UNITED SURGICAL PARTNERS INTERNATIONAL INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

		For the quarterly period ended June 30, 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.

(Exact name of registrant as specified in its charter)






Delaware		75-2749762
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)





15305 Dallas Parkway, Suite 1600 Addison, Texas		75001 (Zip Code)
(Address of principal executive offices)

(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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

At July 26, 2004 there were 28,327,800 shares of Common Stock outstanding.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX


PART I. Financial Information




Item 1.	Financial Statements (unaudited)	2




	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003.	2




	Consolidated Statements of Income for the three months and six months ended June 30, 2004 and 2003.	3




	Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2004 and 2003.	4




	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003	5




	Notes to Consolidated Financial Statements	6




Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17




Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27




Item 4.	Controls and Procedures	28





PART II. Other Information




Item 1.	Legal Proceedings	28




Item 4.	Submission of Matters to a Vote of Security Holders	29




Item 6.	Exhibits and Reports on Form 8-K	29





Signatures		31
Certification of Chief Executive Officer Pursuant to Section 302
Certification of Chief Financial Officer Pursuant to Section 302
Certification of Chief Executive Officer Pursuant to Section 906
Certification of Chief Financial Officer Pursuant to Section 906

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

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited — in thousands, except per share amounts)


			June 30,			December 31,
			2004			2003





ASSETS




Cash and cash equivalents			$	43,162		$	28,519




Patient receivables, net of allowance for doubtful accounts of $9,830 and $8,838, respectively				64,783			56,591




Other receivables				21,995			20,168




Inventories of supplies				9,433			9,024




Deferred tax asset, net				8,036			6,747




Prepaids and other current assets				14,838			12,548

		Total current assets		162,247			133,597




Property and equipment, net				372,412			348,063




Investments in affiliates				37,492			32,104




Intangible assets, net				338,963			326,645




Other assets				19,215			30,100

		Total assets	$	930,329		$	870,509





LIABILITIES AND STOCKHOLDERS’ EQUITY




Accounts payable			$	34,662		$	36,453




Accrued salaries and benefits				23,605			19,609




Due to affiliates				5,335			5,490




Accrued interest				2,011			1,739




Current portion of long-term debt				22,519			16,794




Other accrued expenses				29,398			23,555

		Total current liabilities		117,530			103,640




Long-term debt, less current portion				305,644			287,950




Other long-term liabilities				6,697			8,327




Deferred tax liability, net				35,106			33,979

		Total liabilities		464,977			433,896




Minority interests				49,749			45,958




Stockholders’ equity:




	Common stock, $0.01 par value; 200,000 shares authorized; 28,331 and 27,705 shares issued at June 30, 2004 and December 31, 2003, respectively			283			277




	Additional paid-in capital			339,652			330,519




	Treasury stock, at cost, 29 and 52 shares at June 30, 2004 and December 31, 2003, respectively			(611	)		(986	)




	Deferred compensation			(6,499	)		(4,548	)




	Receivables from sales of stock			—			(1	)




	Accumulated other comprehensive income, net of tax			29,720			32,852




	Retained earnings			53,058			32,542

		Total stockholders’ equity		415,603			390,655

		Total liabilities and stockholders’ equity	$	930,329		$	870,509

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited — in thousands, except per share amounts)



		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2004			2003			2004			2003

Net patient service revenue		$	120,248		$	98,094		$	238,180		$	188,564




Management and administrative services revenue			9,703			9,161			19,207			17,198




Equity in earnings of unconsolidated affiliates			5,149			3,265			10,459			5,806




Other income			966			1,024			1,942			2,035

	Total revenue		136,066			111,544			269,788			213,603




Salaries, benefits, and other employee costs			35,465			27,407			69,577			52,903




Medical services and supplies			26,348			21,129			52,407			41,032




Other operating expenses			23,475			19,955			46,450			37,971




General and administrative expenses			8,347			7,373			16,340			14,087




Provision for doubtful accounts			1,895			1,994			4,190			3,542




Depreciation and amortization			9,219			7,870			18,098			15,307

	Total operating expenses		104,749			85,728			207,062			164,842

	Operating income		31,317			25,816			62,726			48,761




Interest income			219			194			389			511




Interest expense			(7,919	)		(6,860	)		(15,443	)		(13,734	)




Other			23			103			30			109

	Total other expense, net		(7,677	)		(6,563	)		(15,024	)		(13,114	)




	Income before minority interests		23,640			19,253			47,702			35,647




Minority interests in income of consolidated subsidiaries			(7,336	)		(6,178	)		(15,486	)		(11,188	)

	Income before income taxes		16,304			13,075			32,216			24,459




Income tax expense			(5,793	)		(4,902	)		(11,702	)		(9,164	)

	Net income	$	10,511		$	8,173		$	20,514		$	15,295

Net income per share attributable to common stockholders




	Basic	$	0.38		$	0.30		$	0.74		$	0.57




	Diluted	$	0.36		$	0.29		$	0.70		$	0.55
Weighted average number of common shares




	Basic		27,865			27,064			27,793			27,055




	Diluted		29,247			27,950			29,214			27,854

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited — in thousands)



		Three Months Ended					Six Months Ended
		June 30,					June 30,

		2004			2003		2004			2003

Net income		$	10,511		$	8,173	$	20,514		$	15,295




Other comprehensive income (loss), net of taxes:




