
    
    1,400
    
    
    
    (1,362
    )
    
    
    (362
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    (42
    )Net increase in cash
    
    
    20,958
    
    
    
    2,179
    
    
    
    
    
    
    
    23,137Cash and cash equivalents at beginning of period
    
    
    15,147
    
    
    
    13,372
    
    
    
    
    
    
    
    28,519Cash and cash equivalents at end of period
    
    $
    36,105
    
    
    $
    15,551
    
    
    $
    
    
    
    $
    51,656
 Non-Participating
    
    Consolidation
    
    ConsolidatedThree months ended March 31, 2003
    
    Guarantors
    
    Investees
    
    Adjustments
    
    TotalCash flows from operating activities:Net income (loss)
    
    $
    (2,224
    )
    
    $
    11,752
    
    
    $
    (2,406
    )
    
    $
    7,122Changes in operating and intercompany assets and
liabilities and noncash items included in net income
(loss)
    
    
    (9,888
    )
    
    
    (5,732
    )
    
    
    27,013
    
    
    
    11,393Net cash provided by (used in) operating activities
    
    
    (12,112
    )
    
    
    6,020
    
    
    
    24,607
    
    
    
    18,515Cash flows from investing activities:Purchases of property and equipment, net
    
    
    (1,838
    )
    
    
    (7,638
    )
    
    
    
    
    
    
    (9,476
    )Purchases of new businesses
    
    
    (294
    )
    
    
    (9,013
    )
    
    
    
    
    
    
    (9,307
    )Other items
    
    
    (4
    )
    
    
    (3,141
    )
    
    
    
    
    
    
    (3,145
    )Net cash used in investing activities
    
    
    (2,136
    )
    
    
    (19,792
    )
    
    
    
    
    
    
    (21,928
    )Cash flows from financing activities:Long-term borrowings, net
    
    
    (515
    )
    
    
    26,962
    
    
    
    (24,607
    )
    
    
    1,840Proceeds from issuance of common stock
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    159Other items
    
    
    (1,468
    )
    
    
    
    
    
    
    
    
    
    
    (1,468
    )Net cash provided by (used in) financing activities
    
    
    (1,824
    )
    
    
    26,962
    
    
    
    (24,607
    )
    
    
    531Effect of exchange rate changes on cash
    
    
    
    
    
    
    (299
    )
    
    
    
    
    
    
    (299
    )Net increase (decrease) in cash
    
    
    (16,072
    )
    
    
    12,891
    
    
    
    
    
    
    
    (3,181
    )Cash and cash equivalents at beginning of period
    
    
    24,712
    
    
    
    22,859
    
    
    
    
    
    
    
    47,571Cash and cash equivalents at end of period
    
    $
    8,640
    
    
    $
    35,750
    
    
    $
    
    
    
    $
    44,390
 14




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##### Table of Contents



(6)
    
    Commitments and Contingencies  As of March 31, 2004, the Company had issued guarantees of the
indebtedness of its investees to third parties which could potentially
require the Company to make maximum aggregate payments totaling
approximately $41.1 million. Of the total, $24.3 million relates to the
debt of consolidated subsidiaries, whose debt is included in the Companys
consolidated balance sheet, and the remaining $16.8 million relates to the
debt of unconsolidated affiliated companies, whose debt is not included in
the Companys consolidated balance sheet. In accordance with Financial
Accounting Standards Board Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, the Company has recorded long-term liabilities
totaling approximately $0.1 million related to the guarantees the Company
has issued to unconsolidated affiliates after December 31, 2002, and has
not recorded any liabilities related to guarantees issued prior to January
1, 2003. Generally, these arrangements (a) consist of guarantees of real
estate and equipment financing, (b) are secured by the related property
and equipment, (c) require payments by the Company, when the collateral is
insufficient, in the event of a default by the investee primarily
obligated under the financing, (d) expire as the underlying debt matures
at various dates through 2022,and (e) provide no recourse for the Company
to recover any amounts from third parties.(7)
    
    Subsequent EventsThe Company has entered into letters of intent with various entities
regarding possible joint venture, development, or other transactions.
These possible joint ventures, developments, or other transactions are in
various stages of negotiation. 15




