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UGHS > SEC Filings for UGHS > Form 10-K on 21-Oct-2013All Recent SEC Filings

Show all filings for UNIVERSITY GENERAL HEALTH SYSTEM, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for UNIVERSITY GENERAL HEALTH SYSTEM, INC.


21-Oct-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") begins with an executive overview which provides a general description of our company today, 2012 in review, the plans and objectives of our management for future operations and our outlook for 2013. Next, we analyze the results of our operations for the last two years, including the trends in our business. Then we review our cash flows and liquidity and capital resources. We conclude with an overview of our critical accounting judgments and estimates and a summary of recently issued accounting pronouncements.

The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in "Item 8. Financial Statements and Supplementary Data." Our discussion includes various forward-looking statements about our industry, environmental laws, regulations, risks and our future results. These statements are based on certain assumptions we consider reasonable. For information about these assumptions, you should refer to the section entitled "Item 1A. Risk Factors - Forward-Looking Statements."

Executive Overview

In 2012, we completed several acquisitions that enhance our capabilities in existing markets and in new markets. We acquired South Hampton Community Hospital in Dallas, Texas in December 2012, which we believe provides us a growth opportunity in a new market, where we can leverage the established market presence of South Hampton Community Hospital and our expertise to expand services and pursue other initiatives that we believe will result in attractive growth. Additionally, we acquired Baytown Endoscopy Center, LLC, Diagnostic Imaging and Physical Therapy Center, Kingwood Diagnostic and Rehabilitation Center, Robert Horry Center for Sports and Physical Rehabilitation, Baytown Sleep Evaluation Center and Baytown Diagnostic Imaging Center.

2012 in Review

In 2012 the economy continued to recover from the deep recession that began at the end of 2007. It was marked by signs of a modest recovery from the United States and global economic recession and turmoil in the financial and health care and housing markets that began in 2008. Despite these challenging economic conditions, we integrated the acquisition of South Hampton Community Hospital and acquired several related healthcare services located in Houston, Texas. We continued to execute our business strategy, which is discussed in detail in Item 1. Business-Business Strategy, in this Form 10-K.

Our strategy for 2012 was to build on our 2011 achievements and to pursue revenues and earnings growth as the economy stabilized. Reflecting the successful implementation of our business acquisition strategies, total revenues for the year increased 59.0%. The revenues increase was driven by the increases in admissions, surgeries and adjusted patient days of 6.0%, 7.9% and 9.5%, respectively. We operated throughout the year as a financially sound company. The significant increase in net patient service revenues was primarily the result of recent acquisitions, including the nine hospital outpatient departments (HOPDs) acquired by University General Hospital during 2012. These HOPDs contributed to additional revenues of $8.7 million for the year ended December 31, 2012. In addition, the acquisitions of TrinityCare, Autimis and Sybaris contributed to additional revenues of approximately $6.4 million over the previous partial year revenues of 2011 for these segments.

The senior living properties reported an overall occupancy of 93.1%. This is a favorable comparison to the national average as reported by the National Investment Center for the Senior Housing and Care Center (NIC) which reports similar facilities with an overall average occupancy rate of less than 89%.

2013 Outlook and Trends

Our strategy in 2013 will be focused on building on our 2012 achievements and pursuing additional acquisitions and earnings growth. We plan to capitalize on opportunities created by the current regulatory and reimbursement environment through acquisitions and expansions to create an integrated, physician-centric, health care delivery system. Further, we will continue our commitment to providing superior patient care with greater efficiency and lower operating cost. We also continue to focus our business strategy on retention of our employees, efforts to improve physician and employee satisfaction and targeted investments in new technologies, new service lines and capital improvements at our facilities. In addition, we are committed to improve in costs of revenues and operating expenses. Our objective for 2013 is to focus on expanding into the Dallas market through University General Hospital Dallas, further expanding our presence in the Houston market, operating high-quality senior living and memory care communities, increasing occupancy and improving the operating efficiency of our senior care communities, restructuring certain mortgages and lender relationships to further stabilize our revenue stream and cash flow, seeking strategic investments in attractive real estate opportunities, improving the operating efficiency of our corporate operations, and reducing our operational financial risk. We expect these efforts, among other factors, will result in improved financial performance and gains in 2013.


