Form 10-K

10-K 1 d443949d10k.htm FORM 10-K Form 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2012

Commission file No. 333-144337

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)


Delaware		75-2749762
(State of Incorporation)		(I.R.S. Employer Identification No.)

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

(972) 713-3500

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ

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 ¨ 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 þ No ¨

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

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 ¨		Accelerated filer ¨		Non-accelerated filer þ		Smaller reporting company ¨

(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 ¨ No þ

None of the registrant’s common stock is held by non-affiliates.

As of February 26, 2013, 100 shares of the Registrant’s common stock were outstanding.

Documents Incorporated by Reference

None.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

2012 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS


PART I
Item 1.	Business	4

Item 1A.	Risk Factors	33

Item 1B.	Unresolved Staff Comments	45

Item 2.	Properties	46

Item 3.	Legal Proceedings	46

Item 4.	Mine Safety Disclosures	46

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	47

Item 6.	Selected Financial Data	48

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	80

Item 8.	Financial Statements and Supplementary Data	81

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	81

Item 9A.	Controls and Procedures	81

Item 9B.	Other Information	82

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	83

Item 11.	Executive Compensation	85

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	97

Item 13.	Certain Relationships and Related Transactions, and Director Independence	100

Item 14.	Principal Accounting Fees and Services	101

PART IV

Item 15	Exhibits, Financial Statement Schedules	103

FORWARD LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K, 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 the financial markets, 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 (U.S.); 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 healthcare; 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 healthcare professionals and other personnel; the availability of suitable acquisition and development opportunities and the length of time it takes to complete acquisitions and developments; our ability to integrate new and acquired businesses with our existing operations; the availability and terms of capital to fund the expansion of our business, including the acquisition and development of additional facilities and certain additional factors, risks and uncertainties discussed in this Annual Report on Form 10-K. 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. Given these uncertainties, investors and prospective investors are cautioned not to rely on such forward-looking statements.

PART I

Item 1. Business

General

United Surgical Partners International, Inc. (together with its subsidiaries, the “Company” or “USPI”, unless otherwise indicated or the context otherwise requires, the terms “we,” “us,” “our” and similar terms refer to USPI and its subsidiaries) owns and operates short stay surgical facilities including surgery centers and hospitals. We focus primarily on providing high quality surgical facilities that meet the needs of patients, physicians and payors better than hospital-based and other outpatient surgical facilities. We believe that our facilities (1) enhance the quality of care and the healthcare experience of patients, (2) offer a strategic approach for physicians that provides significant administrative, clinical and economic benefits to physicians, (3) offer a strategic approach for our health system partners to expand capacity and access within the markets they serve, and (4) offer an efficient and low cost alternative for payors, employers and other financing organizations. We acquire and develop our facilities through the formation of strategic relationships with physicians and not-for-profit healthcare systems to better access and serve the communities in our markets. Our operating model is efficient and scalable, and we have adapted it to each of our markets. We believe that our acquisition and development strategy and operating model enable us to continue to grow by taking advantage of highly-fragmented markets, an increasing demand for short stay surgery and a need by both our health system partners and physician partners to facilitate strategic networks to meet the needs of the evolving healthcare landscape.

As of December 31, 2012 we operated 213 facilities, Of the 213 facilities, 145 are jointly owned with major not-for-profit healthcare systems (hospital partners). Due in large part to our partnerships with physicians and hospital partners, we do not consolidate the financial results of 149 of the 213 facilities in which we have ownership, meaning that while we record a share of their net profit within our operating income, we do not include their revenues and expenses in the consolidated revenue and expense line items of our consolidated financial statements. Until April 3, 2012, we also had ownership in seven facilities in the United Kingdom. On April 3, 2012, we distributed the stock of our U.K. subsidiary to our parent’s (USPI Group Holdings, Inc.) equity holders. Subsequent to April 3, 2012, we have had no further ownership in the U.K. operations.

Our consolidated revenues increased 8% from $499.2 million in 2011 to $540.2 million in 2012. In addition to our consolidated revenues, we also review an internal operating measure called systemwide revenue growth, which includes both consolidated and unconsolidated facilities. Our systemwide revenues grew 12% during 2012. 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 our 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.

Donald E. Steen, who is our chairman, formed USPI with the private equity firm Welsh, Carson, Anderson & Stowe in February 1998. USPI had publicly traded equity securities from June 2001 until April 2007. Pursuant to an Agreement and Plan of Merger (the merger) dated as of January 7, 2007, with an affiliate of Welsh, Carson, Anderson & Stowe X, L.P. (Welsh Carson), we became a wholly owned subsidiary of USPI Holdings, Inc. on April 19, 2007. USPI Holdings, Inc. is a wholly owned subsidiary of USPI Group Holdings, Inc., which is owned by an investor group that includes affiliates of Welsh Carson, members of our management and other investors. As a result of the merger, we no longer have publicly traded equity securities.

Available Information

We file annual, quarterly and current reports with the Securities and Exchange Commission (SEC). You may read and copy any document that we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may also call the SEC at 1-800-SEC-0330 for information on the operation of the public reference room. Our SEC filings are also available to you free of charge at the SEC’s web site at http://www.sec.gov. We also maintain a web site at http://www.uspi.com that includes links to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. These reports are available on our website without charge as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Information on our web site is not deemed incorporated by reference into this Form 10-K.

Industry Overview

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

New surgical techniques and technology, as well as advances in anesthesia, have significantly expanded the types of surgical procedures that are being performed in surgery centers and have helped drive the growth in outpatient surgery. Lasers, arthroscopy, enhanced endoscopic techniques and fiber optics have reduced the trauma and recovery time associated with many surgical procedures. Improved anesthesia has shortened recovery time by minimizing post-operative side effects such as nausea and drowsiness, thereby avoiding the need for overnight hospitalization in many cases. In addition, some states in the United States permit surgery centers to keep a patient for up to 23 hours. This allows more complex surgeries, previously only performed in an inpatient setting, to be performed in a surgery center.

In addition to these technological and other clinical advancements, a changing payor environment has contributed to the growth of outpatient surgery relative to all surgery performed. Government programs, private insurance companies, managed care organizations and self-insured employers have implemented cost containment measures to limit increases in healthcare expenditures, including procedure reimbursement. In addition, as self-funded employers are looking to curb annual increases in premiums, they continue to shift additional financial responsibility to patients through higher co-payments, higher deductibles and higher premium contributions. These cost containment measures have contributed to the significant shift in the delivery of healthcare services away from traditional inpatient hospitals to more cost-effective alternate sites, including surgery centers. We believe that surgery performed at a surgery center is generally less expensive than hospital-based outpatient surgery because of lower facility development costs, more efficient staffing and space utilization and a specialized operating environment focused on quality of care and cost containment.

Today, large healthcare systems generally offer both inpatient and outpatient surgery on site. In connection with the implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, or the Acts, the associated healthcare reform activities and the expected transition to more connected, value-based care management models, there is a rise in consolidation activities within the industry with certain payors expanding into the provider space along with an increase in hospital mergers and

acquisitions. In addition, a number of not-for-profit healthcare systems have begun to expand their portfolios of facilities and services by entering into strategic relationships with specialty operators of surgery centers in order to expand capacity and access in the markets they serve. These strategic relationships enable not-for-profit healthcare systems to offer patients, physicians and payors the cost advantages, convenience and other benefits of outpatient surgery in a freestanding facility and, and in certain markets, establish networks needed to manage the full continuum of care for a defined population. Further, these relationships allow the not-for-profit healthcare systems to focus their attention and resources on their core business without the challenge of acquiring, developing and operating these facilities.

Our Business Strategy

Our goal is to steadily increase our revenues and cash flows. The key elements of our business strategy are to:

•

attract and retain, and pursue strategic relationships with top quality surgeons and other physicians;

•

expand our presence in existing markets and assist with the development of integrated networks in certain markets;

•

pursue strategic relationships with leading not-for-profit healthcare systems;

•

expand selectively in new markets; and

•

enhance operating efficiencies and the healthcare experience of patients.

Attract and retain top quality surgeons and other physicians

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

Expand our presence in existing markets

One of the key elements of our business strategy is to grow selectively in markets in which we already operate facilities. We believe that selective acquisitions and development of new facilities in existing markets allow us to leverage our existing knowledge of these markets and to improve operating efficiencies. In particular, our experience has been that newly developed facilities in markets where we already have a presence and a not-for-profit hospital partner is one of the best uses of our capital. In addition, in certain markets, we believe that we can leverage the infrastructure in place to assist our strategic partners with the development of integrated networks needed to meet the needs of the evolving healthcare landscape.

Pursue strategic relationships with not-for-profit healthcare systems

Through strategic relationships with us, not-for-profit healthcare systems can benefit from our operating expertise, create a new cash flow opportunity with limited capital expenditures and develop the ambulatory components of a network needed for patient retention and care management across the continuum. We believe that these relationships also allow not-for-profit healthcare systems to attract and retain physicians and secure alignment needed for new delivery system objectives, create new access points to support their missions or ministries, and improve their hospital operations by focusing on their core business. We also believe that strategic relationships with these healthcare systems help us to more quickly develop relationships with

physicians, communities, payors, employers and other financing organizations. Generally, the healthcare systems with which we develop relationships have strong local market positions and excellent reputations that we use in branding our facilities. In addition, our relationships with not-for-profit healthcare systems enhance our acquisition and development efforts by (1) providing opportunities to acquire facilities the systems may own, (2) providing access to physicians already affiliated with the systems, (3) attracting additional physicians to affiliate with newly developed facilities, and (4) encouraging physicians who own facilities to consider a strategic relationship with us.

Expand selectively in new markets

We may continue to enter targeted markets by acquiring and developing surgical facilities. We expect we will often undertake these activities in conjunction with a local not-for-profit healthcare system or hospital. We typically target the acquisition or development of multi-specialty centers that perform high volume, non-emergency, lower risk procedures requiring lower capital and operating costs than hospitals. In addition, we will also consider the acquisition of multi-facility companies.

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

•

the potential to achieve strong increases in revenues and cash flows;

•

whether the physicians, healthcare systems and payors in the market are receptive to surgery centers and/or surgical hospitals;

•

the demographics of the market;

•

the number of surgical facilities in the market;

•

the number and nature of outpatient surgical procedures performed in the market;

•

the case mix of the facilities to be acquired or developed;

•

whether the facility is or will be well-positioned to negotiate agreements with insurers and other payors; and

•

licensing and other regulatory considerations.

Upon identifying a target facility, we conduct clinical, financial, legal and compliance, operational, technology and systems reviews of the facility and conduct interviews with the facility’s management, affiliated physicians and staff. Once we acquire or develop a facility, we focus on implementing our proprietary systems and protocols, USPI’s EDGE, to increase case volume and improve operating efficiencies.

Enhance operating efficiencies and the healthcare experience of patients

Once we acquire a new facility, we integrate it into our existing network by implementing a specific action plan to support the local management team, design growth strategies and incorporate the new facility into our group purchasing contracts. We also implement our systems and protocols to improve operating efficiencies and contain costs. Our most important operational tool is our management system “Every Day Giving Excellence,” which we refer to as USPI’s EDGE. This proprietary process management and measurement system allows us to track our clinical, service and financial performance, best practices and key indicators in each of our facilities. Our goal is to use USPI’s EDGE to ensure that we provide each of the patients using our facilities with high quality healthcare, offer physicians a superior work environment and eliminate inefficiencies. Using USPI’s EDGE, we track and monitor our performance in areas such as (1) providing surgeons the equipment, supplies and surgical support they need, (2) starting cases on time, (3) minimizing turnover time between cases, and (4) providing efficient case and personnel schedules. USPI’s EDGE compiles and organizes the specified information on a daily basis and is easily accessed over the Internet by our facilities on a secure basis. The information provided by USPI’s EDGE enables our medical staffs, employees, facility administrators and management to analyze trends over time and share processes and best practices among our facilities. USPI’s EDGE is now deployed in substantially all of our facilities. In addition to continuing to invest in USPI’s EDGE,

we have also invested in decision support, market analysis and training tools that will allow us to better manage our facilities. During 2012, we also began deploying an electronic health record (EHR) system. By December 31, 2012, we had installed an EHR system at two of our hospitals and plan to deploy EHR systems at all twelve of our remaining hospitals during 2013. We expect to use our experience with that system to develop an electronic health record strategy for our surgery centers.

Operations

Our operations consist primarily of our ownership and management of surgery centers. As of December 31, 2012, we had ownership interests in 199 surgery centers and 14 surgical hospitals. We also own interests in and expect to operate one surgical facility that was under construction at December 31, 2012, and have numerous other potential projects in various stages of consideration, which may result in our adding additional facilities during 2013. Approximately 9,000 physicians have privileges to use our facilities. Our surgery centers are licensed outpatient surgery centers, and our surgical hospitals are licensed as hospitals. Each of our facilities is generally equipped and staffed for multiple surgical specialties and located in freestanding buildings or medical office buildings. Our average surgery center has approximately 12,000 square feet of space with three operating rooms, as well as ancillary areas for preparation, recovery, reception and administration. Our surgery center facilities range from a 2,000 square foot, one operating room facility to a 33,000 square foot, nine operating room facility. Our surgery centers are normally open weekdays from 7:00 a.m. to approximately 5:00 p.m. or until the last patient is discharged. We estimate that a surgery center with three operating rooms can accommodate up to 4,500 procedures per year. Our surgical hospitals have from six to 68 beds and average 60,000 square feet of space with seven operating rooms, ranging in size from 30,000 to 167,000 square feet and having from four to eleven operating rooms.

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

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

Generally, our surgical facilities are limited partnerships, limited liability partnerships or limited liability companies in which ownership interests are also held by local physicians who are on the medical staff of the facilities. Our ownership interests in the facilities range from 5% to 100%, with our average ownership being approximately 29%. Our partnership and limited liability company agreements typically provide for the monthly or quarterly pro rata distribution of cash equal to net profits from operations, less amounts held in reserve for expenses and working capital. Our facilities derive their operating cash flow by collecting 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. Our billing systems estimate revenue and generate contractual adjustments based on a fee schedule for approximately 90% of the total cases performed at our facilities. For the remaining cases, the contractual allowance is estimated based on the historical collection percentages of each facility by payor group. The historical collection percentage is updated quarterly for each facility. We estimate each patient’s financial obligation prior to the date of service. We request payment of that obligation at the time of service. Any amounts not collected at the time of service are subject to our normal collection and reserve

policy. We also have a management agreement with each of the facilities under which we provide day-to-day management services for a management fee that is typically a percentage of the net revenues of the facility.

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

Strategic Relationships

A key element of our business strategy is to pursue strategic relationships with hospital partners in selected markets. Of our 213 facilities, 145 are jointly-owned with hospital partners. Our strategy involves developing these relationships in three primary ways. One way is by adding new facilities in existing markets with our existing hospital partners. An example of this is our relationship with the Baylor Health Care System (Baylor) in Dallas, Texas. Our joint ventures with Baylor own a network of 30 surgical facilities that serve the approximately six million people in the Dallas / Fort Worth area. Another example of a growing single-market relationship is our network of facilities in Houston, Texas with Memorial Hermann Healthcare System, with whom we opened our first facility in 2003 and with whom we now operate 19 facilities.

A second way we develop these relationships is through expansion into new markets, both with existing hospital partners and with new partners. In 2012, we entered into new hospital partner relationships in Midland, Texas; Hackensack, New Jersey and also gained two new hospital partners in Pennsylvania. A good long-term example of this strategy is our relationship with Ascension Health, with whom we initially owned a single facility in Nashville, Tennessee and now have a total of 22 facilities in four states. Similarly, with Dignity Health we began with one facility, which was in a suburb of Las Vegas, Nevada. This relationship has expanded to a total of 18 facilities, including seven in various California markets, nine in the Phoenix, Arizona market and two in the Las Vegas area.

A third way we develop our strategic relationships with hospital partners is by adding them as co-owners of facilities that we have previously operated without them as partners. During 2012, we completed a transaction of this nature with a new hospital partner in St. Louis, Missouri. During 2010 and 2011 we completed transactions of this nature to expand our joint ventures with Baylor, Memorial Hermann, and Dignity Health. We expect to add a hospital partner in the future to some of the remaining 68 facilities that do not yet have such a partner.

Case Mix

The following table sets forth the percentage of internally reported revenues from our facilities for the year ended December 31, 2012 from each of the following specialties:


Specialty
Orthopedic	44	%
Pain management	11
Gynecology	3
General surgery	5
Ear, nose and throat	7
Gastrointestinal	10
Cosmetic surgery	3
Ophthalmology	8
Other	9

Total	100	%

Payor Mix

The following table sets forth the percentage of the internally reported revenues from our facilities for the year ended December 31, 2012 from each of the following payors:


Payor
Private insurance	78	%
Self-pay	2
Government	19	(1)
Other	1

Total	100	%

(1)	The percentage of our revenue attributable to government payors is approximately 17% for Medicare and 2% for Medicaid.

The following table sets forth information relating to the hospital partners with which we were affiliated as of December 31, 2012:


Healthcare System	Healthcare System’s Geographical Focus	Number of Facilities Operated with USPI
Single Market Systems:
Baylor Health Care System	Dallas/Fort Worth, Texas		30
Centura Health	Colorado		4
Cookeville Regional Medical Center	Middle Tennessee		1
Covenant Health	Eastern Tennessee		2
Einstein Healthcare Network	Philadelphia, Pennsylvania		1
Hackensack University Medical Center	Hackensack, New Jersey		2
INTEGRIS Health	Oklahoma		2
Kennedy Health System	New Jersey		1
Legacy Health System	Portland, Oregon		2
Liberty Health	Jersey City, New Jersey		1
McLaren Health Care Corporation	Michigan		4
Memorial Hermann Healthcare System	Houston, Texas		19
Meridian Health System	New Jersey		6
Midland Memorial Hospital	Midland, Texas		1
Monongahela Valley Hospital	Pittsburgh, Pennsylvania		1
Mountain States Health Alliance	Northeast Tennessee		1
North Kansas City Hospital	Kansas City, Missouri		3
NorthShore University Health System	Chicago, Illinois		4
Our Lady of the Lake Regional Medical Center	Covington (New Orleans), Louisiana		1
Penn State Hershey Health System	Hershey, Pennsylvania		1
Scripps Health	San Diego, California		1
St. John Health System	Oklahoma		1
St. John’s Mercy Healthcare	Missouri		1
St. Luke’s Episcopal – Presbyterian Hospitals	St. Louis, Missouri		1
The Christ Hospital	Cincinnati, Ohio		1
West Penn Allegheny Health System	Pennsylvania		1
Multi-Market Systems:
Adventist Health System:	12 states(a)		1
Adventist Hinsdale Hospital	Hinsdale, Illinois


Healthcare System	Healthcare System’s Geographical Focus	Number of Facilities Operated with USPI
Ascension Health:	19 states and D.C.(b)		22
Carondelet Health System (2 facilities)	Blue Springs, Missouri
St. Thomas Health Services System (15 facilities)	Middle Tennessee
St. Vincent Health (1 facility)	Indiana
Seton Healthcare Network (4 facilities)	Austin, Texas
Bon Secours Health System:	Six states(c)		4
Bon Secours Health Center at Virginia Beach	Virginia Beach, Virginia
Mary Immaculate Hospital	Newport News, Virginia
Maryview Medical Center	Suffolk, Virginia
St. Mary’s Hospital	Richmond, Virginia
Catholic Health Partners:	Two states(d)
Humility of Mary Health	Canfield, Ohio		1
Dignity Health:	California, Arizona and Nevada		18
Mercy Hospital of Folsom (1 facility)	Sacramento, California
Mercy Medical Center (2 facilities)	Redding, California
Mercy San Juan Medical Center (1 facility)	Roseville, California
Sierra Nevada Memorial Hospital (1 facility)	Grass Valley, California
St. Joseph’s Hospital and Medical Center (7 facilities) and Arizona Orthopedic Surgical Hospital (2 facilities)	Phoenix, Arizona
St. Joseph’s Medical Center (2 facilities)	Stockton, California
St. Rose Dominican Hospital (2 facilities)	Las Vegas, Nevada
CHRISTUS Health:	Six states(e)		3
CHRISTUS Health Central Louisiana (1 facility)	Alexandria, Louisiana
CHRISTUS Spohn Health System (2 facilities)	Corpus Christi, Texas
Providence Health System:	Five states(f)		2
Providence Holy Cross Health Center	Santa Clarita, California
Providence Holy Cross Medical Center	Mission Hills, California
SSM Healthcare:	Four states(g)
SSM St. Clare Health System	St. Louis, Missouri		1

Totals			145

(a)	Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Missouri, North Carolina, Tennessee, Texas, West Virginia, and Wisconsin.

(b)	Alabama, Arkansas, Arizona, Connecticut, District of Columbia, Georgia, Florida, Idaho, Illinois, Indiana, Kansas, Louisiana, Maryland, Michigan, Missouri, New York, Tennessee, Texas, Washington, and Wisconsin.

(c)	Florida, Kentucky, Maryland, New York, South Carolina, and Virginia

(d)	Kentucky and Ohio

(e)	Arkansas, Georgia, Louisiana, Missouri, New Mexico, and Texas.

(f)	Alaska, California, Montana, Oregon, and Washington.

(g)	Illinois, Missouri, Oklahoma and Wisconsin.

Facilities

The following table sets forth information relating to the facilities that we operated as of December 31, 2012:


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
	United States
	Atlanta
	East West Surgery Center, Austell, Georgia		9/1/00	(1)		3		77	%
	Lawrenceville Surgery Center, Lawrenceville, Georgia		8/1/01			2		15
	Northwest Georgia Surgery Center, Marietta, Georgia		11/1/00	(1)		3		15
	Orthopaedic South Surgical Center, Morrow, Georgia		11/28/03			2		15
	Resurgens Surgical Center, Atlanta, Georgia		10/1/98	(1)		4		48
	Roswell Surgery Center, Roswell, Georgia		10/1/00	(1)		3		15
	Austin
*	Cedar Park Surgery Center, Cedar Park, Texas		11/22/05			2		26
*	Medical Park Tower Surgery Center, Austin, Texas		8/27/10			5		34
*	Northwest Surgery Center, Austin, Texas		5/30/07			6		27
	Texan Surgery Center, Austin, Texas		6/1/03			3		55
*	Williamson Surgery Center, Round Rock, Texas		5/12/11			4		26
	Chicago
*	Hinsdale Surgical Center, Hinsdale, Illinois		5/1/06			4		22
*	Same Day Surgery 25 East, Chicago, Illinois		10/15/04			4		45
*	Same Day Surgery Elmwood Park, Elmwood Park, Illinois		10/15/04			3		33
*	Same Day Surgery North Shore, Evanston, Illinois		10/15/04			2		27
*	Same Day Surgery River North, Chicago, Illinois		10/15/04			4		34
	Corpus Christi
*	Corpus Christi Outpatient Surgery Center, Corpus Christi, Texas		5/1/02			5		28
*	Shoreline Surgery Center, Corpus Christi, Texas		7/1/06			4		30
	Dallas/Fort Worth
*	Baylor Medical Center at Frisco, Frisco, Texas(2)		9/30/02			11		25
*	Baylor Medical Center at Trophy Club, Trophy Club, Texas(2)		5/3/04			6		34
*	Baylor Medical Center at Uptown, Dallas, Texas(2)		4/1/03			5		17
*	Baylor Orthopedic and Spine Hospital at Arlington, Arlington, Texas(2)		2/22/10			6		25
*	Baylor Surgicare at Arlington, Arlington, Texas		2/1/99			6		26
*	Baylor Surgicare at Bedford, Bedford, Texas		12/18/98			5		33
*	Baylor Surgicare at Carrollton, Carrollton, Texas		7/1/10			2		26
*	Baylor Surgicare, Dallas, Texas		6/1/99			6		32
*	Baylor Surgicare at Denton, Denton, Texas		2/1/99			4		25
*	Baylor Surgicare at Ennis, Ennis, Texas		11/1/10	(5)		3		26
*	Baylor Surgicare at Fort Worth I and II, Fort Worth, Texas		7/13/04			4		25
*	Baylor Surgicare at Garland, Garland, Texas		2/1/99			2		30
*	Baylor Surgicare at Granbury, Granbury, Texas		2/1/09			4		25
*	Baylor Surgicare at Grapevine, Grapevine, Texas		2/16/02			4		29


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
*	Baylor Surgicare at Heath, Rockwall, Texas		11/1/04			3		26
*	Baylor Surgicare at Lewisville, Lewisville, Texas		9/16/02			6		38
*	Baylor Surgicare at Mansfield, Mansfield, Texas		5/1/10			5		26
*	Baylor Surgicare at North Garland, Garland, Texas		5/1/05			6		26
*	Baylor Surgicare at Oakmont, Fort Worth, Texas		10/15/02			4		25
*	Baylor Surgicare at Plano, Plano, Texas		10/1/07			1		27
*	Baylor Surgicare at Plano Parkway, Plano, Texas		3/1/11			1		26
*	Baylor Surgical Hospital at Fort Worth, Fort Worth, Texas(2)		12/18/98			8		36
*	Irving-Coppell Surgical Hospital, Irving, Texas(2)		10/20/03			5		9
*	Lone Star Endoscopy, Keller, Texas		11/1/10			1		26
*	North Central Surgical Center, Dallas, Texas(2)		12/12/05			10		18
*	North Texas Surgery Center, Dallas, Texas		12/18/98			4		33
*	Park Cities Surgery Center, Dallas, Texas		6/9/03			4		25
*	Rockwall Surgery Center, Rockwall, Texas		09/1/06			3		38
	Specialty Surgery Center of Fort Worth, Fort Worth, Texas		11/8/12	(7)		3		65
	Surgery Center of Richardson, Richardson, Texas		11/8/12	(7)		5		76
*	Tuscan Surgery Center at Las Colinas, Irving, Texas		12/1/10			1		27
*	Valley View Surgery Center, Dallas, Texas		12/18/98			4		32
	Denver
*	Crown Point Surgical Center, Parker, Colorado		10/1/08			4		42
*	Flatirons Surgery Center, Boulder, Colorado		12/1/10			3		27
	Greenwood Ambulatory Surgery Center, Greenwood Village, Colorado		9/1/11	(6)		—		43
*	Harvard Park Surgery Center, Denver Colorado		1/1/09			3		29
	Northwest Regional Ambulatory Surgery Center, Westminster, Colorado		9/1/11	(6)		1		41
*	Summit View Surgery Center, Littleton, Colorado		1/1/09			3		33
	Houston
*	Doctors Outpatient Surgicenter, Pasadena, Texas		9/1/99			5		43
*	Kingsland Surgery Center, Katy, Texas		12/31/08			4		31
*	Memorial Hermann Specialty Hospital Kingwood, Kingwood, Texas(2)		9/1/07			6		25
*	Memorial Hermann Surgery Center — Katy, Katy, Texas		1/19/07			4		10
*	Memorial Hermann Surgery Center — Memorial Village, Houston, Texas		12/1/2010			4		11
*	Memorial Hermann Surgery Center — Northwest, Houston, Texas		9/1/04			5		10
*	Memorial Hermann Surgery Center — Richmond, Richmond, Texas		12/31/09			2		26
*	Memorial Hermann Surgery Center — Southwest, Houston, Texas		9/21/06			6		9
*	Memorial Hermann Surgery Center — Sugar Land, Sugar Land, Texas		9/21/06			4		10
*	Memorial Hermann Surgery Center — Texas Medical Center, Houston, Texas		1/17/07			5		18
*	Memorial Hermann Surgery Center — The Woodlands, The Woodlands, Texas		8/9/05			4		12
*	Memorial Hermann Surgery Center — West Houston , Houston, Texas		4/19/06	(4)		5		25
*	Memorial Hermann Surgery Center — Woodlands Parkway, Houston Texas		12/31/10			4		26
*	North Houston Endoscopy and Surgery, Houston, Texas		10/1/08			2		26
*	Memorial Hermann Endoscopy Center North Freeway, Houston, Texas		10/1/10			1		28


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
	Physicians Surgery Center of Houston, Houston, Texas		11/8/12	(7)		5		93
*	Sugar Land Surgical Hospital, Sugar Land, Texas(2)		12/28/02			4		13
*	TOPS Surgical Specialty Hospital, Houston, Texas(2)		7/1/99			7		44
*	United Surgery Center — Southeast, Houston, Texas		9/1/99			3		29
	Kansas City
*	Briarcliff Surgery Center, Kansas City, Missouri		6/1/05			2		26
*	Creekwood Surgery Center, Kansas City, Missouri		7/29/98			4		33
*	Liberty Surgery Center, Liberty, Missouri		6/1/05			2		29
*	Saint Mary’s Surgical Center, Blue Springs, Missouri		5/1/05			4		26
*	Midwest Physicians Surgery Center, Lee’s Summit Missouri		11/1/10	(5)		—		26
	Knoxville
*	Parkwest Surgery Center, Knoxville, Tennessee		7/26/01			5		22
*	Physician’s Surgery Center of Knoxville, Knoxville, Tennessee		1/1/08			5		26
	Las Vegas
*	Durango Outpatient Surgery Center, Las Vegas, Nevada		12/9/08			4		30
*	Parkway Surgery Center, Henderson, Nevada		8/3/98			5		25
	Los Angeles
	Coast Surgery Center of South Bay, Torrance, California		12/18/01			3		25
	Pacific Endo-Surgical Center, Torrance, California		8/1/03			1		55
*	San Fernando Valley Surgery Center, Mission Hills, California		11/1/04			4		29
	San Gabriel Valley Surgical Center, West Covina, California		11/16/01			3		47
*	Santa Clarita Ambulatory Surgery Center, Santa Clarita, California		3/7/06			3		31
	The Center for Ambulatory Surgical Treatment, Los Angeles, California		11/14/02			4		34
	Michigan
*	Clarkston Surgery Center, Clarkston, Michigan		6/1/09			4		39
*	Genesis Surgery Center, Lansing, Michigan		11/1/06			4		33
*	Lansing Surgery Center, Lansing, Michigan		11/1/06			4		33
	Matrix Surgery Center, Saginaw, Michigan		9/1/11	(6)		3		44
*	Utica Surgery and Endoscopy Center, Utica, Michigan		4/1/07			3		34
	Nashville
*	Baptist Ambulatory Surgery Center, Nashville, Tennessee		3/1/98	(1)		6		29
*	Baptist Plaza Surgicare, Nashville, Tennessee		12/3/03			9		30
*	Center for Spinal Surgery, Nashville, Tennessee(2)		12/31/08			6		20
*	Clarksville Surgery Center, Clarksville, Tennessee		10/1/12			3		28
*	Eye Surgery Center of Nashville, Nashville, Tennessee		11/1/10	(5)		1		26
*	Franklin Endoscopy Center, Franklin, Tennessee		11/1/10	(5)		—		26
*	Lebanon Endoscopy Center, Lebanon, Tennessee		11/1/10	(5)		—		26
*	Middle Tennessee Ambulatory Surgery Center, Murfreesboro, Tennessee		7/29/98			4		42
*	Mid-State Endoscopy Center, Murfreesboro, Tennessee		4/6/11			2		15
*	Northridge Surgery Center, Nashville, Tennessee		4/19/06	(4)		5		31
*	Patient Partners Surgery Center, Gallatin, Tennessee		11/1/10	(5)		2		30
*	Physicians Pavilion Surgery Center, Smyrna, Tennessee		7/29/98			4		49
*	Saint Thomas Surgicare, Nashville, Tennessee		7/15/02			5		34
*	Tennessee Sports Medicine Surgery Center, Mt. Juliet, Tennessee		11/1/10	(5)		4		13
	New Jersey
*	Central Jersey Surgery Center, Eatontown, New Jersey		11/1/04			3		30
*	Endoscopy Center of Bergen County, Paramus, New Jersey		9/1/12			4		26
*	Hackensack Endoscopy Center, Hackensack, New Jersey		9/1/12			2		26


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
*	Lakewood Surgery Center, Lakewood, New Jersey		9/1/11	(6)		2		36
	Millennium Surgical Center, Cherry Hill, New Jersey		9/1/11	(6)		4		51
*	Ambulatory Surgery Center, Jersey City, New Jersey		6/9/11			3		25
	Metropolitan Surgery Center, Hackensack, New Jersey		11/1/11			2		51
*	Northern Monmouth Regional Surgery Center, Manalapan, New Jersey		7/10/06			4		44
	Surgical Specialists at Princeton, Princeton, New Jersey		9/1/11	(6)		3		15
*	Select Surgical Center at Kennedy, Sewell, New Jersey		10/29/09			3		23
*	Shore Outpatient Surgicenter, Lakewood, New Jersey		11/1/04			3		44
*	Shrewsbury Surgery Center, Shrewsbury, New Jersey		4/1/99			4		14
	Suburban Endoscopy Services, Verona, New Jersey		4/19/06	(4)		2		51
*	Toms River Surgery Center, Toms River, New Jersey		3/15/02			4		15
	Oklahoma City
*	Oklahoma Center for Orthopedic MultiSpecialty Surgery, Oklahoma City, Oklahoma(2)		8/2/04			4		22
*	Southwest Orthopaedic Ambulatory Surgery Center, Oklahoma City, Oklahoma		8/2/04			2		22
	Phoenix
*	Arizona Orthopedic Surgical Hospital, Chandler, Arizona(2)		5/19/04			6		38
*	Chandler Endoscopy Center, Chandler, Arizona		3/1/12			1		26
*	Desert Ridge Outpatient Surgery Center, Phoenix, Arizona		3/30/07			4		28
*	Metro Surgery Center, Phoenix, Arizona		4/19/06	(4)		4		63
*	OASIS Hospital, Phoenix, Arizona(2)		6/27/11			8		50
	Physicians Surgery Center of Tempe, Tempe, Arizona		4/19/06	(4)		2		10
*	St. Joseph’s Outpatient Surgery Center, Phoenix, Arizona		9/2/03			8		26
*	Surgery Center of Peoria, Peoria, Arizona		4/19/06	(4)		3		30
*	Surgery Center of Scottsdale, Scottsdale, Arizona		4/19/06	(4)		4		26
	Surgery Center of Gilbert, Gilbert, Arizona		4/19/06	(4)		3		20
	Tempe New Day Surgery Center		11/8/12	(7)		2		89
*	Warner Outpatient Surgery Center, Chandler, Arizona		7/1/99			4		30
	Pennsylvania
*	Einstein Montgomery Surgery Center, East Norriton, Pennsylvania		12/21/12			4		15
*	Hershey Outpatient Surgery Center, Hershey, Pennsylvania		9/1/11	(6)		7		28
	Gamma Surgery Center, Pittsburgh, Pennsylvania		9/1/11	(6)		2		51
*	Peters Township Surgery Center, McMurray, Pennsylvania		3/19/12			3		24
	Reading Endoscopy Center, Wyomissing, Pennsylvania		11/1/10	(5)		—		51
	Reading Surgery Center, Wyomissing, Pennsylvania		7/1/04			3		25
*	Southwestern Ambulatory Surgery Center, Pittsburgh, Pennsylvania		9/1/11	(6)		4		20
	Portland
	Cascade Spine Center, Tualatin, Oregon		9/1/11	(6)		—		20
*	East Portland Surgical Center, Portland, Oregon		12/31/09			4		31
*	Northwest Surgery Center, Portland, Oregon		12/1/08			3		26
	Redding
*	Court Street Surgery Center, Redding, California		4/19/06	(4)		2		32
*	Mercy Surgery Center, Redding, California		3/1/08			4		32
	Sacramento
*	Folsom Outpatient Surgery Center, Folsom, California		6/1/05			2		30
*	Grass Valley Surgery Center, Grass Valley, California		7/1/10			2		23
	Pain Diagnostic and Treatment Center, Sacramento, California		9/1/11	(6)		1		52
*	Roseville Surgery Center, Roseville, California		7/1/06			2		28


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
	San Antonio
	Alamo Heights Surgery Center, San Antonio, Texas		12/1/04			3		67
	San Antonio Endoscopy Center, San Antonio, Texas		5/1/05			1		53
	Turning Point Specialty Surgery Center, San Antonio, Texas		11/8/12	(7)		2		85
	San Diego
*	Scripps Encinitas Surgery Center, Encinitas, California		2/6/08			3		20
	Encinitas Surgery Center, Encinitas, California		12/30/11			—		51
	St. Louis
	Advanced Surgical Care, Creve Coeur, Missouri		1/1/06			2		45
	Chesterfield Surgery Center, Chesterfield, Missouri		1/1/06			2		65
	Frontenac Surgery and Spine Care Center, Frontenac, Missouri		5/1/07			2		36
*	Gateway Endoscopy Center, St. Louis, Missouri		5/1/10			—		35
	Manchester Surgery Center, St. Louis, Missouri		2/1/07			3		55
	Mason Ridge Surgery Center, St. Louis, Missouri		2/1/07			2		57
	Mid Rivers Surgery Center, Saint Peters, Missouri		1/1/06			2		67
	Old Tesson Surgery Center, St. Louis, Missouri		8/1/08			3		61
	Olive Surgery Center, St. Louis, Missouri		1/1/06			2		61
	Riverside Ambulatory Surgery Center, Florissant, Missouri		8/1/06			2		37
	South County Outpatient Endoscopy Services, St. Louis, Missouri		10/1/08			2		35
*	SSM St. Clare Surgical Center, Fenton, Missouri		10/23/09			3		21
*	St. Louis Surgical Center, Creve Coeur, Missouri		4/1/10			7		34
	Sunset Hills Surgery Center, St. Louis, Missouri		1/1/06			2		66
	The Ambulatory Surgical Center of St. Louis, Bridgeton, Missouri		8/1/06			2		66
	Twin Cities Ambulatory Surgery Center, St. Louis, Missouri		9/1/08			2		59
	Webster Surgery Center, Webster Groves, Missouri		3/1/07			2		32
	Virginia
*	Bon Secours Surgery Center at Harbour View, Suffolk, Virginia		11/12/07			6		22
*	Bon Secours Surgery Center at Virginia Beach, Virginia Beach, Virginia		5/30/07			2		24
*	Mary Immaculate Ambulatory Surgical Center, Newport News, Virginia		7/19/04			3		16
*	St. Mary’s Ambulatory Surgery Center, Richmond, Virginia		11/29/06			4		13
	Surgi-Center of Central Virginia, Fredericksburg, Virginia		11/29/01			4		62
	Additional Markets
*	Ambulatory Surgery Center of Stockton, Stockton, California		12/28/12			3		26
*	Beaumont Surgical Affiliates, Beaumont, Texas		4/19/06	(4)		6		15
	Chattanooga Pain Center, Chattanooga, Tennessee		9/1/11	(6)		3		43
	Chico Surgery Center, Chico, California		4/19/06	(4)		3		61
*	CHRISTUS Cabrini Surgery Center, Alexandria, Louisiana		6/22/07			4		22
	Day-Op Center of Long Island, Mineola, New York(3)		12/4/98			4		100
	Destin Surgery Center, Destin, Florida		9/25/02			2		59
	Effingham Ambulatory Surgery Center, Effingham, Illinois		12/31/12			5		49
	Hope Square Surgical Center, Rancho Mirage, California		11/1/10	(5)		2		51
	MedPlex Outpatient Surgery Center, Birmingham, Alabama		11/1/10	(5)		4		22
*	Mountain Empire Surgery Center, Johnson City, Tennessee		2/20/00	(1)		4		18
	New Horizons Surgery Center, Marion, Ohio		4/19/06	(4)		2		12
	New Mexico Orthopaedic Surgery Center, Albuquerque, New Mexico		2/29/00	(1)		6		51
	North Haven Surgery Center, North Haven, Connecticut		9/1/11	(6)		1		23


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
*	Our Lady of the Lake Pontchartrain Surgery Center, Covington, Louisiana		12/31/12			2		27
	Physicians Surgery Center of Chattanooga, Chattanooga, Tennessee		11/1/10	(5)		4		58
	Redmond Surgery Center, Redmond, Oregon		4/19/06	(4)		2		71
*	St. Joseph’s Surgery Center, Stockton, California		2/1/09			6		5
*	Surgery Center of Canfield, Canfield, Ohio		4/19/06	(4)		3		26
	Surgery Center of Columbia, Columbia, Missouri		8/1/06			2		59
	Surgery Center of Fort Lauderdale, Fort Lauderdale, Florida		11/1/04			4		51
	SurgiCenter of Baltimore, Owings Mills, Maryland		11/1/10	(5)		5		45
*	Terre Haute Surgical Center, Terre Haute, Indiana		12/19/07			2		23
	Teton Outpatient Services, Jackson, Wyoming		8/1/98	(1)		2		50
*	Texas Surgical Center, Midland, Texas		2/1/12			2		26
*	The Christ Hospital Spine Surgery Center, Cincinnati, Ohio		12/31/09			3		26
	Titusville Center for Surgical Excellence, Titusville, Florida		9/1/11	(6)		2		31
	Tri-City Orthopaedic Center, Richland, Washington(3)		4/19/06	(4)		2		17
*	Tullahoma Surgery Center, Tullahoma, Tennessee		12/31/10			2		26
*	Tulsa Surgery Center, Tulsa, Oklahoma		10/1/09			4		25
*	Upper Cumberland Physician Surgery Center, Cookeville, Tennessee		11/1/10	(5)		2		11
	University Surgical Center, Winter Park, Florida		10/15/98			3		69
	Victoria Ambulatory Surgery Center, Victoria, Texas		4/19/06	(4)		2		59

*	Facilities jointly owned with hospital partners.

(1)	Indicates date of acquisition by OrthoLink Physician Corporation. We acquired OrthoLink in February 2001.

(2)	Surgical hospitals, all of which are licensed and equipped for overnight stays.

(3)	Operated through a consulting and administrative agreement.

(4)	Indicates the date of our acquisition of Surgis.

(5)	Indicates the date of our acquisition of HealthMark.

(6)	Indicates the date of our acquisition of Titan.

(7)	Indicates the date of our acquisition of AIGB Holdings, Inc. (True Results)

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

Our corporate headquarters is located in a suburb of Dallas, Texas. We currently lease approximately 100,000 square feet of space at 15305 Dallas Parkway, Addison, Texas. The lease expires in October 2020.

We also lease approximately 45,000 square feet of total additional space in Brentwood, Tennessee; Chicago, Illinois; Houston, Texas; St. Louis, Missouri; Denver, Colorado; and Pasadena, California for regional offices. These leases expire between July 2013 and March 2021.

Acquisitions and Development

The following table sets forth information relating to the facility that was under construction at December 31, 2012:


Facility Location	Hospital Partner	Type	Expected Opening Date	Number of Operating Rooms
St. Louis, Missouri	SSM	Surgery center	Q1’13		3

The facility in St. Louis opened in February 2013. We also have additional projects under development. It is possible that some of these projects, as well as other projects which are in various stages of negotiation with both current and prospective joint venture partners, will result in our operating additional facilities sometime in 2013. While our history suggests that many of these projects will culminate with the opening or acquisition of a profitable surgical facility, we can provide no assurance that any of these projects will reach that stage or will be successful thereafter.

Marketing

Our sales and marketing efforts are directed primarily at physicians, who are principally responsible for referring patients to our facilities. We market our facilities to physicians by emphasizing (1) the high level of patient and physician satisfaction with our facilities, which is based on surveys we take concerning our facilities, (2) the quality and responsiveness of our services, (3) the practice efficiencies provided by our facilities, and (4) the benefits of our affiliation with our hospital partners, if applicable. We also directly negotiate, together in some instances with our hospital partners, agreements with third-party payors, which generally focus on the pricing, number of facilities in the market and affiliation with physician groups in a particular market. Maintaining access to physicians and patients through third-party payor contracting is essential for the economic viability of most of our facilities.

Competition

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

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

There are several companies, both public and private, that acquire and develop freestanding multi-specialty surgery centers and surgical hospitals. Some of these competitors have greater resources than we do. The principal competitive factors that affect our ability and the ability of our competitors to acquire surgery centers and surgical hospitals are price, experience, reputation and access to capital. Further, many physician groups develop surgery centers without a corporate partner, and this presents a competitive threat to our company.

Employees

As of December 31, 2012, we employed approximately 10,000 people, 6,500 of whom are full-time employees and 3,500 of whom are part-time employees. The physicians that affiliate with us and use our facilities are not our employees, except in a limited number of circumstances. However, we generally offer the physicians the opportunity to purchase equity interests in the facilities they use.

Professional and General Liability Insurance

We maintain professional and general liability insurance through a wholly-owned captive insurance company. We make premium payments to the captive insurance company and accrue for claims costs based on actuarially predicted ultimate losses and the captive insurance company then pays administrative fees and the insurance claims. We also maintain business interruption, property damage and umbrella insurance with third-party providers. The governing documents of each of our surgical facilities require physicians who conduct surgical procedures at those facilities to maintain stated amounts of insurance. Our insurance policies are generally subject to annual renewals. We believe that we will be able to renew current policies or otherwise obtain comparable insurance coverage at reasonable rates. However, we have no control over the insurance markets and can provide no assurance that we will economically be able to maintain insurance similar to our current policies.

Government Regulation

General

The healthcare industry is subject to extensive regulation by federal, state and local governments. Government regulation affects our business by controlling growth, requiring licensing or certification of facilities, regulating how facilities are used and controlling payment for services provided. Further, the regulatory environment in which we operate may change significantly in the future. While we believe we have structured our agreements and operations in material compliance with applicable law, there can be no assurance that we will be able to successfully address changes in the regulatory environment.

Every state imposes licensing and other requirements on healthcare facilities. In addition, many states require regulatory approval, including certificates of need, before establishing or expanding various types of healthcare facilities, including ambulatory surgery centers and surgical hospitals, offering services or making capital expenditures in excess of statutory thresholds for healthcare equipment, facilities or programs. In addition, the federal Medicare program imposes additional conditions for coverage and payment rules for services furnished to Medicare beneficiaries. We may become subject to additional regulations as we expand our existing operations and enter new markets.

In addition to extensive existing government healthcare regulation, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. We believe that these healthcare reform initiatives will continue during the foreseeable future. If adopted, some aspects of proposed reforms, such as further reductions in Medicare or Medicaid payments, or additional prohibitions on physicians’ financial relationships with facilities to which they refer patients, could adversely affect us.

We believe that our business operations materially comply with applicable law. However, we have not received a legal opinion from counsel or from any federal or state judicial or regulatory authority to this effect, and many aspects of our business operations have not been the subject of state or federal regulatory scrutiny or interpretation. Some of the laws applicable to us are subject to limited or evolving interpretations; therefore, a review of our operations by a court or law enforcement or regulatory authority might result in a determination that could have a material adverse effect on us. Furthermore, the laws applicable to us may be amended or interpreted in a manner that could have a material adverse effect on us. Our ability to conduct our business and to operate profitably will depend in part upon obtaining and maintaining all necessary licenses, certificates of need and other approvals, and complying with applicable healthcare laws and regulations.

Healthcare Reform

The Acts were signed into law on March 23, 2010 and March 30, 2010, respectively, and were largely upheld as constitutional by the Supreme Court on June 28, 2012. However, a majority of the measures contained in the Acts do not take effect until 2014. The Acts are intended to provide coverage and access to substantially all Americans, to increase the quality of care provided and to reduce the rate of growth in healthcare expenditures. The changes include, among other things, expanding Medicare’s use of value-based purchasing programs, tying facility payments to the satisfaction of certain quality criteria, bundling payments to hospitals and other providers, reducing Medicare and Medicaid payments, expanding Medicaid eligibility, requiring many health plans (including Medicare) to cover, without cost-sharing, certain preventative services, and expanding access to health insurance. The Acts also place limitations on the Stark Law exception that allows physicians to invest in hospitals if the physicians’ investments are in the entire hospital and not just a department of the hospital (the “whole hospital exception”). Among other things, the Acts prohibit hospitals from increasing the percentages of the total value of the ownership interests held in the hospital by physicians after March 23, 2010, as well as place restrictions on the ability of a hospital subject to the whole hospital exception to add operating rooms, procedure rooms and beds. The Acts provide for additional enforcement tools, cooperation between agencies, and funding for enforcement. It is difficult to predict the impact the Acts will have on our operations given the delay in implementing regulation, pending court challenges, and possible amendment or repeal of elements of the Acts. The Acts mandate reductions in reimbursement, such as adjustments to the hospital inpatient and outpatient prospective payment system market basket updates and productivity adjustments to Medicare’s annual inflation updates, which became effective in 2010 and 2012. Further, additional cuts to Medicare and Medicaid payments are expected as Congress continues to grapple with the U.S. fiscal crisis: already hospitals and other health care providers will see a $30.0 billion reduction in spending, including reductions to Medicare and Medicaid payments.

The Acts make several significant changes to healthcare fraud and abuse laws, provide additional enforcement tools to the government, increase cooperation between agencies by establishing mechanisms for the sharing of information and enhance criminal and administrative penalties for non-compliance. For example, the Acts (i) provide $350 million in increased federal funding over the next 10 years to fight healthcare fraud, waste and abuse; (ii) expand the scope of the recovery audit contractor program to include Medicaid and Medicare Advantage plans; (iii) authorize the Department of Health and Human Services, in consultation with the Office of Inspector General, to suspend Medicare and Medicaid payments to a provider of services or a supplier “pending an investigation of a credible allegation of fraud;” (iv) provide Medicare contractors with additional flexibility to conduct random prepayment reviews; and (iv) strengthen the rules for returning overpayments made by governmental health programs, including expanding False Claims Act liability to extend to failures to timely repay identified overpayments.

As a result of the Acts, we also expect enhanced scrutiny of healthcare providers’ compliance with state and federal regulations, infection control standards and other quality control measures. Effective January 15, 2009, CMS promulgated three national coverage determinations that prevent Medicare from paying for certain serious, preventable medical errors performed in any healthcare facility, such as surgery performed on the wrong patient. Several commercial payors also do not reimburse providers for certain preventable adverse events. The Acts also contain a number of provisions that are intended to improve the quality of care that is provided to Medicare and Medicaid beneficiaries. For example, beginning July 1, 2011, the Acts prohibited Medicaid programs from using federal funds to reimburse providers for the costs of care needed to treat hospital acquired conditions (“HACs”). Beginning in federal fiscal year 2015, the Acts mandate a 1% reduction in Medicare payments for hospitals that were in the highest quartile of national risk-adjusted HAC rates for the previous federal fiscal year. In addition, the Acts require CMS to conduct a study on whether to expand Medicare’s HAC policy to ASCs. Therefore, we could be subject to greater reduction in Medicare or Medicaid reimbursement in the future if such policy is expanded to ASCs.

In addition, federal law authorizes CMS to require ambulatory surgery centers to submit data on certain quality measures. CMS did not implement the quality measure reporting requirement in 2011, but effective

October 1, 2012, CMS required ASCs to report data on certain quality measures or face a two percentage point reduction in their annual reimbursement rates. In addition, effective October 1, 2012, Medicare began offering incentive payments to hospitals for delivering high-quality care through a value-based purchasing program. The incentives will be funded through a one percent deduction in the base operating diagnosis-related group payments for hospitals’ discharges. The reductions will increase over subsequent years. Hospitals must meet or exceed a baseline score on a set of predetermined clinical and patient experience measures. With regard to ambulatory surgery centers, the Department of Health and Human Services submitted a report to Congress in April 2011 outlining the Department’s plan to implement a value-based purchasing program. While the report describes efforts to improve quality and payment efficiency in ambulatory surgery centers and examines the steps required to design and implement an ambulatory surgery center valued-based program, Congress has not yet authorized CMS to implement a valued-based program for ambulatory surgery centers.

Accountable Care Organizations

On October 31, 2011, CMS issued its final regulations for Accountable Care Organizations (“ACOs”), which were created under the Acts and intended to allow providers, including hospitals, physicians and other designated professionals and suppliers to coordinate care for Medicare beneficiaries. This shared savings program is intended to produce savings as a result of improved quality and operational efficiency. ACOs that achieve certain savings benchmarks and quality performance standards will be eligible to share in a portion of the amounts saved by the Medicare program. The final regulations detail certain key characteristics of an ACO, including the scope and length of an ACO’s contract with CMS, the required governance of an ACO, the assignment of Medicare beneficiaries to an ACO, the payment models under which an ACO can share in cost savings, and the quality and other reporting requirements expected of an ACO. Under the regulations, patient and provider participation in ACOs will be voluntary. We will continue to monitor developments with the implementation of the ACO regulations and their effect on our business in order to react accordingly.

Licensure and certificate-of-need regulations

Capital expenditures for the construction of new facilities, the addition of capacity or the acquisition of existing facilities may be reviewable by state regulators under statutory schemes that are sometimes referred to as certificate of need laws. States with certificate of need laws place limits on the construction and acquisition of healthcare facilities and the expansion of existing facilities and services. In these states, approvals are required for capital expenditures exceeding certain specified amounts and that involve certain facilities or services, including ambulatory surgery centers and surgical hospitals.

State certificate of need laws generally provide that, prior to the addition of new beds, the construction of new facilities or the introduction of new services, a designated state health planning agency must determine that a need exists for those beds, facilities or services. The certificate of need process is intended to promote comprehensive healthcare planning, assist in providing high quality healthcare at the lowest possible cost and avoid unnecessary duplication by ensuring that only those healthcare facilities that are needed will be built.