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##### Table of Contents



ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Companys
unaudited Consolidated Financial Statements and the notes thereto included in
Item 1 of this Quarterly Report on Form 10-Q. Forward-Looking Statements Certain statements contained or incorporated by reference in this
Quarterly Report on Form 10-Q, including without limitation statements
containing the words believes, anticipates, expects, continues, will,
may, should, estimates, intends, plans, and similar expressions, and
statements regarding the Companys business strategy and plans, constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
managements current expectations and involve known and unknown risks,
uncertainties and other factors, many of which the Company is unable to predict
or control, that may cause the Companys actual results, performance or
achievements to be materially different from those expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, both nationally and regionally;
foreign currency fluctuations; demographic changes; changes in, or the failure
to comply with, laws and governmental regulations; the ability to enter into
managed care provider arrangements on acceptable terms; changes in Medicare,
Medicaid and other government funded payments or reimbursement in the United
States and Western Europe; liability and other claims asserted against us; the
highly competitive nature of healthcare; changes in business strategy or
development plans of healthcare systems with which we partner; the ability to
attract and retain qualified personnel, including physicians, nurses and other
health care professionals; our significant indebtedness; the availability of
suitable acquisition and development opportunities and the length of time it
takes to accomplish acquisitions and developments; our ability to integrate new
businesses with our existing operations; the availability and terms of capital
to fund the expansion of our business, including the acquisition and
development of additional facilities and certain additional factors, risks, and
uncertainties discussed in this Quarterly Report on Form 10-Q and the documents
incorporated herein by reference. Given these uncertainties, investors and
prospective investors are cautioned not to rely on such forward-looking
statements. We disclaim any obligation and make no promise to update any such
factors or forward-looking statements or to publicly announce the results of
any revisions to any such factors or forward-looking statements, whether as a
result of changes in underlying factors, to reflect new information as a result
of the occurrence of events or developments or otherwise. Overview We operate ambulatory surgery centers and private surgical hospitals in
the United States and Western Europe. As of March 31, 2004, we operated 74
facilities, consisting of 62 in the United States, nine in Spain, and three in
the United Kingdom. Most of our U.S. facilities are jointly owned with local
physicians and a not-for-profit healthcare system that has other healthcare
businesses in the region. At March 31, 2004, we had agreements with 16
not-for-profit healthcare systems providing for the joint ownership of 35 of
our 62 U.S. facilities and also providing a framework for the planning and
construction of additional facilities in the future. All of our U.S.
facilities include physician owners. Our U.S. facilities, consisting of ambulatory surgery centers and private
surgical hospitals (collectively short-stay surgical facilities), specialize
in non-emergency surgical cases, the volume of which has steadily increased
over the past two decades due in part to advancements in medical technology.
These facilities earn a fee from patients, insurance companies, or other payors
in exchange for providing the facility and related services a surgeon requires
in order to perform a surgical case. In addition, we in turn earn a monthly
fee from each facility we operate in exchange for managing its operations.
Approximately 84% of our facilities are located in the U.S., where we have
focused increasingly on adding facilities with not-for-profit healthcare system
partners (hospital partners). From December 31, 2001 to March 31, 2004, 92%
of the increase in the number of facilities we operate has occurred in the
United States. During this period, the number of facilities we own jointly
with not-for-profit healthcare systems increased from 19 to 35, an increase of
84%. In Spain and the United Kingdom we operate private hospitals which
supplement the services provided by the government-sponsored healthcare systems
in each country. Our patients choose our facilities primarily because of
waiting lists to receive diagnostic procedures or elective surgery at
government-sponsored facilities and pay us either from personal funds or
through private insurance, offered by an increasing number of employers as a
benefit to their employees. We have expanded selectively in these two
countries. Critical Accounting Policies and Estimates Our discussion and analysis of our results of operations and liquidity and
capital resources are based on our consolidated financial statements which have
been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP). The preparation of consolidated financial
statements under GAAP requires our management to make certain
estimates and assumptions which impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities 16




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##### Table of Contents



as of the date
of the consolidated financial statements. These estimates and assumptions also
impact the reported amount of net earnings during any period. Estimates are
based on information available as of the date financial statements are
prepared. Accordingly, actual results could differ from those estimates.
Critical accounting policies and estimates are defined as those that are both
most important to the portrayal of our financial condition and operating
results and that require managements most subjective judgments. Our critical
accounting policies and estimates include our policies and estimates regarding
consolidation, revenue recognition, income taxes, and intangible assets. Our determination of whether to consolidate an entity in which we hold an
investment, account for it under the equity method, or carry it at cost has a
significant impact on our financial statements because of the typical business
model under which we operate, particularly in the United States, where the
majority of the facilities we operate are partially owned by not-for-profit
hospital systems, physicians, and other parties. These quarterly financial
statements have been prepared using the same consolidation policy as was used
in the Companys latest audited financial statements. Our revenue recognition policy and method of accounting for income taxes
involve significant judgments and estimates. There have been no significant
changes in assumptions, estimates, and judgments in the preparation of these
quarterly financial statements from the assumptions, estimates, and judgments
used in the preparation of the Companys latest audited financial statements. We also consider our accounting policy regarding intangible assets to be a
critical accounting policy given the significance of intangible assets as
compared to the total assets of the Company and the recent changes in
accounting for intangible assets required under Statement of Financial
Accounting Standards No. 142, Accounting for Goodwill and other Intangible
Assets(SFAS No. 142), which was issued by the Financial Accounting Standards
Board on July 20, 2001 and was adopted by the Company as of January 1, 2002.
There have been no significant changes in the application of SFAS No. 142 since
the preparation of the Companys latest audited financial statements. Acquisitions, Equity Investments and Development Projects Effective January 1, 2004, we acquired a controlling interest in an
ambulatory surgery center in Torrance, California in which we had previously
owned a noncontrolling interest. The $9.8 million cost was paid in cash in
December 2003. We also engage in purchases and sales of noncontrolling interests in
facilities we already operate and invest additional cash in surgical facilities
under development. These transactions resulted in a net cash outflow of $1.3
million during the three months ended March 31, 2004. Sources of Revenue Revenues primarily include the following:  
    
