<Page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 2002
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
UNITED SURGICAL PARTNERS HOLDINGS, INC.
AND THE GUARANTORS NAMED IN FOOTNOTE (1) BELOW
(exact name of Co-Registrants as specified in their charters)
<Table>
DELAWARE 75-2943434
(state or jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
DONALD E. STEEN
UNITED SURGICAL PARTNERS HOLDINGS, INC.
15305 DALLAS PARKWAY 15305 DALLAS PARKWAY
SUITE 1600 SUITE 1600
ADDISON, TEXAS 75001 DALLAS, TEXAS 75001
(972) 713-3500 (972) 713-3500
(Address, including zip code, and telephone number,
including area code, of Co-Registrants' principal executive (Name, address, including zip code, and telephone number,
offices) including area code, of agent for service)
</Table>
--------------------
COPIES TO:
JEFFREY A. CHAPMAN
VINSON & ELKINS L.L.P.
3700 TRAMMELL CROW CENTER
2001 ROSS AVENUE
DALLAS, TEXAS 75201-2975
TELEPHONE: (214) 220-7700
FACSIMILE: (214) 220-7716
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement
--------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED NOTE(2) PRICE(2) REGISTRATION FEE
10% Senior Subordinated Notes due 2011.... $150,000,000 100% $150,000,000 $35,850
Senior Subordinated Note Guarantees (3)... -- -- -- --
</Table>
(1) United Surgical Partners International, Inc., a Delaware corporation (I.R.S.
Employer Identification No. 75-2749762), Day-Op Management Company, Inc., a
New York corporation (I.R.S. Employer Identification No. 11-2908189), Day-Op
Surgery Consulting Company, LLC, a Delaware limited liability company
(I.R.S. Employer Identification No. 75-2790863), Georgia Musculoskeletal
Network, Inc., a Georgia corporation (I.R.S. Employer Identification No.
62-1749874), Health Horizons of Decatur, Inc., a Tennessee corporation
(I.R.S. Employer Identification No. 62-1497774), Health Horizons of Kansas
City, Inc., a Tennessee corporation (I.R.S. Employer Identification
No. 62-1545988), Health Horizons of Murfreesboro, Inc., a Tennessee
corporation (I.R.S. Employer Identification No. 62-1699666), Health Horizons
of Nashville, Inc., a Tennessee corporation (I.R.S. Employer Identification
No. 62-1481503), MedCenter Management Services, Inc., a Delaware corporation
(I.R.S. Employer Identification No. 31-1277552), Medical Documenting
Systems, Inc. a Delaware corporation (I.R.S. Employer Identification No.
41-1636501), Neurosurgical Associates, Inc. a New Mexico corporation (I.R.S.
Employer Identification No. 85-0213432), NYCAS Administrative Services, LLC,
a Delaware limited liability company (I.R.S. Employer Identification No.
13-4090381), Ortho Excel, Inc., a Delaware corporation (I.R.S. Employer
Identification No. 31-1447996), OrthoLink ASC Corporation, a Tennessee
corporation (I.R.S. Employer Identification No. 62-1691093), OrthoLink
Occupational Medicine Services Corporation, a Tennessee corporation (I.R.S.
Employer Identification No. 62-1723531), OrthoLink of Colorado, Inc., a
Colorado corporation (I.R.S. Employer Identification No. 84-1152821),
OrthoLink Physicians Corporation, a Delaware corporation (I.R.S. Employer
Identification No. 62-1646034), OrthoLink Securities Corporation, a
Tennessee corporation (I.R.S. Employer Identification No. 62-1781381),
OrthoLink/Georgia ASC, Inc., a Georgia corporation (I.R.S. Employer
Identification No. 62-1823694), OrthoLink/New Mexico ASC, Inc., a Georgia
corporation (I.R.S. Employer Identification No. 62-1807450), OrthoLink/TN
ASC, Inc., a Tennessee corporation (I.R.S. Employer Identification No.
62-1825621), Southwest Spine Center, Inc., a New Mexico corporation (I.R.S.
Employer Identification No. 85-0255325), Tennessee Musculoskeletal
Network, Inc., a Tennessee corporation (I.R.S. Employer Identification No.
62-1709381), Texas Outpatient Surgicare Center, Inc., a Texas corporation
(I.R.S. Employer Identification No. 74-2112653), USP Chandler, Inc., an
Arizona corporation (I.R.S. Employer Identification No. 75-2824257), USP
Coast, Inc., a California corporation (I.R.S. Employer Identification No.
), USP Domestic Holdings, Inc., a Delaware corporation (I.R.S. Employer
Identification No. 75-2866111), USP Fredericksburg, Inc., a Virginia
corporation (I.R.S. Employer Identification No. 75-2965011), USP
International Holdings, Inc., a Delaware corporation (I.R.S. Employer
Identification No. 62-1664326), USP Las Cruces, Inc., a New Mexico
corporation (I.R.S. Employer Identification No. 75-2924966), USP Long
Island, Inc., a Delaware corporation (I.R.S. Employer Identification No.
75-2853167), USP Manhattan, Inc., a New York corporation (I.R.S. Employer
Identification No. 13-4090380), USP Nevada Holdings, LLC, a Nevada limited
liability company (I.R.S. Employer Identification No. 88-0452476), USP
Nevada, Inc., a Nevada corporation (I.R.S. Employer Identification No.
88-0401393), USP New Jersey, Inc., a New Jersey corporation (I.R.S. Employer
Identification No. 75-2839367), USP North Texas, Inc., a Delaware
corporation (I.R.S. Employer Identification No. 75-2851636), USP
Pasadena, Inc., a Texas corporation (I.R.S. Employer Identification No.
75-2832362), USP Sarasota, Inc., a Florida corporation (I.R.S. Employer
Identification No. 75-2957239), USP South Houston, Inc., a Texas corporation
(I.R.S. Employer Identification No. 75-2832364), USP Tennessee, Inc., a
Tennessee corporation (I.R.S. Employer Identification No. 75-2955391), USP
Texas, L.P., a Texas limited partnership (I.R.S. Employer Identification
No. 75-2850832), USP West Covina, Inc., a California corporation (I.R.S.
Employer Identification No. 75-2965450), USP Westwood, Inc., a California
corporation (I.R.S. Employer Identification No. ), and USP Winter
Park, Inc., a Florida corporation (I.R.S. Employer Identification
No. 75-2785714).
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The 10% Senior Subordinated Notes due 2011 are guaranteed by the
Co-Registrants on a senior subordinated basis. No separate consideration
will be paid in respect of the guarantees.
THE CO-REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE CO-REGISTRANTS SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<Page>
PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 8, 2002
[LOGO]
OFFER TO EXCHANGE UP TO
$150,000,000 10% SENIOR SUBORDINATED NOTES DUE 2011
FOR
$150,000,000 10% SENIOR SUBORDINATED NOTES DUE 2011
THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
TERMS OF THE EXCHANGE OFFER
- We are offering to exchange up to $150,000,000 of our outstanding 10%
Senior Subordinated Notes due 2011, which we refer to herein as the "old
notes," for new notes with substantially identical terms that have been
registered under the Securities Act and are freely tradable.
- We will exchange all old notes that you validly tender and do not validly
withdraw before the exchange offer expires for an equal principal amount
of new notes.
- The exchange offer expires at 5:00 p.m., New York City time, on
, 2002, unless extended. We do not currently intend to extend
the exchange offer.
- Tenders of old notes may be withdrawn at any time prior to the expiration
of the exchange offer.
- The exchange of old notes for new notes will not be a taxable event for
U.S. federal income tax purposes.
- We will not receive any proceeds from the exchange offer.
TERMS OF THE NEW 10% SENIOR SUBORDINATED NOTES OFFERED IN THE EXCHANGE OFFER
MATURITY
- The new notes will mature on December 15, 2011.
INTEREST
- Interest on the new notes is payable on June 15 and December 15 of each
year, beginning June 15, 2002.
- Interest will accrue from December 19, 2001.
REDEMPTION
- We may redeem the new notes, in whole or in part, on or after
December 15, 2006. We may redeem the new notes in whole prior to that date
pursuant to the make-whole provisions described in this prospectus.
- In addition, on or prior to December 15, 2004, we may redeem up to $52.5
million of the new notes using the net proceeds of one or more qualified
equity offerings.
CHANGE OF CONTROL
- Upon a change of control, you may require us to repurchase all or a
portion of your new notes at a purchase price of 101% of their principal
amount, plus accrued and unpaid interest.
RANKING
- The new notes and the guarantees will be our and the applicable
guarantors' unsecured general obligations.
- The new notes will rank junior to debt outstanding under our credit
facilities. The new notes will be guaranteed on a senior subordinated
basis by our parent and our wholly-owned restricted domestic subsidiaries
and, in limited circumstances, by some of our other subsidiaries.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF FACTORS YOU
SHOULD CONSIDER BEFORE INVESTING IN THE NEW NOTES.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. The letter of transmittal
accompanying this prospectus states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of new notes received in exchange for old notes where
such old notes were acquired by the broker-dealer as a result of market-making
activities or other trading activities. We have agreed that, for a period of 180
days after the expiration date of this exchange offer, we will make this
prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
THE DATE OF THIS PROSPECTUS IS , 2002
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
FORWARD-LOOKING STATEMENTS........... ii
PROSPECTUS SUMMARY................... 1
RISK FACTORS......................... 13
EXCHANGE OFFER....................... 30
USE OF PROCEEDS...................... 41
CAPITALIZATION....................... 42
SELECTED CONSOLIDATED FINANCIAL AND
OTHER DATA......................... 43
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 45
BUSINESS............................. 54
MANAGEMENT........................... 76
SECURITY OWNERSHIP OF PRINCIPAL
STOCKHOLDERS AND MANAGEMENT........ 84
</Table>
<Table>
<Caption>
PAGE
----
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS....................... 85
DESCRIPTION OF CREDIT FACILITIES..... 87
DESCRIPTION OF THE NEW NOTES......... 89
TAX CONSIDERATIONS................... 135
PLAN OF DISTRIBUTION................. 135
LEGAL MATTERS........................ 136
EXPERTS.............................. 136
WHERE YOU CAN FIND MORE
INFORMATION........................ 137
SUMMARY PRO FORMA FINANCIAL
STATEMENTS......................... P-1
INDEX TO FINANCIAL STATEMENTS........ F-1
</Table>
i
<Page>
FORWARD-LOOKING STATEMENTS
Some statements in this prospectus and the documents we refer you to, as
well as written and oral statements made from time to time by us and our
representatives in reports, filings with the Securities and Exchange Commission,
news releases, conferences, teleconferences, web postings or otherwise, may be
deemed to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act, Section 21E of the Securities Exchange Act of 1934 and the
Private Securities Litigation Reform Act of 1995. This information is subject to
the "Safe Harbor" provisions of those statutes. All statements other than
statements of current or historical fact contained in this prospectus, including
statements regarding our future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations,
are forward-looking statements. The words "anticipate," "believe," "continue,"
"estimate," "expect," "intend," "may," "plan," "will" and similar expressions,
as they relate to us, are intended to identify forward-looking statements. In
particular, these include, among other things, statements relating to:
- our significant indebtedness;
- our ability to obtain financing in the future;
- our future cash flow and earnings;
- our fiduciary duties to the other interest holders in our surgical
facilities;
- our ability to attract and retain top quality physicians;
- our ability to grow through selective acquisitions and development;
- our ability to pursue strategic relationships with healthcare systems;
- our ability to expand selectively in Western Europe;
- our ability to enhance operating efficiencies; and
- changes in healthcare regulation that adversely affect our business.
Any or all of our forward-looking statements in this prospectus may turn out
to be wrong. We have based these forward-looking statements largely on our
current expectations and projections about future events and financial trends
that we believe may affect our financial condition, results of operations,
business strategy and financial needs. They can be affected by inaccurate
assumptions we might make or by known or unknown risks, uncertainties and
assumptions, including the risks, uncertainties and assumptions described in
"Risk Factors." In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this prospectus may not
occur and actual results could differ materially from those anticipated or
implied in the forward- looking statements. When you consider these
forward-looking statements, you should keep in mind these risk factors and other
cautionary statements in this prospectus.
Our forward-looking statements speak only as of the date made. Other than as
required by law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ii
<Page>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION ABOUT US AND THE OFFERING OF
THE NEW NOTES CONTAINED ELSEWHERE IN THIS PROSPECTUS. IT IS NOT COMPLETE AND MAY
NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO YOU. FOR A MORE
COMPLETE UNDERSTANDING OF US AND THE OFFERING OF THE NEW NOTES, WE URGE YOU TO
READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION, OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS. THROUGHOUT
THIS PROSPECTUS (EXCEPT IN "DESCRIPTION OF THE NEW NOTES"), WHEN WE REFER TO
"US," "WE," "OUR," OR THE "COMPANY," WE ARE DESCRIBING UNITED SURGICAL PARTNERS
HOLDINGS, INC. TOGETHER WITH OUR PARENT COMPANY UNITED SURGICAL PARTNERS
INTERNATIONAL, INC. AND ITS OTHER SUBSIDIARIES AND OPERATIONS.
THE COMPANY
OUR BUSINESS
We own and operate surgery centers and private surgical hospitals in the
United States, Spain and the United Kingdom. We generally seek to acquire and
develop our facilities through the formation of strategic relationships with
physicians and healthcare systems to access and serve better the communities in
our markets. Our operating model allows us to focus on meeting the needs of
patients, physicians and payors and is designed to (1) provide an enhanced
quality of care and overall healthcare experience to patients, (2) attract
physicians by providing significant administrative, clinical and economic
benefits and (3) offer an efficient, low cost alternative to payors.
In the United States, we have ownership interests in 35 surgery centers and
one private surgical hospital and manage or operate through consulting
agreements three additional surgery centers. Also in the United States, we will
operate three surgery centers and one private surgical hospital that are
currently under construction and have ownership interests in three of these
facilities. In Spain, we own and operate six private surgical hospitals, two
surgery centers and one diagnostic facility. In the United Kingdom, we own and
operate two private surgical hospitals and are developing a cancer treatment
center.
On a pro forma basis, reflecting our acquisition of OrthoLink and our recent
acquisition of a 35% interest in a surgical facility in Torrance, California as
if these acquisitions occurred on January 1, 2000, we would have had revenues
and EBITDA of $180.5 million and $45.5 million, respectively, for the nine
months ended September 30, 2001. For the year ended December 31, 2000, we would
have had pro forma revenues and EBITDA of $195.2 million and $32.6 million,
respectively.
OUR COMPETITIVE STRENGTHS
We have grown rapidly and achieved profitability as a result of the
following competitive advantages:
- ATTRACTIVE ASSET BASE WITH FAVORABLE MARKET TRENDS. We are focused on the
short-stay surgical facility industry, which has grown rapidly in the
United States and Western Europe. In the United States, outpatient
surgical procedures represented approximately 70% of all surgical
procedures performed in 2000 compared to approximately 15% in 1980. In
Spain and the United Kingdom, a private healthcare industry is emerging to
serve the growing percentage of the population that maintains private
insurance or pays for elective procedures from personal funds.
- FAVORABLE PAYOR AND PROCEDURE MIX. We receive most of our revenues from
non-governmental payors. Approximately 14% and 12% of our total revenues
were received from governmental payors for the nine months ended September
30, 2001 and the year ended December 31, 2000, respectively. In addition,
most of the procedures performed at our surgical facilities are pre-
planned, non-emergency procedures for which we have automated and
efficient billing procedures. We believe that for these reasons, our days
sales outstanding were 45 and 49, and
1
<Page>
our bad debt expense was 1.2% and 1.8% of total revenue, for the nine
months ended September 30, 2001 and the year ended December 31, 2000,
respectively.
- STRONG SAME STORE CASE GROWTH WITH COST EFFICIENT OPERATING MODEL. Our
cost efficient operating model, including, where implemented, our
proprietary measurement and monitoring system, which we refer to as USPI's
EDGE, has resulted in improved operating margins at our surgical
facilities. We believe that our focus on improving facility-level
operations and increasing patient volumes resulted in our same store case
growth of 16% and 12% in the United States and our same store adjusted
admissions growth of 13% and 11% in Western Europe for the nine months
ended September 30, 2001 and the year ended December 31, 2000,
respectively. In addition, our overall EBITDA margins improved by 46% and
132% for the nine months ended September 30, 2001 and the year ended
December 30, 2000, from the corresponding periods in the previous year.
- PREFERRED STRATEGIC ALLIANCE RELATIONSHIP FOR DEVELOPMENT OF SURGICAL
CENTERS WITH LARGE, NONPROFIT HEALTHCARE SYSTEMS. We believe that many
nonprofit healthcare systems prefer to enter into strategic alliances with
us because they can benefit from our operating expertise and create a new
cash flow opportunity. We believe these relationships allow nonprofit
healthcare systems to attract and retain physicians and improve their
hospital operations by focusing on their core business.
- PROVEN ABILITY TO INTEGRATE ACQUISITIONS AND DEVELOP NEW FACILITIES. We
have grown rapidly through a focused strategy of acquisitions and
development of surgical facilities and surgical facility companies. Of our
49 surgical facilities, we have acquired 35 facilities, have developed 11
facilities and manage or operate through consulting agreements three
additional facilities. We are currently developing five additional
facilities. We have successfully integrated the operations of surgical
facility companies we have acquired.
- EXPERIENCED MANAGEMENT TEAM. Our senior management has an average of 20
years of experience in the healthcare industry. Our senior management team
operates as a cohesive, complementary group and has an extensive operating
knowledge of our industry and understanding of the regulatory environment
in which we operate, both domestically and internationally.
OUR BUSINESS STRATEGY
We believe our business strategy will help us maintain growth and increase
market share in each of our markets. The key elements of our strategy are to:
- ATTRACT AND RETAIN TOP QUALITY SURGEONS AND OTHER PHYSICIANS. Recognizing
the importance of physician satisfaction, we operate our facilities and
have designed our operating model to encourage physicians to choose our
facilities. We have identified and seek to accommodate the key factors in
a physician's decision-making process, which we believe include quality of
care, patient comfort, streamlined administrative processes, efficient
operation and overall opportunity for increased physician productivity.
- GROW THROUGH SELECTIVE DOMESTIC ACQUISITIONS AND DEVELOPMENT OF SURGICAL
FACILITIES. We typically target the acquisition or development of surgery
centers that perform high volume, non-emergency, lower risk procedures in
several medical specialties. These centers require lower capital and
operating costs than hospitals. In addition, we will also consider the
acquisition of surgical facility companies that fit our overall
acquisition profile.
- PURSUE STRATEGIC RELATIONSHIPS WITH HEALTHCARE SYSTEMS. We believe that
developing strategic relationships with nonprofit healthcare systems
benefits both the healthcare system and us. Our freestanding surgical
facilities provide healthcare systems with a way to accommodate the needs
of their doctors and patients without requiring significant amounts of
their capital or
2
<Page>
administrative resources. In return, we receive the access to and
credibility in new local markets that we need to appeal to physicians,
patients and payors and to further our access to potential acquisitions.
- EXPAND SELECTIVELY IN WESTERN EUROPE. We intend to expand selectively in
Spain and the United Kingdom and to enter one or two additional national
markets in Western Europe. We intend to continue to acquire and develop
private surgical hospitals to meet the growing demand for private
healthcare in those regions.
- ENHANCE OPERATING EFFICIENCIES. We use systems and protocols, including
USPI's EDGE, to enhance operating efficiencies at both existing and newly
acquired or developed facilities. We believe that this focus on efficient
operations increases our own profitability and encourages physicians to
use our facilities by increasing their productivity. In addition,
efficient operations are critical to our lower cost model and our
competitive advantage in attracting and negotiating with payors.
Our parent was incorporated under the laws of the State of Delaware and
began operations on February 27, 1998. We were incorporated under the laws of
the State of Delaware on June 11, 2001. Our executive offices are located at
15305 Dallas Parkway, Suite 1600, Addison, Texas 75001, and our telephone number
is (972) 713-3500. Our website address is WWW.UNITEDSURGICAL.COM. Information
contained on our website does not constitute part of this prospectus.
RECENT DEVELOPMENTS
During October 2001, we acquired a 66% interest in a surgical facility in
Sarasota, Florida for a total consideration of approximately $3.4 million in
cash and approximately $1.3 million in assumed debt. During November 2001, we
acquired an 80% interest in a surgical facility in West Covina, California for a
total consideration of approximately $10.8 million in cash and approximately
$1.2 million in assumed debt. We also acquired an 83% interest in a surgical
facility in Fredericksburg, Virginia for a total consideration of approximately
$6.3 million in cash, a warrant to acquire 25,000 shares of our parent's common
stock at a price equal to approximately $16.45 per share and approximately
$700,000 in assumed debt. In December 2001, we acquired a 35% interest in a
surgical facility in Torrance, California for total consideration of
approximately $11.0 million.
We have a definitive agreement to acquire a surgical hospital in Murcia,
Spain for a total consideration of approximately $7.4 million in cash (of which
$6.7 million will be paid upon the consummation of the acquisition and
$0.7 million will be paid one year later), approximately $0.3 million in assumed
debt and approximately $12.4 million in assumed capital lease obligations. We
are awaiting approval from senior officials of the Catholic church and expect
this acquisition to be consummated in January 2002 but can give you no
assurances that this acquisition will be consummated.
In December 2001, we entered into our amended and restated credit facility.
Our amended and restated credit facility is an $85.0 million revolving credit
facility under which our subsidiaries, USP Domestic Holdings, Inc. and USPE
Holdings Limited, are co-borrowers. See "Description of Credit
Facilities--Amended and Restated Credit Facility."
3
<Page>
CORPORATE STRUCTURE
The following diagram shows our corporate structure and our obligations
under our senior credit facilities and the indenture governing the old notes and
new notes:
[organizational chart depicting the corporate structure
of the issuer and its subsidiaries]
- --------------
(1) Guarantor of the old notes and new notes.
(2) Guarantor of borrowings of USP Domestic Holdings under the amended and
restated credit facility.
(3) USP International Holdings will pledge 100% of its stock in USPE Holdings
Limited to guarantee the borrowings of USPE Holdings Limited under the
amended and restated credit facility and 65% of that stock to guarantee the
borrowings of USP Domestic Holdings under the amended and restated credit
facility.
(4) Unrestricted subsidiaries under the indenture.
(5) Guarantor of borrowings of USPE Holdings Limited under the amended and
restated credit facility.
(6) Some domestic subsidiaries will be unrestricted subsidiaries under the
indenture.
4
<Page>
THE EXCHANGE OFFER
ON DECEMBER 19, 2001, WE COMPLETED A PRIVATE OFFERING OF THE OLD NOTES. WE
ENTERED INTO A REGISTRATION RIGHTS AGREEMENT WITH THE INITIAL PURCHASERS IN THE
PRIVATE OFFERING IN WHICH WE AGREED TO DELIVER TO YOU THIS PROSPECTUS AND TO USE
OUR REASONABLE BEST EFFORTS TO COMPLETE THE EXCHANGE OFFER WITHIN 220 DAYS AFTER
THE DATE WE ISSUED THE OLD NOTES.
<Table>
Exchange offer.................... We are offering to exchange new notes for old notes.
Expiration date................... The exchange offer will expire at 5:00 p.m. New York City
time, on , 2002, unless we decide to extend it.
We do not currently intend to extend the exchange offer.
Condition to the exchange offer... The registration rights agreement does not require us to
accept old notes for exchange if the exchange offer or the
making of any exchange by a holder of the old notes would
violate any applicable law or interpretation of the staff
of the Securities and Exchange Commission. A minimum
aggregate principal amount of old notes being tendered is
not a condition to the exchange offer.
Procedures for tendering old
notes............................. To participate in the exchange offer, you must complete,
sign and date the letter of transmittal, or a facsimile of
the letter of transmittal, and transmit it together with
all other documents required by the letter of transmittal,
including the old notes that you wish to exchange, to U.S.
Trust Company of Texas, N.A., as exchange agent, at the
address indicated on the cover page of the letter of
transmittal. In the alternative, you can tender your old
notes by following the procedures for book-entry transfer
described in this prospectus.
If your old notes are held through The Depository Trust
Company and you wish to participate in the exchange offer,
you may do so through the automated tender offer program
of The Depository Trust Company. If you tender under this
program, you will agree to be bound by the letter of
transmittal that we are providing with this prospectus as
though you had signed the letter of transmittal.
If a broker, dealer, commercial bank, trust company or
other nominee is the registered holder of your old notes,
we urge you to contact that person promptly to tender your
old notes in the exchange offer.
For more information on tendering your old notes, please
refer to the sections in this prospectus entitled
"Exchange Offer--Terms of the Exchange Offer,"
"--Procedures for Tendering" and "--Book Entry Transfer."
Guaranteed delivery procedures.... If you wish to tender your old notes and you cannot submit
your required documents to the exchange agent on time, you
may tender your old notes according to the guaranteed
delivery procedures described in "Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal of tenders............. You may withdraw your tender of old notes at any time
prior to the expiration date. To withdraw, you must have
delivered a written or facsimile transmission notice of
withdrawal, in compliance with the requirements of
Rule 14d-7 of the
</Table>
5
<Page>
<Table>
Exchange Act of 1934, to the exchange agent at its address
indicated on the cover page of the letter of transmittal
before 5:00 p.m. New York City time on the expiration date
of the exchange offer.
Acceptance of old notes and
delivery of new notes........... If you fulfill all conditions required for proper
acceptance of old notes, we will accept any and all old
notes that you properly tender in the exchange offer on or
before 5:00 p.m. New York City time on the expiration
date. We will return any old notes that we do not accept
for exchange to you without expense as promptly as
practicable after the expiration date. We will deliver the
new notes as promptly as practicable after the expiration
date and acceptance of the old notes for exchange. Please
refer to the section in this prospectus entitled "Exchange
Offer--Terms of the Exchange Offer."
Accrued interest on the new notes
and the old notes................. The new notes will bear interest from December 19, 2001.
Holders of old notes whose old notes are accepted for
exchange will be deemed to have waived the right to
receive any payment in respect of interest on such old
notes accrued from December 19, 2001 to the date of the
issuance of the new notes. Consequently, holders who
exchange their old notes for new notes will receive the
same interest payment on June 15, 2002 (the first interest
payment date with respect to the old notes and the new
notes) that they would have received had they not accepted
the exchange offer.
Resale............................ We believe that the new notes issued pursuant to the
exchange offer may be offered for resale, resold and
otherwise transferred by you (unless you are an
"affiliate" of ours within the meaning of Rule 405 under
the Securities Act) without compliance with the
registration and prospectus delivery provisions of the
Securities Act, so long as you are acquiring the new notes
in the ordinary course of your business and you have not
engaged in, do not intend to engage in, and have no
arrangement or understanding with any person to
participate in, a distribution of the new notes.
Each participating broker-dealer that receives new notes
for its own account under the exchange offer in exchange
for old notes that were acquired by the broker-dealer as a
result of market-making or other trading activity must
acknowledge that it will deliver a prospectus in
connection with any resale of the exchange notes. See
"Plan of Distribution."
Any holder of old notes who:
- is our affiliate;
- does not acquire new notes in the ordinary course of its
business; or
- exchanges old notes in the exchange offer with the
intention to participate, or for the purpose of
participating, in a distribution of new notes
</Table>
6
<Page>
<Table>
must, in the absence of an exemption, comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with the resale of the new
notes.
Fees and expenses................. We will bear all expenses related to the exchange offer.
Please refer to the section in this prospectus entitled
"Exchange Offer--Fees and Expenses."
Use of proceeds................... The issuance of the new notes will not provide us with any
new proceeds. We are making this exchange offer solely to
satisfy our obligations under our registration rights
agreement. Please refer to the sections entitled "Use of
Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity
and Capital Resources" for a discussion of our use of the
proceeds from the issuance of the old notes.
Consequences of failure to
exchange old notes.............. If you do not exchange your old notes in this exchange
offer, you will no longer be able to require us to
register the old notes under the Securities Act except in
the limited circumstances provided under our registration
rights agreement. In addition, you will not be able to
resell, offer to resell or otherwise transfer the old
notes unless we have registered the old notes under the
Securities Act, or unless you resell, offer to resell or
otherwise transfer them under an exemption from the
registration requirements of, or in a transaction not
subject to, the Securities Act.
Tax considerations................ The exchange of new notes for old notes in the exchange
offer will not be a taxable event for U.S. federal income
tax purposes. Please read "Tax Considerations."
Exchange agent.................... We have appointed U.S. Trust Company of Texas, N.A. as
exchange agent for the exchange offer. You should direct
questions and requests for assistance, requests for
additional copies of this prospectus or the letter of
transmittal and requests for the notice of guaranteed
delivery to the exchange agent by telephone at (800)
548-6565.
</Table>
7
<Page>
TERMS OF THE NEW NOTES
THE NEW NOTES WILL BE IDENTICAL TO THE OLD NOTES EXCEPT THAT THE NEW NOTES
ARE REGISTERED UNDER THE SECURITIES ACT AND WILL NOT HAVE RESTRICTIONS ON
TRANSFER, REGISTRATION RIGHTS OR PROVISIONS FOR ADDITIONAL INTEREST AND WILL
CONTAIN DIFFERENT ADMINISTRATIVE TERMS. THE NEW NOTES WILL EVIDENCE THE SAME
DEBT AS THE OLD NOTES, AND THE SAME INDENTURE WILL GOVERN THE NEW NOTES AND THE
OLD NOTES.
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THE NEW NOTES AND IS
NOT INTENDED TO BE COMPLETE. IT DOES NOT CONTAIN ALL THE INFORMATION THAT IS
IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THE NEW NOTES, PLEASE
REFER TO THE SECTION OF THIS DOCUMENT ENTITLED "DESCRIPTION OF THE NEW NOTES."
<Table>
Issuer............................ United Surgical Partners Holdings, Inc.
Notes offered..................... $150 million aggregate principal amount of 10% senior
subordinated notes due 2011.
Interest rate and payment dates... The new notes will bear interest at the rate of 10% per
annum, payable semi-annually, in arrears, on June 15 and
December 15 of each year, commencing on June 15, 2002.
Maturity date..................... December 15, 2011
Ranking........................... The new notes and the guarantees will be our and the
applicable guarantors' unsecured general obligations and
will be:
- subordinated in right of payment to all of our and
our guarantor subsidiaries' current and future
indebtedness, except indebtedness that expressly
provides that it is equal or subordinate in right of
payment to the notes and the guarantees; and
- structurally subordinated to claims of creditors
(including trade creditors) and preferred
stockholders, if any, of our non-guarantor
subsidiaries.
As of September 30, 2001 on a pro forma basis after giving
effect to the issuance of the notes and the application of
the net proceeds therefrom, we would have had outstanding
an aggregate of approximately $88.4 million of senior
debt.
The new notes will rank junior to debt outstanding under
our credit facilities. The new notes will be guaranteed on
a senior subordinated basis by our parent and our
wholly-owned restricted domestic subsidiaries and, in
limited circumstances, by some of our other subsidiaries.
See "Description of the New Notes--Brief Description of
the New Notes" and "--Ranking."
Optional redemption............... We may redeem the new notes, in whole or in part, on or
after December 15, 2006 at the redemption prices set forth
in this prospectus, plus accrued and unpaid interest. We
may redeem the new notes in whole prior to that date
pursuant to the make-whole provisions described in this
prospectus.
In addition, on or prior to December 15, 2004, we may
redeem up to $52.5 million of the new notes with the net
proceeds of one or more qualified equity offerings. See
"Description of the New Notes--Optional Redemption" for
more information.
</Table>
8
<Page>
<Table>
Guarantees........................ Substantially all of our operations are conducted through
our subsidiaries. Our obligations under the new notes will
be fully and unconditionally guaranteed on a senior
subordinated basis by our parent and our wholly-owned
restricted domestic subsidiaries and, in limited
circumstances, by some of our other subsidiaries. For the
nine months ended September 30, 2001, the entities that
will guarantee the new notes as of the issue date
generated approximately 27% of our pro forma EBITDA.
Restrictive covenants............. The indenture governing the new notes contains covenants
that limit our and our restricted subsidiaries' ability
to, among other things:
- incur additional indebtedness;
- pay dividends on capital stock or redeem, repurchase
or retire capital stock or subordinated indebtedness;
- make investments;
- incur liens;
- create any consensual limitation on the ability of
our restricted subsidiaries to pay dividends, make
loans or transfer property to us;
- engage in transactions with our affiliates;
- sell assets, including the capital stock of our
subsidiaries;
- issue common and preferred stock of our
subsidiaries; and
- consolidate, merge or transfer assets.
The indenture also contains a covenant that we will cause
our subsidiaries to pay regular distributions to us.
All of these covenants are subject to important exceptions
and qualifications described under "Description of the New
Notes--Certain Covenants."
Change of control................. Upon a change of control, you may require us to repurchase
all or a portion of your new notes at a purchase price of
101% of their principal amount, plus accrued and unpaid
interest. The term "change of control" is defined in the
"Description of the New Notes--Change of Control" section
of this prospectus.
Transfer restrictions; absence of
a public market for the new
notes........................... The new notes generally will be freely transferable, but
will also be new securities for which there will not
initially be a market. There can be no assurance as to the
development or liquidity of any market for the new notes.
</Table>
9
<Page>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table summarizes the consolidated statement of operations and
consolidated balance sheet data for our business. The historical results
presented below are not necessarily indicative of results to be expected for any
future period. The comparability of the financial and other data included in the
table is affected by our parent's acquisition of OrthoLink on February 12, 2001
and Aspen Healthcare Holdings Limited on April 6, 2000 as well as other
acquisitions completed since our inception. For a more detailed explanation of
this financial data, see "Selected Consolidated Financial and Other Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Summary Pro Forma Financial Statements" and the consolidated
financial statements and related notes included elsewhere in this prospectus.
The unaudited pro forma as adjusted consolidated statement of operations
data give effect to:
- our parent's acquisition of OrthoLink Physicians Corporation as if it
had occurred on January 1, 2000;
- our recent acquisition of a 35% interest in a surgical facility in
Torrance, California, and corresponding entry into a contract to manage
that facility, as if the transaction had occurred on January 1, 2000;
- the conversion of our Class A and Class B common stock, Series C
convertible preferred stock and convertible subordinated note with
Baylor Health Care System into shares of our common stock;
- the sale of 10,350,000 shares of our parent's common stock in its
initial public offering for a price of $14.00 per share, after
deducting the underwriting discount and offering expenses, and the
application of the net proceeds to repay outstanding indebtedness and
to redeem each outstanding share of our parent's Series A redeemable
preferred stock;
- for the year ended December 31, 2000 only, our acquisition of Aspen
Healthcare Holdings Limited as if it had occurred on January 1, 2000;
- the offering of the old notes;
- the redemption of the Series D redeemable preferred stock of our
parent;
- the repayment of the existing 10% senior subordinated notes of our
subsidiary, USP Domestic Holdings, Inc.; and
- the repayment of the existing domestic credit facility of our
subsidiary, USP Domestic Holdings, Inc., and the repayment and
termination of the Spanish credit facility of our subsidiary, United
Surgical Partners Europe, S.L.
The unaudited pro forma balance sheet data give effect to:
- the offering of the old notes;
- the redemption of the Series D redeemable preferred stock of our
parent;
- the repayment of the existing 10% senior subordinated notes of our
subsidiary, USP Domestic Holdings, Inc.; and
- the repayment of the existing domestic credit facility of our
subsidiary, USP Domestic Holdings, Inc., and the repayment and
termination of the Spanish credit facility of our subsidiary, United
Surgical Partners Europe, S.L.
See "Summary Pro Forma Financial Statements."
EBITDA should not be considered in isolation or as a substitute for net
income (loss), operating income (loss), cash flows provided by operating
activities or any other measure of operating performance calculated in
accordance with generally accepted accounting principles in the United States.
EBITDA is widely used by financial analysts as a measure of financial
performance. Our calculation of EBITDA may be comparable to similarly titled
measures reported by other companies.
11
<Page>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<Table>
<Caption>
PERIOD FROM YEAR ENDED NINE MONTHS ENDED PRO FORMA AS
FEBRUARY 27, DECEMBER 31, SEPTEMBER 30, ADJUSTED
1998 ---------------------- ------------------------- ------------------------------
(INCEPTION) NINE MONTHS
THROUGH YEAR ENDED ENDED
DECEMBER 31, 2000 DECEMBER 31, SEPTEMBER 30,
1998 1999 RESTATED(A) 2000 2001 2000 2001
------------- -------- ----------- ----------- ----------- ------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues.............. $20,572 $70,413 $138,408 $97,932 $174,515 $195,219 $180,505
Operating expenses excluding
depreciation and
amortization.............. 22,788 65,635 116,621 81,489 131,829 162,644 135,022
Depreciation and
amortization.............. 2,015 7,875 14,138 9,866 19,190 21,998 20,137
------- ------- -------- ------- -------- -------- --------
Operating income (loss)..... (4,231) (3,097) 7,649 6,577 23,496 10,577 25,346
Other income (expense):
Interest income........... 722 329 912 854 696 912 696
Interest expense.......... (497) (3,144) (12,540) (8,819) (13,734) (22,547) (17,697)
Other..................... (246) (362) (782) (711) (49) (782) (49)
------- ------- -------- ------- -------- -------- --------
Income (loss) before
minority interest......... (4,252) (6,275) (4,761) (2,099) 10,409 (11,840) 8,296
Minority interest in
(income) loss of
consolidated
subsidiaries.............. 23 (118) (2,332) (1,179) (5,175) (2,373) (5,258)
Net income (loss)........... $(3,928) $(6,844) $ (8,163) $(3,899) $ 3,996 $(16,178) $ 1,246
Net income (loss)
attributable to common
stockholders(b)........... (4,356) (8,540) (14,134) (8,917) 1,745 (25,866) (5,107)
OTHER DATA:
Number of facilities
operated as of the end of
period.................... 16 28 33 31 45 44 46
EBITDA...................... $(2,216) $ 4,778 $ 21,787 $16,443 $ 42,686 $ 32,575 $ 45,483
Ratio of earnings to fixed
charges................... 1.36x 1.29x
Fixed charge coverage
deficiency................ $ 4,640 $ 7,229 $ 9,408 $ 5,412 -- $ 14,740 --
</Table>
- ------------------
(a) On September 6, 2001, were were advised by the Commission that, based on the
facts and circumstances presented by us, Day-Op Center of Long Island, Inc.
must be consolidated pursuant to an interpretation of EITF 97-2. As a
result, we have restated our consolidated financial statements in order to
consolidate a previously unconsolidated entity.
(b) Includes preferred stock dividends of $428, $1,696, $5,971, $5,018 and
$2,251 for the period from February 27, 1998 (inception) through December
31, 1998, the year ended December 31, 1999, the year ended December 31,
2000, the nine months ended September 30, 2000 and the nine months ended
September 30, 2001, respectively.
<Table>
<Caption>
AS OF SEPTEMBER 30, 2001
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $ 19,750 $ 55,332
Total cash and cash equivalents............................. 15,572 48,623
Total assets................................................ 496,531 544,726
Total debt.................................................. 159,339 237,283
Redeemable preferred stock.................................. 20,597 --
Total stockholders' equity.................................. 231,463 224,842
</Table>
12
<Page>
RISK FACTORS
THE VALUE OF AN INVESTMENT IN THE NEW NOTES WILL BE SUBJECT TO THE
SIGNIFICANT RISKS INHERENT IN OUR BUSINESS. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND OTHER INFORMATION INCLUDED IN THIS
PROSPECTUS BEFORE DECIDING WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER. IF ANY
OF THE EVENTS DESCRIBED BELOW OCCUR, OUR BUSINESS AND FINANCIAL RESULTS AND OUR
ABILITY TO MAKE PAYMENT OBLIGATIONS PURSUANT TO THE NOTES COULD BE ADVERSELY
AFFECTED IN A MATERIAL WAY. ADDITIONAL RISKS AND UNCERTAINTIES, INCLUDING THOSE
THAT ARE NOT YET IDENTIFIED OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL, MAY
ALSO ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS.
RISKS RELATING TO OUR INDEBTEDNESS
OUR SIGNIFICANT INDEBTEDNESS COULD LIMIT OUR ABILITY TO SUCCESSFULLY OPERATE OUR
BUSINESS AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NEW NOTES.
We are substantially leveraged and will continue to have significant
indebtedness following this offering. As of September 30, 2001, on a pro forma
basis after giving effect to the use of the net proceeds of the offering of the
old notes, we would have had total debt of approximately $237.3 million, or
approximately 51.3% of our total capitalization, $88.4 million of which is
senior to the new notes. Our acquisition and development program will require
substantial capital resources, estimated to range from $40.0 to $50.0 million
per year over the next three years, and the operation of our existing surgical
facilities will also require ongoing capital expenditures.
We will need to incur additional indebtedness to fund future acquisitions,
developments and capital expenditures. Our amended and restated credit facility
is an $85.0 million revolving credit facility, which is senior to the new notes.
See "Description of Credit Facilities--Amended and Restated Credit Facility."
However, we may be unable to obtain sufficient financing on terms satisfactory
to us, or at all. As a result, our acquisition and development activities would
have to be curtailed or eliminated and our financial results would be adversely
affected.
The degree to which we are leveraged could have other important consequences
to you, including the following:
- we must dedicate a substantial portion of our cash flows from operations
to the payment of our indebtedness, reducing the funds available to pay
principal and interest on the new notes and for our operations;
- a portion of our borrowings are at variable rates of interest, making us
vulnerable to increases in interest rates;
- we may be more highly leveraged than some of our competitors, which could
place us at a competitive disadvantage;
- our degree of leverage may make us more vulnerable to a downturn in our
business or the economy generally;
- the terms of our existing credit arrangements and the indenture governing
the new notes contain numerous financial and other restrictive covenants;
- our amended and restated credit facility requires us to pledge the capital
stock or other equity interests and assets of our domestic subsidiaries;
- our debt level could limit our flexibility in planning for, or reacting
to, changes in our business and the industry in which we operate; and
- we may have difficulties borrowing money in the future.
13
<Page>
DESPITE OUR CURRENT LEVELS OF INDEBTEDNESS, WE STILL MAY BE ABLE TO INCUR
SUBSTANTIALLY MORE DEBT. THIS COULD FURTHER INCREASE THE RISKS DESCRIBED ABOVE.
We may be able to incur substantial additional indebtedness in the future.
The terms of the indenture relating to the new notes do not fully prohibit us
from doing so. Our amended and restated credit facility permits borrowings of
$85.0 million and all of those borrowings will be senior to the new notes and
any note guarantees. If new debt is added to our current debt levels, the
related risks that we now face could intensify. See "Capitalization," "Selected
Consolidated Financial and Other Data" and "Description of Credit Facilities."
TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on and to refinance our indebtedness, including
the new notes, and to fund planned capital expenditures will depend on our
ability to generate cash in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. We cannot assure you that our business will
generate sufficient cash flow from operations, that we will realize operating
improvements on schedule or that future borrowings will be available to us under
our amended and restated credit facility in an amount sufficient to enable us to
pay our indebtedness, including the new notes, or to fund our other liquidity
needs. We may need to refinance all or a portion of our indebtedness, including
the new notes, on or before maturity. We might not be able to refinance any of
our indebtedness, including indebtedness under our amended and restated credit
facility and the new notes, on commercially reasonable terms or at all.
ANY FAILURE TO MEET OUR DEBT OBLIGATIONS COULD HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
If our cash flow and capital resources are insufficient to fund our debt
obligations, we may be forced to sell assets, seek additional equity or debt
capital or restructure our debt. In addition, any failure to make scheduled
payments of interest and principal on our outstanding indebtedness would likely
result in a reduction of our credit rating, which could harm our ability to
incur additional indebtedness on acceptable terms. Our cash flow and capital
resources may be insufficient for payment of interest on and principal of our
debt in the future, including payments on the new notes, and any such
alternative measures may be unsuccessful or may not permit us to meet scheduled
debt service obligations, which could cause us to default on our obligations and
impair our liquidity.
RISKS RELATING TO THE EXCHANGE OFFER, THE NEW NOTES AND OUR STRUCTURE
IF YOU DO NOT PROPERLY TENDER YOUR OLD NOTES, YOU WILL CONTINUE TO HOLD
UNREGISTERED OLD NOTES AND YOUR ABILITY TO TRANSFER OLD NOTES WILL BE ADVERSELY
AFFECTED.
We will only issue new notes in exchange for old notes that you timely and
properly tender. Therefore, you should allow sufficient time to ensure timely
delivery of the old notes and carefully follow the instructions on how to tender
your old notes. Neither we nor the exchange agent are required to tell you of
any defects or irregularities with respect to your tender of the old notes.
If you do not exchange your old notes for new notes pursuant to the exchange
offer, the old notes you hold will continue to be subject to the existing
transfer restrictions. In general, you may not offer or sell the old notes
except under an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. We do not plan to register
old notes under the Securities Act. Further, if you continue to hold any old
notes after the exchange offer is consummated, you may not be able to sell the
old notes because there will be fewer old notes outstanding.
14
<Page>
YOUR RIGHT TO RECEIVE PAYMENTS ON THE NEW NOTES IS JUNIOR TO MOST OF OUR
EXISTING INDEBTEDNESS AND POSSIBLY MOST OF OUR FUTURE BORROWINGS. FURTHER, THE
NOTE GUARANTEES WILL BE JUNIOR TO MOST OF THE GUARANTORS' EXISTING INDEBTEDNESS
AND POSSIBLY TO ALL OF THEIR FUTURE BORROWINGS.
The new notes rank behind all of our existing indebtedness and all of our
future borrowings, except any future indebtedness that expressly provides that
it ranks equal with, or is subordinated in right of payment to, the notes. The
note guarantees are similarly subordinated. As a result, upon any distribution
to our creditors or the creditors of any guarantors in a bankruptcy or similar
proceeding relating to us or any guarantors, the holders of our senior debt and
the senior debt of any guarantors will be entitled to be paid in full in cash
before any payment may be made with respect to the notes or any note guarantees.
In addition, all payments on the new notes and any note guarantees will be
blocked in the event of a payment default on Designated Senior Indebtedness (as
defined in "Description of the New Notes--Certain Definitions") and may be
prohibited for up to 179 days each year in the event of certain non-payment
defaults on Designated Senior Indebtedness.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or any note guarantor, holders of the new notes will
participate with all other holders of our subordinated indebtedness and any
guarantors in the assets remaining after we and the note guarantors have paid
all of our senior debt. In any of these cases, we and the note guarantors may
not have sufficient funds to pay all of our creditors; therefore, holders of the
new notes may receive ratably less than trade creditors. As of September 30,
2001, on a pro forma basis after giving effect to the offering of the old notes
and the application of the net proceeds therefrom, our senior debt would have
been approximately $88.4 million. In addition to the foregoing, we have
$85.0 million of revolving credit available under our amended and restated
credit facility. See "Description of Credit Facilities" and "Description of the
New Notes--Ranking."
MANY OF OUR SUBSIDIARIES WILL NOT BE GUARANTORS OF THE NEW NOTES, AND THESE
NON-GUARANTOR SUBSIDIARIES MAY INCUR SIGNIFICANT AMOUNTS OF DEBT.
The new notes will not be guaranteed by most of our subsidiaries. For the
nine months ended September 30, 2001, the entities that will guarantee the new
notes as of the issue date of the old notes generated approximately 27% of our
pro forma EBITDA. Under the indenture, these non-guarantor subsidiaries may be
able to incur significant amounts of additional debt. As a result, the new notes
are effectively structurally subordinated to the debt incurred by these
non-guarantor subsidiaries. Upon any distribution to creditors of a
non-guarantor subsidiary in a bankruptcy or similar proceeding relating to such
entity, creditors of such entity will be entitled to be paid in full in cash
before any payment may be made with respect to the new notes or any note
guarantee. See "Description of the New Notes."
BECAUSE WE ARE A HOLDING COMPANY WE MAY HAVE LIMITED ACCESS TO THE CASH FLOW OF
OUR SUBSIDIARIES TO SERVICE OUR INDEBTEDNESS. NOT ALL OF OUR DOMESTIC OR FOREIGN
SUBSIDIARIES WILL GUARANTEE THE NEW NOTES. FURTHER, WE DO NOT HAVE EXCLUSIVE
CONTROL OVER THE DISTRIBUTION OF REVENUES FROM SOME OF OUR SUBSIDIARIES AND WE
MAY BE UNABLE TO CAUSE ALL OR A PORTION OF THE REVENUES OF THESE ENTITIES TO BE
DISTRIBUTED.
We conduct our business through our subsidiaries. Our only assets consist of
all of the outstanding shares of the capital stock of USP Domestic
Holdings, Inc. and USP International Holdings, Inc., which in turn, directly or
indirectly, hold ownership interests in our other operating subsidiaries.
Therefore, our sole source of cash from which to make payments of interest on
the new notes will be distributions made to us from our subsidiaries. Our
obligations under the new notes will be fully and unconditionally guaranteed on
a senior subordinated basis by our parent and our wholly-owned restricted
domestic subsidiaries and, in limited circumstances, by some of our other
subsidiaries. The entities that will guarantee the new notes as of the issue
date of the old notes generated approximately 27% of our pro forma EBITDA for
the nine months ended September 30, 2001. Our subsidiaries that own our assets
15
<Page>
and operations in the United Kingdom will not guarantee the new notes, will be
Unrestricted Subsidiaries as defined in the indenture, and will therefore not be
subject to the covenants or restrictions in the indenture. In addition, we hold
our ownership interests in surgical facilities in the United States through
limited partnerships or limited liability companies in which healthcare systems,
physicians or physician groups hold limited partnership or membership interests.
These limited partnerships and limited liability companies will not guarantee
the new notes. Our non-guarantor subsidiaries, including our subsidiaries in the
United Kingdom and Spain and these limited partnerships and limited liability
companies are legally distinct from us and have or will have no obligation to
pay amounts due pursuant to the new notes or to make any funds available for
such payments. The ability of our non-guarantor subsidiaries to make such funds
available to us through distributions will be subject to applicable corporate
and other laws and, with respect to some of our domestic subsidiaries, to the
agreements to which such subsidiaries are or become subject. As a result, the
new notes are effectively subordinated to the liabilities of our non-guarantor
subsidiaries.
Our limited partnership and limited liability company agreements relating to
our domestic surgical facilities, which are typically with the physicians who
perform procedures at our surgery centers, usually provide for the quarterly
distribution of net revenues from operations, less amounts used for expenses and
working capital. We generally control the entities that function as the general
partner of the limited partnerships or the managing member of the limited
liability companies through which we conduct operations. For 19 of our surgery
centers, we share control of these general partner or managing member entities
with one of the healthcare systems with which we have a strategic alliance, or,
in the case of our strategic relationship with the Baylor Health Care System, an
entity that controls the general partner or managing entity. As a result, we do
not have exclusive control in these 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. In addition, our credit agreement in
the United Kingdom prohibits the distribution of revenues out of the United
Kingdom.
WE MAY HAVE A SPECIAL LEGAL RESPONSIBILITY TO THE HOLDERS OF OWNERSHIP INTERESTS
IN THE ENTITIES THROUGH WHICH WE OWN DOMESTIC SURGICAL FACILITIES, AND THAT
RESPONSIBILITY MAY PREVENT US FROM ACTING SOLELY IN OUR OWN BEST INTERESTS OR IN
COMPLIANCE WITH THE INDENTURE.
We hold ownership interests in surgery centers and private surgical
hospitals in the United States through limited partnerships or limited liability
companies in which healthcare systems, physicians or physician practice groups
hold limited partnership or membership interests. As general partner or managing
member 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
interest holders. We have attempted to structure the indenture in a manner that
will enable us to comply with our fiduciary duties to our other interest
holders. However, no assurance can be given that we will not encounter
situations in which we have a conflict between the best interests of the company
and/or our obligations under the indenture, on the one hand, and the best
interests of one of our limited partnerships or limited liability companies, on
the other. For example, we may encounter situations in which one of our limited
partnerships or limited liability companies would benefit from incurring
indebtedness that is not permitted under the terms of the indenture. If a
conflict of interest arises as a result of our compliance with the terms of the
indenture, no assurance can be given that the other interest holders will not
sue us alleging a violation of our fiduciary duties to them. Conversely, our
failure to comply with the terms of the indenture could lead to an event of
default which could result in an acceleration of the new notes.
16
<Page>
OUR AMENDED AND RESTATED CREDIT FACILITY IMPOSES MANY RESTRICTIONS ON US.
Our amended and restated credit facility restricts, among other things, our
ability to:
- incur additional indebtedness;
- declare or make any dividend or other restricted payment;
- engage in any business activity except those engaged in at the closing
date and activities reasonably related thereto;
- issue any equity interest to any person;
- make certain investments;
- make intercompany loans and transfers;
- create liens;
- enter into transactions with affiliates;
- enter into sale and leaseback transactions;
- merge or consolidate; and
- transfer and sell assets.
These restrictions may limit our ability to successfully operate our
business and prevent us from fulfilling our obligations under the new notes. In
addition, we are required to maintain maximum leverage ratios under our amended
and restated credit facility. A failure to comply with the restrictions
contained in our amended and restated credit facility could lead to an event of
default which could result in an acceleration of the indebtedness under the
credit facility. Such an acceleration would also constitute an event of default
under the indenture governing the new notes. See "Description of Credit
Facilities--Amended and Restated Credit Facility."
THE NEW NOTES CONTAIN A NUMBER OF RESTRICTIVE COVENANTS. WE MAY BE UNABLE TO
REPAY OR REPURCHASE THE NEW NOTES.
Our ability to comply with the restrictive covenants set forth in the
indenture may be affected by events beyond our control, and we may not be able
to meet these obligations. A breach of any of the covenants could result in a
default under the indenture and, potentially, an acceleration of our obligation
to repay the new notes. At maturity, the entire outstanding principal amount of
the new notes, together with accrued and unpaid interest, will become due and
payable. At maturity, we may not have the funds to fulfill these obligations and
may not be able to arrange for additional financing. If the maturity date occurs
at a time when other arrangements prohibit us from repaying the new notes, we
would try to obtain waivers of such prohibitions from the lenders under those
arrangements, or we could attempt to refinance the borrowings that contain the
restrictions. If we could not obtain the waivers or refinance these borrowings,
we would be unable to repay the new notes.
A FINANCIAL FAILURE BY US, OUR PARENT OR ANY SUBSIDIARY GUARANTOR MAY HINDER THE
RECEIPT OF PAYMENT ON THE NEW NOTES, AS WELL AS THE ENFORCEMENT OF REMEDIES
UNDER THE NOTE GUARANTEES.
An investment in the new notes, as in any type of security, involves
insolvency and bankruptcy considerations that investors should carefully
consider. If we, our parent or any of our subsidiary guarantors become a debtor
subject to insolvency proceedings under the bankruptcy code, it is likely to
result in delays in the payment of the new notes and in the exercise of
enforcement remedies under the new notes or the note guarantees. Provisions
under the bankruptcy code or general principles of equity that could result in
the impairment of your rights include the automatic stay, avoidance of
preferential transfers by a trustee or debtor-in-possession, substantive
consolidation, limitations of collectibility of unmatured interest or attorneys'
fees and forced restructuring of the notes.
17
<Page>
A FINANCIAL FAILURE BY US, OUR PARENT, OUR SUBSIDIARIES OR ANY OTHER ENTITY IN
WHICH WE HAVE AN INTEREST MAY RESULT IN THE ASSETS OF ANY OR ALL OF THOSE
ENTITIES BECOMING SUBJECT TO THE CLAIMS OF ALL CREDITORS OF THOSE ENTITIES.
A financial failure by us, our parent, our subsidiaries or any other entity
in which we have an interest could affect payment of the new notes if a
bankruptcy court were to "substantively consolidate" us, our parent and our
subsidiaries, including entities in which we have an interest but whose
financial statements are not consolidated with ours. If a bankruptcy court
substantively consolidated us, our parent and our subsidiaries, including
entities in which we have an interest but whose financial statements are not
consolidated with ours, the assets of each entity would be subject to the claims
of creditors of all entities. This would expose you not only to the usual
impairments arising from bankruptcy, but also to potential dilution of the
amount ultimately recoverable because of the larger creditor base. The indenture
will not limit the ability of entities whose financial statements are not
consolidated with ours to incur debt, which could increase this risk.
Furthermore, forced restructuring of the new notes could occur through the
"cram-down" provision of the bankruptcy code. Under this provision, the new
notes could be restructured over your objections as to their general terms,
primarily interest rate and maturity.
THE INTERESTS OF AFFILIATED STOCKHOLDERS WHO TOGETHER OWN A LARGE PERCENTAGE OF
THE COMMON STOCK OF OUR PARENT MAY NOT BE ALIGNED WITH THE INTERESTS OF THE
HOLDERS OF THE NEW NOTES.
Currently, officers and directors of our parent and their affiliated
entities together own approximately 39% of the outstanding common stock of our
parent, United Surgical Partners International, Inc. Accordingly, these
stockholders will be able to exert significant influence over:
- the election of our parent's board of directors;
- our parent's management and policies; and
- the outcome of any corporate transaction or other matter submitted to the
stockholders of our parent for approval, including mergers, consolidations
and the sale of all or substantially all of our parent's assets.
These stockholders will also be able to exert significant influence over a
change in control of our parent or an amendment to its certificate of
incorporation or bylaws. Their interests may conflict with the interests of the
holders of the new notes and they may take actions affecting us with which you
disagree. See "Security Ownership of Principal Stockholders and Management."
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE GOVERNING THE NEW NOTES.
Upon the occurrence of certain change of control events, we will be required
to offer to repurchase all outstanding new notes. However, it is possible that
we will not have sufficient funds at the time of the change of control to make
the required repurchase of new notes or that restrictions in our amended and
restated credit facility will not allow these repurchases.
FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES, TO VOID
GUARANTEES AND REQUIRE HOLDERS OF THE NEW NOTES TO RETURN PAYMENTS RECEIVED FROM
GUARANTORS.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of a
guarantee could be subordinated to all other debts of that guarantor, if, among
other things, the guarantor, at the time it incurred the indebtedness evidenced
by its guarantee:
- received less than reasonably equivalent value or fair consideration for
the incurrence of the guarantee;
- was insolvent or rendered insolvent by reason of the incurrence;
18
<Page>
- was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay the debts as they mature.
In addition, any payment by that guarantor pursuant to its guarantee could
be voided and required to be returned to the guarantor or to a fund for the
benefit of the creditors of the guarantor.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, a guarantor would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable value of all of its assets;
- if the present fair saleable value of its assets were less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
- it could not pay its debts as they become due.
We believe that any guarantor of the new notes, after giving effect to its
guarantee of the new notes, would not be insolvent, would not have unreasonably
small capital for the business in which it would be engaged and would not have
incurred debts beyond its ability to pay such debts as they mature. We cannot
assure you, however, as to what standard a court would apply in making these
determinations or that a court would agree with our conclusions in this regard.
IF AN ACTIVE TRADING MARKET DOES NOT DEVELOP FOR THE NEW NOTES, YOU MAY BE
UNABLE TO SELL THE NEW NOTES OR TO SELL THE NEW NOTES AT A PRICE THAT YOU DEEM
SUFFICIENT.
The new notes will be new securities for which there currently is no
established trading market. Although we will register the new notes under the
Securities Act, we do not intend to apply for listing of the new notes on any
securities exchange or for quotation of the new notes in any automated dealer
quotation system. In addition, although the initial purchasers of the old notes
have informed us that they intend to make a market in the new notes after the
exchange offer, the initial purchasers may stop making a market at any time.
Finally, if a large number of holders of old notes do not tender old notes or
tender old notes improperly, the limited amount of new notes that would be
issued and outstanding after we consummate the exchange offer could adversely
affect the development of a market for these new notes.
INCREASES IN OUR U.S. FEDERAL INCOME TAX LIABILITY RESULTING FROM GUARANTEES OF
ANY OF OUR FOREIGN SUBSIDIARIES COULD REDUCE THE FUNDS AVAILABLE TO US TO MAKE
REQUIRED PAYMENTS UNDER THE NEW NOTES.
Although none of our foreign subsidiaries will be a guarantor of our
obligations under the new notes on the issue date, certain of our foreign
subsidiaries may be required, in limited circumstances, to guarantee our
obligations under the new notes in the future. If any of our foreign
subsidiaries are required to guarantee our obligations under the new notes in
the future, our U.S. federal income tax liability would increase by a portion of
those subsidiaries' taxable income, if any. Any increase in our U.S. federal
income tax liability for these reasons would reduce the funds available to us,
including the funds available to make required payments under the new notes.
19
<Page>
WE ARE NOT LIMITED IN OUR ABILITY TO INVEST IN OUR NON-GUARANTOR QUALIFIED
RESTRICTED SUBSIDIARIES. WE MAY NOT HAVE THE ABILITY TO RECAPTURE FUNDS WE
INVEST IN THESE NON-GUARANTOR QUALIFIED RESTRICTED SUBSIDIARIES.
The indenture does not limit our ability to invest in our Qualified
Restricted Subsidiaries (as defined in "Description of the New Notes--Certain
Definitions"). These Qualified Restricted Subsidiaries can incur significant
amounts of debt. As a result, the Qualified Restricted Subsidiaries may in the
future become highly leveraged. Since these Qualified Restricted Subsidiaries
are not guarantors of the new notes, in the event of a bankruptcy of one or more
of these entities, funds we invested in these entities may not be available to
us to repay the new notes or for other purposes. Our inability to recover funds
invested in our Qualified Restricted Subsidiaries could limit our ability to
service our debt obligations, including obligations under the new notes.
WE ARE NOT LIMITED IN OUR ABILITY TO PURCHASE EQUITY INTERESTS IN OUR QUALIFIED
RESTRICTED SUBSIDIARIES; THEREFORE THE NEW NOTES ARE EFFECTIVELY STRUCTURALLY
SUBORDINATED TO EQUITY HOLDERS IN THOSE ENTITIES.
Many of our agreements with our Qualified Restricted Subsidiaries require us
to repurchase the equity interests of the other equity investors under certain
circumstances, and many give us the ability to do so at our election. The
indenture does not materially limit our ability to make these repurchases. As a
result, holders of equity interests in our Qualified Restricted Subsidiaries may
have the ability to obtain a return on their investment senior to the new note
holders. See "Description of the New Notes--Ranking."
RISKS RELATING TO OUR BUSINESS
WE DEPEND ON PAYMENTS FROM THIRD-PARTY PAYORS, INCLUDING GOVERNMENT HEALTHCARE
PROGRAMS. IF THESE PAYMENTS ARE REDUCED, OUR OPERATING INCOME 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 private
surgical hospitals. The amount of payment a surgery center or private surgical
hospital 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. We derived approximately 20% and 18% of our
domestic revenues for the nine months ended September 30, 2001 and the year
ended December 31, 2000, respectively, from U.S. government healthcare programs,
including Medicare and Medicaid. In addition, we derived approximately 68% and
72% of our domestic revenues for the nine months ended September 30, 2001 and
the year ended December 31, 2000, respectively, from private third party payors.
We derived approximately 2% and 10% of our revenues from governmental payors,
and 67% and 69% of our revenues from private third-party payors, in the United
Kingdom and Spain for the nine months ended September 30, 2001 and the year
ended December 31, 2000, respectively. The revenue from private third-party
payors in the United Kingdom and Spain is a result of 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 by the national
healthcare systems in the United Kingdom and Spain. Fixed fee schedules,
capitation payment arrangements, exclusion from participation in managed care
programs or other factors affecting payments for healthcare services over which
we have no control could cause a reduction in our revenues in the future.
IF WE ARE UNABLE TO ACQUIRE AND DEVELOP ADDITIONAL SURGERY CENTERS OR PRIVATE
SURGICAL HOSPITALS ON FAVORABLE TERMS, 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 surgical facility companies, groups of surgical facilities and
individual surgical facilities and to develop additional surgical facilities.
Our efforts to execute our acquisition and development strategy may be affected
by
20
<Page>
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 during the first six to 12 months of operation
and, unless and until their case loads grow, they generally experience lower
total revenues and operating margins than established surgical facilities. We
expect that our development candidates will experience similar losses and lower
revenues and operating margins. Historically, each of our newly developed
facilities has generated positive cash flow within the first 12 months of
operations. We may not be successful in acquiring other companies or additional
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 INCUR MATERIAL LIABILITIES AS A RESULT OF ACQUIRING COMPANIES OR SURGICAL
FACILITIES, OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
Although we seek indemnification from prospective sellers covering unknown
or contingent liabilities, we may acquire companies and 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 occur after the
acquisition of companies and 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.
IF WE DO NOT HAVE SUFFICIENT CAPITAL RESOURCES FOR OUR ACQUISITION AND
DEVELOPMENT STRATEGY, OUR GROWTH WILL BE LIMITED.
We will need capital to acquire other companies and to acquire, develop,
integrate, operate and expand surgery centers and private surgical hospitals. We
may finance future acquisition and development projects through debt or equity
financings and may use shares of our capital stock for all or a portion of the
consideration to be paid in acquisitions. In the event that our common stock
does not maintain a sufficient valuation, or potential acquisition candidates
are unwilling to accept our common stock as all or part of the consideration, we
may be required to use more of our cash resources, if available, which would
reduce the cash resources available for payments required pursuant to the notes,
or to rely solely on additional financing arrangements to pursue our acquisition
and development strategy. Further, any debt financing used in future
acquisitions or developments could be senior to the notes. We cannot assure you
that we will have sufficient capital resources or be able to obtain financing on
terms acceptable to us for our acquisition and development strategy, which would
limit our growth.
IF WE ARE UNABLE TO MANAGE GROWTH, WE MAY BE UNABLE TO ACHIEVE OUR GROWTH
STRATEGY.
We have acquired or developed all of our surgery centers and private
surgical hospitals since February 1998. Our acquisition of OrthoLink was
completed in February 2001. We expect to continue to expand our operations in
the future. As a new company, 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 implement and 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 implement and improve our
21
<Page>
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 HEALTHCARE SYSTEMS. IF WE ARE NOT ABLE TO
MAINTAIN OR RENEW OUR STRATEGIC ALLIANCES WITH THESE HEALTHCARE SYSTEMS, OR
ENTER INTO NEW ALLIANCES, WE MAY BE UNABLE TO IMPLEMENT OUR BUSINESS STRATEGIES
SUCCESSFULLY.
We currently have strategic alliances with Baylor Health Care System,
Meridian Health System, St. Thomas Health Services and Mt. Sinai Health System.
Our most important strategic alliance is with Baylor. The Baylor and Meridian
strategic alliances currently operate surgery centers and the Mt. Sinai
strategic alliance's application for a surgery center is awaiting approval from
New York regulatory authorities. We expect to contribute two of our surgery
centers to the St. Thomas joint venture. Our domestic business depends in part
upon the efforts and success of Baylor and the strength of our alliance with
Baylor. Our business could be adversely affected by any damage to Baylor's
reputation or to our alliance with Baylor. Our alliance agreement with Baylor
does not have an expiration date but may be terminated with the mutual consent
of both parties, if the joint venture is determined to be illegal due to a
change in laws or regulations or upon stated changes in control of our company.
We may not be able to maintain our existing alliance agreement with Baylor on
terms and conditions favorable to us or enter into alliances with additional
healthcare systems. If we are unable to maintain our existing strategic alliance
with Baylor on terms favorable to us or enter into alliances with additional
healthcare systems, we may be unable to implement our business strategies
successfully.
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 services at our facilities and the strength of our relationships
with these physicians. Our revenues would be reduced if we lost our relationship
with a key physician or group of physicians or the physician or group reduces
his or its use of our facilities. In addition, 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 damage our
reputation, subject us to liability and significantly reduce our revenues. For
example, in six of our surgery centers an affiliated group of physicians at each
surgery center generates the majority of the cases performed at the surgery
center. If we fail to maintain our relationships with these physicians, the
revenues of these six surgery centers, in particular, and our revenues, in
general, would be reduced.
OUR EUROPEAN OPERATIONS, WHICH WE PLAN TO EXPAND, ARE SUBJECT TO UNIQUE RISKS.
IF ANY OF THESE EVENTS ACTUALLY OCCUR, OUR FINANCIAL RESULTS COULD BE ADVERSELY
AFFECTED.
Our international operations are located in Spain and the United Kingdom.
For the nine months ended September 30, 2001 and the year ended December 31,
2000, respectively, approximately 30% and 42% of our revenues were generated
from operations in Spain, 53% and 39% from the United States and 17% and 19%
from the United Kingdom. For 1999 and 1998, respectively, these percentages were
67% and 91% for Spain and 33% and 9% for the United States. We did not have
operations in the United Kingdom before April 2000. We expect that revenue from
our European operations will continue to account for a significant percentage of
our total revenue. We have approved the purchase contract to acquire a private
surgical hospital in Murcia, Spain and we may pursue additional acquisitions in
Spain, the United Kingdom and other countries in Western Europe. Expansion of
our European operations will require substantial financial resources and
management attention. This focus of financial resources and management attention
could have an adverse effect on our financial results. Our European operations
are subject, and as they continue to develop may become increasingly subject, to
risks such as:
- competition with government-sponsored healthcare systems;
22
<Page>
- changes in foreign regulatory requirements;
- identifying, attracting, retaining and working successfully with qualified
local management;
- difficulties in staffing and managing geographically and culturally
diverse, multinational operations;
- foreign exchange risks; and
- the possibility of an economic downturn in the Western European countries
in which we operate, which could adversely affect the ability or
willingness of employers and individuals in these countries to purchase
private health insurance.
These or other factors could have a material adverse effect on our ability to
successfully operate in Europe.
OUR REVENUES MAY BE REDUCED BY PENDING CHANGES IN THE SYSTEM OF PAYING FOR
OUTPATIENT SURGICAL PROCEDURES UNDER THE MEDICARE PROGRAM.
Medicare's system of paying for covered procedures performed in a surgery
center may change in the future. On June 12, 1998, the Department of Health and
Human Services proposed major revisions to the surgery center payment
methodology. The proposed rule would increase the number of surgical procedure
payment groups from eight to 105 and the number of procedures covered by the
Medicare program from 2,280 to 2,499. All of the procedures that are paid at a
particular rate would constitute a payment group. Therefore, each of the 2,499
procedures would be paid at one of the 105 prospectively determined payment
rates.
According to the Centers for Medicare and Medicaid Services, the payment
rate for virtually every covered procedure performed in a surgery center would
change under the proposed revisions to the payment methodology, with some
procedures receiving a lower rate and others receiving a higher rate than they
do currently. The Centers for Medicare and Medicaid Services has estimated that
the proposed payment rates would reduce Medicare payments to surgery centers, in
the aggregate, by 2% from current spending levels. We do not know at this time
when the proposed revisions to this surgery payment methodology will be
implemented.
For the nine months ended September 30, 2001 and the year ended December 31,
2000, approximately 20% and 18%, respectively, of our domestic revenues were
attributable to U.S. government healthcare programs, including Medicare and
Medicaid. The changes discussed above could reduce our Medicare revenues,
depending on the volume and type of procedures performed at a particular
facility.
IF WE ARE UNABLE TO 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 domestic healthcare facility revenue growth.
Similarly, in the United Kingdom, most patients at private surgical hospitals
have private healthcare insurance, either paid for by the patients or received
as part of their employment compensation. In 2000, approximately 68% of our
total revenues were attributable to patients with private insurance. The
majority of our revenues in the United Kingdom are attributable to patients with
private insurance. Our private surgical hospitals in the United Kingdom contract
with healthcare insurers on an annual basis to provide services to insured
patients.
23
<Page>
In Spain, the majority of our revenues are attributable to patients with
private insurance. Our private surgical hospitals in Spain contract with
healthcare insurers on an annual basis to provide services to insured patients.
In addition, our Spanish hospitals contract with the Spanish public healthcare
system, which awards contracts based on a hospital's satisfaction of specified
criteria. Currently, we have five contracts with the Spanish public healthcare
system. The Spanish public healthcare system has the right to give priority to
hospitals owned by nonprofit entities if the efficiency, quality and cost
conditions of these entities are comparable to those of for profit hospitals.
Our contracts with the Spanish public healthcare system typically have a term of
less than one year and are renewable at the sole discretion of the Spanish
public healthcare system. As the majority of our revenues in Spain are derived
from private insurance companies, the annual negotiation of price increases is
very important to the profitability of our hospitals. Any termination of an
existing third-party contract could result in a significant loss of revenues and
could have a material adverse effect on us.
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 ability to negotiate favorable
contracts on behalf of our facilities with managed care organizations, employer
groups and other private third-party payors. 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 and Spain on favorable terms, or if we fail to remain on
insurers' networks of approved hospitals, it could have a material adverse
effect on us. We could experience a material adverse effect to our operating
results and financial condition as a result of the termination of existing
third-party payor contracts.
EFFORTS TO REGULATE THE CONSTRUCTION, ACQUISITION OR EXPANSION OF HEALTHCARE
FACILITIES COULD PREVENT US FROM ACQUIRING ADDITIONAL SURGERY CENTERS OR PRIVATE
SURGICAL HOSPITALS, RENOVATING OUR EXISTING FACILITIES OR EXPANDING THE BREADTH
OF SERVICES WE OFFER.
Some states in the United States require prior approval for the
construction, acquisition or expansion of healthcare facilities or expansion of
the services they offer. In giving approval, these states consider the need for
additional or expanded healthcare facilities or services. In Alabama, Georgia,
Tennessee and New York, we are required to obtain certificates of need for
capital expenditures exceeding a prescribed amount, changes in bed capacity or
services offered and various other matters. Other states in which we now or may
in the future operate may adopt similar legislation. Our costs of obtaining a
certificate of need have been as much as $500,000. Spain also requires prior
approval of the construction or expansion of healthcare facilities. In addition,
private surgical hospitals in Spain must obtain a number of licenses, including
a license to operate a pharmacy or to perform tests using radioactive materials.
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 required approvals, we may not be able to
acquire additional surgery centers or private surgical hospitals, expand
healthcare services we provide at these facilities or replace or expand acquired
facilities.
NEW FEDERAL AND STATE LEGISLATIVE AND REGULATORY INITIATIVES RELATING TO PATIENT
PRIVACY COULD REQUIRE US TO EXPEND SUBSTANTIAL SUMS ACQUIRING AND IMPLEMENTING
NEW INFORMATION SYSTEMS, WHICH COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS.
There are currently numerous legislative and regulatory initiatives at the
U.S. state and federal levels addressing patient privacy concerns. In
particular, the Health Insurance Portability and Accountability Act of 1996
contains provisions that may require us to acquire and implement expensive new
computer systems and to adopt business procedures designed to protect the
privacy of each of our
24
<Page>
patient's individual health information. On December 28, 2000, the Department of
Health and Human Services released the final health privacy regulations, which
generally require compliance by April 14, 2003. Proposed regulations addressing
standards for the security of health information were issued by the Department
of Health and Human Services on August 12, 1998. These regulations are expected
to have a financial impact on the healthcare industry because they impose
extensive new requirements and restrictions on the use and disclosure of
identifiable patient information. We estimate the total cost of these systems
and procedures to be $175,000. However, because of the proposed nature of the
security regulations, we cannot fully predict the total financial or other
impact of these regulations on our business and compliance with these
regulations could require us to spend substantial additional sums, which could
negatively impact our financial results. We believe that we are in material
compliance with existing state and federal regulations relating to patient
privacy. However, if we fail to comply with the newly released regulations, we
could suffer civil penalties up to $25,000 per calendar year for each violation
and criminal penalties with fines up to $250,000.
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 domestic and European 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;
- 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 European jurisdictions in which
we operate. 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, including additional foreign countries. 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 referring items or services
payable by Medicare, Medicaid, or any other federally funded healthcare program.
Additionally, the Anti-Kickback Statute prohibits any form of
25
<Page>
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.
Violations of the Anti-Kickback Statute may result in substantial civil or
criminal penalties, including 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 the Medicare
and Medicaid programs. The exclusion, if applied to our surgery centers or
private 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 private surgical hospitals: the "investment interest" safe
harbor and the "personal services and management contracts" safe harbor.
However, the structure of the limited partnerships and limited liability
companies operating our surgery centers and private surgical hospitals, as well
as our various business arrangements involving physician group practices, do not
satisfy all of the requirements of either safe harbor. Therefore, our business
arrangements with our surgery centers, private surgical hospitals and physician
groups do not qualify for "safe harbor" protection from government review or
prosecution under the Anti-Kickback Statute. Since there is no legal requirement
that transactions with referral sources fit within a safe harbor, a business
arrangement that does not substantially comply with the relevant safe harbor is
not necessarily illegal under the Anti-Kickback Statute.
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 surgery centers typically consist of one of our
subsidiaries being an investor in each limited partnership or limited liability
company that owns the surgery center, in addition to providing management and
other services to the surgery center. As a result, these business arrangements
do not comply with all the requirements of the surgery center safe harbor, and,
therefore, are not immune from government review or prosecution.
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.
IF PHYSICIAN SELF-REFERRAL LAWS ARE INTERPRETED DIFFERENTLY OR IF OTHER
LEGISLATIVE RESTRICTIONS ARE ISSUED, WE COULD INCUR A SIGNIFICANT 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 if the physician or a member of the physician's immediate
family has a financial relationship with the entity. The original Stark Law,
commonly known as Stark I, only addressed referrals involving clinical
laboratory services. However, in 1995 additional legislation, commonly known as
Stark II, expanded the ban on self-
26
<Page>
referrals by adding the following services to the definition of "designated
health services": physical therapy services; occupational therapy services;
radiology services; radiation therapy services and supplies; durable medical
equipment and supplies; parenteral and enteral nutrients, equipment and
supplies; prosthetics, orthotics, and prosthetic devices and supplies; home
health services; outpatient prescription drugs; and inpatient and outpatient
hospital services.
The Department of Health and Human Services issued a portion of the Stark II
final rule, which it called "Phase I," on January 4, 2001. The Phase I
regulations, which are generally scheduled to take effect on January 4, 2002,
address some of the ownership and investment interest exceptions and
compensation arrangement exceptions found in the Stark Law. Phase II of the
final rule will address, among other things, any comments made in response to
the Phase I final rule, the remaining ownership and investment interest
exceptions and compensation arrangement exceptions, the reporting requirements,
sanctions and the Stark Law's application to the Medicaid program. Under current
regulations interpreting Stark I and under the Phase I regulations, services
that would otherwise constitute designated health services, but that are paid by
Medicare as part of the surgery center payment rate, are not designated health
services for purposes of the Stark Law.
