United Surgical Partners International 10K 2011 Annual report

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, 2011

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 þ No ¨

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 March 2, 2012, 100 shares of the Registrant’s common stock were outstanding.

Documents Incorporated by Reference

None.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

2011 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS


PART I
Item 1.	Business	4

Item 1A.	Risk Factors	35

Item 1B.	Unresolved Staff Comments	48

Item 2.	Properties	48

Item 3.	Legal Proceedings	48

Item 4.	Mine Safety Disclosures	48

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	49

Item 6.	Selected Financial Data	50

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	83

Item 8.	Financial Statements and Supplementary Data	85

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	85

Item 9A.	Controls and Procedures	85

Item 9B.	Other Information	86

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	87

Item 11.	Executive Compensation	90

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	101

Item 13.	Certain Relationships and Related Transactions, and Director Independence	103

Item 14.	Principal Accounting Fees and Services	105

PART IV

Item 15	Exhibits, Financial Statement Schedules	106

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, both nationally and internationally; foreign currency fluctuations; demographic changes; changes in, or the failure to comply with, laws and governmental regulations; the ability to enter into or renew managed care provider arrangements on acceptable terms; changes in Medicare, Medicaid and other government funded payments or reimbursement in the United States (U.S.) and the United Kingdom (U.K.); 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 in the United States and the United Kingdom. We focus on providing high quality surgical facilities that meet the needs of patients, physicians and payors better than hospital-based and other outpatient surgical facilities. We believe that our facilities (1) enhance the quality of care and the healthcare experience of patients, (2) offer 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. 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 and an increasing demand for short stay surgery.

As of December 31, 2011 we operated 206 facilities, consisting of 200 in the United States and six in the United Kingdom. Of the 200 U.S. facilities, 138 are jointly owned with major not-for-profit healthcare systems. Due in large part to our partnerships with physicians and not-for-profit healthcare systems, we do not consolidate the financial results of 141 of the 206 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.

Our consolidated revenues increased from $576.7 million in 2010 to $609.6 million in 2011. 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 13% during 2011. 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. In this Form 10-K, we have reported our operating results and financial position for the period subsequent to the merger date of April 19, 2007, as the “Successor Period” and all periods prior to April 19, 2007, as “Predecessor Periods.”

Available Information

We file annual, quarterly and current reports with the Securities and Exchange Commission. You may read and copy any document that we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may also call the Securities and Exchange Commission at 1-800-SEC-0330 for information on the operation of the public reference room. Our SEC filings are also available to you free of charge at the SEC’s web site athttp://www.sec.gov.We also maintain a web site athttp://www.uspi.comthat 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 Background

We believe many physicians 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 surgery centers and surgical hospitals, which allows physicians to schedule their time more efficiently and therefore increase the number of surgeries they can perform in a given amount of time. In addition, 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, acute care hospitals and national health service facilities generally provide a broad range of services, including high priority and emergency procedures. Medical emergencies often demand the unplanned use of operating rooms and result in the postponement or delay of scheduled surgeries, disrupting physicians’ practices and inconveniencing patients. Surgery centers and surgical hospitals in the United States and the United Kingdom are designed to improve physician work environments and improve physician efficiency. In addition, many physicians choose to perform surgery in facilities like ours because their patients prefer the comfort of a less institutional atmosphere and the convenience of simplified admissions and discharge procedures.

United States

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. 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 in the United States generally offer both inpatient and outpatient surgery on site. In addition, a number of not-for-profit healthcare systems have begun to expand their portfolios of facilities and services by entering into strategic relationships with specialty operators of surgery centers 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. 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.

United Kingdom

The United Kingdom provides government-funded healthcare to all of its residents through the National Health Service. However, due to funding and capacity limitations, the demand for healthcare services exceeds the public system’s capacity. In response to these shortfalls, private healthcare networks and private insurance companies have developed in the United Kingdom. Approximately 11% of the U.K. population has private insurance to cover elective surgical procedures, and another segment of the population pays for elective procedures from personal funds. For the year ended December 31, 2011, in the United Kingdom, we derived 67% of our revenues from private insurance, 24% from self-pay patients, who typically arrange for payment prior to surgery being performed, 5% from government payors, and 4% from other payors.

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 top quality surgeons and other physicians;

•

expand our presence in existing markets;

•

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

•

expand selectively in new markets; and

•

enhance operating efficiencies.

Attract and retain top quality surgeons and other physicians

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

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 and create a new cash flow opportunity with limited capital expenditures. We believe that these relationships also allow not-for-profit healthcare systems to attract and retain physicians and improve their hospital operations by focusing on their core business. We also believe that strategic relationships with these healthcare systems help us to more quickly develop relationships with physicians, communities, and payors. Generally, the healthcare systems with which we develop relationships have strong local market positions and excellent reputations that we use in branding our facilities. In addition, our relationships with 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 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 invested capital.

Expand selectively in new markets

We may continue to enter targeted markets by acquiring and developing surgical facilities. In the United States, 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 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 upgrading systems and protocols, including implementing our proprietary methodology of defined processes and information systems, to increase case volume and improve operating efficiencies.

Enhance operating efficiencies

Once we acquire a new facility in the U.S., 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 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 employees, facility administrators and management to analyze trends over time and share processes and best practices among our facilities. In addition, the information is used as an evaluative tool by our administrators and as a budgeting and planning tool by our management. USPI’s EDGE is now deployed in substantially all of our U.S. facilities. In addition to continuing to invest in USPI’s EDGE, we are currently investing in other tools that will allow us to better manage our facilities.

Operations

Operations in the United States

Our operations in the United States consist primarily of our ownership and management of surgery centers. As of December 31, 2011, we had ownership interests in 186 surgery centers and 14 surgical hospitals. We also own interests in and expect to operate two more surgical facilities that are currently under construction, and have numerous other potential projects in various stages of consideration, which may result in our adding additional facilities during 2012. Both of the facilities under construction include a not-for-profit hospital partner. Approximately 8,800 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 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 day-to-day activities 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 U.S. 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 28%. 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. 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 not-for-profit healthcare systems (hospital partners) in selected markets. Of our 200 U.S. facilities, 138 are jointly-owned with not-for-profit healthcare systems. 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. These joint ventures have added new facilities each year since their inception in 1999, including three during 2011. 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 20 facilities.

A second way we develop these relationships is through expansion into new markets, both with existing hospital partners and with new partners. In 2011, we entered into a new hospital partner relationship in 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 21 facilities in four states. Similarly, with Dignity Health (formerly known as Catholic Healthcare West) we began with one facility, which was in a suburb of Las Vegas, Nevada. This relationship has expanded to a total of 17 facilities, including seven in various California markets, eight in the Phoenix, Arizona market and two in the Las Vegas area.

A third way we develop our strategic relationships with not-for-profit healthcare systems is by adding them as co-owners of facilities that we have previously operated without them as partners. 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 not-for-profit hospital partner in the future to some of the remaining 62 facilities that do not yet have such a partner.

Operations in the United Kingdom

We operate three hospitals and an oncology center in greater London and in December 2011 acquired a fourth hospital, Claremont Hospital, in the city of Sheffield. In January 2011, we acquired an ownership interest in a diagnostic and surgery center in Edinburgh, Scotland, and at the end of December 2011, we increased our ownership to 90% and now have a controlling interest in the facility.

Parkside Hospital, located in Wimbledon, a suburb southwest of London, has 78 registered acute care beds, including four high dependency beds and four operating rooms, one of which is a dedicated endoscopy suite and an outpatient surgery unit. Parkside also has its own on-site pathology laboratory which provides services to the on-site cancer treatment center. The imaging department, which has been extensively upgraded in the past five years, has two MRI scanners, a CT scanner, and two X-ray screening rooms, plus mammography, dental and ultrasound services available. Over 500 surgeons, anesthesiologists, and physicians have admitting privileges to the hospital. Parkside’s key specialties include orthopedics, oncology, gynecology, neurosurgery, ear-nose-throat, endoscopy and general surgery. The expansion of Parkside’s outpatient clinic was completed in August 2010, and the refurbishment of a portion of the hospital was completed in the second quarter of 2011. Parkside Hospital is developing satellite clinics to extend its market and one in Putney (southwest London) opened in February 2012.

Cancer Centre London opened in August 2003. In 2010, we partnered with local physicians who own a 25% ownership in the facility, which has a state of the art equipment designed to provide a wide range of cancer treatments. The pre-treatment and planning suite houses a dedicated CT scanner, which, along with the linear accelerators and virtual simulation software, is linked to the department’s planning system. The centre provides inverse planned intensity-modulated radiation therapy (IMRT). The facility has its own pharmacy aseptic suite which provides chemotherapy to the day case unit at the hospital. The facility also has a nuclear medicine unit.

Holly House Hospital, located in a suburb northeast of London near Essex, has 55 registered acute care beds, including the ability to provide high dependency care. The hospital has three operating rooms and its own on-site pathology laboratory and pharmacy. A diagnostic suite houses MRI and CT scanners, X-ray screening rooms, mammography, ultrasound, and other imaging services. Approximately 300 surgeons, anesthesiologists, and physicians have admitting privileges at the hospital, and there are well-established orthopedic, cosmetic, in vitro fertilization, and general surgery practices. We have started a refurbishment and expansion program at Holly House which is due to be completed by late 2012. This expansion will provide three new operating rooms, an endoscopy suite, ten additional patient rooms, an eight bed day unit, and six additional consulting rooms.

Highgate Hospital is a 32 bed acute care hospital located in the affluent Highgate area of London. The hospital has an established cosmetic surgery business and additional practices including endoscopy and general surgery. Approximately 200 surgeons, anesthesiologists, and physicians have admitting privileges at the hospital.

Claremont Hospital has 41 beds, 11 consulting rooms and three operating rooms. The hospital provides a wide range of services and includes a day surgery unit, endoscopy suite, critical care beds and a full diagnostic suite including MRI and CT. Approximately 275 surgeons and physicians have admitting and practicing privileges and they cover a wide range of specialties including orthopedics, neurosurgery, general surgery and sports medicine.

The Edinburgh Clinic offers outpatient surgeries through its one operating and recovery room. The clinic also provides a wide range of imaging services including MRI, CT, general x-ray and ultrasound. Over 60 surgeons and physicians have practicing privileges.

Case Mix

The following table sets forth the percentage of internally reported revenues from our U.S. and U.K. facilities for the year ended December 31, 2011 from each of the following specialties:


Specialty	U.S.			U.K.
Orthopedic		45	%		26	%
Pain management		11			1
Gynecology		3			7	(1)
General surgery		6			14
Ear, nose and throat		7			2
Gastrointestinal		9			2
Cosmetic surgery		3			14
Ophthalmology		8			1
Other		8			33

Total		100	%		100	%

(1)	Also includes in vitro fertilization.

Payor Mix

The following table sets forth the percentage of the internally reported revenues from our U.S. and U.K. facilities for the year ended December 31, 2011 from each of the following payors:


Payor	U.S.			U.K.
Private insurance		75	%		67	%
Self-pay		2			24
Government		18	(1)		5
Other		5			4

Total		100	%		100	%

(1)	The percentage of our U.S. revenue attributable to government payors is approximately 16% for Medicare and 2% for Medicaid.

The following table sets forth information relating to the not-for-profit healthcare systems with which we were affiliated as of December 31, 2011:


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
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		20


Healthcare System	Healthcare System’s Geographical Focus	Number of Facilities Operated with USPI
Meridian Health System	New Jersey		6
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
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
The Christ Hospital	Cincinnati, Ohio		1
Williamson Medical Center	Franklin, Tennessee		1
Multi-Market Systems:
Adventist Health System:	12 states(a)		1
Adventist Hinsdale Hospital	Hinsdale, Illinois
Ascension Health:	19 states and D.C.(b)		21
Carondelet Health System (2 facilities)	Blue Springs, Missouri
St. Thomas Health Services System (14 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 (1 facility)	Canfield, Ohio		1
Dignity Health:	California, Arizona and Nevada		17
Mercy Hospital of Folsom (1 facility)	Sacramento, California
Mercy Medical Center (3 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 (6 facilities) and Arizona Orthopedic Surgical Hospital (2 facilities)	Phoenix, Arizona
St. Joseph’s Medical Center (1 facility)	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			138

(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, 2011:


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		78	%
	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		37
*	Northwest Surgery Center, Austin, Texas		5/30/07			6		29
	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		39
*	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		29
*	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		32
*	Baylor Surgicare at Carrollton, Carrollton, Texas		7/1/10			2		26
*	Baylor Surgicare, Dallas, Texas		6/1/99			6		34
*	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


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
*	Baylor Surgicare at Grapevine, Grapevine, Texas		2/16/02			4		29
*	Baylor Surgicare at Heath, Rockwall, Texas		11/1/04			3		26
*	Baylor Surgicare at Lewisville, Lewisville, Texas		9/16/02			6		37
*	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		26
*	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
*	Tuscan Surgery Center at Las Colinas, Irving, Texas		12/1/10			1		26
*	Valley View Surgery Center, Dallas, Texas		12/18/98			4		32
	Denver
*	Crown Point Surgical Center, Parker, Colorado		10/1/08			4		43
*	Flatirons Surgery Center, Boulder, Colorado		12/1/10			3		28
	Greenwood Ambulatory Surgery Center, Greenwood Village, Colorado		9/1/11	(6)		—		43
*	Harvard Park Surgery Center, Denver Colorado		1/1/09			3		31
	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		41
*	Kingsland Surgery Center, Katy, Texas		12/31/08			4		28
*	KSF Orthopaedic Surgery Center, Houston, Texas		5/1/07			3		44
*	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		10
*	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		28
*	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
*	Sugar Land Surgical Hospital, Sugar Land, Texas(2)		12/28/02			4		13


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
*	TOPS Surgical Specialty Hospital, Houston, Texas(2)		7/1/99			7		44
*	United Surgery Center — Southeast, Houston, Texas		9/1/99			3		30
	Kansas City
*	Briarcliff Surgery Center, Kansas City, Missouri		6/1/05			2		27
*	Creekwood Surgery Center, Kansas City, Missouri		7/29/98			4		37
*	Liberty Surgery Center, Liberty, Missouri		6/1/05			2		30
*	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		29
*	Parkway Surgery Center, Henderson, Nevada		8/3/98			5		28
	Los Angeles
	Coast Surgery Center of South Bay, Torrance, California		12/18/01			3		24
	Pacific Endo-Surgical Center, Torrance, California		8/1/03			1		55
*	San Fernando Valley Surgery Center, Mission Hills, California		11/1/04			4		26
	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		30
	The Center for Ambulatory Surgical Treatment, Los Angeles, California		11/14/02			4		40
	Michigan
*	Clarkston Surgery Center, Clarkston, Michigan		6/1/09			4		36
*	Genesis Surgery Center, Lansing, Michigan		11/1/06			4		23
*	Lansing Surgery Center, Lansing, Michigan		11/1/06			4		23
	Matrix Surgery Center, Saginaw, Michigan		9/1/11	(6)		3		44
*	Utica Surgery and Endoscopy Center, Utica, Michigan		4/1/07			3		33
	Nashville
*	Baptist Ambulatory Surgery Center, Nashville, Tennessee		3/1/98	(1)		6		29
*	Baptist Plaza Surgicare, Nashville, Tennessee		12/3/03			9		28
*	Center for Spinal Surgery, Nashville, Tennessee(2)		12/31/08			6		20
*	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		13
*	Physicians Pavilion Surgery Center, Smyrna, Tennessee		7/29/98			4		49
*	Saint Thomas Surgicare, Nashville, Tennessee		7/15/02			5		33
*	Tennessee Sports Medicine Surgery Center, Mt. Juliet, Tennessee		11/1/10	(5)		4		13
*	Williamson Surgery Center, Franklin, Tennessee		11/1/10	(5)		3		20
	New Jersey
*	Central Jersey Surgery Center, Eatontown, New Jersey		11/1/04			3		35
*	Lakewood Surgery Center, Lakewood, New Jersey		9/1/11	(6)		2		36
	Millennium Surgical Center, Cherry Hill, New Jersey		9/1/11	(6)		4		12
*	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		39
	Surgical Specialists at Princeton, Princeton, New Jersey		9/1/11	(6)		3		15


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
*	Select Surgical Center at Kennedy, Sewell, New Jersey		10/29/09			3		24
*	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		20
	Oklahoma City
*	Oklahoma Center for Orthopedic MultiSpecialty Surgery, Oklahoma City, Oklahoma(2)		8/2/04			4		24
*	Southwest Orthopaedic Ambulatory Surgery Center, Oklahoma City, Oklahoma		8/2/04			2		24
	Phoenix
*	Arizona Orthopedic Surgical Hospital, Chandler, Arizona(2)		5/19/04			6		37
*	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		28
*	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		22
*	Warner Outpatient Surgery Center, Chandler, Arizona		7/1/99			4		35
	Pennsylvania
*	Hershey Outpatient Surgery Center		9/1/11	(6)		7		28
	Gamma Surgery Center, Pittsburgh, Pennsylvania		9/1/11	(6)		2		51
*	Southwestern Ambulatory Surgery Center, Pittsburgh, Pennsylvania		9/1/11	(6)		4		24
	Portland
	Cascade Spine Center, Tualatin, Oregon		9/1/11	(6)		—		20
*	East Portland Surgical Center, Portland, Oregon		12/31/09			4		30
*	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
*	Redding Surgery Center, Redding, California		4/19/06	(4)		2		32
	Sacramento
*	Folsom Outpatient Surgery Center, Folsom, California		6/1/05			2		31
*	Grass Valley Surgery Center, Grass Valley, California		7/1/10			2		23
	Pain Diagnostic and Treatment Center, Sacramento, California		9/1/11	(6)		1		51
*	Roseville Surgery Center, Roseville, California		7/1/06			2		28
	San Antonio
	Alamo Heights Surgery Center, San Antonio, Texas		12/1/04			3		68
	San Antonio Endoscopy Center, San Antonio, Texas		5/1/05			1		53
	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		57
	Chesterfield Surgery Center, Chesterfield, Missouri		1/1/06			2		65
	Frontenac Surgery and Spine Care Center, Frontenac, Missouri		5/1/07			2		38
	Gateway Endoscopy Center, St. Louis, Missouri		5/1/10			—		50
	Manchester Surgery Center, St. Louis, Missouri		2/1/07			3		62
	Mason Ridge Surgery Center, St. Louis, Missouri		2/1/07			2		57
	Mid Rivers Surgery Center, Saint Peters, Missouri		1/1/06			2		64


Facility		Date of Acquisition or Affiliation			Number of Operating Rooms		Percentage Owned by USPI
	Old Tesson Surgery Center, St. Louis, Missouri		8/1/08			3		61
	Olive Surgery Center, St. Louis, Missouri		1/1/06			2		62
	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		22
*	St. Louis Surgical Center, Creve Coeur, Missouri		4/1/10			7		20
	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		31
	Virginia
*	Bon Secours Surgery Center at Harbour View, Suffolk, Virginia		11/12/07			6		21
*	Bon Secours Surgery Center at Virginia Beach, Virginia Beach, Virginia		5/30/07			2		23
*	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		75
	Additional Markets
*	Beaumont Surgical Affiliates, Beaumont, Texas		4/19/06	(4)		6		29
	Chattanooga Pain Center, Chattanooga, Tennessee		9/1/11	(6)		3		43
	Chico Surgery Center, Chico, California		4/19/06	(4)		3		80
*	CHRISTUS Cabrini Surgery Center, Alexandria, Louisiana		6/22/07			4		23
	Day-Op Center of Long Island, Mineola, New York(3)		12/4/98			4		100
	Destin Surgery Center, Destin, Florida		9/25/02			2		58
	Hope Square Surgical Center, Rancho Mirage, California		11/1/10	(5)		2		51
*	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
	Physicians Surgery Center of Chattanooga, Chattanooga, Tennessee		11/1/10	(5)		4		54
	Reading Endoscopy Center, Wyomissing, Pennsylvania		11/1/10	(5)		—		51
	Reading Surgery Center, Wyomissing, Pennsylvania		7/1/04			3		25
	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		25
	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		43
*	Terre Haute Surgical Center, Terre Haute, Indiana		12/19/07			2		23
	Teton Outpatient Services, Jackson, Wyoming		8/1/98	(1)		2		50
*	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		57
	Victoria Ambulatory Surgery Center, Victoria, Texas		4/19/06	(4)		2		59


Facility		Date of Acquisition or Affiliation		Number of Operating Rooms		Percentage Owned by USPI
	United Kingdom
	Cancer Centre London, Wimbledon		8/1/03		—		75
	Holly House Hospital, Essex		4/6/00		3		100
	Highgate Private Clinic, Highgate		4/29/03		3		100
	Parkside Hospital, Wimbledon		4/6/00		4		100
	The Claremont Hospital, Sheffield		12/30/11		3		100
	The Edinburgh Clinic, Edinburgh		1/1/11		1		90

*	Facilities jointly owned with not-for-profit hospital systems.

(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.

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 90,000 square feet of space at 15305 Dallas Parkway, Addison, Texas. The lease expires in October 2020.

Our administrative office in the United Kingdom is located in London. We currently lease 2,300 square feet. The lease expires in November 2013.

We also lease approximately 40,000 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 November 2012 and March 2021.

Acquisitions and Development

The following table sets forth information relating to facilities that are currently under construction at December 31, 2011:


Facility Location	Hospital Partner	Type	Expected Opening Date	Number of Operating Rooms
Pittsburgh, Pennsylvania	West Penn	Surgery center	Q1’12		3
St. Louis, Missouri	SSM	Surgery center	Q4’12		3

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 2012. While our history suggests that many of these projects will culminate with the opening 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, in the United States many physician groups develop surgery centers without a corporate partner, and this presents a competitive threat to the Company.

In the United Kingdom, we face competition from both the National Health Service and other privately operated hospitals. Across the United Kingdom, a large number of private hospitals are owned by the four largest hospital operators. In addition, the two largest payors account for over half of the privately insured market. We believe our hospitals can effectively compete in this market due to location and specialty mix of our facilities. Our hospitals also have a higher portion of self-pay business than the overall market. Although self-pay business is not influenced by the private insurers, it is more dramatically affected by a downturn in the economy.

Employees

As of December 31, 2011, we employed approximately 11,000 people, 7,000 of whom are full-time employees and 4,000 of whom are part-time employees. Of these employees, we employ approximately 9,500 in the United States and 1,500 in the United Kingdom. The physicians that affiliate with us and use our facilities are not our employees. However, we generally offer the physicians the opportunity to purchase equity interests in the facilities they use.

Professional and General Liability Insurance

In the United States, 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. In the United Kingdom, we maintain general public insurance, malpractice insurance and property and business interruption 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

United States

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 Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, or the Acts, were signed into law on March 23, 2010 and March 30, 2010, respectively, although 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 Medicare and 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 or will be effective in 2012.

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 prohibit 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 will require 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 will offer

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, or 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 U.S. 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, 2011, 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, 2011, 2010 and 2009, Medicare and Medicaid payments comprised 33%, 31%, and 28%, respectively, of our domestic 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 16% and 2% respectively of our 2011 domestic patient service revenues despite the fact that governmental payors represented a total of 33% of our domestic case volume during 2011.

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 will be 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.

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 be 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 200 surgical facilities in the United States in which we hold an ownership interest are owned by partnerships or limited liability companies, and 197 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; and

(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 internal certification process, which tracks each physician’s 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 fradulent 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 of 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

Section 1877 of the Social Security Act, commonly known as 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 U.S. 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 interest 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 domestic 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 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. 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. A violation of the privacy standards could result in civil money penalties of $100 per incident, up to a maximum of $25,000 per person per year per standard. The final rule also provides 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. 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. 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 2011. 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.

European Union and United Kingdom

The European Commission’s Directive on Data Privacy has been implemented in national EU data protection laws (such as the Data Protection Act of 1998). EU data protection legislation prohibits the transfer of personal data to non-EEA countries that do not meet the European “adequacy” standard for privacy protection. The European Union privacy legislation requires, among other things, the creation of government data protection agencies, registration of processing with those agencies, and in some instances prior approval before personal data processing may begin.

The U.S. Department of Commerce, in consultation with the European Commission, developed a “safe harbor” framework to protect data transferred in trans-Atlantic businesses like ours. The safe harbor provides a way for us to avoid experiencing interruptions in our business dealings in the European Union. It also provides a way to avoid prosecution by European authorities under European privacy laws. By certifying to the safe harbor, we will notify the European Union organizations that we provide “adequate” privacy protection, as defined by European privacy laws, in relation to international data transfers to the USA. To certify to the safe harbor, we must adhere to seven principles. These principles relate to notice, choice, onward transfer or transfers to third parties, access, security, data integrity and enforcement.