	Foreign currency translation adjustments		(2,419	)		9,149		(3,175	)		11,713




	Net unrealized gains on securities		10			138		43			15

	Other comprehensive income (loss)		(2,409	)		9,287		(3,132	)		11,728

	Comprehensive income	$	8,102		$	17,460	$	17,382		$	27,023

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited — in thousands)



					Six Months Ended
					June 30,

					2004			2003

Cash flows from operating activities:




	Net income				$	20,514		$	15,295




	Adjustments to reconcile net income to net cash provided by operating activities:




		Provision for doubtful accounts				4,190			3,542




		Depreciation and amortization				18,098			15,307




		Amortization of debt issue costs and discount				1,079			905




		Deferred income tax expense				624			6,575




		Equity in earnings of unconsolidated affiliates				(10,459	)		(5,806	)




		Minority interests in income of consolidated subsidiaries				15,486			11,188




		Equity-based compensation				1,692			279




		Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses:




			Patient receivables			(11,465	)		(11,261	)




			Other receivables			(1,862	)		9,919




			Inventories of supplies, prepaids and other current assets			(1,414	)		(2,279	)




			Accounts payable and other current liabilities			6,486			2,979




			Long-term liabilities			911			(1,687	)

				Net cash provided by operating activities		43,880			44,956

Cash flows from investing activities:




	Purchases of new businesses and equity interests, net of cash received					(8,061	)		(35,307	)




	Purchases of property and equipment					(20,329	)		(20,720	)




	Increase in deposits and notes receivable					(2,273	)		(4,256	)




	Cash placed in escrow					—			(3,145	)

				Net cash used in investing activities		(30,663	)		(63,428	)

Cash flows from financing activities:




	Proceeds from long-term debt					9,480			37,341




	Payments on long-term debt					(8,314	)		(29,006	)




	Proceeds from issuances of common stock					5,256			965




	Distributions on investments in affiliates					(4,972	)		(3,766	)

				Net cash provided by financing activities		1,450			5,534

Effect of exchange rate changes on cash						(24	)		(189	)

Net increase (decrease) in cash and cash equivalents						14,643			(13,127	)




Cash and cash equivalents at beginning of period						28,519			47,571

Cash and cash equivalents at end of period					$	43,162		$	34,444

Supplemental information:




	Interest paid				$	13,905		$	13,092




	Income taxes paid					6,463			1,814




	Non-cash transactions:




		Assets acquired under capital lease obligations			$	20,169		$	1,669




		Issuance of common stock for service contracts				—			254




		Issuance of common stock to employees				2,832			1,103




		Repurchases of common stock using noncash assets				207			—

See accompanying notes to consolidated financial statements

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 June 30, 2004, USPI, headquartered in Dallas, Texas, operated 77 short-stay surgical facilities. Of these 77 facilities, USPI consolidates the results of 43, accounts for 33 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 65 of its 77 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 June 30, 2004, the Company had agreements with 20 not-for-profit healthcare systems providing for joint ownership of 38 of the Company’s 65 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 June 30, 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 June 30, 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

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (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 (in thousands, except per share data):



		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2004			2003			2004			2003

Net income attributable to common stockholders




	As reported	$	10,511		$	8,173		$	20,514		$	15,295




	Add: Total stock-based employee compensation expense included in reported net income, net of taxes		626			451			1,100			759




	Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes		(1,742	)		(1,520	)		(3,297	)		(2,830	)

	Pro forma	$	9,395		$	7,104		$	18,317		$	13,224

Basic earnings per share




	As reported	$	0.38		$	0.30		$	0.74		$	0.57




	Pro forma		0.34			0.26			0.66			0.49
Diluted earnings per share




	As reported	$	0.36		$	0.29		$	0.70		$	0.55




	Pro forma		0.32			0.25			0.63			0.47

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.

Effective May 1, 2004, the Company acquired a controlling interest in an ambulatory surgery center in Austintown, Ohio, in which the Company had previously owned a noncontrolling interest, for $6.4 million in cash.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Following are the unaudited pro forma results for the three months and six months ended June 30, 2004 and 2003 as if the acquisitions discussed above had occurred on January 1 of each year (in thousands, except per share amounts):



	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2004		2003		2004		2003

Net revenues	$	136,543	$	114,411	$	271,676	$	219,254




Net income		10,528		8,542		20,664		16,086




Diluted earnings per share	$	0.36	$	0.31	$	0.71	$	0.58

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 six months ended June 30, 2004, these transactions resulted in a net cash outflow of $1.7 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 Ended				Six Months Ended
		June 30,				June 30,

		2004		2003		2004		2003

Unconsolidated facilities operated at period end			33		29		33		29
Income statement information




	Revenues	$	82,154	$	56,051	$	161,031	$	102,588




	Operating income		27,524		16,657		55,557		29,809




	Net income		25,162		14,725		50,902		25,781

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)


(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 earnings per share for the three months and six months ended June 30, 2004 and 2003 (in thousands, except per share amounts):



		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2004		2003		2004		2003

Net income attributable to common shareholders		$	10,511	$	8,173	$	20,514	$	15,295




Weighted average common shares outstanding			27,865		27,064		27,793		27,055




Effect of dilutive securities:




	Stock options		1,270		589		1,300		512




	Warrants and restricted stock		112		297		121		287

Shares used for diluted earnings per share			29,247		27,950		29,214		27,854

Basic earnings per share		$	0.38	$	0.30	$	0.74	$	0.57




Diluted earnings per share		$	0.36	$	0.29	$	0.70	$	0.55

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)


(4)	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 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 (amounts below are in thousands).