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 private
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.
In Spain, there is legislation which prohibits physicians who have
contracted with the Spanish public healthcare system on an exclusive basis from
rendering services in a private hospital. Spanish legislation also prohibits
physicians rendering services within the Spanish public healthcare system on a
non-exclusive basis from rendering services to Spanish public healthcare system
patients in private hospitals such as ours. Violations of these laws could
result in administrative fines or termination of our alliance with the Spanish
public healthcare system. If the physicians who use our Spanish facilities
violate these regulations and their or our contracts are terminated with the
Spanish public healthcare system, preventing them from continuing to use our
facilities, we could experience a significant loss of revenues in Spain.
IF LAWS GOVERNING THE CORPORATE PRACTICE OF MEDICINE 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. 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 private 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.
As a result of our acquisition of OrthoLink, we provide management 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
27
<Page>
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 OUR DESIGNEES FOR OWNERSHIP AT NEW YORK FACILITIES ARE NOT APPROVED OR IF OUR
OPERATIONS IN NEW YORK ARE FOUND TO NOT BE IN COMPLIANCE WITH NEW YORK LAW, WE
MAY BE UNABLE TO CONTINUE OR EXPAND OUR OPERATIONS IN NEW YORK.
New York law requires that corporations have natural persons as stockholders
in order to be approved by the New York Department of Health as licensed
healthcare facilities. Accordingly, we are not able to own interests in a
partnership or limited liability company that owns an interest in a New York
healthcare facility and may only operate a facility in New York if our designee
for ownership of the facility is approved by the New York Department of Health.
The New York Department of Health may determine that our relationship with our
designee for ownership of the Day-Op Center of Long Island is not in compliance
with New York law. New York law also prohibits any unauthorized delegation of
management authority by a licensed healthcare facility. The law does permit a
licensed facility to obtain various services from non-licensed entities;
however, it is not clear what types of delegation constitute a violation.
Further, New York regulatory authorities may not approve our pending application
for a surgery center in conjunction with Mt. Sinai Health System. Although we
believe that our operations and relationships in New York are in compliance with
these New York laws, if New York regulatory authorities or a third party asserts
a contrary position, we may be unable to continue or expand our operations in
New York.
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 will be
obligated to purchase some or all of the ownership interests of the physicians
affiliated with us in the limited partnerships or limited liability companies
that own and operate our surgery centers and private 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. Some of our limited 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. 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 $40 million. Our existing capital resources would not be
sufficient for us to meet this obligation. The creation of these obligations and
the possible termination of our affiliation with these physicians could have a
material adverse effect on us.
28
<Page>
IF WE BECOME SUBJECT TO SIGNIFICANT LEGAL ACTIONS, WE COULD BE SUBJECT TO
SUBSTANTIAL UNINSURED LIABILITIES.
In recent years, physicians, hospitals and other healthcare providers have
become subject to an increasing number of legal actions alleging malpractice,
product liability or related legal theories. Many of these actions involve large
monetary claims and significant defense costs. We do not employ any of the
physicians who conduct surgical procedures at our facilities and the governing
documents of each of our surgery centers require physicians who conduct surgical
procedures at our surgery centers to maintain stated amounts of insurance.
Additionally, to protect us from the cost of these claims, we maintain
professional malpractice liability insurance and general liability insurance
coverage in amounts and with deductibles that we believe to be appropriate for
our operations. Currently, in the United States, we maintain professional
liability insurance that provides coverage on a claims made basis of $1.0
million per incident and $3.0 million in annual aggregate amount per facility.
We also maintain general liability insurance coverage of $1.0 million per
occurrence and $2.0 million in annual aggregate amount per facility, as well as
business interruption insurance and property damage insurance. In addition, we
maintain umbrella liability insurance in the aggregate amount of $10.0 million.
In the United Kingdom, we maintain general public insurance in the amount of
$5.0 million, malpractice insurance in the amount of $3.0 million and property
and business interruption insurance. In Spain, we maintain property damage
insurance in the amount of $30.0 million and general liability insurance
coverage of $550,000 per accident and victim per year per facility and $2.2
million at the group level. However, our insurance coverage may not cover all
claims against us or continue to be available at a cost allowing us to maintain
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 hospitals, in recruiting physicians and
contracting with managed care payors in each of our markets. In Spain and the
United Kingdom, we also compete with these countries' national health systems in
our recruitment of 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 private 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 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 WE HAVE A LIMITED OPERATING HISTORY AND OUR SENIOR MANAGEMENT HAS BEEN
KEY TO OUR GROWTH, 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,
our parent's chairman and chief executive officer, William H. Wilcox, our
parent's president, and Gabriel Masfurroll, president of our parent's Spanish
operations. Although we have employment agreements with Mr. Steen and Mr.
Wilcox, 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
personnel could have a material adverse effect on us.
29
<Page>
EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the issuance of the old notes, we entered into a
registration rights agreement under which we agreed to:
- within 90 days after the issue date, file a registration statement with
the Securities and Exchange Commission with respect to a registered offer
to exchange the old notes for new notes of ours having terms substantially
identical in all material respects to the old notes except with respect to
transfer restrictions;
- use our reasonable best efforts to cause the registration statement to be
declared effective under the Securities Act within 180 days after the
issue date;
- as soon as practicable after the effectiveness of the registration
statement offer the new notes in exchange for surrender of the old notes;
and
- keep the exchange offer open for not less than 30 days (or longer if
required by applicable law) after the date notice of the exchange offer is
mailed to the holders of the old notes.
For each old note tendered to us pursuant to the exchange offer, we will
issue to the holder of such old note a new note having a principal amount equal
to that of the surrendered old note. Interest on each new note will accrue from
the last interest payment date on which interest was paid on the old note
surrendered in exchange therefor, or, if no interest has been paid on such old
note, from the date of its original issue.
Under existing Securities and Exchange Commission interpretations, the new
notes will be freely transferable by holders other than our affiliates after the
exchange offer without further registration under the Securities Act if the
holder of the new notes represents to us in the exchange offer that it is
acquiring the new notes in the ordinary course of its business, that it has no
arrangement or understanding with any person to participate in the distribution
of the new notes and that it is not our affiliate, as such terms are interpreted
by the Securities and Exchange Commission; PROVIDED, HOWEVER, that
broker-dealers receiving new notes in the exchange offer will have a prospectus
delivery requirement with respect to resales of such new notes. The Securities
and Exchange Commission has taken the position that participating broker-dealers
may fulfill their prospectus delivery requirements with respect to new notes
(other than a resale of an unsold allotment from the original sale of the old
notes) with the prospectus contained in the registration statement. Each
broker-dealer that receives new notes for its own account in exchange for old
notes, where such old notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such new notes. See
"Plan of Distribution."
Under the registration rights agreement, we are required to allow
participating broker-dealers and other persons, if any, with similar prospectus
delivery requirements to use the prospectus contained in the registration
statement in connection with the resale of the new notes for 180 days following
the effective date of such registration statement (or such shorter period during
which participating broker-dealers are required by law to deliver such
prospectus).
A holder of old notes (other than certain specified holders) who wishes to
exchange old notes for new notes in the exchange offer will be required to
represent that any new notes to be received by it will be acquired in the
ordinary course of its business and that at the time of the commencement of the
exchange offer it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the new notes and that it is not our "affiliate," as defined in Rule 405 of the
Securities Act, or if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
30
<Page>
In the event that:
(1) any change of law or in applicable interpretations thereof by the
staff of the Securities and Exchange Commission do not permit us to effect
an exchange offer; or
(2) for any other reason we do not consummate the exchange offer within
220 days of the issue date; or
(3) an initial purchaser of the old notes notifies us following
consummation of the exchange offer that old notes held by it are not
eligible to be exchanged for new notes in the exchange offer; or
(4) certain holders are prohibited by law or Securities and Exchange
Commission policy from participating in the exchange offer or do not receive
freely tradeable new notes in the exchange offer,
then we will, subject to certain exceptions:
(1) promptly file a shelf registration statement with the Securities and
Exchange Commission covering resales of the old notes or the new notes, as
the case may be, on or prior to the date which is the 75th day after the
date on which the obligation to file the shelf registration statement
arises;
(2) use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act on or prior to
the 75th day after the shelf filing date; and
(3) use our reasonable best efforts to keep the shelf registration
statement effective until the earliest of (A) the time when the old or new
notes covered by the shelf registration statement can be sold pursuant to
Rule 144 without any limitations under Rule 144, (B) two years from the
effective date of the shelf registration statement and (C) the date on which
all old or new notes registered under the shelf registration statement are
disposed of in accordance with the shelf registration statement.
We will, in the event the shelf registration statement is filed, among other
things, provide to each holder for whom the shelf registration statement was
filed copies of the prospectus which is a part of the shelf registration
statement, notify each holder when the shelf registration statement has become
effective and take other actions as are required to permit unregistered resales
of the old notes or the new notes, as the case may be. A holder selling old
notes or new notes pursuant to the shelf registration statement generally would
be required to be named as a selling security holder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with those
sales and will be bound by the provisions of the registration rights agreement
that are applicable to the holder (including certain indemnification
obligations).
We will pay additional cash interest on the applicable old notes and new
notes, subject to certain exceptions:
(1) if the registration statement of which this prospectus forms a part is
not declared effective by the Securities and Exchange Commission on or
prior to the 180th day after the issue date of the old notes;
(2) if the exchange offer is not consummated on or before the 40th day after
the registration statement is declared effective;
(3) if obligated to file the shelf registration statement, we fail to file
the shelf registration statement with the Securities and Exchange
Commission on or prior to the shelf filing date;
31
<Page>
(4) if obligated to file the shelf registration statement, the shelf
registration statement is not declared effective on or prior to the 75th
day after the shelf filing date; or
(5) after the registration statement or the shelf registration statement, as
the case may be, is declared effective, that registration statement
ceases to be effective or usable (subject to some exceptions);
from and including the date on which any registration default shall occur to but
excluding the date on which all registration defaults have been cured.
The rate of the additional interest will be 0.25% per annum for the first
90-day period immediately following the occurrence of a registration default,
and this rate will increase by an additional 0.25% per annum with respect to
each subsequent 90-day period until all registration defaults have been cured,
up to a maximum additional interest rate of 1.25% per annum. We will pay
additional interest on regular interest payment dates. The additional interest
will be in addition to any other interest payable from time to time with respect
to the old notes and the new notes.
All references in the indenture, in any context, to any interest or other
amount payable on or with respect to the old notes or new notes shall be deemed
to include any additional interest pursuant to the registration rights
agreement.
If we effect the exchange offer, we will be entitled to close the exchange
offer 30 days after its commencement provided that we have accepted all old
notes theretofore validly tendered in accordance with the terms of the exchange
offer.
RESALE OF NEW NOTES
Based on no action letters of the Securities and Exchange Commission staff
issued to third parties, we believe that new notes may be offered for resale,
resold and otherwise transferred by you without further compliance with the
registration and prospectus delivery provisions of the Securities Act if:
- you are not our "affiliate" within the meaning of Rule 405 under the
Securities Act;
- such new notes are acquired in the ordinary course of your business; and
- you do not intend to participate in the distribution of such new notes.
The Securities and Exchange Commission, however, has not considered the
exchange offer for the new notes in the context of a no action letter, and the
Securities and Exchange Commission may not make a similar determination as in
the no action letters issued to these third parties.
If you tender in the exchange offer with the intention of participating in
any manner in a distribution of the new notes:
- you cannot rely on such interpretations by the Securities and Exchange
Commission staff; and
- you must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale transaction.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act. This registration statement
should contain the selling security holder's information required by Item 507 of
Regulation S-K under the Securities Act. This prospectus may be used for an
offer to resell, resale or other retransfer of new notes only as specifically
described in this prospectus. Only broker-dealers that acquired the old notes as
a result of market-making activities or other trading activities may participate
in the exchange offer. Each broker-dealer that receives new notes for its own
account in exchange for old notes, where such old notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a
32
<Page>
prospectus in connection with any resale of the new notes. Please read the
section captioned "Plan of Distribution" for more details regarding the transfer
of new notes.
TERMS OF THE EXCHANGE OFFER
Subject to the terms and conditions described in this prospectus and in the
letter of transmittal, we will accept for exchange any old notes properly
tendered and not withdrawn prior to the expiration date. We will issue new notes
in principal amount equal to the principal amount of old notes surrendered under
the exchange offer. Old notes may be tendered only for new notes and only in
integral multiples of $1,000.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered for exchange.
As of the date of this prospectus, $150,000,000 aggregate principal amount
of the old notes is outstanding. This prospectus and the letter of transmittal
are being sent to all registered holders of old notes. There will be no fixed
record date for determining registered holders of old notes entitled to
participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions of
the registration rights agreement, the applicable requirements of the Securities
Act and the Securities Exchange Act of 1934 and the rules and regulations of the
Securities and Exchange Commission. Old notes that the holders thereof do not
tender for exchange in the exchange offer will remain outstanding and continue
to accrue interest. These old notes will be entitled to the rights and benefits
such holders have under the indenture relating to the notes and the registration
rights agreement.
We will be deemed to have accepted for exchange properly tendered old notes
when we have given oral or written notice of the acceptance to the exchange
agent and complied with the applicable provisions of the registration rights
agreement. The exchange agent will act as agent for the tendering holders for
the purposes of receiving the new notes from us.
If you tender old notes in the exchange offer, you will not be required to
pay brokerage commissions or fees or, subject to the letter of transmittal,
transfer taxes with respect to the exchange of old notes. We will pay all
charges and expenses, other than certain applicable taxes described below, in
connecting with the exchange offer. It is important that you read the section
labeled "--Fees and Expenses" for more details regarding fees and expenses
incurred in the exchange offer.
We will return any old notes that we do not accept for exchange for any
reason without expense to their tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
Each broker-dealer that receives new notes for its own account in exhange
for old notes, where such old notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such new
notes. See "Plan of Distribution."
EXPIRATION DATE
The exchange offer will expire at 5:00 p.m. New York City time on
, 2002 unless, in our sole discretion, we extend it.
EXTENSIONS, DELAYS IN ACCEPTANCE, TERMINATION OR AMENDMENT
We expressly reserve the right, at any time or various times, to extend the
period of time during which the exchange offer is open. We may delay acceptance
of any old notes by giving oral or written
33
<Page>
notice of such extension to their holders. During any such extensions, all old
notes previously tendered will remain subject to the exchange offer, and we may
accept them for exchange.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders of
old notes of the extension no later than 9:00 a.m., New York City time, on the
business day after the previously scheduled expiration date.
If any of the conditions described below under "--Conditions to the Exchange
Offer" have not been satisfied, we reserve the right, in our sole discretion
- to delay accepting for exchange any old notes,
- to extend the exchange offer, or
- to terminate the exchange offer,
by giving oral or written notice of such delay, extension or termination to the
exchange agent. Subject to the terms of the registration rights agreement, we
also reserve the right to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of old notes. If we amend the exchange offer in a manner that
we determine to constitute a material change, we will promptly disclose such
amendment by means of a prospectus supplement. The supplement will be
distributed to the registered holders of the old notes. Depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, we will extend the exchange offer if the exchange offer would otherwise
expire during such period.
CONDITIONS TO THE EXCHANGE OFFER
We will not be required to accept for exchange, or exchange any new notes
for, any old notes if the exchange offer, or the making of any exchange by a
holder of old notes, would violate applicable law or any applicable
interpretation of the staff of the Securities and Exchange Commission.
Similarly, we may terminate the exchange offer as provided in this prospectus
before accepting old notes for exchange in the event of such a potential
violation.
In addition, we will not be obligated to accept for exchange the old notes
of any holder that has not made to us the representations described under
"--Purpose and Effect of the Exchange Offer," "--Procedures for Tendering" and
"Plan of Distribution" and such other representations as may be reasonably
necessary under applicable Securities and Exchange Commission rules, regulations
or interpretations to allow us to use an appropriate form to register the new
notes under the Securities Act.
We expressly reserve the right to amend or terminate the exchange offer, and
to reject for exchange any old notes not previously accepted for exchange, upon
the occurrence of any of the conditions to the exchange offer specified above.
We will give oral or written notice of any extension, amendment, non-acceptance
or termination to the holders of the old notes as promptly as practicable.
These conditions are for our sole benefit, and we may assert them or waive
them in whole or in part at any time or at various times in our sole discretion.
If we fail at any time to exercise any of these rights, this failure will not
mean that we have waived our rights. Each such right will be deemed an ongoing
right that we may assert at any time or at various times.
In addition, we will not accept for exchange any old notes tendered, and
will not issue new notes in exchange for any such old notes, if at such time any
stop order has been threatened or is in effect with respect to the registration
statement of which this prospectus constitutes a part or the qualification of
the indenture relating to the notes under the Trust Indenture Act of 1939.
34
<Page>
PROCEDURES FOR TENDERING
HOW TO TENDER GENERALLY
Only a holder of old notes may tender such old notes in the exchange offer.
To tender in the exchange offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal;
- have the signature on the letter of transmittal guaranteed if the letter
of transmittal so requires; and
- mail or deliver such letter of transmittal or facsimile to the exchange
agent prior to the expiration date; or
- comply with the automated tender offer program procedures of The
Depository Trust Company, or DTC, described below.
In addition, either:
- the exchange agent must receive old notes along with the letter of
transmittal;
- the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such old notes into the exchange
agent's account at DTC according to the procedure for book-entry transfer
described below or a properly transmitted agent's message; or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address indicated on the cover page of the letter of transmittal. The exchange
agent must receive such documents prior to the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between the holder and us in accordance with the
terms and subject to the conditions described in this prospectus and in the
letter of transmittal.
The method of delivery of old notes, the letter of transmittal and all other
required documents to the exchange agent is at your election and risk. Rather
than mail these items, we recommend that you use an overnight or hand delivery
service. In all cases, you should allow sufficient time to assure delivery to
the exchange agent before the expiration date. You should not send the letter of
transmittal or old notes to us. You may request your brokers, dealers,
commercial banks, trust companies or other nominees to effect the above
transactions for you.
HOW TO TENDER IF YOU ARE A BENEFICIAL OWNER
If you beneficially own old notes that are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and you wish to
tender those notes, you should contact the registered holder promptly and
instruct it to tender on your behalf. If you are a beneficial owner and wish to
tender on your own behalf, you must, prior to completing and executing the
letter of transmittal and delivering your old notes, either:
- make appropriate arrangements to register ownership of the old notes in
your name; or
- obtain a properly completed bond power from the registered holder of old
notes.
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
35
<Page>
SIGNATURES AND SIGNATURE GUARANTEES
You must have signatures on a letter of transmittal or a notice of
withdrawal (as described below) guaranteed by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act. In addition, such
entity must be a member of one of the recognized signature guarantee programs
identified in the letter of transmittal. Signature guarantees are not required,
however, if the notes are tendered:
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter of
transmittal;
- for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondence in the
United States, or an eligible guarantor institution.
WHEN YOU NEED ENDORSEMENTS OR BOND POWERS
If the letter of transmittal is signed by a person other than the registered
holder of any old notes, the old notes must be endorsed or accompanied by a
properly completed bond power. The bond power must be signed by the registered
holder as the registered holder's name appears on the old notes. A member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an eligible guarantor institution must
guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless waived by us, they should also
submit evidence satisfactory to us of their authority to deliver the letter of
transmittal.
TENDERING THROUGH DTC'S AUTOMATED TENDER OFFER PROGRAM
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's automated tender offer
program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so by causing DTC to transfer the old notes to the exchange agent in
accordance with its procedures for transfer. DTC will then send an agent's
message to the exchange agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, to the
effect that:
- DTC has received an express acknowledgment from a participant in its
automated tender offer program that is tendering old notes that are the
subject of such book-entry confirmation;
- such participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that such participant has received and agrees to be
bound by the applicable notice of guaranteed delivery; and
- the agreement may be enforced against such participant.
DETERMINATIONS UNDER THE EXCHANGE OFFER
We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered old notes and
withdrawal of tendered old notes. Our determinations
36
<Page>
will be final and binding. We reserve the absolute right to reject any old notes
not properly tendered or any old notes our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular old notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, all defects or irregularities in connection with tenders
of old notes must be cured within such time as we shall determine. Although we
intend to notify holders of defects or irregularities with respect to tenders of
old notes, neither we, the exchange agent nor any other person will incur any
liability for failure to give such notification. Tenders of old notes will not
be deemed made until such defects or irregularities have been cured or waived.
Any old notes received by the exchange agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned to the tendering holder, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
WHEN WE WILL ISSUE NEW NOTES
In all cases, we will issue new notes for old notes that we have accepted
for exchange under the exchange offer only after the exchange agent timely
receives:
- old notes or a timely book-entry confirmation of such old notes into the
exchange agent's account at DTC; and
- a properly completed and duly executed letter of transmittal and all other
required documents or a properly transmitted agent's message.
RETURN OF OLD NOTES NOT ACCEPTED OR EXCHANGED
If we do not accept any tendered old notes for exchange or if old notes are
submitted for a greater principal amount than the holder desires to exchange,
the unaccepted or non-exchanged old notes will be returned without expense to
their tendering holder. In the case of old notes tendered by book-entry transfer
in the exchange agent's account at DTC according to the procedures described
below, such non-exchanged old notes will be credited to an account maintained
with DTC. These actions will occur as promptly as practicable after the
expiration or termination of the exchange offer.
YOUR REPRESENTATIONS TO US
By signing or agreeing to be bound by the letter of transmittal, you will
represent to us that, among other things:
- any new notes that you receive will be acquired in the ordinary course of
your business;
- you have no arrangement or understanding with any person or entity to
participate in the distribution of the new notes within the meaning of the
Securities Act;
- if you are not a broker-dealer that you are not engaged in and do not
intend to engage in the distribution of the new notes;
- if you are a broker-dealer that will receive new notes for your own
account in exchange for old notes, you acquired those notes as a result of
market-making activities or other trading activities and you will deliver
a prospectus, as required by law, in connection with any resale of such
new notes; and
- you are not our "affiliate," as defined in Rule 405 of the Securities Act
or if you are our "affiliate" that you will comply with the registration
and prospectus delivery requirements of the Securities Act to the extent
applicable.
37
<Page>
BOOK-ENTRY TRANSFER
The exchange agent will establish an account with respect to the old notes
at DTC for purposes of the exchange offer promptly after the date of this
prospectus. Any financial institution participating in DTC's system may make
book-entry delivery of old notes by causing DTC to transfer such old notes into
the exchange agent's account at DTC in accordance with DTC's procedures for
transfer. Holders of old notes who are unable to deliver confirmation of the
book-entry tender of their old notes into the exchange agent's account at DTC or
all other documents required by the letter of transmittal to the exchange agent
on or prior to the expiration date must tender their old notes according to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your old notes but your old notes are not immediately
available or you cannot deliver your old notes, the letter of transmittal or any
other required documents to the exchange agent or comply with the applicable
procedures under DTC's automated tender offer program prior to the expiration
date, you may tender if:
- the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent
in the United States, or an eligible guarantor institution,
- prior to the expiration date, the exchange agent receives from such member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., commercial bank or trust company
having an office or correspondent in the United States, or eligible
guarantor institution either a properly completed and duly executed notice
of guaranteed delivery by facsimile transmission, mail or hand delivery or
a properly transmitted agent's message and notice of guaranteed delivery:
- setting forth your name and address, the registered number(s) of your
old notes and the principal amount of old notes tendered,
- stating that the tender is being made thereby, and
- guaranteeing that, within three New York Stock Exchange trading days
after the expiration date, the letter of transmittal or facsimile
thereof, together with the old notes or a book-entry confirmation, and
any other documents required by the letter of transmittal will be
deposited by the eligible guarantor institution with the exchange
agent, and
- the exchange agent receives such properly completed and executed letter of
transmittal or facsimile thereof, as well as all tendered old notes in
proper form for transfer or a book-entry confirmation, and all other
documents required by the letter of transmittal, within three New York
Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent you if you wish to tender your old notes according to the guaranteed
delivery procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw your
tender at any time prior to the expiration date.
For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at the
address indicated on the cover page of the letter of transmittal, or
38
<Page>
- you must comply with the appropriate procedures of DTC's automated tender
offer program system.
Any notice of withdrawal must:
- specify the name of the person who tendered the old notes to be withdrawn,
and
- identify the old notes to be withdrawn, including the principal amount of
such old notes.
If old notes have been tendered under the procedure for book-entry transfer
described above, any notice of withdrawal must specify the name and number of
the account at DTC to be credited with withdrawn old notes and otherwise comply
with the procedures of DTC.
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal. Our determination shall be final and
binding on all parties. We will deem any old notes so withdrawn not to have been
validly tendered for exchange for purposes of the exchange offer.
Any old notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder. In the case of old notes tendered by book-entry transfer into the
exchange agent's account at DTC according to the procedures described above,
such old notes will be credited to an account maintained with DTC for the old
notes. This return or crediting will take place as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. You may
retender properly withdrawn old notes by following one of the procedures
described under "--Procedures for Tendering" above at any time on or prior to
the expiration date.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the exchange
offer. They include:
- Securities and Exchange Commission registration fees;
- fees and expenses of the exchange agent and trustee;
- accounting and legal fees and printing costs; and
- related fees and expenses.
TRANSFER TAXES
We will pay all transfer taxes, if any, applicable to the exchange of old
notes under the exchange offer. The tendering holder, however, will be required
to pay any transfer taxes, whether imposed on the registered holder or any other
person, if:
- certificates representing old notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of old notes
tendered;
- tendered old notes are registered in the name of any person other than the
person signing the letter of transmittal; or
39
<Page>
- a transfer tax is imposed for any reason other than the exchange of old
notes under the exchange offer.
If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of such
transfer taxes will be billed directly to that tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange new notes for your old notes under the exchange
offer, you will remain subject to the existing restrictions on transfer of the
old notes. In general, you may not offer or sell the old notes unless they are
registered under the Securities Act or unless the offer or sale is exempt from
the registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the old notes under the Securities Act.
ACCOUNTING TREATMENT
We will record the new notes in our accounting records at the same carrying
value as the old notes. This carrying value is the aggregate principal amount of
the old notes, as reflected in our accounting records on the date of exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes in
connection with the exchange offer. The expenses of the exchange offer will be
amortized over the term of the new notes.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered old notes in open market or
privately negotiated transactions, through subsequent exchange offers or
otherwise. We have no present plans to acquire any old notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any untendered old notes.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where such were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such new notes. See
"Plan of Distribution."
40
<Page>
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement. We will not receive any cash proceeds from the
issuance of the new notes in the exchange offer. In consideration for issuing
the new notes as contemplated by this prospectus, we will receive old notes in a
like principal amount. The form and terms of the new notes are identical in all
respects to the form and terms of the old notes, except the new notes are
registered under the Securities Act and will not have restrictions on transfer,
registration rights or provisions for additional interest. Old notes surrendered
in exchange for the new notes will be retired and cancelled and will not be
reissued. Accordingly, the issuance of the new notes will not result in any
increase in our outstanding indebtedness.
We received approximately $142.8 million from the offering of the old notes,
after deducting the initial purchasers' discounts and the expenses of that
offering. We used the net proceeds of that offering as follows:
- to make a subordinated intercompany loan to our subsidiary, USP Domestic
Holdings, Inc., which used those loan proceeds to repay, for a cash
payment of $41.5 million, the outstanding principal balance, plus accrued
and unpaid interest, under its domestic credit facility existing at that
time;
- to make a subordinated intercompany loan to our subsidiary, USP Domestic
Holdings, Inc., which used those loan proceeds to redeem in full, for a
cash payment of $36.0 million, its 10% senior subordinated notes
outstanding at that time;
- to make a subordinated intercompany loan, the proceeds from which were
ultimately used by our indirect wholly-owned subsidiary, United Surgical
Partners Europe, S.L., to repay, for a cash payment of $24.9 million, the
outstanding principal balance, plus accrued and unpaid interest, under its
credit facility in Spain;
- to make a subordinated intercompany loan to our parent in the amount of
$21.1 million, which used those loan proceeds to redeem in full all shares
of its Series D redeemable preferred stock outstanding at that time; and
- the balance for general corporate purposes, including acquisitions and to
make subordinated intercompany loans to our indirect wholly-owned
subsidiary, United Surgical Partners Europe, S.L., which used those loan
proceeds to repay certain working capital lines of credit in Spain.
41
<Page>
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of September 30, 2001:
- on an actual basis; and
- as adjusted to give effect to the offering of the old notes and the
application of the net proceeds therefrom and the exchange of the old
notes for the new notes.
You should read this table in conjunction with the other financial
information appearing elsewhere in this prospectus.
<Table>
<Caption>
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
ACTUAL AS ADJUSTED
Cash and cash equivalents................................... $ 15,572 $ 48,623
======== ========
Current portion of long-term debt........................... $ 11,951 $ 11,951
Long-term debt:
Capitalized lease obligations and other debt.............. 42,231 42,231
Credit Facilities:
Existing domestic credit facility(1).................... 14,800 --
Spanish credit facility................................. 24,900 --
United Kingdom credit facility.......................... 34,266 34,266
Subordinated debt......................................... 31,191(2) 148,835(3)
-------- --------
Total debt.............................................. $159,339 $237,283
-------- --------
Series D redeemable preferred stock, $0.01 par value per
share; 40,000 shares authorized and 20,000 shares issued
and outstanding, actual; 40,000 shares authorized and no
shares outstanding, pro forma............................. $ 20,597 $ --
Stockholders' equity:
Common stock, $0.01 par value; 200,000,000 shares
authorized, 24,292,452 shares outstanding, actual and
pro forma............................................... 243 243
Additional paid-in capital................................ 264,916 264,916
Treasury stock, at cost, 136,965 shares................... (1,819) (1,819)
Deferred compensation..................................... (400) (400)
Receivables from sales of common stock.................... (2,598) (2,598)
Accumulated other comprehensive loss, net of tax.......... (13,940) (13,940)
Accumulated deficit....................................... (14,939) (21,560)
-------- --------
Total stockholders' equity.............................. 231,463 224,842
-------- --------
Total capitalization.................................. $411,399 $462,125
======== ========
</Table>
- --------------
(1) Subsequent to September 30, 2001, we have borrowed an additional
$26.7 million. All borrowings under this credit facility were repaid with a
portion of the net proceeds of the offering of the old notes. Concurrently
with the consummation of the old notes we entered into our amended and
restated credit facility, which provides for borrowings of up to
$85.0 million. See "Description of Credit Facilities--Amended and Restated
Credit Facility."
(2) The subordinated debt was issued at a discount. The difference between the
carrying amount of subordinated debt as of September 30, 2001 and the
$36.0 million amount of debt redeemed with the net proceeds of the offering
of the old notes is attributable to the unamortized portion of the discount.
(3) The $150.0 million of the old notes were priced at a discount of
$1.165 million.
42
<Page>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated statement of operations data set forth below for
the period from February 27, 1998 (inception) through December 31, 1998 and the
years ended December 31, 1999 and 2000, and the consolidated balance sheet data
at December 31, 1999 and 2000, are derived from our consolidated financial
statements. These consolidated financial statements, which have been audited by
KPMG LLP, independent auditors, are included elsewhere in this prospectus, and
are qualified by this reference to them. The selected consolidated statement of
operations data for the nine months ended September 30, 2000 and 2001, and the
consolidated balance sheet data at September 30, 2000 and 2001 are derived from
unaudited financial statements included elsewhere in this prospectus. We have
prepared the unaudited information on the same basis as the audited consolidated
financial statements and have included all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair presentation
of our consolidated financial position at that date and our consolidated
operating results for these periods.
The historical results presented below are not necessarily indicative of
results to be expected for any future period. The comparability of the financial
and other data included in the table is affected by our parent's acquisition of
OrthoLink on February 12, 2001 and of Aspen Healthcare Holdings Limited on April
6, 2000 as well as other acquisitions completed since our inception. For a more
detailed explanation of this financial data, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Summary Pro Forma
Financial Statements" and the consolidated financial statements and related
notes included elsewhere in this prospectus.
EBITDA should not be considered in isolation or as a substitute for net
income (loss), operating income (loss), cash flows provided by operating
activities or any other measure of operating performance calculated in
accordance with generally accepted accounting principles. EBITDA is widely used
by financial analysts as a measure of financial performance. Our calculation of
EBITDA may be comparable to similarly titled measures reported by other
companies.
43
<Page>
<Table>
<Caption>
YEAR ENDED
PERIOD FROM DECEMBER 31,
FEBRUARY 27, 1998 ---------------------- NINE MONTHS ENDED
(INCEPTION) SEPTEMBER 30,
THROUGH 2000 -------------------------
DECEMBER 31, 1998 1999 RESTATED(A) 2000 2001
------------------ -------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenues.......................... $20,572 $ 70,413 $138,408 $ 97,932 $174,515
Operating expenses excluding
depreciation and amortization......... 22,788 65,635 116,621 81,489 131,829
Depreciation and amortization........... 2,015 7,875 14,138 9,866 19,190
------- -------- -------- -------- --------
Operating income (loss)................. (4,231) (3,097) 7,649 6,577 23,496
Other income (expense):
Interest income....................... 722 329 912 854 696
Interest expense...................... (497) (3,144) (12,540) (8,819) (13,734)
Other................................. (246) (362) (782) (711) (49)
------- -------- -------- -------- --------
Income (loss) before minority
interest.............................. (4,252) (6,275) (4,761) (2,099) 10,409
Minority interest in (income) loss of
consolidated subsidiaries............. 23 (118) (2,332) (1,179) (5,175)
Net income (loss)....................... $(3,928) $ (6,844) $ (8,163) $ (3,899) $ 3,996
Net income (loss) attributable to common
stockholders(b)....................... (4,356) (8,540) (14,134) (8,917) 1,745
OTHER DATA:
Number of facilities operated as of the
end of period......................... 16 28 33 31 45
EBITDA.................................. $(2,216) $ 4,778 $ 21,787 $ 16,443 $ 42,686
Ratio of earnings to fixed charges...... 1.36x
Fixed charge coverage deficiency........ $ 4,640 $ 7,229 $ 9,408 $ 5,412
</Table>
- ----------------
(a) On September 6, 2001, we were advised by the Commission that, based on the
facts and circumstances presented by us, Day-Op Center of Long Island, Inc.
must be consolidated pursuant to an interpretation of EITF 97-2. As a
result, we have restated our consolidated financial statements in order to
consolidate a previously unconsolidated entity.
(b) Includes preferred stock dividends of $428, $1,696, $5,971, $5,018 and
$2,251 for the period from February 27, 1998 (inception) through December
31, 1998, the year ended December 31, 1999, the year ended December 31,
2000, the nine months ended September 30, 2000 and the nine months ended
September 30, 2001, respectively.
<Table>
<Caption>
AS OF DECEMBER 31,
--------------------------------- AS OF SEPTEMBER 30,
2000 -------------------------
1998 1999 RESTATED(A) 2000 2001
-------- -------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................ $ 18,490 $ 10,461 $(58,213) $ 3,201 $ 19,750
Cash and cash equivalents.................. 4,965 3,716 3,451 6,422 15,572
Total assets............................... 124,792 176,703 330,396 292,755 496,531
Total debt................................. 11,675 72,684 187,766 162,860 159,339
Redeemable preferred stock................. 34,344 36,040 32,819 32,175 20,597
Total stockholders' equity................. 52,103 36,571 48,797 48,637 231,463
</Table>
44
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Consolidated
Financial and Other Data" and our consolidated financial statements and related
notes included elsewhere in this prospectus.
OVERVIEW
We were organized in February 1998 and we operate surgery centers and
private surgical hospitals in the United States, Spain and the United Kingdom.
We began operations on February 27, 1998, and our first acquisition was of one
hospital and a group of clinics located in Barcelona, Spain in April 1998. We
have grown through the acquisition of additional facilities in Spain, the United
States and the United Kingdom as well as the development of new facilities in
the United States. We have ownership interests in 35 surgery centers and one
private surgical hospital and manage or operate through consulting agreements
three additional surgery centers in the United States. Also in the United
States, we own interests in and will operate three surgery centers and one
private surgical hospital that are currently under construction. In Spain, we
own and operate six private surgical hospitals, two surgery centers and a
diagnostic facility. In the United Kingdom, we own and operate two private
surgical hospitals and are developing a cancer treatment center. For the year
ended December 31, 1999, our first full year in operation, we generated
$70.4 million of revenues and $4.8 million of EBITDA. For the year ended
December 31, 2000, our revenues had grown to $138.4 million and our EBITDA had
grown to $21.8 million.
ACQUISITIONS, EQUITY INVESTMENTS AND DEVELOPMENT PROJECTS
During October 2001, we acquired a 66% interest in a surgical facility in
Sarasota, Florida for a total consideration of approximately $3.4 million in
cash and approximately $1.3 million in assumed debt. During November 2001, we
acquired an 80% interest in a surgical facility in West Covina, California for a
total consideration of approximately $10.8 million in cash and approximately
$1.2 million in assumed debt. We also acquired an 83% interest in a surgical
facility in Fredericksburg, Virginia for a total consideration of approximately
$6.3 million in cash, a warrant to acquire 25,000 shares of our parent's common
stock at a price equal to approximately $16.45 per share and approximately
$700,000 in assumed debt. In December 2001, we acquired a 35% interest in a
surgical facility in Torrance, California for a total consideration of
approximately $11.0 million.
We have a definitive agreement to acquire a surgical hospital in Murcia,
Spain for a total consideration of approximately $7.4 million in cash (of which
$6.7 million will be paid upon the consummation of the acquisition and
$0.7 million will be paid on the first anniversary of the consummation of the
acquisition), approximately $0.3 million in assumed debt and approximately
$12.4 million in assumed capital lease obligations. We are awaiting approval
from senior officials of the Catholic church and expect this acquisition to be
consummated in January 2002 but can give you no assurances that this acquisition
will be consummated.
During July 2001, we acquired a controlling interest in a surgery center in
Fort Worth, Texas for approximately $14.0 million in cash. We had previously
operated this surgery center under a management contract. In addition, in July
and August 2001, we opened newly developed surgery centers in Knoxville,
Tennessee and Lawrenceville, Georgia.
On February 12, 2001, we completed a merger with OrthoLink Physicians
Corporation. The transaction was funded through the issuance of 3,390,939 shares
of our common stock to OrthoLink stockholders. OrthoLink was incorporated in
1996 and, as of February 1, 2001, held a direct or indirect ownership interest
in eight surgery centers. We also held an ownership interest in and managed one
of these centers. OrthoLink managed six of the eight surgery centers in which it
held an ownership
45
<Page>
interest and managed two additional surgery centers in which it had no ownership
interest. OrthoLink also provides specialized management services for hospitals.
In addition, OrthoLink has service agreements with 14 physician groups in six
states. OrthoLink's physician practice management operations are not, and are
not expected to be in the future, a material part of our business. For the year
ended December 31, 2000, OrthoLink had pro forma revenues of $45.2 million.
In April 2000, we acquired 100% of the outstanding common stock of Aspen
Healthcare Holdings Limited that owns and operates two private surgical
hospitals in England. We paid approximately $89.2 million in cash for that
acquisition, approximately $54.0 million of which we borrowed under a credit
agreement denominated in British pounds with a commercial lender. Additionally,
during 2000, we acquired two hospitals and a radiology center in Madrid, Spain
through three separate transactions. We paid approximately $32.2 million for
these three acquisitions, approximately $27.3 million of which we borrowed under
a credit agreement denominated in Euros with a commercial lender. Also, during
2000, we opened two newly developed surgery centers in the United States. We
have management contracts with and a minority ownership interest in each of
these two centers.
During 1999, we acquired interests in seven surgery centers in the United
States and opened three additional newly developed surgery centers. We have
management agreements with all of these centers and have ownership interests in
nine of the ten, ranging from 10% to 100%. Our total investment related to these
centers was approximately $42.1 million, $3.3 million of which we financed
through convertible subordinated notes issued to a seller and the remaining
$38.8 million of which we paid in cash. Additionally during 1999, we acquired a
majority interest in a surgery center in Spain for approximately $1.6 million in
cash.
During 1998, we acquired four hospitals and a diagnostic center in Spain for
total consideration of approximately $46.3 million, which we paid in cash. Also
during 1998, we acquired ownership interests, ranging from 30% to 100%, in nine
existing surgery centers in the United States and a surgery center project then
under development in the United States, which opened during 1999. We entered
into management contracts for these ten centers as well as management contracts
with two additional surgery centers in the United States during 1998. Our
investment in these United States centers totaled approximately $36.6 million in
1998, $4.5 million of which we funded with our capital stock and the remaining
$32.1 million of which we paid in cash.
SOURCES OF REVENUE
Revenues primarily include:
- net patient services revenues for the facilities that we consolidate for
financial reporting purposes, which are typically those in which we have
ownership interests of greater than 50%; and
- management and administrative service fees earned from, and our share of
net income of, the non-consolidated facilities that we account for under
the equity method of accounting. These amounts are included in revenues as
these operations are central to our business strategy.
For the nine months ended September 30, 2001, revenue from net patient services
represented approximately 86% of our total revenues as compared to 97% for the
same period in 2000, and management and administrative service fees from and our
share of net income of, the non-consolidated facilities accounted for under the
equity method of accounting together with other income represented approximately
14% and 3% of our total revenues for the nine months ended September 30, 2001
and 2000, respectively. For 2000, revenue from net patient services represented
approximately 96% of our total revenues, and management and administrative
service fees from and our share of net income of, the non-consolidated
facilities accounted for under the equity method of accounting together with
other income represented approximately 4% of our total revenues. For 1999,
revenue from net patient
46
<Page>
services represented approximately 91% of our total revenues, and management and
administrative service fees from and our share of net income of, the
non-consolidated facilities accounted for under the equity method of accounting
together with other income represented approximately 9% of our total revenues.
For the 1998 fiscal period, revenue from net patient services represented
approximately 93% of our total revenues, and management and administrative
service fees from and our share of net income of, the non-consolidated
facilities accounted for under the equity method of accounting together with
other income represented approximately 7% of our total revenues.
For the nine months ended September 30, 2001, approximately 53% of our
revenues were generated from operations in the United States and 47% from
Western Europe. For the year ended December 31, 2000, approximately 39% of our
revenues were generated from operations in the United States and 61% from
Western Europe. For 1999 and 1998, respectively, these percentages were 67% and
91% for Western Europe and 33% and 9% for the United States.
RESULTS OF OPERATIONS
The following table summarizes certain statements of operations items
expressed as a percentage of revenues for the periods indicated:
<Table>
<Caption>
NINE MONTHS
YEARS ENDED ENDED
FEBRUARY 27, 1998 DECEMBER 31, SEPTEMBER 30,
(INCEPTION) THROUGH ------------------- -------------------
DECEMBER 31, 1998 1999 2000 2000 2001
------------------- -------- -------- -------- --------
Total revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses, excluding depreciation and
amortization.................................. 110.8 93.2 84.3 83.2 75.5
----- ----- ----- ----- -----
EBITDA.......................................... (10.8) 6.8 15.7 16.8 24.5
Minority interest in (income) loss of
consolidated subsidiaries..................... 0.1 (0.2) (1.7) 1.2 3.0
Depreciation and amortization................... 9.8 11.2 10.2 10.1 11.0
Interest and other expense (income), net........ (0.1) 4.5 9.0 8.9 7.5
----- ----- ----- ----- -----
Income (loss) before income taxes............... (20.6) (9.1) (5.2) (3.4) 3.0
Income tax (expense) benefit.................... 1.5 (0.6) (0.7) (0.6) (0.7)
----- ----- ----- ----- -----
Net income (loss)............................... (19.1)% (9.7)% (5.9)% (4.0)% 2.3%
===== ===== ===== ===== =====
</Table>
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
Revenues increased by $76.6 million, or 78%, to $174.5 million for the nine
months ended September 30, 2001 from $97.9 million for the nine months ended
September 30, 2000. Of this increase in revenues, $40.7 million was contributed
by facilities acquired since September 30, 2000, of which $34.7 million was
contributed by OrthoLink. An additional $10.2 million was attributable to
revenue generated in the first quarter of fiscal 2001 by the two hospitals in
the United Kingdom. These hospitals were acquired on April 6, 2000. The exchange
rate of the European currencies to the U.S. dollar was lower in the nine months
ended September 30, 2001 as compared to the same period in the prior year,
resulting in a negative impact of $2.7 million on period over period revenues
for the facilities in Western Europe that were owned in both 2001 and 2000
("same store" facilities). Absent this foreign exchange impact, same store
facilities in Western Europe contributed $7.2 million more to consolidated
revenue in the nine months ended September 30, 2001 as compared to the same
period in 2000. The remaining increase in revenues was contributed by same store
U.S. facilities, which performed approximately 16% more cases in the nine months
ended September 30, 2001 as compared to the nine months ended September 30,
2000.
47
<Page>
Operating expenses, excluding depreciation and amortization, increased by
$50.3 million, or 62%, to $131.8 million for the nine months ended
September 30, 2001 from $81.5 million for the nine months ended September 30,
2000. Operating expenses, excluding depreciation and amortization, as a
percentage of revenues, decreased to 75.5% for the nine months ended
September 30, 2001 from 83.2% for the nine months ended September 30, 2000,
primarily as a result of improved economies of scale as we expanded.
EBITDA less minority interest increased $22.2 million, or 146%, to
$37.5 million for the nine months ended September 30, 2001 from $15.3 million
for the nine months ended September 30, 2000. Of this increase in EBITDA less
minority interest, $14.1 million was contributed by facilities acquired since
September 30, 2000. EBITDA less minority interest, as a percentage of revenues,
increased to 21.5% for the nine months ended September 30, 2001 from 15.6% for
the nine months ended September 30, 2000, primarily as a result of leveraging
our operational management and corporate overhead expenses over the increased
revenue.
Depreciation and amortization increased $9.3 million, or 95%, to
$19.2 million for the nine months ended September 30, 2001 from $9.9 million for
the nine months ended September 30, 2000 as a result of amortization of the
goodwill and other intangibles and depreciation of the additional property and
equipment associated with the acquisitions completed during 2000 and the first
nine months of 2001. Depreciation and amortization, as a percentage of revenues,
increased to 11.0% for the nine months ended September 30, 2001 from 10.1% for
the nine months ended September 30, 2000.
Interest expense, net of interest income, increased 64% to $13.0 million for
the nine months ended September 30, 2001 from $8.0 million for the nine months
ended September 30, 2000 as a result of additional borrowings to finance
acquisitions.
Provision for income taxes was $1.2 million for the nine months ended
September 30, 2001 and $0.6 million for the nine months ended September 30,
2000. Our results for the nine months ended September 30, 2001 include a full
nine months of results of our United Kingdom subsidiaries, which were acquired
in April 2000. Our United Kingdom operations have a higher effective tax rate
than our U.S. operations because of net operating losses utilized to offset
current U.S. taxable income.
Net income was $4.0 million for the nine months ended September 30, 2001 as
compared to a net loss of $3.9 million for the nine months ended September 30,
2000. This $7.9 million improvement primarily results from the increased
revenues and improved economies of scale related to expenses discussed above.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues increased by $68.0 million, or 97%, to $138.4 million for the year
ended December 31, 2000 from $70.4 million for the year ended December 31, 1999.
Of this increase in revenues, $38.1 million was contributed by facilities we
acquired during 2000, of which $26.2 million was generated by the two hospitals
we acquired in the United Kingdom in April 2000, $11.9 million was generated by
two facilities we acquired in Spain in March 2000 and November 2000. The
exchange rate of the Euro to the U.S. dollar declined during 2000, resulting in
a negative impact of $6.4 million on same store revenues for the facilities in
Spain relative to 1999. Excluding this foreign exchange impact, same store
facilities in Spain contributed $46.7 million to consolidated revenues in 2000,
an increase of $6.1 million over 1999. The remaining increase in revenues was
contributed by U.S. facilities.
Operating expenses, excluding depreciation and amortization, increased by
$51.0 million, or 78%, to $116.6 million for the year ended December 31, 2000
from $65.6 million for the year ended December 31, 1999. Operating expenses as a
percentage of revenues decreased to 84.3% for the year ended December 31, 2000
from 93.2% for the year ended December 31, 1999, primarily as a result of
leveraging our corporate overhead expenses over the increased revenue
contributed by our facilities.
48
<Page>
EBITDA less minority interest increased $14.0 million, or 301%, to
$18.7 million for the year ended December 31, 2000 from $4.7 million for the
year ended December 31, 1999. EBITDA less minority interest, as a percentage of
revenues, increased to 13.9% for the year ended December 31, 2000 from 6.6% for
the year ended December 31, 1999, primarily as a result of leveraging our
corporate overhead expenses over the increased revenue contributed by our
facilities.
Depreciation and amortization increased to $14.1 million, or 80%, for the
year ended December 31, 2000 from $7.9 million for the year ended December 31,
1999, as a result of the amortization of goodwill and the depreciation of
property and equipment we acquired during 1999 and 2000. Depreciation and
amortization, as a percentage of revenues, decreased to 10.2% for the year ended
December 31, 2000 from 11.2% for the year ended December 31, 1999.
Interest expense, net of interest income, increased 313% to $11.6 million
for the year ended December 31, 2000 from $2.8 million for the year ended
December 31, 1999. Of the $8.8 million increase, approximately $6.6 million
related to borrowings to finance acquisitions in Spain and the United Kingdom
and the remainder of the increase was incurred in the U.S. as a result of the
additional subordinated and commercial long-term debt incurred to finance
acquisitions.
Provision for income taxes increased 138% to $1.1 million for the year ended
December 31, 2000 from $0.5 million for the year ended December 31, 1999. The
$0.6 million increase resulted from taxable income in certain of our
subsidiaries. Income tax regulations in Spain do not allow pretax losses from
one legal entity to offset pretax income in other entities until common
ownership at certain levels exists for a specified period of time. Additionally,
in some instances, state income tax regulations in the U.S. prevent this type of
offsetting for state income tax purposes. Accordingly, we have incurred income
tax expense in spite of our consolidated operating losses.
Net loss increased by $1.3 million, or 19%, to $8.2 million for the year
ended December 31, 2000 from $6.8 million for the year ended December 31, 1999
primarily as a result of the increases in depreciation and amortization and
interest expense discussed above.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE PERIOD FROM FEBRUARY 27, 1998
(INCEPTION) THROUGH DECEMBER 31, 1998
We do not believe that our results for the year ended December 31, 1999 are
comparable to the period from February 27, 1998 through December 31, 1998, which
we refer to as the "1998 fiscal period," because in the 1998 fiscal period we
had fifty-seven fewer days of operations than we did in 1999.
Revenues increased by $49.8 million, or 242%, to $70.4 million for the year
ended December 31, 1999 from $20.6 million for the 1998 fiscal period. Our
Spanish facilities contributed $28.3 million of this increase in revenues and
our U.S. facilities contributed the remaining $21.5 million. We completed our
initial acquisition of an operating entity, which owned a hospital and a group
of clinics in Barcelona, Spain, in April 1998. We completed our acquisition of
our initial U.S. operating entity in July 1998. Accordingly, all of our
facilities contributing to our 1999 revenue were not owned or were not
operational (in the case of development projects that opened during 1999) for a
significant portion of the 1998 fiscal period.
Operating expenses, excluding depreciation and amortization, increased by
$42.8 million, or 188%, to $65.6 million in 1999 from $22.8 million in the 1998
fiscal period. This increase was primarily the result of our acquisitions and
the development of facilities in 1998 and 1999 that we did not own or operate
for a significant portion of the 1998 fiscal period. Operating expenses as a
percentage of revenues decreased to 93.2% in 1999 from 110.8% for the 1998
fiscal period.
EBITDA less minority interest increased $6.9 million to $4.7 million for the
year ended December 31, 1999 from $(2.2) million for the 1998 fiscal period.
EBITDA less minority interest, as a
49
<Page>
percentage of revenues, increased to 6.6% for the year ended December 31, 1999
from (10.7)% for the 1998 fiscal period, as a result of our leveraging of
expenses.
Depreciation and amortization increased 291% to $7.9 million for the year
ended December 31, 1999 from $2.0 million for the 1998 fiscal period. The
$5.9 million increase was a result of amortization of the goodwill and
depreciation of the property and equipment associated with the acquisitions
completed during these periods.
For the year ended December 31, 1999, interest expense, net of interest
income, was $2.8 million, as we borrowed funds from commercial lenders and
issued subordinated notes to finance acquisitions. Interest income, net of
interest expense, was $0.2 million for the 1998 fiscal period as a result of
investing proceeds from our initial equity fundings prior to use of those funds
for acquisitions.
Provision for income taxes increased to $0.5 million for the year ended
December 31, 1999 from an income tax benefit of $0.3 million for the 1998 fiscal
period. The increase was a result of tax regulations restricting the offsetting
of taxable income of legal entities with taxable losses at other legal entities.
The income tax benefit of $0.3 million recognized for the 1998 fiscal period was
a result of net operating loss carryforwards for some of our Spanish
subsidiaries that were deemed realizable under U.S. generally accepted
accounting principles.
Net loss increased by $2.9 million, or 74%, to $6.8 million for the year
ended December 31, 1999 from $3.9 million for the 1998 fiscal period primarily
as a result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On June 13, 2001, our parent received net proceeds of $130.7 million from an
initial public offering of 10,350,000 shares of our common stock, which included
1,350,000 shares attributable to the underwriters' exercise of their
over-allotment option. Net proceeds of the offering were used to redeem
$33.7 million of redeemable preferred stock and repay $91.3 million of bank
indebtedness. The remaining $5.7 million, together with borrowings under USP
Domestic Holdings' domestic credit facility, were used during the quarter ended
September 30, 2001 to acquire a controlling interest in a surgery center in Fort
Worth, Texas. Working capital was $19.7 million at September 30, 2001. During
the nine months ended September 30, 2001, we generated $22.5 million of cash
flows from operations as compared to $5.8 million during the nine months ended
September 30, 2000. Our cash flows from operations increased by $6.8 million to
$11.0 million for the year ended December 31, 2000 from cash flows from
operations of $4.2 million for the year ended December 31, 1999. Our cash flows
from operations increased by $3.6 million, or 575%, for the year ended
December 31, 1999 to $4.2 million from $0.6 million for the 1998 fiscal period.
For the period from inception, February 27, 1998, through December 31, 2000, our
cash requirements for acquisitions and purchases of property and equipment
totaled $200.1 million, which we funded with a combination of $110.0 million we
raised from the issuance of capital stock, $15.8 million of cash flows from
operations and net borrowings of $74.3 million.
During the nine months ended September 30, 2001, our net cash required for
investing activities was $41.0 million, consisting of $26.1 million for the
purchase of businesses, $15.7 million for the purchase of property and
equipment, and net cash inflows from other investing activities of
$0.8 million. The $26.1 million primarily represents purchases of new
businesses, net of cash acquired, and incremental investments in unconsolidated
affiliates, including the acquisition of the surgery center in Fort Worth, Texas
for $14.0 million. Approximately $3.8 million of the property and equipment
purchases related to ongoing development projects. The $41.0 million of cash
required for investing activities was funded primarily with the cash flows from
operations noted above and net borrowings under credit agreements with banks.
Net cash provided during the nine months ended September 30, 2001 by financing
activities totaled $30.6 million.
50
<Page>
In December 2001, we issued the old notes and received approximately
$142.8 million in net proceeds, after deducting the initial purchasers' discount
and the expenses of that offering. We used those proceeds to finance the
repayment of the outstanding indebtedness under our domestic credit facility and
our credit facility in Spain, the redemption of the outstanding 10% senior
subordinated notes of our subsidiary, USP Domestic Holdings, Inc., and the
redemption of the outstanding shares of the Series D redeemable preferred stock
of our parent. The balance of the proceeds received are being used for general
corporate purposes, including acquisitions and the repayment of certain working
capital lines of credit in Spain. See "Use of Proceeds." Concurrently with the
consummation of the offering of the old notes, we entered into our amended and
restated credit facility with a group of commercial lenders providing us with
the ability to borrow up to $85.0 million to be used for acquisitions and
general corporate purposes. Borrowings under our amended and restated credit
facility mature on December 19, 2004. As of the date of this prospectus no
borrowings are outstanding under this facility and approximately $85.0 is
available for borrowing. See "Description of Credit Facilities--Amended and
Restated Credit Facility."
The indenture governing the new notes and our amended and restated credit
facility contain various restrictive covenants including covenants that limit
our and certain of our subsidiaries' ability to borrow money or guarantee other
indebtedness, grant liens on our assets, make investments, use assets as
security in other transactions, pay dividends on stock, enter into sale and
leaseback transactions or sell assets or capital stock. See "Description of the
New Notes" and "Description of Credit Facilities--Amended and Restated Credit
Facility."
The credit agreement in the United Kingdom provides for total borrowings of
L42.0 million (approximately $61.7 million as of September 30, 2001) under three
separate facilities. At September 30, 2001, total outstanding borrowings under
the United Kingdom credit facility were approximately $36.3 million and
approximately $18.1 million was available for borrowings. The United Kingdom
credit facility specifies that of this available amount, $10.3 million be used
not later than September 30, 2003 to retire demand notes payable to the former
owners of our two hospitals in the United Kingdom. Borrowings under the United
Kingdom credit facility bear interest at rates of 1.50% to 2.00% over LIBOR and
mature in April 2010. We pledged the capital stock of our U.K. subsidiaries to
secure borrowings under the United Kingdom credit facility. We were in
compliance with all covenants under our credit agreements as of September 30,
2001.
Currently, we (1) have three surgery centers and one private surgical
hospital under construction in the United States, (2) have one cancer treatment
center under development in the United Kingdom, and (3) have a definitive
agreement to acquire a surgical hospital in Murcia, Spain for a total
consideration of $7.4 million in cash, $12.4 million in assumed capital lease
obligations and $0.3 million in assumed debt. With respect to the acquisition in
Murcia, Spain, we are awaiting approval from senior officials of the Catholic
church and expect the acquisition to be consummated in January 2002 but can give
you no assurances that this acquisition will be consummated. A typical surgery
center costs from $5.0 to $6.0 million to construct and fit out with equipment.
These costs vary depending on the range of specialties that will be undertaken
at the facility. We have budgeted amounts ranging from $4.5 million to $6.5
million for each of the three surgery centers that we have under construction in
the United States, with an average expected cost of $5.3 million. For the
surgery centers where construction has begun, financing has been put in place
and no additional financing is needed. We typically fund development costs with
approximately 50% debt at the facility level with the remainder provided as
equity from the owners of the facility. Our ownership interests range from 10%
to 100%, although we anticipate that our ownership interest in future facilities
will range from 30% to 60%.
Our acquisition and development program will require substantial capital
resources, which we estimate to range from $40.0 million to $50.0 million per
year over the next three years. In addition, the operations of our existing
surgical facilities will require ongoing capital expenditures. We believe that
existing funds, cash flows from operations, borrowings under our credit
facilities and the net
51
<Page>
proceeds from this offering will provide sufficient liquidity for the next
twelve months. Thereafter, it is likely that we will require additional debt or
equity financing for these 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate risk related to our financing, investing
and cash management activities. Our financing arrangements with banks are based
on the spread over LIBOR or Euribor. Inflation and changing prices have not
significantly affected our operating results or the markets in which we perform
services.
Our international revenues are a growing portion of our total revenues. We
are exposed to risks associated with operating internationally, including:
- foreign currency exchange risk; and
- taxes and regulatory changes.
Historically, we have not held or issued derivative financial instruments.
We do not use derivative financial instruments for speculative purposes. Our
international operations in some instances operate in a natural hedge because
both operating expenses and revenues are denominated in local currency.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2002 we adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives Instruments and Hedging Activities," as
amended by SFAS 138. This standard requires us to recognize all derivative
financial instruments on our balance sheet at fair value with changes in fair
value recorded to the statement of operations or comprehensive income, depending
on the nature of the investment. The adoption of the standard did not have a
material effect on our consolidated financial statements.
On July 20, 2001 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS (SFAS 141), and
No. 142, ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS 142). Under
SFAS 141, all business combinations initiated after June 30, 2001 will be
accounted for using the purchase method of accounting; the use of the
pooling-of-interests method of accounting will be prohibited. We adopted this
standard on January 1, 2002, and it did not have a material effect on our
financial position or results of operations.
SFAS 142 eliminates the amortization of goodwill. Under SFAS 142, the
carrying amount of goodwill should be tested for impairment at least annually at
the reporting unit level, as defined, and will be reduced only if it is found to
be impaired or is associated with assets sold or otherwise disposed of.
SFAS 142 is effective for fiscal years beginning after December 15, 2001.
However, the cessation of goodwill amortization related to acquisitions
subsequent to June 30, 2001 is required currently under SFAS 142. We adopted
this standard on January 1, 2002 and are assessing its impact including the
determination of reporting units and the methodology for testing intangible
assets for impairment. Please see the notes to our Consolidated Financial
Statements (Unaudited) for a presentation of our net income (loss) for the nine
months ended September 30, 2001 and 2000 on a pro forma basis as if the
cessation of goodwill amortization required by the new standard had occurred
July 1, 2000.
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS (SFAS 143). SFAS 143 applies to legal obligations associated with
the retirement of tangible, long-lived assets. SFAS 143 requires that all
entities recognize the estimated fair value of an asset retirement obligation as
a liability in the period in which it is incurred, if a reasonable estimate of
fair value can
52
<Page>
be made. SFAS 143 also requires that all entities capitalize the associated
asset retirement costs as part of the carrying amount of the long-lived asset.
We are required to adopt SFAS 143 as of January 1, 2003. We do not believe that
this standard will have a material effect on our future financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS (SFAS 144). SFAS 144 replaces SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, and amends the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING
THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL,
AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. The following highlights the
major changes:
- Assets to be held and used--no longer required to allocate goodwill to the
assets.
- Assets to be disposed of by abandonment--requires the revision of the
depreciable life of the assets.
- Assets to be disposed of either by exchange for similar productive assets
or distribution to owners in a spinoff--requires the recognition of an
impairment loss if the carrying amounts of the assets exceed their fair
value.
- Assets to be disposed of by sale--requires the remeasurement of the assets
at either the carrying amount or the fair value, whichever is lower, with
no further depreciation or amortization of the assets.
- Discontinued operations--excludes future operating losses until realized;
now includes discontinued "components of an entity," which has a broader
definition than a segment.
We adopted SFAS 144 as of January 1, 2002. Our adoption of SFAS 144 did not have
a material effect on our financial position or results of operations.
53
<Page>
BUSINESS
OVERVIEW
We own and operate surgery centers and private surgical hospitals in the
United States, Spain and the United Kingdom. We focus on providing high quality
surgical facilities that meet the needs of patients, physicians and payors
better than hospital-based and other outpatient surgical facilities. We believe
that our facilities (1) enhance the quality of care and the healthcare
experience of patients, (2) offer significant administrative, clinical and
economic benefits to physicians and (3) offer an efficient and low cost
alternative to payors. We acquire and develop our facilities through the
formation of strategic relationships with physicians and healthcare systems to
better access and serve the communities in our markets. Our operating model is
efficient, scalable and portable and we have adapted it to each of our national
markets. We believe that our acquisition and development strategy and operating
model enable us to continue to grow by taking advantage of highly-fragmented
markets and an increasing demand for outpatient surgery.
Since physicians provide and influence the direction of healthcare
worldwide, we have developed our operating model to encourage physicians to
affiliate with us and to use our facilities. We operate our facilities,
structure our strategic relationships and adopt staffing, scheduling and
clinical systems and protocols with the goal of increasing physician
productivity. We believe that our focus on physician satisfaction, combined with
providing high quality healthcare in a friendly and convenient environment for
patients, will continue to increase the number of procedures performed at our
facilities each year.
Donald E. Steen, our chairman and chief executive officer, and Welsh,
Carson, Anderson & Stowe formed United Surgical Partners International in
February 1998. We have ownership interests in 35 surgery centers and one private
surgical hospital and manage or operate through consulting agreements three
additional surgery centers in the United States. Also in the United States, we
own interests in and will operate three surgery centers and one private surgical
hospital that are currently under construction. In Spain, we own and operate six
private surgical hospitals, two surgery centers and a diagnostic facility. In
the United Kingdom, we own and operate two private surgical hospitals and are
developing a cancer treatment center. Our revenues increased 97% to $138.4
million in 2000 from $70.4 million in 1999. Our EBITDA increased 356% to $21.8
million in 2000 from $4.8 million in 1999. Pro forma as adjusted revenues and
EBITDA for the nine months ended September 30, 2001 were $180.6 million and
$45.6 million, respectively. See "Summary Pro Forma Financial Statements."
INDUSTRY BACKGROUND
We believe many physicians prefer surgery centers and private surgical
hospitals to general acute care hospitals. We believe that this is due to the
elective nature of the procedures performed at our surgery centers and private
surgical hospitals, which allows physicians to schedule their time more
efficiently and therefore increase the number of surgeries they can perform in a
given amount of time. In addition, these facilities usually provide physicians
with greater scheduling flexibility, more consistent nurse staffing and faster
turnaround time between cases. While surgery centers and private surgical
hospitals generally perform scheduled surgeries, private acute care hospitals
and national health service facilities generally provide a broad range of
services, including high priority and emergency procedures. Medical emergencies
often demand the unplanned use of operating rooms and result in the postponement
or delay of scheduled surgeries, disrupting physicians' practices and
inconveniencing patients. Surgery centers and private surgical hospitals in the
United States, Spain and the United Kingdom are designed to improve physician
work environments and improve physician efficiency. In Spain and the United
Kingdom, our surgery centers are also designed to provide an opportunity to
physicians to supplement their incomes. 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.
54
<Page>
UNITED STATES
According to SMG Marketing Group Inc.'s Freestanding Outpatient Surgery
Center Directory, the number of outpatient surgery cases performed in
freestanding surgery centers increased 191% from 2.3 million in 1990 to 6.7
million in 2000. Outpatient surgical procedures represented approximately 15% of
all surgical procedures performed in the United States in 1980 compared to
approximately 70% in 2000. New surgical techniques and technology, as well as
advances in anesthesia, have significantly expanded the types of surgical
procedures that are being performed in surgery centers and have helped drive the
growth in outpatient surgery. Lasers, arthroscopy, enhanced endoscopic
techniques and fiber optics have reduced the trauma and recovery time associated
with many surgical procedures. Improved anesthesia has shortened recovery time
by minimizing post-operative side effects such as nausea and drowsiness, thereby
avoiding the need for overnight hospitalization in many cases. In addition, some
states in the United States now permit surgery centers to keep a patient for up
to 23 hours. This allows more complex surgeries, previously only performed in an
inpatient setting, to be performed in a surgery center.
In addition to these technological and other clinical advancements, a
changing payor environment has contributed to the rapid growth in outpatient
surgery in recent years. Government programs, private insurance companies,
managed care organizations and self-insured employers have implemented cost
containment measures to limit increases in healthcare expenditures, including
procedure reimbursement. These cost containment measures have greatly
contributed to the significant shift in the delivery of healthcare services away
from traditional inpatient hospitals to more cost-effective alternate sites,
including surgery centers. We believe that surgery performed at a surgery center
is generally less expensive than hospital-based outpatient surgery because of
lower facility development costs, more efficient staffing and space utilization
and a specialized operating environment focused on cost containment.
Today, large healthcare systems in the United States generally offer both
inpatient and outpatient surgery on site. In addition, a number of nonprofit
healthcare systems have begun to expand their portfolios of facilities and
services by entering into strategic relationships with specialty operators of
surgery centers. These strategic relationships enable nonprofit 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 nonprofit healthcare systems to focus
their attention and resources on their core business without the challenge of
acquiring, developing and operating these facilities. According to SMG Marketing
Group, as of June 30, 2000, there were 3,191 freestanding surgery centers in the
United States, of which 3% were owned by healthcare systems and 27% were owned
by corporate entities. The remaining 70% were independently owned, primarily by
physicians.
WESTERN EUROPE
Most countries in Western Europe provide their populations with some level
of government funded healthcare. Despite the success of these public programs,
the practical limitations of these systems have resulted in delays or rationing
of elective surgeries and certain other procedures. In many of these countries,
funding and capacity constraints of public healthcare systems have created an
opportunity for private healthcare systems to develop.
While Spain's national health service covers substantially all of the
country's population, a private healthcare industry has emerged that currently
serves the 17.2% of Spain's population that maintains private insurance and
another growing portion of the population that pays for elective procedures from
personal funds. Total healthcare expenditures in Spain grew from 5.9% of gross
domestic product, or GDP, in 1997 to 7.6% in 1998. In addition, Spain's GDP and
wages have experienced compound annual growth of 1.9% and 2.6%, respectively,
from 1975 to 1998. We believe that these increases support our
55
<Page>
view that the number of privately insured citizens, the amount of private
healthcare expenditures and the resulting demand for private networks such as
ours will continue to grow. We also believe that the growth in Spain's private
healthcare industry has been driven in large part by an increase in the number
of employers offering private insurance as a benefit to their employees. Like
their U.S. counterparts, private insurance companies in Spain typically offer
comprehensive health coverage. Since only 57 of the 347 private surgical
hospitals in Spain are owned by multi-facility systems, we believe an
opportunity exists to build a private hospital network that will enable us to
negotiate more effectively with the country's large health insurance companies.
Our facilities also supplement the national health service as public hospitals
sometimes refer overload cases to our facilities.
We are able to accept or reject these cases based on the available capacity
of our facilities and the profitability of the cases. As of September 30, 2001,
we derived approximately 69% of our revenues in Spain from private insurance,
approximately 20% from private pay, approximately 10% from government payors and
approximately 1% from other payors.
The United Kingdom also provides government funded healthcare to all of its
residents through a national health service. It, however, is also subject to
funding and capacity limitations. Since the demand for healthcare services
exceeds the public system's capacity, U.K. residents may encounter waiting lists
for elective surgery of up to 18 months as well as delays in obtaining cancer
biopsies and other diagnostic procedures. The World Health Organization reports
that 25,000 people die unnecessarily of cancer in Britain each year due to
underfinanced and poorly managed cancer programs. In response to these
shortfalls, private healthcare networks and private insurance companies have
developed in the United Kingdom. Approximately 11% of the U.K. population has
private insurance to cover elective surgical procedures, and another rapidly
growing segment of the population pays for elective procedures from personal
funds. As of September 30, 2001, in the United Kingdom, we derived approximately
67% of our revenues from private insurance, approximately 28% from private pay
patients, approximately 2% from government payors and approximately 3% from
other payors.
OUR BUSINESS STRATEGY
Our goal is to steadily increase our revenues and cash flows by becoming a
leading operator of surgery centers and private surgical hospitals in the United
States and selected nations in Western Europe. The key elements of our business
strategy are to:
- attract and retain top quality surgeons and other physicians;
- grow through selective acquisitions and development of surgery centers and
private surgical hospitals;
- pursue strategic relationships with healthcare systems;
- expand selectively in Western Europe; and
- enhance operating efficiencies.
ATTRACT AND RETAIN TOP QUALITY SURGEONS AND OTHER PHYSICIANS
Since physicians provide and influence the direction of healthcare
worldwide, we have developed our operating model to encourage physicians to
affiliate with us and to use our facilities. We 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. We believe this opportunity attracts
56
<Page>
quality physicians to our facilities and ownership increases the physicians'
involvement in facility operations, enhancing quality of patient care,
increasing productivity and reducing costs. In addition, we believe our recent
acquisition of OrthoLink will strengthen our ability to attract leading
physicians in the profitable field of orthopedics.
GROW THROUGH SELECTIVE ACQUISITIONS AND DEVELOPMENT
We intend to continue to enter targeted markets by acquiring and developing
surgical facilities. In the United States, we expect to do this primarily in
conjunction with a local healthcare system or hospital. We typically target the
acquisition or development of multi-specialty centers that perform high volume,
non-emergency, lower risk procedures requiring lower capital and operating costs
than hospitals. In addition, we will also consider the acquisition of
multi-facility companies. Since inception, we have successfully acquired and
integrated facilities, generating average EBITDA less minority interest growth
of 19% over the twelve months following acquisition.
In determining whether to enter a new market, we examine numerous criteria,
including:
- the potential to achieve strong increases in revenues and cash flows;
- the size 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;
- whether the physicians, healthcare systems and payors in the market are
receptive to surgery centers;
- whether the facility is well-positioned to negotiate agreements with
insurers, other payors and suppliers; and
- licensing and other regulatory considerations.
Upon identifying a target facility, we conduct financial, legal,
engineering, operational, technology and systems audits of the facility and
conduct interviews with the facility's management, affiliated physicians and
staff. Once we acquire or develop a facility, we focus on upgrading systems and
protocols, including implementing USPI's EDGE, to increase case volume and
improve operating efficiencies.
PURSUE STRATEGIC RELATIONSHIPS WITH HEALTHCARE SYSTEMS
Through strategic relationships with us, healthcare systems can benefit from
our operating expertise and create a new cash flow opportunity with limited
capital expenditures. We believe that these relationships also allow nonprofit
healthcare systems in particular to attract and retain physicians and improve
their hospital operations by focusing on their core business. We also believe
that strategic relationships with these healthcare systems help us to develop
more quickly relationships with physicians, communities, suppliers and payors.
Generally, the healthcare systems with which we develop relationships have
strong local market positions and excellent reputations that we use in branding
our facilities. In addition, our relationships with healthcare systems enhance
our acquisition and development efforts by (1) providing opportunities to
acquire facilities the systems may own, (2) providing access to physicians
already affiliated with the systems, (3) attracting additional physicians to
affiliate with newly developed facilities, and (4) encouraging physicians who
own facilities to consider a strategic relationship with us.
57
<Page>
EXPAND SELECTIVELY IN WESTERN EUROPE
We are well-positioned in Western Europe to take advantage of the demand for
privately provided surgery and cancer treatment. To this end, we intend to
continue to acquire private surgical hospitals in existing markets and selected
new countries. We own two private surgical hospitals in the United Kingdom and
six private surgical hospitals, two surgery centers and a diagnostic facility in
Spain. We enter new national markets through the acquisition of anchor hospitals
in or near major cities. In accordance with this acquisition strategy, we
established our presence in the United Kingdom and Spain through the
acquisitions of Parkside Hospital outside London and Instituto Universitario
Dexeus in Barcelona. We intend to continue to execute our acquisition strategy
in Western Europe by continuing to develop local networks of private healthcare
facilities in major population centers of the United Kingdom and Spain and by
entering one or two additional national markets. As we enter a new country, we
intend to establish a local management team with in-depth knowledge of the
culture and complexities of that country's delivery system. While our operating
model is designed to be applied consistently in different countries, it is
flexible enough to allow local management to help us capitalize on
country-specific opportunities, work more efficiently with local physicians,
surgeons, patients and payors and adapt more effectively to local customs. We
also seek to establish a brand name in selected markets to heighten awareness of
our facilities.
ENHANCE OPERATING EFFICIENCIES
Once we acquire a new facility, we integrate it into our existing network by
implementing a specific action plan to support the local management team and
incorporate the new facility into our group purchasing contracts. We also
implement our systems and protocols to improve operating efficiencies and
contain costs. Our most important operational tool is our management system
"Every Day Giving Excellence," which we refer to as USPI's EDGE. This
proprietary measurement system allows us to track our clinical, service and
financial performance, best practices and key indicators in each of our
facilities. Our goal is to use USPI's EDGE to ensure that we provide each of the
patients using our facilities with high quality healthcare, offer physicians a
superior work environment and eliminate inefficiencies. Using USPI's EDGE, we
track and monitor our performance in clinical care areas such as (1) providing
surgeons the equipment, supplies and surgical support they need, (2) starting
cases on time, (3) minimizing turnover time between cases, and (4) providing
efficient schedules. USPI's EDGE compiles and organizes the specified
information on a daily basis and is easily accessed over the Internet by our
facilities on a secure basis. The information provided by USPI's EDGE enables
our employees, facility administrators and management to analyze trends over
time and share processes and best practices among our facilities. In addition,
the information is used as an evaluative tool by our administrators and a
budgeting and planning tool by our management. USPI's EDGE is now deployed in a
majority of our U.S. facilities. We have begun deployment of USPI's EDGE in the
United Kingdom and anticipate introducing it in Spain and our other domestic
facilities in 2002.
OPERATIONS
OPERATIONS IN THE UNITED STATES
Our operations in the United States consist primarily of our ownership and
management of surgery centers. We have ownership interests in 35 surgery centers
and one private surgical hospital and manage or operate through consulting
agreements three additional surgery centers. In addition, we own interests in
and will operate three surgery centers and one private surgical hospital that
are currently under construction. Over 2,000 physicians have access privileges
to use our facilities. Our surgery centers are licensed outpatient surgery
centers and are generally equipped and staffed for multiple surgical specialties
and located in freestanding buildings or medical office buildings. Our average
surgery center has approximately 15,000 square feet of space with four or five
operating rooms, as well as ancillary areas for preparation, recovery, reception
and administration. Our surgery center facilities
58
<Page>
range from a 6,700 square foot, two operating room facility to a 17,000 square
foot, six operating room facility. Our surgery centers are normally open
weekdays from 7:00 a.m. to approximately 5:00 p.m. or until the last patient is
discharged. We estimate that a surgery center with four operating rooms can
accommodate up to 6,000 procedures per year.
Our surgery center support staff typically consists of registered nurses,
operating room technicians, an administrator who supervises the day-to-day
activities of the surgery center, a receptionist and a small number of office
staff. Each center also has a medical director, who is typically an
anesthesiologist and responsible for and supervises the quality of medical care
provided at the center. Use of our surgery centers is limited to licensed
physicians, podiatrists and oral surgeons who are also on the medical staff of a
local accredited hospital. Each center maintains a peer review committee
consisting of physicians who use our facilities and who review the professional
credentials of physicians applying for surgical privileges.
