UNITED SURGICAL PARTNERS INTERNATIONAL INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - EX-32.2 - UNITED SURGICAL PARTNERS INTERNATIONAL INC	d77361exv32w2.htm
EX-32.1 - EX-32.1 - UNITED SURGICAL PARTNERS INTERNATIONAL INC	d77361exv32w1.htm
EX-31.1 - EX-31.1 - UNITED SURGICAL PARTNERS INTERNATIONAL INC	d77361exv31w1.htm
EX-31.2 - EX-31.2 - UNITED SURGICAL PARTNERS INTERNATIONAL INC	d77361exv31w2.htm

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 September 30, 2010
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 333-144337

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 (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 o No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ	Smaller reporting company o

(Do not check if a smaller reporting company)

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

The number of shares of Common Stock of the Registrant outstanding at November 9, 2010 was 100.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX


PART I.	Financial Information	3
Item 1.	Financial Statements:	3
	Review Report of Independent Registered Public Accounting Firm	3
	Consolidated Balance Sheets (unaudited)	4
	Consolidated Statements of Income (unaudited)	5
	Consolidated Statements of Comprehensive Income (unaudited)	7
	Consolidated Statements of Changes in Equity (unaudited)	8
	Consolidated Statements of Cash Flows (unaudited)	10
	Notes to Consolidated Financial Statements (unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	51

PART II.	Other Information	51
Item 1.	Legal Proceedings	51
Item 6.	Exhibits	51
Signatures		52
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Note: Items 1A, 2, 3, 4, and 5 of Part II are omitted because they are not applicable.

PART I. FINANCIAL INFORMATION


ITEM 1.	*Financial Statements*

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder

United Surgical Partners International, Inc.:

We have reviewed the accompanying consolidated balance sheet of United Surgical Partners International, Inc. and subsidiaries (the Company) as of September 30, 2010, the related consolidated statements of income, comprehensive income and changes in equity for the three-month and nine-month periods ended September 30, 2010 and 2009, and the related consolidated statements of cash flows for the nine-month periods ended September 30, 2010 and 2009. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Dallas, Texas

November 9, 2010

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets


	September 30,			December 31,
	2010			2009
	(Unaudited)
	(In thousands — except share
	data)

ASSETS
Cash and cash equivalents	$	60,726		$	34,890
Accounts receivable, net of allowance for doubtful accounts of $8,422 and $8,160, respectively		48,087			54,237
Other receivables		20,140			15,246
Inventories of supplies		8,951			8,789
Deferred tax asset, net		11,101			16,400
Prepaids and other current assets		10,593			14,382

Total current assets		159,598			143,944
Property and equipment, net		215,753			198,506
Investments in unconsolidated affiliates		347,120			355,499
Goodwill		1,278,615			1,279,291
Intangible assets, net		323,210			322,896
Other assets		26,363			25,256

Total assets	$	2,350,659		$	2,325,392


LIABILITIES AND EQUITY
Accounts payable	$	21,701		$	23,475
Accrued salaries and benefits		22,654			33,015
Due to affiliates		109,175			129,296
Accrued interest		18,673			8,784
Current portion of long-term debt		29,014			23,337
Other current liabilities		50,214			39,053

Total current liabilities		251,431			256,960
Long-term debt, less current portion		1,036,647			1,048,191
Other long-term liabilities		27,206			32,466
Deferred tax liability, net		135,314			125,907

Total liabilities		1,450,598			1,463,524
Noncontrolling interests — redeemable (Note 3)		71,995			63,865
Commitments and contingencies (Note 11)
Equity:
United Surgical Partners International, Inc. (USPI) stockholder’s equity:
Common stock, $0.01 par value; 100 shares authorized, issued and outstanding		—			—
Additional paid-in capital		784,867			789,505
Accumulated other comprehensive loss		(62,929	)		(58,845	)
Retained earnings		66,188			27,292

Total USPI stockholder’s equity		788,126			757,952
Noncontrolling interests — nonredeemable (Note 3)		39,940			40,051

Total equity		828,066			798,003

Total liabilities and equity	$	2,350,659		$	2,325,392

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Income


	Three Months			Three Months
	Ended			Ended
	September 30,			September 30,
	2010			2009
	(Unaudited — in thousands)

Revenues:
Net patient service revenues	$	126,061		$	129,588
Management and contract service revenues		21,012			19,521
Other revenues		1,717			3,272

Total revenues		148,790			152,381
Equity in earnings of unconsolidated affiliates		17,247			14,913
Operating expenses:
Salaries, benefits, and other employee costs		42,763			44,223
Medical services and supplies		24,347			25,451
Other operating expenses		28,926			21,210
General and administrative expenses		9,626			9,609
Provision for doubtful accounts		2,032			2,674
Depreciation and amortization		8,294			8,745

Total operating expenses		115,988			111,912

Operating income		50,049			55,382
Interest income		212			520
Interest expense		(17,333	)		(17,589	)
Other, net		476			(8,925	)

Total other expense, net		(16,645	)		(25,994	)

Income before income taxes		33,404			29,388
Income tax (expense) benefit (Note 7)		(7,247	)		24,123

Net income		26,157			53,511
Less: Net income attributable to noncontrolling interests		(14,309	)		(14,807	)

Net income attributable to USPI’s common stockholder	$	11,848		$	38,704

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Income


	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2010			2009
	(Unaudited — in thousands)

Revenues:
Net patient service revenues	$	377,477		$	396,979
Management and contract service revenues		61,232			57,573
Other revenues		5,135			11,335

Total revenues		443,844			465,887
Equity in earnings of unconsolidated affiliates		49,754			43,110
Operating expenses:
Salaries, benefits, and other employee costs		124,226			130,089
Medical services and supplies		74,203			76,019
Other operating expenses		76,817			69,904
General and administrative expenses		27,295			29,708
Provision for doubtful accounts		6,351			7,553
Depreciation and amortization		25,080			26,610

Total operating expenses		333,972			339,883

Operating income		159,626			169,114
Interest income		638			2,261
Interest expense		(53,069	)		(53,384	)
Other, net (Note 3)		304			(19,145	)

Total other expense, net		(52,127	)		(70,268	)

Income before income taxes		107,499			98,846
Income tax (expense) benefit (Note 7)		(24,674	)		9,504

Net income		82,825			108,350
Less: Net income attributable to noncontrolling interests		(43,079	)		(47,207	)

Net income attributable to USPI’s common stockholder	$	39,746		$	61,143

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income


	Three Months			Three Months
	Ended			Ended
	September 30,			September 30,
	2010			2009
	(Unaudited — in thousands)

Net income	$	26,157		$	53,511
Other comprehensive income (loss):
Foreign currency translation adjustments		11,857			(6,538	)
Unrealized gain on interest rate swaps, net of tax		792			2,277

Total other comprehensive income (loss)		12,649			(4,261	)

Comprehensive income		38,806			49,250
Less: Comprehensive income attributable to noncontrolling interests		(14,309	)		(14,807	)

Comprehensive income attributable to USPI’s common stockholder	$	24,497		$	34,443


	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2010			2009
	(Unaudited — in thousands)

Net income	$	82,825		$	108,350
Other comprehensive income (loss):
Foreign currency translation adjustments		(6,294	)		19,625
Unrealized gain on interest rate swaps, net of tax		2,210			3,179

Total other comprehensive income (loss)		(4,084	)		22,804

Comprehensive income		78,741			131,154
Less: Comprehensive income attributable to noncontrolling interests		(43,079	)		(47,207	)

Comprehensive income attributable to USPI’s common stockholder	$	35,662		$	83,947

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statement of Changes in Equity
For the Three Months and Nine Months Ended September 30, 2010


				USPI’s Common Stockholder
														Accumulated
											Additional			Other						Noncontrolling
				Comprehensive			Outstanding				Paid-in			Comprehensive			Retained			Interests
	Total			Income (Loss)			Shares		Par Value		Capital			Income (Loss)			Earnings			Nonredeemable
	(Unaudited — in thousands, except share amounts)

Balance, December 31, 2009	$	798,003		$	—			100	$	—	$	789,505		$	(58,845	)	$	27,292		$	40,051
Distributions to noncontrolling interests		(1,702	)		—			—		—		—			—			—			(1,702	)
Purchases of noncontrolling interests		(88	)		—			—		—		(28	)		—			—			(60	)
Sales of noncontrolling interests		(2,797	)		—			—		—		(2,950	)		—			—			153
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		532			—			—		—		532			—			—			—
Comprehensive income (loss):
Net income		13,518			12,011			—		—		—			—			12,011			1,507
Other comprehensive loss:
Unrealized gain on interest rate swaps, net of tax		300			300			—		—		—			300			—			—
Foreign currency translation adjustments		(14,588	)		(14,588	)		—		—		—			(14,588	)		—			—

Other comprehensive loss		(14,288	)		(14,288	)		—		—		—			—			—			—

Comprehensive income (loss)		(770	)	$	(2,277	)		—		—		—			—			—			1,507

Balance, March 31, 2010		793,178						100		—		787,059			(73,133	)		39,303			39,949
Distributions to noncontrolling interests		(1,450	)		—			—		—		—			—			—			(1,450	)
Purchases of noncontrolling interests		(142	)		—			—		—		(115	)		—			—			(27	)
Sales of noncontrolling interests		(919	)		—			—		—		(1,496	)		—			—			577
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		452			—			—		—		452			—			—			—
Dividend to USPI Holdings/USPI Group Holdings		(850	)		—			—		—		—			—			(850	)		—
Comprehensive income:
Net income		17,058			15,887			—		—		—			—			15,887			1,171
Other comprehensive loss:
Unrealized gain on interest rate swaps, net of tax		1,118			1,118			—		—		—			1,118			—			—
Foreign currency translation adjustments		(3,563	)		(3,563	)		—		—		—			(3,563	)		—			—

Other comprehensive income		(2,445	)		(2,445	)		—		—		—			—			—			—

Comprehensive income		14,613		$	13,442			—		—		—			—			—			1,171

Balance, June 30, 2010		804,882						100		—		785,900			(75,578	)		54,340			40,220
Distributions to noncontrolling interests		(1,565	)		—			—		—		—			—			—			(1,565	)
Purchases of noncontrolling interests		(75	)		—			—		—		(283	)		—			—			208
Sales of noncontrolling interests		(1,279	)		—			—		—		(1,228	)		—			—			(51	)
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		478			—			—		—		478			—			—			—
Comprehensive income:
Net income		12,976			11,848			—		—		—			—			11,848			1,128
Other comprehensive income:
Unrealized gain on interest rate swaps, net of tax		792			792			—		—		—			792			—			—
Foreign currency translation adjustments		11,857			11,857			—		—		—			11,857			—			—

Other comprehensive income		12,649			12,649			—		—		—			—			—			—

Comprehensive income		25,625		$	24,497			—		—		—			—			—			1,128

Balance, September 30, 2010	$	828,006						100	$	—	$	784,867		$	(62,929	)	$	66,188		$	39,940

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statement of Changes in Equity
For the Three Months and Nine Months Ended September 30, 2009


				USPI Common Stockholder
														Accumulated
											Additional			Other					Noncontrolling
				Comprehensive			Outstanding				Paid-in			Comprehensive			Retained		Interests —
	Total			Income (Loss)			Shares		Par Value		Capital			Income (Loss)			Earnings		Nonredeemable
	(Unaudited — in thousands, except share amounts)

Balance, December 31, 2008	$	805,964		$	—			100	$	—	$	801,902		$	(84,008	)	$	46,243	$	41,827
Distributions to noncontrolling interests		(605	)		—			—		—		—			—			—		(605	)
Purchases of noncontrolling interests		(668	)		—			—		—		(453	)		—			—		(215	)
Sales of noncontrolling interests		(2,146	)		—			—		—		(2,142	)		—			—		(4	)
Deconsolidation of subsidiaries		(5,852	)		—			—		—		—			—			—		(5,852	)
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		462			—			—		—		462			—			—		—
Comprehensive income:
Net income		6,915			5,687			—		—		—			—			5,687		1,228
Other comprehensive loss:
Unrealized loss on interest rate swaps, net of tax		(63	)		(63	)		—		—		—			(63	)		—		—
Foreign currency translation adjustments		(4,480	)		(4,480	)		—		—		—			(4,480	)		—		—

Other comprehensive loss		(4,543	)		(4,543	)		—		—		—			—			—		—

Comprehensive income		2,372		$	1,144			—		—		—			—			—		1,228

Balance, March 31, 2009		799,527						100		—		799,769			(88,551	)		51,930		36,379
Distributions to noncontrolling interests		(962	)		—			—		—		—			—			—		(962	)
Purchases of noncontrolling interests		(288	)		—			—		—		(270	)		—			—		(18	)
Sales of noncontrolling interests		(1,904	)		—			—		—		(1,953	)		—			—		49
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		495			—			—		—		495			—			—		—
Comprehensive income:
Net income		18,314			16,752			—		—		—			—			16,752		1,562
Other comprehensive loss:
Unrealized gain on interest rate swaps, net of tax		965			965			—		—		—			965			—		—
Foreign currency translation adjustments		30,643			30,643			—		—		—			30,643			—		—

Other comprehensive income		31,608			31,608			—		—		—			—			—		—

Comprehensive income		49,922		$	48,360			—		—		—			—			—		1,562

Balance, June 30, 2009		846,790						100		—		798,041			(56,943	)		68,682		37,010
Distributions to noncontrolling interests		(1,557	)		—			—		—		—			—			—		(1,557	)
Purchases of noncontrolling interests		(34	)		—			—		—		(30	)		—			—		(4	)
Sales of noncontrolling interests		(1,767	)		—			—		—		(1,770	)		—			—		3
Deconsolidation of subsidiaries		(876	)		—			—		—		—			—			—		(876	)
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		467			—			—		—		467			—			—		—
Comprehensive income:
Net income		39,789			38,704			—		—		—			—			38,704		1,085
Other comprehensive loss:
Unrealized gain on interest rate swaps, net of tax		2,277			2,277			—		—		—			2,277			—		—
Foreign currency translation adjustments		(6,538	)		(6,538	)		—		—		—			(6,538	)		—		—

Other comprehensive loss		(4,261	)		(4,261	)		—		—		—			—			—		—

Comprehensive income		35,528		$	34,443			—		—		—			—			—		1,085

Balance, September 30, 2009	$	878,551						100	$	—	$	796,708		$	(61,204	)	$	107,386	$	35,661

