UNITED SURGICAL PARTNERS INTERNATIONAL INC - 10-Q Quarterly Report

QuickLinks -- Click here to rapidly navigate through this document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to to

Commission file number 000-32837

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

Delaware (State or other jurisdiction of incorporation or organization)		75-2749762 (IRS Employer Identification Number)
15305 Dallas Parkway, Suite 1600 Addison, Texas (Address of principal executive offices)		75001 (Zip Code)
(972) 713-3500 (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

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

At August 5, 2003 there were 27,265,734 shares of Common Stock outstanding.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX

PART I.	Financial Information
	Item 1.	Financial Statements (unaudited)	3
		Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002	3
		Consolidated Statements of Income for the three months and six months ended June 30, 2003 and 2002	4
		Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2003 and 2002	5
		Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
	Item 4.	Controls and Procedures	29
PART II.	Other Information
	Item 1.	Legal Proceedings	30
	Item 4.	Submission of Matters to a Vote of Security Holders	30
	Item 6.	Exhibits and Reports on Form 8-K	30
Signatures			32

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, 2003			December 31, 2002
Assets
Cash and cash equivalents			$	34,444		$	47,571
Patient receivables, net of allowance for doubtful accounts of $7,232 and $7,154, respectively				49,282			39,176
Other receivables				25,805			34,735
Inventories of supplies				8,142			7,756
Deferred tax asset, net				5,701			5,657
Prepaids and other current assets				9,453			7,001

	Total current assets			132,827			141,896
Property and equipment, net				315,992			270,387
Investments in affiliates				21,875			18,696
Intangible assets, net				309,488			287,584
Other assets				19,483			8,722

	Total assets		$	799,665		$	727,285

Liabilities and Stockholders' Equity
Accounts payable			$	31,222		$	25,989
Accrued salaries and benefits				20,551			20,322
Due to affiliates				8,287			6,890
Accrued interest				1,600			1,650
Current portion of long-term debt				15,465			13,132
Other accrued expenses				24,254			22,501

	Total current liabilities			101,379			90,484
Long-term debt, less current portion				281,560			263,571
Other long-term liabilities				8,447			4,532
Deferred tax liability, net				25,039			19,577

	Total liabilities			416,425			378,164
Minority interests				32,413			26,860
Stockholders' equity:
	Common stock:
		Other, $0.01 par value; 200,000 shares authorized; 27,385 and 27,306 shares issued at June 30, 2003 and December 31, 2002, respectively		274			273
	Additional paid-in capital			321,748			320,750
	Treasury stock, at cost, 137 and 202 shares at June 30, 2003 and December 31, 2002, respectively			(2,522	)		(3,733	)
	Deferred compensation			(2,050	)		(1,226	)
	Receivables from sales of stock			(22	)		(191	)
	Accumulated other comprehensive income, net of tax			15,018			3,290
	Retained earnings			18,381			3,098

		Total stockholders' equity		350,827			322,261

		Total liabilities and stockholders' equity	$	799,665		$	727,285

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 June 30,						Six months ended June 30,
		2003			2002			2003			2002
Net patient service revenue		$	98,094		$	74,393		$	188,564		$	139,421
Management and administrative services revenue			9,161			8,363			17,198			15,686
Equity in earnings of unconsolidated affiliates			3,265			2,397			5,806			4,493
Other income			1,024			688			2,035			1,319

	Total revenues		111,544			85,841			213,603			160,919
Salaries, benefits, and other employee costs			27,407			20,852			52,903			39,968
Medical services and supplies			21,129			16,759			41,032			31,155
Other operating expenses			19,955			15,319			37,971			29,019
General and administrative expenses			7,373			6,383			14,087			12,279
Provision for doubtful accounts			1,994			1,570			3,542			2,698
Depreciation and amortization			7,870			6,321			15,307			11,978

	Total operating expenses		85,728			67,204			164,842			127,097

	Operating income		25,816			18,637			48,761			33,822
Interest income			194			81			511			389
Interest expense			(6,860	)		(6,283	)		(13,734	)		(12,211	)
Other			103			(26	)		109			(73	)

	Total other expense, net		(6,563	)		(6,228	)		(13,114	)		(11,895	)
	Income before minority interests		19,253			12,409			35,647			21,927
Minority interests in income of consolidated subsidiaries			(6,178	)		(3,418	)		(11,188	)		(6,106	)