All of our surgery centers eligible for accreditation are accredited by the
Joint Commission on Accreditation of Healthcare Organizations or by the
Accreditation Association for Ambulatory Healthcare. We believe that
accreditation is the quality benchmark for managed care organizations. Many
managed care organizations will not contract with a facility until it is
accredited. We believe that our historical performance in the accreditation
process reflects our commitment to providing high quality care in our surgery
centers.
All of our surgery centers in which we have ownership interests are limited
partnerships or limited liability companies in which ownership interests are
also held by local physicians who are on the medical staff of the centers. Our
ownership interests in the centers range from 11% to 100%. Our partnership and
limited liability company agreements typically provide for the quarterly pro
rata distribution of net revenues from operations, less amounts held in reserve
for expenses and working capital. We also have a management agreement with each
of the centers under which we provide day-to-day management services for a
management fee that is typically a percentage of the net revenues of the center.
Our partnership and limited liability company agreements typically provide
that if various regulatory changes take place we will be obligated to purchase
some or all of the ownership interests of the physicians in the partnerships or
limited liability companies that own and operate the applicable surgery centers.
The regulatory changes that could trigger such an obligation include changes
that:
- make illegal the referral of Medicare and other patients to our surgery
centers by physicians affiliated with us;
- create the substantial likelihood that cash distributions from the
partnership or limited liability company to the physicians associated
therewith will be illegal; or
- cause physician ownership interests in the partnerships or limited
liability companies to be illegal.
Typically, our partnership and limited liability company agreements allow us
to use shares of our common stock as consideration for the purchase of a
physician's interest should we be required to purchase these interests. In the
event we are required to purchase these interests and our common stock does not
maintain a sufficient valuation, we may be required to use cash for the
acquisition of a physician's interest. As a result, the triggering of these
obligations and the possible termination of our affiliation with these
physicians could have a material adverse effect on us. See "Risk Factors" and
"Business--Government Regulation."
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
59
<Page>
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. The
table below sets forth (1) each of the six surgery centers which has a group of
physicians that generates the majority of the cases performed at the surgery
center for the nine months ended September 30, 2001, (2) the percentage of
revenues at that surgery center attributable to those groups of physicians for
such period, (3) the percentage of our overall revenues attributable to those
groups of physicians for such period, and (4) the ownership interests of each of
those groups of physicians in the partnerships or limited liability companies
that own and operate the applicable surgery center.
<Table>
<Caption>
OWNERSHIP
PERCENTAGE OF PERCENTAGE OF INTEREST
REVENUES REVENUES OF OF GROUP OF
ATTRIBUTABLE TO THE PHYSICIANS IN
SURGERY CENTER NAME GROUP OF PHYSICIANS COMPANY SURGERY CENTER
- ------------------- ------------------- ------------- --------------------
Resurgens Surgery Center, Atlanta, Georgia........ 100% * 85%
Atlanta East West, Austell, Georgia............... 60 * 1
Mountain Empire Surgery Center, Johnson City,
Tennessee....................................... 62 * 40
Parkwest Surgery Center, Knoxville, Tennessee..... 80 * 20
Baptist Ambulatory Surgery Center, Nashville,
Tennessee....................................... 65 * 24
New Mexico Orthopaedic Surgery Center,
Albuquerque, New Mexico......................... 100 3% 49
</Table>
- --------------
* Less than one percent.
STRATEGIC RELATIONSHIPS
We have entered into strategic relationships with four established
healthcare systems and hospitals in the United States, two of which currently
operate surgery centers, one of which is awaiting approval from New York
regulatory authorities, and one of which will operate two surgery centers which
we expect to contribute to the joint venture. Our largest joint venture is with
the Baylor Health Care System in Dallas, Texas. The Baylor joint venture owns
interests in limited liability companies and limited partnerships which own and
operate surgery centers. Our alliance agreement with Baylor does not have an
expiration date but may be terminated with the mutual consent of both parties,
if the joint venture is determined to be illegal due to a change in laws or
regulations or upon stated changes in control of our company. In addition,
agreements governing the joint venture have provisions governing management
power, dissolution events and veto power. This joint venture owns an outpatient
surgery network that serves the approximately four million persons located in
the Dallas/Fort Worth area. The Baylor joint venture currently has ownership
interests, or management agreements with options to purchase an ownership
interest, in eleven operational surgery centers. The Baylor joint venture is
developing a private surgical hospital and two surgery centers. We also have a
joint venture with the Meridian Health System in Wall, New Jersey. This joint
venture currently operates one surgery center and is developing one additional
surgery center. In addition, in August 2001 we entered into a joint venture with
St. Thomas Health Services in Nashville, Tennessee. We expect to contribute two
of our surgery centers to this joint venture. All of our joint ventures require
both parties to afford the other party the opportunity to participate in any
surgery center project within specified geographic regions prior to the other
party participating in the project.
A key element of our business strategy is to pursue additional strategic
relationships with healthcare providers in selected markets. To this end, we
have signed an agreement for a strategic relationship with Mt. Sinai Health
System in New York City through which we would develop a surgery
60
<Page>
center in Manhattan. However, this transaction is subject to approval from New
York regulatory authorities and may not be consummated. We intend to structure
our future joint ventures with service providers in a manner similar to our
joint venture with Baylor.
OPERATIONS IN SPAIN
We believe our operations in Spain comprise one of the largest private
hospital networks in this highly fragmented market. We own and operate six
private surgical hospitals, two surgery centers and a diagnostic facility in
Spain and over 700 physicians use our facilities. These facilities, located
primarily in Barcelona, Madrid and Seville, range in size from 19 beds to 133
beds with an average of 92 beds. In this market, we focus primarily on five
specialties: obstetrics/gynecology; orthopedic surgery; general surgery;
internal medicine; and plastic surgery.
In addition, we are developing our brand name, "USPE," in all of our markets
in Spain in an effort to attract top quality physicians and a greater number of
patients. We are developing this brand by leveraging the reputation of our more
prominent physicians and facilities, particularly Instituto Universitario Dexeus
in Barcelona. Dexeus is one of only two private teaching hospitals in Spain. We
believe Dexeus' affiliation with the University of Barcelona, which has
nationally renowned physicians, makes it one of Spain's most respected private
hospitals and greatly enhances the USPE brand image. To this end, we also intend
to develop our brand name through future acquisitions of private surgical
hospitals.
OPERATIONS IN THE UNITED KINGDOM
We acquired Parkside Hospital in Wimbledon, a suburb southwest of London,
and Holly House Hospital in a suburb northeast of London near Essex in April
2000 for approximately $89.2 million in cash, approximately $54.0 million of
which we borrowed from a commercial lender. Parkside has 69 registered acute
care beds, including four high dependency beds, on three floors. The hospital
has four operating theatres, including a dedicated endoscopy suite that opened
in 1998. Parkside also has its own on-site pathology laboratory, pharmacy and
diagnostic suite with an MRI scanner, two X-ray screening rooms and a color
Doppler ultrasound machine. Approximately 270 surgeons and physicians, all of
whom hold or have held consulting positions in hospitals operated by the United
Kingdom's national health service, have admitting privileges to the hospital.
Parkside has established practices including orthopedics, gynecology and general
surgery, as well as neurosurgery and endoscopic procedures. Parkside also
intends to expand its outpatient department from 12 to 15 physicians' offices,
which are referred to as consulting rooms.
We are in the process of developing a comprehensive cancer treatment center,
the Parkside Clinic, near Parkside Hospital. Our development of Parkside Clinic
has the support of a number of oncologists at Parkside Hospital and the center
has already contracted with the BUPA Group, Britain's largest insurance company.
We anticipate that the center will provide superior inpatient and outpatient
services. We also anticipate that Parkside Clinic will be fully operational in
2002 and will provide radiotherapy, chemotherapy and nuclear medicine facilities
on an outpatient basis with inpatient cancer services being provided at Parkside
Hospital. Parkside Clinic also will provide additional space for expansion of
other specialties and programs at Parkside Hospital.
Holly House Hospital has been an acute care hospital for 20 years and has 56
registered acute care beds on two floors, including three high dependency beds.
The hospital has three operating theatres built in 1988 and its own on-site
pathology laboratory and pharmacy with cytotoxic reconstitution facilities to
serve its expanding oncology program. A diagnostic suite houses MRI and CT
scanners and two X-ray screening rooms together with a color Doppler ultrasound
machine. Over 100 surgeons and physicians have admitting privileges at the
hospital. The hospital has established orthopedic and general surgery practices
and is developing oncology and plastic surgery programs.
61
<Page>
CASE MIX
The following table sets forth the percentage of our revenues determined
based on internally reported case volume from our U.S. facilities and internally
reported revenue from our Spain and U.K. facilities for the nine months ended
September 30, 2001 from each of the following specialties:
<Table>
<Caption>
SPECIALTY TOTAL U.S. SPAIN U.K.
--------- -------- -------- -------- --------
Orthopedic.................................................. 25% 29 % 18 % 26 %
Obstetrics/gynecology....................................... 12 5(1) 23(2) 13(3)
General surgery............................................. 9 6 10 16
Ear, nose and throat........................................ 6 8 3 5
Pain management............................................. 13 24 -- --
Gastrointestinal............................................ 8 9 7 4
Plastic surgery............................................. 6 5 7 5
Ophthalmology............................................... 7 11 1 7
Other....................................................... 14 3 31 24
--- --- --- ---
Total................................................... 100% 100 % 100 % 100 %
=== === === ===
</Table>
- --------------
(1) Includes gynecology only.
(2) Includes obstetrics and gynecology.
(3) Includes gynecology and in vitro fertilization.
PAYOR MIX
The following table sets forth the percentage of our revenues determined
based on internally reported case volume from our U.S. facilities and internally
reported revenue from our Spain and U.K. facilities for the nine months ended
September 30, 2001 from each of the following payors:
<Table>
<Caption>
PAYOR TOTAL U.S. SPAIN U.K.
----- -------- -------- -------- --------
Private insurance........................................... 68% 68% 69% 67%
Self-pay.................................................... 12 3 20 28
Government.................................................. 14 20 10 2
Other....................................................... 6 9 1 3
--- --- --- ---
Total................................................... 100% 100% 100% 100%
=== === === ===
</Table>
FACILITIES
SURGERY CENTERS
The following table sets forth information relating to the surgery centers
that we operate as of the date of this prospectus:
<Table>
<Caption>
DATE OF NUMBER
ACQUISITION OF PERCENTAGE
OR OPERATING OWNED BY
FACILITY AFFILIATION ROOMS USPI
-------- ----------- --------- ----------
UNITED STATES
Decatur Surgery Center, Decatur, Alabama(1)................. 7/29/98 2 66 %
Warner Park Surgery Center, Chandler, Arizona(1)............ 7/1/99 4 78
Coast Surgery Center of South Bay, Inc., Torrance,
California................................................ 12/18/01 3 35
San Gabriel Valley Surgical Center, West Covina,
California................................................ 11/16/01 4 80
University Surgical Center, Winter Park, Florida............ 10/15/98 3 70
</Table>
62
<Page>
<Table>
<Caption>
DATE OF NUMBER
ACQUISITION OF PERCENTAGE
OR OPERATING OWNED BY
FACILITY AFFILIATION ROOMS USPI
-------- ----------- --------- ----------
Surgery Center of Sarasota, Sarasota, Florida............... 10/12/01 4 66
East West Surgery Center, Austell, Georgia.................. 9/1/00(4) 3 88
Northwest Georgia Orthopaedic Surgery Center, Marietta,
Georgia................................................... 11/1/00(4) 2 15
Lawrenceville Surgical Center, Lawrenceville, Georgia....... 8/1/01 2 15
Resurgens Surgery Center, Atlanta, Georgia.................. 10/1/98(4) 4 15
Roswell Surgery Center, Roswell, Georgia.................... 10/1/00(4) 2 15
Creekwood Surgery Center, Kansas City, Missouri(1).......... 7/29/98 3 75
Parkway Surgery Center, Henderson, Nevada................... 8/3/98 5 50
Shrewsbury Ambulatory Surgery Center, Shrewsbury, New
Jersey.................................................... 4/1/99 4 25
New Mexico Orthopaedic Surgery Center, Albuquerque, New
Mexico.................................................... 2/29/00(4) 6 51
Las Cruces Surgery Center, Las Cruces, New Mexico(1)........ 2/1/01 3 50
Day-Op Center of Long Island, Mineola, New York(2).......... 12/4/98 4 0
Eastside Surgery Center, Columbus, Ohio(3).................. 3/20/00(4) 4 0
Riverside Outpatient Surgery Center, Columbus, Ohio(3)...... 3/20/00(4) 6 0
Mountain Empire Surgery Center, Johnson City, Tennessee..... 2/2/00(4) 4 20
Baptist Ambulatory Surgery Center, Nashville, Tennessee..... 3/1/98(4) 6 20
Middle Tennessee Ambulatory Surgery Center, Murfreesboro,
Tennessee................................................. 7/29/98 4 41
Parkwest Surgery Center, Knoxville, Tennessee............... 7/26/01 5 20
Physicians Pavilion Surgery Center, Nashville,
Tennessee(1).............................................. 7/29/98 4 75
Arlington Surgery Center, Arlington, Texas(1)............... 2/1/99 3 11
Baylor Surgicare, Dallas, Texas(1).......................... 6/1/99 6 26
Denton Surgicare, Denton, Texas(1).......................... 2/1/99 4 23
Doctors Surgery Center (Houston), Pasadena, Texas(1)........ 9/1/99 4 91
Medical Centre Surgicare, Fort Worth, Texas(1).............. 12/18/98 5 49
Metroplex Surgery Center, Bedford, Texas(1)................. 12/18/98 4 50
North Texas Surgery Center, Dallas, Texas(1)................ 12/18/98 4 47
Physicians Day Surgery Center, Dallas, Texas................ 10/12/00 4 26
Premier Ambulatory Surgery Center of Garland, Garland,
Texas..................................................... 2/1/99 2 51
Texas Surgery Center, Dallas, Texas(1)...................... 6/1/99 4 26
United Surgery Center--Southeast, Houston, Texas(1)......... 9/1/99 3 95
Valley View Surgery Center, Dallas, Texas(1)................ 12/18/98 4 65
Surgi-Center of Central Virginia, Fredericksburg,
Virginia.................................................. 11/29/01 4 83
Teton Outpatient Services, Jackson Hole, Wyoming............ 8/1/98(4) 2 56
SPAIN
Centro de Cirugia Ambulatario, Barcelona.................... 3/1/99 3 100
USP Dermoestetica, S.L. Madrid.............................. 5/1/99 2 70
</Table>
- ----------------
(1) Licensed and equipped to accommodate 23-hour stays.
(2) Operated through a consulting and administrative agreement.
(3) Management agreement only.
(4) Indicates date of acquisition by OrthoLink. We acquired OrthoLink in
February 2001.
63
<Page>
PRIVATE SURGICAL HOSPITALS
The following table sets forth information relating to the private surgical
hospitals that we operate as of the date of this prospectus:
<Table>
<Caption>
DATE OF
ACQUISITION NUMBER OF PERCENTAGE
OR OPERATING NUMBER OF OWNED BY
FACILITY AFFILIATION ROOMS BEDS USPI
-------- ----------- --------- --------- ----------
UNITED STATES
TOPS Specialty Hospital, Houston, Texas............. 7/1/99 7 20 55%
SPAIN
Instituto Universitario Dexeus, Barcelona........... 4/30/98 12 106 79
Hospital Santa Teresa, La Coruna.................... 11/5/98 5 133 96
Hospital Sagrado Corazon, Seville................... 10/16/98 9 95 100
Clinica Nuestra Senora de la Esperanza, Vitoria..... 10/5/98 3 19 100
Clinica San Camilo, Madrid.......................... 3/15/00 8 130 97
Clinica San Jose, Madrid............................ 11/1/00 7 72 100
Juan XXIII, Madrid(1)............................... 2/1/00 -- -- 100
UNITED KINGDOM
Parkside Hospital, Wimbledon........................ 4/6/00 4 69 100
Holly House Hospital, Essex......................... 4/6/00 3 59 100
</Table>
- --------------
(1) Imaging center only.
We own the buildings and property of three of our surgery centers and lease
all other facilities where our various surgery centers and private surgical
hospitals conduct their operations. Our leases have initial terms ranging from
one to twenty years and most of the leases contain options to extend the lease
period for up to ten additional years.
Our corporate headquarters are located in Dallas, Texas. We currently lease
approximately 25,000 square feet of space at 15305 Dallas Parkway, Addison,
Texas. This lease will expire in 2011.
Our office in the United Kingdom is located in London. We currently lease
1,900 square feet. The lease expires in February 2004.
Our Spanish offices are located in Madrid and Barcelona. We currently lease
2,600 square feet of space in Madrid. The lease expires in December 2002.
Additionally, we lease 2,800 square feet of space in Barcelona. The lease
expires in December 2002.
We also lease 13,504 square feet of space in Brentwood, Tennessee, which
serves as headquarters for the operations we acquired from OrthoLink. The lease
expires in November 2002.
64
<Page>
DEVELOPMENT
The following table sets forth information relating to facilities that are
currently under construction:
<Table>
<Caption>
EXPECTED NUMBER OF
OPENING OPERATING ROOMS/
FACILITY TYPE DATE BEDS
-------- ----------------- -------- ----------------
Toms River Surgery Center, Toms River, New
Jersey.......................................... Surgery Center 1Q 2002 4 ORs
Frisco Surgical Hospital, Frisco, Texas........... Surgical Hospital 3Q 2002 6 ORs/8 beds
Grapevine Surgery Center, Grapevine, Texas........ Surgery Center 1Q 2002 4 ORs
Lewisville Surgicare, Lewisville, Texas........... Surgery Center 2Q 2002 4 ORs
Cancer Treatment Center adjacent to Parkside
Hospital, Wimbledon, United Kingdom............. Cancer Center 4Q 2002 --
</Table>
We also intend to develop a surgical hospital in Chandler, Arizona which we
anticipate will open in the second quarter of 2003. In addition, we have
identified New York, New York and Nashville, Tennessee as markets for possible
future acquisition and development projects. Any acquisition or development in
these or other markets must meet our acquisition and development criteria. We
cannot assure you that we will be successful in developing facilities in any of
these markets.
ORTHOLINK
In February 2001, we acquired OrthoLink Physicians Corporation. In total, we
acquired ownership interests in seven additional surgery centers, six of which
OrthoLink manages. OrthoLink also manages two additional surgery centers in
which it has no ownership interests and provides specialized management services
for hospitals. Prior to the transaction, OrthoLink managed the practices of 207
physicians in eight markets working at 64 facilities in Colorado, Georgia, New
Mexico, Ohio, Tennessee and Wyoming. We did not acquire all of OrthoLink's
historical management services obligations. As a condition to our completing the
OrthoLink acquisition, we required that the affiliated physician groups assume
from OrthoLink various employment obligations, office leases and other
agreements previously held by OrthoLink in connection with the performance of
its management services. While we may enter into additional management services
agreements with physician groups, we do not intend to purchase the assets of any
of these groups.
MARKETING
Our sales and marketing efforts are directed primarily at physicians, which
are principally responsible for referring patients to our facilities. We market
our facilities to physicians by emphasizing (1) the high level of patient
satisfaction with our surgery centers, which is based on patient surveys we take
concerning our facilities, (2) the quality and responsiveness of our services,
and (3) the practice efficiencies provided by our facilities. In those U.S.
markets in which we have established a strategic alliance with a healthcare
system, we coordinate the marketing effort with the healthcare system and
generally benefit from this managed care strategy. We also directly negotiate
agreements with third-party payors, which generally focus on the pricing, number
of facilities in the market and affiliation with physician groups in a
particular market. Maintaining access to physicians and patients through
third-party payor contracting is essential for the economic viability of most of
our facilities.
COMPETITION
In all of our markets, we compete with other providers, including major
acute care hospitals. Hospitals have various competitive advantages over us,
including their established managed care contracts, community position,
physician loyalty and geographical convenience for physicians' in-patient and
out-patient practices. However, we believe that, in comparison to hospitals with
which we compete
65
<Page>
for managed care contracts, our surgery centers and private surgical hospitals
compete favorably on the basis of cost, quality, efficiency and responsiveness
to physician needs in a more comfortable environment for the patient.
We compete with other providers in each of our markets for patients and for
contracts with insurers or managed care payors. Competition for managed care
contracts with other providers is focused on the pricing, number of facilities
in the market and affiliation with key physician groups in a particular market.
We also encounter competition with other companies for acquisition and
development of facilities and in the United States for strategic relationships
with healthcare systems and physicians.
There are several large, publicly-held companies, or divisions or
subsidiaries of large publicly-held companies, that acquire and develop
freestanding multi-specialty surgery centers and private surgical hospitals.
Some of these competitors have greater resources than we do. The principal
competitive factors that affect our ability and the ability of our competitors
to acquire surgery centers and private surgical hospitals are price, experience
and reputation and access to capital. Further, in the United States some
physician groups develop surgery centers without a corporate partner. It is
generally difficult, however, for a single practice to create effectively the
efficient operations and marketing programs necessary to compete with other
provider networks and companies. As a result, and also due to the financial
investment necessary to develop surgery centers and private surgical hospitals,
many healthcare systems and physician groups are attracted to corporate partners
such as us.
In the United Kingdom, we face competition from both the national health
service and other privately operated hospitals, including hospitals owned by the
BUPA Group, our primary competitor in the United Kingdom. Across the United
Kingdom, a large number of private hospitals are owned by the four largest
hospital operators. In addition, the two largest payors account for over half of
the privately insured market. We believe our hospitals can effectively compete
in this market due to location and specialty mix of our facilities. Our
hospitals also have a higher portion of self pay business than the overall
market. Self pay business is not influenced by the private insurers.
In Spain, we face competition from several privately held independent
hospitals and a few networks of hospitals that are owned by insurance companies.
Insurance companies that own hospitals have the benefit of a captured market of
their insured, including hospitals owned by Adesla, our primary competitor in
Spain. These insurance companies compete with us in acquisitions of
strategically placed hospitals in major cities. Other hospital networks are
attempting to replicate our model and have begun to compete with us in the
acquisition of hospitals. The acquisition of hospitals in Spain is greatly
affected by price. In our experience, sellers are typically the physicians that
have built the hospitals, and most physicians prefer an independent position in
a market rather than becoming a provider for an insurance company. We focus our
efforts on partnering with physicians and assisting them in growing their
business and medical practices by encouraging group rather than individual
practices.
Our hospitals compete with other providers in the Spanish market, including
other private hospitals and hospitals operated by Spain's national health
service. The national health coverage makes the hospitals operated by Spain's
national health service accessible to the entire Spanish population. In
contrast, private hospitals such as ours must negotiate agreements with
third-party payors, which focus on services available to their members as well
as pricing. We believe that the size of our operations in Spain will give us the
ability to negotiate effectively with insurance companies.
EMPLOYEES
We employ approximately 2,600 persons, 2,250 of whom are full-time employees
and 350 of whom are part-time employees. Of these employees, we employ
approximately 800 in the United States, 600 in the United Kingdom and 1,200 in
Spain. The physicians that affiliate with us and use our facilities
66
<Page>
are not our employees. However, we generally offer the physicians the
opportunity to purchase equity interests in the facilities they use.
LEGAL PROCEEDINGS AND INSURANCE
From time to time, we may be named 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 impact on
us.
In the United States, we maintain professional liability insurance that
provides coverage on a claims made basis of $1.0 million per incident and $3.0
million in annual aggregate amount per location. We also maintain general
liability insurance coverage of $1.0 million per occurrence and $2.0 million in
annual aggregate amount per location, as well as business interruption insurance
and property damage insurance. In addition, we maintain umbrella liability
insurance in the aggregate amount of $10.0 million. In the United Kingdom, we
maintain general public insurance in the amount of $5.0 million, malpractice
insurance in the amount of $3.0 million and property and business interruption
insurance. In Spain, we maintain property damage insurance in the amount of
$30.0 million and general liability insurance coverage of $550,000 per accident
and victim per year, per facility and $2.2 million at the group level. The
governing documents of each of our surgery centers require physicians who
conduct surgical procedures at our surgery centers to maintain stated amounts of
insurance.
GOVERNMENT REGULATION
UNITED STATES
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 surgery centers and private surgical hospitals,
offering services or making capital expenditures in excess of statutory
thresholds for healthcare equipment, facilities or programs. We may become
subject to additional burdensome 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 previously 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
67
<Page>
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.
LICENSURE AND CERTIFICATE OF NEED REGULATIONS
Capital expenditures for the construction of new facilities, the addition of
beds 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 surgery centers and private 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 are also subject to state and local licensing
regulations ranging from the adequacy of medical care to compliance with
building codes and environmental protection laws. To assure continued compliance
with these regulations, governmental and other authorities periodically inspect
our facilities. The failure to comply with these regulations could result in the
suspension or revocation of a healthcare facility's license.
Our healthcare facilities receive accreditation from the Joint Commission on
Accreditation of Healthcare Organizations or the Accreditation Association for
Ambulatory Health Care, Inc., nationwide commissions which establish standards
relating to the physical plant, administration, quality of patient care and
operation of medical staffs of various types of healthcare facilities.
Generally, our healthcare facilities must be in operation for at least six
months before they are eligible for accreditation. As of December 31, 2001, all
but our four most recently opened healthcare facilities had been accredited by
either the Joint Commission on Accreditation of Healthcare Organizations or the
Accreditation Association for Ambulatory Health Care, Inc. 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 SURGERY CENTERS
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 provide
payment for surgery center services. All of the states in which we currently
operate cover Medicaid surgery center services; however, these states may not
continue to cover surgery center services and states into which we expand our
operations may not cover or continue to cover surgery center services.
68
<Page>
Medicare payments for procedures performed at surgery centers are not based
on costs or reasonable charges. Instead, Medicare prospectively determines fixed
payment amounts for procedures performed at surgery centers. These amounts are
adjusted for regional wage variations. The various state Medicaid programs also
pay us a fixed payment for our services, which amount varies from state to
state. A portion of our revenues are attributable to payments received from the
Medicare and Medicaid programs. For the years ended December 31, 1999 and 2000
and the nine months ended September 30, 2001, 19%, 18% and 20%, respectively, of
our domestic revenues were attributable to Medicare and Medicaid payments.
To participate in the Medicare program and receive Medicare payment, our
facilities must comply with regulations promulgated by the Department of Health
and Human Services. Among other things, these regulations, known as "conditions
of participation," relate to the type of facility, its equipment, its personnel
and its standards of medical care, as well as compliance with state and local
laws and regulations. Our surgery centers must also satisfy the conditions of
participation in order to be eligible to participate in the Medicaid program.
All of our surgery centers and private surgical hospitals in the United States
are certified or awaiting certification to participate in the Medicare program.
These facilities are subject to annual on-site surveys to maintain their
certification. Failure to comply with Medicare's conditions of participation may
result in loss of program payment or other governmental sanctions. We have
established ongoing quality assurance activities to monitor and ensure our
facilities' compliance with these conditions of participation.
As with most government programs, the Medicare and Medicaid 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
surgery centers. Reductions or changes in Medicare or Medicaid funding could
significantly affect our results of operations. We cannot predict at this time
whether additional healthcare reform initiatives will be implemented or whether
there will be other changes in the administration of government healthcare
programs or the interpretation of government policies that would adversely
affect our business.
FEDERAL ANTI-KICKBACK AND PHYSICIAN SELF-REFERRAL 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 in
this prospectus as the Anti-Kickback Statute, that prohibits offering, paying,
soliciting, or receiving any form of remuneration in return for:
- referring patients for services or items payable under a federal
healthcare program, including Medicare or Medicaid, or
- 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.
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, including the Medicare and Medicaid
programs. The applicability of these provisions to many business transactions in
the healthcare industry has not yet been subject to judicial or regulatory
interpretation.
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 increased 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
69
<Page>
ventures involving physicians and other referral sources. In 1989, the Office of
the Inspector General published a fraud alert that outlined questionable
features of "suspect" joint ventures, and the Office of the Inspector General
has continued to rely on fraud alerts in later pronouncements. The Office of the
Inspector General has also published regulations containing numerous "safe
harbors" that exempt some practices from enforcement under the Anti-Kickback
Statute. These safe harbor regulations, if fully complied with, assure
participants in particular types of arrangements that the Office of the
Inspector General will not treat their participation as a violation of the
Anti-Kickback Statute. The 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 a safe harbor may subject an
arrangement to increased scrutiny.
Our partnerships and limited liability companies that are providers of
services under the Medicare and Medicaid programs, and their respective limited
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 safe harbor regulations issued by the
Office of the Inspector General. Of our 38 surgical facilities in the United
States, 35 are owned by partnerships or limited liability companies, which
include as partners or members physicians who perform surgical or other
procedures at the facilities.
On November 19, 1999, the Office of the Inspector General promulgated rules
setting forth additional safe harbors under the Anti-Kickback Statute. The new
safe harbors include a safe harbor applicable to surgery centers, referred to in
this prospectus as the "surgery center safe harbor." 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, the following
standards, among others, apply:
(1) all of the investors must be physicians who are in a position to refer
patients directly to the center and perform procedures on the referred patients,
group practices composed exclusively of those physicians, or investors who are
not employed by the entity or by any of its investors, 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 or indirectly to the entity
or any of its investors;
(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 a surgery center or
private 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 surgery center in which
the investment is made.
Similar standards apply to each of the remaining three categories of surgery
centers set forth in the regulations. In particular, each of the four categories
includes a requirement that no ownership interests be held by a non-physician or
non-hospital investor if that investor is employed by the center or another
investor, is in a position to provide items or services to the center or any of
its other
70
<Page>
investors, or is in a position to make or influence referrals directly or
indirectly to the center or any of its investors.
Since one of our subsidiaries is an investor in each partnership or limited
liability company that owns one of our 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 surgery center safe harbor or any other safe harbor.
In addition, 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 you no assurances that these ownership interests will not be challenged
under the Anti-Kickback Statute. However, we believe that our arrangements
involving physician ownership interests in our surgery centers should not fall
within the activities prohibited by the Anti-Kickback Statute.
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.
Section 1877 of the Social Security Act, commonly known as the "Stark Law,"
prohibits physicians, subject to the exceptions described below, from referring
Medicare or Medicaid patients to any entity providing "designated health
services" in which the physician or an immediate family member has an ownership
or investment interest or with which the physician or an immediate family member
has entered into a compensation arrangement. These prohibitions, contained in
the Omnibus Budget Reconciliation Act of 1993, commonly known as "Stark II,"
amended prior federal physician self-referral legislation known as "Stark I" by
expanding the list of designated health services to a total of eleven categories
of health services. 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 $100,000 for participation in a "circumvention
scheme" and exclusion from the Medicare and Medicaid programs. In addition, the
Stark Law requires the refund of any Medicare and Medicaid payments received for
designated health services that resulted from a prohibited referral.
Ambulatory surgery is not specifically enumerated as a health service
subject to this prohibition; however, some of the eleven designated health
services under the Stark Law are among the specific services furnished by our
surgery facilities. Final regulations interpreting Stark I, often referred to as
the "Stark I regulations," were issued on August 14, 1995. On January 4, 2001
the Department of Health and Human Services published "Phase I" of the final
regulations interpreting Stark II and modifying the Stark I regulations. The
Department of Health and Human Services anticipates publishing "Phase II" of the
regulations in the near future. The Phase I regulations, which in general are
scheduled to take effect on January 4, 2002, address some of the ownership and
investment interest exceptions and compensation arrangement exceptions found in
the Stark Law. Under the Stark I regulations, clinical laboratory services
provided by a surgery center are excepted from the Stark Law's self-referral
prohibition, if these services are included in the surgery center's composite
Medicare payment rate. The Phase I regulations take a different approach and
exclude from the definition of "designated health services" any designated
health services provided by a surgery center, if the services
71
<Page>
are included in the surgery center's composite Medicare payment rate. Therefore,
under the Phase I regulations, the Stark Law's self-referral prohibition does
not apply to designated health services provided by a surgery center, unless the
surgery center separately bills Medicare for the services. We believe that our
operations do not violate the Stark Law, as currently interpreted. However, the
Department of Health and Human Services has indicated that it will further
address the exception relating to services provided by a surgery center in
Phase II of the regulations. Therefore, we cannot assure you that future
regulatory changes will not result in us becoming subject to the Stark Law's
self-referral prohibition.
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. While the criminal statutes are generally reserved for instances of
fraudulent intent, 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
merely 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 United States government. The
statute defines "knowingly" to include not only actual knowledge of a claims
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, a billing error or cost reporting error could
result in significant civil or criminal penalties.
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 any
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 be
excluded from the Medicare and Medicaid programs as a result of an investigation
resulting from a whistleblower case. 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. 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 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
72
<Page>
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 upon
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 PRACTICES
The Health Insurance Portability and Accountability Act of 1996 contains,
among other measures, provisions that may require many organizations, including
us, to implement very significant and potentially expensive new computer systems
and business procedures designed to protect each patient's individual healthcare
information. The Health Insurance Portability and Accountability Act of 1996
requires the Department of Health and Human Services to issue rules to define
and implement patient privacy standards. Among the standards that the Department
of Health and Human Services will adopt pursuant to the Health Insurance
Portability and Accountability Act of 1996 are standards for the following:
- electronic transactions and code sets;
- unique identifiers for providers, employers, health plans and individuals;
- security and electronic signatures;
- privacy; and
- enforcement.
On August 17, 2000, the Department of Health and Human Services finalized
the new transaction standards. The recently enacted Administrative
Simplification and Compliance Act extends the date by which we must comply with
the transaction standards to October 16, 2003, provided we submit a compliance
plan to the Secretary of Health and Human Services by October 16, 2002. The
transaction standards will 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.
On August 12, 1998, the Department of Health and Human Services issued a
proposed rule that establishes, 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 would be an affected entity under the proposed 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, we expect that the security standards will require us
to implement significant systems.
On December 28, 2000, the Department of Health and Human Services published
a final rule establishing standards for the privacy of individually identifiable
health information. These privacy standards apply to all health plans, all
healthcare clearinghouses and many healthcare providers,
73
<Page>
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 apply to 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.
The final rule establishing the privacy standards became effective on April
14, 2001, with compliance required by April 14, 2003. The security regulations
under the Health Insurance Portability and Accountability Act of 1996 are
currently scheduled to be finalized by the Department of Health and Human
Services in the near future. Once the security regulations are issued in final
form, we will have approximately two years to become fully compliant.
We expect that compliance with these standards will require significant
commitment and action by us. We have appointed members of our management team to
direct our compliance with these standards. Although we and other covered
entities generally are not required to be in compliance with these standards
until two years following the effective date of the final rules issued or to be
issued by the Department of Health and Human Services, implementation will
require us to conduct extensive preparation and make significant expenditures.
Because the security standards are proposed regulations, we cannot predict the
total financial impact of the regulations on our operations.
EUROPEAN UNION
The European Commission's Directive on Data Privacy went into effect in
October 1998 and prohibits the transfer of personal data to non-European Union
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 databases
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, recently 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. 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 formulate and execute programs that will 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.
74
<Page>
SPAIN
Under the Spanish General Health Act and related regulations, private
hospitals must report periodically to the applicable health authorities. These
reports, which describe a hospital's activities, provide a method to identify
and control epidemics. Private hospitals in Spain must obtain a number of
licenses, permits and authorizations, including those required to begin
operating the facility and to dispense drugs. In addition, private hospitals are
subject to regular inspections by the health and administrative authorities to
ensure compliance with applicable regulations. Private hospitals must register
their personal databases with the Data Protection Agency. The Law of Personal
Data Protection provides specific protection for the health information portion
of this personal data. Private hospitals must adopt the necessary measures to
ensure the safety of the personal data. Violations of these regulations could
subject the hospital to administrative fines and civil and criminal liability.
Administrative fines range from 500,000 Pesetas (approximately $2,700) to
100,000,000 Pesetas (approximately $540,000), or five times the value of the
products and services that are the subject of the violation, depending on the
seriousness of the violation. Health and administrative authorities may also
close a private hospital for up to five years for serious violations. A
violation that endangers the public health is a criminal offense. We believe
that our operations in Spain are in material compliance with the laws referred
to in this paragraph.
UNITED KINGDOM
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 private surgical 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. Private surgical hospitals in the United Kingdom are required to
register with the local Social Services Authority pursuant to the Registered
Homes Act 1984, which provides for regular inspections of the facility by the
registering authority. The operation of a private surgical 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
private surgical hospitals to register as "data controllers." The processing of
personal data, such as patient information and medical records, without prior
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.
75
<Page>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the directors and
executive officers of our parent, United Surgical Partners International, Inc.
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- ----------------------------------------------------------
Donald E. Steen(1).......... 55 Chief Executive Officer and Chairman of the Board
William H. Wilcox(2)........ 49 President and Director
Sue H. Shelley.............. 47 Executive Vice President
Mark A. Kopser(3)........... 37 Senior Vice President and Chief Financial Officer
John J. Wellik(4)........... 40 Vice President, Controller, Compliance Officer and
Secretary
Dave A. Alexander, Jr., 50 Director
M.D.........................
Dale L. Stegall............. 55 Senior Vice President and General Counsel
John C. Garrett, M.D........ 59 Director
D. Scott Mackesy(6)......... 33 Director
Thomas L. Mills(5).......... 54 Director
Boone Powell, Jr.(6)........ 64 Director
Paul B. Queally(6).......... 37 Director
David P. Zarin, M.D.(5)..... 53 Director
James C. Crews(5)(7)........ 64 Director
</Table>
- --------------
(1) Also the chief executive officer and sole director of United Surgical
Partners Holdings, Inc.
(2) Also the president of United Surgical Partners Holdings, Inc.
(3) Also the senior vice president of United Surgical Partners Holdings, Inc.
(4) Also the vice president, treasurer and secretary of United Surgical Partners
Holdings, Inc.
(5) Member of our parent's audit committee.
(6) Member of our parent's options and compensation committee.
(7) Mr. Crews was appointed to our parent's board of directors on December 17,
2001 to fill a vacancy created when Carlos A. Ferrer resigned from our
parent's board of directors on December 17, 2001.
KEY EMPLOYEES
The following table sets forth information with respect to certain key
employees of our parent.
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- ----------------------------------------------------------
Jonathan R. Bond............ 43 Senior Vice President, Operations
Mark Garvin................. 37 Senior Vice President, Operations
Brett Brodnax............... 37 Senior Vice President, Development
Gabriel Masfurroll.......... 48 President of Spanish operations
Pat McCann.................. 50 Managing Director of United Kingdom operations
</Table>
DONALD E. STEEN founded our parent in February 1998 and has been the chief
executive officer and chairman of our parent since that time. Mr. Steen served
as president of the International Group of HCA--The Healthcare Company, formerly
known as Columbia/HCA Healthcare Corporation, from 1995 until 1997 and as
president of the Western Group of HCA from 1994 until 1995. Mr. Steen founded
Medical Care International, Inc., a pioneer in the surgery center business, in
1982. Mr. Steen is also a member of the board of directors of Horizon Health
Corporation, Kinetic Concepts, Inc. and Medcath Corporation.
76
<Page>
WILLIAM H. WILCOX joined us as the president and a director of our parent in
September 1998. Mr. Wilcox served as president and chief executive officer of
United Dental Care, Inc. from 1996 until joining us. 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.
SUE H. SHELLEY is a founder of our parent and has been the executive vice
president of our parent since September 1999. Ms. Shelley served as the senior
vice president of our parent from February 1998 until September 1999 and as one
of the directors of our parent from October 1998 until May 1999. Ms. Shelley
served as a private healthcare consultant from August 1995 until February 1998.
Ms. Shelley also served as vice president, Strategic Operations and Development
for the Western Group of HCA from 1994 until 1995.
MARK A. KOPSER joined us as the senior vice president and chief financial
officer of our parent in May 2000. Prior to that time, 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.
JOHN J. WELLIK is the vice president, controller, compliance officer and
secretary of our parent. Prior to joining us in April 1999, Mr. Wellik served as
vice president and controller for Dynamex, Inc., a transportation services
company, from November 1997 until February 1999. Mr. Wellik also served as an
assistant controller for American Pad & Paper Company from May 1997 until
November 1997. Mr. Wellik served in various accounting management positions,
including director of financial accounting, for Avnet, Inc., an electronics
distributor, from July 1993 until February 1997.
DAVE A. ALEXANDER, JR., M.D. joined us as a director of our parent in
February 2001. Prior to joining us, Dr. Alexander was the chairman and a
director of OrthoLink since it was founded in July 1996. From 1992 to 1996, Dr.
Alexander served as president of Tennessee Orthopedic Alliance. Dr. Alexander
has been in private practice of orthopedics in Nashville, Tennessee since 1982.
Dr. Alexander is a Fellow of the American Academy of Orthopedic Surgeons and
holds a Surgery Certificate of Added Qualification in Surgery of the Hand.
DALE L. STEGALL joined us as the chief administrative officer of OrthoLink
in February 2001 and was appointed senior vice president and general counsel of
our parent in August 2001. Mr. Stegall was a founder of OrthoLink and served as
OrthoLink's senior vice president, general counsel and secretary from its
inception in 1996 until February 2001. From 1973 to 1996, Mr. Stegall was in the
private practice of law and a healthcare consultant in Nashville, Tennessee.
JOHN C. GARRETT, M.D. joined us as a director of our parent in February
2001. Mr. Garrett had been a director of OrthoLink since July 1997. Dr. Garrett
founded Resurgens, P.C. in 1986, where he continues his specialized orthopedics
practice in arthroscopic and reconstructive knee surgery. He is a Fellow of the
American Academy of Orthopedic Surgeons.
D. SCOTT MACKESY has served as one of the directors of our parent since our
inception in February 1998. Mr. Mackesy has been a principal with Welsh, Carson,
Anderson & Stowe since January 1998. Prior to joining Welsh, Carson, Anderson &
Stowe, Mr. Mackesy was senior research analyst and vice president in the
Investment Research Department at Morgan Stanley Dean Witter from January 1996
to January 1998. Mr. Mackesy is also on the board of directors of Pediatrix
Medical Group, Inc. and six other private companies.
THOMAS L. MILLS has served as one of the directors of our parent since
September 1999. Mr. Mills is the chairman of our parent's audit committee. Mr.
Mills has been a partner in the law firm of Winston & Strawn since 1995,
specializing in health law.
77
<Page>
BOONE POWELL, JR. has served as one of the directors of our parent since
June 1999. Mr. Powell is the chairman of Baylor Health Care System and served as
its president and chief executive officer from 1980 until 2000.
PAUL B. QUEALLY has served as one of the directors of our parent since our
inception in February 1998. Mr. Queally has been a general partner at Welsh,
Carson, Anderson & Stowe since January 1996. Prior to joining Welsh, Carson,
Anderson & Stowe, Mr. Queally was a general partner at The Sprout Group, which
was the private equity group of Donaldson, Lufkin & Jenrette Securities
Corporation.
DAVID P. ZARIN, M.D. has served as one of the directors of our parent since
February 2000. Dr. Zarin has practiced otolaryngology in Houston, Texas since
1979. Dr. Zarin was a founding partner and serves as vice president of Texas ENT
Specialists, PA, formed in 1997. Dr. Zarin was also a founding partner and a
director of TOPS Surgical Specialty Hospital, which we acquired in July 1999.
Dr. Zarin has served as chairman and president of the medical staff of TOPS
Specialty Hospital since 1999.
JAMES C. CREWS was appointed to our parent's board of directors on
December 17, 2001. Mr. Crews retired in May 2000 from Banner Health Arizona
where he was Chief Executive Officer from September 1999 to his retirement. From
1991 to 1999, Mr. Crews served as President and Chief Executive Officer at
Samaritan Health System in Phoenix, Arizona.
JONATHAN R. BOND joined us as senior vice president, operations of our
parent in April 1999. Prior to that time, Mr. Bond served as senior vice
president for the Surgery Division of Physician Resource Group, Inc. from
November 1995 until April 1999.
MARK GARVIN joined us as senior vice president, operations of our parent in
February 2001. Mr. Garvin joined OrthoLink in 1996, serving in various senior
management positions until 1999, when he became OrthoLink's senior vice
president, surgical operations. From 1992 to 1996, Mr. Garvin was vice
president, operations, with the surgery division of HealthSouth Corporation.
BRETT BRODNAX is the senior vice president, development of our parent. Prior
to joining us in December 1999, Mr. Brodnax was an assistant vice president for
Baylor Healthcare System from May 1990 until December 1999.
GABRIEL MASFURROLL has been the president of United Surgical Partners
Europe, S.L., our wholly owned Spanish subsidiary through which we conduct our
operations in Spain, since April 1998. From 1996 to 1998, Mr. Masfurroll was
president and chief executive officer of HCA's Spanish subsidiary. From 1994 to
1996, Mr. Masfurroll served as a director of the hospital division of Sanitas,
S.A., the second largest Spanish health insurance company and an affiliate of
the BUPA Group, Britain's largest insurance company. From 1991 to 1993, Mr.
Masfurroll was a healthcare consultant with GESGRUP.
PAT MCCANN is the managing director of our United Kingdom operations. Prior
to joining us in April 2001, Ms. McCann served as chief executive officer of
HCA's Harley Street Clinic in London since October 1998. Prior to that time
Ms. McCann served as chief executive officer of a large NHS University Hospital
in London.
BOARD OF DIRECTORS
Our parent's board of directors is divided into three classes serving
staggered three-year terms. Each year, the directors of one class stand for
election as their terms of office expire. Messrs. Crews, Garrett and Wilcox have
been designated as Class I directors with their terms of office expiring in
2002; Messrs. Alexander, Mackesy and Zarin have been designated as Class II
directors with their terms of office expiring in 2003; and Messrs. Mills,
Powell, Queally and Steen have been designated as Class III directors with their
terms of office expiring in 2004.
78
<Page>
BOARD COMPENSATION
Directors who are also officers or employees of our parent do not receive
compensation for their services as directors. Each non-employee director who has
not previously been granted options to purchase the common stock of our parent
is entitled to an award of stock options to purchase up to 8,333 shares of the
common stock of our parent when he becomes a non-employee director, at an
exercise price equal to the fair market value of our parent's common stock on
the date of grant. In each case, the stock options granted to the non-employee
directors will have a three-year vesting schedule. Directors who are not
affiliates or employees of a stockholder owning five percent or more of the
outstanding common stock of our parent are entitled to a $2,500 fee for
attendance at meetings of the board of directors or committees thereof and all
directors are entitled to reimbursement of their reasonable out-of-pocket
expenses in connection with their travel to and attendance at meetings of the
board of directors or committees thereof.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our parent has entered into agreements to indemnify its directors and
executive officers. Under these agreements, our parent is obligated to indemnify
our directors and officers to the fullest extent permitted under the Delaware
General Corporate Law for expenses, including attorneys' fees, judgments, fines
and settlement amounts incurred by them in any action or proceeding arising out
of their services as a director or officer. We believe that these agreements are
helpful in attracting and retaining qualified directors and officers.
COMPENSATION OF EXECUTIVE OFFICERS
The following table contains summary information concerning the total
compensation paid to or earned for the fiscal year ended December 31, 2001 by
the chief executive officer and by the four other most highly compensated
executive officers of our parent serving in this capacity as of December 31,
2001, whose total annual salary and bonus exceeded $100,000 for that fiscal
year. We refer to these persons as the "named executive officers."
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) (#) ($)
- --------------------------- -------- -------- ------------ ------------
Donald E. Steen................................... 400,000 (1) 100,000 5,250(2)
Chief Executive Officer
and Chairman of the Board
William H. Wilcox................................. 350,000 (1) 146,666 5,250(2)
President
Sue H. Shelley....................................
Executive Vice President 165,375 (1) -- 3,041(2)
Mark A. Kopser....................................
Senior Vice President 211,250 (1) 45,000 --
Dale L. Stegall...................................
Senior Vice President and
General Counsel 250,274 (1) 36,666 5,250(2)
</Table>
- --------------
(1) Bonuses will be based upon our final audited earnings for the year ended
December 31, 2001, which are not available as of the date of this
prospectus.
(2) Consists of contributions to the named executive officer's 401(k) plan
account.
79
<Page>
The following table provides information regarding stock options granted to
the named executive officers in 2001.
OPTION GRANTS IN 2001
<Table>
<Caption>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------- VALUES AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL EXERCISE STOCK PRICE
UNDERLYING OPTIONS GRANTED PRICE APPRECIATION FOR
OPTIONS TO OR BASE OPTION TERM(2)
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#) FISCAL YEAR ($/SHARE)(1) DATE 5% 10%
- ---- ---------- ----------------- ------------ ---------- --------- ---------
Donald E. Steen.................... 100,000 8.1% 20.65 8/6/11 1,299,000 3,291,000
William H. Wilcox.................. 66,666 5.4% 14.00 2/1/11 587,000 1,487,000
80,000 6.5% 20.65 8/6/11 976,000 2,474,000
Sue H. Shelley..................... -- -- -- -- -- --
Mark A. Kopser..................... 45,000 3.6% 20.65 8/6/11 584,000 1,481,000
Dale L. Stegall.................... 26,666 2.2% 13.50 3/1/11 226,000 574,000
10,000 0.8% 15.00 6/8/11 96,000 242,000
</Table>
- ----------------
(1) The exercise price is based on the fair market value of the underlying
common stock on the date of grant, as reasonably determined by the options
and compensation committee based on, among other things, available
information regarding recent sales of common stock.
(2) In accordance with the rules of the Securities and Exchange Commission,
shown are the gains or "option spreads" that would exist for the respective
options granted. These gains are based on the assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option was
granted over the full option term. These assumed annual compound rates of
stock price appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent our estimate or projection of our
parent's future common stock prices.
The following table provides summary information with respect to stock
options held by the named executive officers as of December 31, 2001.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Donald E. Steen...................... -- -- 244,992 307,772 3,061,626 2,147,753
William H. Wilcox.................... -- -- 217,496 245,832 2,545,064 1,519,030
Sue H. Shelley....................... -- -- 65,000 18,333 872,250 240,246
Mark A. Kopser....................... -- -- 29,168 132,498 285,637 879,357
Dale L. Stegall...................... 27,533 301,487 -- 36,666 -- 265,495
</Table>
COMMITTEES OF THE BOARD
Our parent's board of directors has established an audit committee and an
options and compensation committee.
AUDIT COMMITTEE. The audit committee is comprised of Messrs. Crews, Mills
and Zarin. The audit committee reports on its activities to the board of
directors and is responsible for reviewing:
- the recommendation to our parent's board of directors of the appointment
of our parent's independent auditors;
- the independence of our parent's outside auditors;
80
<Page>
- the scope, timing and results of the audit and non-audit services
performed by our parent's independent auditors;
- the audit committee charter of our parent on an annual basis;
- the appropriateness of our parent's accounting policies;
- the adequacy of our parent's accounting and financial controls;
- compliance with our parent's accounting policies and accounting and
financial controls;
- the reliability of the financial information that our parent reports to
the public; and
- the proxy statement disclosures required by the audit committee.
OPTIONS AND COMPENSATION COMMITTEE. The options and compensation committee
is comprised of Messrs. Mackesy, Powell and Queally. The primary functions of
the options and compensation committee are to:
- review and recommend the compensation arrangements for our parent's
directors and officers; and
- monitor and administer our parent's stock option plans.
EMPLOYMENT AGREEMENTS
DONALD E. STEEN. On November 1, 2000, our parent entered into a four-year
employment agreement with Donald E. Steen that provides that he will serve as
the chairman and chief executive officer of our parent. The employment agreement
provides for annual base compensation of $400,000. Mr. Steen is also eligible
for a performance bonus of up to 100% of his annual base salary. During any time
when Mr. Steen is no longer serving as chief executive officer and, therefore,
only serving as chairman, his annual base compensation would be reduced by
$100,000. The employment agreement provides that, at any time after November 1,
2002, Mr. Steen is entitled to resign and that our parent's board of directors
is entitled to remove Mr. Steen from his position as chief executive officer,
but not as chairman of the board of directors. In the event that our parent
terminates the employment agreement other than for cause, Mr. Steen would be
entitled to receive his annual base salary plus the average annual bonus, if
any, awarded to Mr. Steen for the prior two calendar years until the later of 12
months following termination or the expiration of the initial four-year term of
the agreement. The employment agreement further provides that all of Mr. Steen's
stock options automatically become fully vested if our parent terminates the
agreement for any reason other than for cause.
WILLIAM H. WILCOX. On January 1, 2001, our parent entered into a two-year
employment agreement with William H. Wilcox that provides that he will serve as
the president of our parent. The employment agreement provides for annual base
compensation of $350,000. Mr. Wilcox is also eligible for a performance bonus of
up to 100% of his base salary. In the event that our parent terminates the
employment agreement other than for cause, Mr. Wilcox would be entitled to
receive his annual base salary plus the average annual bonus, if any, awarded to
Mr. Wilcox for the prior two calendar years until the later of 12 months
following termination or the expiration of the initial two-year term of the
agreement. The employment agreement further provides that if our parent
terminates the agreement for any reason other than for cause all of Mr. Wilcox's
stock options automatically become fully vested.
2001 EQUITY-BASED COMPENSATION PLAN
Our parent adopted its 2001 Equity-Based Compensation Plan on February 13,
2001. At any given time, the number of shares of our parent's common stock
issued and issuable, upon the exercise of outstanding and future awards or the
lapse of forfeiture restrictions for outstanding and future awards, under the
plan may not exceed the lesser of 300,000,000 shares or 12.5% of the total
number of shares
81
<Page>
of common stock then outstanding, assuming the exercise of all outstanding
options and warrants and the conversion of all securities convertible or
exchangeable into our parent's common stock. Shares of common stock relating to
forfeited awards will again be available for purposes of these share limitations
but not for purposes of share limitations imposed by Section 162(m) of the
Internal Revenue Code. The plan provides for grants of incentive stock options,
within the meaning of Section 422 of the Internal Revenue Code, to our
employees, including officers and employee-directors, and for grants of
nonstatutory stock options, restricted stock awards, stock appreciation rights,
phantom stock awards and annual incentive awards to our employees, consultants
and nonemployee directors. The purposes of the plan are:
- to attract and retain the best available personnel for positions of
substantial responsibility;
- to provide additional incentives to our parent's employees and
consultants; and
- to promote the success of our business.
Our parent's board of directors or options and compensation committee, to
the extent it is directed to do so by our board of directors, administers the
plan. Our parent's options and compensation committee will at all times will be
comprised of two or more individuals that constitute "outside directors" for
purposes of Section 162(m) of the Internal Revenue Code of 1986 and, in the
discretion of our parent's board of directors, "nonemployee directors" for
purposes of Rule 16b-3 under the Securities Exchange Act of 1934. Our parent's
board of directors or options and compensation committee will designate the
individuals to receive awards, the number of shares subject to the awards and
the terms and conditions of each award, subject to the terms of the plan.
While our parent's board of directors or options and compensation committee
determines the terms of awards granted under the plan, the term of any incentive
stock option cannot exceed ten years from the date of grant. Further, any
incentive stock option granted to an employee who possesses more than ten
percent of the total combined voting power of all classes of our parent's shares
within the meaning of Section 422(b)(6) of the Internal Revenue Code of 1986
cannot be exercisable after the expiration of five years from the date of grant.
While our parent's options and compensation committee determines the
exercise price of options granted under the plan, the exercise price of any
incentive stock option granted to an employee who possesses more than ten
percent of the total combined voting power of all classes of our parent's shares
within the meaning of Section 422(b)(6) of the Internal Revenue Code of 1986
must be at least 110% of the fair market value of the underlying share at the
time the option is granted. The exercise price of options granted under the plan
will be paid in full in a manner prescribed by our parent's options and
compensation committee.
The plan is not subject to the Employee Retirement Income Security Act of
1974; however, the plan is designed to allow for awards that constitute
performance-based awards as provided for in Section 162(m) of the Internal
Revenue Code of 1986. Therefore, awards may be exempt from the limitations on
the deductibility of compensation that exceeds $1 million.
EMPLOYEE STOCK PURCHASE PLAN
Our parent adopted its Employee Stock Purchase Plan on February 13, 2001. A
total of 500,000 shares of common stock are authorized for issuance under the
plan. The plan provides for the grant of stock options to selected eligible
employees. The purpose of the plan is to provide eligible employees with an
incentive to advance our interests by providing an opportunity to purchase stock
of our parent at a favorable price. The plan is administered by our parent's
options and compensation committee.
Any eligible employee may elect to participate in the plan by authorizing
our parent's options and compensation committee to make payroll deductions to
pay the exercise price of an option at the time
82
<Page>
and in the manner prescribed by our parent's options and compensation committee.
This payroll deduction may be a specific amount or a designated percentage to be
determined by the employee, but the specific amount may not be less than an
amount established by our parent and the designated percentage may not exceed an
amount of eligible compensation established by our parent from which the
deduction is made. In no event will an employee be granted an option under the
plan that would permit the purchase of stock with a fair market value in excess
of $25,000, or to purchase more than 5,000 shares in any six month period.
There are two six-month offering periods in each calendar year. The date of
grant and the date of exercise for the first option period is January 1 and June
30, respectively, and the date of grant and date of exercise for the second
option period is July 1 and December 31, respectively. The exercise price of
options granted under the plan will be an amount equal to the lesser of 85% of
the fair market value of our common stock on the date of exercise or on the date
of grant.
The plan is designed to comply with Section 423 of the Internal Revenue Code
and thus is eligible for the favorable tax treatment afforded by Section 423.
83
<Page>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
All of our issued and outstanding capital stock is owned by our parent,
United Surgical Partners International, Inc. The following table sets forth
certain information with respect to the beneficial ownership of United Surgical
Partners International's common stock as of December 31, 2001. As of
December 31, 2001, there were 24,161,893 shares of common stock outstanding. We
have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. Unless otherwise indicated, the persons
included in this table have sole voting and investment power with respect to all
the shares of common stock beneficially owned by them, subject to applicable
community property laws. The number of shares beneficially owned by a person
includes shares of common stock that are subject to stock options or warrants
that are either currently exercisable or exercisable within 60 days after
December 31, 2001. These shares are also deemed outstanding for the purpose of
computing the percentage of outstanding shares owned by the person. These shares
are not deemed outstanding, however, for the purpose of computing the percentage
ownership of any other person.
<Table>
<Caption>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT
- ------------------------ ---------------- --------
Welsh, Carson, Anderson & Stowe VII, L.P.................... 7,705,893(1) 31.54%
320 Park Avenue, Suite 2500
New York, NY 10022-9500
Donald E. Steen............................................. 609,646(2) 2.50%
William H. Wilcox........................................... 311,816(3) 1.28%
Mark A. Kopser.............................................. 72,488(4) *
Sue H. Shelley.............................................. 152,756(5) *
John J. Wellik.............................................. 19,586(6) *
Dave A. Alexander, Jr., M.D................................. 89,784(7) *
Dale L. Stegall............................................. 45,687(8) *
John C. Garrett, M.D........................................ 76,857 *
D. Scott Mackesy............................................ 2,866 *
Thomas L. Mills............................................. 4,167(9) *
Boone Powell, Jr............................................ -- --
Paul B. Queally............................................. 8,338,468(10) 34.13%
David P. Zarin, M.D......................................... 4,167(11) *
James C. Crews.............................................. 4,000 *
All directors and executive officers as a group (14
persons).................................................. 9,732,288(12) 38.82%
</Table>
- ------------------
* Less than one percent (1%).
(1) Includes 266,666 shares issuable upon exercise of outstanding warrants.
(2) Includes 244,992 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(3) Includes 217,496 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(4) Includes 29,168 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(5) Includes 65,000 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(6) Includes 8,751 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(7) Includes 62,932 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(8) Includes 6,667 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(9) Consists of 4,167 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(10) Includes (i) 500,000 shares held by WCAS Capital Partners III, L.P., (ii)
the shares held by Welsh, Carson, Anderson & Stowe VII, L.P. as previously
described in note (1), and (iii) 119,977 shares held by WCAS Healthcare
Partners. Mr. Queally is a general partner of each of WCAS Capital Partners
III, L.P., Welsh, Carson, Anderson & Stowe VII, L.P. and WCAS Healthcare
Partners, L.P., and has shared voting and dispositive power with respect to
the shares held by each of WCAS Capital Partners III, L.P., Welsh, Carson,
Anderson & Stowe VII, L.P. and WCAS Healthcare Partners, L.P.
(11) Consists of 4,167 shares issuable upon exercise of stock options that have
already vested or will vest within 60 days.
(12) Includes (i) 643,340 shares issuable upon exercise of stock options that
have already vested or will vest within 60 days and (ii) 266,666 shares
issuable upon exercise of outstanding warrants.
84
<Page>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
WARRANTS
Our parent issued a warrant, dated March 27, 2000, to Welsh, Carson,
Anderson & Stowe, a stockholder owning more than 5% of our parent's outstanding
common stock, to purchase 266,666 shares of our parent's common stock at an
exercise price of $.03 per share in connection with its purchase of shares of
our parent's Series C convertible preferred stock. The warrant will terminate on
June 18, 2009.
7% SENIOR SUBORDINATED NOTES
In November 1998, March 1999 and June 1999, our parent issued $16.0 million
principal amount of its 7% senior subordinated notes due April 30, 2008 to
Welsh, Carson, Anderson & Stowe and its affiliates, and $3.8 million principal
amount and $0.2 million principal amount, respectively, of its 7% senior
subordinated notes to FFT Partners I, L.P. and FFT Executive Partners I, L.P.,
affiliates of Carlos A. Ferrer, a former director of our parent. Our parent paid
to these entities $91,013, $1,271,811 and $1,567,222 in accrued interest on the
notes in 1999, 2000 and 2001, respectively. Upon the consummation of our
parent's initial public offering, Welsh, Carson, Anderson & Stowe, FFT Partners
I, L.P. and FFT Executive Partners I, L.P. exchanged the 7% senior subordinated
notes held by them for shares of our parent's Series D redeemable preferred
stock. We used approximately $21.1 million of the net proceeds from the offering
of the old notes to make a subordinated intercompany loan to our parent, which
used those loan proceeds to redeem all of its outstanding shares of Series D
redeemable preferred stock.
10% SENIOR SUBORDINATED NOTES
In March 2000, in connection with the issuance of 500,000 shares of our
parent's Class A common stock for an aggregate purchase price of $5,250,000, our
parent issued $36,000,000 principal amount of its 10% senior subordinated notes
due March 27, 2010, for a purchase price of $30,750,000 to WCAS Capital Partners
III, L.P., an affiliate of Welsh, Carson, Anderson & Stowe. Our parent paid no
interest on the notes in 2000 and paid $6,229,178 in interest in 2001. Upon the
consummation of our parent's initial public offering, the 10% senior
subordinated notes issued by our parent were exchanged for 10% senior
subordinated notes issued by our subsidiary, USP Domestic Holdings, Inc. We used
approximately $36.0 million of the net proceeds from the offering of the old
notes to make a subordinated intercompany loan to USP Domestic Holdings, which
used those loan proceeds to redeem all of its outstanding 10% senior
subordinated notes.
REGISTRATION RIGHTS AGREEMENT
Donald E. Steen, William H. Wilcox, Sue H. Shelley, Paul B. Queally, D.
Scott Mackesy, Dave A. Alexander, Jr., M.D., Dale L. Stegall, Mark Garvin, John
C. Garrett, M.D., Baylor Health Services, Welsh, Carson, Anderson & Stowe VII,
L.P., WCAS Healthcare Partners, L.P., WCAS Capital Partners III, L.P., FFT
Partners I, L.P. and FFT Executive Partners I, L.P. and other holders of our
parent's common stock are entitled under a registration rights agreement with
our parent to the following registration rights for the shares of common stock
held by them:
- at any time Welsh, Carson, Anderson & Stowe VII, L.P., on behalf of the
holders of registrable securities, may require, on two occasions only,
that our parent use its best efforts to register registrable securities
for public resale;
- holders of registrable securities under the agreement may require our
parent to use its best efforts to register their shares of common stock on
a Form S-3 registration statement, provided
85
<Page>
that our parent is eligible to use the form and provided further that our
parent shall not be required to effect the registration more than once in
any 180 day period; and
- if our parent registers any common stock at any time, either for its own
account or for the account of other security holders, holders of
registrable securities under the agreement are entitled to include their
shares of common stock in the registration, subject to the ability of the
underwriters to limit the number of shares included in the offering in
view of market conditions.
Our parent will bear all registration expenses other than underwriting
discounts and commissions in connection with any registration under the
registration rights agreement.
OTHER TRANSACTIONS
Our parent accepted promissory notes from the following executive officers
as partial consideration for the purchase by the executive officer of our
parent's common stock as set forth below:
<Table>
<Caption>
DATE OUTSTANDING
OF PRINCIPAL INTEREST BALANCE AS OF
EXECUTIVE OFFICER NOTE AMOUNT RATE DECEMBER 31, 2001
- ----------------- -------- --------- -------- -----------------
Sue H. Shelley................................... 4/30/98 $250,000 7% $250,000
William H. Wilcox................................ 10/31/98 400,000 7 (1)
John J. Wellik................................... 11/22/99 26,250 7 2,919
John J. Wellik................................... 8/15/00 52,500 7 52,500
Mark A. Kopser................................... 5/1/00 328,125 7 (1)
</Table>
- --------------
(1) This note was repaid prior to December 31, 2001.
Interest on the outstanding balance of the promissory notes is payable
quarterly. As a result of our parent's initial public offering in June 2001, the
principal under the notes became due on December 13, 2001. However, our parent
has agreed to extend this repayment date to March 31, 2002. Each promissory note
is secured by a pledge of the shares of our parent's common stock purchased with
the note.
On June 1, 1999, our parent issued a convertible subordinated promissory
note to Baylor Health Care System Foundation in the principal amount of
$3,287,234 in connection with Baylor's contribution of two surgery centers to
our joint venture with Baylor. The conversion price of the convertible
subordinated promissory note was $10.50 per share of common stock. Our
contribution and purchase agreement with Baylor contains an "earn-out" provision
under which Baylor could have received additional convertible promissory notes.
Under the earn-out provision, if earnings before interest, taxes, depreciation,
amortization and management fees of our limited partnership with Baylor exceed
stated amounts in the second and third years of the limited partnership, Baylor
would have been entitled to receive additional convertible subordinated notes in
an amount equal to 50% of the excess. The conversion price of any additional
convertible promissory notes would have been the greater of $10.50 per share or
the fair market value of the underlying common stock at the time the additional
convertible promissory note was issued. Immediately prior to the consummation of
our parent's initial public offering, Baylor converted the note into shares of
our parent's common stock. Boone Powell, Jr., one of our parent's directors, is
the chairman of the board of directors of Baylor and served as its president and
chief executive officer from 1980 until 2000. We derived approximately 7.7% of
our revenues from our joint venture with Baylor in 2000. For more information
regarding our joint venture with Baylor, see "Business--Operations--Operations
in the United States--Strategic Relationships."
Effective as of February 1, 2001, our parent granted options to purchase
66,666 shares of its common stock to William H. Wilcox. The exercise price of
the options is equal to $14.00, our parent's initial public offering price. If
our parent meets an earnings per share target in 2001, options with respect to
8,333 shares will vest on December 31 of each of 2003, 2004, 2005 and 2006. If
our parent meets an earnings per share target in 2002, options with respect to
11,111 shares will vest on December 31 of each of 2003, 2004 and 2005. If our
parent does not meet the earnings per share targets in 2001 and 2002, all of the
options become exercisable on February 1, 2007.
86
<Page>
DESCRIPTION OF CREDIT FACILITIES
AMENDED AND RESTATED CREDIT FACILITY
GENERAL. On December 19, 2001, we amended and restated our existing credit
agreement, entered into on June 13, 2001, with Credit Suisse First Boston, New
York branch, Lehman Commercial Paper Inc., New York branch, Societe Generale,
New York branch, Credit Suisse First Boston, as administrative agent, Lehman
Commercial Paper Inc., as syndication agent, and Societe Generale, as
documentation agent. The amended and restated credit facility allows us to
borrow up to $85.0 million through a revolving loan commitment and up to
$2.5 million through one or more standby letters of credit. The sum of of all
letters of credit and the aggregate principal amount of all revolving loans then
outstanding cannot exceed $85.0 million. The sum of all letters of credit and
the aggregate principal amount of all revolving loans outstanding cannot exceed
$85.0 million. This credit facility matures on December 19, 2004. Currently, no
borrowings are outstanding under this facility.
At our option, amounts outstanding under our existing domestic credit
facility bear interest at a rate based upon either the prime rate established by
the administrative agent from time to time or LIBOR. Amounts borrowed at the
prime based rate bear interest at an annual rate equal to the sum of the prime
rate margin plus the higher of (i) the prime rate in effect on such day and (ii)
the federal funds rate in effect on such day plus one-half of 1%. The prime rate
margin ranges from 1.50% to 2.25%. Amounts borrowed at the LIBOR based rate bear
interest at a rate per annum equal to the sum of LIBOR plus a margin, which may
range from 2.50% to 3.25%.
AFFIRMATIVE COVENANTS. The amended and restated credit facility contains
affirmative covenants customary for similar credit facilities.
NEGATIVE COVENANTS. The amended and restated credit facility contains
negative covenants that limit our ability and the ability of certain of our
subsidiaries to, among other things:
- incur additional indebtedness;
- create liens on our property, revenues or assets;
- make certain investments;
- declare or make certain restricted payments;
- make certain capital expenditures;
- redeem, retire, purchase, defease or otherwise acquire any subordinated
debt;
- designate any indebtedness other than obligations under the amended and
restated credit facility as senior debt;
- issue equity interests;
- liquidate, dissolve, consolidate with, merge or acquire all or
substantially all of the assets of any person or entity;
- sell assets;
- organize or acquire any foreign subsidiaries; and
- make intercompany loans and transfers.
FINANCIAL COVENANTS. The amended and restated credit facility also contains
financial covenants requiring us to maintain:
- a maximum total debt to EBITDA ratio;
87
<Page>
- a maximum senior debt to EBITDA ratio;
- a minimum fixed charge coverage ratio; and
- a minimum fixed interest coverage ratio.
EVENTS OF DEFAULT. In addition to customary default provisions, each of the
following events is an event of default under the amended and restated credit
facility:
- breach of representations, warranties and covenants;
- defaults on other indebtedness;
- material judgments;
- a change in control; and
- certain events related to bankruptcy and insolvency.
UNITED KINGDOM CREDIT FACILITY
GENERAL. On April 6, 2000, we entered into a credit agreement with the Bank
of Scotland. This credit facility allows us to borrow from time to time up to
L42.0 million (approximately $61.7 milllion as of September 30, 2001) and it
matures in April 2010. As of September 30, 2001, approximately $36.3 million was
outstanding under this facility. Borrowings under this credit facility bear
interest at rates of 1.50% to 2.00% over LIBOR. We have pledged the capital
stock of our United Kingdom subsidiaries to secure borrowings outstanding under
this credit facility.
AFFIRMATIVE COVENANTS. Our United Kingdom credit facility contains
affirmative covenants customary for similar credit facilities.
NEGATIVE COVENANTS. Our United Kingdom credit facility contains negative
covenants that limit our ability and the ability of our subsidiaries in the
United Kingdom to, among other things:
- incur additional indebtedness;
- create liens on our property, revenues or assets;
- make certain loans;
- dissolve, consolidate, merge, enter into joint ventures or acquire the
business or assets of other entities; and
- sell assets.
FINANCIAL COVENANTS. Our United Kingdom credit facility also contains
financial covenants requiring us, among other things, to maintain:
- a minimum profit to total debt costs ratio; and
- a minimum cash flow to total funding costs ratio.
EVENTS OF DEFAULT. In addition to customary default provisions, each of the
following events is an event of default under our United Kingdom credit
facility:
- our failure to pay principal and interest;
- breach of representations, warranties and covenants;
- defaults on other indebtedness;
- material judgments;
- a change in control; and
- certain events related to bankruptcy and insolvency.
88
<Page>
DESCRIPTION OF THE NEW NOTES
The form and terms of the new notes are the same as the form and terms of
the old notes, except that the new notes have been registered under the
Securities Act, will not bear legends restricting the transfer thereof, will not
be entitled to registration rights under the Registration Rights Agreement, and
will not contain provisions relating to additional interest. United Surgical
Partners Holdings, Inc. will issue the new notes under an Indenture (the
"INDENTURE") among itself, the Guarantors and U.S. Trust Company of
Texas, N.A., as Trustee. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939.
Certain terms used in this description are defined under the subheading
"--Certain Definitions." In this description, the words "COMPANY," "WE," "US"
and "OUR" refer only to United Surgical Partners Holdings, Inc. and not to any
of its subsidiaries. As used in this section, the term "Notes" refers to both
old notes and new notes.
The old notes, the new notes and any additional notes issued from time to
time in accordance with the terms of the indenture will constitute a single
class of debt securities under the indenture. If the exchange offer is
consummated, holders of old notes who do not exchange new notes for their old
notes will vote together with holders of the new notes and, if applicable, any
holders of additional notes for all relevant purposes under the indenture.
Accordingly, in determining whether the required holders have given any notice,
consent or waiver or taken any other action permitted under the indenture, any
old notes that remain outstandiing after the exchange offer will be aggregated
with the new notes and, if applicable, any additional notes, and the holders of
the old notes, the new notes and the additional notes will vote together as a
single class. All references in this prospectus to specified percentages in
aggregate principal amount of the notes that are outstanding means, at any time
after the exchange offer is consummated, the percentage in aggregate principal
amount of the old notes, the new notes and the additional notes then
outstanding.
The following description is only a summary of the material provisions of
the Indenture. We urge you to read the Indenture because it, not this
description, define your rights as holders of these Notes. You may request
copies of the Indenture at our address set forth under the heading "Where You
Can Find More Information."
BRIEF DESCRIPTION OF THE NOTES
These Notes:
- are unsecured senior subordinated obligations of the Company;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- are senior in right of payment to any future Subordinated Obligations of
the Company; and
- are guaranteed by each Guarantor.
PRINCIPAL, MATURITY AND INTEREST
The Company will issue the Notes initially with a maximum aggregate
principal amount of $150.0 million. The Company will issue the Notes in
denominations of $1,000 and any integral multiple of $1,000. The Notes will
mature on December 15, 2011. Subject to our compliance with the covenant
described under the subheading "--Certain Covenants--Limitation on
Indebtedness," we are permitted to issue more Notes from time to time under the
Indenture ("ADDITIONAL NOTES") in an unlimited principal amount. Any Additional
Notes that we issue in the future will be identical in all respects to the Notes
that we are issuing now, except that the Additional Notes may have different
issuance prices and will have different issuance dates. The Notes and the
Additional Notes, if any, will be treated as a
89
<Page>
single class for all purposes of the Indenture, including waivers, amendments,
redemptions and offers to purchase. Unless the context otherwise requires, for
all purposes of the Indenture and this "Description of the New Notes,"
references to the "NOTES" include any Additional Notes actually issued.
Interest on the Notes will accrue at the rate of 10% per annum and will be
payable semiannually in arrears on June 15 and December 15, commencing on
June 15, 2002. We will make each interest payment to the holders of record of
these Notes on the immediately preceding June 1 and December 1.
Interest on the Notes will accrue from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the Notes at
our option prior to December 15, 2006.
On and after December 15, 2006, we will be entitled at our option to redeem
all or a portion of the Notes upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed in percentages of principal amount
on the redemption date), plus accrued and unpaid interest thereon, if any, to
the applicable redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the 12-month period commencing on December 15 of the
years set forth below:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
- ------ ----------
2006........................................................ 105.000%
2007........................................................ 103.333%
2008........................................................ 101.667%
2009........................................................ 100.000%
2010........................................................ 100.000%
</Table>
In addition, before December 15, 2004, we may at our option on one or more
occasions redeem Notes (which includes Additional Notes, if any) in an aggregate
principal amount not to exceed 35% of the aggregate principal amount of the
Notes (which includes Additional Notes, if any) issued prior to such date at a
redemption price (expressed as a percentage of principal amount) of 110.00%,
plus accrued and unpaid interest to the redemption date, with the Net Cash
Proceeds from one or more Qualified Equity Offerings; PROVIDED THAT:
(1) at least 65% of such aggregate principal amount of Notes (which includes
Additional Notes, if any) remains outstanding immediately after the
occurrence of each such redemption (other than Notes held, directly or
indirectly, by the Company or its Affiliates); and
(2) each such redemption occurs within 90 days after the date of the related
Qualified Equity Offering.
Pending the application of the Net Cash Proceeds of any Qualified Equity
Offering to redeem Notes in accordance with the provisions of this paragraph,
Parent or its Restricted Subsidiaries may temporarily repay Senior Indebtedness
of the Company or any Domestic Guarantor with those Net Cash Proceeds.
We will be entitled, at our option, at any time as a whole prior to
December 15, 2006, to redeem the Notes (which includes the Additional Notes, if
any) at a redemption price equal to the sum of:
(1) the principal amount thereof, plus
(2) accrued and unpaid interest, if any, to the redemption date, plus
(3) the Applicable Premium at the redemption date.
90
<Page>
"APPLICABLE PREMIUM" means, with respect to any Note on any redemption date,
the greater of (1) 1.0% of the principal amount of such Note and (2) the excess
of (a) the present value at such redemption date of (i) the redemption price of
such Note at December 15, 2006 plus (ii) all required interest payments due on
such Note through December 15, 2006 (excluding accrued but unpaid interest),
computed using a discount rate equal to the Treasury Rate on such redemption
date plus 50 basis points, over (b) the principal amount of such Note.
"TREASURY RATE" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to the redemption date (or, if such statistical release is
no longer published, any publicly available source of similar market data)) most
nearly equal to the period from the redemption date to December 15, 2006;
PROVIDED, HOWEVER, that if the period from the redemption date to December 15,
2006 is not equal to the constant maturity of a United States Treasury security
for which a weekly average yield is given, then the Treasury Rate shall be
obtained by linear interpolation (calculated to the nearest one-twelfth of a
year) from the weekly average yields of United States Treasury securities for
which such yields are given, except that if the period from the redemption date
to December 15, 2006 is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of one
year shall be used.
