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 1934For the
  quarterly period ended September 30, 2003oro
  
  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. (Exact name of registrant as specified in its charter)  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. Yesx  No o Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yesx  No o At November 5,
2003 there were 27,422,093 shares of Common Stock outstanding.


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UNITED SURGICAL
PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES INDEX PART I.
  
  Financial
  InformationItem 1.
  
  Financial Statements
  (unaudited)
  
  3Consolidated
  Balance Sheets as of September 30, 2003 and December 31, 
  2002
  
  3Consolidated
  Statements of Income for the three months and nine months ended
  September 30, 2003 and 2002
  
  4Consolidated
  Statements of Comprehensive Income for the three months and nine months ended
  September 30, 2003 and 2002
  
  5Consolidated
  Statements of Cash Flows for the nine months ended September 30, 2003
  and 2002
  
  6Notes to Consolidated
  Financial Statements
  
  7Item
  2.
  
  Managements
  Discussion and Analysis of Financial Condition and Results of Operations
  
  19Item
  3.
  
  Quantitative
  and Qualitative Disclosures About Market Risk
  
  29Item 4.
  
  Controls and
  Procedures
  
  29PART II.
  
  Other InformationItem 1.
  
  Legal Proceedings
  
  30Item
  6.
  
  Exhibits
  and Reports on Form 8-K
  
  30Signatures
  
  32  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) September 30,
  2003
  
  December 31,
  2002AssetsCash and cash
  equivalents
  
  
  $
  45,390
  
  
  
  $
  47,571Patient receivables, net
  of allowance for doubtful accounts of $8,015 and $7,154, respectively
  
  
  48,467
  
  
  
  39,176Other receivables
  
  
  11,049
  
  
  
  34,735Inventories of supplies
  
  
  8,210
  
  
  
  7,756Deferred tax asset, net
  
  
  5,732
  
  
  
  5,657Prepaids and other
  current assets
  
  
  8,352
  
  
  
  7,001Total current assets
  
  
  127,200
  
  
  
  141,896Property and equipment,
  net
  
  
  326,778
  
  
  
  270,387Investments in
  affiliates
  
  
  31,440
  
  
  
  18,696Intangible assets, net
  
  
  311,804
  
  
  
  287,584Other assets
  
  
  20,731
  
  
  
  8,722Total assets
  
  
  $
  817,953
  
  
  
  $
  727,285Liabilities
  and Stockholders EquityAccounts payable
  
  
  $
  29,743
  
  
  
  $
  25,989Accrued salaries and
  benefits
  
  
  19,676
  
  
  
  20,322Due to affiliates
  
  
  4,382
  
  
  
  6,890Accrued interest
  
  
  5,419
  
  
  
  1,650Current portion of long-term
  debt
  
  
  14,288
  
  
  
  13,132Other accrued expenses
  
  
  25,503
  
  
  
  22,501Total current
  liabilities
  
  
  99,011
  
  
  
  90,484Long-term debt, less
  current portion
  
  
  285,223
  
  
  
  263,571Other long-term
  liabilities
  
  
  8,443
  
  
  
  4,532Deferred tax liability,
  net
  
  
  28,154
  
  
  
  19,577Total liabilities
  
  
  420,831
  
  
  
  378,164Minority interests
  
  
  36,507
  
  
  
  26,860Stockholders equity:Common stock:Other, $0.01 par value;
  200,000 shares authorized; 27,526 and 27,306 shares issued at
  September 30, 2003 and December 31, 2002, respectively
  
  
  275
  
  
  
  273Additional paid-in
  capital
  
  
  325,411
  
  
  
  320,750Treasury stock, at cost,
  137 and 202 shares at September 30, 2003 and December 31, 2002,
  respectively
  
  
  (2,522
  )
  
  
  (3,733
  )Deferred compensation
  
  
  (3,601
  )
  
  
  (1,226
  )Receivables from sales
  of stock
  
  
  (10
  )
  
  
  (191
  )Accumulated other
  comprehensive income, net of tax
  
  
  17,105
  
  
  
  3,290Retained earnings
  
  
  23,957
  
  
  
  3,098Total stockholders
  equity
  
  
  360,615
  
  
  
  322,261Total liabilities and stockholders equity
  
  
  $
  817,953
  
  
  
  $
  727,285  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 ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Net patient service
  revenue
  
  $
  93,731
  
  $
  75,234
  
  $
  282,296
  
  $
  214,655Management and
  administrative services revenue
  
  9,482
  
  7,765
  
  26,681
  
  23,451Equity in
  earnings of unconsolidated affiliates
  
  4,624
  
  2,100
  
  10,429
  
  6,593Other revenue
  
  983
  
  732
  
  3,017
  
  2,051Total revenues
  
  108,820
  
  85,831
  
  322,423
  
  246,750Salaries, benefits, and other employee costs
  
  28,832
  
  23,216
  
  81,735
  
  63,184Medical services
  and supplies
  
  20,543
  
  16,324
  
  61,576
  
  47,479Other operating
  expenses
  
  20,403
  
  16,139
  
  58,373
  
  45,159General and
  administrative expenses
  
  7,344
  
  5,889
  
  21,431
  
  18,168Provision for
  doubtful accounts
  
  2,198
  
  1,502
  
  5,740
  
  4,200Depreciation and
  amortization
  
  8,296
  
  6,942
  
  23,603
  
  18,920Total operating expenses
  
  87,616
  
  70,012
  
  252,458
  
  197,110Operating income
  
  21,204
  
  15,819
  
  69,965
  
  49,640Interest income
  
  280
  
  256
  
  791
  
  645Interest expense
  
  (7,372
  )
  (6,734
  )
  (21,106
  )
  (18,945
  )Other
  
  588
  
  
  
  697
  
  (74
  )Total other expense, net
  
  (6,504
  )
  (6,478
  )
  (19,618
  )
  (18,374
  )Income before minority interests
  
  14,700
  
  9,341
  
  50,347
  
  31,266Minority
  interests in income of consolidated subsidiaries
  
  (5,590
  )
  (4,066
  )
  (16,778
  )
  (10,172
  )Income before income taxes
  
  9,110
  
  5,275
  
  33,569
  
  21,094Income tax
  expense
  
  (3,534
  )
  (2,235
  )
  (12,698
  )
  (7,238
  )Net income
  
  $
  5,576
  
  $
  3,040
  
  $
  20,871
  
  $
  13,856Net income per share
  attributable to common stockholdersBasic
  
  $
  0.21
  
  $
  0.12
  
  $
  0.77
  
  $
  0.57Diluted
  
  $
  0.20
  
  $
  0.12
  
  $
  0.74
  
  $
  0.54Weighted average
  number of common sharesBasic
  
  27,151
  
  24,472
  
  27,088
  
  24,284Diluted
  
  28,398
  
  25,762
  
  28,033
  
  25,529  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 ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Net income
  
  $
  5,576
  
  $
  3,040
  
  $
  20,871
  
  $
  13,856Other comprehensive
  income, net of taxes:Foreign currency translation adjustments
  
  2,030
  
  1,699
  
  13,743
  
  13,223Net unrealized gains on securities
  
  57
  
  
  
  72
  
  Other comprehensive income
  
  2,087
  
  1,699
  
  13,815
  
  13,223Comprehensive
  income
  
  $
  7,663
  
  $
  4,739
  
  $
  34,686
  
  $
  27,079  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) Nine months ended
  September 30,2003
  
  2002Cash flows from operating activities:Net income
  
  $
  20,871
  
  $
  13,856Adjustments to reconcile net income to net cash
  provided by operating activities:Provision for doubtful
  accounts
  
  5,740
  
  4,200Depreciation and
  amortization
  
  23,603
  
  18,920Amortization of debt
  issue costs and discount
  
  1,364
  
  1,134Equity in earnings of
  unconsolidated affiliates
  
  (10,429
  )
  (6,593
  )Minority interests in
  income of consolidated subsidiaries
  
  16,778
  
  10,172Stock-based compensation
  
  2,119
  
  285Increases (decreases) in cash from changes in
  operating assets and liabilities, net of effects from purchases of new
  businesses:Patient receivables
  