We intend to satisfy the requirements of the safe harbor. Even if we are able to formulate programs that attempt to meet these objectives, we may not be able to execute them successfully, which could have a material adverse effect on our revenues, profits or results of operations.

While there is no specific anti-kickback legislation in the United Kingdom that is unique to the medical profession, general criminal legislation prohibits bribery and corruption. Our hospitals in the United Kingdom do not pay commissions to or share profits with referring physicians who invoice patients or insurers directly for fees relating to the provision of their services, although we have explored the possibility of syndicating ownership in certain facilities in the U.K. with physicians. Hospitals in the United Kingdom are required to register with the Healthcare Commission pursuant to the Care Standards Act 2000, as amended by the Health and Social Care (Community Health and Standards) Act 2003, which provides for regular inspections of the facility by representatives of the Healthcare Commission. Beginning April 1, 2009, these registration and inspection functions transferred to the Care Quality Commission established under the Health and Social Care Act 2008. Hospitals are also required to comply with the Private and Voluntary Health Care (England) Regulations 2001. The operation of a hospital without registration is a criminal offense. Under the Misuse of Drugs Act 1971, the supply, possession or production of controlled drugs without a license from the Secretary of State is a criminal offense. The Data Protection Act 1998 requires hospitals to register as “data controllers.” The processing of personal data, such as patient information and medical records, without prior registration or maintaining an inaccurate registration is a criminal offense. We believe that our operations in the United Kingdom are in material compliance with the laws referred to in this paragraph.

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. In the United Kingdom, a significant portion of our revenues result from referrals of patients to our hospitals by the national health system. We have no control over the number of patients that are referred to the private sector annually. 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 Acts’ creation of ACOs 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.

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 ultimate impact of the changes in Medicare reimbursement will depend on a number of factors, including the procedure mix at the centers 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, 2011, we had $1.07 billion of total indebtedness and a total indebtedness to total capitalization percentage ratio of approximately 55%.

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 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 subordinated 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 2012, 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.

In addition, the senior secured U.K. credit facility restricts, subject to certain exceptions, the ability of certain of our subsidiaries existing in the United Kingdom to, among other things:

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incur or permit to exist additional indebtedness;

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incur liens;

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make loans, investments or acquisitions;

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declare dividends or other distributions;

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enter into operating leases;

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engage in mergers, joint ventures or partnerships;

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sell assets;

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alter the business that the U.K. borrowers and their subsidiaries conduct; and

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incur financial lease expenditures.

The indenture governing our senior subordinated notes includes similar restrictions. Our 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 and the senior secured U.K. credit facility requires certain of our subsidiaries in the United Kingdom to comply with certain financial covenants, including a maximum leverage ratio test, a debt service coverage ratio test and an interest coverage ratio test. 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 domestic 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 domestic 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 domestic healthcare facility margins and revenue. Similarly, in the United Kingdom, most patients at hospitals have private healthcare insurance, either paid for by the patient or received as part of their employment compensation. Our hospitals in the United Kingdom contract with healthcare insurers on an annual basis to provide services to insured patients.

As an increasing percentage of domestic 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. Similarly, if we fail to negotiate contracts with healthcare insurers in the United Kingdom on favorable terms, or if we fail to remain on insurers’ networks of approved hospitals, such failure could have a material adverse effect on us. 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 United Kingdom operations are subject to unique risks, any of which, if they actually occur, could adversely affect our results.

We expect that revenue from our United Kingdom operations will continue to account for a significant percentage of our total revenue. Further, we may pursue additional acquisitions in the United Kingdom, which would require substantial financial resources and management attention. This focus of financial resources and management attention could have an adverse effect on our financial results. In addition, our United Kingdom operations are subject to risks such as:

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fluctuations in exchange rates;

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competition with government sponsored healthcare systems;

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unforeseen changes in foreign regulatory requirements or domestic regulatory requirements affecting our foreign operations;

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identifying, attracting, retaining and working successfully with qualified local management;

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difficulties in staffing and managing geographically and culturally diverse, multinational operations;

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the economic conditions in the United Kingdom, which could adversely affect the ability or willingness of employers and individuals in these countries to purchase private health insurance; and

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a higher concentration of self-pay business than our U.S. facilities.

These or other factors could have a material adverse effect on our ability to successfully operate in the United Kingdom and our financial condition and operations.

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-sitting 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:

•

physician ownership of our domestic facilities;

•

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

•

building codes;

•

licensure, certification and accreditation;

•

billing for services;

•

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, both domestically and in the United Kingdom. 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 domestic 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 domestic 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 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 claming 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, that may nevertheless be the subject of a whistleblower lawsuit or may otherwise be challenged or scrutinized by government 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 2012 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 domestic relationships which may result in significant costs to us and divert other resources.

The laws of various domestic 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 domestic 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 $568.0 million at December 31, 2011. 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 domestic 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. In the United Kingdom, we also compete with their national health system in recruiting healthcare professionals. 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, and 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 U.S. allowance for doubtful accounts at December 31, 2011 and 2010, represented approximately 17% and 15% of our U.S. 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 domestic 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 domestic operating entities and may be unable to cause all or a portion of the revenues of these entities to be distributed.

All of the domestic 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 March 2, 2012, there were 109 holders of USPI Group Holdings, Inc. common stock.

Payment of dividends is restricted under our senior secured credit facility and senior secured U.K. credit facility and the indenture governing our senior subordinated 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, 2011, 2010, 2009 and 2008, (Successor), the periods January 1 through April 18, 2007 (Predecessor) and April 19 through December 31, 2007 (Successor), and the consolidated balance sheet data at December 31, 2011, 2010, 2009, 2008 and 2007 (Successor) 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 the U.K. goodwill impairment in 2011, our merger transaction in 2007, loss on early retirement of debt in 2007 and various acquisitions completed during the years presented. In addition, the results of operations of subsidiaries sold by us 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.


	Successor															Predecessor
	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009			Year Ended December 31, 2008			Period from April 19 through December 31, 2007			Period from January 1 through April 18, 2007
Consolidated Statements of Operations Data:
Total revenues	$	609,586		$	576,665		$	593,475		$	615,098		$	435,699		$	185,169
Equity in earnings of unconsolidated affiliates		82,752			69,916			61,771			47,042			23,867			9,906
Operating expenses excluding depreciation and amortization		(521,745	)		(406,266	)		(425,786	)		(431,731	)		(300,937	)		(156,227	)
Depreciation and amortization		(29,462	)		(29,799	)		(31,165	)		(32,305	)		(23,765	)		(11,301	)

Operating income		141,131			210,516			198,295			198,104			134,864			27,547
Other income (expense):
Interest income		583			798			2,741			3,278			3,255			967
Interest expense		(65,308	)		(70,038	)		(70,353	)		(84,916	)		(67,553	)		(9,394	)
Loss on early retirement of debt		—			—			—			—			—			(2,435	)
Other, net		(73	)		708			373			32			72			(67	)

Income from continuing operations before income taxes		76,333			141,984			131,056			116,498			70,638			16,618
Income tax benefit (expense)		(56,729	)		(32,328	)		879			(22,667	)		(14,588	)		(4,433	)

Income from continuing operations		19,604			109,656			131,935			93,831			56,050			12,185
Earnings (loss) from discontinued operations, net of tax		(519	)		(7,003	)		1,453			(1,179	)		(2,146	)		(786	)

Net income		19,085			102,653			133,388			92,652			53,904			11,399
Less: Net income attributable to noncontrolling interests		(69,929	)		(60,560	)		(63,722	)		(55,138	)		(45,175	)		(18,548	)

Net income (loss) attributable to USPI’s common stockholders	$	(50,844	)	$	42,093		$	69,666		$	37,514		$	8,729		$	(7,149	)

Other Data:
Number of facilities operated as of the end of period(a):
Consolidated		65			58			60			62			61			64
Equity method		141			130			109			102			94			85
Management contract only		—			1			—			—			—			—

Total		206			189			169			164			155			149

Cash flows from operating activities	$	184,114		$	169,064		$	180,610		$	142,119		$	109,933		$	47,177


	As of December 31,
	2011			2010			2009			2008			2007
Consolidated Balance Sheet Data:
Working capital (deficit)	$	(121,909	)	$	(100,249	)	$	(113,016	)	$	(38,838	)	$	(12,569	)
Cash and cash equivalents		41,822			60,253			34,890			49,435			76,758
Total assets		2,393,498			2,372,739			2,325,392			2,268,163			2,277,393
Total debt		1,068,456			1,069,826			1,071,528			1,097,947			1,098,062
Noncontrolling interests — redeemable		106,668			81,668			63,865			51,961			52,769
Total equity		767,871			821,151			798,003			806,217			837,100

(a)	Not derived from audited financial statements.

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 in the United States and the United Kingdom. As of December 31, 2011, we operated 206 facilities, consisting of 200 in the United States and six in the United Kingdom. All but three of our 200 U.S. facilities include local physician owners, and 138 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. Both facilities we are currently developing include a hospital partner.

Our U.S. 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. All but six of our facilities are located in the U.S., where we have focused increasingly on adding facilities with hospital partners, which we believe improves the long-term profitability and potential of our facilities.

In the United Kingdom, we operate four hospitals, an oncology clinic and a diagnostic and surgery center which supplement the services provided by the government-sponsored healthcare system. Our patients choose to receive care at private facilities primarily because of waiting lists to receive diagnostic procedures or elective surgery at government-sponsored facilities and pay us either from personal funds or through private insurance, which is offered by some employers as a benefit to their employees. Since acquiring our first two facilities in the United Kingdom in 2000, we have expanded selectively by acquiring a third facility and increasing the capacity and services offered at each facility, including the construction of an oncology clinic near the campus of one of our hospitals. In January 2011, we acquired an equity interest in a diagnostic and surgery center located in Edinburgh, Scotland and acquired a controlling interest in this facility in December 2011. In addition, in December 2011, we acquired 100% of The Claremont Hospital in Sheffield, England.

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 141 of the 206 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 U.S. facility we operate. As discussed in “Results of Operations,” local physicians invest in all but three of our U.S. 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, 2011, we consolidated the financial results of 65 of the facilities we operate and account for 141 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’sAccounting Standards Codification, Topic 810,Consolidationto determine if we are the primary beneficiary of (and therefore should consolidate) any entity whose operations we do not control with voting rights. At December 31, 2011, we consolidated one entity as a result of being its primary beneficiary. See further discussion in Note 5 to the consolidated financial statements.

Accounting for an investment as consolidated versus equity method has no impact on our net income (loss) or stockholder’s 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 2011 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.

Our accounts receivable are comprised of receivables in both the United Kingdom and the United States. As of December 31, 2011, approximately 30% of our total accounts receivable were attributable to our U.K. business. Because our U.K. facilities only treat patients who have a demonstrated ability to pay, our U.K. patients arrange for payment prior to treatment and our bad debt expense in the U.K. is low. In 2011, U.K. bad debt expense was approximately $0.2 million, as compared to our total U.K. revenues of $110.4 million. Our average days sales outstanding in the U.K. were 46 and 38 as of December 31, 2011 and 2010, respectively. The lower DSO in 2010 was related to the receipt of several payments made by large payors on December 31, 2010.

Our U.S. accounts receivable were approximately 70% of our total accounts receivable as of December 31, 2011. In 2011, uninsured or self-pay revenues only accounted for 2% of our U.S. revenue and approximately 6% 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 2011 U.S. revenue and approximately 94% of our accounts receivable balance was comprised of amounts owed from contracted payors. Our U.S. 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 2011 and 2010, our bad debt expense attributable to U.S. revenue was approximately 2%. In addition, as of both December 31, 2011 and 2010, our average days sales outstanding in the U.S. were 33 days. The aging of our U.S. accounts receivable at December 31, 2011 was 63% less than 60 days old, 12% between 60 and 120 days and 25% over 120 days old. Our U.S. bad debt allowance at December 31, 2011 and 2010 represented approximately 17% and 15% of our U.S. 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; our reporting units are defined as our operating segments (United States and United Kingdom). 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 units, 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 each reporting unit which is, in turn, sensitive to our estimates of future revenue growth and margins for these businesses. 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 2011, our U.S. reporting unit’s estimated fair value substantially exceeds its carrying value. However, due primarily to declining market values of businesses similar to our U.K. operations as well as general economic conditions affecting the demand for our services in this market, we recorded a $107.0 million goodwill impairment charge related to our U.K. reporting unit. We believe the decrease in market values of hospitals and other businesses in the U.K. is driven by adverse conditions in U.K. and European capital markets, which have reduced the availability of capital for acquisitions and expansion of existing operations. In late 2011, numerous news reports indicated a growing belief that weakness in the region’s capital markets was deeper and affected more countries than previously thought. Eurozone members agreed to double their commitment to the primary Eurozone bailout fund, pursued stricter budget measures for member states, and sought additional funding from outside the region. Near the end of 2011, ratings agencies downgraded several additional Eurozone members. In addition to the weakening capital markets, our self-pay business, which represents 24% of our U.K. revenues, decreased in the second half of 2011. We believe this is attributable to the persistence of poor overall economic conditions in the U.K., which has 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 represents 24% of the Company’s 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 a patients who must demonstrate ability to pay at the time of service. While fair value estimates have inherent limitations, we believe our estimates to be reasonable at December 31, 2011. After the impairment charge, at December 31, 2011

goodwill associated with our U.K. reporting unit is $113.5 million and goodwill associated with our U.S. reporting unit is $1.1 billion.

The fair value of an indefinite-lived intangible asset is compared to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its 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

USPI 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), USPI 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 meeting 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, 2011, we obtained control of the following entities:


Effective Date	Facility Location	Amount
Investments
December 2011	Sheffield, England(1)	$	23.1 million
December 2011	Edinburgh, Scotland(2)		0.9 million
December 2011	San Diego, California(3)		3.3 million
September 2011	Various(4)		43.4 million
September 2011	Rancho Mirage, California(5)		—
April 2011	Destin, Florida(5)		—

Total		$	70.7 million

(1)	Acquisition of 100% of a hospital in which we previously had no involvement.

(2)	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.

(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.

(4)

We acquired 100% of the equity interests in Titan Health Corporation (Titan), a privately-held, Sacramento, California-based owner and operator of ambulatory surgery centers. Titan has an equity investment in 14 surgery centers, nine of which are located in markets in which we already operate. Local physicians have ownership in all but one of the 14 facilities, and hospital partners have invested in three of these facilities. The purchase price noted above is net of approximately $5.0 million of cash acquired.

(5)

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, including 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.

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
January 2011	Edinburgh, Scotland(7)	1.1 million

		44.0 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.

(8)	A hospital partner obtained ownership in this entity, which is also owned with local physicians. Additionally, this hospital partner is a related party.

(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. HealthMark holds an equity interest in 14 surgery centers, all of which are accounted for under the equity method. Eleven of these facilities are located in markets in which we already operate. Local physicians have ownership in all 14 facilities and by December 31, 2010 and January 31, 2011, hospital partners had invested in nine and ten of these facilities, respectively.

(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


Effective Date	Facility Location	Amount
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. (AES). We also received cash proceeds of $0.6 million related to the sale of a controlling interest in one facility to a hospital partner.

During 2009, we acquired interests in existing surgical facilities from third parties and invested in new facilities that we are developing in partnership with hospital partners and local physicians. Some of these transactions result in our controlling the acquired entity (business combinations). In December 2009, we invested $9.9 million in a subsidiary jointly operated with one of our hospital partners, which the subsidiary used to acquire a controlling interest in a facility in Houston, Texas.

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, 2009, these transactions resulted in a net cash outflow of approximately $47.4 million, which is summarized below:


Effective Date	Facility Location	Amount
Investments
December 2009	Cincinnati, Ohio(1)	$17.7 million
December 2009	Portland, Oregon(2)	11.1 million
December 2009	Nashville, Tennessee(3)	6.1 million
September 2009	Fort Worth, Texas(3)	1.2 million
July 2009	Fort Worth, Texas(3)	1.0 million
May 2009	St. Louis, Missouri(4)	0.9 million
February 2009	Fort Worth, Texas(2)	2.0 million
February 2009	Stockton, California(2)	2.5 million
Various	Various(5)	7.3 million

Total		49.8 million

Sales(6)
December 2009	Dallas, Texas(7)	2.4 million

Total		$47.4 million

(1)	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 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 additional ownership in one of our existing facilities.

(4)

Acquisition of the right to manage a surgical facility in which we previously had no involvement. We have a purchase option to acquire a 20% equity interest in the facility within one year, and after approximately three years, an option to purchase an additional 20% equity interest. We acquired ownership in April 2010.

(5)	Represents the net purchase of additional ownership and equity contributions in various unconsolidated affiliates, including $3.4 million of investment in four de novos.

(6)	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.”

(7)	Sale of a portion of our noncontrolling interest in two facilities to a hospital partner. This hospital partner is a related party (Note 12). We retained a noncontrolling interest in these facilities and continue to operate them.

Additionally, effective January 1, 2009, we acquired noncontrolling equity interests in and rights to manage two surgical facilities in which we previously had no involvement. These facilities are jointly owned with one of our hospital partners and local physicians. The total purchase price of $2.2 million was paid in December 2008.

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, 2009, we purchased and sold equity interests in various consolidated subsidiaries in the amounts of $9.4 million and $7.4 million, respectively. The $9.4 million of purchases includes the partial exercise of our purchase option in one of our existing centers in St. Louis for $7.1 million. 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 $14.3 million decrease to our additional paid-in capital during the year ended December 31, 2009.

Discontinued Operations and Other Dispositions

Sales of consolidated subsidiaries in which we have no continuing involvement are classified as discontinued operations, as are consolidated subsidiaries that are held for sale. The gains or losses on these transactions are classified within discontinued operations in our consolidated statements of operations. Also, we have 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 were as follows:


Date	Facility Location	Proceeds		Gain (Loss)
December 2010	Nashville, Tennessee	$	32.5 million	$	2.8 million
December 2010	Orlando, Florida		—		(2.0 million	)
December 2010	Templeton, California(1)		—		(1.9 million	)
December 2010	Houston, Texas(1)		—		(0.2 million	)

Total		$	32.5 million	$	(1.3 million	)

(1)	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.

Equity method investments that are sold do not represent discontinued operations under GAAP. During the year ended December 31, 2011, we sold six facilities we operated through unconsolidated affiliates and terminated our contracts to manage them. The resulting gains and losses 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)
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. During 2009, we completed sales of investments in six facilities operated through unconsolidated affiliates, including our equity ownership in these entities as well as the related rights to manage the facilities. 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 (Costs)			Loss
December 2009	Oxnard, California	$	0.3 million		$	(0.3 million	)
December 2009	Baton Rouge, Louisiana		(5.1 million	)		(8.2 million	)
September 2009	San Antonio, Texas		—			(2.6 million	)
July 2009	Cleveland, Ohio		1.0 million			—
February 2009	Las Cruces, New Mexico		—			—
February 2009	East Brunswick, New Jersey		0.7 million			(2.6 million	)

Total		$	(3.1 million	)	$	(13.7 million	)

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 and 2009 which are described below, as part of our strategy for partnering with these systems. We sold no controlling interests to hospital partners during 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

December 2009	Dallas, Texas(3)	$	1.2 million	$	0.3 million
July 2009	Oklahoma City, Oklahoma(4)		0.2 million		0.1 million
March 2009	Phoenix, Arizona(5)		0.1 million		(8.2 million	)

Total		$	1.5 million	$	(7.8 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.

(3)	The hospital partner acquired a controlling interest from us in this transaction. Additionally, this hospital partner is a related party.

(4)	We and the other owners of a facility consolidated by us agreed to merge the facility into another entity in which we hold an investment accounted for under the equity method.

(5)

A controlling interest in an entity was sold to a hospital partner. The hospital partner already had a 49% ownership interest in this entity, which owns and manages two surgical facilities, and through the transaction acquired an additional 1.1% interest. The $8.2 million loss was primarily related to the revaluation of our remaining investment in the entity to fair value.

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,
	2011			2010			2009
Net patient service revenues		87	%		88	%		88	%
Management and contract service revenues		12			11			10
Other revenues		1			1			2

Total revenues		100	%		100	%		100	%

As a percentage of total revenues, net patient service revenues decreased to 87% of our total revenues in 2011 from 88% of our total revenues for the years ended December 31, 2010 and 2009. As we execute our strategy of partnering with not-for-profit healthcare systems, more 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 U.S. facilities we account for under the equity method was 71%, 70%, and 64% at December 31, 2011, 2010, and 2009, respectively.

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


	Years Ended December 31,
	2011		2010		2009
Management of surgical facilities	$	61,584	$	53,934	$	46,438
Contract services provided to other healthcare providers		10,529		10,904		11,888

Total management and contract service revenues	$	72,113	$	64,838	$	58,326

The following table summarizes our revenues by operating segment:


	Years Ended December 31,
	2011			2010			2009
United States		82	%		82	%		82	%
United Kingdom		18			18			18

Total		100	%		100	%		100	%

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	2011			2010			2009
Total revenues		100.0	%		100.0	%		100.0	%
Equity in earnings of unconsolidated affiliates		13.6			12.1			10.4
Operating expenses, excluding depreciation and amortization		(85.6	)		(70.5	)		(71.7	)
Depreciation and amortization		(4.8	)		(5.1	)		(5.3	)

Operating income		23.2			36.5			33.4
Interest and other expense, net		(10.6	)		(11.9	)		(11.3	)

Income from continuing operations before income taxes		12.6			24.6			22.1
Income tax benefit (expense)		(9.3	)		(5.6	)		0.1

Income from continuing operations		3.3			19.0			22.2
Earnings (loss) from discontinued operations, net of tax		(0.1	)		(1.2	)		0.2

Net income		3.2			17.8			22.4
Less: Net income attributable to noncontrolling interests		(11.5	)		(10.5	)		(10.7	)

Net income (loss) attributable to USPI’s common stockholder		(8.3	)%		7.3	%		11.7	%

Our business model of partnering with not-for-profit hospitals and physicians results in our accounting for 141 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	2011			2010			2009
Revenues		100.0	%		100.0	%		100.0	%
Operating expenses, excluding depreciation and amortization		(69.8	)		(69.7	)		(69.6	)
Depreciation and amortization		(4.3	)		(4.2	)		(4.3	)

Operating income		25.9			26.1			26.1
Interest expense, net		(2.2	)		(1.9	)		(2.1	)
Other, net		—			—			0.4

Income before income taxes		23.7			24.2			24.4
Income tax expense		(0.5	)		(0.6	)		(0.6	)

Net income		23.2	%		23.6	%		23.8	%

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 added 23 facilities and sold six facilities during 2011 and operated 206 facilities at year-end, up from 189 at the end of 2010. 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 six during 2011.

Our operating results for the year ended December 31, 2011, reflect 6% U.S. same store facility revenue growth as compared to 2010, and our overall business also grew as a result of our operating more facilities in 2011, largely as a result of acquisitions made during the second half of 2010 and our acquisition of Titan in September 2011. Continuing a trend experienced in recent years, our consolidated revenue growth in 2011 (also 6%) was significantly less than our systemwide revenue growth of 13%, 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 more of our facilities under the equity method is a direct result of deploying our primary U.S. 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, 2010 to December 31, 2011, our number of equity method facilities increased from 109 to 141 while our consolidated facility count increased from 60 to 65.

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. These measures were positive in 2011, with same store revenues increasing 6% (equal to our revenue growth of 6%) and systemwide revenues increasing 13%, a product of same store growth plus a net increase of 37 facilities since the beginning of 2010. Overall, these operational factors, together with acquisition and disposal activities, and excluding the U.K. goodwill impairment charge described in “Critical Accounting Policies and Estimates,” resulted in our operating income margin increasing to 40.7% during 2011 as compared to 36.5% in 2010.

Operating income decreased 33% during 2011 as compared to 2010. Operating income was significantly impacted by several amounts not directly related to our facilities’ operating results in 2011, 2010 and 2009. Excluding the amounts shown below, operating income increased 10% and operating income margins increased 150 basis points during 2011. During 2010, excluding the amounts shown below, operating income and margin were up 2% and 180 basis points, respectively.


In Millions	2011			2010		2009
Goodwill impairment	$	107.0		$	—	$	—
Net gains (losses) on deconsolidations, disposals and impairments(1)		(1.5	)		10.1		29.2
De novo start-up losses		4.0			0.1		—
Expense related to previous acquisition and facility purchase option		—			6.0		—
Acquisition costs		2.7			3.3		—
VAT assessment(2)		—			1.0		(1.0	)

Total impact on operating income	$	112.2		$	20.5	$	28.2

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

(2)	U.K. taxing authority awarded us a value-added tax refund in 2009 but reversed its position in 2010. We are appealing the decision.