				Western Europe

										Western
Three Months Ended							United			Europe
June 30, 2004 (unaudited)	U.S.			Spain			Kingdom			Total			Total

Net patient service revenue	$	63,554		$	36,147		$	20,547		$	56,694		$	120,248




Other revenue		15,016			802			—			802			15,818

Total revenues	$	78,570		$	36,949		$	20,547		$	57,496		$	136,066

Depreciation and amortization	$	4,917		$	2,670		$	1,632		$	4,302		$	9,219




Operating income		23,648			4,283			3,386			7,669			31,317




Net interest expense		(5,561	)		(1,083	)		(1,056	)		(2,139	)		(7,700	)




Income tax expense		(4,763	)		(644	)		(389	)		(1,030	)		(5,793	)




Total assets		518,701			240,027			171,601			411,628			930,329




Capital expenditures		23,810			4,127			3,468			7,595			31,405



				Western Europe

										Western
Three Months Ended							United			Europe
June 30, 2003 (unaudited)	U.S.			Spain			Kingdom			Total			Total

Net patient service revenue	$	53,493		$	30,398		$	14,203		$	44,601		$	98,094




Other revenue		12,764			686			—			686			13,450

Total revenues	$	66,257		$	31,084		$	14,203		$	45,287		$	111,544

Depreciation and amortization	$	4,411		$	2,369		$	1,090		$	3,459		$	7,870




Operating income		20,155			3,759			1,902			5,661			25,816




Net interest expense		(4,090	)		(2,095	)		(481	)		(2,576	)		(6,666	)




Income tax expense		(4,004	)		(617	)		(281	)		(898	)		(4,902	)




Total assets		441,221			211,279			147,165			358,444			799,665




Capital expenditures		3,024			3,470			4,963			8,433			11,457

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)



				Western Europe

										Western
Six Months Ended							United			Europe
June 30, 2004 (unaudited)	U.S.			Spain			Kingdom			Total			Total

Net patient service revenue	$	123,122		$	73,426		$	41,632		$	115,058		$	238,180




Other revenue		30,043			1,565			—			1,565			31,608

Total revenues	$	153,165		$	74,991		$	41,632		$	116,623		$	269,788

Depreciation and amortization	$	9,603		$	5,200		$	3,295		$	8,495		$	18,098




Operating income		46,439			8,960			7,327			16,287			62,726




Net interest expense		(10,759	)		(2,197	)		(2,098	)		(4,295	)		(15,054	)




Income tax expense		(9,097	)		(1,408	)		(1,197	)		(2,605	)		(11,702	)




Total assets		518,701			240,027			171,601			411,628			930,329




Capital expenditures		27,050			7,934			5,514			13,448			40,498



				Western Europe

										Western
Six Months Ended							United			Europe
June 30, 2003 (unaudited)	U.S.			Spain			Kingdom			Total			Total

Net patient service revenue	$	102,498		$	58,013		$	28,053		$	86,066		$	188,564




Other revenue		23,652			1,387			—			1,387			25,039

Total revenues	$	126,150		$	59,400		$	28,053		$	87,453		$	213,603

Depreciation and amortization	$	8,649		$	4,528		$	2,130		$	6,658		$	15,307




Operating income		36,503			7,092			5,166			12,258			48,761




Net interest expense		(8,169	)		(3,944	)		(1,110	)		(5,054	)		(13,223	)




Income tax expense		(7,081	)		(1,122	)		(961	)		(2,083	)		(9,164	)




Total assets		441,221			211,279			147,165			358,444			799,665




Capital expenditures		7,040			6,162			9,187			15,349			22,389

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)


(5)	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 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:


					Non-Participating		Consolidation			Consolidated
As of June 30, 2004			Guarantors		Investees		Adjustments			Total

Assets:




Current assets:




	Cash and cash equivalents		$	27,233	$	15,929	$	—		$	43,162




	Patient receivables, net			178		64,605		—			64,783




	Other receivables			9,094		18,763		(5,862	)		21,995




	Inventories of supplies			220		9,213		—			9,433




	Other			12,161		10,713		—			22,874

		Total current assets		48,886		119,223		(5,862	)		162,247




Property and equipment, net				32,966		339,446		—			372,412




Investments in affiliates				201,710		2,444		(166,662	)		37,492




Intangible assets, net				197,500		156,372		(14,909	)		338,963




Other				113,362		12,052		(106,199	)		19,215

		Total assets	$	594,424	$	629,537	$	(293,632	)	$	930,329


Liabilities and Stockholders’ Equity:




Current liabilities:




	Accounts payable		$	939	$	33,716	$	7		$	34,662




	Accrued expenses			28,445		31,031		873			60,349




	Current portion of long-term debt			2,186		21,789		(1,456	)		22,519

		Total current liabilities		31,570		86,536		(576	)		117,530




Long-term debt				155,268		257,556		(107,180	)		305,644




Other liabilities				20,705		21,098		—			41,803




Minority interests				—		17,290		32,459			49,749




Stockholders’ equity				386,881		247,057		(218,335	)		415,603

		Total liabilities and stockholders’ equity	$	594,424	$	629,537	$	(293,632	)	$	930,329

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)


					Non-Participating		Consolidation			Consolidated
As of December 31, 2003			Guarantors		Investees		Adjustments			Total

Assets:




Current assets:




	Cash and cash equivalents		$	15,147	$	13,372	$	—		$	28,519




	Patient receivables, net			127		56,464		—			56,591




	Other receivables			37,980		21,183		(38,995	)		20,168




	Inventories of supplies			279		8,745		—			9,024




	Other			11,781		7,514		—			19,295

		Total current assets		65,314		107,278		(38,995	)		133,597




Property and equipment, net				36,044		312,587		(568	)		348,063




Investments in affiliates				175,504		14,344		(157,744	)		32,104




Intangible assets, net				184,314		158,378		(16,047	)		326,645




Other				120,142		11,521		(101,563	)		30,100

		Total assets	$	581,318	$	604,108	$	(314,917	)	$	870,509


Liabilities and Stockholders’ Equity:




Current liabilities:




	Accounts payable		$	1,396	$	35,994	$	(937	)	$	36,453




	Accrued expenses			27,138		24,500		(1,245	)		50,393




	Current portion of long-term debt			1,763		16,146		(1,115	)		16,794

		Total current liabilities		30,297		76,640		(3,297	)		103,640




Long-term debt				156,963		264,020		(133,033	)		287,950




Other liabilities				18,998		23,308		—			42,306




Minority interests				—		11,403		34,555			45,958




Stockholders’ equity				375,060		228,737		(213,142	)		390,655

		Total liabilities and stockholders’ equity	$	581,318	$	604,108	$	(314,917	)	$	870,509

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Statements of Income:


				Non-Participating			Consolidation			Consolidated
Six Months Ended June 30, 2004	Guarantors			Investees			Adjustments			Total

Revenues	$	46,301		$	232,818		$	(9,331	)	$	269,788




Operating expenses, excluding depreciation and amortization		28,398			169,966			(9,400	)		188,964




Depreciation and amortization		5,331			12,767			—			18,098

Operating income		12,572			50,085			69			62,726




Interest expense, net		(5,753	)		(9,301	)		—			(15,054	)




Other income (expense)		174			11			(155	)		30

Income (loss) before minority interests		6,993			40,795			(86	)		47,702




Minority interests in income of consolidated subsidiaries		—			(7,025	)		(8,461	)		(15,486	)

Income (loss) before income taxes		6,993			33,770			(8,547	)		32,216




Income tax expense		(8,987	)		(2,715	)		—			(11,702	)

Net income (loss)	$	(1,994	)	$	31,055		$	(8,547	)	$	20,514


				Non-Participating			Consolidation			Consolidated
Six Months Ended June 30, 2003	Guarantors			Investees			Adjustments			Total

Revenues	$	38,612		$	181,159		$	(6,168	)	$	213,603




Operating expenses, excluding depreciation and amortization		25,662			130,746			(6,873	)		149,535




Depreciation and amortization		4,980			10,331			(4	)		15,307

Operating income		7,970			40,082			709			48,761




Interest expense, net		(5,822	)		(7,402	)		—			(13,223	)




Other expense		157			107			(155	)		109

Income before minority interests		2,305			32,788			554			35,647




Minority interests in income of consolidated subsidiaries		—			(5,225	)		(5,963	)		(11,188	)




Income (loss) before income taxes		2,305			27,563			(5,409	)		24,459




Income tax expense		(6,912	)		(2,252	)		—			(9,164	)

Net income (loss)	$	(4,607	)	$	25,311		$	(5,409	)	$	15,295

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)

Condensed Consolidating Statements of Cash Flows:


					Non-Participating			Consolidation			Consolidated
Six Months Ended June 30, 2004		Guarantors			Investees			Adjustments			Total

Cash flows from operating activities:




Net income (loss)		$	(1,994	)	$	31,056		$	(8,548	)	$	20,514




Changes in operating and intercompany assets and liabilities and noncash items included in net income(loss)			32,430			(20,159	)		11,095			23,366

	Net cash provided by operating activities		30,436			10,897			2,547			43,880




Cash flows from investing activities:




Purchases of property and equipment, net			(2,549	)		(17,780	)		—			(20,329	)




Purchases of new businesses			(7,946	)		(115	)		—			(8,061	)




Other items			(2,276	)		3			—			(2,273	)

	Net cash used in investing activities		(12,771	)		(17,892	)		—			(30,663	)




Cash flows from financing activities:




Long-term borrowings, net			(5,864	)		7,030			—			1,166




Proceeds from issuance of common stock			5,256			—			—			5,256




Other items			(4,972	)		2,547			(2,547	)		(4,972	)

	Net cash provided by (used in) financing activities		(5,580	)		9,577			(2,547	)		1,450




Effect of exchange rate changes on cash			—			(24	)		—			(24	)




Net increase in cash			12,085			2,558			—			14,643




Cash at the beginning of the period			15,147			13,372			—			28,519

Cash at the end of the period		$	27,232		$	15,930		$	—		$	43,162


					Non-Participating			Consolidation			Consolidated
Six Months Ended June 30, 2003		Guarantors			Investees			Adjustments			Total

Cash flows from operating activities:




Net income (loss)		$	(4,605	)	$	25,309		$	(5,409	)	$	15,295




Changes in operating and intercompany assets and liabilities and noncash items included in net income (loss)			10,174			(12,513	)		32,000			29,661

	Net cash provided by operating activities		5,569			12,796			26,591			44,956




Cash flows from investing activities:




Purchases of property and equipment, net			(3,281	)		(17,439	)		—			(20,720	)




Purchases of new businesses			(13,549	)		(21,758	)		—			(35,307	)




Other items			(4,257	)		(3,144	)		—			(7,401	)