Typically, the provider of services submits an application to the appropriate agency with information concerning the area and population to be served, the anticipated demand for the facility or service to be provided, the amount of capital expenditure, the estimated annual operating costs, the relationship of the proposed facility or service to the overall state health plan and the cost per patient day for the type of care contemplated. The issuance of a certificate of need is based upon a finding of need by the agency in accordance with criteria set forth in certificate of need laws and state and regional health facilities plans. If the proposed facility or service is found to be necessary and the applicant to be the appropriate provider, the agency will issue a certificate of need containing a maximum amount of expenditure and a specific time period for the holder of the certificate of need to implement the approved project.

Our healthcare facilities also are subject to state licensing requirements for medical providers. Our facilities have licenses to operate as ASCs in the states in which they operate. Our surgical facilities that are licensed as

ASCs must meet all applicable requirements for ASCs. In addition, even though our surgical facilities that are licensed as hospitals primarily provide surgical services, they must meet all applicable requirements for hospital licensure. To assure continued compliance with these regulations, governmental and other authorities periodically inspect our surgical facilities. The failure to comply with these regulations could result in the suspension or revocation of a facility’s license. In addition, based on the specific operations of our surgical facilities, some of these facilities maintain a pharmacy license, a controlled substance registration, and a clinical laboratory certification waiver, as required by applicable law.

Our healthcare facilities are also subject to state and local licensing regulations ranging from the adequacy of medical care to compliance with building codes and environmental protection laws. To assure continued compliance with these regulations, governmental and other authorities periodically inspect our facilities. The failure to comply with these regulations could result in the suspension or revocation of a healthcare facility’s license.

Our healthcare facilities receive accreditation from the Joint Commission on Accreditation of Healthcare Organizations or the Accreditation Association for Ambulatory Health Care, Inc., nationwide commissions which establish standards relating to the physical plant, administration, quality of patient care and operation of medical staffs of various types of healthcare facilities. Generally, our healthcare facilities must be in operation for at least six months before they are eligible for accreditation. As of December 31, 2012, all of our eligible healthcare facilities had been accredited by either the Joint Commission on Accreditation of Healthcare Organizations or the Accreditation Association for Ambulatory Health Care, Inc. or are in the process of applying for such accreditation. Many managed care companies and third-party payors require our facilities to be accredited in order to be considered a participating provider under their health plans.

Medicare and Medicaid Participation in Short Stay Surgical Facilities

Medicare is a federally funded and administered health insurance program, primarily for individuals entitled to social security benefits who are 65 or older or who are disabled. Medicaid is a health insurance program jointly funded by state and federal governments that provides medical assistance to qualifying low income persons. Each state Medicaid program has the option to determine coverage and payment rates for surgical services furnished in hospitals and in ASCs. All of the states in which we currently operate cover Medicaid surgical facility services provided in these settings; however, these states may not continue to cover short stay surgical facility services and states into which we expand our operations may not cover or continue to cover short stay surgical facility services.

A portion of our revenues are attributable to payments received from the Medicare and Medicaid programs. For the years ended December 31, 2012, 2011 and 2010, Medicare and Medicaid comprised 35%, 33%, and 31%, respectively, of our case volumes. These payments represented, however, a significantly lower percentage of our overall revenues due to the lower reimbursement provided by government payors in comparison to private payors. For example, Medicare and Medicaid contributed approximately 17% and 2% respectively of our 2012 patient service revenues despite the fact that governmental payors represented a total of 35% of our case volume during 2012.

In order to participate in the Medicare program, our facilities (known to Medicare as “providers”) must satisfy provider enrollment requirements as well as regulatory conditions of participation (“COPs”) for hospitals and conditions for coverage (“CFCs”) for ASCs. Each facility can meet its COPs or CFCs requirements through accreditation with The Joint Commission on Accreditation of Healthcare Organizations or other CMS-approved accreditation organizations, or through direct surveys by CMS. All of our short stay surgical facilities in the United States are enrolled in Medicare and certified to participate in the Medicare program or, with respect to newly acquired or developed facilities, are awaiting enrollment and certification to participate in the Medicare program. We have established systems to ensure our facilities’ compliance with their enrollment obligations, including certain ongoing reporting obligations. In addition, we have implemented ongoing quality assurance

activities to monitor and to ensure our facilities’ compliance with their COPs or CFCs. Any failure by a facility to maintain compliance with its enrollment obligations, COPs or CFCs could result in the loss of the facility’s Medicare billing privileges and provider agreement. The loss of Medicare billing privileges results in the termination of the facility’s enrollment in the Medicare program and may preclude the facility from re-enrolling in the Medicare program for up to three years. In addition, federal regulations require states to deny Medicaid program enrollment or to terminate Medicaid program enrollment for any facility that has been terminated from Medicare or any other state’s Medicaid program. Conversely, federal regulations permit CMS to revoke Medicare billing privileges when a state Medicaid agency terminates, revokes, or suspends a facility’s Medicaid enrollment or billing privileges.

CMS also requires hospitals to disclose physician ownership to patients. Congress now requires written disclosures of physician ownership interests to hospital patients, on the hospital’s website and in any advertising. Federal legislation also imposes a requirement that any hospital that does not have 24/7 physician coverage inform patients of this fact and receive signed acknowledgments from the patients of the disclosure. A hospital’s provider agreement may be terminated if it fails to make such disclosures. We believe all of our facilities meet their disclosure obligations.

Medicare’s payment for short-stay surgical procedures, whether performed in a hospital or an ASC, is based upon a prospectively determined fixed payment amount. For most covered surgical procedures, the payment rate is the product of the relative weight determined for the procedure and a conversion factor and then adjusted for variations in labor costs across geographic areas. The hospital outpatient prospective payment system conversion factor is generally higher than the conversion factor set for procedures in ASCs. As a result, Medicare payment rates for a procedure are typically lower in ASCs than in hospital surgical facilities. Congress requires Medicare to update the conversion factor used to determine payment rates under the hospital outpatient prospective payment system and the ASC payment methodology annually. Medicare’s annual update to the hospital outpatient prospective payment system is equal to the hospital inpatient market basket percentage increase; the ASC annual payment update is based on the Consumer Price Index. Medicare thus uses a lower inflationary factor for ASC payments than for hospital surgical facilities. There is no certainty that the annual update in a given year will equal or exceed the update in the previous year. In addition, starting in calendar year 2011 for ASCs and in calendar year 2012 for hospitals, the annual update applicable to our facilities has been reduced by a productivity adjustment. The amount of that reduction is based on the projected nationwide productivity gains over the preceding 10 years. To determine the projection, Medicare uses the Bureau of Labor Statistics 10-year moving average of changes in specified economy-wide productivity.

Medicare’s payments for physician services under the physician fee schedule are updated annually based in part on the sustainable growth rate, or SGR, formula, which weighs factors such as health care costs and gross domestic product. Economic projections released by the Congressional Budget Office on August 22, 2012 assume a twenty-seven percent (27%) reduction in physician payments in January 2013. Since 2003, Congress has overridden scheduled reductions. As part of the American Taxpayer Relief Act of 2012, which became law on January 2, 2013, Congress again acted to defer any reductions in the SGR formula through 2013, but Congress would be required to act again to defer future reductions. The 2013 deferment is paid for through Medicare and Medicaid payment reductions of $30 billion to hospitals and other providers. As Congress continues to debate the U.S. debt ceiling, additional cuts to Medicare and Medicaid are expected. Additional reductions in Medicare reimbursement could have a negative impact on various factors that affect the profitability of USPI, such as the number of overall procedures performed at the ASCs.

Our hospitals and ASCs are subject to other payment adjustments. Since calendar year 2008, Medicare has required hospitals to report specified hospital outpatient quality measures in order to avoid reduction in their annual payment updates. In November 2011, CMS introduced a quality reporting program for ASCs which, beginning on October 1, 2012, requires ASCs to report data on quality measures as well. Like hospitals, ASCs that fail to report on the required measures in any year will face reductions in their Medicare payment rates in a subsequent year. In addition, Congress has authorized CMS to establish a value-based purchasing program for

Medicare hospital services. CMS has implemented value-based purchasing for hospital inpatient services but has not yet done so for hospital outpatient services. Similarly, Congress has directed CMS to develop a plan to implement a value-based purchasing program for payments to ASCs, although Congress still must provide statutory authority to implement such a program for ASCs. Failure by any of our facilities to meet Medicare’s quality measures and any performance standards implemented under value-based purchasing regulations may adversely affect such facilities’ net revenues from the Medicare program.

The various state Medicaid programs also pay us a fixed payment for our services, which amount varies from state to state. There is no certainty that the amount of Medicaid or Medicare payments we have received in prior years will continue at current levels. Both the Medicaid and Medicare programs are subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and funding reductions, all of which may adversely affect the level of payments to our short stay surgical facilities. The ultimate impact of the changes in Medicare reimbursement will depend on a number of factors, including the procedure mix at our facilities and our ability to realize an increased procedure volume.

Utilization Review

Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by quality improvement organizations, which review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of diagnosis related group classifications and the appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided or assess fines and also have the authority to recommend to the U.S. Department of Health and Human Services that a provider which is in substantial noncompliance with the standards of the quality improvement organization be excluded from participation in the Medicare program.

Federal Anti-Kickback Statute and Medicare Fraud and Abuse Laws

State and federal laws regulate relationships among providers of healthcare services, including employment or service contracts and investment relationships. These restrictions include a federal criminal law, referred to herein as the anti-kickback statute, that prohibits offering, paying, soliciting or receiving, directly or indirectly, any form of remuneration in return for:

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referring an individual to a person for furnishing, or arranging for the furnishing of, any service or item payable under a federal healthcare program, including Medicare or Medicaid, or

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purchasing, leasing or ordering, or arranging for or recommending purchasing, leasing or ordering, any good, facility, service or item for which payment may be made in whole or in part by a federal healthcare program, including Medicare or Medicaid.

A violation of the anti-kickback statute constitutes a felony. Potential sanctions include imprisonment of up to five years, criminal fines of up to $25,000, civil money penalties of up to $50,000 per act plus three times the remuneration offered or three times the amount claimed and exclusion from all federally funded healthcare programs. The applicability of these provisions to some forms of business transactions in the healthcare industry has not yet been subject to judicial or regulatory interpretation. Moreover, several federal courts have held that the anti-kickback statute can be violated if only one purpose (not necessarily the primary purpose) of the transaction is to induce or reward a referral of business, notwithstanding other legitimate purposes.

Pursuant to the anti-kickback statute, and in an effort to reduce potential fraud and abuse relating to federal healthcare programs, the federal government has announced a policy of a high level of scrutiny of joint ventures and other transactions among healthcare providers. The Office of the Inspector General of the Department of

Health and Human Services closely scrutinizes healthcare joint ventures involving physicians and other referral sources. The Office of the Inspector General published a fraud alert that outlined questionable features of “suspect” joint ventures in 1989 and a Special Advisory Bulletin related to contractual joint ventures in 2003, and the Office of the Inspector General has continued to rely on fraud alerts in later pronouncements.

The anti-kickback statute contains provisions that insulate certain transactions from liability. In addition, pursuant to the provisions of the anti-kickback statute, the Health and Human Services Office of the Inspector General has also published regulations that exempt additional practices from enforcement under the anti-kickback statute. These statutory exceptions and regulations, known as “safe harbors,” if fully complied with, assure participants in particular types of arrangements that the Office of the Inspector General will not treat their participation in that arrangement as a violation of the anti-kickback statute. The statutory exceptions and safe harbor regulations do not expand the scope of activities that the anti-kickback statute prohibits, nor do they provide that failure to satisfy the terms of a safe harbor constitutes a violation of the anti-kickback statute. The Office of the Inspector General has, however, indicated that failure to satisfy the terms of an exception or a safe harbor may subject an arrangement to increased scrutiny. Therefore, if a transaction or relationship does not fit within an exception or safe harbor, the facts and circumstances as well as intent of the parties related to a specific transaction or relationship must be examined to determine whether or not any illegal conduct has occurred.

Our partnerships and limited liability companies that are providers of services under the Medicare and Medicaid programs, and their respective partners and members, are subject to the anti-kickback statute. A number of the relationships that we have established with physicians and other healthcare providers do not fit within any of the statutory exceptions or safe harbor regulations issued by the Office of the Inspector General. All of the 211 surgical facilities in which we hold an ownership interest are owned by partnerships or limited liability companies, and 211 include as partners or members physicians who perform surgical or other procedures at the facilities. Because physician investors in our surgical facilities are in a position to generate referrals to the facilities, the distribution of available cash to those investors could come under scrutiny under the anti-kickback statute.

On November 19, 1999, the Office of the Inspector General promulgated regulations setting forth certain safe harbors under the anti-kickback statute, including a safe harbor applicable to surgery centers. The surgery center safe harbor generally protects ownership or investment interests in a center by physicians who are in a position to refer patients directly to the center and perform procedures at the center on referred patients, if certain conditions are met. More specifically, the surgery center safe harbor protects any payment that is a return on an ownership or investment interest to an investor if certain standards are met in one of four categories of ambulatory surgery centers (1) surgeon-owned surgery centers, (2) single-specialty surgery centers, (3) multi-specialty surgery centers, and (4) hospital/physician surgery centers.

For multi-specialty ambulatory surgery centers, for example, if all of the investors are (i) physicians who are in a position to refer patients directly to the entity and perform procedures on such referred patients, (ii) group practices composed exclusively of such physicians, or (iii) investors who are not employed by the entity or by any investor, are not in a position to provide items or services to the entity or any of its investors and are not in a position to make or influence referrals directly to the entity or any of its investors, the following standards must be met:

(1) the terms on which an investment interest is offered to an investor must not be related to the previous or expected volume of referrals, services furnished, or the amount of business otherwise generated from that investor to the entity;

(2) at least one-third of each physician investor’s medical practice income from all sources for the previous fiscal year or twelve-month period must be derived from performing outpatient procedures that require an ambulatory surgery center or specialty hospital setting in accordance with Medicare reimbursement rules;

(3) at least one third of the Medicare-eligible outpatient surgery procedures performed by each physician investor for the previous fiscal year or previous twelve-month period must be performed at the ambulatory surgery center in which the investment is made;

(4) the entity or any investor (or other individual or entity acting on behalf of the entity or any investor) must not loan funds to or guarantee a loan for an investor if the investor uses any part of such loan to obtain the investment interest;

(5) the amount of payment to an investor in return for the investment must be directly proportional to the amount of the capital investment (including the fair market value of any pre-operational services rendered) of that investor;

(6) all ancillary services for federal health care program beneficiaries performed at the entity must be directly and integrally related to primary procedures performed at the entity, and none may be separately billed to Medicare or other federal health care programs; and

(7) the entity and any physician investors must treat patients receiving medical benefits or assistance under any federal health care program in a nondiscriminatory manner.

Similar standards apply to each of the remaining three categories of ambulatory surgery centers set forth in the regulations. In particular, each of the four categories includes the requirement that no ownership interests be held by a non-physician or non-hospital investor if that investor is (a) employed by the center or another investor, (b) in a position to provide items or services to the center or any of its other investors, or (c) in a position to make or influence referrals directly or indirectly to the center or any of its investors.

Because one of our subsidiaries is an investor in each partnership or limited liability company that owns one of our ambulatory surgery centers, and since this subsidiary provides management and other services to the surgery center, our arrangements with physician investors do not fit within the specific terms of the ambulatory surgery center safe harbor or any other safe harbor. We cannot assure you that the OIG would view our activities favorably even though we strive to achieve compliance with the remaining elements of the safe harbor.

In addition, although we typically contractually require that each physician-investor utilize the ASC as an extension of his or her practice, i.e. that such physician-investor meet the quantitative requirements of the surgery center safe harbor because we do not control the medical practices of our physician investors or control where they perform surgical procedures, it is possible that the quantitative tests described above will not be met, or that other conditions of the surgery center safe harbor will not be met. Accordingly, while the surgery center safe harbor is helpful in establishing that a physician’s investment in a surgery center should be considered an extension of the physician’s practice and not as a prohibited financial relationship, we can give no assurances that these ownership interests will not be challenged under the anti-kickback statute. In an effort to monitor our compliance with the safe harbor’s extension of practice requirement, we have implemented an attestation process, which tracks physicians’ annual extension of practice certification. While this process provides support for physician compliance with the safe harbor’s quantitative tests, we can give no assurance of such compliance. However, we believe that our arrangements involving physician ownership interests in our ambulatory surgery centers do not fall within the activities prohibited by the anti-kickback statute.

With regard to our hospitals, the Office of Inspector General has not adopted any safe harbor regulations under the anti-kickback statute for physician investments in hospitals. All but one of our hospitals is held in partnership with physicians who are in a position to refer patients to the hospital. There can be no assurances that these relationships will not be found to violate the anti-kickback statute or that there will not be regulatory or legislative changes that prohibit physician ownership of hospitals.

While several federal court decisions have aggressively applied the restrictions of the anti-kickback statute, they provide little guidance regarding the application of the anti-kickback statute to our partnerships and limited liability companies. We believe that our operations do not violate the anti-kickback statute. However, a federal agency charged with enforcement of the anti-kickback statute might assert a contrary position. Further, new

federal laws, or new interpretations of existing laws, might adversely affect relationships we have established with physicians or other healthcare providers or result in the imposition of penalties on us or some of our facilities. Even the assertion of a violation could have a material adverse effect upon us.

In addition, the Medicare Patient and Program Protection Act of 1987, as amended by the Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), and the Balanced Budget Act of 1997, impose civil monetary penalties and exclusion from state and federal healthcare programs on providers who commit violations of the Medicare fraud and abuse laws. Pursuant to the enactment of HIPAA, as of June 1, 1997, the Secretary of the U.S. Department of Health and Human Services may, and in some cases must, exclude individuals and entities that the Secretary determines have “committed an act” in violation of the Medicare fraud and abuse laws or improperly filed claims in violation of the Medicare fraud and abuse laws from participating in any federal healthcare program, HIPAA also expanded the Secretary’s authority to exclude a person involved in fraudulent activity from participating in a program providing health benefits, whether directly or indirectly, in whole or in part, by the U.S. government. Additionally, under HIPAA, individuals who hold a direct or indirect ownership or controlling interest in an entity that is found to violate the Medicare fraud and abuse laws may also be excluded from Medicare and Medicaid and other federal and state healthcare programs if the individual knew or should have known, or acted with deliberate ignorance or reckless disregard of, the truth or falsity of the information of the activity leading to the conviction or exclusion of the entity, or where the individual is an officer or managing employee of such entity. This standard does not require that specific intent to defraud be proven by the Office of the Inspector General of the U.S. Department of Health and Human Services; however, the Office of the Inspector General will apply a series of factors enumerated in a guidance document issued in 2010 to determine whether exclusion is warranted. Under HIPAA it is also a crime to defraud any commercial healthcare benefit program.

Federal Physician Self-Referral Law

The Stark Law prohibits any physician from referring patients to any entity for the furnishing of certain “designated health services” otherwise payable by Medicare or Medicaid, if the physician or an immediate family member has a financial relationship such as an ownership interest or compensation arrangement with the entity that furnishes services to Medicare beneficiaries, unless an exception applies. Persons who violate the Stark Law are subject to potential civil money penalties of up to $15,000 for each bill or claim submitted in violation of the Stark Law and up to $100,000 for each “circumvention scheme” they are found to have entered into, and potential exclusion from the Medicare and Medicaid programs. In addition, the Stark Law requires the denial (or, refund, as the case may be) of any Medicare and Medicaid payments received for designated health services that result from a prohibited referral.

The list of designated health services under the Stark Law does not include ambulatory surgery services as such. However, some of the ten types of designated health services are among the types of services furnished by our ambulatory surgery centers. The Department of Health and Human Services, acting through the Centers for Medicare and Medicaid Services, has promulgated regulations implementing the Stark Law. These regulations exclude health services provided by an ambulatory surgery center from the definition of “designated health services” if the services are included in the surgery center’s composite Medicare payment rate. Therefore, the Stark Law’s self-referral prohibition generally does not apply to health services provided by an ambulatory surgery center. However, if the ambulatory surgery center is separately billing Medicare for designated health services that are not covered under the ambulatory surgery center’s composite Medicare payment rate, or if either the ambulatory surgery center or an affiliated physician is performing (and billing Medicare) for procedures that involve designated health services that Medicare has not designated as an ambulatory surgery center service, the Stark Law’s self-referral prohibition would apply and such services could implicate the Stark Law. We believe that our operations do not violate the Stark Law, as currently interpreted. However, it is possible that the Centers for Medicare and Medicaid Services will further address the exception relating to services provided by an ambulatory surgery center in the future. Therefore, we cannot assure you that future regulatory changes will not result in our ambulatory surgery centers becoming subject to the Stark Law’s self-referral prohibition.

Fourteen of our facilities are hospitals rather than ambulatory surgery centers, and physicians invest directly in thirteen of our fourteen hospitals. We believe that the physician investments in our hospitals fall within the whole hospital exception and are therefore permitted under the Stark Law. The whole hospital exception applies to physician ownership of a hospital, provided such ownership is in the whole hospital and the physician is authorized to perform services at the hospital. Physician investments in our facilities licensed as hospitals meet this requirement. However, changes to the whole hospital exception have been the subject of recent regulatory action and legislation. Changes in the Acts include:

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a prohibition on hospitals from having any physician ownership unless the hospital already had physician ownership and a Medicare provider agreement in effect as of December 31, 2010;

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a limitation on the maximum aggregate percentage of total physician ownership in the hospital to the aggregate percentage of physician ownership as of March 23, 2010;

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a prohibition on expanding the aggregate number of beds, operating rooms, and procedure rooms for which the hospital is licensed as of March 23, 2010, unless the hospital obtains an exception from the Secretary of the Department of Health and Human Services;

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a requirement that return on investment be proportionate to the investment by each investor;

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restrictions on preferential treatment of physician versus non-physician investors;

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a requirement for written disclosures of physician ownership interests to the hospital’s patients and on the hospital’s website and in any advertising, along with annual reports to the government detailing such interests;

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a prohibition on the hospital or other investors from providing financing to physician investors;

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a requirement that any hospital that does not have 24/7 physician coverage inform patients of this fact and receive signed acknowledgement from the patients of the disclosure; and

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a prohibition on “grandfathered” status for any physician owned hospital that converted from an ambulatory surgery center to a hospital on or after March 23, 2010 (of which we have none).

We cannot predict whether other proposed amendments to the whole hospital exception will be included in any future legislation or if Congress will adopt any similar provisions that would prohibit or otherwise restrict physicians from holding ownership interests in hospitals. The Acts could have an adverse effect on our financial condition and results of operations. See “Risk Factors — Healthcare Reform has restricted our ability to operate our surgical hospitals.”

In addition to the physician ownership in our surgical facilities, we have other financial relationships with potential referral sources that potentially could be scrutinized under the fraud and abuse laws. We have entered into personal service agreements, such as medical director agreements, with physicians at our hospitals and ASCs. We believe that our agreements with referral sources satisfy the requirements of the applicable exceptions to the fraud and abuse laws and we have implemented formal compliance programs designed to safeguard against overbilling. However, we cannot assure you that the Office of the Inspector General would find our compliance programs to be adequate or that our agreements with referral sources would be found to comply with the fraud and abuse laws.

False and Other Improper Claims

The federal government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs. Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes. The government is applying its criminal, civil and administrative penalty statutes in an ever-expanding range of circumstances. For example, the government has taken the position that a

pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant should have known the services were unnecessary, even if the government cannot demonstrate actual knowledge. The government has also taken the position that claiming payment for low-quality services is a violation of these statutes if the claimant should have known that the care was substandard.

Over the past several years, the government has accused an increasing number of healthcare providers of violating the federal False Claims Act. The False Claims Act prohibits a person from knowingly presenting, or causing to be presented, a false or fraudulent claim to the U.S. government for payment. The statute defines “knowingly” to include not only actual knowledge of a claim’s falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a claim. Because our facilities perform hundreds of similar procedures a year for which they are paid by Medicare, and there is a relatively long statute of limitations (of up to ten years), a billing error or cost reporting error could result in significant penalties under the False Claims Act. Additionally, anti-kickback statute or Stark Law claims can be “bootstrapped” to claims under the False Claims Act on the theory that, when a provider submits a claim to a federal healthcare program, the claim includes an explicit or implicit certification that the provider is in compliance with the Medicare Act, which would require compliance with other laws, including the anti-kickback statute and the Stark Law. As a result of this “bootstrap” theory, the U.S. government can collect additional civil penalties under the False Claims Act for claims that have been “tainted” by the anti-kickback or Stark Law violation. In addition, civil penalties may be imposed by the Office of the Inspector General of the U.S. Department of Health and Human Services and a provider can be found liable for violating the False Claims Act for the failure to report and return an overpayment within 60 days of identifying the overpayment or, in certain circumstances, by the date a corresponding cost report is due, whichever is later.

Under the “qui tam,” or whistleblower, provisions of the False Claims Act, private parties may bring actions on behalf of the federal government. Such private parties, often referred to as relators, are entitled to share in the amounts recovered by the government through trial or settlement. Both direct enforcement activity by the government and whistleblower lawsuits have increased significantly in recent years and have increased the risk that a healthcare company, like us, will have to defend a false claims action, pay fines or face exclusion from the Medicare and Medicaid programs as a result of an investigation resulting from a whistleblower complaint. Although we believe that our operations materially comply with both federal and state laws, they may nevertheless be the subject of a whistleblower lawsuit, or may otherwise be challenged or scrutinized by governmental authorities. Providers found liable for False Claims Act violations are subject to damages of up to three times the actual damage sustained by the government plus mandatory civil monetary penalties between $5,500 and $11,000 for each separate false claim. A determination that we have violated these laws could have a material adverse effect on us.

State Anti-Kickback and Physician Self-Referral Laws

Many states, including those in which we do or expect to do business, have laws that prohibit payment of kickbacks or other remuneration in return for the referral of patients. Some of these laws apply only to services reimbursable under state Medicaid programs. However, a number of these laws apply to all healthcare services in the state, regardless of the source of payment for the service. Based on court and administrative interpretations of the federal anti-kickback statute, we believe that the federal anti-kickback statute prohibits payments only if they are intended to induce referrals. However, the laws in most states regarding kickbacks have been subjected to more limited judicial and regulatory interpretation than federal law. Therefore, we can give you no assurances that our activities will be found to be in compliance with these laws. Noncompliance with these laws could subject us to penalties and sanctions and have a material adverse effect on us.

A number of states, including those in which we do or expect to do business, have enacted physician self-referral laws that are similar in purpose to the Stark Law but which impose different restrictions. Some states, for example, only prohibit referrals when the physician’s financial relationship with a healthcare provider is based upon an investment interest. Other state laws apply only to a limited number of designated health services. Some

states do not prohibit referrals, but require that a patient be informed of the financial relationship before the referral is made. We believe that our operations are in material compliance with the physician self-referral laws of the states in which our facilities are located.

Health Information Security and Privacy Practices

We are subject to HIPAA and the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”), which was enacted as part of the American Recovery and Reinvestment Act of 2009 (“ARRA”). The regulations promulgated under HIPAA contain, among other measures, provisions that require many organizations, including us, to employ systems and procedures designed to protect the privacy and security of each patient’s individual healthcare information. Among the standards that the Department of Health and Human Services has adopted pursuant to HIPAA are standards for the following:

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electronic transactions and code sets;

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unique identifiers for providers, employers, health plans and individuals;

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security and electronic signatures;

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privacy; and

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enforcement.

In August 2000, the Department of Health and Human Services finalized the transaction standards, with which we are in material compliance. The transaction standards require us to use standard code sets established by the rule when transmitting health information in connection with some transactions, including health claims and health payment and remittance advices.

The Department of Health and Human Services has also published a rule establishing standards for the privacy of individually identifiable health information, with which we are in material compliance. These privacy standards apply to all health plans, all healthcare clearinghouses and many healthcare providers, including healthcare providers that transmit health information in an electronic form in connection with certain standard transactions. We are a covered entity under the final rule. The privacy standards protect individually identifiable health information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally. These standards not only require our compliance with rules governing the use and disclosure of protected health information, but they also require us to impose those rules, by contract, on any business associate to whom such information is disclosed, and, as of a final rule promulgated by the Department of Health and Human Services on January 25, 2013, by our business associates on any subcontractor to which such information is disclosed. Under the January 25, 2013, final rule, we must conform all of our contracts with business associates to certain established standards by September 23, 2014. The rule further requires certain revisions to our notices of privacy practices, redistribution of these policies to our patients, and for us to provide our patients with access to an electronic copy of their health records, upon request. A violation of the privacy standards could result in civil money penalties (which amounts are described below) and the federal rules also provide for criminal penalties of up to $50,000 and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to $100,000 and five years in prison for obtaining protected health information under false pretenses, and up to $250,000 and ten years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm.

Finally, the Department of Health and Human Services has also issued a rule establishing, in part, standards for the security of health information by health plans, healthcare clearinghouses and healthcare providers that maintain or transmit any health information in electronic form, regardless of format. We are an affected entity under the rule. These security standards require affected entities to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure integrity, confidentiality and the availability of the information. The security standards were designed to protect the health information against

reasonably anticipated threats or hazards to the security or integrity of the information and to protect the information against unauthorized use or disclosure. Although the security standards do not reference or advocate a specific technology, and affected entities have the flexibility to choose their own technical solutions, the security standards required us to implement significant systems and protocols. We also comply with these regulations.

Signed into law on February 17, 2009, the HITECH Act broadened the scope of the HIPAA privacy and security regulations. Among other things, the HITECH Act extends the application of certain provisions of the security and privacy regulations to business associates (entities that handle identifiable health information on behalf of covered entities) and subjects business associates to civil and criminal penalties for violation of the regulations. Under the HITECH Act, the U.S. Department of Health and Human Services is required to conduct periodic compliance audits of covered entities and their business associates. Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties, and the HITECH Act has strengthened the enforcement provisions of HIPAA, which may result in increased enforcement activity. The HITECH Act increased the amount of civil penalties, with penalties now ranging up to $50,000 per violation for a maximum civil penalty of $1,500,000 in a calendar year for violations of the same requirement. Under the final rule promulgated by the Department of Health and Human Services on January 25, 2013, civil monetary penalties may not be imposed for violations where the covered entity did not know or, after exercising reasonable diligence, could not have known that the violation had occurred, if the covered entity corrects the violation within 30 days. In addition, the HITECH Act authorized state attorneys general to bring civil actions seeking either injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents.

In addition to HIPAA, many states have enacted their own security and privacy provisions concerning a patient’s health information. These state privacy provisions will control whenever they provide more stringent privacy protections than HIPAA. Therefore, a healthcare facility could be required to meet both federal and state privacy provisions if it is located in a state with strict privacy protections.

Adoption of Electronic Health Records

ARRA also includes provisions designed to increase the use of Electronic Health Records (“EHR”) by both physicians and hospitals. Beginning with 2011 and extending through 2016, eligible hospitals may receive reimbursement incentives based upon successfully demonstrating “meaningful use” of certified EHR technology. Beginning in 2015, those hospitals that do not successfully demonstrate meaningful use of EHR technology are subject to reductions in reimbursements. On July 13, 2010, HHS released final meaningful use regulations and on August 23, 2012, CMS released final rules on the Stage 2 meaningful use criteria. We are currently implementing EHR at our hospitals and intend to comply with the EHR meaningful use requirements, but we did not comply in time to qualify for available incentive payments in 2012. Implementation of EHR may result in additional costs in the future, although this may be largely offset by the reimbursement incentives we will receive.

Audits

Our facilities will be subject to federal audits to validate the accuracy of Medicare and Medicaid program submitted claims. If these audits identify overpayments, we could be required to pay a substantial rebate of prior years’ payments subject to various administrative appeal rights. The federal government contracts with third-party recovery audit contractors (“RACs”) to identify overpayment and underpayments for services through post-payment reviews of Medicare providers and suppliers. The Acts expand the RAC program’s scope to include managed Medicare and to include Medicaid claims by requiring all states to establish programs to contract with RACs by December 31, 2010. In addition, the federal government employs Medicaid integrity contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. The Acts increase federal funding for the MIC program for federal fiscal year 2011 and later years. Similarly, Medicare zone program integrity contractors (“ZPICs”) target claims for potential fraud and abuse. Additionally, Medicare

administrative contractors (“MACs”) must ensure they pay the right amount for covered and correctly coded services rendered to eligible beneficiaries by legitimate providers. However, potential liability from future federal or state audits could ultimately exceed established reserves, and any excess could potentially be substantial.

Corporate Practice of Medicine

Several states have laws and/or regulations that prohibit corporations and other entities from employing physicians and practicing medicine for a profit or that prohibit certain direct and indirect payments or fee-splitting arrangements between health care providers that are designed to induce or encourage the referral of patients to, or the recommendation of, particular providers for medical products and services. Possible sanctions for violation of these restrictions include loss of license and civil and criminal penalties. In addition, agreements between the corporation and the physician may be considered void and unenforceable. These statutes and/or regulations vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. We do not expect these state corporate practice of medicine proscriptions to significantly affect our operations. Many states also have laws and regulations which prohibit payments for referral of patients and fee-splitting with physicians.

EMTALA

All of our hospitals in the United States are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires any hospital participating in the Medicare program to conduct an appropriate medical screening examination of every individual who presents to the hospital’s emergency room for treatment and, if the individual is suffering from an emergency medical condition, to either stabilize the condition or make an appropriate transfer of the individual to a facility able to handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of an individual’s ability to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer an individual or if the hospital delays appropriate treatment in order to first inquire about the individual’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program. In addition, an injured individual, the individual’s family or a medical facility that suffers a financial loss as a direct result of a hospital’s violation of the law can bring a civil suit against the hospital. We believe our hospitals are in material compliance with EMTALA.

Regulatory Compliance Program

It is our policy to conduct our business with integrity and in compliance with the law. We have in place and continue to enhance a company-wide compliance program that focuses on regulatory compliance including billing, reimbursement, cost reporting practices and contractual arrangements with referral sources.

Our regulatory compliance program is intended to maintain high standards of conduct applicable to the conduct of our business and that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, every employee receives legal compliance and ethics training upon hire and annually thereafter. In addition, we regularly monitor our ongoing compliance efforts and develop and implement policies and procedures designed to foster compliance with the law. The program also includes a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations through our independent compliance hotline. In addition, we perform excluded parties background checks of employees upon hire, annually thereafter and as otherwise required by state law. We believe our compliance program is consistent with standard industry practices. However, we cannot provide any assurances that our compliance program will detect all violations of law or protect against qui tam suits or government enforcement actions.

Item 1A. Risk Factors

You should carefully read the risks and uncertainties described below and the other information included in this report. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

We depend on payments from third-party payors, including government healthcare programs. If these payments are reduced, our revenue will decrease.

We are dependent upon private and governmental third-party sources of payment for the services provided to patients in our surgery centers and surgical hospitals. The amount of payment a surgical facility receives for its services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare and Medicaid regulations and the cost containment and utilization decisions of third-party payors. Fixed fee schedules, capitation payment arrangements, exclusion from participation in or inability to reach agreement with managed care programs or other factors affecting payments for healthcare services over which we have no control could also cause a reduction in our revenues.

If we are unable to acquire and develop additional surgical facilities on favorable terms, are not successful in integrating operations of acquired surgical facilities, or are unable to manage growth, we may be unable to execute our acquisition and development strategy, which could limit our future growth.

Our strategy is to increase our revenues and earnings by continuing to acquire and develop additional surgical facilities, primarily in collaboration with our hospital partners. Our efforts to execute our acquisition and development strategy may be affected by our ability to identify suitable candidates and negotiate and close acquisition and development transactions. We are currently evaluating potential acquisitions and development projects and expect to continue to evaluate acquisitions and development projects in the foreseeable future. The surgical facilities we develop typically incur losses in their early months of operation (more so in the case of surgical hospitals) and, until their case loads grow, they generally experience lower total revenues and operating margins than established surgical facilities, and we expect this trend to continue. Historically, most of our newly developed facilities have generated positive cash flow within the first 12 months of operations. We may not be successful in acquiring surgical facilities, developing surgical facilities or achieving satisfactory operating results at acquired or newly developed facilities. Further, the companies or assets we acquire in the future may not ultimately produce returns that justify our related investment. If we are not able to execute our acquisition and development strategy, our ability to increase revenues and earnings through future growth would be impaired.

If we are not successful in integrating newly acquired surgical facilities, we may not realize the potential benefits of such acquisitions. Likewise, if we are not able to integrate acquired facilities’ operations and personnel with ours in a timely and efficient manner, then the potential benefits of the transaction may not be realized. Further, any delays or unexpected costs incurred in connection with integration could have a material adverse effect on our operations and earnings. In particular, if we experience the loss of key personnel or if the effort devoted to the integration of acquired facilities diverts significant management or other resources from other operational activities, our operations could be impaired.

We have acquired interests in or developed all of our surgical facilities since our inception. We expect to continue to expand our operations in the future. Our rapid growth has placed, and will continue to place, increased demands on our management, operational and financial information systems and other resources. Further expansion of our operations will require substantial financial resources and management attention. To accommodate our past and anticipated future growth, and to compete effectively, we will need to continue to improve our management, operational and financial information systems and to expand, train, manage and motivate our workforce. Our personnel, systems, procedures or controls may not be adequate to support our operations in the future. Further, focusing our financial resources and management attention on the expansion of

our operations may negatively impact our financial results. Any failure to improve our management, operational and financial information systems, or to expand, train, manage or motivate our workforce, could reduce or prevent our growth.

We depend on our relationships with the physicians who use our facilities. Our ability to provide medical services at our facilities would be impaired and our revenues reduced if we are not able to maintain these relationships.

Our business depends upon the efforts and success of the physicians who provide medical and surgical services at our facilities and the strength of our relationships with these physicians. Our revenues would be reduced if we lost our relationship with one or more key physicians or group of physicians or such physicians or groups reduce their use of our facilities. Any failure of these physicians to maintain the quality of medical care provided or to otherwise adhere to professional guidelines at our surgical facilities or any damage to the reputation of a key physician or group of physicians could also damage our reputation, subject us to liability and significantly reduce our revenues.

In addition, healthcare reform may contribute to increased physician employment with hospitals, which could weaken our relationships with these physicians. The creation of ACOs in the Acts may cause physicians to accept employment to become part of a network that includes an ACO. In addition, the Acts’ focus on investing in infrastructure to increase efficiencies may further contribute to shifting physicians’ practice patterns from private practice to employment with hospitals and ACOs. ACOs that achieve quality performance standards established by the Department of Health and Human Services will be eligible to share in a portion of the amounts saved by the Medicare program. Because an individual physician may view the costs associated with investing in technology and processes to increase efficiencies as too large to bear individually, the physician may turn to employment as a means to participate in the Medicare savings and the capital investments required by the Acts. Physicians who accept employment may be restricted from owning interests in or utilizing our facilities.

If we fail to effectively and timely implement electronic health record systems, our operations could be adversely affected.

As required by ARRA, the Secretary of HHS has developed and implemented an incentive payment program for eligible hospitals and health care professionals that adopt and meaningfully use certified EHR technology. We have incurred and will continue to incur both capital costs and operating expenses in order to implement our certified EHR technology and meet meaningful use requirements. These expenses are ongoing and are projected to continue over all stages of implementation of meaningful use. The timing of expenses will not correlate with the receipt of the incentive payments and the recognition of incentive income. If our eligible hospitals are unable to meet the requirements for participation in the incentive payment program, we will not be eligible to receive incentive payments that could offset some of the costs of implementing EHR systems. In addition, although the ARRA incentive payment program does not apply to surgery centers, we have not yet determined an EHR solution for our surgery center facilities. As physicians become more integrated with EHR in their practices, we could incur additional capital costs and operating expenses in connection with implementing new technologies at our surgery centers.

Our revenues may be reduced by changes in payment methods or rates under the Medicare or Medicaid programs.

The Department of Health and Human Services and the states in which we perform surgical procedures for Medicaid patients may revise the Medicare and Medicaid payment methods or rates in the future. Any such changes could have a negative impact on the reimbursements we receive for our surgical services from the Medicare program and the state Medicaid programs. In addition, the Acts’ requirement that the Department of Health and Human Services develop a value-based purchasing program for ambulatory surgery centers may further impact Medicare reimbursement of ambulatory surgery centers or increase our operating costs in order to satisfy the value-based standards. The Acts’ creation of a bundled payment initiative, under which organizations

enter into payment arrangements that include financial and performance accountability for episodes of care, may impact our Medicare reimbursement as organizations develop and implement this new reimbursement model. The ultimate impact of the changes in Medicare reimbursement will depend on a number of factors, including the procedure mix at our facilities, our ability to demonstrate our high quality of care, our potential participation with other organizations in new payment programs and our ability to realize an increased procedure volume.

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations.

We have a substantial amount of indebtedness. As of December 31, 2012, we had $1.5 billion of total indebtedness and a total indebtedness to total capitalization percentage ratio of approximately 78%.

Our and our subsidiaries’ high degree of leverage could have important consequences to you. For example, it:

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requires us and certain of our subsidiaries to dedicate a substantial portion of cash flow from operations to payments on indebtedness, reducing the availability of cash flow to fund working capital, capital expenditures, development activity, acquisitions and other general corporate purposes;

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increases vulnerability to adverse general economic or industry conditions;

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limits flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;

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makes us and our subsidiaries more vulnerable to increases in interest rates, as borrowings under our amended senior secured credit facilities are at variable rates;

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limits our and our subsidiaries’ ability to obtain additional financing in the future for working capital or other purposes, such as raising the funds necessary to repurchase our senior unsecured notes upon the occurrence of specified changes of control, or

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places us at a competitive disadvantage compared to our competitors that have less indebtedness.

Our significant indebtedness could limit our flexibility.

We are significantly leveraged and will continue to have significant indebtedness in the future. Our acquisition and development program requires substantial capital resources, estimated to range from $80.0 million to $110.0 million per year over the next three years, although the range could be exceeded if we identify attractive multi-facility acquisition opportunities. The operations of our existing surgical facilities also require ongoing capital expenditures. We believe that our cash on hand, cash flows from operations and available borrowings under our revolving credit facility will be sufficient to fund our acquisition and development activities in 2013, but if we identify favorable acquisition and development opportunities that require additional resources, we may be required to incur additional indebtedness in order to pursue these opportunities. However, we may be unable to obtain sufficient financing on terms satisfactory to us, or at all. In that event, our acquisition and development activities would have to be curtailed or eliminated and our financial results could be adversely affected.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

The operating and financial restrictions and covenants in our debt instruments, including our senior secured credit facilities and the indenture governing our senior subordinated notes, may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest. For example, our senior secured credit facility restricts, subject to certain exceptions, our and our subsidiaries’ ability to, among other things:

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incur, assume or permit to exist additional indebtedness or guarantees;

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incur liens and engage in sale leaseback transactions;

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make loans, investments and other advances;

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declare dividends, make payments or redeem or repurchase capital stock;

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engage in mergers, acquisitions and other business combinations;

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prepay, redeem or repurchase certain indebtedness including the notes;

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amend or otherwise alter terms of certain subordinated indebtedness including the notes;

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enter into agreements limiting subsidiary distributions;

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sell assets;

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engage in certain transactions with affiliates;

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alter the business that we conduct; and

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issue and sell capital stock of subsidiaries.

The indenture governing our senior notes includes similar restrictions. Our amended senior secured credit facility also requires us to comply with a financial covenant with respect to the revolving credit facility that becomes more restrictive over time. Our and our subsidiaries’ ability to comply with these covenants and ratios may be affected by events beyond our control. A breach of any covenant or required financial ratio could result in a default under the senior secured credit facilities. In the event of any default under the senior secured credit facilities, the applicable lenders could elect to terminate borrowing commitments and declare all borrowings and accrued interest and fees to be due and payable, to require us to apply all available cash to repay these borrowings or to prevent us from making or permitting subsidiaries to make distributions or dividends, the proceeds of which are used by us to make debt service payments on our senior subordinated notes, any of which would be an event of default under the notes.

If we incur material liabilities as a result of acquiring surgical facilities, our operating results could be adversely affected.

Although we conduct extensive due diligence prior to the acquisition of surgical facilities and seek indemnification from prospective sellers covering unknown or contingent liabilities, we may acquire surgical facilities that have material liabilities for failure to comply with healthcare laws and regulations or other past activities. Although we maintain professional and general liability insurance, we do not currently maintain insurance specifically covering any unknown or contingent liabilities that may have occurred prior to the acquisition of surgical facilities. If we incur these liabilities and are not indemnified or insured for them, our operating results and financial condition could be adversely affected.

We depend on our relationships with not-for-profit healthcare systems. If we are not able to maintain our relationships with these not-for-profit healthcare systems, or enter into new relationships, we may be unable to implement our business strategies successfully.

Our business depends in part upon the efforts and success of our not-for-profit healthcare system partners and the strength of our relationships with those healthcare systems. Our business could be adversely affected by any damage to those healthcare systems’ reputations or to our relationships with them. We may not be able to maintain our existing agreements on terms and conditions favorable to us or enter into relationships with additional not-for-profit healthcare systems. Our relationships with not-for-profit healthcare systems and the joint venture agreements that represent these relationships are structured to comply with current revenue rulings published by the Internal Revenue Service as well as case law relevant to joint ventures between for-profit and not-for-profit healthcare entities. Material changes in these authorities could adversely affect our relationships with not-for-profit healthcare systems. If we are unable to maintain our existing arrangements on terms favorable to us or enter into relationships with additional not-for-profit healthcare systems, we may be unable to implement our business strategies successfully.

If we and our not-for-profit healthcare system partners are unable to successfully negotiate contracts and maintain satisfactory relationships with managed care organizations or other third-party payors, our revenues may decrease.

Our competitive position has been, and will continue to be, affected by initiatives undertaken during the past several years by major purchasers of healthcare services, including federal and state governments, insurance companies and employers, to revise payment methods and monitor healthcare expenditures in an effort to contain healthcare costs. As a result of these initiatives, managed care companies such as health maintenance and preferred provider organizations, which offer prepaid and discounted medical service packages, represent a growing segment of healthcare payors, the effect of which has been to reduce the growth of healthcare facility margins and revenue.

As an increasing percentage of patients become subject to healthcare coverage arrangements with managed care payors, we believe that our success will continue to depend upon our and our not-for-profit healthcare system partners’ ability to negotiate favorable contracts on behalf of our facilities with managed care organizations, employer groups and other private third-party payors. We have structured our ventures with not-for-profit healthcare system partners in a manner we believe to be consistent with applicable regulatory requirements. If applicable regulatory requirements were interpreted to require changes to our existing arrangements, or if we are unable to enter into these arrangements on satisfactory terms in the future, we could be adversely affected. Many of these payors already have existing provider structures in place and may not be able or willing to change their provider networks. We could also experience a material adverse effect to our operating results and financial condition as a result of the termination of existing third-party payor contracts.

Our surgical facilities face competition for patients from other healthcare providers.

The healthcare business is highly competitive, and competition among hospitals and other healthcare providers for patients has intensified in recent years. Generally, other facilities in the local communities served by our facilities provide services similar to those offered by our surgery centers and surgical hospitals. In addition, the number of freestanding surgical hospitals and surgery centers in the geographic areas in which we operate has increased significantly, and many of these facilities operate under different reimbursement models than we have traditionally seen. As a result, most of our surgery centers and surgical hospitals operate in a highly competitive environment. Some of the hospitals that compete with our facilities are owned by governmental agencies or not-for-profit corporations supported by endowments, charitable contributions and/or tax revenues and can finance capital expenditures and operations on a tax-exempt basis. Our surgery centers and surgical hospitals are facing increasing competition from unaffiliated physician-owned surgery centers and surgical hospitals for market share in high margin services and for quality physicians and personnel. If our competitors are better able to attract patients, recruit physicians, expand services or obtain favorable managed care contracts at their facilities than our surgery centers and surgical hospitals, we may experience an overall decline in patient volume.

The current state of the economy and future economic conditions may adversely impact our business.

The U.S. economy continues to experience difficult conditions. Burdened by economic constraints and higher patient deductibles, patients have delayed or canceled non-emergency surgical procedures. Although we have taken steps to minimize the impact of these conditions, it is difficult to predict the degree to which our business will continue to be impacted by such conditions or the course of the economy in the future.

Our surgical facilities may be negatively impacted by weather and other factors beyond our control.

The results of operations of our surgical facilities may be adversely impacted by adverse weather conditions, including hurricanes, or other factors beyond our control that cause disruption of patient scheduling, displacement of our patients, employees and physician partners and force certain of our surgical facilities to close

temporarily. In certain markets, we have a large concentration of surgical facilities that could be simultaneously affected by adverse weather conditions or events. In addition, an unexpected shortage in supplies used in our surgical procedures could increase the cost to perform cases or lead to rescheduling or possible cancelations, which in turn could negatively impact our financial performance. Our future financial and operating results may be adversely affected by weather and other factors that disrupt the operation of our surgical facilities.

Efforts to regulate the construction, acquisition or expansion of healthcare facilities could prevent us from acquiring additional surgical facilities, renovating our existing facilities or expanding the breadth of services we offer.

Many states in the United States require prior approval for the construction, acquisition or expansion of healthcare facilities or expansion of the services they offer. When considering whether to approve such projects, these states take into account the need for additional or expanded healthcare facilities or services. In a number of states in which we operate, we are required to obtain certificates of need for capital expenditures exceeding a prescribed amount, changes in bed capacity or services offered and under various other circumstances. Other states in which we now or may in the future operate may adopt certificate of need legislation or regulatory provisions. Our costs of obtaining a certificate of need have ranged up to $500,000. Although we have not previously been denied a certificate of need, we may not be able to obtain the certificates of need or other required approvals for additional or expanded facilities or services in the future. In addition, at the time we acquire a facility, we may agree to replace or expand the acquired facility. If we are unable to obtain the required approvals, we may not be able to acquire additional surgery centers or surgical hospitals, expand the healthcare services provided at these facilities or replace or expand acquired facilities.

If any of our existing health care facilities lose their accreditation or any of our new facilities fail to receive accreditation, such facilities could become ineligible to receive reimbursement under Medicare or Medicaid.

The construction and operation of healthcare facilities are subject to extensive federal, state and local regulation relating to, among other things, the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection. Additionally, such facilities are subject to periodic inspection by government authorities to assure their continued compliance with these various standards.

All of our facilities are deemed certified, meaning that they are accredited, properly licensed under the relevant state laws and regulations and certified under the Medicare program or are in the process of applying for such accreditation, licensing or certification. The effect of maintaining certified facilities is to allow such facilities to participate in the Medicare and Medicaid programs. We believe that all of our healthcare facilities are in material compliance with applicable federal, state, local and other relevant regulations and standards. However, should any of our healthcare facilities lose their deemed certified status and thereby lose certification under the Medicare or Medicaid programs, such facilities would be unable to receive reimbursement from either of those programs and our business could be materially adversely affected.

Failure to comply with federal and state statutes and regulations relating to patient privacy and electronic data security could negatively impact our financial results.

There are currently numerous federal and state statutes and regulations that address patient privacy concerns and federal standards that address the maintenance of the security of electronically maintained or transmitted electronic health information and the format of transmission of such information in common healthcare financing information exchanges. These provisions are intended to enhance patient privacy and the effectiveness and efficiency of healthcare claims and payment transactions. In particular, the Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 required us to implement new systems and to adopt business procedures for transmitting healthcare information and for protecting the privacy and security of individually identifiable information.

We believe that we are in material compliance with existing state and federal regulations relating to patient privacy, security and with respect to the format for electronic healthcare transactions. However, if we fail to comply with the federal privacy, security and transactions and code sets regulations, we could incur significant civil and criminal penalties. Failure to comply with state laws related to privacy could, in some cases, also result in civil fines and criminal penalties.

If we fail to comply with applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations.

We are subject to many laws and regulations at the federal, state and local government levels in the jurisdictions in which we operate. These laws and regulations require that our healthcare facilities meet various licensing, certification and other requirements, including those relating to:

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physician ownership of our facilities;

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the adequacy of medical care, equipment, personnel, operating policies and procedures;

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building codes;

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licensure, certification and accreditation;

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billing for services;

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handling of medication;

•

maintenance and protection of records; and

•

environmental protection.

We believe that we are in material compliance with applicable laws and regulations. However, if we fail or have failed to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in Medicare, Medicaid and other government sponsored healthcare programs. A number of initiatives have been proposed during the past several years to reform various aspects of the healthcare system in the United States. In the future, different interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. Current or future legislative initiatives or government regulation may have a material adverse effect on our operations or reduce the demand for our services.

In pursuing our growth strategy, we may expand our presence into new geographic markets. In entering a new geographic market, we will be required to comply with laws and regulations of jurisdictions that may differ from those applicable to our current operations. If we are unable to comply with these legal requirements in a cost-effective manner, we may be unable to enter new geographic markets.

If a federal or state agency asserts a different position or enacts new laws or regulations regarding illegal remuneration under the Medicare or Medicaid programs, we may be subject to civil and criminal penalties, experience a significant reduction in our revenues or be excluded from participation in the Medicare and Medicaid programs.

