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EX-32 - EXHIBIT 32 - Alliance HealthCare Services, Inc | a2195102zex-32.htm |
EX-31 - EXHIBIT 31 - Alliance HealthCare Services, Inc | a2195102zex-31.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 2009
Commission File Number: 1-16609
ALLIANCE HEALTHCARE SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of incorporation or organization) |
33-0239910 (IRS Employer Identification Number) |
100 Bayview Circle
Suite 400
Newport Beach, California 92660
(Address of principal executive office)
(949) 242-5300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 2009:
Common Stock, $.01 par value, 51,867,533 shares
ALLIANCE HEALTHCARE SERVICES, INC.
FORM 10-Q
September 30, 2009
Index
1
ALLIANCE HEALTHCARE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
|
December 31, 2008 | September 30, 2009 | ||||||
---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 73,305 | $ | 129,739 | ||||
Accounts receivable, net of allowance for doubtful accounts |
67,147 | 68,146 | ||||||
Deferred income taxes |
17,719 | 17,719 | ||||||
Prepaid expenses and other current assets |
10,272 | 7,082 | ||||||
Other receivables |
7,902 | 5,215 | ||||||
Total current assets |
176,345 | 227,901 | ||||||
Equipment, at cost |
836,842 |
846,939 |
||||||
Less accumulated depreciation |
(479,609 | ) | (507,224 | ) | ||||
Equipment, net |
357,233 | 339,715 | ||||||
Goodwill |
193,430 |
194,243 |
||||||
Other intangible assets, net |
110,720 | 102,806 | ||||||
Deferred financing costs, net |
7,173 | 5,688 | ||||||
Other assets |
38,822 | 31,964 | ||||||
Total assets |
$ | 883,723 | $ | 902,317 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 21,468 | $ | 12,407 | ||||
Accrued compensation and related expenses |
18,575 | 18,293 | ||||||
Accrued interest payable |
3,642 | 8,763 | ||||||
Other accrued liabilities |
38,446 | 34,829 | ||||||
Current portion of long-term debt |
7,743 | 6,670 | ||||||
Total current liabilities |
89,874 | 80,962 | ||||||
Long-term debt, net of current portion |
365,323 |
366,855 |
||||||
Senior subordinated notes |
289,496 | 291,201 | ||||||
Other liabilities |
7,901 | 8,065 | ||||||
Deferred income taxes |
102,136 | 108,480 | ||||||
Total liabilities |
854,730 | 855,563 | ||||||
Commitments and contingencies (Note 12) |
||||||||
Stockholders' equity: |
||||||||
Common stock |
514 | 517 | ||||||
Treasury stock |
(430 | ) | (430 | ) | ||||
Additional paid-in capital |
4,606 | 9,031 | ||||||
Accumulated comprehensive loss |
(2,159 | ) | (2,623 | ) | ||||
Retained earnings |
20,996 | 32,513 | ||||||
Total stockholders' equity attributable to Alliance HealthCare Services, Inc. |
23,527 | 39,008 | ||||||
Noncontrolling interest |
5,466 | 7,746 | ||||||
Total stockholders' equity |
28,993 | 46,754 | ||||||
Total liabilities and stockholders' equity |
$ | 883,723 | $ | 902,317 | ||||
See accompanying notes.
2
ALLIANCE HEALTHCARE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share amounts)
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | 2008 | 2009 | ||||||||||
Revenues |
$ | 128,125 | $ | 124,227 | $ | 370,027 | $ | 386,031 | ||||||
Costs and expenses: |
||||||||||||||
Cost of revenues, excluding depreciation and amortization |
67,047 | 65,515 | 193,316 | 202,060 | ||||||||||
Selling, general and administrative expenses |
15,876 | 15,746 | 46,878 | 51,065 | ||||||||||
Transaction costs |
| 79 | | 880 | ||||||||||
Severance and related costs |
127 | 462 | 453 | 750 | ||||||||||
Depreciation expense |
21,894 | 24,184 | 64,972 | 71,378 | ||||||||||
Amortization expense |
2,470 | 2,721 | 6,215 | 8,258 | ||||||||||
Interest expense and other, net |
10,706 | 11,166 | 33,771 | 33,380 | ||||||||||
Loss on extinguishment of debt |
| | 61 | | ||||||||||
Other (income) and expense, net |
(140 | ) | (244 | ) | (473 | ) | (878 | ) | ||||||
Total costs and expenses |
117,980 | 119,629 | 345,193 | 366,893 | ||||||||||
Income before income taxes, earnings from unconsolidated investees, and noncontrolling interest, net of tax |
10,145 |
4,598 |
24,834 |
19,138 |
||||||||||
Income tax expense |
4,165 | 2,053 | 10,998 | 8,269 | ||||||||||
Earnings from unconsolidated investees |
(1,235 | ) | (1,260 | ) | (3,549 | ) | (2,678 | ) | ||||||
Net income |
7,215 | 3,805 | 17,385 | 13,547 | ||||||||||
Less: Net income attributable to noncontrolling interest, net of tax |
(884 | ) | (783 | ) | (2,520 | ) | (2,030 | ) | ||||||
Net income attributable to Alliance HealthCare Services, Inc. |
$ | 6,331 | $ | 3,022 | $ | 14,865 | $ | 11,517 | ||||||
Comprehensive income, net of taxes: |
||||||||||||||
Net income attributable to Alliance HealthCare Services, Inc. |
$ | 6,331 | $ | 3,022 | $ | 14,865 | $ | 11,517 | ||||||
Unrealized loss on hedging transactions, net of taxes |
(1,440 | ) | (304 | ) | (215 | ) | (464 | ) | ||||||
Comprehensive income |
$ | 4,891 | $ | 2,718 | $ | 14,650 | $ | 11,053 | ||||||
Earnings per common share attributable to Alliance HealthCare Services, Inc.: |
||||||||||||||
Basic |
$ | 0.12 | $ | 0.06 | $ | 0.29 | $ | 0.22 | ||||||
Diluted |
$ | 0.12 | $ | 0.06 | $ | 0.29 | $ | 0.22 | ||||||
Weighted-average number of shares of common stock and common stock equivalents: |
||||||||||||||
Basic |
51,072 | 51,765 | 51,037 | 51,691 | ||||||||||
Diluted |
52,073 | 52,014 | 51,945 | 52,157 |
See accompanying notes.