  (12,402
  )
  (5,598
  )Other receivables
  
  24,033
  
  (903
  )Inventories of supplies,
  prepaids and other current assets
  
  (2,212
  )
  (460
  )Accounts payable and
  other current liabilities
  
  (252
  )
  5,000Other long-term
  liabilities
  
  6,461
  
  5,140Net cash provided by
  operating activities
  
  75,674
  
  45,153Cash flows from investing activities:Purchases of new
  businesses and equity interests, net of cash received
  
  (45,773
  )
  (39,780
  )Purchases of property
  and equipment
  
  (31,204
  )
  (18,909
  )Sales of property
  
  
  
  789Sale of investments
  
  (4,244
  )
  Decrease in deposits and
  notes receivable
  
  
  
  215Cash placed in escrow
  
  (3,145
  )
  Net cash used in investing
  activities
  
  (84,366
  )
  (57,685
  )Cash flows from financing activities:Proceeds from long-term
  debt
  
  51,932
  
  53,964Payments on long-term
  debt
  
  (41,680
  )
  (44,424
  )Proceeds from issuances
  of common stock
  
  2,030
  
  2,879Distributions on investments
  in affiliates
  
  (5,649
  )
  (1,753
  )Net cash provided by financing
  activities
  
  6,633
  
  10,666Effect of exchange rate
  changes on cash
  
  (122
  )
  120Net decrease in cash and
  cash equivalents
  
  (2,181
  )
  (1,746
  )Cash and cash
  equivalents at beginning of period
  
  47,571
  
  33,881Cash and cash
  equivalents at end of period
  
  $
  45,390
  
  $
  32,135Supplemental information:Interest paid
  
  $
  16,270
  
  $
  14,607Income taxes paid
  
  4,827
  
  2,548Non-cash transactions:Common stock issued for
  purchase of new businesses and equity interests
  
  
  
  1,170Assets acquired under
  capital lease obligations
  
  2,712
  
  1,705Issuance of restricted
  stock awards
  
  2,881
  
  Issuance of common stock for service contracts
  
  254
  
  761  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.
(together with its subsidiaries, USPI or the Company), a Delaware 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 Western Europe. At September 30, 2003, USPI,
headquartered in Dallas, Texas, operated 59 surgical facilities in the United
States. Of these 59 facilities, USPI consolidates the results of 26, owns a
minority or otherwise noncontrolling equity interest in 32, which are accounted
for under the equity method, and holds no ownership interest in the remaining
facility, which is operated by USPI under a management contract. In addition,
United Surgical Partners Europe, S.L. (USPE), a company incorporated in Spain
and majority owned by USPI, managed and owned a majority interest in eight
private surgical hospitals and one surgery center in Spain at September 30,
2003. Global Healthcare Partners Limited (Global), a company incorporated in
England and majority owned by USPI, managed and wholly owned three private
surgical hospitals in the United Kingdom at September 30, 2003. 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 because USPI generally issues options whereby 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.
Had USPI determined compensation cost 7 UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (1)    Basis of
Presentation (Continued) 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:  Three months ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Net income attributable
  to common stockholdersAs reported
  
  $
  5,576
  
  $
  3,040
  
  $
  20,871
  
  $
  13,856Add: Total stock-based employee compensation
  expense included in reported net income, net of taxes
  
  618
  
  162
  
  1,377
  
  385Less: Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of taxes
  
  (1,648
  )
  (1,207
  )
  (4,478
  )
  (2,750
  )Pro forma
  
  $
  4,546
  
  $
  1,995
  
  $
  17,770
  
  $
  11,491Basic earnings
  per shareAs reported
  
  $
  0.21
  
  $
  0.12
  
  $
  0.77
  
  $
  0.57Pro forma
  
  0.17
  
  0.08
  
  0.66
  
  0.47Diluted earnings per
  shareAs reported
  
  0.20
  
  0.12
  
  0.74
  
  0.54Pro forma
  
  0.16
  
  0.08
  
  0.63
  
  0.45  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 2.3% 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 In March 2003, the Company acquired 100% of a
private surgical hospital in Marbella, Spain, for approximately8.4 million
($9.0 million) in cash. In addition, the Company agreed to pay up to an
additional total of 4.3 million
($5.0 million) to the sellers, depending on the resolution of certain
contingencies over the next four years, of which 2.9 million ($3.4
million)  has been placed in escrow and is included in other assets in the
Companys balance sheet at September 30, 2003. 8 UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (2)   Acquisitions
(Continued) During April 2003, the Company acquired a private
surgical hospital in London, England for approximately £8.7 million
($13.8 million), of which the payment of approximately £0.5 million
($0.8 million) has been deferred pending the resolution of certain
contingencies. During June 2003, the Company acquired a 65%
interest in an ambulatory surgery center in Austin, Texas for $10.8 million in
cash. Following are the unaudited pro forma results for the
three months and nine months ended September 30, 2003 and 2002 as if the
acquisitions discussed above had occurred on January 1, 2002 (in
thousands, except per share amounts):  Three months ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Net revenues
  
  $
  108,820
  
  $
  90,099
  
  $
  326,994
  
  $
  258,538Net income
  
  5,576
  
  3,703
  
  21,131
  
  15,889Basic earnings
  per share
  
  0.21
  
  0.15
  
  0.78
  
  0.65Diluted earnings per
  share
  
  0.20
  
  0.14
  
  0.75
  
  0.62  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 nine months ended September 30,
2003, these transactions resulted in net cash outflows from USPI totaling
$12.1 million, of which $6.1 million was paid to acquire a noncontrolling
interest in an ambulatory surgery center in Torrance, California. (3)   Earnings Per Share Basic 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 9 UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (3)   Earnings Per Share
(Continued) earnings
per share for the three months and nine months ended September 30, 2003
and 2002 (in thousands, except per share amounts):  Three months ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Net income
  attributable to common shareholders
  
  $
  5,576
  
  $
  3,040
  
  20,871
  
  $
  13,856Weighted average
  common shares outstanding
  
  27,151
  
  24,472
  
  27,088
  
  24,284Effect of dilutive
  securities:Stock options
  
  925
  
  997
  
  648
  
  951Warrants and restricted stock
  
  322
  
  293
  
  297
  
  294Shares used for
  diluted earnings per share
  
  28,398
  
  25,762
  
  28,033
  
  25,529Basic earnings per share
  
  $
  0.21
  
  $
  0.12
  
  0.77
  
  $
  0.57Diluted earnings per
  share
  
  $
  0.20
  
  $
  0.12
  
  0.74
  
  $
  0.54  (4)   Other Receivables During the second and
third quarters, the Company modified some of the agreements under which the
Company provides certain administrative services to physicians, eliminating the
financing of accounts receivable from the scope of administrative services
provided by the Company. As a result, the Company collected approximately $20.0
million of the outstanding other receivables from these physicians. (5)   Segment Disclosures Statement 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 surgery centers and private surgical hospitals for
assessing performance and allocating resources both domestically 10 UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (5)   Segment Disclosures
(Continued) 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. Western EuropeThree months ended
  September 30, 2003 (unaudited)
  
  
  
  U.S.
  
  Spain
  
  United
  Kingdom
  
  Western
  Europe
  Total
  
  TotalNet patient
  service revenue
  
  $
  52,598
  
  $
  26,133
  
  $
  15,000
  
  $
  41,133
  
  $
  93,731Other revenue
  
  14,471
  
  618
  
  
  
  618
  
  15,089Total revenues
  
  $
  67,069
  
  $
  26,751
  
  $
  15,000
  
  $
  41,751
  
  $
  108,820Depreciation and amortization
  
  $
  4,554
  
  $
  2,413
  
  $
  1,329
  
  $
  3,742
  
  $
  8,296Operating income
  
  19,463
  
  (201
  )
  1,942
  
  1,741
  
  21,204Net interest
  expense
  
  (5,345
  )
  (993
  )
  (754
  )
  (1,747
  )
  (7,092
  )Income tax
  benefit (expense)
  
  (3,859
  )
  732
  
  (407
  )
  325
  
  (3,534
  )Total assets
  
  444,766
  
  222,365
  
  150,822
  
  373,187
  
  817,953Capital
  expenditures
  
  2,929
  
  7,355
  
  1,241
  
  8,596
  
  10,483  Western EuropeThree months
  ended
  September 30, 2002 (unaudited)
  
  
  
  U.S.
  