Table of Contents

Results of Operation

Key Performance Indicators

We manage our business by monitoring certain key performance indicators. We believe our most important key performance indicators are:

Census

Census is defined as the number of units of patient rooms occupied or rented at a given time.

Average Daily Census

For our Hospital Segment, the average daily census, or ADC, is the sum of the patient rooms occupied at midnight, divided by the number of days in that period. For our Senior Living Segment, the ADC is the sum of rented units for each day over a period of time, divided by the number of days in that period.

Occupancy

Occupancy is measured as the percentage of average daily census relative to the total number of patient rooms or units available for occupancy in the period.

Adjusted patient days

Adjusted patient days have been calculated based on a revenue-based formula of multiplying actual patient days by the sum of gross inpatient revenues and gross outpatient revenues and dividing the result by gross inpatient revenues for each hospital. Adjusted patient days is a statistic (which is used generally in the industry) designed to communicate an approximate volume of service provided to inpatients and outpatients by converting total patient revenues to a number representing adjusted patient days.


Table of Contents

The following table contains our consolidated and segments results of operations for 2012 and 2011:

                                                                         Year Ended December 31, (1)
                                                                 2012                                    2011
                                                     Amount           % of Revenues           Amount          % of Revenues          Variance
Revenues
Hospital                                          $ 102,764,871                 90.8 %     $ 67,144,396                 94.3 %     $ 35,620,475
Senior living                                         7,946,793                  7.0          3,564,514                  5.0          4,382,279
Support services                                      2,511,594                  2.2            465,639                  0.7          2,045,955

Total Revenues                                      113,223,258                100.0         71,174,549                100.0         42,048,709
Operating expenses
Salaries, wages and benefits                         39,627,334                 35.0         29,157,012                 41.0         10,470,322
Medical supplies                                     16,194,606                 14.3         13,202,829                 18.5          2,991,777
Management fees (includes related party fees of
$0 and $461,814, respectively)                               -                                5,346,456                  7.5         (5,346,456 )
General and administrative expenses (includes
related party expenses of $1,921,501 and
$5,944,441, respectively)                            32,766,205                 28.9         18,078,907                 25.4         14,687,298
Gain on extinguishment of liabilities                (3,644,068 )               (3.2 )       (4,441,449 )               (6.2 )          797,381
Depreciation and amortization (includes related
party expenses of $685,162 and $685,162,
respectively)                                         9,215,713                  8.1          7,336,710                 10.3          1,879,003

Total operating expenses                             94,159,790                 83.2         68,680,465                 96.5         25,479,325

Operating income                                     19,063,468                 16.8          2,494,084                  3.5         16,569,384
Other income (expense)
Interest expense, net of interest income of
$85,000 and $67,068 (includes related party
interest expense $2,289,287 and $2,513,922)          (6,111,582 )               (5.4 )       (4,938,603 )               (6.9 )       (1,172,979 )
Other income (expense)                                 (381,026 )               (0.3 )          500,000                  0.7           (881,026 )
Direct investor expense                              (6,853,356 )               (6.1 )               -                    -          (6,853,356 )
Change in fair market value of derivatives           (4,937,170 )               (4.4 )               -                    -          (4,937,170 )

Income (loss) before income tax                         780,334                  0.7         (1,944,519 )               (2.7 )        2,724,853
Income tax expense                                    4,564,195                  4.0            443,862                  0.6          4,120,333

Income (loss) before noncontrolling interest         (3,783,861 )               (3.3 )       (2,388,381 )               (3.4 )       (1,395,480 )
Net income (loss) attributable to
noncontrolling interests                                363,531                  0.3           (182,814 )               (0.3 )          546,345

Net income (loss) attributable to Company         $  (3,420,330 )               (3.0 )%    $ (2,571,195 )               (3.6 )%    $   (849,135 )

Less: Cash dividend-Convertible Preferred C
Stock                                                   (46,921 )               (0.0 )               -                    -             (46,921 )
Less: Accretion non-cash dividend-Convertible
Preferred C Stock                                      (512,190 )               (0.5 )               -                    -            (512,190 )

Net income (loss) attributable to common
shareholders                                      $  (3,979,441 )               (3.5 )%    $ (2,571,195 )               (3.6 )%    $ (1,408,246 )

(1) Percentages may not foot due to rounding.