3
ALLIANCE HEALTHCARE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
Nine Months Ended September 30, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | ||||||
Operating activities: |
||||||||
Net income |
$ | 17,385 | $ | 13,547 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for doubtful accounts |
3,838 | 1,976 | ||||||
Share-based payment |
3,966 | 4,492 | ||||||
Depreciation and amortization |
71,187 | 79,636 | ||||||
Amortization of deferred financing costs |
1,728 | 1,742 | ||||||
Accretion of discount on senior subordinated notes |
1,509 | 1,705 | ||||||
Adjustment of derivatives to fair value |
(682 | ) | (405 | ) | ||||
Distributions greater than (less than) undistributed earnings from investees |
844 | (567 | ) | |||||
Noncontrolling interest in subsidiaries |
1,012 | (3,490 | ) | |||||
Deferred income taxes |
5,080 | 6,655 | ||||||
Excess tax benefit from share-based payment arrangements |
(218 | ) | (8 | ) | ||||
Gain on sale of assets |
(473 | ) | (977 | ) | ||||
Loss on extinguishment of debt |
61 | | ||||||
Changes in operating assets and liabilities, net of acquisitions: |
||||||||
Accounts receivable |
(6,744 | ) | (2,898 | ) | ||||
Prepaid expenses and other current assets |
62 | 3,212 | ||||||
Other receivables |
777 | 744 | ||||||
Other assets |
(8,389 | ) | (1,764 | ) | ||||
Accounts payable |
(7,152 | ) | (3,776 | ) | ||||
Accrued compensation and related expenses |
935 | (282 | ) | |||||
Accrued interest payable |
4,403 | 5,121 | ||||||
Income taxes payable |
| (277 | ) | |||||
Other accrued liabilities |
7,451 | 748 | ||||||
Other liabilities |
167 | | ||||||
Net cash provided by operating activities |
96,747 | 105,134 | ||||||
Investing activities: |
||||||||
Equipment purchases |
(41,192 | ) | (51,389 | ) | ||||
Decrease in deposits on equipment |
1,192 | 270 | ||||||
Acquisitions, net of cash received |
(34,582 | ) | (760 | ) | ||||
(Increase) decrease in cash in escrow |
(3,105 | ) | 2,947 | |||||
Investment in unconsolidated joint ventures |
| (240 | ) | |||||
Proceeds from sale of assets |
2,713 | 6,459 | ||||||
Net cash used in investing activities |
(74,974 | ) | (42,713 | ) | ||||
Financing activities: |
||||||||
Principal payments on equipment debt |
(3,589 | ) | (6,204 | ) | ||||
Proceeds from equipment debt |
396 | 415 | ||||||
Principal payments on term loan facility |
(15,000 | ) | | |||||
Principal payments on senior subordinated notes |
(3,541 | ) | | |||||
Payments of debt issuance costs |
(973 | ) | (257 | ) | ||||
Payments of debt retirement costs |
(61 | ) | | |||||
Proceeds from shared-based payment arrangements |
576 | 51 | ||||||
Excess tax benefit from share-based payment arrangements |
218 | 8 | ||||||
Net cash used in financing activities |
(21,974 | ) | (5,987 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(201 | ) | 56,434 | |||||
Cash and cash equivalents, beginning of period |
120,892 | 73,305 | ||||||
Cash and cash equivalents, end of period |
$ | 120,691 | $ | 129,739 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Interest paid |
$ | 28,873 | $ | 25,555 | ||||
Income taxes paid, net of refunds |
5,491 | (1,202 | ) | |||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Net book value of assets exchanged |
$ | 293 | $ | 2,132 | ||||
Capital lease obligations related to the purchase of equipment |
2,438 | 6,955 | ||||||
Capital lease obligations transferred |
| (707 | ) | |||||
Comprehensive loss from hedging transactions, net of taxes |
(215 | ) | (464 | ) | ||||
Equipment debt assumed in connection with acquisitions |
2,296 | | ||||||
Equipment purchases in accounts payable |
5,442 | 595 |
See accompanying notes.