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the Notes at any time, the Trustee will
select Notes on a pro rata basis, by lot or by such other method as the Trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem Notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note will state the portion of the principal amount thereof to
be redeemed. We will issue a new Note in a principal amount equal to the
unredeemed portion of the original Note in the name of the holder upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
We are not required to make any mandatory redemption or sinking fund
payments with respect to the Notes. However, under certain circumstances, we may
be required to offer to purchase Notes as described under the captions "--Change
of Control" and "Certain Covenants--Limitation on Sales of Assets and Subsidiary
Stock." We may at any time and from time to time purchase Notes in the open
market or otherwise.
GUARANTIES
The Guarantors will jointly and severally guarantee, on a senior
subordinated basis, our obligations under the Notes. We anticipate that the
Guarantors will also guarantee all obligations under the Credit Facilities, and
each Guarantor will grant a security interest in all or substantially all of its
assets to secure the obligations under the Credit Facilities.
On the Issue Date, the only Guarantors were Parent and its Domestic Wholly
Owned Subsidiaries (other than the Company), each of which is a Domestic
Guarantor. Under certain limited
91
<Page>
circumstances, as more particularly described under the heading "--Certain
Covenants--Guarantors" below, certain other Subsidiaries of Parent may be
required to become Guarantors after the Issue Date.
The obligations of each Guarantor under its Guaranty will be limited as
necessary to prevent that Guaranty from constituting a fraudulent conveyance
under applicable law. See "Risk Factors--Federal and state statutes allow
courts, under specific circumstances, to void guarantees and require holders of
the notes to return payments received from guarantors."
Each Guarantor that makes a payment under its Guaranty will be entitled upon
payment in full of all guarantied obligations under the Indenture to a
contribution from each other Guarantor in an amount equal to such other
Guarantor's PRO RATA portion of such payment based on the respective net assets
of all the Guarantors at the time of such payment determined in accordance with
GAAP.
If a Guaranty were rendered voidable, it could be subordinated by a court to
all other indebtedness (including guarantees and other contingent liabilities)
of the applicable Guarantor, and, depending on the amount of such indebtedness,
a Guarantor's liability on its Guaranty could be reduced to zero. See "Risk
Factors--Your right to receive payments on the notes is junior to most of our
existing indebtedness and possibly most of our future borrowings. Further, the
note guarantees will be junior to most of the guarantors' existing indebtedness
and possibly to all of their future borrowings."
The Guaranty of a Guarantor (other than Parent) will be released:
(1) upon the sale or other disposition (including by way of consolidation or
merger) of that Guarantor, other than to Parent or a Restricted
Subsidiary of Parent and as permitted by the Indenture;
(2) upon the sale or other disposition of all or substantially all the
assets of that Guarantor, other than to Parent or a Restricted Subsidiary
of Parent and as permitted by the Indenture;
(3) if the Company designates that Guarantor as an Unrestricted Subsidiary
in accordance with the applicable provisions of the Indenture;
(4) if that Guarantor ceases to be a Wholly Owned Subsidiary and is not
required to Guarantee the Notes pursuant to the covenant described below
under "--Certain Covenants--Guarantors"; and
(5) in the case of a Foreign Guarantor, if that Foreign Guarantor is not
required to Guarantee the Notes pursuant to the covenant described below
under "--Certain Covenants--Guarantors."
RANKING
SENIOR INDEBTEDNESS VERSUS NOTES
The payment of the principal of, premium, if any, and interest on the Notes
and the payment of any Guaranty will be subordinate in right of payment to the
prior payment in full of all Senior Indebtedness of the Company or the relevant
Guarantor, as the case may be, including the obligations of the Company and such
Guarantor under the Credit Agreement.
As of September 30, 2001, after giving PRO FORMA effect to the offering of
the old notes and the application of the net proceeds thereof:
(1) the Company's Senior Indebtedness would have been approximately
$88.4 million including $86.0 million of secured indebtedness; and
(2) the Senior Indebtedness of the Guarantors would have been approximately
$10.4 million.
92
<Page>
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company and the Guarantors may incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness. See "--Certain
Covenants--Limitation on Indebtedness."
LIABILITIES AND EQUITY OF SUBSIDIARIES VERSUS NOTES
A substantial portion of our operations are conducted through our
subsidiaries. Many of our subsidiaries, including subsidiaries that are not
wholly-owned, are not guaranteeing the Notes. Claims of creditors of such
non-guarantor subsidiaries, including trade creditors and creditors holding
indebtedness or guarantees issued by such non-guarantor subsidiaries, and claims
of preferred stockholders of such non-guarantor subsidiaries generally will have
priority with respect to the assets and earnings of such non-guarantor
subsidiaries over the claims of our creditors, including holders of the Notes,
even if such claims do not constitute Senior Indebtedness. In addition, since
the Indenture will not materially limit our ability to purchase equity interests
of other equity investors in our Qualified Restricted Subsidiaries, the holders
of those interests may have the ability to obtain a return on their investment
senior to the Noteholders. Accordingly, the Notes will be effectively
subordinated to creditors (including trade creditors), preferred stockholders,
if any, and other holders of Capital Stock of such non-guarantor subsidiaries.
See "Risk Factors--Because we are a holding company we may have limited access
to the cash flow of our subsidiaries to service our indebtedness. Not all of our
domestic or foreign subsidiaries will guarantee the notes. Further, we do not
have exclusive control over the distribution of revenues from some of our
subsidiaries and we may be unable to cause all or a portion of the revenues of
these entities to be distributed."
At September 30, 2001, the total liabilities of our subsidiaries (other than
Subsidiaries that are Guarantors as of the Issue Date) were approximately
$139.3 million, including trade payables. Although the Indenture limits the
incurrence of Indebtedness and preferred stock of certain of our subsidiaries,
such limitation is subject to a number of significant qualifications. Moreover,
the Indenture does not impose any limitation on the incurrence by such
subsidiaries of liabilities that are not considered Indebtedness under the
Indenture. See "--Certain Covenants--Limitation on Indebtedness."
OTHER SENIOR SUBORDINATED INDEBTEDNESS VERSUS NOTES
Only Indebtedness of the Company or a Guarantor that is Senior Indebtedness
will rank senior to the Notes and the relevant Guaranty in accordance with the
provisions of the Indenture. The Notes and each Guaranty will in all respects
rank PARI PASSU with all other Senior Subordinated Indebtedness of the Company
and the relevant Guarantor, respectively.
As of September 30, 2001, after giving PRO FORMA effect to the offering of
the old notes and the application of the net proceeds thereof:
(1) the Company's Senior Subordinated Indebtedness would have been
$150.0 million less the pricing discount, consisting entirely of the
Notes; and
(2) the Senior Subordinated Indebtedness of the Guarantors would have been
$150.0 million less the pricing discount, consisting entirely of their
respective Guaranties of Senior Subordinated Indebtedness of the Company
represented by the Notes.
We and the Guarantors have agreed in the Indenture that we and they will not
Incur, directly or indirectly, any Indebtedness that is contractually
subordinate or junior in right of payment to our Senior Indebtedness or the
Senior Indebtedness of such Guarantors, unless such Indebtedness is Senior
Subordinated Indebtedness of the applicable Person or is expressly subordinated
in right of payment to Senior Subordinated Indebtedness of such Person. The
Indenture does not treat unsecured Indebtedness as subordinated or junior to
secured Indebtedness merely because it is unsecured.
93
<Page>
PAYMENT OF NOTES
We are not permitted to pay principal of, premium, if any, or interest on
the Notes (except in Permitted Junior Securities or from the trust described
under "--Defeasance" below) or make any deposit pursuant to the provisions
described under "--Defeasance" below and may not purchase, redeem or otherwise
retire any Notes (except in Permitted Junior Securities or from the trust
described under "--Defeasance" below) (collectively, "PAY THE NOTES") if either
of the following occurs (a "PAYMENT DEFAULT"):
(1) any Designated Senior Indebtedness of the Company is not paid in full in
cash when due; or
(2) any other default on Designated Senior Indebtedness of the Company
occurs and the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms;
unless, in either case, the Payment Default has been cured or waived and any
such acceleration has been rescinded or such Designated Senior Indebtedness has
been paid in full in cash. Regardless of the foregoing, we are permitted to pay
the Notes if we and the Trustee receive written notice approving such payment
from the Representatives of all Designated Senior Indebtedness with respect to
which the Payment Default has occurred and is continuing.
During the continuance of any default (other than a Payment Default) with
respect to any Designated Senior Indebtedness pursuant to which the maturity
thereof may be accelerated without further notice (except such notice as may be
required to effect such acceleration) or the expiration of any applicable grace
periods, we are not permitted to pay the Notes for a period (a "PAYMENT BLOCKAGE
PERIOD") commencing upon the receipt by the Trustee (with a copy to us) of
written notice (a "BLOCKAGE NOTICE") of such default from the Representative of
such Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter. The Payment Blockage Period will
end earlier if such Payment Blockage Period is terminated:
(1) by written notice to the Trustee and us from the Person or Persons who
gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is cured, waived
or otherwise no longer continuing; or
(3) because such Designated Senior Indebtedness has been discharged or
repaid in full in cash.
Notwithstanding the provisions described above, unless the holders of such
Designated Senior Indebtedness or the Representative of such Designated Senior
Indebtedness have accelerated the maturity of such Designated Senior
Indebtedness, we are permitted to resume paying the Notes after the end of such
Payment Blockage Period. The Notes shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period irrespective of the number of
defaults with respect to Designated Senior Indebtedness during such period,
except that if any Blockage Notice is delivered to the Trustee by or on behalf
of holders of Designated Senior Indebtedness (other than holders of the Bank
Indebtedness), a Representative of holders of Bank Indebtedness may give another
Blockage Notice within such period. However, in no event may the total number of
days during which any Payment Blockage Period or Periods is in effect exceed
179 days in the aggregate during any consecutive 360-day period, and there must
be 181 days during any consecutive 360-day period during which no Payment
Blockage Period is in effect.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property:
(1) the holders of Senior Indebtedness of the Company will be entitled to
receive payment in full in cash of such Senior Indebtedness before the
holders of the Notes are entitled to receive
94
<Page>
any payment (except that holders of Notes may receive and retain
Permitted Junior Securities and payments from the trust described under
"--Defeasance");
(2) until the Senior Indebtedness of the Company is paid in full in cash,
any payment or distribution to which holders of the Notes would be
entitled but for the subordination provisions of the Indenture will be
made to holders of such Senior Indebtedness as their interests may appear
(except that holders of Notes may receive and retain Permitted Junior
Securities and payments from the trust described under "--Defeasance");
and
(3) if a distribution is made to holders of the Notes that, due to the
subordination provisions, should not have been made to them, such holders
of the Notes are required to hold it in trust for the holders of Senior
Indebtedness of the Company and pay it over to them as their interests
may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee must promptly notify the holders of Designated Senior
Indebtedness or the Representative of such Designated Senior Indebtedness of the
acceleration.
A Guarantor's obligations under its Guaranty are senior subordinated
obligations. As such, the rights of Noteholders to receive payment by a
Guarantor pursuant to its Guaranty will be subordinated in right of payment to
the rights of holders of Senior Indebtedness of such Guarantor. The terms of the
subordination provisions described above with respect to the Company's
obligations under the Notes apply equally to a Guarantor and the obligations of
such Guarantor under its Guaranty.
By reason of the subordination provisions contained in the Indenture, in the
event of a liquidation or insolvency proceeding, creditors of the Company or a
Guarantor who are holders of Senior Indebtedness of the Company or a Guarantor,
as the case may be, may recover more, ratably, than the holders of the Notes,
and creditors of ours who are not holders of Senior Indebtedness may recover
less, ratably, than holders of Senior Indebtedness and may recover more,
ratably, than the holders of the Notes.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "--Defeasance."
The definition of "Change of Control" includes the sale of all or
substantially all of the assets of Parent and its Restricted Subsidiaries
(determined on a consolidated basis) to any Person. Although there is a limited
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law. Accordingly,
in certain circumstances there may be a degree of uncertainty as to whether a
particular transaction would involve a sale of "substantially all" assets. As a
result, it may be unclear as to whether a Change of Control has occurred and
whether a holder of Notes may require the Company to make an offer to purchase
the Notes as described above.
The provisions under the Indenture relative to our obligation to make an
offer to purchase the Notes as a result of a Change of Control may be waived or
modified with the written consent of the holders of a majority in principal
amount of the Notes.
BOOK-ENTRY, DELIVERY AND FORM
We will initially issue the Notes in the form of one or more global notes
(the "GLOBAL NOTE"). The Global Note will be deposited with, or on behalf of,
The Depository Trust Company (the "DEPOSITORY") and registered in the name of
the Depository or its nominee. Except as set forth below, the Global Note may be
transferred, in whole and not in part, and only to the Depository or another
nominee of the Depository. You may hold your beneficial interests in the Global
Note directly through the
95
<Page>
Depository if you have an account with the Depository or indirectly through
organizations which have accounts with the Depository.
The Depository has advised the Company as follows: the Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("PARTICIPANTS") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the initial purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
(collectively, the "INDIRECT PARTICIPANTS") that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository, upon the deposit of the Global Note with the Depository, the
Depository will credit, on its book-entry registration and transfer system, the
principal amount of Notes represented by such Global Note to the accounts of
participants. The accounts to be credited shall be designated by the initial
purchasers. Ownership of beneficial interests in the Global Note will be limited
to participants or persons that may hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depository (with respect to participants' interests), the
participants and the indirect participants (with respect to the owners of
beneficial interests in the Global Note other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of any related Notes
evidenced by the Global Note for all purposes of such Notes and the Indenture.
Except as set forth below, as an owner of a beneficial interest in the Global
Note, you will not be entitled to have the Notes represented by the Global Note
registered in your name, will not receive or be entitled to receive physical
delivery of certificated Notes and will not be considered to be the owner or
holder of any Notes under the Global Note. We understand that under existing
industry practice, in the event an owner of a beneficial interest in the Global
Note desires to take any action that the Depository, as the holder of the Global
Note, is entitled to take, the Depository would authorize the participants to
take such action, and the participants would authorize beneficial owners owning
through such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
We will make payments of principal of, premium, if any, and interest on
Notes represented by the Global Note registered in the name of and held by the
Depository or its nominee to the Depository or its nominee, as the case may be,
as the registered owner and holder of the Global Note.
We expect that the Depository or its nominee, upon receipt of any payment of
principal of, premium, if any, or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. We also expect that
payments by participants or indirect participants to owners of beneficial
interests in the Global Note held through such participants or indirect
participants will be governed by standing instructions and customary
96
<Page>
practices and will be the responsibility of such participants or indirect
participants. We will not have any responsibility or liability for any aspect of
the records relating to, or payments made on account of, beneficial ownership
interests in the Global Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for any other aspect
of the relationship between the Depository and its participants or indirect
participants or the relationship between such participants or indirect
participants and the owners of beneficial interests in the Global Note owning
through such participants.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility or liability for the
performance by the Depository or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
Subject to certain conditions, the Notes represented by the Global Note are
exchangeable for certificated Notes in definitive form of like tenor in
denominations of $1,000 and integral multiples thereof if:
(1) the Depository notifies us that it is unwilling or unable to continue as
Depository for the Global Note or the Depository ceases to be a clearing
agency registered under the Exchange Act and, in either case, we are
unable to locate a qualified successor within 90 days;
(2) we in our discretion at any time determine not to have all the Notes
represented by the Global Note; or
(3) a default entitling the holders of the Notes to accelerate the maturity
thereof has occurred and is continuing.
Any Note that is exchangeable as described above is exchangeable for
certificated Notes issuable in authorized denominations and registered in such
names as the Depository shall direct. Subject to the foregoing, the Global Note
is not exchangeable, except for a Global Note of the same aggregate denomination
to be registered in the name of the Depository or its nominee. In addition, such
certificates will bear the legend referred to under "Transfer Restrictions"
(unless we determine otherwise in accordance with applicable law), subject, with
respect to such certificated Notes, to the provisions of such legend.
SAME-DAY PAYMENT
The Indenture requires us to make payments in respect of Notes (including
principal, premium and interest) by wire transfer of immediately available funds
to the U.S. dollar accounts with banks in the U.S. specified by the holders
thereof or, if no such account is specified, by mailing a check to each such
holder's registered address.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "CHANGE OF
CONTROL"), each Holder shall have the right to require that the Company purchase
such Holder's Notes at a purchase price in cash equal to 101% of the principal
amount thereof on the date of purchase plus accrued and unpaid
97
<Page>
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(1) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) (other than a Permitted Holder or Parent or a Wholly Owned
Subsidiary of Parent as a stockholder of the Company) is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that for purposes of this clause (1) such person
shall be deemed to have "beneficial ownership" of all shares that any
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly,
of more than 35% of the total voting power of the Voting Stock of Parent
or the Company;
(2) individuals who on the Issue Date constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of Parent
was approved by a vote of at least a majority of the directors of Parent
then still in office who were either directors on the Issue Date or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors then in
office;
(3) the adoption of a plan relating to the liquidation or dissolution of the
Company or Parent; or
(4) the merger or consolidation of the Company or Parent with or into
another Person (other than a Permitted Holder) or the merger of another
Person (other than a Permitted Holder, Parent or the Company) with or
into the Company or Parent, or the sale of all or substantially all the
assets of Parent and its Restricted Subsidiaries (determined on a
consolidated basis) to another Person (other than a Permitted Holder),
other than a transaction following which, in the case of a merger or
consolidation transaction, holders of securities that represented 100% of
the Voting Stock of the Company or Parent, as applicable, immediately
prior to such transaction (or other securities into which such securities
are converted as part of such merger or consolidation transaction) own
directly or indirectly at least a majority of the voting power of the
Voting Stock of the surviving Person in such merger or consolidation
transaction immediately after such transaction and in substantially the
same proportion as before the transaction.
Within 30 days following any Change of Control, we will mail a notice to
each Holder with a copy to the Trustee (the "CHANGE OF CONTROL OFFER") stating:
(1) that a Change of Control has occurred and that such Holder has the right
to require us to purchase such Holder's Notes at a purchase price in cash
equal to 101% of the principal amount thereof on the date of purchase,
plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest on the relevant interest payment date);
(2) the purchase date (which shall be no earlier than 30 days nor later than
90 days from the date such notice is mailed); and
(3) the instructions, as determined by us, consistent with the covenant
described hereunder, that a Holder must follow in order to have its Notes
purchased.
The Credit Agreement prohibits us from purchasing any Notes, and also
provides that the occurrence of certain change of control events with respect to
the Company or Parent would constitute a default thereunder. In the event that
at the time of a Change of Control, the terms of the Credit Agreement prohibit
the Company from making a Change of Control Offer or from purchasing the
98
<Page>
Notes pursuant thereto, the Company shall, prior to the mailing of the notice to
Noteholders described in the preceding paragraph, but in any event within
30 days following any Change of Control:
(1) repay in full all Indebtedness outstanding under the Credit Agreement;
or
(2) obtain the requisite consent under the Credit Agreement to permit the
purchase of the Notes as described above.
The Company must first comply with the covenant described above before it
will be required to purchase Notes in the event of a Change of Control,
PROVIDED, HOWEVER, that the Company's failure to comply with the covenant
described in the preceding sentence or to make a Change of Control Offer because
of any such failure shall constitute a default described in clause (4) under
"--Defaults" below (and not under clause (2) thereof). As a result of the
foregoing, a holder of the Notes may not be able to compel the Company to
purchase the Notes unless the Company is able at the time to refinance all
Indebtedness outstanding under the Credit Agreement or obtain requisite consents
under the Credit Agreement.
The Company will not be required to make a Change of Control Offer following
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes properly tendered and not withdrawn under the Change of
Control Offer.
We will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the purchase of Notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, we will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached our obligations under the covenant described hereunder by virtue of our
compliance with such securities laws or regulations.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a sale or takeover of the
Company and, thus, the removal of incumbent management. The Change of Control
purchase feature is a result of negotiations between the Company and the Initial
Purchasers. We have no present intention to engage in a transaction involving a
Change of Control, although it is possible that we could decide to do so in the
future. Subject to the limitations discussed below, we could, in the future,
enter into certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect our capital structure or credit ratings.
Restrictions on our ability to Incur additional Indebtedness are contained in
the covenants described under "--Certain Covenants--Limitation on Indebtedness."
Such restrictions can be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. The covenants set forth in the
Indenture may not afford holders of the Notes protection in the event of a
highly leveraged transaction.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the Holders of their right to require us to purchase the Notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such purchase on us. Finally,
our ability to pay cash to the holders of Notes following the occurrence of a
Change of Control may be limited by our then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required purchases.
99
<Page>
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS
(a) The Company and Parent shall not, and shall not permit any Restricted
Subsidiary to, Incur, directly or indirectly, any Indebtedness; PROVIDED,
HOWEVER, that:
(1) the Company and the Domestic Guarantors shall be entitled to Incur
Indebtedness if, on the date of such Incurrence and after giving effect
thereto and to the use of the proceeds therefrom on a PRO FORMA basis, no
Event of Default has occurred and is continuing and the Consolidated
Coverage Ratio exceeds (A) during the period from the Issue Date to
December 15, 2003, 2.25 to 1, and (B) from and after December 15, 2003,
2.5 to 1; and
(2) Restricted Subsidiaries of Parent (other than the Company and the
Domestic Guarantors) shall be entitled to Incur Indebtedness if, on the
date of such Incurrence and after giving effect thereto and to the use of
the proceeds therefrom on a PRO FORMA basis, (A) such Restricted
Subsidiary would constitute a Qualified Restricted Subsidiary, (B) the
Company would have been entitled to Incur at least $1.00 of additional
Indebtedness pursuant to paragraph (a) (1) and (C) the Restricted
Subsidiary Leverage Ratio is greater than zero and less than or equal to
1.25 to 1.
(b) Notwithstanding the foregoing paragraph (a), Parent and its Restricted
Subsidiaries shall be entitled to Incur any or all of the following
Indebtedness:
(1) (A) Indebtedness of the Company and the Domestic Guarantors Incurred
pursuant to Credit Facilities, and Indebtedness constituting Guarantees
thereof Incurred by the Company and the Guarantors, and
(B) Indebtedness of USPE Holdings Limited Incurred pursuant to Credit
Facilities, and Indebtedness constituting Guarantees thereof Incurred
by the Company, the Guarantors and Foreign Subsidiaries; PROVIDED,
HOWEVER, that after giving effect to any such Incurrence, the aggregate
principal amount of all Indebtedness Incurred under this clause (1) and
then outstanding does not exceed $100.0 million less the sum of all
principal payments with respect to such Indebtedness pursuant to
paragraph (a)(3)(A) of the covenant described under "--Limitation on
Sales of Assets and Subsidiary Stock";
(2) (A) short-term Indebtedness of Parent or any of its Wholly Owned
Subsidiaries owed to a Restricted Subsidiary, a Qualified Joint Venture
or any other Person in a Related Business that receives day-to-day
management services from Parent, a Qualified Restricted Subsidiary, a
QJVGP or a Qualified Joint Venture pursuant to a Management Agreement
to the extent such Indebtedness is Incurred by Parent or such Wholly
Owned Subsidiary solely as a result of cash advanced by such Restricted
Subsidiary, Qualified Joint Venture or other Person to Parent or such
Wholly Owned Subsidiary in the ordinary course of business for purposes
of cash management; PROVIDED, HOWEVER, that any subsequent issuance or
transfer of any Capital Stock which results in any such creditor under
this subparagraph (A) ceasing to be a Restricted Subsidiary, a
Qualified Joint Venture or a Person of the type described above, or any
subsequent transfer of such Indebtedness (other than to Parent or a
Qualified Restricted Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the obligor thereon;
and (B) Indebtedness owed to and held by Parent or a Wholly Owned
Subsidiary; PROVIDED, HOWEVER, that any subsequent issuance or transfer
of any Capital Stock which results in any such creditor under this
subparagraph (B) ceasing to be Parent or a Wholly Owned Subsidiary, or
any subsequent transfer of such Indebtedness (other than to Parent or a
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness by the obligor thereon; PROVIDED
FURTHER, HOWEVER, in the case
100
<Page>
of both subparagraphs (A) and (B), if the Company or a Guarantor is the
obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations
with respect to the Notes or such Guarantor's Guaranty;
(3) the Notes, the Exchange Notes (other than any Additional Notes) and the
Guaranties;
(4) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (3) or (4) or this clause (5);
(6) Hedging Obligations consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by Parent and its
Restricted Subsidiaries pursuant to the Indenture;
(7) Hedging Obligations consisting of Currency Agreements entered into for
bona fide hedging purposes of Parent and its Restricted Subsidiaries
and not for speculative purposes;
(8) obligations in respect of letters of credit to support workers
compensation obligations, performance, bid and surety bonds and
completion guarantees provided by Parent or any Restricted Subsidiary
in the ordinary course of business;
(9) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business; PROVIDED,
HOWEVER, that such Indebtedness is extinguished within two Business
Days of its Incurrence;
(10) Indebtedness arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from letters of
credit, surety bonds or performance bonds securing any obligations of
Parent or any Restricted Subsidiary pursuant to such agreements, in
each case incurred in connection with the disposition of any business
assets or Restricted Subsidiaries of Parent in a principal amount not
to exceed the gross proceeds actually received by Parent and its
Restricted Subsidiaries in connection with such disposition; and
(11) Indebtedness of the Company, the Domestic Guarantors and Qualified
Restricted Subsidiaries in an aggregate principal amount that when
taken together with all other Indebtedness outstanding under this
clause (11) on the date of such Incurrence does not exceed
$10.0 million.
(c) Notwithstanding the foregoing, the Company and Parent shall not, and
shall not permit any Restricted Subsidiary to, Incur any Indebtedness pursuant
to the foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations of the Company or any
Guarantor unless such Indebtedness shall be subordinated to the Notes or the
applicable Guaranty to at least the same extent as such Subordinated
Obligations.
(d) For purposes of determining compliance with this covenant, (1) in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described above, the Company, in its sole discretion,
shall classify such item of Indebtedness at the time of Incurrence and only be
required to include the amount and type of such Indebtedness in one of the above
clauses and (2) the Company shall be entitled to divide and classify an item of
Indebtedness in more than one of the types of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, the Company and Parent
shall not, and shall not permit any Restricted Subsidiary to:
(1) in the case of the Company or any Guarantor, Incur any Indebtedness if
such Indebtedness is subordinate or junior in right of payment to any
Senior Indebtedness of such Person, unless
101
<Page>
such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness of
such Person; and
(2) in the case of a Restricted Subsidiary that is not a Guarantor, Incur
any Indebtedness that is subordinate or junior in right of payment to any
other Indebtedness of such Restricted Subsidiary.
LIMITATION ON RESTRICTED PAYMENTS
(a) The Company and Parent shall not, and shall not permit any Restricted
Subsidiary, directly or indirectly, to make a Restricted Payment if at the time
Parent or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of Indebtedness
pursuant to paragraph (a)(1) of the covenant described under
"--Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment, all other Restricted
Payments since the Issue Date made pursuant to this clause (a)(3) and all
Restricted Payments since the Issue Date made pursuant to paragraph (b)
below (other than subparagraphs (b)(3), (b)(4), (b)(5), (b)(6), (b)(8),
(b)(9), (b)(10) and (b)(11)) would exceed the sum of (without
duplication):
(A) 50% of the Consolidated Net Income of Parent accrued during the
period (treated as one accounting period) from the beginning of the
fiscal quarter immediately following the fiscal quarter during which
the Issue Date occurs to the end of the most recent fiscal quarter
for which financial statements are available immediately preceding
the date of such Restricted Payment (or, in case such Consolidated
Net Income shall be a deficit, minus 100% of such deficit); plus
(B) 100% of the aggregate Net Cash Proceeds received by Parent from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of Parent and other than an issuance or sale to an ESOP)
and 100% of any cash capital contribution received by Parent from its
stockholders subsequent to the Issue Date; plus
(C) the amount by which Indebtedness of Parent is reduced on Parent's
balance sheet upon the conversion or exchange (other than by a
Subsidiary of Parent) subsequent to the Issue Date of any
Indebtedness of Parent convertible or exchangeable for Capital Stock
(other than Disqualified Stock) of Parent (less the amount of any
cash, or the fair value of any other property, distributed by Parent
upon such conversion or exchange); plus
(D) an amount equal to the sum of (x) the net reduction in the
Investments (other than Permitted Investments) made by Parent or any
Restricted Subsidiary in any Person resulting from repurchases,
repayments or redemptions of such Investments by such Person,
proceeds realized on the sale of such Investment and proceeds
representing the return of capital (excluding dividends,
distributions and other amounts that contribute to Consolidated Net
Income) in each case received by the Company, any Domestic Guarantor
or any other Restricted Subsidiary of Parent (but in the case of any
such Restricted Subsidiary other than the Company or a Domestic
Guarantor, only the portion thereof proportionate to Parent's direct
or indirect equity interest in such Restricted Subsidiary), and
(y) the portion (proportionate to Parent's direct or indirect equity
interest in such Subsidiary) of the fair market value of the net
assets of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; PROVIDED, HOWEVER,
that the foregoing sum shall not exceed, in the case of any such
Person
102
<Page>
or Unrestricted Subsidiary, the amount of Investments (excluding
Permitted Investments) previously made (and treated as a Restricted
Payment) by Parent and its Restricted Subsidiaries in such Person or
Unrestricted Subsidiary.
(b) The preceding provisions will not prohibit the following Restricted
Payments (but in the case of clause (1) below, only if no Default has occurred
and is continuing or would result therefrom):
(1) dividends or distributions paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend or
distribution would have complied with this covenant;
(2) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for, Capital
Stock of Parent (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary of Parent or an ESOP to the extent
that such sale to an ESOP is financed by loans from or guaranteed by
Parent or any Restricted Subsidiary unless such loans have been repaid
with cash on or prior to the date of determination) or a substantially
concurrent cash capital contribution received by Parent from one or
more of its stockholders;
(3) any purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value of Subordinated Obligations of the Company or a
Guarantor made by exchange for, or out of the proceeds of the
substantially concurrent Incurrence or sale of, Indebtedness of the
Company or a Guarantor that (A) is permitted to be Incurred pursuant to
the covenant described under "--Limitation on Indebtedness" and (B) is
Refinancing Indebtedness;
(4) the purchase, redemption or other acquisition or retirement for value
of shares of Capital Stock of Parent or any of its Subsidiaries from
employees, former employees, directors or former directors of Parent or
any of its Subsidiaries (or permitted transferees of such employees,
former employees, directors or former directors), pursuant to the terms
of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or
sell, shares of such Capital Stock; PROVIDED, HOWEVER, that the
aggregate amount of such purchases and other acquisitions shall not
exceed $2.0 million in any calendar year;
(5) the payment of any dividend or distribution to any holder of Capital
Stock of a Qualified Restricted Subsidiary of Parent as part of a PRO
RATA dividend or distribution to all holders of such Capital Stock;
(6) the purchase, redemption or other acquisition or retirement for value
of all but not less than all shares of Common Stock of a Qualified
Restricted Subsidiary owned by a Strategic Investor if such purchase,
redemption or other acquisition or retirement for value is made for
consideration not in excess of the fair market value of such Common
Stock;
(7) cash payments to holders of Parent's Capital Stock in lieu of issuance
of fractional shares of its Capital Stock so long as the aggregate
amount of payments pursuant to this clause (7) does not exceed $100,000
in any calendar year;
(8) repurchases of Capital Stock deemed to occur upon the exercise of stock
options or warrants if such Capital Stock represents a portion of the
exercise price thereof;
(9) repurchases of Capital Stock deemed to occur upon the acceptance of
such Capital Stock as the repayment of loans made to employees of
Parent or any Restricted Subsidiary;
(10) the repayment on the Issue Date of: (A) Indebtedness in an amount not
to exceed $41.5 million owed by USP Domestic Holdings, Inc. to Credit
Suisse First Boston, Lehman Commercial Paper Inc., Societe Generale and
the other lender parties to such credit
103
<Page>
agreement in connection with the USP Domestic Holdings, Inc. Credit
Agreement dated as of June 13, 2001, (B) Indebtedness in an amount not
to exceed $33.6 million owed by United Surgical Partners Europe, S.L.
to a syndicate of lenders for which Societe Generale is administrative
agent in connection with the credit facility of United Surgical
Partners Europe, S.L. that was in existence prior to the Issue Date and
(C) Indebtedness in an amount not to exceed $36.0 million owed by USP
Domestic Holdings, Inc. to WCAS Capital Partners III, L.P. in
connection with the 10% senior subordinated notes of USP Domestic
Holdings, Inc., in each case PROVIDED THAT the funds used to make such
repayments are advanced by the Company to USP Domestic Holdings, Inc.
and United Surgical Partners Europe, S.L., as appropriate, pursuant to
intercompany advances made in compliance with the covenant described
under "--Intercompany Advances";
(11) the redemption on the Issue Date by Parent of its Series D Redeemable
Preferred Stock for an aggregate redemption price not in excess of
$21.1 million, PROVIDED THAT the funds used to make such redemption are
advanced by the Company directly to Parent pursuant to an intercompany
advance made in compliance with the covenant described under
"--Intercompany Advances"; and
(12) Restricted Payments in the aggregate amount of $10.0 million.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the assets proposed to be
transferred by Parent or such Restricted Subsidiary, as the case may be, in
accordance with the Restricted Payment. The fair market value of any non-cash
Restricted Payment shall be determined in good faith by the Board of Directors
whose resolution with respect thereto shall be delivered to the Trustee.
LIMITATION ON LIENS
The Company and Parent shall not, and shall not permit any Guarantor to,
directly or indirectly, create, incur, assume or suffer to exist or become
effective any Lien securing Indebtedness of any kind (other than Senior
Indebtedness), on or with respect to any of its assets, whether owned at the
Issue Date or thereafter acquired, unless (a) in the case of any Lien securing
Subordinated Obligations, the Notes (or the appropriate Guaranty) are secured by
a Lien on such assets that is senior in priority to such Lien and (b) in the
case of any other Lien, the Notes (or the appropriate Guaranty) are either
secured equally and ratably with such Indebtedness or are secured by a Lien on
such assets that is senior in priority to such Lien.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company and Parent shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to Parent or a Restricted Subsidiary or pay any Indebtedness owed to
Parent or a Restricted Subsidiary, (b) make any loans or advances to Parent or a
Restricted Subsidiary or (c) transfer any of its property or assets to Parent or
a Restricted Subsidiary, except:
(1) with respect to clauses (a), (b) and (c):
(A) any encumbrance or restriction pursuant to (i) the Credit Agreement
as entered into on the Issue Date and (ii) any agreement (other than
(x) agreements relating to Indebtedness and (y) charter provisions
and other agreements relating to Capital Stock) in effect at or
entered into on the Issue Date;
(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary on or
104
<Page>
prior to the date on which such Restricted Subsidiary was acquired by
Parent or any Restricted Subsidiary (other than Indebtedness Incurred
as consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary
became a Restricted Subsidiary or was acquired by Parent) and
outstanding on such date;
(C) any encumbrance or restriction pursuant to an agreement effecting an
amendment, modification, restatement, renewal, increase, supplement,
replacement or Refinancing of an agreement referred to in
clause (1)(A) or (1)(B) or this clause (1)(C) or contained in any
amendment to an agreement referred to in clause (1)(A) or (1)(B) or
this clause (1)(C); PROVIDED, HOWEVER, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in
any such refinancing agreement or amendment are no less favorable to
the Noteholders than encumbrances and restrictions with respect to
such Restricted Subsidiary contained in such predecessor agreements;
(D) restrictions on cash or other deposits imposed by customers under
contracts entered into in the ordinary course of business;
(E) restrictions in Management Agreements that require the payment of
management fees to Parent or one of its Qualified Restricted
Subsidiaries prior to payment of dividends or distributions;
(F) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale of such Restricted
Subsidiary (whether by stock sale, asset sale, merger, consolidation
or otherwise) pending the closing of such sale or disposition; and
(G) any Permitted Payment Restriction;
(2) with respect to clause (c) only:
(A) any such encumbrance or restriction consisting of customary
nonassignment provisions in leases and licenses; and
(B) restrictions contained in security agreements, mortgages and other
similar agreements securing Indebtedness of a Restricted Subsidiary
to the extent such restrictions restrict the transfer of the property
subject to such agreements; and
(3) with respect to clauses (b) and (c) only, any encumbrance or restriction
with respect to a Qualified Restricted Subsidiary with respect to any
agreement or charter provision evidencing Indebtedness or Capital Stock
otherwise permitted under the Indenture; PROVIDED, HOWEVER, that the
provisions relating to such encumbrance or restriction contained in such
agreement or charter provision are not less favorable to the Holders than
the encumbrances and restrictions described in clause (1)(A) above.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) The Company and Parent shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, consummate any Asset Disposition unless:
(1) Parent or such Restricted Subsidiary receives consideration at the time
of such Asset Disposition at least equal to the fair market value
(including as to the value of all non-cash consideration), as determined
in good faith by the Board of Directors, of the shares or assets subject
to such Asset Disposition;
(2) at least 75% of the consideration thereof received by Parent or such
Restricted Subsidiary is in the form of Permitted Asset Disposition
Consideration;
105
<Page>
(3) with respect to Asset Dispositions by Parent and its Wholly Owned
Subsidiaries, an amount equal to 100% of the Net Available Cash from such
Asset Disposition is applied by Parent or such Wholly Owned Subsidiary,
as the case may be:
(A) FIRST, to the extent the Company so elects (or is required by the
terms of any Indebtedness), to prepay, repay, purchase, repurchase,
redeem, defease or otherwise acquire or retire for value Senior
Indebtedness of the Company or any Guarantor or Indebtedness of a
Wholly Owned Subsidiary of Parent that is not a Guarantor (in each
case other than Indebtedness owed to Parent or a Subsidiary of
Parent) within one year from the date of such Asset Disposition;
(B) SECOND, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to the extent the Company
so elects, to acquire Additional Assets within one year from the date
of such Asset Disposition; and
(C) THIRD, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer
to the holders of the Notes (and to holders of other Senior
Subordinated Indebtedness of the Company designated by the Company)
to purchase Notes (and such other Senior Subordinated Indebtedness of
the Company) pursuant to and subject to the conditions contained in
the Indenture; and
(4) with respect to Asset Dispositions by Restricted Subsidiaries that are
not Wholly Owned Subsidiaries, an amount equal to 100% of the Net
Available Cash from such Asset Disposition is applied by such Restricted
Subsidiary:
(A) FIRST, to the extent the Restricted Subsidiary so elects (or is
required by the terms of any Indebtedness), to prepay, repay,
purchase, repurchase, redeem, defease or otherwise acquire or retire
for value Indebtedness of such Restricted Subsidiary within one year
from the date of such Asset Disposition;
(B) SECOND, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to the extent the
Restricted Subsidiary so elects, to acquire Additional Assets within
one year from the date of such Asset Disposition; and
(C) THIRD, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to distribute
such Net Available Cash PRO RATA to holders of Common Stock of such
Restricted Subsidiary;
PROVIDED, THAT, upon receipt of any Net Available Cash from a Restricted
Subsidiary pursuant to clause (a)(4)(A) or (a)(4)(C), a Restricted
Subsidiary that is not a Wholly Owned Subsidiary shall apply such Net
Available Cash in accordance with clause (a)(4) above, and Parent or a
Wholly Owned Subsidiary shall apply such Net Available Cash in accordance
with clause (a)(3) above; and
PROVIDED, HOWEVER, that in connection with any prepayment, repayment,
purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness pursuant to clause (a)(3)(A) or
(a)(4)(A) above, Parent or such Restricted Subsidiary shall permanently
retire such Indebtedness and shall cause the related loan commitment (if
any) to be permanently reduced in an amount equal to the principal amount
so prepaid, repaid or purchased.
To the extent that any Net Available Cash remains after compliance with
clauses (a)(3) and (a)(4) above, Parent or any Wholly Owned Subsidiary, as the
case may be, may use such Net Available Cash for any purpose not otherwise
prohibited by the Indenture.
106
<Page>
Notwithstanding the foregoing provisions of this covenant, Parent and its
Restricted Subsidiaries will not be required to apply any Net Available Cash in
accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which is not applied in accordance
with this covenant exceeds $10.0 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash shall be invested in
Temporary Cash Investments or applied to temporarily reduce revolving credit
indebtedness.
(b) In the event of an Asset Disposition that requires the purchase of Notes
(and other Senior Subordinated Indebtedness of the Company) pursuant to
clause (a)(3)(C) above, the Company shall make such offer to purchase Notes on
or before the 366th day after the date of such Asset Disposition, and shall
purchase Notes tendered pursuant to an offer by the Company for the Notes (and
such other Senior Subordinated Indebtedness of the Company) at a purchase price
of 100% of their principal amount (or, in the event such other Senior
Subordinated Indebtedness of the Company was issued with significant original
issue discount, 100% of the accreted value thereof) without premium, plus
accrued but unpaid interest (or, in respect of such other Senior Subordinated
Indebtedness of the Company, such lesser price, if any, as may be provided for
by the terms of such Senior Subordinated Indebtedness of the Company) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
the Notes and other Senior Subordinated Indebtedness tendered exceeds the Net
Available Cash allotted to their purchase, the Company shall select the
securities to be purchased on a PRO RATA basis but in round denominations, which
in the case of the Notes will be denominations of $1,000 principal amount or
multiples thereof. The Company shall not be required to make such an offer to
purchase Notes (and other Senior Subordinated Indebtedness of the Company)
pursuant to this covenant if the Net Available Cash available therefor is less
than $10.0 million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to the Net Available
Cash from any subsequent Asset Disposition). Upon completion of any application
of Net Available Cash in accordance with the foregoing provisions of
clauses (a)(3) and (a)(4) of this covenant, the amount of Net Available Cash
shall be reset at zero.
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue of its compliance
with such securities laws or regulations.
The provisions under the Indenture relative to our obligation to make an
offer to purchase the Notes as a result of an Asset Disposition may be waived or
modified with the written consent of the holders of a majority in principal
amount of the Notes.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company and Parent shall not, and shall not permit any Restricted
Subsidiary to, enter into or permit to exist any transaction (including the
purchase, sale, lease or exchange of any property, employee compensation
arrangements or the rendering of any service) with, or for the benefit of, any
Affiliate of Parent (an "AFFILIATE TRANSACTION") unless:
(1) the terms of the Affiliate Transaction are no less favorable to the
Company, Parent or such Restricted Subsidiary than those that could
reasonably be expected to be obtained at the time of the Affiliate
Transaction in arm's-length dealings with a Person who is not an
Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of
$5.0 million, the terms of the Affiliate Transaction are set forth in
writing and a majority of the non-employee directors of Parent
disinterested with respect to such Affiliate Transaction shall have
determined in good
107
<Page>
faith that the criteria set forth in clause (1) are satisfied and shall
have approved the relevant Affiliate Transaction as evidenced by a
resolution of the Board of Directors; and
(3) if such Affiliate Transaction involves an amount in excess of
$10.0 million, the Board of Directors shall also have received a written
opinion from an Independent Qualified Party to the effect that such
Affiliate Transaction is fair, from a financial standpoint, to Parent or
is not less favorable to Parent than could reasonably be expected to be
obtained at the time in an arm's-length transaction with a Person who was
not an Affiliate.
(b) The provisions of the preceding paragraph (a) will not prohibit:
(1) any Restricted Payment permitted to be made pursuant to the covenant
described under "--Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the
Board of Directors or senior management of Parent;
(3) loans or advances to employees in the ordinary course of business of
Parent and its Restricted Subsidiaries, but in any event not to exceed
$5.0 million in the aggregate outstanding at any one time;
(4) the payment of customary directors' fees, indemnification and similar
arrangements and payments thereunder, as well as agreements requiring or
permitting such payments or indemnification, by Parent or any of its
Restricted Subsidiaries;
(5) any transaction between or among Parent, a Restricted Subsidiary or any
other Person that would constitute an Affiliate Transaction solely
because Parent or a Restricted Subsidiary owns an equity interest in or
otherwise controls such Person;
(6) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of Parent or any contribution to the capital of Parent or any
Restricted Subsidiary; and
(7) any agreement as in effect as of the Issue Date that is disclosed in
this Offering Circular or any amendment of any such agreement (so long as
any such amendment is not more disadvantageous to the Holders than the
original agreement as in effect on the Issue Date) or any transaction
contemplated thereby.
LIMITATION ON OWNERSHIP OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company and Parent shall not, and shall not permit any Restricted
Subsidiary to, (1) permit any Restricted Subsidiary of Parent to issue any
Capital Stock (including pursuant to any merger, consolidation, recapitalization
or similar transaction) other than to Parent or a Wholly Owned Subsidiary or
(2) permit any Person other than Parent or a Wholly Owned Subsidiary to own any
Capital Stock of a Restricted Subsidiary, except in each case for
(A) directors' qualifying shares and (B) Common Stock issued to or owned by
Strategic Investors.
DISTRIBUTIONS BY QUALIFIED RESTRICTED SUBSIDIARIES
Except to the extent restricted pursuant to any Permitted Payment
Restriction, the Company and Parent shall, and shall cause each Restricted
Subsidiary to, cause each Qualified Restricted Subsidiary to declare and pay
regular monthly, quarterly or semi-annual dividends or distributions to the
holders of its Capital Stock in an amount equal to substantially all of the
available cash flow of such Restricted Subsidiary for such period as determined
in good faith by the board of directors, board of governors or such other
individuals performing similar functions, subject to such ordinary and customary
reserves
108
<Page>
and other amounts as, in the good faith judgment of such individuals, may be
necessary so that the business of such Restricted Subsidiary may be properly and
advantageously conducted at all times.
INTERCOMPANY ADVANCES
The Company and Parent shall, and shall cause each Restricted Subsidiary to,
evidence all transfers made by the Company, Parent or any Restricted Subsidiary
of Parent to Parent or any Wholly Owned Subsidiary of Parent of the direct or
indirect proceeds of the issuance and sale of the Notes by executing and
delivering an intercompany promissory note. Each such intercompany promissory
note will be payable upon each payment of principal of the Notes (whether upon
Stated Maturity, optional redemption, required purchase, declaration of
acceleration or otherwise) and will bear interest at the same rate, payable on
the same dates, as the Notes.
MERGER AND CONSOLIDATION
(a) The Company shall not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, directly or
indirectly, all or substantially all of the assets of the Company and its
Restricted Subsidiaries, taken as a whole, to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "SUCCESSOR COMPANY")
shall be a Person organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia and the
Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form reasonably satisfactory to the Trustee, all the obligations of the
Company under the Notes and the Indenture;
(2) immediately after giving PRO FORMA effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary of the Successor Company as a result of such
transaction as having been Incurred by such Successor Company or such
Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing;
(3) immediately after giving PRO FORMA effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a)(1) of the covenant described under
"--Limitation on Indebtedness";
(4) (other than Guarantors that were Guarantors prior to such transaction
and continue to be Guarantors after such transaction, and upon
consummation of such transaction, the Company is the Successor Company),
each Person that is required pursuant to the terms of the Indenture to be
a Guarantor shall have become a Guarantor pursuant to a Supplemental
Guaranty Agreement or shall have confirmed its Guaranty pursuant to a
supplemental indenture in form reasonably satisfactory to the Trustee;
and
(5) the Company and each appropriate Guarantor shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger, conveyance, transfer or lease and such
supplemental indenture (if any) comply with the Indenture;
PROVIDED, HOWEVER, that clause (3) will not be applicable to (A) Parent or a
Restricted Subsidiary consolidating with, merging into, conveying, transferring
or leasing all or part of its assets to the Company or (B) Parent or the Company
merging with an Affiliate of the Company solely for the purpose and with the
sole effect of reincorporating Parent or the Company in another jurisdiction
within the United States of America.
109
<Page>
The Successor Company (if not the Company) will be the successor to the
Company and shall succeed to, and be substituted for, and may exercise every
right and power of, the Company under the Indenture, and the predecessor
Company, except in the case of a lease, shall be released from the obligation to
pay the principal of and interest on the Notes.
(b) Parent shall not, and the Company and Parent shall not permit any
Guarantor to, consolidate with or merge with or into, or convey, transfer or
lease, in one transaction or a series of transactions, all or substantially all
of its assets to any Person unless:
(1) (other than in the case of a Guarantor (other than Parent) that has been
disposed of in its entirety to another Person (other than to Parent or a
Subsidiary of Parent), whether through a merger, consolidation or sale of
Capital Stock or assets, if in connection therewith the Company provides
an Officers' Certificate to the Trustee to the effect that the Company
will comply with, and does comply with, its obligations under the
covenant described under "--Limitation on Sales of Assets and Subsidiary
Stock" in respect of such disposition), the resulting, surviving or
transferee Person (if not the Company or a Person that was a Guarantor
immediately prior to such transaction) shall expressly assume, by a
Supplemental Guaranty Agreement, all the obligations of such Guarantor
under its Guaranty;
(2) immediately after giving effect to such transaction or transactions on a
PRO FORMA basis (and treating any Indebtedness which becomes an
obligation of the resulting, surviving or transferee Person as a result
of such transaction as having been issued by such Person at the time of
such transaction), no Default shall have occurred and be continuing; and
(3) the Company delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that such consolidation, merger,
conveyance, transfer or lease and such Supplemental Guaranty Agreement,
if any, complies with the Indenture.
GUARANTORS
Parent shall, and Parent and the Company shall cause all present and future
Subsidiaries of Parent (other than the Company) that fall within one or more of
the categories set forth below to, Guarantee, jointly and severally, payment of
the Notes and all other amounts due under the Indenture by either executing and
delivering the Indenture on the Issue Date or executing and delivering to the
Trustee after the Issue Date a Supplemental Guaranty Agreement:
(1) any Domestic Wholly Owned Subsidiary of Parent;
(2) any Subsidiary of Parent that Guarantees any Indebtedness of the Company
or any Domestic Guarantor (other than the Notes and the Guaranties);
(3) any Subsidiary of Parent, the assets of which are subject to a Lien
securing any Indebtedness of the Company or any Domestic Guarantor (other
than the Notes and the Guaranties); and
(4) any Subsidiary of Parent, more than 65% of the Voting Stock of which has
been pledged, directly or indirectly, individually or in the aggregate,
by Parent and its Subsidiaries, to secure Indebtedness of the Company or
any Domestic Guarantor (other than the Notes and the Guaranties).
The Guaranty by a Guarantor will be released under certain circumstances as
described under the heading "--Guaranties" above.
SEC REPORTS
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the SEC the annual reports, quarterly reports
110
<Page>
and other documents which the Company would have been required to file with the
SEC pursuant to such Section 13(a) or 15(d) or any successor provision thereto
if the Company were subject thereto, such documents to be filed with the SEC on
or prior to the respective dates (the "REQUIRED FILING DATES") by which the
Company would have been required to file them; PROVIDED, HOWEVER, if the Company
is not subject to Section 13(a) or 15(d) of the Exchange Act, the Company shall
not be required to file such reports and documents with the SEC under
Section 13(a) or 15(d) of the Exchange Act (or any successor provisions thereto)
so long as (i) Parent files the reports and documents with the SEC under
Section 13(a) or 15(d) of the Exchange Act that it is required to file and
(ii) the Company and Parent are in compliance with the requirements set forth in
Rule 3-10 of Regulation S-X under the Exchange Act.
The Company shall also (whether or not it is required to file reports with
the SEC), within 30 days of each Required Filing Date, (i) transmit by mail to
all holders of Notes, as their names and addresses appear in the applicable
security register, without cost to such holders, and (ii) file with the Trustee,
copies of the annual reports, quarterly reports and other documents (without
exhibits) which the Company has filed or would have filed, or which Parent has
filed, with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act, any
successor provisions thereto or this covenant. The Company shall not be required
to file any report with the SEC if the SEC does not permit such filing. In
addition, the Company shall furnish to the Trustee, to the holders of the Notes
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act and the exhibits omitted from the information furnished pursuant
to the preceding sentence, for so long as the Notes are not freely transferable
under the Securities Act.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due, continued
for 30 days;
(2) a default in the payment of principal of any Note when due at its Stated
Maturity, upon optional redemption, upon required purchase, upon
declaration of acceleration or otherwise;
(3) the failure by the Company or any Guarantor to comply with its
obligations under "--Certain Covenants--Merger and Consolidation" above;
(4) the failure by the Company or any Guarantor to comply for 30 days after
notice with its other agreements contained in the Indenture;
However, a default under clause (4) will not constitute an Event of Default
until the Trustee or the holders of at least 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration." Upon such
a declaration, such principal and interest shall be due and payable immediately.
In the event of a declaration of acceleration of the Notes because an Event of
Default described in clause (5) above has occurred and is continuing, the
declaration of acceleration of the Notes shall be automatically annulled if
(A) the event of default or payment default triggering such Event of Default
pursuant to clause (5) shall be remedied or cured by Parent or a Restricted
Subsidiary or waived by the holders of the relevant Indebtedness within 20 days
after the declaration of acceleration with respect thereto, (B) the annulment of
the acceleration of the Notes would not conflict with any judgment or decree of
a court of competent jurisdiction and (C) all existing Events of Default, except
nonpayment of principal,
111
<Page>
premium or interest on the Notes that became due solely because of the
acceleration of the Notes, have been cured or waived. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
Company or any Guarantor occurs and is continuing, the principal of and interest
on all the Notes will IPSO FACTO become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holders
of the Notes. Under certain circumstances, the holders of a majority in
principal amount of the outstanding Notes may rescind any such acceleration with
respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity; and
(5) holders of a majority in principal amount of the outstanding Notes have
not given the Trustee a direction inconsistent with such request within
such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a Note or that would involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee
must mail to each holder of the Notes notice of the Default within 90 days after
it occurs. Except in the case of a Default in the payment of principal of or
interest on any Note, the Trustee may withhold notice if and so long as a
committee of its Trust Officers determines that withholding notice is not
opposed to the interest of the holders of the Notes. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. We are required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or propose to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
(including consents obtained in connection with a purchase of or tender offer or
exchange offer for the Notes) and any past default or compliance with any
provisions may also be waived with the consent of the holders of a majority in
principal amount of the Notes then outstanding. However, without the consent of
each holder of an outstanding Note affected thereby, an amendment or waiver may
not, among other things:
(1) reduce the amount of Notes whose holders must consent to an amendment;
112
<Page>
(2) reduce the rate of or extend the time for payment of interest on any
Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) reduce the amount payable upon the redemption of any Note or change the
time at which any Note may be redeemed as described under "--Optional
Redemption";
(5) make any Note payable in money other than that stated in the Note;
(6) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on
or with respect to such holder's Notes;
(7) make any change in the provisions which require each affected holder's
consent to an amendment or waiver;
(8) make any change in the ranking or priority of any Note that would
adversely affect the Noteholders; or
(9) make any change in any Guaranty that would adversely affect the
Noteholders.
Notwithstanding the preceding, the covenants described under the caption
"--Change of Control" and "--Limitations on Sales of Assets and Subsidiary
Stock" may be amended as described in the last paragraphs of their respective
descriptions.
Notwithstanding the preceding, without the consent of any holder of the
Notes, the Company, the Guarantors and Trustee may amend the Indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor corporation of the
obligations of the Company or any Guarantor under the Indenture;
(3) to provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in
Section 163(f)(2)(B) of the Code);
(4) to add guarantees with respect to the Notes, including any Guaranties,
or to secure the Notes;
(5) to add to the covenants of the Company or any Guarantor for the benefit
of the holders of the Notes or to surrender any right or power conferred
upon the Company or any Guarantor;
(6) to make any change that does not adversely affect the rights of any
holder of the Notes in any material respect;
(7) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act; or
(8) to evidence the release of a Guarantor pursuant to and in accordance
with the terms of the Indenture.
However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior Indebtedness
of the Company or of a Guarantor then outstanding unless such holder of such
Senior Indebtedness (or its Representative) consents to such change.
The consent of the holders of the Notes is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
113
<Page>
After an amendment under the Indenture becomes effective, we are required to
mail to holders of the Notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the Notes, or any
defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers and exchanges.
DEFEASANCE
At any time, we may terminate all our obligations under the Notes and the
Indenture ("LEGAL DEFEASANCE"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and
to maintain a registrar and paying agent in respect of the Notes.
In addition, at any time we may terminate the subordination provisions
described above under "Ranking" and our obligations under "--Change of Control"
and under the covenants described under "--Certain Covenants" (other than the
covenant described under "--Merger and Consolidation"), the operation of the
cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default and Guarantor failure
provisions described under "--Defaults" above and the limitations contained in
clauses (3) and (4) of the first paragraph under "--Certain Covenants--Merger
and Consolidation" above ("COVENANT DEFEASANCE").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the Notes may not be accelerated because of an Event of Default
specified in clause (5) or (6) (with respect only to Significant Subsidiaries)
or (7) or (8) under "--Defaults" above or because of the failure of the Company
to comply with clause (3) or (4) of the first paragraph under "--Certain
Covenants--Merger and Consolidation" above. If we exercise our legal defeasance
option or our covenant defeasance option, each Guarantor will be released from
all of its obligations with respect to its Guaranty.
In order to exercise either of our defeasance options, we must irrevocably
deposit in trust (the "DEFEASANCE TRUST") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
U.S. Trust Company of Texas, N.A. is to be the Trustee under the Indenture
and Registrar and Paying Agent with regard to the Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received
114
<Page>
in respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions; PROVIDED, HOWEVER, if it acquires any
conflicting interest it must either eliminate such conflict within 90 days,
apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. If an Event of Default occurs (and is not cured), the Trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of Notes unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the Indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guarantor will have any liability for any obligations of the Company or
any Guarantor under the Notes, any Guaranty or the Indenture or for any claim
based on, in respect of, or by reason of such obligations or their creation.
Each Holder of the Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes. Such waiver and release may not be effective to waive liabilities
under the U.S. federal securities laws, and it is the view of the SEC that such
a waiver is against public policy.
GOVERNING LAW
The Notes and the Indenture will be governed by and construed in accordance
with the internal laws of the State of New York.
CERTAIN DEFINITIONS
"ADDITIONAL ASSETS" means:
(1) any property, plant or equipment used in a Related Business;
(2) Capital Stock of a Person that becomes a Qualified Restricted Subsidiary
as a result of the acquisition of such Capital Stock by Parent or a
Restricted Subsidiary; or
(3) Capital Stock of a Qualified Restricted Subsidiary, a Qualified Joint
Venture or a QJVGP.
"AFFILIATE" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"CONTROL" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing.
"AFFILIATE" shall also mean any beneficial owner of Capital Stock representing
10% or more of the total voting power of the Voting Stock (on a fully diluted
basis) of the Company or of rights or warrants to purchase such Capital Stock
(whether or not currently exercisable) and any Person who would be an Affiliate
of any such beneficial owner pursuant to the first sentence hereof.
"ASSET DISPOSITION" means any sale, lease, issuance, transfer or other
disposition (or series of related sales, leases, issuances, transfers or
dispositions) by Parent or any Restricted Subsidiary,
115
<Page>
including any disposition by means of a merger, consolidation or similar
transaction (each referred to for the purposes of this definition as a
"DISPOSITION"), of:
(1) any shares of Capital Stock of the Company or any other Restricted
Subsidiary of Parent (other than directors' qualifying shares or an
immaterial number of shares required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of business
of Parent or any Restricted Subsidiary; or
(3) any other assets of Parent or any Restricted Subsidiary outside of the
ordinary course of business of Parent or such Restricted Subsidiary.
Notwithstanding the foregoing, the following shall be deemed not to be Asset
Dispositions:
(A) a disposition by Parent or a Restricted Subsidiary to the Company or a
Guarantor;
(B) for purposes of the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only,
(i) a disposition that constitutes a Restricted Payment permitted by the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments" or a Permitted Investment and (ii) a transaction in accordance
with the covenant described under "--Certain Covenants--Merger and
Consolidation";
(C) for purposes of the covenant described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, the
trade or exchange by Parent or any Restricted Subsidiary of (i) any
assets of a kind used or usable in the primary business of Parent and its
Restricted Subsidiaries or any Capital Stock of a Restricted Subsidiary,
a QJVGP or a Qualified Joint Venture for (ii) any assets of a kind used
or usable in the primary business of Parent and its Restricted
Subsidiaries or any Capital Stock of a Person that is, or that shall
become upon such trade or exchange, a Qualified Restricted Subsidiary, a
QJVGP or a Qualified Joint Venture, and any cash or cash equivalents
necessary in order to achieve an exchange of equivalent value; PROVIDED,
HOWEVER, that (a) the value of the assets received by Parent and its
Restricted Subsidiaries in such trade or exchange is at least equal to
the fair market value (as determined in good faith by the Board of
Directors) of the assets so traded or exchanged and (b) such trade or
exchange shall constitute an Asset Disposition to the extent of the
amount of any cash, cash equivalents and assets other than assets of the
types specified in clause (ii) above received by Parent and its
Restricted Subsidiaries as consideration in such trade or exchange;
(D) for purposes of the covenant described under "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, the
sale of Capital Stock in a Qualified Restricted Subsidiary to a Strategic
Investor; PROVIDED, THAT (i) after giving effect to such sale, such
Qualified Restricted Subsidiary continues to constitute a Qualified
Restricted Subsidiary and (ii) an amount equal to the Net Available Cash
from such sale are applied in accordance with clauses (a)(3) and (a)(4)
of the covenant described under "Certain Covenants--Limitation on Sales
of Assets and Subsidiary Stock";
(E) the creation of a Lien;
(F) for purposes of the covenant described under "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" only, any
commercially reasonable foreclosure of a Lien on assets; PROVIDED, THAT
an amount equal to the Net Available Cash, if any, to Parent and its
Restricted Subsidiaries from such foreclosure are applied in accordance
with clauses (a)(3) and (a)(4) of the covenant described under "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock"; and
116
<Page>
(G) a disposition of assets with a fair market value of less than
$2.0 million.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of or redemption or similar payment with respect to such Indebtedness
multiplied by the amount of such payment, by
(2) the sum of all such payments.
"BANK INDEBTEDNESS" means all obligations pursuant to the Credit Agreement.
"BOARD OF DIRECTORS" means the board of directors of Parent or any committee
thereof duly authorized to act on behalf of such board.
"BUSINESS DAY" means each day which is not a Legal Holiday.
"CAPITAL LEASE OBLIGATION" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"CAPITAL STOCK" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON STOCK" of any Person means Capital Stock of such Person that does
not rank senior in any respect to, and does not have any preference or priority
over, any shares of Capital Stock of any other class of such Person, including
with respect to the payment of dividends or the distribution of assets upon any
voluntary or involuntary liquidation, dissolution or winding up of such Person.
"CONSOLIDATED COVERAGE RATIO" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA of Parent for the period of the most
recent four consecutive fiscal quarters for which financial statements are
available immediately preceding the date of such determination to
(y) Consolidated Interest Expense of Parent for such four fiscal quarters;
PROVIDED, HOWEVER, that:
(1) if Parent or any Restricted Subsidiary has Incurred any Indebtedness
since the beginning of such period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, or both, then EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a PRO FORMA basis to such Indebtedness and the
application of the proceeds therefrom as if such Indebtedness had been
Incurred and such proceeds had been applied on the first day of such
period;
(2) if Parent or any Restricted Subsidiary has repaid, repurchased, defeased
or otherwise discharged any Indebtedness since the beginning of such
period or if any Indebtedness is to be repaid, repurchased, defeased or
otherwise discharged on the date of the transaction giving rise to the
need to calculate the Consolidated Coverage Ratio, then EBITDA and
Consolidated Interest Expense for such period shall be calculated on a
PRO FORMA basis as if such discharge had occurred on the first day of
such period and as if Parent or such Restricted Subsidiary had not earned
the interest income actually earned (if any) during such
117
<Page>
period in respect of cash or Temporary Cash Investments used to repay,
repurchase, defease or otherwise discharge such Indebtedness;
(3) if, since the beginning of such period, Parent or any Restricted
Subsidiary shall have made any Asset Disposition, then EBITDA for such
period shall be reduced by an amount equal to EBITDA (if positive)
directly attributable to the assets which were the subject of such Asset
Disposition for such period, or increased by an amount equal to EBITDA
(if negative), directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable
to any Indebtedness of Parent or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to Parent and
its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period
directly attributable to the Indebtedness of such Restricted Subsidiary
to the extent Parent and its continuing Restricted Subsidiaries are no
longer liable for such Indebtedness after such sale);
(4) if, since the beginning of such period, Parent or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person that becomes a Restricted
Subsidiary) or an acquisition of assets outside of the ordinary course of
business, then EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving PRO FORMA effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or acquisition had
occurred on the first day of such period; and
(5) if, since the beginning of such period, any Person (that subsequently
became a Restricted Subsidiary or was merged with or into Parent or any
Restricted Subsidiary since the beginning of such period) shall have made
any Asset Disposition, any Investment or acquisition of assets that would
have required an adjustment pursuant to clause (3) or (4) above if made
by Parent or a Restricted Subsidiary during such period, then EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving PRO FORMA effect thereto as if such Asset Disposition, Investment
or acquisition had occurred on the first day of such period.
For purposes of this definition, whenever PRO FORMA effect is to be given to
an acquisition of assets, the amount of income or earnings relating thereto and
the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the PRO FORMA calculations shall be determined
in good faith by a responsible financial or accounting Officer of Parent.
If any Indebtedness bears a floating rate of interest and is being given PRO
FORMA effect, the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness, but if the remaining term of such Interest Rate Agreement is
less than 12 months, then such Interest Rate Agreement shall only be taken into
account for that portion of the period equal to the remaining term thereof).
The Consolidated Interest Expense attributable to interest on any
Indebtedness under a revolving credit facility the outstanding principal balance
of which is required to be computed on a PRO FORMA basis in accordance with the
foregoing shall be computed based upon the average daily balance of such
Indebtedness during the applicable period, PROVIDED, that such average daily
balance shall take into account the amount of any repayment of Indebtedness
under such revolving credit facility during the applicable period, to the extent
such repayment permanently reduced the commitments or amounts available to be
borrowed under such facility.
118
<Page>
"CONSOLIDATED INTEREST EXPENSE" of a Person means, for any period, the total
interest expense of such Person and its Restricted Subsidiaries, plus, to the
extent not included in such total interest expense, and to the extent incurred
by such Person or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to Capital Lease Obligations;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing;
(6) net payments pursuant to Interest Rate Agreements;
(7) Disqualified Stock dividends in respect of all Disqualified Stock held
by Persons other than such Person or a Wholly Owned Subsidiary of such
Person (other than dividends payable solely in Capital Stock (other than
Disqualified Stock) of such Person); PROVIDED, HOWEVER, that such
dividends will be multiplied by a fraction the numerator of which is one
and the denominator of which is one minus the effective combined tax rate
of the issuer of such Disqualified Stock (expressed as a decimal) for
such period (as estimated by the chief financial officer of such Person
in good faith);
(8) interest accruing on any Indebtedness of any other Person to the extent
such Indebtedness is Guaranteed by (or secured by the assets of) such
first Person or any of its Restricted Subsidiaries; and
(9) the cash contributions to any ESOP to the extent such contributions are
used by such ESOP to pay interest or fees to any Person (other than such
first Person) in connection with Indebtedness Incurred by such ESOP.
"CONSOLIDATED NET INCOME" of a Person means, for any period, the net income
of such Person and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there
shall not be included in such Consolidated Net Income:
(1) any net income of any Person (other than such first Person) if such
other Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, such first
Person's equity in the net income of any such other Person for such
period shall be included in such Consolidated Net Income only to the
extent of the aggregate amount of cash actually distributed by such
other Person during such period to such first Person or any of its
Restricted Subsidiaries as a dividend or other distribution (subject,
in the case of a dividend or other distribution paid to a Restricted
Subsidiary of such first Person, to the limitations contained in
clause (3) below); and
(B) such first Person's equity in a net loss of any such other Person for
such period shall be included in determining such Consolidated Net
Income;
(2) any net income (or loss) of any Person acquired by such first Person or
a Subsidiary of such first Person in a pooling of interests transaction
for any period prior to the date of such acquisition;
(3) any net income of any Restricted Subsidiary of such first Person to the
extent such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the
119
<Page>
making of distributions by such Restricted Subsidiary, directly or
indirectly, to such first Person, except that:
(A) subject to the exclusion contained in clause (4) below, the net
income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income to the extent of the
aggregate amount of cash actually distributed by such Restricted
Subsidiary during such period to such first Person or another
Restricted Subsidiary of such first Person as a dividend or other
distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary of such first
Person, to the limitation contained in this clause); and
(B) the net loss of any such Restricted Subsidiary for such period shall
be included in determining such Consolidated Net Income;
(4) any gain (but not loss) realized upon the sale or other disposition of
any assets of such first Person or its consolidated Subsidiaries
(including pursuant to any Sale/Leaseback Transaction) not made in the
ordinary course of business and any gain (but not loss) realized upon the
sale or other disposition of any Capital Stock of any Person;
(5) extraordinary gains or losses;
(6) the cumulative effect of a change in accounting principles;
(7) any unrealized gain or loss from foreign exchange transactions; and
(8) any non-cash compensation expense in connection with the issuance of
employee or independent contractor stock options.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants--Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any repurchases, repayments or redemptions
of Investments, proceeds realized on the sale of Investments or return of
capital to Parent or a Restricted Subsidiary to the extent such repurchases,
repayments, redemptions, proceeds or returns would increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D)
thereof.
"CREDIT AGREEMENT" means the Credit Agreement dated as of December 19, 2001,
among USP Domestic Holdings, Inc. and USPE Holdings Limited as co-borrowers, the
lenders from time to time parties thereto, Credit Suisse First Boston as
Administrative Agent, Lehman Commercial Paper Inc. as Syndication Agent, and
Societe Generale as Documentation Agent, together with the related documents
thereto (including any guarantees and security documents), as amended, extended,
renewed, restated, supplemented or otherwise modified (in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions) from time to time, and any agreement (and related documents)
governing Indebtedness Incurred to Refinance, in whole or in part, the
borrowings and commitments then outstanding or permitted to be outstanding under
such credit agreement or a successor credit agreement, whether by the same or
any other lenders or agents or group of lenders or agents.
"CREDIT FACILITIES" means, with respect to Parent and its Restricted
Subsidiaries, one or more debt facilities (including the Credit Agreement) or
commercial paper facilities with banks or other institutional lenders providing
revolving credit loans, term loans, production payments, receivables financing
(including through the sale of receivables) or letters of credit, in each case,
as amended, restated, modified, renewed, refunded, replaced or refinanced in
whole or in part from time to time.
"CURRENCY AGREEMENT" means, in respect of a Person, any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
120
<Page>
"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" with respect to a Person means:
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness of such Person which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to, at least $25.0 million and is specifically designated by such
Person in the instrument evidencing or governing such Senior Indebtedness
as "Designated Senior Indebtedness" for purposes of the Indenture.
"DISQUALIFIED STOCK" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable (other than redeemable only for
Capital Stock of such Person which is not itself Disqualified Stock)
pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the occurrence of
certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of the
Notes; PROVIDED, HOWEVER, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to purchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if:
(A) the "asset sale" or "change of control" provisions applicable to such
Capital Stock are not more favorable to the holders of such Capital Stock
than the terms applicable to the Notes and described under "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" and
"--Change of Control"; and
(B) any such requirement only becomes operative after compliance with such
terms applicable to the Notes, including the purchase of any Notes
tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; PROVIDED, HOWEVER, that if such
Disqualified Stock could not be required to be redeemed, repaid or repurchased
at the time of such determination, the redemption, repayment or repurchase price
will be the book value of such Disqualified Stock as reflected in the most
recent financial statements of such Person.
"DOMESTIC GUARANTOR" means Parent and each Domestic Subsidiary of Parent
that executes the Indenture on the Issue Date as a guarantor and each other
Domestic Subsidiary of Parent that thereafter Guarantees the Notes pursuant to
the terms of the Indenture, in each case unless and until such Domestic
Guarantor is released from its obligations under its Guaranty pursuant to the
terms of the Indenture.
121
<Page>
"DOMESTIC SUBSIDIARY" means any Restricted Subsidiary that is not a Foreign
Subsidiary, and "DOMESTIC WHOLLY OWNED SUBSIDIARY" means any Domestic Subsidiary
that is a Wholly Owned Subsidiary.
"EBITDA" of a Person for any period means the sum of Consolidated Net
Income, plus the following to the extent deducted in calculating such
Consolidated Net Income:
(1) all income tax expense of such Person and its consolidated Restricted
Subsidiaries;
(2) Consolidated Interest Expense of such Person;
(3) depreciation and amortization expense of such Person and its
consolidated Restricted Subsidiaries;
(4) all other non-cash charges of such Person and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures in any
future period); and
(5) any loss realized upon the sale or other disposition of any assets of
such Person or its consolidated Subsidiaries (including pursuant to any
Sale/Leaseback Transaction) not made in the ordinary course of business
and any loss realized upon the sale or other disposition of any Capital
Stock of any Person;
in each case for such period.
Notwithstanding the foregoing, the provisions above for taxes, depreciation,
amortization and non-cash charges of a Restricted Subsidiary shall be added to
Consolidated Net Income to compute EBITDA only to the extent (and in the same
proportion, including by reason of minority interests) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income.
"ESOP" means any employee stock ownership plan or a trust established by
Parent or any of its Subsidiaries for the benefit of their employees.
"EXCHANGE ACT" means the U.S. Securities Exchange Act of 1934, as amended.
"FOREIGN GUARANTOR" means each Foreign Subsidiary of Parent that, after the
Issue Date, Guarantees the Notes pursuant to the terms of the Indenture, in each
case unless and until such Foreign Subsidiary is released from its obligations
under its Guaranty pursuant to the terms of the Indenture.
"FOREIGN SUBSIDIARY" means any Subsidiary that (1) is not organized under
the laws of the United States, any state thereof or the District of Columbia and
(2) conducts substantially all of its business operations outside of the United
States.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting Standards
Board;
(3) such other statements by such other entity as approved by a significant
segment of the accounting profession; and
(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including PRO FORMA financial statements) in
periodic reports required to be filed pursuant to Section 13 of the
Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the
SEC.
122
<Page>
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person (including as
a general partner of a partnership) and any obligation, direct or indirect,
contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the obligee
of such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"GUARANTOR" means each Domestic Guarantor and, if any, each Foreign
Guarantor.
"GUARANTY" means a Guarantee by a Guarantor of the Company's obligations
with respect to the Notes.
"HEDGING OBLIGATIONS" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"HOLDER" or "NOTEHOLDER" means the Person in whose name a Note is registered
on the Registrar's books.
"INCUR" means issue, assume, Guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or Disqualified Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Person at the time it becomes a Restricted Subsidiary. The term
"INCURRENCE" when used as a noun shall have a correlative meaning. Solely for
purposes of determining compliance with "--Certain Covenants--Limitation on
Indebtedness," (1) amortization of debt discount or the accretion of principal
with respect to a non-interest bearing or other discount security, (2) the
payment of regularly scheduled interest in the form of additional Indebtedness
of the same instrument or the payment of regularly scheduled dividends on
Capital Stock in the form of additional Capital Stock of the same class and with
the same terms, and (3) unrealized losses or charges in respect of Hedging
Obligations (including those resulting from the application of FAS 133), in each
case will be deemed not to be Incurrences of Indebtedness.
"INDEBTEDNESS" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable arising in the ordinary
course of business);
(4) all obligations of such Person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction;
123
<Page>
(5) the amount of all obligations of such Person with respect to the
payment, purchase, redemption or other acquisition or retirement for
value of any Disqualified Stock of such Person or, with respect to any
Preferred Stock of any Subsidiary of such Person, the principal amount of
such Preferred Stock to be determined in accordance with the Indenture
(but excluding, in each case, any accrued dividends);
(6) all obligations of the type referred to in clauses (1) through (5) of
other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(7) all obligations of the type referred to in clauses (1) through (6) of
other Persons secured by any Lien on any assets of such Person (whether
or not such obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the value of such assets and
the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person,
if and to the extent, in the case of obligations of the types referred to in
clauses (1), (2) and (3) above, such obligations would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP.
Notwithstanding the foregoing, in connection with the purchase by Parent or
any Restricted Subsidiary of any business, the term "Indebtedness" will exclude
post-closing payment adjustments to which the seller may become entitled to the
extent such payment is determined by a final closing balance sheet or such
payment depends on the performance of such business after the closing; PROVIDED,
HOWEVER, that, at the time of closing, the amount of any such payment is not
determinable and, to the extent such payment thereafter becomes fixed and
determined, the amount is paid within 30 days thereafter.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; PROVIDED,
HOWEVER, that in the case of Indebtedness sold at a discount, the amount of such
Indebtedness at any time will be the accreted value thereof at such time.
"INDEPENDENT QUALIFIED PARTY" means an investment banking firm, accounting
firm or appraisal firm of national standing; PROVIDED, HOWEVER, that such firm
is not an Affiliate of Parent.
"INTEREST" with respect to a Note includes additional interest payable
pursuant to the Registration Rights Agreement.
"INTEREST RATE AGREEMENT" means, in respect of a Person, any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"INVESTMENT" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the lender) or other extensions
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. Except as otherwise provided for herein, the
amount of an Investment shall be its fair value at the time the Investment is
made and without giving effect to subsequent changes in value.
124
<Page>
For purposes of the definition of "Unrestricted Subsidiary," the definition
of "Restricted Payment" and the covenant described under "--Certain
Covenants--Limitation on Restricted Payments":
(1) "Investment" shall include the portion (proportionate to Parent's equity
interest in such Subsidiary) of the fair market value of the net assets
of any Subsidiary at the time that such Subsidiary is designated an
Unrestricted Subsidiary; and
(2) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors.
"ISSUE DATE" means December 19, 2001.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"LIEN" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"MANAGEMENT AGREEMENTS" means the management, service or similar agreements
pursuant to which Parent, any of its Qualified Restricted Subsidiaries or any
QJVGP or Qualified Joint Venture manages the assets and businesses of any of its
Restricted Subsidiaries or any Qualified Joint Ventures.
"MINORITY INTERESTS" means the interests in income of Parent's Restricted
Subsidiaries held by Persons other than Parent or a Restricted Subsidiary, as
reflected on Parent's consolidated financial statements.
"MOODY'S" means Moody's Investors Service, Inc.
