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USMD HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

As used in this Quarterly Report on Form 10-Q, the terms "Holdings," the "Company," "we," "us" and "our" refer to USMD Holdings, Inc. and its consolidated subsidiaries (collectively, "Holdings").

Forward-Looking Statements


This Quarterly Report on Form 10-Q contains, and from time to time management
may make, statements that may constitute "forward-looking statements" within the
meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are not historical facts but
instead represent management's current expectations regarding future events,
many of which, by their nature, are inherently uncertain and outside its
control. The forward-looking statements contained in this Quarterly Report are
based on information as of the date of this Quarterly Report. Many of these
forward-looking statements relate to future industry trends, actions, future
performance or results of current and anticipated initiatives and the outcome of
contingencies and other uncertainties that may have a significant impact on
Holdings' business, future operating results and liquidity. Whenever possible,
Holdings identifies these statements by using words such as "anticipate,"
"believe," "estimate," "continue," "intend," "expect," "plan," "forecast,"
"project" and similar expressions, for future-tense or conditional constructions
("will," "may," "should," "could," etc.). Holdings cautions you that these
statements are only predictions and are not guarantees of future performance.
These forward-looking statements and Holdings actual results, developments and
business are subject to certain risks and uncertainties that could cause actual
results and events to differ materially from those anticipated by these
statements. By identifying these statements for you in this manner, we are
alerting you to the possibility that our actual results may differ, possibly
materially, from the anticipated results indicated in these forward-looking
statements. Holdings assumes no obligation to update or revise any
forward-looking statements, whether as a result of new information or future
events, except as required by law. Many factors that could cause actual results
to differ from those in the forward-looking statements including, among others,
those discussed under "Risk Factors," in Holdings' Registration Statement on
Form S-4 and those described elsewhere in this Quarterly Report on Form 10-Q and
from time to time in Holdings' future reports filed with the Securities and
Exchange Commission.

Executive Overview

Background

USMD Holdings, Inc., a Delaware corporation, was formed on May 7, 2010 to
facilitate the business combination of USMD Inc., a Texas corporation ("USMD"),
Urology Associates of North Texas, L.L.P., a Texas limited liability partnership
("UANT"), and UANT Ventures, L.L.P., a Texas limited liability partnership
("Ventures"). On August 19, 2010, Holdings, USMD, Ventures and UANT entered into
a Contribution and Purchase Agreement (such agreement, the "Original
Contribution Agreement") pursuant to which the entities would combine into a
single integrated health services company (such transaction, the
"Contribution"). Immediately prior to the Contribution, a subsidiary of Ventures
would merge with and into UANT, resulting in UANT becoming a wholly-owned
subsidiary of Ventures, and certain of the USMD shareholders would contribute
all or a portion of their shares of USMD common stock to Ventures in exchange
for partnership interests in Ventures. When the Contribution is consummated,
Ventures would contribute its assets, which would include its equity interests
in USMD and UANT, and the remaining USMD shareholders would contribute their
USMD shares, to Holdings in exchange for shares of Holdings common stock.
Holdings described the Contribution in its Registration Statement on Form S-4
filed with the Securities and Exchange Commission (the "SEC") on December 23,
2010 and declared effective by the SEC on July 25, 2011. On August 23, 2011, the
shareholders of USMD and the partners of Ventures voted on and approved the
Original Contribution Agreement.

Prior to the consummation of the Contribution, on December 1, 2011, Ventures and
Holdings entered into a merger agreement with The Medical Clinic of North Texas,
P.A., a Texas professional association ("MCNT"), and on December 15, 2011,
Ventures and Holdings entered into a merger agreement with Impel Management
Services, LLC, a Texas limited liability company ("Impel"). These merger
agreements provide that subsidiaries of Ventures would merge with and into each
of MCNT and Impel, resulting in these businesses becoming wholly-owned
subsidiaries of Ventures prior to the closing of the Contribution. As a result
of these merger agreements, on February 9, 2012, Holdings, USMD, UANT and
Ventures executed an amendment to the Original Contribution Agreement (the
"Amendment") to reflect, among other changes, that Ventures would contribute to
Holdings, in addition to its equity interests in USMD and UANT, its equity
interests in MCNT and Impel as part of the Contribution. Holdings described
these transactions in a post-effective amendment to its Registration Statement
on Form S-4 filed with the SEC on February 10, 2012, which was declared
effective on April 30, 2012. On May 21, 2012, Ventures, Holdings, MCNT and Impel
executed a corresponding amendment to the merger agreements. On May 29, 2012,
USMD, Ventures, MCNT and Impel voted on and approved the Amendment. On
August 31, 2012, Holdings and the other parties consummated the foregoing
mergers and the Contribution.