The federal anti-kickback statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referrals for items or services payable by Medicare, Medicaid, or any other federally funded healthcare program. Additionally, the anti-kickback statute prohibits any form of remuneration in return for purchasing, leasing or ordering, or arranging for or recommending the purchasing, leasing or ordering of items or services payable by Medicare, Medicaid or any other federally funded healthcare program. The anti-kickback statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. Moreover, several federal courts have held that the anti-kickback

statute can be violated if only one purpose (not necessarily the primary purpose) of a transaction is to induce or reward a referral of business, notwithstanding other legitimate purposes. Violations of the anti-kickback statute may result in substantial civil or criminal penalties, including up to five years imprisonment and criminal fines of up to $25,000 and civil penalties of up to $50,000 for each violation, plus three times the remuneration involved or the amount claimed and exclusion from participation in all federally funded healthcare programs. An exclusion, if applied to our surgery centers or surgical hospitals, could result in significant reductions in our revenues, which could have a material adverse effect on our business.

In July 1991, the Department of Health and Human Services issued final regulations defining various “safe harbors.” Two of the safe harbors issued in 1991 apply to business arrangements similar to those used in connection with our surgery centers and surgical hospitals: the “investment interest” safe harbor and the “personal services and management contracts” safe harbor. However, the structure of the partnerships and limited liability companies operating our surgery centers and surgical hospitals, as well as our various business arrangements involving physician group practices, do not satisfy all of the requirements of either safe harbor.

On November 19, 1999, the Department of Health and Human Services promulgated final regulations creating additional safe harbor provisions, including a safe harbor that applies to physician ownership of or investment interests in surgery centers. The surgery center safe harbor protects four types of investment arrangements: (1) surgeon owned surgery centers; (2) single specialty surgery centers; (3) multi-specialty surgery centers; and (4) hospital/physician surgery centers. Each category has its own requirements with regard to what type of physician may be an investor in the surgery center. In addition to the physician investor, the categories permit an “unrelated” investor, who is a person or entity that is not in a position to provide items or services related to the surgery center or its investors. Our business arrangements with our surgical facilities typically consist of one of our subsidiaries being an investor in each partnership or limited liability company that owns the facility, in addition to providing management and other services to the facility. Therefore, our business arrangements with our surgery centers, surgical hospitals and physician groups do not qualify for “safe harbor” protection from government review or prosecution under the anti-kickback statute. When a transaction or relationship does not fit within a safe harbor, it does not mean that an anti-kickback violation has occurred; rather, it means that the facts and circumstances as well as the intent of the parties related to a specific transaction or relationship must be examined to determine whether or not any illegal conduct has occurred.

Although we believe that our business arrangements do not violate the anti-kickback statute, a government agency or a private party may assert a contrary position. Additionally, new federal or state laws may be enacted that would cause our relationships with the physician investors to become illegal or result in the imposition of penalties against us or our facilities. If any of our business arrangements with physician investors were deemed to violate the anti-kickback statute or similar laws, or if new federal or state laws were enacted rendering these arrangements illegal, our business could be adversely affected.

Also, most of the states in which we operate have adopted anti-kickback laws, many of which apply more broadly to all third-party payors, not just to federal or state healthcare programs. Many of the state laws do not have regulatory safe harbors comparable to the federal provisions and have only rarely been interpreted by the courts or other governmental agencies. We believe that our business arrangements do not violate these state laws. Nonetheless, if our arrangements were found to violate any of these anti-kickback laws, we could be subject to significant civil and criminal penalties that could adversely affect our business.

If physician self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur significant sanctions and loss of reimbursement revenues.

The U.S. federal physician self-referral law, commonly referred to as the “Stark Law,” prohibits a physician from making a referral for a “designated health service” to an entity to furnish an item or service payable under Medicare if the physician or a member of the physician’s immediate family has a financial relationship with the

entity such as an ownership interest or compensation arrangement, unless an exception applies. The list of designated health services under the Stark Law does not include ambulatory surgery services as such. However, some of the designated health services are among the types of services furnished by our facilities.

The Department of Health and Human Services, acting through the Centers for Medicare and Medicaid Services, has promulgated regulations implementing the Stark Law. These regulations exclude health services provided by an ambulatory surgery center from the definition of “designated health services” if the services are included in the facility’s composite Medicare payment rate. Therefore, the Stark Law’s self-referral prohibition generally does not apply to health services provided by a surgery center. However, if the surgery center is separately billing Medicare for designated health services that are not covered under the surgery center’s composite Medicare payment rate, or if either the surgery center or an affiliated physician is performing (and billing Medicare) for procedures that involve designated health services that Medicare has not designated as an ambulatory surgery center service, the Stark Law’s self-referral prohibition would apply and such services could implicate the Stark Law. We believe that our operations do not violate the Stark Law, as currently interpreted.

In addition, we believe that physician ownership of surgery centers is not prohibited by similar self-referral statutes enacted at the state level. However, the Stark Law and similar state statutes are subject to different interpretations with respect to many important provisions. Violations of these self-referral laws may result in substantial civil or criminal penalties, including large civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs. Exclusion of our surgery centers or surgical hospitals from these programs through future judicial or agency interpretation of existing laws or additional legislative restrictions on physician ownership or investments in healthcare entities could result in significant loss of reimbursement revenues.

We may be subject to actions for false and other improper claims.

Federal and state government agencies, as well as private payors, have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of the cost reporting and billing practices of healthcare organizations and their quality of care and financial relationships with referral sources. In addition, the Office of the Inspector General of the U.S. Department of Health and Human Services, and the U.S. Department of Justice have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse.

The U.S. government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs and other federal and state healthcare programs. Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes, as well as penalties under the anti-fraud provisions of the HIPAA. The U.S. government is applying its criminal, civil and administrative penalty statutes in an ever-expanding range of circumstances. For example, the government has taken the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant should have known the services were unnecessary, even if the government cannot demonstrate actual knowledge. The government has also taken the position that claiming payment for low-quality services is a violation of these statutes if the claimant should have known that the care was substandard. The Fraud Enforcement and Recovery Act of 2009 (“FERA”) further expanded the scope of the False Claims Act to create liability for knowingly and improperly avoiding or decreasing an obligation to pay money to the federal government and FERA, along with statutory provisions found in the Acts, created federal False Claims Act liability for the knowing failure to report and return an overpayment within 60 days of the identification of the overpayment or, in certain cases, the date by which a corresponding cost report is due, whichever is later. Although we believe that our operations comply with both federal and state laws, they may nevertheless be the subject of a whistleblower lawsuit or may otherwise be challenged or scrutinized by governmental authorities. A determination that we have violated these laws could have a material adverse effect on our financial condition or results of operations.

Companies within the healthcare industry continue to be the subject of federal and state audits and investigations, which increases the risk that we may become subject to investigations in the future.

Both federal and state government agencies, as well as private payors, have heightened and coordinated audits and administrative, civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare organizations. These investigations relate to a wide variety of topics, including the following:

•

cost reporting and billing practices;

•

quality of care;

•

financial reporting;

•

financial relationships with referral sources; and

•

medical necessity of services provided.

In addition, the Office of the Inspector General of the Department of Health and Human Services and the Department of Justice have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. In its 2013 Work Plan, the office of the Inspector General states its intent to review the safety and quality of care for Medicare beneficiaries having surgeries and procedures in ambulatory surgery centers and hospital outpatient departments. We have not received any related audit letters to date. Moreover, another trend impacting healthcare providers is the increased use of the federal False Claims Act, particularly by individuals who bring actions under that law. Such “qui tam” or “whistleblower” actions allow private individuals to bring actions on behalf of the government alleging that a healthcare provider has defrauded the federal government. If the government intervenes and prevails in the action, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil monetary penalties of between $5,500 and $11,000 for each false claim submitted to the government. As part of the resolution of a qui tam case, the party filing the initial complaint may share in a portion of any settlement or judgment. If the government does not intervene in the action, the qui tam plaintiff may pursue the action independently. Additionally, some states have adopted similar whistleblower and false claims provisions. Although companies in the healthcare industry have been, and may continue to be, subject to qui tam actions, we are unable to predict the impact of such actions on our business, financial position or results of operations.

If laws governing the corporate practice of medicine or fee-splitting change, we may be required to restructure some of our relationships which may result in significant costs to us and divert other resources.

The laws of various jurisdictions in which we operate or may operate in the future do not permit business corporations to practice medicine, exercise control over physicians who practice medicine or engage in various business practices, such as fee-splitting with physicians (i.e., sharing a percentage of professional fees). The interpretation and enforcement of these laws vary significantly from state to state. We are not required to obtain a license to practice medicine in any jurisdiction in which we own or operate a surgery center or surgical hospital because our facilities are not engaged in the practice of medicine. The physicians who utilize our facilities are individually licensed to practice medicine. In most instances, the physicians and physician group practices performing medical services at our facilities do not have investment or business relationships with us other than through the physicians’ ownership interests in the partnerships or limited liability companies that own and operate our facilities and the service agreements we have with some of those physicians.

Through our OrthoLink subsidiary, we provide consulting and administrative services to a number of physicians and physician group practices affiliated with OrthoLink. Although we believe that our arrangements with these and other physicians and physician group practices comply with applicable laws, a government agency charged with enforcement of these laws, or a private party, might assert a contrary position. If our arrangements with these physicians and physician group practices were deemed to violate state corporate practice of medicine, fee-splitting or similar laws, or if new laws are enacted rendering our arrangements illegal, we may be required to restructure these arrangements, which may result in significant costs to us and divert other resources.

If regulations change, we may be obligated to purchase some or all of the ownership interests of the physicians affiliated with us.

Upon the occurrence of various fundamental regulatory changes, we could be obligated to purchase some or all of the ownership interests of the physicians affiliated with us in the partnerships or limited liability companies that own and operate our surgery centers and surgical hospitals. The regulatory changes that could create this obligation include changes that:

•

make illegal the referral of Medicare or other patients to our surgical facilities by physicians affiliated with us;

•

create the substantial likelihood that cash distributions from the limited partnerships or limited liability companies through which we operate our surgical facilities to physicians affiliated with us would be illegal; or

•

make illegal the ownership by the physicians affiliated with us of interests in the partnerships or limited liability companies through which we own and operate our surgical facilities.

At this time, we are not aware of any regulatory amendments or proposed changes that would trigger this obligation. Typically, our partnership and limited liability company agreements allow us to use shares of our common stock as consideration for the purchase of a physician’s ownership interest. The use of shares of our common stock for that purpose would dilute the ownership interests of our common stockholders. In the event that we are required to purchase all of the physicians’ ownership interests and our common stock does not maintain a sufficient valuation, we could be required to use our cash resources for the acquisitions, the total cost of which we estimate to be up to approximately $623.5 million at December 31, 2012. The creation of these obligations and the possible termination of our affiliation with these physicians could have a material adverse effect on us.

Healthcare reform has restricted our ability to operate our surgical hospitals.

The Acts provide, among other things: (i) a prohibition on hospitals from having any physician ownership unless the hospital already had physician ownership and a Medicare provider agreement in effect on December 31, 2010; (ii) a limitation on the maximum percentage of total physician ownership in the hospital to the percentage of physician ownership as of March 23, 2010; (iii) a requirement for written disclosures of physician ownership interests, along with an annual report to the government detailing such ownership; and (iv) restrictions on the ability of a hospital subject to the whole hospital exception to add operating rooms, procedure rooms and beds.

Thirteen of our existing hospitals were grandfathered at the dates of enactment of the Acts, although they are largely prohibited from expanding their physical plants. Our fourteenth hospital does not have any physician ownership. If future legislation were to be enacted by Congress that prohibits physician referrals to hospitals in which the physicians own an interest, or that otherwise further limits physician ownership in existing facilities, our financial condition and results of operations could be materially adversely affected.

If we become subject to significant legal actions, we could be subject to substantial uninsured liabilities.

In recent years, physicians, surgery centers, hospitals and other healthcare providers have become subject to an increasing number of legal actions alleging malpractice or related legal theories. Many of these actions involve large monetary claims and significant defense costs. In particular, since the majority of our hospitals maintain emergency departments, there is an increased risk of claims at these facilities because of the nature of the cases seen in the emergency departments. We do not employ any of the physicians who conduct surgical procedures at our facilities and the governing documents of each of our facilities require physicians who conduct surgical procedures at our facilities to maintain stated amounts of insurance. Additionally, to protect us from the cost of these claims, we maintain (through a captive insurance company) professional malpractice liability

insurance and general liability insurance coverage in amounts and with deductibles that we believe to be

appropriate for our operations. Although we have excess coverage beyond our captive, we are effectively self-insured up to the excess. If we become subject to claims, however, our insurance coverage may not cover all claims against us or continue to be available at adequate levels of insurance. If one or more successful claims against us were not covered by or exceeded the coverage of our insurance, we could be adversely affected.

If we are unable to effectively compete for physicians, strategic relationships, acquisitions and managed care contracts, our business could be adversely affected.

The healthcare business is highly competitive. We compete with other healthcare providers, primarily other surgery centers and hospitals, in recruiting physicians and contracting with managed care payors in each of our markets. There are major unaffiliated hospitals in each market in which we operate. These hospitals have established relationships with physicians and payors. In addition, other companies either are currently in the same or similar business of developing, acquiring and operating surgery centers and surgical hospitals or may decide to enter our business. Many of these companies have greater financial, research, marketing and staff resources than we do. We may also compete with some of these companies for entry into strategic relationships with not-for-profit healthcare systems and healthcare professionals. If we are unable to compete effectively with any of these entities, we may be unable to implement our business strategies successfully and our business could be adversely affected.

Because our senior management has been key to our growth and success, we may be adversely affected if we lose any member of our senior management.

We are highly dependent on our senior management, including Donald E. Steen, who is our chairman, William H. Wilcox, who is our chief executive officer and Brett P. Brodnax, who is our president and chief development officer. Although we have employment agreements with Mr. Steen, Mr. Wilcox and Mr. Brodnax and other senior managers, we do not maintain “key man” life insurance policies on any of our officers. Because our senior management has contributed greatly to our growth since inception, the loss of key management personnel or our inability to attract, retain and motivate sufficient numbers of qualified management or other personnel could have a material adverse effect on us.

The growth of patient receivables and a deterioration in the collectability of these accounts could adversely affect our results of operations.

The primary collection risks of our accounts receivable relate to patient receivables for which the primary insurance carrier has paid the amounts covered by the applicable agreement but patient responsibility amounts (deductibles and copayments) remain outstanding. The allowance for doubtful accounts relates primarily to amounts due directly from patients.

We provide for bad debts principally based upon the aging of accounts receivable and use specific identification to write-off amounts against our allowance for doubtful accounts, without differentiation between payor sources. Our allowance for doubtful accounts at December 31, 2012 and 2011, represented approximately 16% and 17% of our accounts receivable balance, respectively. Due to the difficulty in assessing future trends, we could be required to increase our provisions for doubtful accounts. A deterioration in the collectability of these accounts could adversely affect our collection of accounts receivable, cash flows and results of operations.

We may have a special legal responsibility to the holders of ownership interests in the entities through which we own surgical facilities, and that responsibility may prevent us from acting solely in our own best interests or the interests of our stockholders.

Our ownership interests in surgery centers and surgical hospitals generally are held through partnerships or limited liability companies. We typically maintain an interest in a partnership or limited liability company in which physicians or physician practice groups also hold interests. As general partner or manager of these entities,

we may have a special responsibility, known as a fiduciary duty, to manage these entities in the best interests of the other owners. We also have a duty to operate our business for the benefit of our stockholders. As a result, we may encounter conflicts between our responsibility to the other owners and our responsibility to our stockholders. For example, we have entered into management agreements to provide management services to our facilities in exchange for a fee. Disputes may arise as to the nature of the services to be provided or the amount of the fee to be paid. In these cases, we are obligated to exercise reasonable, good faith judgment to resolve the disputes and may not be free to act solely in our own best interests. Disputes may also arise between us and our affiliated physicians with respect to a particular business decision or regarding the interpretation of the provisions of the applicable partnership or limited liability company agreement. If we are unable to resolve a dispute on terms favorable or satisfactory to us, our business may be adversely affected.

We do not have exclusive control over the distribution of revenues from some of our operating entities and may be unable to cause all or a portion of the revenues of these entities to be distributed.

All of the surgical facilities in which we have ownership interests are partnerships or limited liability companies in which we own, directly or indirectly, ownership interests. Our partnership, and limited liability company agreements, which are typically with the physicians who perform procedures at our surgical facilities, usually provide for the monthly or quarterly pro-rata cash distribution of net profits from operations, less amounts to satisfy obligations such as the entities’ non-recourse debt and capitalized lease obligations, operating expenses and working capital. The creditors of each of these partnerships and limited liability companies are entitled to payment of the entities’ obligations to them, when due and payable, before ordinary cash distributions or distributions in the event of liquidation, reorganization or insolvency may be made. We generally control the entities that function as the general partner of the partnerships or the managing member of the limited liability companies through which we conduct operations. However, we do not have exclusive control in some instances over the amount of net revenues distributed from some of our operating entities. If we are unable to cause sufficient revenues to be distributed from one or more of these entities, our relationships with the physicians who have an interest in these entities may be damaged and we could be adversely affected. We may not be able to resolve favorably any dispute regarding revenue distribution or other matters with a healthcare system with which we share control of one of these entities. Further, the failure to resolve a dispute with these healthcare systems could cause the entity we jointly control to be dissolved.

Welsh Carson controls us and may have conflicts of interest with us or you in the future.

An investor group led by Welsh Carson owns substantially all of the outstanding equity securities of our Parent, USPI Group Holdings, Inc. Welsh Carson controls a majority of the voting power of such outstanding equity securities and therefore ultimately controls all of our affairs and policies, including the election of our board of directors, the approval of certain actions such as amending our charter, commencing bankruptcy proceedings and taking certain corporate actions (including, without limitation, incurring debt, issuing stock, selling assets and engaging in mergers and acquisitions), and appointing members of our management. The interests of Welsh Carson could conflict with your interests.

Additionally, Welsh Carson is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Welsh Carson may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by Welsh Carson continue to indirectly own a significant amount of our capital stock, even if such amount is less than 50% of our outstanding common stock on a fully-diluted basis, Welsh Carson will continue to be able to strongly influence or effectively control our decisions.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The response to this item is included in Item 1.

Item 3. Legal Proceedings

From time to time, we may be named as a party to legal claims and proceedings in the ordinary course of business. We are not aware of any claims or proceedings against us or our subsidiaries that might have a material adverse impact on us.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

We are wholly-owned by USPI Holdings, Inc., which is wholly-owned by USPI Group Holdings, Inc., both of which are privately owned corporations. There is no public trading market for our equity securities or those of USPI Holdings, Inc. or USPI Group Holdings, Inc. As of February 26, 2013, there were 256 holders of USPI Group Holdings, Inc. common stock.

Payment of dividends is restricted under our amended senior secured credit facility and the indenture governing our senior notes, except for limited circumstances. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financing Activities — Dividend Payment.” Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operation, capital requirements, restrictions contained in current and future financing instruments and other factors that our board of directors deems relevant.

Item 6. Selected Financial Data

The selected consolidated statement of operations data set forth below for the years ended December 31, 2012, 2011, 2010, 2009 and 2008 and the consolidated balance sheet data at December 31, 2012, 2011, 2010, 2009, and 2008 are derived from our consolidated financial statements.

The historical results presented below are not necessarily indicative of results to be expected for any future period. The comparability of the financial and other data included in the table is affected by our debt refinancing in April 2012, the U.K. goodwill impairment in 2011 (now presented in discontinued operations), and various acquisitions completed during the years presented. In addition, the results of operations of subsidiaries sold by us, including the spin-off of our U.K. subsidiary in April 2012 have been reclassified to “discontinued operations” for all data presented in the table below except for the “consolidated balance sheet data.” For a more detailed explanation of this financial data, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this report.


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008
Consolidated Statements of Operations Data:
Total revenues	$	540,235		$	499,178		$	473,949		$	488,378		$	493,066
Equity in earnings of unconsolidated affiliates		96,393			83,137			69,916			61,771			47,042
Operating expenses excluding depreciation and amortization		(367,439	)		(327,479	)		(326,762	)		(347,542	)		(341,987	)
Depreciation and amortization		(23,955	)		(21,177	)		(22,493	)		(24,431	)		(25,480	)

Operating income		245,234			233,659			194,610			178,176			172,641
Other income (expense):
Interest income		676			516			742			1,729			3,237
Interest expense		(85,934	)		(63,537	)		(66,886	)		(67,770	)		(79,701	)
Loss on early retirement of debt		(37,450	)		—			—			—			—
Other, net		(613	)		(73	)		708			373			32

Income from continuing operations before income taxes		121,913			170,565			129,174			112,508			96,209
Income tax benefit (expense)		(21,502	)		(39,918	)		(29,257	)		5,455			(17,215	)

Income from continuing operations		100,411			130,647			99,917			117,963			78,994
Earnings (loss) from discontinued operations, net of tax		3,073			(111,562	)		2,736			15,425			13,658

Net income		103,484			19,085			102,653			133,388			92,652
Less: Net income attributable to noncontrolling interests		(72,693	)		(69,929	)		(60,560	)		(63,722	)		(55,138	)

Net income (loss) attributable to USPI’s common stockholder	$	30,791		$	(50,844	)	$	42,093		$	69,666		$	37,514

Other Data:
Number of facilities operated as of the end of period(a):
Consolidated		64			59			54			56			59
Equity method		149			141			130			109			102
Management contract only		—			—			1			—			—

Total		213			200			185			165			161

Cash flows from operating activities	$	180,313		$	164,667		$	148,318		$	162,019		$	123,573


	As of December 31,
	2012			2011			2010			2009			2008
Consolidated Balance Sheet Data:
Working capital (deficit)	$	(102,432	)	$	(121,909	)	$	(100,249	)	$	(113,016	)	$	(38,838	)
Cash and cash equivalents		51,203			41,822			60,253			34,890			49,435
Total assets		2,360,749			2,393,498			2,372,739			2,325,392			2,268,163
Total debt		1,479,534			1,068,456			1,069,826			1,071,528			1,097,947
Noncontrolling interests — redeemable		153,399			106,668			81,668			63,865			51,961
Total equity		271,987			767,871			821,151			798,003			806,217

(a)	Not derived from audited financial statements; excludes U.K. facilities.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this report.

Overview

We operate ambulatory surgery centers and surgical hospitals across the United States. Prior to April 3, 2012, we also owned and operated private healthcare facilities in the United Kingdom (U.K.). On April 3, 2012, we declared a stock dividend which distributed our investment in our U.K. subsidiary to the equity holders of our parent, USPI Group Holdings, Inc. (Parent), and as a result, we no longer own or operate facilities in the U.K. Our U.K. operations are now classified as “discontinued operations” in our historical results of operations.

As of December 31, 2012, we operated 213 facilities. All but two of our 213 facilities include local physician owners, and 145 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 these healthcare systems provide a framework for the planning and construction of additional facilities in the future. During 2012, we acquired facilities with existing hospital partners in Arizona, Tennessee and California, and we acquired facilities with new hospital partners in Texas, New Jersey and Louisiana. Our newest facility, a surgical center in Philadelphia, Pennsylvania, which opened in December 2012, also has a hospital partner.

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

Prior to April 3, 2012, we operated and owned four hospitals, an oncology clinic, a diagnostic and surgery center and an eye clinic in the U.K., which supplement the services provided by the government-sponsored healthcare system. Patients at these facilities choose to receive care at private facilities primarily because of the long wait 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 some employers as a benefit to their employees. In 2011, we acquired a controlling interest in a diagnostic and surgery center located in Edinburgh, Scotland and a hospital in Sheffield, England. In March 2012, we acquired an eye clinic in Solihull, England. As described above, we have had no ownership in the U.K. operations since April 3, 2012.

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 in the future in existing and new markets and that many of these will include hospital partners.

Due in large part to our partnerships with physician and hospital partners, we do not consolidate 149 of the 213 facilities in which we have ownership interests. 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 of USPI, we believe the information is important in understanding our financial performance because these revenues are the basis for calculating our management services revenues and, together with the expenses of our unconsolidated facilities, are the basis for our equity in earnings of unconsolidated affiliates. In addition, we disclose growth rates and operating margins (both consolidated and unconsolidated) for the facilities that were operational in both the current and prior year periods, a group that 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 and accounts receivable, income taxes, and goodwill and intangible assets.

Consolidation

We generally own less than 100% of each facility we operate. As discussed in “Results of Operations,” local physicians have invested in all but two of our facilities. A majority of our facilities also include a hospital partner. We generally have a leadership role in these facilities through a significant voting and economic interest and a contract to manage each facility’s operations, but the degree of control we have varies from facility to facility. Accordingly, as of December 31, 2012, we consolidated the financial results of 64 of the facilities we operate and accounted for 149 under the equity method.

Our consolidated financial statements include our accounts, the accounts of our wholly owned subsidiaries, and other investees over which we have control or of which we are the primary beneficiary. Investments in companies that we neither control nor are the primary beneficiary, but over whose operations we have the ability to exercise significant influence (including some investees in which we have less than 20% ownership), are accounted for under the equity method. We also consider the relevant sections of the Financial Accounting Standards Board’s Accounting Standards Codification, Topic 810, Consolidation to determine if we are the primary beneficiary of (and therefore should consolidate) any entity whose operations we do not control with voting rights. See further discussion in Note 5 to our consolidated financial statements.

Accounting for an investment as consolidated versus equity method has no impact on our net income (loss) or total equity in any accounting period, but it does impact individual balances within the consolidated statement of operations and consolidated balance sheet. Under either consolidation or equity method accounting, our results of operations include our share, generally corresponding to our ownership percentage, of the underlying facility’s net income or loss.

Revenue Recognition and Accounts Receivable

We recognize revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, as updated, which has four criteria that must be met before revenue is recognized:

•

Existence of persuasive evidence that an arrangement exists;

•

Delivery has occurred or services have been rendered;

•

The seller’s price to the buyer is fixed or determinable; and

•

Collectibility is reasonably assured.

Our revenue recognition policies are consistent with these criteria. Approximately 90% of our facilities’ surgical cases are performed under contracted or government mandated fee schedules or discount arrangements.

The patient service revenues recorded for these cases are recorded at the contractually defined amount at the time of billing. We estimate the remaining revenue based on historical collections, and adjustments to these estimates in subsequent periods have not had a material impact in any period presented. If the discount percentage used in estimating revenues for the cases not billed pursuant to fee schedules were changed by 1%, our 2012 after-tax net income would change by approximately $0.2 million. The collection cycle for patient services revenue is relatively short, typically ranging from 30 to 60 days depending upon payor and geographic norms, which allows us to evaluate our estimates frequently. Our revenues earned under management and other service contracts are typically based upon objective formulas driven by an entity’s financial performance and are generally earned and paid monthly.

In 2012, uninsured or self-pay revenues only accounted for 2% of our revenue and approximately 14% of our accounts receivable balance was comprised of amounts owed from patients, including the patient portion of amounts covered by insurance. Insurance revenues (including government payors) accounted for 98% of our 2012 revenue and approximately 86% of our accounts receivable balance was comprised of amounts owed from contracted payors. Our facilities primarily perform surgery that is scheduled in advance by physicians who have already seen the patient. As part of our internal control processes, we verify benefits, obtain insurance authorization, calculate patient financial responsibility and notify the patient of their responsibility, usually prior to surgery. The nature of our business is such that we do not have any significant receivables that are pending approval from third-party payors. We also focus our collection efforts on aged accounts receivable. However, due to complexities involved in insurance reimbursements and inherent limitations in verification procedures, our business will always have some level of bad debt expense. In both 2012 and 2011, our bad debt expense was approximately 2% of revenue. In addition, as of both December 31, 2012 and 2011, our average days sales outstanding were 35 days and 33 days, respectively. The aging of our accounts receivable at December 31, 2012 was 62% less than 60 days old, 13% between 60 and 120 days and 25% over 120 days old. Our bad debt allowance at December 31, 2012 and 2011 represented approximately 16% and 17% of our accounts receivable balance, respectively.

Due to the nature of our business, management relies upon the aging of accounts receivable as its primary tool to estimate bad debt expense. Therefore, we reserve for bad debt based principally upon the aging of accounts receivable, without differentiating by payor source. We write off accounts on an individual basis based on that aging. We believe our reserve policy allows us to accurately estimate our allowance for doubtful accounts and bad debt expense.

Income Taxes

Our 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 our consolidated balance sheets. This estimation process requires that we evaluate the need to accrue deferred tax liabilities or 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. While we recognized the benefit of the majority of our deferred tax assets in 2009, we still carry a valuation allowance against deferred tax assets that have restrictions as to use and are not considered more likely than not to be realized. If our estimates related to the above items change significantly, we may need to alter the amount of our valuation allowance in the future through a favorable or unfavorable adjustment to net income.

Goodwill and Intangible Assets

Given the significance of our intangible assets as a percentage of our total assets, we also consider our accounting policy regarding goodwill and intangible assets to be a critical accounting policy. Consistent with GAAP, we do not amortize goodwill or indefinite-lived intangibles but rather test them for impairment annually or more often when circumstances change in a manner that indicates they may be impaired. Impairment tests occur at the reporting unit level for goodwill. Historically, our reporting units were defined as our operating

segments (United States and United Kingdom). Due to the spin-off of our U.K. subsidiary in April 2012, we now operate in one segment and test goodwill within one reporting unit. Our intangible assets consist primarily of indefinite-lived rights to manage individual surgical facilities. The values of these rights are tested individually. Intangible assets with definite lives primarily consist of rights to provide management and other contracted services to surgical facilities, hospitals, and physicians. These assets are amortized over their estimated useful lives, and the portfolios are tested for impairment when circumstances change in a manner that indicates their carrying values may not be recoverable.

To determine the fair value of our goodwill reporting unit, we generally use a present value technique (discounted cash flow) corroborated by market multiples and/or data from third-party valuation specialists. The factor most sensitive to change with respect to our discounted cash flow analyses is the estimated future cash flows of the reporting unit which is, in turn, sensitive to our estimates of future revenue growth and margins for the business. If actual revenue growth and/or margins are lower than our expectations, the impairment test results could differ. We base our fair value estimates on assumptions we believe to be reasonable and consistent with market participant assumptions, but that are unpredictable and inherently uncertain. The provisions of the accounting standard for goodwill require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.

Based on the results of our annual goodwill impairment testing performed in the 4^th quarter of 2012, our reporting unit’s estimated fair value substantially exceeds its carrying value.

In 2011, we recorded a $107.0 million goodwill impairment charge related to our former U.K. reporting unit, due primarily to declining market values of businesses similar to our U.K. operations as well as general economic conditions which affected the demand for our services in this market. Due to the spin-off of our U.K. subsidiary in April 2012, this impairment charge is now included within “discontinued operations” in our consolidated statement of operations.

In tests for impairment of indefinite-lived intangible assets, the fair value of the asset is compared to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized. Fair values for indefinite-lived intangible assets are estimated based on market multiples and discounted cash flow models which have been derived based on our experience in acquiring surgical facilities, market participant assumptions and third-party valuations we have obtained with respect to such transactions.

Merger Transaction

We had publicly traded equity securities from June 2001 through April 2007. Pursuant to an Agreement and Plan of Merger (the merger) dated as of January 7, 2007, between an affiliate of Welsh, Carson, Anderson & Stowe X, L.P. (Welsh Carson), we became a wholly owned subsidiary of USPI Holdings, Inc. on April 19, 2007. USPI Holdings is a wholly owned subsidiary of USPI Group Holdings, Inc. (Parent), which is owned by an investor group that includes affiliates of Welsh Carson, members of our management and other investors.

Acquisitions, Equity Investments and Development Projects

We acquire interests in existing surgery facilities from third parties and invest in new facilities that we develop in partnership with hospital partners and local physicians. Some of these transactions result in our controlling the acquired entity and meet the GAAP definition of a business combination. The financial results of

acquired entities are included in our consolidated financial statements beginning on the acquisition’s effective date. During the year ended December 31, 2012, we obtained control of the following entities:


Effective Date	Facility Location	Amount
Investments
November 2012	Various(1)	$	65.4 million
November 2012	Hackensack, New Jersey(2)		0 million
October 2012	Clarksville, Tennessee(3)		4.6 million
June 2012	Cherry Hill, New Jersey(4)		17.1 million

Total		$	87.1 million

(1)

As further discussed below, we acquired 100% of the equity interests of AIGB Holdings, Inc. (True Results). True Results has an equity investment in five surgery centers, all of which are located in markets in which we already operate. The purchase price noted above is net of approximately $5.8 million of cash acquired.

(2)

We obtained control of this facility in which we already had ownership due to changes in the voting rights of the facility. Although no consideration was transferred, GAAP requires the transaction to be accounted for as a business combination and requires adjusting the carrying value of our existing ownership to its fair value. As a result, we recorded a loss totaling approximately $6.5 million for the year ended December 31, 2012, which is included in “Net (gains) losses on deconsolidations, disposals and impairments” in the accompanying consolidated statements of operations.

(3)	Acquisition of a controlling interest in and right to manage a surgical facility in which we previously had no involvement. This facility is jointly owned with local physicians and a hospital partner.

(4)

Acquisition of a controlling interest in a surgical facility in which we already had an equity method investment and the right to manage. This facility is jointly owned with local physicians. We recorded a gain of approximately $0.2 million as a result of adjusting the carrying value of our existing ownership to fair value as required by GAAP. The gain is included in “Net (gains) losses on deconsolidations, disposals and impairments” in the accompanying consolidated statements of operations.

Effective November 8, 2012, we completed the acquisition of 100% of the equity interests in True Results, a privately-held, Dallas, Texas-based owner and operator of surgery centers specializing in weight loss services. We paid cash totaling approximately $65.4 million, which is net of $5.8 million of cash acquired, subject to certain purchase price adjustments set forth in the purchase agreement. We funded the purchase using cash on hand and by drawing on our revolving credit facility. We incurred approximately $0.7 million in acquisition costs, which are included in “general and administrative expenses” in the accompanying consolidated statements of operations.

In January 2013, we contributed two of the surgery centers acquired in the True Results acquisition to a joint venture with one of our hospital partners, Baylor Healthcare System (Baylor). Baylor, which is a related party, paid us approximately $9.0 million for a ownership interests in the two surgery centers, which we believe approximates fair value as if it had been negotiated on an arms’ length basis. We continue to account for these facilities under the equity method.

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 year ended December 31, 2012, these transactions resulted in a net cash outflow of approximately $54.5 million, which is summarized as follows


Effective Date	Facility Location	Amount
Investments
December 2012	Effingham, Illinois(1)	$	23.4 million
December 2012	Covington, Louisiana(2)		9.2 million
December 2012	Stockton, California(2)		0.7 million
September 2012	New Jersey(3)		12.3 million
March 2012	Chandler, Arizona(2)		0.8 million
February 2012	Midland, Texas(2)		3.0 million
Various	Various(4)		5.1 million

Total		$	54.5 million

(1)	Acquisition of a noncontrolling interest in and right to manage a surgical facility in which we previously had no involvement. The facility is jointly owned with local physicians.

(2)	Acquisition of a noncontrolling interest in and right to manage a surgical facility in which we previously had no involvement. The facility is jointly owned with a hospital partner and local physicians.

(3)	Acquisition of a noncontrolling interest in and right to manage two surgical facilities in Hackensack and Paramus, New Jersey, respectively, in which we previously had no involvement. The facilities are jointly owned with a hospital partner and local physicians.

(4)	Represents the net payment related to various other purchases and sales of equity interests and contributions of cash to equity method investees.

We control and therefore consolidate 64 of our 213 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 types of transactions are accounted for as equity transactions, as they are undertaken among us, our consolidated subsidiaries, and noncontrolling interests. During the year ended December 31, 2012, we purchased and sold equity interests in various consolidated subsidiaries in the amounts of $4.0 million and $8.8 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 $17.1 million decrease to our additional paid-in capital during the year ended December 31, 2012.

During the year ended December 31, 2011, we obtained control of the following entities:


Effective Date	Facility Location	Amount
Investments
December 2011	San Diego, California(1)	$	3.3 million
September 2011	Various(2)		43.4 million
September 2011	Rancho Mirage, California(3)		—
April 2011	Destin, Florida(3)		—

Total — continuing operations			46.7 million
December 2011	Sheffield, England(4)		23.1 million
December 2011	Edinburgh, Scotland(5)		0.9 million

Total — discontinued operations			24.0 million

Total		$	70.7 million

(1)	Acquisition of a controlling interest in and right to manage a surgical facility in which we previously had no involvement. This facility is jointly owned with local physicians.

(2)	We acquired 100% of the equity interests in Titan Health Corporation (Titan). The purchase price noted above is net of approximately $5.0 million of cash acquired.

(3)

We obtained control of two separate facilities in which we already had ownership due to changes in the voting rights of the facilities. Although no consideration was transferred, GAAP requires the transactions to be accounted for as business combinations and requires adjusting the carrying value of our existing ownership to its fair value. As a result, we recorded gains totaling $1.8 million for the year ended December 31, 2011, which are included in “Net (gains) losses on deconsolidations, disposals and impairments” in the accompanying consolidated statements of operations.

(4)	Acquisition of 100% of a hospital in which we previously had no involvement. This hospital was purchased by our former U.K. subsidiary which was spun-off on April 3, 2012.

(5)	Acquisition of a controlling interest in a diagnostic and surgical facility in which we already held an ownership interest. The remainder of the facility is owned by local physicians. This facility was purchased by our former U.K. subsidiary which was spun-off on April 3, 2012.

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 year ended December 31, 2011, these transactions resulted in a net cash outflow of approximately $39.1 million, which is summarized as follows:


Effective Date	Facility Location	Amount
Investments
December 2011	Hackensack, New Jersey(1)	$	23.7 million
September 2011	Various(2)		14.3 million
March 2011	Plano, Texas(3)		1.9 million
March 2011	Oklahoma City, Oklahoma(4)		1.2 million
January 2011	Dallas, Texas(5)		1.3 million
January 2011	Rancho Mirage, California(6)		0.5 million

Total — continuing operations			42.9 million
January 2011 — discontinued operations	Edinburgh, Scotland(7)		1.1 million

Sales
August 2011	Dallas, Texas(8)		1.6 million
Various	Various(9)		3.3 million

			4.9 million

Total		$	39.1 million

(1)	Acquisition of an equity interest in and right to manage a surgical facility in which we previously had no involvement. This facility is jointly owned with local physicians.

(2)	Through negotiations with each facility’s other owners, we acquired additional ownership in six of Titan’s facilities. These facilities are jointly owned with local physicians and one facility also has a hospital partner.

(3)

Represents additional capital we contributed to a joint venture with one of our not-for-profit hospital partners, which the joint venture used to acquire an equity interest in this facility. The remainder of this facility is owned by local physicians. We also acquired the right to manage this facility.

(4)	Represents additional capital we contributed to a facility in which we hold an equity interest.

(5)

Represents additional capital we contributed to a joint venture with one of our not-for-profit hospital partners, which the joint venture used to acquire an equity interest in this facility. We were already providing management services to the facility. The remainder of this facility is owned by local physicians.

(6)	Acquisition of additional equity interest in a surgical facility in which we already held an investment. This facility is jointly owned with physicians and continued to be accounted for under the equity method until we obtained control in September 2011.

(7)

Acquisition of a 50% noncontrolling interest in diagnostic and surgery facility in which we had no previous involvement. We obtained control of this entity by acquiring an additional 40% of it in December 2011. This facility was purchased by our former U.K. subsidiary which was spun-off on April 3, 2012.

(8)	A hospital partner obtained ownership in this entity, which is also owned with local physicians. Additionally, this hospital partner is a related party (Note 12 of our consolidated financial statements).

(9)	Represents the net receipt related to various other purchases and sales of equity interests and contributions of cash to equity method investees.

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 types of transactions are accounted for as equity transactions, as they are undertaken among us, our consolidated subsidiaries, and noncontrolling interests. During the year ended December 31, 2011, we purchased and sold equity interests in various consolidated subsidiaries in the amounts of $3.7 million and $4.2 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 $7.7 million decrease to our additional paid-in capital during the year ended December 31, 2011.

During the year ended December 31, 2010, we obtained control (business combinations) of the following entities:


Effective Date	Facility Location	Amount
Investments
December 2010	Houston, Texas(1)	$	9.0 million
December 2010	Reading, Pennsylvania(2)		1.1 million
November 2010	Various(3)		31.1 million
October 2010	Houston, Texas(1)		2.4 million
May 2010	St. Louis, Missouri(4)		4.6 million

Total		$	48.2 million

(1)	Acquisition of a controlling interest in and right to manage a surgical facility in which we previously had no involvement. The remainder of this facility is owned by a hospital partner and local physicians.

(2)	Acquisition of a controlling interest in a surgical facility in which we already held an ownership interest.

(3)	We acquired 100% of the equity interests in HealthMark Partners, Inc. (HealthMark), a privately-held, Nashville-based owner and operator of surgery centers.

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

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 year ended December 31, 2010, these transactions resulted in a net cash outflow of approximately $21.3 million, which is summarized below:


Effective Date	Facility Location	Amount
Investments
December 2010	Irving, Texas(1)	$	1.9 million
December 2010	Boulder, Colorado(2)		4.7 million
December 2010	Houston, Texas(2)		0.9 million
December 2010	Chattanooga, Tennessee(3)		2.6 million
December 2010	Kansas City, Missouri(4)		1.2 million
December 2010	Nashville, Tennessee(5)		13.4 million
November 2010	Keller, Texas(1)		4.6 million
July 2010	Carrollton, Texas(1)		0.8 million
July 2010	Sacramento, California(2)		1.5 million
May 2010	Mansfield, Texas(1)		0.4 million
April 2010	Destin, Florida(3)		1.3 million
April 2010	St. Louis, Missouri(6)		0.4 million

			33.7 million

Sales(7)
December 2010	Phoenix, Arizona(8)		4.1 million
June 2010	Cincinnati, Ohio(9)		7.9 million
Various	Various(10)		0.4 million

			12.4 million

Total		$	21.3 million

(1)

Acquisition of the right to manage a surgical facility in which we previously had no involvement. Concurrent with this transaction, an unconsolidated investee that 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.

(2)	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.

(3)	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.

(4)	Acquisition of an additional noncontrolling interest in a surgical facility in which we already held an investment. This facility is jointly owned with one of our hospital partners and local physicians.

(5)	Acquisition of an additional noncontrolling interest in three surgical facilities in which we already held an investment and one surgical facility in which we already provided management services. These facilities are jointly owned with one of our hospital partners and local physicians.

(6)	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.

(7)	Sale transactions not involving our surrendering control of the facility are described in this section. Transactions involving the sale of our entire interest in a facility or our surrendering control of a facility are described in “Discontinued Operations and Other Dispositions.”

(8)	Sale of a portion of our equity ownership in two facilities to a hospital partner. The remainder of these facilities are owned by local physicians.

(9)	Sale of a portion of our equity ownership in one facility to a hospital partner. The remainder of this facility is owned by local physicians.

(10)	Represents the net receipt related to various other purchases and sales of equity interests and contributions of cash to equity method investees.

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 types of transactions are accounted for as equity transactions, as they are undertaken among us, our consolidated subsidiaries, and noncontrolling interests. During the year ended December 31, 2010, we purchased and sold equity interests in various consolidated subsidiaries in the amounts of $2.9 million and $4.0 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 $7.2 million decrease to our additional paid-in capital during the year ended December 31, 2010.

As further described in the section, “Discontinued Operations and Other Dispositions,” during 2010, we received proceeds of $32.5 million related to our sale of our wholly-owned subsidiary, American Endoscopy Services, Inc. We also received cash proceeds of $0.6 million related to the sale of a controlling interest in one facility to a hospital partner.

Discontinued Operations and Other Dispositions

We classify formerly consolidated subsidiaries in which we have no continuing involvement and consolidated subsidiaries that are held for sale as discontinued operations. The gains or losses on these transactions are classified within discontinued operations in our consolidated statements of operations. We have also reclassified our historical results of operations to remove the operations of these entities from our revenues and expenses, collapsing the historical net income or loss from these operations into a single line within discontinued operations.

Discontinued operations are as follows:


Date	Facility Location	Proceeds		Gain (Loss)
April 2012	United Kingdom(1)	$	—	$	—

December 2010	Nashville, Tennessee(2)	$	32.5 million	$	2.8 million
December 2010	Orlando, Florida		—		(2.0 million	)
December 2010	Templeton, California(3)		—		(1.9 million	)
December 2010	Houston, Texas(3)		—		(0.2 million	)

Total		$	32.5 million	$	(1.3 million	)

(1)

On April 3, 2012, we distributed the stock of our U.K. subsidiary to our Parent’s equity holders. Subsequent to April 3, 2012, we have no ownership in the U.K. operations. Because GAAP requires spin-off transactions to be accounted for at carrying value, there was no gain or loss recorded on the spin-off of the U.K. operations.

(2)	We sold an endoscopy service business that was based in Nashville, Tennessee.

(3)	These investments were written down to estimated fair value less costs to sell at December 31, 2010. We received cash proceeds of $1.9 million in February 2011 related to the sale of these two facilities. The assets and liabilities of these entities were not material.

Equity method investments that are sold do not represent discontinued operations under GAAP. The resulting gains and losses are classified within “Net (gains) losses on deconsolidations, disposals and

impairments” in the accompanying consolidated statements of operations. During the year ended December 31, 2012, we sold one facility we operated through an unconsolidated affiliate and terminated our contract to manage it. We received proceeds of $0.5 million and recorded a gain of approximately $0.3 million related to the sale transaction.

During the year ended December 31, 2011, we sold six facilities we operated through unconsolidated affiliates and terminated our contracts to manage them. These transactions are summarized below


Date	Facility Location	Proceeds		Gain (loss)
December 2011	Caldwell, Idaho	$	1.0 million	$	0.1 million
September 2011	Cleveland, Ohio		1.2 million		0.2 million
June 2011	Lawton, Oklahoma		1.7 million		0.6 million
May 2011	Flint, Michigan		1.1 million		0.4 million
May 2011	Fort Worth, Texas		0.7 million		(0.1 million	)
April 2011	Richmond, Virginia		0.6 million		0.2 million

Total		$	6.3 million	$	1.4 million

We did not sell any equity method investments during 2010.

In 2010, we sold approximately 50% of our ownership interests in an entity that was developing and constructing a new hospital for one of our unconsolidated affiliates. We received $3.1 million in cash related to this sale.

In addition to the sales of ownership interests noted above, we sold controlling interests to various hospital partners during 2010 which are described below, as part of our strategy for partnering with these systems. We sold no controlling interests to hospital partners during 2012 or 2011. Our continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations. Gains and losses are classified within “Net (gains) losses on deconsolidations, disposals and impairments” in the accompanying consolidated statements of operations.


Date	Facility Location	Proceeds		Gain (Loss)
December 2010	Phoenix, Arizona(1)	$	0.6 million	$	(1.5 million	)
December 2010	Dallas, Texas(2)		—		1.6 million

Total		$	0.6 million	$	0.1 million

(1)	A hospital partner acquired a portion of our interest in this facility and shares control of it with us.

(2)	We previously controlled this facility but now share control with physician partners due to a change in the entity’s governing documents.

Sources of Revenue

Revenues primarily include the following:

•

net patient service revenues of the facilities that we consolidate for financial reporting purposes, which are those in which we have ownership interests of greater than 50% or otherwise maintain effective control or for which we are otherwise the primary beneficiary;

•

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 contracted services to other healthcare providers. 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 are eliminated in consolidation.

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


	Years Ended December 31,
	2012			2011			2010
Net patient service revenues		84	%		84	%		85	%
Management and contract service revenues		15			14			14
Other revenues		1			2			1

Total revenues		100	%		100	%		100	%

As a percentage of total revenues, net patient service revenues remained at 84% of our total revenues in 2012 and 2011 from 85% of our total revenues for the years ended December 31, 2010. As we execute our strategy of partnering with not-for-profit healthcare systems, the majority of our business is being conducted through unconsolidated affiliates. With respect to unconsolidated facilities, we do not include the facilities’ net patient service revenues in our revenues; instead, our consolidated financial statements reflect revenues we earn for our management and contract services as noted below. Our share of the revenues, net of expenses of unconsolidated facilities, is reported in our consolidated financial statements as “equity in earnings of unconsolidated affiliates,” which is displayed between revenues and operating expenses. The percentage of our facilities we account for under the equity method was 70%, 71%, and 70% at December 31, 2012, 2011, and 2010, respectively.

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


	Years Ended December 31,
	2012		2011		2010
Management of surgical facilities	$	68,660	$	61,584	$	53,934
Contract services provided to other healthcare providers		10,778		10,529		10,904

Total management and contract service revenues	$	79,438	$	72,113	$	64,838

Results of Operations

The following table summarizes certain consolidated statements of operations items expressed as a percentage of revenues for the periods indicated:


	Years Ended December 31,
USPI	2012			2011			2010
Total revenues		100.0	%		100.0	%		100.0	%
Equity in earnings of unconsolidated affiliates		17.8			16.7			14.8
Operating expenses, excluding depreciation and amortization		(68.0	)		(65.6	)		(68.9	)
Depreciation and amortization		(4.4	)		(4.3	)		(4.8	)

Operating income		45.4			46.8			41.1
Interest and other expense, net		(22.8	)		(12.6	)		(13.8	)

Income from continuing operations before income taxes		22.6			34.2			27.3
Income tax expense		(4.0	)		(8.0	)		(6.2	)

Income from continuing operations		18.6			26.2			21.1
Earnings (loss) from discontinued operations, net of tax		0.6			(22.4	)		0.6

Net income		19.2			3.8			21.7
Less: Net income attributable to noncontrolling interests		(13.5	)		(14.0	)		(12.8	)

Net income (loss) attributable to USPI’s common stockholder		5.7	%		(10.2	)%		8.9	%

Our business model of partnering with not-for-profit hospitals and physicians results in our accounting for 149 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 represent 100% of the investees’ results on an aggregated basis):


	Years Ended December 31,
USPI’s Unconsolidated Affiliates	2012			2011			2010
Revenues		100.0	%		100.0	%		100.0	%
Operating expenses, excluding depreciation and amortization		(70.2	)		(69.8	)		(69.7	)
Depreciation and amortization		(4.1	)		(4.3	)		(4.2	)

Operating income		25.7			25.9			26.1
Interest expense, net		(2.0	)		(2.2	)		(1.9	)
Other, net		—			—			—

Income before income taxes		23.7			23.7			24.2
Income tax expense		(0.5	)		(0.5	)		(0.6	)

Net income		23.2	%		23.2	%		23.6	%

Executive Summary

Our strategy continues to focus on growing the profits of our existing facilities, acquiring existing facilities, and developing new facilities with hospital partners. We operated 213 facilities at year-end, up from 206 (including six U.K. facilities) at the end of 2011, largely as a result of our acquiring 15 facilities, opening two new facilities, and spinning off our U.K. subsidiary to our Parent’s equity holders effective April 3, 2012. Consistent with our primary strategy, we continued to focus on partnering both existing facilities and newly acquired or constructed facilities with a not-for-profit health system (hospital partner). The number of facilities with hospital partners increased by seven during 2012. We also refinanced a significant portion of our debt during 2012 and paid cash dividends totaling $384.4 million to our Parent.

Our net earnings from a facility, whether consolidated or equity method, are driven by the same factors: the facility’s underlying profits and revenues and our ownership percentage. Accordingly, to assess our overall operating results we often utilize systemwide and same store measures, which include all facilities. Our operating results for the year ended December 31, 2012, reflect 6% same store facility revenue growth as compared to 2011, and our overall business also grew as a result of our operating more facilities in 2012, largely as a result of acquisitions made during 2012 and our acquisition of Titan in September 2011. Continuing a trend experienced in recent years, our consolidated revenue growth in 2012 of 8% was less than our systemwide revenue growth of 12%, primarily due to our continuing to add more equity method facilities than consolidated facilities. Our systemwide revenues include all facilities that we operate; our revenues only include consolidated facilities, which represent less than one-third of our facilities. Accounting for the majority of our facilities under the equity method is a direct result of deploying our primary business strategy of jointly owning our facilities with prominent local physicians and a hospital partner. In carrying out this strategy during the period from January 1, 2011 to December 31, 2012, our number of equity method facilities increased from 130 to 149 while our consolidated facility count increased from 54 to 64.

Operating income increased 5% and operating income margin decreased 140 basis points during 2012 as compared to 2011. Operating income was significantly impacted by several amounts not directly related to our facilities’ operating results in 2012, 2011 and 2010. Excluding the amounts shown below, operating income increased 7% and operating income margin decreased 40 basis points during 2012. During 2011, excluding the amounts shown below, operating income and margin were up 12% and 270 basis points, respectively.


In Millions	2012		2011			2010
Net gains (losses) on deconsolidations, disposals and impairments(1)	$	7.6	$	(1.5	)	$	10.1
Transaction expenses		3.0		2.6			2.9
De novo start-up losses		0.5		4.0			0.1
Expense related to previous acquisition and facility purchase option		—		—			6.0

Total impact on operating income	$	11.1	$	5.1		$	19.1

(1)	Of the 2010 amount, $3.7 million is classified within equity in earnings of unconsolidated affiliates.

In addition to our consolidated operating income margin, we also focus on same store facility level operating income margins (which include both consolidated and equity method facilities) as important indicators of our business because the net earnings and cash flows we derive from our facilities are the same whether they are reflected in our individual revenue and expense line items (consolidated facilities) or on a net basis within our equity in earnings of unconsolidated affiliates (unconsolidated facilities). These margins were in aggregate down 80 basis points in 2012 compared to 2011 in part due to the underperformance of the Titan facilities we acquired in 2011.