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows


	Nine Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2010			2009
	(Unaudited — in thousands)

Cash flows from operating activities:
Net income	$	82,825		$	108,350
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		6,351			7,553
Depreciation and amortization		25,080			26,610
(Gain) loss on sale of equity interests and other		(519	)		12,778
Loss on impairment of intangible assets		1,004			4,370
Amortization of debt issue costs and discount		2,429			2,517
Deferred income tax expense (benefit)		14,054			(16,795	)
Equity in earnings of unconsolidated affiliates, net of distributions received		7,633			(4,499	)
Equity-based compensation		1,383			1,463
Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses:
Accounts receivable		(168	)		(5,832	)
Other receivables		(181	)		2,330
Inventories of supplies, prepaids and other current assets		2,711			(1,607	)
Accounts payable and other current liabilities		(1,852	)		6,563
Long-term liabilities		1,387			1,378

Net cash provided by operating activities		142,137			145,179

Cash flows from investing activities:
Purchases of new businesses and equity interests, net of cash received		(15,266	)		(12,855	)
Proceeds from sale of equity interests		9,953			2,091
Purchases of property and equipment		(29,173	)		(17,016	)
Returns of capital from unconsolidated affiliates		870			2,613
Increase in deposits and notes receivable		(1,132	)		(3,686	)

Net cash used in investing activities		(34,748	)		(28,853	)

Cash flows from financing activities:
Proceeds from long-term debt		13,032			761
Payments on long-term debt		(29,615	)		(20,404	)
(Decrease) increase in cash held on behalf of unconsolidated affiliates and other		(21,248	)		55,887
Sales of noncontrolling interests, net		1,228			1,791
Distributions to noncontrolling interests		(45,133	)		(47,435	)

Net cash used in financing activities		(81,736	)		(9,400	)

Effect of exchange rate changes on cash		183			182

Net increase in cash and cash equivalents		25,836			107,108
Cash and cash equivalents at beginning of period		34,890			49,435

Cash and cash equivalents at end of period	$	60,726		$	156,543

Supplemental information:
Interest paid	$	42,624		$	43,771
Income taxes paid		7,521			6,556
Non-cash transactions:
Assets acquired under capital lease obligations	$	12,562		$	1,863
Receipt of note receivable for sale of equity interests		—			980

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 ambulatory surgery centers, hospitals and related businesses in the United States and Europe. At September 30, 2010, the Company, headquartered in Dallas, Texas, operated 174 short-stay surgical facilities. Of these 174 facilities, the Company consolidates the results of 60 and accounts for 114 under the equity method. The Company operates in two countries, with 170 of its 174 facilities located in the United States of America; the remaining four facilities are located in the United Kingdom. The majority 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 September 30, 2010, the Company had agreements with not-for-profit healthcare systems providing for joint ownership of 117 of the Company’s 170 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.

Global Healthcare Partners Limited (Global), a USPI subsidiary incorporated in England, manages and owns three hospitals and an oncology center in the greater London area.

The Company’s business is subject to various risks, including changes in government and commercial reimbursement, changes in healthcare regulations and the impact of healthcare reform.

The Company maintains its books and records on the accrual basis of accounting, and the accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The accompanying consolidated financial statements and notes should be read in conjunction with the Company’s December 31, 2009 Form 10-K. It is management’s opinion that the accompanying consolidated financial statements reflect all adjustments necessary for a fair presentation of the results for the periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. As discussed in Note 7, the Company’s results of operations for the three months ended September 30, 2009 include a tax benefit of $31.5 million related to the reversal of the majority of its deferred income tax asset allowance during the third quarter of 2009.

The preparation of financial statements in conformity with GAAP requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


(2)	Investments in Unconsolidated Affiliates and Business Combinations

The Company’s U.S. facilities are generally operated through separate legal entities in which the Company holds an equity interest. Other investors include physicians who utilize the facility and, in many cases, a not-for-profit health system that has other healthcare businesses in the region.

The Company controls 56 of these entities and therefore consolidates their results. However, the Company accounts for an increasing majority (114 of its 170 U.S. facilities at September 30, 2010) as investments in unconsolidated affiliates, i.e., under the equity method, as the Company’s level of influence is significant but does not reach the threshold of controlling the entity, as that concept is defined under GAAP. 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

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

investees on a combined basis is as follows (amounts are in thousands, except number of facilities, reflect 100% of the investees’ results on an aggregated basis and are unaudited):


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2010			2009			2010			2009

Unconsolidated facilities operated at period-end		114			106			114			106
Income statement information:
Revenues	$	328,879		$	293,207		$	948,350		$	852,679
Operating expenses:
Salaries, benefits, and other employee costs		77,875			71,391			224,641			204,485
Medical services and supplies		76,520			68,086			222,362			194,973
Other operating expenses		78,592			68,718			224,055			200,531
Depreciation and amortization		13,813			12,645			40,636			37,474

Total operating expenses		246,800			220,840			711,694			637,463

Operating income		82,079			72,367			236,656			215,216
Interest expense, net		(6,431	)		(6,041	)		(19,090	)		(18,312	)
Other, net		(46	)		838			1,805			2,177

Income before income taxes	$	75,602		$	67,164		$	219,371		$	199,081

Balance sheet information:
Current assets	$	261,874		$	237,086		$	261,874		$	237,086
Noncurrent assets		439,402			405,547			439,402			405,547
Current liabilities		146,095			153,621			146,095			153,621
Noncurrent liabilities		305,316			288,629			305,316			288,629

The Company also regularly engages in the purchase and sale of equity interests with respect to its investments in unconsolidated affiliates that do not result in a change of control. These transactions are primarily the acquisitions and sales of equity interests in unconsolidated surgical facilities and the investment of additional cash in surgical facilities under development. During the nine months ended September 30, 2010, these transactions resulted in a net cash outflow of approximately $0.7 million, which is summarized below:


Effective Date	Facility Location	Amount

Investments
April 2010	Destin, Florida(1)	$	1.3 million
April 2010	St. Louis, Missouri(2)		0.4 million
May 2010	Mansfield, Texas(3)		0.6 million
July 2010	Carrollton, Texas(3)		0.8 million
July 2010	Sacramento, California(4)		1.5 million
Various	Various(5)		4.0 million

			8.6 million
Sales
June 2010	Cincinnati, Ohio(6)		7.9 million

Total		$	0.7 million

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Notes to Consolidated Financial Statements (Unaudited) — (Continued)


(1)		Acquisition of an additional noncontrolling interest in a surgical facility in which the Company already held an investment. This facility is jointly owned with local physicians.

(2)		Acquisition of a noncontrolling interest in a surgical facility in which the Company already provided management services. This facility is jointly owned with one of the Company’s hospital partners and local physicians.

(3)		Acquisition of the right to manage a surgical facility in which the Company previously had no involvement. Concurrent with this transaction, an unconsolidated investee the Company jointly owns with a hospital partner used cash on hand to acquire an equity interest in this facility, resulting in the Company having an indirect ownership interest in the facility. The remainder of this facility is owned by local physicians.

(4)		Acquisition of a noncontrolling interest in and right to manage a surgical facility in which the Company previously had no involvement. This facility is jointly owned with one of the Company’s hospital partners and local physicians.

(5)		Represents the net purchase of additional ownership and equity contributions in various other unconsolidated affiliates, including $3.1 million paid for additional ownership in four centers the Company already operated.

(6)		Sale of a portion of the Company’s equity ownership in one facility to a hospital partner.

In May 2010, the Company obtained control of a surgical facility in St. Louis, Missouri. The purchase price was approximately $4.6 million in cash. The financial results of the acquired entity are included in the Company’s consolidated financial statements beginning on the acquisition’s effective closing date. The actual results of those operations were not material. Additionally, the adjustments to arrive at pro forma operating results for this acquisition are not material.


(3)	Noncontrolling Interests

The Company controls and therefore consolidates the results of 60 of its 174 facilities. Similar to its investments in unconsolidated affiliates, the Company regularly engages in the purchase and sale of equity interests with respect to its consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions, as they are undertaken among the Company, its consolidated subsidiaries, and noncontrolling interests, and their cash flow effect is classified within financing activities.

During the nine months ended September 30, 2010, the Company purchased and sold equity interests in various U.S. consolidated subsidiaries in the amounts of $1.3 million and $2.2 million, respectively. The basis difference between the Company’s carrying amount and the proceeds received or paid in each transaction is

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Notes to Consolidated Financial Statements (Unaudited) — (Continued)

recorded as an adjustment to additional paid-in capital. The impact of these transactions is summarized as follows (in thousands):


	Three Months			Nine Months			Three Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2010			2009			2009

Net income attributable to USPI’s common stockholder	$	11,848		$	39,746		$	38,704		$	61,143
Transfers to the noncontrolling interests:
Decrease in USPI’s additional paid-in capital for sales of subsidiaries’ equity interests		(1,228	)		(5,674	)		(1,770	)		(5,865	)
Decrease in USPI’s additional paid-in capital for purchases of subsidiaries’ equity interests		(283	)		(426	)		(30	)		(753	)

Net transfers to noncontrolling interests		(1,511	)		(6,100	)		(1,800	)		(6,618	)

Change in equity from net income attributable to USPI and transfers to noncontrolling interests	$	10,337		$	33,646		$	36,904		$	54,525

In addition, as part of its strategy of partnering with physicians and not-for-profit health systems, the Company from time to time surrenders control of an entity but retains a noncontrolling interest (classified within “investments in unconsolidated affiliates”). These transactions result in a gain or loss, computed as the difference between (a) the sales proceeds and fair value of the retained investment compared to (b) the Company’s carrying value of the investment prior to the transaction. Gains or losses for such transactions are classified within “Other, net” in the accompanying consolidated statements of income and their cash flow effects within investing activities. During the nine months ended September 30, 2010, the Company completed one such transaction whereby it merged a consolidated surgery center into a surgery center accounted for under the equity method. A local not-for-profit health system obtained ownership in the combined center. The Company received immaterial proceeds and recorded a pretax gain of approximately $0.6 million, which was primarily related to the revaluation of the Company’s remaining investment in the entity to fair value.

During the nine months ended September 30, 2009, the Company completed one such transaction. A controlling interest in an entity was sold to a hospital partner as part of its strategy for partnering with this health system. The hospital partner already had a 49% ownership interest in this entity, which owns and manages two surgical facilities in the Phoenix, Arizona area, and through the transaction acquired an additional 1.1% interest. The Company received proceeds of approximately $0.1 million and recorded a pretax loss of approximately $8.2 million, which was primarily related to the revaluation of the Company’s remaining investment in the entity to fair value.

Fair values for the retained noncontrolling interests are estimated based on market multiples and discounted cash flow models which have been derived from the Company’s experience in acquiring surgical facilities and by third party valuations it has obtained with respect to such transactions. The Company’s continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations.

Upon the occurrence of certain fundamental regulatory changes, the Company could be obligated, under the terms of its investees’ partnership and operating agreements, to purchase some or all of the noncontrolling interests related to the Company’s consolidated subsidiaries. These repurchase requirements are limited to the portions of its facilities that are owned by physicians who perform surgery at the Company’s facilities and would be triggered by regulatory changes making the existing ownership structure illegal. While the Company is not aware of events that

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements (Unaudited) — (Continued)

would make the occurrence of such a change probable, regulatory changes are outside the control of the Company. Accordingly, the noncontrolling interests subject to these repurchase provisions have been classified outside of equity and are carried as “noncontrolling interests — redeemable” on the Company’s consolidated balance sheets. The activity for the three and nine months ended September 30, 2010 and 2009 is summarized below (in thousands):


	2010
	Noncontrolling
	Interests —
	Redeemable

Balance, December 31, 2009	$	63,865
Net income attributable to noncontrolling interests		12,128
Distributions to noncontrolling interests		(12,452	)
Purchases of noncontrolling interests		(195	)
Sales of noncontrolling interests		3,708
Deconsolidation of noncontrolling interests and other		75

Balance, March 31, 2010		67,129
Net income attributable to noncontrolling interests		13,964
Distributions to noncontrolling interests		(13,881	)
Purchases of noncontrolling interests		(229	)
Sales of noncontrolling interests		1,923
Purchase of new business		2,455

Balance, June 30, 2010		71,361
Net income attributable to noncontrolling interests		13,180
Distributions to noncontrolling interests		(14,085	)
Purchases of noncontrolling interests		(443	)
Sales of noncontrolling interests		1,982

Balance, September 30, 2010	$	71,995

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements (Unaudited) — (Continued)


	2009
	Noncontrolling
	Interests —
	Redeemable

Balance, December 31, 2008	$	51,961
Net income attributable to noncontrolling interests		15,054
Distributions to noncontrolling interests		(13,359	)
Purchases of noncontrolling interests		(594	)
Sales of noncontrolling interests		3,117
Deconsolidation of noncontrolling interests and other		(2,189	)

Balance, March 31, 2009		53,990
Net income attributable to noncontrolling interests		14,544
Distributions to noncontrolling interests		(14,780	)
Purchases of noncontrolling interests		(345	)
Sales of noncontrolling interests		2,926
Deconsolidation of noncontrolling interests and other		(239	)

Balance, June 30, 2009		56,096
Net income attributable to noncontrolling interests		13,722
Distributions to noncontrolling interests		(15,913	)
Purchases of noncontrolling interests		248
Sales of noncontrolling interests		3,491
Deconsolidation of noncontrolling interests and other		(182	)

Balance, September 30, 2009	$	57,462

(4) Other Investments

The consolidated financial statements include the financial statements of USPI and its wholly-owned and majority-owned subsidiaries. The Company also determines if it is the primary beneficiary of (and therefore should consolidate) any entity whose operations it does not control with voting rights. At September 30, 2010, the Company consolidated two entities in accordance with this accounting guidance. At September 30, 2009, the Company consolidated one such entity.

