UNITED SURGICAL PARTNERS INTERNATIONAL INC - 10-K Annual Report

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)

Delaware		75-2749762
(State of Incorporation)		(I.R.S. Employer Identification No.)
15305 Dallas Parkway, Suite 1600		75001
Addison, Texas		(Zip Code)
(Address of principal executive offices)

Title of each class		Name of each exchange on which registered
Common Stock, par value $.01 per share		The Nasdaq Stock Market
Rights to Purchase Series A Junior Participating Preferred Stock, par value $.01 per share		The Nasdaq Stock Market

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 ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Parts I, II, III, and IV of this Form 10-K or any amendment to this Form 10-K. o

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

Part III—Portions of the registrant's definitive proxy statement to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held May 22, 2003.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

2002 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

Certain statements contained in this Annual Report on Form 10-K, and the document incorporated herein by reference, 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 U.S. and Western Europe; liability and other claims asserted against us; the highly competitive nature of healthcare; changes in business strategy or development plans of healthcare systems with which we partner; the ability to attract and retain qualified personnel, including physicians, nurses and other health care professionals; our significant indebtedness; the availability of suitable acquisition opportunities and the length of time it takes to accomplish acquisitions; 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 Annual Report on Form 10-K and the documents incorporated herein by reference. Given these uncertainties, investors and prospective investors are cautioned not to rely on such forward-looking statements. We disclaim any obligation and make no promise to update any such factors or forward-looking statements or to publicly announce the results of any revisions to any such factors or forward-looking statements, whether as a result of changes in underlying factors, to reflect new information as a result of the occurrence of events or developments or otherwise.

United Surgical Partners International, Inc. (together with its subsidiaries, "we", the "Company" or "USPI") owns and operates short stay surgical facilities including surgery centers and private surgical hospitals in the United States, Spain and the United Kingdom. We focus on providing high quality surgical facilities that meet the needs of patients, physicians and payors better than hospital-based and other outpatient surgical facilities. We believe that our facilities (1) enhance the quality of care and the healthcare experience of patients, (2) offer significant administrative, clinical and economic benefits to physicians and (3) offer an efficient and low cost alternative to payors. We acquire and develop our facilities through the formation of strategic relationships with physicians and healthcare systems to better access and serve the communities in our markets. Our operating model is efficient, scalable and portable and we have adapted it to each of our national markets. We believe that our acquisition and development strategy and operating model enable us to continue to grow by taking advantage of highly-fragmented markets and an increasing demand for short stay surgery.

Since physicians provide and influence the direction of healthcare worldwide, we have developed our operating model to encourage physicians to affiliate with us and to use our facilities. We operate our facilities, structure our strategic relationships and adopt staffing, scheduling and clinical systems and protocols with the goal of increasing physician productivity. We believe that our focus on physician

satisfaction, combined with providing high quality healthcare in a friendly and convenient environment for patients, will continue to increase the number of procedures performed at our facilities each year.

Donald E. Steen, our chairman and chief executive officer, and Welsh, Carson, Anderson & Stowe formed USPI in February 1998. We operate surgery centers and private surgical hospitals in the United States and Western Europe. As of December 31, 2002, we operated 64 facilities, consisting of 54 in the United States, eight in Spain, and two in the United Kingdom. Of the 54 U.S. facilities, 26 are jointly owned with ten major not-for-profit healthcare systems. Overall, as of December 31, 2002, we held ownership interests in 61 of the facilities and operated the remaining three facilities, all in the United States, under management contracts. Our revenues for 2002 were $342.4 million, up 40% from $244.4 million for 2001.

We file proxy statements and annual, quarterly and current reports with the Securities and Exchange Commission. You may read and copy any document that we file at the SEC's public reference room located at 450 Fifth Street N.W., Washington, D.C. 20549. You may also call the Securities and Exchange Commission at 1-800-SEC-0330 for information on the operation of the public reference room. Our SEC filings are also available to you free of charge at the SEC's web site at http://www.sec.gov. We also maintain a website at http://www.unitedsurgical.com that includes links to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. These reports are available on our website without charge as soon as reasonably practicable after such reports are filed with or furnished to the SEC.

We believe many physicians prefer surgery centers and private surgical hospitals to general acute care hospitals. We believe that this is due to the elective nature of the procedures performed at our surgery centers and private surgical hospitals, which allows physicians to schedule their time more efficiently and therefore increase the number of surgeries they can perform in a given amount of time. In addition, these facilities usually provide physicians with greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases. While surgery centers and private surgical hospitals generally perform scheduled surgeries, private acute care hospitals and national health service facilities generally provide a broad range of services, including high priority and emergency procedures. Medical emergencies often demand the unplanned use of operating rooms and result in the postponement or delay of scheduled surgeries, disrupting physicians' practices and inconveniencing patients. Surgery centers and private surgical hospitals in the United States, Spain and the United Kingdom are designed to improve physician work environments and improve physician efficiency. In addition, many physicians choose to perform surgery in facilities like ours because their patients prefer the comfort of a less institutional atmosphere and the convenience of simplified admissions and discharge procedures.