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, operating each 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; and

•

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

Our role as an owner and day-to-day manager provides us with significant influence over the operations of each facility. In a majority of our facilities (currently 149 of our 213 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 other 64 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 consolidated statements of operations reflect, within each revenue and expense line item, 100% of the revenues and expenses of each subsidiary, 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 operations reflect our earnings in only two line items:

•

equity in earnings of unconsolidated affiliates: our share of the net income or loss 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, our operating income is driven by the performance of all facilities we operate and by our ownership interest in those facilities, but our individual revenue and expense line items only contain consolidated businesses, which represent less than one-third of our operations. This translates to trends in operating income that often do not correspond with changes in our 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 during the ongoing deployment of our strategy to partner with not-for-profit health systems. Accordingly, we supplementally review several types of information in order to monitor and analyze our results of operations, including:

•

The results of operations of our unconsolidated affiliates

•

Our 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 our results of operations and the results of operations of our unconsolidated affiliates.


	Year Ended December 31,
	2012						2011						Variance to Prior Year
	USPI As Reported Under GAAP			Unconsolidated Affiliates			USPI As Reported Under GAAP			Unconsolidated Affiliates			USPI As Reported Under GAAP			Unconsolidated Affiliates
Revenues:
Net patient service revenues	$	451,598		$	1,721,559		$	418,155		$	1,527,069		$	33,443		$	194,490
Management and contract service revenues		79,438			—			72,113			—			7,325			—
Other income		9,199			10,346			8,910			10,961			289			(615	)

Total revenues		540,235			1,731,905			499,178			1,538,030			41,057			193,875
Equity in earnings of unconsolidated affiliates		96,393			—			83,137			—			13,256			—
Operating expenses:
Salaries, benefits, and other employee costs		138,020			401,521			125,143			360,519			12,877			41,002
Medical services and supplies		83,546			429,516			76,721			360,148			6,825			69,368
Other operating expenses		87,173			344,921			79,707			314,768			7,466			30,153
General and administrative expenses		41,434			—			38,028			—			3,406			—
Provision for doubtful accounts		9,678			45,306			9,409			37,899			269			7,407
Net (gains) losses on deconsolidations, disposals and impairments		7,588			(6,280	)		(1,529	)		(309	)		9,117			(5,971	)
Depreciation and amortization		23,955			72,027			21,177			66,608			2,778			5,419

Total operating expenses		391,394			1,287,011			348,656			1,139,633			42,738			147,378

Operating income		245,234			444,894			233,659			398,397			11,575			46,497
Interest income		676			350			516			382			160			(32	)
Interest expense		(85,934	)		(34,901	)		(63,537	)		(34,101	)		(22,397	)		(800	)
Loss on early retirement of debt		(37,450	)		—			—			—			(37,450	)		—
Other, net		(613	)		426			(73	)		(15	)		(540	)		441

Total other expense, net		(123,321	)		(34,125	)		(63,094	)		(33,734	)		(60,227	)		(391	)

Income from continuing operations before income taxes		121,913			410,769			170,565			364,663			(48,652	)		46,106
Income tax expense		(21,502	)		(8,576	)		(39,918	)		(8,367	)		18,416			(209	)

Income from continuing operations		100,411			402,193			130,647			356,296			(30,236	)		45,897
Earnings (loss) from discontinued operations, net		3,073			—			(111,562	)		—			114,635			—

Net income		103,484		$	402,193			19,085		$	356,296			84,399		$	45,897

Less: Net income attributable to noncontrolling interests		(72,693	)					(69,929	)					(2,764	)

Net income (loss) attributable to USPI	$	30,791					$	(50,844	)				$	81,635

USPI’s equity in earnings of unconsolidated affiliates				$	96,393					$	83,137					$	13,256


	Year Ended December 31,
	2011						2010						Variance to Prior Year
	USPI As Reported Under GAAP			Unconsolidated Affiliates			USPI As Reported Under GAAP			Unconsolidated Affiliates			USPI As Reported Under GAAP			Unconsolidated Affiliates
Revenues:
Net patient service revenues	$	418,155		$	1,527,069		$	402,049		$	1,322,393		$	16,106		$	204,676
Management and contract service revenues		72,113			—			64,838			—			7,275			—
Other income		8,910			10,961			7,062			6,648			1,848			4,313

Total revenues		499,178			1,538,030			473,949			1,329,041			25,229			208,989
Equity in earnings of unconsolidated affiliates		83,137			—			69,916			—			13,221			—
Operating expenses:
Salaries, benefits, and other employee costs		125,143			360,519			118,838			309,698			6,305			50,821
Medical services and supplies		76,721			360,148			75,341			310,770			1,380			49,378
Other operating expenses		79,707			314,768			84,026			273,649			(4,319	)		41,119
General and administrative expenses		38,028			—			33,762			—			4,266			—
Provision for doubtful accounts		9,409			37,899			8,417			31,396			992			6,503
Net (gains) losses on deconsolidations, disposals and impairments		(1,529	)		(309	)		6,378			1,025			(7,907	)		(1,334	)
Depreciation and amortization		21,177			66,608			22,493			55,216			(1,316	)		11,392

Total operating expenses		348,656			1,139,633			349,255			981,754			(599	)		157,879

Operating income		233,659			398,397			194,610			347,287			39,049			51,110
Interest income		516			382			742			378			(226	)		4
Interest expense		(63,537	)		(34,101	)		(66,886	)		(26,008	)		3,349			(8,093	)
Other		(73	)		(15	)		708			(200	)		(781	)		185

Total other expense, net		(63,094	)		(33,734	)		(65,436	)		(25,830	)		2,342			(7,904	)

Income from continuing operations before income taxes		170,565			364,663			129,174			321,457			41,391			43,206
Income tax expense		(39,918	)		(8,367	)		(29,257	)		(7,562	)		(10,661	)		(805	)

Income from continuing operations		130,647			356,296			99,917			313,895			30,730			42,401
Earnings (loss) from discontinued operations		(111,562	)		—			2,736			—			(114,298	)		—

Net income		19,085		$	356,296			102,653		$	313,895			(83,568	)	$	42,401

Less: Net income attributable to noncontrolling interests		(69,929	)					(60,560	)					(9,369	)

Net income (loss) attributable to USPI	$	(50,844	)				$	42,093					$	(92,937	)

USPI’s equity in earnings of unconsolidated affiliates				$	83,137					$	69,916					$	13,221

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


	Years Ended December 31,
	2012			2011			2010
Long-term debt of USPI’s unconsolidated facilities	$	407,172		$	440,582		$	330,578
USPI’s equity in earnings of unconsolidated affiliates		96,393			82,752			69,916
USPI’s imputed weighted average ownership percentage based on affiliates’ pretax income(1)		23.5	%		22.7	%		21.7	%
USPI’s imputed weighted average ownership percentage based on affiliates’ debt(2)		26.2	%		26.1	%		23.8	%
Unconsolidated facilities operated at period end		149			141			130

(1)

Our weighted average percentage ownership in our unconsolidated affiliates is calculated as our equity in earnings of unconsolidated affiliates divided by the total net income (loss) of unconsolidated affiliates for each respective period. This is a non-GAAP measure but management believes it provides further useful information about our involvement in unconsolidated affiliates.

(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 we 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 our involvement in unconsolidated affiliates.

One of our unconsolidated affiliates, Texas Health Ventures Group, L.L.C., is considered significant to our consolidated financial statements under regulations of the SEC. As a result, we have filed Texas Health Ventures Group, L.L.C.’s consolidated financial statements with this Form 10-K for the appropriate periods.

As shown above, our consolidated net patient service revenues for the year ended December 31, 2012 increased $33.4 million compared to the prior year, and the net patient service revenues of our unconsolidated affiliates increased $194.5 million. These variances are analyzed more extensively in the “Revenues” section, but in general they reflect the fact that we are conducting more of our operations through unconsolidated affiliates. The increase in revenues of these unconsolidated affiliates, net of their expenses, led to the affiliates earning $45.9 million more compared to the prior year. The affiliates’ increase in net income, once allocated to USPI and the affiliates’ other investors, led to our equity in earnings of unconsolidated affiliates increasing by $13.3 million. Our consolidated net patient service revenues for the year ended December 31, 2011 increased $16.1 million compared to the prior year, and the net patient service revenues of our unconsolidated affiliates increased $204.7 million. The increase in revenues of these unconsolidated affiliates, net of their expenses, led to the affiliates earning $42.4 million more compared to the prior year. The affiliates’ increase in net income, once allocated to our and the affiliates’ other investors, led to our equity in earnings of unconsolidated affiliates increasing by $13.2 million.

Our Ownership Interests in the Facilities We Operate

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


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Unconsolidated facilities(1)		23.5	%		22.7	%		21.7	%
Consolidated facilities(2)		44.2	%		44.1	%		46.7	%
Total(3)		28.5	%		28.2	%		28.2	%

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

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

(3)	Computed in total by dividing our share of the facilities’ net income (loss), defined as the sum of (a) in footnotes (1) and (2), by the aggregate net income of our 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 focus on partnering our facilities with hospital partners 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 19 from January 1, 2011 to December 31, 2012, while our number of consolidated facilities increased by ten. We generally have a lower ownership percentage in an equity method facility as compared to a consolidated facility.

Revenues

Our consolidated net revenues increased approximately 8% during the year ended December 31, 2012, as compared to the year ended December 31, 2011. The table below quantifies several significant items impacting year over year growth.


	Year Ended December 31, 2012
	USPI as Reported Under GAAP		Unconsolidated Affiliates
Total revenues, year ended December 31, 2011	$	499,178	$	1,538,030
Add: revenue from acquired facilities		33,429		61,772
Less: revenue of disposed facilities		—		(9,432	)

Adjusted base year		532,607		1,590,370
Increase from operations		7,339		142,150
Non-facility based revenue		289		(615	)

Total revenues, year ended December 31, 2012	$	540,235	$	1,731,905

As shown above, the majority of the increase in our consolidated revenues resulted from acquisitions, but on a systemwide basis (including both consolidated and unconsolidated facilities) the biggest component of our growth was in facilities we operated in both years, which grew by $142.1 million for unconsolidated facilities and $7.3 million for consolidated facilities. This relationship illustrates the reason our growth in income often outpaces our growth in revenues: growing the volume and profits of unconsolidated facilities has relatively little impact on our consolidated revenues, but our share of their increasing net income (equity in earnings of unconsolidated affiliates, which grew by 16%, 19% and 13% in 2012, 2011 and 2010, respectively) is reflected in our operating income and net income. Accordingly, as described above, we supplementally focus on our systemwide results in order to understand the source of our growth in income. Our systemwide revenues, which include revenues of facilities we account for under the equity method as well as facilities we consolidate, grew by 12%, 13% and 8% during the years ended December 31, 2012, 2011 and 2010, respectively. Acquisitions were also a significant component of the 2012 increase in revenues at both consolidated and unconsolidated facilities. As shown above, acquisitions added $33.4 million and $61.8 million to revenues for consolidated and unconsolidated affiliates, respectively.

Facility Growth

While systemwide revenue growth was partially driven by acquisitions and development of new facilities, the majority of the growth was driven by facilities that have been open for more than one year (same store facilities). Same store case volume, which had been largely flat in 2010 and 2011, was 3% for 2012. However, a majority of this growth was not in our higher reimbursement specialties and payors, so the overall 6% growth in same store revenues was similar to the 6% and 5% experienced in 2011 and 2010, respectively. While some of our increases in net revenue per case from year to year reflect increases in rates we negotiate with payors, we believe a more significant portion of the increase is driven by the type of cases we perform, which on average continues to shift to more complex cases. We believe that several factors, including changes to health insurance plans to require more patient responsibility for healthcare expenses and a generally soft economy, may be adversely affecting our case volumes.

The following table summarizes our same store facility growth rates, as compared to the corresponding prior year period:


	Years Ended December 31,
	2012			2011			2010
Facilities:
Net revenue		6	%		6	%		5	%
Surgical cases		3	%		1	%		—	%
Net revenue per case		3	%		5	%		5	%

Joint Ventures with Not-for-Profit Hospitals

The addition of new facilities continues to be more heavily weighted to 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 through construction of new facilities (de novos), acquisitions of facilities 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.

While this strategy has generally led to our adding more facilities with hospital partners than without hospital partners, our acquisition of Titan Health Corporation in September 2011 altered this pattern with respect to the past twelve months. At December 31, 2012, only three of the 14 facilities Titan operated have hospital partners. We continue to explore affiliating more of our facilities with hospital partners. Often these affiliations are initiated in markets where we already operate other facilities with a hospital partner, but we also affiliate our facilities with new partners.

The following table summarizes the facilities we operated as of December 31, 2012, 2011, and 2010:


	2012			2011			2010
United States facilities(1):
With a hospital partner		145			138			132
Without a hospital partner		68			62			53

Total U.S. facilities		213			200			185
United Kingdom facilities(2)		—			6			4

Total facilities operated		213			206			189

Change from prior year-end:
De novo (newly constructed)		2			4			2
Acquisition		15			19			25
Disposals(2)		(10	)		(6	)		(7	)

Total increase in number of facilities		7			17			20

(1)	At December 31, 2012, physicians own a portion of all but two of these facilities.

(2)

During 2012, we sold our ownership interests in a facility in Nashville, Tennessee. We also merged two Houston-area facilities into one location and two of our Redding, California facilities into one location. On April 3, 2012, we spun off our U.K. subsidiary, which operated seven facilities, to our Parent’s equity holders. During 2011, we sold our ownership interests in facilities in Richmond Virginia; Caldwell, Idaho; Flint, Michigan; Fort Worth, Texas; Cleveland, Ohio; and Lawton, Oklahoma. During 2010, we merged two of our Dallas-area surgery centers into one location, and also merged two of our Ohio surgery centers into one location. We sold our ownership interests in a facility in Orlando, Florida during 2010 and classified a facility in Templeton, California and Houston, Texas as held for sale at December 31, 2010 (sold in February 2011).

Facility Operating Margins

Same store facility operating margins decreased 80 basis points for the year ended December 31, 2012 as compared to 2011 in part due to the underperformance of the Titan facilities we acquired in 2011. Continuing a trend we have experienced in recent years, the year-over-year change in the operating margins of facilities partnered with a hospital partner was more favorable (or, in the case of 2010 and 2012, less unfavorable) than the change experienced by the facilities that do not have a hospital partner. We believe this is due in part to our hospital-partnered facilities having more stable reimbursement rates and in many cases more stable referral patterns. Consistent with this belief, our hospital-partnered facilities’ operating margins were only down 20 basis points in 2012, as compared to 300 basis points for the facilities that do not have hospital partners. Only three of the 14 Titan facilities have a hospital partner. The pattern of our acquisition and development activity can also affect this relationship over time.

In 2010, our facility operating margins decreased 60 basis points. The decrease was broad-based, and was largely due to lower case volumes early in the year that were not offset by a proportionate decrease in operating expenses. Following the pattern of same store revenues, and driven by similar factors, margins improved during the year, recovering from a 240 basis point drop in year-over-year margins for the first quarter of 2010 to finish the year down 60 basis points on a full year basis, due to an improvement each quarter ending with a fourth quarter that was up 60 basis points over prior year.

This improvement continued into 2011, with same store facility operating margins increasing 30 basis points for the year ended December 31, 2011 as compared to 2010. The increase was due to slightly higher case volumes, more complex cases, and improvement in the management of operating expenses.

The following table summarizes our year-over-year increases (decreases) in same store operating margins (see footnote 1 below):


	Year Ended December 31,
	2012			2011			2010
With a hospital partner		(20)	bps		80	bps		(40)	bps
Without a hospital partner		(300	)		(110	)		(120	)
Total facilities		(80	)		30			(60	)

(1)

Operating margin is calculated as operating income divided by total net 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 our operations 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.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

As discussed more fully in “Revenues,” our consolidated revenues increased by $41.1 million, or 8.2%, to $540.2 million for the year ended December 31, 2012 from $499.2 million for the year ended December 31, 2011. The majority of the increase, approximately $33.4 million, was due to acquisitions.

Equity in earnings of unconsolidated affiliates increased by $13.3 million, or 15.9%, to $96.4 million for the year ended December 31, 2012 from $83.1 million for the year ended December 31, 2011. The increase in equity in earnings was driven by growth in our existing facilities of $9.9 million. In addition, our acquisitions of equity method investments in facilities increased equity in earnings by approximately $1.0 million and equity in earnings was also positively affected by our $2.4 million share of a gain on the sale of real estate by one of our investees.

Depreciation and amortization increased $2.8 million, or 13.1% to $24.0 million for the year ended December 31, 2012 from $21.2 million for the year ended December 31, 2011. Depreciation and amortization, as a percentage of revenues, increased slightly to 4.4% for the year ended December 31, 2012 from 4.3% for the year ended December 31, 2011.

Operating income increased $11.6 million, or 5.0%, to $245.2 million for the year ended December 31, 2012 from $233.7 million for the year ended December 31, 2011, and decreased as a percentage of revenues to 45.4% from 46.8%, respectively. The increase was driven by the increases of revenues of our facilities and equity in earnings of unconsolidated affiliates described above, which was partially offset by the effect of our facilities’ lower operating margins costs of acquisitions, and by fees paid in conjunction with our dividend payments in April and December 2012. As further discussed in the “Executive Summary,” operating income was significantly impacted during 2012 and 2011 by several items. Excluding these items, operating income increased 7% and operating margins decreased 40 basis points as compared to 2011.

Interest expense, net of interest income, increased $22.2 million to $85.3 million for the year ended December 31, 2012 from $63.0 million for the year ended December 31, 2011. The increase is due to higher overall debt balances and interest rates at December 31, 2012 due to the refinancing we completed in April 2012.

We incurred a loss on the early retirement of debt of $37.5 million during the year ended December 31, 2012, as a result of the refinancing we completed on April 3, 2012. The amount consists of a premium paid to retire our previously outstanding bonds, finance and legal fees, and the write-off of debt issuance costs.

Provision for income taxes was $21.5 million for the year ended December 31, 2012 as compared $39.9 million for the year ended December 31, 2011. Our effective tax rates for the years ended December 31, 2012 and 2011 were approximately 44% and 40%, respectively.

Total income from discontinued operations was $3.7 million for the year ended December 31, 2012 as compared to a loss of $111.6 million for the year ended December 31, 2011. On April 3, 2012, we spun-off our

U.K. subsidiary to the equity holders of our Parent. As a result, the historical results of our U.K. operations are now classified as discontinued operations. The $3.7 million of income in 2012 is primarily related to our U.K. operations before the spin-off. In 2011, the driver of the $111.0 million loss from discontinued operations was the $107.0 million goodwill impairment charge we recorded in December 2011 related to our U.K. operations.

Net income attributable to noncontrolling interests increased $2.8 million, or 4.0%, to $72.7 million for the year ended December 31, 2012 from $69.9 million for the year ended December 31, 2011. The increase in revenues of our consolidated facilities, as described above, drove an increase in our consolidated subsidiaries’ net income. As most of our consolidated businesses include owners besides us, an increase in the earnings of these businesses resulted in an increase in net income attributable to noncontrolling interests.

Net income increased $84.4 million to $103.5 million for the year ended December 31, 2012 as compared to $19.1 million for the year ended December 31, 2011. Net income (loss) attributable to USPI’s common stockholder increased $81.6 million to a net income of $30.8 million for the year ended December 31, 2012 as compared to a net loss of $50.8 million for the year ended December 31, 2011. While our facilities’ revenues and operating income increased during 2012 and we acquired additional facilities, the biggest factor in our improvement in net income is that we recorded the $107.0 million U.K. impairment loss in 2011.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

As discussed more fully in “Revenues,” our consolidated revenues increased by $25.2 million, or 5.3%, to $499.2 million for the year ended December 31, 2011 from $473.9 million for the year ended December 31, 2010. Slightly more than half of the increase, or approximately $12.9 million, was driven by operations of facilities owned during both years, which experienced slight case growth and higher net revenue per case. Acquisitions of facilities increased revenues by $17.0 million. Other factors, including a decrease in revenues resulting from our selling a portion of our interest in two facilities (causing us to deconsolidate them), had minimal net impact.

Equity in earnings of unconsolidated affiliates increased by $13.2 million, or 18.9%, to $83.1 million for the year ended December 31, 2011 from $69.9 million for the year ended December 31, 2010. This increase was driven by $13.5 million growth in our existing facilities. Other factors include acquisitions of equity method investments in facilities and deconsolidations of facilities we already operated, which together increased equity in earnings by $3.7 million, which was offset by start-up losses of $4.0 million from recently opened facilities. The number of facilities we account for under the equity method increased by 11 from December 31, 2010 to December 31, 2011.

Operating income increased $39.0 million, or 20.1%, to $233.7 million for the year ended December 31, 2011 from $194.6 million for the year ended December 31, 2010, and increased as a percentage of revenues to 46.8% from 41.1%, respectively. As further discussed in the “Executive Summary,” operating income was significantly impacted during 2011 and 2010 by several items. Excluding these items, operating income increased 12% and operating margins improved 270 basis points as compared to 2010. These increases were driven by increases in revenues of our facilities and equity in earnings of unconsolidated affiliates described above.

Interest expense, net of interest income, decreased $3.1 million to $63.0 million for the year ended December 31, 2011 from $66.1 million for the year ended December 31, 2010. The decrease is primarily due to the expiration of the U.S. interest rate swap in July 2011.

Provision for income taxes was $39.9 million for the year ended December 31, 2011 as compared $29.3 million for the year ended December 31, 2010. Our effective tax rate for the years ended December 31, 2011 and 2010 was approximately 40% and 43%, respectively.

Total loss from discontinued operations was $111.6 million for the year ended December 31, 2011 as compared to earnings of $2.7 million for the year ended December 31, 2010. On April 3, 2012, we spun-off our U.K. subsidiary to the equity holders of our Parent. As a result, the historical results of our U.K operations are now classified as discontinued operations. The primary driver of the $111.0 million loss from discontinued operations was the $107.0 million goodwill impairment charge we recorded in December 2011 related to our U.K. operations. We sold two entities in 2010 and designated two others as held for sale at December 31, 2010; these two facilities were sold in February 2011. The 2011 loss of $0.5 million represents the activity of the two entities sold during 2011 and final adjustment to the loss on their disposal. Because these entities are classified as discontinued operations, our consolidated statements of operations and the year over year comparisons reflect the historical results of their operations in discontinued operations for all periods presented.

Net income attributable to noncontrolling interests increased $9.4 million, or 15.5%, to $69.9 million for the year ended December 31, 2011 from $60.6 million for the year ended December 31, 2010. The increase in revenues of our consolidated facilities, as described above, drove an increase in our consolidated subsidiaries’ net income. As most of our consolidated businesses include owners besides us, an increase in the earnings of these businesses resulted in an increase in net income attributable to noncontrolling interests.

Net income decreased $83.6 million, or 81.4%, to $19.1 million for the year ended December 31, 2011 as compared to $102.7 million for the year ended December 31, 2010. Net income (loss) attributable to USPI’s common stockholder decreased $92.9 million to a net loss of $50.8 million for the year ended December 31, 2011 as compared to net income of $42.1 million for the year ended December 31, 2010. While our facilities’ revenues and operating income margins increased during 2011 and we acquired additional facilities, this growth was more than offset by the goodwill impairment charge.

Liquidity and Capital Resources

At December 31, 2012, we had cash and cash equivalents totaling $51.2 million, as compared to $41.8 million at December 31, 2011.


	Years Ended December 31,
	2012			2011			2010
Net cash provided by operating activities	$	180,313		$	164,667		$	148,318
Net cash used in investing activities		(160,907	)		(93,555	)		(51,502	)
Net cash used in financing activities		(42,960	)		(64,208	)		(67,917	)
Net cash (used in) provided by discontinued operations		32,935			(25,335	)		(3,536	)

Overview

As discussed in more detail below, we completed several significant financing and equity transactions in April 2012, including the payment of a $314.5 million cash dividend, the spin-off of our U.K. operations and the refinancing of a substantial portion of our outstanding debt. Additionally, in December 2012, we borrowed $150.0 million in a new term loan and paid a cash dividend of $69.9 million.

Operating Activities

Our cash flows from operating activities were $180.3 million, $164.7 million, and $148.3 million in the years ended December 31, 2012, 2011, and 2010, respectively. Operating cash flows in 2012 increased $15.6 million, or 9.5% as compared to 2011. Operating cash flows in 2011 increased $16.3 million, or 11.0%, as compared to 2010 primarily as a result of the higher operating cash flows of our facilities being partially offset by our making $11.4 million of federal tax payments during 2011 that related to the 2010 tax year. The timing of these tax payments had a favorable impact when comparing our 2012 cash flows to 2011.

A significant element of our cash flows from operating activities is the collection of patient receivables and the timing of payments to our vendors and service providers. Collections efforts for patient receivables are

conducted primarily by our personnel at each facility or in centralized service centers for some metropolitan areas with multiple facilities. These collection efforts are facilitated by our patient accounting system, which prompts individual account follow-up through a series of phone calls and/or collection letters written 30 days after a procedure is billed and at 30 day intervals thereafter. Bad debt reserves are established in increasing percentages by aging category based on historical collection experience. Generally, the entire amount of all accounts remaining uncollected 180 days after the date of service are written off as bad debt and sent to an outside collection agency. Net amounts received from collection agencies are recorded as recoveries of bad debts. Our operating cash flows, including changes in accounts payable and other current liabilities, are impacted by the timing of payments to our vendors. We typically pay our vendors and service providers in accordance with invoice terms and conditions, and take advantage of invoice discounts when available. In 2012, 2011 and 2010, we did not make any significant changes to our payment timing to our vendors.

Our net working capital deficit was $102.4 million at December 31, 2012 as compared to a net working capital deficit of $121.9 million in the prior year. The overall negative working capital position at December 31, 2012 and 2011 is primarily the result of $155.4 million and $139.6 million due to affiliates associated with our cash management system being employed for our unconsolidated facilities. We hold our unconsolidated facilities’ cash until these amounts are distributed to our partners, typically on a monthly or quarterly basis. As discussed further below, we have sufficient availability under our new credit agreement, together with our expected future operating cash flows, to service our obligations.

Investing Activities

During the years ended December 31, 2012, 2011 and 2010, respectively, our net cash used for investing activities was $160.9 million, $93.6 million and $51.5 million, respectively. The majority of the cash used in our investing activities relates to our purchases of businesses, incremental investment in unconsolidated affiliates and purchases of property and equipment. The cash used in investing activities was funded primarily from cash on hand as well as draws upon the revolving feature of our amended senior secured credit facility.

Acquisitions and Sales

During the year ended December 31, 2012, we invested $141.2 million, net of cash acquired, for the purchase and sales of businesses and investments in unconsolidated affiliates. These 2012 transactions are described earlier in this Item 7 under the captions “Acquisitions, Equity Investments and Development Projects” and “Discontinued Operations and Other Dispositions.” These transactions are summarized below:


Effective Date	Facility Location	Amount
Investments
December 2012	Effingham, Illinois	$	23.4 million
December 2012	Covington, Louisiana		9.2 million
December 2012	Stockton, California		0.7 million
November 2012	Various (True Results)		65.4 million
October 2012	Clarksville, Tennessee		4.6 million
September 2012	Hackensack and Paramus, New Jersey		12.3 million
June 2012	Cherry Hill, New Jersey		17.1 million
March 2012	Chandler, Arizona		0.8 million
February 2012	Midland, Texas		3.0 million
Various	Various		7.2 million

			143.7 million
Sales
July 2012	Franklin, Tennessee		0.5 million
Various	Various		2.0 million

			2.5 million

Total		$	141.2 million

During the years 2011 and 2010, we invested $103.4 million, of which $25.1 million is classified as discontinued operations, and $33.3 million, respectively (all net of cash acquired) to make similar acquisitions. These transactions are summarized in this Item 7 under the caption “Acquisitions, Equity Investments and Development Projects.”

As part of our business strategy, we have made, and expect to continue to make, selective acquisitions in existing markets to leverage our existing knowledge of these markets and to improve operating efficiencies. Additionally, we may also make acquisitions in new markets. In making such acquisitions, we may use available cash on hand or draw upon our revolving credit facility as discussed below.

Property and Equipment/Facilities under Development

During the year ended December 31, 2012, we added $20.2 million in property and equipment, and an additional $10.5 million under capital lease arrangements. Approximately $17.5 million of the additions related to expansion and development projects, and the remaining $13.2 million primarily represents purchase of equipment at existing facilities. During the year ended December 31, 2011, we added $15.2 million in property and equipment, and an additional $17.0 million of property and equipment acquired under capital lease arrangements. Approximately $19.0 million of the additions related to expansion and development projects, and the remaining $13.2 million primarily represents purchase of equipment at existing facilities. During the year ended December 31, 2010, approximately $8.7 million of the property and equipment purchases related to expansion and development projects, and the remaining $11.0 million primarily represents purchase of equipment at existing facilities.

Our growth strategy (through both acquisition and de novo projects) will continue to require substantial capital resources, which we estimate to range from $80.0 million to $110.0 million per year over the next three years. If we identify strategic opportunities that are larger than usual for us, then these amounts could increase.

Other than the specific transactions described above, our acquisition and development activities primarily include the development of new facilities, buyups of additional ownership in facilities we already operate, and acquisitions of additional facilities. In addition, the operations of our existing surgical facilities will require ongoing capital expenditures. The amount and timing of these purchases and related cash outflows in future periods is difficult to predict and is dependent on a number of factors including hiring of employees, the rate of change in technology/equipment used in our business and our business outlook.

Financing Activities

Cash flows used in financing activities were $43.0 million, $64.2 million and $67.9 million in the years ended December 31, 2012, 2011 and 2010, respectively. Historically, our cash flows from financing activities have been received through proceeds from long-term debt, offset by payments on long-term debt, as well as proceeds received from the issuance of our common stock. We also manage the cash of our unconsolidated affiliates. During 2012, our financing activities include net proceeds on the issuance of long-term debt of $397.2 million, which was offset by payment of cash dividends of $384.4 million. Additionally, cash distributions to noncontrolling interests (the other investors in the facilities we operate) are also a large component of our financing activities and were $77.8 million, $67.8 million and $59.0 million in the years ended December 31, 2012, 2011 and 2010, respectively. We intend to fund our ongoing capital and working capital requirements through a combination of cash flows from operations and borrowings under our $125.0 million revolving credit facility, under which we had $123.4 million available at December 31, 2012. 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.

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.

Debt

As noted above, in April 2012 we amended our existing credit facility, issued new senior unsecured notes, redeemed all validly tendered outstanding notes pursuant to the previously announced tender offer and consent solicitation, and deposited funds with the trustee to redeem the remaining outstanding notes (which have since all been redeemed). In addition, we distributed the stock of our U.K. subsidiary to our Parent’s equity holders. As a result of the spin-off, we no longer have any ownership in the U.K operations.

The amended credit facility provides borrowings consisting of $144.4 million in non-extended term loans maturing in April 2014; $312.4 million in extended term loans maturing in April 2017; $375.0 million in a new term loan maturing in April 2019; and $125.0 million under the new revolving facility maturing in April 2017. In conjunction with the amendment to the credit facility, we repaid $16.0 million that was outstanding on our existing revolver and also repaid $45.0 million of our existing term loan. The extended and new term loans each require quarterly principal payments of 0.25% of the outstanding balance as of April 3, 2012 with the remaining balances due in 2014 for the non-extended term loans, in 2017 for the extended term loans and in 2019 for the new term loan. No principal payments are required on the revolving credit facility until its maturity in 2017. Interest rates on the amended credit facility are based on LIBOR plus a margin of 2.00% to 4.75%. Additionally, we pay 0.50% per annum on the daily-unused commitment of the new revolving credit facility. We also pay a quarterly participation fee of 2.13% per annum related to outstanding letters of credit.

In December 2012, we borrowed an additional $150.0 million in new term loans under the amended credit facility. This borrowing requires quarterly principal payments of 0.25% of the outstanding balance and matures in April 2019.

At December 31, 2012, we had $976.3 million outstanding under the amended credit facility at a weighted average interest rate of approximately 5.2%. At December 31, 2012, we had $123.4 million available for borrowing under the revolving credit facility, representing the revolving facility’s $125.0 million capacity, net of $1.6 million of outstanding letters of credit.

The amended credit facility is guaranteed by USPI Holdings, Inc. and its current and future directly and indirectly 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 and the capital stock of each of our wholly owned domestic 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 at December 31, 2012.

On May 1, 2012, we completed the redemption of all of the remaining $240.0 million of our 8 7/8% senior subordinated notes and $200.0 million of our 9 1/4%/10% senior subordinated toggle notes, which was funded by our issuance of $440.0 million of the 9.0% senior unsecured notes due in April 2020. Interest on the outstanding notes is payable on April 1 and October 1 of each year, and commenced on October 1, 2012. At December 31, 2012, we had $440.0 million of the senior unsecured notes outstanding. The senior notes are unsecured senior obligations of our company; however, the senior unsecured notes are guaranteed by all of our current and future direct and indirect 100%-owned domestic subsidiaries. Additionally, the senior unsecured 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, sells assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. We believe we were in compliance with these covenants at December 31, 2012.

Contractual Cash Obligations

Our contractual cash obligations as of December 31, 2012 are summarized as follows:


	Payments Due by Period
Contractual Cash Obligations	Total		Within 1 Year		Years 2 and 3		Years 4 and 5		Beyond 5 Years
	(In thousands)
Long term debt obligations:
Amended senior secured credit facility – new term loan(1)	$	521,818	$	5,231	$	10,463	$	10,463	$	495,661
Amended senior secured credit facility – non-extended term loan(1)		144,428		—		144,428		—		—
Amended senior secured credit facility – extended term loan(1)		310,092		3,124		6,249		300,719		—
Senior unsecured notes (1)		440,000		—		—		—		440,000
Other debt at operating subsidiaries(1)		37,891		6,779		9,566		8,021		13,525
Interest on long-term debt obligations(2)		566,224		92,081		176,472		166,344		131,327
Capitalized lease obligations(3)		43,189		5,339		8,270		6,931		22,649
Operating lease obligations		87,107		16,427		26,478		20,303		23,899

Total contractual cash obligations	$	2,150,749	$	128,981	$	381,926	$	512,781	$	1,127,061

(1)	Scheduled principal payments.

(2)	Represents interest due on long-term debt obligations. For variable rate debt, the interest is calculated using the December 31, 2012 rates applicable to each debt instrument.

(3)	Includes principal and interest.

In February 2013, we further amended our senior secured credit facility and borrowed $150.0 million, which was used to repay the non-extended term loan of $144.4 million and related fees and expenses. The new term loan matures in April 2019. The amendment also changed the interest rate charged on the term loans to LIBOR plus a margin of 3.50% to 3.75%.

Our contractual cash obligations subsequent to the February 2013 amendment may be summarized as follows:


	Payments Due by Period
Contractual Cash Obligations	Total		Within 1 Year		Years 2 and 3		Years 4 and 5		Beyond 5 Years
	(In thousands)
Long term debt obligations:
Amended senior secured credit facility – new term loan(1)	$	521,818	$	5,231	$	10,463	$	10,463	$	495,661
Amended senior secured credit facility – February 2013 term loan(1)		150,000		1,500		3,000		3,000		142,500
Amended senior secured credit facility – extended term loan(1)		310,092		3,124		6,249		300,719		—
Senior unsecured notes (1)		440,000		—		—		—		440,000
Other debt at operating subsidiaries(1)		37,891		6,779		9,566		8,021		13,525
Interest on long-term debt obligations(2)		552,873		90,747		170,487		159,559		132,080
Capitalized lease obligations(3)		43,189		5,339		8,270		6,931		22,649
Operating lease obligations		87,107		16,427		26,478		20,303		23,899

Total contractual cash obligations	$	2,142,970	$	129,147	$	234,513	$	508,996	$	1,270,314

(1)	Scheduled principal payments.

(2)	Represents interest due on long-term debt obligations. For variable rate debt, the interest is calculated using the December 31, 2012 rates applicable to each debt instrument plus the new LIBOR margins as amended in February 2013.

(3)	Includes principal and interest.

Debt at Operating Subsidiaries

Our operating subsidiaries, many of which have noncontrolling interest holders 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 and is generally secured by the assets of those operating entities. The total amount of these obligations, which was $63.2 million at December 31, 2012, 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 approximately 45% at December 31, 2012. As further discussed below, our unconsolidated affiliates that we account for under the equity method have debt and capitalized lease obligations that are generally non-recourse to USPI and are not included in our consolidated financial statements.

We believe that existing funds, cash flows from operations, borrowings under our credit facilities, and borrowings under capital lease arrangements at newly developed or acquired facilities will provide sufficient liquidity for the next twelve months. We may require additional debt or equity financing for our future acquisitions and development projects. There are no assurances that needed capital will be available on acceptable terms, if at all. If we are unable to obtain funds when needed or on acceptable terms, we will be required to curtail our acquisition and development program.

Purchases and Sales of Noncontrolling Interests

During 2012, 2011 and 2010, we purchased and sold a net of $4.8 million, $0.5 million and $0.7 million of noncontrolling interests. Transactions with noncontrolling interests in which we do not lose control of an entity are classified as financing activities. These transactions represent equity transactions because they are between us (or our subsidiaries) and noncontrolling interests

Dividend Payments

On April 3, 2012 and December 17, 2012, we paid cash dividends of approximately $314.5 million and $69.9 million, respectively, to our Parent’s equity holders.

Off-Balance Sheet Arrangements

As a result of our strategy of partnering with physicians and not-for-profit health systems, we do not own controlling interests in the majority of our facilities. We account for 149 of our 213 surgical facilities under the equity method. 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 December 31, 2012, the total debt on the balance sheets of our unconsolidated affiliates was approximately $407.2 million. Our average percentage ownership, weighted based on the individual affiliate’s amount of debt, of these unconsolidated affiliates was approximately 26% at December 31, 2012. USPI or one of its wholly-owned subsidiaries had collectively guaranteed $30.5 million of the $407.2 million in total debt of our unconsolidated affiliates as of December 31, 2012. In addition, our unconsolidated affiliates have obligations under operating leases, of which USPI or a wholly owned subsidiary had guaranteed $15.3 million as of December 31, 2012. Of the total $45.8 million of guarantees related to unconsolidated affiliates, approximately $8.0 million represents guarantees

of obligations of four facilities which have been sold. We have full recourse to the buyers with respect to the $8.0 million related to the sold facilities. 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.

As described above, our unconsolidated affiliates own operational surgical facilities or surgical facilities that are under development. These entities are structured as limited partnerships, limited liability partnerships, or limited liability companies. None of these affiliates provide financing, liquidity, or market or credit risk support for us. They also do not engage in hedging, research and development services with us. Moreover, we do not believe that they expose us to any of their liabilities that are not otherwise reflected in our consolidated financial statements and related disclosures. Except as noted above with respect to guarantees, we are not obligated to fund losses or otherwise provide additional funding to these affiliates other than as we determine to be economically required in order to successfully implement our development plans.

Related Party Transactions

We have entered into agreements with certain majority and minority owned surgery centers to provide management services. As compensation for these services, the surgery centers are charged management fees which are either fixed in amount or represent a fixed percentage of each center’s net revenue less bad debt. The percentages range from 3% to 8%. Amounts recognized under these agreements, after elimination of amounts from consolidated surgery centers, totaled approximately $67.6 million, $60.0 million, and $52.1 million in 2012, 2011, and 2010, respectively, and are included in management and contract service revenues in our consolidated statements of operations.

We regularly engage in purchases and sales of ownership interests in our facilities. We operate 30 surgical facilities in partnership with the Baylor Healthcare System (Baylor) and local physicians in the Dallas/Fort Worth area. Baylor’s Chief Executive Officer is a member of our board of directors. The following table summarizes transactions with Baylor during 2011. We had no such transactions in 2012 or 2010. We believe that the sale price was approximately the same as if it had been negotiated on an arms’ length basis, and the price equaled the value assigned by an external appraiser who valued the business immediately prior to the sale.

Date

Facility Location

Proceeds

Gain

August 2011

Dallas, Texas

(1)

1.6 million

— million

(1)	Baylor acquired a controlling interest in this facility. We continue to account for this facility under the equity method of accounting.

In January 2013, we contributed two of the surgery centers acquired in the True Results acquisition to a joint venture with Baylor. Baylor paid us approximately $9.0 million for ownership interests in the two surgery centers, which we believe approximates fair value as if it had been negotiated on an arms’ length basis.

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 $2.0 million for the years ended December 31, 2012, 2011 and 2010. 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 December 31, 2012, we had approximately $6.5 million accrued related to such management fee, of which $0.8 million is included in other current liabilities and $5.7 million is included in other long term liabilities in our consolidated balance sheet. At December 31, 2011, we had approximately $5.5 million accrued related to such management fee, of which $0.8 million is included in other current liabilities and $4.7 million is included in other long term liabilities in our consolidated balance sheet.

Item 7A. 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.

Our financing arrangements with many commercial lenders are based on the spread over Prime or LIBOR. At December 31, 2012, $477.9 million of our outstanding debt was in fixed rate instruments and the remaining $976.3 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 $9.8 million.

Until April 3, 2012, our United Kingdom revenues were a significant portion of our total revenues. As discussed previously, on April 3, 2012, we distributed the stock of our U.K. subsidiary to our Parent’s equity holders. We were exposed to risks associated with operating internationally, including foreign currency exchange risk and taxes and regulatory changes. Our United Kingdom facilities operated in a natural hedge to a large extent because both expenses and revenues were denominated in the local currency. Additionally, our borrowings in the United Kingdom were denominated in the local currency. Historically, the cash generated from our operations in the United Kingdom was 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, except as described below.

In December 2011, one of our U.S. subsidiaries loaned our former U.K. subsidiary £15.0 million to fund the purchase of a hospital in Sheffield, England. In order to protect us against foreign currency fluctuations, in January 2012, we entered into a forward contract with a bank to lock in the receipt of $21.5 million when the loan was due on May 31, 2012. In conjunction with the spin-off noted above, our U.K. subsidiary fully repaid the £15.0 million loan on April 3, 2012. As a result, we settled the forward contract on April 4, 2012 which resulted in a payment to the bank for approximately $0.9 million.

Item 8. Financial Statements and Supplementary Data

For the financial statements and supplementary data required by this Item 8, see the Index to Consolidated Financial Statements included elsewhere in this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Commission. Such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this Annual Report on Form 10-K, we have carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as of December 31, 2012, our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our reports filed with the Commission. There have been no significant changes in our internal controls which could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Annual Report on Form 10-K.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Our internal control over financial reporting includes those policies and procedures that:

•

Pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets.

•

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and board of directors; and

•

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Management’s assessment included an evaluation of the design and testing of the operational effectiveness of the Company’s internal control over financial reporting. USPI acquired several subsidiaries and equity method investments during 2012. Accordingly, management’s evaluation excluded the operations of the following

subsidiaries and equity method investments acquired during 2012, with total assets of approximately

$129.3 million and approximately $11.8 million of revenues included in the Company’s consolidated financial statements as of December 31, 2012:

•

AIGB Holdings, Inc.

•

USP Effingham, Inc.

•

USP Louisiana, Inc.

•

USP New Jersey, Inc. (Investments in Endoscopy Center of Hackensack, LLC and Paramus Endoscopy, LLC)

•

USP Sacramento, Inc. (Investment in Stockton Outpatient Surgery Center, LLC)

•

USP Tennessee, Inc. (Investment in Clarksville Surgery Center, LLC)

Based on this assessment, management did not identify any material weakness in the Company’s internal control, and management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2012.

KPMG LLP, the registered public accounting firm that audited the Company’s consolidated financial statements included in this report, has issued an attestation report on management’s assessment of internal control over financial reporting, a copy of which is included with the Company’s consolidated financial statements in Item 15(a)(1).

Limitations on the Effectiveness of Controls

Our management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls. For these reasons, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation described above that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Effective December 31, 2012, Boone Powell, Jr. retired from our board of directors.

PART III

ITEM 10. Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

Executive officers of USPI are elected annually by the board of directors and serve until their successors are duly elected and qualified. Directors are elected by USPI’s stockholders and serve until their successors are duly elected and qualified. There are no arrangements or understandings between any officer or director and any other person pursuant to which any officer or director was, or is to be, selected as an officer, director, or nominee for officer or director. There are no family relationships among any of our executive officers or directors. The names, ages as of February 26, 2013, and positions of the executive officers and directors of USPI are listed below along with their relevant business experience.


Name	Age	Position(s)
Donald E. Steen	66	Chairman of the Board
William H. Wilcox	61	Chief Executive Officer and Director
Brett P. Brodnax	48	President and Chief Development Officer
Mark A. Kopser	48	Executive Vice President and Chief Financial Officer
Niels P. Vernegaard	56	Executive Vice President and Chief Operating Officer
Philip A. Spencer	43	Executive Vice President, Business Development
Joel T. Allison	65	Director
Michael E. Donovan	36	Director
John C. Garrett, M.D.	70	Director
D. Scott Mackesy	44	Director
James Ken Newman	69	Director
Paul B. Queally	48	Director
Raymond A. Ranelli	65	Director

Donald E. Steen founded USPI in February 1998 and served as its chief executive officer until April 2004. Mr. Steen continues to serve as chairman of the board of directors and the executive committee. Mr. Steen was chairman of AmeriPath, Inc. and chief executive officer of AmeriPath, Inc. from July 2004 until May 2007. Mr. Steen founded Medical Care International, Inc., a pioneer in the surgery center business, in 1982. Mr. Steen’s experience in the healthcare industry as well as his leadership of USPI and his role as a director since its founding provides the board with a deeper insight into the Company’s business, challenges and opportunities.

William H. Wilcox joined USPI as its president and a director in September 1998. Mr. Wilcox has served as USPI’s chief executive officer since April 2004 and is a member of the executive committee. Mr. Wilcox served as president and chief executive officer of United Dental Care, Inc. from 1996 until joining USPI. Mr. Wilcox served as president of the Surgery Group of HCA and president and chief executive officer of the Ambulatory Surgery Division of HCA from 1994 until 1996. Prior to that time, Mr. Wilcox also previously served as the chief operating officer and a director of Medical Care International, Inc. Mr. Wilcox, through his intimate knowledge of the operational, financial and strategic development of USPI and his experience in the healthcare industry, provides the board with a valuable perspective into the opportunities and challenges facing the Company.

Brett P. Brodnax serves as the president and chief development officer of USPI. Prior to joining USPI in December 1999, Mr. Brodnax was an assistant vice president of the Baylor Health Care System (Baylor) from 1990 until 1999. Mr. Brodnax currently serves as a director of K2M, Inc. and also served as a director of AmeriPath, Inc. from January 2005 until May 2007.

Mark A. Kopser serves as the executive vice president and chief financial officer of USPI. Prior to joining USPI in May 2000, Mr. Kopser served as chief financial officer for the International Division of HCA from 1997 until 2000 and as chief financial officer for the London Division of HCA from 1992 until 1996. Effective with

the filing of this Annual Report on Form 10-K, and as further described in the Company’s Current Report on Form 8-K filed with the Commission on January 21, 2013, Mr. Kopser will resign as Chief Financial Officer of the Company to assume the position of Chief Executive Officer of the Company’s former European business, which the Company spun-off in April 2012. Jason B. Cagle, currently the Company’s Senior Vice President, General Counsel and Head of Acquisitions, will assume the role of Chief Financial Officer of the Company upon the effectiveness of Mr. Kopser’s resignation.

Niels P. Vernegaard joined USPI as the executive vice president and chief operating officer in June 2006. Prior to joining USPI, Mr. Vernegaard served in various positions with HCA (or predecessors) for 25 years, including as president and chief executive officer of HCA’s Research Medical Center in Kansas City, Missouri, and chief executive officer of the Wellington Hospital in London, England.

Philip A. Spencer joined USPI in July 2009. From November 2006 until joining USPI, Mr. Spencer served as President, Anatomic Pathology Services for AmeriPath, Inc. From November 2003 to November 2006, he served as Executive Vice President of Healthcare Sales and Marketing for LabOne, Inc. From December 2000 to November 2003, Mr. Spencer served as Vice President, Business Development for Laboratory Corporation of America.

Joel T. Allison has served on our board since March 2002. Mr. Allison has served as president and chief executive officer of Baylor since 2000 and served as its senior executive vice president from 1993 until 2000. Mr. Allison brings an important perspective to the board through his role in leading a major healthcare system and his familiarity with issues impacting physicians and the delivery of healthcare in the U.S.

Michael E. Donovan joined our board in April 2007 and serves as a member of the executive and audit and compliance committees. Mr. Donovan is currently a general partner at Welsh, Carson, Anderson & Stowe. Prior to joining Welsh Carson in 2001, Mr. Donovan worked at Windward Capital Partners and in the investment banking division at Merrill Lynch. He is a member of the board of directors of several private companies. Mr. Donovan’s experience in healthcare transactions and finance provides the board greater insight into the healthcare industry and financial strategy.

John C. Garrett, M.D. has served on our board since February 2001 and is a member of the audit and compliance committee. Dr. Garrett had been a director of OrthoLink Physicians Corporation, which was acquired by USPI in February 2001, since July 1997. Dr. Garrett founded Resurgens, P.C. in 1986, where he maintained a specialized orthopedics practice in arthroscopic and reconstructive knee surgery until his retirement in 2007. Dr. Garrett is a Fellow of the American Academy of Orthopedic Surgeons. The board benefits from Dr. Garrett’s knowledge of clinical and regulatory issues impacting our facilities and physician partners and his familiarity with USPI with which he has served as a director since 2001.

D. Scott Mackesy joined our board, executive committee and compensation committee in April 2007. Mr. Mackesy is a general partner of Welsh, Carson, Anderson & Stowe, where he focuses primarily on investments in the healthcare industry and is a managing member of the general partner of Welsh, Carson, Anderson & Stowe X, L.P. Prior to joining Welsh Carson, Mr. Mackesy was a research analyst at Morgan Stanley, where he was responsible for coverage of the healthcare services industry. He is a member of the board of directors of several private companies. Mr. Mackesy, through his lengthy and broad focus on the healthcare industry, offers the board greater insight into industry dynamics as well as investment and acquisition strategies.

James Ken Newman has served on our board since May 2005 and is a member of the audit and compliance committee. Mr. Newman served as president and chief executive officer of Horizon Health Corporation from May 2003 until its sale in June 2007 and as chairman of the board from February 1992 until June 2007. From July 1989 until September 1997, he served as president of Horizon Health and from July 1989 until October 1998, he also served as chief executive officer of Horizon Health. Mr. Newman is a member of the board of directors of Telescape Communications, Inc. and Springstone, Inc. Mr. Newman’s leadership and experience in the healthcare industry helps the board better assess the challenges and opportunities facing USPI.

Paul B. Queally has served as a director of USPI since its inception in February 1998 and serves as the chairman of the compensation committee and a member of the executive committee. Mr. Queally is Co-President of Welsh, Carson, Anderson & Stowe, where he focuses primarily on investments in the healthcare industry and is a managing member of the general partner of Welsh, Carson, Anderson & Stowe IX, L.P. Prior to joining Welsh Carson in 1996, Mr. Queally was a general partner at the Sprout Group, the private equity group of the former Donaldson, Lufkin & Jenrette. He is a member of the boards of directors of AGA Medical Corporation, Aptuit, Inc. and several private companies. Mr. Queally’s service on the boards of multiple private and public companies and his extensive experience in corporate transactions, including M&A, leveraged buyouts and private equity financing, provide the board with an important perspective in making strategic decisions.

Raymond A. Ranelli joined our board in May 2007 and serves as the chairman of the audit and compliance committee. Mr. Ranelli retired from PricewaterhouseCoopers in 2003 where he was a partner for over 20 years. Mr. Ranelli held several positions at PricewaterhouseCoopers including Vice Chairman and Global Leader of the Financial Advisory Services practice. Mr. Ranelli is also a director of United Vision Logistics, Ozburn-Hessey Logistics, K2M, Inc., Syniverse Technologies, Inc. and Peak 10. Mr. Ranelli possesses in-depth, practical knowledge of financial and accounting principles, having served in the financial services sector for over 20 years and serving on other boards and committees. This background, along with his past experience as a certified public accountant, is important to his role as chairman of the audit and compliance committee.

Audit Committee Financial Expert

Our board has determined that Raymond A. Ranelli, a director and chairman of the audit and compliance committee, is a financial expert and is independent as that term is used in the rules of the National Association of Securities Dealers’ listing standards (“NASDAQ Rules”).

Nominations for the Board of Directors

Our board of directors does not have a separately designated, standing nominating committee, a nominating committee charter, or a formal procedure for security holders to recommend nominees to the board of directors. USPI is not listed on a national securities exchange or in an automated inter-dealer quotation system of a national securities association, and we are not subject to either the listing standards of the New York Stock Exchange or the NASDAQ Rules.

Section 16(a) Beneficial Ownership Reporting Compliance

USPI does not have any class of equity securities registered under Section 12 of the Exchange Act. Consequently, Section 16(a) of the Exchange Act is not applicable.

Code of Ethics

We have adopted a Code of Conduct and a Financial Code of Ethics both applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or other persons performing similar functions. Copies of the Code of Conduct and the Financial Code of Ethics may be obtained, free of charge, by writing to the secretary of the Company at: United Surgical Partners International, Inc., 15305 Dallas Parkway, Suite 1600, Addison, Texas 75001.

Item 11. Executive Compensation

Overview

This compensation discussion and analysis describes the material elements of compensation awarded to named executive officers for our 2012 fiscal year. It should be read in conjunction with the Summary Compensation Table, related tables and the narrative disclosure. Unless otherwise specifically noted, the information contained in this section is stated as of December 31, 2012.