	Net cash used in investing activities		(21,087	)		(42,341	)		—			(63,428	)




Cash flows from financing activities:




Long-term borrowings, net			4,413			30,513			(26,591	)		8,335




Proceeds from issuance of common stock			965			—			—			965




Other items			(3,766	)		—			—			(3,766	)

	Net cash provided by (used in) financing activities		1,612			30,513			(26,591	)		5,534




Effect of exchange rate changes on cash			—			(189	)		—			(189	)




Net increase (decrease) in cash			(13,906	)		779			—			(13,127	)




Cash at the beginning of the period			24,712			22,859			—			47,571

Cash at the end of the period		$	10,806		$	23,638		$	—		$	34,444

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)


(6)	Commitments and Contingencies

As of June 30, 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 $29.2 million. Of the total, $14.8 million relates to the debt of consolidated subsidiaries, whose debt is included in the Company’s consolidated balance sheet, and the remaining $14.4 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 Events

On July 1, 2004, the Company acquired a controlling interest in an ambulatory surgery center in Reading, Pennsylvania, for approximately $14.6 million in cash. The Company also has entered into a definitive agreement to acquire a company that owns controlling interests in five ambulatory surgery centers in greater Chicago, Illinois. Completion of the Chicago acquisition is pending receipt of regulatory approval, which is expected during the third quarter of 2004.

In addition, the 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.


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 the healthcare industry; 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. 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 June 30, 2004, we operated 77 facilities, consisting of 65 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 June 30, 2004, we had agreements with 20 not-for-profit healthcare systems providing for the joint ownership of 38 of our 65 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 (each are generally referred to herein as “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 June 30, 2004, 93% of the increase in the number of facilities we operate has occurred in the United States. The number of facilities we own jointly with not-for-profit healthcare systems doubled during this period, increasing from 19 to 38.

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 financial condition, 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 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.

Effective May 1, 2004, we acquired a controlling interest in an ambulatory surgery center in Austintown, Ohio, in which we had previously owned a noncontrolling interest, for $6.4 million in cash.

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 $1.7 million during the six months ended June 30, 2004.

On July 1, 2004, we acquired a controlling interest in an ambulatory surgery center in Reading, Pennsylvania, for approximately $14.6 million in cash. We also have entered into a definitive agreement to acquire a company that owns controlling interests in five ambulatory surgery centers in greater Chicago,

Illinois. Completion of the Chicago acquisition is pending receipt of regulatory approval, which is expected during the third quarter of 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.

The following table summarizes our revenues by type and as a percentage of total revenue for the periods presented:



		Three Months						Six Months
		Ended June 30,						Ended June 30,

		2004			2003			2004			2003

Net patient service revenue			88	%		88	%		88	%		88	%




Management and administrative services revenue			7			8			7			8




Equity in earnings of unconsolidated affiliates			4			3			4			3




Other income			1			1			1			1

	Total revenues		100	%		100	%		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 and six months ended June 30, 2004, as compared to the prior year periods. This increase reflects the overall improved profitability of these 33 facilities, 25 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				Six Months Ended
		Ended June 30,				June 30,

		2004		2003		2004		2003

Management of surgical facilities		$	4,485	$	3,836	$	9,187	$	6,951




Consulting and other services provided to physicians and related entities			5,218		5,325		10,020		10,247

	Total management and administrative service revenues	$	9,703	$	9,161	$	19,207	$	17,198

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						Six Months Ended
	June 30,						June 30,

	2004			2003			2004			2003

Total revenues	$	82,154		$	56,051		$	161,031		$	102,588




Depreciation and amortization		3,629			2,761			6,933			5,248




Operating income		27,524			16,657			55,557			29,809




Interest expense, net		1,984			1,744			3,950			3,421




Net income		25,162			14,725			50,902			25,781




Long-term debt		89,656			82,079			89,656			82,079




USPI’s equity in earnings of unconsolidated affiliates		5,149			3,265			10,459			5,806




USPI’s imputed weighted average ownership percentage based on affiliates’ net income(1)		20.5	%		22.2	%		20.5	%		22.5	%




USPI’s imputed weighted average ownership percentage based on affiliates’ debt(2)		23.5	%		23.5	%		23.5	%		23.5	%




Unconsolidated facilities operated at period end		33			29			33			29

(1) Our weighted average percentage ownership in our unconsolidated affiliates is calculated as USPI’s equity in earnings of unconsolidated affiliates divided by the total net income of unconsolidated affiliates for each respective period.

(2) Our weighted average percentage ownership in our unconsolidated affiliates is calculated as the total debt of each unconsolidated 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 unconsolidated affiliates as of the end of each respective period.

The following table summarizes our revenues by operating segment:



		Three Months						Six Months
		Ended						Ended
		June 30,						June 30,

		2004			2003			2004			2003

United States			58	%		59	%		57	%		59	%




Western Europe			42			41			43			41

	Total		100	%		100	%		100	%		100	%

The proportion of our revenues earned in Western Europe was higher during the three months and six months ended June 30, 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 and the management fees we earn from these facilities. 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						Six Months
	Ended						Ended
	June 30,						June 30,

	2004			2003			2004			2003

Total revenues		100	%		100	%		100	%		100	%




Operating expenses, excluding depreciation and amortization		70.2			69.8			70.0			70.0




Depreciation and amortization		6.8			7.1			6.7			7.2

Operating income		23.0			23.1			23.3			22.8




Minority interests in income of consolidated entities		5.4			5.5			5.7			5.2




Interest and other expense, net		5.6			5.9			5.7			6.1

Income before income taxes		12.0			11.7			11.9			11.5




Income tax expense		(4.3	)		(4.4	)		(4.3	)		(4.3	)

Net income		7.7			7.3			7.6			7.2

EBITDA less minority interests(a)		24.4			24.7			24.2			24.8


(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.