According to SMG Marketing Group Inc.'s Freestanding Outpatient Surgery Center Directory, the number of outpatient surgery cases performed in freestanding surgery centers increased 169% from 2.6 million in 1991 to 7.0 million in 2001. Outpatient surgical procedures represented approximately 20% of all surgical procedures performed in the United States in 1981 compared to approximately 78% in 2001. New surgical techniques and technology, as well as advances in anesthesia, have significantly expanded the types of surgical procedures that are being performed in surgery centers and have helped drive the growth in outpatient surgery. Lasers, arthroscopy, enhanced endoscopic techniques and fiber optics have reduced the trauma and recovery time associated with many surgical procedures. Improved anesthesia has shortened recovery time by minimizing post-operative side effects such as nausea and

drowsiness, thereby avoiding the need for overnight hospitalization in many cases. In addition, some states in the United States now permit surgery centers to keep a patient for up to 23 hours. This allows more complex surgeries, previously only performed in an inpatient setting, to be performed in a surgery center.

In addition to these technological and other clinical advancements, a changing payor environment has contributed to the rapid growth in outpatient surgery in recent years. Government programs, private insurance companies, managed care organizations and self-insured employers have implemented cost containment measures to limit increases in healthcare expenditures, including procedure reimbursement. These cost containment measures have greatly contributed to the significant shift in the delivery of healthcare services away from traditional inpatient hospitals to more cost-effective alternate sites, including surgery centers. We believe that surgery performed at a surgery center is generally less expensive than hospital-based outpatient surgery because of lower facility development costs, more efficient staffing and space utilization and a specialized operating environment focused on cost containment.

Today, large healthcare systems in the United States generally offer both inpatient and outpatient surgery on site. In addition, a number of not-for-profit healthcare systems have begun to expand their portfolios of facilities and services by entering into strategic relationships with specialty operators of surgery centers. These strategic relationships enable not-for-profit healthcare systems to offer patients, physicians and payors the cost advantages, convenience and other benefits of outpatient surgery in a freestanding facility. Further, these relationships allow the not-for-profit healthcare systems to focus their attention and resources on their core business without the challenge of acquiring, developing and operating these facilities.

Most countries in Western Europe provide their populations with some level of government-funded healthcare. Despite the success of these public programs, the practical limitations of these systems have resulted in delays or rationing of elective surgeries and certain other procedures. In many of these countries, funding and capacity constraints of public healthcare systems have created an opportunity for private healthcare systems to develop.

While Spain's national health service covers substantially all of the country's population, a private healthcare industry has emerged that currently serves the 17% of Spain's population that maintains private insurance and another growing portion of the population that pays for elective procedures from personal funds. Total healthcare expenditures in Spain grew from 5.9% of gross domestic product, or GDP, in 1997 to 7.7% in 1999. In addition, Spain's GDP and wages have experienced compound annual growth of 3.4% and 2.7%, respectively, from 1996 to 2001. We believe that these increases support our view that the number of privately insured citizens, the amount of private healthcare expenditures and the resulting demand for private networks such as ours will continue to grow. We also believe that the growth in Spain's private healthcare industry has been driven in large part by an increase in the number of employers offering private insurance as a benefit to their employees. Like their U.S. counterparts, private insurance companies in Spain typically offer comprehensive health coverage. Since only 75 of the 355 private surgical hospitals in Spain are owned by multi-facility systems, we believe an opportunity exists to expand our private hospital network that will enable us to negotiate more effectively with the country's large health insurance companies. Our facilities also supplement the national health service as public hospitals periodically refer overload cases to our facilities.

We are able to accept or reject these cases based on the available capacity of our facilities and the profitability of the cases. For the year ended December 31, 2002, we derived approximately 71% of our revenues in Spain from private insurance, approximately 18% from private pay and approximately 11% from government payors.

The United Kingdom also provides government-funded healthcare to all of its residents through a national health service. It, however, is also subject to funding and capacity limitations. Since the demand for healthcare services exceeds the public system's capacity, U.K. residents may encounter waiting lists for elective surgery of up to 18 months as well as delays in obtaining cancer biopsies and other diagnostic procedures. The World Health Organization reports that 25,000 people die unnecessarily of cancer in Britain each year due to underfinanced and poorly managed cancer programs. In response to these shortfalls, private healthcare networks and private insurance companies have developed in the United Kingdom. Approximately 11% of the U.K. population has private insurance to cover elective surgical procedures, and another rapidly growing segment of the population pays for elective procedures from personal funds. For the year ended December 31, 2002, in the United Kingdom, we derived approximately 60% of our revenues from private insurance, approximately 33% from private pay patients and approximately 7% from government payors.