The compensation committee of our board of directors makes decisions regarding salaries, annual bonuses and equity incentive compensation for our named executive officers. Our named executive officers include our chief executive officer, our chief financial officer and our three most highly compensated executive officers other than our chief executive officer and chief financial officer. The compensation committee is also responsible for reviewing and approving corporate goals and objectives relevant to the compensation of our named executive officers, as well as evaluating their performance in light of those goals and objectives. Based on this evaluation, the compensation committee determines and approves the named executive officers’ compensation. The compensation committee solicits input from our chief executive officer regarding the performance of the company’s other named executive officers. Finally, the compensation committee also administers our equity incentive plan.

The chief executive officer reviews our compensation plan. Based on his analysis, the chief executive officer recommends a level of compensation to the compensation committee, other than for himself, which he views as appropriate to attract, retain and motivate executive talent. The compensation committee determines and approves the chief executive officer’s and other named executive officers’ compensation.

Our Compensation Philosophy and Objectives

We have sought to create an executive compensation program that balances short-term versus long-term payments and awards, cash payments versus equity awards and fixed versus contingent payments and awards in ways that we believe are most appropriate to motivate our executive officers. Our executive compensation program is designed to:

•

attract and retain superior executive talent in the healthcare industry;

•

motivate and reward executives to achieve optimum short-term and long-term corporate operating results;

•

align the interests of our executive officers and stockholders by motivating executive officers to increase stockholder value; and

•

provide a compensation package that recognizes individual contributions as well as overall business results.

In determining each component of, and the overall, compensation of our named executive officers, the compensation committee does not exclusively use quantitative methods or formulas, but instead considers various factors, including the position of the named executive officer, the compensation of officers of comparable companies within the healthcare industry, the performance of the named executive officer with respect to specific objectives, increases in responsibilities, recommendations of the chief executive officer and other objective and subjective criteria as the compensation committee deems appropriate. The specific objectives for each named executive officer vary each year in accordance with the scope of the officer’s position, the potential inherent in that position for impacting the Company’s operating and financial results and the actual operating and financial contributions produced by the officer in previous years.

Compensation Components

Our compensation consists primarily of three elements: base salary, annual bonus and long-term equity incentives. We describe each element of compensation in more detail below.

Base Salary

Base salaries for our named executive officers are established based on the scope of their responsibilities and their prior relevant experience, taking into account competitive market compensation paid by other companies in our industry for similar positions and the overall market demand for such executives at the time of hire. A named executive officer’s base salary is also determined by reviewing the executive’s other compensation

to ensure that the executive’s total compensation is in line with our overall compensation philosophy. Base salaries are reviewed annually and may be increased for merit reasons, based on the executive’s success in meeting or exceeding individual performance objectives. Additionally, we may adjust base salaries as warranted throughout the year for promotions or other changes in the scope or breadth of an executive’s role or responsibilities. Based on these factors base salaries for our named executive officers were set as follows effective June 1, 2012: $635,000 for Mr. Wilcox, $535,000 for Mr. Brodnax, $346,000 for Mr. Spencer and $458,000 for Mr. Vernegaard. Mr. Kopser’s base salary was set at $450,000 effective July 1, 2012 with $ 57,000 of that reimbursed to the Company by European Surgical Partners Limited.

Annual Bonus

Our compensation program includes eligibility for an annual incentive cash bonus. The compensation committee assesses the level of the named executive officer’s achievement of meeting individual goals, as well as that officer’s contribution towards our long-term, Company-wide goals. The amount of the cash bonus depends primarily on the Company meeting budgeted EBITDA goals, with a target bonus for each named executive officer generally set as a percentage of base salary. Target bonuses for the named executive officers were set at 50% of base salary for 2012, except for Mr. Wilcox whose target bonus was set at 75% of base salary for 2012. Based on the Company’s EBITDA performance compared to budget in 2012, all named executive officers received a bonus of 23% of their base salaries, except for Mr. Wilcox whose bonus was 22% of his base salary and Mr. Spencer whose bonus was 27% of his base salary.

EBITDA is not a measure defined under GAAP. The Company believes EBITDA is an important measure for purposes of assessing performance. EBITDA, which is computed by adding operating income plus depreciation and amortization and losses on deconsolidations, disposals and impairments, is commonly used as an analytical indicator within the healthcare industry and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as measures of financial performance under GAAP and EBITDA targets and the Company’s achievement of such targets should not be understood as management’s prediction of future performance or guidance to investors.

Long-Term Equity Incentives

We believe that equity-based awards allow us to reward named executive officers for their sustained contributions to the Company. We also believe that equity awards reward continued employment by a named executive officer, with an associated benefit to us of employee continuity and retention. We believe that equity awards provide management with a strong link to long-term corporate performance and the creation of stockholder value. The compensation committee has the authority to grant shares of restricted stock and options to purchase shares of certain classes of common and preferred equity securities of our Parent. The compensation committee does not award equity awards according to a prescribed formula or target. Instead, the compensation committee takes into account the individual’s position, scope of responsibility, ability to affect profits and the individual’s historic and recent performance and the value of the awards in relation to other elements of the individual executive’s total compensation. No equity awards were granted to the Company’s named executive officers in 2012. For a further description of the Company’s equity-based plan, see “Restricted Stock and Option Plan” below.

Termination Based Compensation

For payments due to our named executive officers upon termination, and the acceleration of vesting of equity-based awards in the event of a change of control under our new equity plan, see “Restricted Stock and Option Plan” and “Employment Arrangements and Agreements” below.

Other Benefits and Perquisites

We provide health and welfare benefits to our named executive officers that are available to all of the Company’s employees. Included in these benefits is a 401(k) plan that we maintain because we wish to encourage our employees to save a percentage of their cash compensation, through voluntary deferrals, for their eventual retirement. We match fifty percent of the first six percent of cash compensation contributed by individual employees subject to IRS limitations.

We also make available to our named executive officers certain perquisites and other benefits that we believe are reasonable and consistent with the perquisites that would be available to them at companies with whom we compete for experienced senior management. The primary perquisite we currently provide to named executive officers as well as certain other select members of the management team is access to a Deferred Compensation Plan (“DCP”) through which the individuals can voluntarily defer up to 75% of their base salary and 100% of their bonus. We match fifty percent of the first ten percent of compensation voluntarily deferred under this plan. Additionally, in 2012 we contributed $200,000 and $75,000 respectively to Messrs. Wilcox’s and Vernegaard’s DCP accounts.

Compensation Committee Report

The compensation committee of USPI has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the compensation committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

The Compensation Committee

Paul B. Queally, Chairman

D. Scott Mackesy

Summary Compensation Table for 2012

The following table sets forth the total remuneration paid by us for each of the last three fiscal years to the named executive officers.


Name and Principal Position	Year		Salary		Bonus			Stock Awards(1)		Option Awards(1)		Non-Equity Incentive Plan Compensation		Change in Nonqualified Deferred Compensation Earnings			All Other Compensation			Total
William H. Wilcox		2012	$	630,823	$	138,577	(2)	$	—	$	—	$	—	$	160,687		$	7,896,292	(3)	$	8,826,379
Chief Executive Officer		2011		614,583		110,625	(2)		—		—		—		90,781			245,279	(3)		1,061,268
and Director		2010		600,000		150,000	(2)		—		—		—		147,624			273,866	(3)		1,171,490

Brett P. Brodnax		2012		530,833		120,421	(2)		—		—		—		43,243			3,102,542	(3)		3,797,039
President and		2011		466,250		69,938	(4)		—	$	750,000		—		6,638			35,463	(3)		1,328,289
Chief Development Officer		2010		384,000		96,000	(4)		—		—		—		78,887			40,860	(3)		599,747

Mark A. Kopser		2012		417,333		95,639	(2)		—		—		—		37,922			2,773,867	(3)		3,324,761
Executive Vice President		2011		372,583		55,887	(2)		—		—		—		(2,118	)		30,454	(3)		456,806
and Chief Financial Officer		2010		358,000		89,500	(2)		—		—		—		39,159			38,591	(3)		525,250

Philip A. Spencer		2012		343,500		91,779	(2)		—		—		—		11,209			832,175	(3)		1,278,663
Executive Vice President,		2011		333,750		50,063	(5)		—		—		—		1,419			19,756	(3)		404,988
Business Development		2010		325,000		81,250	(2)		—		—		—		3,505			23,600	(3)		433,355

Niels P. Vernegaard		2012		453,333		104,091	(2)		—		—		—		135,888			2,850,692	(3)		3,544,004
Executive Vice President		2011		439,667		65,950	(2)		—		—		—		8,920			109,633	(3)		624,170
and Chief Operating Officer		2010		428,000		107,000	(2)		—		—		—		74,782			119,700	(3)		729,482

(1)

We account for the cost of stock-based and option-based compensation awarded under the 2007 Equity Incentive Plan adopted by our Parent under which the cost of equity awards to employees is measured by the aggregate grant date fair value of the awards on their grant date calculated in accordance with the FASB’s Accounting Standards Codification Topic 718. No forfeitures occurred during 2010, 2011 or 2012. Assumptions used in calculation of these amounts are included in Note 14 to our consolidated audited financial statements for the fiscal year ended December 31, 2012, included in this Annual Report on Form 10-K.

(2)	Ninety percent of the amount shown was paid in cash and ten percent was deferred at our named executive officer’s election pursuant to USPI’s Deferred Compensation Plan (the “DCP”).

(3)	Includes cash dividends paid on stock awards held by each named executive officer and discretionary contributions to the named executive officers’ DCP and matching contributions to the named executive officers’ DCP and 401(k) accounts as follows:


	Cash Dividends on Stock Awards		Discretionary Contribution to DCP		Matching Contribution 401(k)		Matching Contribution DCP
Mr. Wilcox
2012	$	7,657,250	$	200,000	$	7,500	$	31,542
2011		—		200,000		7,350		37,929
2010		—		200,000		7,350		66,516

Mr. Brodnax
2012		3,068,500		—		7,500		26,542
2011		—		—		7,350		28,113
2010		—		—		7,350		33,510

Mr. Kopser
2012		2,745,500		—		7,500		20,867
2011		—		—		7,350		23,104
2010		—		—		7,350		31,241

Mr. Spencer
2012		807,500		—		7,500		17,175
2011		—		—		7,350		12,406
2010		—		—		2,505		16,250

Mr. Vernegaard
2012		2,745,500		75,000		7,500		22,692
2011		—		75,000		7,350		27,283
2010		—		75,000		7,350		37,350

(4)	Fifty percent of the amount shown was paid in cash and fifty percent was deferred at Mr. Brodnax’s election pursuant to the DCP.

(5)	Ninety-five percent of the amount shown was paid in cash and five percent was deferred at our named executive officers’ election pursuant to the DCP.

Grant of Plan-Based Awards

The following table shows the plan-based awards granted to the named executive officers during 2012.

Name

Grant
Date

All Other Options Awards:
Number of Securities
Underlying Options

Exercise or Base Price of
Option Awards

Grant Date Fair Value of
Stock and Option Awards

William H. Wilcox

—

Brett P. Brodnax

—

Mark A. Kopser

—

Philip A. Spencer

—

Niels P. Vernegaard

—

Outstanding Equity Awards at Fiscal Year-End

The following table shows all outstanding equity awards held by our named executive officers as of December 31, 2012.


				Option Awards								Stock Awards
	Grant Date			Number of Securities Underlying Unexercised Options				Option Exercise Price		Option Expiration Date		Number of Shares that have not Vested			Fair Value of Shares that have not Vested(4)
Name				(Exerciseable)		(Unexerciseable)
William H. Wilcox		4/19/2007	(1)		—		—		—		—		2,375,000	(5)	$	3,776,250
		4/19/2007	(1)		—		—		—		—		495,536	(6)		789,492
Brett P. Brodnax		4/19/2007	(1)		—		—		—		—		950,000	(5)		1,510,500
		4/19/2007	(1)		—		—		—		—		275,853	(6)		438,606
		6/1/2011	(2)		250,000		750,000	$	0.29		6/1/2019		—			—
Mark A. Kopser		4/19/2007	(1)		—		—		—		—		850,000	(5)		1,351,500
		4/19/2007	(1)		—		—		—		—		220,683	(6)		350,886
Philip A. Spencer		8/28/2009	(3)		—		—		—		—		250,000	(5)		397,500
					—		—		—		—		—			—
Niels P. Vernegaard		4/19/2007	(1)		—		—		—		—		850,000	(5)		1,351,500
		4/19/2007	(1)		—		—		—		—		245,203	(6)		389,873

(1)	Upon consummation of the merger, our named executive officers received new stock awards under the 2007 Equity Incentive Plan.

(2)	Mr. Brodnax received an option award under the 2007 Equity Incentive Plan in connection with his promotion to President of the Company. In connection with the dividends declared on the Company’s stock in 2012, the exercise price on these options was reduced to $0.29 during 2012.

(3)	Mr. Spencer received a stock award upon joining the Company.

(4)

Because there is no active trading market for our common stock, we rely on members of the compensation committee and Welsh Carson to determine in good faith the fair value of our common stock. As of December 31, 2012, this value was determined to be $1.59 per share of common stock. Neither USPI, USPI Holdings, Inc. nor USPI Group Holdings, Inc. has any class of equity securities registered under Section 12 of the Exchange Act.

(5)	The restrictions with respect to these shares will lapse on April 19, 2015; provided however, that such restrictions may lapse sooner if certain internal rate of return targets are met.

(6)	The restrictions with respect to such shares will lapse upon a change of control or other exit event provided that Welsh Carson shall have disposed of all of its shares of our Parent acquired in connection with the merger and received its cost basis in such shares plus a return of at least 100%.

Option Exercises and Stock Values

The following table shows all stock options exercised during 2012 and the value realized upon exercise, and all stock awards vested during 2012 and the value realized upon vesting.

Option Awards

Stock Awards

Name

Number of
Shares
Acquired on
Exercise

Value
Realized on
Exercise

Number of
Shares
Acquired on
Vesting

Value
Realized
on Vesting

William H. Wilcox

N/A

—

Brett P. Brodnax

N/A

—

Mark A. Kopser

N/A

—

Philip A. Spencer

N/A

—

Niels P. Vernegaard

N/A

—

Restricted Stock and Option Plan

Our Parent adopted the 2007 Equity Incentive Plan which became effective contemporaneously with the consummation of the merger, which we sometimes refer to as the equity plan. The purposes of the equity plan are to attract and retain the best available personnel, provide additional incentives to our employees, directors and consultants and to promote the success of our business. A maximum of 20,726,523 shares of common stock may be delivered in satisfaction of awards made under the equity plan.

The compensation committee administers the equity plan (the “Administrator”). Participation in the plan is limited to those key employees and directors, as well as consultants and advisors, who in the Administrator’s opinion are in a position to make a significant contribution to the success of USPI and its affiliated corporations and who are selected by the Administrator to receive an award. The plan provides for awards of stock appreciation rights (“SARs”), stock options, restricted stock, unrestricted stock, stock units, including restricted stock units, and performance awards pursuant to the Administrator’s discretion and the provisions set forth in the plan. Eligibility for incentive stock options (“ISOs”) is limited to employees of USPI or of a “parent corporation” or “subsidiary corporation” of USPI as those terms are defined in Section 424 of the United States Internal Revenue Code of 1986, as amended. Each option granted pursuant to the plan will be treated as providing by its terms that it is to be a non-incentive stock option unless, as of the date of grant, it is expressly designated as an ISO.

The exercise price of each stock option and the share value above which appreciation is to be measured in the case of a SAR will be 100% of the fair value of the stock subject to the stock option or SAR, determined as of the date of grant, or such higher amount as the Administrator may determine in connection with the grant.

Neither ISOs nor, except as the Administrator otherwise expressly provides, other awards may be transferred other than by will or by the laws of descent and distribution. During a recipient’s lifetime an ISO and, except as the Administrator may provide, other non-transferable awards requiring exercise may be exercised only by the recipient. Awards permitted by the Administrator to be transferred may be transferred only to a permitted transferee.

No awards may be made after April 18, 2017, but previously granted awards may continue beyond that date in accordance with their terms. The Administrator may at any time amend the equity plan or any outstanding award for any purpose which may at the time be permitted by law, and may at any time terminate the equity plan as to any future grants of awards; provided, that except as otherwise expressly provided in the plan, the Administrator may not, without the participant’s consent, alter the terms of an award so as to affect adversely the participant’s right under the award, unless the Administrator expressly reserved the right to do so at the time of the award.

Upon termination of a named executive officer’s employment for any reason (including, without limitation, as a result of death, disability, incapacity, retirement, resignation, or dismissal with or without cause), then any vested shares as of the date of such termination shall remain vested shares, and no additional shares will become vested after the date of such termination, except if otherwise determined by the Administrator or within 180 days after the executive’s termination, USPI consummates a change of control, in which case, the provisions pertaining to a change of control will apply.

The shares acquired under the equity plan shall vest in full upon a change of control if, as a result of such change of control, Welsh Carson shall have disposed of all of the investor shares and received its cost basis in its investor shares plus an investor return of at least 100%. In the event the shares do not vest on such change of control, such shares shall be forfeited upon the closing of such change of control.

Nonqualified Deferred Compensation

The following table shows certain information regarding the named executive officers’ DCP accounts as of December 31, 2012.


	2012 Activity								Aggregate Balance at December 31, 2012
Name	Executive Contribution		USPI Contribution		Aggregate Earnings		Aggregate Withdrawals/ Distributions		Aggregate Balance at December 31, 2012
William H. Wilcox	$	73,396	$	236,698	$	160,687	$	165,863	$	2,902,846
Brett P. Brodnax		61,327		30,664		43,243		—		453,521
Mark A. Kopser		47,322		23,661		37,922		—		359,432
Philip A. Spencer		36,853		18,426		11,209		—		157,381
Niels P. Vernegaard		51,878		100,939		135,888		—		1,470,019

Deferred Compensation Plan

USPI has a deferred compensation plan that certain of its directors, executive officers and other employees participate in which allows such participants to defer a portion of their compensation to be paid upon certain specified events (including death, termination of employment, disability or some future date). Under the terms of the DCP, all amounts payable under the DCP would become immediately vested in connection with a change of control of USPI, and as a result, each participant would be entitled to be paid their full account balance upon consummation of such a transaction. Notwithstanding the foregoing, USPI amended the DCP to exclude the merger from the definition of a change of control for purposes of the DCP. As a result, the merger had no effect on the vesting of the account balance of any participant in the deferred compensation plan.

Our board of directors designates those persons who are eligible to participate in the DCP. Currently, each of Messrs. Steen, Wilcox, Brodnax, Vernegaard, Kopser and Spencer are eligible to participate in the DCP. The DCP enables participants to defer all or a portion of their bonus in a calendar year and up to 75% of their base salary, typically by making a deferral election in the calendar year prior to the year in which the bonus relates or the annual salary is otherwise payable.

Although participants are 100% vested in their deferrals of salary and bonus, USPI contributions to the DCP are subject to vesting schedules established by the compensation committee in its sole discretion (which may vary among different contributions). Notwithstanding such vesting schedules, participants will become 100% vested in their accounts under the DCP in the event of (i) retirement on or after the earlier to occur of (a) age 60 following the completion of five years of service with USPI or (b) age 65, (ii) a change in control or (iii) death.

Benefits are payable upon termination of employment. Participants may also elect, at the time they make an annual deferral, to receive a lump sum in-service distribution payable in a calendar year that is three or more

years after the calendar year to which the deferral is related. A participant who elects an in-service distribution may defer the distribution for an additional five years from the original payment date so long as such election is made at least 12 months prior to the original payment date. Participants may also make an in-service withdrawal from the DCP on account of an unforeseeable emergency (as defined in the DCP). Amounts under the DCP are distributed in a lump sum cash payment, except as provided below, unless the distribution is on account of retirement at normal retirement age under the DCP. A participant can elect, at the time of a deferral under the DCP, to receive his retirement benefit in either a lump sum or pursuant to annual installments over five, 10 or 15 years. Participants may change the form of payment of their retirement benefit from a lump sum to an annual installment payment, provided such election is submitted one year prior to the participant’s retirement.

A participant’s account will be credited with earnings and losses based on returns on deemed investment options selected by the participant from a group of deemed investments established by the deferred compensation plan committee.

USPI may make a discretionary contribution on behalf of any or all participants depending upon the financial strength of USPI. The amount of the contribution, if any, is determined in the sole discretion of the compensation committee. Currently, USPI matches fifty percent of any deferral by a named executive officer, subject to a total cap on the matching contribution of five percent of the officer’s compensation.

The DCP is administered by USPI’s compensation committee. The DCP is an “unfunded” arrangement for purposes of ERISA. Accordingly, the DCP consists of a mere promise by USPI to make payments in accordance with the terms of the DCP and participants and beneficiaries have the status of general unsecured creditors of USPI. A participant’s account and benefits payable under the DCP are not assignable. USPI may amend or terminate the DCP provided that no amendment adversely affects the rights of any participant with respect to amounts that have been credited to his account under the DCP prior to the date of such amendment. Upon termination of the DCP, a participant’s account will be paid out as though the participant experienced a termination of employment on the date of the DCP’s termination or, for participants who have attained normal retirement age, in the form of payment elected by the participant.

Employment Arrangements and Agreements

Set forth below is a description of our employment agreements and other compensation arrangements with our named executive officers.

We have employment agreements with William H. Wilcox as Chief Executive Officer, Brett P. Brodnax as President and Chief Development Officer, Mark A. Kopser as Executive Vice President and Chief Financial Officer, Niels Vernegaard as Executive Vice President and Chief Operating Officer and Philip A. Spencer as Senior Vice President, Business Development.

The initial term of our employment agreement with William H. Wilcox was for two years from April 18, 2007. Thereafter, Mr. Wilcox’s employment agreement automatically renews for additional two-year terms unless at least 30 days prior to the end of a two-year term, USPI or Mr. Wilcox gives notice that it or he does not wish to extend the agreement. Mr. Wilcox is paid a base salary of $635,000 per year, subject to increase from time to time with the possibility of a bonus, determined by the compensation committee in its sole discretion.

The initial term of our employment agreement with Brett P. Brodnax was for one year from April 18, 2007. Thereafter, Mr. Brodnax’s agreement automatically renews for additional one-year terms unless at least 30 days prior to the end of a one-year term, USPI or Mr. Brodnax gives notice that it or he does not wish to extend the agreement. Mr. Brodnax is paid a base salary of $535,000 per year, subject to increase from time to time with the possibility of a bonus, determined by the compensation committee in its sole discretion.

The initial term of our employment agreement with Mark A. Kopser is for one year from September 1, 2012. Thereafter, Mr. Kopser’s employment agreement automatically renews for additional one-year terms unless at 30 days prior to the end of a one-year term, USPI or Mr. Kopser gives notice that it or he does not wish to extend the agreement. Mr. Kopser is paid a base salary of $450,000 per year, subject to increase from time to time with the possibility of a bonus determined by the compensation committee in its sole discretion.

The initial term of our employment agreement with Niels P. Vernegaard was for two years from April 18, 2007. Thereafter, Mr. Vernegaard’s employment agreement automatically renews for additional one-year terms unless at 30 days prior to the end of a one-year term, USPI or Mr. Vernegaard gives notice that it or he does not wish to extend the agreement. Mr. Vernegaard is paid a base salary of $458,000 per year, subject to increase from time to time with the possibility of a bonus determined by the compensation committee in its sole discretion.

The initial term of our employment agreement with Philip A. Spencer was for three years from July 29, 2009. Thereafter, Mr. Spencer’s employment agreement automatically renews for additional one-year terms unless at 30 days prior to the end of a one-year term, USPI or Mr. Spencer gives notice that it or he does not wish to extend the agreement. Mr. Spencer is paid a base salary of $346,000 per year, subject to increase from time to time with the possibility of a bonus determined by the compensation committee in its sole discretion.

Each of the employment agreements with our named executive officers also provides that if the executive is terminated for cause, or if he terminates his employment agreement without certain enumerated good reasons, we shall pay to him any accrued or unpaid base salary through the date of his termination. In addition, if we terminate the employment without cause or upon failure to renew his employment agreement, or if he terminates his employment for certain enumerated good reasons, we will (i) continue to pay him his base salary at the rate in effect on the date of his termination for 12 months (24 months for Mr. Kopser); (ii) continue his health insurance benefits for 12 months following his date of termination (24 months for Messrs. Wilcox and Kopser) or the economic equivalent thereof if such continuation is not permissible under the terms of our health insurance plan; and (iii) pay him a good faith estimate of the bonus he would have received had he remained employed through the end of the fiscal year in which his termination occurred (two fiscal years for Mr. Kopser). Our obligations set forth in items (i) to (iii) above are conditioned on the executive signing a release of claims and the continued performance of his continuing obligations under his employment agreement.

In connection with the consummation of the merger and the adoption of our Parent’s equity plan, certain of our executive officers, including our named executive officers, were awarded restricted shares of our Parent’s common stock under the equity plan pursuant to an agreement between each such named executive officer and our Parent. Pursuant to these restricted stock award agreements with our named executive officers, upon termination of such named executive officer’s employment for any reason (including, without limitation, as a result of death, disability, incapacity, retirement, resignation, or dismissal with or without cause), any vested shares as of the date of such termination shall remain vested shares and no additional shares will become vested after the date of such termination unless USPI consummates a change of control within 180 days after such named executive officer’s termination, in which case, such unvested shares shall become fully vested if such awards would have become fully vested had such named executive officer not been terminated on the date of such change of control as described below. Additionally, pursuant to such restricted stock award agreements with our named executive officers, all unvested restricted shares vest in full upon a change of control if, as a result of such change of control, Welsh Carson shall have disposed of all of its shares of our Parent acquired in connection with the merger and received its cost basis in such shares plus a return of at least 100%. In the event such restricted shares do not vest on such change of control, then such restricted shares shall be forfeited upon the closing of such change of control.

Potential Payments Upon Termination or Change of Control

The following table sets forth for each named executive officer potential post-employment payments and payments on a change in control and assumes that the triggering event took place on December 31, 2012.


Name	Cash Severance Payment			Accrued Bonus(1)(2)		Benefits(3)			Accelerated Vesting upon Change of Control(4)
William H. Wilcox	$	1,270,000	(5)	$	138,577	$	14,592	(5)	$	4,565,742
Brett P. Brodnax		535,000	(6)		120,421		6,996	(6)		1,949,106
Mark A. Kopser		900,000	(6)		95,639		19,464	(5)		1,702,386
Philip A. Spencer		346,000	(6)		91,779		480	(6)		397,500
Niels P. Vernegaard		458,000	(6)		104,091		8,460	(6)		1,741,373

(1)	Amounts are based on the bonus amount paid with respect to 2012.

(2)	Amounts will be paid at such time as annual bonuses are payable to other executive and officers of USPI in accordance with USPI’s normal payroll practices.

(3)	Amounts consist of the cost to continue to pay such named executive officer’s health insurance benefits for the designated term or the economic equivalent thereof if such continuation is not permissible under the terms of the USPI’s health insurance plan.

(4)

Pursuant to the restricted stock award agreements with our named executive officers, all unvested restricted shares of our Parent’s common stock will vest in full upon a change of control if, as a result of such change of control, Welsh Carson shall have disposed of all of its shares of our Parent acquired in connection with the merger and received its cost basis in such shares plus a return of at least 100%. A change of control is not defined to include an initial public offering of our stock. In the event such restricted shares do not vest on such change of control, then such restricted shares shall be forfeited upon the closing of such change of control transaction. The results in this column are the result of multiplying the total possible number of restricted shares of our Parent’s common stock that vest upon a change of control by $1.59 per share. Because there is no active trading market for our common stock, we rely on members of the compensation committee and Welsh Carson to determine in good faith the fair value of our common stock. As of December 31, 2012, this value was determined to be $1.59 per share of common stock. Neither USPI, USPI Holdings, Inc. nor USPI Group Holdings, Inc. has any class of equity securities registered under Section 12 of the Exchange Act.

(5)	Amounts to be paid over twenty-four months.

(6)	Amounts to be paid over twelve months.

Director Compensation

The chairman and members of our board of directors who are also officers or employees of USPI, affiliates of Welsh Carson and Mr. Allison do not receive compensation for their services as directors. At Mr. Allison’s direction, his compensation for his service as a director are paid to his employer Baylor. The other directors (“non—employee directors”) receive cash compensation in the amount of $30,000 per year and are eligible to participate in our group insurance benefits. If a non-employee director elects to participate, the director will pay the full cost of such benefits. Non-employee directors also receive the following for all meetings attended: $2,500 per board meeting, $1,250 per telephonic meeting, $3,000 per audit committee meeting and $1,000 per other committee meeting. In addition, the audit committee chairman is paid a retainer of $20,000 per year.

The following table sets forth the compensation paid to our non-employee directors in 2012.

2012 Non-Employee Director Compensation Table


Name	Fees Earned or Paid in Cash		Stock Awards		All Other Compensation		Total
Joel T. Allison	$	—	$	—	$	—	$	—
John C. Garrett, M.D.		54,500		—		—		54,500
James Ken Newman		54,500		—		—		54,500
Raymond A. Ranelli		72,000		—		—		72,000

Compensation Risk Assessment

At the request of the Compensation Committee, management conducted an assessment of the Company’s compensation plans to determine whether such plans encourage excessive or inappropriate risk taking by our employees. This assessment included a review of the risk characteristics of our business and the design of our compensation plans. Although a significant portion of our executive compensation program is performance-based, the Compensation Committee has focused on aligning the Company’s compensation plans with the long-term interests of the Company and its stockholders and avoiding rewards or incentive structures that could encourage unnecessary risks to the Company.

Management reported its findings from this assessment to the Compensation Committee. The Compensation Committee agreed that the Company’s compensation plans do not encourage excessive or inappropriate risk taking and are not reasonably likely to have a material, adverse effect on the Company.

Compensation Committee Interlocks and Insider Participation

The compensation committee of the board of directors consists of Messrs. Queally (Chairman) and Mackesy. None of such persons are officers or employees or former officers or employees of the Company. None of the executive officers of the Company served as a member of the compensation committee of any other company during 2012.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

USPI does not issue any of its equity securities in conjunction with an equity compensation plan. See Item 11, “Executive Compensation—Restricted Stock and Option Plan,” for a discussion of Parent’s equity compensation plan.

All of the issued and outstanding stock of USPI is owned by Holdings, which in turn is wholly-owned by Parent. The following table sets forth information as of February 26, 2013, with respect to the beneficial ownership of the capital stock of our Parent by (i) our chief executive officer and each of the other named executive officers, (ii) each of our directors, (iii) all of our directors and executive officers as a group and (iv) each holder of five percent (5%) or more of any class of our Parent’s outstanding capital stock.

Except as described in the agreements mentioned above or as otherwise indicated in a footnote, each of the beneficial owners listed has, to our knowledge, sole voting, dispositive and investment power with respect to the indicated shares of common stock beneficially owned by them.


Name of Beneficial Owner(1)	Common Shares Beneficially Owned		Percent of Outstanding Common Shares			Participating Preferred Shares Beneficially Owned		Percent of Outstanding Participating Preferred Shares
Welsh, Carson, Anderson & Stowe(2)		136,448,356		84.3	%		17,326,775		96.3	%
California State Teacher’s Retirement System(3)		22,183,099		13.7	%		2,816,901		15.7	%
CPP Investment Board (USRE II) Inc.(4)		26,619,718		16.5	%		3,380,282		18.8	%
Silvertech Investment PTE Ltd(5)		8,873,239		5.5	%		1,126,761		6.3	%
Donald E. Steen(6)		600,000		*			—		*
William H. Wilcox(7)		6,188,790		3.8	%		236,618		*
Brett P. Brodnax(8)		2,388,811		1.5	%		27,042		*
Mark A. Kopser(9)		2,364,345		1.5	%		56,338		*
Niels P. Vernegaard(10)		2,007,194		1.2	%		7,872		*
Philip A. Spencer(11)		513,310		*			1,690		*
Joel T. Allison		—		—			—		—
Michael E. Donovan(12)(13)		80,000		*			—		—
John C. Garrett, M.D.(13)		213,095		*			16,901		*
D. Scott Mackesy(12)(13)		80,000		*			—		—
James K. Newman(13)		257,463		*			22,535		*
Paul B. Queally(12)(14)		255,457		*			22,281		*
Raymond A. Ranelli(15)		137,363		*			7,885		*
All directors and executive officers as a group(16)		15,085,828		9.82	%		399,162		2.2	%

*	Less than one percent

(1)	Unless otherwise indicated, the principal executive offices of each of the beneficial owners identified are located at 15305 Dallas Parkway, Suite 1600, Addison, Texas 75001.

(2)

Represents (A) 54,671,610 common shares and 6,942,423 participating preferred shares held by Welsh Carson over which Welsh Carson has sole voting and investment power, (B) 25,200 common shares and 3,200 participating preferred shares held by WCAS Management Corporation, an affiliate of Welsh Carson, over which WCAS Management Corporation has sole voting and investment power, (C) an aggregate 1,462,785 common shares and 185,752 participating preferred over which individuals who are general partners of WCAS X Associates LLC, the sole general partner of Welsh Carson, and/or otherwise employed by an affiliate of Welsh, Carson, Anderson & Stowe have voting and investment power, and (D) an aggregate 80,288,761 common shares and 10,195,400 participating preferred shares held by other co-investors, over which Welsh Carson has sole voting power. WCAS X Associates LLC, the sole general partner of Welsh Carson and the individuals who serve as general partners of WCAS X Associates LLC, including D. Scott Mackesy, Paul B. Queally and Michael E. Donovan, may be deemed to beneficially own the shares beneficially owned by Welsh Carson. Such persons disclaim beneficial ownership of such shares. The principal executive offices of Welsh, Carson, Anderson & Stowe are located at 320 Park Avenue, Suite 2500, New York, New York 10022.

(3)	Such beneficial owner has granted to Welsh Carson sole voting power over its shares. The principal executive offices of such beneficial owner is 7667 Folsom Blvd., Suite 250, Sacramento, California 95826.

(4)	Such beneficial owner has granted to Welsh Carson sole voting power over its shares. The principal executive offices of such beneficial owner is One Queen Street East, Suite 2600, Toronto, Ontario, M5C 2W5, Canada.

(5)	Such beneficial owner has granted to Welsh Carson sole voting power over its shares. The principal executive offices of such beneficial owner is 255 Shoreline Drive, Suite 600, Redwood City, California 94065.

(6)	Includes 600,000 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(7)

Includes 3,700,000 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger. Also included are 275,000 common shares, 39,436 participating preferred shares and 100,000 common shares subject to restrictions on transfer owned by each of the Michelle Ann Steen Trust and the Marcus Anthony Steen Trust for which, in each case, Mr. Wilcox acts as trustee and has voting and investment power over such shares. Such shares are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger. Not included are 1,000,000 common shares owned by the 2012 WHW Descendants Trust over which Mr. Wilcox’s spouse is trustee.

(8)	Includes 2,175,853 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(9)	Includes 1,920,683 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(10)	Includes 1,945,203 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(11)	Includes 500,000 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of initial employment with USPI and 13,310 common shares.

(12)

Does not include (A) 54,671,610 common shares or 6,942,423 participating preferred shares owned by Welsh Carson, or (B) 25,200 common shares or 3,200 participating preferred shares owned by WCAS Management Corporation. Messrs Queally, Mackesy and Donovan, as general partners of WCAS X Associates LLC, the sole general partner of Welsh Carson, and officers of WCAS Management Corporation, may be deemed to beneficially own the shares beneficially owned by Welsh Carson and WCAS Management Corporation. Each of Messrs Queally, Mackesy and Donovan disclaims beneficial ownership of such shares. The principal executive offices of Messrs Queally, Mackesy and Donovan are located at 320 Park Avenue, Suite 2500, New York, New York 10022.

(13)	Includes 80,000 common shares which are subject to restrictions set forth in a restricted stock award agreement.

(14)

Includes (A) an aggregate 3,090 common shares and 393 preferred shares owned by certain trusts established for the benefit of Mr. Queally’s children for which, in each case, Mr. Queally acts as a trustee and has voting and investment power over such shares and (B) 80,000 common shares which are subject to restrictions on transfer set forth in a restricted stock awards agreement.

(15)

Includes 80,000 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement. The 137,363 common shares and 7,885 participating preferred shares are owned by the Lisa C. Ranelli Trust for which Mr. Ranelli acts as trustee and has voting and investment power over such shares.

(16)

Does not include (A) 54,671,610 common shares or 6,942,423 participating preferred shares owned by Welsh Carson, or (B) 25,200 common shares or 3,200 participating preferred shares owned by WCAS Management Corporation. Includes an aggregate 12,361,836 common shares which are subject to restrictions on transfer set forth in restricted stock award agreements entered into at the time of the consummation of the merger.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

This section describes certain relationships and transactions involving us and certain of our directors, executive officers, and other related parties. We believe that all the transactions described in herein are upon fair and reasonable terms no less favorable than could be obtained in comparable arm’s length transactions with unaffiliated third parties under the same or similar circumstances.

Arrangements with Our Investors

Welsh Carson, its co-investors and the rollover stockholders entered into agreements described below with our Parent. Welsh Carson’s co-investors includes individuals and entities invited by Welsh Carson to participate in our Parent’s financings such as affiliated investment funds, individuals employed by affiliates of Welsh Carson and limited partners of Welsh Carson.

Stockholders Agreement

The stockholders agreement contains certain restrictions on the transfer of equity securities of our Parent and provides certain stockholders with certain preemptive and information rights.

Management Agreement

In connection with the merger, USPI entered into a management agreement with WCAS Management Corporation, an affiliate of Welsh Carson, pursuant to which WCAS Management Corporation will provide management and financial advisory services to us. WCAS Management Corporation receives an annual management fee of $2.0 million, of which $1.0 million will be payable in cash on an annual basis and the remainder will accrue annually over time, and annual reimbursement for out-of-pocket expenses incurred in connection with the provision of such services.

Other Arrangements with Directors and Executive Officers

Restricted Stock and Option Plan

In connection with the merger, our Parent adopted a new restricted stock and option plan. Members of our management, including some of those who are participating in the merger as rollover stockholders, received awards under this plan. See “Compensation Discussion and Analysis — Restricted Stock and Option Plan.”

Employment Agreements

Each of the named executive officers of USPI has employment agreements with us. See “Compensation Discussion and Analysis — Employment Arrangements and Agreements.”

Other Arrangements

We have entered into agreements with certain majority and minority owned surgery centers to provide management services. As compensation for these services, the surgery centers are charged management fees which are either fixed in amount or represent a fixed percentage of each center’s net revenue less bad debt. The percentages range from 3% to 8%. Amounts recognized under these agreements, after elimination of amounts from consolidated surgery centers, totaled approximately $67.6 million, $60.0 million, and $52.1 million in 2012, 2011 and 2010, respectively, and are included in management and contract service revenue in our consolidated statements of operations.

We regularly engage in purchases and sales of ownership interests in our facilities. We operate 30 surgical facilities in partnership with the Baylor Health Care System (Baylor) and local physicians in the Dallas/Fort Worth area. Baylor’s Chief Executive Officer is a member of our board of directors. The following table

100

summarizes transactions with Baylor during 2011. We had no such transactions in 2012 or 2010. We believe that the sale price was approximately the same as if it had been negotiated on an arms’ length basis, and the price equaled the value assigned by an external appraiser who valued the business immediately prior to the sale.

Date

Facility Location

Proceeds

Gain

August 2011

Dallas, Texas

(1)

1.6 million

— million

(1)	Baylor acquired a controlling interest in this facility. We continue to account for this facility under the equity method of

Additionally, we derived approximately 3% of our revenues and approximately 43% of our equity in earnings of unconsolidated affiliates in 2012 from our joint venture with Baylor.

Marc Steen, the son of Donald E. Steen, is employed by USPI as Vice President, Development. During 2012, Marc Steen earned $241,471 in salary and bonus.

Blake Allison, the son of Joel T. Allison, is employed by USPI as a Vice President. During 2012, Blake Allison earned $188,913 in salary and bonus.

USPI does not have a written policy on related party transactions, however, the audit and compliance committee will review and approve all related party transactions required to be reported pursuant to item 404(a) of Regulation S-X.

Neither the Company, USPI Holdings, Inc. nor USPI Group Holdings, Inc. are listed on a national securities exchange or in an automated inter-dealer quotation system of a national securities association, and we are not subject to either the listing standards of the New York Stock Exchange or the NASDAQ Rules. For the purposes of the following determinations of director independence, we have chosen to use the NASDAQ Rules. Using such Rules, we have determined that each of the directors on our board of directors are independent for general board service, except Messrs. Steen, Wilcox, Mackesy, Queally, Donovan and Allison.

Our board of directors has a separately designated, standing audit and compliance committee comprised of the following members of the board: Messrs. Ranelli (Chairman), Donovan, Garrett and Newman. Under the NASDAQ Rules, Messrs. Ranelli, Garrett and Newman would be considered independent for the purposes of audit and compliance committee service.

Our board of directors also has a separately designated, standing compensation committee comprised of the following members of the board: Messrs. Queally (Chairman) and Mackesy. Under the NASDAQ Rules, Messrs. Queally and Mackesy would not be considered independent for the purposes of compensation committee service.

ITEM 14. Principal Accounting Fees and Services

The following table shows the aggregate fees billed by KPMG LLP, our independent registered public accounting firm, during the years ended December 31, 2012 and 2011:


Description of Fees	2012		2011
Audit Fees(1)	$	1,591,000	$	1,732,719
Audit Related Fees(2)		150,000		—
Tax Fees(3)		—		—
All Other Fees(4)		238,750		403,980

	$	1,979,750	$	2,136,699

(1)	Audit Fees. Includes fees billed for professional services rendered for the audit of our annual financial statements included in our Form 10-K, reviews of our quarterly financial statements included in

101

Forms 10-Q, audits of subsidiaries, reviews of our other filings with the SEC, and other research work necessary to comply with generally accepted accounting standards for the years ended December 31, 2012 and 2011.

(2)	Audit Related Fees. Includes fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include other accounting and reporting consultations.

(3)	Tax Fees. Includes fees billed for tax compliance, tax advice, and tax planning.

(4)	All Other Fees. Includes fees billed for assistance with preparation of Medicare cost reports and due diligence procedures on potential acquisitions.

The charter of our audit and compliance committee provides that the committee must approve in advance all audit and non-audit services provided by KPMG LLP. The audit and compliance committee approved all of these services.

102

PART IV

Item 15.

Exhibits, Financial Statement Schedules

(a) (1) Financial Statements

The following consolidated financial statements are filed as part of this Form 10-K:


Reports of Independent Registered Public Accounting Firm			F-1

Consolidated Balance Sheets			F-3

Consolidated Statements of Operations			F-4

Consolidated Statements of Comprehensive Income (Loss)			F-5

Consolidated Statements of Changes in Equity			F-6

Consolidated Statements of Cash Flows			F-7

Notes to Consolidated Financial Statements			F-8

(2) Financial Statement Schedule — Schedule II			S-1

(3) The following consolidated financial statements of Texas Health Ventures Group, L.L.C. and Subsidiaries are presented pursuant to Rule 3-09 of Regulation S-X:

Report of Independent Auditors			3

Consolidated Balance Sheets as of June 30, 2012 and 2011			4

Consolidated Statements of Income for the years ended June 30, 2012 and 2011			5

Consolidated Statements of Changes in Equity for the years ended June 30, 2012 and 2011			6

Consolidated Statements of Cash Flows for the years ended June 30, 2012 and 2011			7

Notes to Consolidated Financial Statements			8

Report of Independent Auditors			25

Consolidated Balance Sheets as of June 30, 2011 and 2010			26

Consolidated Statements of Income for the years ended June 30, 2011 and 2010			27

Consolidated Statements of Changes in Equity for the years ended June 30, 2011 and 2010			28

Consolidated Statements of Cash Flows for the years ended June 30, 2011 and 2010			29

Notes to Consolidated Financial Statements			30

(4) Exhibits			IV-1

103

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder

United Surgical Partners International, Inc.:

We have audited the accompanying consolidated balance sheets of United Surgical Partners International, Inc. (the Company) and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the years in the three year period ended December 31, 2012. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Surgical Partners International, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), United Surgical Partners International, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.


				/s/ KPMG LLP

Dallas, Texas

February 26, 2013

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder

United Surgical Partners International, Inc.:

We have audited United Surgical Partners International, Inc.’s (the Company) internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). United Surgical Partners International, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, United Surgical Partners International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

United Surgical Partners International, Inc. acquired several subsidiaries and equity method investments during 2012, and management excluded from its assessment of the effectiveness of United Surgical Partners International, Inc.’s internal control over financial reporting as of December 31, 2012, the Company’s internal control over financial reporting associated with total assets of $129.3 million and $11.8 million of revenues included in the consolidated financial statements of United Surgical Partners International, Inc. and subsidiaries as of and for the year ended December 31, 2012. Our audit of internal control over financial reporting of United Surgical Partners International, Inc. excluded an evaluation of the internal control over financial reporting of those subsidiaries and equity method investments which are listed below:

•

AIGB Holdings, Inc.

•

USP Effingham, Inc.

•

USP Louisiana, Inc.

•

USP New Jersey, Inc. (Investments in Endoscopy Center of Hackensack, LLC and Paramus Endoscopy, LLC)

•

USP Sacramento, Inc. (Investment in Stockton Outpatient Surgery Center, LLC)

•

USP Tennessee, Inc. (Investment in Clarksville Surgery Center, LLC)

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of United Surgical Partners International, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for each of the years in the three year period ended December 31, 2012 and our report dated February 26, 2013 expressed an unqualified opinion on those consolidated financial statements.


				/S/ KPMG LLP

Dallas, Texas

February 26, 2013

F-2

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2012 and 2011


	2012		2011
	(In thousands, except share amounts)
ASSETS
Cash and cash equivalents (Note 1)	$	51,203	$	41,822
Available for sale securities (Note 1)		10,741		4,815
Accounts receivable, net of allowance for doubtful accounts of $9,904 and $8,576 respectively		50,108		58,057
Other receivables (Note 6)		14,611		10,499
Inventories of supplies		8,017		10,117
Deferred tax asset, net (Note 13)		20,687		14,704
Prepaids and other current assets		16,607		15,314

Total current assets		171,974		155,328
Property and equipment, net (Note 7)		126,526		235,321
Investments in unconsolidated affiliates (Note 3)		484,079		444,734
Goodwill (Note 8)		1,195,686		1,209,345
Intangible assets, net (Note 8)		359,422		327,140
Other assets		23,062		21,630

Total assets	$	2,360,749	$	2,393,498

LIABILITIES AND EQUITY
Accounts payable	$	14,981	$	28,765
Accrued salaries and benefits		28,992		24,405
Due to affiliates		155,389		139,628
Accrued interest		10,053		6,671
Current portion of long-term debt (Note 9)		17,913		25,487
Other current liabilities		47,078		52,281

Total current liabilities		274,406		277,237
Long-term debt, less current portion (Note 9)		1,461,621		1,042,969
Other long-term liabilities		30,583		30,807
Deferred tax liability, net (Note 13)		168,753		167,946

Total liabilities		1,935,363		1,518,959
Noncontrolling interests — redeemable (Note 4)		153,399		106,668
Commitments and contingencies (Notes 4 and 15)
Equity (Note 14)
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		231,056		778,030
Accumulated other comprehensive income (loss), net of tax		64		(63,033	)
Retained earnings		2,595		17,691

Total USPI stockholder’s equity		233,715		732,688
Noncontrolling interests — nonredeemable (Note 4)		38,272		35,183

Total equity		271,987		767,871

Total liabilities and equity	$	2,360,749	$	2,393,498

See accompanying notes to consolidated financial statements

F-3

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Operations


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
	(In thousands)
Revenues:
Net patient service revenues	$	451,598		$	418,155		$	402,049
Management and contract service revenues		79,438			72,113			64,838
Other revenues		9,199			8,910			7,062

Total revenues		540,235			499,178			473,949
Equity in earnings of unconsolidated affiliates		96,393			83,137			69,916
Operating expenses:
Salaries, benefits, and other employee costs		138,020			125,143			118,838
Medical services and supplies		83,546			76,721			75,341
Other operating expenses		87,173			79,707			84,026
General and administrative expenses		41,434			38,028			33,762
Provision for doubtful accounts		9,678			9,409			8,417
Net (gains) losses on deconsolidations, disposals and impairments (Notes 2, 3 and 8)		7,588			(1,529	)		6,378
Depreciation and amortization		23,955			21,177			22,493

Total operating expenses		391,394			348,656			349,255

Operating income		245,234			233,659			194,610
Interest income		676			516			742
Interest expense		(85,934	)		(63,537	)		(66,886	)
Loss on early retirement of debt		(37,450	)		—			—
Other, net		(613	)		(73	)		708

Total other expense, net		(123,321	)		(63,094	)		(65,436	)

Income from continuing operations before income taxes		121,913			170,565			129,174
Income tax expense (Note 13)		(21,502	)		(39,918	)		(29,257	)

Income from continuing operations		100,411			130,647			99,917
Discontinued operations, net of tax (Note 2):
Income (loss) from discontinued operations		3,073			(111,033	)		9,518
Loss on disposal of discontinued operations		—			(529	)		(6,782	)

Total earnings (loss) from discontinued operations		3,073			(111,562	)		2,736

Net income		103,484			19,085			102,653
Less: Net income attributable to noncontrolling interests		(72,693	)		(69,929	)		(60,560	)

Net income (loss) attributable to USPI’s common stockholder	$	30,791		$	(50,844	)	$	42,093

Amounts attributable to USPI’s common stockholder:
Income from continuing operations, net of tax	$	27,777		$	60,868		$	39,678
Earnings (loss) from discontinued operations, net of tax		3,014			(111,712	)		2,415

Net income (loss) attributable to USPI’s common stockholder	$	30,791		$	(50,844	)	$	42,093

See accompanying notes to consolidated financial statements

F-4

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
	(In thousands)
Net income	$	103,484		$	19,085		$	102,653
Other comprehensive income (loss):
Foreign currency translation adjustments		4,938			1,272			(11,638	)
Unrealized loss on foreign currency contract, net of tax		(560	)		—			—
Unrealized gain on available for sale securities, net of tax		22			42			—
Unrealized gain on interest rate swaps, net of tax		15			2,560			3,408
Pension adjustments, net of tax		—			(556	)		724
Reclassification due to spin-off of U.K. subsidiary:
Foreign currency translation adjustments		58,682			—			—

Total other comprehensive income (loss)		63,097			3,318			(7,506	)

Comprehensive income		166,581			22,403			95,147
Less: Comprehensive income attributable to noncontrolling interests		(72,693	)		(69,929	)		(60,560	)

Comprehensive income (loss) attributable to USPI’s common stockholder	$	93,888		$	(47,526	)	$	34,587

See accompanying notes to consolidated financial statements

F-5

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Equity


	USPI Common Stockholder													Noncontrolling Interests — Nonredeemable			Total
	Outstanding Shares		Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Noncontrolling Interests — Nonredeemable			Total
	(In thousands, except share amounts)
Balance, December 31, 2009		100	$	—	$	789,505		$	(58,845	)	$	27,292		$	40,051		$	798,003
Distributions to noncontrolling interests		—		—		—			—			—			(5,710	)		(5,710	)
Purchases of noncontrolling interests		—		—		(452	)		—			—			329			(123	)
Sales of noncontrolling interests		—		—		(6,774	)		—			—			678			(6,096	)
Deconsolidation of subsidiaries		—		—		—			—			—			(6,621	)		(6,621	)
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		—		—		2,294			—			—			—			2,294
Dividend to USPI Holdings, Inc. / USPI Group Holdings, Inc.		—		—		—			—			(850	)		—			(850	)
Net income		—		—		—			—			42,093			5,667			47,760
Other comprehensive income (loss)		—		—		—			(7,506	)		—			—			(7,506	)

Balance, December 31, 2010		100		—		784,573			(66,351	)		68,535			34,394			821,151
Distributions to noncontrolling interests		—		—		—			—			—			(8,163	)		(8,163	)
Purchases of noncontrolling interests		—		—		(473	)		—			—			(672	)		(1,145	)
Sales of noncontrolling interests		—		—		(7,220	)		—			—			1,081			(6,139	)
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		—		—		1,150			—			—			—			1,150
Net income (loss)		—		—		—			—			(50,844	)		8,543			(42,301	)
Other comprehensive income		—		—		—			3,318			—			—			3,318

Balance, December 31, 2011		100		—		778,030			(63,033	)		17,691			35,183			767,871
Distributions to noncontrolling interests		—		—		—			—			—			(10,524	)		(10,524	)
Purchases of noncontrolling interests		—		—		1,568			—			—			(322	)		1,246
Sales of noncontrolling interests		—		—		(18,664	)		—			—			5,674			(12,990	)
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		—		—		1,981			—			—			—			1,981
Spin-off of U.K. subsidiary (Note 2)		—		—		(193,320	)		—			—			(523	)		(193,843	)
Dividend to Parent’s equity holders (Note 14)		—		—		(338,539	)		—			(45,887	)		—			(384,426	)
Net income		—		—		—			—			30,791			8,784			39,575
Other comprehensive income		—		—		—			63,097			—			—			63,097

Balance, December 31, 2012		100	$	—	$	231,056		$	64		$	2,595		$	38,272		$	271,987

See accompanying notes to consolidated financial statements

F-6

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
	(In thousands)
Cash flows from operating activities:
Net income	$	103,484		$	19,085		$	102,653
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (earnings) from discontinued operations		(3,073	)		111,562			(2,736	)
Loss on early retirement of debt		37,450			—			—
Provision for doubtful accounts		9,678			9,409			8,417
Depreciation and amortization		23,955			21,177			22,493
Amortization of debt issue costs and discount		4,027			3,483			3,266
Deferred income taxes		3,672			16,612			8,353
Net (gains) losses on deconsolidations, disposals and impairments		7,588			(1,529	)		6,378
Equity in earnings of unconsolidated affiliates, net of distributions received		(9,502	)		45			1,265
Equity-based compensation		1,677			1,237			1,694
Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses:
Accounts receivable		(6,222	)		(7,774	)		(9,126	)
Other receivables		(6,501	)		1,632			(2,456	)
Inventories of supplies, prepaids and other assets		(2,289	)		(366	)		3,703
Accounts payable and other current liabilities		14,115			(16,373	)		3,538
Other long-term liabilities		2,254			6,467			876

Net cash provided by operating activities		180,313			164,667			148,318

Cash flows from investing activities:
Purchases of new businesses and equity interests, net of cash received		(143,653	)		(93,413	)		(83,475	)
Proceeds from sales of businesses and equity interests, net		2,543			15,532			50,377
Purchases of property and equipment		(20,202	)		(15,196	)		(19,698	)
Purchases of marketable securities, net		(5,938	)		(4,820	)		—
Returns of capital from unconsolidated affiliates		4,718			1,744			1,193
Decrease in deposits and notes receivable		1,625			2,598			101

Net cash used in investing activities		(160,907	)		(93,555	)		(51,502	)

Cash flows from financing activities:
Proceeds from long-term debt, net of debt issuance costs		987,548			21,067			35,054
Payments on long-term debt		(590,338	)		(41,059	)		(29,777	)
Net equity contribution from USPI Group Holdings, Inc. and other		(545	)		(102	)		72
Sales of noncontrolling interests, net		4,763			510			739
Payment of common stock dividend		(384,426	)		—			(850	)
Increase (decrease) in cash held on behalf of unconsolidated affiliates		17,798			23,167			(14,166	)
Distributions to noncontrolling interests		(77,760	)		(67,791	)		(58,989	)

Net cash used in financing activities		(42,960	)		(64,208	)		(67,917	)

Cash flows of discontinued operations:
Operating cash flows		(8,745	)		19,448			25,083
Investing cash flows		(11,383	)		(43,801	)		(22,008	)
Financing cash flows		53,142			(481	)		(6,780	)
Effect of exchange rate changes on cash		(79	)		(501	)		169

Net cash provided by (used in) discontinued operations		32,935			(25,335	)		(3,536	)

Net increase (decrease) in cash and cash equivalents		9,381			(18,431	)		25,363
Cash and cash equivalents at beginning of period		41,822			60,253			34,890

Cash and cash equivalents at end of period	$	51,203		$	41,822		$	60,253

Supplemental information:
Interest paid — continuing operations	$	78,572		$	62,089		$	67,003
Income taxes paid — continuing operations		8,114			31,127			14,085
Interest paid — discontinued operations		772			1,781			2,327
Income taxes paid — discontinued operations		15,835			2,001			2,871
Non-cash transactions:
Spin-off of U.K. subsidiary	$	(193,843	)	$	—		$	—
Assets acquired under capital lease obligations — continuing operations		10,515			16,983			11,452
Assets acquired under capital lease obligations — discontinued operations		—			—			2,029

See accompanying notes to consolidated financial statements

F-7

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2012, 2011 and 2010

(1)

Summary of Significant Accounting Policies and Practices

(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 management of ambulatory surgery centers, surgical hospitals and related businesses. At December 31, 2012, the Company, headquartered in Dallas, Texas, operated 213 short-stay surgical facilities in the United States. Of these 213 facilities, the Company consolidates the results of 64 and accounts for 149 under the equity method. The majority of the Company’s facilities are jointly owned with local physicians and a not-for-profit healthcare system (hospital partner) that has other healthcare businesses in the region. At December 31, 2012, the Company had agreements with hospital partners providing for joint ownership of 145 of the Company’s 213 facilities and also providing a framework for the planning and construction of additional facilities in the future. All but two of the Company’s facilities include physician owners.