"NET AVAILABLE CASH" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to such properties or assets or received in any other
noncash form), in each case net of:
(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses incurred, relocation
costs, and all Federal, state, provincial, foreign and local taxes
required to be accrued as a liability under GAAP, as a consequence of
such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of
the proceeds from such Asset Disposition; and
(3) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and
retained by Parent or any Restricted Subsidiary after such Asset
Disposition.
"NET CASH PROCEEDS," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
125
<Page>
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither Parent nor any Restricted Subsidiary (A) provides
credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), (B) is directly or
indirectly liable as a guarantor or otherwise, or (C) constitutes the
lender;
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement action against the issuer of such
Indebtedness) would permit (upon notice, lapse of time or both) any
holder of any Indebtedness of Parent or any Restricted Subsidiary to
declare a default on such Indebtedness of Parent or a Restricted
Subsidiary or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and
(3) as to which the lenders of such Indebtedness have been notified in
writing or have agreed in writing (in the agreement relating to the
Indebtedness or otherwise) that they will not have any recourse to the
assets of Parent or any of its Restricted Subsidiaries,
in each case, except for Guarantees of such Indebtedness made by Parent or a
Restricted Subsidiary in compliance with the covenants described under
"--Limitation on Indebtedness" and "--Limitation on Restricted Payments."
"OFFICER" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers.
"OPINION OF COUNSEL" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"PARENT" means United Surgical Partners International, Inc.
"PERMITTED ASSET DISPOSITION CONSIDERATION" means, in connection with any
Asset Disposition, (1) cash and Temporary Cash Investments, (2) securities,
notes and other obligations received by Parent or any Restricted Subsidiary from
the transferee that are converted into cash within 90 days of receipt
("converted obligations"), (3) the assumption by a Person (other than Parent or
a Subsidiary of Parent) of Senior Indebtedness of the Company or any Guarantor
or Indebtedness of a Restricted Subsidiary of Parent that is not a Guarantor (in
each case other than Indebtedness owed to Parent or a Subsidiary of Parent) and
the release of Parent and its Restricted Subsidiaries from all liability on such
Indebtedness in connection with such Asset Disposition, and (4) any other
consideration received by Parent or any Restricted Subsidiary in connection with
such Asset Disposition in an aggregate amount that, when taken together with all
other amounts outstanding under this clause (4) at the time of receipt of such
consideration, does not exceed the greater of (A) $5.0 million and (B) 5% of
Total Net Tangible Assets. For purposes of clause (4) of this definition,
(i) the "amount" of any item of consideration shall be the fair market value
thereof at the time of receipt by Parent or such Restricted Subsidiary, as
determined in good faith by the Board of Directors, and (ii) the "amount
outstanding" of any item of consideration at any time shall be (a) the amount
thereof at the time of receipt by Parent or such Restricted Subsidiary (without
giving effect to any subsequent changes in the fair market value thereof) minus
(b) the amount of cash, Temporary Cash Investments and converted obligations
received by Parent or a Restricted Subsidiary upon the subsequent disposition of
such item of consideration to the extent such subsequent disposition was made
(and the proceeds thereof have been applied) in accordance with the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock"
(regardless of whether such subsequent disposition constituted an Asset
Disposition and as if such covenant required 100% of the consideration received
to be cash, Temporary Cash Investments and converted obligations), but in no
event may the amount outstanding of any item of consideration be less than zero.
126
<Page>
"PERMITTED HOLDERS" means any of (i) Welsh, Carson, Anderson & Stowe VII,
L.P. and any of its affiliates, (ii) Donald E. Steen and any of his affiliates,
and (iii) any Person ("New Parent") that acquires all of the Capital Stock of
Parent if the holders of securities that represented 100% of the Voting Stock of
Parent immediately prior to such acquisition directly own 100% of the Voting
Stock of New Parent immediately after such acquisition and in the exact same
percentages as they owned Voting Stock of Parent immediately prior to such
acquisition.
"PERMITTED INVESTMENT" means an Investment by Parent or any Restricted
Subsidiary in:
(1) the Company, a Domestic Guarantor or a Person that will, upon the
making of such Investment, become a Domestic Guarantor; PROVIDED,
HOWEVER, that the primary business of such Domestic Guarantor is a
Related Business;
(2) another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Domestic Guarantor;
PROVIDED, HOWEVER, that such Person's primary business is a Related
Business;
(3) a Qualified Restricted Subsidiary, a Person that will, upon the making
of such Investment, become a Qualified Restricted Subsidiary, or a
Person that transfers or conveys all or substantially all of its assets
to a Qualified Restricted Subsidiary;
(4) Qualified Joint Ventures and QJVGPs in an aggregate amount that when
taken together with all other Investments made pursuant to this
clause (4) does not exceed the sum of (A) $25.0 million, (B) if,
subsequent to the Issue Date, Parent issues Capital Stock (other than
Disqualified Stock) to a Person (other than an issuance to a Subsidiary
of Parent or an ESOP) in exchange for the acquisition by Parent or any
of its Restricted Subsidiaries of Capital Stock of a Qualified
Restricted Subsidiary or a Person that becomes a Qualified Restricted
Subsidiary as a result of such transaction or assets of a kind used or
usable in the primary business of Parent and its Restricted
Subsidiaries, an amount equal to 100% of the aggregate net proceeds of
such issuance, based upon the fair market value of the Capital Stock or
assets acquired by Parent and its Restricted Subsidiaries, as
determined by the Board of Directors in good faith or, if such amount
would be in excess of $10.0 million, as determined by an Independent
Qualified Party, and (C) in the case of a Qualified Joint Venture that
becomes a Qualified Restricted Subsidiary because of additional
Investments therein made by Parent and its Subsidiaries, the portion
(proportionate to Parent's direct or indirect equity interest in such
Qualified Restricted Subsidiary) of the fair market value of the net
assets of such Qualified Joint Venture at the time such Qualified Joint
Venture becomes a Qualified Restricted Subsidiary; PROVIDED, HOWEVER,
that the amount under this clause (C) shall not exceed, in the case of
each such Qualified Joint Venture, the amount of Investments previously
made by Parent and its Restricted Subsidiaries in such Qualified Joint
Venture and any related QJVGP;
(5) cash and Temporary Cash Investments;
(6) receivables owing to Parent or any Restricted Subsidiary if created or
acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; PROVIDED,
HOWEVER, that such trade terms may include such concessionary trade
terms as Parent or any such Restricted Subsidiary deems reasonable
under the circumstances;
(7) payroll, travel and similar advances to cover matters that are expected
at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of
business;
127
<Page>
(8) loans or advances to employees or independent contractors made in the
ordinary course of business consistent with past practices of Parent or
such Restricted Subsidiary;
(9) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to Parent or any
Restricted Subsidiary or in satisfaction of judgments;
(10) any Investment made as a result of the receipt of non-cash
consideration from a sale of assets that was made pursuant to and in
compliance with the covenant described under the caption "--Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock";
(11) any Investments to the extent acquired in exchange for the issuance of
Capital Stock (other than Disqualified Stock) of Parent;
(12) Investments in securities of trade creditors, wholesalers, suppliers or
customers received pursuant to any plan of reorganization or similar
arrangement;
(13) Hedging Obligations incurred in compliance with "Certain
Covenants--Limitation on Indebtedness"; and
(14) Phoenix constituting a Guarantee by Parent of Non-Recourse Debt of
Phoenix in an amount not to exceed $20.0 million; PROVIDED THAT such
Guarantee is Incurred pursuant to and in compliance with
paragraph (a)(1) of the covenant described under "--Limitation on
Indebtedness."
"PERMITTED JUNIOR SECURITIES" of a Person means Capital Stock (other than
Disqualified Stock) and Indebtedness of such Person that are contractually
subordinated in right of payment to all Senior Indebtedness at least to the same
extent as the Notes are subordinated to Senior Indebtedness, and has no
scheduled installment of principal due, by redemption, sinking fund payment or
otherwise, on or prior to the Stated Maturity of the Notes.
"PERMITTED PAYMENT RESTRICTION" means any consensual encumbrance or
restriction (each, a "RESTRICTION") on the ability of any Restricted Subsidiary
to (a) pay dividends or make any other distributions on its Capital Stock to
Parent or a Restricted Subsidiary or pay any Indebtedness owed to Parent or a
Restricted Subsidiary, (b) make any loans or advances to Parent or a Restricted
Subsidiary or (c) transfer any of its property or assets to Parent or a
Restricted Subsidiary, which restriction satisfies all of the following
conditions: (i) such restriction becomes effective only upon the occurrence of a
default by such Restricted Subsidiary in the payment of principal of or interest
on Indebtedness that was Incurred by such Restricted Subsidiary in compliance
with the Indenture, (ii) such restriction was entered into by such Restricted
Subsidiary in good faith as a condition to the Incurrence by such Restricted
Subsidiary of such Indebtedness, and (iii) at the time such restriction was
incurred, there did not exist, and Parent and such Restricted Subsidiary in good
faith did not believe it to be likely that in the reasonably foreseeable future
there would exist, a default under such Indebtedness or an event or condition
that, with the giving of notice or the passage of time or both, would constitute
such a default.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"PHOENIX" means an Unrestricted Subsidiary of Parent the primary business of
which is to construct and operate a short-stay surgical hospital in the greater
Phoenix, Arizona area and a surgery center in Chandler, Arizona.
"PREFERRED STOCK," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
128
<Page>
"PRINCIPAL" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"QUALIFIED EQUITY OFFERING" means the issuance after the Issue Date of
Common Stock of Parent to any Person or Persons (other than a Subsidiary of
Parent, an ESOP or an employee or director of Parent or any of its Subsidiaries)
in a transaction resulting in Net Cash Proceeds to Parent of at least
$20.0 million.
"QUALIFIED JOINT VENTURE" means any Person that is not a Subsidiary and that
satisfies all of the following requirements:
(1) Parent, a Qualified Restricted Subsidiary, a QJVGP or a Qualified Joint
Venture has a Management Agreement to provide day-to-day management
services to such Person;
(2) except for Permitted Payment Restrictions, there are no restrictions,
directly or indirectly, on the ability of such Person to pay dividends or
make distributions to the holders of its Capital Stock;
(3) the Capital Stock of such Person consists solely of (A) Capital Stock
owned by Parent, its Qualified Restricted Subsidiaries and QJVGPs,
(B) Common Stock owned by Strategic Investors and (C) directors'
qualifying shares;
(4) the primary business of such Person is a Related Business; and
(5) such Person has no Indebtedness other than Non-Recourse Debt.
"QUALIFIED JOINT VENTURE GENERAL PARTNER" or "QJVGP" means any Unrestricted
Subsidiary of Parent that satisfies all of the following requirements:
(1) the Capital Stock of such QJVGP consists solely of Capital Stock owned
by Parent and its Wholly Owned Subsidiaries and Common Stock owned by
Strategic Investors;
(2) except for Permitted Payment Restrictions, there are no restrictions,
directly or indirectly, on the ability of such QJVGP to pay dividends or
make distributions to the holders of its Capital Stock;
(3) except to the extent restricted pursuant to a Permitted Payment
Restriction, such QJVGP customarily declares and pays regular monthly,
quarterly or semi-annual dividends or distributions to the holders of its
Capital Stock in an amount equal to substantially all of the available
cash flow of such QJVGP for such period, as determined in good faith by
the board of directors, board of governors or such other individuals
performing similar functions, subject to such ordinary and customary
reserves and other amounts as, in the good faith judgment of such
individuals, may be necessary so that the business of such QJVGP may be
properly and advantageously conducted at all times, and Parent intends to
cause such QJVGP to continue to declare and pay such regular dividends or
distributions in the manner set forth above;
(4) all Capital Stock owned by such QJVGP is Capital Stock of a Qualified
Joint Venture that is a partnership;
(5) such QJVGP conducts no business other than (A) owning general
partnership interests in, and making other Investments in, Qualified
Joint Ventures that are partnerships and (B) providing day-to-day
management services to Qualified Joint Ventures pursuant to Management
Agreements; and
(6) such QJVGP has no Indebtedness other than Non-Recourse Debt.
129
<Page>
"QUALIFIED RESTRICTED SUBSIDIARY" means (a) the Company and (b) any other
Restricted Subsidiary of Parent, including a Wholly Owned Subsidiary, that
satisfies all of the following requirements:
(1) except for Permitted Payment Restrictions, there are no restrictions,
directly or indirectly, on the ability of such Restricted Subsidiary to
pay dividends or make distributions to the holders of its Capital Stock;
(2) except to the extent restricted pursuant to a Permitted Payment
Restriction, such Restricted Subsidiary customarily declares and pays
regular monthly, quarterly or semi-annual dividends or distributions to
the holders of its Capital Stock in an amount equal to substantially all
of the available cash flow of such Restricted Subsidiary for such period,
as determined in good faith by the board of directors, board of governors
or such other individuals performing similar functions, subject to such
ordinary and customary reserves and other amounts as, in the good faith
judgment of such individuals, may be necessary so that the business of
such Restricted Subsidiary may be properly and advantageously conducted
at all times, and Parent intends to cause such Restricted Subsidiary to
continue to declare and pay such regular dividends or distributions in
the manner set forth above;
(3) the Capital Stock of such Restricted Subsidiary consists solely of
(A) Capital Stock owned by Parent and its Qualified Restricted
Subsidiaries, (B) Common Stock owned by Strategic Investors and
(C) directors' qualifying shares; and
(4) the primary business of such Restricted Subsidiary is a Related
Business.
"REFINANCE" means, in respect of any Indebtedness, to refinance or refund,
or to issue other Indebtedness in exchange or replacement for, such
Indebtedness. "REFINANCED" and "REFINANCING" shall have correlative meanings.
"REFINANCING INDEBTEDNESS" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced;
(3) such Refinancing Indebtedness has an aggregate principal amount (or if
Incurred with original issue discount, an aggregate issue price) that is
equal to or less than the aggregate principal amount (or if Incurred with
original issue discount, the aggregate accreted value) then outstanding
or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced;
(4) if the Indebtedness being Refinanced is subordinated in right of payment
to the Notes or any Guaranty, such Refinancing Indebtedness is
subordinated in right of payment to the Notes or such Guaranty on terms
at least as favorable to the Holders of the Notes as those contained in
the documentation governing the Indebtedness being Refinanced; and
(5) such Refinancing Indebtedness is Incurred only by the Person that is the
obligor on the Indebtedness being Refinanced.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated as of December 19, 2001, among the Company, the Guarantors, Credit Suisse
First Boston Corporation, Lehman Brothers Inc. and SG Cowen Securities
Corporation.
130
<Page>
"RELATED BUSINESS" means any business in which Parent was engaged on the
Issue Date and any business directly related to the primary business in which
Parent was engaged on the Issue Date.
"REPRESENTATIVE" means with respect to a Person any trustee, agent or
representative (if any) for an issue of Senior Indebtedness of such Person.
"RESTRICTED PAYMENT" with respect to any Person means:
(1) the declaration or payment of any dividends or any other distributions
of any sort in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving such Person) or
similar payment to the direct or indirect holders of its Capital Stock
(other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and dividends or distributions
payable solely to Parent or a Wholly Owned Subsidiary);
(2) the purchase, redemption or other acquisition or retirement for value of
any Capital Stock of Parent or any Restricted Subsidiary (other than a
Wholly Owned Subsidiary), including the exercise of any option to
exchange any Capital Stock (other than into Capital Stock of Parent that
is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations of such
Person; or
(4) the making of any Investment (other than a Permitted Investment) in any
Person.
"RESTRICTED SUBSIDIARY" means any Subsidiary that is not an Unrestricted
Subsidiary.
"RESTRICTED SUBSIDIARY LEVERAGE RATIO" as of any date of determination means
the ratio, on a PRO FORMA basis, of (1) the consolidated Indebtedness of
Parent's Restricted Subsidiaries (other than the Company and the Domestic
Guarantors) as of such date of determination (other than Indebtedness Incurred
pursuant to and in compliance with paragraph (b)(1) of the covenant described
under "--Limitation on Indebtedness") to (2) EBITDA of such Persons for the
period of the most recent four consecutive fiscal quarters for which financial
statements are available immediately preceding the date of such determination
plus the Minority Interests for such period.
"S&P" means Standard and Poor's Ratings Group.
"SALE/LEASEBACK TRANSACTION" means an arrangement relating to property owned
by Parent or a Restricted Subsidiary on the Issue Date or thereafter acquired by
Parent or a Restricted Subsidiary whereby Parent or a Restricted Subsidiary
transfers such property to a Person and Parent or a Restricted Subsidiary
thereafter leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the U.S. Securities Act of 1933, as amended.
"SENIOR INDEBTEDNESS" means, with respect to the Company or any Guarantor:
(1) Indebtedness of such Person, whether outstanding on the Issue Date or
thereafter Incurred; and
(2) accrued and unpaid interest (including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to
such Person whether or not post-filing interest is allowed in such
proceeding) in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable;
131
<Page>
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate or PARI PASSU in right of payment to the
Notes or the Guaranty of such Person, as the case may be; PROVIDED, HOWEVER,
that Senior Indebtedness shall not include:
(A) any obligation of such Person to any Subsidiary;
(B) any liability for Federal, state, local or other taxes owed or owing by
such Person;
(C) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);
(D) any Indebtedness of such Person (and any accrued and unpaid interest in
respect thereof) which is subordinate or junior in right of payment to
any other Indebtedness or other obligation of such Person; or
(E) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the Indenture.
"SENIOR SUBORDINATED INDEBTEDNESS" means, with respect to a Person, the
Notes, the Guaranties and any other Indebtedness of such Person that
specifically provides that such Indebtedness is to rank PARI PASSU with the
Notes or such Guaranty, as the case may be, in right of payment and is not
subordinated by its terms in right of payment to any Indebtedness or other
obligation of such Person which is not Senior Indebtedness of such Person.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Parent within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"STATED MATURITY" means, with respect to any security, the date specified in
such security as the fixed date on which the final payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"STRATEGIC INVESTORS" means physicians, hospitals, health systems, other
healthcare providers, other healthcare companies and other similar strategic
joint venture partners which joint venture partners are actively involved in the
day-to-day operations of providing surgical care and surgery-related services,
or, in the case of physicians, that have retired therefrom, individuals who are
former owners or employees of surgical care facilities purchased by Parent, any
of its Restricted Subsidiaries or any Qualified Joint Venture, and consulting
firms that receive Common Stock solely as consideration for consulting services
performed.
"SUBORDINATED OBLIGATION" means, with respect to a Person, any Indebtedness
of such Person (whether outstanding on the Issue Date or thereafter Incurred)
which is subordinate or junior in right of payment to the Notes or a Guaranty of
such Person, as the case may be, pursuant to a written agreement to that effect.
"SUBSIDIARY" means, with respect to any Person:
(A) any corporation, association, partnership, limited liability company or
other business entity of which more than 50% of the total voting power of shares
of Voting Stock is at the time owned or controlled, directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person; or
132
<Page>
(B) any corporation, association, partnership, limited liability company or
other business entity, the financial statements of which are consolidated with
the Parent's financial statements under GAAP as applied by the Parent on the
Issue Date.
Unless otherwise specified or appropriate in the context, "SUBSIDIARY" means
a Subsidiary of Parent, and includes the Company where appropriate in the
context.
"SUPPLEMENTAL GUARANTY AGREEMENT" means a supplemental indenture, in a form
reasonably satisfactory to the Trustee, pursuant to which a Guarantor guarantees
the Company's obligations with respect to the Notes on the terms provided for in
the Indenture.
"TEMPORARY CASH INVESTMENTS" means any of the following:
(1) any investment in direct obligations of the United States of America or
any agency thereof or obligations guaranteed by the United States of
America or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the
laws of the United States of America, any State thereof or any foreign
country recognized by the United States of America, and which bank or
trust company has capital, surplus and undivided profits aggregating in
excess of $50.0 million (or the foreign currency equivalent thereof) and
has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or
any money-market fund sponsored by a registered broker dealer or mutual
fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2)
above;
(4) investments in commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an Affiliate
of Parent) organized and in existence under the laws of the United States
of America or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is
made of "P-1" (or higher) according to Moody's or "A-1" (or higher)
according to S&P; and
(5) investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth
or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or
"A" by Moody's.
"TOTAL NET TANGIBLE ASSETS" means the total consolidated net assets, less
goodwill and intangibles, of Parent and its Restricted Subsidiaries, as shown on
the balance sheet of Parent as of the end of the most recent fiscal quarter for
which financial statements are available.
"TRUSTEE" means United States Trust Company of Texas until a successor
replaces it and, thereafter, means the successor.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939 (15 U.S.C.
SectionSection 77aaa-77bbbb) as in effect on the Issue Date.
"TRUST OFFICER" means any officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"UNRESTRICTED SUBSIDIARY" means:
(1) any Subsidiary of Parent that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below;
133
<Page>
(2) any Subsidiary of an Unrestricted Subsidiary; and
(3) Global Healthcare Partners, Ltd., Phoenix, the QJVGPs in existence on
the Issue Date and their respective Subsidiaries, if any;
in each case unless and until such time as such Subsidiary is designated a
Restricted Subsidiary for purposes of the Indenture.
The Board of Directors may designate any Subsidiary of Parent (including any
newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary if
(A) neither such Subsidiary nor any of its Subsidiaries owns any Capital Stock
or Indebtedness of, or holds any Lien on any property of, Parent or any other
Subsidiary of Parent that is not a Subsidiary of the Subsidiary to be so
designated, (B) such designation would be permitted under the covenant described
under "--Certain Covenants--Limitation on Restricted Payments" (the amount of
such Restricted Payment being calculated in the manner set forth in the
definition of the term "Investment"), (C) such Subsidiary has no Indebtedness
other than Non-Recourse Debt, and (D) immediately after giving effect to such
designation, the Company could Incur $1.00 of additional Indebtedness under
paragraph (a)(1) of the covenant described under "--Certain
Covenants--Limitation on Indebtedness."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving effect to such designation
(A) the Company could Incur $1.00 of additional Indebtedness under
paragraph (a)(1) of the covenant described under "--Certain Covenants--
Limitation on Indebtedness" and (B) no Default shall have occurred and be
continuing.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"VOTING STOCK" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by Parent or
one or more Wholly Owned Subsidiaries.
134
<Page>
TAX CONSIDERATIONS
The following discusssion is a summary of certain federal income tax
considerations relevant to the exchange of old notes for new notes, but does not
purport to be a complete analysis of all potential tax effects. This discussion
is based upon the provisions of the Internal Revenue Code of 1986, as amended,
applicable Treasury Regulations promulgated and proposed thereunder, judicial
authority and administrative interpretations, as of the date hereof, all of
which are subject to change, possibly with retroactive effect, or are subject to
different interpretations. This discussion does not address the tax
considerations arising under the laws of any foreign, state, local, or other
jurisdiction.
We believe that the exchange of old notes for new notes should not be an
exchange or otherwise a taxable event to a holder for United States federal
income tax purposes. Accordingly, a holder should have the same adjusted issue
price, adjusted basis and holding period in the new notes as it had in the old
notes immediately before the exchange.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Securities and Exchange
Commission in no action letters issued to third parties, we believe that you may
transfer new notes issued in the exchange offer in exchange for the old notes
if:
- you acquire the new notes in the ordinary course of your business; and
- you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of the new notes.
You may not participate in the exchange offer if you are:
- our "affiliate" within the meaning of Rule 405 under the Securities Act;
or
- a broker-dealer that acquired old notes directly from us.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
such old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration date of the exchange offer, we will make this prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until , 2002, all dealers effecting
transactions in the new notes may be required to deliver a prospectus.
If you wish to exchange new notes for your old notes in the exchange offer,
you will be required to make representations to us as described in "Exchange
Offer--Purpose and Effect of the Exchange Offer" and "--Procedures for
Tendering--Your Representations to Us" in this prospectus and in the letter of
transmittal. In addition, if you are a broker-dealer who receives new notes for
your own account in exchange for old notes that were acquired by you as a result
of market-making activities or other trading activities, you will be required to
acknowledge that you will deliver a prospectus in connection with any resale by
you of the new notes.
We will not receive any proceeds from any sale of new notes by
broker-dealers. New notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may
135
<Page>
receive compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such new notes. Any broker-dealer that
resells new notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
such new notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of new notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securites Act. The letter of transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the expiration date of the exchange offer we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer (including the expenses of one counsel for the holders of the old
notes) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the old notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the new notes offered in this exchange offer will be passed
upon for us by Vinson & Elkins L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements and schedule of United Surgical
Partners International, Inc. as of December 31, 2000 (restated) and 1999, and
for the years ended December 31, 2000 (restated) and 1999 and the period from
February 7, 1998 (inception) through December 31, 1998, and the consolidated
financial statements of OrthoLink Physicians Corporation as of and for the year
ended December 31, 2000 have been included herein in reliance upon the reports
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The reports of KPMG LLP for United Surgical Partners
International, Inc. refer to a restatement of the December 31, 2000 financial
statements due to a reclassification of debt and the consolidation of a
previously unconsolidated entity.
The consolidated financial statements of Aspen Healthcare Holdings Limited
as of March 31, 2000 and for the three-month period then ended have been
included herein in reliance upon the report of KPMG, chartered accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of OrthoLink Physicians Corporation at December 31, 1999
and 1998 and for each of the two years in the period ended December 31, 1999 as
set forth in their report. The OrthoLink Physicians Corporation consolidated
financial statements are included in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
The consolidated financial statements of Aspen Healthcare Holdings Limited
as of December 31, 1999 and 1998, and for the year ended December 31, 1999 and
the ten-month period ended December 31, 1998 have been included herein in
reliance upon the report of Arthur Andersen, chartered accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
136
<Page>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Commission. Our filings with the Commission are also
available to the public from the Commission's website at HTTP://WWW.SEC.GOV. Our
parent's common stock is listed and traded on The Nasdaq Stock Market's National
Market under the trading symbol "USPI."
In addition, pursuant to the indenture governing the new notes, we have
agreed to the extent permitted by the Commission to file with the Commission and
in all events to distribute to the Trustee (as defined in "Description of the
New Notes--Certain Definitions") our annual reports containing audited annual
consolidated financial statements and our quarterly reports containing our
unaudited consolidated financial statements for each of the three first quarters
of each fiscal year. We will do this without regard to whether we are subject to
the informational requirements of the Securities Exchange Act.
While any old notes remain outstanding, we will make available, upon
request, to any beneficial owner and any prospective purchaser of notes the
information required pursuant to Rule 144A(d)(4) under the Securities Act during
any period in which we are not subject to Section 13 or 15(d) of the Exchange
Act. Any such request should be directed Investor Relations, United Surgical
Partners Holdings, Inc., at 15305 Dallas Parkway, Addison, Texas 75001.
137
<Page>
SUMMARY PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma as adjusted consolidated statement of operations
data give effect to:
- our parent's acquisition of OrthoLink Physicians Corporation as if it
had occurred on January 1, 2000;
- our recent acquisition of a 35% interest in a surgical facility in
Torrance, California, and corresponding entry into a contract to manage
that facility, as if the transaction had occurred on January 1, 2000;
- the conversion of our Class A and Class B common stock, Series C
convertible preferred stock and convertible subordinated note with
Baylor Health Care System into shares of our common stock;
- the sale of 10,350,000 shares of our parent's common stock in its
initial public offering for a price of $14.00 per share, after
deducting the underwriting discount and offering expenses, and the
application of the net proceeds to repay outstanding indebtedness and
to redeem each outstanding share of our parent's Series A redeemable
preferred stock;
- for the year ended December 31, 2000 only, our acquisition of Aspen
Healthcare Holdings Limited as if it had occurred on January 1, 2000;
- the sale of $150 million of Senior Subordinated Notes (the old notes),
which was completed on December 19, 2001;
- the redemption of the Series D redeemable preferred stock of our
parent;
- the repayment of the existing 10% senior subordinated notes of our
subsidiary, USP Domestic Holdings, Inc.; and
- the repayment of the existing domestic credit facility of our
subsidiary, USP Domestic Holdings, Inc., and the repayment and
termination of the Spanish credit facility of our subsidiary, United
Surgical Partners Europe, S.L.
The unaudited pro forma balance sheet data give effect to:
- the sale of $150 million of Senior Subordinated Notes (the old notes),
which was completed on December 19, 2001;
- the redemption of the Series D redeemable preferred stock of our
parent;
- the repayment of the existing 10% senior subordinated notes of our
subsidiary, USP Domestic Holdings, Inc.; and
- the repayment of the existing domestic credit facility of our
subsidiary, USP Domestic Holdings, Inc., and the repayment and
termination of the Spanish credit facility of our subsidiary, United
Surgical Partners Europe, S.L.
The unaudited pro forma combined condensed information is presented for
illustrative purposes. Net income from discontinued operations of $0.3 million
recognized by OrthoLink in the year ended December 31, 2000 in connection with
the discontinued operations of a subsidiary are not reflected in the unaudited
pro forma combined condensed statements of operations for the year ended
December 31, 2000. The pro forma adjustments are based on management's estimates
of the value of the tangible and intangible assets acquired. The actual
adjustments may differ materially from those presented in these unaudited pro
forma combined condensed financial statements.
The unaudited pro forma combined condensed information does not purport to
represent what our results actually would have been if the acquisitions and
other events had occurred at the dates indicated nor does such information
purport to project our results for any future period.
P-1
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
ASPEN
THREE
MONTHS
USPI ENDED
HISTORICAL ORTHOLINK MARCH 31, COAST PRO FORMA PRO FORMA
RESTATED (A) HISTORICAL 2000 (B) HISTORICAL (C) ADJUSTMENTS IPO
------------ ---------- --------- -------------- ----------- ----------
Revenues........................... $138,408 $123,309 $10,079 $1,330 $(76,184)(d)
(3,353)(d)
1,392 (e)
238 (f)
Operating expenses, excluding 116,621 114,285 7,059 -- (76,184)(d)
depreciation and amortization.... 1,392 (e)
(529)(g)
Depreciation and amortization...... 14,138 5,542 795 -- 998 (h)
121 (i)
404 (f)
-------- -------- ------- ------ -------- -------
Operating income (loss)............ 7,649 3,482 2,225 1,330 (4,109) --
Interest expense, net.............. (11,628) (4,127) (874) -- (1,074)(j) 7,560 (l)
Other expense...................... (782) -- -- -- -- --
-------- -------- ------- ------ -------- -------
Income (loss) before minority (4,761) (645) 1,351 1,330 (5,183) 7,560
interests........................
Minority interests in income of (2,332) (41) -- -- -- --
consolidated subsidiaries........
-------- -------- ------- ------ -------- -------
Income (loss) before income (7,093) (686) 1,351 1,330 (5,183) 7,560
taxes............................
Income tax (expense) benefit....... (1,070) (106) (402) -- 56 (k) --
-------- -------- ------- ------ -------- -------
Net income (loss).................. (8,163) (792) 949 1,330 (5,127) 7,560
Preferred stock dividends.......... (5,971) -- -- -- -- 3,077 (o)
(2,000)(p)
-------- -------- ------- ------ -------- -------
Net income (loss) attributable to
common stockholders before
extraordinary item............... $(14,134) $ (792) $ 949 $1,330 $ (5,127) $ 8,637
Extraordinary item, net of tax..... --
Net income (loss) attributable to
common stockholders..............
Loss per common share before
extraordinary item
Basic............................ $ (1.80)
Diluted.......................... $ (1.80)
Loss per common share,
extraordinary item
Basic............................
Diluted..........................
Loss per common share after
extraordinary item
Basic............................
Diluted..........................
Weighted average shares used in
earnings per common and common
equivalent share computations (in
thousands):
Basic............................ 7,850 3,391 (m) 12,600 (q)
Diluted.......................... 7,850 3,391 (m) 12,600 (q)
<Caption>
PRO FORMA PRO FORMA
DEBT OFFERING AS ADJUSTED
------------- -----------
Revenues........................... $195,219
Operating expenses, excluding 162,644
depreciation and amortization....
Depreciation and amortization...... 21,998
-------- --------
Operating income (loss)............ -- 10,577
Interest expense, net.............. (11,181)(r) (21,635)
(600)(t)
289 (v)
Other expense...................... -- (782)
-------- --------
Income (loss) before minority (11,492) (11,840)
interests........................
Minority interests in income of -- (2,373)
consolidated subsidiaries........
-------- --------
Income (loss) before income (11,492) (14,213)
taxes............................
Income tax (expense) benefit....... (443)(n) (1,965)
-------- --------
Net income (loss).................. (11,935) (16,178)
Preferred stock dividends.......... -- (2,894)
2,000 (s)
-------- --------
Net income (loss) attributable to
common stockholders before
extraordinary item............... $ (9,935) $(19,072)
Extraordinary item, net of tax..... (6,794)(u) (6,794)
--------
Net income (loss) attributable to $(25,866)
common stockholders..............
========
Loss per common share before
extraordinary item
Basic............................ $ (0.80)
Diluted.......................... $ (0.80)
Loss per common share,
extraordinary item
Basic............................ $ (0.28)
Diluted.......................... $ (0.28)
Loss per common share after
extraordinary item
Basic............................ $ (1.08)
Diluted.......................... $ (1.08)
Weighted average shares used in
earnings per common and common
equivalent share computations (in
thousands):
Basic............................ 23,841
Diluted.......................... 23,841
</Table>
See accompanying notes to the Unaudited Pro Forma Combined Condensed Statement
of Operations.
P-2
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
ORTHOLINK
PERIOD FROM
JANUARY 1,
2001
THROUGH
USPI FEBRUARY 11, COAST PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL 2001 HISTORICAL (C) ADJUSTMENTS IPO DEBT OFFERING AS ADJUSTED
----------- ------------ -------------- ----------- ---------- ------------- -----------
Revenues................... $174,515 $4,701 $1,084 $205 (f) $180,505
Operating expenses, 131,829 3,193 -- 135,022
excluding depreciation
and amortization.........
Depreciation and 19,190 609 -- 35 (h) 20,137
amortization............. 303 (f)
-------- ------ ------ ---- ------ -------- --------
Operating income (loss).... 23,496 899 1,084 (133) -- -- 25,346
Interest expense, net...... (13,038) (415) -- 3,492 (l) (6,801)(r) (17,001)
(450)(t)
211 (v)
Other expense.............. (49) -- -- -- -- -- (49)
-------- ------ ------ ---- ------ -------- --------
Income (loss) before 10,409 484 1,084 (133) 3,492 (7,040) 8,296
minority interests.......
Minority interests in (5,175) (83) -- -- -- -- (5,258)
income of consolidated
subsidiaries.............
-------- ------ ------ ---- ------ -------- --------
Income (loss) before income 5,234 401 1,084 (133) 3,492 (7,040) 3,038
taxes....................
Income tax (expense) (1,238) (140) -- 123 (k) (537)(n) (1,792)
benefit..................
-------- ------ ------ ---- ------ -------- --------
Net income (loss).......... 3,996 261 1,084 (10) 3,492 (7,577) 1,246
Preferred stock (2,251) -- -- -- 1,654 (o) -- --
dividends................ (899)(p) 1,496 (s)
-------- ------ ------ ---- ------ -------- --------
Net income (loss) $ 1,745 $ 261 $1,084 $(10) $4,247 $ (6,081) $ 1,246
attributable to common
stockholders before
extraordinary item.......
Extraordinary item, net of -- (6,353)(u) (6,353)
tax......................
--------
Net income (loss) $ (5,107)
attributable to common
stockholders.............
========
Earnings (loss) per common
share before
extraordinary item
Basic.................... $ 0.11 $ 0.05
Diluted.................. $ 0.10 $ 0.05
Loss per common share,
extraordinary item
Basic.................... $ (0.26)
Diluted.................. $ (0.26)
Loss per common share after
extraordinary item
Basic.................... $ (0.21)
Diluted.................. $ (0.21)
Weighted average shares
used in earnings per
common and common
equivalent share
computations (in
thousands):
Basic.................... 16,458 527 (m) 7,328 (q) 24,313
Diluted.................. 17,374 527 (m) 7,328 (q) 24,313
</Table>
See accompanying notes to the Unaudited Pro Forma Combined Condensed Statement
of Operations.
P-3
<Page>
NOTES TO UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS AND POUNDS IN THOUSANDS)
(a) On September 6, 2001, we were advised by the Commission that, based on
the facts and circumstances presented by us, Day-Op Center of Long
Island, Inc. must be consolidated pursuant to an interpretation of
EITF 97-2. As a result, we have restated our consolidated financial
statements in order to consolidate a previously unconsolidated entity.
(b) Represents historical Aspen Healthcare Holdings Limited results of
operations for the three months ended March 31, 2000 after the following:
- conversion from U.K. GAAP to U.S. GAAP; and
- conversion from U.K. pounds to U.S. dollars using the average
exchange rate for the year.
The following table reconciles Aspen income in accordance with U.K.
GAAP to U.S. GAAP:
<Table>
Income from operations in accordance with U.K. GAAP........ L 527
U.S. GAAP adjustments:
Additional goodwill amortization resulting from deferred
income tax............................................. (15)
Pension expense.......................................... (40)
Capitalization of interest expense....................... 51
Tax effect of above adjustments.......................... (3)
Deferred income tax...................................... 71
-------
Net income in accordance with U.S. GAAP.................. L 591
Foreign currency exchange rate........................... 1.6068
-------
Income from operations in accordance with U.S. GAAP...... $ 949
-------
</Table>
(c) Represents our 35% share of the net earnings of Coast Surgery Center of
South Bay, Inc. included as revenue as the operations are central to our
business strategy.
(d) The following adjustments reflect the restructuring of OrthoLink's
service agreements with physician practices whereby (i) the service fee
is reduced as a percentage of practice earnings, (ii) the remaining terms
of the agreements are reduced to 15 years, (iii) the physicians'
professional corporations hire all direct employees and assume certain
leases and operating contracts, and (iv) the physicians' professional
corporations assume all clinical facility expenses of the practices:
<Table>
Eliminate salary and other clinical facility expenses
assumed by practices..................................... $76,184
Reflect approximate 25% reduction in service fee........... $ 3,353
</Table>
(e) Adjustment to reclassify OrthoLink's equity in earnings of
unconsolidated entities to revenues as the operations are central to our
business strategy.
(f) Represents income derived from a contract to manage the Coast Surgery
Center of South Bay, Inc. and amortization of the intangible asset
generated by this acquisition.
(g) Eliminates expenses incurred by OrthoLink that are directly related to
its acquisition by USPI.
P-4
<Page>
NOTES TO UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS AND POUNDS IN THOUSANDS)
(h) Adjusts amortization expense for the following intangible related to the
OrthoLink merger:
<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2000 SEPTEMBER 30, 2001
------------------ -------------------
Record amortization related to the
following intangibles:
Goodwill of $22,334 amortized over
25 year period.................. $ 893 $ 74
Value of $17,428 assigned to
service agreements amortized
over their 15 year life......... 1,162 97
Eliminate historical amortization
expense........................... (1,057) (136)
------- -----
$ 998 $ 35
======= =====
</Table>
(i) Adjusts depreciation and amortization expense to reflect the allocation
of the Aspen purchase price to the fair value of assets acquired.
(j) Increases interest expense to reflect incremental borrowings related to
the Aspen acquisition as outstanding for the three months ended
March 31, 2000:
<Table>
<Caption>
INSTRUMENT AMOUNT INTEREST RATE INTEREST EXPENSE
- ---------- -------- ------------- ----------------
Senior subordinated notes
Face amount.................... $36,000 10.0% $ 900
Discount amortization.......... 131
Loans from former owners......... 2,867 6.0% 43
------
Proforma adjustment............ $1,074
======
</Table>
(k) Eliminates the U.S. federal tax on OrthoLink income as a result of the
availability of USPI net operating loss carryforwards.
(l) Adjusts interest expense to give effect to each of the following events
as if they had occurred on January 1, 2000:
- the consummation of our public offering of common stock and the use
of estimated net proceeds to repay a portion of outstanding
indebtedness; and
- the conversion of our convertible subordinated note into common
stock; and
P-5
<Page>
NOTES TO UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS AND POUNDS IN THOUSANDS)
- the exchange of our 7% senior subordinated notes for Series D
redeemable preferred stock.
<Table>
<Caption>
INTEREST EXPENSE
INCREASE/(DECREASE)
----------------------------------------
YEAR ENDED NINE MONTHS ENDED
INSTRUMENT INTEREST RATE DECEMBER 31, 2000 SEPTEMBER 30, 2001
- ---------- ------------------ ------------------ -------------------
Borrowings
eliminated:
Chase revolving
credit
facility......... LIBOR plus 1% $(1,475) $ (884)
Bank of America
revolving credit LIBOR plus 2.25%
facility......... to 3.25% (3,483) (1,885)
Note payable to
financial LIBOR plus 2.25%
institution...... to 2.75% (1,026) --
Convertible
subordinated note
to Baylor Health
Care System
assumed converted
into common
stock............ 5.07% (168) (72)
Senior subordinated
notes assumed
converted to
Series D
redeemable
preferred
stock............ 7.00% (1,408) (651)
------------------ ------- -------
Proforma
adjustment..... $(7,560) $(3,492)
======= =======
</Table>
(m) Gives effect to 3,390,939 shares of USPI common stock used as
consideration for the acquisition of OrthoLink as outstanding at the
beginning of the period.
(n) Reflects income tax expenses at anticipated effective tax rate.
(o) Eliminates dividends on Series A redeemable and Series C convertible
preferred stock.
(p) Reflect dividends on $20,000 of Series D redeemable preferred stock at
10%.
(q) Includes 10,350,000 shares issued in connection with our initial common
stock offering, 1,937,233 shares issued upon conversion of our Series C
convertible preferred stock and 313,070 shares issued upon conversion of
our convertible subordinated note to Baylor Health Care System
Foundation.
P-6
<Page>
NOTES TO UNAUDITED COMBINED CONDENSED PRO FORMA STATEMENTS OF OPERATIONS
(DOLLARS AND POUNDS IN THOUSANDS)
(r) Adjusts interest expense to give effect to the consummation of the
offering of the old notes, with an effective interest rate of 10.13%, and
the use of estimated net proceeds to repay a portion of outstanding
indebtedness, as if these events had occurred on January 1, 2000:
<Table>
<Caption>
INTEREST EXPENSE
INCREASE (DECREASE)
----------------------------------------
EFFECTIVE INTEREST YEAR ENDED NINE MONTHS ENDED
INSTRUMENT RATE DECEMBER 31, 2000 SEPTEMBER 30, 2001
- ---------- ------------------ ------------------ -------------------
Senior Subordinated
Notes of USP
Domestic Holdings,
Inc................ 12.61% $(2,912) $(2,930)
U.S. revolving credit LIBOR plus 3% to
facility........... Prime plus 2% -- (249)
Spain revolving Euribor plus 0.75%
credit facility.... to 2.25% (976) (1,322)
Senior Subordinated
Notes of United
Surgical Partners
Holdings, Inc. (the
old notes)......... 10.13% 15,069 11,302
------- -------
Pro forma
adjustment......... $11,181 $ 6,801
======= =======
</Table>
(s) Eliminates dividends on Series D redeemable preferred stock.
(t) Reflects amortization of costs of issuing and exchanging the old notes
as if the issuance and exchange had occurred on January 1, 2000.
(u) Reflects write-off of unamortized debt issuance costs as a result of
terminating the Spain credit facility and write-off of the unamortized
discount related to the Senior Subordinated Notes of USP Domestic
Holdings, Inc., net of related tax benefit.
(v) Reflects reduction of historical interest expense as if the write-off of
the unamortized debt issuance costs related to the Spain credit facility
had occurred on January 1, 2000.
P-7
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 2001
(IN THOUSANDS)
<Table>
<Caption>
USPI PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ------------ -----------
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 15,572 $ 33,051 (a) $ 48,623
Accounts receivable, net.................................. 25,113 25,113
Other receivables......................................... 37,990 37,990
Inventories............................................... 5,681 5,681
Other..................................................... 6,989 6,989
-------- --------
Total current assets.................................... 91,345 124,396
Property and equipment, net............................... 207,006 207,006
Investments in affiliates................................. 13,619 853 (a) 14,472
Intangible assets, net.................................... 177,444 16,103 (a) 191,735
(1,812)(b)
Other..................................................... 7,117 7,117
-------- --------
Total assets............................................ $496,531 $544,726
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 16,689 $ 16,689
Accrued expenses.......................................... 42,955 (2,531)(a) 40,424
Current portion of long-term debt......................... 11,951 11,951
-------- --------
Total current liabilities............................... 71,595 69,064
Long-term debt............................................ 147,388 77,944 (a) 225,332
Other liabilities......................................... 10,154 10,154
Minority interests........................................ 15,334 15,334
Redeemable preferred stock................................ 20,597 (20,597)(a) --
Stockholders' equity...................................... 231,463 (1,812)(b) 224,842
(4,809)(c)
-------- --------
Total liabilities and stockholders' equity.............. $496,531 $544,726
======== ========
</Table>
See accompanying notes to the Unaudited Pro Forma Combined Condensed Balance
Sheet
P-8
<Page>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET (DOLLARS IN
THOUSANDS):
(a) Reflects our issuance of $150 million of Senior Subordinated Notes (the
old notes) and using proceeds as follows:
<Table>
<Caption>
ACCRUED
DEBT INTEREST TOTAL
-------- -------- --------
Total proceeds from issuance of Senior Subordinated
Notes(d)................................................ $148,835 $ -- $148,835
Repay outstanding indebtedness under our U.S. credit
facility.............................................. (14,800) (33) (14,833)
Repay outstanding indebtedness under our Spain credit
facility.............................................. (24,900) (698) (25,598)
Repay outstanding indebtedness under our 10% Senior
Subordinated Notes.................................... (31,191) (1,800) (32,991)
-------- ------- --------
Pro forma adjustment to long-term debt and accrued
interest.............................................. 77,944 (2,531) 75,413
Discount related to Senior Subordinated Notes of USP
Domestic Holdings, Inc................................ (4,809) -- (4,809)
Redeem Series D redeemable preferred stock.............. (20,597) -- (20,597)
Equity method investment in Coast....................... (853) -- (853)
Excess of purchase price over tangible assets
acquired--Coast....................................... (10,103) -- (10,103)
Estimated offering costs................................ (6,000) -- (6,000)
-------- ------- --------
Net pro forma adjustment to cash...................... $ 35,582 $(2,531) $ 33,051
======== ======= ========
</Table>
(b) Reflects our write-off of unamortized debt issuance costs as a result of
terminating the Spain credit facility.
(c) Reflects our write-off of the unamortized discount related to Senior
Subordinated Notes of USP Domestic Holdings, Inc.
(d) The $150.0 million of Senior Subordinated Notes were issued at a
discount of $1.165 million.
P-9
<Page>
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
Independent Auditors' Report of KPMG LLP.................... F-2
Consolidated Balance Sheets as of December 31, 2000
(restated) and December 31, 1999.......................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000 (restated) and 1999 and the period from
February 27, 1998 (inception) through December 31, 1998... F-5
Consolidated Statements of Comprehensive Loss for the years
ended December 31, 2000 (restated) and 1999 and the period
from February 27, 1998 (inception) through December 31,
1998...................................................... F-6
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000 (restated) and 1999 and the
period from February 27, 1998 (inception) through December
31, 1998.................................................. F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 (restated) and 1999 and the period from
February 27, 1998 (inception) through December 31, 1998... F-8
Notes to Consolidated Financial Statements.................. F-9
Consolidated Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000......................... F-40
Consolidated Statements of Operations (unaudited) for the
three months and nine months ended September 30, 2001 and
2000...................................................... F-42
Consolidated Statements of Comprehensive Income (Loss)
(unaudited) for the three months and nine months ended
September 30, 2001 and 2000............................... F-43
Consolidated Statements of Cash Flows (unaudited) for the
three months and nine months ended September 30, 2001 and
2000...................................................... F-44
Notes to Consolidated Financial Statements (unaudited)...... F-45
ORTHOLINK PHYSICIANS CORPORATION
Independent Auditors' Report of KPMG LLP.................... F-56
Consolidated Balance Sheet as of December 31, 2000.......... F-57
Consolidated Statement of Operations for the year ended
December 31, 2000......................................... F-58
Consolidated Statement of Stockholders' Equity for the year
ended December 31, 2000................................... F-59
Consolidated Statement of Cash Flows for the year ended
December 31, 2000......................................... F-60
Notes to Consolidated Financial Statements.................. F-61
Report of Independent Auditors, Ernst & Young LLP........... F-71
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-72
Consolidated Statements of Income for the two years ended
December 31, 1999......................................... F-74
Consolidated Statements of Changes in Stockholders' Equity
for the two years ended December 31, 1999................. F-75
Consolidated Statements of Cash Flows for the two years
ended December 31, 1999................................... F-76
Notes to Consolidated Financial Statements.................. F-77
ASPEN HEALTHCARE HOLDINGS LIMITED
Independent Auditors' Report of KPMG........................ F-87
Consolidated Profit and Loss Account for the three-month
period ended March 31, 2000............................... F-88
Consolidated Statement of Total Recognised Gains and Losses
for the three-month period ended March 31, 2000........... F-88
Consolidated Balance Sheet as of March 31, 2000............. F-89
Consolidated Cash Flow Statement for the three-month period
ended March 31, 2000...................................... F-90
Reconciliation of Net Cash Flow to Movement in Net Debt..... F-90
Notes to Consolidated Financial Statements.................. F-91
Report of Independent Public Accountants, Arthur Andersen... F-107
Consolidated Profit and Loss Account for the year ended
December 31, 1999 and the ten-month period ended
December 31, 1998......................................... F-108
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-109
Consolidated Cash Flow Statement for the year ended
December 31, 1999 and the ten-month period ended
December 31, 1998......................................... F-110
Reconciliation of Net Cash Flow to Movement in Net Debt..... F-110
Statement of Accounting Policies............................ F-111
Notes to Consolidated Financial Statements.................. F-113
</Table>
F-1
<Page>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Surgical Partners International, Inc.:
We have audited the accompanying consolidated balance sheets of United Surgical
Partners International, Inc. and subsidiaries as of December 31, 2000 (restated)
and 1999, and the related consolidated statements of operations, comprehensive
loss, stockholders' equity and cash flows for the years then ended and for the
period from February 27, 1998 (inception) through December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits 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. 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, 2000 and 1999,
and the results of their operations and their cash flows for the years then
ended and the period from February 27, 1998 (inception) through December 31,
1998, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in note (1)(b) to the consolidated financial statements, the
Company has restated its 2000 consolidated financial statements in order to (1)
reclassify certain debt from long-term to current pursuant to SFAS 78 and to
(2) consolidate an entity previously unconsolidated pursuant to EITF 97-2.
KPMG LLP
Dallas, Texas
March 31, 2001, except as to
the last paragraph of
Note 16, which is as of
April 4, 2001, the
third paragraph of
note 5(a) which is
as of May 16, 2001, the second
paragraph of note 1(b), which
is as of September 6, 2001,
and note 18 which is as
of November 28, 2001
F-2
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
2000
RESTATED 1999
----------- -----------
ASSETS
Cash and cash equivalents................................... $ 3,451,199 3,716,334
Restricted cash (notes 2 and 15)............................ 1,731,347 13,100,000
Patient receivables, net of allowance for doubtful accounts
of $3,665,564 and $2,741,549, respectively................ 20,794,787 11,801,006
Other receivables........................................... 3,173,907 3,331,448
Inventories of supplies..................................... 4,667,638 2,620,768
Prepaids and other current assets........................... 3,080,446 3,312,494
----------- -----------
Total current assets.................................. 36,899,324 37,882,050
----------- -----------
Property and equipment, net (note 4)........................ 165,195,298 59,418,082
Investments in affiliates (note 2).......................... 7,277,571 7,880,526
Intangible assets, net (note 3)............................. 114,424,214 69,876,974
Other assets................................................ 6,599,172 1,645,601
----------- -----------
Total assets.......................................... 330,395,579 176,703,233
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $16,350,210 9,822,443
Accrued salaries and benefits............................... 4,885,602 1,577,483
Due to affiliates........................................... -- --
Accrued interest............................................ 5,211,295 875,604
Current portion of long-term debt (note 5).................. 53,914,580 9,390,882
Other accrued expenses...................................... 8,673,982 5,486,644
Deferred tax liability, net................................. 6,076,273 268,000
----------- -----------
Total current liabilities............................. 95,111,942 27,421,056
----------- -----------
Long-term debt, less current portion (note 5)............... 133,851,775 63,292,902
Other long-term liabilities................................. 3,461,292 3,142,449
Deferred tax liability, net................................. 7,580,420 3,317,000
----------- -----------
Total liabilities..................................... 240,005,429 97,173,407
Minority interests (note 2)................................. 8,774,499 6,918,882
Redeemable preferred stock (note 7):
Series A, $0.01 par value per share; 31,200 shares
authorized, issued and outstanding...................... 32,818,910 33,131,470
Series B, $0.01 par value per share; 2,716 shares
authorized and issued, 2,716 shares redeemed in 2000 and
2,716 shares outstanding at December 31, 1999........... -- 2,908,383
Commitments and contingencies (note 15).....................
</Table>
(Continued)
F-3
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
2000
RESTATED 1999
------------ -----------
Stockholders' equity (notes 9 and 16):
Series C convertible preferred stock, $0.01 par value;
20,000 shares authorized; 18,750 shares issued and
outstanding at December 31, 2000, -0- shares issued and
outstanding at December 31, 1999........................ 19,746,771 --
Common stock (note 9)
Class A shares, $0.01 par value; 45,000,000 shares
authorized; 7,839,844 shares issued at December 31,
2000, 7,335,952 shares issued at December 31, 1999.... 78,398 73,359
Class B shares, $0.01 par value; 3,000,000 shares
authorized; 333,333 shares issued and outstanding at
December 31, 2000, -0- shares issued and outstanding
at December 31, 1999.................................. 3,333 --
Other, $0.01 par value; 87,000,000 shares authorized;
170,046 shares issued and outstanding at
December 31, 2000, 24,523 shares issued and
outstanding at December 31, 1999...................... 1,701 246
Additional paid-in capital................................ 63,739,370 55,983,928
Treasury stock, at cost, 54,166 shares at December 31,
2000 and 1999........................................... (343,750) (343,750)
Deferred compensation..................................... (494,969) --
Receivables from sales of common stock.................... (2,973,027) (1,103,887)
Accumulated other comprehensive loss, net of tax.......... (12,025,769) (7,266,717)
Accumulated deficit....................................... (18,935,317) (10,772,088)
------------ -----------
Total stockholders' equity.......................... 48,796,741 36,571,091
------------ -----------
Total liabilities and stockholders' equity.......... $330,395,579 176,703,233
============ ===========
</Table>
See accompanying notes to consolidated financial statements.
F-4
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
PERIOD FROM
FEBRUARY 27,
YEARS ENDED DECEMBER 31, 1998 (INCEPTION)
------------------------- THROUGH
2000 DECEMBER 31,
RESTATED 1999 1998
------------ ---------- ----------------
Net patient service revenue.............................. $133,487,813 63,769,768 19,116,092
Management and administrative services revenue........... 2,157,525 5,111,496 223,011
Equity in earnings (loss) of unconsolidated affiliates... 844,170 (236,874) (39,822)
Other income............................................. 1,918,748 1,768,194 1,272,790
------------ ---------- ----------
Total revenues................................... 138,408,256 70,412,584 20,572,071
------------ ---------- ----------
Salaries, benefits and other employee costs.............. 44,246,309 21,643,193 10,020,124
Medical services and supplies............................ 34,882,932 22,867,747 7,605,566
Other operating expenses................................. 22,922,408 9,450,385 2,893,838
General and administrative expenses...................... 12,102,779 10,441,552 2,032,413
Provision for doubtful accounts.......................... 2,466,798 1,231,396 235,725
Depreciation and amortization............................ 14,137,684 7,875,448 2,015,123
------------ ---------- ----------
Total operating expenses......................... 130,758,910 73,509,721 24,802,789
------------ ---------- ----------
Operating income (loss).......................... 7,649,346 (3,097,137) (4,230,718)
Interest income.......................................... 911,617 328,769 721,530
Interest expense......................................... (12,539,722) (3,144,479) (496,874)
Other.................................................... (781,979) (361,953) (246,378)
------------ ---------- ----------
Total other expense, net......................... (12,410,084) (3,177,663) (21,722)
Loss before minority interest.................... (4,760,738) (6,274,800) (4,252,440)
Minority interest in (income) loss of consolidated
subsidiaries........................................... (2,332,440) (118,453) 23,030
------------ ---------- ----------
Loss before income taxes......................... (7,093,178) (6,393,253) (4,229,410)
Income tax (expense) benefit (note 11)................... (1,070,051) (450,537) 301,112
------------ ---------- ----------
Net loss......................................... (8,163,229) (6,843,790) (3,928,298)
Preferred stock dividends................................ (5,971,120) (1,695,803) (428,050)
------------ ---------- ----------
Net loss attributable to common stockholders..... $(14,134,349) (8,539,593) (4,356,348)
============ ========== ==========
Net loss per share attributable to common stockholders
(note 13).............................................. (1.80) (1.17) (1.29)
Weighted average number of common shares
Basic.............................................. 7,850,370 7,307,882 3,366,427
Diluted............................................ 7,850,370 7,307,882 3,366,427
</Table>
See accompanying notes to consolidated financial statements.
F-5
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<Table>
<Caption>
PERIOD FROM
FEBRUARY 27,
YEARS ENDED DECEMBER 31, 1998 (INCEPTION)
--------------------------- THROUGH
2000 DECEMBER 31,
RESTATED 1999 1998
------------ ------------ ----------------
Net loss........................................... $ (8,163,229) (6,843,790) (3,928,298)
Other comprehensive loss, before taxes:
Foreign currency translation adjustments......... (7,321,618) (11,019,126) (160,438)
Income tax benefit related to other comprehensive
loss............................................. 2,562,566 3,856,694 56,153
------------ ------------ ----------
Other comprehensive loss..................... (4,759,052) (7,162,432) (104,285)
------------ ------------ ----------
Comprehensive loss........................... $(12,922,281) (14,006,222) (4,032,583)
============ ============ ==========
</Table>
See accompanying notes to consolidated financial statements.
F-6
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 (RESTATED)
AND 1999 AND THE PERIOD FROM FEBRUARY 27, 1998 (INCEPTION) THROUGH DECEMBER 31,
1998
<Table>
<Caption>
SERIES C
PREFERRED STOCK COMMON STOCK
------------------------- ---------------------- ADDITIONAL
OUTSTANDING LIQUIDATION OUTSTANDING PAR PAID-IN TREASURY DEFERRED
SHARES VALUE SHARES VALUE CAPITAL STOCK COMPENSATION
----------- ----------- ----------- -------- ----------- -------- ------------
Balance, February 27, 1998
(inception)................... -- $ -- -- $ -- -- -- --
Issuance of common stock........ -- -- 7,312,976 73,130 57,540,763 -- --
Accrued dividends on preferred
stock......................... -- -- -- -- (428,050) -- --
Net loss........................ -- -- -- -- -- -- --
Foreign currency translation
adjustments, net of taxes..... -- -- -- -- -- -- --
------ ----------- ---------- -------- ----------- -------- --------
Balance, December 31, 1998...... -- -- 7,312,976 73,130 57,112,713 -- --
Issuance of common stock........ -- -- 47,499 475 522,018 -- --
Issuance of warrants for
noncompete agreement.......... -- -- -- -- 45,000 -- --
Repurchases of common stock..... -- -- (54,166) -- -- (343,750) --
Accrued dividends on preferred
stock......................... -- -- -- -- (1,695,803) -- --
Net loss........................ -- -- -- -- -- -- --
Foreign currency translation
adjustments, net of taxes..... -- -- -- -- -- -- --
------ ----------- ---------- -------- ----------- -------- --------
Balance, December 31, 1999...... -- -- 7,306,309 73,605 55,983,928 (343,750) --
Issuance of common stock and
exercise of stock options..... -- -- 982,748 9,827 10,428,514 -- --
Issuance of Series C preferred
stock......................... 18,750 15,950,000 -- -- (7,452) -- --
Issuance of warrants............ -- -- -- -- 2,800,000 -- --
Issuance of stock options....... -- -- -- -- 505,500 -- (505,500)
Amortization of deferred
compensation.................. -- -- -- -- -- -- 10,531
Accrued dividends on preferred
stock......................... -- 3,796,771 -- -- (5,971,120) -- --
Net loss........................ -- -- -- -- -- -- --
Foreign currency translation
adjustments, net of taxes..... -- -- -- -- -- -- --
------ ----------- ---------- -------- ----------- -------- --------
Balance, December 31, 2000
(restated).................... 18,750 $19,746,771 8,289,057 $ 83,432 63,739,370 (343,750) (494,969)
====== =========== ========== ======== =========== ======== ========
See accompanying notes to consolidated financial statements.
<Caption>
RECEIVABLES ACCUMULATED
FROM SALES OF OTHER
COMMON COMPREHENSIVE ACCUMULATED
STOCK LOSS DEFICIT TOTAL
------------- ------------- ----------- ----------
Balance, February 27, 1998
(inception)................... -- -- -- --
Issuance of common stock........ (1,050,000) -- -- 56,563,893
Accrued dividends on preferred
stock......................... -- -- -- (428,050)
Net loss........................ -- -- (3,928,298) (3,928,298)
Foreign currency translation
adjustments, net of taxes..... -- (104,285) -- (104,285)
---------- ----------- ----------- ----------
Balance, December 31, 1998...... (1,050,000) (104,285) (3,928,298) 52,103,260
Issuance of common stock........ (253,887) -- -- 268,606
Issuance of warrants for
noncompete agreement.......... -- -- -- 45,000
Repurchases of common stock..... 200,000 -- -- (143,750)
Accrued dividends on preferred
stock......................... -- -- -- (1,695,803)
Net loss........................ -- -- (6,843,790) (6,843,790)
Foreign currency translation
adjustments, net of taxes..... -- (7,162,432) -- (7,162,432)
---------- ----------- ----------- ----------
Balance, December 31, 1999...... (1,103,887) (7,266,717) (10,772,088) 36,571,091
Issuance of common stock and
exercise of stock options..... (1,869,140) -- -- 8,569,201
Issuance of Series C preferred
stock......................... -- -- -- 15,942,548
Issuance of warrants............ -- -- -- 2,800,000
Issuance of stock options....... -- -- -- --
Amortization of deferred
compensation.................. -- -- 10,531
Accrued dividends on preferred
stock......................... -- -- -- (2,174,349)
Net loss........................ -- -- (8,163,229) (8,163,229)
Foreign currency translation
adjustments, net of taxes..... -- (4,759,052) -- (4,759,052)
---------- ----------- ----------- ----------
Balance, December 31, 2000
(restated).................... (2,973,027) (12,025,769) (18,935,317) 48,796,741
========== =========== =========== ==========
See accompanying notes to consolidated
financial statements.
</Table>
F-7
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
PERIOD FROM
FEBRUARY 27,
YEARS ENDED DECEMBER 31, 1998 (INCEPTION)
--------------------------- THROUGH
2000 DECEMBER 31,
RESTATED 1999 1998
------------ ------------ ----------------
Cash flows from operating activities:
Net loss.................................................. $ (8,163,229) (6,843,790) (3,928,298)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts......................... 2,466,798 1,231,396 235,725
Depreciation and amortization........................... 14,137,684 7,875,448 2,015,123
Amortization of discount on debt........................ 211,555 -- --
Deferred income taxes................................... (837,368) 98,112 (301,112)
Equity in (earnings) loss of unconsolidated
affiliates............................................. (844,170) 236,874 39,822
Minority interest in income (loss) of consolidated
subsidiaries........................................... 2,332,440 118,453 (23,030)
Amortization of deferred compensation................... 10,531 -- --
Increases (decreases) in cash from changes in operating
assets and liabilities, net of effects from purchases
of new businesses:
Patient receivables................................. (4,610,584) (2,212,918) 118,590
Other receivables................................... (571,218) (3,548,344) (1,046,467)
Inventories of supplies, prepaids and other current
assets.............................................. 1,362,827 (132,965) 603,553
Accounts payable and accrued expenses............... 1,709,849 9,121,603 1,001,133
Other long-term liabilities......................... 3,797,316 (1,753,915) 1,906,083
------------ ------------ -----------
Net cash provided by operating activities......... 11,002,431 4,189,954 621,122
------------ ------------ -----------
Cash flows from investing activities:
Purchases of new businesses, net of cash received......... (83,283,580) (35,863,123) (66,216,330)
Purchases of property and equipment....................... (16,892,860) (11,323,363) (3,948,751)
Sale of property.......................................... 17,379,214 -- --
Proceeds from sales of investments........................ -- 1,156,883 424,659
Increase in deposits...................................... (3,703,789) -- --
Cash (placed in) released from escrow..................... 11,435,724 -- (13,100,000)
------------ ------------ -----------
Net cash used in investing activities............. (75,065,291) (46,029,603) (82,840,422)
------------ ------------ -----------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 85,941,179 66,339,633 1,493,337
Payments on long-term debt................................ (42,169,174) (26,176,060) (245,673)
Proceeds from issuance of common stock.................... 5,069,201 268,606 54,750,747
Payments to repurchase common stock....................... -- (143,750) --
Proceeds from issuance of preferred stock and warrants.... 18,742,548 -- 31,200,000
Payments of dividends and redemption of redeemable
preferred stock......................................... (5,234,593) -- --
Distributions on investments in affiliates................ 842,105 506,407 (50,000)
------------ ------------ -----------
Net cash provided by financing activities......... 63,191,266 40,794,836 87,148,411
------------ ------------ -----------
Effect of exchange rate changes on cash..................... 606,459 (203,604) 35,640
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents........ (265,135) (1,248,417) 4,964,751
Cash and cash equivalents at beginning of year.............. 3,716,334 4,964,751 --
------------ ------------ -----------
Cash and cash equivalents at end of year.................... $ 3,451,199 3,716,334 4,964,751
============ ============ ===========
Supplemental information:
Interest paid............................................. 8,204,031 2,263,328 473,046
Non-cash transactions:
Debt issued for purchases of new business............... 54,012,058 -- --
Subordinated debt issued for purchases of new
business............................................... -- 3,287,234 --
Sale of common stock for notes receivable from
employees, net......................................... 1,075,547 53,887 1,050,000
Common stock issued for purchases of new businesses..... 3,500,000 -- 1,813,146
Preferred stock issued for purchase of new business..... $ -- -- 2,716,000
Conversion of Class B redeemable preferred stock to
Class A common......................................... 70,000 -- --
Accrued dividends on preferred stock.................... 5,971,120 1,695,803 428,050
Warrants issued for noncompete agreement................ -- 45,000 --
Assets acquired under capital lease obligations......... 18,913,203 1,482,329 --
</Table>
See accompanying notes to consolidated financial statements.
F-8
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) DESCRIPTION OF BUSINESS
United Surgical Partners International, Inc. and subsidiaries (USPI or
the Company), a Delaware Company, majority-owned by Welsh, Carson,
Anderson & Stowe and certain of its affiliates (WCAS) was formed in
February 1998 for the primary purpose of ownership and operation of
surgery centers, private surgical hospitals and related businesses in the
United States and Europe. At December 31, 2000, USPI, headquartered in
Dallas, Texas, operated twenty-four surgical facilities in the United
States. Of these twenty-four facilities, USPI consolidates the results of
twelve and owns a minority equity interest in nine which are accounted
for under the equity method and holds no ownership interest in the
remaining three centers which are operated by USPI under management
contracts. In addition, United Surgical Partners Europe, S.L. (USPE), a
company incorporated in Spain and wholly-owned by USPI, managed and owned
a majority interest in six private surgical hospitals, two surgery
centers, and one diagnostic facility in Spain at December 31, 2000.
Global Healthcare Partners Limited (Global), a company incorporated in
England and wholly-owned by USPI, managed and wholly-owned two private
surgical hospitals in the United Kingdom at December 31, 2000.
USPI is subject to changes in government legislation that could impact
Medicare, Medicaid and foreign government reimbursement levels and is
also subject to increased levels of managed care penetration and changes
in payor patterns that may impact the level and timing of payments for
services rendered.
USPI maintains its books and records on the accrual basis of accounting
and the consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America.
(B) RESTATEMENT
The Company has restated its consolidated financial statements as of and
for the year ended December 31, 2000 in order to reclassify certain debt
from long-term to current pursuant to an interpretation of SFAS 78. The
impact at December 31, 2000 is as follows:
<Table>
<Caption>
AMOUNTS
AS PREVIOUSLY AMOUNTS
REPORTED AS RESTATED
------------- -----------
Current portion of LT debt.................................. 11,287,188 53,914,580
LT debt less current portion................................ 176,479,167 133,851,775
</Table>
Additionally, on September 6, 2001, the Company received communication
from the Securities and Exchange Commission indicating that, based on the
facts and circumstances presented by the Company, Day-Op Center of Long
Island, Inc. must be consolidated pursuant to an interpretation of
EITF 97-2. As a result, the Company restated its consolidated financial
statements in order to consolidate a previously unconsolidated entity.
F-9
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
The impact on 2000 reported results follows:
<Table>
<Caption>
AMOUNTS
AS PREVIOUSLY AMOUNTS
REPORTED AS RESTATED
------------- -----------
Assets...................................................... 331,916,434 330,395,579
Stockholders' equity........................................ 48,674,879 48,796,741
Revenues.................................................... 135,001,678 138,408,256
Operating expenses.......................................... 128,265,565 130,758,910
Other expense, net.......................................... 11,618,713 12,410,084
Net loss.................................................... (8,285,091) (8,163,229)
Net loss per share attributable to common stockholders...... (1.82) (1.80)
</Table>
(C) 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 the changes in the exchange rates are accumulated
in a separate component of stockholders' equity.
(D) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
USPI and its wholly-owned and majority-owned subsidiaries. Significant
investments in other affiliated companies are generally accounted for
using the equity method. In addition, the accounts of certain surgery
centers have been consolidated where the Company maintains effective
control over the surgery centers' assets and operations, not withstanding
a lack of technical majority ownership of the surgery centers. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(E) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
(F) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to be consistent with
the current year presentation.
(G) CASH EQUIVALENTS AND INVESTMENTS
For purposes of the statements of cash flows, USPI considers all highly
liquid debt instruments with original maturities of three months or less
to be cash equivalents.
F-10
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
Investments in unconsolidated companies in which the Company exerts
significant influence and owns between 20% and 50% of the investees are
accounted for using the equity method.
Investments in unconsolidated companies in which the Company owns less
than 20% of an investee but exerts significant influence through board of
director representation and a management agreement to manage the investee
are also accounted for using the equity method.
All investments in companies in which the Company does not exert
significant influence, indicated by ownership less than 20% and the
absence of board representation and a management agreement, are carried
at cost.
(H) INVENTORIES OF SUPPLIES
Inventories of supplies are stated at cost which approximates market.
(I) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. 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. Certain facilities and equipment held under
capital leases are classified as property and equipment and amortized
using the straight-line method over the lease terms and the related
obligations are recorded as liabilities. Lease amortization is included
in depreciation expense.
(J) INTANGIBLE ASSETS
Intangible assets consist of costs in excess of net assets acquired
(goodwill), costs associated with the purchase of management contracts
and other intangibles, which consist primarily of non-compete contracts.
Intangibles, except goodwill, are amortized over the life of the
associated contracts. Goodwill is amortized on a straight-line basis over
the expected periods to be benefited, generally 25 years.
(K) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets, certain identifiable intangibles, and goodwill 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.
The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. 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 resulting from use and ultimate disposition of the
asset.
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable, current portion of long-term debt and
accounts payable approximate fair value because of the short maturity of
these instruments. The carrying values of long-term debt are
F-11
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
based on quoted market prices and are not materially different from the
estimated fair values of these instruments.
(M) REVENUE RECOGNITION
Revenue consists primarily of net patient service revenues which is based
on the facilities' established billing rates less allowances and
discounts, principally for patients covered under contractual programs.
USPI has entered into agreements with certain majority and minority owned
surgery centers to provide management services. As compensation for these
services, USPI charges the surgery centers management fees which are
either fixed in amount or represent a fixed percentage of each center's
net revenue less a provision for doubtful accounts. Amounts are
recognized as services are provided.
(N) EQUITY IN EARNINGS (LOSS) OF UNCONSOLIDATED AFFILIATES
Equity in earnings (loss) of unconsolidated affiliates consists of USPI's
share of the profits or losses generated from its equity investment in
eight ambulatory surgery centers. Because these operations are central to
USPI's business strategy, equity in earnings (loss) of unconsolidated
affiliates is classified as revenue in the accompanying statements of
operations.
(O) INTEREST RATE SWAPS
USPI uses interest rate swap agreements to modify its variable rate debt
obligations to fixed rate obligations, thereby reducing the exposure to
market rate risk. Net amounts to be received or paid under the swap
agreements are reflected as adjustments to interest expense in the period
in which they accrue.
(P) INCOME TAXES
USPI 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) STOCK OPTION PLAN
USPI applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and related interpretations in accounting for its stock
option grants to employees. As such, USPI does not record compensation
expense because USPI issues options whereby the option exercise price
equals the current market price of the underlying stock on the date of
grant. SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic
F-12
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Task Force
(EITF) Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED
TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING
GOODS OR SERVICES.
(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) ACQUISITIONS AND EQUITY INVESTMENTS
On April 30, 1998, USPI purchased 100% of the issued and outstanding stock
of Columbia International Holdings, Inc. (CIH), an unrelated Delaware
corporation, for approximately $7.3 million in cash. As a result of the
purchase of CIH, USPI obtained ownership of 79% and 71%, respectively, of
the issued and outstanding stock of Instituto Dexeus, S.A., the owner of a
private hospital in Spain, and Diagnosticos y Tratamientos Medicos, S.A.,
the owner of a group of clinics in Spain, both Spanish corporations. The
total purchase price for the acquisitions was allocated to the purchased
assets and liabilities based on their estimated fair values and approximated
the fair value of the net assets acquired. Through this acquisition, USPI
also obtained equity interests, which are carried at cost, ranging from 7%
to 15% in five additional Spanish corporations which own healthcare related
operations in Spain. During 2000 USPE paid an additional $363,000 of
purchase price to the hospital for achieving financial targets specified in
the purchase agreement.
In 1998, USPI contributed the Instituto Dexeus hospital plus $250,000 in
cash for a majority ownership stake in USPE. At December 31, 1999 and 1998,
USPI owned approximately 89% and 86%, respectively, of USPE. The remaining
approximate 11% and 14%, respectively, was held by Hospital Management Team
(HMT), a hospital management company incorporated in Spain. In October 2000
USPI paid cash of $811,093 and issued 333,333 shares of Class B common stock
in exchange for HMT's interest in USPE and a note receivable in the
principal amount of $811,093 from HDT, S.C., the successor of HMT. The note
bears interest at 5% per annum, payable at maturity, and matures on the
earlier of six months following the completion of an initial public offering
of USPI's stock or September 26, 2004.
On July 29, 1998, USPI acquired 100% of the stock of Health Horizons, Inc.
(HHI), an unrelated Delaware corporation, for approximately $7.5 million
consisting of $3 million in cash, $2.7 million in USPI Series B preferred
stock and $1.8 million in USPI Class A common stock. As a result of the
acquisition, USPI acquired a 66% interest in a surgery center joint venture
located in Decatur, Alabama, which is consolidated by the Company, and
interests ranging from 35% to 50% in three additional surgery center joint
ventures located in Nashville, Tennessee; Kansas City, Missouri; and
Murfreesboro, Tennessee, which have been accounted for using the equity
method except as noted below. The total purchase price was allocated to the
purchased assets and liabilities based on their estimated fair values and
exceeded the fair value of the net assets acquired by approximately
$7.3 million. On June 30, 1999, USPI acquired an additional 36% interest in
the surgery center
F-13
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
joint venture in Nashville for $550,000 in cash, bringing its total
ownership in the venture to 72%, and resulting in the consolidation of this
venture. On March 1, 2000, USPI acquired an additional 25% interest in the
surgery center joint venture in Kansas City for $200,000 in cash, bringing
its total ownership in the venture to 75%, and resulting in the
consolidation of this venture. During 2000, due to one of the surgery
centers not meeting the target specified in the purchase agreement, USPI
received approximately $700,000, which was settled through the redemption of
an equivalent dollar value of Series B preferred stock shares and accrued
but unpaid dividends.
On August 3, 1998, USPI and St. Rose Dominican Hospital, a not-for-profit
hospital located in Henderson, Nevada entered into an operating agreement to
organize a Nevada limited liability company, Parkway Surgery Center, LLC.
Each party contributed assets totaling approximately $1.9 million for a 50%
ownership interest, accounted for using the equity method, in the Parkway
Surgery Center.
On October 5, 1998, USPE purchased 80% of the issued and outstanding stock
of Clinica Maternal Nuestra Senora de la Esperanza, S.A. (Esperanza), a
Spanish corporation, for approximately $2.4 million in cash. The total
purchase price was allocated to the purchased assets and liabilities based
on their estimated fair values and exceeded the fair value of the net assets
acquired by approximately $1.7 million (using the exchange rate in effect at
the date of purchase). During December 1999, USPE purchased the remaining
20% of the outstanding stock of Esperanza for approximately $470,000 in
cash.
On October 15, 1998, USPI purchased a 70% interest in the assets used to
operate the University Surgical Center in Winter Park, Florida (Assets) for
approximately $5.7 million in cash and assumed approximately $200,000 of
liabilities of University Surgical Center, Inc. (Seller), an unrelated
Florida corporation. The Assets were then contributed to a newly formed
Florida limited partnership, University Surgery Center, Ltd. (limited
partnership) in exchange for general and limited partnership interests. The
Seller contributed the remaining 30% of assets to the Limited Partnership in
exchange for its 30% limited partnership interest. The total purchase price
was allocated to the purchased assets and liabilities based on their
estimated fair values and exceeded the fair value of the net assets acquired
by approximately $5.2 million.