Our goal is to steadily increase our revenues and cash flows by becoming a leading operator of surgery centers and private surgical hospitals in the United States and selected nations in Western Europe. The key elements of our business strategy are to:

Since physicians provide and influence the direction of healthcare worldwide, we have developed our operating model to encourage physicians to affiliate with us and to use our facilities as an extension of their practices. We believe we attract physicians because we design our facilities, structure our strategic relationships and adopt staffing, scheduling and clinical systems and protocols to increase physician productivity and promote their professional and financial success. We believe this focus on physicians, combined with providing high quality healthcare in a friendly and convenient environment for patients, will continue to increase case volumes at our facilities. In addition, in the United States, we generally offer physicians the opportunity to purchase equity interests in the facilities they use as an extension of the physicians' practices. We believe this opportunity attracts quality physicians to our facilities and ownership increases the physicians' involvement in facility operations, enhancing quality of patient care, increasing productivity and reducing costs.

Through strategic relationships with us, healthcare systems can benefit from our operating expertise and create a new cash flow opportunity with limited capital expenditures. We believe that these relationships also allow not-for-profit healthcare systems in particular to attract and retain physicians and improve their hospital operations by focusing on their core business. We also believe that strategic relationships with these healthcare systems help us to develop more quickly, relationships with physicians, communities, suppliers and payors. Generally, the healthcare systems with which we develop relationships have strong local market positions and excellent reputations that we use in branding our facilities. In addition, our relationships with healthcare systems enhance our acquisition and development efforts by (1) providing opportunities to acquire facilities the systems may own, (2) providing access to physicians already affiliated with the systems, (3) attracting additional physicians

to affiliate with newly developed facilities, and (4) encouraging physicians who own facilities to consider a strategic relationship with us.

Our primary strategy is to grow selectively in markets in which we already operate facilities. We believe that selective acquisitions and development of new facilities in existing markets allow us to leverage our existing knowledge of these markets and to improve operating efficiencies. In particular, our experience has been that newly developed facilities in markets where we already have a presence and a not-for-profit hospital partner are the best use of the company's invested capital.

We may continue to enter targeted markets by acquiring and developing surgical facilities. In the United States, we expect to do this primarily in conjunction with a local healthcare system or hospital. We typically target the acquisition or development of multi-specialty centers that perform high volume, non-emergency, lower risk procedures requiring lower capital and operating costs than hospitals. In addition, we will also consider the acquisition of multi-facility companies.

In determining whether to enter a new market, we examine numerous criteria, including:

Upon identifying a target facility, we conduct financial, legal, engineering, operational, technology and systems audits of the facility and conduct interviews with the facility's management, affiliated physicians and staff. Once we acquire or develop a facility, we focus on upgrading systems and protocols, including implementing our proprietary methodology of defined processes and information systems, to increase case volume and improve operating efficiencies.

Once we acquire a new facility, we integrate it into our existing network by implementing a specific action plan to support the local management team and incorporate the new facility into our group purchasing contracts. We also implement our systems and protocols to improve operating efficiencies and contain costs. Our most important operational tool is our management system "Every Day Giving Excellence," which we refer to as USPI's EDGE. This proprietary measurement system allows us to track our clinical, service and financial performance, best practices and key indicators in each of our facilities. Our goal is to use USPI's EDGE to ensure that we provide each of the patients using our facilities with high quality healthcare, offer physicians a superior work environment and eliminate inefficiencies. Using USPI's EDGE, we track and monitor our performance in clinical care areas such as (1) providing surgeons the equipment, supplies and surgical support they need, (2) starting cases on

time, (3) minimizing turnover time between cases, and (4) providing efficient schedules. USPI's EDGE compiles and organizes the specified information on a daily basis and is easily accessed over the Internet by our facilities on a secure basis. The information provided by USPI's EDGE enables our employees, facility administrators and management to analyze trends over time and share processes and best practices among our facilities. In addition, the information is used as an evaluative tool by our administrators and as a budgeting and planning tool by our management. USPI's EDGE is now deployed in over 94% of our U.S. facilities.

Our operations in the United States consist primarily of our ownership and management of surgery centers. We have ownership interests in 48 surgery centers and three private surgical hospitals and manage or operate, through consulting agreements, three additional surgery centers. Additionally, we own interests in and will operate one surgery center and one private surgical hospital that are currently under construction. We also intend to develop two additional surgery centers which we anticipate will open in the second half of 2003, and we have various other potential projects in the early stages of development, some of which may begin construction during 2003. Over 2,000 physicians have access privileges to use our facilities. Our surgery centers are licensed outpatient surgery centers and are generally equipped and staffed for multiple surgical specialties and located in freestanding buildings or medical office buildings. Our average surgery center has approximately 13,000 square feet of space with four or five operating rooms, as well as ancillary areas for preparation, recovery, reception and administration. Our surgery center facilities range from a 4,000 square foot, two operating room facility to a 20,000 square foot, six operating room facility. Our surgery centers are normally open weekdays from 7:00 a.m. to approximately 5:00 p.m. or until the last patient is discharged. We estimate that a surgery center with four operating rooms can accommodate up to 6,000 procedures per year.