The following table reconciles EBITDA and EBITDA less minority interests to net income and to net cash provided by operating activities:



		Three Months Ended						Six Months Ended
		June 30,						June 30,

		2004			2003			2004			2003

Net income		$	10,511		$	8,173		$	20,514		$	15,295




	Income tax expense		5,793			4,902			11,702			9,164




	Interest and other nonoperating expense		7,677			6,563			15,024			13,114




	Depreciation and amortization		9,219			7,870			18,098			15,307

EBITDA less minority interests			33,200			27,508			65,338			52,880




	Minority interests in income of consolidated subsidiaries		7,336			6,178			15,486			11,188

EBITDA			40,536			33,686			80,824			64,068




	Provision for doubtful accounts		1,895			1,994			4,190			3,542




	Amortization of debt issue costs, discount, and deferred compensation		1,501			605			2,771			1,184




	Interest and other nonoperating expense		(7,677	)		(6,563	)		(15,024	)		(13,114	)




	Income tax expense		(5,793	)		(4,902	)		(11,702	)		(9,164	)




	Equity in earnings of unconsolidated affiliates		(5,149	)		(3,265	)		(10,459	)		(5,806	)




	Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses		(13,462	)		4,886			(6,720	)		4,246

Net cash provided by operating activities		$	11,851		$	26,441		$	43,880		$	44,956

The key trends in our results of operations for the three months and six months ended June 30, 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 and six month periods ended June 30, 2004 and the three month and six month periods ended June 30, 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 at the majority of our facilities. During the second quarter of 2004, the personnel and facility costs of recently opened or expanded facilities, which in their initial months of operations have little revenue to offset personnel and facility costs, were significant enough to cause our overall operating margins to decline slightly compared to the prior year period.

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 Months			Six Months
			Ended			Ended
			June 30,			June 30,
			2004(1)			2004(1)

United States facilities:




	Net revenue			20	%		24	%




		Surgical cases		8	%		9	%




		Net revenue per case(2)		11	%		15	%




Western Europe facilities:




	Net revenue using actual exchange rates			22	%		26	%




	Net revenue using constant exchange rates(3)			14	%		13	%

(1) Growth in same store facilities, compared to three and six months ended June 30, 2003.

(2) Net revenue per case of our ambulatory surgery centers grew at a rate of 5% and 9% for the three months and six months ended June 30, 2004, respectively, as compared to the corresponding prior year periods. Adding our six same store surgical hospitals, which on average perform more complex cases than ambulatory surgery centers, increases the growth to 11% and 15% for the three month and six month periods, respectively.

(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 hospital partner, both as we initiate joint venture agreements with new systems and as we add facilities to our existing arrangements. 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 June 30, 2004 and 2003:



			June 30,

			2004		2003

Hospital partners				20		12

United States facilities(1):




	With a hospital partner			38		28




	Without a hospital partner			27		28

Total U.S. facilities				65		56




Western Europe facilities				12		12

Total facilities operated				77		68

Change from June 30, 2003:




	De novo (newly constructed)			8




	Acquisition			1




		Total		9

(1) At June 30, 2004, physicians own a portion of all of these facilities.

Operating expenses have increased at lower rates than revenue, resulting in improved operating margins at most of our facilities. 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 our implementing 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 and six months ended June 30, 2004 to the three and six months ended June 30, 2003:


		Three Months			Six Months
		Ended			Ended
		June 30,			June 30,
		2004(1)			2004(1)

United States facilities:




	With a hospital partner		530	bps		740	bps




	Without a hospital partner		(50	)		60




Total U.S. facilities			380			560




Western Europe facilities(2)			(110	)bps		(270	)bps

(1) EBITDA margin is calculated as EBITDA divided by total revenues. This table aggregates all of the same store 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, and facilities open for less than a year are excluded from same store calculations.

(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 June 30, 2004 Compared to Three Months Ended June 30, 2003

Revenues increased by $24.5 million, or 22.0%, to $136.1 million for the three months ended June 30, 2004 from $111.6 million for the three months ended June 30, 2003. Of this increase in revenues, $16.0 million was contributed by same store facilities, $4.3 million was contributed by newly constructed or acquired facilities, and $4.2 million was due to exchange rate fluctuations. The same store increase was primarily driven by a $9.0 million increase in revenue earned at or from U.S. facilities, which performed approximately 8% more surgical cases and received an average of approximately 11% more per case during the three months ended June 30, 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 $7.0 million higher during the three months ended June 30, 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 June 30, 2004 of $4.3 million. The U.S. dollar being weaker relative to the eurodollar and British pound in 2004 resulted in an $4.2 million increase in revenues.

Operating expenses, excluding depreciation and amortization, increased by $17.7 million, or 22.7%, to $95.5 million for the three months ended June 30, 2004 from $77.9 million for the three months ended June 30, 2003. While same store margins improved from the prior year, our overall operating expenses, excluding depreciation and amortization, as a percentage of revenues, increased to 70.2% for the three months ended June 30, 2004 from 69.8% for the three months ended June 30, 2003, primarily as a consequence of our opening eight de novo facilities and significantly expanding other facilities in the twelve month period ending June 30, 2004. These new and newly expanded facilities hire staff and become fully equipped for a relatively high number of surgical cases in their initial months of operations, but the case volumes are not high enough initially to result in operating margins that are as favorable as those generated by our more mature facilities.