    net patient service revenue of the facilities that we consolidate for financial reporting purposes, which are typically
those facilities in which we have ownership interests of greater than 50% or otherwise maintain effective control.  
    
    management and administrative services revenue, consisting of the fees that we earn from managing the facilities that we
do not consolidate for financial reporting purposes and the fees we earn from providing certain consulting and administrative
services to physicians. Our consolidated revenues and expenses do not include the management fees we earn from operating the
facilities that we consolidate for financial reporting purposes as those fees are charged to subsidiaries and thus eliminate in
consolidation.
    
    our share of the net income or loss of the unconsolidated facilities that we account for under the equity method of
accounting. These amounts are included in revenues as these operations are central to our business strategy. Through our contracts
to manage these facilities, we have an active role in their operations. The level of our corporate resources devoted to fulfilling
these responsibilities is significant and generally equal to that devoted to the operations of the facilities we consolidate for
financial reporting purposes. 17




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##### Table of Contents



The following table summarizes our revenues by type and as a percentage of total revenue for the periods presented: Three Months EndedMarch 31,2004
    
    2003Net patient service revenue
    
    
    88
    %
    
    
    89
    %Management and administrative services revenue.
    
    
    7
    
    
    
    8Equity in earnings of unconsolidated affiliates
    
    
    4
    
    
    
    2Other income
    
    
    1
    
    
    
    1Total revenues
    
    
    100
    %
    
    
    100
    %
 Equity in earnings of unconsolidated affiliates, which is our share of the
net income of the facilities we do not consolidate for financial reporting
purposes, increased as a percentage of our total revenues in the three months
ended March 31, 2004. This increase reflects the overall improved
profitability of these 32 facilities, 24 of which are operated jointly with
not-for-profit healthcare systems. Our profit margins in these joint ventures
have been better than in facilities without a hospital partner. Additionally,
the majority of our newly constructed facilities, whose growth rates are faster
than for more established facilities, are accounted for under the equity
method. Our management and administrative services revenues are earned from the
following types of activities (dollars in thousands): Three Months EndedMarch 31,2004
    
    2003Management of surgical facilities
    
    $
    4,701
    
    
    $
    3,115Consulting and other services provided to physicians
and related entities
    
    
    4,804
    
    
    
    4,922Total management and administrative service revenues
    
    $
    9,505
    
    
    $
    8,037
 The following table reflects the summarized results of the unconsolidated
facilities that we account for under the equity method of accounting (dollars
in thousands): Three Months EndedMarch 31,2004
    
    2003Total revenues
    
    $
    78,877
    
    
    $
    46,537Depreciation and amortization
    
    
    3,304
    
    
    
    2,487Operating income
    
    
    27,823
    
    
    
    13,152Interest expense, net
    
    
    1,966
    
    
    
    1,677Net income
    
    
    25,530
    
    
    
    11,056Long-term debt
    
    
    83,625
    
    
    
    80,315USPIs equity in earnings of unconsolidated affiliates
    
    $
    5,310
    
    
    $
    2,541USPIs imputed weighted average ownership percentage
based on affiliates net income(1)
    
    
    20.8
    %
    
    
    23.0
    %USPIs imputed weighted average ownership percentage
based on affiliates debt(2)
    
    
    23.2
    %
    
    
    24.2
    %Unconsolidated facilities operated at period end
    
    
    32
    
    
    
    26
   (1)
    
    Our weighted average percentage ownership in our unconsolidated
affiliates calculated based on USPIs equity in earnings of unconsolidated
affiliates divided by the total net income of the affiliates for each
respective period.(2)
    
    Our weighted average percentage ownership in our unconsolidated
affiliates calculated based on the total debt of each affiliate multiplied
by the percentage ownership USPI held in the affiliate as of the end of
each respective period, divided by the total debt of all of the affiliates
as of end of each respective period. 18




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##### Table of Contents



The following table summarizes our revenues by operating segment: Three MonthsEnded March 31,2004
    
    2003United States.
    