Our surgery center support staff typically consists of registered nurses, operating room technicians, an administrator who supervises the day-to-day activities of the surgery center, a receptionist and a small number of office staff. Each center also has a medical director, who is typically an anesthesiologist and responsible for and supervises the quality of medical care provided at the center. Use of our surgery centers is limited to licensed physicians, podiatrists and oral surgeons who are also on the medical staff of a local accredited hospital. Each center maintains a peer review committee consisting of physicians who use our facilities and who review the professional credentials of physicians applying for surgical privileges.

All of our surgery centers eligible for accreditation are accredited by the Joint Commission on Accreditation of Healthcare Organizations or by the Accreditation Association for Ambulatory Healthcare. We believe that accreditation is the quality benchmark for managed care organizations. Many managed care organizations will not contract with a facility until it is accredited. We believe that our historical performance in the accreditation process reflects our commitment to providing high quality care in our surgery centers.

Generally, our surgery centers are limited partnerships, limited liability partnerships or limited liability companies in which ownership interests are also held by local physicians who are on the medical staff of the centers. Our ownership interests in the centers range from 10% to 100%. Our partnership and limited liability company agreements typically provide for the quarterly pro rata distribution of cash equal to net revenues from operations, less amounts held in reserve for expenses and working capital. We also have a management agreement with each of the centers under which we provide day-to-day management services for a management fee that is typically a percentage of the net revenues of the center.

Our partnership and limited liability company agreements typically provide that if various regulatory changes take place we will be obligated to purchase some or all of the ownership interests of the physicians in the partnerships or limited liability companies that own and operate the applicable surgery centers. The regulatory changes that could trigger such an obligation include changes that:

Typically, our partnership and limited liability company agreements allow us to use shares of our common stock as consideration for the purchase of a physician's interest should we be required to purchase these interests. In the event we are required to purchase these interests and our common stock does not maintain a sufficient valuation, we may be required to use cash for the acquisition of a physician's interest. As a result, the triggering of these obligations and the possible termination of our affiliation with these physicians, which we do not believe is likely, could have a material adverse effect on us.

Our business depends upon the efforts and success of the physicians who provide medical services at our facilities and the strength of our relationships with these physicians. Our business could be adversely affected by the loss of our relationship with, or a reduction in use of our facilities by, a key physician or group of physicians. The physicians that affiliate with us and use our facilities are not our employees. However, we generally offer the physicians the opportunity to purchase equity interests in the facilities they use.

A key element of our business strategy is to pursue strategic relationships with not-for-profit healthcare systems in selected markets. Twenty-six of our facilities are jointly-owned with ten not-for-profit healthcare systems. As of December 31, 2002, we had joint ventures with six established not-for-profit healthcare systems in the United States: the Baylor Health Care System in Dallas, Texas; Meridian Health System in Northern New Jersey; Saint Thomas Health Services in Middle Tennessee; Memorial Hermann Healthcare System in Houston, Texas; Northside Hospital in Atlanta, Georgia; and Robert Wood Johnson University Hospital in East Brunswick, New Jersey. These joint ventures own interests in an aggregate of 22 of our facilities. In addition to the facilities owned by these joint ventures, four of our other facilities are co-owned with four additional not-for-profit healthcare systems. Additionally, we entered into a joint venture agreement in March 2003 with St. Joseph's Hospital and Medical Center in Phoenix, Arizona. This joint venture does not yet operate any facilities. We hope to develop these relationships into future opportunities for multi-facility strategic relationships. We intend to structure our future joint ventures with service providers in a manner similar to our joint venture with Baylor.

Our largest strategic relationship is with Baylor. The Baylor joint ventures own interests in limited liability companies, limited liability partnerships and limited partnerships which own and operate surgery centers. Our alliance agreements with Baylor do not have expiration dates but may be terminated with the mutual consent of both parties, if the joint ventures are determined to be illegal due to a change in laws or regulations or upon stated changes in control of our company. In addition, agreements governing the joint ventures have provisions governing management power, dissolution events and veto power. These joint ventures own an outpatient surgery network that serves the approximately four million persons located in the Dallas/Fort Worth area. The Baylor joint ventures

currently have ownership interests in thirteen operational surgery centers and one surgical hospital. We also have a joint venture with the Meridian Health System in Wall, New Jersey. This joint venture currently operates two surgery centers. In addition, in August 2001 we entered into a joint venture with Saint Thomas Health Services in Nashville, Tennessee. We operate three surgery centers in joint ownership with Saint Thomas and expect to contribute one additional surgery center to the joint venture. In addition, we entered into a joint venture with Memorial Hermann Healthcare System in March 2002 to develop a surgical hospital in Houston, Texas which opened in December 2002. Our joint venture with Northside Hospital currently operates one surgery center in Atlanta, Georgia. In June 2002 we entered into a joint venture with Robert Wood Johnson University Hospital. This joint venture currently operates one surgery center in East Brunswick, New Jersey. All of our joint ventures require both parties to provide the other party the opportunity to participate in any surgery center project within specified geographic regions prior to the other party participating in the project.