Discussion of Consolidated Results of Operations

Our revenues for 2012 increased $42.0 million, or 59.0%, to $113.2 million as compared to $71.2 million for the year ended December 31, 2011. The revenues increase was primarily attributable to an 8.3% increase in our average daily census. The average daily census for the years ended December 31, 2012 was 39 (or 57% occupancy) as compared to 36 (or 52% occupancy) for the years ended December 31, 2011. In addition, the patient days increased by 1,452 days to 13,151 from 11,699, or 12.4% increase, compared to the prior year. The adjusted patient days increased by 2,257 days to 26,055 from 23,798, or 9.5% increase, compared to the prior year. This increase in net patient revenues was also driven by the continued development of the physician-centric, integrated health delivery system strategy. The significant increase in net patient service revenues was primarily the result of recent acquisitions, including the hospital outpatient departments (HOPDs) during 2012 contributed to additional revenues of $8.7 million for the year ended December 31, 2012. In addition, the acquisitions of TrinityCare, Autimis and Sybaris contributed to additional revenues of approximately $6.4 million over the previous partial year revenues of 2011 for these segments.

Salaries, wages and benefits for the year ended December 31, 2012 increased approximately $10.4 million, or 35.6%, to $39.6 million from $29.2 million for the year ended December 31, 2011. As of December 31, 2012, we had approximately 782 full-time and part-time employees compared to approximately 619 as of December 31, 2011. The number of full-time and part-time employees, approximately 26.3% as compared to the prior year, was due primarily to an increase acquisitions during 2012. As a percentage of revenues, salaries, wages and benefits decreased to 35.0% in 2012 from 41.0% in 2011. The decrease in the salaries, wages and benefits rate in 2012 over 2011 primarily resulted from more efficient management of payroll in response to a challenging economic environment.

Medical supplies expense in 2012 increased approximately $3.0 million, or 22.7%, to $16.2 million from $13.2 million 2011. On an APD basis, medical expenses in 2012 increased approximately by 10.5% or $612 per APD from $554 per APD in 2011. In addition, surgeries for the year ended December 31, 2012 were 7,518 compared to 6,968 for the prior year. As a percentage of revenues, our medical supplies expense decreased to 14.3% in 2012 as compared to 18.5% in 2011. This was due to our continued focus on supply chain efficiencies during the current year.


Table of Contents

During the first quarter of 2012, the total management fees for free-standing emergency rooms in 2011 was $5.3 million. We terminated all of our remaining management services agreements with non-University General Health System emergency room service providers.

General and administrative ("G&A") expenses in 2012 increased approximately $14.8 million, or 82.2%, to $32.8 million from $18.0 million 2011. The increase in G&A expense was primarily comprised of legal fees, contract services, professional fees, repairs and maintenance, penalties and marketing fees. As a percentage of revenues, G&A expenses increased to 29.0% in 2012 from 25.4% in 2011.

We settled certain accounts payable with vendors and reduced the accounts payable owed to those vendors. In 2012 and 2011, we recognized a gain on extinguishment of liabilities of $3.6 million and $4.4 million, respectively. In 2012, in connection with the cancellation of obligations to a debt holder, we recognized a gain of $2.9 million representing the portion of the principal balance, accrued interest, taxes and penalties due on a master equipment lease agreement and two promissory notes that have been extinguished in accordance with the statute of limitations. We recognized $0.7 million in relation to accounts payable settlement. In 2011, in connection with the Siemens settlement, we recognized a gain of $2.3 million and $2.1 million was related to accounts payable settlement.

Depreciation and amortization expense in 2012 increased approximately $1.9 million, or 26.0%, to $9.2 million as compared to $7.3 million in 2011. The increase in depreciation and amortization expense primarily resulted from the amortization expense of debt issuance costs, customer relationship, tradename, software and non-compete intangibles from the final valuation acquisitions of Autimis and TrinityCare in 2012, offset by some assets being fully depreciated in the current year as compared to prior year.

Net interest expense was $6.1 million in 2012 as compared to $4.9 million in 2011. Interest expense is primarily comprised of interest on borrowings under the Revolving Credit Facility, amortization of debt issue costs, interest on financing lease obligations, related party notes and debt obligations. The increase in interest expense in the current year, as compared to the prior year, was attributable to an increase in our outstanding debt balance and debt assumed from the acquisitions.