    
    56
    %
    
    
    59
    %Western Europe
    
    
    44
    
    
    
    41Total
    
    
    100
    %
    
    
    100
    %
 The proportion of our revenues earned in Western Europe was higher during
the three months ended March 31, 2004 than in the prior year period because we
consolidate both of the overseas facilities we have acquired since December 31,
2002, whereas our U.S. acquisition and development activity, while involving
more facilities, has more predominantly involved equity method facilities, for
which our revenues are only impacted by our share of the underlying facilities
net income. Additionally, the dollar was weaker against the eurodollar and
British pound in 2004 than in 2003, which had a favorable impact on our
revenues in 2004. Results of Operations The following table summarizes certain statement of income items expressed
as a percentage of revenues for the periods indicated: Three Months EndedMarch 31,2004
    
    2003Total revenues
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses, excluding depreciation and amortization
    
    
    69.9
    
    
    
    70.2Depreciation and amortization
    
    
    6.6
    
    
    
    7.3Operating income
    
    
    23.5
    
    
    
    22.5Minority interests in income of consolidated entities
    
    
    6.1
    
    
    
    4.9Interest and other expense, net
    
    
    5.5
    
    
    
    6.4Income before income taxes
    
    
    11.9
    
    
    
    11.2Income tax expense
    
    
    (4.4
    )
    
    
    (4.2
    )Net income
    
    
    7.5
    
    
    
    7.0EBITDA less minority interests(a)
    
    
    24.0
    
    
    
    24.9
   (a)
    
    EBITDA is calculated as operating income plus depreciation and
amortization. We use EBITDA and EBITDA less minority interests as
analytical indicators for purposes of allocating resources and assessing
performance. EBITDA is commonly used as an analytical indicator within the
health care industry and also serves as a measure of leverage capacity and
debt service ability. EBITDA should not be considered as a measure of
financial performance under generally accepted accounting principles, and
the items excluded from EBITDA are significant components in understanding
and assessing financial performance. Because EBITDA is not a measurement
determined in accordance with generally accepted accounting principles and
is thus susceptible to varying calculation methods, EBITDA as presented by
United Surgical Partners International may not be comparable to similarly
titled measures of other companies. 19




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##### Table of Contents



The following table reconciles EBITDA and EBITDA less minority interests
to net income and to net cash provided by operating activities: Three Months EndedMarch 31,2004
    
    2003Net income
    
    $
    10,002
    
    
    $
    7,122Income tax expense
    
    
    5,909
    
    
    
    4,261Interest and other non operating expense
    
    
    7,347
    
    
    
    6,551Depreciation and amortization
    
    
    8,879
    
    
    
    7,437EBITDA less minority interests
    
    
    32,137
    
    
    
    25,371Minority interests in income of consolidated subsidiaries
    
    
    8,151
    
    
    
    5,011EBITDA
    
    
    40,288
    
    
    
    30,382Provision for doubtful accounts
    
    
    2,295
    
    
    
    1,548Amortization of debt issue costs, discount, and deferred
compensation
    
    
    1,271
    
    
    
    579Interest and other nonoperating expense
    
    
    (7,347
    )
    
    
    (6,551
    )Income tax expense
    
    
    (5,909
    )
    
    
    (4,261
    )Equity in earnings of unconsolidated affiliates
    
    
    (5,310
    )
    
    
    (2,541
    )Increases (decreases) in cash from changes in operating assets
and liabilities, net of effects from purchases of new businesses
    
    
    6,741
    
    
    
    (641
    )Net cash provided by operating activities
    
    $
    32,029
    
    
    $
    18,515
 The key trends in our results of operations for the three months ended
March 31, 2004 continued to be increases in revenue, operating margins and
overall profitability. The increases in revenue are driven most significantly
by growth in our existing facilities. Facilities that we owned during both the
three month period ended March 31, 2004 and the three month period ended March
31, 2003 (same store facilities) continued the trend from earlier years of
performing more surgical cases than in the prior year, and our facilities also
received higher rates of reimbursement per case, on average, than in the prior
year. As in 2003, these increases in revenues outpaced increases in operating
expenses, resulting in improved operating margins. 20




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##### Table of Contents



Increases in the volume of surgical cases in the U.S. and of patient
admissions for our hospitals in Western Europe continue to drive increases in
our revenues, as does an increase in the average reimbursement for the
surgeries (in all countries) and other services (in Western Europe) that we
provide. The growth of our same store facilities, summarized in the following
table, continues to be the most significant component of our overall increase
in revenues. Three MonthsEnded March 31,2004 (1)United States facilities:Net revenue
    