One of these entities operates and manages five surgical facilities in the Houston, Texas area. Despite not holding a controlling voting interest, the Company is the primary beneficiary because the Company has provided all of the funding the entity has used to purchase surgical facilities, but the Company does not have full recourse to the entity’s other owner with respect to repayment of these amounts. As the entity earns management fees and receives cash distributions of earnings from the surgical facilities, a portion of those proceeds are allocated to the Company prior to being eligible for distribution to the entity’s other owner. At September 30, 2010 and 2009, the Company’s balance sheet included $8.4 million and $11.4 million in other long-term assets related to its advances. The Company has no exposure for the entity’s losses beyond this investment. Accordingly, the Company did not provide any financial or other support to the entity that it was not previously contractually required to provide during the three and nine months ended September 30, 2010 or 2009. At September 30, 2010 and 2009, the total assets of this entity were $65.1 million and $40.4 million, and the total liabilities owed to third parties were $20.5 million and $17.8 million, respectively. Such amounts are included in the Company’s accompanying consolidated balance sheets.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements (Unaudited) — (Continued)

The second entity is developing and constructing a new hospital for one of the Company’s unconsolidated affiliates. The total project cost is approximately $26.2 million, which is being funded by cash contributions from its partners and debt financing. The Company is a limited partner in the entity. However, due to economic structuring of the entity, the Company is considered its primary beneficiary. The Company made its required equity contribution of $6.3 million in December 2009, which is the full amount expected to be required by the Company. The entity has arranged bank financing totaling $17.4 million, of which 70% is guaranteed by the Company. Approximately $7.6 million of the bank financing was borrowed at September 30, 2010. The Company has no exposure for the entity’s losses beyond its investment and bank guarantee. The Company did not provide any financial or other support to the entity that it was not previously contractually required to provide during the three and nine months ended September 30, 2010. At September 30, 2010, the total assets and liabilities of this entity were $16.6 million and $7.7 million, respectively. Such amounts are included in the Company’s accompanying consolidated balance sheet.

The Company also has investments in two unconsolidated variable interest entities in which it is not considered the primary beneficiary. These entities own real estate and fixed assets that are leased to various surgical facilities. The total assets of these entities were $7.3 million and $8.8 million and the total liabilities of these entities were $8.3 million and $8.8 million at September 30, 2010 and 2009, respectively. The Company’s investment in these entities and maximum exposure to loss as a result of its involvement with these entities is not material. The Company did not provide any financial or other support to these entities that it was not previously contractually required to provide during the three and nine months ended September 30, 2010 and 2009.


(5)	Interest Rate Swaps

The Company does not enter into derivative contracts for speculative purposes but has at times entered into interest rate swaps to fix the rate of interest owed on a portion of its variable rate debt. By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. The Company minimizes the credit risk in derivative instruments by entering into transactions with counterparties who maintain a strong credit rating. Market risk is the risk of an adverse effect on the value of a derivative instrument that results from a change in interest rates. This risk essentially represents the risk that variable interest rates decline to a level below the fixed rate the Company has locked in. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

At the inception of the interest rate swap, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

In order to manage the Company’s interest rate risk related to a portion of its variable-rate U.K. debt, on February 29, 2008, the Company entered into an interest rate swap agreement for a notional amount of £20.0 million ($31.5 million). The interest rate swap requires the Company to pay 4.99% and to receive interest at a variable rate of three-month GBP-LIBOR (0.7% at September 30, 2010), which is reset quarterly. The interest rate swap matures in March 2011. No collateral is required under the interest rate swap agreement.

In order to manage the Company’s interest rate risk related to a portion of its variable-rate senior secured credit facility, effective July 24, 2008, the Company entered into a three-year interest rate swap agreement for a notional amount of $200.0 million. The interest rate swap requires the Company to pay 3.6525% and to receive interest at a

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

variable rate of three-month USD-LIBOR (0.5% at September 30, 2010), which is reset quarterly. No collateral is required under the interest rate swap agreement.

The proceeds from the swaps are used to settle the Company’s interest obligations on the hedged portion of the variable rate debt, which has the overall outcome of the Company paying and expensing a fixed rate of interest on the hedged debt.

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheet. The Company designated the interest rate swaps as cash flow hedges of certain of its variable-rate borrowings. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings and would be classified as interest expense in the Company’s consolidated statements of income. The Company recorded no expense related to ineffectiveness for the three and nine months ended September 30, 2010 or 2009. For the three and nine months ended September 30, 2010, the Company reclassified $1.9 million and $5.9 million, respectively, out of other comprehensive income to interest expense related to the swaps. For the three and nine months ended September 30, 2009, the Company reclassified $1.8 million and $4.4 million, respectively, out of other comprehensive income to interest expense related to the swaps. During the next twelve months, if current interest rates remain at September 30, 2010 levels, the Company will record approximately $5.8 million more interest expense than if it had not entered into the interest rate swaps.

At September 30, 2010 and 2009, the fair values of the U.K. interest rate swap were approximately $0.6 million (recorded in other current liabilities) and $1.7 million (recorded in other long-term liabilities), respectively, with the offset to other comprehensive income (loss). At September 30, 2010 and 2009, the fair values of the U.S. interest rate swap were approximately $5.1 million (recorded in other current liabilities) and $8.5 million (recorded in other long-term liabilities), respectively, with the offset to other comprehensive income (loss).

The estimated fair value of the interest rate swaps was determined using present value models of the contractual payments. Inputs to the models were based on prevailing LIBOR market data and incorporate credit data that measure nonperformance risk. The estimated fair value represents the theoretical exit cost the Company would have to pay to transfer the obligations to a market participant with similar credit risk. The interest rate swap agreements are classified within Level 3 of the valuation hierarchy.


(6)	Fair Value Measurements

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2) or unobservable inputs for assets or liabilities (Level 3), depending on the nature of the item being valued. The estimated fair values may not be representative of actual values that will be realized or settled in the future.

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value because of their short maturities. The fair value of the Company’s interest rate swaps is disclosed in Note 5.

The fair value of the Company’s long-term debt is determined by either (i) estimation of the discounted future cash flows of the debt at rates currently quoted or offered to the Company for similar debt instruments of comparable maturities by its lenders, or (ii) quoted market prices at the reporting date for the traded debt securities. At September 30, 2010, the aggregate carrying amount and estimated fair value of long-term debt were $1.1 billion

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements (Unaudited) — (Continued)

and $1.1 billion, respectively. At September 30, 2009, the aggregate carrying amount and estimated fair value of long-term debt were $1.1 billion and $1.0 billion, respectively.


(7)	Income Taxes

The Company’s income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and the bases of those assets and liabilities as reported in the Company’s consolidated balance sheets. This estimation process requires that the Company evaluate the need for a valuation allowance against deferred tax assets, based on factors such as historical financial information, expected timing of future events, the probability of expected future taxable income and available tax planning opportunities.

In conjunction with Welsh Carson’s acquisition of the Company in April 2007, which increased the Company’s debt, caused the Company to generate losses deductible for U.S. tax purposes, and reduced the likelihood of the Company generating U.S. taxable income, the Company established a valuation allowance against its U.S. deferred tax assets. From the acquisition date until September 2009, the Company continued to establish a full valuation allowance against newly generated U.S. deferred tax assets and continuously assessed the likelihood of the assets being realized at a future date.

During the third quarter of 2009, the Company determined, based on factors such as those described above, including recent favorable operating trends, expected future taxable income, and other factors, that it was more likely than not that the majority of these assets, which include net operating loss carryforwards and other items, would be realized in the future. Accordingly, the Company’s results of operations for the three months ended September 30, 2009 included an income tax benefit of $31.5 million related to the reversal of a majority of the Company’s valuation allowance against its deferred tax assets. If the Company’s estimates related to the above items change significantly, the Company may need to alter the amount of its valuation allowance in the future through a favorable or unfavorable adjustment to net income.


(8)	Equity-Based Compensation

The Company accounts for equity-based compensation, such as stock options and other stock-based awards to employees and directors, at fair value. The fair value of the compensation is measured at the date of grant and recognized as expense over the recipient’s requisite service period.

The Company’s equity-based compensation consists primarily of stock options and restricted stock granted by the Company’s parent, USPI Group Holdings, Inc., to certain employees and members of the board of directors. In addition, one of the Company’s wholly-owned subsidiaries granted a limited number of stock options to purchase shares of that subsidiary’s stock to certain of its employees in January 2008. The fair value of stock options was estimated at the date of grant using the Black-Scholes formula based on assumptions derived from historical experience.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements (Unaudited) — (Continued)

Total equity-based compensation included in the accompanying consolidated statements of income, classified by line item, is as follows (in thousands):


	Three Months			Nine Months			Three Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2010			2009			2009

Salaries, benefits and other employee costs	$	175		$	540		$	210		$	594
General and administrative expenses		285			843			257			738
Other operating expenses		—			—			—			131

Expense before income tax benefit		460			1,383			467			1,463
Income tax benefit		(92	)		(287	)		(98	)		(287	)

Total equity-based compensation expense, net of tax	$	368		$	1,096		$	369		$	1,176

Total equity-based compensation, included in the accompanying consolidated statements of income, classified by type of award, is as follows (in thousands):


	Three Months			Nine Months			Three Months			Nine Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,
	2010			2010			2009			2009

Share awards	$	332		$	993		$	304		$	889
Stock options		128			390			163			443
Warrants		—			—			—			131

Expense before income tax benefit		460			1,383			467			1,463
Income tax benefit		(92	)		(287	)		(98	)		(287	)

Total equity-based compensation expense, net of tax	$	368		$	1,096		$	369		$	1,176

The Company has also granted warrants to hospital partners. The warrants are to purchase USPI Group Holdings, Inc. common stock and were fully vested and non-forfeitable at the date of grant but contain exercise restrictions. Because the warrants are fully vested, the expense associated with them was recorded upon grant within other operating expenses at a fair value determined using the Black-Scholes formula. One grant was made during the nine months ended September 30, 2009. In this grant, one of the Company’s hospital partners received 333,330 warrants with an exercise price of $3.00 per share, of which 55,555 are exercisable immediately; the exercise restrictions on additional tranches of 55,555 warrants lapse each December 1 beginning in 2009 and ending in 2013. These warrants have a contractual life of approximately 81/2 years and a fair value of approximately $0.1 million.


(9)	Segment Disclosures

The Company’s business is the operation of surgical facilities and related businesses in the United States and the United Kingdom. The Company’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

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Notes to Consolidated Financial Statements (Unaudited) — (Continued)

allocating resources both domestically and abroad. Accordingly, the Company’s reportable segments consist of (1) U.S. based facilities and (2) U.K. based facilities and are as follows (in thousands):


	United			United
Three Months Ended September 30, 2010	States			Kingdom			Total

Net patient service revenues	$	100,948		$	25,113		$	126,061
Other revenues		22,729			—			22,729

Total revenues	$	123,677		$	25,113		$	148,790

Depreciation and amortization	$	6,442		$	1,852		$	8,294
Operating income		46,222			3,827			50,049
Net interest expense		(16,552	)		(569	)		(17,121	)
Income tax expense		(6,441	)		(806	)		(7,247	)
Total assets		2,018,663			331,996			2,350,659
Capital expenditures		11,891			7,326			19,217


	United			United
Nine Months Ended September 30, 2010	States			Kingdom			Total

Net patient service revenues	$	301,202		$	76,275		$	377,477
Other revenues		66,367			—			66,367

Total revenues	$	367,569		$	76,275		$	443,844

Depreciation and amortization	$	19,827		$	5,253		$	25,080
Operating income		147,643			11,983			159,626
Net interest expense		(49,991	)		(2,440	)		(52,431	)
Income tax expense		(22,258	)		(2,416	)		(24,674	)
Total assets		2,018,663			331,996			2,350,659
Capital expenditures		23,363			18,372			41,735


	United			United
Three Months Ended September 30, 2009	States			Kingdom			Total

Net patient service revenues	$	102,438		$	27,150		$	129,588
Other revenues		22,793			—			22,793

Total revenues	$	125,231		$	27,150		$	152,381

Depreciation and amortization	$	6,921		$	1,824		$	8,745
Operating income		50,844			4,538			55,382
Net interest expense		(16,530	)		(539	)		(17,069	)
Income tax benefit (expense)		25,209			(1,086	)		24,123
Total assets		2,071,602			319,168			2,390,770
Capital expenditures		3,123			3,097			6,220

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)


	United			United
Nine Months Ended September 30, 2009	States			Kingdom			Total

Net patient service revenues	$	319,076		$	77,903		$	396,979
Other revenues		68,908			—			68,908

Total revenues	$	387,984		$	77,903		$	465,887

Depreciation and amortization	$	21,606		$	5,004		$	26,610
Operating income		153,473			15,641			169,114
Net interest expense		(50,224	)		(899	)		(51,123	)
Income tax expense		13,658			(4,154	)		9,504
Total assets		2,071,602			319,168			2,390,770
Capital expenditures		11,664			7,215			18,879

(10) Related Party Transactions

Included in general and administrative expenses are management fees payable to an affiliate of Welsh Carson, which holds a controlling interest in the Company, in the amount of $0.5 million and $1.5 million in the three months and nine months ended September 30, 2010 and 2009, respectively. Such amounts accrue at an annual rate of $2.0 million. The Company pays $1.0 million in cash per year with the unpaid balance due and payable upon a change in control. At September 30, 2010, the Company had approximately $4.0 million accrued related to such management fee, of which $0.5 million is included in other current liabilities and $3.5 million is included in other long-term liabilities in the accompanying consolidated balance sheet.


(11)	Commitments and Contingencies

As of September 30, 2010, the Company had issued guarantees of the indebtedness and other obligations of its investees to third parties, which could potentially require the Company to make maximum aggregate payments totaling approximately $56.9 million. Of the total, $26.1 million relates to the obligations of consolidated subsidiaries, whose obligations are included in the Company’s consolidated balance sheet and related disclosures, and $22.0 million of the remaining $30.8 million relates to the obligations of unconsolidated affiliated companies, whose obligations are not included in the Company’s consolidated balance sheet and related disclosures. The remaining $8.8 million represents guarantees of the obligations of two facilities the Company has sold. The Company has full recourse to the buyers with respect to these amounts.

The Company has recorded long-term liabilities totaling approximately $0.2 million related to the guarantees the Company has issued to unconsolidated affiliates on or after January 1, 2003, and has not recorded any liabilities related to guarantees issued prior to that date. 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. The Company also has $1.6 million of letters of credit outstanding.