Prior to April 3, 2012, the Company operated seven facilities in the United Kingdom. On April 3, 2012, the Company distributed the stock of its U.K. subsidiary to the equity holders of its parent, USPI Group Holdings, Inc. (Parent). Subsequent to April 3, 2012, the Company has no further ownership in the U.K. operations. The Company’s former U.K. operations have now been classified as “discontinued operations” in its historical results of operations.

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

The Company maintains its books and records on the accrual basis of accounting, and the consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The Company operates in one reportable business segment, the ownership and operation of surgical facilities in the United States.

The Company had publicly traded equity securities from June 2001 through April 2007. Pursuant to an Agreement and Plan of Merger (the merger) dated as of January 7, 2007, between an affiliate of Welsh, Carson, Anderson & Stowe X, L.P. (Welsh Carson), the Company became a wholly owned subsidiary of USPI Holdings, Inc. on April 19, 2007. USPI Holdings is a wholly owned subsidiary of the Company’s Parent, which is owned by an investor group that includes affiliates of Welsh Carson, members of the Company’s management and other investors.

Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the 2012 presentation. Net operating results have not been affected by these reclassifications.

(b) Translation of Foreign Currencies

The financial statements of the Company’s former U.K. operations were measured in local currency and then translated into U.S. dollars. All assets and liabilities were translated using the current rate of exchange at the balance sheet date. Results of operations were translated using the average rates prevailing throughout the year. Translation gains or losses resulting from changes in exchange rates were accumulated in a separate component of stockholder’s equity.

F-8

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(c) Principles of Consolidation

The consolidated financial statements include the financial statements of USPI and its 100%-owned and majority-owned subsidiaries. In addition, the Company consolidates the accounts of certain investees of which it does not own a majority ownership interest because the Company maintains effective control over the investees’ assets and operations. All significant intercompany balances and transactions have been eliminated in consolidation.

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 (Note 5).

(d) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (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.

(e) Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original or remaining maturities of three months or less to be cash equivalents. Cash and cash equivalents at times may exceed the FDIC limits. The Company believes no significant concentration of credit risk exists with respect to these cash investments.

The Company’s wholly-owned insurance subsidiary maintains certain balances in cash and cash equivalents that are used in connection with its retained professional and general liability risks and are not designated for general corporate purposes. At December 31, 2012 and 2011, these cash and cash equivalents balances were $2.9 million and $6.4 million, respectively.

(f) Available for Sale Securities

At December 31, 2012 and 2011, the Company had $10.7 million and $4.8 million, respectively, of marketable securities, which are held by the Company’s wholly-owned insurance subsidiary. These investments are used in connection with its retained professional and general liability risks and are not designed for general corporate purposes. The marketable securities consist of U.S. Treasury and corporate debt, are classified as available for sale and are recorded at fair value on the consolidated balance sheet. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive income until realized. Realized gains and losses from the sale of available for sale securities are determined on a specific-identification basis. Premiums and discounts on debt securities are amortized or accreted over the life of the related available for sale security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

The fair value of these securities are classified within Level 2 of the valuation hierarchy, and are based on closing market prices of the investments when applicable, or alternatively, valuations utilizing market data and other observable inputs.

(g) Inventories of Supplies

Inventories of supplies are stated at cost, which approximates market, and are expensed as used.

F-9

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(h) Property and Equipment

Property and equipment are stated at cost or, when acquired as part of a business combination, fair value at date of acquisition. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Upon retirement or disposal of assets, the asset and accumulated depreciation accounts are adjusted accordingly, and any gain or loss is reflected in earnings or loss of the respective period. Maintenance costs and repairs are expensed as incurred; significant renewals and betterments are capitalized. Assets held under capital leases are classified as property and equipment and amortized using the straight-line method over the shorter of the useful lives or lease terms, and the related obligations are recorded as debt. Amortization of assets under capital leases and of leasehold improvements is included in depreciation expense. The Company records operating lease expense on a straight-line basis unless another systematic and rational allocation is more representative of the time pattern in which the leased property is physically employed. The Company amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term.

(i) Goodwill and Intangible Assets

Intangible assets consist of costs in excess of net assets acquired (goodwill), costs of acquired management and other contract service rights, and other intangibles, which consist primarily of debt issue costs. Most of the Company’s intangible assets have indefinite lives. Accordingly, these assets, along with goodwill, are not amortized but are instead tested for impairment annually, or more frequently if changing circumstances warrant. Goodwill is tested for impairment at the reporting unit level. Prior to spinning off its U.K. operations in April 2012, the Company had two reporting units, corresponding to the two countries in which it operated. The Company amortizes intangible assets with definite useful lives over their respective useful lives to their estimated residual values and reviews them for impairment in the same manner as long-lived assets, discussed below.

(j) Impairment of Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or related groups of assets, may not be fully recoverable from estimated future cash flows. In the event of impairment, measurement of the amount of impairment may be based on appraisal, market values of similar assets or estimates of future discounted cash flows using market participant assumptions with respect to the use and ultimate disposition of the asset.

(k) 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 Company discloses on a yearly basis the valuation techniques and discloses any change in method of such within the body of each applicable footnote. 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, accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments.

(l) Derivative Instruments and Hedging Activities

The Company accounts for its derivative instruments at fair value and records the value on its consolidated balance sheet as an asset or liability. The Company does not engage in derivative instruments for speculative

F-10

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

purposes. The Company’s derivatives (interest rate swaps) qualified for hedge accounting, and therefore gains or losses that resulted from changes in the values of the Company’s derivatives were reported in accumulated other comprehensive income (loss), a separate component of equity (Note 10).

(m) Revenue Recognition

Revenues consist primarily of net patient service revenues, which are based on the facilities’ established billing rates less allowances and discounts, principally for patients covered under contractual programs with private insurance companies. The Company derives approximately 78% of its net patient service revenues from private insurance payors, approximately 19% from governmental payors and approximately 3% from self-pay and other payors. Amounts are recognized as services are provided.

With respect to management and contract service revenues, amounts are also recognized as services are provided. The Company is party to agreements with certain surgical facilities, hospitals and physician practices to provide management services. As compensation for these services each month, the Company charges the managed entities management fees which are either fixed in amount or represent a fixed percentage of each entity’s earnings, typically defined as net revenue less a provision for doubtful accounts or operating income. In many cases the Company also holds equity ownership in these entities (Note 12). Amounts charged to consolidated facilities eliminate in consolidation.

(n) Concentration of Credit Risk

Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base and their breakdown among geographical locations in which the Company operates. The Company provides for bad debts principally based upon the aging of accounts receivable and uses specific identification to write off amounts against its allowance for doubtful accounts. The Company believes the allowance for doubtful accounts adequately provides for estimated losses as of December 31, 2012 and 2011. The Company has a risk of incurring losses if such allowances are not adequate.

(o) Investments and Equity in Earnings of Unconsolidated Affiliates

Investments in unconsolidated companies in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method. The Company’s ownership in these entities range from 5% to 76%. Certain investments in unconsolidated companies in which the Company owns a majority interest are not consolidated due to the substantive participating rights of the minority owners.

These investments are included as investments in unconsolidated affiliates in the accompanying consolidated balance sheets.

The carrying amounts of these investments are greater than the Company’s equity in the underlying net assets of many of these companies due in part to goodwill, which is not subject to amortization. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the companies and records reductions in carrying values when necessary.

Equity in earnings of unconsolidated affiliates consists of the Company’s share of the profits or losses generated from its noncontrolling equity investments in 149 surgical facilities. Because these operations are central to the Company’s business strategy, equity in earnings of unconsolidated affiliates is classified as a component of operating income in the accompanying consolidated statements of operations. The Company has contracts to manage these facilities, which results in the Company having an active role in the operations of these facilities and devoting a significant portion of its corporate resources to the fulfillment of these management responsibilities.

F-11

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(p) Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets may not be realized.

(q) 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 is measured at the date of grant and recognized as expense over the employee’s requisite service period. The Company also accounts for equity instruments issued to non-employees at fair value.

(r) Commitments and Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

(2)

Discontinued Operations and Other Dispositions

The Company classifies formerly consolidated subsidiaries in which it has no continuing involvement and consolidated subsidiaries that are held for sale as discontinued operations. The gains or losses on these transactions are classified within discontinued operations in the Company’s consolidated statements of operations. The Company has also reclassified the historical results of these subsidiaries to remove the operations of these entities from its revenues and expenses, collapsing the net income or loss from these operations into a single line within discontinued operations.

Discontinued operations are as follows:


Date	Facility Location	Proceeds		Gain (Loss)
April 2012	United Kingdom(1)	$	—	$	—

December 2010	Nashville, Tennessee(2)	$	32.5 million	$	2.8 million
December 2010	Orlando, Florida		—		(2.0 million	)
December 2010	Templeton, California(3)		—		(1.9 million	)
December 2010	Houston, Texas(3)		—		(0.2 million	)

Total		$	32.5 million	$	(1.3 million	)

(1)

On April 3, 2012, the Company distributed the stock of its U.K. subsidiary to its Parent’s equity holders. Subsequent to April 3, 2012, the Company has no ownership in the U.K. operations. Because GAAP requires spin-off transactions to be accounted for at carrying value, there was no gain or loss recorded on the spin-off of the U.K. operations.

(2)	The Company sold an endoscopy service business that was based in Nashville, Tennessee.

F-12

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(3)	These investments were written down to estimated fair value less costs to sell at December 31, 2010. The Company received cash proceeds of $1.9 million in February 2011 related to the sale of these two facilities. The assets and liabilities of these entities were not material.

The table below summarizes certain amounts related to the Company’s discontinued operations for the periods presented (in thousands):


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Revenues	$	36,528		$	110,983		$	131,896

Income (loss) from discontinued operations before income taxes	$	5,137		$	(94,217	)	$	12,470
Income tax expense		(2,064	)		(16,816	)		(2,952	)

Income (loss) from discontinued operations	$	3,073		$	(111,033	)	$	9,518

Loss on disposal of discontinued operations before income taxes	$	—		$	(902	)	$	(1,332	)
Income tax (expense) benefit		—			373			(5,450	)

Total loss from disposal of discontinued operations	$	—		$	(529	)	$	(6,782	)

Equity method investments that are sold do not represent discontinued operations under GAAP. During 2012 and 2011, the Company completed sales of investments in seven facilities operated through unconsolidated affiliates, including its equity ownership in these entities as well as the related rights to manage the facilities. The Company did not sell any equity method investments during 2010. Gains and losses on the disposals of these investments are classified within “Net (gains) losses on deconsolidations, disposals and impairments” in the accompanying consolidated statements of operations. These transactions are summarized below:


Date	Facility Location	Proceeds		Gain (Loss)
July 2012	Franklin, Tennessee	$	0.5 million	$	0.3 million
December 2011	Caldwell, Idaho		1.0 million		0.1 million
September 2011	Cleveland, Ohio		1.2 million		0.2 million
June 2011	Lawton, Oklahoma		1.7 million		0.6 million
May 2011	Flint, Michigan		1.1 million		0.4 million
May 2011	Fort Worth, Texas		0.7 million		(0.1 million	)
April 2011	Richmond, Virginia		0.6 million		0.2 million

Total		$	6.3 million	$	1.4 million

(3)

Business Combinations and Investments in Unconsolidated Affiliates

The Company acquires interests in existing surgery centers from third parties and invests in new facilities that it develops in partnership with hospital partners and local physicians. Some of these transactions result in the Company controlling the acquired entity and meet the GAAP definition of a business combination. The financial results of the acquired entities are included in the Company’s consolidated financial statements beginning on the acquisition’s effective date.

F-13

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

During the year ended December 31, 2012, the Company obtained control of the following entities:


Effective Date	Facility Location	Amount
Investments
November 2012	Various(1)	$	65.4 million
November 2012	Hackensack, New Jersey(2)		— million
October 2012	Clarksville, Tennessee(3)		4.6 million
June 2012	Cherry Hill, New Jersey(4)		17.1 million

Total		$	87.1 million

(1)

As further discussed below, the Company acquired 100% of the equity interests of AIGB Holdings, Inc. (True Results). True Results has an equity investment in five surgery centers, all of which are located in markets in which the Company already operates. The purchase price noted above is net of approximately $5.8 million of cash acquired.

(2)

The Company obtained control of this facility in which it already had ownership due to changes in the voting rights of the facility. Although no consideration was transferred, GAAP requires the transaction to be accounted for as a business combination and requires adjusting the carrying value of the Company’s existing ownership to its fair value. As a result, the Company recorded a loss totaling $6.5 million for the year ended December 31, 2012, which is included in “Net (gains) losses on deconsolidations, disposals and impairments” in the accompanying consolidated statements of operations. The fair value was estimated based on market multiples and discounted cash flow models which have been derived from the Company’s experience in acquiring surgical facilities and third party valuations it has obtained.

(3)	Acquisition of a controlling interest in and right to manage a surgical facility in which the Company previously had no involvement. This facility is jointly owned with local physicians and a hospital partner.

(4)

Acquisition of a controlling interest in a surgical facility in which the Company already had an equity method investment and the right to manage. This facility is jointly owned with local physicians. The Company recorded a gain of approximately $0.2 million as a result of adjusting the carrying value of its existing ownership to fair value as required by GAAP. The gain is included in “Net (gains) losses on deconsolidations, disposals and impairments” in the accompanying consolidated statements of income.

Effective November 8, 2012, the Company completed the acquisition of 100% of the equity interests in True Results, a privately-held, Dallas, Texas-based owner and operator of surgery centers specializing in weight loss services. The Company paid cash totaling approximately $65.4 million, net of $5.8 million of cash acquired, and subject to certain purchase price adjustments set forth in the purchase agreement. The purchase price was allocated to True Results’ tangible and identifiable intangible assets and liabilities based upon preliminary estimates of fair value, with the remainder allocated to goodwill. The fair value of 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 third party valuations it has obtained. The Company funded the purchase using cash on hand and by drawing on its revolving credit facility. The Company incurred approximately $0.7 million in acquisition costs, which are included in “general and administrative expenses” in the accompanying consolidated statements of operations.

F-14

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The following is a summary of the assets acquired and liabilities assumed in the acquisition of True Results (in thousands):


Purchase price allocated	$	71,226
Estimated fair value of net tangible assets acquired:
Cash	$	5,777
Accounts receivable		8,836
Other current assets		1,236
Investments in affiliates		18,390
Property and equipment and other noncurrent assets		1,950
Current liabilities		(5,599	)
Long term liabilities		(1,166	)

Net tangible assets acquired		29,424
Intangible assets acquired		7,435
Goodwill		37,339
Noncontrolling interests		(2,972	)

Total purchase price	$	71,226

Based on preliminary estimates the Company expects that all of the goodwill will be deductible for income tax purposes. Indefinite-lived intangibles of $7.4 million relate to long-term management contracts and are not subject to amortization.

In January 2013, the Company contributed two of the surgery centers acquired in the True Results acquisition to a joint venture with one of its hospital partners, Baylor Healthcare System (Baylor), also a related party (Note 12). Baylor paid the Company approximately $9.0 million for ownership interests in the two surgery centers. The Company continues to account for these facilities under the equity method.

The following table presents the unaudited pro forma results as if the Company’s 2012 acquisitions had occurred on January 1 of each year. The pro forma results are not necessarily indicative of the results of operations that would have occurred if the acquisitions had been completed on the dates indicated, nor is it indicative of the future operating results of the Company. The pro forma results include acquisition costs of approximately $0.7 million.


	Year Ended December 31, 2012		Year Ended December 31, 2011
	(In thousands)
Total revenues	$	608,795	$	576,109
Net income (loss) attributable to USPI’s common stockholder	$	48,810	$	(30,281	)

F-15

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The Company controls 64 of its entities and therefore consolidates their results. However, the Company accounts for an increasing majority (149 of its 213 facilities at December 31, 2012) 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. The majority of these investments are partnerships or limited liability companies, which require the associated tax benefit or expense to be recorded by the partners or members. Summarized financial information for the Company’s equity method investees on a combined basis is as follows (amounts are in thousands, except number of facilities, and reflect 100% of the investees’ results on an aggregated basis and are unaudited):


	2012			2011			2010
Unconsolidated facilities operated at year-end		149			141			130
Income statement information:
Revenues	$	1,731,905		$	1,538,030		$	1,329,041
Operating expenses:
Salaries, benefits, and other employee costs		401,521			360,519			309,698
Medical services and supplies		429,516			360,148			310,770
Other operating expenses		390,227			352,667			305,045
Loss (gain) on asset disposals, net		(6,280	)		(309	)		1,025
Depreciation and amortization		72,027			66,608			55,216

Total operating expenses		1,287,011			1,139,633			981,754

Operating income		444,894			398,397			347,287
Interest expense, net		(34,551	)		(33,719	)		(25,630	)
Other, net		426			(15	)		(200	)

Income before income taxes	$	410,769		$	364,663		$	321,457

Balance sheet information:
Current assets	$	364,510		$	333,203		$	303,627
Noncurrent assets		576,350			613,114			495,765
Current liabilities		218,434			192,802			177,909
Noncurrent liabilities		402,955			438,523			343,007

The Company’s equity method investment in Texas Health Ventures Group, L.L.C., is considered significant to the Company’s 2012 consolidated financial statements under regulations of the SEC. As a result, the Company has filed Texas Health Ventures Group, L.L.C.’s consolidated financial statements with this Form 10-K for the required periods.

During 2010, the Company recorded an impairment on one of its equity method investments due to the decline in the fair value of the investment being other than temporary. The impairment was approximately $3.7 million and is recorded within “Equity in earnings of unconsolidated affiliates” in the accompanying consolidated statement of operations.

F-16

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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. The cash flow impact of these transactions is classified within investing activities. During the year ended December 31, 2012, these transactions resulted in a cash outflow of approximately $54.5 million, which is summarized as follows:


Effective Date	Facility Location	Amount
Investments
December 2012	Effingham, Illinois(1)	$	23.4 million
December 2012	Covington, Louisiana(2)		9.2 million
December 2012	Stockton, California(2)		0.7 million
September 2012	New Jersey(3)		12.3 million
March 2012	Chandler, Arizona(2)		0.8 million
February 2012	Midland, Texas(2)		3.0 million
Various	Various(4)		5.1 million

Total		$	54.5 million

(1)	Acquisition of a noncontrolling interest in and right to manage a surgical facility in which the Company previously had no involvement. The facility is jointly owned with local physicians.

(2)	Acquisition of a noncontrolling interest in and right to manage a surgical facility in which the Company previously had no involvement. The facility is jointly owned with a hospital partner and local physicians.

(3)	Acquisition of a noncontrolling interest in and right to manage two surgical facilities in Hackensack and Paramus, New Jersey, respectively, in which the Company previously had no involvement. The facilities are jointly owned with a hospital partner and local physicians.

(4)	Represents the net payment related to various other purchases and sales of equity interests and contributions of cash to equity method investees.

(4)

Noncontrolling Interests

The Company controls and therefore consolidates the results of 64 of its 213 U.S. facilities and consolidated all seven U.K. facilities it operated at the time the U.K. operations were spun-off. 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.

F-17

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

During the year ended December 31, 2012, the Company purchased and sold equity interests in various consolidated subsidiaries in the amounts of $4.0 million and $8.8 million, respectively. The basis difference between the Company’s carrying amount and the proceeds received or paid in each transaction is recorded as an adjustment to additional paid-in capital. The impact of these transactions is summarized as follows (in thousands):


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Net income (loss) attributable to USPI’s common stockholder	$	30,791		$	(50,844	)	$	42,093
Transfers to the noncontrolling interests:
Decrease in USPI’s additional paid-in capital for sales of subsidiaries’ equity interests		(18,664	)		(7,220	)		(6,774	)
Increase (decrease) in USPI’s additional paid-in capital for purchases of subsidiaries’ equity interests		1,568			(473	)		(452	)

Net transfers to noncontrolling interests		(17,096	)		(7,693	)		(7,226	)

Change in equity from net income (loss) attributable to USPI and transfers to non-controlling interests	$	13,695		$	(58,537	)	$	34,867

F-18

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Upon the occurrence of various 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 illegal. While the Company is not aware of events that 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, and the income attributable to those interests, are not included as part of the Company’s equity and are carried as noncontrolling interests-redeemable on the Company’s consolidated balance sheets. The activity for the years ended December 31, 2012, 2011 and 2010 is summarized below (in thousands):


	Noncontrolling Interests —Redeemable
Balance, December 31, 2009	$	63,865
Net income attributable to noncontrolling interests		54,893
Distributions to noncontrolling interests		(53,485	)
Purchases of noncontrolling interests		(2,180	)
Sales of noncontrolling interests		9,984
Deconsolidation of noncontrolling interests and other		8,591

Balance, December 31, 2010		81,668
Net income attributable to noncontrolling interests		61,386
Distributions to noncontrolling interests		(59,701	)
Purchases of noncontrolling interests		(1,951	)
Sales of noncontrolling interests		18,422
Acquisition of new businesses		6,844

Balance, December 31, 2011		106,668
Net income attributable to noncontrolling interests		63,909
Distributions to noncontrolling interests		(67,278	)
Purchases of noncontrolling interests		(9,968	)
Sales of noncontrolling interests		25,948
Acquisition of new businesses		34,120

Balance, December 31, 2012	$	153,399

(5)

Other Investments

The consolidated financial statements include the financial statements of USPI and subsidiaries the Company effectively controls, usually indicated by majority ownership. 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.

The Company has ownership in an entity that operates and manages seven surgical facilities in the Houston, Texas area. Despite not holding a controlling voting interest, the Company is the primary beneficiary because the Company is able to make the decisions that are most significant to the operations of the entity and has provided all of the funding for the entity, which the entity has used to acquire surgical facilities. The Company is entitled to a majority of the entity’s earnings until the Company has received a specified return on the investment. 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 years ended December 31, 2012 or 2011. At December 31, 2012 and 2011, the total assets of this entity were $80.1 million and $81.1 million, and the total liabilities owed to third parties were $17.6 million and $19.3 million, respectively. Such amounts are included in the accompanying consolidated balance sheets.

F-19

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(6)

Other Receivables

Other receivables consist primarily of amounts receivable for services performed and funds advanced under management and administrative service agreements. As discussed in Note 12, many of the entities to which the Company provides management and administrative services are related parties, due to the Company being an investor in those facilities. At December 31, 2012 and 2011, the amounts receivable from related parties, which are included in other receivables on the Company’s consolidated balance sheet, totaled $7.5 million and $6.0 million, respectively.

(7)

Property and Equipment

At December 31, 2012 and 2011, property and equipment consisted of the following (in thousands):


	Estimated Useful Lives		2012			2011
Land		—	$	4,441		$	34,963
Buildings and leasehold improvements		7-50 years		110,497			164,808
Equipment		3-15 years		110,962			131,541
Furniture and fixtures		4-10 years		5,459			5,335
Construction in progress		—		2,312			14,412

				233,671			351,059
Accumulated depreciation				(107,145	)		(115,738	)

Net property and equipment			$	126,526		$	235,321

At December 31, 2012 and 2011, assets recorded under capital lease arrangements, included in property and equipment, consisted of the following (in thousands):


	2012			2011
Land and buildings	$	21,087		$	21,087
Equipment and furniture		10,967			16,939

		32,054			38,026
Accumulated amortization		(11,744	)		(10,725	)

Net property and equipment under capital leases	$	20,310		$	27,301

(8)

Goodwill and Intangible Assets

Under GAAP, goodwill and intangible assets with indefinite useful lives are not amortized but instead are tested for impairment at least annually, with tests of goodwill occurring at the reporting unit level (defined as an operating segment or one level below an operating segment). Prior to spinning off its U.K. operations in April 2012, the Company had two reporting units, corresponding to the two countries in which it operated. The Company now operates in one reportable business segment, the ownership and operation of surgical facilities in the U.S. Intangible assets with definite useful lives are amortized over their respective useful lives to their estimated residual values.

The Company completed the required annual impairment tests during 2012, 2011 and 2010. No impairment losses were identified as a result of these goodwill impairment tests during 2012 or 2010.

In 2011, the Company recorded a goodwill impairment charge related to its U.K. reporting unit. The first step in the two-step impairment test for goodwill indicated that the fair value of the Company’s former U.K.

F-20

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

reporting unit was less than the carrying value of the unit’s net assets. Therefore, the Company performed the second step of the test to compute the amount of the impairment. The amount of the impairment is the excess of the goodwill’s carrying value over its implied fair value. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, that is, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any identifiable intangible assets, whether or not previously recognized) as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the purchase price paid. The Company determined the fair value of the reporting unit using discounted estimated future cash flows as well as a market approach that compared the former U.K. reporting unit’s earnings and revenue multiples to those of comparable public companies. The inputs to the cash flow models are Level 3 inputs under the GAAP fair value hierarchy due to the use of significant unobservable inputs, such as estimates of future annual revenues, margins and long-term growth.

As a result of this test, the Company recognized a goodwill impairment charge of $107.0 million at December 31, 2011, which is now included in discontinued operations in the accompanying consolidated statements of operations. The impairment primarily resulted from worsening conditions in the U.K. and European capital markets toward the end of 2011 that lead to generally lower business valuations and poor overall economic conditions which reduced the amount of healthcare purchased by individuals as a supplement to care provided by the National Health Service or funded with private insurance. Self-pay business, which represented 24% of the Company’s former U.K. revenues, is often more elective in nature in the U.K. and is generally considered more susceptible to changes in general economic conditions, as the cost of service is borne entirely by patients who must demonstrate ability to pay at the time of service.

As a result of impairment testing performed on the Company’s indefinite-lived management contracts, the Company recorded impairment losses on one contract in 2012, two contracts in 2011, and six contracts in 2010. These losses totaled approximately $1.7 million, $1.2 million and $5.9 million, respectively, and were primarily triggered by a reduction in the Company’s expected earnings under the contracts. Fair values for indefinite-lived intangible assets are estimated based on market multiples and discounted cash flow models which have been derived from the Company’s experience in acquiring surgical facilities, market participant assumptions and third-party valuations it has obtained with respect to such transactions. The inputs used in these models are Level 3 inputs, which under GAAP, are significant unobservable inputs. Inputs into these models include expected revenue growth, expected gross margins and discount factors. Such expense is recorded in “Net (gains) losses on deconsolidations, disposals and impairments” in the accompanying consolidated statements of operations.

The following is a summary of changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 (in thousands):


	United States		United Kingdom			Total
Balance at December 31, 2010	$	1,063,793		204,870			1,268,663
Additions		32,034		13,408			45,442
Goodwill impairment		—		(107,028	)		(107,028	)
Other		—		2,268			2,268

Balance at December 31, 2011		1,095,827		113,518			1,209,345
Additions		99,859		—			99,859
Other		—		(113,518	)		(113,518	)

Balance at December 31, 2012	$	1,195,686	$	—		$	1,195,686

Goodwill additions resulted primarily from business combinations and additionally from purchases of additional interests in subsidiaries. In the United Kingdom, the other changes were related to foreign currency translation adjustments in 2011 and to the spin-off of the U.K. subsidiary in April 2012.

F-21

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Intangible assets with definite useful lives are amortized over their respective estimated useful lives, ranging from approximately one to nine years, to their estimated residual values. The majority of the Company’s management contracts have indefinite useful lives. Most of these contracts have evergreen renewal provisions that do not contemplate a specific termination date. Some of the contracts have provisions which make it possible for the facility’s other owners to terminate them at certain dates and under certain circumstances. Based on the Company’s history with these contracts, the Company’s management considers the lives of these contracts to be indefinite and therefore does not amortize them unless facts and circumstances indicate otherwise.

The following is a summary of intangible assets at December 31, 2012 and 2011 (in thousands):


	December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Total
Definite Useful Lives
Management and other service contracts	$	20,828	$	(12,534	)	$	8,294
Other		36,983		(7,266	)		29,717

Total	$	57,811	$	(19,800	)	$	38,011

Indefinite Useful Lives
Management contracts							321,411

Total intangible assets						$	359,422


	December 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Total
Definite Useful Lives
Management and other service contracts	$	17,277	$	(9,926	)	$	7,351
Other		30,494		(15,011	)		15,483

Total	$	47,771	$	(24,937	)	$	22,834

Indefinite Useful Lives
Management contracts							304,306

Total intangible assets						$	327,140

Amortization expense from continuing operations related to intangible assets with definite useful lives was $2.6 million and $2.1 million for the year ended December 31, 2012 and 2011, respectively. The amortization of debt issuance costs, which is included within interest expense, was $4.0 million and $3.5 million in for the year ended December 31, 2012 and 2011, respectively.

The following table provides estimated amortization expense, including amounts that will be classified within interest expense, related to intangible assets with definite useful lives for each of the years in the five-year period ending December 31, 2017 (in thousands):


2013	$	7,338
2014		7,013
2015		6,795
2016		4,812
2017		4,445

F-22

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(9)

Long-term Debt

On April 3, 2012, the Company amended its senior secured credit facility, issued new senior unsecured notes, redeemed all validly tendered outstanding notes pursuant to the previously announced tender offer and consent solicitation, deposited funds with the trustee to redeem the remaining outstanding notes (which have since all been redeemed), and distributed the stock of its U.K. subsidiary to the equity holders of the Company’s parent, USPI Group Holdings, Inc.

At December 31, 2012 and 2011, long-term debt consisted of the following (in thousands):


	2012			2011
Amended senior secured credit facility	$	976,338		$	—
Senior secured credit facility		—			519,180
Senior unsecured notes, due 2020		440,000			—
Senior subordinated notes, due 2017		—			437,515
U.K. senior credit agreement		—			50,864
Notes payable to financial institutions		37,891			30,185
Capital lease obligations (Note 11)		25,305			30,712

Total long-term debt		1,479,534			1,068,456
Current portion		(17,913	)		(25,487	)

Long-term debt, less current portion	$	1,461,621		$	1,042,969

(a) Amended senior secured credit facility

The amended credit facility provided a new term loan and modified the terms of the Company’s existing term loan. The amended credit facility provided for borrowings consisting of $144.4 million in non-extended term loans maturing in April 2014; $312.4 million in extended term loans maturing in April 2017; $375.0 million in new term loans maturing in April 2019; and $125.0 million under a revolving facility maturing in April 2017. In December 2012, the Company borrowed an additional $150.0 million in a new term loan. In conjunction with the amendment to the credit facility, the Company repaid $16.0 million that was outstanding on its existing revolver and repaid $45.0 million of its existing term loan. The non-extended, extended and new term loans each require quarterly principal payments of 0.25% of the outstanding balance as of April 3, 2012 with the remaining balances due in April 2014 for the non-extended term loans, in April 2017 for the extended term loans and in April 2019 for the new term loans. No principal payments are required on the revolving credit facility until its maturity in 2017. At December 31, 2012, the Company had $976.3 million outstanding under the amended credit facility at a weighted average interest rate of approximately 5.2%. At December 31, 2012, the Company had $123.4 million available for borrowing under the revolving credit facility, representing the facility’s $125.0 million capacity, net of $1.6 million of outstanding letters of credit.

Interest rates on the amended credit facility are based on the prime rate or LIBOR plus a margin of 1.00% to 4.75%. Additionally, the Company pays 0.50% per annum on the daily-unused commitment of the new revolving credit facility. The Company also pays a quarterly participation fee of 2.13% per annum related to outstanding letters of credit.

The amended credit facility is guaranteed by USPI Holdings, Inc. and most of its directly and indirectly 100%-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 USPI’s capital stock, and the capital stock of each of USPI’s wholly owned domestic

F-23

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

subsidiaries. Additionally, the credit facility contains various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of the Company’s 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.

Fees paid for unused portions of the credit facility were approximately $0.5 million, $0.4 million and $0.4 million in the years ended December 31, 2012, 2011 and 2010, respectively. These amounts are included within interest expense in the Company’s consolidated statements of operations.

(b) Senior unsecured notes

The 9.0% senior unsecured notes, due in April 2020 (Notes) were issued in a private offering on April 3, 2012 and were subsequently registered as publicly traded securities through a Form S-4 declared effective by the SEC on September 5, 2012. The exchange offer was completed in October 2012. Interest on the Notes is payable on April 1 and October 1 of each year, and commenced on October 1, 2012. The Notes are unsecured senior obligations of the Company; however, the Notes are guaranteed by most of the Company’s directly and indirectly 100%-owned domestic subsidiaries. Additionally, the Notes contain various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of its subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sells assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. At December 31, 2012, the Company had $440.0 million of Notes outstanding.

(c) Senior secured credit facility

The senior secured credit facility (credit facility) provided the Company (1) an $85.0 million revolving credit facility with a maturity of six years and (2) a $530.0 million term loan facility with a maturity of seven years. The Company had utilized the availability under the $530.0 million term loan facility and was making the scheduled quarterly principal payments. As further described above, the credit facility was amended in April 2012.

Interest rates on the credit facility were based on LIBOR plus a margin of 2.00% to 2.25%. Additionally, the Company paid 0.50% per annum on the daily-unused commitment of the revolving credit facility. The credit facility was 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 were secured by a first priority security interest in all real and personal property of these subsidiaries, as well as a first priority pledge of the Company’s capital stock, the capital stock of each of its wholly owned domestic subsidiaries and 65% of the capital stock of certain of its wholly-owned foreign subsidiaries. Additionally, the credit facility contained various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of its 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.

(d) Senior subordinated notes

In 2007, the Company issued $240.0 million of 8⁷/₈% senior subordinated notes (the 2017 cash notes) and $200.0 million of 9¹/₄%/10% senior subordinated toggle notes (the 2017 toggle notes and, together with the 2017 cash notes, the 2017 notes), all were due in 2017. Interest on the 2017 notes was payable on May 1 and November 1 of each year, which commenced on November 1, 2007. The 2017 notes were unsecured senior subordinated obligations of the Company; however, the 2017 notes were guaranteed by all of its current and future direct and indirect 100%-owned domestic subsidiaries. Additionally, the 2017 notes contained various

F-24

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

restrictive covenants, including financial covenants that limited the Company’s ability and the ability of its 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.

As further described above, on May 1, 2012, the Company completed the redemption of all of its 2017 notes, which was funded by the Company’s issuance of $440.0 million 9.0% senior unsecured notes due 2020.

(e) United Kingdom borrowings

In April 2007, the Company’s U.K. subsidiary entered into an amended and restated senior credit agreement. Interest on the borrowings was 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%. The required principal payments were made by the Company. The borrowings were guaranteed by certain of the Company’s subsidiaries in the U.K. 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 contained various restrictive covenants, including financial covenants that limited the Company’s ability and the ability of certain U.K. subsidiaries to borrow money or guarantee other indebtedness, grant liens on its assets, make investments, use assets as security in other transactions, pay dividends, enter into leases or sell assets or capital stock.

The Company ceased to be obligated under its U.K. borrowing agreements effective with the spin-off of its U.K. operations on April 3, 2012.

(f) Other Long-term Debt

The Company and its subsidiaries have notes payable to financial institutions and other parties of $37.9 million, which mature at various dates through 2022 and accrue interest at fixed and variable rates ranging from 3.5% to 8.3%. Capital lease obligations in the carrying amount of $25.3 million are secured by underlying real estate and equipment and have implicit interest rates ranging from 1.6% to 19.2%.

At year-end, the aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2012 were as follows (in thousands): 2013, $17,913; 2014, $160,276; 2015, $14,129; 2016, $13,361; 2017, $308,868 and thereafter, $964,987. Note 16 includes a description of changes to these maturities that resulted from a refinancing completed subsequent to year-end.

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 traded debt securities. At December 31, 2012, both the aggregate carrying amount and estimated fair value of long-term debt was approximately $1.5 billion. At December 31, 2011, the aggregate carrying amount and estimated fair value of long-term debt was approximately $1.1 billion and $1.0 billion, respectively. The fair value of debt is classified within Level 2 of the valuation hierarchy.

(10)

Derivatives

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

F-25

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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, in March 2011, the Company entered into an interest rate swap agreement for a notional amount of £18.0 million. The interest rate swap required the Company to pay 1.45% and to receive interest at a variable rate of three-month GBP-LIBOR and was reset quarterly. No collateral was required under the interest rate swap agreement. Although the swap matured in June 2012, the Company ceased to be obligated under the U.K. swap effective with the spin-off of its U.K. operations on April 3, 2012.

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 required the Company to pay 3.6525% and it received interest at a variable rate of three-month USD-LIBOR. The swap matured in July 2011.

The proceeds from the swaps were 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 operations. The Company recorded no expense related to ineffectiveness for the years ended December 31, 2012, 2011 or 2010. For the years ended December 31, 2011 and 2010, the Company reclassified $4.2 million and $7.9 million, respectively, out of other comprehensive income to interest expense related to the swaps. No material amounts were reclassified during 2012.

At December 31, 2011, the fair value of the U.K. interest rate swap was $0.1 million and was included in other current liabilities in the accompanying 2011 consolidated balance sheet, with the offset to other comprehensive income (loss). During the years ended December 31, 2011 and 2010, the amounts, net of taxes, recorded in other comprehensive income (loss) related to the interest rate swaps were $2.6 million and $3.4 million, respectively. The amounts recorded in 2012 were not material. The estimated fair value of the

F-26

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

interest rate swap was determined using a present value model of the contractual payments. Inputs to the model 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 obligation to a market participant with similar credit risk. The fair value of the interest rate swap agreement is classified within Level 2 of the valuation hierarchy.

In December 2011, one of the Company’s U.S. subsidiaries loaned its U.K. subsidiary £15.0 million to fund the purchase of a hospital in Sheffield, England. In order to protect the Company against foreign currency fluctuations, in January 2012, the Company entered into a foreign currency contract with a bank to lock in the receipt of $21.5 million at the loan’s due date of May 31, 2012. This contract qualified for hedge accounting, and therefore the contract was recorded at fair value on the Company’s consolidated balance sheet, with the offset to other comprehensive income (loss). Due to the spin-off of the Company’s U.K. subsidiary, the contract was settled on April 4, 2012, and resulted in a payment to the bank of approximately $0.9 million, which was recorded in “Other, net” in the accompanying consolidated statement of operations.

(11)

Leases

The Company leases various office equipment and office space under a number of operating lease agreements, which expire at various times through the year 2027. Such leases do not involve contingent rentals, nor do they contain significant renewal or escalation clauses. Office leases generally require the Company to pay all executory costs (such as property taxes, maintenance and insurance).

Minimum future payments under noncancelable leases, with remaining terms in excess of one year as of December 31, 2012 are as follows (in thousands):


	Capital Leases			Operating Leases
Year ending December 31,
2013	$	5,339		$	16,427
2014		4,276			14,266
2015		3,994			12,212
2016		3,528			10,740
2017		3,403			9,563
Thereafter		22,649			23,899

Total minimum lease payments		43,189		$	87,107

Amount representing interest		(17,884	)

Present value of minimum lease payments	$	25,305

Total rent expense from continuing operations under operating leases was $15.8 million, $15.2 million and $15.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.

(12)

Related Party Transactions

The Company has entered into agreements with certain majority and minority owned surgery centers to provide management services. As compensation for these services, the surgery centers are charged management fees which are either fixed in amount or represent a fixed percentage of each center’s net revenue less bad debt. The percentages range from 3% to 8%. Amounts recognized under these agreements, after elimination of

F-27

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

amounts from consolidated surgery centers, totaled approximately $67.6 million, $60.0 million and $52.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Such amounts are included in management and contract service revenues in the accompanying consolidated statements of operations.

As discussed in Notes 3 and 4, the Company regularly engages in purchases and sales of ownership interests in its facilities. The Company operates 30 surgical facilities in partnership with the Baylor Healthcare System (Baylor) and local physicians in the Dallas/Fort Worth area. Baylor’s Chief Executive Officer is a member of the Company’s board of directors. The following table summarizes transactions with Baylor during 2011. The Company did not sell any ownership interests in facilities to Baylor in 2012 or 2010. The Company believes that the sale prices were approximately the same as if they had been negotiated on an arms’ length basis, and the prices equaled the value assigned by an external appraiser who valued the businesses immediately prior to the sale.

Date

Facility
Location

Proceeds

Gain

August 2011

Dallas, Texas

(1)

1.6 million

— million

(1)	Baylor acquired a controlling interest in this facility. The Company continues to account for this facility under the equity method of accounting.

In January 2013, the Company contributed two of the surgery centers acquired in the True Results acquisition to a joint venture with Baylor. Baylor paid the Company approximately $9.0 million for ownership interests in the two surgery centers. The Company continues to account for these facilities under the equity method.

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 $2.0 million for the years ended December 31, 2012, 2011 and 2010. 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 December 31, 2012, the Company had approximately $6.5 million accrued related to such management fee, of which $0.8 million is included in other current liabilities and $5.7 million is included in other long term liabilities in the accompanying consolidated balance sheet. At December 31, 2011, the Company had approximately $5.5 million accrued related to such management fee, of which $0.8 million is included in other current liabilities and $4.7 million is included in other long term liabilities in the accompanying consolidated balance sheet.

(13)

Income Taxes

Income tax expense attributable to income from continuing operations consists of (in thousands):


	Current		Deferred		Total
Year ended December 31, 2012:
U.S. federal	$	14,592	$	2,202	$	16,794
State and local		3,238		1,470		4,708

Total income tax expense	$	17,830	$	3,672	$	21,502

F-28

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


	Current		Deferred		Total
Year ended December 31, 2011:
U.S. federal	$	19,151	$	15,194	$	34,345
State and local		4,155		1,418		5,573

Total income tax expense	$	23,306	$	16,612	$	39,918


	Current		Deferred		Total
Year ended December 31, 2010:
U.S. federal	$	17,024	$	7,726	$	24,750
State and local		3,880		627		4,507

Total income tax expense	$	20,904	$	8,353	$	29,257

Income tax expense differed from the amount computed by applying the U.S. federal income tax rate of 35% to pretax income from continuing operations as follows (in thousands):


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Computed “expected” tax expense	$	42,670		$	59,698		$	45,211
Increase (reduction) in income taxes resulting from:
Book income of consolidated entities attributable to noncontrolling interests		(25,424	)		(24,424	)		(21,093	)
State tax expense, net of federal benefit		3,453			3,970			2,979
Nondeductible goodwill		83			215			1,366
Other		720			459			794

Total	$	21,502		$	39,918		$	29,257

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are presented below (in thousands):


	December 31,
	2012			2011
Deferred tax assets:
Net operating loss and other tax carryforwards	$	4,949		$	6,635
Accrued expenses		16,446			11,027
Bad debts/reserves		4,711			3,323
Interest rate swaps		—			13
Capitalized costs and other		2,679			1,287

Total deferred tax assets		28,785			22,285
Valuation allowance		—			(820	)

Total deferred tax assets, net	$	28,785		$	21,465

Deferred tax liabilities:
Basis difference of acquisitions	$	175,382		$	171,367
Accelerated depreciation		(2,081	)		1,933
Capitalized interest and other		3,550			1,407

Total deferred tax liabilities	$	176,851		$	174,707

F-29

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company carries no valuation allowance against its deferred tax assets. If the Company’s estimates change significantly, the Company may need to add a valuation allowance in the future.

At December 31, 2012, the Company had federal net operating loss carryforwards for U.S. federal income tax purposes of approximately $14.1 million. The Company’s ability to offset future taxable income with these carryforwards would begin to be forfeited in 2023, if unused. The Company believes that it is more likely than not that it will be able to generate state taxable income in future periods to utilize its net operating loss carryforwards and other deferred tax assets.

The Company has analyzed its income tax filing positions in all of the federal and state jurisdictions where it is required to file income tax returns for all open tax years in these jurisdictions for uncertainty in tax positions. The Company believes, based on the facts and technical merits associated with each of its income tax filing positions and deductions, that each of its income tax filing positions would be sustained on audit. Further, the Company has concluded that to the extent any adjustments to its income tax filing positions were not to be sustained upon an IRS or other audit, such adjustments would not have a material effect on the Company’s consolidated financial statements. As a result, no reserves for uncertain income tax positions have been recorded. The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. The Company has not recorded any material amounts for interest or penalties related to audit or other activity.

(14)

Equity and Equity-Based Compensation

On April 3, 2012 and December 17, 2012, the Company paid cash dividends of approximately $314.5 million and $69.9 million, respectively, to its Parent’s equity holders. Also, on April 3, 2012, the Company distributed the stock of its U.K. subsidiary to its Parent’s equity holders.

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 parent, USPI Group Holdings, Inc., has granted stock options and nonvested share awards to certain employees and members of the board of directors. These awards were granted pursuant to the 2007 Equity Incentive Plan (the Plan) which was adopted by Parent’s board of directors. The board of directors or a designated administrator has the sole authority to determine which individuals receive grants, the type of grant to be received, the vesting period and all other option terms. Stock options granted generally have a term not to exceed eight years. A maximum of 20,726,523 shares of stock may be delivered under the Plan. As 11,243,875 shares had been delivered under the Plan at December 31, 2012, 9,482,648 remained available for delivery, with 12,108,707 awards having been granted at December 31, 2012.

F-30

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Salaries, benefits and other employee costs	$	445		$	404		$	566
General and administrative expenses		987			833			1,128
Other operating expenses		245			—			—
Discontinued operations		—			—			474

Expense before income tax benefit		1,677			1,237			2,168
Income tax benefit		(247	)		(206	)		(494	)

Total equity-based compensation expense, net of tax	$	1,430		$	1,031		$	1,674

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


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Share awards	$	641		$	835		$	1,331
Stock options		791			402			837
Warrants		245			—			—

Expense before income tax benefit		1,677			1,237			2,168
Income tax benefit		(247	)		(206	)		(494	)

Total equity-based compensation expense, net of tax	$	1,430		$	1,031		$	1,674

Total unrecognized compensation related to nonvested awards of stock options and nonvested shares was $12.7 million at December 31, 2012 of which $3.9 million is expected to be recognized over a weighted average period of approximately three years. The remaining $8.8 million relates to restricted share awards exchanged in conjunction with the merger and will be expensed only upon the occurrence of a change in control or other qualified exit event.

F-31

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Stock Options

Parent generally grants stock options vesting 25% per year over four years and having an eight-year contractual life. The fair value of stock options is estimated using the Black-Scholes formula. The expected lives of options are determined using the “simplified method” which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. The risk-free interest rates are equal to rates of U.S. Treasury notes with maturities approximating the expected life of the option. Volatility was calculated as a weighted average based on the historical volatility of the Company’s predecessor before the merger as well as industry peers. The assumptions are as follows:


	Year Ended December 31, 2012			Year Ended December 31, 2011			Year Ended December 31, 2010
Assumptions:
Expected life in years		4.82			4.82			4.82
Risk-free interest rates		0.67-0.74	%		0.93-2.35	%		1.35-2.59	%
Dividend yield		0.0	%		0.0	%		0.0	%
Volatility		45.16	%		45.16	%		45.16	%
Weighted average grant-date fair value	$	0.54		$	0.75		$	0.65

Stock option activity during the year ended December 31, 2012 was as follows:


Stock Options	Number of Shares (000)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2012		6,157		$	0.99		4.9	$	10,591
Additional grants		659			1.38		—		—
Exercised		(3,702	)		0.46		—		—
Forfeited or expired		(204	)		0.96		—		—

Outstanding at December 31, 2012		2,910		$	0.47		6.5	$	1,840

Exercisable at December 31, 2012		801		$	0.29		5.7	$	652

During the year ended December 31, 2012, the majority of the options exercised were cashless and were exercised in conjunction with the April 2012 dividend payment. During the years ended December 31, 2011 and 2010, the Company received immaterial cash proceeds from the exercise of stock options. The total intrinsic value of options exercised during the year ended December 31, 2012 was $8.2 million.

In conjunction with the dividends paid in 2012, the Company lowered the exercise price on unvested options by an amount equal to the per share dividend paid. As a result of this modification, the Company will incur an additional $1.7 million of compensation expense over the service period of the unvested options. Approximately $0.4 million of additional compensation expense was recorded in 2012 due to the modifications.

Share Awards

On April 19, 2007, Parent granted nonvested share awards to certain company employees. The first tranche (50%) of the share awards vested 25% over four years, while the second tranche (50%) vests 100% in April 2015, but can vest earlier upon the occurrence of a qualified exit event and Company performance. An additional grant was made to Parent’s board of directors in August 2007 and July 2011. The nonvested shares granted to the board of directors vests 25% each year over four years. The grant made to the board of directors in August 2007 is now fully vested. The value of such share awards is equal to the share price on the date of grant.

F-32

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Additionally, in conjunction with the merger in April 2007, Parent cancelled 379,000 restricted share awards of the Company’s predecessor. These share awards were replaced with 2,212,957 nonvested shares of Parent. This cancellation and exchange was accounted for as a modification. The replacement awards vest only upon the occurrence of a change in control or other exit event as defined in the award agreement and Company performance. As a result of the modification, approximately $8.8 million of unamortized compensation cost related to the Predecessor awards will only be expensed upon the occurrence of a change in control or qualified exit event, and the completion of the derived service period. At December 31, 2012, 2,212,957 of these share awards were outstanding and unvested.