Also affecting comparability of the years 2009-2011 were the 2009 recognition of a $31.2 million tax benefit reflecting our expected utilization of the majority of its U.S. deferred tax assets and the 2011 accrual of a $13.2 million deferred U.S. income tax liability with respect to our foreign operations. We are now considering potential transactions that could result in a repatriation of our U.K. subsidiaries earnings and as a result no longer qualify for excluding U.S. income tax from our tax provision with respect to our current and prior U.K. earnings.

In addition to our consolidated operating income margin, we supplementally focus on U.S. 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 up 30 basis points in 2011 compared to 2010.

As noted above, we continued to acquire and develop facilities in 2011, acquiring 19 existing facilities and opening four newly constructed facilities. Our development strategy continues to focus most heavily on markets in which we have a significant presence with prominent local physicians and often a hospital partner, but we also invest capital selectively in new U.S. markets and in our U.K. operations, including the acquisition of two U.K. facilities in 2011. Pursuing this strategy also leads us to deconsolidate or divest of centers from time to time, as we did in 2009, 2010 and 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 141 of our 206 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 65 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,
	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	$	528,563		$	1,527,069		$	504,765		$	1,322,393		$	23,798		$	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		609,586			1,538,030			576,665			1,329,041			32,921			208,989
Equity in earnings of unconsolidated affiliates		82,752			—			69,916			—			12,836			—
Operating expenses:
Salaries, benefits, and other employee costs		165,083			360,519			156,213			309,698			8,870			50,821
Medical services and supplies		99,559			360,148			97,940			310,770			1,619			49,378
Other operating expenses		98,246			314,768			99,075			273,649			(829	)		41,119
General and administrative expenses		43,710			—			38,202			—			5,508			—
Provision for doubtful accounts		9,648			37,899			8,458			31,396			1,190			6,503
Goodwill impairment		107,028			—			—			—			107,028			—
Net (gains) losses on deconsolidations, disposals and impairments		(1,529	)		(309	)		6,378			1,025			(7,907	)		(1,334	)
Depreciation and amortization		29,462			66,608			29,799			55,216			(337	)		11,392

Total operating expenses		551,207			1,139,633			436,065			981,754			115,142			157,879

Operating income		141,131			398,397			210,516			347,287			(69,385	)		51,110
Interest income		583			382			798			378			(215	)		4
Interest expense		(65,308	)		(34,101	)		(70,038	)		(26,008	)		4,730			(8,093	)
Other, net		(73	)		(15	)		708			(200	)		(781	)		185

Total other expense, net		(64,798	)		(33,734	)		(68,532	)		(25,830	)		3,734			(7,904	)

Income from continuing operations before income taxes		76,333			364,663			141,984			321,457			(65,651	)		43,206
Income tax (expense) benefit		(56,729	)		(8,367	)		(32,328	)		(7,562	)		(24,401	)		(805	)

Income from continuing operations		19,604			356,296			109,656			313,895			(90,052	)		42,401
Earnings (loss) from discontinued operations, net		(519	)		—			(7,003	)		—			6,484			—

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				$	82,752					$	69,916					$	12,836


	Year Ended December 31,
	2010						2009						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	$	504,765		$	1,322,393		$	523,899		$	1,171,242		$	(19,134	)	$	151,151
Management and contract service revenues		64,838			—			58,326			—			6,512			—
Other income		7,062			6,648			11,250			6,872			(4,188	)		(224	)

Total revenues		576,665			1,329,041			593,475			1,178,114			(16,810	)		150,927
Equity in earnings of unconsolidated affiliates		69,916			—			61,771			—			8,145			—
Operating expenses:
Salaries, benefits, and other employee costs		156,213			309,698			160,278			277,053			(4,065	)		32,645
Medical services and supplies		97,940			310,770			99,510			271,663			(1,570	)		39,107
Other operating expenses		99,075			273,649			89,347			243,241			9,728			30,408
General and administrative expenses		38,202			—			38,769			—			(567	)		—
Provision for doubtful accounts		8,458			31,396			8,720			28,528			(262	)		2,868
Net (gains) losses on deconsolidations, disposals and impairments		6,378			1,025			29,162			(7	)		(22,784	)		1,032
Depreciation and amortization		29,799			55,216			31,165			50,251			(1,366	)		4,965

Total operating expenses		436,065			981,754			456,951			870,729			(20,886	)		111,025

Operating income		210,516			347,287			198,295			307,385			12,221			39,902
Interest income		798			378			2,741			456			(1,943	)		(78	)
Interest expense		(70,038	)		(26,008	)		(70,353	)		(24,850	)		315			(1,158	)
Other		708			(200	)		373			4,572			335			(4,772	)

Total other expense, net		(68,532	)		(25,830	)		(67,239	)		(19,822	)		(1,293	)		(6,008	)

Income from continuing operations before income taxes		141,984			321,457			131,056			287,563			10,928			33,894
Income tax benefit (expense)		(32,328	)		(7,562	)		879			(6,860	)		(33,207	)		(702	)

Income from continuing operations		109,656			313,895			131,935			280,703			(22,279	)		33,192
Earnings (loss) from discontinued operations		(7,003	)		—			1,453			—			(8,456	)		—

Net income		102,653		$	313,895			133,388		$	280,703			(30,735	)	$	33,192

Less: Net income attributable to noncontrolling interests		(60,560	)					(63,722	)					3,162

Net income attributable to USPI	$	42,093					$	69,666					$	(27,573	)

USPI’s equity in earnings of unconsolidated affiliates				$	69,916					$	61,771					$	8,145

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


	Years Ended December 31,
	2011			2010			2009
Long-term debt of USPI’s unconsolidated facilities	$	440,582		$	330,578		$	271,781
USPI’s equity in earnings of unconsolidated affiliates		82,752			69,916			61,771
USPI’s imputed weighted average ownership percentage based on affiliates’ pretax income(1)		22.7	%		21.7	%		21.5	%
USPI’s imputed weighted average ownership percentage based on affiliates’ debt(2)		24.2	%		23.8	%		25.4	%
Unconsolidated facilities operated at period end		141			130			109

(1)

Our weighted average percentage ownership in our unconsolidated affiliates is calculated as USPI’s equity in earnings of unconsolidated affiliates divided by the total net income of unconsolidated affiliates for each respective period. This is a non-GAAP measure but management believes it provides further useful information about USPI’s 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 USPI held in the affiliate as of the end of each respective period, divided by the total debt of all of the unconsolidated affiliates as of the end of each respective period. This is a non-GAAP measure but management believes it provides further useful information about USPI’s 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, 2011 increased $23.8 million compared to the prior year, and the net patient service revenues of our unconsolidated affiliates increased $204.7 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 $42.4 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 $12.8 million, which represents nearly 35% of the increase in our operating income from 2010 to 2011. Our consolidated net patient service revenues for the year ended December 31, 2010 decreased $19.1 million compared to the prior year, and the net patient service revenues of our unconsolidated affiliates increased $151.2 million. The increase in revenues of these unconsolidated affiliates, net of their expenses, led to the affiliates earning $33.2 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 $8.1 million, which represents nearly 67% of the increase in our operating income from 2009 to 2010.

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 U.S. surgical facilities we operate is as follows:


	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Unconsolidated facilities(1)		22.7	%		21.7	%		21.5	%
Consolidated facilities(2)		44.1	%		46.7	%		48.1	%
Total(3)		28.2	%		28.2	%		29.4	%

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

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

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

Our average ownership interest for each group of facilities is determined by many factors, including the ownership levels we negotiate in our acquisition and development activities, the relative performance of facilities in which we own percentages higher or lower than average, and other factors. As described earlier, our increased focus on partnering our facilities with hospital partners in addition to physicians generally leads to our

accounting for more facilities under the equity method (unconsolidated), and we have moved three facilities from consolidated to unconsolidated during 2010 and four facilities during 2009. Accordingly, our consolidated financial statements show decreases in revenues and most expense line items compared to the respective prior year. However, since our average ownership in our facilities, as shown in the table above, did not significantly change from the respective prior year, our success in growing our facilities’ profits (whether consolidated or unconsolidated) translated to increases in our operating income in 2011, 2010 and 2009.

While our ownership interests remained higher for consolidated facilities than for unconsolidated facilities, our average ownership in our consolidated facilities decreased the past two years. During 2011 the decrease was due primarily to the levels of ownership we negotiated in our acquisition and development activities being lower than our overall average. During 2010 the decrease was caused primarily by our earnings in one market, in which our ownership is higher than average, decreasing more than our other markets.

Revenues

Our consolidated net revenues increased approximately 6% during the year ended December 31, 2011, as compared to the year ended December 31, 2010. The table below quantifies several significant items impacting year over year growth.


	Year Ended December 31, 2011
	USPI as Reported Under GAAP			Unconsolidated Affiliates
Total revenues, year ended December 31, 2010	$	576,665		$	1,329,041
Add: revenue from acquired facilities and de novos		17,010			105,820
Less: revenue of disposed facilities		—			(12,364	)
Less: revenue of deconsolidated facilities		(13,569	)		13,569
Impact of exchange rate		3,728			—

Adjusted base year		583,834			1,436,066
Increase from operations		16,860			97,652
Non-facility based revenue		8,892			4,312

Total revenues, year ended December 31, 2011	$	609,586		$	1,538,030

The reason for the discrepancy between revenue growth and income growth is the increased proportion of our business being conducted through unconsolidated affiliates. 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 18%, 13% and 31% in 2011, 2010 and 2009, 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 rates more commensurate with our overall income growth: 13%, 7% and 9% during the years ended December 31, 2011, 2010 and 2009, respectively. Acquisitions were a significant component of the 2011 increase in revenues at consolidated and unconsolidated facilities. As shown above, acquisitions added $17.0 million and $105.8 million to revenues for consolidated and unconsolidated affiliates, respectively. Revenue also increased due to operations for both types of facilities driven by modest volume growth and a shift to more complex surgical cases and the resulting increased revenue per case. The stronger British pound as compared to the U.S. dollar increased consolidated revenues approximately $3.7 million for the year ended December 31, 2011.

Facility Growth

While systemwide revenue growth was partially driven by acquisitions and development of new facilities, another significant component continued to be the results of facilities that have been open for more than one year (same store facilities). This group of facilities experienced revenue growth of 6% and 5% during 2011 and 2010, respectively. The growth in these facilities was driven more by increases in net revenue per case than by increases in volume. While some of this shift reflects increases in rates we negotiate with payors, we believe a more significant portion of the increase is driven by the type of cases we performed, which continue to shift to more complex cases on average. Our U.S. case volumes increased 1% during 2011 as compared to flat case growth in 2010. 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 volume.

Our United Kingdom facilities’ revenues, when measured in local currency (or constant exchange rate), increased 4% during 2011 as compared to 2010. Our U.K. facilities admissions decreased due largely to a decline in cosmetic surgery cases and a decrease in self-pay business, but the overall impact on revenues was more than offset by a shift to higher-paying cases. While self-pay business represents only 2% of our U.S. business, it represents 24% of our U.K. business. Self-pay business is generally considered more susceptible to changes in general economic conditions, as the cost of care is borne entirely by the patient rather than shared with private insurers or borne by the National Health Service. The strengthening of the British Pound versus the U.S. dollar caused an increase (approximately $3.7 million) in reported revenues during 2011 as compared to 2010.

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


	Years Ended December 31,
	2011			2010			2009
United States facilities:
Net revenue		6	%		5	%		8	%
Surgical cases		1	%		—	%		2	%
Net revenue per case(1)		5	%		5	%		5	%
United Kingdom facilities:
Adjusted admissions		(2	)%		(5	)%		(5	)%
Net revenue using actual exchange rates		7	%		(2	)%		(14	)%
Net revenue using constant exchange rates(2)		4	%		(1	)%		2	%
All same store facilities:
Net revenue using actual exchange rates		6	%		5	%		6	%

(1)

Our overall domestic same store growth in net revenue per case for 2011 was favorably impacted by the 6% growth at our thirteen same store surgical hospitals, which on average perform more complex cases and thus earn a higher average net revenue per case than ambulatory surgery centers. The net revenue per case growth at our ambulatory surgery centers was 3% during 2011.

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

Joint Ventures with Not-for-Profit Hospitals

Our acquisition and development activities continue to emphasize expanding our relationships with existing hospital partners and identifying new hospital partners. We expand our relationships with hospital partners in a variety of ways, including acquiring facilities with them, constructing new facilities (de novos) on or near their campuses, and adding them as equity investors to facilities we already own with local physicians.

During 2009 and 2010 this strategy translated to our operating more hospital-partnered facilities and fewer facilities without a hospital partners. During 2011, we completed the majority of our acquisition activity during the last four months of the year, and initially fewer than half of the acquired facilities include hospital partners as investors. We believe there are opportunities to add hospital partners to some of these facilities in the future.

Both facilities under construction at December 31, 2011, involve a hospital partner, and we continue to explore affiliating more facilities with hospital partners, especially when we already have other hospital partnered facilities in a given market.

The following table summarizes the facilities we operated as of December 31, 2011, 2010, and 2009:


	2011			2010			2009
United States facilities(1):
With a hospital partner		138			132			109
Without a hospital partner		62			53			56

Total U.S. facilities		200			185			165
United Kingdom facilities		6			4			4

Total facilities operated		206			189			169

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

Total increase in number of facilities		17			20			5

(1)	At December 31, 2011, physicians own a portion of all but three of these facilities.

(2)

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). During 2009, we sold our ownership interests in facilities in East Brunswick, New Jersey; Cleveland, Ohio; San Antonio, Texas; Baton Rouge, Louisiana; and Oxnard, California. We also merged one of our surgery centers into one of our surgical hospitals in Oklahoma.

Facility Operating Margins

Same store U.S. facility operating margins increased 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. 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, less unfavorable) than the change experienced by the facilities that do not have a hospital partner. The facilities partnered with a hospital partner are, on average, younger than our other facilities. Younger facilities’ margins grow more rapidly on average than more mature facilities, which generally have higher margins but with less growth. The pattern of our acquisition and development activity can also affect this relationship over time.

In 2010, our U.S. 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 facility 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.

In 2009, same store U.S. facility operating margins increased 250 basis points, largely driven by continued revenue growth together with cost saving measures introduced during 2009 at our facilities. While the improvement was broad-based, it was particularly notable in the group of facilities jointly owned with hospital partners, the margins of which improved 340 basis points. The margins of facilities we operate without a hospital partner did not fare as well, but were up 20 basis points as compared to the year ended December 31, 2008. We believe this disparity in recent years generally reflects the benefits of our increased focus on developing some of our larger markets, where we more often have a hospital partner.

Our U.K. facilities, which including a facility acquired at year-end, comprise six of our 206 facilities at December 31, 2011, experienced a decrease in overall facility margins in 2011 as compared to 2010, largely due to a reduction in the NHS and self-pay business described above.

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


	Year Ended December 31,
	2011			2010			2009
United States facilities:
With a hospital partner		80	bps		(40	) bps		340	bps
Without a hospital partner		(110	)		(120	)		20
Total U.S. facilities		30			(60	)		250
United Kingdom facilities(2)		(330	) bps		(110	) bps		(160	) bps

(1)

Operating margin is calculated as operating income divided by total revenues. This table aggregates all of the same store facilities we operate using 100% of their results. This does not represent the overall margin for USPI’s operations in either the U.S. or U.K. because we have a variety of ownership levels in the facilities we operate, and facilities open for less than a year are excluded from same store calculations.

(2)

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

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

As discussed more fully in “Revenues,” our consolidated revenues increased by $32.9 million, or 5.7%, to $609.6 million for the year ended December 31, 2011 from $576.7 million for the year ended December 31, 2010. Slightly more than half of the increase, or approximately $16.9 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 the favorable impact of a weaker U.S. dollar, and 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 $12.8 million, or 18.4%, to $82.8 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 $4.4 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 decreased $69.4 million, or 33.0%, to $141.1 million for the year ended December 31, 2011 from $210.5 million for the year ended December 31, 2010, and decreased as a percentage of revenues to 23.2% from 36.5%, 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 10% and operating margins improved 150 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 $4.5 million to $64.7 million for the year ended December 31, 2011 from $69.2 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. In addition, 2010 was negatively affected by a $0.8 million interest expense related to a UK VAT assessment as the British tax authority reclaimed the amount.

Provision for income taxes was $56.7 million for the year ended December 31, 2011 as compared $32.3 million for the year ended December 31, 2010. During 2011, our effective tax rate was significantly increased by the U.K. goodwill impairment, which is not deductible in the computation of income tax. In addition, at December 31, 2011, we no longer qualified for excluding U.S. income tax from its provision with respect to our U.K. earnings and accordingly accrued a $13.2 million deferred tax liability.

Total loss from discontinued operations was $0.5 million for the year ended December 31, 2011 as compared to a loss of $7.0 million for the year ended December 31, 2010. 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 $90.1 million, or 82.1%, to $19.6 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, or 63.8% 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.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

As discussed more fully in “Revenues,” our consolidated revenues decreased by $16.8 million, or 2.8%, to $576.7 million for the year ended December 31, 2010 from $593.5 million for the year ended December 31, 2009 as our business continued to shift to unconsolidated affiliates, whose revenues increased 13% but are not included in our consolidated revenues. The number of facilities we account for under the equity method increased by 21 from December 31, 2009 to December 31, 2010; the number of facilities we consolidate decreased by two during this period.

Equity in earnings of unconsolidated affiliates increased by $8.1 million, or 13.2%, to $69.9 million for the year ended December 31, 2010 from $61.8 million for the year ended December 31, 2009. Excluding an impairment charge we recorded on an equity method investment during 2010 of $3.7 million, our equity in earnings increased 19%, driven by the growth in revenues of our unconsolidated affiliates.

Operating income increased 6% year-over-year and was significantly impacted by several items described in “Executive Summary,” the most significant of which were losses on deconsolidations, disposals, and impairments, which decreased $22.8 million to $6.4 million for the year ended December 31, 2010 from $29.2 million for the year ended December 31, 2009. During 2010, we recorded impairment charges of $5.9 million on six indefinite lived management contracts. These impairment charges were partially offset by a net gain on the sale or deconsolidation of various facilities of approximately $1.7 million. In 2009, we recorded approximately $21.4 million in losses on the sale or deconsolidation of various facilities, impairment charges totaling $5.7 million related to three management contracts and $2.1 million of termination fees related to two acquisitions we made in 2007. We elected not to purchase additional ownership in these facilities and expensed the termination fee. Operating expenses, like our revenues, were also reduced due to deconsolidations. This was the primary factor in the $1.4 million, or 4.3%, decrease in depreciation and amortization to $29.8 million for the year ended December 31, 2010 from $31.2 million for the year ended December 31, 2009.

Interest expense, net of interest income, increased $1.6 million to $69.2 million for the year ended December 31, 2010 from $67.6 million for the year ended December 31, 2009. While market interest rates and our debt balance were lower in 2010 than 2009, the $1.6 million increase can primarily be attributed to a $0.8 million interest income on a settlement we received in the second quarter of 2009 from the British tax authority related to the VAT noted above, whereas in the first quarter of 2010, we recorded a $0.8 million expense as the British tax authority reclaimed the amount.

Provision for income taxes was an income tax expense of $32.3 million for the year ended December 31, 2010 as compared to a $0.9 million benefit for the year ended December 31, 2009. The benefit in 2009 was primarily the result of our reversing the valuation allowance ($31.2 million) against a majority of our U.S. deferred tax assets. During the third quarter of 2009, we determined it was more likely than not that we would generate taxable income to recover these assets in future periods. Our effective tax rate for the year ended December 31, 2010 was approximately 40%. Our effective tax rate, excluding the benefit of reversing the deferred tax asset allowance, was approximately 45% for the year ended December 31, 2009.

Total (loss) gain from discontinued operations was a loss of $7.0 million for the year ended December 31, 2010 as compared to earnings of $1.5 million for the year ended December 31, 2009. The $7.0 million represents loss from discontinued operations of $0.2 million and a loss on disposal of discontinued operations of $6.8 million. We sold two entities in 2010 and designated two others as held for sale. 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 was $102.7 million for the year ended December 31, 2010 as compared to $133.4 million for the year ended December 31, 2009. While our surgical facilities earned more in 2010 than 2009, the factors described above, such as the 2009 tax benefit and 2010 loss on discontinued operations, resulted in our net income decreasing compared to 2009.

Net income attributable to noncontrolling interests decreased $3.2 million, or 5.0%, to $60.6 million for the year ended December 31, 2010 from $63.7 million for the year ended December 31, 2009, as a result of more of our profits coming from unconsolidated affiliates and less from consolidated subsidiaries, as discussed above.

Liquidity and Capital Resources


	Years Ended December 31,
	2011			2010			2009
Net cash provided by operating activities	$	184,114		$	169,064		$	180,610
Net cash used in investing activities		(137,355	)		(72,040	)		(85,829	)
Net cash used in financing activities		(64,689	)		(73,999	)		(111,247	)

Overview

At December 31, 2011, we had cash and cash equivalents totaling $41.8 million, as compared to $60.3 million at December 31, 2010. A more detailed discussion of changes in our liquidity follows.

Operating Activities

Our cash flows from operating activities were $184.1 million, $169.1 million, and $180.6 million in the years ended December 31, 2011, 2010, and 2009, respectively. Operating cash flows in 2011 increased $15.1 million, or 8.9%, 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. Operating cash flows in 2010 were lower than 2009 by $11.5 million, or 6.4%, primarily due to the Company utilizing U.S. net operating loss carryforwards to settle the bulk of its U.S. federal tax liability in 2009.

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 2011, 2010 and 2009, we did not make any significant changes to our payment timing to our vendors.

Our net working capital deficit was $121.9 million at December 31, 2011 as compared to a net working capital deficit of $100.2 million in the prior year. The overall negative working capital position at December 31, 2011 and 2010 is primarily the result of $139.6 million and $116.1 million due to affiliates associated with our cash management system being employed for our unconsolidated facilities. As discussed further below, we have sufficient availability under our revolving credit agreement, together with our expected future operating cash flows, to service our obligations.

Investing Activities

During the years ended December 31, 2011, 2010 and 2009, respectively, our net cash used for investing activities was $137.4 million, $72.0 million and $85.8 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 senior secured credit facility.

Acquisitions and Sales

During the year ended December 31, 2011, we invested $103.4 million, net of cash acquired, for the purchase and sales of businesses and investments in unconsolidated affiliates. These 2011 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 2011	Sheffield, England	$	23.1million
December 2011	Edinburgh, Scotland		2.0 million
December 2011	San Diego, California		3.3 million
December 2011	Hackensack, New Jersey		23.7 million
September 2011	Various (Titan and Titan buy-ups)		57.7 million
March 2011	Plano, Texas		1.9 million
March 2011	Oklahoma City, Oklahoma		1.2 million
January 2011	Dallas, Texas		1.3 million
January 2011	Rancho Mirage, California		0.5 million
Various	Various		4.2 million

			118.9 million
Sales
December 2011	Caldwell, Idaho		1.0 million
September 2011	Cleveland, Ohio		1.2 million
August 2011	Dallas, Texas		1.6 million
June 2011	Lawton, Oklahoma		1.7 million
May 2011	Flint, Michigan		1.1 million
May 2011	Fort Worth, Texas		0.7 million
April 2011	Richmond, Virginia		0.6 million
February 2011	Templeton, California		0.4 million
February 2011	Houston, Texas		1.5 million
Various	Various		5.7million

			15.5million

Total		$	103.4 million

During the years 2010 and 2009, we invested $33.3 million and $59.5 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, 2011, we added $50.5 million in property and equipment, which includes $17.0 million of property and equipment acquired under capital lease arrangements. Approximately $31.8 million of the property and equipment purchases related to expansion and development projects, and the remaining $18.7 million primarily represents purchase of equipment at existing facilities. During the year ended December 31, 2010, approximately $21.3 million of the property and equipment purchases related to expansion and development projects, and the remaining $18.7 million primarily represents purchase of equipment at

existing facilities. We added $29.7 million of property and equipment in the year 2009, of which $14.7 million related to expansion and development projects and the remaining $15.0 million related to purchases at existing facilities.

At December 31, 2011, we and our affiliates had two surgical facilities under construction in the United States. Costs to develop a short-stay surgical facility, which include construction, equipment and initial operating losses, vary depending on the range of specialties that will be undertaken at the facility. Our affiliates have budgeted a total of approximately $11.0 million for development costs for the projects under construction. Development costs are typically funded with approximately 50% debt at the entity level with the remainder provided as equity from the owners of the entity. Additionally, as each of these facilities becomes operational, each will have obligations associated with debt and capital lease arrangements.