For accounting purposes, the Contribution qualifies as a business combination
and was accounted for as a reverse acquisition by USMD into Holdings, a business
combination related shell company. Under reverse acquisition accounting, the
financial statements are issued in the name of the legal parent (Holdings), but
represent a continuation of the accounting acquirer's (USMD) financial
statements, with an adjustment to retroactively restate USMD's legal capital to
reflect the legal capital of Holdings. The assets and liabilities of USMD
continue at their pre-combination carrying values. The assets and liabilities of
Holdings are recorded at fair value



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Introducing Term 25 for the

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at the acquisition date, which, for Holdings, equals their carrying values. The
assets acquired and liabilities assumed from Ventures, UANT, MCNT and Impel
(collectively, the "acquired entities") are recorded at their respective fair
values at the acquisition date. Holdings' results of operations and cash flows
for the nine months ended September 30, 2012 include eight months of results and
cash flows of USMD and one month of results and cash flows of post-combination
Holdings. Holdings' statements of operations and cash flows for the nine months
ended September 30, 2011 include the historical results and cash flows of USMD
for that period.

The Business of Holdings

As of September 1, 2012, Holdings, a physician-led integrated health system, by
and through its subsidiaries, provided health care services to patients in
physician clinics, hospitals, medical clinics and other health care facilities,
including cancer treatment centers and anatomical pathology and clinical
laboratories. In addition, we provide management and operational services to
hospitals, physician practices, cancer treatment centers and lithotripsy (kidney
stone treatment) service providers.

A wholly-owned subsidiary of Holdings is the sole member of a Texas Certified
non-Profit Healthcare Organization that owns and operates a multi-specialty
physician group practice (the "TX CNHO") in the Dallas-Fort Worth, Texas
metropolitan area. Through other wholly owned subsidiaries, we provide
management and operational services to two acute care hospitals in the
Dallas-Fort Worth, Texas metropolitan area and provide management and/or
operational services to ten cancer treatment centers in four states and 24
lithotripsy service providers primarily located in the South Central United
States. We have ownership interests in two hospitals and 22 lithotripsy service
providers and also wholly own and operate two clinical labs in the Dallas-Fort
Worth, Texas metropolitan area and one anatomical pathology lab in Florida. At
September 30, 2012, we employ over 240 physicians and associate practitioners
with 18 different specialties.

The Contribution created an innovative physician-led integrated health system
committed to maintaining the vital doctor-patient relationship that results in
higher quality and more affordable patient care. Holdings' focus and the focus
of the healthcare providers of Holdings is to deliver higher quality, more
convenient, cost effective health care to our patients. Our model brings primary
care and specialist physicians together and places them in their proper role as
leaders of healthcare delivery. This important shift brings quality and patient
satisfaction back to the forefront where it belongs by making our providers
responsible for patient outcomes and the overall clinical experience.

The growth and success of Holdings in the near term largely depends on our
ability to successfully organize and integrate components of the businesses
acquired into the new physician-led integrated health system organization, to
maintain productive relationships with physicians, hospital partners and managed
care payers and to effectively identify and optimize revenue and cost synergies
within our physician-led integrated health system. In addition, our current and
future success is dependent upon our ability to:



• deliver a physician-led, patient-centered integrated health system

Introducing Term 25 for the

         experience focused on continuous improvement;



• optimize clinical operations and exceed industry standard clinical and

         patient satisfaction criteria;



• retain and recruit primary care physicians and specialists in our areas of

focus and areas that expand our integrated health system offerings;

• establish high physician satisfaction with a physician leadership structure;




     •   expand service offerings and integrate those services within the
         physician-led integrated health system;



• increase the number of patients served and patient encounters of Holdings

         and its managed entities;




     •   pursue and execute targeted acquisitions of, investments in, or
         affiliations with complementary healthcare service providers; and




  •   successfully open new facilities or expand existing facilities.