  Spain
  
  United
  Kingdom
  
  Western
  Europe
  Total
  
  TotalNet patient
  service revenue
  
  $
  43,906
  
  $
  19,270
  
  $
  12,058
  
  $
  31,328
  
  $
  75,234Other revenue
  
  9,975
  
  622
  
  
  
  622
  
  10,597Total revenues
  
  $
  53,881
  
  $
  19,892
  
  $
  12,058
  
  $
  31,950
  
  $
  85,831Depreciation and amortization
  
  $
  4,052
  
  $
  1,969
  
  $
  921
  
  $
  2,890
  
  $
  6,942Operating income
  
  14,161
  
  (496
  )
  2,154
  
  1,658
  
  15,819Net interest
  expense
  
  (5,281
  )
  (562
  )
  (635
  )
  (1,197
  )
  (6,478
  )Income tax
  benefit (expense)
  
  (2,154
  )
  235
  
  (314
  )
  (81
  )
  (2,235
  )Total assets
  
  404,599
  
  155,452
  
  100,452
  
  255,904
  
  660,503Capital
  expenditures
  
  2,217
  
  2,524
  
  4,203
  
  6,727
  
  8,944  11 UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (5)   Segment Disclosures (Continued) Western EuropeNine months ended
   September 30, 2003 (unaudited)
   
   
   
   U.S.
   
   Spain
   
   United
   Kingdom
   
   Western
   Europe
   Total
   
   TotalNet patient
  service revenue
  
  $
  155,095
  
  $
  84,147
  
  $
  43,054
  
  $
  127,201
  
  $
  282,296Other revenue
  
  38,123
  
  2,004
  
  
  
  2,004
  
  40,127Total revenues
  
  $
  193,218
  
  $
  86,151
  
  $
  43,054
  
  $
  129,205
  
  $
  322,423Depreciation and amortization
  
  $
  13,203
  
  $
  6,941
  
  $
  3,459
  
  $
  10,400
  
  $
  23,603Operating income
  
  55,965
  
  6,890
  
  7,110
  
  14,000
  
  69,965Net interest
  expense
  
  (15,745
  )
  (2,707
  )
  (1,863
  )
  (4,570
  )
  (20,315
  )Income tax
  benefit (expense)
  
  (10,940
  )
  (390
  )
  (1,368
  )
  (1,758
  )
  (12,698
  )Total assets
  
  444,766
  
  222,365
  
  150,822
  
  373,187
  
  817,953Capital
  expenditures
  
  9,970
  
  13,517
  
  10,429
  
  23,946
  
  33,916  Western EuropeNine months
  ended
  September 30, 2002 (unaudited)
  
  
  
  U.S.
  
  Spain
  
  United
  Kingdom
  
  Western
  Europe
  Total
  
  TotalNet patient
  service revenue
  
  $
  116,913
  
  $
  62,387
  
  $
  35,355
  
  $
  97,742
  
  $
  214,655Other revenue
  
  30,246
  
  1,849
  
  
  
  1,849
  
  32,095Total revenues
  
  $
  147,159
  
  $
  64,236
  
  $
  35,355
  
  $
  99,591
  
  $
  246,750Depreciation and amortization
  
  $
  11,159
  
  $
  5,278
  
  $
  2,483
  
  $
  7,761
  
  $
  18,920Operating income
  
  37,974
  
  4,557
  
  7,109
  
  11,666
  
  49,640Net interest
  expense
  
  (15,270
  )
  (1,237
  )
  (1,793
  )
  (3,030
  )
  (18,300
  )Income tax
  benefit (expense)
  
  (6,212
  )
  318
  
  (1,344
  )
  (1,026
  )
  (7,238
  )Total assets
  
  404,599
  
  155,452
  
  100,452
  
  255,904
  
  660,503Capital expenditures
  
  6,505
  
  4,720
  
  9,389
  
  14,109
  
  20,614  (6)   Condensed
Consolidating Financial Statements The 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 12


---

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (6)   Condensed
Consolidating Financial Statements (Continued) 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. Condensed
Consolidating Balance Sheets: As of September 30, 2003
  
  
  
  USPI and
  Wholly-owned
  U.S. Subsidiaries
  
  Non-participating
  Investees
  
  Consolidation
  Adjustments
  
  Consolidated
  TotalAssets:Current assets:Cash and cash
  equivalents
  
  
  $
  20,442
  
  
  
  $
  24,948
  
  
  
  $
  
  
  
  
  $
  45,390Accounts receivable, net
  
  
  154
  
  
  
  47,763
  
  
  
  550
  
  
  
  48,467Other receivables
  
  
  36,622
  
  
  
  12,252
  
  
  
  (37,825
  )
  
  
  11,049Inventories of supplies
  
  
  239
  
  
  
  7,971
  
  
  
  
  
  
  
  8,210Other
  
  
  8,870
  
  
  
  5,214
  
  
  
  
  
  
  
  14,084Total current assets
  
  
  66,327
  
  
  
  98,148
  
  
  
  (37,275
  )
  
  
  127,200Property and equipment,
  net
  
  
  37,386
  
  
  
  289,980
  
  
  
  (588
  )
  
  
  326,778Investments in
  affiliates
  
  
  168,338
  
  
  
  6,120
  
  
  
  (143,018
  )
  
  
  31,440Intangible assets, net
  
  
  181,398
  
  
  
  132,142
  
  
  
  (1,736
  )
  
  
  311,804Other
  
  
  111,443
  
  
  
  16,418
  
  
  
  (107,130
  )
  
  
  20,731Total assets
  
  
  $
  564,892
  
  
  
  $
  542,808
  
  
  
  $
  (289,747
  )
  
  
  $
  817,953Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
  
  
  $
  1,154
  
  
  
  $
  28,576
  
  
  
  $
  13
  
  
  
  $
  29,743Accrued expenses
  
  
  30,509
  
  
  
  25,680
  
  
  
  (1,209
  )
  
  
  54,980Current portion of long-term
  debt
  
  
  2,651
  
  
  
  12,719
  
  
  
  (1,082
  )
  
  
  14,288Total current
  liabilities
  
  
  34,314
  
  
  
  66,975
  
  
  
  (2,278
  )
  
  
  99,011Long-term debt
  
  
  156,621
  
  
  
  267,098
  
  
  
  (138,496
  )
  
  
  285,223Other liabilities
  
  
  15,046
  
  
  
  21,551
  
  
  
  
  
  
  
  36,597Minority interests
  
  
  
  
  
  
  9,585
  
  
  
  26,922
  
  
  
  36,507Stockholders equity
  
  
  358,911
  
  
  
  177,599
  
  
  
  (175,895
  )
  
  
  360,615Total liabilities and stockholders equity
  
  
  $
  564,892
  
  
  
  $
  542,808
  
  
  
  $
  (289,747
  )
  
  
  $
  817,953 13 UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (6)   Condensed
Consolidating Financial Statements (Continued)  As of December 31, 2002
  
  
  
  USPI and
  Wholly-owned
  U.S. Subsidiaries
  
  Non-participating
  Investees
  
  Consolidation
  Adjustments
  
  Consolidated
  TotalAssets:Current assets:Cash and cash
  equivalents
  
  
  $
  24,712
  
  
  
  $
  22,859
  
  
  
  $
  
  
  
  
  $
  47,571Accounts receivable, net
  
  
  90
  
  
  
  39,086
  
  
  
  
  
  
  
  39,176Other receivables
  
  
  46,983
  
  
  
  9,281
  
  
  
  (21,529
  )
  
  
  34,735Inventories of supplies
  
  
  280
  
  
  
  7,476
  
  
  
  
  
  
  
  7,756Other
  
  
  10,235
  
  
  
  2,423
  
  
  
  
  
  
  
  12,658Total current assets
  
  
  82,300
  
  
  
  81,125
  
  
  
  (21,529
  )
  
  
  141,896Property and equipment,
  net
  
  
  39,236
  
  
  
  231,743
  
  
  
  (592
  )
  
  
  270,387Investments in
  affiliates
  
  
  172,050
  
  
  
  375
  
  
  
  (153,729
  )
  
  
  18,696Intangible assets, net
  
  
  166,036
  
  
  
  122,685
  
  
  
  (1,137
  )
  
  
  287,584Other
  
  
  98,647
  
  
  