(12)	Subsequent Events

The Company has entered into letters of intent with various entities regarding possible joint venture, development, or other transactions. These possible joint ventures, developments of new facilities, or other transactions are in various stages of negotiation.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

In October 2010, the Company paid $6.0 million (classified within other operating expenses in the accompanying consolidated statements of income for the three and nine months ended September 30, 2010) in conjunction with resolving a dispute related to the value of an acquisition the Company made in a prior year and obtaining an option to acquire two surgical facilities in the future.

Effective November 1, 2010, the Company completed the acquisition of 100% of the equity interests in HealthMark Partners, Inc. (HealthMark), a privately-held, Nashville-based owner and operator of surgery centers. HealthMark has an equity investment in 14 surgery centers, 11 of which are located in markets in which the Company already operates. The Company paid cash totaling approximately $32.0 million, subject to certain purchase price adjustments set forth in the purchase agreement. The Company funded the purchase through cash on hand and a $25.0 million borrowing under the Company’s revolving credit agreement.


(13)	Condensed Consolidating Financial Statements

The following information is presented as required by regulations of the Securities and Exchange Commission (SEC) in connection with the Company’s subordinated notes that have been registered with the SEC. 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 $240.0 million of 87/8% senior subordinated notes and $200.0 million of 91/4%/10% senior subordinated toggle notes, all due 2017 (the Notes), were issued in a private offering on April 19, 2007 and were subsequently registered as publicly traded securities through a Form S-4 declared effective by the SEC on July 25, 2007. The exchange offer was completed in August 2007. The Notes are unsecured senior subordinated obligations of the Company; however, the Notes are guaranteed by all of the Company’s current and future direct and indirect wholly-owned domestic subsidiaries. USPI, which issued the Notes, does not have independent assets or operations. USPI’s investees in 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. Consolidation adjustments include purchase accounting entries for investments in which the Company’s ownership percentage in non-participating investees is not high enough to permit the application of pushdown accounting.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

Condensed Consolidating Balance Sheets:


			Non-Participating		Consolidation			Consolidated
As of September 30, 2010	Guarantors		Investees		Adjustments			Total

ASSETS
Current assets:
Cash and cash equivalents	$	48,434	$	12,292	$	—		$	60,726
Accounts receivable, net		—		48,087		—			48,087
Other receivables		49,642		40,401		(69,903	)		20,140
Inventories of supplies		573		8,378		—			8,951
Prepaids and other current assets		18,952		2,742		—			21,694

Total current assets		117,601		111,900		(69,903	)		159,598
Property and equipment, net		15,134		200,457		162			215,753
Investments in unconsolidated affiliates		981,681		—		(634,561	)		347,120
Goodwill and intangible assets, net		894,223		352,321		355,281			1,601,825
Other assets		94,884		3,429		(71,950	)		26,363

Total assets	$	2,103,523	$	668,107	$	(420,971	)	$	2,350,659


LIABILITIES AND EQUITY
Liabilities and Equity
Current liabilities:
Accounts payable	$	1,498	$	20,203	$	—		$	21,701
Accrued expenses and other		213,131		55,884		(68,299	)		200,716
Current portion of long-term debt		5,502		23,424		88			29,014

Total current liabilities		220,131		99,511		(68,211	)		251,431
Long-term debt, less current portion		942,739		102,412		(8,504	)		1,036,647
Other long-term liabilities		152,527		10,199		(206	)		162,520
Parent’s equity		788,126		434,187		(434,187	)		788,126
Noncontrolling interests		—		21,798		90,137			111,935

Total liabilities and equity	$	2,103,523	$	668,107	$	(420,971	)	$	2,350,659

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)


			Non-Participating		Consolidation			Consolidated
As of December 31, 2009	Guarantors		Investees		Adjustments			Total

ASSETS
Current assets:
Cash and cash equivalents	$	27,430	$	7,460	$	—		$	34,890
Accounts receivable, net		—		54,202		35			54,237
Other receivables		46,975		45,776		(77,505	)		15,246
Inventories of supplies		428		8,361		—			8,789
Prepaids and other current assets		26,264		4,518		—			30,782

Total current assets		101,097		120,317		(77,470	)		143,944
Property and equipment, net		16,197		181,857		452			198,506
Investments in unconsolidated affiliates		1,027,814		—		(672,315	)		355,499
Goodwill and intangible assets, net		857,802		353,212		391,173			1,602,187
Other assets		96,205		2,213		(73,162	)		25,256

Total assets	$	2,099,115	$	657,599	$	(431,322	)	$	2,325,392


LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	1,396	$	22,079	$	—		$	23,475
Accrued expenses and other		235,904		50,200		(75,956	)		210,148
Current portion of long-term debt		5,480		20,116		(2,259	)		23,337

Total current liabilities		242,780		92,395		(78,215	)		256,960
Long-term debt, less current portion		952,311		118,892		(23,012	)		1,048,191
Other long-term liabilities		146,072		13,122		(821	)		158,373
Parent’s equity		757,952		412,362		(412,362	)		757,952
Noncontrolling interests		—		20,828		83,088			103,916

Total liabilities and equity	$	2,099,115	$	657,599	$	(431,322	)	$	2,325,392

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

Condensed Consolidating Statements of Income:


				Non-Participating			Consolidation			Consolidated
For the Nine Months Ended September 30, 2010	Guarantors			Investees			Adjustments			Total

Revenues	$	71,220		$	389,041		$	(16,417	)	$	443,844
Equity in earnings of unconsolidated affiliates		96,522			1,744			(48,512	)		49,754
Operating expenses, excluding depreciation and amortization		56,324			269,030			(16,462	)		308,892
Depreciation and amortization		5,422			19,502			156			25,080

Operating income		105,996			102,253			(48,623	)		159,626
Interest expense, net		(45,826	)		(6,515	)		(90	)		(52,431	)
Other income (expense), net		383			(738	)		659			304

Income from before income taxes		60,553			95,000			(48,054	)		107,499
Income tax expense		(20,807	)		(3,867	)		—			(24,674	)

Net income		39,746			91,133			(48,054	)		82,825
Less: Net income attributable to noncontrolling interests		—			(8,571	)		(34,508	)		(43,079	)

Net income attributable to Parent	$	39,746		$	82,562		$	(82,562	)	$	39,746


				Non-Participating			Consolidation			Consolidated
For the Nine Months Ended September 30, 2009	Guarantors			Investees			Adjustments			Total

Revenues	$	72,396		$	410,190		$	(16,699	)	$	465,887
Equity in earnings of unconsolidated affiliates		97,831			1,580			(56,301	)		43,110
Operating expenses, excluding depreciation and amortization		54,909			275,095			(16,731	)		313,273
Depreciation and amortization		5,408			20,905			297			26,610

Operating income		109,910			115,770			(56,566	)		169,114
Interest expense, net		(45,365	)		(6,067	)		309			(51,123	)
Other income (expense), net		(19,053	)		141			(233	)		(19,145	)

Income from before income taxes		45,492			109,844			(56,490	)		98,846
Income tax benefit (expense)		15,651			(6,147	)		—			9,504

Net income		61,143			103,697			(56,490	)		108,350
Less: Net income attributable to noncontrolling interests		—			(7,634	)		(39,573	)		(47,207	)

Net income attributable to Parent	$	61,143		$	96,063		$	(96,063	)	$	61,143

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

Condensed Consolidating Statements of Cash Flows:


				Non-Participating			Consolidation			Consolidated
Nine Months Ended September 30, 2010	Guarantors			Investees			Adjustments			Total

Cash flows from operating activities:
Net income	$	39,746		$	91,133		$	(48,054	)	$	82,825
Changes in operating and intercompany assets and liabilities and noncash items included in net income		27,302			24,998			7,012			59,312

Net cash provided by operating activities		67,048			116,131			(41,042	)		142,137
Cash flows from investing activities:
Purchases of property and equipment, net		(3,288	)		(25,885	)		—			(29,173	)
Purchases and sales of businesses and equity interests, net		(5,313	)		—			—			(5,313	)
Other items, net		(3,775	)		4,353			(840	)		(262	)

Net cash provided by (used in) investing activities		(12,376	)		(21,532	)		(840	)		(34,748	)
Cash flows from financing activities:
Long-term borrowings, net		(8,949	)		(8,782	)		1,148			(16,583	)
Purchases and sales of noncontrolling interests, net		880			348			—			1,228
Distributions to noncontrolling interests		—			(86,175	)		41,042			(45,133	)
Decrease in cash held on behalf of noncontrolling interest holders and other		(25,599	)		4,659			(308	)		(21,248	)

Net cash provided by (used in) financing activities		(33,668	)		(89,950	)		41,882			(81,736	)
Effect of exchange rate changes on cash		—			183			—			183

Net increase in cash		21,004			4,832			—			25,836
Cash at the beginning of the period		27,430			7,460			—			34,890

Cash at the end of the period	$	48,434		$	12,292		$	—		$	60,726

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)


				Non-Participating			Consolidation			Consolidated
Nine Months Ended September 30, 2009	Guarantors			Investees			Adjustments			Total

Cash flows from operating activities:
Net income	$	61,143		$	103,697		$	(56,490	)	$	108,350
Changes in operating and intercompany assets and liabilities and noncash items included in net income		(30	)		20,162			16,697			36,829

Net cash provided by operating activities		61,113			123,859			(39,793	)		145,179
Cash flows from investing activities:
Purchases of property and equipment, net		(3,966	)		(13,050	)		—			(17,016	)
Purchases and sales of businesses and equity interests, net		(8,862	)		(1,902	)		—			(10,764	)
Other items, net		(1,495	)		(6,886	)		7,308			(1,073	)

Net cash used in investing activities		(14,323	)		(21,838	)		7,308			(28,853	)
Cash flows from financing activities:
Long-term borrowings, net		(6,434	)		(14,314	)		1,105			(19,643	)
Purchases and sales of noncontrolling interests, net		1,791			—			—			1,791
Distributions to noncontrolling interests		—			(87,228	)		39,793			(47,435	)
Increase in cash held on behalf of noncontrolling interest holders and other		62,773			1,527			(8,413	)		55,887

Net cash provided by (used in) financing activities		58,130			(100,015	)		32,485			(9,400	)
Effect of exchange rate changes on cash		—			182			—			182

Net increase in cash		104,920			2,188			—			107,108
Cash at the beginning of the period		42,025			7,410			—			49,435

Cash at the end of the period	$	146,945		$	9,598		$	—		$	156,543


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 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: our significant indebtedness, general economic and business conditions, including without limitation the condition of financial markets, both nationally and internationally; foreign currency fluctuations; demographic changes; changes in, or the failure to comply with, laws and governmental regulations; the ability to enter into or renew managed care provider arrangements on acceptable terms; changes in Medicare, Medicaid and other government funded payments or reimbursement in the United States and the United Kingdom; the efforts of insurers, healthcare providers and others to contain healthcare costs; the impact of healthcare reform; 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 physicians and personnel, including nurses and other health care professionals; 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 hospitals in the United States and the United Kingdom. As of September 30, 2010, we operated 174 facilities, consisting of 170 in the United States and four in the United Kingdom. All 170 of our U.S. facilities include local physician owners, and 117 of these facilities are also partially owned by various not-for-profit healthcare systems (hospital partners). In addition to facilitating the joint ownership of the majority of our existing facilities, our agreements with hospital partners provide a framework for the planning and construction of additional facilities in the future, including all three of the facilities we are currently constructing and the two additional projects we are developing. During the first nine months of 2010, we have added seven facilities. We opened our newest facility, a surgery center in Austin, Texas, in August 2010. We also opened a surgical hospital in Arlington, Texas in February 2010, and we acquired ownership in five additional facilities, four of which are owned with a hospital partner.

Effective November 1, 2010, we completed the acquisition of 100% of the equity interests in HealthMark Partners, Inc. (HealthMark), a privately-held, Nashville-based owner and operator of surgery centers. HealthMark has an equity investment in 14 surgery centers, 11 of which are located in markets in which we already operate. We paid cash totaling approximately $32.0 million, subject to certain purchase price adjustments set forth in the purchase agreement. We funded the purchase through cash on hand and a $25.0 million borrowing under our revolving credit agreement.

Our U.S. facilities, consisting of ambulatory surgery centers and hospitals, specialize in non-emergency surgical cases. Due in part to advancements in medical technology, the volume of surgical cases performed in an

outpatient setting has steadily increased over the past two decades. Our 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 earn a monthly fee from each facility we operate in exchange for managing its operations. All but four of our facilities are located in the U.S., where we have focused increasingly on adding facilities with hospital partners, which we believe improves the long-term profitability and potential of our facilities.

Our U.S. facilities include 13 hospitals, each of which had a Medicare provider agreement prior to the enactment of the recent healthcare reform legislation. These facilities will, however, be impacted by the reform legislation in that they will be prohibited from adding additional beds, operating rooms or treatment rooms, and the aggregate physician ownership in each of these entities cannot increase over the total percentage interest owned by physicians on the date of enactment. In addition, one project currently under construction is a hospital to be owned in partnership with a hospital partner in Phoenix, Arizona. For new physician-owned hospitals, the reform legislation includes a deadline to obtain a Medicare provider agreement on or before December 31, 2010. The hospital is not expected to have a Medicare provider agreement before that date. Therefore, if there is no additional legislative action, physicians will not be permitted to own an interest in this hospital.

In the United Kingdom, we operate three hospitals and an oncology center, which supplement the services provided by the government-sponsored healthcare system. Our patients choose to receive care at private 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, which is offered by many employers as a benefit to their employees. Since acquiring our first two hospitals in the United Kingdom in 2000, we have expanded selectively by acquiring a third hospital and increasing the capacity and services offered at each facility, including the construction of an oncology center near the campus of our largest hospital. Most recently, we expanded the campus of our largest U.K. hospital by adding an outpatient facility, which was completed in August 2010.

Our growth and success depends on our ability to continue to grow volumes at our existing facilities, to successfully open new facilities we develop, to successfully integrate acquired facilities into our operations, and to maintain productive relationships with our physician and hospital partners. We believe we will have significant opportunities to operate more facilities with hospital partners in the future in existing and new markets.

Due to our partnerships with physician and hospital partners, we do not consolidate 114 of the 174 facilities we operate. To help analyze our results of operations, we disclose an operating measure we refer to as systemwide revenue growth, which includes both consolidated and unconsolidated facilities. While revenues of our unconsolidated facilities are not recorded as revenues by USPI, we believe the information is important in understanding USPI’s financial performance because these revenues are the basis for calculating the Company’s management services revenues and, together with the expenses of our unconsolidated facilities, are the basis for USPI’s equity in earnings of unconsolidated affiliates. In addition, we disclose growth rates and operating margins for the facilities that were operational in both the current and prior year periods, a group we refer to as same store facilities.