The grants of nonvested share awards, excluding the awards exchanged concurrent with the merger, during the year ended December 31, 2012 are summarized as follows:


Nonvested Shares	Number of Shares (000)			Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2012		7,195		$	0.52
Additional grants		—			—
Vested		(110	)		1.38
Forfeited		(100	)		0.45

Nonvested at December 31, 2012		6,985		$	0.50

The weighted average grant-date fair value per share award was $1.85 and $1.62 for the years ended December 31, 2011 and 2010, respectively. No nonvested shares were granted during 2012. The total fair value of shares which vested during the years ended December 31, 2012, 2011 and 2010 was approximately $0.2 million, $3.5 million and $3.0 million, respectively.

Warrants

During 2009, Parent granted warrants to a hospital partner that holds ownership in some of the Company’s facilities. The warrants are to purchase Parent’s 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. The assumptions included an expected life equal to the contractual life of approximately 8¹/₂ years; a risk free interest rate of 2.7%; a dividend yield of 0.0%; and an estimated volatility of approximately 58%. In this grant, the hospital partner received 333,330 warrants with an original exercise price of $3.00 per share, of which 55,555 were exercisable immediately; the exercise restrictions on additional tranches of 55,555 warrants lapse each December 1 which began in 2009 and ends in 2013. At December 31, 2012, 277,775 warrants are exercisable.

During 2008, one of the Company’s hospital partners, Baylor, was granted 666,666 warrants to purchase Parent’s common stock with an original exercise price of $3.00 per share. The warrants were fully vested and nonforfeitable but contain exercise restrictions. The exercise restrictions on 111,111 warrants lapse each December 31 which began in 2008 and ends in 2013. The warrants have a contractual life of ten years. The total fair value of the warrants was approximately $0.3 million and was determined using the Black Scholes formula. The assumptions included an expected life equal to the contractual life of the warrants; a risk free interest rate of 3.5%, a dividend yield of 0.0%; and an estimated volatility of approximately 59%. Because the warrants were fully vested, the expense associated with these warrants was recorded upon grant within “other operating expenses.” Baylor’s Chief Executive Officer is a member of the Company’s Board of Directors (Note 12). At December 31, 2012, 555,555 warrants are exercisable.

F-33

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

During 2007, Parent granted a total of 2,333,328 warrants to purchase its common stock to four of the Company’s hospital partners. The exercise price of the warrants was originally $3.00 per share. All of the warrants were fully vested and non-forfeitable but contain exercise restrictions. Of the 2,333,328 warrants outstanding at December 31, 2012, 2,055,551 warrants are exercisable and the remaining 277,777 warrants will become fully exercisable by 2013. The warrants have a contractual life of eight to ten years. The total fair value of the warrants was approximately $1.1 million and was determined using the Black Scholes formula. The assumptions included an expected life equal to the contractual life of each warrant; a risk free interest rate of 3.6% to 4.6%; a dividend yield of 0.0%; and an estimated volatility of approximately 59%. Because the warrants were fully vested, the expense associated with these warrants was recorded upon grant within “other operating expenses.”

In conjunction with the dividends that were paid by the Company in 2012, the Company lowered the exercise price on the outstanding warrants by an amount equal to the per share dividend. At December 31, 2012, the exercise price is $1.39 per share. As a result of this modification, the Company recorded an additional $0.2 million of other operating expense in 2012.

(15)

Commitments and Contingencies

(a) Financial Guarantees

As of December 31, 2012, 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 $66.0 million. Of the total, $20.2 million relates to the obligations of consolidated subsidiaries, whose obligations are included in the Company’s consolidated balance sheet and related disclosures, and $37.8 million of the remaining $45.8 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 $8.0 million primarily represents guarantees of the obligations of four facilities which have been sold. The Company has full recourse to the buyers with respect to these amounts.

The Company has recorded long-term liabilities totaling approximately $0.4 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, as discussed in Note 9.

(b) Litigation

From time to time the Company is 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 are expected to have a material adverse impact on the Company.

(c) Self Insurance and Professional Liability Claims

The Company is self-insured for certain losses related to health and workers’ compensation claims, although it obtains third-party insurance coverage to limit its exposure to these claims. The Company estimates its self-insured liabilities using a number of factors including historical claims experience, an estimate of incurred but

F-34

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

not reported claims, demographic factors, severity factors and actuarial valuations. The Company believes that the accruals established at December 31, 2012, which were estimated based on actual employee health claim patterns, adequately provide for its exposure under this arrangement. The Company’s potential for losses related to professional and general liability is managed through a wholly-owned insurance captive.

(d) Employee Benefit Plans

The Company’s eligible employees may choose to participate in the United Surgical Partners International, Inc. 401(k) Plan under which the Company may elect to make contributions that match from zero to 100% of participants’ contributions. Charges to expense under this plan were $2.4 million, $2.2 million and $2.0 million for the years ended December 31, 2012, 2011, and 2010, respectively.

The Company’s former U.K. subsidiary, which was spun-off on April 3, 2012, has obligations remaining under a defined benefit pension plan that originated in 1991 and was closed to new participants at the end of 1998. At December 31, 2011, the plan had 59 participants, plan assets of $10.5 million, an accumulated pension benefit obligation of $13.7 million, and a projected benefit obligation of $13.7 million. Pension expense, which is now classified within discontinued operations, for the years ended December 31, 2011 and 2010 was $0.4 million and $0.5 million, respectively.

The Company’s Deferred Compensation Plan covers select members of management as determined by its Compensation Committee. Under the plan, eligible employees may contribute a portion of their salary and annual bonus on a pretax basis. The plan is a non-qualified plan; therefore, the associated liabilities are included in the Company’s consolidated balance sheets as of December 31, 2012 and 2011. In addition, the Company maintains an irrevocable grantor’s trust to hold assets that fund benefit obligations under the plan, including corporate-owned life insurance policies. The cash surrender value of such policies is included in the consolidated balance sheets in other noncurrent assets and totaled $11.8 million and $10.7 million at December 31, 2012 and 2011, respectively. The Company’s obligations related to the plan were $16.5 million and $13.2 million, at December 31, 2012 and 2011, respectively, of which $1.5 million and $0.7 million in 2012 and 2011, respectively, are included in accrued salaries and benefits with the remaining amounts included in other long-term liabilities. Total expense under the plan for the years ended December 31, 2012, 2011 and 2010 was $1.2 million, $1.2 million and $0.8 million, respectively.

(e) Employment Agreements

The Company entered into employment agreements dated April 19, 2007 with Donald E. Steen and William H. Wilcox. The agreement with Mr. Steen, who serves as the Company’s Chairman provides for annual base compensation of $312,500 (as of December 31, 2012), subject to increases approved by the board of directors, a performance bonus based on the sole discretion of the Company’s Board of Directors, and his continued employment until April 19, 2013. After April 19, 2013, the contract automatically renews for additional one year terms unless terminated by either party.

The agreement with Mr. Wilcox, the Company’s Chief Executive Officer, provides for annual base compensation of $635,000 (as of December 31, 2012), subject to increases approved by the board of directors, and Mr. Wilcox is eligible for a performance bonus based on the sole discretion of the Company’s Board of Directors. The agreement renews automatically for two-year terms unless terminated by either party.

At December 31, 2012, the Company has employment agreements with 18 other senior managers which generally include one year terms and renew automatically for additional one year terms unless terminated by

F-35

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

either party. The total annual base compensation under these agreements is $6.2 million as of December 31, 2012, subject to increases approved by the board of directors, and performance bonuses of up to a total of $5.4 million per year.

(16)

Subsequent Events

In February 2013, the Company further amended its senior secured credit facility and borrowed $150.0 million, which was used to repay the non-extended term loan of $144.4 million and related fees and expenses. The new term loan matures in April 2019. The amendment also changed the interest rate charged on the term loans to LIBOR plus a margin of 3.50% to 3.75%.

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

(17)

Condensed Consolidating Financial Statements

The following information is presented as required by regulations of the SEC. None of this information is 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 Notes were issued in a private offering on April 3, 2012 and were subsequently registered as publicly traded securities through a Form S-4 declared effective by the SEC on September 5, 2012. The exchange offer was completed in October 2012. The Notes are unsecured obligations of the Company; however, the Notes are guaranteed by most of its direct and indirect 100%-owned domestic subsidiaries. USPI, which issued the Notes, does not have independent assets or operations. USPI’s investees 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.

F-36

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Balance Sheets:


As of December 31, 2012	Guarantors		Non-Participating Investees		Consolidation Adjustments			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	42,291	$	8,912	$	—		$	51,203
Available for sale securities		10,741		—		—			10,741
Accounts receivable, net		—		50,108		—			50,108
Other receivables		71,246		25,918		(82,553	)		14,611
Inventories of supplies		793		7,224		—			8,017
Prepaids and other current assets		35,460		1,834		—			37,294

Total current assets		160,531		93,996		(82,553	)		171,974
Property and equipment, net		31,919		94,184		423			126,526
Investments in affiliates		922,507		—		(438,428	)		484,079
Goodwill and intangible assets, net		958,104		185,537		411,467			1,555,108
Other assets		22,328		1,169		(435	)		23,062

Total assets	$	2,095,389	$	374,886	$	(109,526	)	$	2,360,749

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	782	$	14,199	$	—		$	14,981
Accrued expenses and other		248,910		74,718		(82,116	)		241,512
Current portion of long-term debt		8,659		10,244		(990	)		17,913

Total current liabilities		258,351		99,161		(83,106	)		274,406
Long-term debt, less current portion		1,408,963		52,861		(203	)		1,461,621
Other long-term liabilities		194,360		5,472		(496	)		199,336
Parent’s equity		233,715		182,214		(182,214	)		233,715
Noncontrolling interests		—		35,178		156,493			191,671

Total liabilities and equity	$	2,095,389	$	374,886	$	(109,526	)	$	2,360,749


As of December 31, 2011	Guarantors		Non-Participating Investees		Consolidation Adjustments			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	36,198	$	5,624	$	—		$	41,822
Available for sale securities		4,815		—		—			4,815
Accounts receivable, net		—		58,057		—			58,057
Other receivables		44,627		52,122		(86,250	)		10,499
Inventories of supplies		737		9,380		—			10,117
Prepaids and other current assets		27,433		2,585		—			30,018

Total current assets		113,810		127,768		(86,250	)		155,328
Property and equipment, net		23,705		211,296		320			235,321
Investments in affiliates		952,116		—		(507,382	)		444,734
Goodwill and intangible assets, net		930,186		251,882		354,417			1,536,485
Other assets		88,206		511		(67,087	)		21,630

Total assets	$	2,108,023	$	591,457	$	(305,982	)	$	2,393,498

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	1,789	$	26,976	$	—		$	28,765
Accrued expenses and other		227,790		79,603		(84,408	)		222,985
Current portion of long-term debt		5,595		21,193		(1,301	)		25,487

Total current liabilities		235,174		127,772		(85,709	)		277,237
Long-term debt, less current portion		952,717		91,038		(786	)		1,042,969
Other long-term liabilities		187,444		11,618		(309	)		198,753
Parent’s equity		732,688		335,461		(335,461	)		732,688
Noncontrolling interests		—		25,568		116,283			141,851

Total liabilities and equity	$	2,108,023	$	591,457	$	(305,982	)	$	2,393,498

F-37

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statements of Operations:


Year Ended December 31, 2012	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Revenues	$	112,454		$	452,614		$	(24,833	)	$	540,235
Equity in earnings of unconsolidated affiliates		145,387			6,652			(55,646	)		96,393
Operating expenses, excluding depreciation and amortization		84,757			316,704			(34,022	)		367,439
Depreciation and amortization		7,419			16,412			124			23,955

Operating income		165,665			126,150			(46,581	)		245,234
Interest expense, net		(80,293	)		(4,965	)		—			(85,258	)
Loss on early retirement of debt		(37,450	)		—			—			(37,450	)
Other income (expense), net		(700	)		(313	)		400			(613	)

Income from continuing operations before income taxes		47,222			120,872			(46,181	)		121,913
Income tax expense		(19,504	)		(1,998	)		—			(21,502	)

Income from continuing operations		27,718			118,874			(46,181	)		100,411
Earnings from discontinued operations, net of tax		3,073			3,212			(3,212	)		3,073

Net income		30,791			122,086			(49,393	)		103,484
Less: Net income attributable to noncontrolling interests		—			(18,462	)		(54,231	)		(72,693	)

Net income attributable to Parent	$	30,791		$	103,624		$	(103,624	)	$	30,791


Year Ended December 31, 2011	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Revenues	$	106,481		$	416,496		$	(23,799	)	$	499,178
Equity in earnings of unconsolidated affiliates		138,005			3,461			(58,329	)		83,137
Operating expenses, excluding depreciation and amortization		79,067			270,353			(21,941	)		327,479
Depreciation and amortization		6,635			14,410			132			21,177

Operating income		158,784			135,194			(60,319	)		233,659
Interest expense, net		(58,835	)		(4,186	)		—			(63,021	)
Other income (expense), net		(155	)		265			(183	)		(73	)

Income from continuing operations before income taxes		99,794			131,273			(60,502	)		170,565
Income tax expense		(39,076	)		(842	)		—			(39,918	)

Income from continuing operations		60,718			130,431			(60,502	)		130,647
Loss from discontinued operations, net of tax		(111,562	)		(97,846	)		97,846			(111,562	)

Net income (loss)		(50,844	)		32,585			37,344			19,085
Less: Net income attributable to noncontrolling interests		—			(16,978	)		(52,951	)		(69,929	)

Net income (loss) attributable to Parent	$	(50,844	)	$	15,607		$	(15,607	)	$	(50,844	)

F-38

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


Year Ended December 31, 2010	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Revenues	$	97,463		$	398,789		$	(22,303	)	$	473,949
Equity in earnings of unconsolidated affiliates		123,107			2,116			(55,307	)		69,916
Operating expenses, excluding depreciation and amortization		86,521			263,185			(22,944	)		326,762
Depreciation and amortization		7,249			15,040			204			22,493

Operating income		126,800			122,680			(54,870	)		194,610
Interest expense, net		(61,205	)		(4,849	)		(90	)		(66,144	)
Other income (expense), net		708			—			—			708

Income from continuing operations before income taxes		66,303			117,831			(54,960	)		129,174
Income tax benefit (expense)		(26,946	)		(2,311	)		—			(29,257	)

Income from continuing operations		39,357			115,520			(54,960	)		99,917
Earnings from discontinued operations, net of tax		2,736			9,205			(9,205	)		2,736

Net income		42,093			124,725			(64,165	)		102,653
Less: Net income attributable to noncontrolling interests		—			(12,879	)		(47,681	)		(60,560	)

Net income attributable to Parent	$	42,093		$	111,846		$	(111,846	)	$	42,093

Condensed Consolidating Statements of Comprehensive Income (Loss):


Year Ended December 31, 2012	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Net income	$	30,791		$	122,086		$	(49,393	)	$	103,484
Other comprehensive income:
Foreign currency translation adjustments		4,938			4,938			(4,938	)		4,938
Unrealized gain on available for sale securities, net of tax		22			—			—			22
Unrealized loss on foreign currency contract, net of tax		(560	)		—			—			(560	)
Unrealized gain on interest rate swap, net of tax		15			15			(15	)		15
Reclassification due to spin-off of U.K. subsidiary:
Foreign currency translation adjustments		58,682			58,682			(58,682	)		58,682

Total other comprehensive income		63,097			63,635			(63,635	)		63,097

Comprehensive income		93,888			185,721			(113,028	)		166,581
Comprehensive income attributable to noncontrolling interests		—			(18,462	)		(54,231	)		(72,693	)

Comprehensive income attributable to Parent	$	93,888		$	167,259		$	(167,259	)	$	93,888

F-39

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)



Year Ended December 31, 2011	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Net income (loss)	$	(50,844	)	$	32,585		$	37,344		$	19,085
Other comprehensive income:
Foreign currency translation adjustments		1,272			1,272			(1,272	)		1,272
Unrealized gain on interest rate swaps, net of tax		2,560			204			(204	)		2,560
Unrealized gain available for sale securities, net of tax		42			—			—			42
Pension adjustments, net of tax		(556	)		(556	)		556			(556	)

Total other comprehensive income		3,318			920			(920	)		3,318

Comprehensive income (loss)		(47,526	)		33,505			36,424			22,403
Less: Comprehensive income attributable to noncontrolling interests		—			(16,978	)		(52,951	)		(69,929	)

Comprehensive income (loss) attributable to Parent	$	(47,526	)	$	16,527		$	(16,527	)	$	(47,526	)


Year Ended December 31, 2010	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Net income	$	42,093		$	124,725		$	(64,165	)	$	102,653
Other comprehensive income:
Foreign currency translation adjustments		(11,638	)		(11,638	)		11,638			(11,638	)
Unrealized gain on interest rate swaps, net of tax		3,408			780			(780	)		3,408
Pension adjustments, net of tax		724			724			(724	)		724

Total other comprehensive income		(7,506	)		(10,134	)		10,134			(7,506	)

Comprehensive income		34,587			114,591			(54,031	)		95,147
Less: Comprehensive income attributable to noncontrolling interests		—			(12,879	)		(47,681	)		(60,560	)

Comprehensive income attributable to Parent	$	34,587		$	101,712		$	(101,712	)	$	34,587

F-40

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statements of Cash Flows:


Year Ended December 31, 2012	Guarantor			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Cash flows from operating activities:
Net income	$	30,791		$	122,086		$	(49,393	)	$	103,484
Earnings from discontinued operations		(3,073	)		(3,212	)		3,212			(3,073	)
Loss on early retirement of debt		37,450			—			—			37,450
Changes in operating and intercompany assets and liabilities and noncash items included in net income		26,477			28,812			(12,837	)		42,452

Net cash provided by (used in) operating activities		91,645			147,686			(59,018	)		180,313
Cash flows from investing activities:
Purchases of property and equipment, net		(13,276	)		(6,926	)		—			(20,202	)
Purchases of new businesses and equity interests, net		(103,322	)		(37,788	)		—			(141,110	)
Other items, net		(56	)		2,513			(2,052	)		405

Net cash used in investing activities		(116,654	)		(42,201	)		(2,052	)		(160,907	)
Cash flows from financing activities:
Long-term borrowings, net		400,165			(3,768	)		813			397,210
Payment of common stock dividend		(384,426	)		—			—			(384,426	)
Purchases and sales of noncontrolling interests, net		4,763			—			—			4,763
Distributions to noncontrolling interests		—			(136,555	)		58,795			(77,760	)
Decrease in cash held on behalf of noncontrolling interest holders and other		(23,049	)		39,063			1,239			17,253

Net cash provided by (used in) financing activities		(2,547	)		(101,260	)		60,847			(42,960	)
Net cash (used in) provided by discontinued operations		33,649			(937	)		223			32,935

Net increase in cash		6,093			3,288			—			9,381
Cash at the beginning of the period		36,198			5,624			—			41,822

Cash at the end of the period	$	42,291		$	8,912		$	—		$	51,203

F-41

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)



Year Ended December 31, 2011	Guarantor			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Cash flows from operating activities:
Net income (loss)	$	(50,844	)	$	32,585		$	37,344		$	19,085
Loss from discontinued operations		111,562			97,846			(97,846	)		111,562
Changes in operating and intercompany assets and liabilities and noncash items included in net income (loss)		26,940			1,350			5,730			34,020

Net cash provided by (used in) operating activities		87,658			131,781			(54,772	)		164,667
Cash flows from investing activities:
Purchases of property and equipment, net		(7,955	)		(7,241	)		—			(15,196	)
Purchases of new businesses and equity interests, net		(77,881	)		—			—			(77,881	)
Other items, net		2,250			12,009			(14,737	)		(478	)

Net cash used in investing activities		(83,586	)		4,768			(14,737	)		(93,555	)
Cash flows from financing activities:
Long-term borrowings, net		(14,265	)		(8,236	)		2,509			(19,992	)
Purchases and sales of noncontrolling interests, net		510			—			—			510
Distributions to noncontrolling interests		—			(122,563	)		54,772			(67,791	)
Decrease in cash held on behalf of noncontrolling interest holders and other		11,057			(220	)		12,228			23,065

Net cash provided by (used in) financing activities		(2,698	)		(131,019	)		69,509			(64,208	)
Net cash (used in) provided by discontinued operations		(25,362	)		27			—			(25,335	)

Net increase (decrease) in cash		(23,988	)		5,557			—			(18,431	)
Cash at the beginning of the period		60,186			67			—			60,253

Cash at the end of the period	$	36,198		$	5,624		$	—		$	41,822


Year Ended December 31, 2010	Guarantor			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Cash flows from operating activities:
Net income	$	42,093		$	124,725		$	(64,165	)	$	102,653
Earnings from discontinued operations		(2,736	)		(9,206	)		9,206			(2,736	)
Changes in operating and intercompany assets and liabilities and noncash items included in net income		26,961			20,065			1,375			48,401

Net cash provided by operating activities		66,318			135,584			(53,584	)		148,318
Cash flows from investing activities:
Purchases of property and equipment, net		(5,437	)		(14,261	)		—			(19,698	)
Purchases of new businesses and equity interests, net		(21,698	)		(11,400	)		—			(33,098	)
Other items, net		(4,808	)		(2,348	)		8,450			1,294

Net cash used in investing activities		(31,943	)		(28,009	)		8,450			(51,502	)
Cash flows from financing activities:
Long-term borrowings, net		14,735			(13,971	)		4,513			5,277
Purchases and sales of noncontrolling interests, net		739			—			—			739
Distributions to noncontrolling interests		—			(112,573	)		53,584			(58,989	)
Dividend payment on common stock		(850	)		—			—			(850	)
Increase in cash held on behalf of noncontrolling interest holders and other		(11,743	)		10,612			(12,963	)		(14,094	)

Net cash used in financing activities		2,881			(115,932	)		45,134			(67,917	)
Net cash used in discontinued operations		(4,500	)		964			—			(3,536	)

Net increase (decrease) in cash		32,756			(7,393	)		—			25,363
Cash at the beginning of the period		27,430			7,460			—			34,890

Cash at the end of the period	$	60,186		$	67		$	—		$	60,253

F-42

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(18)

Selected Quarterly Financial Data (Unaudited)


	2012 Quarters
	First			Second			Third			Fourth
Net revenues	$	128,195		$	129,220		$	128,305		$	154,515
Income from continuing operations		32,968			5,856			26,622			34,321
Net income attributable to noncontrolling interests		(17,680	)		(17,348	)		(16,638	)		(21,027	)
Net income (loss) attributable to USPI’s common stockholder		18,724			(11,492	)		9,983			13,576

	2011 Quarters
	First			Second			Third			Fourth
Net revenues	$	119,094		$	123,447		$	122,261		$	134,376
Income from continuing operations		28,907			32,387			29,878			39,475
Net income attributable to noncontrolling interests		(15,712	)		(17,282	)		(16,598	)		(20,337	)
Net income (loss) attributable to USPI’s common stockholder		15,721			17,786			15,286			(99,637	)

Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including case volumes, interest rates, acquisitions, changes in contracts, the timing of price changes, and financing activities. The Company has also completed acquisitions and opened new facilities throughout 2011 and 2012, all of which significantly affect the comparability of net income (loss) from quarter to quarter. In addition, the Company recorded a $37.5 million loss on the early retirement of debt in the second quarter of 2012 due to the Company refinancing transactions in April 2012. The Company also recorded a $107.0 million goodwill impairment charged related to its former U.K. subsidiary in the fourth quarter of 2011. As further disclosed in Note 1, the U.K. subsidiary’s operating results are now reported in discontinued operations.

F-43

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts


	Balance at Beginning of Period		Additions Charged to:				Deductions⁽²⁾			Other Items⁽³⁾			Balance at End of Period
	Balance at Beginning of Period		Costs and Expenses		Other Accounts		Deductions⁽²⁾			Other Items⁽³⁾			Balance at End of Period
	(In thousands)
Year ended December 31, 2010⁽¹⁾	$	8,160	$	8,458	$	—	$	(8,742	)	$	(395	)	$	7,481
Year ended December 31, 2011⁽¹⁾		7,481		9,648		—		(9,130	)		577			8,576
Year ended December 31, 2012⁽¹⁾		8,576		9,678		—		(9,376	)		1,026			9,904

Valuation allowance for deferred tax assets


	Balance at Beginning of Period		Additions Charged to:				Deductions		Other Items			Balance at End of Period
	Balance at Beginning of Period		Costs and Expenses		Other Accounts		Deductions		Other Items			Balance at End of Period
	(In thousands)
Year ended December 31, 2010	$	3,283	$	—	$	—	$	—	$	(2,598	)	$	685
Year ended December 31, 2011		685		—		—		—		135			820
Year ended December 31, 2012		820		—		—		—		(820	)		—

(1)	Includes amounts related to companies disposed of in 2010 through 2012.

(2)	Accounts written off.

(3)	Balances from entities that were deconsolidated and other.

All other schedules are omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or notes thereto.

S-1

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Consolidated Financial Statements

Years Ended June 30, 2012 and 2011

(With Independent Auditors’ Report Thereon)

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2012 AND 2011

CONTENTS


Report of Independent Auditors			3
Audited Financial Statements
Consolidated Balance Sheets			4
Consolidated Statements of Income			5
Consolidated Statements of Changes in Equity			6
Consolidated Statements of Cash Flows			7
Notes to Consolidated Financial Statements			8

REPORT OF INDEPENDENT AUDITORS

To the Board of Managers

Texas Health Ventures Group, L.L.C.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in equity, and of cash flows present fairly, in all material respects, the financial position of Texas Health Ventures Group, L.L.C and Subsidiaries (the “Company”) at June 30, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

November 5, 2012

Dallas, Texas

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS —

JUNE 30, 2012 AND 2011


	2012		2011
	(In thousands)
ASSETS
CURRENT ASSETS:
Cash	$	—	$	1,085
Funds due from United Surgical Partners, Inc.		46,854		46,538
Patient receivables, net of allowance for doubtful accounts of $13,313 and $10,523 at June 30, 2012 and 2011, respectively		61,648		57,894
Supplies		11,200		10,531
Prepaid and other current assets		3,231		3,076

Total current assets		122,933		119,124
PROPERTY AND EQUIPMENT, net (Note 2)		192,984		199,922
OTHER LONG-TERM ASSETS:
Investments in unconsolidated affiliates (Note 4)		2,503		2,298
Goodwill and intangible assets, net (Note 6)		180,426		174,036
Other		280		575

Total assets	$	499,126	$	495,955

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	19,869	$	17,996
Accrued expenses and other		21,511		21,187
Current portion of long-term obligations (Note 7)		11,688		16,339

Total current liabilities		53,068		55,522
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION (Note 7)		156,815		164,747
OTHER LIABILITIES		13,885		14,424

Total liabilities		223,768		234,693
COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9 and 10)
NONCONTROLLING INTERESTS — REDEEMABLE		53,844		49,251
EQUITY:
Members’ equity		202,740		194,810
Noncontrolling interests — nonredeemable		18,774		17,201

Total equity		221,514		212,011

Total liabilities and equity	$	499,126	$	495,955

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED JUNE 30, 2012 AND 2011

(In thousands)


	2012			2011
REVENUES:
Net patient service revenue	$	666,136		$	578,825
Management and royalty fee income (Note 9)		547			601
Other income		872			802

Total revenues		667,555			580,228

EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES (Note 4)		1,390			1,199

OPERATING EXPENSES:
Salaries, benefits, and other employee costs		142,634			127,628
Medical services and supplies		160,942			139,517
Management and royalty fees (Note 9)		27,333			23,785
Professional fees		3,624			4,072
Other operating expenses		90,616			80,658
Provision for doubtful accounts		21,119			15,636
Depreciation and amortization		27,291			24,536

Total operating expenses		473,559			415,832

Operating income		195,386			165,595
NONOPERATING INCOME (EXPENSES):
Interest expense		(17,044	)		(15,998	)
Interest income (Note 9)		236			235
Other income (expense), net		(271	)		(271	)

Income before income taxes		178,307			149,561
INCOME TAXES		(4,228	)		(3,661	)

Net income		174,079			145,900
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS — Redeemable		(86,872	)		(71,501	)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS — Nonredeemable		(5,209	)		(4,833	)

Net income attributable to the Company	$	81,998		$	69,566

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED JUNE 30, 2012 AND 2011

(In thousands)


	Equity												Noncontrolling Interests — Nonredeemable
	Total			USP			BUMC			Total			Noncontrolling Interests — Nonredeemable
Balance at June 30, 2010	$	187,636		$	85,873		$	86,218		$	172,091		$	15,545
Net income		74,399			34,713			34,853			69,566			4,833
Distributions to members		(68,266	)		(31,727	)		(31,855	)		(63,582	)		(4,684	)
Contributions from members		17,859			8,912			8,947			17,859			—
Purchase of noncontrolling interests		653			(583	)		(585	)		(1,168	)		1,821
Sales of noncontrolling interests		(270	)		22			22			44			(314	)

Balance at June 30, 2011		212,011			97,210			97,600			194,810			17,201
Net income		87,207			40,917			41,081			81,998			5,209
Distributions to members		(80,418	)		(37,834	)		(37,986	)		(75,820	)		(4,598	)
Contributions from members		2,425			1,210			1,215			2,425			—
Purchase of noncontrolling interests		193			(595	)		(597	)		(1,192	)		1,385
Sales of noncontrolling interests		96			259			260			519			(423	)

Balance at June 30, 2012	$	221,514		$	101,167		$	101,573		$	202,740		$	18,774

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2012 AND 2011

(In thousands)


	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	174,079		$	145,900
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		21,119			15,636
Depreciation and amortization		27,291			24,536
Amortization of debt issue costs		19			9
Equity in earnings of unconsolidated affiliates, net of distributions received		(205	)		(427	)
Changes in operating assets and liabilities, net of effects from purchases of new businesses:
Patient receivables		(24,513	)		(22,931	)
Supplies, prepaids, and other assets		(714	)		(2,058	)
Accounts payable and accrued expenses		1,612			3,789

Net cash provided by operating activities		198,688			164,454

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of new businesses and equity interests, net of cash received of $404 and $1,862 for 2012 and 2011, respectively		(3,181	)		(20,000	)
Purchases of property and equipment		(4,642	)		(11,898	)
Change in deposits and notes receivables		(17	)		330
Change in funds due from United Surgical Partners, Inc.		(324	)		(2,219	)

Net cash used in investing activities		(8,164	)		(33,787	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt		—			3,093
Payments on long-term obligations		(27,942	)		(17,067	)
Distributions to noncontrolling interest owners		(87,206	)		(70,644	)
Purchases of noncontrolling interests		(2,044	)		(1,969	)
Sales of noncontrolling interests		1,403			2,206
Contributions from members		—			17,859
Distributions to members		(75,820	)		(63,582	)

Net cash used in financing activities		(191,609	)		(130,104	)

(DECREASE) INCREASE IN CASH		(1,085	)		563
CASH, beginning of period		1,085			522

CASH, end of period	$	—		$	1,085

SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	17,455		$	15,917
Cash paid for income taxes		3,837			3,143
Noncash transactions:
Noncash assets contributed by Members (Note 3)		2,425			—
Assets acquired under capital leases		10,724			36,271

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

THVG owns equity interests in and operates ambulatory surgery centers, surgical hospitals, and related businesses in the Dallas/Fort Worth, Texas, metropolitan area. At June 30, 2012, THVG operated thirty facilities (the Facilities) under management contracts, twenty-nine of which are consolidated for financial reporting purposes and one of which is accounted for under the equity method. In addition, THVG holds equity method investments in two partnerships that each own the real estate used by two of the Facilities.

THVG has been funded by capital contributions from its members and by cash distributions from the Facilities. The board of managers, which is controlled by Baylor, initiates requests for capital contributions. The Facilities’ operating agreements provide that cash flows available for distribution will be distributed at least quarterly to THVG and other owners of the Facilities.

THVG’s operating agreement provides that the board of managers determine, on at least a quarterly basis, if THVG should make a cash distribution based on a comparison of THVG’s excess cash on hand versus current and anticipated needs, including, without limitation, needs for operating expenses, debt service, acquisitions, and a reasonable contingency reserve. The terms of THVG’s operating agreement provide that any distributions, whether driven by operating cash flows or by other sources, such as the distribution of noncash assets or distributions in the event THVG liquidates, are to be shared according to each member’s overall ownership level in THVG.

Basis of Accounting

THVG maintains its books and records on the accrual basis of accounting, and the consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.

Principles of Consolidation

The consolidated financial statements include the financial statements of THVG and its wholly owned subsidiaries and other entities THVG controls. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management of THVG to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Cash Equivalents

THVG considers all highly liquid instruments with original maturities when purchased of three months or less to be cash equivalents. There were no cash equivalents at June 30, 2012 or 2011.

Patient Receivables

Patient receivables are stated at estimated net realizable value. Significant concentrations of patient receivables at June 30, 2012 and 2011 include:


	2012			2011
Commercial and managed care providers		64	%		68	%
Government-related programs		16	%		12	%
Self-pay patients		20	%		20	%

		100	%		100	%

Receivables from government-related programs (i.e. Medicare and Medicaid) represent the only concentrated groups of credit risk for THVG and management does not believe that there are any credit risks associated with these receivables. Commercial and managed care receivables consist of receivables from various payors involved in diverse activities and subject to differing economic conditions, and do not represent any concentrated credit risk to THVG. THVG maintains allowances for uncollectible accounts for estimated losses resulting from the payors’ inability to make payments on accounts. THVG assesses the reasonableness of the allowance account based on historic write-offs, the aging of accounts and other current conditions. Furthermore, management continually monitors and adjusts the allowances associated with its receivables. Accounts are written off when collection efforts have been exhausted.

Supplies

Supplies, consisting primarily of pharmaceuticals and supplies inventories, are stated at cost, which approximates market value, and are expensed as used.

Property and Equipment

Property and equipment are initially recorded at cost or, when acquired as part of a business combination, at fair value at the date of acquisition. Depreciation is calculated on the straight line method over the estimated useful lives of the assets. Upon retirement or disposal of assets, the asset and accumulated depreciation accounts are adjusted accordingly, and any gain or loss is reflected in earnings or loss of the respective period. Maintenance costs and repairs are expensed as incurred; significant renewals and betterments are capitalized. Assets held under capital leases are classified as property and equipment and amortized using the straight line method over the shorter of the useful lives or the lease terms, and the related obligations are recorded as debt. Amortization of property and equipment held under capital leases and leasehold improvements is included in depreciation and amortization expense. THVG records operating lease expense on a straight-line basis unless another systematic and rational allocation is more representative of the time pattern in which the leased property is physically employed. THVG amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Investments in Unconsolidated Affiliates

Investments in unconsolidated affiliates in which THVG exerts significant influence, but has less than a controlling ownership, are accounted for under the equity method. THVG exerts significant influence in the operations of its unconsolidated affiliates through representation on the governing bodies of the investees and additionally, with respect to the Facilities, through contracts to manage the operations of the investees.

Equity in earnings of unconsolidated affiliates consists of THVG’s share of the profits and losses generated from its noncontrolling equity investments. Because these operations are central to THVG’s business strategy, equity in earnings of unconsolidated affiliates is classified as a component of operating income in the accompanying consolidated statements of income. THVG has contracts to manage these facilities, which results in THVG having an active role in the operations of these facilities.

Intangible Assets and Goodwill

Intangible assets consist of costs in excess of net assets acquired (goodwill), costs associated with the purchase of management service contract rights, and other intangibles. Most of these assets have indefinite lives. Accordingly, these assets are not amortized but are instead tested for impairment annually or more frequently if changing circumstances warrant. The amount by which the carrying amount would exceed fair value identified in a test for impairment would be recorded as an impairment loss in the consolidated statements of income. No such impairment was identified in 2012 or 2011. THVG amortizes intangible assets with definite useful lives over their respective useful lives to the estimated residual values and reviews them for impairment in the same manner as long-lived assets, as discussed below.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or related groups of assets, may not be fully recoverable from estimated future cash flows. In the event of impairment, measurement of the amount of impairment may be based on appraisal, fair values of similar assets or estimates of future discounted cash flows resulting from use and ultimate disposition of the asset. No such impairment was identified in 2012 or 2011.

Fair Value of Financial Instruments

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 (Level 3), depending on the nature of the item being valued. The Company does not have financial assets or liabilities measured at fair value on a recurring basis at June 30, 2012. The carrying amounts of cash, funds due from United Surgical Partners, Inc., accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments.

The fair value of the Company’s long-term debt is determined by estimation of the discounted future cash flows of the debt at rates currently quoted or offered to a comparable company for similar debt instruments of comparable maturities by its lenders. At June 30, 2012, the aggregate carrying amount and estimated fair value of long-term debt were $37,754,000 and $37,116,000, respectively. At June 30, 2011, the aggregate carrying amount and estimated fair value of long term debt were $43,435,000 and $42,786,000, respectively.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Revenue Recognition

THVG has agreements with third-party payors that provide for payments to THVG at amounts different from its established rates. Payment arrangements include prospectively-determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amount from patients, third-party payors, and others for services rendered, including estimated contractual adjustments under reimbursement agreements with third party payors. Contractual adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. These contractual adjustments are related to the Medicare and Medicaid programs, as well as managed care contracts.

Net patient service revenue from the Medicare and Medicaid programs accounted for approximately 13% and 14% of total net patient service revenue in 2012 and 2011, respectively.

Net patient service revenue from managed care contracts accounted for approximately 84% and 82% of net patient service revenue in 2012 and 2011, respectively.

Net patient service revenue from private payors accounted for approximately 3% and 4% of total net patient service revenue in 2012 and 2011, respectively.

For facilities licensed as hospitals, federal regulations require the submission of annual cost reports covering medical costs and expenses associated with services provided to program beneficiaries. Medicare and Medicaid cost report settlements are estimated in the period services are provided to beneficiaries.

Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. As a result, there is a reasonable possibility that recorded estimates with respect to the five THVG facilities licensed as hospitals may change as interpretations are clarified. These initial estimates are revised as needed until final cost reports are settled.

Income Taxes

No amounts for federal income taxes have been reflected in the accompanying consolidated financial statements because the federal tax effects of THVG’s activities accrue to the individual members.

The Texas franchise tax applies to all THVG entities and is reflected in the accompanying consolidated statements of income. Under the revised law, the tax is calculated on a margin base and is therefore reflected in THVG’s consolidated statements of income for the years ended June 30, 2012 and 2011 as income tax expense.

THVG follows the provisions of ASC 740, “Income Taxes”, which prescribes a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.

As of June 30, 2012 and 2011, THVG had no gross unrecognized tax benefits. THVG files a partnership income tax return in the U.S. federal jurisdiction and a franchise tax return in the state of Texas. THVG is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2006. THVG has identified Texas as a “major” state taxing jurisdiction. THVG does not expect or anticipate a significant change over the next twelve months in the unrecognized tax benefits.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Commitments and Contingencies

Recently Issued Accounting Pronouncements

In May 2011, FASB issued ASU 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” Including an amendment to ASC 820, “Fair Value Measurements.” The amendment changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The adoption of ASU 2011-04 is not expected to have a material impact on THVG’s financial statements.

In July 2011, The Financial Accounting Standards Board (FASB) issued ASU 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities.” This ASU requires certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. For public entities, this ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for the first annual period ending after December 15, 2012, and interim and annual periods thereafter, with early adoption permitted. The amendments to the presentation of the provision for bad debts related to patient service revenue in the statement of operations should be applied retrospectively to all prior periods presented. The disclosures required by the amendments in this Update should be provided for the period of adoption and subsequent reporting periods. THVG has concluded that this ASU will have no impact on its financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” This ASU provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early application permitted in an entity’s financial statements that have not yet been issued. THVG plans to reevaluate, on a yearly basis, whether or not to elect to implement this option in testing for impairment to goodwill.

In February 2012, the FASB issued ASU 2012-02, “Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to the determination that it

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If, after assessing the totality of events and circumstances, an entity determines that it is not more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, then performing the two-step impairment test is unnecessary. This ASU is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012 with early application permitted in an entity’s financial statements that have not yet been issued. THVG plans to reevaluate, on a yearly basis, whether or not to elect to implement this option in testing for impairment to indefinite-lived intangible assets.

2.	PROPERTY AND EQUIPMENT

At June 30, 2012 and 2011, property and equipment and related accumulated depreciation and amortization consisted of the following (in thousands):


	Estimated Useful Lives		2012			2011

Land		—	$	3,672		$	607
Buildings and leasehold improvements		5-25 years		178,301			178,370
Equipment		3-15 years		112,255			95,470
Furniture and fixtures		5-15 years		6,011			16,124
Construction in progress				2,281			723

				302,520			291,294
Less accumulated depreciation and amortization				(109,536	)		(91,372	)

Net property and equipment			$	192,984		$	199,922

At June 30, 2012 and 2011, assets recorded under capital lease arrangements included in property and equipment consisted of the following (in thousands):


	2012			2011
Buildings	$	127,385		$	131,639
Equipment and furniture		15,292			14,705

		142,677			146,344
Less accumulated amortization		(37,669	)		(31,955	)

Net property and equipment under capital leases	$	105,008		$	114,389

3.	CAPITAL CONTRIBUTIONS BY MEMBERS

As discussed in Note 1, THVG receives part of its funding through cash and capital contributions from its members. During 2011, THVG received noncash capital contributions consisting primarily of investments in partnerships that operate surgery centers in the Dallas/Fort Worth area. These noncash capital contributions, including THVG’s ownership in the investee, are as follows (in thousands):

Investee

Ownership
Percentage

Net Assets
Contributed

Effective Date

Park Cities Surgery Center, L.L.C.

50.1

2,425

August 1, 2011

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

USP previously had a controlling interest in Park Cities. On the effective date listed above, USP sold 25% interest in Park Cities to Baylor. Through the contributions of USP and Baylor, THVG obtained control of Park Cities, and accounted for the acquisition as a business combination in accordance with ASC 805. THVG recorded the contribution from Baylor at predecessor basis, as it was a common control transaction between a parent and subsidiary. In this transaction, Baylor’s predecessor basis is the same as fair value since the transfer happened at the same time as the business combination for Baylor. THVG recorded the contribution from USP at fair value, based on an appraisal, as USP is a noncontrolling interest holder.

Concurrent with the contribution, THVG began managing the operations of this facility. The result of this transaction is included in THVG’s consolidated results of operations from the date of contribution.

The assets acquired and liabilities assumed resulting from the above contribution is summarized as follows (in thousands):


Current assets	$	718
Property and equipment		2,608
Goodwill — Parent		2,710
Goodwill — Noncontrolling interests		1,854
Other noncurrent asset		123

Total assets acquired		8,013
Current liabilities		615
Long-term debt		3,403

Total liabilities assumed		4,018
Noncontrolling interests		1,570

Net assets acquired	$	2,425

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

4.	INVESTMENTS IN SUBSIDIARIES AND UNCONSOLIDATED AFFILIATES

THVG’s investments in consolidated subsidiaries and unconsolidated affiliates consisted of the following:

Legal Name

Facility

City

Percentage Owned

June 30,
2012

June 30,
2011

Consolidated subsidiaries ⁽¹⁾:

Bellaire Outpatient Surgery Center, L.L.P.

Bellaire Surgery Center

Fort Worth

50.1

Dallas Surgical Partners, L.L.C.

Baylor Surgicare

Dallas

60.1

62.6

Dallas Surgical Partners, L.L.C.

Texas Surgery Center

Dallas

60.1

⁽²⁾

62.6

⁽²⁾

Dallas Surgical Partners, L.L.C.

Physicians Day Surgery Center

Dallas

60.1

⁽²⁾

62.6

⁽²⁾

Denton Surgicare Partners, Ltd.

Baylor Surgicare at Denton

Denton

50.1

Frisco Medical Center, L.L.P.

Baylor Medical Center at Frisco

Frisco

50.4

50.2

Garland Surgicare Partners, Ltd.

Baylor Surgicare at Garland

Garland

50.1

Grapevine Surgicare Partners, Ltd.

Baylor Surgicare at Grapevine

Grapevine

50.9

51.1

Lewisville Surgicare Partners, Ltd.

Baylor Surgicare at Lewisville

Lewisville

52.4

51.8

MSH Partners, L.L.C.

Mary Shiels Hospital

Dallas

31.7

North Central Surgical Center, L.L.P.

North Central Surgery Center

Dallas

32.2

North Garland Surgery Center, L.L.P.

North Garland Surgery Center

Garland

52.8

Rockwall/Heath Surgery Center, L.L.P.

Baylor Surgicare at Heath

Heath

51.8

50.4

Trophy Club Medical Center, L.P.

Trophy Club Medical Center

Fort Worth

50.5

50.3

Valley View Surgicare Partners, Ltd.

Baylor Surgicare at Valley View

Dallas

50.1

Fort Worth Surgicare Partners, Ltd.

Baylor Surgical Hospital of Fort Worth

Fort Worth

50.7

50.1

Arlington Surgicare Partners, Ltd.

Surgery Center of Arlington

Arlington

50.1

Rockwall Ambulatory Surgery Center, L.L.P.

Rockwall Surgery Center

Rockwall

50.1

Baylor Surgicare at Plano, L.L.C.

Baylor Surgicare at Plano

Plano

51.1

50.1

Metroplex Surgicare Partners, Ltd.

Metroplex Surgicare

Bedford

50.1

Arlington Orthopedic and Spine Hospitals, LLC

Arlington Hospital

Arlington

50.1

Baylor Surgicare at Granbury, LLC

Granbury Surgical Plaza

Granbury

50.8

51.8

Physicians Center of Fort Worth, L.L.P.

Baylor Surgicare at Fort Worth I & II

Fort Worth

50.3

50.8

DeSoto Surgicare, Ltd.

North Texas Surgery Center

Desoto

52.1

52.3

Baylor Surgicare at Mansfield, L.L.C.

Baylor Surgicare at Mansfield

Mansfield

51.0

Metrocrest Surgery Center, L.L.C.

Baylor Surgicare at Carrollton

Carrollton

51.0

Baylor Surgicare of Duncanville, L.L.C.

Baylor Surgicare at Duncanville

Duncanville

0.0

⁽³⁾

57.8

Lone Star Endoscopy Center, L.L.C.

Lone Star Endoscopy

Keller Endo

51.0

Tuscan Surgery Center, L.L.C.

Tuscan Surgery Center at Las Colinas

Las Colinas

51.0

Baylor Surgicare at Ennis, L.L.C.

Baylor Surgicare at Ennis

Ennis

51.0

Baylor Surgicare at Plano Parkway, L.L.C.

Baylor Surgicare at Plano Parkway

Plano

51.0

Park Cities Surgery Center, L.L.C.

Park Cities Surgery Center

Dallas

50.1

—

Unconsolidated affiliates:

Denton Surgicare Real Estate, Ltd.

⁽⁴⁾

n/a

49.0

Irving-Coppell Surgical Hospital, L.L.P.

Irving-Coppell Surgical Hospital

Irving

18.5

18.9

MCSH Real Estate Investors, Ltd.

⁽⁴⁾

n/a

2.0

(1)	List excludes holding companies, which are wholly owned by the Company and hold the Company’s investments in the Facilities.

(2)	Merged into Baylor Surgicare.

(3)	Merged into Desoto Surgicare, Ltd.

(4)	These entities are not surgical facilities and do not have ownership in any surgical facilities.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

During the fiscal year ended June 30, 2011, THVG acquired the equity interests of the following surgery centers:


Legal Name	Purchase Price (in thousands)	Effective Date	Percentage Acquired
Fiscal year ended June 30, 2011
Metrocrest Surgery Center, L.P. (Carrollton)	$4,003	July 1, 2010		51	%
Baylor Surgicare of Duncanville, LLC (Duncanville)	$ 626	November 1, 2010		50.1	%
Lone Star Endoscopy Center, L.L.C. (Keller Endo)	$7,549	November 1, 2010		51	%
Tuscan Surgery at Las Colinas, L.L.C. (Las Colinas)	$3,192	December 1, 2010		51	%
Baylor Surgicare at Ennis, L.L.C. (Ennis)	$3,341	January 1, 2011		51	%
Baylor Surgicare at Plano Parkway, L.L.C. (Plano Parkway)	$3,151	March 1, 2011		51	%

In July of 2011, Duncanville merged into Desoto Surgicare Partners Ltd. (Desoto), a facility consolidated by THVG. Shares of Duncanville were cancelled and exchanged for Desoto units. The transaction had no effect on THVG’s consolidated financials.

Carrollton, Keller Endo, Las Colinas, Ennis, and Plano Parkway like other facilities in which THVG invests, are operated by Baylor and USP through THVG, as described in Note 9.

In September of 2011, North Central Surgical Center, L.L.P. (North Central), which is consolidated by THVG, acquired Carrell Clinic Imaging Center, and all of its assets and liabilities.

The following table summarizes the recorded values of the assets acquired and liabilities assumed at the dates of acquisition (in thousands):


	7/1/10 Carrollton		11/1/10 Duncanville		11/1/10 Keller Endo		12/1/10 Las Colinas		1/1/11 Ennis		3/1/11 Plano Parkway		9/1/11 Carrell Clinic
Cash and cash equivalents	$	46	$	192	$	337	$	85	$	534	$	686	$	—
Current assets		420		469		412		301		893		342		—
Property and equipment		722		599		1,627		822		1,792		139		2,379
Goodwill — parent		3,450		317		7,142		2,797		2,865		2,592		2,061
Goodwill — noncontrolling interests		1,968		97		4,253		1,566		1,629		1,537		—
Long-term assets		—		—		—		13		—		—		—

Total assets acquired		6,606		1,674		13,771		5,584		7,713		5,296		4,440

Current liabilities		4,106		568		527		409		2,250		71		—
Long-term liabilities		—		13		—		—		—		—		—
Long-term debt		—		61		1,044		36		36		—		854

Total liabilities assumed		4,106		642		1,571		445		2,286		71		854

Noncontrolling interest-redeemable		2,500		406		4,651		1,947		2,086		2,074		—

Net assets acquired	$	—	$	626	$	7,549	$	3,192	$	3,341	$	3,151	$	3,586

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

holders. Fair values for noncontrolling interest holders are estimated based on market multiples and discounted cash flow models which have been derived from the Company’s experience in acquiring surgical facilities, market participant assumptions and third party valuations it has obtained with respect to such transactions. The inputs used in these models are Level 3 inputs, which under GAAP, are significant unobservable inputs. Inputs into these models include expected revenue growth, expected gross margins and discount factors.

The results of these acquisitions are included in THVG’s consolidated statements of income from the dates of acquisition. Total acquisition costs included in professional fees on THVG’s consolidated statement of income were $113,000 and $575,000 for 2012 and 2011, respectively.

5.	NONCONTROLLING INTERESTS

The Company controls and therefore consolidates the results of 29 of its 30 facilities at June 30, 2012. 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 fiscal year ended June 30, 2012, the Company purchased and sold equity interests in various consolidated subsidiaries in the amounts of $2,044,000 and $1,403,000, respectively. During the fiscal year ended June 30, 2011, the Company purchased and sold $1,969,000 and $2,206,000, respectively. The basis difference between the Company’s carrying amount and the proceeds received or paid in each transaction is recorded as an adjustment to the Company’s equity. The impact of these transactions is summarized as follows (in thousands):


	Year Ended June 30, 2012			Year Ended June 30, 2011
Net income attributable to the Company	$	81,998		$	69,566
Net transfers to the noncontrolling interests:
Decrease in the Company’s equity for losses incurred related to sales of subsidiaries’ equity interests		(1,192	)		(1,168	)
Increase in the Company’s equity for losses incurred related to purchases of subsidiaries’ equity interests		519			44

Net transfers to noncontrolling interests		(673	)		(1,124	)

Change in equity from net income attributable to the Company and net transfers to noncontrolling interests	$	81,325		$	68,442

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

As further described in Note 1, upon the occurrence of various 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. As a result, these noncontrolling interests are not included as part of the Company’s equity and are carried as noncontrolling interests- redeemable on the Company’s consolidated balance sheets. The activity in noncontrolling interests-redeemable for the years ended June 30, 2012 and 2011 is summarized below (in thousands):


Balance, June 30, 2010	$	30,352
Net income attributable to noncontrolling interests		71,501
Distributions to noncontrolling interests		(65,960	)
Purchases of noncontrolling interests		(2,781	)
Sales of noncontrolling interests		2,475
Noncontrolling interests attributable to business combinations		13,664

Balance, June 30, 2011		49,251
Net income attributable to noncontrolling interests		86,872
Distributions to noncontrolling interests		(82,608	)
Purchases of noncontrolling interests		(2,550	)
Sales of noncontrolling interests		1,308
Noncontrolling interests attributable to business combinations		1,571

Balance, June 30, 2012	$	53,844

6.	GOODWILL AND INTANGIBLE ASSETS

At June 30, 2012 and 2011, goodwill and intangible assets, net of accumulated amortization, consisted of the following (in thousands):


	2012		2011
Goodwill — parent	$	164,465	$	159,820
Goodwill — noncontrolling interests		14,746		13,014
Other intangible assets		1,215		1,202

Total	$	180,426	$	174,036

REMAINDER OF PAGE INTENTIONALY LEFT BLANK

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The following is a summary of changes in the carrying amount of goodwill for the years ended June 30, 2012 and 2011 (in thousands):


	Parent			Noncontrolling Interests
Balance, June 30, 2010		140,707			2,010
Additions:
Acquisition of Carrollton		3,450			1,968
Acquisition of Duncanville		317			97
Acquisition of Keller Endo		7,142			4,253
Acquisition of Las Colinas		2,797			1,566
Acquisition of Ennis		2,865			1,629
Acquisition of Plano Parkway		2,592			1,537
Other		(50	)		(47	)

Balance, June 30, 2011		159,820			13,013
Additions:
Acquisition of Park Cities		2,710			1,854
Acquisition of North Central Carrell Clinic		2,061			—
Other		(126	)		(123	)

Balance, June 30, 2012	$	164,465		$	14,744

Goodwill additions resulting from business combinations are recorded and assigned to the parent and noncontrolling interests.