  5,204
  
  
  
  (95,129
  )
  
  
  8,722Total assets
  
  
  $
  558,269
  
  
  
  $
  441,132
  
  
  
  $
  (272,116
  )
  
  
  $
  727,285Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
  
  
  $
  1,357
  
  
  
  $
  24,619
  
  
  
  $
  13
  
  
  
  $
  25,989Accrued expenses
  
  
  28,543
  
  
  
  22,769
  
  
  
  51
  
  
  
  51,363Current portion of long-term
  debt
  
  
  2,453
  
  
  
  11,937
  
  
  
  (1,258
  )
  
  
  13,132Total current
  liabilities
  
  
  32,353
  
  
  
  59,325
  
  
  
  (1,194
  )
  
  
  90,484Long-term debt
  
  
  158,199
  
  
  
  216,621
  
  
  
  (111,249
  )
  
  
  263,571Other liabilities
  
  
  7,936
  
  
  
  16,173
  
  
  
  
  
  
  
  24,109Minority interests
  
  
  
  
  
  
  7,387
  
  
  
  19,473
  
  
  
  26,860Stockholders equity
  
  
  359,781
  
  
  
  141,626
  
  
  
  (179,146
  )
  
  
  322,261Total liabilities
  and stockholders 
  equity
  
  
  $
  558,269
  
  
  
  $
  441,132
  
  
  
  $
  (272,116
  )
  
  
  $
  727,285  14 UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (6)   Condensed
Consolidating Financial Statements (Continued) Condensed
Consolidating Statements of Income:  Nine months ended September 30, 2003
  
  
  
  USPI and
  Wholly-owned
  U.S. Subsidiaries
  
  Non-participating
  Investees
  
  Consolidation
  Adjustments
  
  Consolidated
  TotalRevenues
  
  
  $
  60,561
  
  
  
  $
  271,459
  
  
  
  $
  (9,597
  )
  
  
  $
  322,423Operating
  expenses, excluding depreciation and amortization
  
  
  39,425
  
  
  
  199,810
  
  
  
  (10,380
  )
  
  
  228,855Depreciation and
  amortization
  
  
  7,632
  
  
  
  15,975
  
  
  
  (4
  )
  
  
  23,603Operating income
  
  
  13,504
  
  
  
  55,674
  
  
  
  787
  
  
  
  69,965Interest expense,
  net
  
  
  (8,761
  )
  
  
  (11,554
  )
  
  
  
  
  
  
  (20,315
  )Other income
  (expense)
  
  
  234
  
  
  
  696
  
  
  
  (233
  )
  
  
  697Income before
  minority interests
  
  
  4,977
  
  
  
  44,816
  
  
  
  554
  
  
  
  50,347Minority
  interests in income of consolidated subsidiaries
  
  
  
  
  
  
  (7,742
  )
  
  
  (9,036
  )
  
  
  (16,778
  )Income (loss)
  before income taxes
  
  
  4,977
  
  
  
  37,074
  
  
  
  (8,482
  )
  
  
  33,569Income tax
  expense
  
  
  (10,667
  )
  
  
  (2,031
  )
  
  
  
  
  
  
  (12,698
  )Net income (loss)
  
  
  $
  (5,690
  )
  
  
  $
  35,043
  
  
  
  $
  (8,482
  )
  
  
  $
  20,871Nine months ended September 30, 2002
  
  
  
  USPI and
  Wholly-owned
  U.S. Subsidiaries
  
  Non-participating
  Investees
  
  Consolidation
  Adjustments
  
  Consolidated
  TotalRevenues
  
  
  $
  51,676
  
  
  
  $
  203,431
  
  
  
  $
  (8,357
  )
  
  
  $
  246,750Operating
  expenses, excluding depreciation and amortization
  
  
  34,885
  
  
  
  151,770
  
  
  
  (8,465
  )
  
  
  178,190Depreciation and
  amortization
  
  
  7,175
  
  
  
  11,763
  
  
  
  (18
  )
  
  
  18,920Operating income
  
  
  9,616
  
  
  
  39,898
  
  
  
  126
  
  
  
  49,640Interest expense,
  net
  
  
  (9,436
  )
  
  
  (8,864
  )
  
  
  
  
  
  
  (18,300
  )Other expense
  
  
  203
  
  
  
  (74
  )
  
  
  (203
  )
  
  
  (74
  )Income (loss)
  before minority interests
  
  
  383
  
  
  
  30,960
  
  
  
  (77
  )
  
  
  31,266Minority
  interests in income of consolidated subsidiaries
  
  
  
  
  
  
  (4,785
  )
  
  
  (5,387
  )
  
  
  (10,172
  )Income (loss)
  before income taxes
  
  
  383
  
  
  
  26,175
  
  
  
  (5,464
  )
  
  
  21,094Income tax
  expense
  
  
  (5,739
  )
  
  
  (1,499
  )
  
  
  
  
  
  
  (7,238
  )Net income (loss)
  
  
  $
  (5,356
  )
  
  
  $
  24,676
  
  
  
  $
  (5,464
  )
  
  
  $
  13,856  15 UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (6)   Condensed
Consolidating Financial Statements (Continued) Condensed
Consolidating Statements of Cash Flows:  Nine months ended September 30, 2003
  
  
  
  USPI and
  Wholly-owned
  U.S. Subsidiaries
  
  Non-participating
  Investees
  
  Consolidation
  Adjustments
  
  Consolidated
  TotalCash flows from
  operating activities:Net income (loss)
  
  
  $
  (5,689
  )
  
  
  $
  35,042
  
  
  
  $
  (8,482
  )
  
  
  $
  20,871Changes in
  operating and intercompany assets and liabilities and noncash items included
  in net income(loss)
  
  
  38,866
  
  
  
  (20,672
  )
  
  
  36,609
  
  
  
  54,803Net cash provided by operating activities
  
  
  33,177
  
  
  
  14,370
  
  
  
  28,127
  
  
  
  75,674Cash flows from
  investing activities:Purchases of
  property and equipment, net
  
  
  (3,854
  )
  
  
  (27,350
  )
  
  
  
  
  
  
  (31,204
  )Purchases of new
  businesses
  
  
  (23,920
  )
  
  
  (21,853
  )
  
  
  
  
  
  
  (45,773
  )Other items
  
  
  (4,257
  )
  
  
  (3,132
  )
  
  
  
  
  
  
  (7,389
  )Net cash used in investing activities
  
  
  (32,031
  )
  
  
  (52,335
  )
  
  
  
  
  
  
  (84,366
  )Cash flows from
  financing activities:Long-term
  borrowings, net
  
  
  (1,798
  )
  
  
  40,177
  
  
  
  (28,127
  )
  
  
  10,252Proceeds from
  issuance of common stock
  
  
  2,030
  
  
  
  
  
  
  
  
  
  
  
  2,030Other items
  
  
  (5,649
  )
  
  
  
  
  
  
  
  
  
  
  (5,649
  )Net cash provided by (used in) financing activities
  
  
  (5,417
  )
  
  
  40,177
  
  
  
  (28,127
  )
  
  
  6,633Effect of
  exchange rate changes on cash
  
  
  
  
  
  
  (122
  )
  
  
  
  
  
  
  (122
  )Net increase
  (decrease) in cash
  
  
  (4,271
  )
  
  
  2,090
  
  
  
  
  
  
  
  (2,181
  )Cash at the
  beginning of the period
  
  
  24,712
  
  
  
  22,859
  
  
  
  
  
  
  
  47,571Cash at the end
  of the period
  
  
  $
  20,441
  
  
  
  $
  24,949
  
  
  
  $
  
  
  
  
  $
  45,390  16


---

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (6)   Condensed
Consolidating Financial Statements (Continued)  Nine months ended September 30, 2002
  
  
  
  USPI and
  Wholly-owned
  U.S. Subsidiaries
  
  Non-participating
  Investees
  
  Consolidation 
  Adjustments
  
  Consolidated
  TotalCash flows from
  operating activities:Net income (loss)
  
  
  $
  (5,354
  )
  
  
  $
  24,678
  
  
  
  $
  (5,468
  )
  
  
  $
  13,856Changes in
  operating and intercompany assets and liabilities and noncash items included
  in net income (loss)
  
  
  20,916
  
  
  