We believe our operations in Spain comprise one of the largest private hospital networks in this highly fragmented market. We own and operate eight private surgical hospitals (including one that we acquired subsequent to December 31, 2002), one surgery center and a diagnostic facility in Spain and over 700 physicians use our facilities. These facilities, located primarily in Barcelona, Madrid and Seville, range in size from 19 beds to 134 beds with an average of 97 beds. In this market, we focus primarily on five specialties: obstetrics/gynecology; orthopedic surgery; general surgery; internal medicine; and plastic surgery.

In addition, we are developing our brand name, "USPE," in all of our markets in Spain in an effort to attract top quality physicians and a greater number of patients. We are developing this brand by leveraging the reputation of our more prominent physicians and facilities, particularly Instituto Universitario Dexeus in Barcelona. Dexeus is one of only two private teaching hospitals in Spain. We believe Dexeus' affiliation with the University of Barcelona, which has nationally renowned physicians, makes it one of Spain's most respected private hospitals and greatly enhances the USPE brand image. To this end, we also intend to develop our brand name through future acquisitions of private surgical hospitals.

We acquired Parkside Hospital in Wimbledon, a suburb southwest of London, and Holly House Hospital in a suburb northeast of London near Essex in April 2000. Parkside has 69 registered acute care beds, including four high dependency beds, on three floors. The hospital has four operating theatres, including a dedicated endoscopy suite. Parkside also has its own on site pathology laboratory, pharmacy and diagnostic suite with an MRI scanner, CT scanner, two X-ray screening rooms and a color Doppler ultrasound machine. Approximately 270 surgeons and physicians, all of whom hold or have held consulting positions in hospitals operated by the United Kingdom's national health service, have admitting privileges to the hospital. Parkside has established practices including orthopedics, gynecology and general surgery, as well as neurosurgery and endoscopic procedures.

We are in the process of developing a comprehensive cancer treatment center, the Parkside Clinic, near Parkside Hospital. Our development of Parkside Clinic has the support of a number of oncologists at Parkside Hospital and the center has already contracted with the BUPA Group, Britain's largest insurance company. We anticipate that the center will provide superior inpatient and outpatient services. We also anticipate that Parkside Clinic will be fully operational in 2003 and will provide radiotherapy, chemotherapy and nuclear medicine facilities on an outpatient basis with inpatient cancer services being provided at Parkside Hospital. Parkside Clinic also will provide additional space for expansion of other specialties and programs at Parkside Hospital.

Holly House Hospital has been an acute care hospital for 20 years and has 59 registered acute care beds on two floors, including three high dependency beds. The hospital has three operating theatres and its own on site pathology laboratory and pharmacy with cytotoxic reconstitution facilities to serve its expanding oncology program. A diagnostic suite houses MRI and CT scanners and two X-ray screening rooms together with a color Doppler ultrasound machine. Over 100 surgeons and physicians have admitting privileges at the hospital. The hospital has established orthopedic and general surgery practices and is developing oncology and plastic surgery programs.

The following table sets forth the percentage of our revenues determined based on internally reported case volume from our U.S. facilities and internally reported revenue from our Spain and U.K. facilities for the year ended December 31, 2002 from each of the following specialties:

Specialty		Total		U.S.		Spain		U.K.
Orthopedic		26	%	26	%	20	%	37	%
Pain management		14		24		—		1
Obstetrics/gynecology		10		4	(1)	19	(2)	15	(3)
General surgery		8		5		12		18
Ear, nose and throat		4		5		3		4
Gastrointestinal		10		12		8		2
Plastic surgery		5		5		4		7
Ophthalmology		7		9		3		5
Other		16		10		31		11

	Total	100	%	100	%	100	%	100	%

The following table sets forth the percentage of our revenues determined based on internally reported case volume from our U.S. surgical facilities and internally reported revenue from our Spain and U.K. facilities for the year ended December 31, 2002 from each of the following payors:

Payor		Total		U.S.		Spain		U.K.
Private insurance		68	%	69	%	71	%	60	%
Self-pay		11		3		18		33
Government		18		23	(1)	11		7
Other		3		5		—		—

	Total	100	%	100	%	100	%	100	%

The following table sets forth information relating to the not-for-profit healthcare systems with which we are affiliated as of December 31, 2002:

Healthcare System	Geographical Focus	Number of Facilities Operated
Baylor Healthcare System	Dallas/Ft. Worth, Texas	14
Saint Thomas Health Services	Middle Tennessee	3
Meridian Health System	Northern New Jersey	2
Decatur General Hospital	Decatur, Alabama	1
Northside Hospital	Atlanta, Georgia	1
St. Rose Dominican Hospital	Las Vegas, Nevada	1
Robert Wood Johnson University Hospital	East Brunswick, New Jersey	1
Johnson City Medical Center	Johnson City, Tennessee	1
Covenant Healthcare	Knoxville, Tennessee	1
Memorial Hermann Healthcare System	Houston, Texas	1

Additionally, we entered into a joint venture agreement in March 2003 with St. Joseph's Hospital and Medical Center in Phoenix, Arizona. This joint venture does not yet operate any facilities.

The following table sets forth information relating to the surgery centers that we operate as of December 31, 2002:

Facility	Date of Acquisition or Affiliation		Number of Operating Rooms	Percentage Owned by USPI
United States
*Decatur Surgery Center, Decatur, Alabama(1)	7/29/98		3	61	%
Warner Park Surgery Center, Chandler, Arizona(1)	7/1/99		4	80
Coast Surgery Center of South Bay, Inc., Torrance, California	12/18/01		3	63
San Gabriel Valley Surgical Center, West Covina, California	11/16/01		4	80
Destin Surgery Center, Destin, Florida	9/25/02		3	30
University Surgical Center, Winter Park, Florida	10/15/98		3	70
Surgery Center of Sarasota, Sarasota, Florida	10/12/01		4	66
East West Surgery Center, Austell, Georgia	9/1/00	(4)	3	82
*Advanced Surgery Center, Canton, Georgia(1)	3/27/02		3	50
Northwest Georgia Orthopaedic Surgery Center, Marietta, Georgia	11/1/00	(4)	2	15
Lawrenceville Surgical Center, Lawrenceville, Georgia	8/1/01		2	15
Resurgens Surgery Center, Atlanta, Georgia	10/1/98	(4)	4	40
Roswell Surgery Center, Roswell, Georgia	10/1/00	(4)	2	15
Creekwood Surgery Center, Kansas City, Missouri(1)	7/29/98		3	66
*Parkway Surgery Center, Henderson, Nevada	8/3/98		5	47
*Robert Wood Johnson Surgery Center, East Brunswick, New Jersey	6/26/02		5	50
*Shrewsbury Ambulatory Surgery Center, Shrewsbury, New Jersey	4/1/99		4	25
*Toms River Surgery Center, Toms River, New Jersey	3/15/02		4	40
New Mexico Orthopaedic Surgery Center, Albuquerque, New Mexico	2/29/00	(4)	4	51
Las Cruces Surgery Center, Las Cruces, New Mexico(1)	2/1/01		3	50
Day-Op Center of Long Island, Mineola, New York(2)	12/4/98		4	0
Austintown Ambulatory Surgery Center, Austintown, Ohio (1)	4/12/02		5	20
Eastside Surgery Center, Columbus, Ohio (3)	3/20/00	(4)	4	0
Riverside Outpatient Surgery Center, Columbus, Ohio (3)	3/20/00	(4)	6	0
Surgery Center in Middleburg Heights, Middleburg Heights, Ohio (1)	6/19/02		6	62
Zeeba Surgery Center, Lyndhurst, Ohio(1)	10/11/02		5	80
Oklahoma City North Ambulatory Surgery Center, Oklahoma City, Oklahoma(1)	3/27/02		4	51
*Mountain Empire Surgery Center, Johnson City, Tennessee	2/2/00	(4)	4	20

The following table sets forth information relating to the private surgical hospitals that we operate as of December 31, 2002:

In addition, the Company operates the following facilities under short-term management contracts which expire at various dates through 2006: Southwest Ambulatory Surgery Center, L.L.C., which is a surgery center located in Oklahoma City, Oklahoma; The Ambulatory Surgery Center of Tyler, Ltd., which is a surgery center located in Tyler, Texas; and Oklahoma Center for Orthopedic and Multi-Specialty Surgery, which is a surgical hospital located in Oklahoma City, Oklahoma. The Company holds no ownership in these facilities.

We lease the majority of the facilities where our various surgery centers and private surgical hospitals conduct their operations. Our leases have initial terms ranging from one to twenty years and most of the leases contain options to extend the lease period for up to ten additional years.

Our corporate headquarters is located in Dallas, Texas. We currently lease approximately 40,000 square feet of space at 15305 Dallas Parkway, Addison, Texas. This lease will expire in April 2011.

Our office in the United Kingdom is located in London. We currently lease 1,900 square feet. The lease expires in February 2004.