We intend to expand our business in the North Texas service area by developing
or acquiring complementary physician group practices and building or acquiring
ancillary healthcare service providers. In addition, we intend to expand our
business in other strategic service areas by developing strategic alliances with
large integrated practices. We believe that the opportunities to execute our
physician-led integrated health system model and to develop or acquire targeted
physician group practices and ancillary healthcare service providers will place
Holdings in a position to achieve its goal of becoming a national integrated
health services company.

The state of Texas has adopted a legal doctrine known as the "corporate practice
of medicine," which generally prohibits licensed physicians from entering into
partnerships, employee relationships, fee-splitting, or other relationships with
non-physicians where the physician's practice of medicine is in any way directed
by, or fees shared with, a non-physician. Under the Texas corporate practice of
medicine doctrine, it is unlawful for any for-profit corporation to employ
physicians that provide professional medical



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services. In accordance with the laws of the state of Texas, a subsidiary of
Holdings has a long-term management contract to manage the TX CNHO, which
employs or contracts with physicians to provide professional medical services to
the public. Under this arrangement, our physician practice management entity
performs only non-medical management, operational and administrative services,
and is prohibited from offering medical services or exercising influence or
control over the practice of medicine by the physicians employed by the TX CNHO.
We believe that we are in compliance with applicable state laws in relation to
the corporate practice of medicine and fee splitting. However, regulatory
authorities or other parties, including our affiliated physicians, may assert
that, despite these arrangements, we or our physician practice management
subsidiary is engaged in the corporate practice of medicine or that the
contractual arrangements with the TX CNHO constitute unlawful fee splitting. If
we were to be found to be engaged in the corporate practice of medicine, we
could be subject to penalties, the contracts could be found legally invalid and
unenforceable, in whole or in part, or we could be required to restructure our
contractual arrangements with our TX CNHO or its physicians.

Industry Trends

Introducing Term 25 for the

Healthcare Reform


In March 2010, the Patient Protection and Affordable Care Act and the Health
Care and Education Reconciliation Act of 2010 (collectively, the "Healthcare
Reform Law") was enacted. The Healthcare Reform Law is intended to expand health
insurance coverage to uninsured individuals and reform the healthcare delivery
system with the objectives of improving quality and lowering the overall cost of
providing healthcare. Many provisions within the Healthcare Reform Law could
impact us in the future, resulting in potential variances in third-party
reimbursement rates, payer mix and patient encounter volumes. Although certain
provisions of the Healthcare Reform Law are currently in effect, the most
impactful provisions will be implemented in future years and the details of
those provisions will be shaped significantly by future interpretations of the
provisions and execution of those interpretations. Moreover, the Healthcare
Reform Law remains the subject of significant legislative debate, including
possible amendment, modification or repeal. As a result, we cannot predict with
any assurance the ultimate effect of the Healthcare Reform Law and related
regulations and interpretive legislation on Holdings, nor can we provide any
assurance that its provisions will not have a material adverse effect on our
business, financial condition, results of operations or cash flows.