  4,963
  
  
  
  5,418
  
  
  
  31,297Net cash provided by (used in) operating activities
  
  
  15,562
  
  
  
  29,641
  
  
  
  (50
  )
  
  
  45,153Cash flows from
  investing activities:Purchases of
  property and equipment, net
  
  
  (3,016
  )
  
  
  (15,893
  )
  
  
  
  
  
  
  (18,909
  )Purchases of new
  businesses
  
  
  (32,277
  )
  
  
  (7,580
  )
  
  
  77
  
  
  
  (39,780
  )Other items
  
  
  (518
  )
  
  
  1,522
  
  
  
  
  
  
  
  1,004Net cash provided by (used in) investing activities
  
  
  (35,811
  )
  
  
  (21,951
  )
  
  
  77
  
  
  
  (57,685
  )Cash flows from
  financing activities:Long-term
  borrowings, net
  
  
  8,954
  
  
  
  586
  
  
  
  
  
  
  
  9,540Proceeds from
  issuance of common 
  stock
  
  
  2,879
  
  
  
  77
  
  
  
  (77
  )
  
  
  2,879Other items
  
  
  (1,753
  )
  
  
  
  
  
  
  
  
  
  
  (1,753
  )Net cash provided by (used in) financing activities
  
  
  10,080
  
  
  
  663
  
  
  
  (77
  )
  
  
  10,666Effect of
  exchange rate changes on cash
  
  
  
  
  
  
  70
  
  
  
  50
  
  
  
  120Net increase
  (decrease) in cash
  
  
  (10,169
  )
  
  
  8,423
  
  
  
  
  
  
  
  (1,746
  )Cash at the
  beginning of the period
  
  
  20,396
  
  
  
  13,485
  
  
  
  
  
  
  
  33,881Cash at the end of the
  period
  
  
  $
  10,227
  
  
  
  $
  21,908
  
  
  
  
  
  
  
  $
  32,135  (7)   Commitments and
Contingencies (a)Financial Guarantees As of September 30,
2003, 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 $36.9 million. Of the total, $24.7
million relates to the debt of consolidated subsidiaries, whose debt is
included in the Companys consolidated balance sheet, and the remaining
$12.2 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 17 UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) (Continued) (7)   Commitments and
Contingencies (Continued) 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. (b)Litigation and Professional Liability Claims The Company has been named as a defendant in a lawsuit
filed by former shareholders of SURGICOE Corporation, which the Company
acquired in March 2002. The suit alleges that the Company failed to
discharge certain post-closing obligations under the acquisition agreement. The
Companys management believes the suit is wholly without merit, and the Company
is vigorously defending the suit. Additionally, in its
normal course of business, USPI is subject to claims and lawsuits relating to
patient treatment. USPI believes that its liability for damages resulting from
such claims and lawsuits is adequately covered by insurance or is adequately
provided for in its consolidated financial statements. (8)   New Accounting
Pronouncements During May 2003 the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (SFAS No. 150).  The adoption of SFAS No. 150 during the third
quarter of 2003 did not affect the financial statements of the Company but
resulted in the following disclosures regarding the Company's legal structure. The Company conducts a
significant portion of its U.S. operations through consolidated subsidiaries
structured as limited partnerships, limited liability partnerships, and limited
liability companies, in partnership with local physicians and hospital
systems.  Many of these legal entities
will terminate at dates specified in their governing documents, unless the
investors vote to continue their operations. 
Upon their termination, these subsidiaries would liquidate their assets,
settle their liabilities, and distribute the remaining cash to investors.  As these subsidiaries typically lease the
real property they use and generally do not have assets or liabilities that are
of a long-term speculative nature, any estimate of the amounts that would be
paid to noncontrolling investors in a liquidation would not materially exceed
the carrying value of such minority interests on the Company's consolidated
balance sheet.  None of the Company's
finite-lived subsidiaries has a termination date earlier than 2020.  None of the Company's Spain or United Kingdom
subsidiaries has a finite legal life. (9)   Subsequent Events The Company has entered into letters of intent with
various entities regarding possible joint venture, development, or acquisition
projects. These projects are in various stages of negotiation. 18


---

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; demographic changes; changes in, or the failure to
comply with, laws and governmental regulations; foreign currency fluctuations;
the ability to enter into managed care provider arrangements on acceptable
terms; changes in Medicare, Medicaid and other government funded payments or
reimbursement; 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 or development opportunities and the length of time it takes to
accomplish acquisitions and new developments; our ability to integrate new
businesses with our existing operations and certain additional factors, risks,
and uncertainties discussed in this Quarterly Report on Form 10-Q. 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 The Company operates
surgery centers and private surgical hospitals in the United States and Western
Europe. As of September 30, 2003, the Company operated 71 surgical
facilities, consisting of 59in the United
States, nine in Spain, and three in the United Kingdom. Of the 59 U.S.
facilities, the Company jointly operates 30 with 13 major not-for-profit
healthcare systems. Overall, the Company holds ownership in 70 of the
facilities and operates the remaining facility, which is in the United States,
under a management contract. Critical Accounting
Policies Our management is required to make certain estimates
and assumptions during the preparation of our consolidated financial statements
in accordance with generally accepted accounting principles. These estimates
and assumptions impact the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the
consolidated financial statements. They also impact the reported amount of net
earnings during any period. Actual results could differ from those estimates.
Certain of our accounting policies have a more significant impact on our
financial statements than others due to the size of the underlying financial
statement elements. 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 19 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 In March 2003, we acquired a surgical hospital in
Marbella, Spain, for approximately8.4 million
($9.0 million) in cash. In addition, we agreed to pay up to an additional
total of 4.3 million
($5.0 million), depending on the resolution of certain contingencies over
the next four years. During April 2003, we acquired a private surgical
hospital in London, England for approximately £8.7 million
($13.8 million), of which the payment of approximately £0.5 million
($0.8 million) has initially been deferred pending the resolution of
certain contingencies. During June 2003, we acquired a 65% interest in
an ambulatory surgery center in Austin, Texas for $10.8 million in cash. We also engage in
investing transactions that are not business combinations, consisting primarily
of purchases and sales of noncontrolling equity interests in surgical facilities
and the investment of additional cash in surgical facilities under development.
During the nine months ended September 30, 2003, these transactions
resulted in net cash outflows totaling $12.1 million, of which $6.1
million was paid to acquire a noncontrolling interest in an ambulatory surgery
center in Torrance, California. Sources of Revenue Revenues primarily
include: ·       net
patient service revenue at the facilities that we consolidate for financial
reporting purposes, which are typically those in which we have ownership
interests of greater than 50% or otherwise maintain effective control; ·       management
and administrative services revenue earned from management contracts, whereby
we manage the operations of surgical facilities in which we have varying levels
of ownership, and from contracts to provide consulting and specific
administrative services to physicians. Management service revenue and expenses
earned from and incurred by facilities that we consolidate for financial
reporting purposes are eliminated in consolidation and therefore not included
in management service revenue or operating expenses in our consolidated income
statements and accordingly have no impact on consolidated net income; and ·       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 20 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. The following table summarizes our revenues by type
and as a percentage of total revenue for the periods presented:  Three months ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Net patient
  service revenue
  
  86
  %
  88
  %
  88
  %
  87
  %Management and administrative
  services revenue
  
  9
  
  9
  
  8
  
  9Equity in
  earnings of unconsolidated affiliates
  
  4
  
  2
  
  3
  
  3Other income
  
  1
  
  1
  
  1
  
  1Total revenues
  
  100
  %
  100
  %
  100
  %
  100
  %  We experienced increases of greater than 10% in all
four types of revenue, and the mix by type of revenue has remained relatively
constant for the three and nine months ended September 30, 2003 as compared to
the same periods in 2002.  Our revenues
from unconsolidated affiliates, consisting of our equity in their earnings and
the fees for management services we provided to them, did increase slightly as
a percentage of our total revenues for the three months ended September 30,
2003 as compared to the three months ended September 30, 2002.  This increase primarily resulted from the
ramp-up in revenues for the nine unconsolidated facilities, several of which
were newly opened, that were added during the period from July 1, 2002 through
September 30, 2003. Our management and administrative services revenues
are earned from the following types of activities (dollars in thousands):  Three months ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Management of
  surgical facilities
  