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 that impact the reported amounts 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 consolidated 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 hospital partners, physicians, and other parties. These quarterly consolidated financial statements have been prepared using the same consolidation policy as that used in our latest audited consolidated 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. There have been no significant changes in our application of GAAP to intangible assets since the preparation of our latest audited consolidated financial statements.

Our revenue recognition and accounts receivable policy and our 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 consolidated financial statements from the assumptions, estimates, and judgments used in the preparation of our latest audited consolidated financial statements.

Acquisitions, Equity Investments and Development Projects

As part of our growth strategy, we acquire interests in existing surgical facilities from third parties and invest in new facilities that we develop in partnership with hospital partners and local physicians. We obtained control of a surgical facility in St. Louis, Missouri in May 2010. The purchase price was $4.6 million in cash.

We also regularly engage in the purchase and sale of equity interests with respect to our investments in unconsolidated affiliates that do not result in a change of control. These transactions are primarily the acquisitions and sales of equity interests in unconsolidated surgical facilities and the investment of additional cash in surgical facilities under development. During the nine months ended September 30, 2010, these transactions resulted in a net cash outflow of approximately $0.7 million, which is summarized below:


Effective Date	Facility Location	Amount

Investments
April 2010	Destin, Florida(1)	$	1.3 million
April 2010	St. Louis, Missouri(2)		0.4 million
May 2010	Mansfield, Texas(3)		0.6 million
July 2010	Carrollton, Texas(3)		0.8 million
July 2010	Sacramento, California(4)		1.5 million
Various	Various(5)		4.0 million

			8.6 million
Sales
June 2010	Cincinnati, Ohio(6)		7.9 million

Total		$	0.7 million


(1)		Acquisition of an additional noncontrolling interest in a surgical facility in which we already held an investment. This facility is jointly owned with local physicians.

(2)		Acquisition of a noncontrolling interest in a surgical facility in which we already provided management services. This facility is jointly owned with one of our hospital partners and local physicians.

(3)		Acquisition of the right to manage a surgical facility in which we previously had no involvement. Concurrent with this transaction, an unconsolidated investee the we jointly own with a hospital partner used cash on hand to acquire an equity interest in this facility, resulting in our having an indirect ownership interest in the facility. The remainder of this facility is owned by local physicians.

(4)		Acquisition of a noncontrolling interest in and right to manage a surgical facility in which we previously had no involvement. This facility is jointly owned with one of our hospital partners and local physicians.


(5)		Represents the net purchase of additional ownership and equity contributions in various other unconsolidated affiliates, including $3.1 million paid for additional ownership in four centers we already operated.

(6)		Sale of a portion of our equity ownership in one facility to a hospital partner.

We control and therefore consolidate the results of 60 of our 174 facilities. Similar to our investments in unconsolidated affiliates, we regularly engage in the purchase and sale of equity interests in our consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions, as they are undertaken among us, our consolidated subsidiaries, and noncontrolling interests. During the nine months ended September 30, 2010, we purchased and sold equity interests in various U.S. consolidated subsidiaries in the amounts of $1.3 million and $2.2 million, respectively. The difference between our carrying amount and the proceeds received or paid in each transaction is recorded as an adjustment to our additional paid-in capital. These transactions resulted in a $6.1 million net decrease to our additional paid-in capital during the nine months ended September 30, 2010.

Deconsolidations

As part of our strategy of partnering with physicians and not-for-profit health systems, the Company from time to time surrenders control of an entity but retains a noncontrolling interest (classified within “investments in unconsolidated affiliates” in the accompanying consolidated balance sheets). These transactions result in a gain or loss, computed as the difference between (a) the sales proceeds and fair value of the retained investment and (b) our carrying value of the investment prior to the transaction. During the nine months ended September 30, 2010, we completed one such deconsolidation transaction by merging two of our facilities. The impact was not material.

A deconsolidation transaction we completed in March 2009 had a more significant impact. In this transaction, we sold a controlling interest in an entity to a hospital partner. The hospital partner already had a 49% ownership interest in this entity, which owns and manages two surgical facilities in the Phoenix, Arizona area and through the transaction acquired an additional 1.1% interest. We received proceeds of approximately $0.1 million and recorded a pretax loss of approximately $8.2 million, which was primarily related to the revaluation of our remaining investment in the entity to fair value. The loss on this transaction is recorded in “Other, net” in the accompanying consolidated statements of income.

Fair values for the retained noncontrolling interests are estimated based on market multiples and discounted cash flow models which have been derived from our experience in acquiring surgical facilities and by third party valuations we have obtained with respect to such transactions. Our continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations.

Sources of Revenue

Revenues primarily include the following:


	•	net patient service revenues 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 contract service revenues, 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 and hospitals. 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.

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


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net patient service revenues		85	%		85	%		85	%		85	%
Management and contract service revenues		14			13			14			13
Other revenues		1			2			1			2

Total revenues		100	%		100	%		100	%		100	%

Net patient service revenues consist of the revenues earned by facilities we consolidate for financial reporting purposes. As a percent of our total revenues, these revenues did not significantly change compared to prior year periods.

Our management and contract service revenues are earned from the following types of activities (in thousands):


	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
	2010		2009		2010		2009

Management of surgical facilities	$	13,236	$	11,527	$	38,855	$	34,194
Contract services provided to hospitals, physicians and related entities		7,776		7,994		22,377		23,379

Total management and contract service revenues	$	21,012	$	19,521	$	61,232	$	57,573

As described above, our primary business is the operation of surgical facilities. In addition, we earn contract service revenues from other parties, primarily from hospitals through an endoscopy services business we acquired in 2006.

The following table summarizes our revenues by operating segment:


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2010			2009			2010			2009

United States		83	%		82	%		83	%		83	%
United Kingdom		17			18			17			17

Total		100	%		100	%		100	%		100	%

The proportion of our total revenues derived from U.K. operations as stated in U.S. dollars did not change significantly, as compared to the corresponding prior year periods.

Results of Operations

The following table summarizes certain statement of income items expressed as a percentage of revenues for the periods indicated:


	Three Months						Nine Months
	Ended September 30,						Ended September 30,
USPI	2010			2009			2010			2009

Total revenues		100.0	%		100.0	%		100.0	%		100.0	%
Equity in earnings of unconsolidated affiliates		11.6			9.8			11.2			9.3
Operating expenses, excluding depreciation and amortization		(72.4	)		(67.7	)		(69.5	)		(67.2	)
Depreciation and amortization		(5.6	)		(5.8	)		(5.7	)		(5.8	)

Operating income		33.6			36.3			36.0			36.3
Interest and other expense, net		(11.2	)		(17.0	)		(11.7	)		(15.1	)

Income from before income taxes		22.4			19.3			24.3			21.2
Income tax (expense) benefit		(4.8	)		15.8			(5.6	)		2.0

Net income		17.6			35.1			18.7			23.2
Less: Net income attributable to noncontrolling interests		(9.6	)		(9.7	)		(9.7	)		(10.1	)

Net income attributable to USPI’s common stockholder		8.0	%		25.4	%		9.0	%		13.1	%

Our business model of partnering with not-for-profit hospitals and physicians results in our accounting for 114 of our surgical facilities under the equity method rather than consolidating their results. The following table reflects the summarized results of the unconsolidated facilities that we account for under the equity method of accounting (amounts are expressed as a percentage of unconsolidated affiliates’ revenues, and reflect 100% of the investees’ results on an aggregated basis):


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
USPI’s Unconsolidated Affiliates	2010			2009			2010			2009

Total revenues		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses, excluding depreciation and amortization		(70.8	)		(71.0	)		(70.8	)		(70.4	)
Depreciation and amortization		(4.2	)		(4.3	)		(4.2	)		(4.4	)

Operating income		25.0			24.7			25.0			25.2
Interest and other expense, net		(2.0	)		(1.8	)		(1.8	)		(1.9	)

Income before income taxes		23.0			22.9			23.2			23.3
Income tax expense		(0.6	)		(0.6	)		(0.6	)		(0.5	)

Net income		22.4	%		22.3	%		22.6	%		22.8	%

Executive Summary

Our strategy continues to focus on growing the profits of our existing facilities, developing new facilities with hospital partners, and adding other facilities selectively through acquisition. Our progress during the nine months ended September 30, 2010 included opening two new facilities with hospital partners in February 2010 and August 2010 and adding a hospital partner to two facilities we already operated. We also added, through acquisition, two additional facilities in the St. Louis, Missouri area, one additional facility in the Sacramento, California area, and one additional facility in the Dallas / Fort Worth area. Our operating results, while still not as strong as in recent years, improved in the second and third quarters of 2010 as compared to the first quarter.

Our U.S. facilities’ surgical case volumes (including both consolidated and unconsolidated facilities) during the three months ended September 30, 2010 were essentially flat compared to the third quarter of 2009. While

volumes have typically increased in prior years, this represented an improvement compared to the first quarter, when volumes were down 2% compared to the prior year period. Despite the lack of growth in case volume, our overall U.S. systemwide revenues (a measure that also includes both consolidated and unconsolidated facilities) increased on a year-over-year basis by 7% in the third quarter. The increase in systemwide revenues is driven by our facilities performing more complex cases on average, the effect of which more than offset adverse changes in our payor mix, as fewer of our revenues were earned from the more profitable payors.

While our systemwide revenues grew, USPI’s reported revenues (consisting only of consolidated businesses) decreased compared to prior year by 5% for the nine months ended September 30, 2010. This decrease was driven by two factors related to the deployment of our primary business model, which is jointly owning our facilities with prominent local physicians and a hospital partner. We generally do not consolidate the businesses in these structures, but our profits from them (reflected in equity in earnings of unconsolidated affiliates) increased 16% and 15% during the three and nine months ended September 30, 2010, respectively, as compared to the corresponding prior year periods. The revenues of these facilities are growing more than our consolidated facilities; their revenues (not included in ours) increased $63.0 million during the nine months ended September 30, 2010 as compared to the prior year period, and grew an additional $13.0 million as a result of our partnering five of these facilities with a hospital partner so far in 2010, thereby moving their revenues out of our consolidated revenues and into the revenues of our unconsolidated group of facilities. Our consolidated revenues decreased both due to declines in operational results ($13.5 million) and due to the “deconsolidation” transactions described above (the movement of $13.0 million of revenues from the consolidated to the unconsolidated group).

On a year-to-date basis, operating income was down 6%, driven largely by a $6.0 million payment recorded in the third quarter of 2010 related to an unconsolidated acquisition and option on a potential acquisition and by the drop in cases during the first quarter of 2010. The comparability of year-over-year operating income is also impacted by a value-added tax (VAT) assessment in the United Kingdom, which increased operating income by $1.0 million in the second quarter of 2009 and decreased it by an equal amount in the first quarter of 2010, when the taxing authority reversed its position on amounts it had awarded in 2009. We are appealing the decision. Absent the VAT amounts in each period and the payment noted above, operating income was still down 1% on a year-to-date basis, but operating income margin was up 140 basis points, driven largely by a 15% increase in equity in earnings of unconsolidated affiliates, which represents our share of the net income of the 114 facilities we account for under the equity method.

While the leveraging of overall operating expenses was also a contributing factor to the improvement in USPI’s operating income margin, we additionally focus on U.S. same store facility level operating income margins (which reflect all facilities) as indicators of the trend of our business, because our earnings and cash flows are heavily driven by the results at those facilities, whether we consolidate them or not. Those margins actually decreased year-over-year by 30 and 110 basis points for the three months and nine months ended September 30, 2010, respectively, reflecting the lack of case growth described above. Because of relationships like these (differences in the magnitude or direction of consolidated versus systemwide revenues and margins), which often are driven by “deconsolidations” such as the five described above, we supplementally focus on systemwide revenues and facility level operating income margins as important indicators for our business, given that our earnings ultimately are driven heavily by facility level revenues and operating margins.

As noted above, despite weaker case growth than we have historically experienced, we continued to grow the revenues of our facilities and to leverage operating expenses, resulting in a 1% year-over-year increase to operating income during the third quarter, excluding the $6.0 million payment recorded in the third quarter of 2010. Both case volume and operating income indicators at our facilities improved in the second and third quarter compared to the first quarter, but our year-to-date operating income remains 2% behind prior year, excluding the $6.0 million payment described above. Our development strategy continues to focus on markets in which we have a significant presence with prominent local physicians and often a hospital partner and selectively in new markets. This strategy resulted in our increasing the number of hospital-partnered facilities by 18 from January 1, 2009 to September 30, 2010 and decreasing by nine the number of facilities not involving a hospital partner.

Our Business and Key Measures

We operate surgical facilities in partnership with local physicians and, in the majority of cases, a not-for-profit health system partner. We hold an ownership interest in each facility, each being operated through a separate legal entity owned by us, the health systems and physicians. We operate each facility on a day-to-day basis through a management services contract. Our sources of earnings from each facility consist of:


	•	our share of each facility’s net income or loss, which is computed by multiplying the facility’s net income or loss times the percentage of each facility’s equity interests owned by us.

	•	management services revenues, computed as a percentage of each facility’s net revenues (often net of bad debt expense); and

Our role as an owner and day-to-day manager provides us with significant influence over the operations of each facility. In a growing majority of our facilities (currently 114 of our 174 facilities), this influence does not represent control of the facility, so we account for our investment in the facility under the equity method, i.e., as an unconsolidated affiliate. We control the remaining 60 of our facilities and account for these investments as consolidated subsidiaries.

Our net earnings from a facility are the same under either method, but the classification of those earnings differs. For consolidated subsidiaries, our financial statements reflect 100% of the revenues and expenses of the subsidiaries, after the elimination of intercompany amounts. The net profit attributable to owners other than us is classified within “net income attributable to noncontrolling interests.”

For unconsolidated affiliates, our consolidated statements of income reflect our earnings in only two line items:


	•	equity in earnings of unconsolidated affiliates: our share of the net income of each facility, which is based on the facilities’ net income or loss and the percentage of the facility’s outstanding equity interests owned by us; and

	•	management and administrative services revenues: income we earn in exchange for managing the day-to-day operations of each facility, usually quantified as a percentage of each facility’s net revenues less bad debt expense.