Electronic Health Records


The American Recovery and Reinvestment Act of 2009 ("ARRA") provides for
incentive payments under the Medicare and Medicaid programs for certain
hospitals and physicians that demonstrate meaningful use of certified electronic
health record ("EHR") technology. Physicians and other professionals may be
eligible for either Medicare or Medicaid incentive payments, but not both.
During the nine months ended September 30, 2012 and 2011, we did not recognize
any EHR incentive income. Holdings anticipates that nearly all of its physicians
will meet the criteria required to demonstrate meaningful use during the various
measurement periods in 2012. In connection with the Contribution, Holdings
recorded a $1.0 million other current asset for meaningful use incentive
payments accrued by the acquired entities under a private company optional
accounting policy. Holdings will only recognize 2012 EHR incentive income when
participating physicians have met all criteria required to demonstrate
meaningful use of EHR technology, which we anticipate to be December 31, 2012.
We anticipate that nearly all of our physicians will participate in the
meaningful use program in 2013. We have incurred and will continue to incur both
capital expenditures and operating expenses in order to implement EHR technology
and meet the meaningful use requirements; the timing of recognition of EHR
incentive income does not correlate with those expenditures and expenses. We
believe that the operational benefits of EHR technology, including anticipated
improved clinical outcomes and increased operational and administrative
efficiencies, will contribute to our long-term ability to grow our business and
meet targeted quality objectives.

Economic Uncertainties

The United States continues to be affected by economic uncertainty resulting in unfavorable economic conditions. As a result, the number of unemployed, underemployed and uninsured workers remains significant and exposed to fluctuation. A shift in payer mix to a higher percentage of self-pay and/or government-sponsored programs would have an unfavorable impact on our net patient service revenue and net income.

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Sources of Revenue

Net Patient Service Revenue

We generate net patient service revenue through the provision of healthcare
services to patients and are paid for our services by managed care providers and
commercial insurers, governmental agencies, such as Medicare and Medicaid, and
the patients we serve. We have entered into agreements with the third-party
payers under which we are paid based upon contractually defined criteria that
generally result in reimbursement amounts that are less than our established
billing rates; patient service revenue is recorded net of these contractual
allowances and discounts. To provide for patients' accounts receivable that
could become uncollectible in the future, we establish an allowance for doubtful
accounts to reduce the carrying value of such receivables to their estimated net
realizable value. Accordingly, net patient service revenue is reported at the
net amount expected to be received.

Net patient service revenue is primarily affected by payer mix, patient encounter volume, the mix of services provided to the patients and estimated collections.


Prior to the Contribution, neither Holdings nor USMD, the historical accounting
entity, had patient services revenue. Holdings' patient service revenue before
the provision for doubtful accounts by payer is summarized in the table that
follows.



                                                               Three and Nine Months
                                                             Ended September 30, 2012
                                                                                Ratio of
                                                                                 Patient
                                                                                 Service
                                                            Amount               Revenue
Medicare                                                 $      4,052                 29.8 %
Medicaid                                                           92                  0.7
Managed care and commerical payers                              9,367       

68.9

Self-pay                                                          343                  2.5

Patient service revenue before provision for
doubtful accounts                                              13,854       

102.0

Patient service revenue provision for doubtful
accounts                                                         (268 )               (2.0 )

Net patient service revenue                              $     13,586                100.0 %



Management Services Revenue

We primarily generate management services revenue through services provided to
USMD at Arlington and USMD at Fort Worth Management fees are based on a
percentage of each hospital's adjusted net patient service revenues, as
contractually defined. Hospital net patient service revenue depends on a variety
of factors, such as surgical case volume, the case mix or intensity of
utilization of services and the mix of third-party payer sources. We also earn
management services revenue through the provision of broad-based management and
clinical services to cancer treatment centers and lithotripsy service providers.
Management fees are based on defined criteria, generally a percentage of
collections, and revenue is recognized as services are provided.

We provide managed entities with management, information technology, operations
and revenue cycle staff, or a subset of those services, and the entities pay us
for the labor costs associated with staffing these functions.

Lithotripsy Services Revenue


We recognize lithotripsy services revenue through the provision of lithotripsy
services to hospitals and other healthcare entities by the lithotripsy entities
Holdings consolidates. We serve as the general partner or managing member and
also have an ownership interest in these consolidated entities. We typically
provide these lithotripsy services to our hospital, ambulatory surgery center
and physician office clients based on contracted fee-for-service arrangements.



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Key Developments


• On June 19, 2012, USMD pursuant to a private placement memorandum offered

to certain qualified investors shares of common stock of USMD. Prior to

the closing of the Contribution, USMD completed the offering and issued

shares of common stock in exchange for aggregate investment, proceeds of

$980,000 received from investors. The proceeds of the offering provided

additional working capital for the Company and increased the number of

         record holders of common stock of USMD.