  $
  3,998
  
  $
  2,412
  
  $
  10,949
  
  $
  6,760Consulting and
  other services provided to physicians
  and related entities
  
  5,484
  
  5,353
  
  15,732
  
  16,691Total management and
  administrative service revenues
  
  $
  9,482
  
  $
  7,765
  
  $
  26,681
  
  $
  23,451  21 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 ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Total revenues
  
  $
  65,443
  
  $
  34,977
  
  $
  168,417
  
  $
  99,283Depreciation and
  amortization
  
  3,060
  
  1,795
  
  8,330
  
  4,816Operating income
  
  22,780
  
  9,607
  
  52,664
  
  29,954Interest expense,
  net
  
  1,849
  
  906
  
  5,282
  
  2,605Net income
  
  20,729
  
  8,580
  
  46,573
  
  26,883Long-term
  debt
  
  76,221
  
  48,038
  
  76,221
  
  48,038USPIs equity in
  earnings of unconsolidated affiliates
  
  4,624
  
  2,100
  
  10,429
  
  6,593USPIs imputed
  weighted average ownership percentage based on affiliates net income(1)
  
  22.3
  %
  24.5
  %
  22.4
  %
  24.5
  %USPIs imputed
  weighted average ownership percentage based on affiliates debt(2)
  
  23.6
  %
  28.8
  %
  23.6
  %
  28.8
  %Unconsolidated
  facilities operated at period end
  
  32
  
  25
  
  32
  
  25  
 (1)Calculated
by dividing USPIs equity in earnings of unconsolidated affiliates by the total
net income of the affiliates for each respective period. (2)Calculated by
multiplying the total debt of each affiliate by the percentage ownership USPI
held in the affiliate as of the end of each respective period. For the three months ended September 30, 2003 and
2002, approximately 62% and 63% of our revenues were generated from operations
in the United States and 38% and 37% from Western Europe, respectively. For the
nine months ended September 30, 2003 and 2002, approximately 60% of our
revenues were generated from operations in the United States and 40% from
Western Europe, respectively. While we continue to experience growth at our
U.S. facilities at rates faster than what we experience in our Western Europe
facilities and also continue to focus our development activity more heavily in
the U.S. than in Western Europe, two factors have caused the percentage of
revenues generated by each segment to remain relatively constant. One factor is
the weaker U.S. dollar, which causes our Western Europe revenues to be measured
in higher amounts of U.S. dollars. Another factor is that, while we consolidate
all of our Western Europe facilities, we consolidate less than one-half of our
U.S. facilities. 22


---

Results of
Operations The following table summarizes certain statement of
income items expressed as a percentage of revenues for the periods indicated:  Three months ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Total revenues
  
  100.0
  %
  100.0
  %
  100.0
  %
  100.0
  %Operating
  expenses, excluding depreciation and amortization
  
  72.9
  
  73.5
  
  71.0
  
  72.2Depreciation and
  amortization
  
  7.6
  
  8.1
  
  7.3
  
  7.7Operating income
  
  19.5
  
  18.4
  
  21.7
  
  20.1Minority
  interests in income of consolidated entities
  
  5.1
  
  4.7
  
  5.2
  
  4.1Interest and
  other expense, net
  
  6.0
  
  7.6
  
  6.1
  
  7.5Income before
  income taxes
  
  8.4
  
  6.1
  
  10.4
  
  8.5Income tax
  expense
  
  (3.3
  )
  (2.6
  )
  (3.9
  )
  (2.9
  )Net income
  
  5.1
  
  3.5
  
  6.5
  
  5.6EBITDA less minority
  interests(a)
  
  22.0
  
  21.8
  
  23.8
  
  23.7  
 (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 us may not be comparable to similarly titled measures of
other companies. 23 The following table reconciles EBITDA and EBITDA less
minority interests to net income and to net cash provided by operating
activities:  Three months ended
  September 30,
  
  Nine months ended
  September 30,2003
  
  2002
  
  2003
  
  2002Net income
  
  $
  5,576
  
  $
  3,040
  
  $
  20,871
  
  $
  13,856Income tax expense
  
  3,534
  
  2,235
  
  12,698
  
  7,238Interest and other non-operating expense
  
  6,504
  
  6,478
  
  19,618
  
  18,374Depreciation and amortization
  
  8,296
  
  6,942
  
  23,603
  
  18,920EBITDA less
  minority interests
  
  23,910
  
  18,695
  
  76,790
  
  58,388Minority interests in income of consolidated 
  subsidiaries
  
  5,590
  
  4,066
  
  16,778
  
  10,172EBITDA
  
  29,500
  
  22,761
  
  93,568
  
  68,560Provision for doubtful accounts
  
  2,198
  
  1,502
  
  5,740
  
  4,200Amortization of debt issue costs, discount, and
  deferred
  compensation
  
  2,299
  
  526
  
  3,483
  
  1,419Interest and other nonoperating expense
  
  (6,504
  )
  (6,478
  )
  (19,618
  )
  (18,374
  )Income tax expense
  
  (3,534
  )
  (2,235
  )
  (12,698
  )
  (7,238
  )Equity in earnings of unconsolidated affiliates
  
  (4,624
  )
  (2,100
  )
  (10,429
  )
  (6,593
  )Increases (decreases) in cash from changes in
  operating assets and liabilities, net of effects from purchases of new
  businesses
  