We are subject to a tax mandated by the State of Texas based on a defined calculation of gross margin (the "margin tax"). The margin tax is calculated by applying a tax rate to a base that considers both revenue and expenses and therefore has the characteristics of an income tax. As a result, we recorded $0.4 million and $0.4 million in state income tax expense for the years ended December 31, 2012 and 2011, respectively.

Our provision for income taxes was $4.2 million in 2012, which resulted in an effective tax rate of 528.3%. Our provision for income taxes was significantly impacted by direct investor expense of $6.8 million, change in fair market value of derivatives of $4.9 million and fines and penalties of $0.8 million, which were non-deductible. In 2011, we did not recognize tax benefit because the potential tax benefit is offset by a valuation allowance of the same amount.

As fully described in Notes 12 and 14 to the Consolidated Financial Statements, the Company issued preferred stock and the related common stock warrant in May 2012, which do not have readily determinable fair values and therefore require significant management judgment and estimation. The Company uses the Binomial pricing model to estimate the fair value of warrant and preferred stock conversion features at the end of each applicable reporting period. Changes in the fair value of these derivatives during each reporting period are included in the statement of income. As a result, the total direct investor expense and change in fair market value of derivatives were approximately $6.9 million and $4.9 million in 2012, which directly reduced the net income attributable to the Company.

As a result of the foregoing, our net loss attributable to the Company was $3.4 million for 2012 as compared to a net loss of $2.6 million for 2011.


Table of Contents

Discussion of Segment Results of Operations

Hospital

Our net patient service revenues in 2012 increased $35.7 million, or 53.1%, to $102.8 million as compared to $67.1 million in 2011. The revenues increase was primarily attributable to an 8.3% increase in our ADC. The ADC for the years ended December 31, 2012 was 39 (or 57% occupancy) as compared to 36 (or 52% occupancy) for the year ended December 31, 2011. In addition, the patient days increased by 1,452 days to 13,151 from 11,699, or 12.4% increase, compared to the prior year. The adjusted patient days increased by 2,257 days to 26,055 from 23,798, or 9.5% increase, compared to the prior year. This increase in net patient revenues was also driven by the continued development of the physician-centric, integrated health delivery system strategy. The significant increase in net patient service revenues was primarily the result of recent acquisitions, including the HOPDs acquired during 2012, which contributed to additional revenues of $8.7 million for the year ended December 31, 2012.

Our provision for doubtful accounts in 2012 increased $9.1 million to 8.1% of net revenue before the provision for doubtful accounts as compared to 2.0% of net revenue before the provision for doubtful accounts in 2011. This change was primarily due an increase in self-pay patients gross revenue of $7.9 million. In addition, the increase in provision for doubtful accounts was also contributed by increase in deductibles and co-insurance.

We adopted the provisions of Accounting Standards Update No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities ("ASU 2011-07"), during the period ended March 31, 2012. ASU 2011-07 requires health care entities to change the presentation of the statement of income by reclassifying the provision for doubtful accounts from an operating expense to a deduction from patient service revenues. All periods presented have been reclassified in accordance with ASU 2011-07.

Our days revenues outstanding were 73 days at December 31, 2012 as compared to 59 days at December 31, 2011. To calculate our day's revenues outstanding, we divide our average accounts receivable net of allowance for doubtful accounts by our net revenues per day. Our net revenues per day is calculated by dividing our revenues for the periods by the number of calendar days in the periods. The increase in days revenues outstanding due to a significant increase in revenues and accounts receivable during current year as a result of the acquisitions in 2012.

Salaries, wages and benefits in 2012 increased approximately $3.1 million, or 10.9%, to $29.6 million from $26.7 million in 2011. This was primarily due to acquisitions. As of December 31, 2012, we had approximately 443 full-time equivalent employees compared to approximately 274 full-time equivalent employees as of December 31, 2011. As a percentage of revenues, salaries, wages and benefits decreased to 28.8% in 2012 from 39.8% in 2011. The decrease in the salaries, wages and benefits rate in 2012 over 2011 was primarily due to more efficient management of payroll in response a challenging economic environment.