Generally, we estimate that we will add 15 to 20 facilities per year through a combination of acquisition and de novo projects. This strategy will continue to require substantial capital resources, which for this number of facilities we would estimate to range from $80.0 million to $110.0 million per year over the next three years. If we identify strategic acquisition opportunities that are larger than usual for us, then these amounts could increase greatly.

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 $64.7 million, $74.0 million and $111.2 million in the years ended December 31, 2011, 2010 and 2009, 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. Cash distributions to noncontrolling interests (the other investors in the facilities we operate) are also a large component of our financing activities and were $67.9 million, $59.0 million and $63.6 million in the years ended December 31, 2011, 2010 and 2009, respectively.

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

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.

Dividend Payment

On December 1, 2009, our board of directors declared and we paid a special cash dividend in the amount of $88.6 million on our common stock. The proceeds of the dividend were used by USPI Holdings, Inc., our sole stockholder, to pay a special cash dividend on its common stock. In turn, the proceeds were used by USPI Group Holdings, Inc., the sole stockholder of USPI Holdings, Inc., to pay amounts currently accrued on its preferred stock.

Debt

Senior secured credit facility

The senior secured credit facility (credit facility) provides for borrowings of up to $615.0 million (with a $150.0 million accordion feature described below), consisting of (1) an $85.0 million revolving credit facility with a maturity of six years, including a $20.0 million letter of credit sub-facility, and a $20.0 million swing-line loan sub-facility; and (2) a $530.0 million term loan facility (including a $100.0 million delayed draw facility) with a maturity of seven years. We have utilized the availability under the $530.0 million term loan facility and are making scheduled quarterly principal payments. The term loans require principal payments each year in an amount of $4.3 million per annum in equal quarterly installments and $0.2 million per quarter with respect to the delayed draw facility with the remaining balance maturing in 2014. No principal payments are required on the revolving credit facility until its maturity in 2013.

We may request additional tranches of term loans or additional commitments to the revolving credit facility in an aggregate amount not exceeding $150.0 million, subject to certain conditions. Interest rates on the credit facility are based on LIBOR plus a margin of 2.00% to 2.25%. Additionally, we currently pay 0.50% per annum on the daily-unused commitment of the revolving credit facility. We also currently pay a quarterly participation fee of 2.13% per annum related to outstanding letters of credit. At December 31, 2011, we had $519.2 million of debt outstanding under the credit facility at a weighted average interest rate of approximately 2.3%. At December 31, 2011, we had $67.4 million available for borrowing under the revolving credit facility, representing the facility’s $85.0 million capacity, net of the $16.0 million outstanding balance at December 31, 2011 and $1.6 million of outstanding letters of credit.

The credit facility is guaranteed by USPI Holdings, Inc. and its current and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions, and borrowings under the credit facility are secured by a first priority security interest in all real and personal property of these subsidiaries, as well as a first priority pledge of our capital stock, the capital stock of each of our wholly owned domestic subsidiaries and 65% of the capital stock of certain of our wholly-owned foreign subsidiaries. Additionally, the credit facility contains various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. We believe we were in compliance with these covenants as of December 31, 2011.

Senior subordinated notes

Also in connection with the merger, we issued $240.0 million of 8⁷/8% senior subordinated notes and $200.0 million of 9¹/4%/10% senior subordinated toggle notes (together, the Notes), all due in 2017. Interest on the Notes is payable on May 1 and November 1 of each year, which commenced on November 1, 2007. All interest payments on the senior subordinated notes are payable in cash. The initial interest payment on the toggle notes was payable in cash. For any interest period after November 1, 2007 through November 1, 2012, we may pay interest on the toggle notes (i) in cash, (ii) by increasing the principal amount of the outstanding toggle notes or by issuing payment-in-kind notes (PIK Interest) or (iii) by paying interest on half the principal amount of the toggle notes in cash and half in PIK Interest. PIK Interest is paid at 10% and cash interest is paid at 9¹/4% per annum. To date, we have paid all interest payments in cash. During 2009, we repurchased approximately $2.5 million in principal amount of the senior subordinated toggle notes in the open market. At December 31, 2011, we had $437.5 million of Notes outstanding. The Notes are unsecured senior subordinated obligations of our Company; however, the Notes are guaranteed by all of our current and future direct and indirect wholly-owned domestic subsidiaries. Additionally, the Notes contain various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. We believe we were in compliance with these covenants as of December 31, 2011.

On or after May 1, 2012, we may redeem all or a part of the Notes at a redemption price (expressed as a percentage of principal amount) plus accrued and unpaid interest. The redemption prices range from approximately 104% in 2012 to 100% in 2015 and thereafter.

United Kingdom borrowings

In April 2007, we entered into an amended and restated credit agreement, which covered our existing overdraft facility and term loan facility (Term Loan A). This agreement provides a total overdraft facility of £2.0 million, and an additional Term Loan B facility of £10 million, which was drawn in April 2007. In March 2008, we further amended our U.K. Agreement to provide for a £2.0 million Term Loan C facility. We borrowed the entire £2.0 million in March 2008 to acquire property adjacent to one of our hospitals in London. In September 2011, we renewed our overdraft facility and added a new £10.0 million revolving credit facility to assist in funding the expansion of Holly House hospital. Under the renewal, we must pay a commitment fee of 0.5% per annum on the unused portion of the overdraft facility and 1.10% per annum on the unused revolving credit facility each quarter. Excluding availability on the overdraft facility and revolving credit facility, no additional borrowings can be made under the Term Loan A, B or C facilities. At December 31, 2011, we had £32.7 million ($50.9 million) outstanding under the U.K. credit facility, including £4.0 million ($6.2 million) on the revolving credit facility at a weighted average interest rate of approximately 2.7%.

Interest on the borrowings is based on a three-month or six-month LIBOR, or other rate as the bank may agree, plus a margin of 1.25% to 1.50%. Quarterly principal payments are required on the Term Loan A, which began in June 2007, and approximate $4.7 million in the first and second year, $6.2 million in the third and fourth year; $7.8 million in the fifth year, with the remainder due in the sixth year after the April 2007 closing. The Term Loan B does not require any principal payments prior to maturity and matures in 2013. The Term Loan C requires quarterly principal payments of approximately £0.1 million ($0.2 million), which began in June 2008 and continue through its maturity date of February 2013 when the final payment of £0.5 million ($0.8 million) is due. No principal payments are due on the revolving credit facility until its maturity in February 2013. The borrowings are guaranteed by certain of our subsidiaries in the United Kingdom with a security interest in various assets, and a pledge of the capital stock of the U.K. borrowers and the capital stock of certain guarantor subsidiaries. The Agreement contains various restrictive covenants, including financial covenants that limit our ability and the ability of certain U.K. subsidiaries to borrow money or guarantee other indebtedness, grant liens on our assets, make investments, use assets as security in other transactions, pay dividends, enter into leases or sell assets or capital stock. We believe we were in compliance with these covenants as of December 31, 2011.

We also have the ability to borrow under a capital asset finance facility in the U.K. of up to £2.5 million ($3.9 million). We borrowed against the facility in June 2010 and November 2010 and have £1.1 million ($1.7 million) outstanding at December 31, 2011. The terms of the borrowings require monthly principal and interest payments over 48 months. We have pledged capital assets as collateral against these borrowings.

Purchases and Sales of Noncontrolling Interests

During 2011, 2010 and 2009, we purchased and sold a net of $0.5 million, $1.1 million and $2.1 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.

Contractual Cash Obligations

Our contractual cash obligations as of December 31, 2011 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:
Senior secured credit facility(1)	$	519,180	$	5,265	$	513,915	$	—		$	—
Senior subordinated notes, due 2017(1)		240,000		—		—		—			240,000
Senior subordinated toggle notes, due 2017(1)		197,515		—		—		—			197,515
U.K. credit facility(1)		50,864		10,392		40,472		—			—
Other debt at operating subsidiaries(1)		30,185		5,683		11,618		7,315			5,569
Interest on long-term debt obligations(2)		245,512		52,849		95,617		79,984			17,062
Capitalized lease obligations(3)		51,264		6,962		11,052		7,305			25,945
Operating lease obligations		79,481		14,724		23,449		16,566			24,742

Total contractual cash obligations	$	1,414,001	$	95,875	$	696,123	$	111,170		$	510,833
									��

(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, 2011 rates applicable to each debt instrument and also gives effect to the interest rate swap designated in a cash flow hedging relationship against a portion of the U.K. credit facility.

(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 $56.9 million at December 31, 2011, 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 51% at December 31, 2011. 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.

A £19.0 million ($29.5 million) refurbishment and extension program has begun at our Holly House hospital in the U.K. and is due to be completed by late 2012. This expansion will provide three new operating rooms, an endoscopy suite, ten additional patient rooms, an eight bed day unit and six additional physician offices.

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 141 of our 206 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, 2011, the total debt on the balance sheets of our unconsolidated affiliates was approximately $440.6 million. Our average percentage ownership, weighted based on the individual affiliate’s amount of debt, of these unconsolidated affiliates was approximately 24% at December 31, 2011. USPI or one of its wholly-owned subsidiaries had collectively guaranteed $42.8 million of the $440.6 million in total debt of our unconsolidated affiliates as of December 31, 2011. In addition, our unconsolidated affiliates have obligations under operating leases, of which USPI or a wholly owned subsidiary had guaranteed $12.5 million as of December 31, 2011. Of the total $55.3 million of guarantees related to unconsolidated affiliates, approximately $8.7 million represents guarantees of obligations of four facilities which have been sold. We have full recourse to the buyers with respect to the $8.7 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 $60.0 million, $52.1 million, and $45.2 million in 2011, 2010, and 2009, 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 and 2009. We had no such transactions in 2010. We believe 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
December 2009	Dallas, Texas(2)	$	1.2 million	$	0.3 million
December 2009	Fort Worth, Texas(3)		2.4 million		0.1 million

Total		$	3.6 million	$	0.4 million

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

(2)	Baylor acquired a controlling interest in a facility from us, which transferred control of the facility to Baylor. We now account for this facility under the equity method of accounting.

(3)	Baylor acquired a controlling interest in two facilities. We continue to account for these facilities under the equity method of accounting.

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, 2011, 2010 and 2009. 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, 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 the accompanying consolidated balance sheet. At December 31, 2010, we had approximately $4.5 million accrued related to such management fee, of which $0.8 million is included in other current liabilities and $3.7 million is included in other long term liabilities in the accompanying 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. The interest rate swaps serve to stabilize our cash flow and expense but ultimately may cost more or less in interest than if we had carried all of our debt at a variable rate over the swap term.

As further discussed in Note 10 to the accompanying consolidated financial statements, in order to manage interest rate risk related to a portion of our variable-rate U.K. debt, we entered into an interest swap effective March 31, 2011 for a notional amount of £18.0 million ($28.0 million). The interest rate swap requires us to pay 1.45% and to receive interest at a variable rate of three-month GBP-LIBOR (currently 1.1%), and is reset quarterly. No collateral is required under the interest rate swap agreement. As of December 31, 2011, the rate under our swap agreement was unfavorable compared to the market. The swap matures in June 2012.

At December 31, 2011, the fair value of U.K. interest rate swap was a current liability of approximately $0.1 million. The estimated fair value of the 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 we would have to pay to transfer the obligation to a market participant with similar credit risk.

Our financing arrangements with many commercial lenders are based on the spread over Prime or LIBOR. At December 31, 2011, $511.7 million of our outstanding debt was in fixed rate instruments and the remaining $526.1 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 $5.3 million.

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

In December 2011, one of our U.S. subsidiaries loaned our 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, we entered into a forward contract with a bank to lock in the receipt of $21.5 million when the loan is due on May 31, 2012.

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, 2011, 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, 2011. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal 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 2011. Accordingly, management’s evaluation excluded the operations of the following subsidiaries and equity method investments acquired during 2011, with total assets of approximately

$101.2 million and approximately $2.5 million of revenues included in the Company’s consolidated financial statements as of December 31, 2011:

•

Titan Health Corporation

•

USP Bergen, Inc.

•

USP Encinitas Endoscopy, Inc.

•

Aspen Healthcare, Ltd. (Investment in Claremont Hospital)

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, 2011.

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

None.

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 March 2, 2012, 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	65	Chairman of the Board
William H. Wilcox	60	Chief Executive Officer and Director
Brett P. Brodnax	47	President and Chief Development Officer
Mark A. Kopser	47	Executive Vice President and Chief Financial Officer
Niels P. Vernegaard	55	Executive Vice President and Chief Operating Officer
Philip A. Spencer	42	Senior Vice President, Business Development
Joel T. Allison	64	Director
Michael E. Donovan	35	Director
John C. Garrett, M.D.	69	Director
D. Scott Mackesy	43	Director
James Ken Newman	68	Director
Boone Powell, Jr.	75	Director
Paul B. Queally	47	Director
Raymond A. Ranelli	64	Director

Donald E. Steenfounded 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. Wilcoxjoined 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. Brodnaxserves 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 also served as a director of AmeriPath, Inc. from January 2005 until May 2007.

Mark A. Kopserserves 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.

Niels P. Vernegaardjoined 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. Spencerjoined 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. Allisonhas 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. Donovanjoined 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 Mackesyjoined 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 Dean Witter, 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 Newmanhas 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.

Boone Powell, Jr.has served on our board since June 1999. Mr. Powell served as the chairman of Baylor until June 2001 and served as its president and chief executive officer from 1980 until 2000. Mr. Powell also serves as a director of US Oncology, Inc. Mr. Powell, through over a decade of experience with USPI, provides the board with a comprehensive knowledge of the Company and its structure and management team. In addition,

his experience in overseeing the management of a major healthcare system gives him valuable insight into the competitive environment of the healthcare industry.

Paul B. Queallyhas 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. Ranellijoined 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. and Syniverse Technologies, Inc. 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

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, 2011: $625,000 for Mr. Wilcox, $525,000 for Mr. Brodnax, $383,000 for Mr. Kopser, $340,000 for Mr. Spencer and $448,000 for Mr. Vernegaard.

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 2011, except for Mr. Wilcox whose target bonus was set at 75% of base salary for 2011. Based on the Company’s EBITDA performance compared to budget in 2011, all named executive officers received a bonus of 15% of their base salaries, except for Mr. Wilcox whose bonus was 18% 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. In connection with Mr. Brodnax’s promotion to the additional position of President effective June 1, 2011, he was granted options to purchase 1,000,000 shares of the Company’s common stock. These options vest ratably over four years and have an exercise price of $1.85 per share, equal to the compensation committee’s estimate of fair value on the date of grant. No other equity awards were granted to the Company’s named executive officers in 2011. 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 2011 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 2011

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		2011	$	614,583	$	110,625	(2)	$	—	$	—		—	$	90,781		$	245,279	(3)	$	1,061,268
President, Chief		2010		600,000		150,000	(2)		—		—		—		147,624			273,866	(3)		1,171,490
Executive Officer and		2009		600,000		750,000	(2)		—		—		—		243,983			264,350	(3)		1,858,332
Director

Brett P. Brodnax		2011		466,250		69,938	(4)		—		750,000		—		6,638			35,463	(3)		1,328,289
President and		2010		384,000		96,000	(4)		—		—		—		78,887			40,860	(3)		599,747
Chief Development Officer		2009		384,000		288,000	(4)		—		—		—		129,867			38,050	(3)		839,917

Mark A. Kopser		2011		372,583		55,887	(2)		—		—		—		(2,118	)		30,454	(3)		456,806
Executive Vice President		2010		358,000		89,500	(2)		—		—		—		39,159			38,591	(3)		525,250
and Chief Financial Officer		2009		358,000		268,500	(2)		—		—		—		81,803			35,546	(3)		743,849

Philip A. Spencer		2011		333,750		50,063	(5)		—		—		—		1,419			19,756	(3)		404,988
Senior Vice President,		2010		325,000		81,250	(2)		—		—		—		3,505			23,600	(3)		433,355
Business Development		2009		139,167		104,375			380,000		—		—		—			2,505	(3)		626,047

Niels P. Vernegaard		2011		439,667		65,950	(2)		—		—		—		8,920			109,633	(3)		624,170
Executive Vice President		2010		428,000		107,000	(2)		—		—		—		74,782			119,700	(3)		729,482
and Chief Operating Officer		2009		428,000		321,000	(2)		—		—		—		91,422			116,039	(3)		956,461

(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’sAccounting Standards Codification Topic 718. No forfeitures occurred during 2009, 2010 or 2011. 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, 2011, 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 officers’ election pursuant to USPI’s Deferred Compensation Plan (the “DCP”).

(3)	Includes discretionary contributions to the named executive officers’ DCP and matching contributions to the named executive officers’ DCP and 401(k) accounts as follows:


	Discretionary Contribution to DCP		Matching Contribution 401(k)		Matching Contribution DCP
Mr. Wilcox
2011	$	200,000	$	7,350	$	37,929
2010		200,000		7,350		66,516
2009		200,000		7,350		57,000

Mr. Brodnax
2011		—		7,350		28,113
2010		—		7,350		33,510
2009		—		7,350		30,700

Mr. Kopser
2011		—		7,350		23,104
2010		—		7,350		31,241
2009		—		7,350		28,196

Mr. Spencer
2011		—		7,350		12,406
2010		—		7,350		16,250
2009		—		2,505		—

Mr. Vernegaard
2011		75,000		7,350		27,283
2010		75,000		7,350		37,350
2009		75,000		7,350		33,689

(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 2011.


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		6/1/2011	(1)		1,000,000	(2)	$	1.85	$	750,000
Mark A. Kopser		—			—			—		—
Philip A. Spencer		—			—			—		—
Niels P. Vernegaard		—			—			—		—

(1)	Mr. Brodnax received an option award under the 2007 Equity Incentive Plan in connection with his promotion to President of the Company.

(2)	Mr. Brodnax’s options vest 25% per year over four years and have an eight-year contractual life.

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, 2011.


				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)	$	6,436,250
		4/19/2007	(1)		—		—		—		—		495,536	(6)		1,342,903
Brett P. Brodnax		4/19/2007	(1)		—		—		—		—		950,000	(5)		2,574,500
		4/19/2007	(1)		—		—		—		—		275,853	(6)		747,562
		6/1/2011	(2)		—		1,000,000	$	1.85		6/1/2019		—			—
Mark A. Kopser		4/19/2007	(1)		—		—		—		—		850,000	(5)		2,303,500
		4/19/2007	(1)		—		—		—		—		220,683	(6)		598,051
Philip A. Spencer		8/28/2009	(3)		—		—		—		—		250,000	(5)		677,500
					—		—		—		—		—			—
Niels P. Vernegaard		4/19/2007	(1)		—		—		—		—		850,000	(5)		2,303,500
		4/19/2007	(1)		—		—		—		—		245,203	(6)		664,500

(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.

(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, 2011, this value was determined to be $2.71 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 2011 and the value realized upon exercise, and all stock awards vested during 2011 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(1)
William H. Wilcox		N/A	$	—		593,750	$	1,098,738
Brett P. Brodnax		N/A		—		237,500		439,375
Mark A. Kopser		N/A		—		212,500		393,125
Philip A. Spencer		N/A		—		125,000		231,250
Niels P. Vernegaard		N/A		—		212,500		393,125

(1)

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 April 19, 2011, this value was determined to be $1.85 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.

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, 2011.


	2011 Activity									Aggregate Balance at December 31, 2011
Name	Executive Contribution		USPI Contribution		Aggregate Earnings			Aggregate Withdrawals/ Distributions		Aggregate Balance at December 31, 2011
William H. Wilcox	$	75,858	$	237,929	$	90,781		$	361,037	$	2,597,929
Brett P. Brodnax		94,625		28,113		6,638			536,619		318,287
Mark A. Kopser		46,208		23,104		(2,118	)		192,636		250,527
Philip A. Spencer		24,812		12,406		1,419			—		90,893
Niels P. Vernegaard		54,567		102,283		8,920			—		1,181,314

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 President and Chief Executive Officer, Mark A. Kopser as Executive Vice President and Chief Financial Officer, Brett P. Brodnax as Executive Vice President and Chief Development 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 $625,000 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 agreements with Mark A. Kopser and Brett P. Brodnax was for one year from April 18, 2007 to April 18, 2008. Thereafter, each agreement automatically renews for additional one-year terms unless at 30 days prior to the end of a one-year term, USPI or the executive gives notice that it or he does not wish to extend the agreement. Mr. Kopser is paid a base salary of $383,000 per year and Mr. Brodnax, $525,000 per year, and each is 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 $448,000 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 is 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 $340,000 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 twelve months; (ii) continue his health insurance benefits for 12 months following his date of termination (24 months for Mr. Wilcox) 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. 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, 2011.


Name	Cash Severance Payment			Accrued Bonus(1)(2)		Benefits(3)			Accelerated Vesting upon Change of Control(4)
William H. Wilcox	$	1,300,000	(5)	$	110,625	$	14,088	(5)	$	7,779,153
Brett P. Brodnax		525,000	(6)		69,938		6,744	(6)		3,322,062
Mark A. Kopser		383,000	(6)		55,887		9,108	(6)		2,901,551
Philip A. Spencer		340,000	(6)		50,063		9,108	(6)		677,500
Niels P. Vernegaard		448,000	(6)		65,950		7,944	(6)		2,968,000

(1)	Amounts are based on the bonus amount paid with respect to 2011.

(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 $2.71 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, 2011, this value was determined to be $2.71 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 2011.

2011 Non-Employee Director Compensation Table


Name	Fees Earned or Paid in Cash		Stock Awards(1)		All Other Compensation(2)		Total
Joel T. Allison	$	—	$	—	$	—	$	—
John C. Garrett, M.D.		46,500		74,000		18,500		139,000
James Ken Newman		46,500		74,000		18,500		139,000
Boone Powell, Jr.		37,500		74,000		18,500		130,000
Raymond A. Ranelli		65,250		74,000		18,500		157,750

(1)

We account for the cost of stock-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’sAccounting Standards Codification Topic 718. No forfeitures occurred during 2011. On July 1, 2011 a grant of 40,000 restricted shares was made to each of Parent’s non-employee directors. The shares vest 25% per year over four years. These restricted shares were valued at $1.85 per share equal to the fair value per share of common stock as determined by the compensation committee. 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, 2011, included in this Annual Report on Form 10-K.

(2)	Non-employee directors were issued a cash stipend of $18,500 in connection with the stock awards issued in July 2011.

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 2011.

100

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 March 2, 2012, 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.


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		86.1	%		17,326,775		96.3	%
California State Teacher’s Retirement System(3)		22,183,099		14.0	%		2,816,901		15.7	%
CPP Investment Board (USRE II) Inc.(4)		26,619,718		16.8	%		3,380,282		18.8	%
Silvertech Investment PTE Ltd(5)		8,873,239		5.6	%		1,126,761		6.3	%
Donald E. Steen(6)		1,421,127		*			78,873		*
William H. Wilcox(7)		6,488,790		4.1	%		157,746		*
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		1.3	%		7,872		*
Philip A. Spencer(11)		500,000		*			—		*
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		*
Boone Powell, Jr.(13)		151,001		*			9,016		*
Paul B. Queally(12)(14)		255,457		*			22,281		*
Raymond A. Ranelli(13)		137,363		*			7,885		*
All directors and executive officers as a group(15)		16,344,646		10.3	%		406,489		2.3	%

*	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 77001.

(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,

101

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 100,000 common shares owned by the Michelle Ann Steen Trust and 100,000 common shares owned by the Marcus Anthony Steen Trust for which, in each case, Mr. Steen acts as a 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. Also included are another 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 5,246,536 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.

(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.

(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 on transfer 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)

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.

102

Item 13.

Certain Relationships and Related Transactions, and Director Independence

This Item 13 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 this Item 13 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 have 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 $60.0 million, $52.1 million, and $45.2 million in 2011, 2010 and 2009, respectively, and are included in management and contract service revenue in our consolidated statements of operations.

103

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 summarizes transactions with Baylor during 2011 and 2009. We had no such transactions in 2010. We believe 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

December 2009

Dallas, Texas

(2)

1.2 million

0.3 million

December 2009

Fort Worth, Texas

(3)

2.4 million

0.1 million

Total

3.6 million

0.4 million

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

(2)	Baylor acquired a controlling interest in a facility from us, which transferred control of the facility to Baylor. We now account for this facility under the equity method of accounting.