Operating income increased $5.5 million, or 21.3%, to $31.3 million for the three months ended June 30, 2004 from $25.8 million for the three months ended June 30, 2003. Operating income, as a percentage of revenues, decreased slightly to 23.0% for the three months ended June 30, 2004 from 23.1% for the three

months ended June 30, 2003, primarily as a result of improved operating margins at our same store facilities being offset by the lower margins generated at our recently opened facilities.

Depreciation and amortization increased $1.3 million, or 17.1%, to $9.2 million for the three months ended June 30, 2004 from $7.9 million for the three months ended June 30, 2003, primarily as a result of additional depreciation on tangible assets added through expansions of our facilities. Depreciation and amortization, as a percentage of revenues, decreased to 6.8% for the three months ended June 30, 2004 from 7.1% for the three months ended June 30, 2003 due to our increased revenue.

Interest expense, net of interest income, increased 15.5% to $7.7 million for the three months ended June 30, 2004 from $6.7 million for the three months ended June 30, 2003 primarily as a result of our borrowing a portion of the costs of acquiring, developing, and expanding facilities.

Net income was $10.5 million for the three months ended June 30, 2004 compared to $8.2 million for the three months ended June 30, 2003. This $2.3 million improvement primarily results from the increased revenues discussed above.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Revenues increased by $56.2 million, or 26.3%, to $269.8 million for the six months ended June 30, 2004 from $213.6 million for the six months ended June 30, 2003. Of this increase in revenues, $32.3 million was contributed by same store facilities, $11.6 million was contributed by newly constructed or acquired facilities, and $12.3 million was due to exchange rate fluctuations. The same store increase was primarily driven by a $19.6 million increase in revenue earned at or from U.S. facilities, which performed approximately 9% more surgical cases and received an average of approximately 15% more per case during the six months ended June 30, 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 $12.7 million higher during the six months ended June 30, 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 six months ended June 30, 2004 of $11.6 million. The U.S. dollar being weaker relative to the eurodollar and British pound in 2004 resulted in an $12.3 million increase in revenues.

Operating expenses, excluding depreciation and amortization, increased by $39.4 million, or 26.4%, to $189.0 million for the six months ended June 30, 2004 from $149.5 million for the six months ended June 30, 2003. While same store margins improved from the prior year, our overall operating expenses, excluding depreciation and amortization, remained flat as a percentage of revenues. The improvement in the margins of our same store facilities was offset by the lower margins earned at facilities we recently opened or expanded.

Operating income increased $14.0 million, or 28.6%, to $62.7 million for the six months ended June 30, 2004 from $48.8 million for the six months ended June 30, 2003. Operating income, as a percentage of revenues, increased to 23.3% for the six months ended June 30, 2004 from 22.8% for the six months ended June 30, 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 $2.8 million, or 18.2%, to $18.1 million for the six months ended June 30, 2004 from $15.3 million for the six months ended June 30, 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 6.7% for the six months ended June 30, 2004 from 7.2% for the six months ended June 30, 2003 due to our increased revenue.

Interest expense, net of interest income, increased 13.8% to $15.1 million for the six months ended June 30, 2004 from $13.2 million for the six months ended June 30, 2003 primarily as a result of our borrowing a portion of the costs of acquiring, developing, and expanding facilities.

Net income was $20.5 million for the six months ended June 30, 2004 compared to $15.3 million for the six months ended June 30, 2003. This $5.2 million improvement primarily results from the increased revenues and improved operating efficiencies and economies of scale related to expenses discussed above.

Liquidity and Capital Resources

During the six months ended June 30, 2004, the Company generated $43.9 million of cash flows from operating activities as compared to $45.0 million during the six months ended June 30, 2003. The prior year period included the collection of $7.0 million of receivables advances as a result of the Company modifying its relationships with the OrthoLink physicians. Excluding this amount, cash flows from operating activities increased $5.9 million, or 16%, from the prior year period.

During the six months ended June 30, 2004, the Company’s net cash required for investing activities was $30.7 million, consisting primarily of $20.3 million for the purchase of property and equipment, $6.4 million to acquire a majority interest in a surgery center in Austintown, Ohio and $1.7 million for the purchase of equity interests. The $1.7 million primarily consists of the investment of cash in unconsolidated affiliates that are constructing new surgical facilities. Approximately $8.3 million of the property and equipment purchases related to ongoing development and expansion projects and the remaining $12.0 million represents purchases of equipment at existing facilities. The $30.7 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 six months ended June 30, 2004 totaled $1.5 million. Cash and cash equivalents were $43.2 million at June 30, 2004 as compared to $28.5 million at December 31, 2003, and net working capital was $44.7 million at June 30, 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 June 30, 2004, no amounts were outstanding under this facility and $50.1 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 $69.5 million would be available for borrowing to finance acquisitions as of June 30, 2004, of which none was drawn at June 30, 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 $94.3 million as of June 30, 2004) under four separate facilities. At June 30, 2004, total outstanding borrowings under this credit agreement were approximately $64.6 million which represents total borrowings net of scheduled repayments of $17.5 million that have been made under the agreement, and approximately $12.2 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 June 30, 2004.