• On August 31, 2012, in connection with the Contribution, Holdings and all

of its wholly-owned subsidiaries entered into agreements with a consortium

of lenders for a six month revolving credit facility of up to $10 million

         and term loan facilities of $21 million. On the same day, the term loan
         proceeds were used to pay off long-term debt and capital leases of the
         acquired entities and pay down a portion of USMD related party debt.



• On August 31, 2012, in connection with the Contribution, the former owners

         of MCNT and UANT, all of whom are physicians entered into ten year
         employment agreements with the TX CNHO.



• On August 31, 2012, Holdings became listed on the NASDAQ securities

         exchange under the ticker symbol "USMD."




     •   On August 31, 2012, all conditions precedent to the closing of the
         Contribution were met and the initial closing of the Contribution
         occurred.




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Results of Operations

Effects of Reverse Acquisition


As a result of the August 31, 2012 Contribution, which was accounted for as a
reverse acquisition by USMD into Holdings, results of operations and cash flows
have limited comparability to prior periods. Holdings' results of operations and
cash flows for the nine months ended September 30, 2012 include eight months of
results of operations and cash flows of USMD and one month of results of
operations and cash flows of post-combination Holdings. Holdings' statements of
operations and cash flows for the nine months ended September 30, 2011 include
the historical results and cash flows of USMD for that period.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

The following table summarizes Holdings' results of operations for the periods indicated and is used in the discussions that follow (in thousands):



                                               Three Months Ended September 30,                Three Months Variance
                                               2012                       2011                     2012 vs. 2011
                                        Amount        Ratio        Amount        Ratio         Amount           Ratio
Revenues:
Net patient service revenue            $ 13,586         53.1 %    $     -           0.0 %    $   13,586           100.0 %
Management services revenue               6,138         24.0 %       5,890         37.9 %           248             4.2 %
Lithotripsy revenue                       5,869         22.9 %       5,948         38.3 %           (79 )          -1.3 %
Other operating revenue                      -           0.0 %       3,690  

23.8 % (3,690 ) -100.0 %


Net operating revenue                    25,593        100.0 %      15,528        100.0 %        10,065            64.8 %

Operating expenses:
Salaries, wages and employee
benefits                                 14,922         58.3 %       5,454         35.1 %         9,468           173.6 %
Medical supplies and services
expense                                   1,785          7.0 %          90          0.6 %         1,695          1883.3 %
Provision for doubtful accounts              16          0.1 %          (1 )        0.0 %            17         -1700.0 %
Other operating expenses                  5,997         23.4 %       1,903         12.3 %         4,094           215.1 %
Depreciation and amortization               797          3.1 %         205          1.3 %           592           288.8 %

                                         23,517         91.9 %       7,651         49.3 %        15,866           207.4 %

Income from operations                    2,076          8.1 %       7,877         50.7 %        (5,801 )         -73.6 %
Other income (expense), net                 602          2.4 %         200          1.3 %           402           201.0 %

Income before (provision) benefit
for income taxes                          2,678         10.5 %       8,077  

52.0 % (5,399 ) -66.8 % (Provision) benefit for income taxes 145 0.6 % (1,587 ) -10.2 % 1,732 -109.1 %


Net income                                2,823         11.0 %       6,490         41.8 %        (3,667 )         -56.5 %
Less: net income attributable to
noncontrolling interests                 (3,183 )      -12.4 %      (3,716 )      -23.9 %           533           -14.3 %

Net income (loss) attributable to
USMD                                   $   (360 )       -1.4 %    $  2,774         17.9 %    $   (3,134 )        -113.0 %



Revenues

Net operating revenue increased 64.8% to $25.6 million for the three months ended September 30, 2012, from $15.5 million for the same period in 2011, due primarily to increases in net patient services revenue related to the Contribution offset by a $3.7 million decline in other operating revenue.