(3)	Baylor acquired a controlling interest in two facilities. We continue to account for these facilities under the equity method of accounting.

Additionally, we derived approximately 3% of our revenues and approximately 46% of our equity in earnings of unconsolidated affiliates in 2011 from our joint venture with Baylor.

Marc Steen, the son of Donald E. Steen, is employed by USPI as Vice President, Development. During 2011, Marc Steen earned approximately $206,500 in salary and bonus. Additionally, $84,736 of relocation expenses were paid by USPI on behalf of Marc Steen.

Blake Allison, the son of Joel T. Allison, is employed by USPI as a Vice President. During 2011, Blake Allison earned approximately $170,000 in salary and bonus. Additionally, $32,311 of relocation expenses were paid by USPI on behalf of Blake Allison.

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, UPSI Holdings, Inc. nor Parent 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.

104

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, 2011 and 2010:


Description of Fees	2011		2010
Audit Fees(1)	$	1,655,000	$	1,489,640
Audit Related Fees(2)		—		—
Tax Fees(3)		—		—
All Other Fees(4)		403,980		332,250

	$	2,058,980	$	1,821,890

(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 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, 2011 and 2010.

(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.

105

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, 2011 and 2010			4

Consolidated Statements of Income for the years ended June 30, 2011 and 2010			5

Consolidated Statements of Changes in Equity for the years ended June 30, 2011 and 2010			6

Consolidated Statements of Cash Flows for the years ended June 30, 2011 and 2010			7

Notes to Consolidated Financial Statements			8

Report of Independent Auditors			27

Consolidated Balance Sheets as of June 30, 2010 and 2009			28

Consolidated Statements of Income for the years ended June 30, 2010 and 2009			29

Consolidated Statements of Changes in Equity for the years ended June 30, 2010 and 2009			30

Consolidated Statements of Cash Flows for the years ended June 30, 2010 and 2009			31

Notes to Consolidated Financial Statements			32

(4) Exhibits			IV-1

106

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, 2011 and 2010, 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, 2011. 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, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2011, 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, 2011, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Dallas, Texas

March 2, 2012

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, 2011, based on criteria established inInternal Control — Integrated Frameworkissued 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 accompanyingManagement’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, 2011, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

United Surgical Partners International, Inc. acquired several subsidiaries and equity method investments during 2011, 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, 2011, the Company’s internal control over financial reporting associated with total assets of $101.2 million and $2.5 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, 2011. Our audit of internal control over financial reporting of United Surgical Partners International, Inc. also excluded an evaluation of the internal control over financial reporting of those subsidiaries and equity method investments which are listed below:

•

Titan Health Corporation

•

USP Bergen, Inc.

•

USP Encinitas Endoscopy, Inc.

•

Aspen Healthcare, Ltd. (Investment in Claremont Hospital)

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, 2011 and 2010, 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, 2011 and our report dated March 2, 2012 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Dallas, Texas

March 2, 2012

F-2

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2011 and 2010


	2011			2010
	(In thousands, except share amounts)
ASSETS
Cash and cash equivalents (Note 1)	$	41,822		$	60,253
Accounts receivable, net of allowance for doubtful accounts of $8,576 and $7,481, respectively		58,057			50,082
Other receivables (Note 6)		10,499			15,242
Inventories of supplies		10,117			9,191
Deferred tax asset, net (Note 13)		14,704			14,961
Prepaids and other current assets (Note 1)		20,129			14,682

Total current assets		155,328			164,411
Property and equipment, net (Note 7)		235,321			202,260
Investments in unconsolidated affiliates (Note 3)		444,734			393,561
Goodwill (Note 8)		1,209,345			1,268,663
Intangible assets, net (Note 8)		327,140			319,213
Other assets		21,630			24,631

Total assets	$	2,393,498		$	2,372,739

LIABILITIES AND EQUITY
Accounts payable	$	28,765		$	23,488
Accrued salaries and benefits		24,405			26,153
Due to affiliates		139,628			116,104
Accrued interest		6,671			8,714
Current portion of long-term debt (Note 9)		25,487			22,386
Other current liabilities		52,281			67,815

Total current liabilities		277,237			264,660
Long-term debt, less current portion (Note 9)		1,042,969			1,047,440
Other long-term liabilities		30,807			26,615
Deferred tax liability, net (Note 13)		167,946			131,205

Total liabilities		1,518,959			1,469,920
Noncontrolling interests — redeemable (Note 4)		106,668			81,668
Commitments and contingencies (Notes 4 and 16)
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		778,030			784,573
Accumulated other comprehensive loss, net of tax		(63,033	)		(66,351	)
Retained earnings		17,691			68,535

Total USPI stockholder’s equity		732,688			786,757
Noncontrolling interests — nonredeemable (Note 4)		35,183			34,394

Total equity		767,871			821,151

Total liabilities and equity	$	2,393,498		$	2,372,739

See accompanying notes to consolidated financial statements

F-3

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Statements of Operations


	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
	(In thousands)
Revenues:
Net patient service revenues	$	528,563		$	504,765		$	523,899
Management and contract service revenues		72,113			64,838			58,326
Other revenues		8,910			7,062			11,250

Total revenues		609,586			576,665			593,475
Equity in earnings of unconsolidated affiliates		82,752			69,916			61,771
Operating expenses:
Salaries, benefits, and other employee costs		165,083			156,213			160,278
Medical services and supplies		99,559			97,940			99,510
Other operating expenses		98,246			99,075			89,347
General and administrative expenses		43,710			38,202			38,769
Provision for doubtful accounts		9,648			8,458			8,720
Goodwill impairment (Note 8)		107,028			—			—
Net (gains) losses on deconsolidations, disposals and impairments (Notes 2 and 8)		(1,529	)		6,378			29,162
Depreciation and amortization		29,462			29,799			31,165

Total operating expenses		551,207			436,065			456,951

Operating income		141,131			210,516			198,295
Interest income		583			798			2,741
Interest expense		(65,308	)		(70,038	)		(70,353	)
Other, net		(73	)		708			373

Total other expense, net		(64,798	)		(68,532	)		(67,239	)

Income from continuing operations before income taxes		76,333			141,984			131,056
Income tax benefit (expense) (Note 13)		(56,729	)		(32,328	)		879

Income from continuing operations		19,604			109,656			131,935
Discontinued operations, net of tax (Note 2):
Income (loss) from discontinued operations		10			(221	)		1,453
Loss on disposal of discontinued operations		(529	)		(6,782	)		—

Total earnings (loss) from discontinued operations		(519	)		(7,003	)		1,453

Net income		19,085			102,653			133,388
Less: Net income attributable to noncontrolling interests		(69,929	)		(60,560	)		(63,722	)

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

Amounts attributable to USPI’s common stockholder:
Income (loss) from continuing operations, net of tax	$	(50,321	)	$	49,123		$	68,023
Earnings (loss) from discontinued operations, net of tax		(523	)		(7,030	)		1,643

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

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, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
	(In thousands)
Net income	$	19,085		$	102,653		$	133,388
Other comprehensive income (loss):
Foreign currency translation adjustments		1,314			(11,638	)		21,967
Unrealized gain on interest rate swaps, net of tax		2,560			3,408			3,894
Pension adjustments, net of tax		(556	)		724			(698	)

Total other comprehensive income (loss)		3,318			(7,506	)		25,163

Comprehensive income		22,403			95,147			158,551
Less: Comprehensive income attributable to noncontrolling interests		(69,929	)		(60,560	)		(63,722	)

Comprehensive income (loss) attributable to USPI’s common stockholder	$	(47,526	)	$	34,587		$	94,829

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
	Total			Comprehensive Income (Loss)			Outstanding Shares		Par Value		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Noncontrolling Interests — Nonredeemable
	(In thousands, except share amounts)
Balance, December 31, 2008	$	806,217						100	$	—	$	801,902		$	(84,008	)	$	46,243		$	42,080
Distributions to noncontrolling interests		(5,749	)					—		—		—			—			—			(5,749	)
Purchases of noncontrolling interests		(3,814	)					—		—		(8,411	)		—			—			4,597
Sales of noncontrolling interests		(6,062	)					—		—		(5,922	)		—			—			(140	)
Deconsolidation of subsidiaries		(6,682	)					—		—		—			—			—			(6,682	)
Payment of common stock dividend		(88,617	)					—		—		—			—			(88,617	)		—
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		1,936						—		—		1,936			—			—			—
Comprehensive income (loss):
Net income		75,611		$	69,666			—		—		—			—			69,666			5,945
Other comprehensive income:
Foreign currency translation adjustments		21,967			21,967			—		—		—			21,967			—			—
Unrealized gain on interest rate swaps, net of tax		3,894			3,894			—		—		—			3,894			—			—
Pension liability adjustment, net of tax		(698	)		(698	)		—		—		—			(698	)		—			—

Other comprehensive income		25,163			25,163			—		—		—			—			—			—

Comprehensive income		100,774		$	94,829			—		—		—			—			—			5,945

Balance, December 31, 2009		798,003						100		—		789,505			(58,845	)		27,292			40,051
Distributions to noncontrolling interests		(5,710	)					—		—		—			—			—			(5,710	)
Purchases of noncontrolling interests		(123	)					—		—		(452	)		—			—			329
Sales of noncontrolling interests		(6,096	)					—		—		(6,774	)		—			—			678
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	)		—
Comprehensive income (loss):
Net income		47,760		$	42,093			—		—		—			—			42,093			5,667
Other comprehensive income:
Foreign currency translation adjustments		(11,638	)		(11,638	)		—		—		—			(11,638	)		—			—
Unrealized gain on interest rate swaps, net of tax		3,408			3,408			—		—		—			3,408			—			—
Pension liability adjustment, net of tax		724			724			—		—		—			724			—			—

Other comprehensive loss		(7,506	)		(7,506	)		—		—		—			—			—			—

Comprehensive income		40,254		$	34,587			—		—		—			—			—			5,667

Balance, December 31, 2010		821,151						100		—		784,573			(66,351	)		68,535			34,394
Distributions to noncontrolling interests		(8,163	)					—		—		—			—			—			(8,163	)
Purchases of noncontrolling interests		(1,145	)					—		—		(473	)		—			—			(672	)
Sales of noncontrolling interests		(6,139	)					—		—		(7,220	)		—			—			1,081
Contribution related to equity award grants by USPI Group Holdings, Inc. and other		1,150						—		—		1,150			—			—			—
Comprehensive income (loss):
Net income (loss)		(42,301	)	$	(50,844	)		—		—		—			—			(50,844	)		8,543
Other comprehensive income:
Foreign currency translation adjustments		1,314			1,314			—		—		—			1,314			—			—
Unrealized gain on interest rate swaps, net of tax		2,560			2,560			—		—		—			2,560			—			—
Pension liability adjustment, net of tax		(556	)		(556	)		—		—		—			(556	)		—			—

Other comprehensive income		3,318			3,318			—		—		—			—			—			—

Comprehensive income (loss)		(38,983	)	$	(47,526	)		—		—		—			—			—			8,543

Balance, December 31, 2011	$	767,871						100	$	—	$	778,030		$	(63,033	)	$	17,691		$	35,183

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, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
	(In thousands)
Cash flows from operating activities:
Net income	$	19,085		$	102,653		$	133,388
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (earnings) from discontinued operations		519			7,003			(1,453	)
Provision for doubtful accounts		9,648			8,458			8,720
Depreciation and amortization		29,462			29,799			31,165
Amortization of debt issue costs and discount		3,618			3,348			3,337
Deferred income taxes		30,093			8,290			(10,401	)
Goodwill impairment		107,028			—			—
Net (gains) loss on deconsolidations, disposals and impairments		(1,529	)		6,378			29,162
Equity in earnings of unconsolidated affiliates, net of distributions received		435			1,265			(6,951	)
Equity-based compensation		1,237			1,694			1,695
Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses:
Accounts receivable		(12,118	)		(5,416	)		(7,780	)
Other receivables		3,963			(3,304	)		(1,491	)
Inventories of supplies, prepaids and other assets		(711	)		4,386			(3,607	)
Accounts payable and other current liabilities		(12,688	)		1,545			2,561
Other long-term liabilities		6,072			2,965			2,265

Net cash provided by operating activities		184,114			169,064			180,610

Cash flows from investing activities:
Purchases of new businesses and equity interests, net of cash received		(118,869	)		(83,676	)		(59,549	)
Proceeds from sales of businesses and equity interests, net		15,532			50,377			22
Purchases of property and equipment		(33,540	)		(40,035	)		(29,704	)
Purchases of marketable securities, net		(4,820	)		—			—
Returns of capital from unconsolidated affiliates		1,744			1,193			2,894
Decrease in deposits and notes receivable		2,598			101			508

Net cash used in investing activities		(137,355	)		(72,040	)		(85,829	)

Cash flows from financing activities:
Proceeds from long-term debt, net of debt issuance costs		30,911			38,974			5,600
Payments on long-term debt		(51,311	)		(40,126	)		(25,670	)
Net equity contribution from USPI Group Holdings, Inc. and other		(102	)		72			(39	)
(Purchases) sales of noncontrolling interests, net		510			1,086			(2,067	)
Payment of common stock dividend		—			(850	)		(88,617	)
(Decrease) increase in cash held on behalf of unconsolidated affiliates		23,167			(14,166	)		63,101
Distributions to noncontrolling interests		(67,864	)		(58,989	)		(63,555	)

Net cash used in financing activities		(64,689	)		(73,999	)		(111,247	)

Cash flows of discontinued operations:
Operating cash flows		—			4,339			4,602
Investing cash flows		—			(1,471	)		(2,099	)
Financing cash flows		—			(699	)		(778	)

Net cash provided by discontinued operations		—			2,169			1,725

Effect of exchange rate changes on cash		(501	)		169			196

Net (decrease) increase in cash and cash equivalents		(18,431	)		25,363			(14,545	)
Cash and cash equivalents at beginning of period		60,253			34,890			49,435

Cash and cash equivalents at end of period	$	41,822		$	60,253		$	34,890

Supplemental information:
Interest paid, net of amounts capitalized	$	63,870		$	69,331		$	70,920
Income taxes paid		33,128			16,955			8,060
Non-cash transactions:
Assets acquired under capital lease obligations	$	16,983		$	13,481		$	2,985

See accompanying notes to consolidated financial statements

F-7

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2011, 2010 and 2009

(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 operation of ambulatory surgery centers, surgical hospitals and related businesses in the United States and Europe. At December 31, 2011 the Company, headquartered in Dallas, Texas, operated 206 short-stay surgical facilities. Of these 206 facilities, the Company consolidates the results of 65 and accounts for 141 under the equity method. The Company operates in two countries, with 200 of its 206 facilities located in the United States of America; the remaining six facilities are located in the United Kingdom. The majority of the Company’s U.S. facilities are jointly owned with local physicians and a not-for-profit healthcare system that has other healthcare businesses in the region. At December 31, 2011, the Company had agreements with not-for-profit healthcare systems providing for joint ownership of 138 of the Company’s 200 U.S. facilities and also providing a framework for the planning and construction of additional facilities in the future. All but three of the Company’s U.S. facilities include physician owners.

Global Healthcare Partners Limited (Global), a USPI subsidiary incorporated in England, manages and owns three surgical hospitals, an oncology clinic in the greater London area, a hospital in Sheffield, England and a diagnostic and surgery center in Edinburgh, Scotland.

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

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 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 USPI Group Holdings, Inc. (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 2011 presentation. Net operating results have not been affected by these reclassifications.

(b) Translation of Foreign Currencies

The financial statements of foreign subsidiaries are measured in local currency and then translated into U.S. dollars. All assets and liabilities have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year. Translation gains or losses resulting from changes in exchange rates are 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 wholly-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. At December 31, 2011 and 2010, the Company consolidated one such entity (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, 2011 and 2010, these cash and cash equivalents balances were $6.4 million and $6.0 million, respectively.

(f) Marketable Securities

At December 31, 2011, the Company had $4.8 million of marketable securities (included in other current assets), 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. These amounts are not material for the year ended December 31, 2011. 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.

F-9

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(g) Inventories of Supplies

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

(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, which corresponds to the Company’s operating segments, or countries. 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.

F-10

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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 purposes. Because the Company’s current derivatives (interest rate swaps) qualify for hedge accounting, gains or losses resulting from changes in the values of the Company’s derivatives are 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 70% of its net patient service revenues from private insurance payors, approximately 15% from governmental payors and approximately 15% 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, 2011 and 2010. 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 71%. 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.

F-11

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Equity in earnings of unconsolidated affiliates consists of the Company’s share of the profits or losses generated from its noncontrolling equity investments in 141 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.

(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

Sales of consolidated subsidiaries in which the Company has no continuing involvement are classified as discontinued operations, as are consolidated subsidiaries that are held for sale. The gains or losses on these transactions are classified within discontinued operations in our consolidated statements of operations. Also, the Company has reclassified its historical results of operations 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)
December 2010	Nashville, Tennessee(1)	$	32.5 million	$	2.8 million
December 2010	Orlando, Florida		—		(2.0 million	)
December 2010	Templeton, California(2)		—		(1.9 million	)
December 2010	Houston, Texas(2)		—		(0.2 million	)

Total		$	32.5 million	$	(1.3 million	)

(1)	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)

(2)	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, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Revenues	$	575		$	29,180		$	28,889
Income (loss) from discontinued operations before income taxes	$	15		$	(340	)	$	2,235
Income tax (expense) benefit		(5	)		119			(782	)

Income (loss) from discontinued operations	$	10		$	(221	)	$	1,453

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 2011 and 2009, the Company completed sales of investments in twelve 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 (Costs)			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

December 2009	Oxnard, California	$	0.3 million		$	(0.3 million	)
December 2009	Baton Rouge, Louisiana		(5.1 million	)		(8.2 million	)
September 2009	San Antonio, Texas		—			(2.6 million	)
July 2009	Cleveland, Ohio		1.0 million			—
February 2009	Las Cruces, New Mexico		—			—
February 2009	East Brunswick, New Jersey		0.7 million			(2.6 million	)

Total		$	(3.1 million	)	$	(13.7 million	)

F-13

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The Company from time to time surrenders control of an entity but retains a noncontrolling interest (classified within “investments in unconsolidated affiliates”). These types of transactions result in a gain or loss, computed as the difference between (a) the sales proceeds and fair value of the retained investment and (b) the Company’s carrying value of the investment prior to the transaction. Gains or losses for such transactions are classified within “Net (gains) losses on deconsolidations, disposals and impairments” in the accompanying consolidated statements of operations. The Company’s continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations. Fair values for the retained noncontrolling interests are estimated based on market multiples and discounted cash flow models which have been derived from the Company’s experience in acquiring surgical facilities and third-party valuations it has obtained with respect to such transactions.

During the years ended December 31, 2010, and 2009, the Company surrendered control of, but retained an equity method investment in, five entities as summarized below. The Company did not surrender control of any entities during 2011.


Effective 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

December 2009	Dallas, Texas(3)	$	1.2 million	$	0.3 million
July 2009	Oklahoma City, Oklahoma(4)		0.2 million		0.1 million
March 2009	Phoenix, Arizona(5)		0.1 million		(8.2 million	)

Total		$	1.5 million	$	(7.8 million	)

(1)	A hospital partner acquired a portion of the Company’s interest in this facility and shares control of the facility with the Company.

(2)	The Company previously controlled this facility but now shares control with physicians due to a change in the entity’s governing documents.

(3)

A controlling interest in a facility was sold to a hospital partner as part of the Company’s strategy for partnering with this hospital system. The Company recorded a net gain of $0.3 million on the sale and deconsolidation of the facility. The gain is comprised of a $1.4 million gain related to the remeasurement of the Company’s retained interest to fair value, offset by a loss of $1.1 million, the amount by which the carrying value of the investment exceeded the proceeds received. This hospital system is a related party (Note 12).

(4)	The Company and other owners of a facility consolidated by the Company agreed to merge the facility into another entity in which the Company holds an investment accounted for under the equity method. The Company recorded a gain of $0.1 million on the sale and deconsolidation of the facility.

(5)

A controlling interest in an entity was sold to a hospital partner as part of the Company’s strategy for partnering with this hospital system. The hospital partner already had a 49% ownership interest in this entity, which owns and manages two surgical facilities, and through the transaction acquired an additional 1.1% interest. The $8.2 million loss was primarily related to the revaluation of the Company’s remaining investment in the entity to fair value.

F-14

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(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 closing date.

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


Effective Date	Facility Location	Amount
Investments
December 2011	Sheffield, England(1)	$	23.1 million
December 2011	Edinburgh, Scotland(2)		0.9 million
December 2011	San Diego, California(3)		3.3 million
September 2011	Various(4)		43.4 million
September 2011	Rancho Mirage, California(5)		—
April 2011	Destin, Florida(5)		—

Total		$	70.7 million

(1)	Acquisition of 100% of a hospital in which the Company previously had no involvement.

(2)	Acquisition of a controlling interest in a diagnostic and surgical facility in which the Company already held an ownership interest. The remainder of the facility is owned by local physicians.

(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.

(4)

As further discussed below, the Company acquired 100% of the equity interests in Titan Health Corporation. (Titan). Titan has an equity investment in 14 ambulatory surgery centers, nine of which are located in markets in which the Company already operates. Local physicians have ownership in all but one of the 14 facilities, and hospital partners have invested in three of these facilities. The purchase price noted above is net of approximately $5.0 million of cash acquired.

(5)

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

Effective September 1, 2011, the Company completed the acquisition of 100% of the equity interests in Titan, a privately-held, Sacramento, California-based owner and operator of surgery centers. The Company paid cash totaling approximately $43.4 million, net of $5.0 million of cash acquired, and subject to certain purchase price adjustments set forth in the purchase agreement. The purchase price was allocated to Titan’s tangible and identifiable intangible assets and liabilities based upon estimates of fair value, with the remainder allocated to goodwill. The Company funded the purchase using cash on hand. The Company incurred approximately $2.6 million in acquisition and severance costs, of which $0.6 million is included in “general and administrative expenses” and the remaining $2.0 million is included in “salaries, benefits, and other employee costs” in the accompanying consolidated statements of operations.

F-15

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 Titan (in thousands):


Purchase price allocated	$	48,419

Estimated fair value of net tangible assets acquired:
Cash	$	4,952
Other current assets		909
Investments in affiliates		25,188
Property and equipment and other noncurrent assets		515
Current liabilities		(542	)
Long term liabilities		(2,220	)

Net tangible assets acquired		28,802
Intangible assets acquired		9,412
Goodwill		10,205

Total purchase price	$	48,419

The goodwill recorded in conjunction with the Titan acquisition was allocated to the Company’s United States reporting unit and the Company expects that none of the goodwill will be deductible for income tax purposes. Indefinite-lived intangibles of $9.4 million relate to long-term management contracts and are not subject to amortization.

Effective December 30, 2011, the Company completed the acquisition of 100% of the assets of The Claremont Hospital (Claremont), an acute care hospital located in Sheffield, England. The Company paid cash totaling approximately £14.9 million ($23.1 million), and subject to certain purchase price adjustments set forth in the purchase agreement. The purchase price was allocated to Claremont’s tangible and assets and liabilities based upon preliminary estimates of fair value, with the remainder allocated to goodwill. The Company funded the purchase using cash on hand. The Company incurred approximately $0.1 million in acquisition costs, which are included in “general and administrative expenses” in the accompanying consolidated statements of operations.

The following is a summary of the assets acquired and liabilities assumed in the acquisition of Claremont (in thousands):


Purchase price allocated	$	23,084

Estimated fair value of net tangible assets acquired:
Accounts receivable	$	2,277
Inventory		515
Other current assets		275
Property and equipment		13,707
Current liabilities		(3,190	)
Long term liabilities		(701	)

Net tangible assets acquired		12,883
Goodwill		10,201

Total purchase price	$	23,084

F-16

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The goodwill recorded in conjunction with the Claremont acquisition was allocated to the Company’s United Kingdom reporting unit, and the Company expects all of goodwill will be deductible for income tax purposes.

The following table presents the unaudited pro forma results as if the acquisitions of Titan and Claremont 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 and severance costs of approximately $2.7 million. The adjustments to arrive at pro forma operating results for the other business combinations noted above are not material.