In summary, USPI’s operating income is driven by the performance of all facilities we operate and by our ownership interest in those facilities, but USPI’s individual revenue and expense line items only contain consolidated businesses, which represent less than half of our operations. This translates to trends in operating income that often do not correspond with changes in revenues and expenses. The divergence in these relationships is particularly significant when our strategy is heavily weighted to unconsolidated affiliates, as it has been in recent years. Accordingly, we review several types of information in order to monitor and analyze USPI’s results of operations, including:


	•	The results of operations of USPI’s unconsolidated affiliates

	•	USPI’s average ownership share in the facilities we operate; and

	•	Facility operating indicators, such as systemwide revenue growth, same store revenue growth, and same store operating margins

Our Consolidated and Unconsolidated Results

The following table shows USPI’s results of operations and the results of operations of USPI’s unconsolidated affiliates (in thousands).


	Three Months Ended September 30,
	2010						2009						Variance to Prior Year
	USPI as						USPI as						USPI as
	Reported						Reported						Reported
	Under			Unconsolidated			Under			Unconsolidated			Under			Unconsolidated
	GAAP			Affiliates			GAAP			Affiliates			GAAP			Affiliates

Revenues:
Net patient service revenues	$	126,061		$	328,153		$	129,588		$	292,800		$	(3,527	)	$	35,353
Management and administrative services revenues		21,012			—			19,521			—			1,491			—
Other income		1,717			726			3,272			407			(1,555	)		319

Total revenues		148,790			328,879			152,381			293,207			(3,591	)		35,672
Equity in earnings of unconsolidated affiliates		17,247			—			14,913			—			2,334			—
Operating expenses:
Salaries, benefits and other employee costs		42,763			77,875			44,223			71,391			(1,460	)		6,484
Medical services and supplies		24,347			76,520			25,451			68,086			(1,104	)		8,434
Other operating expenses		28,926			69,665			21,210			60,808			7,716			8,857
General and administrative expenses		9,626			—			9,609			—			17			—
Provision for doubtful accounts		2,032			8,927			2,674			7,910			(642	)		1,017
Depreciation and amortization		8,294			13,813			8,745			12,645			(451	)		1,168

Total operating expenses		115,988			246,800			111,912			220,840			4,076			25,960

Operating income		50,049			82,079			55,382			72,367			(5,333	)		9,712
Interest income		212			88			520			89			(308	)		(1	)
Interest expense		(17,333	)		(6,519	)		(17,589	)		(6,130	)		256			(389	)
Other, net		476			(46	)		(8,925	)		838			9,401			(884	)

Total other expenses, net		(16,645	)		(6,477	)		(25,994	)		(5,203	)		9,349			(1,274	)

Income before income taxes		33,404			75,602			29,388			67,164			4,016			8,438
Income tax (expense) benefit		(7,247	)		(1,993	)		24,123			(1,708	)		(31,370	)		(285	)

Net income		26,157		$	73,609			53,511		$	65,456			(27,354	)	$	8,153

Less: Net income attributable to noncontrolling interests		(14,309	)					(14,807	)					498

Net income attributable to USPI’s common stockholder	$	11,848					$	38,704					$	(26,856	)

USPI’s equity in earnings of unconsolidated affiliates				$	17,247					$	14,913					$	2,334


	Nine Months Ended September 30,
	2010						2009						Variance to Prior Year
	USPI as						USPI as						USPI as
	Reported						Reported						Reported
	Under			Unconsolidated			Under			Unconsolidated			Under			Unconsolidated
	GAAP			Affiliates			GAAP			Affiliates			GAAP			Affiliates

Revenues:
Net patient service revenues	$	377,477		$	946,521		$	396,979		$	849,849		$	(19,502	)	$	96,672
Management and administrative services revenues		61,232			—			57,573			—			3,659			—
Other income		5,135			1,829			11,335			2,830			(6,200	)		(1,001	)

Total revenues		443,844			948,350			465,887			852,679			(22,043	)		95,671
Equity in earnings of unconsolidated affiliates		49,754			—			43,110			—			6,644			—
Operating expenses:
Salaries, benefits and other employee costs		124,226			224,641			130,089			204,485			(5,863	)		20,156
Medical services and supplies		74,203			222,362			76,019			194,973			(1,816	)		27,389
Other operating expenses		76,817			200,652			69,904			180,631			6,913			20,021
General and administrative expenses		27,295			—			29,708			—			(2,413	)		—
Provision for doubtful accounts		6,351			23,403			7,553			19,900			(1,202	)		3,503
Depreciation and amortization		25,080			40,636			26,610			37,474			(1,530	)		3,162

Total operating expenses		333,972			711,694			339,883			637,463			(5,911	)		74,231

Operating income		159,626			236,656			169,114			215,216			(9,488	)		21,440
Interest income		638			281			2,261			364			(1,623	)		(83	)
Interest expense		(53,069	)		(19,371	)		(53,384	)		(18,676	)		315			(695	)
Other, net		304			1,805			(19,145	)		2,177			19,449			(372	)

Total other expenses, net		(52,127	)		(17,285	)		(70,268	)		(16,135	)		18,141			(1,150	)

Income before income taxes		107,499			219,371			98,846			199,081			8,653			20,290
Income tax (expense) benefit		(24,674	)		(5,149	)		9,504			(4,806	)		(34,178	)		(343	)

Net income		82,825		$	214,222			108,350		$	194,275			(25,525	)	$	19,947

Less: Net income attributable to noncontrolling interests		(43,079	)					(47,207	)					4,128

Net income attributable to USPI’s common stockholder	$	39,746					$	61,143					$	(21,397	)

USPI’s equity in earnings of unconsolidated affiliates				$	49,754					$	43,110					$	6,644

The following table provides other information regarding our unconsolidated affiliates (dollars in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Long-term debt	$	290,230		$	280,217		$	290,230		$	280,217
USPI’s imputed weighted average ownership percentage based on affiliates’ pre-tax income(1)		22.8	%		22.2	%		22.7	%		21.7	%
USPI’s imputed weighted average ownership percentage based on affiliates’ debt(2)		25.3	%		25.0	%		25.3	%		25.0	%
Unconsolidated facilities operated at period end		114			106			114			106


(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. This is a non-GAAP measure but management believes it provides further useful information about its involvement in equity method investments.

(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. This is a non-GAAP measure but management believes it provides further useful information about its involvement in equity method investments.

As shown above, USPI’s net patient service revenues for the three and nine months ended September 30, 2010 decreased $3.5 million and $19.5 million, respectively, compared to the corresponding prior year periods. The net patient service revenues of USPI’s unconsolidated affiliates increased $35.4 million and $96.7 million for the three and nine months ended September 30, 2010, respectively, as compared to the corresponding prior year periods. These variances are analyzed more extensively below under “Revenues,” but in general they reflect the fact that the revenues of our unconsolidated facilities, which largely represent the facilities we operate under our primary business model of partnering with physicians and a hospital partner, are growing at a faster rate than the revenues of our other facilities (the consolidated facilities, whose revenues actually decreased compared to prior year). In addition to the underlying growth rates at these facilities, we continue to shift more of our facilities into our primary business model, which usually moves them from the consolidated to the unconsolidated group. Once netted with expenses, these increased revenues at our unconsolidated affiliates, resulted in their earning $19.9 million more in net income on year-to-date basis than in the corresponding prior year period. Our share of that increase, based on our ownership levels in these facilities, was approximately $6.6 million. Both of these figures represented improvements compared to the first quarter, when the drop in case volumes and operating margin resulted in almost no net income growth for our unconsolidated affiliates.

Our Ownership Interests in the Facilities We Operate

Our earnings are predominantly driven by our investments in the facilities we operate, so we focus on those businesses’ growth rates together with the percentage ownership interest we hold in them to help us understand our results of operations. Our average ownership interest in the U.S. surgical facilities we operate is as follows:


	Nine Months Ended			Year Ended			Nine Months Ended
	September 30, 2010			December 31, 2009			September 30, 2009

Equity method facilities(1)		22.7	%		21.5	%		21.7	%
Consolidated facilities(2)		47.5	%		48.1	%		48.7	%
Total(3)		29.4	%		29.4	%		30.2	%


(1)		Computed for unconsolidated facilities by dividing (a) our total equity in earnings of unconsolidated affiliates by (b) the aggregate net income of U.S. surgical facilities we account for under the equity method.


(2)		Computed for consolidated facilities by dividing (a) the aggregate net income of U.S. surgical facilities we operate less our total noncontrolling interests in income of consolidated subsidiaries by (b) the aggregate net income of our consolidated U.S. surgical facilities.

(3)		Computed in total by dividing our share of the facilities’ net income, defined as the sum of (a) in footnotes (1) and (2), by the aggregate net income of our U.S. surgical facilities, defined as the sum of (b) in footnotes (1) and (2).

Our average ownership interest for each group of facilities is determined by many factors, including the ownership levels we negotiate in our acquisition and development activities, the relative performance of facilities in which we own percentages higher or lower than average, and other factors. As described earlier, our increased focus on partnering our facilities with not-for-profit health systems in addition to physicians generally leads to our accounting for more facilities under the equity method (unconsolidated) as reflected in our number of unconsolidated facilities increasing by 13 from January 1, 2009 to September 30, 2010, while our number of consolidated facilities decreased by two. We generally have a lower ownership percentage in an equity method facility as compared to a consolidated facility.

While our ownership interests remained higher for consolidated facilities than for unconsolidated facilities, our average ownership in our consolidated facilities decreased from the third quarter of 2009 to the third quarter of 2010 due to relative performance of certain consolidated facilities, namely that one market’s facilities, in which our ownership is higher than average, experienced steeper than average drops in profitability compared to our other consolidated facilities.

Revenues

Our consolidated net revenues decreased 2% and 5% and during the three and nine months ended September 30, 2010, respectively, as compared to the corresponding prior year periods. The table below quantifies several significant items impacting year over year growth.


	Three Months Ended
	September 30, 2010
	USPI as Reported			Unconsolidated
	Under GAAP			Affiliates

Total revenues, three months ended September 30, 2009	$	152,381		$	293,207
Add: Revenue from acquired facilities		2,432			10,468
Less: Revenue of disposed facilities		—			(2,449	)
Less: Revenue of deconsolidated facilities		(1,925	)		1,925
Impact of exchange rate		(1,440	)		—

Adjusted base period		151,448			303,151
(Decrease) increase from operations		(2,907	)		23,969
Non-facility based revenue		249			1,759

Total revenues, three months ended September 30, 2010	$	148,790		$	328,879


	Nine Months Ended
	September 30, 2010
	USPI as Reported			Unconsolidated
	Under GAAP			Affiliates

Total revenues, nine months ended September 30, 2009	$	465,887		$	852,679
Add: Revenue from acquired facilities		5,839			26,297
Less: Revenue of disposed facilities		—			(9,848	)
Less: Revenue of deconsolidated facilities		(13,035	)		13,035
Impact of exchange rate		(304	)		—

Adjusted base period		458,387			882,163
(Decrease) increase from operations		(13,546	)		62,975
Non-facility based revenue		(997	)		3,212

Total revenues, nine months ended September 30, 2010	$	443,844		$	948,350

Our systemwide revenues, which include all facilities we operate, whether consolidated or equity method, increased 7% and 5% for the three and nine months ended September 30, 2010, respectively, as compared to the prior year corresponding periods due to several factors, but disproportionate expense increases resulted in a net decrease to USPI’s earnings from its facilities. As depicted above, a major component of the decrease in consolidated revenues was the deconsolidation of facilities, which caused a corresponding increase in the revenues of unconsolidated affiliates. However, operations also were a significant factor, although differently for each of the two groups. Despite only slight growth in case volumes, a shift to more complex surgical cases in several equity method facilities, and the resulting increased revenue per case, actually caused an approximate $63.0 million increase in the revenues of this group of facilities, whereas the consolidated facilities experienced decreases in average reimbursement as well as case volumes.

Facility Growth

As described above, our systemwide revenues grew 7% and 5% in the three and nine months ended September 30, 2010, respectively, compared to the corresponding prior year periods. This growth corresponds closely to the 5% and 4% increase in the three and nine months ended September 30, 2010, respectively, in the net revenues of our same store facilities, which are those facilities we operated in both periods.

In the U.S., we experienced a 1% reduction in same store case volumes during the first nine months of 2010, driven by a 2% drop in the first quarter and essentially flat second and third quarters. We believe this decrease could have resulted from several factors, including changes to health insurance plans to require more patient responsibility for healthcare expenses and a generally soft economy. In addition, our facilities’ revenues were adversely impacted by shift in payor mix, as fewer revenues were earned from the more profitable payors. As described above, a shift to more complex cases at several of our larger facilities, resulted in the revenues of the same store group increasing year-over-year despite the small drop in volume and the unfavorable change to payor mix.

Our United Kingdom facilities’ revenues, when measured in local currency (or constant exchange rates), declined 3% and 2% for the three and nine months ended September 30, 2010, respectively. These declines are largely due to a decrease in self-pay business. Self-pay business is generally considered more susceptible to changes in general economic conditions, as the cost of care is borne entirely by the patient rather than shared with private insurers or borne by the National Health Service. While the movement of the U.S. dollar against the British pound also affects our reported revenues, the effect has not been material on a year-to-date basis in 2010.

The following table summarizes our same store facility revenue growth rates, as compared to the three and nine months ended September 30, 2009:


	Three Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2010			2010

United States facilities:
Net revenue		5	%		4	%
Surgical cases		—	%		(1	)%
Net revenue per case(1)		6	%		5	%
United Kingdom facilities:
Adjusted admissions		(8	)%		(6	)%
Net revenue using actual exchange rates		(8	)%		(2	)%
Net revenue using constant exchange rates(2)		(3	)%		(2	)%
All same store facilities:
Net revenue using actual exchange rates		5	%		4	%


(1)		Our overall domestic same store growth in net revenue per case for the three and nine months ended September 30, 2010, was favorably impacted by the 10% growth at our thirteen same store hospitals, which on average perform more complex cases and thus earn a higher average net revenue per case than ambulatory surgery centers. The net revenue per case growth at our ambulatory surgery centers was 3% during the third quarter of 2010.