4
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation, Principles of Consolidation, and Use of Estimates
Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared by Alliance HealthCare Services, Inc. (the "Company") in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine-month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes to the consolidated financial statements for the year ended December 31, 2008.
On January 1, 2009, the Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, "Business Combinations" [formerly Statement of Financial Accounting Standards ("SFAS") No. 141(R) (Revised 2007), "Business Combinations" ("SFAS 141(R)")], ASC 810, "Consolidation" [formerly SFAS No. 160 "Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of Accounting Research Bulletin No. 51" ("SFAS 160")] and ASC 260, "Earnings Per Share" [formerly FASB Staff Position ("FSP") Emerging Issues Task Force No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ("FSP 03-6-1")]. As a result of the adoption of ASC 805, the Company is presenting transaction costs as a line on the statement of operations. The adoption of ASC 810 changed the presentation of noncontrolling interest to a component of stockholders' equity, rather than a liability, at September 30, 2009, and the corresponding reclassification as of December 31, 2008. In addition, ASC 810 required the presentation of net income attributable to noncontrolling interest, rather than minority interest expense, for the quarters and nine months ended September 30, 2009 and 2008. The adoption of ASC 260 changed the calculation of basic earnings per share requiring restricted stock awards that have previously been included in the Company's diluted weighted-average shares to be included in basic weighted-average shares. Earnings per share for prior periods has been recalculated to conform to the current year presentation.
Principles of Consolidation The accompanying unaudited condensed consolidated financial statements of the Company include the assets, liabilities, revenues and expenses of all majority owned subsidiaries over which the Company exercises control. Intercompany transactions have been eliminated. The Company records noncontrolling interest related to its consolidated subsidiaries which are not wholly owned. Investments in non-consolidated investees are accounted for under the equity method.
Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
5
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
2. Transactions
Effective November 2, 2007, the Company purchased the assets of eight radiation oncology centers in Alabama, Arkansas, Mississippi, and Missouri from Bethesda Resources, Inc., a wholly-owned subsidiary of Sonix, Inc. Many of these centers are sole community providers and are located on or near hospital campuses. Several of these radiation oncology centers operate under certificates of need. The purchase price consisted of $36,500 in cash and $800 in assumed liabilities and transaction costs. The acquisition was financed using internally generated funds and capital leases. As a result of this acquisition, the Company recorded goodwill of $4,246 and acquired intangible assets of $31,230, of which $2,230 was assigned to the physician referral network, which is amortized over seven years and $29,000 was assigned to certificates of need, which have indefinite useful lives and are not subject to amortization. The intangible assets were recorded at fair value at the acquisition date. All recorded goodwill and intangible assets are capitalized for tax purposes and amortized over 15 years. During the nine months ended September 30, 2008, the Company decreased goodwill by $72 as a result of changes in the original valuation of assets acquired and liabilities assumed.
Effective November 5, 2007, the Company purchased all of the outstanding shares of the New England Health Enterprises Business Trust and all of the outstanding membership interests of New England Imaging Management, LLC, a fixed-site provider of magnetic resonance imaging ("MRI") and computed tomography ("CT"), collectively referred to as New England Health Enterprises, or NEHE. NEHE operated seven fixed-site imaging centers and one mobile MRI system in Maine and Massachusetts. The purchase price consisted of $44,635 in cash, $2,270 in cash which has been held in an escrow account, and $4,592 in assumed liabilities and transaction costs. The acquisition was financed using internally generated funds, borrowings under an Acquisition Credit Facility and capital leases. The Company recorded total goodwill of $19,341, which includes $10,947 of goodwill related to deferred tax liabilities recorded for basis differences in intangible assets as a result of the acquisition. None of the goodwill recorded is deductible for tax purposes. The Company acquired intangible assets of $29,000, of which $15,700 was assigned to the physician referral network, which is amortized over 15 years, $3,800 was assigned to the non-compete agreement, which is amortized over five years, and $9,500 was assigned to certificates of need held by NEHE, which have indefinite useful lives and are not subject to amortization. These assets were recorded at fair value at the acquisition date. At the acquisition date, the acquisition included $2,270 for a contingent payment which was placed in an escrow account, pending the resolution of claims for indemnification and contingent consideration based on certain performance target requirements, which are to be resolved over one to three years following the acquisition date. During the nine months ended September 30, 2009, some of these contingencies were resolved and the Company recorded a decrease to goodwill of $570. The Company received $2,075 from escrow during the first quarter of 2009 and an additional $750 was received in the third quarter of 2009. When the remaining contingencies are resolved and consideration is distributable from the escrow account, the Company will record the fair value of the consideration as additional purchase price to goodwill.
In the first quarter of 2008, the Company purchased six CyberKnife® robotic radiosurgery facilities from Accuray, Inc. The radiosurgery systems are currently providing radiosurgery services at hospitals located in California, Maryland, New Jersey and Tennessee. The purchase price totaled $10,287 in cash
6
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
2. Transactions (Continued)
and $732 in transaction costs. The acquisition was financed using proceeds from the Company's issuance of its 71/4% Senior Subordinated Notes due 2012 (the "new 71/4% Notes"). As a result of this acquisition, the Company recorded acquired intangible assets of $1,459, which was assigned to customer contracts and is being amortized over seven years. The intangible assets were recorded at fair value at the acquisition date. All recorded intangible assets are capitalized for tax purposes and are being amortized over 15 years. The year ended December 31, 2008 included approximately nine months of operations from this acquisition. The Company has not included pro forma information as this acquisition did not have a material impact on its consolidated financial position or results of operations.