	Year Ended December 31, 2011			Year Ended December 31, 2010
	(In thousands)
Total revenues	$	631,490		$	596,795
Net income (loss) attributable to USPI’s common stockholder	$	(48,226	)	$	43,617

The Company controls 65 of its entities and therefore consolidates their results. However, the Company accounts for an increasing majority (141 of its 200 U.S. facilities at December 31, 2011) 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):


	2011			2010			2009
Unconsolidated facilities operated at year-end		141			130			109
Income statement information:
Revenues	$	1,538,030		$	1,329,041		$	1,178,114
Operating expenses:
Salaries, benefits, and other employee costs		360,519			309,698			277,053
Medical services and supplies		360,148			310,770			271,663
Other operating expenses		352,667			305,045			271,769
Loss (gain) on asset disposals, net		(309	)		1,025			(7	)
Depreciation and amortization		66,608			55,216			50,251

Total operating expenses		1,139,633			981,754			870,729

Operating income		398,397			347,287			307,385
Interest expense, net		(33,719	)		(25,630	)		(24,394	)
Other, net		(15	)		(200	)		4,572

Income before income taxes	$	364,663		$	321,457		$	287,563

Balance sheet information:
Current assets	$	333,203		$	303,627		$	264,944
Noncurrent assets		613,114			495,765			412,977
Current liabilities		192,802			177,909			152,081
Noncurrent liabilities		438,523			343,007			283,951

F-17

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The Company’s equity method investment in Texas Health Ventures Group, L.L.C., is considered significant to the Company’s 2011 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.

The Company also regularly engages in the purchase and sale of equity interests with respect to its investments in unconsolidated affiliates that do not result in a change of control. These transactions are primarily the acquisitions and sales of equity interests in unconsolidated surgical facilities and the investment of additional cash in surgical facilities under development. During the year ended December 31, 2011, these transactions resulted in a 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
January 2011	Edinburgh, Scotland(7)		1.1 million

			44.0 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 the Company previously had no involvement. This facility is jointly owned with local physicians.

(2)	Through negotiations with each facility’s other owners, the Company 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 the Company contributed to a joint venture with one of its 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. The Company also acquired the right to manage this facility.

(4)	Represents additional capital the Company contributed to a facility in which it holds an equity interest.

(5)

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

F-18

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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

(7)	Acquisition of a 50% noncontrolling interest in diagnostic and surgery facility in which the Company had no previous involvement. The Company obtained control of this entity by acquiring an additional 40% of it in December 2011.

(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).

(9)	Represents the net receipt 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 65 of its 206 facilities. Similar to its investments in unconsolidated affiliates, the Company regularly engages in the purchase and sale of equity interests with respect to its consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions, as they are undertaken among the Company, its consolidated subsidiaries, and noncontrolling interests, and their cash flow effect is classified within financing activities.

During the year ended December 31, 2011, the Company purchased and sold equity interests in various consolidated subsidiaries in the amounts of $3.7 million and $4.2 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, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Net income (loss) attributable to USPI’s common stockholder	$	(50,844	)	$	42,093		$	69,666
Transfers to the noncontrolling interests:
Decrease in USPI’s additional paid-in capital for sales of subsidiaries’ equity interests		(7,220	)		(6,774	)		(5,922	)
Decrease in USPI’s additional paid-in capital for purchases of subsidiaries’ equity interests		(473	)		(452	)		(8,411	)

Net transfers to noncontrolling interests		(7,693	)		(7,226	)		(14,333	)

Change in equity from net income (loss) attributable to USPI and transfers to non-controlling interests	$	(58,537	)	$	34,867		$	55,333

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 U.S. 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

F-19

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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, 2011, 2010 and 2009 is summarized below (in thousands):


	Noncontrolling Interests — Redeemable
Balance, December 31, 2008	$	51,961
Net income attributable to noncontrolling interests		57,777
Distributions to noncontrolling interests		(57,807	)
Purchases of noncontrolling interests		(2,519	)
Sales of noncontrolling interests		12,403
Deconsolidation of noncontrolling interests and other		2,050

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

(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. At December 31, 2011 and 2010, the Company consolidated one such entity.

This entity 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 has lent the entity funds to purchase surgical facilities, but the Company does not have full recourse to the entity’s other owner with respect to repayment of the loans. As the entity earns management fees and receives cash distributions of earnings from the surgical facilities, a portion of those proceeds are used to repay the loans prior to being eligible for distribution to the entity’s other owner. At December 31, 2011 and 2010, $7.2 million and $8.1 million, respectively, of such advances are outstanding and are included in other long-term assets. 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, 2011 or 2010. At December 31, 2011 and 2010, the total assets of this entity were $81.1 million and $82.3 million, and the total liabilities owed to third parties were $19.3 million and $22.6 million, respectively. Such amounts are included in the accompanying consolidated balance sheets.

F-20

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, 2011 and 2010, the amounts receivable from related parties, which are included in other receivables on the Company’s consolidated balance sheet, totaled $6.0 million and $6.2 million, respectively.

(7)

Property and Equipment

At December 31, 2011 and 2010, property and equipment consisted of the following (in thousands):


	Estimated Useful Lives		2011			2010
Land		—	$	33,156		$	29,379
Buildings and leasehold improvements		7-50 years		164,808			135,631
Equipment		3-15 years		131,541			118,709
Furniture and fixtures		4-10 years		5,335			4,563
Construction in progress		—		16,219			7,248

				351,059			295,530
Accumulated depreciation				(115,738	)		(93,270	)

Net property and equipment			$	235,321		$	202,260

At December 31, 2011 and 2010, assets recorded under capital lease arrangements, included in property and equipment, consisted of the following (in thousands):


	2011			2010
Land and buildings	$	21,087		$	16,955
Equipment and furniture		16,939			15,666

		38,026			32,621
Accumulated amortization		(10,725	)		(10,450	)

Net property and equipment under capital leases	$	27,301		$	22,171

(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). The Company determined that its reporting units are at the operating segment (country) level. 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 2011, 2010 and 2009. No impairment losses were identified in any reporting unit as a result of these goodwill impairment tests during 2010 or 2009. No impairment loss was identified in the U.S. reporting unit during 2011.

F-21

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The Company recorded a goodwill impairment charge related to its United Kingdom (U.K.) reporting unit in 2011. The first step in the two-step impairment test for goodwill indicated that the fair value of the Company’s U.K. 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 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. The impairment primarily results from worsening conditions in the U.K. and European capital markets toward the end of 2011 leading to generally lower business valuations and poor overall economic conditions reducing 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 represents 24% of the Company’s 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 two contracts in 2011, six contracts in 2010 and three contracts in 2009. These losses totaled approximately $1.2 million, $5.9 million and $5.7 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 by operating segment and reporting unit for the years ended December 31, 2011 and 2010 (in thousands):


	United States			United Kingdom			Total
Balance at December 31, 2009	$	1,064,139		$	215,152		$	1,279,291
Additions		27,474			—			27,474
Disposals		(27,820	)		—			(27,820	)
Other		—			(10,282	)		(10,282	)

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

F-22

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Goodwill additions resulted primarily from business combinations and additionally from purchases of additional interests in subsidiaries. Disposals of goodwill relate to businesses that the Company has sold or the deconsolidation of entities the Company no longer controls. In the United Kingdom, the other changes were primarily due to foreign currency translation adjustments.

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, 2011 and 2010 (in thousands):


	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


	December 31, 2010
	Gross Carrying Amount		Accumulated Amortization			Total
Definite Useful Lives
Management and other service contracts	$	17,242	$	(7,856	)	$	9,386
Other		30,405		(11,580	)		18,825

Total	$	47,647	$	(19,436	)	$	28,211


Indefinite Useful Lives
Management contracts							291,002

Total intangible assets						$	319,213

Amortization expense from continuing operations related to intangible assets with definite useful lives was $2.1 million and $2.0 million for the year ended December 31, 2011 and 2010, respectively. The amortization of debt issuance costs, which is included within interest expense, was $3.6 million and $3.3 million in for the year ended December 31, 2011 and 2010, respectively.

F-23

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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, 2016 (in thousands):


2012	$	5,715
2013		5,664
2014		4,279
2015		3,848
2016		2,353

(9)

Long-term Debt

At December 31, 2011 and 2010 long-term debt consisted of the following (in thousands):


	2011			2010
Senior secured credit facility	$	519,180		$	533,445
U.K. senior credit agreement		50,864			49,981
Senior subordinated notes		437,515			437,515
Notes payable to financial institutions		30,185			22,347
Capital lease obligations (Note 11)		30,712			26,538

Total long-term debt		1,068,456			1,069,826
Current portion		(25,487	)		(22,386	)

Long-term debt, less current portion	$	1,042,969		$	1,047,440

(a) Senior secured credit facility

The senior secured credit facility (credit facility) provides for borrowings of up to $615.0 million (with a $150.0 million accordion feature described below), consisting of (1) an $85.0 million revolving credit facility with a maturity of six years, including a $20.0 million letter of credit sub-facility, and a $20.0 million swing-line loan sub-facility; and (2) a $530.0 million term loan facility (including a $100.0 million delayed draw facility) with a maturity of seven years. The Company has utilized the availability under the $530.0 million term loan facility and is making scheduled quarterly principal payments. The term loans require principal payments each year in an amount of $4.3 million per annum in equal quarterly installments and $0.2 million per quarter with respect to the delayed draw facility with the remaining balance maturing in 2014. No principal payments are required on the revolving credit facility until its maturity in 2013.

The Company may request additional tranches of term loans or additional commitments to the revolving credit facility in an aggregate amount not exceeding $150.0 million, subject to certain conditions. Interest rates on the credit facility are based on LIBOR plus a margin of 2.00% to 2.25%. Additionally, the Company currently pays 0.50% per annum on the daily-unused commitment of the revolving credit facility. The Company also currently pays a quarterly participation fee of 2.13% per annum related to outstanding letters of credit. At December 31, 2011, the Company had $519.2 million of debt outstanding under the credit facility at a weighted average interest rate of approximately 2.3%. At December 31, 2011, the Company had $67.4 million available for borrowing under the revolving credit facility, representing the facility’s $85.0 million capacity, net of the $16.0 million outstanding balance at December 31, 2011 and $1.6 million of outstanding letters of credit.

F-24

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The credit facility is guaranteed by USPI Holdings, Inc. and its current and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions, and borrowings under the credit facility are secured by a first priority security interest in all real and personal property of these subsidiaries, as well as a first priority pledge of 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 contains 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.

Fees paid for unused portions of the senior secured credit facility were approximately $0.4 million in each of the years ended December 31, 2011 and 2010 and $0.5 million for the year ended December 31, 2009. These amounts are included within interest expense in the Company’s consolidated statements of operations.

(b) Senior subordinated notes

Also in connection with the merger, the Company issued $240.0 million of 8⁷/8% senior subordinated notes and $200.0 million of 9¹/4%/10% senior subordinated toggle notes (together, the Notes), all due in 2017. Interest on the Notes is payable on May 1 and November 1 of each year, which commenced on November 1, 2007. All interest payments on the senior subordinated notes are payable in cash. The initial interest payment on the toggle notes was payable in cash. For any interest period after November 1, 2007 through November 1, 2012, the Company may pay interest on the toggle notes (i) in cash, (ii) by increasing the principal amount of the outstanding toggle notes or by issuing payment-in-kind notes (PIK Interest) or (iii) by paying interest on half the principal amount of the toggle notes in cash and half in PIK Interest. PIK Interest is paid at 10% and cash interest is paid at 9¹/4% per annum. To date, the Company has paid all interest payments in cash. During 2009, the Company repurchased approximately $2.5 million in principal amount of the senior subordinated toggle notes in the open market. At December 31, 2011, the Company had $437.5 million of Notes outstanding. The Notes are unsecured senior subordinated obligations of the Company; however, the Notes are guaranteed by all of its current and future direct and indirect wholly-owned domestic subsidiaries. Additionally, the Notes contain various restrictive covenants, including financial covenants that limit its 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.

On or after May 1, 2012, the Company may redeem all or a part of the Notes at a redemption price (expressed as a percentage of principal amount) plus accrued and unpaid interest. The redemption prices range from approximately 104% in 2012 to 100% in 2015 and thereafter.

(c) United Kingdom borrowings

In April 2007, the Company entered into an amended and restated credit agreement, which covered its existing overdraft facility and term loan facility (Term Loan A). This agreement provides a total overdraft facility of £2.0 million, and an additional Term Loan B facility of £10 million, which was drawn in April 2007. In March 2008, the Company further amended its U.K. Agreement to provide for a £2.0 million Term Loan C facility. The Company borrowed the entire £2.0 million in March 2008 to acquire property adjacent to one of its hospitals in London. In September 2011, the Company renewed its overdraft facility and added a new £10.0 million revolving credit facility to assist in funding the expansion of Holly House hospital. Under the renewal, the Company must pay a commitment fee of 0.5% per annum on the unused portion of the overdraft facility and 1.10% per annum on the unused revolving credit facility each quarter. Excluding availability on the overdraft

F-25

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

facility and revolving credit facility, no additional borrowings can be made under the Term Loan A, B or C facilities. At December 31, 2011, the Company had £32.7 million ($50.9 million) outstanding under the U.K. credit facility, including £4.0 million ($6.2 million) on the revolving credit facility at a weighted average interest rate of approximately 2.7%.

Interest on the borrowings is based on a three-month or six-month LIBOR, or other rate as the bank may agree, plus a margin of 1.25% to 1.50%. Quarterly principal payments are required on the Term Loan A, which began in June 2007, and approximate $4.7 million in the first and second year, $6.2 million in the third and fourth year; $7.8 million in the fifth year, with the remainder due in the sixth year after the April 2007 closing. The Term Loan B does not require any principal payments prior to maturity and matures in 2013. The Term Loan C requires quarterly principal payments of approximately £0.1 million ($0.2 million), which began in June 2008 and continue through its maturity date of February 2013 when the final payment of £0.5 million ($0.8 million) is due. No principal payments are due on the revolving credit facility until its maturity in February 2013. The borrowings are guaranteed by certain of the Company’s subsidiaries in the United Kingdom with a security interest in various assets, and a pledge of the capital stock of the U.K. borrowers and the capital stock of certain guarantor subsidiaries. The Agreement contains various restrictive covenants, including financial covenants that limit 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 also has the ability to borrow under a capital asset finance facility in the U.K. of up to £2.5 million ($3.9 million). The Company borrowed against the facility in June 2010 and November 2010 and have £1.1 million ($1.7 million) outstanding at December 31, 2011. The terms of the borrowings require monthly principal and interest payments over 48 months. The Company has pledged capital assets as collateral against these borrowings.

(d) Other Long-term Debt

The Company and its subsidiaries have notes payable to financial institutions and other parties of $30.2 million, which mature at various dates through 2018 and accrue interest at fixed and variable rates ranging from 4.4% to 8.8%. Capital lease obligations in the carrying amount of $30.7 million are secured by underlying real estate and equipment and have implicit interest rates ranging from 1.6% to 19.2%.

The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2011 are as follows (in thousands): 2012, $25,487; 2013, $72,516; 2014, $499,665; 2015, $5,538; 2016, $4,876 and thereafter, $460,374.

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, 2011, the aggregate carrying amount and estimated fair value of long-term debt was $1.1 billion and $1.0 billion, respectively. At December 31, 2010, the aggregate carrying amount and estimated fair value of long-term debt was $1.1 billion.

F-26

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(10) Interest Rate Swaps

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

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

In order to manage the Company’s interest rate risk related to a portion of its variable-rate U.K. debt, on February 29, 2008, the Company entered into an interest rate swap agreement for a notional amount of £20.0 million. The interest rate swap required the Company to pay 4.99% and it received interest at a variable rate of three-month GBP-LIBOR. The interest rate swap matured in March 2011. The Company entered into a new interest swap effective March 31, 2011 for a notional amount of £18.0 million ($28.1 million). The interest rate swap requires the Company to pay 1.45% and to receive interest at a variable rate of three-month GBP-LIBOR (currently 1.1%), and is reset quarterly. No collateral is required under the interest rate swap agreement. The swap matures in June 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 are used to settle the Company’s interest obligations on the hedged portion of the variable rate debt, which has the overall outcome of the Company paying and expensing a fixed rate of interest on the hedged debt.

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheet. The Company designated the interest rate swaps as cash flow hedges of certain of its variable-rate borrowings. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings and would be classified as interest expense in the Company’s consolidated statements of operations. The Company recorded no expense

F-27

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

related to ineffectiveness for the years ended December 31, 2011, 2010 or 2009. For the years ended December 31, 2011, 2010 and 2009, the Company reclassified $4.2 million, $7.9 million and $6.4 million, respectively, out of other comprehensive income to interest expense related to the swaps. Through the expiration date of the U.K. swap, if current interest rates remain at December 31, 2011 levels, the Company will record approximately $0.1 million more interest expense than if it had not entered into the interest rate swap.

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). At December 31, 2010, the fair values of the U.K. and U.S. interest rate swaps were current liabilities of $0.3 million and $3.6 million, respectively and were included in other current liabilities in the accompanying 2010 consolidated balance sheet, with the offset to other comprehensive income (loss). During the years ended December 31, 2011, 2010 and 2009, the amounts, net of taxes, recorded in other comprehensive income (loss) related to the interest rate swaps were $2.6 million, $3.4 million and $3.9 million, respectively. The estimated fair value of the interest rate swaps was determined using present value models of the contractual payments. Inputs to the models were based on prevailing LIBOR market data and incorporate credit data that measure nonperformance risk. The estimated fair value represents the theoretical exit cost the Company would have to pay to transfer the obligations to a market participant with similar credit risk. The interest rate swap agreements are classified within Level 2 of the valuation hierarchy.

(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 2024. 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, 2011 are as follows (in thousands):


	Capital Leases			Operating Leases
Year ending December 31,
2012	$	6,962		$	14,724
2013		6,544			12,758
2014		4,508			10,691
2015		3,856			9,033
2016		3,449			7,533
Thereafter		25,945			24,742

Total minimum lease payments		51,264		$	79,481

Amount representing interest		(20,552	)

Present value of minimum lease payments	$	30,712

Total rent expense from continuing operations under operating leases was $16.1 million, $15.8 million and $16.4 million for the years ended December 31, 2011, 2010 and 2009, respectively.

F-28

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(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 amounts from consolidated surgery centers, totaled approximately $60.0 million, $52.1 million and $45.2 million for the years ended December 31, 2011, 2010 and 2009, 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 and 2009. The Company did not sell any ownership interests in facilities to Baylor in 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
December 2009	Dallas, Texas(2)	$	1.2 million	$	0.3 million
December 2009	Fort Worth, Texas(3)		2.4 million		0.1 million

Total		$	3.6 million	$	0.4 million

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

(2)	Baylor acquired a controlling interest in a facility from the Company, which transferred control of the facility to Baylor.

(3)	Baylor acquired a controlling interest in two facilities. The Company continues to account for these facilities under the equity method of accounting.

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, 2011, 2010 and 2009. 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, 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. At December 31, 2010, the Company had approximately $4.5 million accrued related to such management fee, of which $0.8 million is included in other current liabilities and $3.7 million is included in other long term liabilities in the accompanying consolidated balance sheet.

(13) Income Taxes

The components of income (loss) from continuing operations before income taxes were as follows (in thousands):


	2011			2010		2009
Domestic	$	170,565		$	129,174	$	112,508
Foreign		(94,232	)		12,810		18,548

	$	76,333		$	141,984	$	131,056

F-29

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Income tax expense (benefit) attributable to income from continuing operations consists of (in thousands):


	Current		Deferred		Total
Year ended December 31, 2011:
U.S. federal	$	19,151	$	28,396	$	47,547
State and local		4,155		1,418		5,573
Foreign		3,330		279		3,609

Net income tax expense	$	26,636	$	30,093	$	56,729


	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
Foreign		3,134		(63	)		3,071

Net income tax expense	$	24,038	$	8,290		$	32,328


	Current		Deferred			Total
Year ended December 31, 2009:
U.S. federal	$	1,260	$	(9,859	)	$	(8,599	)
State and local		3,144		—			3,144
Foreign		5,118		(542	)		4,576

Net income tax expense (benefit)	$	9,522	$	(10,401	)	$	(879	)

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 is as follows (in thousands):


	Year Ended December 31, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Computed “expected” tax expense	$	26,717		$	49,694		$	45,870
Increase (reduction) in income taxes resulting from:
Book income of consolidated entities attributable to noncontrolling interests		(24,424	)		(21,195	)		(22,303	)
Differences between U.S. financial reporting and foreign statutory reporting		120			(218	)		(152	)
State tax expense, net of federal benefit		3,970			2,979			1,824
Nondeductible goodwill and impairment charge		37,674			1,366			6,338
Deferred income taxes on foreign earnings		13,202			—			—
Removal of foreign tax rate differential		(989	)		(982	)		(1,211	)
Valuation allowance		—			—			(31,193	)
Other		459			684			(52	)

Total	$	56,729		$	32,328		$	(879	)

F-30

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010 are presented below (in thousands).


	December 31,
	2011			2010
Deferred tax assets:
Net operating loss and other tax carryforwards	$	6,635		$	8,276
Accrued expenses		11,027			11,687
Bad debts/reserves		3,323			3,334
Interest rate swaps		13			1,359
Capitalized costs and other		1,287			1,605

Total deferred tax assets		22,285			26,261
Valuation allowance		(820	)		(685	)

Total deferred tax assets, net	$	21,465		$	25,576


Deferred tax liabilities:
Basis difference of acquisitions	$	171,367		$	139,362
Accelerated depreciation		1,933			1,126
Capitalized interest and other		1,407			1,332

Total deferred tax liabilities	$	174,707		$	141,820

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.

In conjunction with Welsh Carson’s acquisition of the Company in April 2007, which increased the Company’s debt, caused the Company to generate U.S. taxable losses, and reduced the likelihood of the Company generating U.S. taxable income, the Company established a valuation allowance against its U.S. deferred tax assets. Subsequent to the acquisition, the Company continued to establish a full valuation allowance against newly generated U.S. deferred tax assets and has continuously assessed the likelihood of the assets being realized at a future date. During the third quarter of 2009, the Company determined, based on factors such as those described above, including recent favorable operating trends, expected future taxable income, and other factors, that it is more likely than not that the majority of these assets, which include net operating loss carryforwards and other items, will be realized in the future. Accordingly, the Company’s results of operations for 2009 include an income tax benefit of $31.2 million related to the reversal of a majority of the Company’s valuation allowance against its deferred tax assets. The Company still carries a valuation allowance totaling $0.8 million against certain of its deferred tax assets, which relates to deferred tax assets that have restrictions as to use and are not considered more likely than not to be realized. It the Company’s estimates related to the above items change significantly, the Company may need to alter the amount of its valuation allowance in the future through a favorable or unfavorable adjustment to net income.

F-31

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

At December 31, 2011, the Company had federal net operating loss carryforwards for U.S. federal income tax purposes of approximately $16.6 million. The Company’s ability to offset future taxable income with these carryforwards would begin to be forfeited in 2022, if unused. The Company does not believe 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’s U.K. operations have no net operating loss carryforwards or other deferred tax assets. These operations continued to be profitable in 2011, and the Company therefore has accrued the related income tax expense. At December 31, 2011, the Company is now considering potential transactions that could result in the repatriation of its U.K. subsidiaries’ earnings and as a result no longer qualified for excluding U.S. income tax from its provision with respect to its current and prior U.K. earnings and accordingly accrued a $13.2 million deferred tax liability.

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 December 1, 2009, the Company’s board of directors declared and the Company paid a special cash dividend in the amount of $88.6 million on the Company’s common stock. The proceeds of the dividend were used by USPI Holdings, Inc., the sole stockholder of the Company, to pay a special cash dividend on its common stock. In turn, the proceeds were used by USPI Group Holdings, Inc., the sole stockholder of USPI Holdings, Inc., to pay amounts currently accrued on its preferred stock.

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. (Parent), 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 7,541,875 shares had been delivered under the Plan at December 31, 2011, 13,184,648 remained available for delivery, with 15,565,207 having been granted at December 31, 2011.

F-32

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, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Salaries, benefits and other employee costs	$	404		$	566		$	548
General and administrative expenses		833			1,128			1,016
Other operating expenses		—			—			131
Discontinued operations		—			474			256

Expense before income tax benefit		1,237			2,168			1,951
Income tax benefit		(206	)		(494	)		(389	)

Total equity-based compensation expense, net of tax	$	1,031		$	1,674		$	1,562

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, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Share awards	$	835		$	1,331		$	1,215
Stock options		402			837			605
Warrants		—			—			131

Expense before income tax benefit		1,237			2,168			1,951
Income tax benefit		(206	)		(494	)		(389	)

Total equity-based compensation expense, net of tax	$	1,031		$	1,674		$	1,562

Total unrecognized compensation related to nonvested awards of stock options and nonvested shares was $12.6 million at December 31, 2011 of which $3.8 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.