(2)		Calculated using 2010 exchange rates for both periods. Although this computation represents a non-GAAP measure, we believe that using a constant currency translation rate more accurately reflects the trend of the business.

Joint Ventures With Not-For-Profit Hospitals

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.

Consistent with this strategy, our net overall number of facilities increased by seven from September 30, 2009 to September 30, 2010, while the net increase in facilities partnered with not-for-profit hospitals and local physicians increased by 14. All three of our facilities under construction at September 30, 2010 involve a hospital partner. In addition, all of our projects in the earlier stages of development involve a hospital partner, and we continue to explore affiliating more facilities with hospital partners, especially for facilities in markets where we

already operate other facilities with a hospital partner. The following table summarizes the facilities we operated as of September 30, 2010 and 2009:


	September 30,
	2010			2009

United States facilities(1):
With a hospital partner		117			103
Without a hospital partner		53			60

Total U.S. facilities		170			163
United Kingdom facilities		4			4

Total facilities operated		174			167

Change from September 30, 2009:
De novo (newly constructed)		4
Acquisition		8
Disposals(2)		(5	)

Total increase in number of facilities		7


(1)		At September 30, 2010, physicians own a portion of all of these facilities.

(2)		We sold our ownership interests in facilities in Baton Rouge, Louisiana and Oxnard, California. We merged two of our surgery centers into one location in Dallas, Texas and also merged two of our surgery centers into one location in Ohio.

Facility Operating Margins

Same store U.S. facility operating margins decreased 110 basis points in the nine months ended September 30, 2010 as compared to 2009. The decrease was broad-based, and was largely due to lower case volumes that were not offset by a proportionate decrease in operating expenses, although the third quarter decrease of 30 basis points and the second quarter decrease of 40 basis points was far less than the first quarter 240 basis point drop. Continuing a trend we experienced in 2008 and 2009, the year-over-year change in the operating margins of facilities partnered with a not-for-profit healthcare system was more favorable (or, in the case of the three and nine months ended September 30, 2010, less unfavorable) than the change experienced by the facilities that do not have a hospital partner.

With respect to the actual operating income margins our facilities are generating, the composition of our acquisition and development activities continues to result in the hospital-partnered group of facilities having a lower average operating margin than the group operating without a hospital partner. This is due in large part to the fact that virtually all of our newly developed facilities have a hospital partner. As they ramp-up their operations, these facilities earn lower margins in their first few years than more mature facilities, which unfavorably impacts the overall margin of the hospital-partnered group of facilities. This relationship can change depending on which facilities we succeed in partnering with a not-for-profit hospital.

Our U.K. facilities, which comprise four of our 174 facilities at September 30, 2010, experienced a decrease in overall facility margins in the nine months ended September 30, 2010 as compared to the prior year period, also due to lower volumes that were not offset by a proportionate decrease in operating expenses.

The following table summarizes the year-over-year changes in our same store facility operating margins (see footnote 1 below), comparing the three and nine months ended September 30, 2010 to the three and nine months ended September 30, 2009:


	Three Months Ended					Nine Months Ended
	September 30, 2010			(Decrease)		September 30, 2010			(Decrease)

United States facilities:
With a hospital partner		25.4	%		— bps		25.2	%		(80) bps
Without a hospital partner		30.5	%		(140) bps		31.2	%		(150) bps
Total U.S. facilities		26.4	%		(30) bps		26.4	%		(110) bps
United Kingdom facilities(2)		21.7	%		(100) bps		23.5	%		(110) bps


(1)		Operating margin is calculated as operating income 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 the U.K. 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)		Calculated using 2010 exchange rates for both periods. Although this computation represents a non-GAAP measure, we believe that using a constant currency translation rate more accurately reflects the trend of the business. In addition, the $1.0 million unfavorable impact of a payment of value-added tax in the first quarter of 2010 has been excluded from U.K. same store facility operating margins. The favorable impact of this value-added tax recorded in the second quarter of 2009 was also excluded.

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenues decreased by $3.6 million, or 2.4%, to $148.8 million for the three months ended September 30, 2010 from $152.4 million for the three months ended September 30, 2009. Approximately $1.9 million of this decrease was the result of our selling a partial interest in two of our consolidated facilities, which resulted in our deconsolidating the facilities; this effect was partially offset by an increase in revenues of approximately $2.6 million due to acquisition activity and other changes. Due to lower case volumes, our consolidated centers experienced a decrease in revenues of approximately $2.9 million. Revenues were also negatively affected by an approximate $1.4 million decrease in our U.K. revenues as the result of the British pound weakening against the U.S. dollar.

Equity in earnings of unconsolidated affiliates increased by $2.3 million, or 15.7%, to $17.2 million for the three months ended September 30, 2010 from $14.9 million for the three months ended September 30, 2009. This increase in equity in earnings was primarily driven by same store growth ($0.9 million), acquisitions of additional facilities we account for under the equity method ($1.3 million) and deconsolidations of facilities ($0.1 million). The number of facilities we account for under the equity method increased by eight from September 30, 2009 to September 30, 2010.

Operating expenses, excluding depreciation and amortization, increased by $4.5 million, or 4.4% to $107.7 million for the three months ended September 30, 2010 from $103.2 million for the three months ended September 30, 2009, primarily due to reductions in expenses resulting from our deconsolidating two facilities and cost saving measures being employed across our facilities due to lower case volumes being more than offset by a $6.0 million payment related to a prior acquisition and option on a potential acquisition. Operating expenses, excluding depreciation and amortization, as a percentage of revenues, increased to 72.4% (68.3% excluding the $6.0 million payment) for the three months ended September 30, 2010 from 67.7% for the three months ended September 30, 2009.

Depreciation and amortization decreased $0.5 million, or 5.2%, to $8.3 million for the three months ended September 30, 2010 from $8.7 million for the three months ended September 30, 2009. Depreciation and amortization, as a percentage of revenues, was approximately 5.6% and 5.8% for the three months ended September 30, 2010 and September 30, 2009, respectively.

Operating income decreased $5.3 million, or 9.6%, to $50.0 million for the three months ended September 30, 2010 from $55.4 million for the three months ended September 30, 2009, primarily as a result the $6.0 million payment noted above. Excluding this payment, the operating income increase of $0.7 million was largely driven by cost saving measures and revenue increases associated with an increase in the complexity of cases performed at both our consolidated and unconsolidated facilities more than offsetting the adverse impact of flat case volumes. These factors, which decreased our revenues and expenses but increased our equity in earnings of unconsolidated affiliates, drove a net change in operating income, as a percentage of revenues, to 33.6% (37.7% excluding the $6.0 million payment) for the three months ended September 30, 2010 from 36.3% for the three months ended September 30, 2009.

Provision for income taxes was $7.2 million for the three months ended September 30, 2010 as compared to an income tax benefit of $24.1 million for the three months ended September 30, 2009. Our income taxes for the three months ended September 30, 2009, included a $31.5 million tax benefit related to our reversing the valuation allowance against a majority of our U.S. deferred tax assets. During the third quarter of 2009, we determined it was more likely than not that we would generate taxable income to recover these assets in future periods.

The decrease in case volumes described herein was the primary driver in the $0.5 million year-over-year decrease in net income attributable to noncontrolling interests. Overall, cost saving measures and increases in average revenue per case mostly offset the adverse effect of lower case volumes on our pretax income. The absence of the income tax benefit recorded in 2009 and the $6.0 million payment recorded in the third quarter of 2010 were the primary drivers in our net income attributable to USPI’s common stockholder decreasing by $26.9 million during the three months ended September 30, 2010 compared to the corresponding prior year period.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenues decreased by $22.0 million, or 4.7%, to $443.8 million for the nine months ended September 30, 2010 from $465.9 million for the nine months ended September 30, 2009. Approximately $13.0 million of this decrease was the result of our selling a partial interest in five of our consolidated facilities, which resulted in our deconsolidating the facilities; this effect was partially offset by a net $4.8 million increase related to acquisition activity and other changes. Due to lower case volumes, our consolidated centers experienced a decrease in revenues of approximately $13.5 million. Revenues were also negatively affected by an approximate $0.3 million decrease in our U.K. revenues as the result of the British pound weakening against the U.S. dollar.

Equity in earnings of unconsolidated affiliates increased by $6.6 million, or 15.4% to $49.8 million for the nine months ended September 30, 2010 from $43.1 million for the nine months ended September 30, 2009. This increase in equity in earnings was primarily driven by same store growth ($3.5 million), acquisitions of additional facilities we account for under the equity method ($2.8 million) and deconsolidation of facilities ($0.3 million). The number of facilities we account for under the equity method increased by eight from September 30, 2009 to September 30, 2010.

Operating expenses, excluding depreciation and amortization, decreased by $4.4 million, or 1.4%, to $308.9 million for the nine months ended September 30, 2010 from $313.3 million for the nine months ended September 30, 2009, primarily due to our deconsolidating five facilities, mostly offset by an increase in operating expenses related to the $6.0 million payment noted above. Operating expenses, excluding depreciation and amortization, as a percentage of revenues, increased to 69.5% for the nine months ended September 30, 2010 from 67.2% for the nine months ended September 30, 2009. This increase as a percentage of revenues is primarily attributable the $6.0 million payment and to our not reducing staffing and supply costs at our facilities in proportion to the lower case volumes we experienced during the first nine months of 2010, particularly during the first quarter of 2010. Our results were also affected by a $1.0 million expense accrued in March 2010 due to the British tax authority reversing its position on a value-added tax refund awarded to our U.K. subsidiary in the second quarter of 2009.

Depreciation and amortization decreased $1.5 million, or 5.7%, to $25.1 million for the nine months ended September 30, 2010 from $26.6 million for the nine months ended September 30, 2009, primarily due to the deconsolidation of five facilities. Depreciation and amortization, as a percentage of revenues, was constant at approximately 5.7% for the nine months ended September 30, 2010 and September 30, 2009.

Operating income decreased $9.5 million, or 5.6%, to $159.6 million for the nine months ended September 30, 2010 from $169.1 million for the nine months ended September 30, 2009, primarily as a result of the $6.0 million payment noted above and lower case volumes. Operating income, as a percentage of revenues, was 36.0% (37.3% excluding the $6.0 million payment) for the nine months ended September 30, 2010 compared to 36.3% for the nine months ended September 30, 2009.

Interest expense, net of interest income, was $52.4 million for the nine months ended September 30, 2010 as compared to $51.1 million for the nine months ended September 30, 2009. While market interest rates and our debt balance were lower in the third quarter of 2010 than in the third quarter 2009, the $1.3 million increase can primarily be attributed to a $0.8 million interest income on a settlement we received in the second quarter of 2009 from the British tax authority related to the VAT noted above, whereas in the first quarter of 2010, we recorded a $0.8 million expense as the British tax authority reclaimed the amount.

Other expense, net of other income increased by $19.4 million for the nine months ended September 30, 2010 from the nine months ended September 30, 2009 primarily as the result of activity in 2009 that included an $13.5 million pretax loss related to the deconsolidation of two facilities and the sale of two other facilities during the first nine month of 2009. We also recorded a charge of $4.4 million related to two management contract intangible assets that were impaired during the third quarter of 2009.

Provision for income taxes was $24.7 million for the nine months ended September 30, 2010 compared to an income tax benefit of $9.5 million for the nine months ended September 30, 2009. Our income taxes for the nine months ended September 30, 2009, included a $31.5 million tax benefit related to our reversing the valuation allowance against a majority of our U.S. deferred tax assets. During the third quarter of 2009, we determined it was more likely than not that we would generate taxable income to recover these assets in future periods.

The decrease in case volumes described herein was the primary driver in the $4.1 million year-over-year decrease in net income attributable to noncontrolling interests. This factor, together with the adverse effect of a drop in volumes in the first quarter of 2010, decreased net income, but overall $1.8 million of expense related to reversal of the value-added tax refund, the $6.0 million payment and the absence in the current year of significant losses from disposals and deconsolidations, which totaled $13.5 million, impairment charges of $4.4 million during the first nine months of 2009, offset by the reversal of the deferred tax asset valuation allowance of $31.5 million resulted in the $25.5 million year-over-year decrease in net income and the $21.4 million decrease in net income attributable to USPI’s common stockholder.

Liquidity and Capital Resources

Cash Flows

During the nine months ended September 30, 2010, the Company generated $142.1 million of cash flows from operating activities as compared to $145.2 million during the nine months ended September 30, 2009. Cash flows from operating activities decreased $3.0 million, or 2.1%, from the prior year period.

During the nine months ended September 30, 2010, the Company’s net cash used in investing activities was $34.7 million, consisting primarily of $29.2 million used for purchases of property and equipment. Approximately $14.1 million of property and equipment purchases were related to ongoing development projects, and the remaining $15.1 million represented purchases of equipment at existing facilities. Net cash used in financing activities for the nine months ended September 30, 2010 totaled $81.7 million and resulted primarily from net payments on long-term debt of $29.6 million, distributions to noncontrolling interests of $45.1 million and a net decrease in cash held on behalf of noncontrolling interests of $21.2 million.

Cash and cash equivalents were $60.7 million at September 30, 2010 as compared to $34.9 million at December 31, 2009, and the net working capital deficit was $91.8 million at September 30, 2010 as compared to $113.0 million at December 31, 2009. The overall negative working capital position at September 30, 2010 and December 31, 2009 is primarily the result of $109.2 million and $129.3 million due to affiliates, respectively, associated with our practice of holding our unconsolidated facilities’ cash. As discussed below, we have sufficient availability under our credit facility, together with our operating cash flows, to service our obligations.

Debt

We intend to fund our ongoing capital and working capital requirements through a combination of cash flows from operations and borrowings under our $85.0 million revolving credit facility. We believe that funds generated by operations and funds available under the revolving credit facility will be sufficient to meet working capital requirements over at least the next 12 months. However, in the future, we may have to incur additional debt or issue additional debt or equity securities from time to time. We may be unable to obtain sufficient financing on satisfactory terms or at all.

One of our consolidated entities is developing and constructing a new hospital which is expected to be completed in the first quarter of 2011. The total project cost is approximately $26.2 million which is being funded by cash contributions from its partners and debt financing. The entity has arranged bank financing totaling $17.4 million. Approximately $7.6 million of the bank financing was borrowed at September 30, 2010. We have made our required cash contribution based on the project’s estimated cost.