    
    29
    %Surgical cases
    
    
    9
    %Net revenue per case
    
    
    18%
    (2)Western Europe facilities:Net revenue using actual exchange rates
    
    
    30
    %Net revenue using constant exchange rates (3)
    
    
    12
    %
   (1)
    
    Growth in same store facilities, compared to three months ended March 31,
2003.(2)
    
    Net revenue per case of our ambulatory surgery centers, which constitute
80% of our U.S. revenues, grew at a rate of 12%. Adding our four same
store surgical hospitals, which on average perform more complex cases than
ambulatory surgery centers, increases the growth to 18%. This increase is
significantly affected by two hospitals which opened during the past 18
months and therefore are significantly impacting comparisons to prior year
as their initial operations continue to ramp-up.(3)
    
    Measures current year using prior year exchange rates. The addition of new facilities continues to be more heavily weighted to U.S.
surgical facilities with a not-for-profit healthcare system partner (hospital
partner), both as we initiate joint venture agreements with new systems and as
we add facilities to our arrangements with existing systems. Facilities have
been added to hospital joint ventures both through construction of new
facilities (de novos) and through our contribution of our equity interests in
existing facilities into a hospital joint venture structure, effectively
creating three-way joint ventures by sharing our ownership in these facilities
with a hospital partner while leaving the existing physician ownership intact.
We also have selectively added facilities in Western Europe through acquisition
and construction. The following table summarizes our facilities as of March
31, 2004 and 2003: March 31,2004
    
    2003Hospital partners
    
    
    16
    
    
    
    11United States facilities (1):With a hospital partner
    
    
    35
    
    
    
    26Without a hospital partner.
    
    
    27
    
    
    
    28Total U.S. facilities
    
    
    62
    
    
    
    54Western Europe facilities
    
    
    12
    
    
    
    11Total facilities operated
    
    
    74
    
    
    
    65Change from March 31, 2003:De novo (newly constructed)
    
    
    4Acquisition
    
    
    5Total
    
    
    9
   (1)
    
    At March 31, 2004, physicians own a portion of all of these facilities. 21




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##### Table of Contents



Operating expenses have increased at lower rates than revenue, resulting
in improved operating margins. This relationship results from the double digit
percentage growth in the same store revenues exceeding the volume-driven and
inflation-driven increases in most operating expenses, including the costs of
personnel, supplies, and facility costs, and also, we believe, from
implementing our proprietary management and measurement system, USPIs EDGE, in
newly acquired facilities, which we believe improves operating efficiencies.
The following table summarizes changes in our same store EBITDA margins (1),
comparing the three months ended March 31, 2004 to the three months ended March
31, 2003: Three MonthsEnded March 31,2004 (1)United States facilities:With a hospital partner
    
    
    970
    
    
    bpsWithout a hospital partner
    
    
    180Total U.S. facilities
    
    
    747Western Europe facilities(2)
    
    
    (110
    )
    
    bps
   (1)
    
    EBITDA margin is calculated as EBITDA divided by total revenues. This
table aggregates all of the facilities we operate using 100% of their
results. This does not represent the overall margin for USPIs operations
in either the U.S. or Western Europe because we have a variety of
ownership levels in the facilities we operate.(2)
    