On October 16, 1998, USPI purchased, through USPE, 100% of the issued and
outstanding stock of Clinica Sagrado Corazon, S.A., a hospital and Spanish
corporation, and interests ranging from 55% to 100% in ten related companies
providing a variety of medical services, for approximately $27.5 million in
cash. The total purchase price was allocated to the purchased assets and
liabilities based on their estimated fair values and exceeded the fair value
of the net assets acquired by approximately $17.8 million (using the
exchange rate in effect at the date of purchase).
During November and December 1998, USPI purchased, through USPE, a total of
70% of the issued and outstanding stock of Instituto Policlinico Santa
Teresa, S.A., a private hospital and Spanish corporation, which also owns
60% of Resonancia Nuclear Magnetica, S.A., a Spanish corporation that
provides magnetic resonance imaging services. The total purchase price of
approximately $8.8 million was allocated to the purchased assets and
liabilities based on their estimated fair values and exceeded the fair value
of the net assets acquired by approximately $5.3 million (using the exchange
rate in effect at the date of purchase). During April 1999 and May 1999,
USPI made stock purchases totaling $1.9 million in cash for an additional
26% interest in Instituto Policlinico Santa Teresa, S.A. During 2000, USPE
paid an additional $553,000 in cash
F-14
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
as contingent purchase price to the sellers based on the acquired facilities
achieving financial targets specified in the purchase agreement.
On December 4, 1998, a newly created subsidiary of USPI (Day-Op Consulting)
entered into certain agreements (Day-Op Agreements) with the shareholders of
Day-Op Surgery Center of Long Island, Inc. (Day-Op Center) and Day-Op
Management Company, Inc. (Day-Op Management). As defined in the Day-Op
Agreements, Day-Op Consulting acquired 100% of the outstanding common stock
of Day-Op Management for $300,000 and certain long-lived tangible net assets
of Day-Op Center for $1.4 million (the Asset and Stock Purchase). In
addition, Day-Op Consulting and the shareholders of Day-Op Center entered
into a Consulting and Administrative Agreement whereby Day-Op Consulting
provides certain administrative and consulting services to Day-Op Center in
exchange for a monthly service fee. The State of New York did not approve
the Day-Op Agreements until December 1999. However, the Day-Op Agreements
provided that they become effective, upon state approval, retroactive to
December 4, 1998. Because of the uncertainty regarding the state of New York
approval process, no amounts or activity with respect to the Agreements was
recognized in the 1998 consolidated financial statements. As a result, the
service fees of $3,607,500 under the Consulting and Administrative Agreement
recognized in the accompanying 1999 consolidated statement of operations
include service fees of $348,333 for the period from December 4, 1998
through December 31, 1998. The 1999 accompanying consolidated balance sheet
includes the acquired assets of Day-Op Center, the net assets of Day-Op
Management, and short-term debt of $1.7 million representing the cost of the
Asset and Stock Purchase.
In 1998, the Company originally escrowed $13.1 million of cash related to
the DayOp Agreements and related transactions and reported this amount as
restricted cash in the accompanying 1999 consolidated balance sheet. On
January 4, 2000, the Company released $1.7 million to DayOp Center to fund
the Asset and Stock Purchase and $9.5 million to finance the buyout of the
remaining shareholders of DayOp Center. Of the $1.9 million remaining in
escrow, $200,000 was returned to USPI during 2000 by agreement with the
former shareholders of Day-Op Center, and the remaining $1.7 million, which
is reflected as restricted cash in the accompanying 2000 consolidated
balance sheet, was released to the sellers in March 2001.
On December 18, 1998, USPI entered into an asset purchase agreement to
purchase certain management agreements related to the operations of five
surgery centers located in the Dallas and Ft. Worth, Texas metropolitan area
(HealthFirst Transaction). In addition, USPI acquired a 20% interest in two
of the five surgery centers (Equity Centers). The Equity Centers were
accounted for using the equity method until additional interests were
purchased through THVG discussed below, resulting in the consolidation of
the Equity Centers. The total cost of $8.2 million, all paid to unrelated
parties, exceeded the fair value of the identifiable net assets acquired by
$7.6 million of which $5.5 million was allocated to the management
agreements and $2.1 million was allocated to goodwill. USPI is also
obligated to offer to purchase existing and newly issued partnership units
(the Buyup) that would increase USPI's ownership interest by 40% in each of
the Equity Centers at a price based upon the financial performance of the
centers. Successful completion of any or all of the Buyup further obligates
USPI to make additional payments to the parties who sold USPI the equity
interests. USPI was not obligated to buy any partnership units under the
Buyup at December 31, 2000.
F-15
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
On February 1, 1999, USPI acquired, for $400,000 in cash, a 50% interest in
Texas Health Ventures Group, L.L.C. (THVG 1), which held ownership interests
in one operational surgery center and three surgery centers under
development in the Dallas/Fort Worth, Texas metropolitan area. This
investment is accounted for using the equity method. THVG is a limited
liability company which facilitates the joint management and development by
USPI and Baylor Health System (Baylor) of surgery centers. During 2000 USPI
paid in cash additional purchase price of $715,000 as a result of the
performance of one of the surgery centers exceeding the target specified in
the purchase agreement.
In May 1999, USPI purchased through USPE, a 70% interest in USP
Dermoestetica, S.L. for $1.6 million in cash. The total purchase price was
allocated to the purchased assets and liabilities and exceeded the fair
value of the net assets by approximately $1.1 million.
On June 1, 1999, USPI entered into an additional surgery center joint
venture with Baylor by contributing its equity investments and management
agreements acquired in the December 1998 HealthFirst Transaction to a newly
created limited liability company, THVG/HealthFirst, L.L.C. (THVG 2). In
exchange for its contribution to THVG 2, USPI received a 51% ownership
interest in THVG 2. Baylor contributed 100% of the assets of two operational
surgery centers to THVG 1, in exchange for receiving a 49% ownership in
THVG 2 as well as convertible subordinated notes payable from USPI in the
amount of $3.3 million. The joint venture agreements for THVG 1 and THVG 2
have non-compete clauses and provide for shared management services and
fees. During 1999 and 2000, USPI invested additional cash totaling
$5.3 million in THVG 2, which acquired additional ownership interests in the
two operational surgery centers in which it had previously invested,
increasing THVG 2's ownership in each of the two centers from 20% to 57%,
resulting in the consolidation of these surgery centers.
On July 1, 1999, USPI acquired 100% of the stock of Texas Outpatient
Surgicare Center, Inc. (TOPS GP), a Texas corporation that is the general
partner with a 63% ownership interest in TOPS Specialty Hospital, Ltd.
(TOPS), a Limited Partnership that operates a surgical hospital in Houston,
Texas. Concurrent with its acquisition of TOPS GP, USPI also facilitated the
acquisition by TOPS GP of an additional 31% interest in TOPS. In connection
with the acquisition of the additional limited partner interests, USPI
issued warrants for the purchase of 33,333 shares of its common stock at an
exercise price of $12.00 per share in exchange for non-compete agreements
with the selling limited partners. Subsequent to these transactions, TOPS
borrowed $15 million, guaranteed by USPI. TOPS GP subsequently sold limited
partner interests representing approximately 25% ownership of TOPS. Total
net cash consideration paid by USPI for these acquisition transactions was
approximately $11 million. As a result of these transactions, USPI owns 100%
of TOPS GP, which in turn owns approximately 69% of TOPS. The total purchase
price was allocated to the purchased assets and liabilities and exceeded the
fair value of the net assets by approximately $12.2 million. During 2000,
USPI purchased the remaining 31% of TOPS for approximately $1.7 million in
cash.
On July 1, 1999, USPI acquired 100% of the assets used to operate Warner
Park Surgery Center in Chandler, Arizona for approximately $5.1 million in
cash. The total purchase price was allocated to the purchased assets and
liabilities and exceeded the fair value of the net assets by approximately
$4.2 million.
F-16
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
On September 1, 1999, USPI acquired 100% of the assets used to operate two
ambulatory surgery centers in the Houston metropolitan area, for
approximately $12 million in cash. The total purchase price was allocated to
the purchased assets and liabilities and exceeded the fair value of the net
assets by approximately $9.2 million.
USPI acquired, through USPE, controlling interests in three facilities in
Madrid, Spain during 2000. In March 2000, USPE acquired a 72% interest in
Clinica San Camilo, S.A., a private hospital, for $17.9 million in cash, and
acquired 100% of Centro Radiologico, S.L., a radiology center, for
$1.7 million in cash. USPE subsequently acquired, at a cost of
$5.5 million, additional shares in Clinica San Camilo, increasing USPE's
ownership to approximately 97% by December 31, 2000. During November 2000,
USPE acquired 100% of the assets of Clinica San Jose, a private hospital,
for $7.1 million in cash which was allocated to the purchased assets and
liabilities based on their estimated fair values and approximated the fair
value of the net assets acquired. The purchase price exceeded the fair value
of the net assets by $11.1 million and $1.5 million for the Clinica San
Camilo and Centro Radiologico acquisitions, respectively. USPE subsequently
sold the land and buildings of Clinica San Camilo for $17.4 million and
leased them back from the purchaser during 2000 under a 20 year lease at a
rate of 7.22%. Under the agreements, USPE has deposited, as a guarantee,
$3.7 million, which is equivalent to 36 monthly payments of rent. USPE has
the option to purchase the hospital, land and building in 2010 at the fair
value plus 6%. This transaction has been accounted for as a direct financing
lease. There was no gain recognized in connection with the above
transaction.
USPI acquired, through Global, 100% of the outstanding common stock of Aspen
Healthcare Holdings Limited (Aspen) for approximately $35 million in cash
and incurring $54 million of indebtedness. Aspen owns and operates two
private hospitals in England. The purchase price exceeded the fair value of
the net assets by $19.8 million.
The terms of certain of USPI's acquisition agreements provide for additional
consideration to be paid to or received from the seller based on certain
financial targets for the acquired facilities. Such additional
consideration, which amounted to a net payment by USPI of approximately
$2.3 million in 2000, was recorded as an increase or decrease to goodwill at
the time of payment or receipt. There were no such payments or receipts in
1999 or 1998. The additional potential consideration that may be paid in
future years is estimated not to exceed $9.4 million.
The acquisitions referred to above resulted in the Company consolidating the
investee except where noted. The acquisitions of majority interests and step
acquisitions referred to above were accounted for under the purchase method
of accounting, and accordingly, the accompanying statements of operations do
not include any revenues or expenses related to these acquisitions prior to
the respective closing dates. The unconsolidated ownership interests
acquired are accounted for under the equity method of accounting or carried
at cost, depending on the Company's ability to exert significant influence.
Step acquisitions resulted in the recording of additional goodwill in the
aggregate amount of $6.2 million in 2000. Following are the unaudited pro
forma results for the years ended December 31, 2000 and 1999 and from
February 27, 1998
F-17
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
(inception) through December 31, 1998 as if the consolidated acquisitions
occurred at the beginning of the preceding period:
<Table>
<Caption>
PERIOD FROM
FEBRUARY 27,
1998
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
--------------------------- DECEMBER 31
2000 1999 1998
------------ ------------ ------------
Net operating revenues............. $156,994,834 $145,819,584 $ 67,590,931
Income (loss) before income
taxes............................ (7,215,316) (6,691,259) 648,967
</Table>
These unaudited pro forma results have been prepared for comparative
purposes only. The pro forma results do not purport to be indicative of the
results of operations which would have actually resulted had the
acquisitions been in effect on February 27, 1998, nor are they necessarily
indicative of the results of operations that may be achieved in the future.
(3) INTANGIBLE ASSETS
At December 31, intangible assets consisted of the following:
<Table>
<Caption>
ESTIMATED
USEFUL LIVES 2000 1999
------------ ------------ -----------
Goodwill............................... 25 years $114,633,146 $65,601,492
Management contracts................... 5-17 years 6,317,990 6,317,990
Other.................................. 5 years 1,262,449 1,044,783
------------ -----------
122,213,585 72,964,265
Less accumulated amortization.......... (7,789,371) (3,087,291)
------------ -----------
Net intangible assets.............. $114,424,214 $69,876,974
============ ===========
</Table>
(4) PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
<Table>
<Caption>
ESTIMATED
USEFUL LIVES 2000 1999
------------ ------------ ------------
Land and land improvements............ -- $ 22,041,048 $ 2,418,669
Buildings and leasehold
improvements........................ 7-50 years 121,419,584 44,205,265
Equipment............................. 3-12 years 55,336,341 34,095,622
Furniture and fixtures................ 4-20 years 10,879,781 9,401,819
Construction in progress.............. 6,725,301 1,646,279
------------ ------------
216,402,055 91,767,654
Less accumulated depreciation......... (51,206,757) (32,349,572)
------------ ------------
Net property and equipment........ $165,195,298 $ 59,418,082
============ ============
</Table>
F-18
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
Assets recorded under capital lease arrangements included in property and
equipment consist of the following:
<Table>
<Caption>
2000 1999
---------- ----------
Land and buildings................................... 20,790,995 1,681,834
Equipment and furniture.............................. 9,677,725 5,386,576
---------- ----------
30,468,720 7,068,410
Less accumulated depreciation........................ (6,669,949) (2,390,740)
---------- ----------
Net property and equipment under capital leases.... 23,798,771 4,677,670
========== ==========
</Table>
(5) LONG-TERM DEBT
At December 31, long-term debt consisted of the following:
<Table>
<Caption>
2000 1999
------------ -----------
Lines of credit................................... $ 90,148,927 $25,029,151
Senior subordinated notes......................... 54,368,789 23,407,234
Notes payable to financial institution............ 9,968,556 14,623,907
Mortgage notes.................................... -- 1,584,447
Loans from former owners of subsidiaries.......... 10,776,874 1,116,155
Capital lease obligations......................... 22,503,209 4,873,743
Other............................................. -- 2,049,147
------------ -----------
Total long-term debt.......................... 187,766,355 72,683,784
Less current portion.............................. (53,914,580) (9,390,882)
------------ -----------
Long-term debt, less current portion.......... $133,851,775 $63,292,902
============ ===========
</Table>
(A) LINES OF CREDIT
Total borrowings under lines of credit were approximately $90.1 million
at December 31, 2000. USPI has a credit agreement with a commercial bank
dated June 29, 1999 which allows the Company, as of December 31, 2000, to
borrow up to $25.0 million at an interest rate of LIBOR plus 1%, all of
which was outstanding at December 31, 2000. In February 2001, the
agreement was amended, increasing the amount available for borrowing from
$25 million to $35 million and extending the maturity date to June 30,
2002. Interest payments are due quarterly. Borrowings under this
agreement become due in the event of a change in control or the
completion of an initial public offering of the Company's Stock (IPO).
Repayment of amounts borrowed under the agreement is guaranteed by WCAS.
USPE, the Company's wholly-owned Spanish subsidiary, reached an agreement
in March 2000 with a commercial bank that provides USPE with the
potential to borrow up to 100 million Euros (approximately $93.9 million
at December 31, 2000). The amount available to borrow depends on the
level of USPE's operating performance and acquisition activity.
Borrowings under this agreement are secured by certain assets of USPE and
its subsidiaries, bear interest ranging from 0.75% to 2.25% over Euribor,
and mature December 31, 2007. At December 31,
F-19
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
2000, approximately $23.6 million was outstanding under this agreement at
a weighted average rate of 7.09%, and $2.2 million was available for
borrowing.
Global, the Company's wholly-owned U.K. subsidiary, has a credit
agreement with a commercial lender that provides for total borrowings of
L42.0 million (approximately $62.8 million at December 31, 2000). At
December 31, 2000, $40.2 million had been drawn and $22.6 million was
available. The credit agreement specifies that of this available amount,
$10.5 million will be used not later than September 30, 2003 to retire
demand notes payable to the former owners of Aspen. Borrowings under this
agreement, are secured by certain assets and the capital stock of Global
and its subsidiaries, bear interest ranging from 1.50% to 2.00% over
LIBOR, and mature in April 2010. At December 31, 2000, the weighted
average rate applicable to the outstanding balance was 7.88%. Global was
not in compliance with the cash flow and loan to EBITDA covenants at
December 31, 2000 and the loan to EBITDA covenant at March 31, 2001. On
February 9, 2001, the lender waived Global's compliance with such
covenants as of December 31, 2000 and on May 16, 2001, amended the loan
to EBITDA covenant effective March 31, 2001. As a result, Global was in
compliance with its covenants related to this debt (as amended) at
March 31, 2001 and believes it is probable that it will be in compliance
with these covenants at June 30, 2001 and throughout fiscal 2001 and
beyond. Despite the lender's waiver at December 31, 2000 and the
Company's compliance with the amended covenant as of March 31, 2001, the
Company has classified this debt as current as of December 31, 2000 and
March 31, 2001 based on an interpretation of Statement of Financial
Accounting Standards No. 78 which interpretation requires debt to be
classified as current unless the lender waives the right to demand
repayment for more than one year from the date of the specific covenant
violation.
The remaining lines of credit are held by several of the Company's
subsidiaries, mature throughout 2001, and have variable rates of interest
which ranged from 4.55% to 11.00% at December 31, 2000.
Fees paid for unused portions of the lines of credit were approximately
$301,000, $16,000, and $-0- in 2000, 1999 and 1998, respectively.
(B) SUBORDINATED DEBT
The Company issued notes in an aggregate principal amount of $56,120,000
which are subordinated to all senior indebtedness (the Senior
Subordinated Notes). Of this amount, $20,120,000 bears interest at 7%
which is payable annually beginning April 30, 2000 and matures April 30,
2008, and $36,000,000 bears interest at 10% which is payable each
September 27 and March 27 beginning in 2000, and matures March 27, 2010.
The holders of Senior Subordinated Notes may require the principal and
any accrued but unpaid interest to be repaid in the event of a change in
control, including the completion of an IPO. However, WCAS and another
significant investor, which collectively hold Senior Subordinated Notes
in the aggregate principal amount of $56,000,000, have advised the
Company of their intent to waive their rights to such mandatory
prepayment of the notes and exchange the 7% Senior Subordinated Notes for
20,120 shares of the Company's Series D redeemable preferred stock in the
event of an IPO. The Series D redeemable preferred stock provides holders
the right to receive cumulative paid-in-kind dividends, payable
quarterly, at the annual rate of 10% of the Series D preferred
liquidation value. The Series D preferred liquidation value is an amount
F-20
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
equal to $1,000 per share plus accrued and unpaid dividends. The Company
will be required to redeem all outstanding shares of its Series D
redeemable preferred stock at a per share price equal to the common stock
after an IPO. The $36,000,000 Senior Subordinated note was issued at a
discount of $5,250,000 which yields an effective interest rate of 12.61%.
At December 31, 2000 the unamortized discount was $5,038,443.
In addition, the Company issued a convertible subordinated note payable
in the amount of $3,287,234 to Baylor in forming its joint ventures with
Baylor, THVG 1 and THVG 2, in 1999. Interest at a rate of 5.07% is
payable quarterly on the Baylor note, with all principal due on the
maturity date of June 1, 2007. Baylor may require the principal and any
accrued but unpaid interest to be repaid in the event of a change in
control, including the completion of an IPO. The conversion price of the
Baylor note is $10.50 per share of common stock. Baylor has advised the
Company of its intention to convert the note into shares of the Company's
stock immediately prior to its IPO.
(C) OTHER LONG-TERM DEBT
The Company and its subsidiaries have notes payable to financial
institutions, former owners of acquired businesses, and other parties
which mature at various date through 2009 and accrue interest at fixed
and variable rates ranging from 6.18% to 9.78%. At December 31, 2000, one
of the Company's subsidiaries was not in compliance with two covenants
related to notes payable to a financial institution totaling
$8.3 million. In connection with an amendment to the note agreement in
February 2001 and reduction of the outstanding balance with a principal
payment of $3.6 million, the lender waived the subsidiary's compliance
with such covenants as of December 31, 2000 and restructured the payment
terms and covenants. The Company was in compliance with its covenants
related to this debt at March 31, 2001 and believes it is probable that
it will be in compliance with these covenants throughout fiscal 2001 and
beyond. Despite the lender's waiver at December 31, 2000, the Company
classified these notes payable as current at December 31, 2000 based on
an interpretation of SFAS No. 78. At December 31, 2000, this subsidiary
had two interest rate swap agreements related to the notes with a fixed
rate of 6.59% on notional amounts of $3,000,000 and $2,413,000. The
interest rate swap agreements expire June 28, 2002.
Capital lease obligations totaling $22.5 million are secured by
underlying real estate and equipment and have interest rates ranging from
4.74% to 13.19%.
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 2000 are as follows: 2001, $53,914,580; 2002,
$27,487,413, 2003, $4,790,767; 2004, $4,896,281, 2005, $4,965,328;
thereafter, $96,750,429.
(6) LEASES
USPI leases various office equipment and office space under a number of
operating lease agreements, which expire at various times through the year
2020. Such leases do not involve contingent rentals, nor do they contain
significant renewal or escalation clauses. Office leases generally require
USPI to pay all executory costs (such as property taxes, maintenance and
insurance).
F-21
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
Minimum future payments under noncancelable leases, with remaining terms in
excess of one year as of December 31, 2000 are as follows:
<Table>
<Caption>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ ------------ -----------
2001.............................................. $ 3,939,245 $ 2,569,937
2002.............................................. 3,476,151 2,123,681
2003.............................................. 2,989,758 1,933,682
2004.............................................. 2,182,525 1,847,589
2005.............................................. 2,022,145 1,553,248
Thereafter........................................ 25,482,598 7,198,589
------------ -----------
Total minimum lease payments.................... $ 40,092,422 $17,226,726
============ ===========
Amount representing interest...................... (17,589,213)
------------
Present value of minimum lease payments......... $ 22,503,209
============
</Table>
Total rent expense under operating leases was $4,174,190, $1,815,529 and
$538,792 for the years ended December 31, 2000, 1999 and 1998, respectively.
(7) REDEEMABLE PREFERRED STOCK, SERIES A AND SERIES B
USPI has authorized 31,200 shares of Series A redeemable preferred stock
with a $.01 par value and authorized 2,716 shares of Series B redeemable
preferred stock with a $.01 par value. USPI may redeem some or all of the
outstanding shares of preferred stock at any time for $1,000 per share plus
accrued dividends. USPI has a mandatory requirement to redeem all redeemable
preferred stock on the earlier of April 30, 2008 or upon an initial public
offering of its common stock registered under the Securities Act of 1933, as
amended. Additionally, holders of redeemable preferred stock may choose to
have their shares redeemed in the case of a change in control, as defined.
Shares of redeemed Preferred Stock are deemed retired. Redeemable preferred
stock has a stated liquidation preference of $1,000 per share plus accrued
dividends and is senior to all common shares. Dividends are cumulative and
accrue at an annual rate of $50 per share through April 30, 2000 and $75 per
share thereafter. Accumulated dividends are non-interest bearing and accrue
whether or not declared and whether or not funds are legally available for
payment. As of December 31, 2000 and 1999, USPI had issued 31,200 shares of
Series A redeemable preferred stock for $31,200,000 and 2,716 shares of
Series B redeemable preferred stock for $2,716,000. During 2000 all
Series B shares were either converted to Class A common stock or redeemed
for cash. Accrued dividends for Series A and Series B were $1,618,910 and
-0-, respectively, at December 31, 2000 and $1,931,470 and $192,383,
respectively, at December 31, 1999.
(8) CONVERTIBLE PREFERRED STOCK, SERIES C
During 2000 USPI authorized 20,000 shares of Series C convertible preferred
stock with a $.01 par value, of which 18,750 were issued and outstanding at
December 31, 2000. The shares were issued with 266,667 detachable warrants
to purchase Class A common stock. The Series C convertible preferred stock
per share liquidation value is determined by adding $1,000 per share plus an
amount equal to 7% on each $1,000 per share amount compounded quarterly.
Series C shares are converted to common stock by dividing the liquidation
value by $10.50 which amounted to
F-22
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
1,880,644 shares at December 31, 2000. The detachable warrants are
exercisable at issuance at $.03 per warrant into common stock at $10.50 per
share. In connection with the Series C shares and detachable warrants, the
$18,750,000 in proceeds was allocated $15,950,000 to the Series C
Convertible Preferred Stock and $2,800,000 to the warrants. The $2,800,000
was calculated based on a Black Scholes valuation model using the following
assumptions: expected life of two years, interest rate 5.12%, dividend yield
0% and volatility 40%.
(9) STOCKHOLDERS' EQUITY
Employees and certain independent contractors holding common stock in USPI
are bound by a Stockholders Agreement (Agreement), which restricts the
ability to transfer or assign Company common stock under certain
circumstances and also contains certain repurchase rights.
The Agreement terminates at the earlier of April 30, 2008, an initial public
offering, the consummation of any sale, transfer or other disposition of
substantially all the capital stock or assets of USPI for cash, or with
respect to any stockholder, the date on which such stockholder no longer
owns any shares of capital stock.
Receivables from sales of stock, primarily resulting from purchases of
common stock by employees, are presented in the consolidated balance sheets
as a deduction from stockholders' equity. Interest of 7% is due quarterly
and principal payments are due four years from the date of issuance at
various dates from May 1, 2002 to August 15, 2004. Payment of the principal
shall accelerate in the event of termination of employment, an initial
public offering of common stock by USPI, or a change in control of USPI, as
defined.
REGISTRATION RIGHTS AGREEMENT
Donald E. Steen, William H. Wilcox, Sue H. Shelley. Paul B. Queally, D.
Scott Mackesy, Dave A. Alexander, Jr., M.D., Dale L. Stegall, Mark Garvin,
John C. Garrett, M.D., Baylor Health Services, Welsh, Carson, Anderson &
Stowe VII, L.P., WCAS Healthcare Partners, L.P., WCAS Capital
Partners III, L.P., FFT Partners I, L.P. and FFT Executive
Partners I, L.P. and other holders of the Company's Class A common stock and
shares of common stock issuable upon the conversion of the Company's
Class A common stock are entitled under a registration rights agreement with
the Company to the following registration rights for the shares of Class A
common stock and shares of common stock issuable upon conversion of Class A
common stock held by them:
- at any time Welsh, Carson, Anderson & Stowe VII, L.P., on behalf of the
holders of registrable securities, may require, on two occasions only,
that the Company use its best efforts to register registrable
securities for public resale;
- holders of registrable securities under this agreement may require the
Company to use its best efforts to register their shares of common
stock on a Form S-3 registration statement, provided that the Company
is eligible to use the form and provided further that the Company shall
not be required to effect the registration more than once in any
180 day period; and
- if the Company registers any common stock at any time, either for its
own account or for the account of other security holders, holders of
restorable securities under the agreement are entitled to include their
shares of common stock in the registration, subject to the
F-23
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
ability of the underwriters to limit the number of shares included in
the offering in view of market conditions.
The Company will bear all registration expenses other than underwriting
discounts and commissions in connection with any registration under this
registration rights agreement.
(10) RELATED PARTY TRANSACTIONS
During 1998, the Company sold to WCAS 30,000 shares of Series A redeemable
preferred stock at a purchase price of $1,000 per share. In November 1998,
March 1999 and June 1999, the Company issued a total of $16.0 million
principal amount of 7% senior subordinated notes due April 30, 2008 to WCAS
and a total of $4.0 million principal amount of 7% senior subordinated notes
to FFT Partners I, L.P., a stockholder owning more than 5% of our
outstanding common stock, and affiliates. In March 2000, the Company sold
15,000 shares of Series C Convertible Preferred Stock to WCAS at a purchase
price of $1,000 per share and issued a warrant to WCAS, in connection with
this sale, to purchase 266,666 shares of the Company's Class A Common Stock
at an exercise price of $.03 per share. The warrant will terminate in June
2009. Also in March 2000, in connection with the issuance of 500,000 shares
of our Class A Common Stock for an aggregate purchase price of $5,250,000,
the Company issued $36,000,000 principal amount of 10% senior subordinated
notes due March 27, 2010, for a purchase price of $30,750,000 to WCAS.
Additionally, in March 2000, the Company sold 3,750 shares of Series C
Convertible Preferred Stock to FFT Partners I, L.P. and affiliates at a
purchase price of $1,000 per share.
Several partners in a law firm that provides legal services to USPI are also
partners in an entity that owns shares of USPI's stock. Legal fees related
to those services were approximately $356,000, $326,000 and $152,000 in
2000, 1999 and 1998, respectively.
A minority interest owner of HMT provided financial advisory services to
USPE related to acquisitions. Fees related to these services were
approximately -0-, $50,000 and $413,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
USPI has entered into agreements with certain majority and minority owned
surgery centers to provide management services. As compensation for these
services, USPI charges the surgery centers 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 3.8% to 7.0%. Amounts recognized
under these agreements, after eliminations of amounts from majority-owned,
consolidated surgery centers, totaled approximately $2,157,000, $5,111,000
and $223,000 in 2000, 1999 and 1998, respectively and are included in
management and administrative services revenue in the accompanying
consolidated statements of operations.
USPI has an agreement with HMT to manage its hospitals in Spain. In
initiating this arrangement in 1998, USPI incurred costs of $2,180,874.
(11) INCOME TAXES
The components of income (loss) before income taxes were as follows:
F-24
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
PERIOD FROM
FEBRUARY 27, 1998
(INCEPTION) THROUGH
DECEMBER 31,
2000 1999 1998
----------- ----------- -------------------
Domestic........................... $(4,960,264) $(4,948,301) $(1,333,265)
Foreign............................ (2,132,914) (1,444,952) (2,896,145)
----------- ----------- -----------
$(7,093,178) $(6,393,253) $(4,229,410)
=========== =========== ===========
</Table>
Income tax expense (benefit) attributable to income consists of:
<Table>
<Caption>
CURRENT DEFERRED TOTAL
---------- --------- ----------
Year ended December 31, 2000:
U.S. federal............................ $ -- $ -- $ --
State and local......................... 248,364 -- 248,364
Foreign................................. 1,659,055 (837,368) 821,687
---------- --------- ----------
Total tax expense..................... $1,907,419 $(837,368) $1,070,051
========== ========= ==========
</Table>
<Table>
<Caption>
CURRENT DEFERRED TOTAL
-------- --------- ----------
Year ended December 31, 1999:
U.S. federal.................................. $ -- $ -- $ --
State and local............................... -- -- --
Foreign....................................... 352,425 98,112 450,537
-------- --------- ----------
Total tax expense........................... $352,425 $ 98,112 $ 450,537
======== ========= ==========
</Table>
<Table>
<Caption>
CURRENT DEFERRED TOTAL
-------- --------- ---------
Period from February 27, 1998 (inception)
through December 31, 1998:
U.S. federal.............................. $ -- $ -- $ --
State and local........................... -- -- --
Foreign................................... -- (301,112) (301,112)
-------- --------- ---------
Net tax benefit......................... $ -- $(301,112) $(301,112)
======== ========= =========
</Table>
Income tax expense (benefit) differed from the amount computed by applying
the U.S. federal income tax rate of 34% to pretax loss in fiscal years ended
December 31, 2000, 1999 and 1998 as follows:
<Table>
<Caption>
PERIOD FROM
FEBRUARY 27, 1998
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
2000 1999 1998
----------- ----------- ------------------
Computed "expected" tax benefit........ $(2,411,681) $(2,173,706) $(1,437,999)
Increase (reduction) in income taxes
resulting from:
</Table>
F-25
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
PERIOD FROM
FEBRUARY 27, 1998
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
2000 1999 1998
----------- ----------- ------------------
Net operating loss carryforwards... 2,660,579 -- 20,944
Differences between US financial
reporting and foreign statutory
reporting........................ (949,559) 664,020 --
State tax expense.................. (249,609) -- --
Removal of 1% tax rate differential
between foreign and US........... 139 (59,830) (17,022)
Capitalized professional fees...... -- -- 47,250
Goodwill........................... 240,054 (106,839) 47,131
Increase in valuation allowance.... 2,078,329 1,743,838 362,166
Equity investment in foreign
subsidiary......................... (194,927) 306,189 665,557
Other.............................. (103,274) 76,865 10,861
----------- ----------- -----------
Total............................ $ 1,070,051 $ 450,537 $ (301,112)
=========== =========== ===========
</Table>
F-26
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at
December 31, 2000 and 1999 are presented below.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards................. $ 3,984,916 $ 2,320,529
Organization costs due to difference in
amortization lives............................. 1,483,947 1,709,000
Basis difference in start-up costs............... 384,488 148,264
Spanish tax credit............................... 620,141 669,000
Other accruals................................... 982,733 95,410
----------- -----------
Total deferred tax assets...................... 7,456,225 4,942,203
Less valuation allowance........................... (4,398,557) (2,320,228)
----------- -----------
Net deferred tax assets........................ $ 3,057,668 $ 2,621,975
=========== ===========
Deferred tax liabilities:
Basis difference of acquisitions................. $15,730,537 $ 6,018,000
Capital leases................................... 55,040 74,000
Accelerated depreciation......................... 661,944 98,975
Accrued pension obligation....................... 195,836 --
Other............................................ 71,004 16,000
----------- -----------
Total deferred tax liabilities................. $16,714,361 $ 6,206,975
=========== ===========
</Table>
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. At
December 31, 2000, USPI had net operating loss carryforwards for federal
income tax purposes of $10,486,619, which are available to offset future
federal taxable income, if any, through 2018. In addition, USPI has $578,289
of net operating loss carryforwards, which are only available to reduce
future federal taxable income related to the Health Horizons, Inc.
acquisition. The valuation allowance which primarily reserves the net
operating loss carryforwards, was increased by $2,078,329 during the period.
(12) STOCK OPTION PLAN
On April 30, 1998, USPI adopted a stock option plan (the Plan) pursuant to
which USPI's Board of Directors may grant non-qualified or incentive stock
options to selected employees, officers, and directors of USPI. The Plan
authorizes grants of options to purchase up to 2,000,000 shares of par value
$.01 common stock. The Board of Directors or a designated committee shall
have the sole authority to determine which employees receive grants, the
type of grant to be received, vesting period and all other option terms.
Incentive stock options granted generally have an option price no less than
100% of the fair market value of the common stock on the date of grant with
the term not to exceed ten years.
F-27
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
In December 2000, the Company granted approximately 333,333 options to
employees. In connection with this option grant, the Company recorded a
compensation charge in December 2000 for approximately $10,000, representing
the difference between the option exercise price of $13.50 and the estimated
fair value of the options based on the underwriter's share valuation of
$15.00, multiplied by the options granted and considering the four-year
vesting period. Amounts recognized as deferred compensation for this grant
at December 31, 2000 totaled $494,969.
At December 31, 2000, there were 500,187 shares available for grant under
the Plan. The per share weighted-average fair values at date of grant for
stock options granted during 2000, 1999 and 1998 were $5.52, $3.09 and
$2.55, respectively and were estimated based on a Black Scholes valuation
model, using the following assumptions:
<Table>
<Caption>
PERIOD FROM
YEARS ENDED FEBRUARY 27, 1998
DECEMBER (INCEPTION)
31, TO
------------------- DECEMBER 31,
2000 1999 1998
-------- -------- ------------------
Expected life in years........................... 5.0 5.0 5.0
Interest rate.................................... 5.0% 6.3% 6.0%
Dividend yield................................... 0.0% 0.0% 0.0%
Volatility....................................... 40.0% 0.0% 0.0%
</Table>
USPI applies APB Opinion No. 25 in accounting for its Plan whereby no
compensation expense is recognized when options are granted at a price equal
to the fair market value of the underlying stock on the date of grant. Had
USPI determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, USPI's net loss would have
resulted in the pro forma amounts indicated below:
<Table>
<Caption>
PERIOD FROM
FEBRUARY 27, 1998
(INCEPTION)
YEARS ENDED DECEMBER 31, TO
------------------------- DECEMBER 31,
2000 1999 1998
----------- ----------- ------------------
Net loss
As reported....................... $(8,163,229) $(6,843,790) $(3,928,298)
Pro forma......................... (8,644,080) (7,214,503) (4,129,306)
Basic and diluted loss per share
As reported....................... (1.80) (1.17) (1.29)
Pro forma......................... (1.86) (1.22) (1.35)
</Table>
Stock option activity during 2000, 1999 and 1998 was as follows:
<Table>
<Caption>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
Balance at February 27, 1998............................. -- $ --
Granted................................................ 761,100 8.40
</Table>
F-28
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
Exercised.............................................. -- --
Forfeited.............................................. -- --
Expired................................................ -- --
--------- ------
Balance at December 31, 1998............................. 761,100 8.40
Granted................................................ 219,166 11.10
Exercised.............................................. -- --
Forfeited.............................................. (123,333) 9.75
Expired................................................ -- --
--------- ------
Balance at December 31, 1999............................. 856,933 9.00
Granted................................................ 506,000 12.90
Exercised.............................................. (5,000) 6.00
Forfeited.............................................. (28,167) 10.68
Expired................................................ -- --
--------- ------
Balance at December 31, 2000............................. 1,329,766 $10.47
========= ======
Shares exercisable at December 31, 1998.................. 78,553 $ 6.00
Shares exercisable at December 31, 1999.................. 236,273 $ 7.95
Shares exercisable at December 31, 2000.................. 422,368 $ 8.55
</Table>
Exercise prices for options outstanding as of December 31, 2000, ranged from
$6.00 to $15.00. The following table provides certain information with
respect to stock options outstanding at December 31, 2000:
<Table>
<Caption>
WEIGHTED
WEIGHTED AVERAGE
STOCK AVERAGE REMAINING
RANGE OF OPTIONS EXERCISE CONTRACTUAL
EXERCISE PRICES OUTSTANDING PRICE LIFE
- --------------- ----------- -------- -----------
Under $10.50.................................. 387,766 $ 6.00 7.43
$10.50-$15.00................................. 942,000 $12.30 8.91
--------- ------ ----
1,329,766 $10.47 8.48
========= ====== ====
</Table>
The following table provides certain information with respect to stock
options exercisable at December 31, 2000:
<Table>
<Caption>
RANGE OF STOCK OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
- --------------- ------------- ----------------
Under $10.50..................................... 230,660 $ 6.00
$10.50-$15.00.................................... 191,708 $11.64
------- ------
422,368 $ 8.55
======= ======
</Table>
F-29
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
(13) LOSS PER SHARE
Basic and diluted loss per common share are based on the weighted average
number of common shares outstanding. Convertible preferred stock,
convertible debt and outstanding options and warrants to purchase shares
have not been included in the computation of loss per common share because
the effect would be anti-dilutive. Net loss attributable to common
stockholders and net loss per common share include preferred stock dividends
for purposes of this computation.
The potential common stock amounts listed below were not included in the
computation of diluted earnings per share because to do so would have been
antidilutive for the periods presented.
<Table>
<Caption>
PERIOD FROM
FEBRUARY 27,
1998
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------- DECEMBER 31,
2000 1999 1998
----------- ----------- -------------
Stock options...................................... 1,329,766 856,933 761,100
Warrants........................................... 300,000 33,333 --
Convertible subordinated debt...................... 313,070 313,070 --
Series C preferred stock........................... 1,880,644 -- --
</Table>
(14) SEGMENT DISCLOSURES
USPI has adopted Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION(SFAS 131). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements. USPI's
business is the operation of surgery centers, private surgical hospitals and
related businesses in the United States, Spain and the United Kingdom.
USPI's chief operating decision maker, as that term is defined in the
accounting standard, regularly reviews financial information about its
surgery centers and private surgical hospitals for assessing performance and
allocating resources both domestically and abroad. Accordingly, USPI's
reportable segments consist of (1) U.S. based facilities, (2) Spain based
facilities, and (3) U.K. based facilities (beginning with USPI's acquisition
of Aspen in April 2000, as discussed in Note 2).
F-30
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
UNITED
2000 U.S. SPAIN KINGDOM TOTAL
- ---- ------------ ------------ ------------ -------------
Net patient service revenue.......... $ 50,143,152 $ 57,115,904 $ 26,228,757 $ 133,487,813
Other revenue........................ 3,366,479 1,553,964 -- 4,920,443
------------ ------------ ------------ -------------
Total revenues................... $ 53,509,631 $ 58,669,868 $ 26,228,757 $ 138,408,256
============ ============ ============ =============
Depreciation and amortization........ $ 5,316,657 $ 6,334,580 $ 2,486,447 $ 14,137,684
Operating income..................... 3,835,160 446,052 3,368,134 7,649,346
Net interest income (expense)........ (7,335,217) (1,421,276) (2,871,612) (11,628,105)
Total assets......................... 111,549,421 121,727,360 97,118,798 330,395,579
Capital expenditures................. 5,614,392 27,719,754 2,471,917 35,806,063
</Table>
<Table>
<Caption>
1999 U.S. SPAIN TOTAL
- ---- ------------ ----------- ------------
Net patient service revenue......................... $ 18,050,768 $45,719,000 $ 63,769,768
Other revenue....................................... 5,322,816 1,320,000 6,642,816
------------ ----------- ------------
Total revenues.................................. $ 23,373,584 $47,039,000 $ 70,412,584
============ =========== ============
Depreciation and amortization....................... $ 2,701,448 $ 5,174,000 $ 7,875,448
Operating income (loss)............................. (3,545,137) 448,000 (3,097,137)
Net interest income (expense)....................... (606,710) (2,209,000) (2,815,710)
Total assets........................................ 100,268,233 76,435,000 176,703,233
Capital expenditures................................ 2,913,901 9,891,791 12,805,692
</Table>
<Table>
<Caption>
1998 U.S. SPAIN TOTAL
- ---- ----------- ----------- ------------
Net patient service revenue........................... $ 1,719,092 $17,397,000 $ 19,116,092
Other revenue......................................... 200,979 1,255,000 1,455,979
----------- ----------- ------------
Total revenues.................................... $ 1,920,071 $18,652,000 $ 20,572,071
=========== =========== ============
Depreciation and amortization......................... $ 315,123 $ 1,700,000 $ 2,015,123
Operating loss........................................ (1,849,844) (2,380,874) (4,230,718)
Net interest income (expense)......................... 696,656 (472,000) 224,656
Total assets.......................................... 43,142,402 81,650,000 124,792,402
Capital expenditures.................................. 405,055 3,543,696 3,948,751
</Table>
(15) COMMITMENTS AND CONTINGENCIES
(A) RESTRICTED CASH
As discussed in Note 2, approximately $1.7 million and $13.1 million in
cash remained in escrow at December 31, 2000 and 1999, respectively,
related to the Day-Op transactions. These amounts are reported as
restricted cash in the accompanying balance sheets.
(B) FINANCIAL GUARANTEES
As of December 31, 2000, USPI had issued guarantees aggregating $700,000
on borrowings of unconsolidated affiliated companies. No amount has been
accrued for USPI's obligation under these guaranty arrangements.
F-31
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
As of December 31, 2000, USPE had issued guarantees on certain
acquisitions in the amount of $3.7 million. Long-term investments of
approximately $3.7 million at December 31, 2000 have been pledged as
security for these guarantees. USPE has also received guarantees in the
amount of $2.9 million from the sellers of certain acquisitions regarding
potential liabilities at the date of acquisition. Approximately
$1.5 million of these guarantees received by USPE remained outstanding at
December 31, 2000.
(C) GENERAL AND PROFESSIONAL LIABILITY
In its normal course of business, USPI is subject to claims and lawsuits
relating to patient treatment. USPI 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.
(D) SELF INSURANCE
The Company is self-insured for healthcare for its U.S. employees up to
predetermined amounts above which third party insurance applies. We
believe that the accruals established at December 31, 2000, which were
estimated based on actual employee health claim patterns, adequately
provide for our exposure under this arrangement.
(E) EMPLOYMENT AGREEMENTS
On November 1, 2000, the Company entered into a four-year employment
agreement with Donald E. Steen that provides that he will serve as the
Company's chairman and chief executive officer. The employment agreement
provides for annual base compensation of $400,000. Mr. Steen is also
eligible for a performance bonus of up to 100% of his annual base salary.
During any time when Mr. Steen is no longer serving as chief executive
officer and therefore, only serving as chairman, his annual base salary
will be reduced by $100,000. The employment agreement provides that, at
any time after November 1, 2002, Mr. Steen is entitled to resign and that
the Company's board of directors is entitled to remove Mr. Steen from his
position as chief executive officer, but not as chairman of the board of
directors. In the event that the Company terminates the employment
agreement other than for cause, Mr. Steen would be entitled to receive
his annual base salary for the balance of the term of the employment
agreement plus the average annual bonus, if any, awarded to Mr. Steen for
the prior two calendar years until the later of 12 months following
termination or the expiration of the initial four-year term of the
agreement. The employment agreement further provides that all of
Mr. Steen's stock options automatically become fully vested if the
Company terminates the agreement for any reason other than for cause.
On January 1, 2001, the Company entered into a two-year employment
agreement, which renews for successive one year terms unless terminated
by either party, with William H. Wilcox that provides that he will serve
as the Company's president. The employment agreement provides for annual
base compensation of $350,000. Mr. Wilcox is also eligible for a
performance bonus of up to 100% of his annual base salary. In the event
the Company terminates the employment agreement other than for cause,
Mr. Wilcox would be entitled to receive his annual base salary for the
balance of the term of the employment agreement plus the average annual
bonus, if any, awarded to Mr. Wilcox for the prior two calendar years
until the later of 12 months following termination or the expiration of
the initial two-year term of
F-32
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
the agreement. The employment agreement further provides that if the
Company terminates the agreement for any reason other than for cause all
of Mr. Wilcox's stock options automatically become fully vested.
(F) LETTER OF CREDIT
In connection with a lease agreement the Company funded a Letter of
Credit in the amount of $619,000 during 1999 which the lessor may draw
down in accordance with the terms of the lease agreement. Draws totaling
$300,000 were made during 2000. Amounts of $319,000 and $619,000 were
included in other assets in the accompanying 2000 and 1999 balance
sheets, respectively.
(16) SUBSEQUENT EVENTS
In February 2001, the Company acquired OrthoLink Physicians Corporation
(OrthoLink) by issuing 3,390,939 shares of the Company's common stock for
all of the outstanding capital stock of OrthoLink. In connection with this
acquisition, the Company assumed approximately $46 million of notes payable
and $10 million in capital lease obligations. In addition, the Company
assumed options to purchase shares of OrthoLink common stock that the
Company converted into options for the right to purchase 604,663 shares of
USPI common stock. This acquisition was accounted for as a purchase and
resulted in goodwill of approximately $8,000,000.
Effective February 1, 2001, the Company invested additional cash in THVG 2,
which acquired a 79.4% interest in Valley View Surgery Center, an short-stay
surgery center the Company had managed since 1998, for $5.6 million in cash.
2001 EQUITY-BASED COMPENSATION PLAN
USPI adopted a 2001 Equity-Based Compensation Plan on February 13, 2001. At
any given time in the number of shares of common stock issued under the plan
plus the number of shares of common stock issuable upon the exercise of all
outstanding awards under the plan and USPI's 1998 stock option plan may not
exceed the lesser of 300,000,000 shares or 12.5% of the total number of
shares of common stock then outstanding, assuming the exercise of all
outstanding options and warrants.
The plan provides for grants of incentive stock options, within the meaning
of Section 422 of the Internal Revenue Code, to USPI employees, including
officers and employee-directors, and for grants of nonstatutory stock
options, restricted stock awards, stock appreciation rights, phantom stock
awards and annual incentive awards to USPI employees, consultants and
nonemployee directors.
EMPLOYEE STOCK PURCHASE PLAN
USPI adopted an Employee Stock Purchase Plan on February 13, 2001. The plan
provides for the grant of stock options to selected eligible employees. Any
eligible employee may elect to participate in the plan by authorizing USPI's
options and compensation committee to make payroll deductions to pay the
exercise price of an option at the time and in the manner prescribed by
USPI's options and compensation committee. This payroll deduction may be a
specific amount or a designated percentage to be determined by the employee,
but the specific amount may not be less than an amount established by the
Company and the designated percentage may not exceed an
F-33
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
amount eligible compensation established by the Company from which the
deduction is made. The Company has reserved 500,000 shares of common stock
for this plan.
PROPOSED ACQUISITIONS
USPE has a nonbinding letter of intent to acquire Clinica Esperanza de
Triana, S.A., a private hospital in Seville, Spain for approximately
$20 million. Negotiations are ongoing and USPE is currently performing due
diligence. Management anticipates a decision on this acquisition by
May 2001.
STOCK OPTIONS
Effective as of February 1, 2001, the Company granted options to purchase
66,666 shares of common stock to William H. Wilcox. The exercise price of
the options is equal to the initial public offering price. If an earnings
per share target is met by the Company in 2001, options with respect to
8,333 shares will vest on December 31 of each of 2003, 2004, 2005 and 2006.
If an earnings per share target is met by the Company in 2002, options with
respect to 11,111 shares will vest on December 31 of each of 2003, 2004 and
2005. If the earnings per share targets are not met by the Company in 2001
and 2002, all of the options become exercisable on February 1, 2007.
REVERSE STOCK SPLIT
On February 13, 2001, the Board of Directors authorized a stock split to be
determined based upon the recommendation of the Company's underwriters in
connection with the Company's IPO. On April 4, 2001, the Company's
underwriters recommended a one-for-three reverse stock split to be effected
upon the effective date of the registration statement of the Company's IPO.
Accordingly, the effect of the reverse stock split has been retroactively
reflected in the consolidated financial statements and notes thereto
including weighted average share and per share amounts.
(17) LIQUIDITY
The Company has reached the limits of its current financing arrangements.
Additionally, Global defaulted on certain of its debt covenants at
December 31, 2000 with its commercial lender. The Company's actions and
plans to address its liquidity are as follows:
- Global received a waiver from its commercial lender as of December 31,
2000 as a result of USPI and WCAS agreeing to support the operations of
Global. The lender agreed to amend a covenant effective March 31, 2001
whereby Global was in compliance with its covenants at March 31, 2001
(as amended). Global believes it is probable that it will be in
compliance with its covenants at June 30, 2001 and throughout fiscal
2001 and beyond.
- Finalized a $10,000,000 increase in the revolving line of credit that
originated June 29, 1999, which amount is guaranteed by WCAS.
- Initiated negotiations for a $50 million credit facility.
- Finalize its IPO for net proceeds of $115.6 million.
In the event the $50 million credit facility and the IPO are not
consummated, the Company has received representation from WCAS that WCAS has
the ability and intent to support the financing requirements of the Company
and its subsidiaries through June 30, 2002 to the extent required.
F-34
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
(18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following information is presented as required by regulations of the
Securities and Exchange Commission in connection with the Company's offering
of debt that would be publicly traded. This information is not routinely
prepared for use by management. The operating and investing activities of
the separate legal entities included in the consolidated financial
statements are fully interdependent and integrated. Accordingly, the
operating results of the separate legal entities are not representative of
what the operating results would be on a stand-alone basis. Revenues and
operating expenses of the separate legal entities include intercompany
charges for management and other services.
The $150 million 10% Senior Subordinated Notes due 2011, to be issued by
USPI's wholly-owned subsidiary, United Surgical Partners Holdings, Inc., are
guaranteed by USPI and USPI's wholly-owned subsidiaries domiciled in the
United States. USPI's investees in Spain and the United Kingdom are not
guarantors of the obligation. USPI's investees in the United States in which
USPI owns less than 100% are not guarantors of the obligation. The financial
positions and results of operations (below, in thousands) of the respective
guarantors are based upon the guarantor relationship as of the end of the
year and respective interim periods.
CONDENSED CONSOLIDATING BALANCE SHEETS:
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
AS OF DECEMBER 31, 2000 U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
- ----------------------------------------- ----------------- ----------------- ------------- ------------
ASSETS:
Current assets:
Cash and cash equivalents................ $ 765 $ 2,686 $ -- $ 3,451
Restricted cash.......................... 1,731 -- -- 1,731
Patient receivables, net................. -- 20,955 (160) 20,795
Other receivables........................ 14,710 1,087 (12,623) 3,174
Inventories of supplies.................. 209 4,459 -- 4,668
Prepaids and other current assets........ 713 2,368 -- 3,081
-------- -------- --------- --------
Total current assets................... 18,128 31,555 (12,783) 36,900
Property and equipment, net.............. 7,609 158,225 (639) 165,195
Investments in affiliates................ 86,880 29 (79,631) 7,278
Intangible assets, net................... 36,306 79,302 (1,184) 114,424
Other assets............................. 48,099 6,364 (47,864) 6,599
-------- -------- --------- --------
Total assets........................... $197,022 $275,475 $(142,101) $330,396
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 402 $ 25,454 $ (9,505) $ 16,351
Accrued expenses......................... 8,728 15,978 141 24,847
Current portion of long-term debt........ 53 11,797 42,065 53,915
-------- -------- --------- --------
Total current liabilities.............. 9,183 53,229 32,701 95,113
Long-term debt........................... 79,369 147,739 (93,256) 133,852
Other liabilities........................ 457 10,766 (182) 11,041
Minority interests....................... -- 4,947 3,827 8,774
Redeemable preferred stock............... 32,819 -- -- 32,819
Stockholders' equity..................... 75,194 58,794 (85,191) 48,797
-------- -------- --------- --------
Total liabilities and stockholders'
equity................................. $197,022 $275,475 $(142,101) $330,396
======== ======== ========= ========
</Table>
F-35
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
AS OF DECEMBER 31, 1999 U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
- ----------------------------------------- ----------------- ----------------- ------------- ------------
ASSETS:
Current assets:
Cash and cash equivalents................ $ 470 $ 3,246 $ -- $ 3,716
Restricted cash.......................... 13,100 -- -- 13,100
Patient receivables, net................. -- 11,801 -- 11,801
Other receivables........................ 3,514 1,574 (1,756) 3,332
Inventories of supplies.................. 146 2,475 -- 2,621
Prepaids and other current assets........ 409 2,903 -- 3,312
-------- -------- --------- --------
Total current assets................... 17,639 21,999 (1,756) 37,882
Property and equipment, net.............. 3,821 54,836 761 59,418
Investments in affiliates................ 62,484 429 (55,032) 7,881
Intangible assets, net................... 30,285 40,754 (1,162) 69,877
Other assets............................. 31,978 1,106 (31,439) 1,645
-------- -------- --------- --------
Total assets........................... $146,207 $119,124 $ (88,628) $176,703
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 733 $ 10,845 $ (1,756) $ 9,822
Accrued expenses......................... 2,655 5,586 (33) 8,208
Current portion of long-term debt........ 1,769 7,742 (120) 9,391
-------- -------- --------- --------
Total current liabilities.............. 5,157 24,173 (1,909) 27,421
Long-term debt........................... 45,407 49,053 (31,168) 63,292
Other liabilities........................ 364 6,096 -- 6,460
Minority interests....................... -- 3,906 3,013 6,919
Redeemable preferred stock............... 36,040 -- -- 36,040
Stockholders' equity..................... 59,239 35,896 (58,564) 36,571
-------- -------- --------- --------
Total liabilities and stockholders'
equity................................. $146,207 $119,124 $ (88,628) $176,703
======== ======== ========= ========
</Table>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
YEAR ENDED DECEMBER 31, 2000 U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
- ----------------------------------------- ----------------- ----------------- ------------- ------------
Revenues................................. $ 5,590 $136,394 $ (3,576) $138,408
Operating expenses, excluding
depreciation and amortization.......... 11,406 109,059 (3,844) 116,621
Depreciation and amortization............ 2,043 12,135 (40) 14,138
-------- -------- --------- --------
Operating income (loss).................. (7,859) 15,200 308 7,649
Interest expense, net.................... (3,127) (8,517) 16 (11,628)
Other income (expense)................... 499 (3,251) 1,970 (782)
-------- -------- --------- --------
Income (loss) before minority
interests.............................. (10,487) 3,432 2,294 (4,761)
Minority interests in income of
consolidated subsidiaries.............. -- (1,358) (974) (2,332)
Income (loss) before income taxes........ (10,487) 2,074 1,320 (7,093)
Income tax (expense) benefit............. (223) (847) -- (1,070)
-------- -------- --------- --------
Net income (loss)........................ $(10,710) $ 1,227 $ 1,320 $ (8,163)
======== ======== ========= ========
</Table>
F-36
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
YEAR ENDED DECEMBER 31, 1999 U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
- ------------------------------------------------- ----------------- ----------------- ------------- ------------
Revenues......................................... $ 5,551 $ 65,603 $ (741) $ 70,413
Operating expenses, excluding depreciation and
amortization................................... 10,976 55,558 (899) 65,635
Depreciation and amortization.................... 1,557 6,293 25 7,875
-------- -------- --------- --------
Operating income (loss).......................... (6,982) 3,752 133 (3,097)
Interest expense, net............................ 45 (2,865) 4 (2,816)
Other income (expense)........................... (83) (4,033) 3,754 (362)
-------- -------- --------- --------
Income (loss) before minority interests.......... (7,020) (3,146) 3,891 (6,275)
Minority interests in (income) loss of
consolidated subsidiaries...................... -- (187) 69 (118)
Income (loss) before income taxes................ (7,020) (3,333) 3,960 (6,393)
Income tax (expense) benefit..................... 10 (454) (7) (451)
-------- -------- --------- --------
Net income (loss)................................ $ (7,010) $ (3,787) $ 3,953 $ (6,844)
======== ======== ========= ========
PERIOD FROM FEBRUARY 27, 1998 (INCEPTION) TO
DECEMBER 31, 1998
- -------------------------------------------------
Revenues......................................... $ 304 $ 20,374 $ (106) $ 20,572
Operating expenses, excluding depreciation and
amortization................................... 2,276 18,437 2,075 22,788
Depreciation and amortization.................... 262 1,753 -- 2,015
-------- -------- --------- --------
Operating income (loss).......................... (2,234) 184 (2,181) (4,231)
Interest income (expense), net................... 708 (483) -- 225
Other income (expense)........................... (56) (954) 764 (246)
-------- -------- --------- --------
Income (loss) before minority interests.......... (1,582) (1,253) (1,417) (4,252)
Minority interests in (income) loss of
consolidated subsidiaries...................... -- (83) 106 23
Income (loss) before income taxes................ (1,582) (1,336) (1,311) (4,229)
Income tax (expense) benefit..................... -- 301 -- 301
-------- -------- --------- --------
Net income (loss)................................ $ (1,582) $ (1,035) $ (1,311) $ (3,928)
======== ======== ========= ========
</Table>
F-37
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
YEAR ENDED DECEMBER 31, 2000 U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
- ------------------------------------------------- ----------------- ----------------- ------------- ------------
Cash flows from operating activities:
Net income (loss)................................ $(10,710) $ 1,226 $ 1,321 $ (8,163)
Changes in operating and intercompany assets and
liabilities and noncash items included in net
income (loss).................................. (634) 21,104 (1,304) 19,166
-------- -------- --------- --------
Net cash provided by (used in) operating
activities..................................... (11,344) 22,330 17 11,003
Cash flows from investing activities:
Sales (purchases) of property and equipment,
net............................................ (4,233) 4,719 -- 486
Purchases of new businesses...................... (42,942) (65,581) 25,239 (83,284)
Other items...................................... 4,100 (3,703) 7,336 7,733
-------- -------- --------- --------
Net cash provided by (used in) investing
activities..................................... (43,075) (64,565) 32,575 (75,065)
Cash flows from financing activities:
Long-term borrowings, net........................ 33,750 17,358 (7,336) 43,772
Proceeds from issuance of common stock........... 5,069 25,239 (25,239) 5,069
Other items...................................... 15,895 (1,545) -- 14,350
-------- -------- --------- --------
Net cash provided by (used in) financing
activities..................................... 54,714 41,052 (32,575) 63,191
Effect of exchange rate changes on cash.......... -- 623 (17) 606
Net increase (decrease) in cash.................. 295 (560) -- (265)
Cash at the beginning of the year................ 470 3,246 -- 3,716
-------- -------- --------- --------
Cash at the end of the year...................... $ 765 $ 2,686 $ -- $ 3,451
======== ======== ========= ========
YEAR ENDED DECEMBER 31, 1999
- -------------------------------------------------
Cash flows from operating activities:
Net income (loss)................................ $ (7,011) $ (3,787) $ 3,954 $ (6,844)
Changes in operating and intercompany assets and
liabilities and noncash items included in net
income (loss).................................. 9,622 5,490 (3,954) 11,158
-------- -------- --------- --------
Net cash provided by (used in) operating
activities..................................... 2,611 1,703 -- 4,314
Cash flows from investing activities:
Purchases of property and equipment, net......... (2,868) (9,940) -- (12,808)
Purchases of new businesses...................... (36,960) (2,427) 3,525 (35,862)
Other items...................................... (6,472) 1,157 6,472 1,157
-------- -------- --------- --------
Net cash provided by (used in) investing
activities..................................... (46,300) (11,210) 9,997 (47,513)
Cash flows from financing activities:
Long-term borrowings, net........................ 40,627 7,492 (6,472) 41,647
Proceeds from issuance of common stock........... -- 3,525 (3,525) --
Other items...................................... 506 -- -- 506
-------- -------- --------- --------
Net cash provided by (used in) financing
activities..................................... 41,133 11,017 (9,997) 42,153
Effect of exchange rate changes on cash.......... -- (203) -- (203)
Net increase (decrease) in cash.................. (2,556) 1,307 -- (1,249)
Cash at the beginning of the year................ 3,026 1,939 -- 4,965
-------- -------- --------- --------
Cash at the end of the year...................... $ 470 $ 3,246 $ -- $ 3,716
======== ======== ========= ========
</Table>
F-38
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
USPI AND
PERIOD FROM FEBRUARY 27, 1998 (INCEPTION) TO WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
DECEMBER 31, 1998 U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
- ------------------------------------------------- ----------------- ----------------- ------------- ------------
Cash flows from operating activities:
Net loss......................................... $ (1,582) $ (1,036) $ (1,310) $ (3,928)
Changes in operating and intercompany assets and
liabilities and noncash items included in net
loss........................................... (3,391) 6,630 1,310 4,549
-------- -------- --------- --------
Net cash provided by (used in) operating
activities..................................... (4,973) 5,594 -- 621
Cash flows from investing activities:
Purchases of property and equipment, net......... (270) (3,679) -- (3,949)
Purchases of new businesses...................... (26,300) (47,416) 7,500 (66,216)
Other items...................................... (52,875) 424 39,776 (12,675)
-------- -------- --------- --------
Net cash provided by (used in) investing
activities..................................... (79,445) (50,671) 47,276 (82,840)
Cash flows from financing activities:
Long-term borrowings, net........................ 1,493 39,530 (39,776) 1,247
Proceeds from issuance of common stock........... 54,751 7,500 (7,500) 54,751
Other items...................................... 31,200 (50) -- 31,150
-------- -------- --------- --------
Net cash provided by (used in) financing
activities..................................... 87,444 46,980 (47,276) 87,148
Effect of exchange rate changes on cash.......... -- 36 -- 36
Net increase (decrease) in cash.................. 3,026 1,939 -- 4,965
Cash at inception................................ -- -- -- --
-------- -------- --------- --------
Cash at the end of the year...................... $ 3,026 $ 1,939 $ -- $ 4,965
======== ======== ========= ========
</Table>
F-39
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
DECEMBER 31, 2000
SEPTEMBER 30, 2001 RESTATED
------------------ -----------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 15,572 $ 3,451
Restricted cash............................................. -- 1,731
Patient receivables, net of allowance for doubtful accounts
of $4,305 and $3,666 respectively......................... 25,113 20,795
Other receivables........................................... 37,990 3,174
Inventories................................................. 5,681 4,668
Prepaids and other current assets........................... 6,989 3,081
-------- --------
Total current assets.................................... $ 91,345 $ 36,900
Property and equipment, net................................. 207,006 165,195
Investments in affiliates................................... 13,619 7,278
Intangible assets, net...................................... 177,444 114,424
Other assets................................................ 7,117 6,599
-------- --------
Total assets............................................ $496,531 $330,396
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 16,689 $ 16,351
Accrued salaries and benefits............................... 12,943 4,886
Due to affiliates........................................... 5,277 --
Accrued interest............................................ 3,578 5,211
Current portion of long-term debt........................... 11,951 53,915
Other accrued expenses...................................... 15,607 8,674
Deferred tax liability, net................................. 5,550 6,076
-------- --------
Total current liabilities............................... $ 71,595 $ 95,113
Long-term debt, less current portion........................ 147,388 133,852
Other long-term liabilities................................. 3,221 3,461
Deferred tax liability, net................................. 6,933 7,580
-------- --------
Total liabilities....................................... $229,137 $240,006
Minority interests.......................................... 15,334 8,774
Redeemable preferred stock:
Series A, $0.01 par value per share; 31,200 shares
authorized, issued and outstanding at December 31, 2000;
31,200 shares redeemed as of September 30, 2001......... -- 32,819
Series D, $0.01 par value per share; 40,000 shares
authorized; 20,000 and -0-shares issued and outstanding
at September 30, 2001 and December 31, 2000,
respectively............................................ 20,597 --
</Table>
F-40
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
DECEMBER 31, 2000
SEPTEMBER 30, 2001 RESTATED
------------------ -----------------
(UNAUDITED)
Stockholders' equity:
Series C convertible preferred stock, $0.01 par value;
20,000 shares authorized; 18,750 shares issued and
outstanding at December 31, 2000; 18,750 converted as of
September 30, 2001...................................... -- 19,747
Common stock:
Class A shares, $0.01 par value, 30,000,000 shares
authorized; 7,785,678 shares outstanding at December
31, 2000; all shares converted to common as of
September 30, 2001.................................... -- 78
Class B shares, $0.01 par value, 3,000,000 shares
authorized; 333,333 shares outstanding at December 31,
2000; all shares converted to common as of September
30, 2001.............................................. -- 4
Other, $0.01 par value; 200,000,000 shares authorized;
24,292,452 and 170,046 shares issued and outstanding
at September 30, 2001 and December 31, 2000,
respectively.......................................... 243 2
Additional paid-in capital................................ 264,916 63,739
Treasury stock, at cost, 136,965 shares at September 30,
2001; 54,166 shares at December 31, 2000................ (1,819) (344)
Deferred compensation..................................... (400) (495)
Receivables from sales of common stock.................... (2,598) (2,973)
Accumulated other comprehensive loss, net of tax.......... (13,940) (12,026)
Accumulated deficit....................................... (14,939) (18,935)
-------- --------
Total stockholders' equity.............................. 231,463 48,797
-------- --------
Total liabilities and stockholders' equity.............. $496,531 $330,396
======== ========
</Table>
See accompanying notes to consolidated financial statements.
F-41
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED--IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net patient service revenue............................ $51,829 $35,091 $150,113 $94,575
Management and administrative services revenue......... 7,202 531 18,731 1,552
Equity in earnings of unconsolidated affiliates........ 1,269 156 4,134 487
Other income........................................... 483 405 1,537 1,318
------- ------- -------- -------
Total revenues..................................... 60,783 36,183 174,515 97,932
Salaries, benefits, and other employee costs........... 16,738 12,347 46,636 31,025
Medical services and supplies.......................... 11,743 8,802 35,104 24,701
Other operating expenses............................... 11,596 5,991 32,392 16,151
General and administrative expenses.................... 5,390 2,942 15,571 8,134
Provision for doubtful accounts........................ 949 446 2,126 1,478
Depreciation and amortization.......................... 7,239 3,805 19,190 9,866
------- ------- -------- -------
Total operating expenses........................... 53,655 34,333 151,019 91,355
------- ------- -------- -------
Operating income................................... 7,128 1,850 23,496 6,577
Interest income........................................ 228 299 696 854
Interest expense....................................... (3,407) (2,935) (13,734) (8,819)
Other.................................................. (39) (614) (49) (711)
------- ------- -------- -------
Total other expense, net........................... (3,218) (3,250) (13,087) (8,676)
Income (loss) before minority interest............. 3,910 (1,400) 10,409 (2,099)
Minority interest in income of consolidated
subsidiaries......................................... (1,974) (237) (5,175) (1,179)
------- ------- -------- -------
Income (loss) before income taxes.................. 1,936 (1,637) 5,234 (3,278)
Income tax benefit (expense)....................... (212) 30 (1,238) (621)
------- ------- -------- -------
Net income (loss).................................. 1,724 (1,607) 3,996 (3,899)
Preferred stock dividends.............................. (503) (936) (2,251) (5,018)
------- ------- -------- -------
Net income (loss) attributable to common
stockholders..................................... $ 1,221 $(2,543) $ 1,745 $(8,917)
======= ======= ======== =======
Net income (loss) per share attributable to common
stockholders
Basic................................................ $ 0.05 $ (0.32) $ 0.11 $ (1.16)
Diluted.............................................. $ 0.05 $ (0.32) $ 0.10 $ (1.16)
Weighted average number of common shares
Basic................................................ 24,285 7,912 16,458 7,703
Diluted.............................................. 25,480 7,912 17,374 7,703
</Table>
See accompanying notes to consolidated financial statements.
F-42
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED--IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss)......................................... $1,724 $(1,607) $3,996 $ (3,899)
Other comprehensive income (loss), before taxes:
Foreign currency translation adjustments................ 7,462 (6,555) (2,945) (12,591)
Income tax (expense) benefit related to other
comprehensive income (loss)........................... (2,612) 2,294 1,031 4,407
------ ------- ------ --------
Other comprehensive income (loss)....................... 4,850 (4,261) (1,914) (8,184)
------ ------- ------ --------
Comprehensive income (loss)............................. $6,574 $(5,868) $2,082 $(12,083)
====== ======= ====== ========
</Table>
See accompanying notes to consolidated financial statements.
F-43
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2001 2000
--------- --------
Cash flows from operating activities:
Net income (loss)......................................... $ 3,996 (3,899)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts......................... 2,126 1,478
Depreciation and amortization........................... 19,190 9,866
Amortization of discount on debt........................ 236 184
Equity in earnings of unconsolidated affiliates......... (4,134) (487)
Minority interest in income of consolidated
subsidiaries............................................ 5,175 1,179
Amortization of deferred compensation................... 95 --
Increases (decreases) in cash from changes in operating
assets and liabilities, net of effects from purchases
of new businesses:
Patient receivables................................... (3,667) (2,972)
Other receivables..................................... 2,032 (1,499)
Inventories of supplies, prepaids and other current
assets................................................. (454) (2,053)
Accounts payable and accrued expenses................. (1,740) 3,316
Other long-term liabilities........................... (332) 713
--------- --------
Net cash provided by operating activities........... 22,523 5,826
--------- --------
Cash flows from investing activities:
Purchases of new businesses, net of cash received......... (26,132) (72,139)
Purchases of property and equipment....................... (15,706) (12,241)
Sales of property......................................... -- 17,379
Increase in deposits...................................... (826) (3,704)
Increase in long-term note receivable..................... --
Cash released from escrow................................. 1,664 11,436
--------- --------
Net cash used in investing activities............... (41,000) (59,269)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 42,056 60,374
Payments on long-term debt................................ (108,949) (24,210)
Proceeds from issuances of common stock................... 131,465 5,747
Payments to repurchase common stock....................... (104) --
Proceeds from issuance of preferred stock................. -- 18,743
Payments to redeem preferred stock and dividends.......... (33,878) (5,235)
Distributions on investments in affiliates................ (6) 1,066
--------- --------
Net cash provided by financing activities........... 30,584 56,485
--------- --------
Effect of exchange rate changes on cash..................... 14 (336)
--------- --------
Net increase in cash and cash equivalents................... 12,121 2,706
Cash and cash equivalents at beginning of period............ 3,451 3,716
--------- --------
Cash and cash equivalents at end of period.................. $ 15,572 6,422
========= ========
Supplemental information:
Interest paid............................................. 15,702 6,128
Non-cash transactions:
Debt issued for purchases of new businesses............. -- 54,012
Sale of common stock for notes receivable from
employees, net.......................................... 315 1,076
Common stock issued for purchases of new businesses..... 48,301 --
Conversion of Series C convertible preferred stock to
common stock........................................... 20,341 --
Accrued dividends on preferred stock.................... 1,510 5,018
Conversion of Series B redeemable preferred stock to
Class A common......................................... -- 70
Assets acquired under capital lease obligations......... 562 18,128
Conversion of subordinated notes to Series D preferred
stock.................................................. 20,000 --
Conversion of subordinated note to common stock......... 3,287 --
</Table>
See accompanying notes to consolidated financial statements.
F-44
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
United Surgical Partners International, Inc. and subsidiaries (USPI or the
Company), a Delaware company, was formed in February 1998 for the primary
purpose of ownership and operation of surgery centers, private surgical
hospitals and related businesses in the United States and Western Europe. At
September 30, 2001, USPI, headquartered in Dallas, Texas, operated
thirty-five surgical facilities in the United States. Of these thirty-five
facilities, USPI consolidates the results of seventeen, owns a minority
equity interest in sixteen, which are accounted for under the equity method,
and holds no ownership interest in the remaining two centers, which are
operated by USPI under management contracts. In addition, United Surgical
Partners Europe, S.L. (USPE), a company incorporated in Spain and
wholly-owned by USPI, managed and owned a majority interest in six private
surgical hospitals, two surgery centers, and one diagnostic facility in
Spain at September 30, 2001. Global Healthcare Partners Limited (Global), a
company incorporated in England and majority-owned by USPI, managed two
wholly-owned private surgical hospitals in the United Kingdom at
September 30, 2001.
USPI is subject to changes in government legislation that could impact
Medicare, Medicaid, and foreign government reimbursement levels and is also
subject to increased levels of managed care penetration and changes in payor
patterns that may impact the level and timing of payments for services
rendered.
USPI maintains its books and records on the accrual basis of accounting, and
the consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements and notes should be read
in conjunction with the Company's Form 8-A which incorporates by reference
the Company's Registration Statement on Form S-1. In addition, the
accompanying financial statements reflect the consolidated results of Day-Op
Center of Long Island, Inc., which was not consolidated in the Company's
previously published consolidated financial statements for the periods from
January 1, 2000 through June 30, 2001. On September 27, 2001, the Company
filed a Form 8-K reflecting the restatement of its consolidated results for
periods from January 1, 2000 through June 30, 2001 upon receiving a
communication from the Securities and Exchange Commission indicating that,
based on the facts and circumstances presented by the Company, Day-Op Center
of Long Island, Inc. must be consolidated pursuant to an interpretation of
EITF 97-2.
It is management's opinion that the accompanying consolidated financial
statements reflect all adjustments (which are normal recurring adjustments)
necessary for a fair presentation of the results for the interim period and
the comparable period presented. The results of operations for any interim
period are not necessarily indicative of results for the full year.
(2) ACQUISITIONS
On February 12, 2001, the Company completed a merger with OrthoLink
Physicians Corporation. The transaction was funded through the issuance of
3,390,939 shares of common stock to OrthoLink stockholders. As of
February 12, 2001, OrthoLink held a direct or indirect ownership interest in
eight surgery centers. The Company also held an ownership interest in and
managed one of these centers. OrthoLink managed six of the eight surgery
centers in which it held an ownership interest and managed two additional
surgery centers in which it had no ownership interest. As a result of this
merger, the Company also provides specialized management services
F-45
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
for hospitals and has service agreements with fourteen physician groups in
six states. The Company's physician practice management operations are not,
and are not expected to be in the future, a material part of its business.
During July 2001, the Company invested additional cash in THVG/HealthFirst,
L.L.C. (THVG 2), one of the Company's two joint ventures with the Baylor
Health System. Effective July 1, 2001 THVG 2 acquired a 58.05% interest in
an short-stay surgery center in Fort Worth, Texas, for approximately
$14.0 million in cash. In accordance with SFAS 142 (note 8), the goodwill
related to this acquisition is not being amortized. THVG 2 had previously
held no ownership but had operated the Fort Worth surgery center under a
management contract. The Company consolidates the financial results of THVG
2.
Following are the unaudited pro forma results for the nine months ended
September 30, 2001 and 2000 as if the acquisitions of OrthoLink and the
surgery center in Fort Worth occurred on January 1, 2000 (in thousands,
except per share amounts):
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
Net operating revenues.................................. $182,329 $129,370
Net income (loss)....................................... 5,234 (1,633)
Net income (loss) attributable to common stockholders... 2,983 (6,651)
Basic earnings (loss) per share......................... 0.18 (0.60)
Diluted earnings (loss) per share....................... 0.17 (0.60)
</Table>
(3) INITIAL PUBLIC OFFERING OF COMMON STOCK
In June 2001, the Company received, after offering costs of $14.2 million,
net proceeds of $130.7 million from an initial public offering (IPO) of
10,350,000 shares of its common stock, which included 1,350,000 shares
attributable to the underwriters' exercise of their over-allotment option.
Net proceeds of the offering were used to redeem $33.7 million of redeemable
preferred stock, including accrued dividends, and to repay $91.3 million of
bank indebtedness. The remaining $5.7 million, together with borrowings
under the Company's U.S. credit agreement, was used to acquire the
controlling interest in the surgery center in Fort Worth.
(4) LONG-TERM DEBT
The Company used a portion of the proceeds of its IPO to repay all amounts
outstanding under the Company's credit agreements with commercial lenders in
the United States. Concurrent with these repayments, the existing agreements
were terminated and the Company reached an agreement with another group of
lenders, providing the Company with the ability to borrow up to $55 million
at variable interest rates tied to Prime and LIBOR, based on the Company's
existing debt levels. The new credit agreement matures June 13, 2004;
interest is due at intervals ranging from one to six months from the date
amounts are drawn under the agreement. At September 30, 2001, $14.8 million
was outstanding under the agreement at an average interest rate of 6.99%.
Baylor Health Services, which held a convertible subordinated note in the
amount of approximately $3.3 million, converted the note to 313,069 shares
of the Company's common stock immediately prior to the completion of the
IPO. The Company's primary private investors waived their right to
F-46
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
the mandatory prepayment of subordinated notes upon completion of an IPO,
instead exchanging $20 million of 7% Senior Subordinated Notes for preferred
stock (note 5).
(5) REDEEMABLE PREFERRED STOCK, SERIES A AND D
The Company used a portion of the proceeds of its IPO to redeem all 31,200
outstanding shares of Series A redeemable preferred stock, including all
accrued but unpaid dividends. USPI has authorized 40,000 shares of Series D
redeemable preferred stock, 20,000 of which were issued upon the completion
of the IPO in exchange for $20 million in principal amount of 7% Senior
Subordinated Notes held by the Company's primary private investors. The
Series D shares have a par value of $0.01, a stated liquidation preference
of $1,000 per share plus accrued dividends, and are senior to all common
shares. Dividends are paid-in-kind on a quarterly basis at an annual rate of
10% and accrue daily whether or not declared and whether or not funds are
legally available for payment.