We and our subsidiaries, affiliates (subject to certain limitations imposed by existing indebtedness), or significant stockholders, in their sole discretion, may from time to time, purchase, redeem, exchange or retire any of our outstanding debt in privately negotiated or open market purchases, or otherwise. Such transactions will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

Senior secured credit facility

The senior secured credit facility (credit facility) provides for borrowings of up to $615.0 million (with a $150.0 million accordion feature described below), consisting of (1) an $85.0 million revolving credit facility with a maturity of six years, including a $20.0 million letter of credit sub-facility, and a $20.0 million swing-line loan sub-facility; and (2) a $530.0 million term loan facility (including a $100.0 million delayed draw facility) with a maturity of seven years. We have utilized the availability under the $530.0 million term loan facility and are making scheduled quarterly principal payments. At September 30, 2010, we had approximately $83.4 million available for borrowing under the revolving credit facility, representing the facility’s $85.0 million capacity, net of $1.6 million of outstanding letters of credit. On November 5, 2010, we borrowed $25.0 million under our revolving credit agreement to fund our acquisition of HealthMark.

We may request additional tranches of term loans or additional commitments to the revolving credit facility in an aggregate amount not exceeding $150.0 million, subject to certain conditions. Interest rates on the credit facility are based on LIBOR plus a margin of 2.00% to 2.25%. Additionally, we currently pay quarterly commitment fees of 0.50% per annum on the daily-unused commitment of the revolving credit facility. We also currently pay a quarterly participation fee of 2.13% per annum related to outstanding letters of credit. The term loans under the credit facility require principal payments each year in an amount of $4.3 million per annum in equal quarterly installments and $0.2 million per quarter with respect to the delayed draw facility. No principal payments are required on the revolving credit facility. At September 30, 2010, we had $509.8 million of debt outstanding under the credit facility at a weighted average interest rate of approximately 3.6%.

The credit facility is guaranteed by USPI Holdings, Inc. and its current and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions, and borrowings under the credit facility are secured by a first priority security interest in all real and personal property of these subsidiaries, as well as a first priority pledge of our capital stock, the capital stock of each of our wholly-owned domestic subsidiaries and 65% of the capital stock of certain of our wholly-owned foreign subsidiaries. Additionally, the credit facility contains various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. We believe we were in compliance with these covenants as of September 30, 2010.

Senior subordinated notes

Also in connection with the merger, we issued $240.0 million of 87/8% senior subordinated notes and $200.0 million of 91/4%/10% senior subordinated toggle notes (together, the Notes), all due in 2017. Interest on

the Notes is payable on May 1 and November 1 of each year, which commenced on November 1, 2007. All interest payments on the senior subordinated notes are payable in cash. The initial interest payment on the toggle notes was payable in cash. For any interest period after November 1, 2007 through November 1, 2012, we may pay interest on the toggle notes (i) in cash, (ii) by increasing the principal amount of the outstanding toggle notes or by issuing payment-in-kind notes (PIK Interest) or (iii) by paying interest on half the principal amount of the toggle notes in cash and half in PIK Interest. PIK Interest is paid at 10% and cash interest is paid at 91/4% per annum. To date, we have paid all interest payments in cash. At September 30, 2010, we had $437.5 million of Notes outstanding. The Notes are unsecured senior subordinated obligations of our company; however, the Notes are guaranteed by all of our current and future direct and indirect wholly-owned domestic subsidiaries. Additionally, the Notes contain various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. We believe we were in compliance with these covenants as of September 30, 2010.

United Kingdom borrowings

In April 2007, we entered into an amended and restated credit agreement, which covered our existing overdraft facility and term loan facility (Term Loan A). This agreement provides a total overdraft facility of £2.0 million, and an additional Term Loan B facility of £10 million, which was drawn in April 2007. In March 2008, we further amended our U.K. Agreement to provide for a £2.0 million Term Loan C facility. We borrowed the entire £2.0 million in March 2008 to acquire property adjacent to one of our hospitals in London. In June 2009, we renewed our overdraft facility. Under the renewal, we must pay a commitment fee of 0.5% per annum on the unused portion of the overdraft facility each quarter. Excluding availability on the overdraft facility, no additional borrowings can be made under the Term Loan A, B or C facilities. At September 30, 2010, we had approximately £37.9 million ($59.6 million) outstanding under the U.K. credit facility at a weighted average interest rate of approximately 4.5%.

Interest on the borrowings is based on a three-month or six-month LIBOR, or other rate as the bank may agree, plus a margin of 1.25% to 1.50%. Quarterly principal payments are required on the Term Loan A, which began in June 2007, and approximate $4.7 million in the first and second year, $6.3 million in the third and fourth year; $7.9 million in the fifth year, with the remainder due in the sixth year after the April 2007 closing. The Term Loan B does not require any principal payments prior to maturity and matures in 2013. The Term Loan C requires quarterly principal payments of approximately £0.1 million ($0.2 million), which began in June 2008 and continue through its maturity date of February 2013 when the final payment of £0.5 million ($0.8 million) is due. The borrowings are guaranteed by certain of our subsidiaries in the United Kingdom with a security interest in various assets, and a pledge of the capital stock of the U.K. borrowers and the capital stock of certain guarantor subsidiaries. The Agreement contains various restrictive covenants, including financial covenants that limit our ability and the ability of certain U.K. subsidiaries to borrow money or guarantee other indebtedness, grant liens on our assets, make investments, use assets as security in other transactions, pay dividends, enter into leases or sell assets or capital stock. We believe we were in compliance with these covenants as of September 30, 2010.

We also have the ability to borrow under a capital asset finance facility in the U.K. of up to £2.5 million ($3.9 million). The exact terms and payments are negotiated upon a draw on the facility. We borrowed against the facility in June 2010 and have £1.2 million ($1.8 million) outstanding at September 30, 2010. The terms of the borrowing require monthly principal and interest payments over 48 months. We have pledged capital assets as collateral against this borrowing.

Contractual Cash Obligations

Our contractual cash obligations as of September 30, 2010 are summarized as follows:


	Payments Due by Period
			Within		Years		Years		Beyond
Contractual Cash Obligations	Total		1 Year		2 and 3		4 and 5		5 Years
	(In thousands)

Long-term debt obligations:
Senior secured credit facility(1)	$	509,761	$	5,265	$	10,530	$	493,966	$	—
Senior subordinated notes, due 2017(1)		240,000		—		—		—		240,000
Senior subordinated toggle notes, due 2017(1)		197,515		—		—		—		197,515
U.K. credit facility(1)		57,755		10,462		47,293		—		—
Other debt at operating subsidiaries(1)		30,314		6,227		8,177		11,754		4,156
Interest on long-term debt obligations(2)		336,709		61,254		119,559		89,489		66,407
Capitalized lease obligations(3)		49,367		7,960		11,633		7,394		22,380
Operating lease obligations		82,739		14,474		24,406		16,013		27,846

Total contractual cash obligations	$	1,504,160	$	105,642	$	221,598	$	618,616	$	558,304


(1)		Scheduled principal payments

(2)		Represents interest due on long-term debt obligations. For variable rate debt, the interest is calculated using the September 30, 2010 rates applicable to each debt instrument and also gives effect to the interest rate swaps designated in a cash flow hedging relationship against portions of the U.K. credit facility and senior secured credit facility in the U.S.

(3)		Includes related principal and interest.

Debt at Operating Subsidiaries

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 approximately $58.8 million at September 30, 2010, 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 lease obligations, of these consolidated subsidiaries was 48% at September 30, 2010. Similar to our consolidated facilities, our unconsolidated facilities have debts, including capitalized lease obligations, that are generally non-recourse to USPI. With respect to our unconsolidated facilities, these debts are not included in our consolidated financial statements. At September 30, 2010, the total debt on the balance sheets of our unconsolidated affiliates was approximately $290.2 million. Our average percentage ownership, weighted based on the individual affiliate’s amount of debt, of these unconsolidated affiliates was 25% at September 30, 2010. USPI or one of its wholly-owned subsidiaries had collectively guaranteed $17.0 million of the $290.2 million in total debt of our unconsolidated affiliates as of September 30, 2010. In addition, our unconsolidated affiliates have obligations under operating leases, of which USPI or a wholly-owned subsidiary had guaranteed $13.8 million as of September 30, 2010, of which $8.5 million represents guarantees of two facilities we have sold. We have full recourse to the buyers with respect to such amounts. Some of the facilities we are currently developing will be accounted for under the equity method. As these facilities become operational, they will have debt and lease obligations.

In connection with our acquisition of equity interests in a surgery center in 2007, we had the option to purchase additional ownership in the facility during a specified time period in the purchase agreement. If we did not exercise

the purchase option, we were required to pay an option termination fee, which was equal to the lesser of an EBITDA calculation, as specified in the purchase agreement, or $2.5 million. We elected to purchase only a portion of the ownership as stated in the agreement and therefore paid a $1.5 million termination fee in 2009. The parties agreed to another purchase option that can be exercised at any time during the 60 day period following September 30, 2011 or the remaining $1.0 million option termination fee would be required to be paid.

In addition, our U.K. subsidiary has begun expanding our Parkside hospital, already our largest facility. Located outside London in the Wimbledon area, this facility’s expansion is expected to cost approximately £11.5 million ($18.1 million). The expansion of the outpatient clinic was completed in August 2010 and the refurbishment of a portion of the hospital is expected to be completed by the first quarter of 2011.

Related Party Transactions

Included in general and administrative expenses are management fees payable to an affiliate of Welsh Carson, which holds a controlling interest in our company, in the amount of $0.5 million and $1.5 million for the three month and nine months ended September 30, 2010 and 2009, respectively. Such amounts accrue at an annual rate of $2.0 million. We pay $1.0 million in cash per year with the unpaid balance due and payable upon a change in control. At September 30, 2010, we had approximately $4.0 million accrued related to such management fee, of which $0.5 million is included in other current liabilities and $3.5 million is included in other long-term liabilities in the accompanying consolidated balance sheet.


ITEM 3.	*Quantitative and Qualitative Disclosures About Market Risk*

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in interest rates and other relevant market risks. Our primary market risk is a change in interest rates associated with variable-rate borrowings. 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 credit agreements. We do not use derivative instruments for speculative purposes. The interest rate swaps serve to stabilize our cash flow and expense but ultimately may cost more or less in interest than if we had carried all of our debt at a variable rate over the swap term.

As further discussed in Note 5 to the accompanying consolidated financial statements, in order to manage interest rate risk related to a portion of our variable-rate U.K. debt, on February 29, 2008, we entered into an interest rate swap agreement for a notional amount of £20.0 million ($31.5 million). The interest rate swap requires us to pay 4.99% and to receive interest at a variable rate of three-month GBP-LIBOR (0.7% at September 30, 2010), which is reset quarterly. The interest rate swap expires in March 2011. No collateral is required under the interest rate swap agreement. As of September 30, 2010, the rate under our swap agreement was unfavorable compared to the market.

Additionally, effective July 24, 2008, in order to manage interest rate risk related to a portion of our variable-rate U.S. senior secured credit facility, we entered into an interest rate swap agreement for a notional amount of $200.0 million. The interest rate swap requires us to pay 3.6525% and to receive interest at a variable rate of three-month USD-LIBOR (0.5% at September 30, 2010), which is paid and reset on a quarterly basis. The interest rate swap expires in July 2011. No collateral is required under the interest rate swap agreement. As of September 30, 2010, the rate under our swap agreement was unfavorable compared to the market.

At September 30, 2010, the fair values of the U.K. and U.S. interest rate swaps were current liabilities of approximately $0.6 million and $5.1 million, respectively. The estimated fair value of the interest rate swaps was determined using present value models of the contractual payments. Inputs to the models were based on prevailing LIBOR market data and incorporate credit data that measure nonperformance risk. The estimated fair value represents the theoretical exit cost we would have to pay to transfer the obligations to a market participant with similar credit risk.

Our financing arrangements with many commercial lenders are based on the spread over Prime or LIBOR. At September 30, 2010, $699.3 million of our outstanding debt was in fixed rate instruments and the remaining $337.9 million was in variable rate instruments. Accordingly, a hypothetical 100 basis point increase in market interest rates would result in additional annual expense of approximately $3.4 million.

Our United Kingdom 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 United Kingdom facilities operate in a natural hedge to a large extent because both expenses and revenues are denominated in the local currency. Additionally, our borrowings in the United Kingdom are currently denominated in the local currency. Historically, the cash generated from our operations in the United Kingdom has been utilized within that country to finance development and acquisition activity as well as for repayment of debt denominated in the local currency. Accordingly, we have not generally utilized financial instruments to hedge our foreign currency exchange risk.


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 in bringing to their attention on a timely basis material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings with the SEC. 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 September 30, 2010 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 the Company may be named as a party to legal claims and proceedings in the ordinary course of business. The Company’s management is not aware of any claims or proceedings that might have a material adverse impact on the Company.


ITEM 6.	*Exhibits*


3	.1	Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) 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-4 (No. 333-144337) and incorporated herein by reference).
4	.1	Indenture governing 87/8% Senior Subordinated Notes due 2017 and 9 1/4%/10% Senior Subordinated Toggle Notes due 2017, among the Company, the Guarantors named therein and U.S. Bank National Association, as trustee (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).
4	.2	Form of 87/8% Senior Subordinated Note due 2017 and 9 1/4%/10% Senior Subordinate Toggle Note due 2017 (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) 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 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

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

Executive Vice President

and Chief Financial Officer

(Principal Financial Officer)

Date: November 9, 2010


	By:	/s/ J. Anthony Martin

J. Anthony Martin

Vice President, Corporate Controller,

and Chief Accounting Officer

(Principal Accounting Officer)

Exhibit Index


3	.1	Amended and Restated Certificate of Incorporation (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) 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-4 (No. 333-144337) and incorporated herein by reference).
4	.1	Indenture governing 87/8% Senior Subordinated Notes due 2017 and 91/4%/10% Senior Subordinated Toggle Notes due 2017, among the Company, the Guarantors named therein and U.S. Bank National Association, as trustee (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).
4	.2	Form of 87/8% Senior Subordinated Note due 2017 and 91/4%/10% Senior Subordinate Toggle Note due 2017 (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) 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 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.

UNITED SURGICAL PARTNERS INTERNATIONAL INC - FORM 10-Q - November 9, 2010

Attached files

UNITED SURGICAL PARTNERS INTERNATIONAL INC Reports