	Income before income taxes		13,075			8,991			24,459			15,821
Income tax expense			(4,902	)		(2,877	)		(9,164	)		(5,003	)

	Net income	$	8,173		$	6,114		$	15,295		$	10,818

Net income per share attributable to common stockholders
	Basic	$	0.30		$	0.25		$	0.57		$	0.45
	Diluted	$	0.29		$	0.24		$	0.55		$	0.43
Weighted average number of common shares
	Basic		27,064			24,270			27,055			24,189
	Diluted		27,950			25,655			27,854			25,430

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 June 30,				Six months ended June 30,
		2003		2002		2003		2002
Net income		$	8,173	$	6,114	$	15,295	$	10,818
Other comprehensive income, net of taxes:
	Foreign currency translation adjustments		9,149		13,476		11,713		11,524
	Net unrealized gains on securities		138		—		15		—

	Other comprehensive income		9,287		13,476		11,728		11,524

	Comprehensive income	$	17,460	$	19,590	$	27,023	$	22,342

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,
					2003			2002
Cash flows from operating activities:
	Net income				$	15,295		$	10,818
	Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for doubtful accounts				3,542			2,698
		Depreciation and amortization				15,307			11,978
		Amortization of debt issue costs and discount				905			748
		Equity in earnings of unconsolidated affiliates				(5,806	)		(4,493	)
		Minority interests in income of consolidated subsidiaries				11,188			6,106
		Amortization of deferred compensation				279			145
		Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses:
			Patient receivables			(11,261	)		(7,534	)
			Other receivables			9,919			1,509
			Inventories of supplies, prepaids and other current assets			(2,324	)		111
			Accounts payable and other current liabilities			2,979			(426	)
			Other long-term liabilities			4,933			2,386

				Net cash provided by operating activities		44,956			24,046

Cash flows from investing activities:
	Purchases of new businesses and equity interests, net of cash received					(35,307	)		(34,653	)
	Purchases of property and equipment					(20,720	)		(11,140	)
	Sales of property					—			789
	Decrease (increase) in deposits and notes receivable					(4,256	)		140
	Cash placed in escrow					(3,145	)		—

				Net cash used in investing activities		(63,428	)		(44,864	)

Cash flows from financing activities:
	Proceeds from long-term debt					37,341			35,289
	Payments on long-term debt					(29,006	)		(24,938	)
	Proceeds from issuances of common stock					965			2,860
	Distributions on investments in affiliates					(3,766	)		(1,281	)

				Net cash provided by (used in) financing activities		5,534			(11,930	)

Effect of exchange rate changes on cash						(189	)		90

Net decrease in cash and cash equivalents						(13,127	)		(8,798	)
Cash and cash equivalents at beginning of period						47,571			33,881

Cash and cash equivalents at end of period					$	34,444		$	25,083

Supplemental information:
	Interest paid				$	13,092		$	12,016
	Income taxes paid					1,814			1,246
	Non-cash transactions:
		Assets acquired under capital lease obligations				1,669			530
		Issuance of common stock for service contracts				254			761
		Issuance of restricted stock awards				1,103			—

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. (together with its subsidiaries, USPI or the Company), a Delaware company, was formed in February 1998 for the primary purpose of ownership and operation of surgery centers, private surgical hospitals and related businesses in the United States and Western Europe. At June 30, 2003, USPI, headquartered in Dallas, Texas, operated 56 surgical facilities in the United States. Of these 56 facilities, USPI consolidates the results of 26, owns a minority or otherwise noncontrolling equity interest in 29, which are accounted for under the equity method, and holds no ownership interest in the remaining facility, which is operated by USPI under a management contract. In addition, United Surgical Partners Europe, S.L. (USPE), a company incorporated in Spain and majority owned by USPI, managed and owned a majority interest in eight private surgical hospitals and one surgery center in Spain at June 30, 2003. Global Healthcare Partners Limited (Global), a company incorporated in England and majority owned by USPI, managed and wholly owned three private surgical hospitals in the United Kingdom at June 30, 2003.