(6) EARNINGS PER SHARE
Basic earnings per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted earnings per share is computed
on the basis of the weighted average number of common shares outstanding
plus the effect of convertible preferred stock, convertible debt, and
outstanding options and warrants, except where such effect would be
antidilutive. Net income or loss attributable to common stockholders and net
income or loss per common share include preferred stock dividends for
purposes of this computation. The following table sets forth the computation
of basic and diluted earnings per share for the quarters and nine months
ended September 30, 2001 and 2000 (in thousands, except per share amounts):
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) attributable to common
shareholders....................................... $ 1,221 $(2,543) $1,745 $(8,917)
Weighted average common shares outstanding........... 24,285 7,912 16,458 7,703
Effect of dilutive securities:
Stock options...................................... 914 (A) 640 (A)
Warrants........................................... 281 (A) 276 (A)
Convertible subordinated debt...................... (B) (A) (A) (A)
Series C convertible preferred stock............... (B) (A) (A) (A)
------- ------- ------ -------
Shares used for diluted earnings (loss) per share.... 25,480 7,912 17,374 7,703
======= ======= ====== =======
Basic earnings (loss) per share...................... $ 0.05 $ (0.32) $ 0.11 $ (1.16)
Diluted earnings (loss) per share.................... $ 0.05 $ (0.32) $ 0.10 $ (1.16)
</Table>
- --------------
(A) No incremental shares are included because the effect would be
antidilutive.
(B) Securities were settled for cash or stock during the quarter ended
June 30, 2001.
F-47
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The potential common stock amounts listed below represent securities that
could potentially dilute basic earnings per share in the future that were
not included in the computation of diluted earnings per share because to do
so would have been antidilutive for the periods presented:
<Table>
<Caption>
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
------------------------ ------------------
Stock options..................................... 3,008,300 3,008,300
Warrants.......................................... 300,000 300,000
Convertible subordinated debt..................... 313,069 313,069
Series C convertible preferred stock.............. 1,848,214 1,848,214
</Table>
(7) SEGMENT DISCLOSURE
USPI has adopted Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(SFAS 131). SFAS 131 establishes standards for reporting information about
operating segments in financial statements. USPI's business is the operation
of surgery centers, private surgical hospitals and related businesses in the
United States and Western Europe. USPI's chief operating decision maker, as
that term is defined in the accounting standard, regularly reviews financial
information about its surgery centers and private surgical hospitals for
assessing performance and allocating resources both domestically and abroad.
Accordingly, USPI's reportable segments consist of (1) U.S. based facilities
and (2) Western Europe based facilities, including those in Spain and the
United Kingdom (beginning with USPI's April 2000 acquisition of Aspen
Healthcare Holdings, Limited in the United Kingdom).
<Table>
<Caption>
WESTERN EUROPE
------------------------------
WESTERN
UNITED EUROPE
THREE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) U.S. SPAIN KINGDOM TOTAL TOTAL
---------------------------------------------------------- -------- -------- -------- -------- --------
Net patient service revenue............................... $27,440 $14,799 $ 9,590 $24,389 $ 51,829
Other revenue............................................. 8,498 456 -- 456 8,954
------- ------- ------- ------- --------
Total revenues............................................ $35,938 $15,255 $ 9,590 $24,845 $ 60,783
======= ======= ======= ======= ========
Depreciation and amortization............................. $ 4,088 $ 2,228 $ 923 $ 3,151 $ 7,239
Operating income (loss)................................... 7,691 (1,965) 1,402 (563) 7,128
Net interest expense...................................... (1,811) (681) (687) (1,368) (3,179)
Total assets.............................................. 319,732 117,142 59,657 176,799 496,531
Capital expenditures...................................... 2,894 417 1,366 1,783 4,677
------- ------- ------- ------- --------
THREE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
----------------------------------------------------------
Net patient service revenue............................... $13,368 $13,226 $ 8,497 $21,723 $ 35,091
Other revenue............................................. 754 338 -- 338 1,092
------- ------- ------- ------- --------
Total revenues............................................ $14,122 $13,564 $ 8,497 $22,061 $ 36,183
======= ======= ======= ======= ========
Depreciation and amortization............................. $ 1,474 $ 1,496 $ 835 $ 2,331 $ 3,805
Operating income (loss)................................... 1,594 (879) 1,135 256 1,850
Net interest income (expense)............................. (2,216) 552 (972) (420) (2,636)
Total assets.............................................. 113,398 88,472 90,885 179,357 292,755
Capital expenditures...................................... 2,771 12,218 631 12,849 15,620
------- ------- ------- ------- --------
</Table>
F-48
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
WESTERN EUROPE
------------------------------
WESTERN
UNITED EUROPE
NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) U.S. SPAIN KINGDOM TOTAL TOTAL
---------------------------------------------------------- -------- -------- -------- -------- --------
Net patient service revenue............................... $69,817 $51,479 $28,817 $80,296 $150,113
Other revenue............................................. 23,055 1,347 -- 1,347 24,402
------- ------- ------- ------- --------
Total revenues............................................ $92,872 $52,826 $28,817 $81,643 $174,515
======= ======= ======= ======= ========
Depreciation and amortization............................. $10,536 $ 6,046 $ 2,608 $ 8,654 $ 19,190
Operating income.......................................... 17,962 651 4,883 5,534 23,496
Net interest expense...................................... (8,441) (2,191) (2,406) (4,597) (13,038)
Total assets.............................................. 319,732 117,142 59,657 176,799 496,531
Capital expenditures...................................... 8,353 2,015 5,900 7,915 16,268
------- ------- ------- ------- --------
NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
----------------------------------------------------------
Net patient service revenue............................... $36,364 $40,998 $17,213 $58,211 $ 94,575
Other revenue............................................. 2,326 1,031 -- 1,031 3,357
------- ------- ------- ------- --------
Total revenues............................................ $38,690 $42,029 $17,213 $59,242 $ 97,932
======= ======= ======= ======= ========
Depreciation and amortization............................. $ 3,872 $ 4,333 $ 1,661 $ 5,994 $ 9,866
Operating income.......................................... 3,568 412 2,597 3,009 6,577
Net interest expense...................................... (5,320) (719) (1,926) (2,645) (7,965)
Total assets.............................................. 113,398 88,472 90,885 179,357 292,755
Capital expenditures...................................... 5,340 23,813 1,216 25,029 30,369
</Table>
(8) NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS
(SFAS 141), and No. 142, ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
(SFAS 142). Under SFAS 141, all business combinations initiated after
June 30, 2001 will be accounted for using the purchase method of accounting;
the use of the pooling-of-interests method of accounting will be prohibited.
We adopted this standard on January 1, 2002, and it did not have a material
effect on the Company's financial position or results of operations.
SFAS 142 eliminates the amortization of goodwill. Under SFAS 142, the
carrying amount of goodwill should be tested for impairment at least
annually at the reporting unit level, as defined, and will be reduced only
if it is found to be impaired or is associated with assets sold or otherwise
disposed of. SFAS 142 is effective for fiscal years beginning after
December 15, 2001 except that SFAS 142 requires the cessation of goodwill
amortization resulting from acquisitions consummated subsequent to June 30,
2001. We adopted this standard on January 1, 2002 and are assessing its
impact including the determination of reporting units and the methodology
for testing intangible assets for impairment. The table below shows the
Company's net income (loss) for the quarters ended September 30, 2001 and
2000 on a pro forma basis as if the cessation of goodwill
F-49
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
amortization required by the new standard had occurred July 1, 2000 (in
thousands, except per share amounts):
<Table>
<Caption>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) attributable to common
shareholders, as reported.......................... $1,221 $(2,543) $ 1,745 $(8,917)
Goodwill amortization, net of applicable income tax
benefits........................................... 1,309 926 3,763 2,562
------ ------- ------- -------
Pro forma net income (loss) attributable to common
shareholders....................................... $2,530 $(1,617) $ 5,508 $(6,355)
====== ======= ======= =======
Diluted earnings (loss) per share, as reported....... $ 0.05 $ (0.32) $ 0.10 $ (1.16)
Goodwill amortization, net of applicable income tax
benefits........................................... 0.05 0.12 0.22 0.33
------ ------- ------- -------
Pro forma diluted earnings (loss) per share.......... $ 0.10 $ (0.20) $ 0.32 $ (0.83)
====== ======= ======= =======
</Table>
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS (SFAS 143). SFAS 143 applies to legal obligations associated
with the retirement of tangible, long-lived assets. SFAS 143 requires that
all entities recognized the estimated fair value of an asset retirement
obligation as a liability in the period in which it is incurred, if a
reasonable estimate of fair value can be made. SFAS 143 also requires that
all entities capitalized the associated asset retirement costs as part of
the carrying amount of the long-lived asset. The Company must adopt
SFAS 143 as of January 1, 2003. The Company does not believe that this
standard will have a material effect on the Company's future financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS (SFAS 144). SFAS 144 replaces SFAS
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and amends the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, REPORTING THE
RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, AND EXTRAORDINARY, UNUSUAL, AND INFREQUENTLY OCCURRING EVENTS AND
TRANSACTIONS. The following highlights the major changes:
- ASSETS TO BE HELD AND USED--no longer required to allocate goodwill to the
assets.
- ASSETS TO BE DISPOSED OF BY ABANDONMENT--requires the revision of the
depreciable life of the assets.
- ASSETS TO BE DISPOSED OF EITHER BY EXCHANGE FOR SIMILAR PRODUCTIVE ASSETS
OR DISTRIBUTION TO OWNERS IN A SPINOFF--requires the recognition of an
impairment loss if the carrying amounts of the assets exceed their fair
value.
- ASSETS TO BE DISPOSED OF BY SALE--requires the remeasurement of the assets
at either the carrying amount or the fair value, whichever is lower, with
no further depreciation or amortization of the assets.
- DISCONTINUED OPERATIONS--excludes future operating losses until realized;
now includes discontinued "components of an entity," which has a broader
definition than a segment.
F-50
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Company adopted SFAS 144 as of January 1, 2002 which did not have a
material effect on the Company's financial position or results of
operations.
(9) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following information is presented as required by regulations of the
Securities and Exchange Commission in connection with the Company's offering
of debt that would be publicly traded. This information is not routinely
prepared for use by management. The operating and investing activities of
the separate legal entities included in the consolidated financial
statements are fully interdependent and integrated. Accordingly, the
operating results of the separate legal entities are not representative of
what the operating results would be on a stand-alone basis. Revenues and
operating expenses of the separate legal entities include intercompany
charges for management and other services.
The $150 million 10% Senior Subordinated Notes due 2011, to be issued by
USPI's wholly-owned subsidiary, United Surgical Partners Holdings, Inc., are
guaranteed by USPI and USPI's wholly-owned subsidiaries domiciled in the
United States. USPI's investees in Spain and the United Kingdom are not
guarantors of the obligation. USPI's investees in the United States in which
USPI owns less than 100% are not guarantors of the obligation. The financial
positions and results of operations (below, in thousands) of the respective
guarantors are based upon the guarantor relationship as of the end of the
year and respective interim periods.
CONDENSED CONSOLIDATING BALANCE SHEETS:
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
----------------- ----------------- ------------- ------------
AS OF SEPTEMBER 30, 2001
ASSETS:
Current assets:
Cash and cash equivalents........ $ 7,621 $ 7,951 $ -- $ 15,572
Patient receivables, net......... 596 25,227 (710) 25,113
Other receivables................ 57,239 (13,637) (5,612) 37,990
Inventories of supplies.......... 229 5,452 -- 5,681
Prepaids and other current
assets......................... 4,314 2,675 -- 6,989
-------- -------- --------- --------
Total current assets......... 69,999 27,668 (6,322) 91,345
Property and equipment, net...... 40,785 166,842 (621) 207,006
Investments in affiliates........ 164,827 131 (151,339) 13,619
Intangible assets, net........... 78,871 98,616 (43) 177,444
Other assets..................... 52,072 6,261 (51,216) 7,117
-------- -------- --------- --------
Total assets................. $406,554 $299,518 $(209,541) $496,531
======== ======== ========= ========
</Table>
F-51
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
----------------- ----------------- ------------- ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable................. $ 1,229 $ 15,471 $ (11) $ 16,689
Accrued expenses................. 23,501 19,483 (29) 42,955
Current portion of long-term
debt........................... 2,437 10,037 (523) 11,951
-------- -------- --------- --------
Total current liabilities.... 27,167 44,991 (563) 71,595
Long-term debt................... 53,913 146,065 (52,590) 147,388
Other liabilities................ 441 9,894 (181) 10,154
Minority interests............... -- 6,134 9,200 15,334
Redeemable preferred stock....... 20,597 -- -- 20,597
Stockholders' equity............. 304,536 92,434 (165,407) 231,463
-------- -------- --------- --------
Total liabilities and
stockholders' equity....... $406,554 $299,518 $(209,541) $496,531
======== ======== ========= ========
AS OF DECEMBER 31, 2000
ASSETS:
Current assets:
Cash and cash equivalents........ $ 765 $ 2,686 $ -- $ 3,451
Restricted cash.................. 1,731 -- -- 1,731
Patient receivables, net......... -- 20,955 (160) 20,795
Other receivables................ 14,710 1,087 (12,623) 3,174
Inventories of supplies.......... 209 4,459 -- 4,668
Prepaids and other current
assets......................... 713 2,368 -- 3,081
-------- -------- --------- --------
Total current assets......... 18,128 31,555 (12,783) 36,900
Property and equipment, net...... 7,609 158,225 (639) 165,195
Investments in affiliates........ 86,880 29 (79,631) 7,278
Intangible assets, net........... 36,306 79,302 (1,184) 114,424
Other assets..................... 48,099 6,364 (47,864) 6,599
-------- -------- --------- --------
Total assets................. $197,022 $275,475 $(142,101) $330,396
======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable................. $ 402 $ 25,454 $ (9,505) $ 16,351
Accrued expenses................. 8,728 15,878 141 24,847
Current portion of long-term
debt........................... 53 11,797 42,065 53,915
-------- -------- --------- --------
Total current liabilities.... 9,183 53,229 32,701 95,113
Long-term debt................... 79,369 147,739 (93,256) 133,852
Other liabilities................ 457 10,766 (182) 11,041
Minority interests............... -- 4,947 3,827 8,774
Redeemable preferred stock....... 32,819 -- -- 32,819
Stockholders' equity............. 75,194 58,794 (85,191) 48,797
-------- -------- --------- --------
Total liabilities and
stockholders' equity....... $197,022 $275,475 $(142,101) $330,396
======== ======== ========= ========
</Table>
F-52
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
----------------- ----------------- ------------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues................................... $ 37,325 $141,658 $ (4,468) $174,515
Operating expenses, excluding depreciation
and amortization......................... 27,657 108,587 (4,415) 131,829
Depreciation and amortization.............. 7,146 12,283 (239) 19,190
-------- -------- --------- --------
Operating income (loss).................... 2,522 20,788 186 23,496
Interest expense, net...................... (5,048) (7,988) (2) (13,038)
Other income (expense)..................... 195 (64) (180) (49)
-------- -------- --------- --------
Income (loss) before minority interests.... (2,331) 12,736 4 10,409
Minority interests in income of
consolidated subsidiaries................ -- (2,617) (2,558) (5,175)
Income (loss) before income taxes.......... (2,331) 10,119 (2,554) 5,234
Income tax (expense) benefit............... (386) (852) -- (1,238)
-------- -------- --------- --------
Net income (loss).......................... $ (2,717) $ 9,267 $ (2,554) $ 3,996
======== ======== ========= ========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues................................... $ 3,809 $ 97,052 $ (2,929) $ 97,932
Operating expenses, excluding depreciation
and amortization......................... 7,965 76,494 (2,970) 81,489
Depreciation and amortization.............. 1,481 8,391 (6) 9,866
-------- -------- --------- --------
Operating income (loss).................... (5,637) 12,167 47 6,577
Interest expense, net...................... (2,121) (5,813) (31) (7,965)
Other income (expense)..................... 188 (4,816) 3,917 (711)
-------- -------- --------- --------
Income (loss) before minority interests.... (7,570) 1,538 3,933 (2,099)
Minority interests in income of
consolidated subsidiaries................ -- (657) (522) (1,179)
Income (loss) before income taxes.......... (7,570) 881 3,411 (3,278)
Income tax (expense) benefit............... (91) (530) -- (621)
-------- -------- --------- --------
Net income (loss).......................... $ (7,661) $ 351 $ 3,411 $ (3,899)
======== ======== ========= ========
</Table>
F-53
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
----------------- ----------------- ------------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Cash flows from operating activities:
Net income (loss).......................... $ 2,717 $ 9,267 $(2,554) $ 3,996
Changes in operating and intercompany
assets and liabilities and noncash items
included in net income (loss)............ 1,335 14,525 2,667 18,527
-------- ------- ------- --------
Net cash provided by (used in)
operating activities................. (1,382) 23,792 113 22,523
Cash flows from investing activities:
Purchases of property and equipment, net... (7,163) (8,543) -- (15,706)
Purchases of new businesses................ (26,258) -- 126 (26,132)
Other items................................ 1,664 (826) -- 838
-------- ------- ------- --------
Net cash provided by (used in)
investing
activities........................... (31,757) (9,369) 126 (41,000)
Cash flows from financing activities:
Long-term borrowings, net.................. (57,482) (9,411) -- (66,893)
Proceeds from issuance of common stock..... 131,465 239 (239) 131,465
Other items................................ (33,988) -- -- (33,988)
-------- ------- ------- --------
Net cash provided by (used in)
financing activities................. 39,995 (9,172) (239) 30,584
Effect of exchange rate change on cash..... -- 14 -- 14
Net increase (decrease) in cash............ 6,856 5,265 -- 12,121
Cash at the beginning of the year.......... 765 2,686 -- 3,451
-------- ------- ------- --------
Cash at the end of the period.............. $ 7,621 $ 7,951 $ -- $ 15,572
======== ======= ======= ========
</Table>
F-54
<Page>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
<Table>
<Caption>
USPI AND
WHOLLY-OWNED NON-PARTICIPATING CONSOLIDATION CONSOLIDATED
U.S. SUBSIDIARIES INVESTEES ADJUSTMENTS TOTAL
----------------- ----------------- ------------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2000
Cash flows from operating activities:
Net income (loss).......................... $ (7,661) $ 351 $ 3,411 $ 3,899
Changes in operating and intercompany
assets and liabilities and noncash items
included in net income (loss)............ (6,475) 19,611 (3,411) 9,725
-------- ------- ------- --------
Net cash provided by (used in)
operating activities................. (14,136) 19,962 -- 5,826
Cash flows from investing activities:
Sales (purchases) of property and
equipment, net........................... (3,863) 9,001 -- 5,138
Purchases of new businesses................ (41,952) (55,426) 25,239 (72,139)
Other items................................ 11,436 (3,704) -- 7,732
-------- ------- ------- --------
Net cash provided by (used in)
investing
activities........................... (34,379) (50,129) 25,239 (59,269)
Cash flows from financing activities:
Long-term borrowings, net.................. 28,750 7,414 -- 36,164
Proceeds from issuance of common stock..... 5,747 25,239 (25,239) 5,747
Other items................................ 14,574 -- -- 14,574
-------- ------- ------- --------
Net cash provided by financing
activities........................... 49,071 32,653 (25,239) 56,485
Effect of exchange rate changes on cash.... -- (336) -- (336)
Net increase in cash....................... 556 2,150 -- 2,706
Cash at the beginning of the year.......... 470 3,246 -- 3,716
-------- ------- ------- --------
Cash at the end of the period.............. $ 1,026 $ 5,396 $ -- $ 6,422
======== ======= ======= ========
</Table>
(10) SUBSEQUENT EVENTS
During October, November, and December the Company acquired controlling
interests in three surgery centers and a minority share in two surgery
centers, one of which was already managed by the Company, for an aggregate
cash purchase price of approximately $32.3 million. In addition, the Company
issued warrants to purchase 25,000 shares of its common stock at a price of
$16.45 per share as partial consideration in one of the acquisitions.
On December 19, 2001 a subsidiary of the Company issued $150 million of
Senior Subordinated Notes. The notes bear interest at a stated rate of 10%,
have an effective rate of 10.13% as a result of being issued at a discount
of $1.165 million, and mature December 15, 2011. The Company can call
certain amounts of the notes on various dates prior to their maturity.
Immediately following completion of the debt offering, the Company entered
into an amended and restated domestic revolving credit facility which
provides for borrowings of up to $85.0 million.
F-55
<Page>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
OrthoLink Physicians Corporation:
We have audited the accompanying consolidated balance sheet of OrthoLink
Physicians Corporation and subsidiaries as of December 31, 2000 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit 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. 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 audit provides 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 OrthoLink Physicians
Corporation and subsidiaries as of December 31, 2000 and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
March 30, 2001
Dallas, Texas
F-56
<Page>
ORTHOLINK PHYSICIANS CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,085
Accounts receivable, less allowances of $3,668............ 38,208
Deferred taxes............................................ 1,729
Other current assets...................................... 3,732
--------
Total current assets.................................... 48,754
Leasehold improvements...................................... 4,833
Leased equipment............................................ 7,489
Furniture and equipment..................................... 17,339
Computer equipment and software............................. 7,993
--------
Total leasehold improvements and equipment.................. 37,654
Less accumulated depreciation and amortization.......... (8,454)
--------
Leasehold improvements and equipment, net................... 29,200
Service agreements, net..................................... 19,145
Goodwill, net............................................... 10,725
Investments in joint ventures............................... 5,137
Other assets................................................ 1,433
Joint venture project costs................................. 6,439
--------
Total assets............................................ $120,833
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,219
Salaries and benefits payable............................. 7,656
Due to physician groups................................... 4,030
Current portion of capital lease obligations.............. 2,223
Current portion of notes payable.......................... 44,339
Other accrued expenses.................................... 5,905
--------
Total current liabilities............................... 67,372
Notes payable............................................... 1,964
Capital lease obligations, less current portion............. 7,975
--------
Total liabilities....................................... 77,311
--------
Minority interest........................................... 794
Stockholders' equity:
Common stock, $.01 par value, 30,000 authorized; 10,221
shares, issued and outstanding.......................... 102
Class A common stock, convertible, $.01 par value, 10,000
shares authorized; 5,891 issued and outstanding......... 59
Class B common stock, convertible, $.01 par value, 1,000
shares authorized, issued and outstanding............... 10
Additional paid-in capital................................ 41,420
Retained earnings......................................... 1,137
--------
Total stockholders' equity.............................. 42,728
--------
Total liabilities and stockholders' equity.............. $120,833
========
</Table>
See accompanying notes to consolidated financial statements.
F-57
<Page>
ORTHOLINK PHYSICIANS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)
<Table>
Net service agreement revenue............................... $103,714
Contract revenue............................................ 15,400
Other income................................................ 4,195
--------
Total income............................................ 123,309
Operating expenses:
Clinic expenses........................................... 76,184
Contract expenses......................................... 12,566
General and administrative................................ 10,232
Personnel costs........................................... 7,080
Depreciation and amortization............................. 5,542
Rent and lease expense.................................... 9,615
Interest expense.......................................... 4,127
Equity in earnings of unconsolidated entities............. (1,392)
Minority interest in income of consolidated
subsidiaries............................................ 41
--------
123,995
--------
Loss from continuing operations before income taxes......... (686)
Provision for income taxes.................................. (106)
--------
Loss from continuing operations......................... (792)
--------
Discontinued operations:
Income from operations of OMS, less applicable income tax
provision of $67........................................ 110
Gain on disposal of OMS less applicable income tax
provision of $120....................................... 195
--------
Net loss.................................................. $ (487)
========
</Table>
See accompanying notes to consolidated financial statements.
F-58
<Page>
ORTHOLINK PHYSICIANS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)
<Table>
<Caption>
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL
------------------- ------------------- ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- -------- -------- -------- -------- ---------- -------- --------
Balance at December 31,
1999....................... 9,907 $ 99 5,898 $59 1,000 $10 $40,780 $1,624 $42,572
Stock issued for
acquisitions............... 122 1 569 570
Stock reacquired............. (7) -- (36) (36)
Exercise of stock options.... 192 2 107 109
Net loss..................... (487) (487)
------ ---- ----- --- ----- --- ------- ------ -------
Balance at December 31,
2000....................... 10,221 $102 5,891 $59 1,000 $10 $41,420 $1,137 $42,728
====== ==== ===== === ===== === ======= ====== =======
</Table>
See accompanying notes to consolidated financial statements.
F-59
<Page>
ORTHOLINK PHYSICIANS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)
<Table>
Operating activities:
Net loss.................................................. $ (487)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Equity in earnings of unconsolidated entities........... (1,392)
Depreciation and amortization........................... 5,542
Deferred taxes.......................................... (411)
Gain on disposal of discontinued operations............. (195)
Minority interests in income of consolidated
subsidiaries........................................... 41
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable..................................... 5,765
Other current assets.................................... (2,208)
Accounts payable, salaries and benefits payable and
other accrued liabilities.............................. (80)
Due to physician groups................................. 596
Deferred revenue........................................ (1,954)
--------
Net cash provided by operating activities............. 5,217
--------
Investing activities:
Cash paid for acquisitions, net of cash acquired.......... (5,087)
Purchases of leasehold improvements and equipment......... (3,341)
Distributions from joint venture partners................. 1,149
Investments in joint ventures............................. (379)
Increase in joint venture project costs................... (460)
--------
Net cash used in investing activities................. (8,118)
--------
Financing activities:
Cash paid to reacquire stock.............................. (36)
Proceeds from stock option exercises...................... 109
Proceeds from line of credit.............................. 12,000
Payments on line of credit................................ (5,500)
Proceeds on notes payable................................. 2,880
Payments on notes payable................................. (77)
Payments on capital lease obligations..................... (1,436)
--------
Net cash provided by financing activities............. 7,940
--------
Net change in cash and cash equivalents..................... 5,039
Cash and cash equivalents at beginning of year.............. 46
--------
Cash and cash equivalents at end of year.................... $ 5,085
========
Supplemental cash flow information:
Stock issued for acquisitions............................... (570)
--------
Income taxes paid........................................... $ 1,106
========
Interest paid............................................... $ 3,695
========
Assets acquired under capital lease obligations............. $ 9,854
========
</Table>
See accompanying notes to consolidated financial statements.
F-60
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
OrthoLink Physicians Corporation (the Company or OrthoLink) is a
management company that develops, in selected geographic markets,
comprehensive and integrated networks of musculoskeletal care systems
that provide high-quality care in a cost-effective manner. As of
December 31, 2000, the Company operated 14 clinics with approximately 200
physicians in six states and manages the orthopaedic services of five
hospitals. In addition, the Company has minority interests in joint
ventures that provide orthopaedic short-stay services.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
(C) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly-liquid investments with an original
maturity of three months or less when purchased. The Company has no cash
equivalents as of December 31, 2000.
(D) ACCOUNTS RECEIVABLE
Accounts receivable consist of advances to physician groups based on the
groups' cash collections for the previous month on receivables from
patients for medical services provided by the physician groups. Physician
group patient receivables available as the underlying basis for repaying
these advances are considered net of contractual allowances and estimated
bad debts. The Company analyzes aging reports provided by the physician
groups and historical cash collections in assessing the allowance for
doubtful accounts. In addition, the Company had approximately $324 of
receivables due from hospitals as of December 31, 2000 with which the
Company has service agreements. Concentration of credit risk relating to
physician group accounts receivable is limited to some extent by the
diversity of the number of patients and payors and the geographic
dispersion of the Company's operations.
(E) LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful lives of the
assets. The useful lives are generally ten years for equipment, furniture
and leasehold improvements and five years for computer equipment and
software.
(F) JOINT VENTURES
The Company has entered into joint venture agreements with certain of its
affiliated physicians obtaining ownership interests ranging from 2% to
98%. Earnings from investments in joint ventures, which are accounted for
under the equity method, are included in other income in the consolidated
statements of operations. The joint ventures generally provide ancillary
services which complement the services provided by the Company and its
affiliated physicians. The Company has entered into management agreements
with some of the joint
F-61
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ventures for the provision of non-medical related services in exchange
for a fee. Such agreements are for terms consistent with the terms of the
joint venture agreements and range from 5 to 25 years.
(G) INTANGIBLE ASSETS
- SERVICE AGREEMENTS
The Company enters into service agreements with each acquired
practicing physician group for a period of 40 years. Upon acquisition
of clinic assets by OrthoLink, the physician groups maintain their
separate corporate entities and enter into employment and noncompete
agreements with the practicing physicians. Costs of obtaining clinic
service agreements are amortized using the straight-line method over
a period of 25 years. Clinic service agreements represent the
exclusive right to operate the Company's clinics in affiliation with
the related physician groups during the term of the agreements.
Accumulated amortization of clinic service agreements amounted to
$2,029 at December 31, 2000.
As part of the service agreement, physician groups are required to
maintain medical malpractice insurance which names the Company as an
additional insured. The Company is also required to maintain
professional liability insurance naming the physician groups as
additional insureds.
- GOODWILL
Goodwill represents the excess of purchase price over the fair value
of net assets acquired. Goodwill is amortized over 25 years.
Accumulated amortization on goodwill was $930 at December 31, 2000.
The Company reviews its intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
may not be recoverable. The measurement of possible impairment is
based upon determining whether projected undiscounted future cash
flows of the acquired business, or from the use of the asset, over
the remaining amortization period is less than the carrying amount of
the asset. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount
rate reflecting the Company's average cost of funds.
(H) JOINT VENTURE PROJECT COSTS
The Company capitalizes costs associated with acquiring or constructing
long-lived assets and preparing them for their intended use. Joint
venture project costs associated with the build out of surgery centers
and physician clinics are capitalized. Upon completion, the treatment of
these costs is determined by the ownership of the assets. If the joint
venture purchases the assets from the Company, the capitalized costs are
transferred to the joint venture and are amortized over the useful lives
by the joint venture. If the Company retains ownership of the assets, the
capitalized costs are transferred to the appropriate long-lived asset
category and amortized over their estimated useful lives. The Company
charges the joint venture a rental fee for use of the assets. Costs
capitalized to fund projects in progress were $6,193 as of December 31,
2000. If a project is discontinued any deferred costs are charged to
expense.
F-62
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(I) SELF-INSURANCE
The Company is self-insured with respect to employee health insurance and
maintains commercial stop-loss insurance for individual claims in excess
of $100. The Company has accrued self-insurance reserves of $1,657 at
December 31, 2000.
(J) USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements
in conformity with accounting principles generally accepted in the United
States of America. Actual results could differ from those estimates.
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheet for cash,
accounts receivable, accounts payable and due to physician groups
approximate fair value. The Company's debt bears interest at variable
market rates and approximates fair value.
(2) REVENUES AND EXPENSES
(A) NET SERVICE AGREEMENT REVENUE
Net medical service revenue for orthopaedic clinics is recorded at
established rates, reduced by allowances for doubtful accounts and
contractual adjustments. Contractual adjustments arise due to the terms
of certain reimbursement and managed care contracts. Such adjustments
represent the difference between charges at established rates and
estimated recoverable amounts and are recognized in the period the
services are rendered. Physician expenses consist primarily of salaries
and benefits for physicians and other professional services.
The allowance for doubtful accounts represents management's estimate of
potential credit issues associated with amounts due from patients,
commercial insurers, and other third-party payors.
Net service agreement revenue consists of the following amounts:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2000
-------------
Medical service revenue................................. $ 399,724
Contractual and bad debt allowances..................... (221,628)
---------
Net medical service revenue......................... 178,096
Physician expenses...................................... (74,382)
---------
Net service agreement revenue....................... $ 103,714
=========
</Table>
The Company's affiliated physician groups derived approximately 19.7% of
their net medical service revenue from services provided under the
Medicare program for the year ended December 31, 2000. Other than the
Medicare program, the physician groups have no customers which
individually represent more than 10% of net medical service revenue.
F-63
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following sets forth the net service agreement revenue generated
under management service agreements by clinics who accounted for more
than 10% of the Company's net service agreement revenue:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
CLINIC 2000
- ------ -------------
Resurgens Orthopaedic, P.C.............................. 27.3
Tennessee Orthopaedic Alliance, Inc..................... 22.4
New Mexico Orthopaedics Associates, P.C................. 11.5
Tennessee Orthopaedic Clinic, P.C....................... 11.1
</Table>
(B) CONTRACT REVENUE AND EXPENSES
The Company manages the orthopaedic services of five hospitals with which
it has service agreements. The service agreements are generally for terms
of one year and require the respective hospital to pay the Company a
fixed fee on a monthly basis. The Company is then responsible for the
costs of certain overhead, supplies and personnel required by the service
agreement. The excess of fees received less expenses incurred by the
Company is retained by the Company up to a predetermined limit, at which
point such excess is generally shared in equal proportion between the
respective hospital and the Company. The Company is responsible for any
expenses which exceed fees received. Upon termination of a service
agreement, any amounts payable to a hospital are generally due within
30 days.
(3) ACQUISITIONS
(A) ACQUIRED CLINICS
The Company acquired five clinics with 10 physicians in 2000.
Consideration for the clinic acquisitions, including cash, common stock
and notes payable, was $2,793. The Company also entered into long-term
service agreements with each of the clinic's physician groups. Intangible
assets of approximately $2,563, were recorded related to the underlying
service agreement rights. The acquisitions were accounted for as
purchases, and the accompanying consolidated financial statements include
the results of their operations, as defined in the service agreements,
from the dates of acquisition.
(B) ACQUIRED BUSINESSES
Effective February 1, 2000, The Georgia Musculoskeletal Network, a
wholly-owned subsidiary of OrthoLink Physicians Corporation, acquired
RAO-MT, Inc and RAO-CHP, Inc. This entity performs the third party
administrator function for various capitation contracts. The total
purchase price included $500 in cash, future consideration of 1.5% of net
captitation revenue for three years and 25% of any annual surplus dollars
related to the contracts each year. The transaction was accounted for as
a purchase and resulted in goodwill of $1,598.
Effective September 1, 2000, the Company acquired a majority equity
interest in the East West Surgery Center L.P. The purchase price
consisted of $3,998 in cash and resulted in $1,000 in goodwill. The
acquisition was accounted for as a purchase and the accompanying
F-64
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
financial statements include the results of the surgical center's
operations from the date of acquisition.
(4) DISCONTINUED OPERATIONS
On March 14, 2000, the Company entered into a formal plan to dispose of OMS.
The Company completed the disposal in June 2000. The operations of OMS are
reflected in the consolidated statement of income as discontinued operations
for 2000. In fiscal 1999 the Company recorded a loss on disposal of $2,432
related to the write-off of OMS assets expected to be disposed and losses
expected to be incurred during the phase-out period.
(5) LEASES
The Company has entered into operating and capital leases for office space,
office equipment and computer equipment. At December 31, 2000, future
minimum lease payments under noncancelable operating leases and capital
lease obligations are as follows:
<Table>
<Caption>
ORTHOLINK CLINIC
OPERATING OPERATING CAPITAL
LEASE LEASE LEASE
OBLIGATIONS OBLIGATIONS OBLIGATIONS TOTAL
----------- ----------- ----------- --------
2001.................................. $371 6,415 3,110 9,896
2002.................................. 313 3,867 3,027 7,207
2003.................................. 60 3,405 2,539 6,004
2004.................................. 60 2,959 1,959 4,978
2005.................................. 60 2,529 1,664 4,253
Thereafter............................ 10,361 316 10,677
---- ------ ------- ------
$864 29,536 12,615 43,015
==== ====== ======
Less amounts representing interest.... (2,417)
-------
10,198
Less current portion.................. (2,223)
-------
$ 7,975
=======
</Table>
Total rental expense for operating leases (excluding amounts paid to related
parties) was approximately $9,153 for the year ended December 31, 2000. The
Company leases certain office space and equipment from related parties.
Expense incurred related to transactions under agreements with related
parties was $462 for the year ended December 31, 2000. The capital lease
obligations were incurred to purchase equipment for use in clinics with
which the Company has service agreements. Future payments under capital
lease obligations are reimbursable under the service agreements. Accumulated
amortization of equipment under capital lease obligations was $1,483 at
December 31, 2000.
(6) LONG-TERM DEBT
On December 18, 1998, the Company amended its line of credit agreement to
increase the aggregate principal available thereunder to $45,000 and to
extend the maturity date to December 28, 2001. The line is collateralized by
the Company's assets and bears interest at the
F-65
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
bank's prime interest rate or LIBOR, plus 2.25% to 3.25% (8.25% at
December 31, 2000), depending upon the borrowing capacity of the Company as
defined in the line of credit agreement. At December 31, 2000, the Company
had $43,500 of outstanding borrowings and $875 of letters of credit under
the line of credit and had available borrowings of $625.
Effective December 31, 1999, the Company amended its line of credit
agreement changing the definitions of certain debt covenant ratio terms.
Borrowings available under the Agreement are subject to certain financial
and operating covenants, all of which the Company was in compliance with at
December 31, 2000.
(7) STOCKHOLDERS' EQUITY
The Company has authorized common stock, Class A common stock and Class B
common stock. Holders of common stock and Class A common stock are both
entitled to one vote per share. Class B common stock does not carry any
voting privileges but is entitled to a liquidation preference of $5.00 per
share and may be converted to common stock upon the occurrence of certain
events. Class A common stock is convertible into common stock at any time at
the option of the holder and is entitled to a liquidation preference of
$5.00 per share.
The Company also has authorized 150 shares of Series A redeemable preferred
stock. At December 31, 2000, there were no such outstanding shares.
F-66
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities were as
follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2000
-------------
Deferred tax assets:
Bad debts................................................. $ 785
Accrued vacation.......................................... 795
Reserve balances.......................................... 1,256
Net operating loss carryforwards.......................... 2,924
AMT credit................................................ 782
------
Total gross deferred tax asset.............................. 6,542
Less valuation allowance.................................... (2,043)
------
Net deferred tax asset...................................... 4,499
------
Deferred tax liabilities:
Book over tax basis of partnership investments............ (233)
Amortization.............................................. (400)
Depreciation.............................................. (2,137)
------
Total gross deferred tax liability.......................... (2,770)
------
Net deferred tax asset...................................... $1,729
======
</Table>
The valuation allowance of $2,043 is equal to the amount of federal net
operating losses that the Company may lose due to IRC Section 382 limitation
on net operating losses. If these deferred tax assets are subsequently
recognized, the related tax benefit will be allocated to reduce intangible
assets acquired in the acquisition of the Company's OrthoExcel subsidiary.
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $9 million expiring from 2012 to 2019.
F-67
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Significant components of federal income tax expense (benefit) were as
follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2000
-------------
Current:
Federal................................................... $ 105
State..................................................... 50
Deferred:
Federal................................................... (49)
State..................................................... --
------
Income tax expense.......................................... $ 106
======
</Table>
The reconciliation of income tax expense (benefit) computed at the federal
statutory tax rate to income tax expense is as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2000
-------------
Federal income tax benefit.................................. $ (233)
State income tax, net of federal impact..................... 27
Merger costs................................................ 177
Goodwill amortization....................................... 126
Other....................................................... 9
-------
Total income tax expense.................................... $ 106
=======
</Table>
(9) STOCK OPTION PLANS
The Company has three stock option plans: (1) the 1996 Management Stock
Option Plan (the Management Plan), (2) the 1996 Physician's Stock Option
Plan (the Physician's Plan) and (3) the 1996 Director's Stock Option Plan
(the Director's Plan).
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (FAS 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and has been determined as if the Company had accounted
for its employee stock options using the fair value method under FAS 123.
The fair value of options granted during 2000 was estimated at $1.09 per
share on the date of grant using a Black Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rates of
6.0%, dividend yields of 0%, a volatility factor of 40%, and a weighted
average expected life of the options of approximately five years.
F-68
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
Company's pro forma information follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2000
-------------
Net loss.................................................... $(487)
Pro forma compensation expense from stock options, net of
taxes..................................................... (44)
-----
Pro forma net loss.......................................... $(531)
=====
</Table>
Stock option activity is as follows:
<Table>
<Caption>
AVERAGE AVERAGE AVERAGE
MANAGEMENT EXERCISE PHYSICIAN'S EXERCISE DIRECTOR'S EXERCISE
PLAN PRICE PLAN PRICE PLAN PRICE TOTAL
---------- -------- ----------- -------- ---------- -------- --------
December 31, 1999..... 2,411 1.45 486 2.37 160 .78 3,057
Granted............. 231 5.00 324 5.00 -- -- 555
Exercised........... (72) .94 0 -- (120) .50 (192)
Forfeited........... (189) 1.57 (15) 5.00 -- -- (204)
----- ----- ----- ----- ----- ----- -----
December 31, 2000..... 2,381 $1.81 795 $3.29 40 $1.63 3,216
===== ===== ===== ===== ===== ===== =====
Available for grant... 358 116 90 564
Options exercisable... 1,261 .97 254 1.46 2 5.00 1,517
Option price range.... $0.50 $0.50 $0.50
5.00 5.00 5.00
</Table>
At December 31, 2000, the weighted-average remaining contractual life of
outstanding options was 8.1 years.
(10) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan (the OrthoLink Plan)
which covers substantially all employees and is designed to qualify under
Section 401(k) of the Internal Revenue Code of 1986. The OrthoLink Plan
includes a Company matching contribution not to exceed 6% of eligible
employee compensation and a discretionary profit sharing contribution not to
exceed 6% of total compensation. Employer contributions amounted to $3,291
for the year ended December 31, 2000.
(11) COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. The Company has professional liability
insurance to protect against such claims or legal actions. In the opinion of
management, the ultimate resolution of such matters will be adequately
F-69
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
covered by insurance and will not have a material adverse effect on the
Company's financial position or results of operations.
The Company and its affiliated physician groups are insured with respect to
medical malpractice risks on a claims-made basis. Management is not aware of
any claims against it or its affiliated physician groups which might have a
material impact on the Company's financial position.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance
with such laws and regulations can be subject to future government review
and interpretation, as well as significant regulatory action, including
fines, penalties and exclusion from the Medicare and Medicaid programs.
The Company has acquired and will likely continue to acquire entities with
prior operating histories. Acquired entities may have unknown or contingent
liabilities for failure to comply with healthcare laws and regulations, such
as billing and reimbursement, fraud and abuse and similar anti-referral
laws. Although the Company attempts to assure itself that no such
liabilities exist and obtains indemnification from prospective sellers
covering such matters, there can be no assurance that any such matter will
be covered by indemnification or, if covered, that the liability sustained
will not exceed contractual limits or the financial capacity of the
indemnifying party.
(12) SUBSEQUENT EVENTS
On February 12, 2001, the Company was acquired by United Surgical Partners
International, Inc. (USPI) by USPI issuing 10,172,817 shares, prior to the
effect of any reverse stock split, of its common stock for all outstanding
capital stock of OrthoLink. In addition, USPI assumed the options to
purchase shares of OrthoLink's common stock that USPI converted into options
for the right to purchase of 1,813,991 shares, prior to the effect of any
reverse stock split, of USPI common stock. This acquisition was accounted
for as a purchase.
The Company entered into a newly restructured and restated credit agreement
with Bank of America due to the acquisition of the Company by USPI in
February 2001. The new credit facility is due on the earlier of
December 28, 2001 or upon USPI's Initial Public Offering. The refinancing
amended certain financial and operating debt covenants, in which the Company
expects to meet in the subsequent year.
Also, the Company has amended its clinic service agreements (CSA) by
reducing the terms to 15 years; reducing the CSA's management fee percentage
charged to the physician practices; placing operating agreements, assets and
employees back with the physician groups; and negotiating the assumption by
the physician groups of all clinical facility expenses.
In December 2000, the Atlanta Knee & Shoulder physician group notified the
Company of its intentions to terminate its CSA due to the impending USPI
acquisition. Atlanta Knee & Shoulder and the Company are negotiating the
terms of the termination in the year 2001.
F-70
<Page>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
OrthoLink Physicians Corporation
We have audited the accompanying consolidated balance sheets of OrthoLink
Physicians Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1999. 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 in accordance with auditing standards generally
accepted in the 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of OrthoLink
Physicians Corporation as of December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
March 14, 2000
F-71
<Page>
ORTHOLINK PHYSICIANS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
DECEMBER 31
-------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 46 $ 2,704
Accounts receivable, less allowances of $236 and $170 at
December 31, 1999 and 1998, respectively................ 42,607 32,225
Related party receivable.................................. 625 625
Deferred taxes............................................ 1,654 278
Other current assets...................................... 1,092 788
-------- -------
Total current assets........................................ 46,024 36,620
Leasehold improvements...................................... 2,754 2,115
Leased equipment............................................ 2,588 1,783
Furniture and equipment..................................... 8,965 7,408
Computer equipment and software............................. 5,274 4,004
Construction in progress.................................... -- 312
-------- -------
19,581 15,622
Less accumulated depreciation and amortization.............. (4,476) (2,049)
-------- -------
Leasehold improvements and equipment, net................... 15,105 13,573
Service agreements, net..................................... 18,059 15,542
Goodwill, net............................................... 7,393 11,295
Investments in joint ventures............................... 4,516 3,927
Other assets................................................ 839 600
Joint venture project costs................................. 8,977 701
-------- -------
Total assets.............................................. $100,913 $82,258
======== =======
</Table>
F-72
<Page>
ORTHOLINK PHYSICIANS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>
DECEMBER 31
-------------------
1999 1998
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,427 $ 1,009
Salaries and benefits payable............................. 4,811 3,765
Due to physician groups................................... 3,434 4,746
Deferred revenue.......................................... 1,954 2,254
Current portion of capital lease obligations.............. 702 403
Other accrued expenses.................................... 3,817 2,254
Net liabilities of discontinued operations................ 782 --
-------- -------
Total current liabilities................................... 19,927 14,431
Line of credit.............................................. 37,000 24,000
Notes payable............................................... -- --
Deferred taxes.............................................. 336 770
Capital lease obligations, less current portion............. 1,078 1,166
-------- -------
Total liabilities....................................... 58,341 40,367
Minority interests..........................................
Series A Redeemable Preferred Stock, $.01 par value, 150
authorized................................................ -- --
Stockholders' equity:
Common stock, $.01 par value, 30,000 authorized; 9,907 and
9,752 issued and outstanding at December 31, 1999 and
1998, respectively...................................... 99 98
Class A common stock, convertible, $.01 par value, 10,000
authorized; 5,898 issued and outstanding at December 31,
1999 and 1998........................................... 59 59
Class B common stock, convertible, $.01 par value; 1,000
authorized and issued at December 31, 1999 and 1998,
respectively............................................ 10 10
Additional paid-in capital................................ 40,780 40,470
Retained earnings......................................... 1,624 1,254
-------- -------
Total stockholders' equity.................................. 42,572 41,891
-------- -------
Total liabilities and stockholders' equity.................. $100,913 $82,258
======== =======
</Table>
See accompanying notes to consolidated financial statements.
F-73
<Page>
ORTHOLINK PHYSICIANS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-----------------------
1999 1998
-------- --------
Net service agreement revenue............................... $ 80,341 $60,709
Contract revenue............................................ 32,091 12,405
Other income................................................ 2,134 1,497
-------- -------
Total income................................................ 114,566 74,611
Operating expenses:
Clinic expenses........................................... 58,749 43,371
Contract expenses......................................... 29,567 11,896
General and administrative................................ 1,706 1,215
Personnel costs........................................... 6,336 5,090
Depreciation and amortization............................. 3,149 1,871
Rent and lease expense.................................... 7,614 6,339
Interest expense.......................................... 2,798 1,151
Loss on disposal of software.............................. 1,093 --
Equity in earnings of joint ventures...................... (820) (203)
-------- -------
110,192 70,730
Income from continuing operations before income taxes....... 4,374 3,881
Provision for income taxes.................................. (1,906) (1,061)
-------- -------
Income from continuing operations........................... 2,468 2,820
Discontinued operations:
Loss from operations of OMS, less applicable income tax
benefit of $361 and
$333 at December 31, 1999 and 1998, respectively........ 590 544
Loss on disposal of OMS, including provision of $782 for
operating losses
during phase-out period, less applicable income tax
benefit of $924........................................... 1,508 --
-------- -------
Net income.................................................. $ 370 $ 2,276
======== =======
</Table>
See accompanying notes to consolidated financial statements.
F-74
<Page>
ORTHOLINK PHYSICIANS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
<Table>
<Caption>
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL RETAINED
------------------- ------------------- -------------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-------- -------- -------- -------- -------- --------- ---------- --------- --------
Balance at
January 1, 1998.......... 8,805 $ 88 5,898 $59 -- $ -- $33,530 $(1,022) $32,655
Sale of stock............ -- -- -- -- 1,000 10 4,990 -- 5,000
Stock issued for
acquisitions........... 909 9 -- -- -- -- 1,932 -- 1,941
Stock reacquired......... (12) -- -- -- -- -- (7) -- (7)
Exercise of stock
options................ 50 1 -- -- -- -- 25 -- 26
Net income............... -- -- -- -- -- -- -- 2,276 2,276
------ ---- ----- --- ----- --------- ------- ------- -------
Balance at
December 31, 1998........ 9,752 98 5,898 59 1,000 10 40,470 1,254 41,891
Stock issued for
acquisitions........... 151 1 -- -- -- -- 397 -- 398
Stock reacquired......... (22) -- -- -- -- -- (100) -- (100)
Exercise of stock
options................ 26 -- -- -- -- -- 13 -- 13
Net income............... -- -- -- -- -- -- -- 370 370
------ ---- ----- --- ----- --------- ------- ------- -------
Balance at
December 31, 1999........ 9,907 $ 99 5,898 $59 1,000 $ 10 $40,780 $ 1,624 $42,572
====== ==== ===== === ===== ========= ======= ======= =======
</Table>
See accompanying notes to consolidated financial statements.
F-75
<Page>
ORTHOLINK PHYSICIANS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-----------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Income from continuing operations........................... $ 2,468 $ 2,820
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in earnings of joint ventures.................... (820) (203)
Loss on disposal of software............................ 1,093 --
Depreciation and amortization........................... 3,149 1,871
Deferred taxes.......................................... (1,810) 492
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable................................. (10,157) (13,636)
Other current assets................................ (338) (202)
Accounts payable, salaries and benefits payable and
other accrued liabilities......................... 8,629 (847)
Due to physician groups............................. (1,312) 1,690
Deferred revenue.................................... (300) 2,254
-------- --------
Net cash provided by (used in) operating activities....... 602 (5,761)
INVESTING ACTIVITIES
Cash paid for acquisitions.................................. (3,363) (13,761)
Purchases of leasehold improvements and equipment........... (3,375) (3,261)
Related party receivable.................................... -- (625)
Distributions from joint venture partners................... 459 (78)
Investments in joint ventures............................... (440) (3,271)
Decrease (increase) in joint venture project costs.......... (8,276) (701)
Distributable minority interest............................. -- --
Other assets................................................ (72) (5)
-------- --------
Net cash used in investing activities..................... (15,067) (21,702)
FINANCING ACTIVITIES
Proceeds from issuance of stock, net of stock reacquired.... -- 4,994
Cash paid to repurchase stock............................... (100) --
Proceeds from stock option exercises........................ 13 25
Proceeds from line of credit................................ 13,000 24,000
Payments on notes payable................................... -- (3,455)
Payments on capital lease obligations....................... (603) (213)
Deferred financing costs.................................... (55) (162)
-------- --------
Net cash provided by financing activities................. 12,255 25,189
DISCONTINUED OPERATIONS
Loss from discontinued operations........................... (448) (544)
-------- --------
Net cash used in discontinued operations.................. (448) (544)
Net change in cash and cash equivalents..................... (2,658) (2,818)
Cash and cash equivalents at beginning of period............ 2,704 5,522
-------- --------
Cash and cash equivalents at end of period.................. $ 46 $ 2,704
======== ========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Effects of acquisitions:
Fair value of assets acquired............................. $ 3,792 $ 20,876
Fair value of liabilities assumed......................... (31) (5,174)
Stock issued for acquisitions............................. (398) (1,941)
-------- --------
Cash paid for acquisitions.................................. $ 3,363 $ 13,761
======== ========
Income taxes paid........................................... $ 333 $ 241
======== ========
Interest paid............................................... $ 1,977 $ 547
======== ========
Assets acquired under capital lease obligations............. $ 814 $ 1,783
======== ========
</Table>
See accompanying notes to consolidated financial statements.
F-76
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
OrthoLink Physicians Corporation (the "Company" or "OrthoLink") is a
management company that develops, in selected geographic markets, comprehensive
and integrated networks of musculoskeletal care systems that provide high
quality care in a cost-effective manner. As of December 31, 1999, the Company
operated 16 clinics with 196 physicians in six states and manages the
orthopaedic services of five hospitals. In addition, the Company has minority
interests in joint ventures that provide orthopaedic short-stay services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly-liquid investments with an original
maturity of three months or less when purchased.
ACCOUNTS RECEIVABLE
Accounts receivable consist of receivables from patients for medical
services which the Company has purchased from physician groups. Such amounts are
purchased net of contractual allowances and estimated bad debts. In addition,
the Company had approximately $1,227 and $1,257 of receivables due from
hospitals as of December 31, 1999 and 1998, respectively, with which the Company
has service agreements. Concentration of credit risk relating to accounts
receivable is limited to some extent by the diversity of the number of patients
and payors and the geographic dispersion of the Company's operations.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful lives of the assets.
The general range of useful lives is 10 years for equipment, furniture, and
leasehold improvements and 5 years for computer equipment and software.
JOINT VENTURES
The Company has entered into joint venture agreements with certain of its
affiliated physicians obtaining ownership interests ranging from 15% to 39%.
Earnings from investments in joint ventures, are accounted for under the equity
method. The joint ventures generally provide ancillary services which compliment
the services provided by the Company and its affiliated physicians. The Company
has entered into management agreements with some of the joint ventures for the
provision of non-medical related services in exchange for a fee. Such agreements
are for terms consistent with the term of the joint venture agreements and range
from 5 to 25 years.
F-77
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
SERVICE AGREEMENTS
The Company enters into service agreements with each acquired practicing
physician group for a period of 40 years. Upon acquisition of clinic assets by
OrthoLink, the physician groups maintain their separate corporate entities and
enter into employment and noncompete agreements with the practicing physicians.
Costs of obtaining clinic service agreements are amortized using the
straight-line method over a period of 25 years. Clinic service agreements
represent the exclusive right to operate the Company's clinics in affiliation
with the related physician groups during the term of the agreements. Accumulated
amortization of clinic service agreements amounted to $1,271 and $549 at
December 31, 1999 and 1998, respectively.
As part of the service agreement, physician groups are required to maintain
medical malpractice insurance which names the Company as an additional insured.
The Company is also required to maintain professional liability insurance naming
the physician groups as additional insureds.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. Goodwill is amortized over 25 years. Accumulated amortization
on goodwill was $631 and $175 at December 31, 1999 and 1998, respectively.
The Company reviews its intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. The measurement of possible impairment is based upon determining
whether projected undiscounted future cash flows of the acquired business, or
from the use of the asset, over the remaining amortization period is less than
the carrying amount of the asset. The amount of impairment, if any, is measured
based on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. As of December 31, 1999, in the
opinion of management, there has been no such impairment, other than described
in Note 4.
JOINT VENTURE PROJECT COSTS
Joint venture costs associated with the acquisition, development and
construction of surgery center projects are capitalized as a cost of that
project. Costs to fund these projects were $8,977 and $701 as of December 31,
1999 and 1998, respectively.
SELF-INSURANCE
The Company is self-insured with respect to employee health insurance for
claims up to $15 on an individual basis and maintains commercial stop-loss
insurance for individual claims in excess of $100, up to an individual maximum
of $2,000 per participant. The Company has accrued self-insurance reserves of
$482 and $678 at December 31, 1999 and 1998, respectively.
DEFERRED REVENUE
The Company receives payment for certain of its hospital contracts one month
in advance. Revenue is recognized on such amounts as services are performed,
which is generally within 30 days of receipt of payment.
F-78
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable, accounts payable and due to physician groups approximate
fair value. The Company's debt bears interest at variable market rates and
approximates fair value.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1998 financial statements to
conform to the 1999 presentation. These reclassifications had no effect on the
net results of operations as previously reported.
2. REVENUES AND EXPENSES
NET SERVICE AGREEMENT REVENUE
Net medical service revenue for orthopaedic clinics is recorded at
established rates, reduced by allowances for doubtful accounts and contractual
adjustments and physician expenses. Contractual adjustments arise due to the
terms of certain reimbursement and managed care contracts. Such adjustments
represent the difference between charges at established rates and estimated
recoverable amounts and are recognized in the period the services are rendered.
Physician expenses consist primarily of salaries and benefits for physicians and
other professional services.
The allowance for doubtful accounts represents management's estimate of
potential credit issues associated with amounts due from patients, commercial
insurers, and other third-party payors.
Net service agreement revenue consists of the following amounts:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998
--------- ---------
Medical service revenue..................................... $ 314,106 $ 239,411
Contractual and bad debt allowances......................... (162,915) (114,176)
--------- ---------
Net medical service revenue............................. 151,191 125,235
Physician expenses.......................................... (70,850) (64,526)
--------- ---------
Net service agreement revenue........................... $ 80,341 $ 60,709
========= =========
</Table>
The Company's affiliated physician groups derived approximately 20% and 16%
of their net medical service revenue from services provided under the Medicare
program for the years ended December 31, 1999 and 1998, respectively. Other than
the Medicare program, the physician groups have no customers which individually
represent more than 10% of net medical service revenue.
F-79
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following sets forth the net service agreement revenue generated under
management service agreements by clinics who accounted for more than 10% of the
Company's net service agreement revenue:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-------------------------
CLINIC 1999 1998
------ -------- --------
Tennessee Orthopaedic Alliance, Inc......................... 21.8% 19.7%
Resurgens Orthopaedic, P.C.................................. 18.6 16.2
New Mexico Orthopaedics Associates, P.C..................... 10.6 10.3
Tennessee Orthopaedic Clinic, P.C........................... 11.2 11.5
</Table>
CONTRACT REVENUE AND EXPENSE
The Company manages the orthopaedic services of five hospitals with which it
has service agreements. The service agreements are generally for terms of one
year and require the respective hospital to pay the Company a fixed fee on a
monthly basis. The Company is then responsible for the costs of certain
overhead, supplies and personnel required by the service agreement. The excess
of fees received less expenses incurred by the Company is retained by the
Company up to a predetermined limit, at which point such excess is generally
shared in equal proportion between the respective hospital and the Company. The
Company is responsible for any expenses which exceed fees received. Upon
termination of a service agreement, any amounts payable to a hospital are
generally due within 30 days.
3. ACQUISITIONS
ACQUIRED CLINICS
The Company acquired four clinics with 14 physicians in 1999 and seven
clinics with 32 physicians in 1998. Consideration for the clinic acquisitions,
including cash, common stock, and notes payable, was $3,792 in 1999 and $8,667
in 1998. The Company exchanged a total of 151 and 709 shares of Common Stock in
1999 and 1998, respectively. The Company also entered into long-term service
agreements with each of the clinics physician groups. Intangible assets of
approximately $3,298 and $7,850 in 1999 and 1998, respectively, were recorded
related to the underlying service agreement rights. The acquisitions were
accounted for as purchases and the accompanying consolidated financial
statements include the results of their operations, as defined in the service
agreements, from the dates of acquisition.
ACQUIRED BUSINESSES
Effective September 1, 1998, the Company acquired the outstanding common
stock of OrthoExcel, Inc. and related entities ("OrthoExcel") in exchange for
200 shares of the Company's common stock plus $5,100 in cash. OrthoExcel manages
the orthopaedic services of hospitals with which it has contracts. The
transaction was accounted for as a purchase and resulted in goodwill of $10,250.
Effective January 1, 1998, the Company acquired Occupational Medicine
Services, Inc. and related entities ("OMS"). OMS performs workers compensation
medical case management services and was acquired by the Company for $1,102 in
cash. In addition, the Company issued warrants to purchase 225 shares of Company
Common Stock for $5.00 per share contingent on OMS meeting certain income
levels, which were not achieved. The transaction was accounted for as a purchase
and resulted in goodwill of $1,402. See Note 4.
F-80
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated financial statements of the Company include the results of
operations for OrthoExcel and OMS from their respective dates of acquisition.
4. DISCONTINUED OPERATIONS
On March 14, 2000, the Company entered into a formal plan to dispose of OMS.
The Company expects to complete the disposal by June 2000. The operations of OMS
are reflected in the consolidated statements of income as discontinued
operations for both 1999 and 1998. Also, the Company recorded a loss on disposal
of $2,432 related to the write-off of assets expected to be disposed and losses
expected to be incurred during the phase-out period. Based on the allocated debt
balance attributable to those operations, the Company allocated interest expense
of $78. Income taxes have been allocated using the same overall rate incurred by
the Company in each of the years presented.
5. LEASES
The Company has entered into operating and capital leases for office space,
office equipment and computer equipment. At December 31, 1999, future minimum
lease payments under noncancelable operating leases and capital lease
obligations are as follows:
<Table>
<Caption>
ORTHOLINK CLINIC
OPERATING OPERATING CAPITAL
LEASE LEASE LEASE
OBLIGATIONS OBLIGATIONS OBLIGATIONS TOTAL
----------- ----------- ----------- --------
2000....................................... $358 $ 7,330 $ 821 8,509
2001....................................... 307 4,857 633 5,797
2002....................................... 310 2,637 397 3,344
2003....................................... -- 2,148 158 2,306
2004....................................... -- 1,455 29 1,484
Thereafter................................. -- 3,423 -- 3,423
---- ------- ------ -------
$975 $21,850 $2,038 $24,863
==== ======= ====== =======
Less amounts representing interest......... (258)
------
1,780
Less current portion....................... (702)
------
$1,078
======
</Table>
Total rental expense for operating leases (excluding amounts paid to related
parties) was approximately $7,312 and $5,117 for the years ended December 31,
1999 and 1998, respectively. The Company leases certain office space and
equipment from related parties. Expense incurred related to transactions under
agreements with related parties was $303 and $270 for the years ended
December 31, 1999 and 1998, respectively. The capital lease obligations were
incurred to purchase equipment for use in clinics with which the Company has
service agreements. Future payments under capital lease obligations are
reimbursable under the service agreements. Accumulated amortization of equipment
under capital lease obligations was $731 and $172 at December 31, 1999 and 1998,
respectively.
F-81
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
On December 18, 1998, the Company amended its line of credit agreement to
increase the aggregate principal available thereunder to $45,000 and to extend
the maturity date to December 28, 2001. The line is collateralized by the
Company's assets and bears interest at the bank's prime interest rate or LIBOR,
plus 1%-2.25% depending upon the borrowing capacity of the Company as defined in
the line of credit agreement. At December 31, 1999, the Company had $37,000 of
outstanding borrowings under the line of credit, and had available borrowings of
$8,000.
Effective December 31, 1999, the Company amended its line of credit
agreement that changed the definitions of certain debt covenant ratio terms.
Borrowings available under the agreement are subject to certain financial and
operating convenants, all of which the Company was in compliance with at
December 31, 1999.
7. STOCKHOLDERS' EQUITY
The Company has authorized Common Stock, Class A Common Stock and Class B
Common Stock. Holders of Common Stock and Class A Common Stock are both entitled
to one vote per share. Class B Common Stock does not carry with it any voting
privileges but is entitled to a liquidation preference of $5.00 per share and
may be converted to common stock upon the occurrence of certain events. Class A
Common Stock is convertible into Common Stock at any time at the option of the
holder and is entitled to a liquidation preference of $5.00 per share.
The Company also has authorized 150 shares of Series A Redeemable Preferred
Stock. At December 31, 1999 and 1998 there were no such outstanding shares.
F-82
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities were as follows:
<Table>
<Caption>
DECEMBER 31
-------------------
1999 1998
-------- --------
Deferred tax assets:
Amortization................................................ $ -- $ 112
Accrued vacation.......................................... 713 411
AMT credit................................................ 439 259
Disposal of OMS........................................... 924 --
Net operating loss carryforward........................... 3,952 1,397
Other..................................................... 17 17
------- -------
Total gross deferred tax asset.............................. 6,045 2,196
Less valuation allowance.................................... (2,043) (1,098)
------- -------
Net deferred tax asset...................................... 4,002 1,098
Deferred tax liabilities:
Tax over book basis of partnership
investments............................................... (155) --
Amortization.............................................. (142) --
Depreciation.............................................. (2,387) (1,590)
------- -------
Total gross deferred tax liability.......................... (2,684) (1,590)
======= =======
Net deferred tax asset (liability).......................... $ 1,318 $ (492)
======= =======
</Table>
At January 1, 1998, the Company had a valuation allowance for its deferred
tax assets in the amount of $398. The allowance related to these assets was
removed during 1998 with a corresponding decrease in the provision for income
taxes. The purchase of OrthoExcel during 1998 included deferred tax assets
subject to a valuation allowance in the amount of $1,098, which remained on the
Company's books at December 31, 1998. In 1999, the valuation allowance increased
to $2,043, the amount of federal net operating losses that the Company may lose
due to the IRC ss382 limitation on net operating losses. If these deferred tax
assets are subsequently recognized, the related tax benefit will be allocated to
reduce intangible assets acquired in the transaction.
As of December 31, 1999, the Company had federal and state net operating
loss carry-forwards of approximately $17.8 million expiring from 2012 to 2019.
F-83
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of federal income tax expense were as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31
-------------------------
1999 1998
-------- --------
Current:
Federal................................................... $-- $ 236
State..................................................... 59 --
Deferred
Federal................................................... 1,555 696
State..................................................... 292 129
------ ------
Income tax expense.......................................... $1,906 $1,061
====== ======
</Table>
The reconciliation of income tax expense computed at the federal statutory
tax rate to income tax expense is as follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31
-------------------------
1999 1998
-------- --------
Federal income taxes........................................ $1,487 $1,320
State income tax, net of federal benefit.................... 231 34
Change in valuation allowance............................... -- (398)
Goodwill amortization....................................... 136 46
Meals and entertainment..................................... 12 13
Other....................................................... 40 46
------ ------
Total income tax expense.................................... $1,906 $1,061
====== ======
</Table>
9. STOCK OPTION PLANS
The Company has three stock option plans: (1) the 1996 Management Stock
Option Plan (the "Management Plan"), (2) the 1996 Physician's Stock Option Plan
(the "Physician's Plan"), and (3) the 1996 Director's Stock Option Plan (the
"Director's Plan").
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of options granted during 1999 and 1998 was estimated at $0.00 and
$0.49 per share, respectively, on the date of grant using a minimum value option
pricing model with the following weighted-average assumptions: risk-free
interest rates of 6.0%; dividend yields of 0%; and a weighted average expected
life of the options of approximately five years.
F-84
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31
-----------------------
1999 1998
-------- --------
Net income.................................................. $ 370 $2,276
Pro forma compensation expense from stock options, net of
taxes..................................................... (522) (100)
----- ------
Pro forma net (loss) income................................. $(152) $2,176
===== ======
</Table>
Stock option activity is as follows:
<Table>
<Caption>
AVERAGE AVERAGE AVERAGE
MANAGEMENT EXERCISE PHYSICIAN'S EXERCISE DIRECTOR'S EXERCISE
PLAN PRICE PLAN PRICE PLAN PRICE TOTAL
---------- -------- ----------- -------- ---------- -------- --------
January 1, 1998....... 1,738 $ .51 329 $ .81 150 $ .50 2,217
Granted............. 528 1.81 56 2.51 -- -- 584
Exercised........... (51) .50 -- -- -- -- (51)
Forfeited........... (133) .51 (21) .50 -- -- (154)
----- ----- ---- ----- --- ----- -----
December 31, 1998..... 2,082 .83 364 1.09 150 .50 2,596
Granted............. 355 5.00 202 4.76 10 5.00 567
Exercised........... (26) .51 -- -- -- -- (26)
Forfeited........... -- -- (6) -- -- -- (6)
----- ----- ---- ----- --- ----- -----
December 31, 1999..... 2,411 1.45 560 2.37 160 .78 3,131
Available for grant... 589 -- 440 -- 90 -- 1,119
Options exercisable... 859 .67 148 .95 90 .50 1,097
Option price range at
December 31, 1999... $0.50-$5.00 $0.50-$5.00 $0.50-$5.00 $0.50-$5.00
</Table>
At December 31, 1999, the weighted-average remaining contractual life of
outstanding options was 8.6 years.
10. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan (the "OrthoLink
Plan") which covers substantially all employees and is designed to qualify under
Section 401(k) of the Internal Revenue Code of 1986. The OrthoLink Plan includes
a Company matching contribution not to exceed 6% of eligible employee
compensation and a discretionary profit sharing contribution not to exceed 6% of
total compensation. Employer contributions amounted to $1,445 and $1,963 for the
years ended December 31, 1999 and 1998, respectively.
F-85
<Page>
ORTHOLINK PHYSICIANS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. The Company has professional liability
insurance to protect against such claims or legal actions. In the opinion of
management, the ultimate resolution of such matters will be adequately covered
by insurance and will not have a material adverse effect on the Company's
financial position or results of operations.
The Company and its affiliated physician groups are insured with respect to
medical malpractice risks on a claims-made basis. Management is not aware of any
claims against it or its affiliated physician groups which might have a material
impact on the Company's financial position.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
The Company has acquired and will likely continue to acquire entities with
prior operating histories. Acquired entities may have unknown or contingent
liabilities for failure to comply with healthcare laws and regulations, such as
billing and reimbursement, fraud and abuse and similar anti-referral laws.
Although the Company attempts to assure itself that no such liabilities exist
and obtains indemnification from prospective sellers covering such matters,
there can be no assurance that any such matter will be covered by
indemnification or, if covered, that the liability sustained will not exceed
contractual limits or the financial capacity of the indemnifying party.
12. IMPACT OF YEAR 2000
In late 1999, the Company completed its remediation and testing of systems.
As a result of those planning and implementation efforts, the Company
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. The Company is not aware of
any material problems resulting from Year 2000 issues. The Company will continue
to monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
F-86
<Page>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Aspen Healthcare Holdings Limited
We have audited the accompanying consolidated balance sheet of Aspen Healthcare
Holdings Limited and subsidiaries as of 31 March 2000, and the related
consolidated profit and loss account, cash flow statement and the statement of
total recognised gains and losses for the three month period then ended. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United Kingdom and 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. 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
audit provides 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 Aspen Healthcare
Holdings Limited and subsidiaries as of 31 March 2000, and the results of their
operations and their cash flows for the three month period then ended in
conformity with generally accepted accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected net income for the three month period ended
31 March 2000 and stockholders' equity at 31 March 2000 to the extent summarised
in Note 24 to the consolidated financial statements.
KPMG
Chartered accountants
London, England 30 March 2001
F-87
<Page>
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE 3 MONTH PERIOD ENDED 31 MARCH 2000
<Table>
<Caption>
2000
NOTE L
TURNOVER.................................................... 2 6,273,442
Operating expenses.......................................... (4,833,791)
----------
OPERATING PROFIT............................................ 1,439,651
Investment income........................................... 3 6,525
Interest payable and similar charges........................ 4 (601,044)
----------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION............... 5 845,132
Tax on profit on ordinary activities........................ 8 (318,250)
----------
PROFIT FOR THE FINANCIAL PERIOD TRANSFERRED TO RESERVES..... 17 526,882
==========
</Table>
The accompanying notes are an integral part of this consolidated profit and loss
account.
All activities are continuing.
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE 3 MONTH PERIOD ENDED 31 MARCH 2000
<Table>
<Caption>
2000
L
Profit for the financial period and total recognised gains
and losses relating to the period........................... 526,882
Prior year adjustment (see note 10 and 17).................. (133,844)
--------
Total gains and losses recognised since last annual
report...................................................... 393,038
========
</Table>
F-88
<Page>
CONSOLIDATED BALANCE SHEET
AT 31 MARCH 2000
<Table>
<Caption>
2000
NOTE L
FIXED ASSETS
Intangible assets........................................... 9 12,833,194
Tangible assets............................................. 10 25,493,948
-----------
38,327,142
-----------
CURRENT ASSETS
Stocks...................................................... 11 444,975
Debtors..................................................... 12 2,258,808
Cash at bank and in hand.................................... 2,049
-----------
2,705,832
CREDITORS: amounts falling due within one year.............. 13 (8,701,168)
-----------
NET CURRENT LIABILITIES..................................... (5,995,336)
-----------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 32,331,806
CREDITORS: amounts falling due after more than one year..... 14 (28,390,472)
PROVISIONS FOR LIABILITIES AND CHARGES...................... 15 (524,250)
-----------
NET ASSETS.................................................. 3,417,084
===========
CAPITAL AND RESERVES
Called-up equity share capital.............................. 16 40,500
Share premium account....................................... 17 364,500
Profit and loss account..................................... 17 3,012,084
-----------
TOTAL EQUITY SHAREHOLDERS' FUNDS............................ 18 3,417,084
===========
</Table>
The accompanying notes are an integral part of this balance sheet.
These financial statements were approved by the board of directors on March 30,
2001 and were signed on its behalf by:
JOHN WOTHERSPOON
DIRECTOR
F-89
<Page>
CONSOLIDATED CASH FLOW STATEMENT
FOR THE 3 MONTH PERIOD ENDED 31 MARCH 2000
<Table>
<Caption>
2000
NOTE L
NET CASH INFLOW FROM OPERATING ACTIVITIES................... 19 2,114,677
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE............. 20 (784,162)
TAXATION.................................................... 20 (92,000)
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT................ 20 (240,137)
-----------
CASH INFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND
FINANCING................................................... 998,378
Financing................................................... 20 (848,513)
-----------
INCREASE IN CASH IN THE PERIOD.............................. 21 149,865
===========
</Table>
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<Table>
Increase in cash in the period.............................. 21 149,865
Cash outflow on bank loans.................................. 21 750,000
Cash outflow on finance leases.............................. 21 98,513
Non cash movements.......................................... 21 (4,192)
-----------
Change in net debt.......................................... 994,186
Net debt at beginning of period............................. (34,187,646)
-----------
NET DEBT AT END OF PERIOD................................... 21 (33,193,460)
===========
</Table>
F-90
<Page>
NOTES (FORMING PART OF THE FINANCIAL STATEMENTS)
1 ACCOUNTING POLICIES
A summary of the principal accounting policies, all of which (with the exception
of the changes pursuant to the adoption of Financial Reporting Standard 15
referred to below) have been applied consistently throughout the period are set
out below.
BASIS OF ACCOUNTING
The directors have prepared these financial statements for the purpose of the
initial public offering of common stock of United Surgical Partners Inc., the
ultimate parent undertaking.
The financial statements have been prepared under the historical cost convention
and in accordance with applicable accounting standards.
The consolidated financial statements have not been prepared for the purposes of
section 226 of the Companies Act 1985 (the "Act"), and therefore do not
constitute statutory accounts within the context of the Act. However, the
consolidated financial statements include all disclosures required under the
Companies Act for the 3 month period ended 31 March 2000, with the exception of
comparative amounts. Accordingly, the consolidated financial statements comply
with accounting principles generally accepted in the United Kingdom (UK GAAP).
UK GAAP and accounting principles adopted by the group differ in certain
respects from accounting principles generally accepted in the United States (US
GAAP). See note 24 for a discussion of the principal differences that would
affect the company's consolidated net income and shareholders' equity if US GAAP
had been applied in the preparation of the consolidated financial statements
instead of UK GAAP.
The financial statements have been prepared on a going concern basis on the
grounds that the ultimate parent company has confirmed that it will provide the
group with sufficient funds as are necessary to allow it to continue to meet its
liabilities for the foreseeable future.
PRIOR PERIOD ADJUSTMENT
Following the adoption of Financial Reporting Standard 15, "Tangible fixed
assets", adjustments have been made to previously capitalised fixed assets.
These adjustments have been accounted for as prior year adjustments. Full
details of the adjustments are included in note 10 and the impact on opening
reserves is disclosed in note 17.
BASIS OF CONSOLIDATION
The group financial statements consolidate the financial statements of the
company and all its subsidiary undertakings drawn up to 31 March 2000.
The principles of acquisition accounting have been adopted in respect of the
acquisitions of subsidiaries. Under this method, the results of the subsidiary
undertakings are included in the consolidated profit and loss account from the
date of acquisition. Goodwill arising on consolidation (representing the excess
of the consideration given over the fair value of the separable net assets
acquired) is capitalised in the group's balance sheet and amortised over its
estimated useful economic life of 20 years.
F-91
<Page>
NOTES (CONTINUED)
1 ACCOUNTING POLICIES (CONTINUED)
TANGIBLE FIXED ASSETS
Tangible fixed assets are stated at cost, net of depreciation. Depreciation is
provided at rates calculated to write off the cost less estimated residual value
of each asset on a straight-line basis over its expected useful life, as
follows:
<Table>
Freehold buildings -- 50 years
Short leasehold properties -- Over the life of the lease
Plant and machinery -- 5 - 10 years
Fixtures and fittings -- 5 - 10 years
Computers -- 4 years
Motor vehicles -- 5 years
</Table>
Freehold land and assets in the course of construction are not depreciated.
INVESTMENTS
Fixed asset investments are shown at cost less provisions for any impairment in
value.
TAXATION
Corporation tax payable is provided on taxable profits at the current rate.
Deferred taxation is provided using the liability method on all timing
differences only to the extent that they are expected to reverse in the future
without being replaced, except that the deferred tax effects of timing
differences arising from pensions and other post-retirement benefits are always
recognised in full.
STOCKS
Stocks of drugs and medical consumables have been valued at the lower of cost
and net realisable value.
PENSIONS COSTS AND OTHER POST-RETIREMENT BENEFITS
For defined benefit schemes, the amount charged to the profit and loss account
in respect of pension costs and other post-retirement benefits is the estimated
regular cost of providing the benefits accrued in the period, adjusted to
reflect variations from that cost. The regular cost is calculated so that it
represents a substantially level percentage of current and future payroll.
Variations from regular cost are charged or credited to the profit and loss
account over the estimated average remaining working life of scheme members.