Medical supplies expense in 2012 increased approximately $3.0 million, or 22.7%, to $16.2 million from $13.2 million 2011. On an APD basis, medical expenses in 2012 increased approximately by 10.5% or $612 per APD from $554 per APD in 2011. In addition, surgeries for the year ended December 31, 2012 were 7,518 compared to 6,968 for the prior year. As a percentage of revenues, our medical supplies expense decreased to 15.8% in 2012 as compared to 19.7% in 2011. This was due to our continued focus on supply chain efficiencies during the year.

During the first quarter of 2012, the total management fees for free-standing emergency rooms in 2011 was $5.3 million. We terminated all of our remaining management services agreements with free-standing emergency room service providers.

General and administrative expenses in 2012 increased approximately $17.5 million, or 101.2%, to $34.8 million from $17.3 million in 2011. As a percentage of revenues, G&A expenses increased to 33.9% in 2012 from 25.8% in 2011. The increase in amount of G&A expenses was primarily comprised of legal fees, contract services, professional fees, repairs and maintenance, penalties fees and marketing fees, coupled with acquisitions in 2012.

Depreciation and amortization expense in 2012 decreased by $0.6 million, or 9.0%, to $6.1 million as compared to $6.7 million in 2011. The decrease in depreciation and amortization expense resulted from a large portion of assets being fully depreciated in the current year as compared to the prior year period.


Table of Contents

Net interest expense was $4.9 million in 2012 as compared to $4.3 million in 2011. Interest expense is primarily comprised of interest on borrowings under the Revolving Credit Facility, amortization of debt issue costs, interest on financing lease obligations, related party notes and debt obligations. The increase in interest expense was due to a higher average outstanding amount on notes. For a further discussion of our debt and corresponding interest rate, see "Liquidity and Capital Resources."

Operating income of the hospital segment was approximately $19.6 million for the current year as compared to the operating income of $2.4 million for the prior year. The increase in operating income was due to improved leveraging of expenses from significant increase in revenues. In addition, the increase in net operating expense was driven primarily by increase in G&A expenses and medical supplies, offset by no incurrence of management fees, decreases in depreciation and amortization expenses and additional gain on extinguishment of liabilities in 2012 as compared to the prior year.

Senior Living

In comparison to the same period of the previous year, senior living did not have operations for the first six months of 2011.

Senior living net revenues in 2012 were approximately $7.9 million. This reflects average revenue per unit occupied of $3,096. Net revenues for the six months from the acquisition date to the year ended December 31, 2011 were approximately $3.6 million. This reflects average revenue per unit occupied of $2,987. These are blended rates of assisted living dominant facilities which include independent living and memory care units. The senior living properties reported continued stable occupancy, with an overall average occupancy in excess of 93.1% in 2012 and 89.2% in 2011. Overall occupancy and revenues were not negatively impacted by the significant downturn in the macroeconomic environment, including the high unemployment levels and poor housing markets which affect private pay occupancy.

Salaries and benefit expense in 2012 was approximately $3.0 million, G&A expense was $2.8 million, depreciation and amortization was $2.6 million and interest expenses was $1.3 million. Net operating income before depreciation and amortization and interest expense was approximately $2.1 million.

For the six months ended December 31, 2011, salaries and benefit expense was $1.6 million, G&A expense was $1.4 million, depreciation and amortization was $0.6 million and interest expenses was $0.7 million. Net operating income before depreciation and amortization and interest expense was approximately $1.2 million.

The increase in depreciation and amortization expense in 2012 over 2011 was primarily resulted from the amortization expense of customer relationship, tradename, software and non-compete agreement which was obtained from the final valuation report for the acquisition of TrinityCare.

Support Services

In comparison to the same period of the previous year, support services did not have operations for the first six months of 2011.

Support services segment revenues in 2012 were approximately $2.5 million. The net operations loss was approximately $0.1 million. The revenues for the six months from acquisition date to the year ended December 31, 2011 were approximately $0.5 million, the net operating expense was $0.5 million. The income from operations was approximately $9,000. The increase in revenues was due to increase in new number of clients, coupled with the new acquisitions in 2012.

The Company performs an impairment test for goodwill annually each June, or more frequently if indicators of potential impairment exist. The Company's goodwill impairment test involves a comparison of the fair value of each of its reporting units with its carrying amount. Fair value is estimated using discounted cash flows and a discount rate based on the weighted average cost of capital of the reporting unit.

The fair value of the Autimis reporting unit did not substantially exceed its carrying value as of its June 2012 annual impairment test.


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