In the third quarter of 2008, the Company purchased all of the outstanding membership interests of Medical Outsourcing Services, LLC ("MOS"), a mobile provider of positron emission tomography/computed tomography ("PET/CT"), based in Naperville, Illinois. MOS operated in nine states, including, Illinois, Indiana, Iowa, Michigan, Missouri, New Jersey, Ohio, Pennsylvania, and Wisconsin. The purchase price consisted of $17,271 in cash, $2,500 in cash which is being held in an escrow account, and $4,564 in assumed liabilities and transaction costs. The Company financed this acquisition using internally generated funds and proceeds from the Company's issuance of the new 71/4% Notes. As a result of this acquisition, the Company recorded goodwill of $3,303 and acquired intangible assets of $12,450, of which $3,850 was assigned to the physician referral network, which is being amortized over five years, $6,100 was assigned to customer relationships, which is being amortized over 10 years, and $2,500 was assigned to a non-compete agreement, which is being amortized over three years. The intangible assets were recorded at fair value at the acquisition date. All recorded goodwill and intangible assets are capitalized for tax purposes and are being amortized over 15 years. The acquisition included $2,500 for a contingent payment which is being held in an escrow account, pending the resolution of claims for indemnification, which is expected to be resolved over the three years following the acquisition date. When the contingencies are resolved and consideration is distributable from the escrow account, the Company will record the fair value of the consideration as additional purchase price to goodwill. During the nine months ended September 30, 2009, the Company increased goodwill by $67 as a result of changes in the original valuation of assets acquired and liabilities assumed. The year ended December 31, 2008 included six months of operations from this acquisition. The Company has not included pro forma information as this acquisition did not have a material impact on its consolidated financial position or results of operations. Please also see further discussion in Note 12 of the Notes to the Condensed Consolidated Financial Statements.
In the third quarter of 2008, the Company purchased all of the outstanding membership interests of RAMIC Des Moines, LLC ("RAMIC"), a single modality center providing MRI services in West Des Moines, Iowa. The purchase price consisted of $7,216 in cash, $605 in cash which is being held in an escrow account, and $114 in assumed liabilities and transaction costs. The Company financed this acquisition using internally generated funds and proceeds from the Company's issuance of the new 71/4% Notes. As a result of this acquisition, the Company recorded goodwill of $2,899 and acquired intangible assets of $2,600, of which $1,850 was assigned to the physician network, which is being amortized over five years, and $750 was assigned to certificates of need held by RAMIC, which have indefinite useful lives and are not subject to amortization. The intangible assets were recorded at fair
7
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
2. Transactions (Continued)
value at the acquisition date. All recorded goodwill and intangible assets are capitalized for tax purposes and are being amortized over 15 years. The acquisition included $605 for a contingent payment which is being held in an escrow account, pending the resolution of claims for indemnification, which will be resolved over the year following the acquisition date. During the second quarter of 2009, $550 was released from escrow, which was recorded to goodwill as additional purchase price. When the remaining contingencies are resolved and consideration is distributable from the escrow account, the Company will record the fair value of the consideration as additional purchase price to goodwill. The year ended December 31, 2008 included approximately five months of operations from this acquisition. The Company has not included pro forma information as this acquisition did not have a material impact on its consolidated financial position or results of operations.
In the fourth quarter of 2008, the Company purchased all of the outstanding membership interests of Shared PET Imaging, LLC ("SPI"), a mobile and fixed-site provider of PET and PET/CT, based in Canton, Ohio. SPI served approximately 90 clients in thirteen states, including Ohio, Michigan, Indiana, Illinois, Florida, Pennsylvania, New York, Tennessee and South Carolina. The purchase price consisted of $34,092 in cash, $2,000 in cash which is being held in an escrow account, and $9,102 in assumed liabilities and transaction costs. The Company financed this acquisition using internally generated funds and proceeds from the Company's issuance of the new 71/4% Notes. As a result of this acquisition, the Company recorded goodwill of $6,895 and acquired intangible assets of $9,350, of which $500 was assigned to the physician referral network, which is being amortized over five years, $5,350 was assigned to customer relationships, which is being amortized over 13 years, $3,150 was assigned to a non-compete agreement, which is being amortized over three years, and $350 was assigned to certificates of need held by SPI, which have indefinite useful lives and are not subject to amortization. The intangible assets were recorded at fair value at the acquisition date. All recorded goodwill and intangible assets are capitalized for tax purposes and are being amortized over 15 years. The acquisition included $2,000 for a contingent payment which is being held in an escrow account, pending the resolution of claims for indemnification, which is expected to be resolved over the 18 months following the acquisition date. When the contingencies are resolved and consideration is distributable from the escrow account, the Company will record the fair value of the consideration as additional purchase price to goodwill. The preliminary values above are subject to adjustment for up to one year after the close of the transaction due to additional information that could result in changes in the original valuation of assets acquired and liabilities assumed. During the nine months ended September 30, 2009, the Company increased goodwill by $383 as a result of changes in the original valuation of assets acquired and liabilities assumed. The year ended December 31, 2008 included one month of operations from this acquisition. The Company has not included pro forma information as this acquisition did not have a material impact on its consolidated financial position or results of operations.