Management services revenue includes revenue earned through the provision of
management and staffing services to USMD's managed entities and increased 4.2%
to $6.1 million for the three months ended September 30, 2012 from $5.9 million
for the same period in 2011. The Contribution resulted in a $0.7 million
increase while USMD Hospital Division management services revenue increased $0.1
million as a result of inflation adjustments to the reimbursable management
costs associated with the two managed hospitals. The USMD CTC Division
management services revenue decreased $0.5 million. The decrease in the USMD CTC
Division coincides with a 21.6% decline in treatments for the three months ended
September 30, 2012 compared to the same period in 2011.

Other operating revenue for the three months ended September 30, 2011 includes a $3.7 million gain on early termination of USMD CTC Division's management contract by Willowbrook Cancer Treatment Center, LLC ("Willowbrook").

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Operating Expenses


Salaries, wages and employee benefits increased 173.6% to $14.9 million for the
three months ended September 30, 2012 from $5.5 million for the same period in
2011. The increase is primarily due to a $9.8 million increase related to the
business combination and a $0.3 million increase related to the expansion of
centralized financial reporting staff and other departments at the corporate
offices offset by a $0.3 million decrease in share-based payment expense and a
$0.4 million decrease in 2012 variable bonuses accrued.

Medical supplies and services expense increased due to the Contribution.


Other operating expenses consist primarily of professional fees, purchased
services, facilities expense, travel expense and other expense. Other operating
expenses increased 215.1% to $6.0 million for the three months ended September
30, 2012 from $1.9 million for the same period in 2011 primarily due to a $4.4
million increase related to the business combination offset by a $0.3 million
decrease in purchased services related to the filing of the Registration
Statement on Form S-4 in 2011.

Depreciation and amortization expense increased due to the Contribution.

Other Income (Expense)


Other income increased 201.0% to $0.6 million for the three months ended
September 30, 2012 from $0.2 million for the same period in 2011 as equity in
income of nonconsolidated affiliates increased $0.3 million primarily from the
USMD Hospital Division. There was also a $0.1 million increase related to the
Contribution.

The income tax provision decreased $1.7 million to a $0.1 million benefit for
the three months ended September 30, 2012, from $1.6 million for the same period
in 2011. USMD's effective tax rates were (5.4%) and 19.6% for the three months
ended September 30, 2012 and 2011, respectively.

Net income attributable to noncontrolling interests decreased 14.3% to $3.2
million for the three months ended September 30, 2012, from $3.7 million for the
same period in 2011, due to a $0.3 million decrease in net income of the
consolidated lithotripsy entities and a $0.2 million decrease related to the
Contribution.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

The following table summarizes Holdings results of operations for the periods indicated and is used in the discussions that follow (in thousands):



                                                Nine Months Ended September 30,                 Nine Months Variance
                                               2012                        2011                     2012 vs. 2011
                                        Amount        Ratio        Amount         Ratio         Amount          Ratio
Revenues:
Net patient service revenue            $ 13,586         28.1 %    $      -           0.0 %    $    13,586         100.0 %
Management services revenue              17,845         36.9 %       17,594         46.5 %            251           1.4 %
Lithotripsy revenue                      16,869         34.9 %       16,519         43.7 %            350           2.1 %
Other operating revenue                      -           0.0 %        3,690          9.8 %         (3,690 )      -100.0 %

Net operating revenue                    48,300        100.0 %       37,803        100.0 %         10,497          27.8 %

Operating expenses:
Salaries, wages and employee
benefits                                 25,643         53.1 %       15,143         40.1 %         10,500          69.3 %
Medical supplies and services
expense                                   1,981          4.1 %          290          0.8 %          1,691         583.1 %
Provision for doubtful accounts              88          0.2 %           28          0.1 %             60         214.3 %
Other operating expenses                 10,191         21.1 %        6,348         16.8 %          3,843          60.5 %
Depreciation and amortization             1,334          2.8 %          715          1.9 %            619          86.6 %

                                         39,237         81.2 %       22,524         59.6 %         16,713          74.2 %

Income from operations                    9,063         18.8 %       15,279         40.4 %         (6,216 )       -40.7 %
Other income (expense), net               1,076          2.2 %          718          1.9 %            358          49.9 %