During the years ended December 31, 2011 and 2010, the Company received immaterial cash proceeds from the exercise of stock options. No stock options were exercised during the year ended December 31, 2009.

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

F-33

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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, 2011			Year Ended December 31, 2010			Year Ended December 31, 2009
Assumptions:
Expected life in years		4.82			4.82			4.82
Risk-free interest rates		0.93-2.35	%		1.35-2.59	%		2.09	%
Dividend yield		0.0	%		0.0	%		0.0	%
Volatility		45.16	%		45.16	%		45.16	%
Weighted average grant-date fair value	$	0.75		$	0.65		$	0.37

Stock option activity during the year ended December 31, 2011 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, 2011		4,675		$	0.68		4.9	$	5,480
Additional grants		1,740			1.85		—		—
Exercised		(122	)		0.38		—		—
Forfeited or expired		(136	)		1.43		—		—

Outstanding at December 31, 2011		6,157		$	0.99		4.9	$	10,591

Exercisable at December 31, 2011		3,810		$	0.54		3.6	$	8,269

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.

Additionally, in conjunction with the merger, 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, 2011, 2,212,957 of these share awards were outstanding and unvested.

F-34

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The grants of nonvested share awards, excluding the awards exchanged concurrent with the merger, during the year ended December 31, 2011 are summarized as follows:


Nonvested Shares	Number of Shares (000)			Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2011		8,937		$	0.49
Additional grants		320			1.85
Vested		(1,887	)		0.51
Forfeited		(175	)		1.62

Nonvested at December 31, 2011		7,195		$	0.52

The weighted average grant-date fair value per share award was $1.85, $1.62 and $0.76 for the years ended December 31, 2011, 2010 and 2009, respectively. The total fair value of shares which vested during the years ended December 31, 2011, 2010 and 2009 was approximately $3.5 million, $3.0 million and $1.7 million, respectively.

Warrants

During 2009, Parent granted warrants to a not-for-profit healthcare system (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 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, 2011, 222,220 warrants are exercisable. Because the warrants are fully vested, the expense associated with these warrants was recorded upon grant within “other operating expenses.”

During 2008, one of the Company’s hospital partners, Baylor, was granted 666,666 warrants to purchase Parent’s common stock for $3.00 per share. The warrants are 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 are 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, 2011, 444,444 warrants are exercisable.

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 $3.00 per share. All of the warrants are fully vested and non-forfeitable but contain exercise restrictions. Of the 2,333,328 warrants outstanding at December 31, 2011, 1,777,774 warrants are exercisable and a portion of the remaining 555,554 warrants will

F-35

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

become exercisable in 2012 and 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 are fully vested, the expense associated with these warrants was recorded upon grant within “other operating expenses.”

(15) Segment Disclosures

The Company’s business is the operation of surgical facilities and related businesses in the United States and the United Kingdom. The Company’s chief operating decision maker, as that term is defined in GAAP, regularly reviews financial information about its surgical facilities for assessing performance and allocating resources both domestically and abroad. Accordingly, the Company’s reportable segments consist of (1) U.S. based facilities and (2) United Kingdom based facilities. All amounts related to discontinued operations have also been removed from all periods presented (Note 2).


	United States			United Kingdom			Total
Year Ended December 31, 2011
Net patient service revenues	$	418,155		$	110,408		$	528,563
Other revenues		81,023			—			81,023

Total revenues	$	499,178		$	110,408		$	609,586

Depreciation and amortization	$	21,177		$	8,285		$	29,462
Goodwill impairment		—			107,028			107,028
Operating income (loss)		233,659			(92,528	)		141,131
Net interest expense		(63,021	)		(1,704	)		(64,725	)
Income tax expense		(53,120	)		(3,609	)		(56,729	)
Total assets		2,114,249			279,249			2,393,498
Capital expenditures		32,178			18,345			50,523


	United States			United Kingdom			Total
Year Ended December 31, 2010
Net patient service revenues	$	402,049		$	102,716		$	504,765
Other revenues		71,900			—			71,900

Total revenues	$	473,949		$	102,716		$	576,665

Depreciation and amortization	$	22,493		$	7,306		$	29,799
Operating income		194,610			15,906			210,516
Net interest expense		(66,144	)		(3,096	)		(69,240	)
Income tax expense		(29,257	)		(3,071	)		(32,328	)
Total assets		2,051,144			321,595			2,372,739
Capital expenditures		31,149			22,367			53,516

F-36

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


	United States			United Kingdom			Total
Year Ended December 31, 2009
Net patient service revenues	$	418,802		$	105,097		$	523,899
Other revenues		69,576			—			69,576

Total revenues	$	488,378		$	105,097		$	593,475

Depreciation and amortization	$	24,432		$	6,733		$	31,165
Operating income		178,176			20,119			198,295
Net interest expense		(66,041	)		(1,571	)		(67,612	)
Income tax benefit (expense)		5,455			(4,576	)		879
Total assets		2,000,087			325,305			2,325,392
Capital expenditures		20,296			12,393			32,689

(16) Commitments and Contingencies

(a) Financial Guarantees

As of December 31, 2011, 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 $76.4 million. Of the total, $21.1 million relates to the obligations of consolidated subsidiaries, whose obligations are included in the Company’s consolidated balance sheet and related disclosures, and $46.6 million of the remaining $55.3 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 $8.7 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 $0.5 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 not reported claims, demographic factors, severity factors and actuarial valuations. The Company believes that

F-37

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

the accruals established at December 31, 2011, 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 U.S. 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 $2.2 million for the year ended December 31, 2011 and $2.0 million in each of the years ended December 31, 2010 and 2009.

One of the Company’s U.K. subsidiaries, which the Company acquired in 2000, has obligations remaining under a defined benefit pension plan that originated in 1991 and was closed to new participants at the end of 1998. The plan’s overall strategy is to outperform the CAPS Pooled Fund Median over rolling three year periods. To implement this strategy the plan invests in a wide diversification of asset types and fund strategies. The target allocations for plan assets are approximately 79% equity securities, 14% bonds and 7% to all other types of investments. 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. At December 31, 2010, the plan had 59 participants, plan assets of $10.4 million, an accumulated pension benefit obligation of $13.1 million, and a projected benefit obligation of $13.1 million. Pension expense for the years ended December 31, 2011, 2010 and 2009 was $0.4 million, $0.5 million and $0.5 million, respectively.

At December 31, 2011, the estimated fair value of U.K.’s pension plan assets by asset type was: $8.2 million — equities; $1.4 million — bonds; $0.7 million — cash; and $0.3 million of other investments, which are primarily mutual funds invested in real estate properties. At December 31, 2010, the estimated fair value of U.K.’s pension plan assets by asset type was: $8.6 million — equities; $1.0 million — bonds; $0.5 million — cash; and $0.3 million of other investments, which are primarily mutual funds invested in real estate properties. The estimated fair value of equities, bonds and cash are calculated using Level 1 inputs. The estimated fair value of property mutual funds are based on Level 3 inputs. There was no significant activity within the Level 3 investments during 2011 or 2010.

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, 2011 and 2010. 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 $10.7 million and $11.0 million at December 31, 2011 and 2010, respectively. The Company’s obligations related to the plan were $13.2 million and $13.1 million, at December 31, 2011 and 2010, respectively, of which $0.7 million and $2.3 million in 2011 and 2010, 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, 2011, 2010 and 2009 was $1.2 million, $0.8 million and $0.3 million, respectively.

F-38

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(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, 2011), 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 $625,000 (as of December 31, 2011), 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, 2011, the Company has employment agreements with 17 other senior managers which generally include one year terms and renew automatically for additional one year terms unless terminated by either party. The total annual base compensation under these agreements is $5.5 million as of December 31, 2011, subject to increases approved by the board of directors, and performance bonuses of up to a total of $3.7 million per year.

(17) Subsequent Events

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

(18) Condensed Consolidating Financial Statements

The following information is presented as required by regulations of the SEC in connection with the Company’s senior subordinated notes that have been registered with the SEC. While not required by SEC regulations, additional disclosures have also been presented in this note as required by the Company’s senior secured credit facility’s covenants. 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 $240.0 million of 8⁷/8% senior subordinated notes and $200.0 million of 9¹/4%/10% senior subordinated toggle notes, all due 2017 (the Notes), were issued in a private offering on April 19, 2007 and were subsequently registered as publicly traded securities through a Form S-4 declared effective by the SEC on July 25, 2007. The exchange offer was completed in August 2007. The Notes are unsecured senior subordinated obligations of the Company; however, the Notes are guaranteed by all of the Company’s current and future direct and indirect wholly-owned domestic subsidiaries. USPI, which issued the Notes, does not have independent assets or operations. USPI’s investees in the United Kingdom are not guarantors of the obligation. USPI’s investees in the United States in which USPI owns less than 100% are not guarantors of the obligation. The financial positions and results of operations (below, in thousands) of the respective guarantors are based upon the

F-39

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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.

Condensed Consolidating Balance Sheets:


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
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		32,248		2,585		—			34,833

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-40

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


As of December 31, 2010	Guarantors		Non-Participating Investees		Consolidation Adjustments			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	60,186	$	67	$	—		$	60,253
Accounts receivable, net		—		50,082		—			50,082
Other receivables		27,313		45,146		(57,217	)		15,242
Inventories of supplies		685		8,506		—			9,191
Prepaids and other current assets		27,477		2,166		—			29,643

Total current assets		115,661		105,967		(57,217	)		164,411
Property and equipment, net		24,343		177,803		114			202,260
Investments in affiliates		1,010,592		—		(617,031	)		393,561
Goodwill and intangible assets, net		904,108		342,777		340,991			1,587,876
Other assets		91,151		2,602		(69,122	)		24,631

Total assets	$	2,145,855	$	629,149	$	(402,265	)	$	2,372,739


LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	1,684	$	21,804	$	—		$	23,488
Accrued expenses and other		236,835		37,868		(55,917	)		218,786
Current portion of long-term debt		4,932		19,751		(2,297	)		22,386

Total current liabilities		243,451		79,423		(58,214	)		264,660
Long-term debt, less current portion		966,999		82,732		(2,291	)		1,047,440
Other long-term liabilities		148,648		9,692		(520	)		157,820
Parent’s equity		786,757		432,261		(432,261	)		786,757
Noncontrolling interests		—		25,041		91,021			116,062

Total liabilities and equity	$	2,145,855	$	629,149	$	(402,265	)	$	2,372,739

F-41

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statements of Operations:


Year Ended December 31, 2011	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Revenues	$	106,481		$	526,904		$	(23,799	)	$	609,586
Equity in earnings of unconsolidated affiliates		40,164			3,073			39,515			82,752
Operating expenses, excluding depreciation and amortization		79,067			464,619			(21,941	)		521,745
Depreciation and amortization		6,635			22,695			132			29,462

Operating income		60,943			42,663			37,525			141,131
Interest expense, net		(58,835	)		(5,890	)		—			(64,725	)
Other income (expense), net		(155	)		265			(183	)		(73	)

Income from continuing operations before income taxes		1,953			37,038			37,342			76,333
Income tax expense		(52,278	)		(4,451	)		—			(56,729	)

Income (loss) from continuing operations		(50,325	)		32,587			37,342			19,604
Loss from discontinued operations, net of tax		(519	)		(2	)		2			(519	)

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	)


Year Ended December 31, 2010	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Revenues	$	97,463		$	501,505		$	(22,303	)	$	576,665
Equity in earnings of unconsolidated affiliates		132,846			2,116			(65,046	)		69,916
Operating expenses, excluding depreciation and amortization		86,521			342,690			(22,945	)		406,266
Depreciation and amortization		7,249			22,346			204			29,799

Operating income		136,539			138,585			(64,608	)		210,516
Interest expense, net		(61,205	)		(7,945	)		(90	)		(69,240	)
Other income (expense), net		708			—			—			708

Income from continuing operations before income taxes		76,042			130,640			(64,698	)		141,984
Income tax expense		(26,946	)		(5,382	)		—			(32,328	)

Income from continuing operations		49,096			125,258			(64,698	)		109,656
Loss from discontinued operations, net of tax		(7,003	)		(533	)		533			(7,003	)

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

F-42

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


Year Ended December 31, 2009	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Revenues	$	96,861		$	519,293		$	(22,679	)	$	593,475
Equity in earnings of unconsolidated affiliates		133,230			2,413			(73,872	)		61,771
Operating expenses, excluding depreciation and amortization		101,711			346,489			(22,414	)		425,786
Depreciation and amortization		7,380			23,409			376			31,165

Operating income		121,000			151,808			(74,513	)		198,295
Interest expense, net		(60,386	)		(7,221	)		(5	)		(67,612	)
Other income (expense), net		384			(11	)		—			373

Income from continuing operations before income taxes		60,998			144,576			(74,518	)		131,056
Income tax benefit (expense)		7,215			(6,336	)		—			879

Income from continuing operations		68,213			138,240			(74,518	)		131,935
Earnings from discontinued operations, net of tax		1,453			996			(996	)		1,453

Net income		69,666			139,236			(75,514	)		133,388
Less: Net income attributable to noncontrolling interests		—			(11,128	)		(52,594	)		(63,722	)

Net income attributable to Parent	$	69,666		$	128,108		$	(128,108	)	$	69,666

Condensed Consolidating Statements of Comprehensive Income (Loss):


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		1,314			1,314			(1,314	)		1,314
Unrealized gain on interest rate swaps, net of tax		2,560			204			(204	)		2,560
Pension adjustments, net of tax		(556	)		(556	)		556			(556	)

Total other comprehensive income		3,318			962			(962	)		3,318

Comprehensive income (loss)		(47,526	)		33,547			36,382			22,403
Less: Comprehensive income attributable to noncontrolling interests		—			(16,978	)		(52,951	)		(69,929	)

Comprehensive income (loss) attributable to Parent	$	(47,526	)	$	16,569		$	(16,569	)	$	(47,526	)

F-43

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
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


Year Ended December 31, 2009	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Net income	$	69,666		$	139,236		$	(75,514	)	$	133,388
Other comprehensive income:
Foreign currency translation adjustments		21,967			21,967			(21,967	)		21,967
Unrealized gain on interest rate swaps, net of tax		3,894			108			(108	)		3,894
Pension adjustments, net of tax		(698	)		(698	)		698			(698	)

Total other comprehensive income		25,163			21,377			(21,377	)		25,163

Comprehensive income		94,829			160,613			(96,891	)		158,551
Less: Comprehensive income attributable to noncontrolling interests		—			(11,128	)		(52,594	)		(63,722	)

Comprehensive income attributable to Parent	$	94,829		$	149,485		$	(149,485	)	$	94,829

F-44

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statements of USPI Stockholder’s Equity:


	Guarantors			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Balance, December 31, 2009	$	757,952		$	412,362		$	(412,362	)	$	757,952
Net income		42,093			124,725			(64,165	)		102,653
Net income attributable to noncontrolling interests		—			(12,879	)		(47,681	)		(60,560	)
Contribution related to equity award grants by USPI Group Holdings, Inc.		2,294			527			(527	)		2,294
Acquisitions and contributions		(452	)		36,090			(36,090	)		(452	)
Disposals and deconsolidations		(6,774	)		(5,857	)		5,857			(6,774	)
Distributions		—			(112,573	)		112,573			—
Dividend on common stock		(850	)		—			—			(850	)
Foreign currency translation and other		(7,506	)		(10,134	)		10,134			(7,506	)

Balance, December 31, 2010		786,757			432,261			(432,261	)		786,757
Net income (loss)		(50,844	)		32,585			37,344			19,085
Net income attributable to noncontrolling interests		—			(16,978	)		(52,951	)		(69,929	)
Contribution related to equity award grants by USPI Group Holdings, Inc.		1,150			—			—			1,150
Acquisitions and contributions		(473	)		6,218			(6,218	)		(473	)
Disposals and deconsolidations		(7,220	)		3,049			(3,049	)		(7,220	)
Distributions		—			(122,636	)		122,636			—
Foreign currency translation and other		3,318			962			(962	)		3,318

Balance, December 31, 2011	$	732,688		$	335,461		$	(335,461	)	$	732,688

F-45

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statements of Cash Flows:


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 on discontinued operations		519			2			(2	)		519
Changes in operating and intercompany assets and liabilities and noncash items included in net income		137,984			118,640			(92,114	)		164,510

Net cash provided by (used in) operating activities		87,659			151,227			(54,772	)		184,114
Cash flows from investing activities:
Purchases of property and equipment, net		(7,955	)		(25,585	)		—			(33,540	)
Purchases of new businesses and equity interests, net		(77,881	)		(25,456	)		—			(103,337	)
Other items, net		(23,113	)		12,009			10,626			(478	)

Net cash used in investing activities		(108,949	)		(39,032	)		10,626			(137,355	)
Cash flows from financing activities:
Long-term borrowings, net		(14,265	)		(8,644	)		2,509			(20,400	)
Purchases and sales of noncontrolling interests, net		510			—			—			510
Distributions to noncontrolling interests		—			(122,636	)		54,772			(67,864	)
Decrease in cash held on behalf of noncontrolling interest holders and other		11,057			25,143			(13,135	)		23,065

Net cash provided by (used in) financing activities		(2,698	)		(106,137	)		44,146			(64,689	)

Effect of exchange rate changes on cash		—			(501	)		—			(501	)

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

F-46

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


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
Loss on discontinued operations		7,003			533			(533	)		7,003
Changes in operating and intercompany assets and liabilities and noncash items included in net income		17,222			31,072			11,114			59,408

Net cash provided by (used in) operating activities		66,318			156,330			(53,584	)		169,064
Cash flows from investing activities:
Purchases of property and equipment, net		(5,437	)		(34,598	)		—			(40,035	)
Purchases of new businesses and equity interests, net		(21,698	)		(11,601	)		—			(33,299	)
Other items, net		(9,306	)		(2,350	)		12,950			1,294

Net cash used in investing activities		(36,441	)		(48,549	)		12,950			(72,040	)
Cash flows from financing activities:
Long-term borrowings, net		14,735			(20,400	)		4,513			(1,152	)
Purchases and sales of noncontrolling interests, net		737			349			—			1,086
Distributions to noncontrolling interests		—			(112,573	)		53,584			(58,989	)
Dividend payment on common stock		(850	)		—			—			(850	)
Decrease in cash held on behalf of noncontrolling interest holders and other		(11,743	)		15,112			(17,463	)		(14,094	)

Net cash provided by (used in) financing activities		2,879			(117,512	)		40,634			(73,999	)

Net cash provided by discontinued operations		—			2,169			—			2,169
Effect of exchange rate changes on cash		—			169			—			169

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-47

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)


Year Ended December 31, 2009	Guarantor			Non-Participating Investees			Consolidation Adjustments			Consolidated Total
Cash flows from operating activities:
Net income	$	69,666		$	139,236		$	(75,514	)	$	133,388
Income from discontinued operations		(1,453	)		(996	)		996			(1,453	)
Changes in operating and intercompany assets and liabilities and noncash items included in net income		(1,582	)		30,074			20,183			48,675

Net cash provided by (used in) operating activities		66,631			168,314			(54,335	)		180,610
Cash flows from investing activities:
Purchases of property and equipment, net		(5,139	)		(24,565	)		—			(29,704	)
Purchases of new businesses and equity interests, net		(57,625	)		(11,816	)		9,914			(59,527	)
Other items, net		3,837			(10,668	)		10,233			3,402

Net cash used in investing activities		(58,927	)		(47,049	)		20,147			(85,829	)
Cash flows from financing activities:
Long-term borrowings, net		(2,750	)		(18,905	)		1,585			(20,070	)
Purchases and sales of noncontrolling interests, net		(4,662	)		2,595			—			(2,067	)
Distributions to noncontrolling interests		—			(117,890	)		54,335			(63,555	)
Dividend payment on common stock		(88,617	)		—			—			(88,617	)
Increase in cash held on behalf of noncontrolling interest holders and other		73,730			11,064			(21,732	)		63,062

Net cash used in financing activities		(22,299	)		(123,136	)		34,188			(111,247	)

Net cash provided by discontinued operations		—			1,725			—			1,725
Effect of exchange rate changes on cash		—			196			—			196

Net increase (decrease) in cash		(14,595	)		50			—			(14,545	)
Cash at the beginning of the period		42,025			7,410			—			49,435

Cash at the end of the period	$	27,430		$	7,460		$	—		$	34,890

F-48

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(19) Selected Quarterly Financial Data (Unaudited)


	2011 Quarters
	First			Second			Third			Fourth
Net revenues	$	147,090		$	151,050		$	149,458		$	161,988
Income (loss) from continuing operations		32,126			34,902			31,874			(79,298	)
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	)


	2010 Quarters
	First			Second			Third			Fourth
Net revenues	$	137,871		$	143,190		$	141,392		$	154,212
Income from continuing operations		25,442			30,697			25,875			27,642
Net income attributable to noncontrolling interests		(13,635	)		(15,135	)		(14,309	)		(17,481	)
Net income attributable to USPI’s common stockholder		12,011			15,887			11,848			2,347

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 2010 and 2011, all of which significantly affect the comparability of net income from quarter to quarter. In addition, the Company recorded a $107.0 million goodwill impairment charged related to its U.K. reporting unit in the fourth quarter of 2011.

F-49

(2) Financial Statement Schedule

The following financial statement schedule is filed as part of this Form 10-K:

Schedule II — Valuation and Qualifying Accounts

SCHEDULE VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts


	Balance at Beginning of Period		Additions Charged to:										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, 2009(1)	$	11,544	$	8,958	$	—	$	(10,149	)	$	(2,193	)	$	8,160
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

Valuation allowance for deferred tax assets


	Balance at Beginning of Period		Additions Charged to:										Balance at End of Period
	Balance at Beginning of Period		Costs and Expenses		Other Accounts(4)		Deductions(5)			Other Items			Balance at End of Period
	(In thousands)
Year ended December 31, 2009	$	38,558	$	—	$	—	$	(31,193	)	$	(4,082	)	$	3,283
Year ended December 31, 2010		3,283		—		—		—			(2,598	)		685
Year ended December 31, 2011		685		—		—		—			135			820

(1)	Includes amounts related to companies disposed of in 2009 through 2011.

(2)	Accounts written off.

(3)	Balances from entities that were deconsolidated and other.

(4)	Recorded to goodwill

(5)	Reversal of deferred tax asset allowance (Note 13), recorded as a reduction of income tax expense.

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, 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			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, 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.

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. Those ownership levels were 50.1% for BUMC and 49.9% for USP as of June 30, 2011 and 2010.

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.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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.

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	%

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

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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.

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.

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

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 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.

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.

Equity in Earnings of Unconsolidated Affiliates

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.

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.

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.

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

June 30,
2011

June 30,
2010

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

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

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

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

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

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

Fort Worth Surgicare Partners, Ltd.

Baylor Surgical Hospital of Fort Worth

Fort Worth

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

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

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

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

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

(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.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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 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

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, 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

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.