3. Share-Based Payment
The Company adopted ASC 718, "CompensationStock Compensation" [formerly SFAS No. 123(R) (revised December 2004), "Share-Based Payment" ("SFAS 123(R)")] in the fiscal year beginning January 1, 2006, using the modified prospective application transition method. Under
8
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
3. Share-Based Payment (Continued)
ASC 718, the Company records in its consolidated statements of operations (i) compensation cost for options granted, modified, repurchased or cancelled on or after January 1, 2006 under the provisions of ASC 718 and (ii) compensation cost for the unvested portion of options granted prior to January 1, 2006 over their remaining vesting periods using the amounts previously measured under ASC 718 for pro forma disclosure purposes.
The Company has elected to follow the alternative transition method as described in ASC 718 [formerly FSP FAS123R-3, "Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards"] for computing its beginning additional paid-in capital pool. In addition, the Company treats the tax deductions from stock options as being realized when they reduce taxes payable in accordance with the principles and timing under the relevant tax law.
Stock Option Plans and Awards
In November 1999, the Company adopted an employee stock option plan (the "1999 Equity Plan") pursuant to which options and awards with respect to a total of 6,325,000 shares of the Company's common stock became available for grant. On May 30, 2007, the Company adopted an amendment to the 1999 Equity Plan which increased the number of shares available to be awarded to 8,025,000 shares. On May 27, 2009, the Company adopted an amendment to the 1999 Equity Plan which increased the number of shares available to be awarded to 11,025,000 shares. As of September 30, 2009, a total of 3,221,504 shares were available for grant under the 1999 Equity Plan. Options are granted with exercise prices equal to fair value of the Company's common stock at the date of grant, except as noted below. All options have 10-year terms. Options granted after January 1, 2008 are time options which vest 25% each year, over four years. For options granted prior to January 1, 2008, initial stock option grants were comprised 50% of "time options" and 50% of "performance options." The time options have a five-year vesting schedule, vesting 20% per year. The performance options cliff vest after eight years; however, in the event certain operating performance targets are met, up to 20% of the performance options may vest each year, accelerating the vesting period up to five years. Prior to January 1, 2008, subsequent stock options granted under the 1999 Equity Plan to employees were always time options which vest 5% in the first year, 20% in the second year and 25% in years three through five.
In November 2000, the Company granted stock options to certain employees at exercise prices below the fair value of the Company's common stock, of which 35,000 options were outstanding at September 30, 2009. The exercise prices of these options and the fair value of the Company's common stock on the grant date were $5.60 and $9.52 per share, respectively.
The Company is using the Black-Scholes option pricing model to value the compensation expense associated with share-based payment awards. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the table below. In addition, forfeitures are estimated when recognizing compensation expense and the estimate of forfeitures will be adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be
9
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
3. Share-Based Payment (Continued)
recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods. The Company records share-based payments for stock options granted with exercise prices below the fair value of the Company's common stock at the date of grant and for certain stock options subject to amended performance targets under the 1999 Equity Plan, as discussed below.
The following weighted average assumptions were used in the estimated grant date fair value calculations for stock option awards:
|
|
Nine Months Ended September 30, |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Quarter Ended September 30, 2009 |
|||||||||
|
2008 | 2009 | ||||||||
Risk free interest rate |
2.90 | % | 3.44 | % | 1.96 | % | ||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % | ||||
Expected stock price volatility |
58.4 | % | 53.2 | % | 60.1 | % | ||||
Average expected life (in years) |
6.19 | 6.25 | 6.25 |
There were no stock options granted during the quarter ended September 30, 2008.
The expected stock price volatility rates are based on a blend of the historical volatility of the Company's common stock and peer implied volatility. The risk free interest rates are based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option or award. The average expected life represents the weighted average period of time that options or awards granted are expected to be outstanding, as calculated using the simplified method described in ASC 718 [formerly Securities and Exchange Commission Staff Accounting Bulletin No. 107], as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.
The following table summarizes the Company's stock option activity:
|
Number of Shares |
Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2008 |
4,014,175 | $ | 6.70 | |||||||||||
Granted |
820,000 | 7.99 | ||||||||||||
Exercised |
(11,100 | ) | 4.31 | |||||||||||
Canceled |
(207,900 | ) | 8.15 | |||||||||||
Outstanding at September 30, 2009 |
4,615,175 | $ | 6.87 | 6.11 | $ | 1,678 | ||||||||
Vested and expected to vest in the future at September 30, 2009 |
4,165,788 | $ | 6.85 | 6.00 | $ | 1,534 | ||||||||
Exercisable at September 30, 2009 |
2,497,560 | $ | 6.27 | 4.58 | $ | 1,290 |
10
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
3. Share-Based Payment (Continued)
The weighted average grant-date fair value of options granted during the quarter ended September 30, 2009 was $3.01 per share. The weighted average grant-date fair value of options granted during the nine months ended September 30, 2008 and 2009 was $5.07 per share and $4.59 per share, respectively. The total intrinsic value of options exercised during the quarter ended September 30, 2008 was $677. The total intrinsic value of options exercised during the nine months ended September 30, 2008 and 2009 was $759 and $51, respectively. The total cash received from employees as a result of stock option exercises was $493 for the quarter ended September 30, 2008. The total cash received from employees as a result of stock option exercises was $576 and $48 for the nine months ended September 30, 2008 and 2009, respectively.