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

USPI maintains its books and records on the accrual basis of accounting, and the consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements and notes should be read in conjunction with the Company's Form 10-K. It is management's opinion that the accompanying consolidated financial statements reflect all adjustments (which are normal recurring adjustments) necessary for a fair presentation of the results for the interim period and the comparable period presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

(b): Equity Based Compensation

USPI applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option grants to employees. As such, USPI generally does not record compensation expense because USPI generally issues options whereby the option exercise price equals the current market price of the underlying stock on the date of grant. SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, established accounting and disclosure requirements using a fair value based method of accounting for stock-based employee compensation plans. As permitted under SFAS No. 123, the Company has elected to continue to apply the intrinsic value based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. Had USPI determined compensation cost based on the fair value at the grant date

for its stock options under SFAS No. 123, USPI's net income would have been the pro forma amounts indicated below:

		Three months ended June 30,						Six months ended June 30,
		2003			2002			2003			2002
Net income attributable to common stockholders
	As reported	$	8,173		$	6,114		$	15,295		$	10,818
	Add: Total stock-based employee compensation expense included in reported net income, net of taxes		451			120			759			223
	Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes		(1,520	)		(798	)		(2,830	)		(1,543	)

	Pro forma	$	7,104		$	5,436		$	13,224		$	9,498

Basic earnings per share
	As reported	$	0.30		$	0.25		$	0.57		$	0.45
	Pro forma		0.26			0.22			0.49			0.39
Diluted earnings per share
	As reported		0.29			0.24			0.55			0.43
	Pro forma		0.25			0.21			0.47			0.37

The fair values in the table above were estimated at the date of grant using the Black-Scholes valuation model with the following assumptions: risk-free interest rates ranging from 2.3% to 6.3%, expected dividend yield of zero, expected volatility of the market price of the Company's common stock of 40%, and an expected life of the option ranging from three to five years.

Total stock-based employee compensation expense included in net income, as reported, primarily consists of expense related to grants to employees of the Company's common stock and a December 2000 grant of stock options at a price lower than the current market price at the date of grant. The compensation amounts related to these grants are being amortized into expense over the estimated service periods.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

(2) Acquisitions

In March 2003, the Company acquired 100% of a private surgical hospital in Marbella, Spain, for approximately €8.4 million ($9.0 million) in cash. In addition, the Company agreed to pay up to an additional total of €4.3 million ($4.9 million) to the sellers, depending on the resolution of certain

contingencies over the next four years, of which €2.9 million ($3.4 million) has been placed in escrow and is included in other assets in the Company's balance sheet at June 30, 2003.

During April 2003, the Company acquired a private surgical hospital in London, England for approximately £8.7 million ($13.8 million), of which the payment of approximately £0.5 million ($0.8 million) has been deferred pending the resolution of certain contingencies.

During June 2003, the Company acquired a 65% interest in an ambulatory surgery center in Austin, Texas for $10.8 million in cash.

Following are the unaudited pro forma results for the three months and six months ended June 30, 2003 and 2002 as if the acquisitions discussed above had occurred on January 1, 2002 (in thousands, except per share amounts):

	Three months ended June 30,				Six months ended June 30,
	2003		2002		2003		2002
Net revenues	$	112,638	$	89,867	$	218,174	$	168,440
Net income		8,199		6,849		15,555		12,187
Basic earnings per share		0.30		0.28		0.57		0.50
Diluted earnings per share		0.29		0.27		0.56		0.48

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, 2003, these transactions resulted in net cash outflows from USPI in an aggregate amount of $1.7 million.

(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, 2003 and 2002 (in thousands, except per share amounts):

		Three months ended June 30,				Six months ended June 30,
		2003		2002		2003		2002
Net income attributable to common shareholders		$	8,173	$	6,114	$	15,295	$	10,818
Weighted average common shares outstanding			27,064		24,270		27,055		24,189
Effect of dilutive securities:
	Stock options		589		1,081		512		945
	Warrants and restricted stock		297		304		287		296

Shares used for diluted earnings per share			27,950		25,655		27,854		25,430

Basic earnings per share		$	0.30	$	0.25	$	0.57	$	0.45
Diluted earnings per share		$	0.29	$	0.24	$	0.55	$	0.43

(4) Other Receivables

During the second quarter, the Company modified some of the agreements under which the Company provides certain administrative services to physicians, eliminating the financing of accounts receivable from the scope of administrative services provided by the Company. As a result, the Company collected approximately $7.0 million of the outstanding other receivables from these physicians.

(5) Segment Disclosures

Statement of Financial Accounting Standards No. 131,