Our Spanish offices are located in Madrid and Barcelona. We currently lease 2,800 square feet of space in Madrid. The lease expires in December 2003. Additionally, we lease 3,100 square feet of space in Barcelona. The lease expires in December 2007.

We also lease 10,400 square feet of space in Brentwood, Tennessee, which was the former OrthoLink headquarters and currently serves as a regional office. The lease expires in November 2008.

The following table sets forth information relating to facilities that are currently under construction:

Facility Location		Type		Expected Opening Date		Number of Operating Rooms/Beds
Cottonwood, Arizona		Surgery Center		4Q 2003		2 ORs
Chandler, Arizona		Surgical Hospital		3Q 2003		4 ORs/16 beds

We also intend to develop surgery centers in Atlanta, Georgia and Nashville, Tennessee which we anticipate will open in the second half of 2003. We are in various stages of negotiation with various entities regarding possible joint venture, development or acquisition projects. In the United Kingdom, our Parkside Hospital is in the process of developing a cancer treatment center. Any acquisition or development in these or other markets must meet our acquisition and development criteria. We cannot assure you that we will be successful in developing or acquiring facilities in any of these markets.

Our sales and marketing efforts are directed primarily at physicians, which are principally responsible for referring patients to our facilities. We market our facilities to physicians by emphasizing (1) the high level of patient satisfaction with our surgery centers, which is based on patient surveys we take concerning our facilities, (2) the quality and responsiveness of our services, and (3) the practice efficiencies provided by our facilities. In those U.S. markets in which we have established a strategic alliance with a not-for-profit healthcare system, we coordinate the marketing effort with the healthcare system and generally benefit from this managed care strategy. We also directly negotiate agreements with third-party payors, which generally focus on the pricing, number of facilities in the market and affiliation with physician groups in a particular market. Maintaining access to physicians and patients through third-party payor contracting is essential for the economic viability of most of our facilities.

In all of our markets, we compete with other providers, including major acute care hospitals. Hospitals have various competitive advantages over us, including their established managed care contracts, community position, physician loyalty and geographical convenience for physicians' in-patient and out-patient practices. However, we believe that, in comparison to hospitals with which we compete for managed care contracts, our surgery centers and private surgical hospitals compete favorably on the basis of cost, quality, efficiency and responsiveness to physician needs in a more comfortable environment for the patient.

We compete with other providers in each of our markets for patients and for contracts with insurers or managed care payors. Competition for managed care contracts with other providers is focused on the pricing, number of facilities in the market and affiliation with key physician groups in a particular market. We also encounter competition with other companies for acquisition and development of facilities and in the United States for strategic relationships with not-for-profit healthcare systems and physicians.

There are several large, publicly-held companies, or divisions or subsidiaries of large publicly-held companies, that acquire and develop freestanding multi-specialty surgery centers and private surgical hospitals. Some of these competitors have greater resources than we do. The principal competitive factors that affect our ability and the ability of our competitors to acquire surgery centers and private surgical hospitals are price, experience and reputation and access to capital. Further, in the United States some physician groups develop surgery centers without a corporate partner. It is generally difficult, however, for a single practice to create effectively the efficient operations and marketing programs necessary to compete with other provider networks and companies. As a result, and also due to the financial investment necessary to develop surgery centers and private surgical hospitals, many healthcare systems and physician groups are attracted to corporate partners such as us.

In the United Kingdom, we face competition from both the national health service and other privately operated hospitals, including hospitals owned by the BUPA Group, our primary competitor in the United Kingdom. Across the United Kingdom, a large number of private hospitals are owned by the four largest hospital operators. In addition, the two largest payors account for over half of the privately insured market. We believe our hospitals can effectively compete in this market due to location and specialty mix of our facilities. Our hospitals also have a higher portion of self pay business than the overall market. Self pay business is not influenced by the private insurers.

In Spain, we face competition from several privately held independent hospitals and a few networks of hospitals that are owned by insurance companies. Insurance companies that own hospitals have the benefit of a captured market of their insured, including hospitals owned by Adesla, our primary competitor in Spain. These insurance companies compete with us in acquisitions of strategically placed hospitals in major cities. Other hospital networks are attempting to replicate our model and have begun to compete with us in the acquisition of hospitals. In our experience, sellers are typically the physicians that have built the hospitals, and most physicians prefer an independent position in a market rather than becoming a provider for an insurance company. We focus our efforts on partnering with physicians and assisting them in growing their business and medical practices by encouraging group rather than individual practices.

Our hospitals compete with other providers in the Spanish market, including other private hospitals and hospitals operated by Spain's national health service. The national health coverage makes the hospitals operated by Spain's national health service accessible to the entire Spanish population. In contrast, private hospitals such as ours must negotiate agreements with third-party payors, which focus on services available to their members as well as pricing. We believe that the size of our operations in Spain has given us the ability to negotiate effectively with insurance companies.