The following table summarizes the Company's unvested stock option activity:
|
Shares | Weighted Average Grant Date Fair Value |
||||||
---|---|---|---|---|---|---|---|---|
Unvested at December 31, 2008 |
1,916,115 | $ | 4.20 | |||||
Granted |
820,000 | 4.59 | ||||||
Vested |
(467,375 | ) | 4.03 | |||||
Canceled |
(151,125 | ) | 4.55 | |||||
Unvested at September 30, 2009 |
2,117,615 | $ | 4.36 | |||||
At September 30, 2009, the total unrecognized fair value share-based payment related to unvested stock options granted to both employees and non-employees was $5,340, which is expected to be recognized over a remaining weighted-average period of 2.36 years. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected forfeiture rate and performance targets. Therefore, the amount of unrecognized share-based payment noted above does not necessarily represent the value that will ultimately be realized by the Company in the statements of operations. The total fair value of shares vested during the quarters ended September 30, 2008 and 2009 was $47, and $38, respectively. The total fair value of shares vested during the nine months ended September 30, 2008 and 2009 was $1,633, and $1,883, respectively.
Restricted Stock Awards
The 1999 Equity Plan, as amended and restated, permits the award of restricted stock, restricted stock units, stock bonus awards and performance-based awards. During 2007 and 2008, the Company granted 625,000 and 290,000 restricted stock awards ("awards"), respectively, to certain employees of the Company. During the first nine months of 2009, the Company granted 310,000 awards to certain employees and 25,000 awards to non-employees of the Company. These awards cliff vest after three or five years provided that the employee remains continuously employed and the non-employee continues service through the issuance date. On December 31, 2008, the Company granted restricted stock awards to three non-employee directors of the Company who are unaffiliated with Oaktree Capital Management, LLC ("Oaktree") and MTS Health Investors, LLC ("MTS") ("unaffiliated directors")
11
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
3. Share-Based Payment (Continued)
equal to 11,318 shares of common stock each. These awards to unaffiliated directors cliff vest after one year based on the unaffiliated directors' continued service with the Company through that date. During the nine months ended September 30, 2009, 4,558 of these shares vested due to a change in one of the unaffiliated directors in May 2009. For the quarters ended September 30, 2008 and 2009, the Company recorded share-based payment related to restricted stock awards of $473 and $704, respectively. For the nine months ended September 30, 2008 and 2009, the Company recorded share-based payment related to restricted stock awards of $1,395 and $2,010, respectively. The weighted average grant-date fair value of restricted stock awards granted during the quarter ended September 30, 2009 was $5.25 per share. The weighted average grant-date fair value of restricted stock awards granted during the nine months ended September 30, 2008 and 2009 was $9.26 and $6.26 per share, respectively.
The following table summarizes the Company's unvested restricted stock activity:
|
Shares | Weighted Average Grant Date Fair Value |
||||||
---|---|---|---|---|---|---|---|---|
Unvested at December 31, 2008 |
938,954 | $ | 7.25 | |||||
Granted |
335,000 | 6.26 | ||||||
Vested |
| | ||||||
Canceled |
| | ||||||
Unvested at September 30, 2009 |
1,273,954 | $ | 6.99 | |||||
At September 30, 2009, the total unrecognized fair value share-based payment related to restricted stock awards granted to employees and non-employees was $3,497, which is expected to be recognized over a remaining weighted-average period of 1.38 years. At September 30, 2009, the total unrecognized fair value share-based payment related to the restricted stock awards granted to unaffiliated directors was $20, which is expected to be recognized over a remaining weighted-average period of 0.25 years. The unaffiliated directors will each receive a restricted stock award on December 31, 2009 and each December 31 thereafter (the "Grant Date") of the number of shares of common stock having a value equal to $80, rounded down to the nearest whole share, and calculated using the average share price of the Company's stock over the fifteen-day period preceding the Grant Date. Such restricted stock awards will fully vest one year after the Grant Date based on the continued service of the non-employee director through the vesting date. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected forfeiture rate. Therefore the amount of unrecognized share-based payment noted above does not necessarily represent the amount that will ultimately be realized by the Company in the statements of operations.
Restricted Stock Units
On December 31, 2007, the Company granted restricted stock units to three unaffiliated directors equal to 8,421 shares of common stock each. This number of shares represents the number of shares of the Company's common stock having a value equal to $80, rounded down to the nearest whole share,
12
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
3. Share-Based Payment (Continued)
and calculated using the average share price of the Company's stock over the fifteen-day period preceding December 31, 2007. These restricted stock units vested on December 31, 2008.
Stock Bonus Award
During 2006 and 2007, the Company granted stock bonus awards to certain employees of the Company. On the issuance date, the Company issued a number of shares of the Company's common stock ("shares"), equal to the award divided by the fair market value of the shares at that time, provided that the employee remained continuously employed through the issuance date. During the nine months ended September 30, 2009, the Company issued 125,470 shares related to the stock bonus awards granted in 2006. For the quarters ended September 30, 2008 and 2009, the Company recorded share-based payment related to these grants of $125 and $42, respectively. For the nine months ended September 30, 2008 and 2009, the Company recorded share-based payment related to these grants of $375 and $125, respectively.