    Uses 2003 exchange rates for both years. The decrease was a result of
three expansion projects in Western Europe which generated lower margins
during their construction and initial operations than our overall business
in Western Europe. Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Revenues increased by $31.7 million, or 31%, to $133.7 million for the
three months ended March 31, 2004 from $102.0 million for the three months
ended March 31, 2003. Of this increase in revenues, $16.2 million was
contributed by same store facilities, $7.4 million was contributed by newly
constructed or acquired facilities, and $8.1 million was due to exchange rate
fluctuations. The same store increase was primarily driven by a $10.5 million
increase in revenue earned at or from U.S. facilities, which performed
approximately 9% more surgical cases and received an average of approximately
18% more per case during the three months ended March 31, 2004 than in the
corresponding prior year period. The revenues of same store Western Europe
facilities, when measured using 2003 exchange rates for both periods, were $5.7
million higher during the three months ended March 31, 2004 than in the
corresponding prior year period. Facilities acquired since December 31, 2002,
and thus not owned for the same number of months in the first quarters of 2004
and 2003, contributed net additional revenues in the three months ended March
31, 2004 of $7.4 million. The U.S. dollar being weaker relative to the
eurodollar and British pound in 2004 resulted in an $8.1 million increase in
revenues. Operating expenses, excluding depreciation and amortization, increased by
$21.7 million, or 30%, to $93.4 million for the three months ended March 31,
2004 from $71.7 million for the three months ended March 31, 2003. Operating
expenses, excluding depreciation and amortization, as a percentage of revenues,
decreased to 69.9% for the three months ended March 31, 2004 from 70.2% for the
three months ended March 31, 2003, primarily as a result of increasing revenue
base, operating efficiencies at our facilities and improved economies of scale
as we expanded. Operating income increased $8.5 million, or 36.9%, to $31.4 million for
the three months ended March 31, 2004 from $22.9 million for the three months
ended March 31, 2003. Operating income, as a percentage of revenues, increased
to 23.5% for the three months ended March 31, 2004 from 22.5% for the three
months ended March 31, 2003, primarily as a result of improved operating
margins at our facilities and the leveraging of our corporate overhead expenses
over the increased revenue. Depreciation and amortization increased $1.4 million, or 1.9%, to $8.9
million for the three months ended March 31, 2004 from $7.4 million for the
three months ended March 31, 2003, primarily as a result of additional
depreciation on tangible assets added through acquisitions and expansions of
our facilities. Depreciation and amortization, as a percentage of revenues,
decreased to 6.6% for the three months ended March 31, 2004 from 7.3% for the
three months ended March 31, 2003 due to our increased revenue. Interest expense, net of interest income, increased 12% to $7.4 million
for the three months ended March 31, 2004 from $6.6 million for the three
months ended March 31, 2003 primarily as a result of our borrowing a portion of
the costs of acquiring, developing, and expanding facilities. Net income was $10.0 million for the three months ended March 31, 2004
compared to $7.1 million for the three months ended March 31, 2003. This $2.9
million improvement primarily results from the increased revenues and improved
operating efficiencies and 22




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##### Table of Contents



economies of scale related to expenses discussed
above. Liquidity and Capital Resources During the three months ended March 31, 2004, the Company generated $32.0
million of cash flows from operations as compared to $18.5 million during the
three months ended March 31, 2003. During the three months ended March 31, 2004, the Companys net cash
required for investing activities was $8.5 million, consisting primarily of
$8.9 million for the purchase of property and equipment and $1.3 million for
the purchase of equity interests. Approximately $5.9 million of the property
and equipment purchases related to ongoing development projects, and the
remaining $3.0 million represents purchases of equipment at existing
facilities. The $1.3 million primarily consists of the investment of cash in
unconsolidated affiliates that are constructing new surgical facilities. The
$8.5 million of cash required for investing activities was funded primarily
with cash flows from operations and additionally through borrowings by
individual facilities. Net cash used in financing activities during the three
months ended March 31, 2004 totaled $0.4 million. Cash and cash equivalents
were $51.7 million at March 31, 2004 as compared to $28.5 million at December
31, 2003, and net working capital was $42.9 million at March 31, 2004 as
compared to $30.0 million at December 31, 2003. In November 2002, we entered into a revolving credit facility with a group
of commercial lenders providing us with the ability to borrow up to $115.0
million for acquisitions and general corporate purposes in the United States
and Spain or for the funding of any new subsidiary that becomes a guarantor of
the facility. Under the terms of the facility, we may invest up to a total of
$25.0 million in subsidiaries that are not guarantors, including subsidiaries
in the United Kingdom. Borrowings under our credit facility mature on November
7, 2005. As of March 31, 2004, no amounts were outstanding under this facility
and $41.7 million was available for borrowing based on actual reported
consolidated financial results. Maximum availability under the facility is
based upon pro forma EBITDA including EBITDA from acquired entities. Assuming
historical purchase multiples of annual EBITDA of potential acquisition
targets, approximately $77.8 million would be available for borrowing to
finance acquisitions as of March 31, 2004, of which none was drawn at March 31,
2004. Our credit facility agreement and the indenture governing our Senior
Subordinated Notes contain various restrictive covenants, including covenants
that limit our ability and the ability of certain of our subsidiaries to borrow
money or guarantee other indebtedness, grant liens on our assets, make
investments, use assets as security in other transactions, pay dividends on
stock, enter into sale and leaseback transactions or sell assets or capital
stock. Our credit agreement in the United Kingdom provides for total borrowings
of £52.0 million (approximately $95.7 million as of March 31, 2004) under four
separate facilities. At March 31, 2004, total outstanding borrowings under
this credit agreement were approximately $64.9 million which represents total
borrowings net of scheduled repayments of $16.8 million that have been made
under the agreement, and approximately $14.0 million was available for
borrowing, primarily for capital projects specified in the agreement.
Borrowings under the United Kingdom credit facility bear interest at rates of
1.50% to 2.00% over LIBOR and mature in April 2010. We pledged the capital
stock of our U.K. subsidiaries to secure borrowings under the United Kingdom
credit facility. We were in compliance with all covenants under our credit
agreements as of March 31, 2004. 23