Our contractual cash obligations as of June 30, 2004 may be summarized as follows:



		Payments Due by Period (In Thousands)

				Within		1 to 3		4 to 5		Beyond
Contractual Cash Obligations		Total		1 Year		Years		Years		5 Years

Long term debt obligations (principal plus interest)(1):




	Senior Subordinated Notes	$	262,500	$	15,000	$	30,000	$	30,000	$	187,500




	U.S. credit facility(2)		775		572		203		—		—




	U.K. credit facility		80,331		7,788		20,123		22,748		29,672




	Loans from former owners of subsidiaries		439		278		161		—		—




	Other debt at operating subsidiaries		38,773		10,542		11,473		5,960		10,798




Capitalized lease obligations:




	U.S. operating subsidiaries		84,424		10,017		11,567		8,100		54,740




	Western Europe operating subsidiaries		93,103		4,664		8,659		8,511		71,269




Operating lease obligations:




	U.S. operating subsidiaries		55,640		8,331		15,089		12,462		19,758




	Western Europe operating subsidiaries		11,631		1,823		3,005		2,232		4,571

Total contractual cash obligations		$	627,616	$	59,015	$	100,280	$	90,013	$	378,308

(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 June 30, 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 $114.6 million at June 30, 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 77.0% at June 30, 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 June 30, 2004, the total obligations of these unconsolidated affiliates under debt and capital lease obligations was approximately $82.9 million. Our average percentage ownership, weighted based on the individual affiliate’s amount of debt and capitalized lease obligations, of these unconsolidated affiliates was 23.5% at June 30, 2004. USPI or one of its wholly owned subsidiaries had collectively guaranteed $14.4 million in total debt and capital lease obligations of our unconsolidated affiliates as of June 30, 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 June 30,

2004, $149.0 million of our total outstanding notes payable 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%, $7.1 million was in other fixed rate instruments and the remaining $90.8 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 95% of our total fixed rate debt at June 30, 2004, are considered to have a fair value, based upon recent trading, of $168.9 million, which is approximately $19.9 million higher than the carrying value at June 30, 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.

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 June 30, 2004 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

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 4.	*Submission of Matters to a Vote of Security Holders*

At the Annual Meeting of Stockholders held on April 28, 2004, the following proposals were submitted to stockholders with the following results:

1. Election of Class III directors of the Company to hold office until the Annual Meeting of Stockholders of the Company in 2007 and until their respective successors are elected and qualified or until their earlier death, resignation, or removal from office, as follows:



	Number of Shares

	For		Withheld

Donald E. Steen		23,375,386		229,046




Thomas L. Mills		23,224,549		379,883




Boone Powell, Jr.		23,449,060		155,372




Paul B. Queally		23,341,740		262,692

2. Ratification of the selection of KPMG LLP as the independent accountants of the Company for the fiscal year ending December 31, 2004:


	Number of Shares

For		23,187,890




Against		411,031




Abstain		5,511


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 April 5, 2004, pursuant to Regulation FD, containing a copy of materials dated April 2004 and prepared with respect to presentations to investors and others that may be made by senior officers of the Company.

The Company furnished a report on Form 8-K dated April 6, 2004, pursuant to Regulation FD, containing a news release announcing the formation of a joint venture between the Company and McLaren Health Care Corporation.

The Company furnished a report on Form 8-K dated April 15, 2004, pursuant to Regulation FD, containing a news release describing the expansion of the Company’s relationships with not-for-profit hospital systems.

The Company furnished a report on Form 8-K dated April 23, 2004, pursuant to Regulation FD, containing a news release announcing the formation of a joint venture between the Company and Adventist Health System.

The Company filed a report on Form 8-K dated April 28, 2004, pursuant to Item 12 of Form 8-K, containing a news release announcing the Company’s results of operations for the quarter ended March 31, 2004.

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. KOPSER

Mark A. Kopser

Senior Vice President and Chief Financial Officer

(Principal Financial Officer and duly authorized

to sign this report on behalf of the Registrant)

By: /s/ JOHN J. WELLIK

John J. Wellik

Senior Vice President, Accounting

and Administration, and Secretary

(Principal Accounting Officer)

Date: July 28, 2004

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).
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.

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


	•	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.


(1)	Our weighted average percentage ownership in our unconsolidated affiliates is calculated as USPI’s equity in earnings of unconsolidated affiliates divided by the total net income of unconsolidated affiliates for each respective period.

(2)	Our weighted average percentage ownership in our unconsolidated affiliates is calculated as the total debt of each unconsolidated 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 unconsolidated affiliates as of the end of each respective period.


(1)	Growth in same store facilities, compared to three and six months ended June 30, 2003.

(2)	Net revenue per case of our ambulatory surgery centers grew at a rate of 5% and 9% for the three months and six months ended June 30, 2004, respectively, as compared to the corresponding prior year periods. Adding our six same store surgical hospitals, which on average perform more complex cases than ambulatory surgery centers, increases the growth to 11% and 15% for the three month and six month periods, respectively.

(3)	Measures current year using prior year exchange rates.


(1)	At June 30, 2004, physicians own a portion of all of these facilities.


(1)	EBITDA margin is calculated as EBITDA divided by total revenues. This table aggregates all of the same store 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, and facilities open for less than a year are excluded from same store calculations.

(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.


(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 June 30, 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.



	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)



	John J. Wellik
	Senior Vice President, Accounting
	and Administration, and Secretary
	(Principal Accounting Officer)