At September 30, 2009, the total unrecognized fair value share-based payment related to the stock bonus awards granted to employees was $42, which is expected to be recognized over a remaining weighted-average period of 0.25 years. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected forfeiture rate. Therefore, the amount of unrecognized share-based payment noted above does not necessarily represent the amount that will ultimately be realized by the Company in the statements of operations.
4. Recent Accounting Pronouncements
Business Combinations FASB ASC 805, "Business Combinations" [formerly SFAS 141(R)] significantly changes the accounting for business combinations. Under ASC 805, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. ASC 805 changes the accounting treatment for certain specific items, including:
-
- Acquisition costs will be generally expensed as incurred;
-
- Noncontrolling interests (formerly known as "minority interests"see ASC 810 discussion below) will generally
be valued at fair value at the acquisition date;
-
- Restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date;
and
-
- Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.
ASC 805 also includes a substantial number of new disclosure requirements. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company adopted ASC 805 on January 1, 2009. The Company expects ASC 805 will have an
13
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
4. Recent Accounting Pronouncements (Continued)
impact on accounting for business combinations, but the effect is generally dependent upon acquisitions at that time. The adoption of ASC 805 did not have a material impact on the Company's results of operations, cash flows or financial position for the quarter or nine months ended September 30, 2009, except for the presentation of transaction costs as a line in the statements of operations.
FASB ASC 805 [formerly FSP No. FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies"] is effective for contingent assets or contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this standard did not have a material impact on the Company's results of operations, cash flows or financial position for the quarter or nine months ended September 30, 2009.
Noncontrolling Interests in Consolidated Financial Statements FASB ASC 810, "Consolidation" [formerly SFAS 160] establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. ASC 810 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. ASC 810 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The Company adopted ASC 810 on January 1, 2009. The adoption of ASC 810 did not have a material impact on the Company's results of operations, cash flows or financial position for the quarter or nine months ended September 30, 2009; however, there may be an impact on future transactions. The adoption of ASC 810 changed the presentation of noncontrolling interest to a component of stockholders equity, rather than a liability, at September 30, 2009, and the corresponding reclassification as of December 31, 2008. In addition, ASC 810 required the presentation of net income attributable to noncontrolling interest, rather than minority interest expense, for the quarters and nine months ended September 30, 2009 and 2008.
Derivative Instruments and Hedging Activities FASB ASC 815, "Derivatives and Hedging" [formerly SFAS No. 161, "Disclosure about Derivative Instruments and Hedging ActivitiesAn Amendment of FASB Statement No. 133" ("SFAS 161")] enhances the current guidance on disclosure requirements for derivative instruments and hedging activities. This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. Specifically, ASC 815 requires disclosure about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flow. This statement requires qualitative disclosure about the objectives and strategies for using derivatives in terms of the risks that the entity is intending
14
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
4. Recent Accounting Pronouncements (Continued)
to manage, quantitative disclosures about fair value amounts of gains and losses on derivative instruments in a tabular format, and disclosures about credit-risk-related contingent features in derivative agreements to provide information on potential effect on an entity's liquidity from using derivatives. The derivative instruments shall be distinguished between those used for risk management purposes and those used for other purposes. ASC 815 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008, with early application encouraged. The Company adopted the provisions of ASC 815 on January 1, 2009. The adoption of ASC 815 did not have a material impact on the Company's results of operations, cash flows or financial position for the quarter or nine months ended September 30, 2009.
Earnings per Share FASB ASC 260, "Earnings Per Share" [formerly FSP 03-6-1] addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in ASC 260. ASC 260 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. ASC 260 is effective for fiscal years beginning after December 15, 2008 and is to be applied retrospectively. The Company adopted the provisions of ASC 260 on January 1, 2009. The Company granted and expects to continue to grant restricted stock awards to its officers and non-employee directors that contain non-forfeitable rights to dividend and dividend equivalents. Such awards are considered participating securities under ASC 260. As such, the Company is required to include these awards in the calculation of the Company's basic earnings per share and will need to calculate basic earnings per share using the two-class method. Restricted stock awards have previously been included in the Company's dilutive earnings per share calculation using the treasury stock method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company has historically not paid and does not expect to pay dividends in the foreseeable future; however, the Company must still allocate undistributed earnings between common shareholders and participating securities based on the contractual rights of each security, as if all the earnings for the period have been distributed. Since the adoption of ASC 260 is to be applied retrospectively, the earnings per share for prior periods will be recalculated to conform to the current year presentation. The weighted-average number of shares used in the basic earnings per share calculation for the quarter and nine months ended September 30, 2008 has been recalculated using the two-class method to conform to the current year presentation.
Fair Value of Financial Instruments FASB ASC 825, "Financial Instruments" [formerly FSP No. FAS 107-1 and Accounting Principles Board ("APB") Opinion No. 28-1, "Interim Disclosures about Fair Value of Financial Instruments"] requires disclosures about the fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825 is effective for periods ending after June 15, 2009. The Company adopted ASC 825 during the interim period ended June 30, 2009.