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Our contractual cash obligations as of March 31, 2004 may be summarized as
follows: Payments Due by Period (In Thousands)Within 1
    
    1 to 3
    
    4 to 5
    
    Beyond 5Contractual Cash Obligations
    
    Total
    
    year
    
    years
    
    years
    
    yearsLong term debt obligations (principal plus interest)(1):Senior Subordinated Notes
    
    $
    270,000
    
    
    $
    15,000
    
    
    $
    30,000
    
    
    $
    30,000
    
    
    $
    195,000U.S. credit facility(2)
    
    
    920
    
    
    
    573
    
    
    
    347
    
    
    
    
    
    
    
    U.K. credit facility
    
    
    80,123
    
    
    
    7,693
    
    
    
    20,066
    
    
    
    22,418
    
    
    
    29,946Loans from former owners of subsidiaries
    
    
    496
    
    
    
    362
    
    
    
    134
    
    
    
    
    
    
    
    Other debt at operating subsidiaries
    
    
    33,535
    
    
    
    9,712
    
    
    
    7,369
    
    
    
    5,655
    
    
    
    10,799Capitalized lease obligations:U.S. operating subsidiaries
    
    
    43,433
    
    
    
    8,018
    
    
    
    8,755
    
    
    
    3,957
    
    
    
    22,703Western Europe operating subsidiaries
    
    
    93,745
    
    
    
    4,692
    
    
    
    8,503
    
    
    
    8,243
    
    
    
    72,307Operating lease obligations:U.S. operating subsidiaries
    
    
    50,605
    
    
    
    7,640
    
    
    
    14,063
    
    
    
    11,934
    
    
    
    16,968Western Europe operating subsidiaries
    
    
    12,030
    
    
    
    1,889
    
    
    
    3,097
    
    
    
    2,387
    
    
    
    4,657Total contractual cash obligations
    
    $
    584,887
    
    
    $
    55,579
    
    
    $
    92,334
    
    
    $
    84,594
    
    
    $
    352,380
   (1)
    
    Amounts shown for long-term debt obligations and capital lease
obligations include the associated interest. For variable rate debt, the
interest is calculated using the March 31, 2004 rates applicable to each
debt instrument.(2)
    
    The amounts shown for the U.S. credit facility are the commitment fees
assuming no amounts are drawn under the agreement. If we draw amounts
under this agreement, the commitment fees would be less but we would incur
cash obligations related to interest and principal repayments. Our operating subsidiaries, many of which have minority owners who share
in the cash flow of these entities, have debt consisting primarily of
capitalized lease obligations. This debt is generally non-recourse to USPI, the
parent company, and is generally secured by the assets of those operating
entities. The total amount of these obligations, which was $92.3 million at
March 31, 2004, is included in our consolidated balance sheet because the
borrower or obligated entity meets the requirements for consolidated financial
reporting. Our average percentage ownership, weighted based on the individual
subsidiarys amount of debt and capitalized leased obligations, of these
consolidated subsidiaries was 85.8% at March 31, 2004. Additionally, our
unconsolidated affiliates that we account for under the equity method have debt
and capitalized lease obligations that are generally non-recourse to USPI and
are not included in our consolidated financial statements. At March 31, 2004,
the total obligations of these unconsolidated affiliates under debt and capital
lease obligations was approximately $83.6 million. Our average percentage
ownership, weighted based on the individual affiliates amount of debt and
capitalized lease obligations, of these unconsolidated affiliates was 23.2% at
March 31, 2004. USPI or one of its wholly owned subsidiaries had collectively
guaranteed $16.8 million in total debt and capital lease obligations of our
unconsolidated affiliates as of March 31, 2004. 
 ITEM 3.Quantitative and Qualitative Disclosures About Market Risk We have exposure to interest rate risk related to our financing,
investing, and cash management activities. Historically, we have not held or
issued derivative financial instruments other than the use of variable-to-fixed
interest rate swaps for portions of our borrowings under credit facilities with
commercial lenders as required by the credit agreements. We do not use
derivative instruments for speculative purposes. Our financing arrangements
with commercial lenders are based on the spread over Prime, LIBOR or Euribor.
At March 31, 2004, $149.0 million of our total outstanding debt was the Senior
Subordinated Notes, which were issued in December 2001 at a 0.8% discount and
bear interest at a fixed rate of 10%, $3.2 million was in other fixed rate
instruments and the remaining $89.9 million was in variable rate instruments.
Accordingly, a hypothetical 100 basis point increase in market interest rates
would result in additional annual expense of $0.9 million. The Senior
Subordinated Notes, which represent 98% of our total fixed rate debt at March
31, 2004, are considered to have a fair value, based upon recent trading, of
$170.3 million, which is approximately $21.3 million higher than the carrying
value at March 31, 2004. Our international revenues are a significant portion of our total
revenues. We are exposed to risks associated with operating internationally,
including foreign currency exchange risk and taxes and regulatory changes. 24