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.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Consolidated Financial Statements

Years Ended June 30, 2010 and 2009

(With Independent Auditors’ Report Thereon)

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2010 AND 2009

CONTENTS


Report of PricewaterhouseCoopers LLP, Independent Auditors			27
Audited Financial Statements
Consolidated Balance Sheets			28
Consolidated Statements of Income			29
Consolidated Statements of Changes in Equity			30
Consolidated Statements of Cash Flows			31
Notes to Consolidated Financial Statements			32

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, 2010 and 2009, 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

December 8, 2010

Dallas, Texas

TEXAS HEALTH VENTURES GROUP, L.L.C AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS —

JUNE 30, 2010 AND 2009


	2010		2009
	(In thousands)
ASSETS
CURRENT ASSETS:
Cash	$	522	$	8,315
Patient receivables, net of allowance for doubtful accounts of $12,560 and $9,097 at June 30, 2010 and 2009, respectively		48,468		41,489
Due from affiliate (Note 9)		43,709		70,370
Supplies		8,903		7,570
Prepaid and other current assets		2,096		2,120

Total current assets		103,698		129,864
PROPERTY AND EQUIPMENT, net (Note 2)		170,428		141,603
OTHER LONG-TERM ASSETS:
Investments in unconsolidated affiliates (Note 4)		1,871		1,687
Goodwill and intangible assets, net (Note 6)		143,915		137,303
Other		1,051		633

Total assets	$	420,963	$	411,090

LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	16,335	$	13,063
Accrued expenses and other		16,504		14,316
Due to affiliates (Note 9)		—		3,119
Current portion of long-term obligations (Note 7)		12,887		12,856

Total current liabilities		45,726		43,354
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION (Note 7)		142,709		120,357
OTHER LIABILITIES		14,540		13,376

Total liabilities		202,975		177,087
NONCONTROLLING INTERESTS — REDEEMABLE		30,352		24,400
COMMITMENTS AND CONTINGENCIES (Notes 7, 8, 9 and 10)
EQUITY:
Members’ equity		172,091		194,591
Noncontrolling interests — nonredeemable		15,545		15,012

Total equity		187,636		209,603

Total liabilities and equity	$	420,963	$	411,090

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, 2010 AND 2009


	2010			2009
	(In thousands)
REVENUES:
Net patient service revenue	$	478,973		$	424,071
Management and royalty fee income (Note 9)		600			588
Other income		517			532

Total revenues		480,090			425,191

EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES (Note 4)		1,100			977

OPERATING EXPENSES:
Salaries, benefits, and other employee costs		102,498			92,664
Medical services and supplies		120,017			98,270
Management and royalty fees (Note 9)		19,181			17,021
Professional fees		3,348			3,880
Other operating expenses		65,665			59,491
Provision for doubtful accounts		15,283			12,420
Depreciation and amortization		19,635			18,898

Total operating expenses		345,627			302,644

Operating income		135,563			123,524
NONOPERATING INCOME (EXPENSES):
Interest expense		(13,680	)		(13,251	)
Interest income (Note 9)		338			640
Other income (expense), net		31			(252	)

Income before income taxes		122,252			110,661
INCOME TAXES		(3,009	)		(2,888	)

Net income		119,243			107,773
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS — Redeemable		(57,886	)		(52,871	)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS — Nonredeemable		(4,444	)		(3,889	)

Net income attributable to the Company	$	56,913		$	51,013

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, 2010 AND 2009


																Noncontrolling Interests — Nonredeemable
				Members’ Equity
	Total			USP			BHS			BUMC			Total
	(In thousands)
Balance at June 30, 2008	$	174,532		$	79,798		$	1,760		$	78,360		$	159,918		$	14,614
Net income		54,902			25,434			604			24,975			51,013			3,889
Distributions to members		(19,934	)		(8,132	)		(222	)		(7,986	)		(16,340	)		(3,594	)
Purchase of noncontrolling interests		353			—			—			—			—			353
Sale of noncontrolling interests		(250	)		—			—			—			—			(250	)
Assign remaining BHS 1.1% interest in THVG to BUMC, effective June 30, 2009		—			—			(2,142	)		2,142			—			—

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		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

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, 2010 AND 2009


	2010			2009
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	119,243		$	107,773
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		15,283			12,420
Depreciation and amortization		19,635			18,898
Amortization of debt issue costs		5			4
Equity in earnings of unconsolidated affiliates, net of distributions received		(183	)		(94	)
Changes in operating assets and liabilities, net of effects from purchases of new businesses:
Patient receivables		(20,815	)		(7,988	)
Due to affiliates, net		(3,119	)		(97	)
Supplies, prepaids, and other assets		(835	)		(437	)
Accounts payable and accrued expenses		2,829			(3,829	)

Net cash provided by operating activities		132,043			126,650

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of new businesses and equity interests, net of cash received of $1,506 and $1,758 for 2010 and 2009, respectively		1,506			46
Sale of equity interests		—			25
Purchases of property and equipment		(16,842	)		(6,611	)
Sales of property and equipment		100			45
Change in deposits and notes receivables		43			—
Change in cash management balances with affiliate		26,229			(39,661	)

Net cash provided by (used in) investing activities		11,036			(46,156	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt	$	9,988		$	3,534
Payments on long-term obligations		(17,703	)		(13,164	)
Distributions to noncontrolling interest owners		(61,361	)		(53,158	)
Purchases of noncontrolling interests		(1,838	)		(1,348	)
Sales of noncontrolling interests		2,944			4,770
Distributions to members		(82,902	)		(16,340	)

Net cash used in financing activities		(150,872	)		(75,706	)

(DECREASE) INCREASE IN CASH		(7,793	)		4,788
CASH, beginning of period		8,315			3,527

CASH, end of period	$	522		$	8,315

SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	13,397		$	13,441
Cash paid for income taxes		2,816			2,365
Noncash transactions:
Noncash assets contributed by Members (Note 3)		4,766			—
Assets acquired under capital leases		25,339			2,675

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

FOR THE YEARS ENDED JUNE 30, 2010 AND 2009

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, 2010, THVG operated twenty-six facilities (the Facilities) under management contracts, twenty-five 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

Recently Adopted Accounting Pronouncements

Effective July 1, 2009, THVG adopted Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007),Business Combinations, (SFAS 141R) and SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51(SFAS 160). SFAS 141R and SFAS 160 are now included in the Financial Accounting Standards Board’s (FASB)Accounting Standards Codification(ASC), Topic 805,Business Combinationsand Topic 810,Consolidations, respectively. The ASC is now the source of GAAP recognized by the FASB to be applied to nongovernmental entities.

Under ASC 805, THVG is required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value at the acquisition date. ASC 805 further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, ASC 805 also requires that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resulting from a business combination be recognized in income from continuing operations in the period of the combination.

ASC 810 now requires THVG to clearly identify and present ownership interests in subsidiaries held by parties other than THVG in the consolidated financial statements within the equity section but separate from THVG’s equity, except as noted below. It also requires the amounts of consolidated net income attributable to THVG and the noncontrolling interests to be clearly identified and presented on the face of the consolidated statement of operations; changes in ownership interests to be accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary to be measured at fair value. The implementation of ASC 810 also results in the cash flow impact of certain transactions with noncontrolling interests being classified within financing activities, consistent with the view that under ASC 810 transactions between THVG (or its subsidiaries) and noncontrolling interests are considered to be equity transactions. These changes are summarized in the table below, along with the cash flow classifications of several similar types of transactions that did not change as a result of ASC 810:


	Before ASC 810	ASC 810
Changes in Cash Flow Classification:
Distributions of earnings paid to noncontrolling interests	Operating	Financing
Acquisitions or sales of equity interests in consolidated subsidiaries, no change of control	Investing	Financing
No Change in Cash Flow Classification:
Distributions of earnings received from unconsolidated affiliates	Operating	Operating
Returns of capital paid to noncontrolling interests	Financing	Financing
Returns of capital received from unconsolidated affiliates	Investing	Investing
Sales of equity interests in consolidated subsidiaries resulting in a change of control	Investing	Investing
Acquisitions or sales of equity interests in unconsolidated affiliates, no change of control	Investing	Investing
Acquisitions of equity interests in unconsolidated affiliates, resulting in change of control	Investing	Investing
Business combinations with no previous ownership by THVG	Investing	Investing

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

As summarized below, THVG has retrospectively applied the classification requirements as required by ASC 810 to all periods presented. The effect of these changes on previously reported consolidated financial statements is as follows (in thousands):


	June 30, 2009
Consolidated Balance Sheet
Total equity as previously reported	$	194,591
Reclassification of nonredeemable noncontrolling interests to equity as required by ASC 810		15,012

Total equity as adjusted for ASC 810	$	209,603

Consolidated Statement of Cash Flows
Net cash provided by operating activities as previously recorded	$	73,765
Reclassification of distributions to noncontrolling interests to financing activities		52,885

Net cash provided by operating activities as adjusted for ASC 810	$	126,650

Net cash used in investing activities as previously reported	$	(42,734	)
Reclassification of purchases and sales of noncontrolling interests to financing activities		(3,422	)

Net cash used in investing activities as adjusted for ASC 810	$	(46,156	)

Net cash used in financing activities as previously reported	$	(26,244	)
Reclassifications of distributions to noncontrolling from interests from operating activities		(52,885	)
Reclassifications of purchases and sales of noncontrolling interests from investing activities		3,423

Net cash used in financing activities as adjusted for ASC 810	$	(75,706	)

Upon the occurrence of various fundamental regulatory changes, THVG could be obligated, under the terms of its investees’ partnership and operating agreements, to purchase some or all of the noncontrolling interests related to THVG’s consolidated subsidiaries. These repurchase requirements are limited to the portions of its facilities that are owned by physicians who perform surgery at THVG’s facilities and would be triggered by regulatory changes making the existing ownership structure illegal. While THVG is not aware of events that would make the occurrence of such a change probable, regulatory changes are outside the control of THVG. Accordingly, the noncontrolling interests subject to these repurchase provisions, and the income attributable to those interests, have been classified in the mezzanine, outside of equity, on THVG’s consolidated balance sheets.

The implementation of ASC 810 also had a significant impact on THVG’s statement of income format. Whereas in prior periods THVG’s consolidated statement of income listed “minority interests in the income of consolidated subsidiaries” above the “income tax expense” line item, that order is reversed under ASC 810, which requires that minority interests (now called “net income attributable to noncontrolling interests”) be listed below income tax expense. This change has no effect on the computation or amounts of THVG’s tax expense or payments.

Cash Equivalents

For purposes of the consolidated financial statements, 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, 2010 or 2009.

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Patient Receivables

Patient receivables are stated at estimated net realizable value. Significant concentrations of patient receivables at June 30, 2010 and 2009 include:


	2010			2009
Commercial and managed care providers		64	%		65	%
Government-related programs		18	%		16	%
Self-pay patients		18	%		19	%

		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

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.

Investments in Unconsolidated Affiliates

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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 2010 or 2009. 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 2010 or 2009.

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, 2010. The carrying amounts of cash, 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, 2010, the aggregate carrying amount and estimated fair value of long-term debt were $41,174,000 and $38,705,000, respectively. At June 30, 2009, the aggregate carrying amount and estimated fair value of long-term debt were approximately $41,500,000 and $40,900,000, respectively.

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.

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Net patient service revenue from the Medicare and Medicaid programs accounted for approximately 12% and 9% of total net patient service revenue in 2010 and 2009, respectively.

Net patient service revenue from managed care contracts accounted for approximately 82% and 89% of net patient service revenue in 2010 and 2009, respectively.

Net patient service revenue from private payors accounted for approximately 6% and 2% of total net patient service revenue in 2010 and 2009, 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.

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. The impact on THVG’s financial statements resulting from the adoption of new provisions within ASC 740 on July 1, 2007 was not material.

As of June 30, 2010 and 2009, 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

2.	PROPERTY AND EQUIPMENT

At June 30, 2010 and 2009, property and equipment and related accumulated depreciation and amortization consisted of the following (in thousands):


	Estimated Useful Lives		2010			2009
Land		—	$	612		$	—
Buildings and leasehold improvements		5-25 years		145,242			114,414
Equipment		3-15 years		80,515			70,405
Furniture and fixtures		5-15 years		12,730			10,190
Construction in progress				3,441			1,536

				242,540			196,545
Less accumulated depreciation and amortization				(72,112	)		(54,942	)

Net property and equipment			$	170,428		$	141,603

At June 30, 2010 and 2009, assets recorded under capital lease arrangements included in property and equipment consisted of the following (in thousands):


	2010			2009
Buildings	$	105,186		$	81,271
Equipment and furniture		14,773			16,591

		119,959			97,862
Less accumulated amortization		(23,893	)		(20,584	)

Net property and equipment under capital leases	$	96,066		$	77,278

3.	CAPITAL CONTRIBUTIONS BY MEMBERS


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

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

USP previously had a controlling interest in DeSoto and had an equity method investment (ASC 323) 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.

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

4.	INVESTMENTS IN SUBSIDIARIES AND UNCONSOLIDATED AFFILIATES

THVG’s investments in consolidated subsidiaries and unconsolidated affiliates consisted of the following:

Percentage Owned

Legal Name

Facility

City

June 30,

2010

June 30,

2009

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

62.6

Dallas Surgical Partners, L.L.C.

Texas Surgery Center

Dallas

62.6

Dallas Surgical Partners, L.L.C.

Physicians Day Surgery Center

Dallas

62.6

Denton Surgicare Partners, Ltd.

Baylor Surgicare at Denton

Denton

50.1

Frisco Medical Center, L.L.P.

Baylor Medical Center at Frisco

Frisco

50.3

50.1

Garland Surgicare Partners, Ltd.

Baylor Surgicare at Garland

Garland

50.1

Grapevine Surgicare Partners, Ltd.

Baylor Surgicare at Grapevine

Grapevine

50.1

50.3

Lewisville Surgicare Partners, Ltd.

Baylor Surgicare at Lewisville

Lewisville

52.4

53.1

MSH Partners, L.L.C.

Mary Shiels Hospital

Dallas

31.7

42.4

North Central Surgical Center, L.L.P.

North Central Surgery Center

Dallas

32.2

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

Percentage Owned

Legal Name

Facility

City

June 30,

2010

June 30,

2009

North Garland Surgery Center, L.L.P.

North Garland Surgery Center

Garland

51.6

52.4

Rockwall/Heath Surgery Center, L.L.P.

Baylor Surgicare at Heath

Heath

50.2

50.1

Trophy Club Medical Center, L.P.

Trophy Club Medical Center

Fort Worth

51.2

52.5

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

50.1

50.2

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

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

51.8

50.6

Physicians Center of Fort Worth, L.L.P.

Baylor Surgicare at Fort Worth I & II

Fort Worth

50.1

—

DeSoto Surgicare, Ltd.

North Texas Surgery Center

Desoto

50.1

—

Baylor Surgicare at Mansfield, L.L.C.

Baylor Surgicare at Mansfield

Mansfield

51.0

—

Unconsolidated affiliates:

Denton Surgicare Real Estate, Ltd.

(2)

n/a

49.0

Irving-Coppell Surgical Hospital, L.L.P.

Irving-Coppell Surgical Hospital

Irving

18.3

8.3

MCSH Real Estate Investors, Ltd.

(2)

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)	These entities are not surgical facilities and do not have ownership in any surgical facilities.

Effective February 1, 2009, THVG acquired 50.63 membership units, a 50.63% equity interest, in Granbury Surgical Plaza (Granbury), for a purchase price of $805,000. Granbury, like the other facilities in which THVG invests, is operated by Baylor and USP through THVG, as described in Note 9.

Effective May 1, 2010, THVG assumed ownership of 51 membership units, a 51% equity interest, in Baylor Surgicare at Mansfield (Mansfield), for no consideration. Mansfield, like other facilities in which TVHG invests, is operated by Baylor and USP through THVG, as described in Note 9.

The following table summarizes the recorded values of the assets acquired and liabilities assumed at the dates of acquisition (in thousands):


	2010 Mansfield		2009 Granbury Surgical Plaza
Current assets	$	1,066	$	2,454
Property and equipment		1,305		2,847
Goodwill — parent		1,705		3,916
Goodwill — noncontrolling interests		1,638		—
Long-term assets		—		14

Total assets acquired		5,714		9,231

Current liabilities		2,202		882
Long-term liabilities		950		1,776
Long-term debt		2,562		5,768

Total liabilities assumed		5,714		8,426

Net assets acquired	$	—	$	805

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The acquisition of Mansfield was accounted for in accordance with ASC 805 and the acquisition method was applied. The acquisition was 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 acquisition of Granbury was accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition.

The results of these acquisitions are included in THVG’s consolidated statements of income from the date of acquisition. Total acquisition costs included in professional fees on THVG’s consolidated statement of income for 2010 was $175,000.

5.	NONCONTROLLING INTERESTS

The Company controls and therefore consolidates the results of 25 of its 26 facilities. Similar to its investments in unconsolidated affiliates, the Company regularly engages in the purchase and sale of equity interests with respect to its consolidated subsidiaries that do not result in a change of control. These transactions are accounted for as equity transactions, as they are undertaken among the Company, its consolidated subsidiaries, and noncontrolling interests, and their cash flow effect is classified within financing activities.

During the fiscal year ended June 30, 2010, the Company purchased and sold equity interests in various consolidated subsidiaries in the amounts of $1,838,000 and $2,944,000, 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, 2010
Net income attributable to the Company	$	56,913
Transfers to the noncontrolling interests:
Decrease in the Company’s equity for losses incurred related to sales of subsidiaries’ equity interests		(805	)
Decrease in the Company’s equity for losses incurred related to purchases of subsidiaries’ equity interests		(192	)

Net transfers to noncontrolling interests		(997	)

Change in equity from net income attributable to the Company and transfers to noncontrolling interests	$	55,916

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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 for the years ended June 30, 2010 and 2009 is summarized below (in thousands):


Balance, June 30, 2008	$	15,296
Net income attributable to noncontrolling interests		52,870
Distributions to noncontrolling interests		(49,564	)
Purchases of noncontrolling interests		(1,701	)
Sales of noncontrolling interests		4,990
Noncontrolling interests attributable to business combinations		2,509

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

6.	GOODWILL AND INTANGIBLE ASSETS

At June 30, 2010 and 2009, goodwill and intangible assets, net of accumulated amortization, consisted of the following (in thousands):


	2010		2009
Goodwill — parent	$	140,707	$	136,119
Goodwill — noncontrolling interests		2,010		—
Other intangible assets		1,198		1,184

Total	$	143,915	$	137,303

The following is a summary of changes in the carrying amount of goodwill for the years ended June 30, 2010 and 2009 (in thousands):


	Parent			Noncontrolling Interests
Balance, June 30, 2008	$	130,137		$	—
Additions:
Acquisition of Granbury		3,916			—
Purchase of additional interests in USPD		1,121			—
Additional contribution from BHS for the Metroplex acquisition		107			—
Other		838			—

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

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

As described in Note 1, with the adoption of ASC 805 and ASC 810 effective July 1, 2009, 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. THVG records interest expense related to debt issuance costs on a straight-line basis over the term of the debt obligation, which approximates the effective interest method. The agreements underlying THVG’s management contract assets have no determinable termination date and, consequently, the related intangible assets have indefinite useful lives. 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 2010 or 2009.

The following is a summary of other intangible assets at June 30, 2010 and 2009 (in thousands):


	June 30, 2010
	Gross Carrying Amount		Accumulated Amortization			Total
Definite useful lives:
Debt issue costs	$	104	$	(55	)	$	49
Indefinite useful lives:
Management contracts		1,149		—			1,149

Total intangible assets	$	1,253	$	(55	)	$	1,198


	June 30, 2009
	Gross Carrying Amount		Accumulated Amortization			Total
Definite useful lives:
Debt issue costs	$	84	$	(50	)	$	34
Indefinite useful lives:
Management contracts		1,150		—			1,150

Total intangible assets	$	1,234	$	(50	)	$	1,184

Amortization of debt issue costs in the amount of approximately $5,000 and $4,000 are included in interest expense for the years ended June 30, 2010 and 2009, respectively.

7.	LONG-TERM OBLIGATIONS

At June 30, 2010 and 2009, long-term obligations consisted of the following (in thousands):


	2010			2009
Capital lease obligations (Note 8)	$	114,422		$	91,679
Notes payable to financial institutions		41,174			41,534

Total long-term obligations		155,596			133,213
Less current portion		(12,887	)		(12,856	)

Long-term obligations, less current portion	$	142,709		$	120,357

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

The aggregate maturities of notes payable for each of the five years subsequent to June 30, 2010 and thereafter are as follows (in thousands):


2011	$	9,750
2012		9,810
2013		7,062
2014		5,219
2015		3,279
Thereafter		6,054

Total long-term obligations	$	41,174

The Facilities have notes payable to financial institutions which mature at various dates through 2016 and accrue interest at fixed and variable rates ranging from 3% 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 13.9%.

8.	LEASES

Minimum future payments under noncancelable leases with remaining terms in excess of one year as of June 30, 2010 are as follows (in thousands):


	Capital Leases			Operating Leases
Year ending June 30:
2011	$	15,276		$	12,992
2012		14,936			12,649
2013		14,536			11,060
2014		14,192			10,377
2015		14,506			10,435
Thereafter		180,738			78,524

Total minimum lease payments		254,184		$	136,037


Amount representing interest		(139,760	)


Total principal payments	$	114,424

Total rent expense under operating leases was approximately $14,702,000 and $13,149,000 for the years ended June 30, 2010 and 2009, respectively, and is included in other operating expenses in the accompanying consolidated statements of income.

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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 $600,000 and $588,000 for the years ended June 30, 2010 and 2009, respectively, and is included in the consolidated revenues of THVG.

The management and royalty fee expense to Baylor and USP was approximately $19,181,000 and $17,021,000 for the years ended June 30, 2010 and 2009, 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. Management and royalty fees and other reimbursable costs owed by THVG and its Facilities to USP and Baylor totaled approximately $0 and $3,119,000 at June 30, 2010 and 2009, respectively, and are included in due to affiliates in the accompanying consolidated balance sheets.

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 $43,709,000 and $70,370,000 at June 30, 2010 and 2009, respectively. The interest income amounted to $338,000 and $640,000 for the years ended June 30, 2010 and 2009, respectively.

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 $10,574,000. Of the total, $8,165,000 relates to the obligations of five consolidated subsidiaries, whose obligations are included in THVG’s consolidated balance sheet and related disclosures, and the remaining $2,409,000 relates to the obligations of unconsolidated affiliated companies, 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 2021, 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, 2010 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.

TEXAS HEALTH VENTURES GROUP, L.L.C.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

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, 2010, 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 July 1, 2010, THVG acquired 51% in Metrocrest Surgery Center, LP for approximately $4 million.

THVG has performed an evaluation of subsequent events through December 8, 2010, 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 governing 8⁷/8% Senior Subordinated Note due 2017 and 9¹/4%/10% Senior Subordinated Toggle Note due 2017, among the Company, the Guarantors named therein and U.S. Bank National Association, as trustee. (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(1)

4.2		Form of 8⁷/8% Senior Subordinated Note due 2017 and 9¹/4%/10% Senior Subordinate Toggle Note due 2017 (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(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.(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 an exhibit to the Company’s Current Report on Form 8-K filed with the Commission on August 20, 2009 and incorporated herein by reference).(1)

10.3		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.(1)

10.4		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)

10.5		Amendment to Employment Agreement, dated as of November 14, 2011, by and between the Company and Donald E. Steen.(2)(3)

10.6		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)

IV-1


Exhibit Number		Description

	10.7	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)

	10.8	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)

	10.9	Employment Agreement, dated as of April 19, 2007, by and between the Company and Mark A. Kopser (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)

	10.10	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)

	10.11	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)

	10.12	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)

	10.13	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)

	10.14	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 — Boone Powell, Jr.(2)

	24.8	Power of Attorney — Paul B. Queally(2)

	24.9	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)

IV-2


Exhibit Number		Description

	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, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009, (iv) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and 2009, (v) Consolidated Statement of Changes in Equity for the years ended December 31, 2011, 2010 and 2009and (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: March 2, 2012

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

* Donald E. Steen	Chairman of the Board	March 2, 2012

/s/ William H. Wilcox William H. Wilcox	Chief Executive Officer and Director (Principal Executive Officer)	March 2, 2012

/s/ Mark A. Kopser Mark A. Kopser	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	March 2, 2012

/s/ J. Anthony Martin J. Anthony Martin	Vice President, Corporate Controller And Chief Accounting Officer (Principal Accounting Officer)	March 2, 2012

* Joel T. Allison	Director	March 2, 2012

* Michael E. Donovan	Director	March 2, 2012

* John C. Garrett, M.D.	Director	March 2, 2012

* D. Scott Mackesy	Director	March 2, 2012

* James Ken Newman	Director	March 2, 2012

* Boone Powell, Jr.	Director	March 2, 2012

IV-4


Signature	Title	Date

* Paul B. Queally	Director	March 2, 2012

* Raymond A. Ranelli	Director	March 2, 2012

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: March 2, 2012

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

4.2		Form of 8 7/8% Senior Subordinated Note due 2017 and 9¹/4%/10% Senior Subordinate Toggle Note due 2017 (previously filed as an exhibit to the Company’s Registration Statement on Form S-4 (No. 333-144337) and incorporated herein by reference).(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.(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 an exhibit to the Company’s Current Report on Form 8-K filed with the Commission on August 20, 2009 and incorporated herein by reference).(1)

10.3		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.(1)

10.4		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)

10.5		Amendment to Employment Agreement, dated as of November 14, 2011, by and between the Company and Donald E. Steen.(2)(3)

10.6		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)

IV-6


Exhibit Number		Description

10.7		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)

10.8		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)

10.9		Employment Agreement, dated as of April 19, 2007, by and between the Company and Mark A. Kopser (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)

10.10		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)

10.11		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)

10.12		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)

10.13		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)

10.14		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 — Boone Powell, Jr.(2)

24.8		Power of Attorney — Paul B. Queally(2)

24.9		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)

IV-7


Exhibit Number		Description

101		The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009, (iii) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009, (iv) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and 2009, (v) Consolidated Statement of Changes in Equity for the years ended December 31, 2011, 2010 and 2009and (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

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

United Surgical Partners International (USPI) Inactive 10-K2011 FY Annual report

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