We employ approximately 3,300 persons, 2,700 of whom are full-time employees and 600 of whom are part-time employees. Of these employees, we employ approximately 1,400 in the United States, 600 in the United Kingdom and 1,300 in Spain. The physicians that affiliate with us and use our facilities are not our employees. However, we generally offer the physicians the opportunity to purchase equity interests in the facilities they use.

Aggregate market value of outstanding Common Stock held by non-affiliates of the Registrant, as of June 28, 2002		$	581,718,183
Number of shares of Common Stock outstanding as of March 20, 2003			27,166,860

PART I
	Item 1.	Business
	Item 2.	Properties
	Item 3.	Legal Proceedings
	Item 4.	Submission of Matters to a Vote of Security Holders
PART II
	Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters
	Item 6.	Selected Consolidated Financial Data
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk
	Item 8.	Financial Statements and Supplementary Data
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10.	Directors and Executive Officers of the Registrant
	Item 11.	Executive Compensation
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13.	Certain Relationships and Related Transactions
	Item 14.	Controls and Procedures
	Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K
Note:	The responses to Items 10 through 13 will be included in the Company's definitive proxy statement to be filed pursuant to Regulation 14A for the Annual Meeting of Stockholders to be held May 22, 2003. The required information is incorporated into this Form 10-K by reference to that document and is not repeated herein.

*Baptist Ambulatory Surgery Center, Nashville, Tennessee	3/1/98	(4)	6	20
*Middle Tennessee Ambulatory Surgery Center, Murfreesboro, Tennessee	7/29/98		4	42
*Parkwest Surgery Center, Knoxville, Tennessee	7/26/01		5	22
*Saint Thomas Campus SurgiCare, Nashville, Tennessee	7/15/02		5	25
Physicians Pavilion Surgery Center, Nashville, Tennessee (1)	7/29/98		4	75
*Arlington Surgery Center, Arlington, Texas (1)	2/1/99		3	44
*Baylor Surgicare, Dallas, Texas (1)	6/1/99		6	25
*Bellaire Surgery Center, Fort Worth, Texas	10/15/02		4	22
*Denton Surgicare, Denton, Texas (1)	2/1/99		4	21
Doctors Surgery Center (Houston), Pasadena, Texas (1)	9/1/99		4	78
*Lewisville SurgiCare Partners, Lewisville, Texas (1)(3)	9/16/02		3	0
*Medical Centre Surgicare, Fort Worth, Texas (1)	12/18/98		6	46
*Metroplex Surgery Center, Bedford, Texas (1)	12/18/98		5	45
Corpus Christi Outpatient Surgery, Corpus Christi, Texas (1)	5/1/02		5	69
*North Texas Surgery Center, Dallas, Texas (1)	12/18/98		4	44
*Physicians Day Surgery Center, Dallas, Texas	10/12/00		4	25
*Premier Ambulatory Surgery Center of Garland, Garland, Texas	2/1/99		3	46
*Grapevine Surgery Center, Grapevine, Texas	2/6/02		3	11
*Texas Surgery Center, Dallas, Texas(1)	6/1/99		4	25
United Surgery Center—Southeast, Houston, Texas(1)	9/1/99		3	94
*Valley View Surgery Center, Dallas, Texas(1)	12/18/98		4	56
Surgi-Center of Central Virginia, Fredericksburg, Virginia	11/29/01		4	83
Teton Outpatient Services, Jackson Hole, Wyoming	8/1/98	(4)	2	56
Spain
Centro de Cirugia Ambulatario, Barcelona	3/1/99		3	100
USP Dermoéstetica, S.L. Madrid	5/1/99		2	70

Facility	Date of Acquisition or Affiliation	Number of Operating Rooms	Number of Beds	Percentage Owned by USPI
United States
*Frisco Surgical Hospital, Frisco, Texas	9/30/02	6	13	20	%
*Sugar Land Surgical Hospital, Sugar Land, Texas	12/28/02	4	6	32
TOPS Specialty Hospital, Houston, Texas	7/1/99	7	12	53
Spain
Instituto Universitario Dexeus, Barcelona	4/30/98	12	106	79
Hospital Santa Teresa, La Coruña	11/5/98	5	133	96
Hospital Sagrado Corazón, Seville	10/16/98	9	95	100
Clinica Nuestra Señora de la Esperanza, Vitoria	10/5/98	3	19	100
Clinica San Camilo, Madrid	3/15/00	8	130	93
Clinica San Jose, Madrid	11/1/00	7	72	100
Juan XXIII, Madrid (1)	2/1/00	—	—	100
Hospital San Carlos, Murcia	2/1/02	6	134	100
United Kingdom
Parkside Hospital, Wimbledon	4/6/00	4	69	100
Holly House Hospital, Essex	4/6/00	3	59	100