  11,382
  
  7,131
  
  15,628
  
  3,179Net cash provided by
  operating activities
  
  $
  30,717
  
  $
  21,107
  
  $
  75,674
  
  $
  45,153  Three Months Ended September 30,
2003 Compared to Three Months Ended September 30, 2002 Revenues increased by $23.0 million, or 27%, to $108.8
million for the three months ended September 30, 2003 from $85.8 million
for the three months ended September 30, 2002. Of this increase in
revenues, $8.3 million was contributed by facilities acquired or opened since June 30,
2002. The U.S. dollar was weaker relative to the Eurodollar and the British
pound during the three months ended September 30, 2003 as compared to the
same period in the prior year, resulting in a positive impact of $4.0 million
on year over year revenues for the facilities in Western Europe that were owned
in both 2003 and 2002 (same store facilities). Absent this foreign exchange
impact, same store facilities in Western Europe contributed $3.2 million more
to consolidated revenues in the three months ended September 30, 2003 as
compared to the same period in 2002. The remaining increase in revenues was
contributed by same store U.S. facilities, which performed approximately 8%
more cases in the three months ended September 30, 2003 as compared to the
three months ended September 30, 2002. Operating expenses, excluding depreciation and
amortization, increased by $16.2 million, or 26%, to $79.3 million for the
three months ended September 30, 2003 from $63.1 million for the
three months ended September 30, 2002. Operating expenses, excluding
depreciation and amortization, as a percentage of revenues, decreased to 72.9%
for the three months ended September 30, 2003 from 73.5% for the three
months ended September 30, 2002, primarily as a result of operating
efficiencies at our facilities and improved economies of scale as we expanded. Depreciation and amortization increased $1.4 million,
or 20%, to $8.3 million for the three months ended September 30, 2003 from
$6.9 million for the three months ended September 30, 2002, primarily
as a result of additional depreciation on tangible assets added through
acquisitions, expansions of existing facilities, and the effect of the weaker
U.S. dollar. Depreciation and amortization, as a percentage of revenues,
decreased to 7.6% for the three months ended September 30, 2003 from 8.1%
for the three months ended September 30, 2002. 24 Operating income increased $5.4 million, or 34%,
to $21.2 million for the three months ended September 30, 2003 from
$15.8 million for the three months ended September 30, 2002,
primarily as a result of the impact of acquisitions and improved operating
margins at our facilities, as discussed above. Operating income, as a percentage
of revenues, increased to 19.5% for the three months ended September 30,
2003 from 18.4% for the three months ended September 30, 2002, primarily
as a result of improved operating margins at our facilities and the leveraging
of our corporate overhead expenses over the increased revenue. Interest expense, net of interest income, increased 9%
to $7.1 million for the three months ended September 30, 2003 from
$6.5 million for the three months ended September 30, 2002 primarily
as a result of interest expense on debt of facilities acquired since September 30,
2002. Provision for income taxes and our overall effective
tax rates were $3.5 million and 39% for the three months ended September 30,
2003, compared to $2.2 million and 42% for the three months ended September 30,
2002, respectively. The increase in our actual provision for income taxes
primarily results from an increase in our pretax income. The decrease in our
overall effective tax rate primarily results from our accruing a tax benefit
related to pretax losses in Spain during the three months ended September 30,
2003, as compared to our recording no net income tax in Spain during the same
period in 2002. Our Spanish operations typically generate a pretax loss during
the third quarter due to a seasonal slowdown of the business. Prior to 2003, we
did not recognize the benefit of such net operating losses (NOLs) as our
Spanish operations had not yet achieved overall profitability and our ability
to utilize such NOLs to offset future income was not yet considered more
likely than not. As the full year results of our Spanish operations began to
result in positive pretax income in 2002 and have continued to be profitable on
a year-to-date basis during 2003, we began, on January 1, 2003, to accrue
taxes in Spain at rates approximating statutory rates, both during the
profitable quarters and during the months in the third quarter that typically
generate pretax losses. Net income was $5.6 million for the three months
ended September 30, 2003 compared to $3.0 million for the three
months ended September 30, 2002. This $2.6 million improvement
primarily results from the increased revenues and improved operating
efficiencies and economies of scale related to expenses discussed above. EBITDA less minority
interests increased $5.2 million, or 28%, to $23.9 million for the three months
ended September 30, 2003 from $18.7 million for the three months
ended September 30, 2002. Of this increase in EBITDA less minority
interests, $2.6 million was contributed by facilities acquired or opened since June 30,
2002. EBITDA less minority interests, as a percentage of revenues, increased to
22.0% for the three months ended September 30, 2003 from 21.8% for the
three months ended September 30, 2002, primarily as a result of improved
operating margins at our facilities and the leveraging of our corporate
overhead expenses over the increased revenue. Nine Months Ended September 30,
2003 Compared to Nine Months Ended September 30, 2002 Revenues increased by $75.7 million, or 31%, to
$322.4 million for the nine months ended September 30, 2003 from
$246.7 million for the nine months ended September 30, 2002. Of this
increase in revenues, $30.9 million was contributed by facilities acquired
or opened since December 31, 2001. The U.S. dollar was weaker relative to
the Eurodollar and the British pound during the nine months ended September 30,
2003 as compared to the same period in the prior year, resulting in a positive
impact of $17.8 million on year over year revenues for the facilities in Western
Europe that were owned in both 2003 and 2002 (same store facilities). Absent
this foreign exchange impact, same store facilities in Western Europe
contributed $6.2 million more to consolidated revenues in the nine months
ended September 30, 2003 as compared to the same period in 2002. The
remaining increase in revenues was contributed by same store U.S. facilities,
which performed approximately 9% more cases in the nine months ended September 30,
2003 as compared to the nine months ended September 30, 2002. 25 Operating expenses, excluding depreciation and
amortization, increased by $50.7 million, or 28%, to $228.9 million
for the nine months ended September 30, 2003 from $178.2 million for
the nine months ended September 30, 2002. Operating expenses, excluding
depreciation and amortization, as a percentage of revenues, decreased to 71.0%
for the nine months ended September 30, 2003 from 72.2% for the nine
months ended September 30, 2002, primarily as a result of operating
efficiencies at our facilities and improved economies of scale as we expanded. Depreciation and amortization increased
$4.7 million, or 25%, to $23.6 million for the nine months ended September 30,
2003 from $18.9 million for the nine months ended September 30, 2002,
primarily as a result of additional depreciation on tangible assets added
through acquisitions, expansions of existing facilities, and the effect of the
weaker U.S. dollar. Depreciation and amortization, as a percentage of revenues,
decreased to 7.3% for the nine months ended September 30, 2003 from 7.7%
for the nine months ended September 30, 2002. Operating income increased $20.3 million, or 41%,
to $70.0 million for the nine months ended September 30, 2003 from
$49.6 million for the nine months ended September 30, 2002, primarily
as a result of the impact of acquisitions and improved operating margins at our
facilities, as discussed above. Operating income, as a percentage of revenues,
increased to 21.7% for the nine months ended September 30, 2003 from 20.1%
for the nine months ended September 30, 2002, primarily as a result of
improved operating margins at our facilities and the leveraging of our
corporate overhead expenses over the increased revenue. Interest expense, net of interest income, increased
11% to $20.3 million for the nine months ended September 30, 2003
from $18.3 million for the nine months ended September 30, 2002
primarily as a result of interest expense on debt of facilities acquired since December 31,
2001. Provision for income taxes and our overall effective
tax rates were $12.7 million and 38% for the nine months ended September 30,
2003, compared to $7.2 million and 34% for the nine months ended September 30,
2002, respectively. The increase in our actual provision for income taxes
primarily results from an increase in our pretax income. The increase in our
overall effective tax rate primarily results from our accruing no net income
tax expense in Spain prior to January 1, 2003, at which time we began
accruing taxes at rates approximating statutory rates. We began utilizing net
operating loss carryforwards (NOLs) to offset current taxable income as our
Spain operations achieved profitability for the first time during 2002, and
during the fourth quarter of 2002 we recognized the benefit of a portion of our
Spain NOLs generated during our initial years of operations as the realization
of a portion of our Spain NOLs was deemed more likely than not. Net income was $20.9 million for the nine months
ended September 30, 2003 compared to $13.9 million for the nine
months ended September 30, 2002. This $7.0 million improvement
primarily results from the increased revenues and improved operating
efficiencies and economies of scale related to expenses discussed above. EBITDA less minority
interests increased $18.4 million, or 32%, to $76.8 million for the
nine months ended September 30, 2003 from $58.4 million for the nine
months ended September 30, 2002. Of this increase in EBITDA less minority
interests, $7.9 million was contributed by facilities acquired or opened
since December 31, 2001. EBITDA less minority interests, as a percentage
of revenues, increased to 23.8% for the nine months ended September 30,
2003 from 23.7% for the nine months ended September 30, 2002, primarily as
a result of improved operating margins at our facilities and the leveraging of
our corporate overhead expenses over the increased revenue. Liquidity and
Capital Resources During the nine months ended September 30, 2003,
the Company generated $75.7 million of cash flows from operations as compared
to $45.2 million during the nine months ended September 30, 2002. Of 26 this $30.4 million
improvement, approximately $20.0 million resulted from the collection of
receivables from physician groups to whom we provide certain administrative
services. This collection resulted from the modification of our agreements with
those physicians, whereby the financing of accounts receivable was eliminated
from the scope of administrative services provided by us. During the nine months ended September 30, 2003,
the Companys net cash used in investing activities was $84.4 million,
consisting primarily of $45.8 million for the purchase of businesses and
equity interests, net of cash received, and $31.2 million for the purchase
of property and equipment. The $45.8 million primarily consists of
$9.0 million paid for the acquisition of a private surgical hospital in
Marbella, Spain, $13.8 million paid for the acquisition of a private surgical
hospital in London, England, $10.8 million paid for the acquisition of an ambulatory
surgery center in Austin, Texas, $6.1 million paid for the acquisition of a
noncontrolling interest in an ambulatory surgery center in Torrance,
California, and net incremental investments in unconsolidated affiliates of
$6.1 million. Approximately $18.0 million of the property and equipment
purchases related to ongoing development projects and the remaining $13.2
million represents purchases of equipment at existing facilities. The
$84.4 million of cash used in investing activities was funded primarily
with cash flows from operations and additionally through borrowings under our
credit facilities and a reduction in cash on hand. Net cash provided by
financing activities during the nine months ended September 30, 2003 was
$6.6 million. Cash and cash equivalents were $45.4 million at September 30,
2003 as compared to $47.6 million at December 31, 2002, and net
working capital was $28.2 million at September 30, 2003 as compared
to $51.4 million at December 31, 2002, with the reduction being
primarily the collection of receivables from physician groups (discussed above)
and subsequent use of those funds in investing activities. 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 any new subsidiary
that becomes a guarantor of the facility. Under the terms of the facility, the
Company 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 September 30,
2003, no amounts were outstanding under this facility and $48.7 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
$87.4 million would be available for borrowing to finance acquisitions as
of September 30, 2003, of which none was drawn at September 30, 2003.
Our credit 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. Additionally, one of our U.K. subsidiaries has a
credit agreement with a commercial lender in the United Kingdom that provides
for total borrowings of £52.0 million (approximately $86.4 million as
of September 30, 2003) under four separate facilities, the fourth of which
was added during the second quarter of 2003, increasing the agreements total
borrowing capacity by £10.0 million from its previous total of £42.0 million. At
September 30, 2003, total outstanding borrowings under this credit
agreement were approximately $61.0 million, which represents total
borrowings net of scheduled repayments of $13.3 million that have been
made under the agreement, and approximately $12.1 million was available
for borrowings, primarily for capital projects specified under the agreement.
Borrowings under this agreement 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 this agreement. 27 We were in compliance with all debt covenants as of September 30,
2003.  Payments Due by Period (In Thousands)Contractual Cash Obligations
  