Defined benefit schemes are externally funded, with the assets of the scheme
held separately from those of the group in separate trustee administered funds.
Differences between amounts charged to the profit and loss account and amounts
funded or paid directly to members of unfunded schemes are shown as either
provisions or prepayments in the balance sheet.
For defined contributions schemes, the amount charged to the profit and loss
account in respect of pension costs and other post-retirement benefits is the
total contributions payable in the period. Differences between total
contributions payable in the period and contributions actually paid are shown as
either accruals or prepayments in the balance sheet.
F-92
<Page>
NOTES (CONTINUED)
1 ACCOUNTING POLICIES (CONTINUED)
DEBT
Debt is initially stated at the amount of the net proceeds after deduction of
issue costs. The carrying amount is increased by the finance cost in respect of
the accounting period and reduced by payments made in the period.
FINANCE COSTS
Finance costs (principally interest and arrangement fees) of debt are recognised
in the profit and loss account over the respective term of the related
liabilities at a constant rate on the carrying amount.
LEASES
Assets held under finance leases and other similar contracts, which confer
rights and obligations similar to those attached to owned assets, are
capitalised as tangible fixed assets and are depreciated over the shorter of the
lease terms and their estimated useful lives. The capital elements of future
lease obligations are recorded as liabilities, while the interest elements are
charged to the profit and loss account over the term of the leases to produce a
constant rate of charge on the balance of capital repayments outstanding. Hire
purchase transactions are dealt with similarly, except that assets are
depreciated over their estimated useful lives.
Rentals under operating leases are charged on a straight-line basis over the
lease term, even if the payments are not made on such a basis.
2 TURNOVER
Turnover represents the invoiced value of medical and ancillary services
rendered to patients in the United Kingdom, exclusive of VAT and net of trade
discounts.
3 INVESTMENT INCOME
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH
2000
L
Other interest receivable and similar income................ 6,525
============
</Table>
4 INTEREST PAYABLE AND SIMILAR CHARGES
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH
2000
L
Bank loans and overdrafts................................... 518,715
Finance leases.............................................. 12,032
Other interest payable...................................... 70,297
------------
601,044
============
</Table>
F-93
<Page>
NOTES (CONTINUED)
5 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH
2000
L
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION IS STATED
AFTER CHARGING
Depreciation and other amounts written off tangible fixed
assets:
Owned..................................................... 221,872
Held under hire purchase agreements....................... 79,416
Amortisation of goodwill.................................... 179,068
Operating lease rentals:
Plant and machinery....................................... 13,460
Land and buildings........................................ 9,928
============
</Table>
6 STAFF COSTS
The average monthly number of employees (including executive directors) was:
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH
2000
NUMBER
Medical..................................................... 220
Other....................................................... 149
------------
369
============
</Table>
Their aggregate remuneration comprised:
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH
2000
L
Wages and salaries.......................................... 1,679,151
Social security costs....................................... 122,020
Other pension costs......................................... 73,456
------------
1,874,627
============
</Table>
7 DIRECTORS' REMUNERATION AND TRANSACTIONS
<Table>
<Caption>
SALARY 3 MONTHS ENDED
(INCLUDING 31 MARCH
BENEFITS IN PENSION 2000
KIND) CONTRIBUTIONS TOTAL
L L L
John Wotherspoon.................................... 41,351 6,865 48,216
Michael Broke (Chairman)............................ 6,250 -- 6,250
------------ ------------ ------------
47,601 6,865 54,466
============ ============ ============
</Table>
F-94
<Page>
NOTES (CONTINUED)
7 DIRECTORS' REMUNERATION AND TRANSACTIONS (CONTINUED)
During the period, L4,548 was paid to Electra Fleming Limited in respect of
services provided to the group by David Symondson.
Further transactions with directors are in note 23 'Post balance sheet events'.
8 TAX ON PROFIT ON ORDINARY ACTIVITIES
The tax charge is based on the profit for the period and comprises:
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH
2000
L
Corporation tax charge at 30%............................... 326,000
Deferred taxation (see note 15)............................. (7,750)
------------
318,250
============
</Table>
9 INTANGIBLE FIXED ASSETS -- GOODWILL
<Table>
<Caption>
AT 31 MARCH
2000
L
COST
At 31 December 1999 and at 31 March 2000.................... 14,325,426
----------
AMORTISATION
At 31 December 1999......................................... 1,313,164
Charge for the period....................................... 179,068
----------
At 31 March 2000............................................ 1,492,232
----------
NET BOOK VALUE
AT 31 MARCH 2000............................................ 12,833,194
==========
</Table>
F-95
<Page>
NOTES (CONTINUED)
10 TANGIBLE FIXED ASSETS
<Table>
<Caption>
ASSETS IN
THE
LAND AND COURSE OF PLANT AND FIXTURES AND MOTOR
BUILDINGS CONSTRUCTION MACHINERY FITTINGS COMPUTERS VEHICLES TOTAL
L L L L L L L
COST
At 31 December 1999 as
previously reported....... 23,203,492 -- 3,534,822 350,710 195,597 130,338 27,414,959
Prior period adjustment... (4,097,647) 3,032,429 -- 1,013,811 -- -- (51,407)
---------- --------- --------- --------- ------- ------- ----------
REVISED 1 JANUARY 2000.... 19,105,845 3,032,429 3,534,822 1,364,521 195,597 130,338 27,363,552
Additions................. 57,857 53,639 117,316 3,164 8,161 -- 240,137
---------- --------- --------- --------- ------- ------- ----------
At 31 March 2000.......... 19,163,702 3,086,068 3,652,138 1,367,685 203,758 130,338 27,603,689
---------- --------- --------- --------- ------- ------- ----------
DEPRECIATION
At 31 December 1999, as
previously reported....... 640,711 -- 857,782 92,446 105,007 30,070 1,726,016
Prior period adjustment... (14,935) -- -- 97,372 -- -- 82,437
---------- --------- --------- --------- ------- ------- ----------
REVISED 1 JANUARY 2000.... 625,776 -- 857,782 189,818 105,007 30,070 1,808,453
Charge for the period..... 95,173 -- 140,966 47,424 11,357 6,368 301,288
---------- --------- --------- --------- ------- ------- ----------
At 31 March 2000.......... 720,949 -- 998,748 237,242 116,364 36,438 2,109,741
---------- --------- --------- --------- ------- ------- ----------
NET BOOK VALUE AT 31 MARCH
2000...................... 18,442,753 3,086,068 2,653,390 1,130,443 87,394 93,900 25,493,948
========== ========= ========= ========= ======= ======= ==========
</Table>
PRIOR PERIOD ADJUSTMENT
Financial Reporting Standard 15 "Tangible fixed assets" became mandatory for
accounting periods ending on or after 23 March 2000. Upon adoption of this
standard, the group has reclassified certain expenditure from land and buildings
to fixtures and fittings and assets in the course of construction, and has
expensed to the profit and loss account certain items previously capitalised.
Also, the group has re-evaluated the useful economic life of such expenditure to
reflect a medium to long term programme of planned refurbishment works to the
hospitals' premises. The effect of this adjustment and reclassification on the
accumulated depreciation has been accounted for as a prior period adjustment.
The resulting effect upon the profit and loss account is shown in note 17.
The net book value of fixed assets for the group includes the following amounts
in respect of obligations under hire purchase agreements:
<Table>
<Caption>
COMPUTERS,
FIXTURES AND PLANT AND MOTOR
FITTINGS EQUIPMENT VEHICLES
L L L
Net book value.............................................. 52,841 1,398,889 20,672
Depreciation charged in the period.......................... 2,358 79,921 627
</Table>
The net book value of land and buildings and assets in the course of
construction comprises freehold property of L21,492,615 and short leasehold
property of L36,206.
F-96
<Page>
NOTES (CONTINUED)
10 TANGIBLE FIXED ASSETS (CONTINUED)
Freehold land amounting to L6,900,000 has not been depreciated.
11 STOCKS
<Table>
<Caption>
AT 31 MARCH
2000
L
Drugs....................................................... 184,982
Medical consumables......................................... 259,993
------------
444,975
============
</Table>
In the addition to the above stock, the cost of consignment stock at 31
March 2000 was L140,155.
12 DEBTORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<Table>
<Caption>
AT 31 MARCH
2000
L
Trade debtors............................................... 1,943,176
Other debtors............................................... 109,239
Prepayments and accrued income.............................. 206,393
---------
2,258,808
=========
</Table>
13 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<Table>
<Caption>
AT 31 MARCH
2000
L
Bank loans and overdrafts................................... 4,484,808
Obligations under hire purchase contracts................... 320,229
Trade creditors............................................. 1,738,160
Corporation tax............................................. 1,142,177
Other taxation and social security.......................... 160,699
Other creditors............................................. 69,984
Accruals and deferred income................................ 785,111
---------
8,701,168
=========
</Table>
F-97
<Page>
NOTES (CONTINUED)
14 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<Table>
<Caption>
AT 31 MARCH
2000
L
Obligations under hire purchase contracts................... 69,073
Bank loans.................................................. 23,321,399
Loan notes.................................................. 5,000,000
----------
28,390,472
==========
</Table>
Bank loans are repayable half yearly in equal instalments with a final balloon
payment of L4 million falling due in March 2011. Interest is accrued on these
loans at LIBOR + 1.5%.
Bank loans are secured on the property and assets of the group.
Loan notes comprise the stepped coupon Subordinated Loan Notes 2008 and are
fully repayable in 2008 although they can be repaid earlier at the discretion of
the directors with no financial penalty to the group. Interest accrues on the
Loan Notes as follows:
5% per annum until March 2000
7% per annum until March 2001
10% per annum until the earlier of the redemption in March 2008 or repurchase of
the Loan Notes by the group.
At 31 March 2000 unamortised loan issue costs amounted to L178,601.
F-98
<Page>
NOTES (CONTINUED)
14 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR (CONTINUED)
The maturity profile of the group's borrowings at 31 March 2000 was as follows:
<Table>
<Caption>
AT 31 MARCH
2000
L
LOAN NOTES
After five years............................................ 5,000,000
==========
BANK LOANS AND OVERDRAFTS
Between one and two years................................... 1,500,000
Between two and five years.................................. 6,000,000
After five years............................................ 15,821,399
----------
23,321,399
Due within one year......................................... 4,484,808
----------
27,806,207
==========
HIRE PURCHASE AGREEMENTS
Between one and two years................................... 69,073
Due within one year......................................... 320,229
----------
389,302
==========
TOTAL BORROWINGS INCLUDING HIRE PURCHASE AGREEMENTS
Between one and two years................................... 1,569,073
Between two and five years.................................. 6,000,000
After five years............................................ 20,821,399
----------
28,390,472
Due within one year......................................... 4,805,037
----------
33,195,509
==========
</Table>
15 PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation -- accelerated capital allowances
<Table>
<Caption>
AT 31 MARCH
2000
L
At beginning of period...................................... 532,000
Released to profit and loss account......................... (7,750)
------------
At end of period............................................ 524,250
============
</Table>
Deferred taxation of L734,064 has not been provided on the freehold properties
as the directors currently have no intention of disposing of these properties in
the foreseeable future.
F-99
<Page>
NOTES (CONTINUED)
16 CALLED UP EQUITY SHARE CAPITAL
<Table>
<Caption>
AT 31 MARCH
2000
L
AUTHORISED
450,000 ordinary shares of 10p each......................... 45,000
============
ALLOTTED, CALLED UP AND FULLY PAID
405,000 ordinary shares of 10p each......................... 40,500
============
</Table>
17 RESERVES
<Table>
<Caption>
SHARE PROFIT AND AT 31 MARCH
PREMIUM LOSS 2000
ACCOUNT ACCOUNT TOTAL
L L L
At beginning of period as previously stated................. 364,500 2,619,046 2,983,546
Prior period adjustment..................................... -- (133,844) (133,844)
------- --------- ---------
Revised opening balance at beginning of period.............. 364,500 2,485,202 2,849,702
Retained profit for the period.............................. -- 526,882 526,882
------- --------- ---------
At end of period............................................ 364,500 3,012,084 3,376,584
======= ========= =========
</Table>
18 RECONCILIATION OF MOVEMENTS IN GROUP SHAREHOLDERS' FUNDS
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH
2000
L
Profit for the financial period............................. 526,882
------------
NET INCREASE IN SHAREHOLDERS' FUNDS......................... 526,882
Opening shareholders' funds as previously stated............ 3,024,046
Prior period adjustment (see note 10)....................... (133,844)
------------
CLOSING EQUITY SHAREHOLDERS' FUNDS.......................... 3,417,084
============
</Table>
F-100
<Page>
NOTES (CONTINUED)
19 RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH
2000
L
Operating profit............................................ 1,439,651
Depreciation charges........................................ 301,288
Amortisation charges........................................ 179,068
Decrease in stocks.......................................... 17,920
Decrease in debtors......................................... 179,877
(Decrease) in creditors..................................... (3,127)
------------
NET CASH INFLOW FROM OPERATING ACTIVITIES................... 2,114,677
============
</Table>
20 ANALYSIS OF CASH FLOWS
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH
2000
L
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received........................................... 6,525
Interest paid on bank loans................................. (708,358)
Interest paid on loan notes................................. (70,297)
Interest paid on hire purchase contracts.................... (12,032)
------------
NET CASH OUTFLOW............................................ (784,162)
============
TAXATION
Tax paid.................................................... (92,000)
------------
NET CASH OUTFLOW............................................ (92,000)
============
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets........................... (240,137)
------------
NET CASH OUTFLOW............................................ (240,137)
============
FINANCING
Repaid capital element of hire purchase contracts........... (98,513)
Repayment of bank loan...................................... (750,000)
------------
NET CASH OUTFLOW............................................ (848,513)
============
</Table>
F-101
<Page>
NOTES (CONTINUED)
21 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<Table>
<Caption>
31 NON CASH 31 MARCH
DECEMBER 1999 CASHFLOW MOVEMENTS 2000
L L L L
Cash at bank and in hand....................... 1,869 180 -- 2,049
Overdraft...................................... (221,953) 149,685 -- (72,268)
----------- ------- -------- -----------
(220,084) 149,865 -- (70,219)
Debt due within one year....................... (4,769,819) 848,513 (811,463) (4,732,769)
Debt due after more than one year.............. (29,197,743) -- 807,271 (28,390,472)
----------- ------- -------- -----------
Net debt....................................... (34,187,646) 998,378 (4,192) (33,193,460)
=========== ======= ======== ===========
</Table>
22 GUARANTEES AND OTHER FINANCIAL COMMITMENTS
LEASE COMMITMENTS
The minimum annual commitment under operating leases is as follows:
<Table>
<Caption>
AT 31 MARCH 2000
LAND OTHER
AND OPERATING
BUILDINGS LEASES
L L
OPERATING LEASES EXPIRING:
- -- within one year.......................................... 39,712 45,810
- -- between one and five years............................... 119,136 60,336
------- -------
158,848 106,146
======= =======
</Table>
PENSION ARRANGEMENTS
The group operates a defined benefit pension scheme for all employees, although
this scheme has been closed to new entrants since 1 January 1999. The assets of
the scheme are held separately from those of the group in an independently
administered fund. Contributions to the scheme are charged to the profit and
loss account so as to spread the cost of pensions over the employees' working
lives with the group. The contributions to the scheme are determined with the
advice of independent qualified actuaries on the basis of triennial valuations.
The most recent full actuarial valuation was conducted as at 1 June 1999 using
both the Minimum Funding Requirement and Projected Unit methods.
The valuation using the Minimum Funding Requirement showed that the market value
of the scheme's assets was L2,787,000, representing 97% of the benefits due to
members (a deficit of L89,000). The assumptions used in performing the Minimum
Funding Requirement valuation are governed by the Pensions Act 1995 and guidance
issued by the Institute and Faculty of Actuaries.
The valuation using the Projected Unit method showed that the actuarial value of
the scheme's assets was L2,011,000 representing 82% of the benefits due to
members (a deficit of L432,000). The principal long-term actuarial assumptions
used under the Projected Unit method were that investment returns would be 8.5%
per annum and that the increase in pensionable earnings would be 7% per annum.
F-102
<Page>
NOTES (CONTINUED)
22 GUARANTEES AND OTHER FINANCIAL COMMITMENTS (CONTINUED)
The trustees and the directors have considered the deficits arising under both
valuations, and they consider that the Minimum Funding Requirement valuation is
the most appropriate basis for determining the level of future contributions
that will be required. Accordingly, the employer's contribution rates have
remained unchanged as follows:
<Table>
Staff 12.2% per annum
Management 13.0% per annum
Senior management 17.7% per annum
</Table>
The group is amortising the deficit arising over the service lives of the
employees. The defined benefit pension scheme charge for the period was L62,000.
CAPITAL COMMITMENTS
At 31 March 2000 the capital commitments of the group were:
<Table>
<Caption>
2000
L
Amounts contracted for but not provided for................. 60,863
======
</Table>
23 POST BALANCE SHEET EVENTS
The authorised share capital of the company was increased on 6 April 2000 by the
creation of 55,810 ordinary shares of 10p each. These were allotted to John
Wotherspoon, a director, as bonus shares on 6 April 2000.
Subsequently on 6 April 2000, Global Healthcare Partners Limited, a UK
registered company, acquired the entire issued share capital of the company for
cash consideration of L15.9 million and the issue of new loan notes of
L6.8 million, which includes amounts paid to directors for their share holdings,
as explained below, and acquired the existing loan notes for cash consideration
of L5.1 million.
On this date, John Wotherspoon, a director, sold his holding of 160,180 10p
ordinary shares for L376,610 cash and L6,710,970 loan note consideration
(including total consideration of L2,459,784 in respect of the 55,810 bonus
shares issued on 6 April 2000) and Michael Broke, a director, sold his holding
of 4,500 10p ordinary shares for L98,335 cash and L100,000 loan note
consideration.
On 6 April 2000, following the acquisition of the company by Global Healthcare
Partners Limited, L2,367,559 was paid to employees and L285,442 of related
social security costs were incurred by the group in return for the cancellation
of options they held to purchase ordinary shares in the company.
As part of the acquisition, the company's loans have been repaid in full with
new loan financing being made available and drawn down by Global Healthcare
Partners Limited. The company has guaranteed certain borrowings of Global
Healthcare Partners Limited under the terms of these new loan agreements.
Global Healthcare Partners Limited is ultimately owned by United Surgical
Partners International Inc, a US based company.
F-103
<Page>
NOTES (CONTINUED)
24 SUMMARY OF RELEVANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the UK (UK GAAP)
which differ in certain significant respects from those generally accepted in
the United States (US GAAP). Set forth below is a summary of certain significant
differences between US and UK GAAP which management believe are relevant to the
group.
DEFERRED INCOME TAX
Under UK GAAP, deferred taxation is calculated under the liability method, under
which taxes on temporary differences are recognised to the extent it is probable
that the liabilities will crystallise in the foreseeable future. Under US GAAP,
deferred taxation is provided for all temporary differences using the asset and
liability method. Deferred tax assets and liabilities are measured using the
enacted rate expected to apply to taxable income in the years in which the
temporary differences are expected to be recovered or settled. Valuation
allowances are provided for to the extent that the realisation of deferred tax
assets is not deemed more likely than not. An adjustment to record a deferred
tax liability of L1,200,000 in respect of differences in book depreciation and
tax indexation of properties has been made in the opening balance sheet of the
group at 4 March 1998. Accordingly under US GAAP this resulted in a
corresponding increase in goodwill arising on acquisition of L1,200,000.
PENSION COSTS
Under UK GAAP, pension costs are accounted for in accordance with Statement of
Standard Accounting Practice 24. As a result, such costs are charged against
profit over employees' working lives. Under US GAAP, pension costs are based
upon prescribed actuarial methods in accordance with the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 87. Differences between
the UK and US GAAP figures arise from the respective requirements to use
different actuarial methods and assumptions and different methods of accounting
for surpluses or deficits.
CAPITALISATION OF INTEREST
As permitted under UK GAAP, interest on external financing of assets in the
course of construction is charged to income as incurred. US GAAP, SFAS No. 34
"Capitalization of Interest Cost", requires interest incurred as part of the
cost of constructing certain fixed assets to be capitalised and amortised over
the life of the asset. This would apply to the acquisition and development of a
new cancer centre by the group during the year ended 31 December 1999 and the
three months ended 31 March 2000.
DEBT
Under UK GAAP, debt is initially stated at the amount of the net proceeds after
deduction of issue costs. These unamortised issue costs amount to L178,601 at 31
March 2000. Under US GAAP debt issue costs are recorded separately on the
balance sheet and amortized over the life of the debt by the interest method.
CASH FLOW STATEMENTS
Under UK GAAP, the consolidated cash flow statements are presented in accordance
with UK Financial Reporting Standard No. 1 (FRS 1). The statements prepared
under FRS 1 present substantially the same information as that required under
SFAS No. 95. Under US GAAP, however,
F-104
<Page>
NOTES (CONTINUED)
24 SUMMARY OF RELEVANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
there are certain differences from UK GAAP with regard to classification of
items within the cash flow statement and with regard to the definition of cash.
Under FRS 1, cash flows are presented separately for operating activities;
returns on investments and servicing of finance; taxation; capital expenditure
and financial investment, acquisitions and disposals; dividends paid to the
company's shareholders; management of liquid resources and financing. SFAS
No. 95 requires only three categories of activities, which are operating,
investing and financing activities.
Under SFAS No. 95 cash and cash equivalents include cash and short-term
investments with original maturity of three months or less and bank overdrafts
are classified as borrowings and the movements thereon are included in financing
activities. Under FRS 1 cash comprises cash in hand and at bank and overnight
deposits, net of bank overdrafts. The presentation of cash flows provided by
(used in) operating, investing and financing activities in accordance with US
GAAP would be as follows:
<Table>
<Caption>
3 MONTHS ENDED 31
MARCH 2000
L
Net cash provided by operating activities................... 1,238,515
Net cash used in investing activities....................... (240,137)
Net cash used in financing activities....................... (998,198)
--------------
Net increase in cash and cash equivalents................... 180
Cash and cash equivalents under US GAAP at beginning of
period...................................................... 1,869
--------------
Cash and cash equivalents under US GAAP at end of period.... 2,049
==============
</Table>
F-105
<Page>
NOTES (CONTINUED)
24 SUMMARY OF RELEVANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
RECONCILIATION TO US ACCOUNTING PRINCIPLES
The following is a summary of the significant adjustments to net income and
shareholders' equity which would have been required if US GAAP had been applied
in preparing the group's consolidated financial statements instead of UK GAAP:
<Table>
<Caption>
3 MONTHS ENDED
31 MARCH 2000
L
Profit for the financial period as reported in the
consolidated profit and loss account -- UK GAAP............. 526,882
Adjustments
-- additional goodwill amortisation resulting from
additional deferred tax liability....................... (15,000)
-- pension costs.......................................... (40,000)
-- capitalisation of interest............................. 50,612
-- tax effect of the above adjustments.................... (3,184)
-- release of deferred tax liability related to book
depreciation and tax indexation of properties........... 71,445
------------
Net income under US GAAP.................................... 590,755
============
</Table>
<Table>
<Caption>
AS AT
31 MARCH 2000
L
Equity shareholders' funds as reported in the consolidated
balance sheet--UK GAAP...................................... 3,417,084
Adjustments
-- additional goodwill amortisation resulting from
additional deferred tax liability....................... (125,000)
-- pension costs.......................................... (845,104)
-- capitalisation of interest............................. 72,465
-- tax effect of the above adjustments.................... 235,708
-- release of deferred tax liability related to book
depreciation and tax indexation of properties........... 468,126
-----------
Shareholders' equity under US GAAP.......................... 3,223,279
===========
</Table>
F-106
<Page>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
ASPEN HEALTHCARE HOLDINGS LIMITED:
We have audited the consolidated financial statements of Aspen Healthcare
Holdings Limited and subsidiaries (the "company") on pages 2 to 21 which have
been prepared under the historical cost convention and the accounting policies
set out on pages 5 to 6. As explained in the accounting policies, the financial
statements have not been prepared for the purposes of Section 226 of the
Companies Act 1985.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors are responsible for preparing the financial statements in
accordance with applicable United Kingdom law and accounting standards. Our
responsibilities, as independent auditors, are established in the United Kingdom
by the Auditing Practices Board and by our profession's ethical guidance. It is
our responsibility to report our opinion to you as to whether the financial
statements give a true and fair view.
BASIS OF AUDIT OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board and with generally accepted auditing standards in the
United States. An audit includes examination, on a test basis, of evidence
relevant to the amounts and disclosures in the financial statements. It also
includes an assessment of the significant estimates and judgements made by the
directors in the preparation of the financial statements and of whether the
accounting policies are appropriate to the circumstances of the company,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregulatory or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of affairs of the company as at 31 December 1999 and 31 December 1998 and of the
company's income and cash flows for the year ended 31 December 1999 and the
ten-month period ended 31 December 1998 in conformity with generally accepted
accounting principles in the United Kingdom.
RECONCILIATION TO US GAAP
Accounting practices used by the company in preparing the accompanying financial
statements confirm with generally accepted accounting principles in the United
Kingdom, but do not conform with accounting principles generally accepted in the
United States. A description of these differences and a complete reconciliation
of consolidated net income and shareholders' equity to generally accepted
accounting principles in the United States is set forth in note 23.
ARTHUR ANDERSEN
CHARTERED ACCOUNTANTS
London, England
3 April 2000 (except with respect to
the matters discussed in note 23, as
to which the date is 16 March 2001).
F-107
<Page>
CONSOLIDATED PROFIT AND LOSS ACCOUNT
<Table>
<Caption>
TEN-MONTH
YEAR ENDED PERIOD ENDED
31 DECEMBER 1999 31 DECEMBER 1998
NOTES L L
-------- ---------------- ----------------
TURNOVER............................................... 1 23,312,597 18,739,552
Operating expenses..................................... (18,945,502) (14,697,766)
----------- -----------
OPERATING PROFIT....................................... 4,367,095 4,041,786
Investment income...................................... 2 25,433 67,591
Interest payable and similar charges................... 3 (2,277,128) (1,837,731)
----------- -----------
PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION.......... 4 2,115,400 2,271,646
Tax on profit on ordinary activities................... 7 (1,065,000) (703,000)
----------- -----------
PROFIT FOR THE FINANCIAL PERIOD TRANSFERRED TO
RESERVES............................................. 17 1,050,400 1,568,646
=========== ===========
</Table>
There were no recognised gains or losses in the year and the prior period
other than those disclosed.
The accompanying notes are an integral part of this consolidated profit and
loss account.
F-108
<Page>
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AT AT
31 DECEMBER 1999 31 DECEMBER 1998
NOTES L L
-------- ---------------- ----------------
FIXED ASSETS
Intangible assets...................................... 8 13,012,262 13,728,533
Tangible assets........................................ 9 25,688,943 22,227,323
-- ----------- -----------
38,701,205 35,955,856
Current assets
Stocks................................................. 10 462,895 389,941
Debtors................................................ 11 2,438,685 2,182,201
Cash at bank and in hand............................... 1,869 889,349
----------- -----------
2,903,449 3,461,491
CREDITORS: Amounts falling due within one year......... 12 (8,850,865) (5,888,712)
-- ----------- -----------
NET CURRENT LIABILITIES................................ (5,947,416) (2,427,221)
-- ----------- -----------
TOTAL ASSETS LESS CURRENT LIABILITIES.................. 32,753,789 33,528,635
CREDITORS: Amounts falling due after more than one
year................................................. 13 (29,197,743) (31,127,989)
PROVISIONS FOR LIABILITIES AND CHARGES................. 14 (532,000) (427,000)
-- ----------- -----------
NET ASSETS............................................. 3,024,046 1,973,646
----------- -----------
CAPITAL AND RESERVES
Called-up equity share capital......................... 15 40,500 40,500
Share premium account.................................. 16 364,500 364,500
Profit and loss account................................ 16 2,619,046 1,568,646
-- ----------- -----------
TOTAL EQUITY SHAREHOLDERS' FUNDS....................... 17 3,024,046 1,973,646
=========== ===========
</Table>
The accompanying notes are an integral part of these balance sheets.
F-109
<Page>
CONSOLIDATED CASH FLOW STATEMENT
<Table>
<Caption>
TEN-MONTH
YEAR ENDED PERIOD ENDED
31 DECEMBER 1999 31 DECEMBER 1998
NOTES L L
-------- ---------------- ----------------
NET CASH INFLOW FROM OPERATING ACTIVITIES.............. 18 5,964,511 5,773,310
Returns on investments and servicing of finance........ 19 (1,975,866) (1,403,337)
Taxation............................................... 19 (1,072,954) (1,289,730)
Capital expenditure and financial investment........... 19 (4,521,950) (778,518)
Acquisition............................................ 19 -- (24,423,425)
CASH OUTFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND
FINANCING
Financing.............................................. 19 496,826 23,011,049
----------- -----------
(Decrease) increase in cash in the period.............. 20 (1,109,433) 889,349
----------- -----------
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
1999 1998
L L
----------- -----------
(Decrease) Increase in cash in the period.............. 20 (1,109,433) 889,349
Cash inflow from loan financing........................ 20 (12,535,070) (24,056,336)
Cash outflow on bank loans............................. 20 1,500,000 750,000
Cash outflow on finance leases......................... 20 591,310 827,522
Repayment of loan notes................................ 20 10,000,000
Net borrowings acquired with acquisition............... 20 -- (11,006,393)
Non cash movements..................................... 20 (24,375) (14,220)
----------- -----------
Change in net debt..................................... (1,577,568) (32,610,078)
Net debt at beginning of year.......................... (32,610,078) --
----------- -----------
Net debt at end of year................................ 20 (34,187,646) (32,610,078)
=========== ===========
</Table>
F-110
<Page>
STATEMENT OF ACCOUNTING POLICIES
BASIS OF PREPARATION
The consolidated financial statements have been prepared under the
historical cost convention and in accordance with applicable accounting
standards.
The consolidated financial statements have not been prepared for the
purposes of section 226 of the Companies Act 1985 (the "Act"), and therefore do
not constitute statutory accounts within the context of the Act. However, the
consolidated financial statements include all disclosures required under the
Companies Act with the exception of a directors' report, which is not required
in order for the financial statements to give a true and fair view of the state
of affairs at any point in time. Accordingly, the consolidated financial
statements comply with accounting principles generally accepted in the United
Kingdom (UK GAAP).
UK GAAP and accounting principles adopted by the Company differ in certain
respects from accounting principles generally accepted in the United States (US
GAAP). See Note 23 for a discussion of the principal differences that would
affect the company's consolidated net income and shareholders' equity if US GAAP
had been applied instead of UK GAAP in the preparation of the consolidated
financial statements.
BASIS OF CONSOLIDATION
The group financial statements consolidate the financial statements of the
company and all its subsidiary undertakings drawn up to 31 December 1999 and the
ten month period ended 31 December 1998.
The principles of acquisition accounting have been adopted in respect of the
acquisitions of subsidiaries. Under this method, the results of the subsidiary
undertakings are included in the consolidated profit and loss account from the
date of acquisition. Goodwill arising on consolidation (representing the excess
of the consideration given over the fair value of the separable net assets
acquired) is capitalised in the Group's balance sheet and amortised over its
estimated economic life of 20 years.
TANGIBLE FIXED ASSETS
Tangible fixed assets are stated at cost, net of depreciation. Depreciation
is provided at rates calculated to write off the cost less estimated residual
value of each asset on a straight-line basis over its expected useful life, as
follows:
<Table>
Freehold buildings................................... 50 years
Short leasehold properties........................... Over the shorter life of
the lease or useful life
Plant and machinery.................................. 5-10 years
Fixtures and fittings................................ 8-10 years
Computers............................................ 4 years
</Table>
Freehold land is not depreciated.
Residual value is calculated on prices prevailing at the date of acquisition
or revaluation.
TAXATION
Corporation tax payable is provided on taxable profits at the current rate.
F-111
<Page>
STATEMENT OF ACCOUNTING POLICIES -- (CONTINUED)
Deferred taxation is provided using the liability method on all timing
differences only to the extent that they are expected to reverse in the future
without being replaced, except that the deferred tax effects of timing
differences arising from pensions and other post-retirement benefits are always
recognised in full.
STOCKS
Stocks of drugs and medical consumables have been valued at the lower of
cost and net realisable value.
PENSIONS COSTS AND OTHER POST-RETIREMENT BENEFITS
For defined benefit schemes the amount charged to the profit and loss
account in respect of pension costs and other post-retirement benefits is the
estimated regular cost of providing the benefits accrued in the year, adjusted
to reflect variations from that cost. The regular cost is calculated so that it
represents a substantially level percentage of current and future payroll.
Variations from regular cost are charged or credited to the profit and loss
account as a constant percentage of payroll over the estimated average remaining
working life of scheme members. Defined benefit schemes are either externally
funded, with the assets of the scheme held separately from those of the group in
separate trustee administered funds. Differences between amounts charged to the
profit and loss account and amounts funded or paid directly to members of
unfunded schemes are shown as either provisions or prepayments in the balance
sheet.
For defined contributions schemes the amount charged to the profit and loss
account in respect of pension costs and other post-retirement benefits is the
contributions payable in the year. Differences between contributions payable in
the year and contributions actually paid are shown as either accruals or
prepayments in the balance sheet.
DEBT
Debt is initially stated at the amount of the net proceeds after deduction
of issue costs. The carrying amount is increased by the finance cost in respect
of the accounting period and reduced by payments made in the period.
FINANCE COSTS
Finance costs (principally interest and arrangement fees) of debt are
recognised in the profit and loss account over the term of such instruments at a
constant rate on the carrying amount.
LEASES
Assets held under finance leases and other similar contracts, which confer
rights and obligations similar to those attached to owned assets, are
capitalised as tangible fixed assets and are depreciated over the shorter of the
lease terms or their useful lives. The capital elements of future lease
obligations are recorded as liabilities, while the interest elements are charged
to the profit and loss account over the period of the leases to produce a
constant rate of charge on the balance of capital repayments outstanding. Hire
purchase transactions are dealt with similarly, except that assets are
depreciated over their useful lives.
Rentals under operating leases are charged on a straight-line basis over the
lease term, even if the payments are not made on such a basis.
F-112
<Page>
NOTES TO FINANCIAL STATEMENTS
1. TURNOVER
Turnover represents the invoiced value of medical and ancillary services
rendered to patients in the United Kingdom exclusive of VAT and net of trade
discounts.
2. INVESTMENT INCOME
<Table>
<Caption>
TEN-MONTH
YEAR ENDED PERIOD ENDED
31 DECEMBER 31 DECEMBER
1999 1998
L L
----------- ------------
Other interest receivable and similar income................ 25,433 67,591
====== ======
</Table>
3. INTEREST PAYABLE AND SIMILAR CHARGES
<Table>
<Caption>
TEN-MONTH
YEAR ENDED PERIOD ENDED
31 DECEMBER 31 DECEMBER
1999 1998
L L
----------- ------------
Bank loans and overdrafts................................... 1,820,981 1,122,456
Finance Leases.............................................. 53,066 93,671
Other interest payable...................................... 403,081 621,604
--------- ---------
2,277,128 1,837,731
========= =========
</Table>
4. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
Profit on ordinary activities before taxation is stated after charging:
<Table>
<Caption>
TEN-MONTH
YEAR ENDED PERIOD ENDED
31 DECEMBER 31 DECEMBER
1999 1998
L L
----------- ------------
Depreciation and amounts written off tangible fixed assets
-- owned................................................ 693,216 556,446
-- held under hire purchase agreements.................. 350,136 327,988
Amortisation of goodwill.................................... 716,271 596,893
Operating lease rentals
-- plant and machinery.................................. 44,752 79,298
-- land and buildings................................... 40,465 47,637
Auditors' remuneration for audit services................... 38,911 34,687
======= =======
</Table>
Amounts payable to Arthur Andersen and their associates in respect of non
audit services were L22,446 (ten-month period ended December 31, 1998 --
L706,417). Of this amount, Lnil (ten-month period ended December 31, 1998 --
L685,786) relates to the acquisition of the group and has been included as part
of the cost of that acquisition.
F-113
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STAFF COSTS
The average monthly number of employees (including executive directors) was:
<Table>
<Caption>
TEN-MONTH
YEAR ENDED PERIOD ENDED
31 DECEMBER 31 DECEMBER
1999 1998
L L
----------- ------------
Medical..................................................... 215 201
Other....................................................... 153 156
--- ---
368 357
=== ===
</Table>
Their aggregate remuneration comprised:
<Table>
<Caption>
TEN-MONTH
YEAR ENDED PERIOD ENDED
31 DECEMBER 31 DECEMBER
1999 1998
L L
----------- ------------
Wages and salaries.......................................... 6,460,215 5,356,228
Social security costs....................................... 493,772 389,109
Other pension costs......................................... 310,896 207,008
--------- ---------
7,264,883 5,952,345
========= =========
</Table>
6. DIRECTOR'S REMUNERATION AND TRANSACTIONS
DIRECTORS' REMUNERATION
<Table>
<Caption>
SALARY SALARY TEN-MONTH
(INCLUDING YEAR ENDED (INCLUDING PERIOD ENDED
BENEFITS PENSION 31 DECEMBER BENEFITS PENSION 31 DECEMBER
IN KIND) CONTRIBUTIONS 1999 IN KIND) CONTRIBUTIONS 1998
NAME OF DIRECTOR L L L L L L
---------------- ---------- ------------- ----------- ---------- ------------- ------------
John Wotherspoon.............. 165,404 27,459 192,863 150,096 27,973 178,069
Michael Broke (Chairman)...... 25,000 -- 25,000 16,667 -- 16,667
------- ------ ------- ------- ------ -------
190,404 27,459 217,863 166,763 27,973 194,736
======= ====== ======= ======= ====== =======
</Table>
During the year, L17,907 (ten-month period ended December 31, 1998 --
L14,494) was paid to Electra Fleming Limited in respect of services provided to
the group by David Symondson.
F-114
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. TAX ON PROFIT ON ORDINARY ACTIVITIES
The tax charge is based on the profit for the year/period and comprises:
<Table>
<Caption>
TEN-MONTH
YEAR ENDED PERIOD ENDED
31 DECEMBER 31 DECEMBER
1999 1998
L L
----------- ------------
Corporation tax charge at 30.5% (1998 -- 31%)............... 960,000 811,000
Deferred taxation (see note 14)............................. 105,000 (108,000)
--------- --------
1,065,000 703,000
========= ========
</Table>
8. INTANGIBLE FIXED ASSETS -- GOODWILL
<Table>
<Caption>
31 DECEMBER 31 DECEMBER
1999 1998
L L
----------- -----------
COSTS
At 31 December 1998......................................... 14,325,426 --
Additions................................................... -- 14,325,426
---------- ----------
At 31 December 1999......................................... 14,325,426 14,325,426
========== ==========
AMORTISATION
At 31 December 1998......................................... 596,893 --
Charge for the year/period.................................. 716,271 596,893
---------- ----------
At 31 December 1999......................................... 1,313,164 596,893
========== ==========
NET BOOK VALUE
At 31 December 1998......................................... 13,728,533 --
---------- ----------
At 31 December 1999......................................... 13,012,262 13,728,533
========== ==========
</Table>
F-115
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. TANGIBLE FIXED ASSETS
<Table>
<Caption>
LAND AND PLANT AND FIXTURES AND MOTOR
BUILDINGS MACHINERY FITTINGS COMPUTERS VEHICLES TOTAL
L L L L L L
---------- --------- ------------ --------- -------- ----------
COST
At 31 December 1998......... 19,426,977 3,058,193 267,406 186,471 125,515 23,064,562
Additions................... 3,916,129 560,562 83,304 44,168 17,673 4,621,836
Disposals................... (139,614) (83,933) -- (35,042) (12,850) (271,439)
---------- --------- ------- ------- ------- ----------
At 31 December 1999......... 23,203,492 3,534,822 350,710 195,597 130,338 27,414,959
========== ========= ======= ======= ======= ==========
DEPRECIATION
At 31 December 1998......... 306,979 415,727 42,099 60,907 11,527 837,239
Charge for the year......... 373,157 515,198 50,347 76,038 28,609 1,043,349
Disposals................... (39,425) (73,143) -- (31,938) (10,066) (154,572)
---------- --------- ------- ------- ------- ----------
At 31 December 1999......... 640,711 857,782 92,446 105,007 30,070 1,726,016
========== ========= ======= ======= ======= ==========
NET BOOK VALUE
At 31 December 1998......... 19,119,998 2,642,466 225,307 125,564 113,988 22,227,323
---------- --------- ------- ------- ------- ----------
At 31 December 1999......... 22,562,781 2,677,040 258,264 90,590 100,268 25,688,943
========== ========= ======= ======= ======= ==========
</Table>
The net book value of fixed assets for the group includes the following
amounts in respect of obligations under hire purchase agreements:
<Table>
<Caption>
COMPUTERS,
FIXTURES AND PLANT AND MOTOR
FITTINGS EQUIPMENT VEHICLES
L L L
------------ ---------- --------
NET BOOK VALUE.............................................. 55,199 1,464,254 22,980
------ --------- ------
Depreciation charged in the year............................ 11,206 329,798 9,132
====== ========= ======
</Table>
The net book value of land and buildings comprises freehold property of
L22,496,194 (1998 -- L18,890,000) and short leasehold property of L43,256
(1998 -- L152,000).
Freehold land amounting to L6,900,000 (1998 -- L6,900,000) has not been
depreciated.
10. STOCKS
<Table>
<Caption>
1999 1998
-------- --------
L L
Drugs....................................................... 184,206 138,586
Medical consumables......................................... 278,689 251,355
------- -------
462,895 389,941
======= =======
</Table>
There is no material difference between the balance sheet value of stocks
and their replacement cost.
F-116
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. DEBTORS
<Table>
<Caption>
1999 1998
--------- ---------
L L
Amounts falling due within one year:
Trade debtors............................................... 1,774,938 1,826,581
Other debtors............................................... 426,135 130,458
Prepayments and accrued income.............................. 237,612 225,162
--------- ---------
2,438,685 2,182,201
========= =========
</Table>
12. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<Table>
<Caption>
1999 1998
--------- ---------
L L
Bank loans and overdrafts................................... 4,634,493 1,866,180
Obligations under hire purchase contracts................... 357,279 505,258
Trade creditors............................................. 1,627,513 1,523,778
Amounts owed to other group undertakings.................... -- --
Corporation tax............................................. 908,177 811,000
Other taxation and social security.......................... 168,851 146,902
Other creditors............................................. 87,325 70,868
Accruals and deferred income................................ 1,067,227 964,726
--------- ---------
8,850,865 5,888,712
========= =========
</Table>
13. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<Table>
<Caption>
1999 1998
---------- ----------
L L
Obligations under hire purchase contracts................... 130,536 496,358
Bank loans.................................................. 24,067,207 15,631,631
Loan notes.................................................. 5,000,000 15,000,000
---------- ----------
29,197,743 31,127,989
========== ==========
</Table>
Bank loans are repayable half yearly in equal instalments with a final
balloon payment of L2 million falling due in March 2011. Interest is accrued on
these loans at LIBOR + 1.5%.
Additionally, at 31 December 1999, the group had an undrawn guarantee
facility for L1 million which expires in March 2000.
Bank loans are secured on the property and assets of the group.
The stepped coupon subordinated Loan Notes 2008 are fully repayable in 2008
although they can be repaid earlier at the discretion of the directors with no
financial penalty to the group. Interest accrues on the Loan Notes as follows:
-- 5% per annum until March 2000
-- 7% per annum until March 2001
F-117
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
-- 10% per annum until the earlier of the redemption in March 2008 or
repurchase of the Loan Notes by the group
At 31 December 1999 unamortised loan issue costs amounted to L182,793
(1998--L105,224).
The maturity profile of the groups borrowings at 31 December 1999 were as
follows:
<Table>
<Caption>
1999 1998
---------- ----------
L L
LOAN NOTES
After five years............................................ 5,000,000 15,000,000
---------- ----------
BANK LOANS
Between one and two years................................... 1,500,000 1,500,000
Between two and five years.................................. 5,750,000 7,250,000
After five years............................................ 16,817,207 6,881,631
---------- ----------
24,067,207 15,631,631
Due within one year......................................... 4,412,540 1,866,180
---------- ----------
28,479,747 17,497,811
---------- ----------
HIRE PURCHASE AGREEMENTS
Between one and two years................................... 130,536 496,358
---------- ----------
Due within one year......................................... 357,279 505,258
---------- ----------
487,815 1,001,616
---------- ----------
TOTAL BORROWINGS INCLUDING FINANCE LEASES
Between one and two years................................... 1,630,536 1,996,358
Between two and five years.................................. 5,750,000 7,250,000
After five years............................................ 21,817,207 21,881,631
---------- ----------
29,197,743 31,127,989
Due within one year......................................... 4,769,819 2,371,438
---------- ----------
33,967,562 33,499,427
========== ==========
</Table>
14. PROVISIONS FOR LIABILITIES AND CHARGES
Deferred taxation -- accelerated capital allowances
<Table>
<Caption>
TEN-MONTH PERIOD
1999 ENDED 1998
DEFERRED DEFERRED
TAXATION TAXATION
-------- ----------------
L L
GROUP
At beginning of year/ten-month period....................... 427,000 --
Acquisition of businesses................................... -- 535,000
Released to profit and loss account......................... -- (108,000)
Charged to profit and loss account.......................... 105,000 --
------- --------
At end of year/period....................................... 532,000 427,000
======= ========
</Table>
Deferred taxation of L1,200,000 has not been provided on the freehold
properties as the directors currently have no intention of disposing of these
properties in the foreseeable future.
F-118
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. CALLED-UP EQUITY SHARE CAPITAL
<Table>
<Caption>
1999 1998
-------- --------
L L
AUTHORISED
450,000 ordinary shares of 10 pence each.................... 45,000 45,000
------ ------
ALLOTTED, CALLED-UP AND FULLY PAID
405,000 ordinary shares of 10 pence each.................... 40,500 40,500
------ ------
</Table>
16. RESERVES
<Table>
<Caption>
SHARE PROFIT
PREMIUM AND LOSS
ACCOUNT ACCOUNT TOTAL
-------- --------- ---------
L L L
At beginning of year........................................ 364,500 1,568,646 1,933,146
Retained profit for the year................................ -- 1,050,400 1,050,400
------- --------- ---------
At end of year.............................................. 364,500 2,619,046 2,983,546
======= ========= =========
</Table>
Of the above reserves, only the profit and loss account is regarded as
distributable.
17. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<Table>
<Caption>
TEN-MONTH
PERIOD ENDED
1999 1998
L L
--------- ------------
Profit for the financial year/ten-month period.............. 1,050,400 1,568,646
New shares issued........................................... -- 405,000
--------- ---------
Net increase in shareholders' funds......................... 1,050,400 1,973,646
Opening shareholders' funds................................. 1,973,646 --
--------- ---------
Closing shareholders' funds................................. 3,024,046 1,973,646
========= =========
</Table>
18. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING
ACTIVITIES
<Table>
<Caption>
TEN-MONTH PERIOD
1999 ENDED 1998
L L
--------- ----------------
Operating profit............................................ 4,367,095 4,041,786
Depreciation charges........................................ 1,043,349 884,434
Amortisation charges........................................ 716,271 596,893
Increase in stocks.......................................... (72,955) (40)
Increase in debtors......................................... (256,483) (114,355)
Increase in creditors....................................... 167,234 364,592
--------- ---------
NET CASH INFLOW FROM OPERATING ACTIVITIES................... 5,964,511 5,773,310
--------- ---------
</Table>
F-119
<Page>
NOTES TO FINANCIAL STATEMENTS -- (Continued)
19. ANALYSIS OF CASH FLOWS
<Table>
<Caption>
TEN-MONTH
1999 PERIOD ENDED 1998
L L
---------- -----------------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received........................................... 25,433 67,591
Interest paid on bank loans................................. (1,364,261) (996,304)
Interest paid on Loan Notes................................. (583,972) (347,389)
Interest paid on hire purchase contracts.................... (53,066) (127,235)
---------- ----------
NET CASH OUTFLOW............................................ (1,975,866) (1,403,337)
TAXATION
Tax paid.................................................... (1,072,954) (1,289,730)
---------- ----------
NET CASH OUTFLOW............................................ (1,072,954) (1,289,730)
---------- ----------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets........................... (4,621,836) (799,818)
Sale of tangible fixed assets............................... 99,886 21,300
---------- ----------
NET CASH OUTFLOW............................................ (4,521,950) (778,518)
========== ==========
</Table>
<Table>
<Caption>
TEN-MONTH
1999 PERIOD ENDED 1998
L L
----------- -----------------
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertakings......................... -- (24,855,445)
Net cash acquired with subsidiary undertakings.............. -- 432,020
----------- -----------
NET CASH OUTFLOW............................................ -- (24,423,425)
----------- -----------
FINANCING
Issue of ordinary share capital............................. -- 405,000
Repayment of secured loan................................... (1,500,000) (750,000)
New secured bank loans (net of issue costs)................. 12,535,070 9,056,336
New unsecured and secured loans other than from banks....... -- 15,000,000
Repaid capital element of hire purchase contracts........... (538,244) (700,287)
Repayment of loan notes..................................... (10,000,000) --
----------- -----------
NET CASH INFLOW............................................. 496,826 23,011,049
=========== ===========
</Table>
F-120
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
20. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<Table>
<Caption>
31 DECEMBER NON CASH 31 DECEMBER
1998 CASHFLOW MOVEMENTS 1999
L L L L
----------- ---------- --------- -----------
Cash at bank and in hand...................... 889,349 (887,480) -- 1,869
Overdraft..................................... -- (221,953) -- (221,953)
----------- ---------- ------- -----------
889,349 (1,109,433) -- (220,084)
Debt due within one year...................... (2,371,438) (2,398,381) -- (4,769,819)
Debt due after more than one year............. (31,127,989) 1,954,621 (24,375) (29,197,743)
----------- ---------- ------- -----------
Net debt...................................... (32,610,078) (1,553,193) (24,375) (34,187,646)
=========== ========== ======= ===========
</Table>
21. GUARANTEES AND OTHER FINANCIAL COMMITMENTS
A) LEASE COMMITMENTS
The minimum annual commitment under operating leases is as follows:
<Table>
<Caption>
LAND OTHER OTHER
AND OPERATING LAND AND OPERATING
BUILDINGS LEASES BUILDINGS LEASES
1999 1999 1998 1998
L L L L
--------- --------- ------------- -------------
Operating leases expiring:
-- within 1 year.......................... 39,710 52,189 43,243 35,342
-- between 1-5 years...................... 129,058 96,215 168,768 85,690
------- ------- ------- -------
168,768 148,404 212,011 121,032
======= ======= ======= =======
</Table>
B) PENSION ARRANGEMENTS
The group operates a defined benefit pension scheme for all employees,
although this scheme has been closed to new entrants since 1 January 1999. The
assets of the scheme are held separately from those of the group in an
independently administered fund. Contributions to the scheme are charged to the
profit and loss account so as to spread the cost of pensions over the employees'
working lives with the group. The contributions to the scheme are determined
with the advice of independent qualified actuaries on the basis of triennial
valuations.
The most recent valuation was conducted as at 1 June 1999 using both the
Minimum Funding Requirement and Projected Unit methods.
The valuation using the Minimum Funding Requirement showed that the market
value of the scheme's assets were L2,787,000, representing 97% of the benefits
due to members (a deficit of L89,000). The assumptions used in performing the
Minimum Funding Requirement valuation are governed by the Pensions Act 1995 and
guidance issued by the Institute and Faculty of Actuaries.
The valuation using the Projected Unit method showed that the actuarial
value of the scheme's assets were L2,011,000, representing 82% of the benefits
due to members (a deficit of L432,000). The principal long-term actuarial
assumptions used under the Projected Unit method were that investment returns
would be 8.5% per annum and that the increase in pensionable earnings would be
7% per annum.
F-121
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
21. GUARANTEES AND OTHER FINANCIAL COMMITMENTS (CONTINUED)
The Trustees and the Directors have considered the deficits arising under
both valuations, and they consider that the Minimum Funding Requirement
valuation is the most appropriate basis for determining the level of future
contributions that will be required. Accordingly, the employer's contribution
rates have remained unchanged as follows:
<Table>
Staff 12.2% per annum
Management 13.0% per annum
Senior Management 17.7% per annum
</Table>
The Group is amortising the deficit arising under the Projected Unit basis
over the estimated service lives of the employees. Consequently, the pension
charge for the year was L310,896 (1998 - L260,198) which included a regular
charge of L284,896 (1998 - L260,198)
C) CAPITAL COMMITMENTS
At 31 December 1999 the capital commitments of the group were:
<Table>
<Caption>
1999 1998
L L
-------- --------
Amounts contracted for but not provided for................. 111,016 107,000
======= =======
</Table>
22. ACQUISITION OF SUBSIDIARY UNDERTAKING
On 4 March 1998, the Group acquired Aspen Healthcare Limited (formerly
Paracelsus UK Limited) for a total cash consideration of L24,855,445, including
costs of L1,483,425, together with L11,006,393 of net borrowings assumed.
L405,000 of the consideration arose from the issue of new ordinary shares in
Aspen Healthcare Holdings Limited to John Wotherspoon and Electra Fleming.
The directors have performed an exercise to establish the fair value of the
assets and liabilities of the group at the date of acquisition. The goodwill
arising on this acquisition was L14,325,426.
<Table>
<Caption>
BOOK FAIR
VALUE REVALUATIONS VALUE
L L L
----------- ------------ -----------
Intangible fixed assets................................. 882,763 (882,763) --
Tangible fixed assets................................... 22,095,196 66,578 22,161,774
Stocks.................................................. 389,901 -- 389,901
Debtors................................................. 2,906,301 -- 2,906,301
Creditors............................................... (3,386,564) -- (3,386,564)
Net borrowings.......................................... (11,006,393) -- (11,006,393)
Provisions for liabilities and charges.................. (535,000) -- (535,000)
----------- -------- -----------
11,346,204 (816,185) 10,530,019
----------- -------- -----------
Goodwill................................................ 14,325,426
-----------
Consideration........................................... 24,855,445
-----------
</Table>
F-122
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
23. SUMMARY OF RELEVANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the UK (UK GAAP)
which differ in certain significant respects from those generally accepted in
the United States (US GAAP). Set forth below is a summary of certain significant
differences between US and UK GAAP which management believe are relevant to the
group.
DEFERRED INCOME TAX
Under UK GAAP, deferred taxation is calculated under the liability method to
the extent that it is probable that the liabilities will crystallise in the
foreseeable future. Under US GAAP, deferred taxation is provided for all
temporary differences using the asset and liability method. Valuation allowances
are provided for to the extent that the realisation of deferred tax assets is
not more likely than not. An adjustment to record a deferred tax liability of
L1,200,000 in respect of future capital gains taxation has been made in the
opening balance sheet of the Group at 1 March 1998. Accordingly under US GAAP
this resulted in a corresponding increase in goodwill arising on acquisition of
L1,200,000.
PENSION COSTS
Under UK GAAP, pension costs are accounted for in accordance with Statement
of Standard Accounting Practice 24. As a result, such costs are charged against
profit over employees' working lives. Under US GAAP, pension costs are
determined in accordance with the requirements of Statement of Financial
Accounting Standards No. 87. Differences between the UK and US GAAP figures
arise from the requirement to use different actuarial methods and assumptions
and a different method of amortising surpluses or deficits.
CAPITALISATION OF INTEREST
Under UK GAAP, interest on external financing of assets in the course of
construction is charged to income as incurred. US GAAP requires the
capitalisation of interest assets if certain conditions are met in respect of
assets in the course of construction. This relates to the acquisition and
development of a new cancer centre at 49 Parkside during the year.
DEBT
Under UK GAAP, debt is initially stated at the amount of the net proceeds
after deduction of issue costs. These unamortised issue costs amount to L182,793
at 31 December 1999. US GAAP requires debt issue costs to be separately
classified within current assets.
CASH FLOW STATEMENT
Under UK GAAP, the consolidated cash flow statements are presented in
accordance with UK Financial Reporting Standard No. 1 (FRS 1). The statements
prepared under FRS 1 present substantially the same information as that required
under SFAS No. 95. Under US GAAP, however, there are certain differences from UK
GAAP with regard to classification of items within the cash flow statement and
with regard to the definition of cash.
Under FRS 1, cash flows are presented separately for operating activities;
returns on investments and servicing of finance; taxation; capital expenditure
and financial investments; acquisitions and
F-123
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
23. SUMMARY OF RELEVANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
disposals; dividends paid to the company's shareholders; management of liquid
resources and financing. SFAS No. 95 cash flows are reported as resulting from
operating, investing and financing activities.
Under SFAS No. 95 cash and cash equivalents include cash and short-term
investments with original maturities of three months or less. Under FRS 1 cash
comprises cash in hand and at bank and overnight deposits, net of bank
overdrafts. The presentation of cash flows provided by (used in) operating,
investing and financing activities in accordance with US GAAP would be as
follows:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
1999
L
------------
Net cash provided by operating activities................... 2,915,691
Net cash used in investing activities....................... (4,521,950)
Net cash provided by financing activities................... 718,779
Net decrease in cash and cash equivalents................... (887,480)
Cash and cash equivalents under US GAAP at beginning of
year...................................................... 889,349
----------
Cash and cash equivalents under US GAAP at end of year...... 1,869
==========
</Table>
RECONCILIATION TO US ACCOUNTING PRINCIPLES
The following is a summary of the adjustments to net income and
shareholders' equity which would have been required if US GAAP had been applied
instead of UK GAAP.
PROFIT ATTRIBUTABLE TO SHAREHOLDERS
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
1999
L
------------
Profit attributable to shareholders as reported in the
consolidated profit and loss account...................... 1,050,400
Adjustments
-- deferred income tax.................................. 134,093
-- pension costs........................................ (106,104)
-- capitalisation of interest........................... 21,853
-- tax effect of the above adjustments.................. 25,696
---------
Net income under US GAAP.................................... 1,125,938
=========
</Table>
F-124
<Page>
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
23. SUMMARY OF RELEVANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
<Table>
<Caption>
AT
DECEMBER 31,
1999
L
------------
SHAREHOLDERS' EQUITY
Shareholders' funds as reported in the consolidated balance
sheet..................................................... 3,024,046
Adjustments
-- deferred income tax.................................. 286,681
-- pensions costs....................................... (805,104)
-- capitalisation of interest........................... 21,853
-- tax effect of the above adjustments.................. 238,892
---------
Shareholders' equity under US GAAP.......................... 2,766,368
=========
</Table>
F-125
<Page>
[LOGO]
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2002, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper. The Guarantors have a similar ability to provide
indemnification to their directors and officers pursuant to the applicable state
laws in their state of incorporation.
The Certificate of Incorporation of United Surgical Partners Holdings, Inc.
(the "Company") provides for the indemnification of directors to the fullest
extent permitted by the DGCL. In addition, as permitted by the DGCL, the
Certificate of Incorporation provides that directors of the Company shall have
no personal liability to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except (1) for any breach of the
director's duty of loyalty to the Company or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (3) under Section 174 of the DGCL or (4) for any transaction
from which a director derived an improper personal benefit. The certificate of
incorporation for each guarantor contains similar provisions that provide for
indemnification of directors.
The Company's Certificate of Incorporation provides for the indemnification
of all current and former directors and all current or former officers to the
fullest extent permitted by the DGCL.
The Company's parent, United Surgical Partners International, Inc. (the
"Parent Company"), has entered into indemnification agreements with its
directors and executive officers, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
II-1
<Page>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1* -- Purchase Agreement, dated as of December 14, 2001, among the
Company, Credit Suisse First Boston Corporation, Lehman
Brothers Inc., and SG Cowen Securities Corporation
3.1* -- Certificate of Incorporation of the Company
3.2* -- Bylaws of the Company
4.1* -- Indenture, dated as of December 19, 2001, among the Company,
the Guarantors and U.S. Trust Company of Texas, N.A.
4.2* -- Registration Rights Agreement, dated December 19, 2001, by
and among the Company and the security holders named therein
(the "Registration Rights Agreement"), governing the
Company's outstanding 10% Senior Subordinated Notes due 2011
4.3* -- Global Security, dated as of December 19, 2001, governing
the Company's outstanding 10% Senior Subordinated Notes due
2011
5.1* -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Credit Agreement, dated April 6, 2000, by and among Global
Healthcare Partners Limited and the Governor and Company of
the Bank of Scotland (previously filed as an exhibit to the
Parent Company's Registration Statement on Form S-1
(No. 333-55442) and incorporated herein by reference)
10.2* -- Amended and Restated Credit Agreement, dated as of December
19, 2001, among USP Domestic Holdings, Inc., USPE Holdings
Limited, various financial institutions from time to time
parties thereto as the lenders and Credit Suisse First
Boston, as Administrative Agent
10.3 -- Contribution and Purchase Agreement, dated as of May 11,
1999, by and among USP North Texas, Inc., Baylor Health
Services, Texas Health Ventures Group LLC and THVG/ Health
First L.L.C. (previously filed as an exhibit to the Parent
Company's Registration Statement on Form S-1
(No. 333-55442) and incorporated herein by reference)
10.4 -- Warrant Agreement, dated as of June 18, 1999, among the
Parent Company and Welsh, Carson, Anderson & Stowe VII, L.P.
(previously filed as an exhibit to the Parent Company's
Registration Statement on Form S-1 (No. 333-55442) and
incorporated herein by reference)
10.5 -- Common Stock Purchase Warrant, dated June 1, 1999
(previously filed as an exhibit to the Parent Company's
Registration Statement on Form S-1 (No. 333-55442) and
incorporated herein by reference)
10.6 -- Stock Purchase Warrant, dated March 27, 2000 (previously
filed as an exhibit to the Parent Company's Registration
Statement on Form S-1 (No. 333-55442) and incorporated
herein by reference)
10.7 -- Employment Agreement, dated as of November 1, 2000, by and
between the Parent Company and Donald E. Steen (previously
filed as an exhibit to the Parent Company's Registration
Statement on Form S-1 (No. 333-55442) and incorporated
herein by reference)
10.8 -- Employment Agreement, dated as of March 1, 1999, by and
between the Parent Company and William H. Wilcox (previously
filed as an exhibit to the Parent Company's Registration
Statement on Form S-1 (No. 333-55442) and incorporated
herein by reference)
</Table>
II-2
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.9 -- Parent Company Stock Option and Restricted Stock Purchase
Plan (previously filed as an exhibit to the Parent Company's
Registration Statement on Form S-1 (No. 333-55442) and
incorporated herein by reference)
10.10 -- 2001 Equity-Based Compensation Plan (previously filed as an
exhibit to the Parent Company's Registration Statement on
Form S-1 (No. 333-55442) and incorporated herein by
reference)
10.11 -- Employee Stock Purchase Plan (previously filed as an exhibit
to the Parent Company's Registration Statement on Form S-1
(No. 333-55442) and incorporated herein by reference)
10.12 -- Form of Indemnification Agreement between the Parent Company
and its directors and officers (previously filed as an
exhibit to the Parent Company's Registration Statement on
Form S-1 (No. 333-55442) and incorporated herein by
reference)
12.1* -- Computation of Ratio of Earnings to Fixed Charges
21.1* -- Subsidiaries of the Company
23.1* -- Consent of KPMG LLP
23.2* -- Consent of KPMG LLP
23.3* -- Consent of KPMG
23.4* -- Consent of Ernst & Young LLP
23.5* -- Consent of Arthur Andersen
23.6* -- Consent of Vinson & Elkins L.L.P. (included in
Exhibit 5.1).
24.1* -- Powers of Attorney (included on the first signature page of
this Registration Statement)
25.1* -- Statement of Eligibility of U.S. Trust Company of Texas,
N.A.
99.1* -- Form of Letter of Transmittal
99.2* -- Form of Notice of Guarantee Delivery
99.3* -- Form of Letter to Registered Holders and DTC Participants
99.4* -- Form of Letter to Clients
</Table>
- --------------
* Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
The following reports of independent accountants and financial statement
schedules are included in this Registration Statement:
- Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the registration statement
II-3
<Page>
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
co-registrants pursuant to the foregoing provisions, or otherwise, the
co-registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
co-registrants of expenses incurred or paid by a director, officer or
controlling person of the co-registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned co-registrants hereby undertake to respond to requests for
information that is incorporated by reference into this prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned co-registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this registration statement when it became effective.
II-4
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
co-registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 8th day of January, 2002.
<Table>
UNITED SURGICAL PARTNERS HOLDINGS, INC.
By: /s/ DONALD E. STEEN
------------------------------------------
Donald E. Steen
Chief Executive Officer and Sole Director
</Table>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Donald E. Steen, Mark A. Kopser and John J.
Wellik and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
pre-and post-effective amendments) to this Registration Statement and any
additional registration statement pursuant to Rule 462(b) under the Securities
Act, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or
their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD E. STEEN
----------------------------
Donald E. Steen Chief Executive Officer and Sole Director January 8, 2002
/s/ MARK A. KOPSER
----------------------------
Mark A. Kopser Chief Financial Officer and Vice President January 8, 2002
(Principal Financial Officer)
/s/ JOHN J. WELLIK
----------------------------
John J. Wellik Vice President, Secretary and Treasurer January 8, 2002
(Principal Accounting Officer)
</Table>
II-5
<Page>
Pursuant to the requirements of the Securities Act of 1933, the undersigned
co-registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 8th day of January, 2002.
<Table>
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
By: /s/ DONALD E. STEEN
------------------------------------------
Donald E. Steen
Chief Executive Officer
</Table>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD E. STEEN
- ----------------------------------
Donald E. Steen Chief Executive Officer and Chairman of January 8, 2002
the Board
/s/ WILLIAM H. WILCOX
- ----------------------------------
William H. Wilcox President and Director January 8, 2002
/s/ MARK A. KOPSER
- ----------------------------------
Mark A. Kopser Senior Vice President and Chief January 8, 2002
Financial Officer
(Principal Financial Officer)
/s/ JOHN J. WELLIK
- ----------------------------------
John J. Wellik Vice President, Controller, Compliance January 8, 2002
Officer and Secretary
(Principal Accounting Officer)
/s/ JAMES C. CREWS
- ----------------------------------
James C. Crews Director January 8, 2002
/s/ D. SCOTT MACKESY
- ----------------------------------
D. Scott Mackesy Director January 8, 2002
/s/ DAVE A. ALEXANDER, JR. M.D.
- ----------------------------------
Dave A. Alexander, Jr. M.D. Director January 8, 2002
/s/ THOMAS L. MILLS
- ----------------------------------
Thomas L. Mills Director January 8, 2002
/s/ BOONE POWELL, JR.
- ----------------------------------
Boone Powell, Jr. Director January 8, 2002
/s/ PAUL B. QUEALLY
- ----------------------------------
Paul B. Queally Director January 8, 2002
/s/ DAVID P. ZARIN, M.D.
- ----------------------------------
David P. Zarin, M.D. Director January 8, 2002
/s/ JOHN C. GARRETT, M.D.
- ----------------------------------
John C. Garrett, M.D. Director January 8, 2002
</Table>
II-6
<Page>
Pursuant to the requirements of the Securities Act of 1933, the undersigned
co-registrants have duly caused this Registration Statement to be signed on
their behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on the 8th day of January, 2002.
<Table>
USP CHANDLER, INC.
USP WEST COVINA, INC.
ORTHOLINK OF COLORADO, INC.
MEDCENTER MANAGEMENT SERVICES, INC.
MEDICAL DOCUMENTING SYSTEMS, INC.
ORTHO EXCEL, INC.
ORTHOLINK PHYSICIANS CORPORATION
USP DOMESTIC HOLDINGS, INC.
USP INTERNATIONAL HOLDINGS, INC.
USP LONG ISLAND, INC.
USP NORTH TEXAS, INC.
USP SARASOTA, INC.
USP WINTER PARK, INC.
GEORGIA MUSCULOSKELETAL NETWORK, INC.
ORTHOLINK/GEORGIA ASC, INC.
ORTHOLINK/NEW MEXICO ASC, INC.
USP NEW JERSEY, INC.
NEUROSURGICAL ASSOCIATES, INC.
SOUTHWEST SPINE CENTER, INC.
USP LAS CRUCES, INC.
USP NEVADA, INC.
DAY-OP MANAGEMENT COMPANY, INC.
USP MANHATTAN, INC.
USP TENNESSEE, INC.
HEALTH HORIZONS OF DECATUR, INC.
HEALTH HORIZONS OF KANSAS CITY, INC.
HEALTH HORIZONS OF MURFREESBORO, INC.
HEALTH HORIZONS OF NASHVILLE, INC.
ORTHOLINK ASC CORPORATION
ORTHOLINK OCCUPATIONAL MEDICINE SERVICES
CORPORATION
ORTHOLINK SECURITIES CORPORATION
ORTHOLINK/TN ASC, INC.
TENNESSEE MUSCULOSKELETAL NETWORK, INC.
TEXAS OUTPATIENT SURGICARE CENTER, INC.
USP PASADENA, INC.
USP SOUTH HOUSTON, INC.
USP FREDERICKSBURG, INC.
USP COAST, INC.
USP WESTWOOD, INC.
By: /s/ DONALD E. STEEN
---------------------------------------
Donald E. Steen
Chief Executive Officer and Sole
Director
</Table>
II-7
<Page>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD E. STEEN
----------------------------
Donald E. Steen Chief Executive Officer and Sole Director January 8, 2002
/s/ MARK A. KOPSER
----------------------------
Mark A. Kopser Chief Financial Officer and Vice President January 8, 2002
(Principal Financial Officer)
/s/ JOHN J. WELLIK
----------------------------
John J. Wellik Vice President, Secretary and Treasurer January 8, 2002
(Principal Accounting Officer)
</Table>
II-8
<Page>
Pursuant to the requirements of the Securities Act of 1933, the undersigned
co-registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 8th day of January, 2002.
<Table>
USP NEVADA HOLDINGS, LLC
By: USP North Texas, Inc., its sole member
By: /s/ DONALD E. STEEN
---------------------------------------
Donald E. Steen
Chief Executive Officer
</Table>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD E. STEEN
----------------------------
Donald E. Steen Chief Executive Officer January 8, 2002
/s/ MARK A. KOPSER
----------------------------
Mark A. Kopser Chief Financial Officer and Vice President January 8, 2002
(Principal Financial Officer)
/s/ JOHN J. WELLIK
----------------------------
John J. Wellik Vice President, Secretary and Treasurer January 8, 2002
(Principal Accounting Officer)
</Table>
II-9
<Page>
Pursuant to the requirements of the Securities Act of 1933, the undersigned
co-registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 8th day of January, 2002.
<Table>
DAY-OP SURGERY CONSULTING COMPANY, LLC
By: USP Long Island, Inc., its sole member
By: /s/ DONALD E. STEEN
---------------------------------------
Donald E. Steen
Chief Executive Officer
</Table>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD A. STEEN
----------------------------
Donald E. Steen Chief Executive Officer January 8, 2002
/s/ MARK A. KOPSER
----------------------------
Mark A. Kopser Chief Financial Officer and Vice President January 8, 2002
(Principal Financial Officer)
/s/ JOHN J. WELLIK
----------------------------
John J. Wellik Vice President, Secretary and Treasurer January 8, 2002
(Principal Accounting Officer)
</Table>
II-10
<Page>
Pursuant to the requirements of the Securities Act of 1933, the undersigned
co-registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 8th day of January, 2002.
<Table>
NYCAS ADMINISTRATIVE SERVICES, LLC
By: USP Manhattan, Inc., its sole member
By: /s/ DONALD E. STEEN
---------------------------------------
Donald E. Steen
Chief Executive Officer
</Table>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD A. STEEN
----------------------------
Donald E. Steen Chief Executive Officer January 8, 2002
/s/ MARK A. KOPSER
----------------------------
Mark A. Kopser Chief Financial Officer and Vice President January 8, 2002
(Principal Financial Officer)
/s/ JOHN J. WELLIK
----------------------------
John J. Wellik Vice President, Secretary and Treasurer January 8, 2002
(Principal Accounting Officer)
</Table>
II-11
<Page>
Pursuant to the requirements of the Securities Act of 1933, the undersigned
co-registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 8th day of January, 2002.
<Table>
USP TEXAS, L.P.
By: USP North Texas, Inc., its general
partner
By: /s/ DONALD E. STEEN
---------------------------------------
Donald E. Steen
Chief Executive Officer
</Table>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD E. STEEN
----------------------------
Donald E. Steen Chief Executive Officer January 8, 2002
/s/ MARK A. KOPSER
----------------------------
Mark A. Kopser Chief Financial Officer and Vice President January 8, 2002
(Principal Financial Officer)
/s/ JOHN J. WELLIK
----------------------------
John J. Wellik Vice President, Secretary and Treasurer January 8, 2002
(Principal Accounting Officer)
</Table>
II-12
<Page>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
FOR THE PERIOD FROM FEBRUARY 27, 1998 (INCEPTION)
TO DECEMBER 31, 1998 AND THE YEARS ENDED DECEMBER 31, 1999 AND 2000
ALLOWANCE FOR DOUBTFUL ACCOUNTS (IN THOUSANDS)
<Table>
<Caption>
ADDITIONS CHARGED TO:
BALANCE AT ---------------------
BEGINNING OF COSTS AND OTHER OTHER BALANCE AT
PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) ITEMS(2) END OF PERIOD
------------ --------- --------- ------------- -------- -------------
1998.......................... $ -- 236 -- (47) 1,242 1,431
1999.......................... 1,431 1,231 -- (902) 982 2,742
2000.......................... 2,742 2,467 -- (2,072) 529 3,666
</Table>
- --------------
(1) Accounts written off.
(2) Beginning balances for purchased businesses.
<Page>
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
1.1* -- Purchase Agreement, dated as of December 14, 2001, among the
Company, Credit Suisse First Boston Corporation, Lehman
Brothers Inc., and SG Cowen Securities Corporation
3.1* -- Certificate of Incorporation of the Company
3.2* -- Bylaws of the Company
4.1* -- Indenture, dated as of December 19, 2001, among the Company,
the Guarantors and U.S. Trust Company of Texas, N.A.
4.2* -- Registration Rights Agreement, dated December 19, 2001, by
and among the Company and the security holders named therein
(the "Registration Rights Agreement"), governing the
Company's outstanding 10% Senior Subordinated Notes due 2011
4.3* -- Global Security, dated as of December 19, 2001, governing
the Company's outstanding 10% Senior Subordinated Notes due
2011
5.1* -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Credit Agreement, dated April 6, 2000, by and among Global
Healthcare Partners Limited and the Governor and Company of
the Bank of Scotland (previously filed as an exhibit to the
Parent Company's Registration Statement on Form S-1
(No. 333-55442) and incorporated herein by reference)
10.2* -- Amended and Restated Credit Agreement, dated as of December
19, 2001, among USP Domestic Holdings, Inc., USPE Holdings
Limited, various financial institutions from time to time
parties thereto as the lenders and Credit Suisse First
Boston, as Administrative Agent
10.3 -- Contribution and Purchase Agreement, dated as of May 11,
1999, by and among USP North Texas, Inc., Baylor Health
Services, Texas Health Ventures Group LLC and THVG/ Health
First L.L.C. (previously filed as an exhibit to the Parent
Company's Registration Statement on Form S-1
(No. 333-55442) and incorporated herein by reference)
10.4 -- Warrant Agreement, dated as of June 18, 1999, among the
Parent Company and Welsh, Carson, Anderson & Stowe VII, L.P.
(previously filed as an exhibit to the Parent Company's
Registration Statement on Form S-1 (No. 333-55442) and
incorporated herein by reference)
10.5 -- Common Stock Purchase Warrant, dated June 1, 1999
(previously filed as an exhibit to the Parent Company's
Registration Statement on Form S-1 (No. 333-55442) and
incorporated herein by reference)
10.6 -- Stock Purchase Warrant, dated March 27, 2000 (previously
filed as an exhibit to the Parent Company's Registration
Statement on Form S-1 (No. 333-55442) and incorporated
herein by reference)
10.7 -- Employment Agreement, dated as of November 1, 2000, by and
between the Parent Company and Donald E. Steen (previously
filed as an exhibit to the Parent Company's Registration
Statement on Form S-1 (No. 333-55442) and incorporated
herein by reference)
10.8 -- Employment Agreement, dated as of March 1, 1999, by and
between the Parent Company and William H. Wilcox (previously
filed as an exhibit to the Parent Company's Registration
Statement on Form S-1 (No. 333-55442) and incorporated
herein by reference)
10.9 -- Parent Company Stock Option and Restricted Stock Purchase
Plan (previously filed as an exhibit to the Parent Company's
Registration Statement on Form S-1 (No. 333-55442) and
incorporated herein by reference)
</Table>
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
10.10 -- 2001 Equity-Based Compensation Plan (previously filed as an
exhibit to the Parent Company's Registration Statement on
Form S-1 (No. 333-55442) and incorporated herein by
reference)
10.11 -- Employee Stock Purchase Plan (previously filed as an exhibit
to the Parent Company's Registration Statement on Form S-1
(No. 333-55442) and incorporated herein by reference)
10.12 -- Form of Indemnification Agreement between the Parent Company
and its directors and officers (previously filed as an
exhibit to the Parent Company's Registration Statement on
Form S-1 (No. 333-55442) and incorporated herein by
reference)
12.1* -- Computation of Ratio of Earnings to Fixed Charges
21.1* -- Subsidiaries of the Company
23.1* -- Consent of KPMG LLP
23.2* -- Consent of KPMG LLP
23.3* -- Consent of KPMG
23.4* -- Consent of Ernst & Young LLP
23.5* -- Consent of Arthur Andersen
23.6* -- Consent of Vinson & Elkins L.L.P. (included in
Exhibit 5.1).
24.1* -- Powers of Attorney (included on the first signature page of
this Registration Statement)
25.1* -- Statement of Eligibility of U.S. Trust Company of Texas,
N.A.
99.1* -- Form of Letter of Transmittal
99.2* -- Form of Notice of Guarantee Delivery
99.3* -- Form of Letter to Registered Holders and DTC Participants
99.4* -- Form of Letter to Clients
</Table>
- --------------
* Filed herewith.