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Our international operations operate in a natural hedge to a large extent
because both expenses and revenues are denominated in local currency.
Additionally, our borrowings in the United Kingdom and our capital lease
obligations in the United Kingdom and Spain are currently denominated in local
currency. Historically, the cash generated from our operations in Spain and the
United Kingdom has been utilized within each of those countries to finance
development and acquisition activity as well as for repayment of debt
denominated in local currency. Accordingly, we have not utilized financial
instruments to hedge our foreign currency exchange risk. Inflation and changing prices have not significantly affected our
operating results or the markets in which we perform services. 
 ITEM 4.Controls and Procedures The Companys management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, have evaluated the effectiveness
of the Companys disclosure controls and procedures (as defined by applicable
SEC rules) as of the end of the period covered by this Quarterly Report on Form
10-Q. Based upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer have concluded that, as of the end of such period, the
Companys disclosure controls and procedures are effective. There have been no
significant changes in the Companys internal controls over financial reporting
(as defined by applicable SEC rules) that occurred during the Companys fiscal
quarter ended March 31, 2004 that have materially affected or are reasonably
likely to materially affect the Companys internal controls over financial
reporting. 25




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##### Table of Contents



PART IIOTHER INFORMATION 
 ITEM 1.Legal Proceedings From time to time, we may be named as a party to legal claims and
proceedings in the ordinary course of business. We are not aware of any claims
or proceedings against us or our subsidiaries that might have a material
adverse impact on us. 
 ITEM 6.Exhibits and Reports on Form 8-K  (a)
    
    Exhibits: 3.1
    
    
    Second Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the
Companys Registration Statement on Form S-1 (No. 333-55442) and incorporated herein by reference).3.2
    
    
    Amended and Restated Bylaws (previously filed as an exhibit to the Companys Registration Statement
on Form S-1 (No. 333-55442) and incorporated herein by reference).4.1
    
    
    Form of Common Stock Certificate (previously filed as an exhibit to the Companys Registration
Statement on Form S-1 (No. 333-55442) and incorporated herein by reference).4.2
    
    
    Indenture, dated as of December 19, 2001, among United Surgical Partners Holdings, Inc., the
guarantor parties thereto and U.S. Trust Company of Texas, N.A. (previously filed as Exhibit 4.2 to
the Companys Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated
herein by reference).31.1
    *
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    *
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    *
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    *
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith.  (b)
    
    Reports on Form 8-K:The Company furnished a report on Form 8-K dated January 5, 2004,
pursuant to Item 9 of Form 8-K, containing a news release describing
the Companys development progress.The Company furnished a report on Form 8-K dated February 19, 2004,
pursuant to Item 12 of Form 8-K, containing a news release announcing
the Companys results of operations for the quarter and year ended
December 31, 2003.The Company furnished a report on Form 8-K dated February 26, 2004 to
file, pursuant to Item 5 of Form 8-K, a press release regarding the
Companys Chief Executive Officer.The Company furnished a report on Form 8-K dated March 4, 2004,
pursuant to Regulation FD, containing a copy of materials dated March
2004 and prepared with respect to presentations to investors and
others that may be made by senior officers of the Company. 26




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. United Surgical Partners International, Inc.By:
    
    /s/ Mark A. KopserDate: April 30, 2004
    
    
    
    Mark A. KopserSenior 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. WellikJohn J. WellikSenior Vice President, Accounting and Administration,
and Secretary
(Principal Accounting Officer)
 27




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##### Table of Contents



Exhibit Index 3.1
    
    
    Second Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the
Companys Registration Statement on Form S-1 (No. 333-55442) and incorporated herein by reference).3.2
    
    
    Amended and Restated Bylaws (previously filed as an exhibit to the Companys Registration Statement
o=n Form S-1 (No. 333-55442) and incorporated herein by reference).4.1
    
    
    Form of Common Stock Certificate (previously filed as an exhibit to the Companys Registration
Statement on Form S-1 (No. 333-55442) and incorporated herein by reference).4.2
    
    
    Indenture, dated as of December 19, 2001, among United Surgical Partners Holdings, Inc., the
guarantor parties thereto and U.S. Trust Company of Texas, N.A. (previously filed as Exhibit 4.2 to
the Companys Annual report on Form 10-K for the year ended December 31, 2001 and incorporated
herein be reference).31.1
    *
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    *
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    *
    
    Certification of Chief Executive Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    *
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    Filed herewith. 28