  
  
  Total
  
  Within 
  1 year
  
  1 to 3 
  years
  
  4 to 5 
  years
  
  Beyond 
  5 yearsLong term debtSenior Subordinated Notes
  
  $
  150,000
  
  $
  
  
  $
  
  
  $
  
  
  $
  150,000U.S. Credit Facility
  
  
  
  
  
  
  
  
  
  U.K. Credit Facility
  
  61,024
  
  4,265
  
  11,302
  
  16,205
  
  29,252Loans from former owners of subsidiaries
  
  550
  
  517
  
  33
  
  
  
  Other debt at operating subsidiaries
  
  21,437
  
  4,267
  
  9,601
  
  6,451
  
  1,118Capitalized lease
  obligations:U.S. operating subsidiaries
  
  46,025
  
  8,174
  
  10,615
  
  3,659
  
  23,577Western Europe operating subsidiaries
  
  91,203
  
  4,642
  
  8,273
  
  7,787
  
  70,501Operating lease
  obligations:U.S. operating subsidiaries
  
  49,209
  
  6,921
  
  12,487
  
  10,898
  
  18,903Western Europe operating subsidiaries
  
  12,576
  
  1,664
  
  2,898
  
  2,474
  
  5,540Total contractual cash
  obligations
  
  $
  432,024
  
  $
  30,450
  
  $
  55,209
  
  $
  47,474
  
  $
  298,891  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 $89.5 million at September 30, 2003, 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 86.7% at
September 30, 2003. 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 September 30, 2003, the total
obligations of these unconsolidated affiliates under debt and capital lease
obligations was approximately $76.2 million. Our average percentage
ownership, weighted based on the individual affiliates amount of debt and
capitalized lease obligations, of these unconsolidated affiliates was 23.6% at September 30,
2003. USPI or one of its wholly owned subsidiaries had collectively guaranteed
$12.2 million in total debt and capital lease obligations of our
unconsolidated affiliates as of September 30, 2003. These unconsolidated affiliates are limited
partnerships, limited liability partnerships or limited liability companies
that own operational surgical facilities or surgical facilities that are under
development. None of these affiliates provide financing, liquidity, or market
or credit risk support for us. They also do not engage in leasing, hedging or
research and development services with us. Moreover, we do not believe that
they expose us to any of their liabilities that are not otherwise reflected in
our consolidated financial statements. We are not obligated to fund losses or
otherwise provide additional funding to these affiliates other than as we
determine to be economically required in order to successfully implement our
development plans. Our acquisition and development program will require
substantial capital resources, which we estimate to range from
$40.0 million to $60.0 million per year over the next three years,
including an estimated $3.8 million related to additional consideration to
the sellers of acquired facilities based upon those facilities achieving
certain financial targets and potentially an additional4.3 million
(approximately $5.0 million as of September 30, 2003) related to the
resolution of certain contingencies related to the Marbella acquisition, of
which 2.9
million (approximately $3.4 million as of September 30, 2003) million has
been placed in escrow and is reported in other assets in our consolidated
balance sheet. In addition, 28


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the operations of our
existing surgical facilities will require ongoing capital expenditures. We
believe that existing funds, cash flows from operations and borrowings under
our credit facilities will provide sufficient liquidity for at least the next
twelve months. 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 September 30, 2003, $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%, $4.1 million
was in other fixed rate instruments and the remaining $82.5 million was in
variable rate instruments. Accordingly, a hypothetical 100 basis point increase
in market interest rates would result in additional annual expense of $0.8 million.
The Senior Subordinated Notes, which represent 97% of our total fixed rate debt
at September 30, 2003, are considered to have a fair value, based upon
recent trading, of $163.5 million, which is approximately
$14.5 million higher than the carrying value at September 30, 2003. 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. 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 An evaluation of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures (as defined by SEC rules) was made as of the end of the period
covered by this Quarterly Report on Form 10-Q. The evaluation was made
under the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer. Based
upon that evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that the Companys disclosure controls and procedures
are effective to ensure that information required to be disclosed in the
reports that the Company files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. There have been no significant changes
in the Companys internal controls over financial reporting (as defined by SEC
rules) that occurred during the Companys fiscal quarter ended September 30,
2003 that have materially affected or are reasonably likely to materially
affect the Companys internal controls over financial reporting. 29 PART IIOTHER
INFORMATION ITEM 1.   Legal Proceedings We have been named as a
defendant in a lawsuit filed by former shareholders of SURGICOE Corporation,
which we acquired in March 2002. The suit alleges that we failed to
discharge certain post-closing obligations under the acquisition agreement. We believe
that the suit is wholly without merit, and we are vigorously defending the
suit. In addition, 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 other 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).3.3
  
  Form of Certificate of Designation of Series A
  Junior Participating Preferred Stock setting forth the terms of the Series A
  Junior Participating Preferred Stock, par value $.01 per share (previously
  filed as part of Exhibit 4.1 to the Companys Form 8-A filed with the
  Commission on June 13, 2001 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).4.3
  
  Rights Agreement between the Company and First Union
  National Bank as Rights Agent dated June 13, 2001 (previously filed as
  Exhibit 4.1 to the Companys Form 8-A filed with the Commission on June 13,
  2001 and incorporated herein by reference).10.1*
  
  First Amendment to the Companys Deferred
  Compensation Plan.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
  18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.32.2*
  
  Certification of Chief Financial Officer pursuant to
  18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.  
 *Filed
herewith. (b)   Reports on Form 8-K: The Company filed a report
on Form 8-K dated July 8, 2003 to furnish, pursuant to Regulation FD,
a news release describing the Companys acquisition of ownership interests in
three surgery centers in Texas. The Company filed a report
on Form 8-K dated July 29, 2003 to furnish, pursuant to Regulation
FD, a news release announcing the Companys results for the quarter ended June 30,
2003. 30 The Company filed a report
on Form 8-K dated September 3, 2003 to furnish, pursuant to
Regulation FD, a news release describing the Companys development progress. The Company filed a report
on Form 8-K dated September 3, 2003 to furnish, pursuant to
Regulation FD, a copy of materials dated September 2003 and prepared with
respect to presentations to investors and others that may be made by senior
officers of the Company. The Company filed a report on
Form 8-K dated September 30, 2003 to furnish, pursuant to Regulation FD,
a news release announcing the expansion of the Companys relationship with
Memorial Hermann Healthcare System. 31


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SIGNATURES Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.  United Surgical Partners International, Inc.By:
  
  /s/ Mark A. KopserDate:
  November 6, 2003
  
  
  
  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. WellikJohn J. Wellik Senior Vice President, Accounting and
  Administration, and Secretary
  (Principal Accounting Officer)  32


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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 on Form S-1
  (No. 333-55442) and incorporated herein by reference).3.3
  
  Form of Certificate of Designation of Series A
  Junior Participating Preferred Stock setting forth the terms of the Series A
  Junior Participating Preferred Stock, par value $.01 per share (previously
  filed as part of Exhibit 4.1 to the Companys Form 8-A filed with the
  Commission on June 13, 2001 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).4.3
  
  Rights Agreement between the Company and First Union
  National Bank as Rights Agent dated June 13, 2001 (previously filed as
  Exhibit 4.1 to the Companys Form 8-A filed with the Commission on June 13,
  2001 and incorporated herein by reference).10.1*
  
  First Amendment to the Companys Deferred Compensation
  Plan.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
  18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.32.2*
  
  Certification of Chief Financial Officer pursuant to
  18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.  
 *Filed
herewith. 33


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