Intangible assets with definite useful lives are amortized over their respective estimated useful lives. The agreements underlying THVG’s management contract assets have no determinable termination date and, consequently, the related intangible assets have indefinite useful lives. The carrying amount of THVG’s management contract was approximately $1,150,000 at both June 30, 2012 and 2011. Goodwill and intangible assets with indefinite useful lives are not amortized but instead are tested for impairment at least annually. No impairment was identified in 2012 or 2011.

REMAINDER OF PAGE INTENTIONALY LEFT BLANK

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

7.	LONG-TERM OBLIGATIONS

At June 30, 2012 and 2011, long-term obligations consisted of the following (in thousands):


	2012			2011
Capital lease obligations (Note 8)	$	128,884		$	137,651
Notes payable to financial institutions		39,619			43,435

Total long-term obligations		168,503			181,086
Less current portion		(11,688	)		(16,339	)

Long-term obligations, less current portion	$	156,815		$	164,747

The aggregate maturities of notes payable for each of the five years subsequent to June 30, 2012 and thereafter are as follows (in thousands):


2013	$	8,252
2014		6,951
2015		6,324
2016		7,533
2017		2,106
Thereafter		8,453

Total long-term obligations	$	39,619

The Facilities have notes payable to financial institutions which mature at various dates through 2031 and accrue interest at fixed and variable rates ranging from 4% to 9%. Each note is collateralized by certain assets of the respective Facility.

Capital lease obligations are collateralized by underlying real estate or equipment and have interest rates ranging from 2% to 13%.

8.	LEASES

The Facilities lease various office equipment, medical equipment, and office space under a number of operating lease agreements, which expire at various times through the year 2030. Such leases do not involve contingent rentals, nor do they contain significant renewal or escalation clauses. Office leases generally require the Facilities to pay all executory costs (such as property taxes, maintenance and insurance).

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Minimum future payments under noncancelable leases with remaining terms in excess of one year as of June 30, 2012 are as follows (in thousands):


	Capital Leases			Operating Leases
Year ending June 30:
2013	$	17,122		$	13,434
2014		16,828			12,394
2015		16,800			12,015
2016		16,757			11,170
2017		16,865			10,900
Thereafter		181,789			64,627

Total minimum lease payments		266,161		$	124,540

Amount representing interest		(137,277	)

Total principal payments	$	128,884

Total rent expense under operating leases was approximately $19,085,000 and $18,080,000 for the years ended June 30, 2012 and 2011, respectively, and is included in other operating expenses in the accompanying consolidated statements of income.

9.	RELATED-PARTY TRANSACTIONS

THVG operates the Facilities under management and royalty contracts, and THVG in turn is managed by Baylor and USP, resulting in THVG incurring management and royalty fee expense payable to Baylor and USP in amounts equal to the management and royalty fee income THVG receives from the Facilities. THVG’s management and royalty fee income from the facilities it consolidates for financial reporting purposes eliminates in consolidation with the facilities’ expense and therefore is not included in THVG’s consolidated revenues. THVG’s management and royalty fee income from facilities which are not consolidated was approximately $547,000 and $601,500 for the years ended June 30, 2012 and 2011, respectively, and is included in the consolidated revenues of THVG.

The management and royalty fee expense to Baylor and USP was approximately $27,333,000 and $23,785,000 for the years ended June 30, 2012 and 2011, respectively, and is reflected in operating expenses in THVG’s consolidated statements of income. Of the total, 64.3% and 34.0% represent management fees payable to USP and Baylor, respectively, and 1.7% represents royalty fees payable to Baylor.

Under the management and royalty agreements, the Facilities pay THVG an amount ranging from 4.5% to 7% of their net patient service revenue less provision for doubtful accounts annually, subject, in some cases, to an annual cap.

In addition, a subsidiary of USPI frequently pays bills on behalf of THVG and has custody of substantially all of THVG’s excess cash, paying THVG and the Facilities interest income on the net balance at prevailing market rates. Amounts held by USPI on behalf of THVG and the facilities totaled $46,854,000 and $46,538,000 at June 30, 2012 and 2011, respectively. The interest income amounted to $90,560 and $89,939 for the years ended June 30, 2012 and 2011, respectively.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

10.

COMMITMENTS AND CONTINGENCIES

Financial Guarantees

THVG guarantees portions of the indebtedness of its investees to third-parties, which could potentially require THVG to make maximum aggregate payments totaling approximately $9,601,000. Of the total, $6,752,000 relates to the obligations of four consolidated subsidiaries whose obligations are included in THVG’s consolidated balance sheet and related disclosures, $1,870,000 relates to obligations of three consolidated subsidiaries under operating leases whose obligations are not included in THVG’s consolidated balance sheet and related disclosures and the remaining $979,000 relates to the obligations of an unconsolidated affiliated company whose obligations are not included in THVG’s consolidated balance sheet and related disclosures. These arrangements (a) consist of guarantees of real estate and equipment financing, (b) are collateralized by all or a portion of the investees’ assets, (c) require payments by THVG 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 2020, or earlier if certain performance targets are met, and (e) provide no recourse for THVG to recover any amounts from third-parties. The fair value of the guarantee liability was not material to the consolidated financial statements and, therefore, no amounts were recorded at June 30, 2012 related to these guarantees. When THVG incurs guarantee obligations that are disproportionately greater than the guarantees provided by the investee’s other owners, THVG charges the investee a fair market value fee based on the value of the contingent liability THVG is assuming.

Litigation and Professional Liability Claims

In their normal course of business, the Facilities are subject to claims and lawsuits relating to patient treatment. THVG believes that its liability for damages resulting from such claims and lawsuits is adequately covered by insurance or is adequately provided for in its consolidated financial statements. USPI, on behalf of THVG and each of the Facilities, maintains professional liability insurance that provides coverage on a claims-made basis of $1,000,000 per incident and $11,000,000 in annual aggregate amount with retroactive provisions upon policy renewal. Certain of THVG’s insurance policies have deductibles and contingent premium arrangements. THVG believes that the expense recorded through June 30, 2012, which was estimated based on historical claims, adequately provides for its exposure under these arrangements. Additionally, from time to time, THVG may be named as a party to other legal claims and proceedings in the ordinary course of business. THVG is not aware of any such claims or proceedings that have more than a remote chance of having a material adverse impact on THVG.

11.

SUBSEQUENT EVENTS

THVG regularly engages in exploratory discussions or enters into letters of intent with various entities regarding possible joint ventures, development, or other transactions. These possible joint ventures, developments of new facilities, or other transactions are in various stages of negotiation.

THVG has performed an evaluation of subsequent events through November 5, 2012, which is the date the consolidated financial statements were available to be issued.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Consolidated Financial Statements

Years Ended June 30, 2011 and 2010

(With Independent Auditors’ Report Thereon)

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2011 AND 2010

CONTENTS


Report of Independent Auditors			25
Audited Financial Statements
Consolidated Balance Sheets			26
Consolidated Statements of Income			27
Consolidated Statements of Changes in Equity			28
Consolidated Statements of Cash Flows			29
Notes to Consolidated Financial Statements			30

REPORT OF INDEPENDENT AUDITORS

To the Board of Managers

Texas Health Ventures Group, L.L.C.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in equity, and of cash flows present fairly, in all material respects, the financial position of Texas Health Ventures Group, L.L.C and Subsidiaries (the “Company”) at June 30, 2011 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

October 5, 2011

Dallas, Texas

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS —

JUNE 30, 2011 AND 2010


	2011		2010
	(In thousands)
ASSETS

CURRENT ASSETS:
Cash	$	1,085	$	522
Funds due from United Surgical Partners, Inc.		46,538		43,709
Patient receivables, net of allowance for doubtful accounts of $10,523 and $12,560 at June 30, 2011 and 2010, respectively		57,894		48,468
Supplies		10,531		8,903
Prepaid and other current assets		3,076		2,096

Total current assets		119,124		103,698
PROPERTY AND EQUIPMENT, net (Note 2)		199,922		170,428
OTHER LONG-TERM ASSETS:
Investments in unconsolidated affiliates (Note 4)		2,298		1,871
Goodwill and intangible assets, net (Note 6)		174,036		143,915
Other		575		1,051

Total assets	$	495,955	$	420,963


LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	17,996	$	16,335
Accrued expenses and other		21,187		16,504
Current portion of long-term obligations (Note 7)		16,339		12,887

Total current liabilities		55,522		45,726
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION (Note 7)		164,747		142,709
OTHER LIABILITIES		14,424		14,540

Total liabilities		234,693		202,975
COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9 and 10)
NONCONTROLLING INTERESTS — REDEEMABLE		49,251		30,352
EQUITY:
Members’ equity		194,810		172,091
Noncontrolling interests — nonredeemable		17,201		15,545

Total equity		212,011		187,636

Total liabilities and equity	$	495,955	$	420,963

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED JUNE 30, 2011 AND 2010

(In thousands)


	2011			2010
REVENUES:
Net patient service revenue	$	578,825		$	478,973
Management and royalty fee income (Note 9)		601			600
Other income		802			517

Total revenues		580,228			480,090

EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES (Note 4)		1,199			1,100

OPERATING EXPENSES:
Salaries, benefits, and other employee costs		127,628			102,498
Medical services and supplies		139,517			120,017
Management and royalty fees (Note 9)		23,785			19,181
Professional fees		4,072			3,348
Other operating expenses		80,658			65,665
Provision for doubtful accounts		15,636			15,283
Depreciation and amortization		24,536			19,635

Total operating expenses		415,832			345,627

Operating income		165,595			135,563
NONOPERATING INCOME (EXPENSES):
Interest expense		(15,998	)		(13,680	)
Interest income (Note 9)		235			338
Other income (expense), net		(271	)		31

Income before income taxes		149,561			122,252
INCOME TAXES		(3,661	)		(3,009	)

Net income		145,900			119,243
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS — Redeemable		(71,501	)		(57,886	)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS — Nonredeemable		(4,833	)		(4,444	)

Net income attributable to the Company	$	69,566		$	56,913

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE YEARS ENDED JUNE 30, 2011 AND 2010

(In thousands)


				Equity									Noncontrolling Interests — Nonredeemable
	Total			USP			BUMC			Total			Noncontrolling Interests — Nonredeemable
Balance at June 30, 2009	$	209,603		$	97,100		$	97,491		$	194,591		$	15,012
Net income		61,357			28,400			28,513			56,913			4,444
Distributions to members		(87,059	)		(41,368	)		(41,534	)		(82,902	)		(4,157	)
Contributions from members		4,766			2,238			2,247			4,485			281
Purchase of noncontrolling interests		495			(95	)		(96	)		(191	)		686
Sales of noncontrolling interests		(1,526	)		(402	)		(403	)		(805	)		(721	)

Balance at June 30, 2010		187,636			85,873			86,218			172,091			15,545
Net income		74,399			34,713			34,853			69,566			4,833
Distributions to members		(68,266	)		(31,727	)		(31,855	)		(63,582	)		(4,684	)
Contributions from members		17,859			8,912			8,947			17,859			—
Purchase of noncontrolling interests		653			(583	)		(585	)		(1,168	)		1,821
Sales of noncontrolling interests		(270	)		22			22			44			(314	)

Balance at June 30, 2011	$	212,011		$	97,210		$	97,600		$	194,810		$	17,201

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2011 AND 2010

(In thousands)


	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	145,900		$	119,243
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		15,636			15,283
Depreciation and amortization		24,536			19,635
Amortization of debt issue costs		9			5
Equity in earnings of unconsolidated affiliates, net of distributions received		(427	)		(183	)
Changes in operating assets and liabilities, net of effects from purchases of new businesses:
Patient receivables		(22,931	)		(20,815	)
Due to/from affiliates, net		—			(3,119	)
Supplies, prepaids, and other assets		(2,058	)		(835	)
Accounts payable and accrued expenses		3,789			2,829

Net cash provided by operating activities		164,454			132,043

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of new businesses and equity interests, net of cash received of $1,862 and $1,506 for 2011 and 2010, respectively		(20,000	)		1,506
Purchases of property and equipment		(11,898	)		(16,842	)
Sales of property and equipment		—			100
Change in deposits and notes receivables		330			43
Change in funds due from United Surgical Partners, Inc.		(2,219	)		26,229

Net cash (used in) provided by investing activities		(33,787	)		11,036

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt	$	3,093		$	9,988
Payments on long-term obligations		(17,067	)		(17,703	)
Distributions to noncontrolling interest owners		(70,644	)		(61,361	)
Purchases of noncontrolling interests		(1,969	)		(1,838	)
Sales of noncontrolling interests		2,206			2,944
Contributions from members		17,859			—
Distributions to members		(63,582	)		(82,902	)

Net cash used in financing activities		(130,104	)		(150,872	)

INCREASE (DECREASE) IN CASH		563			(7,793	)
CASH, beginning of period		522			8,315

CASH, end of period	$	1,085		$	522

SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	15,917		$	13,397
Cash paid for income taxes		3,143			2,816
Noncash transactions:
Noncash assets contributed by Members (Note 3)		—			4,766
Assets acquired under capital leases		36,271			25,339

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

FOR THE YEAR ENDED JUNE 30, 2011 AND 2010

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Texas Health Ventures Group, L.L.C. and subsidiaries (THVG or the Company), a Texas limited liability company, was formed on January 21, 1997, for the primary purpose of developing, acquiring, and operating ambulatory surgery centers and related entities. Prior to June 29, 2008, Baylor Health Services (BHS), a Texas nonprofit corporation that is a controlled affiliate of Baylor Health Care System (BHCS), a Texas nonprofit corporation, owned 50.1% interest in THVG. On June 29, 2008, BHS distributed 49% of its existing 50.1% interest in THVG to Baylor University Medical Center (BUMC), a Texas nonprofit corporation whose sole member is BHCS. THVG is ultimately a subsidiary of BHCS through the combined ownership by BUMC and BHS (collectively referred to herein as Baylor). USP North Texas, Inc. (USP), a Texas corporation and subsidiary of United Surgical Partners International, Inc. (USPI), owns 49.9% of THVG. On June 30, 2009, BHS assigned its 1.1% remaining interest to BUMC. THVG’s fiscal year ends June 30. THVG’s subsidiaries’ fiscal years end December 31; however, the financial information of these subsidiaries included in these consolidated financial statements is as of and for the twelve months ended June 30, 2011 and 2010.

THVG owns equity interests in and operates ambulatory surgery centers, surgical hospitals, and related businesses in the Dallas/Fort Worth, Texas, metropolitan area. At June 30, 2011, THVG operated thirty-two facilities (the Facilities) under management contracts, thirty-one of which are consolidated for financial reporting purposes and one of which is accounted for under the equity method. In addition, THVG holds equity method investments in two partnerships that each own the real estate used by two of the Facilities.

Basis of Accounting

Principles of Consolidation

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Use of Estimates

Cash Equivalents

THVG considers all highly liquid instruments with original maturities when purchased of three months or less to be cash equivalents. There were no cash equivalents at June 30, 2011 or 2010.

Patient Receivables

Patient receivables are stated at estimated net realizable value. Significant concentrations of patient receivables at June 30, 2011 and 2010 include:


	2011			2010
Commercial and managed care providers		68	%		64	%
Government-related programs		12	%		18	%
Self-pay patients		20	%		18	%

		100	%		100	%

Supplies

Supplies, consisting primarily of pharmaceuticals and supplies inventories, are stated at cost, which approximates market value, and are expensed as used.

Property and Equipment

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

another systematic and rational allocation is more representative of the time pattern in which the leased property is physically employed. THVG amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term.

Investments in Unconsolidated Affiliates

Intangible Assets and Goodwill

Intangible assets consist of costs in excess of net assets acquired (goodwill), costs associated with the purchase of management service contract rights, and other intangibles. Most of these assets have indefinite lives. Accordingly, these assets are not amortized but are instead tested for impairment annually or more frequently if changing circumstances warrant. The amount by which the carrying amount would exceed fair value identified in a test for impairment would be recorded as an impairment loss in the consolidated statements of income. No such impairment was identified in 2011 or 2010. THVG amortizes intangible assets with definite useful lives over their respective useful lives to the estimated residual values and reviews them for impairment in the same manner as long-lived assets, as discussed below.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or related groups of assets, may not be fully recoverable from estimated future cash flows. In the event of impairment, measurement of the amount of impairment may be based on appraisal, fair values of similar assets or estimates of future discounted cash flows resulting from use and ultimate disposition of the asset. No such impairment was identified in 2011 or 2010.

Fair Value of Financial Instruments

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 (Level 3), depending on the nature of the item being valued. The Company does not have financial assets and liabilities measured at fair value on a recurring basis at June 30, 2011. The carrying amounts of cash, funds due from United Surgical Partners, Inc., accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments.

The fair value of the Company’s long-term debt is determined by estimation of the discounted future cash flows of the debt at rates currently quoted or offered to a comparable company for similar debt instruments of comparable maturities by its lenders. At June 30, 2011, the aggregate carrying amount and estimated fair value of long-term debt were $43,435,000 and $42,786,000, respectively. At June 30, 2010, the aggregate carrying amount and estimated fair value of long term debt were $41,174,000 and $38,705,000, respectively.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Revenue Recognition

Net patient service revenue from the Medicare and Medicaid programs accounted for approximately 14% and 12% of total net patient service revenue in 2011 and 2010, respectively.

Net patient service revenue from managed care contracts accounted for approximately 82% of net patient service revenue in both 2011 and 2010.

Net patient service revenue from private payors accounted for approximately 4% and 6% of total net patient service revenue in 2011 and 2010, respectively.

Equity in Earnings of Unconsolidated Affiliates

Income Taxes

No amounts for federal income taxes have been reflected in the accompanying consolidated financial statements because the federal tax effects of THVG’s activities accrue to the individual members.

The Texas franchise tax applies to all THVG entities for any tax reports filed on or after January 1, 2008 and is reflected in the accompanying consolidated statements of income. Under the revised law, the tax is calculated on a margin base and is therefore reflected in THVG’s consolidated statements of income for the years ended June 30, 2011 and 2010 as income tax expense.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

As of June 30, 2011 and 2010, THVG had no material gross unrecognized tax benefits. THVG files a partnership income tax return in the U.S. federal jurisdiction and a franchise tax return in the state of Texas. THVG is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2006. THVG has identified Texas as a “major” state taxing jurisdiction. THVG does not expect or anticipate a significant change over the next twelve months in the unrecognized tax benefits.

Commitments and Contingencies

Recently Issued Accounting Pronouncements

In July 2011, The Financial Accounting Standards Board (FASB) issued ASU 2011-07, “Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities.” This ASU requires certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. For public entities, this ASU is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are effective for the first annual period ending after December 15, 2012, and interim and annual periods thereafter, with early adoption permitted. The amendments to the presentation of the provision for bad debts related to patient service revenue in the statement of operations should be applied retrospectively to all prior periods presented. The disclosures required by the amendments in this Update should be provided for the period of adoption and subsequent reporting periods. THVG has not yet completed the process of evaluating the impact this ASU will have on its financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” This ASU provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early application permitted in an entity’s financial statements that have not yet been issued. THVG plans to adopt this ASU during its fiscal year ending June 30, 2012.

Reclassifications

Certain reclassifications were made to the 2010 financial statements to conform to the 2011 presentation.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

2.	PROPERTY AND EQUIPMENT

At June 30, 2011 and 2010, property and equipment and related accumulated depreciation and amortization consisted of the following (in thousands):


	Estimated Useful Lives		2011			2010
Land		—	$	607		$	612
Buildings and leasehold improvements		5-25 years		178,370			145,242
Equipment		3-15 years		95,470			80,515
Furniture and fixtures		5-15 years		16,124			12,730
Construction in progress				723			3,441

				291,294			242,540
Less accumulated depreciation and amortization				(91,372	)		(72,112	)

Net property and equipment			$	199,922		$	170,428

At June 30, 2011 and 2010, assets recorded under capital lease arrangements included in property and equipment consisted of the following (in thousands):


	2011			2010
Buildings	$	131,639		$	105,186
Equipment and furniture		14,705			14,773

		146,344			119,959
Less accumulated amortization		(31,955	)		(23,893	)

Net property and equipment under capital leases	$	114,389		$	96,066

3.	CAPITAL CONTRIBUTIONS BY MEMBERS

As discussed in Note 1, THVG receives part of its funding through cash and capital contributions from its members. During 2010, THVG received noncash capital contributions consisting primarily of investments in partnerships that operate surgery centers in the Dallas/Fort Worth area. These noncash capital contributions, including THVG’s ownership in the investee, are as follows (in thousands):


Investee	Ownership Percentage			Net Assets Contributed		Effective Date
DeSoto Surgicare Partners, Ltd. (DeSoto)		50.1	%	$	1,684	December 1, 2009
Physicians Surgical Center of Fort Worth, L.L.P. (FW Physicians)		50.13	%		3,082	December 31, 2009

USP previously had a controlling interest in DeSoto and had an equity method investment in FW Physicians through another subsidiary. On the effective dates listed above, USP sold 25.1% interest in Desoto and 25.12% interest in FW Physicians to Baylor. Through the contributions of USP and Baylor, THVG obtained control of DeSoto and FW Physicians, and accounted for the acquisitions as business combinations in accordance with ASC 805. THVG recorded the contributions from Baylor at predecessor basis, as they were common control transactions between a parent and subsidiary. In this transaction, Baylor’s predecessor basis is the same as fair value since the transfer happened at the same time of the business combination for Baylor. THVG recorded the contributions from USP at fair value, based on an appraisal, as USP is a noncontrolling interest holder.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Concurrent with the contributions, THVG began managing the operations of these facilities. The results of these transactions are included in THVG’s consolidated results of operations from the date of contribution.

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TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The assets acquired and liabilities assumed resulting from the above contributions are summarized as follows (in thousands):


	DeSoto		FW Physicians
Current assets	$	649	$	1,732
Property and equipment		2,678		2,180
Goodwill — Parent		402		2,547
Goodwill — Noncontrolling interests		—		372
Other noncurrent asset		3		—

Total assets acquired		3,732		6,831
Current liabilities		1,154		1,556
Long-term debt		178		250

Total liabilities assumed		1,332		1,806
Noncontrolling interests		716		1,943

Net assets acquired	$	1,684	$	3,082

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TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

4.	INVESTMENTS IN SUBSIDIARIES AND UNCONSOLIDATED AFFILIATES

THVG’s investments in consolidated subsidiaries and unconsolidated affiliates consisted of the following:


Legal Name	Facility	City	Percentage Owned
Legal Name	Facility	City	June 30, 2011	June 30, 2010
Consolidated subsidiaries ⁽¹⁾:
Bellaire Outpatient Surgery Center, L.L.P.	Bellaire Surgery Center	Fort Worth	50.1%	50.1%
Dallas Surgical Partners, L.L.C.	Baylor Surgicare	Dallas	62.6	62.6
Dallas Surgical Partners, L.L.C.	Texas Surgery Center	Dallas	62.6⁽²⁾	62.6
Dallas Surgical Partners, L.L.C.	Physicians Day Surgery Center	Dallas	62.6⁽²⁾	62.6
Denton Surgicare Partners, Ltd.	Baylor Surgicare at Denton	Denton	50.1	50.1
Frisco Medical Center, L.L.P.	Baylor Medical Center at Frisco	Frisco	50.2	50.3
Garland Surgicare Partners, Ltd.	Baylor Surgicare at Garland	Garland	50.1	50.1
Grapevine Surgicare Partners, Ltd.	Baylor Surgicare at Grapevine	Grapevine	51.1	50.1
Lewisville Surgicare Partners, Ltd.	Baylor Surgicare at Lewisville	Lewisville	51.8	52.4
MSH Partners, L.L.C.	Mary Shiels Hospital	Dallas	31.7	31.7
North Central Surgical Center, L.L.P.	North Central Surgery Center	Dallas	32.2	32.2
North Garland Surgery Center, L.L.P.	North Garland Surgery Center	Garland	52.8	51.6
Rockwall/Heath Surgery Center, L.L.P.	Baylor Surgicare at Heath	Heath	50.4	50.2
Trophy Club Medical Center, L.P.	Trophy Club Medical Center	Fort Worth	50.3	51.2
Valley View Surgicare Partners, Ltd.	Baylor Surgicare at Valley View	Dallas	50.1	50.1
Fort Worth Surgicare Partners, Ltd.	Baylor Surgical Hospital of Fort Worth	Fort Worth	50.1	50.1
Arlington Surgicare Partners, Ltd.	Surgery Center of Arlington	Arlington	50.1	50.1
Rockwall Ambulatory Surgery Center, L.L.P.	Rockwall Surgery Center	Rockwall	50.1	50.1
Baylor Surgicare at Plano, L.L.C.	Baylor Surgicare at Plano	Plano	50.1	50.1
Metroplex Surgicare Partners, Ltd.	Metroplex Surgicare	Bedford	50.1	50.1
Arlington Orthopedic and Spine Hospitals, LLC	Arlington Hospital	Arlington	50.1	50.1
Baylor Surgicare at Granbury, LLC	Granbury Surgical Plaza	Granbury	51.8	51.8
Physicians Center of Fort Worth, L.L.P.	Baylor Surgicare at Fort Worth I & II	Fort Worth	50.8	50.1
DeSoto Surgicare, Ltd.	North Texas Surgery Center	Desoto	52.3	50.1
Baylor Surgicare at Mansfield, L.L.C.	Baylor Surgicare at Mansfield	Mansfield	51.0	51.0
Metrocrest Surgery Center, L.L.C.	Baylor Surgicare at Carrollton	Carrollton	51.0	—
Baylor Surgicare of Duncanville, L.L.C.	Baylor Surgicare at Duncanville	Duncanville	57.8	—
Lone Star Endoscopy Center, L.L.C.	Lone Star Endoscopy	Keller Endo	51.0	—
Tuscan Surgery Center, L.L.C.	Tuscan Surgery Center at Las Colinas	Las Colinas	51.0	—
Baylor Surgicare at Ennis, L.L.C.	Baylor Surgicare at Ennis	Ennis	51.0	—
Baylor Surgicare at Plano Parkway, L.L.C.	Baylor Surgicare at Plano Parkway	Plano	51.0	—
Unconsolidated affiliates:
Denton Surgicare Real Estate, Ltd.	⁽³⁾	n/a	49.0	49.0
Irving-Coppell Surgical Hospital, L.L.P.	Irving-Coppell Surgical Hospital	Irving	18.9	18.3
MCSH Real Estate Investors, Ltd.	⁽³⁾	n/a	2.0	2.0

(1)	List excludes holding companies, which are wholly owned by the Company and hold the Company’s investments in the Facilities.

(2)	Merged into Baylor Surgicare.

(3)	These entities are not surgical facilities and do not have ownership in any surgical facilities.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

During the fiscal years ended June 30, 2011 and 2010, THVG acquired the equity interests of the following surgery centers:


Legal Name	Purchase Price (In thousands)		Effective Date	Percentage Acquired
Fiscal year ended June 30, 2011
Metrocrest Surery Center, L.P. (Carrollton)		$4,003	July 1, 2010		51	%
Baylor Surgicare of Duncanville, LLC (Duncanville)		$ 626	November 1, 2010		50.1	%
Lone Star Endoscopy Center, L.L.C. (Keller Endo)		$7,549	November 1, 2010		51	%
Tuscan Surgery at Las Colinas, L.L.C. (Las Colinas)		$3,192	December 1, 2010		51	%
Baylor Surgicare at Ennis, L.L.C. (Ennis)		$3,341	January 1, 2011		51	%
Baylor Surgicare at Plano Parkway, L.L.C. (Plano Parkway)		$3,151	March 1, 2011		51	%
Fiscal year ended June 30, 2010
Baylor Surgicare at Mansfield, LLC (Mansfield)		No consideration	May 1, 2010		51	%

Carrollton, Duncanville, Keller Endo, Las Colinas, Ennis, Plano Parkway, and Mansfield like other facilities in which THVG invests, are operated by Baylor and USP through THVG, as described in Note 9.

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TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The following table summarizes the recorded values of the assets acquired and liabilities assumed at the dates of acquisition (in thousands):


	5/1/10 Mansfield		7/1/10 Carrollton		11/1/10 Duncanville		11/1/10 Keller Endo		12/1/10 Las Colinas		1/1/11 Ennis		3/1/11 Plano Parkway
Cash and cash equivalents	$	791	$	46	$	192	$	337	$	85	$	534	$	686
Current assets		275		420		469		412		301		893		342
Property and equipment		1,305		722		599		1,627		822		1,792		139
Goodwill — parent		1,705		3,450		317		7,142		2,797		2,865		2,592
Goodwill — noncontrolling interests		1,638		1,968		97		4,253		1,566		1,629		1,537
Long-term assets		—		—		—		—		13		—		—

Total assets acquired		5,714		6,606		1,674		13,771		5,584		7,713		5,296

Current liabilities		2,202		4,106		568		527		409		2,250		71
Long-term liabilities		950		—		13		—		—		—		—
Long-term debt		2,562		—		61		1,044		36		36		—

Total liabilities assumed		5,714		4,106		642		1,571		445		2,286		71

Noncontrolling interest-redeemable		—		2,500		406		4,651		1,947		2,086		2,074

Net assets acquired	$	—	$	—	$	626	$	7,549	$	3,192	$	3,341	$	3,151

The acquisitions were accounted for in accordance with ASC 805 and the acquisition method was applied. The acquisitions were recorded at fair value, which resulted in goodwill for the parent and noncontrolling interest holders. Fair values for noncontrolling interest holders are estimated based on market multiples and discounted cash flow models which have been derived from the Company’s experience in acquiring surgical facilities, market participant assumptions and third party valuations it has obtained with respect to such transactions. The inputs used in these models are Level 3 inputs, which under GAAP, are significant unobservable inputs. Inputs into these models include expected revenue growth, expected gross margins and discount factors.

The results of these acquisitions are included in THVG’s consolidated statements of income from the dates of acquisition. Total acquisition costs included in professional fees on THVG’s consolidated statement of income were $575,000 and $175,000 for 2011 and 2010, respectively.

5.	NONCONTROLLING INTERESTS

The Company controls and therefore consolidates the results of 31 of its 32 facilities at June 30, 2011. 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 fiscal year ended June 30, 2011, the Company purchased and sold equity interests in various consolidated subsidiaries in the amounts of $1,969,000 and $2,206,000, respectively. During the fiscal year ended June 30, 2010, the Company purchased $1,838,000 and $2,944,000, respectively. The basis difference

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

between the Company’s carrying amount and the proceeds received or paid in each transaction is recorded as an adjustment to the Company’s equity. The impact of these transactions is summarized as follows (in thousands):


	Year Ended June 30, 2011			Year Ended June 30, 2010
Net income attributable to the Company	$	69,566		$	56,913
Net transfers to the noncontrolling interests:
Decrease in the Company’s equity for losses incurred related to sales of subsidiaries’ equity interests		(1,168	)		(805	)
Increase (decrease) in the Company’s equity for losses incurred related to purchases of subsidiaries’ equity interests		44			(192	)

Net transfers to noncontrolling interests		(1,124	)		(997	)

Change in equity from net income attributable to the Company and net transfers to noncontrolling interests	$	68,442		$	55,916

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TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

As further described in Note 1, upon the occurrence of various 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. As a result, these noncontrolling interests are not included as part of the Company’s equity and are carried as noncontrolling interests-redeemable on the Company’s consolidated balance sheets. The activity in noncontrolling interests-redeemable for the years ended June 30, 2011 and 2010 is summarized below (in thousands):


Balance, June 30, 2009	$	24,400
Net income attributable to noncontrolling interests		57,886
Distributions to noncontrolling interests		(57,204	)
Purchases of noncontrolling interests		(1,860	)
Sales of noncontrolling interests		4,471
Noncontrolling interests attributable to business combinations		2,659

Balance, June 30, 2010		30,352
Net income attributable to noncontrolling interests		71,501
Distributions to noncontrolling interests		(65,960	)
Purchases of noncontrolling interests		(2,781	)
Sales of noncontrolling interests		2,475
Noncontrolling interests attributable to business combinations		13,664

Balance, June 30, 2011	$	49,251

6.	GOODWILL AND INTANGIBLE ASSETS

At June 30, 2011 and 2010, goodwill and intangible assets, net of accumulated amortization, consisted of the following (in thousands):


	2011		2010
Goodwill — parent	$	159,820	$	140,707
Goodwill — noncontrolling interests		13,014		2,010
Other intangible assets		1,202		1,198

Total	$	174,036	$	143,915

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TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The following is a summary of changes in the carrying amount of goodwill for the years ended June 30, 2011 and 2010 (in thousands):


	Parent			Noncontrolling Interests
Balance, June 30, 2009		136,119			—
Additions:
Contribution of DeSoto		402			—
Contribution of FW Physicians		2,547			372
Acquisition of Mansfield		1,705			1,638
Other		(66	)		—

Balance, June 30, 2010		140,707			2,010
Additions:
Acquisition of Carrollton		3,450			1,968
Acquisition of Duncanville		317			97
Acquisition of Keller Endo		7,142			4,253
Acquisition of Las Colinas		2,797			1,566
Acquisition of Ennis		2,865			1,629
Acquisition of Plano Parkway		2,592			1,537
Other		(50	)		(47	)

Balance, June 30, 2011	$	159,820		$	13,014

Goodwill additions resulting from business combinations are recorded and assigned to the parent and noncontrolling interests.

Intangible assets with definite useful lives are amortized over their respective estimated useful lives. The agreements underlying THVG’s management contract assets have no determinable termination date and, consequently, the related intangible assets have indefinite useful lives. The carrying amount of THVG’s management contract was approximately $1,150,000, at both June 30, 2011 and 2010. Goodwill and intangible assets with indefinite useful lives are not amortized but instead are tested for impairment at least annually. No impairment was identified in 2011 or 2010.

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TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

7.	LONG-TERM OBLIGATIONS

At June 30, 2011 and 2010, long-term obligations consisted of the following (in thousands):


	2011			2010
Capital lease obligations (Note 8)	$	137,651		$	114,422
Notes payable to financial institutions		43,435			41,174

Total long-term obligations		181,086			155,596
Less current portion		(16,339	)		(12,887	)

Long-term obligations, less current portion	$	164,747		$	142,709

The aggregate maturities of notes payable for each of the five years subsequent to June 30, 2011 and thereafter are as follows (in thousands):


2012	$	13,455
2013		8,651
2014		6,623
2015		5,448
2016		6,613
Thereafter		2,645

Total long-term obligations	$	43,435

Capital lease obligations are collateralized by underlying real estate or equipment and have interest rates ranging from 2% to 13%.

8.	LEASES

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Minimum future payments under noncancelable leases with remaining terms in excess of one year as of June 30, 2011 are as follows (in thousands):


	Capital Leases			Operating Leases
Year ending June 30:
2012	$	17,636		$	14,707
2013		17,434			12,724
2014		16,938			11,667
2015		17,238			11,502
2016		17,225			10,776
Thereafter		213,039			72,254

Total minimum lease payments		299,510		$	133,630

Amount representing interest		(161,859	)

Total principal payments	$	137,651

Total rent expense under operating leases was approximately $18,080,000 and $14,702,000 for the years ended June 30, 2011 and 2010, respectively, and is included in other operating expenses in the accompanying consolidated statements of income.

9.	RELATED-PARTY TRANSACTIONS

THVG operates the Facilities under management and royalty contracts, and THVG in turn is managed by Baylor and USP, resulting in THVG incurring management and royalty fee expense payable to Baylor and USP in amounts equal to the management and royalty fee income THVG receives from the Facilities. THVG’s management and royalty fee income from the facilities it consolidates for financial reporting purposes eliminates in consolidation with the facilities’ expense and therefore is not included in THVG’s consolidated revenues. THVG’s management and royalty fee income from facilities which are not consolidated was approximately $601,000 and $600,000 for the years ended June 30, 2011 and 2010, respectively, and is included in the consolidated revenues of THVG.

The management and royalty fee expense to Baylor and USP was approximately $23,785,000 and $19,181,000 for the years ended June 30, 2011 and 2010, respectively, and is reflected in operating expenses in THVG’s consolidated statements of income. Of the total, 64.3% and 34.0% represent management fees payable to USP and Baylor, respectively, and 1.7% represents royalty fees payable to Baylor.

In addition, a subsidiary of USPI frequently pays bills on behalf of THVG and has custody of substantially all of THVG’s excess cash, paying THVG and the Facilities interest income on the net balance at prevailing market rates. Amounts held by USPI on behalf of THVG and the facilities totaled $46,538,000 and $43,709,000 at June 30, 2011 and 2010, respectively. The interest income amounted to $235,000 and $338,000 for the years ended June 30, 2011 and 2010, respectively.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

10.

COMMITMENTS AND CONTINGENCIES

Financial Guarantees

THVG guarantees portions of the indebtedness of its investees to third-parties, which could potentially require THVG to make maximum aggregate payments totaling approximately $12,166,000. Of the total, $8,758,000 relates to the obligations of seven consolidated subsidiaries whose obligations are included in THVG’s consolidated balance sheet and related disclosures, $2,123,000 relates to obligations of three consolidated subsidiaries under operating leases whose obligations are not included in THVG’s consolidated balance sheet and related disclosures and the remaining $1,285,000 relates to the obligations of an unconsolidated affiliated company whose obligations are not included in THVG’s consolidated balance sheet and related disclosures. These arrangements (a) consist of guarantees of real estate and equipment financing, (b) are collateralized by all or a portion of the investees’ assets, (c) require payments by THVG 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 2020, or earlier if certain performance targets are met, and (e) provide no recourse for THVG to recover any amounts from third-parties. The fair value of the guarantee liability was not material to the consolidated financial statements and, therefore, no amounts were recorded at June 30, 2011 related to these guarantees. When THVG incurs guarantee obligations that are disproportionately greater than the guarantees provided by the investee’s other owners, THVG charges the investee a fair market value fee based on the value of the contingent liability THVG is assuming.

Litigation and Professional Liability Claims

In their normal course of business, the Facilities are subject to claims and lawsuits relating to patient treatment. THVG believes that its liability for damages resulting from such claims and lawsuits is adequately covered by insurance or is adequately provided for in its consolidated financial statements. USPI, on behalf of THVG and each of the Facilities, maintains professional liability insurance that provides coverage on a claims-made basis of $1,000,000 per incident and $11,000,000 in annual aggregate amount with retroactive provisions upon policy renewal. Certain of THVG’s insurance policies have deductibles and contingent premium arrangements. THVG believes that the expense recorded through June 30, 2011, which was estimated based on historical claims, adequately provides for its exposure under these arrangements. Additionally, from time to time, THVG may be named as a party to other legal claims and proceedings in the ordinary course of business. THVG is not aware of any such claims or proceedings that have more than a remote chance of having a material adverse impact on THVG.

11.

SUBSEQUENT EVENTS

Effective August 1, 2011, Duncanville merged into DeSoto with DeSoto being the surviving company. In addition, USP sold 25.1% interest in Park Cities Surgery Center, LLC (Park Cities) to Baylor for $1.2 million. Through the contributions of USP and Baylor, THVG obtained control of Park Cities.

THVG has performed an evaluation of subsequent events through October 5, 2011, which is the date the consolidated financials statements were available to be issued.

(4)

Exhibits:


Exhibit Number		Description

2.1		Agreement and Plan of Merger dated as of January 27, 2006, by and among United Surgical Partners International, Inc., Peak ASC Acquisition Corp. and Surgis, Inc. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 31, 2006 and incorporated herein by reference).(1)

2.2		Agreement and Plan of Merger, dated as of January 7, 2007, by and among the Company, UNCN Holdings, Inc. and UNCN Acquisition Corp. (previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 8, 2007 and incorporated herein by reference).(1)

3.1		Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1(A) to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)

3.2		Amended and Restated Bylaws (previously filed as Exhibit 3.1(B) to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)

4.1		Indenture, dated as of April 3, 2012 by and among USPI Finance Corp. and U.S. Bank National Association, as trustee (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

4.2		Supplemental Indenture, dated as of April 3, 2012, by and among the Company, the Subsidiary 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. 333-183533) and incorporated herein by reference).(1)

4.3		Form of 9.000% Senior Notes due 2020 (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

4.4		Form of Notation of Subsidiary Guarantees (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

4.5		Registration Rights Agreement, dated April 3, 2012, by and between USPI Finance Corp. and Barclays Capital Inc., as representative of the several initial purchasers named therein (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

4.6		Registration Rights Agreement Joinder, dated as of April 3, 2012, by and between the Company, the Subsidiary Guarantors and Barclays Capital Inc., as representative of the several purchasers named therein (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

10.1		Credit Agreement, dated as of April 19, 2007, among USPI Holdings, Inc., the Company, as Borrower, the Lenders party thereto, Citibank, N.A., as Administrative Agent and Collateral Agent, Lehman Brothers, Inc., as Syndication Agent, and Bear Stearns Corporate Lending, Inc. and UBS Securities LLC, as Co-Documentation Agents. (previously filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

10.2		Amendment No. 1 to that certain Credit Agreement dated as of April 19, 2007, among United Surgical Partners International, Inc., USPI Holdings, Inc., as Borrower, the Lenders party thereto, Citibank, N.A., as Administrative Agent and Collateral Agent, Lehman Brothers, Inc., as Syndication Agent, and Bear Stearns Corporate Lending, Inc. and UBS Securities LLC, as Co-Documentation Agents (previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 20, 2009 and incorporated herein by reference).(1)

IV-1


Exhibit Number		Description

10.3		Incremental Facility Amendment, dated as of April 3, 2012, among Holdings, the Company, the Incremental Lender (as defined therein), and JP Morgan Chase Bank, N.A., as Administrative Agent (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

10.4		Second Amendment, dated as of April 3, 2012, to the Credit Agreement dated as of April 19, 2007, among Holdings, the Company, as the Borrower, and the lenders, agents and other parties thereto (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

10.5		Third Amendment, dated as of December 19, 2012, to the Credit Agreement dated as of April 19, 2007, among Holdings, the Company, as the Borrower, and the lenders, agents and other parties thereto (previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Commission on December 19, 2012 and incorporated herein by reference).(1)

10.6		Fourth Amendment, dated as of February 19, 2013, to the Credit Agreement dated as of April 19, 2007, among Holdings, the Company, as the Borrower, and the lenders, agents and other parties thereto (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on February 22, 2013 and incorporated herein by reference).(1)

10.7		Guarantee and Collateral Agreement, dated as of April 19, 2007, among USPI Holdings, Inc., the Company, the subsidiaries of the Company identified therein and Citibank, N.A., as Collateral Agent (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

10.8		Employment Agreement, dated as of April 19, 2007, by and between the Company and Donald E. Steen (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)(3)

10.9		Amendment to Employment Agreement, dated as of November 14, 2011, by and between the Company and Donald E. Steen.(1)(3)

10.10		Employment Agreement, dated as of April 19, 2007, by and between the Company and William H. Wilcox (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)(3)

10.11		Employment Agreement, dated as of April 19, 2007, by and between the Company and Brett P. Brodnax (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)(3)

10.12		Employment Agreement, dated as of April 19, 2007, by and between the Company and Niels P. Vernegaard (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)(3)

10.13		Second Amended and Restated Employment Agreement, dated as of September 1, 2012, by and between the Company and Mark A. Kopser.(2)(3)

10.14		Employment Agreement, dated as of April 21, 2009, by and between the Company and Philip A. Spencer. (previously filed as an exhibit to the Company’s Current Report on Form 10-K filed with the Commission on February 25, 2011 and incorporated herein by reference).(1)(3)

10.15		USPI Group Holdings, Inc. 2007 Equity Incentive Plan (previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (No. 333-144337) and incorporated herein by reference).(1)(3)

10.16		First Amendment to the USPI Group Holdings, Inc. 2007 Equity Incentive Plan (previously filed as an exhibit to the Company’s Current Report on Form 10-K filed with the Commission on February 26, 2009 and incorporated herein by reference).(1)(3)

IV-2


Exhibit Number		Description

10.17		Second Amendment to the USPI Group Holdings, Inc. 2007 Equity Incentive Plan.(2)(3)

10.18		Amended and Restated Deferred Compensation Plan (previously filed as an exhibit to the Company’s Current Report on Form 10-K filed with the Commission on February 26, 2009 and incorporated herein by reference).(1)(3)

10.19		Form of Indemnification Agreement between United Surgical Partners International, Inc. and its directors and officers (previously filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (No. 333-55442) and incorporated herein by reference).(1)(3)

21.1		List of the Company’s subsidiaries.(2)

24.1		Power of Attorney — Donald E. Steen(2)

24.2		Power of Attorney — Joel T. Allison(2)

24.3		Power of Attorney — Michael E. Donovan(2)

24.4		Power of Attorney — John C. Garrett, M.D.(2)

24.5		Power of Attorney — D. Scott Mackesy(2)

24.6		Power of Attorney — James Ken Newman(2)

24.7		Power of Attorney — Paul B. Queally(2)

24.8		Power of Attorney — Raymond A. Ranelli(2)

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)

101		The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010, (iv) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 2010, (v) Consolidated Statement of Changes in Equity for the years ended December 31, 2012, 2011 and 2010 and (iv) Notes to Consolidated Financial Statements.(4)

(1)	Previously filed.

(2)	Filed herewith.

(3)	Management contract or compensatory plan or arrangement in which a director or executive officer participates.

(4)

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

IV-3

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ WILLIAM H. WILCOX
		William H. Wilcox
		Chief Executive Officer and Director

Date: February 26, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.


Signature	Title	Date

*	Chairman of the Board	February 26, 2013
Donald E. Steen

/s/ William H. Wilcox	Chief Executive Officer and	February 26, 2013
William H. Wilcox	Director (Principal Executive Officer)

/s/ Mark A. Kopser	Executive Vice President and Chief	February 26, 2013
Mark A. Kopser	Financial Officer (Principal Financial Officer)

/s/ J. Anthony Martin	Vice President, Corporate Controller And	February 26, 2013
J. Anthony Martin	Chief Accounting Officer (Principal Accounting Officer)

*	Director	February 26, 2013
Joel T. Allison

*	Director	February 26, 2013
Michael E. Donovan

*	Director	February 26, 2013
John C. Garrett, M.D.

*	Director	February 26, 2013
D. Scott Mackesy

*	Director	February 26, 2013
James Ken Newman

IV-4


Signature	Title	Date

*	Director	February 26, 2013
Paul B. Queally

*	Director	February 26, 2013
Raymond A. Ranelli

John J. Wellik, by signing his name hereto, does hereby sign this Annual Report on Form 10-K on behalf of each of the above-named directors and officers of the Company on the date indicated below, pursuant to powers of attorney executed by each of such directors and officers and contemporaneously filed herewith with the Commission.


By:		/s/ John J. Wellik
		John J. Wellik
		Attorney-in-fact

Date: February 26, 2013

IV-5

INDEX TO EXHIBITS


Exhibit Number		Description

2.1		Agreement and Plan of Merger dated as of January 27, 2006, by and among United Surgical Partners International, Inc., Peak ASC Acquisition Corp. and Surgis, Inc. (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 31, 2006 and incorporated herein by reference).(1)

2.2		Agreement and Plan of Merger, dated as of January 7, 2007, by and among the Company, UNCN Holdings, Inc. and UNCN Acquisition Corp. (previously filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 8, 2007 and incorporated herein by reference).(1)

3.1		Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1(A) to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)

3.2		Amended and Restated Bylaws (previously filed as Exhibit 3.1(B) to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)

4.1		Indenture, dated as of April 3, 2012 by and among USPI Finance Corp. and U.S. Bank National Association, as trustee (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

4.2		Supplemental Indenture, dated as of April 3, 2012, by and among the Company, the Subsidiary 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. 333-183533) and incorporated herein by reference).(1)

4.3		Form of 9.000% Senior Notes due 2020 (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

4.4		Form of Notation of Subsidiary Guarantees (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

4.5		Registration Rights Agreement, dated April 3, 2012, by and between USPI Finance Corp. and Barclays Capital Inc., as representative of the several initial purchasers named therein (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

4.6		Registration Rights Agreement Joinder, dated as of April 3, 2012, by and between the Company, the Subsidiary Guarantors and Barclays Capital Inc., as representative of the several purchasers named therein (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

10.1		Credit Agreement, dated as of April 19, 2007, among USPI Holdings, Inc., the Company, as Borrower, the Lenders party thereto, Citibank, N.A., as Administrative Agent and Collateral Agent, Lehman Brothers, Inc., as Syndication Agent, and Bear Stearns Corporate Lending, Inc. and UBS Securities LLC, as Co-Documentation Agents. (previously filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference)(1)

10.2		Amendment No. 1 to that certain Credit Agreement dated as of April 19, 2007, among United Surgical Partners International, Inc., USPI Holdings, Inc., as Borrower, the Lenders party thereto, Citibank, N.A., as Administrative Agent and Collateral Agent, Lehman Brothers, Inc., as Syndication Agent, and Bear Stearns Corporate Lending, Inc. and UBS Securities LLC, as Co-Documentation Agents (previously filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 20, 2009 and incorporated herein by reference).(1)

IV-6


Exhibit Number		Description

10.3		Incremental Facility Amendment, dated as of April 3, 2012, among Holdings, the Company, the Incremental Lender (as defined therein), and JP Morgan Chase Bank, N.A., as Administrative Agent (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

10.4		Second Amendment, dated as of April 3, 2012, to the Credit Agreement dated as of April 19, 2007, among Holdings, the Company, as the Borrower, and the lenders, agents and other parties thereto (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

10.5		Third Amendment, dated as of December 19, 2012, to the Credit Agreement dated as of April 19, 2007, among Holdings, the Company, as the Borrower, and the lenders, agents and other parties thereto (previously filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Commission on December 19, 2012 and incorporated herein by reference).(1)

10.6		Fourth Amendment, dated as of February 19, 2013, to the Credit Agreement dated as of April 19, 2007, among Holdings, the Company, as the Borrower, and the lenders, agents and other parties thereto (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on February 22, 2013 and incorporated herein by reference).(1)

10.7		Guarantee and Collateral Agreement, dated as of April 19, 2007, among USPI Holdings, Inc., the Company, the subsidiaries of the Company identified therein and Citibank, N.A., as Collateral Agent (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-183533) and incorporated herein by reference).(1)

10.8		Employment Agreement, dated as of April 19, 2007, by and between the Company and Donald E. Steen (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)(3)

10.9		Amendment to Employment Agreement, dated as of November 14, 2011, by and between the Company and Donald E. Steen.(1)(3)

10.10		Employment Agreement, dated as of April 19, 2007, by and between the Company and William H. Wilcox (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)(3)

10.11		Employment Agreement, dated as of April 19, 2007, by and between the Company and Brett P. Brodnax (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)(3)

10.12		Employment Agreement, dated as of April 19, 2007, by and between the Company and Niels P. Vernegaard (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)(3)

10.13		Second Amended and Restated Employment Agreement, dated as of September 1, 2012, by and between the Company and Mark A. Kopser.(2)(3)

10.14		Employment Agreement, dated as of April 21, 2009, by and between the Company and Philip A. Spencer. (previously filed as an exhibit to the Company’s Current Report on Form 10-K filed with the Commission on February 25, 2011 and incorporated herein by reference).(1)(3)

10.15		USPI Group Holdings, Inc. 2007 Equity Incentive Plan (previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q (No. 333-144337) and incorporated herein by reference).(1)(3)

10.16		First Amendment to the USPI Group Holdings, Inc. 2007 Equity Incentive Plan (previously filed as an exhibit to the Company’s Current Report on Form 10-K filed with the Commission on February 26, 2009 and incorporated herein by reference).(1)(3)

IV-7


Exhibit Number		Description

10.17		Second Amendment to the USPI Group Holdings, Inc. 2007 Equity Incentive Plan.(2)(3)

10.18		Amended and Restated Deferred Compensation Plan (previously filed as an exhibit to the Company’s Current Report on Form 10-K filed with the Commission on February 26, 2009 and incorporated herein by reference).(1)(3)

10.19		Form of Indemnification Agreement between United Surgical Partners International, Inc. and its directors and officers (previously filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (No. 333-55442) and incorporated herein by reference).(1)(3)

21.1		List of the Company’s subsidiaries.(2)

24.1		Power of Attorney — Donald E. Steen(2)

24.2		Power of Attorney — Joel T. Allison(2)

24.3		Power of Attorney — Michael E. Donovan(2)

24.4		Power of Attorney — John C. Garrett, M.D.(2)

24.5		Power of Attorney — D. Scott Mackesy(2)

24.6		Power of Attorney — James Ken Newman(2)

24.7		Power of Attorney — Paul B. Queally(2)

24.8		Power of Attorney — Raymond A. Ranelli(2)

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)

101		The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010, (iv) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 2010, (v) Consolidated Statement of Changes in Equity for the years ended December 31, 2012, 2011 and 2010 and (iv) Notes to Consolidated Financial Statements.(4)

(1)	Previously filed.

(2)	Filed herewith.

(3)	Management contract or compensatory plan or arrangement in which a director or executive officer participates.

(4)

IV-8