Income before provision for income
taxes                                    10,139         21.0 %       15,997         42.3 %         (5,858 )       -36.6 %
Provision for income taxes                 (375 )       -0.8 %       (2,411 

) -6.4 % 2,036 -84.4 %


Net income                                9,764         20.2 %       13,586         35.9 %         (3,822 )       -28.1 %
Less: net income attributable to
noncontrolling interests                 (9,171 )      -19.0 %      (10,040 )      -26.6 %            869          -8.7 %

Net income attributable to USMD$ 593 1.2 % $ 3,546

         9.4 %    $    (2,953 )       -83.3 %



Revenues

    Net operating revenue increased 27.8% to $48.3 million for the nine months
ended September 30, 2012, as compared to the same period in 2011, due primarily
to increases in net patient services revenue related to the Contribution offset
by a $3.7 million decline in other operating revenue.

Management services revenue includes revenue earned through the provision of
management and staffing services to Holdings' managed entities and increased
1.4% to $17.8 million for the nine months ended September 30, 2012 from $17.6
million for the same period in 2011. The Contribution resulted in a $0.7 million
increase while USMD Hospital Division management services revenue increased $0.5
million as a result of inflation adjustments to the reimbursable management
costs associated with the two managed hospitals. The USMD CTC Division
management services revenue decreased $0.9 million. The decrease in the USMD CTC
Division coincides with a 8.0% decline in treatments for the nine months ended
September 30, 2012 compared to the same period in 2011.

Lithotripsy revenue consists of revenue of the consolidated lithotripsy
entities, which increased 2.1%, or $0.4 million, to $16.9 million for the nine
months ended September 30, 2012 from $16.5 million for the same period in 2011.
This increase in revenue coincides with the lithotripsy entity case count
increase of 2.4% as compared to the same period in 2011.

Other operating revenue for the nine months ended September 30, 2011 includes a $3.7 million gain on early termination of USMD CTC Division's management contract by Willowbrook.




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Operating Expenses


Salaries, wages and employee benefits increased 69.3% to $25.6 million for the
nine months ended September 30, 2012 from $15.1million for the same period in
2011 due primarily to a $9.8 million increase related to the Contribution. The
remaining $0.7 million increase is due to a $0.4 million increase related to the
expansion of centralized financial reporting staff and other departments at the
corporate offices and a $0.3 million increase in employee health benefits.

Medical supplies and services expense increased due to the Contribution.

Provision for doubtful accounts increased due to the Contribution.


Other operating expenses consist primarily of professional fees, purchased
services, facilities expense, travel expense and other expense. Other operating
expenses increased $3.8 million to $10.2 million for the nine months ended
September 30, 2012 from $6.3 million for the same period in 2011 primarily due
to a $4.4 million increase related to the Contribution offset by a $1.0 million
decrease in professional fees related to the filing of the Registration
Statement on Form S-4 in 2011, a $0.2 million increase in other expenses and a
$0.2 increase in facilities expenses

Depreciation and amortization expense increased due to the Contribution.

Other Income (Expense)


Other income increased 49.9% to $1.1 million for the nine months ended
September 30, 2012 from $0.7 million for the same period in 2011. Equity in
income of nonconsolidated affiliates increased $0.2 million, primarily from the
USMD Hospital Division, offset by a $0.1 million decrease in impairment charges
primarily related to a partial recovery of an investment. There was also a
$0.1 million increase related to the Contribution.

The income tax provision decreased $2.0 million to $0.4 million for the nine
months ended September 30, 2012, from $2.4 million for the same period in 2011.
Holdings effective tax rates were 3.6% and 15.0% for the nine months ended
September 30, 2012 and 2011, respectively.

Net income attributable to noncontrolling interests decreased $0.9 million to
$9.1 million for the nine months ended September 30, 2012, from $10.0 million
for the same period in 2011 due to a $0.7 decrease related to a decline in net
income of the consolidated lithotripsy entities and $0.2 decrease related to the
Contribution.
Wordcount: 4985



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Introducing Term 25 for the