15
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
4. Recent Accounting Pronouncements (Continued)
Subsequent Events FASB ASC 855, "Subsequent Events" [formerly SFAS No. 165, "Subsequent Events" ("SFAS 165")] enhances the current guidance on accounting and disclosure requirements for subsequent events. This statement requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. ASC 855 is effective for interim periods and annual financial periods ending after June 15, 2009. The adoption of ASC 855 did not have a material impact on the Company's results of operations, cash flows or financial position for the quarter or nine months ended September 30, 2009. The Company has evaluated subsequent events through November 5, 2009.
Variable Interest Entities SFAS No. 167, "Amendments to FASB Interpretation No. 46 (R)" ("SFAS 167") [not yet re-codified in the ASC] enhances the current guidance on disclosure requirements for companies with financial interest in a variable interest entity. This statement amends FASB Interpretation No. 46(R) to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (a) the obligation to absorb losses of the entity or (b) the right to receive benefits from the entity. This statement requires an additional reconsideration event when determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity's economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. This statement amends FASB Interpretation No. 46(R) to require additional disclosures about an enterprise's involvement in variable interest entities. SFAS 167 is effective for fiscal years beginning after November 15, 2009, with early application prohibited. The Company will adopt the provisions of SFAS 167 on January 1, 2010. The Company has not completed its evaluation of the potential impact of the adoption of SFAS 167 on the Company's results of operations, cash flows or financial position.
Accounting Standards Codification FASB ASC 105, "Generally Accepted Accounting Principles" [formerly SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles"] is the single source of authoritative GAAP in the United States. The previous GAAP hierarchy consisted of four levels of authoritative accounting and reporting guidance levels. The ASC eliminated this hierarchy and replaced the previous GAAP with just two levels of literature: authoritative and non-authoritative. The ASC was effective as of July 1, 2009.
16
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
5. Fair Value of Financial Instruments
The Company used the following methods and assumptions in estimating fair value disclosure for financial instruments:
Cash and cash equivalents The carrying amounts reported in the balance sheet approximate fair value due to the short-term maturity or variable rates of these instruments.
Debt The fair value of the Company's publicly traded notes was based on the prices of those notes at December 31, 2008 and September 30, 2009. The carrying amount of variable-rate borrowings at September 30, 2009 approximates fair value estimated based on current market rates and credit spreads for similar debt instruments.
Derivative instruments Fair value was determined based on the income approach and standard valuation techniques to convert future amounts to a single present amount and approximates the net gains and losses that would have been realized if the contracts had been settled at each period end.
The estimated fair values of the Company's financial instruments are as follows:
|
December 31, 2008 | September 30, 2009 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||
Cash and cash equivalents |
$ | 73,305 | $ | 73,305 | $ | 129,739 | $ | 129,739 | |||||
Fixed-rate debt |
289,496 | 246,750 | 291,201 | 287,438 | |||||||||
Variable-rate debt |
351,600 | 351,600 | 351,600 | 351,600 | |||||||||
Derivative instrumentsasset position |
| | 59 | 59 | |||||||||
Derivative instrumentsliability position |
6,008 | 6,008 | 6,449 | 6,449 |
The Company adopted ASC 825 [formerly SFAS No. 157, "Fair Value Measurements" ("SFAS 157")] on January 1, 2008. ASC 825 applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 825 requires disclosure that establishes a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1 | Quoted market prices in active markets for identical assets or liabilities. | |
Level 2 |
Observable market based inputs or unobservable inputs that are corroborated by market data. |
|
Level 3 |
Unobservable inputs that are not corroborated by market data. |
17
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
5. Fair Value of Financial Instruments (Continued)
The following table summarizes the valuation of the Company's financial instruments by the above ASC 825 pricing levels as of September 30, 2009:
|
Total | Quoted market prices in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash and cash equivalents |
$ | 129,739 | $ | 129,739 | $ | | $ | | |||||
Interest rate swapsliability position |
6,449 | | 6,449 | | |||||||||
Fuel swapasset position |
59 | | | 59 |
The following table summarizes the Company's fair value measurements of derivative instruments using significant unobservable inputs (Level 3):
Balance as of December 31, 2008 |
$ | | ||||
Total gains or losses (realized/unrealized) |
||||||
Included in earnings |
33 | |||||
Included in other comprehensive income |
26 | |||||
Balance as of September 30, 2009 |
$ | 59 | ||||
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date |
$ | 33 |
The Company's derivative instruments are primarily pay-fixed, receive- variable interest rate swaps based on London Interbank Offered Rate ("LIBOR") swap rate. The Company has elected to use the income approach to value these derivatives, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for interest rate swap valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates at commonly quoted intervals). The Company has identified both a public and a private data source for use in valuing the Department of Energy ("DOE") diesel fuel swap. There appears to be a material difference in the pricing for diesel fuel contracts traded on NYMEX and the pricing that brokers make available to retail clients hedging changes in the DOE average national diesel fuel price as executed by the Company. As a result the Company has elected to use broker data available from its counterparty and informally corroborated by a second broker to fair value the diesel fuel swap. The September 30, 2009 over-the-counter forward rates were compared to the fixed rates executed by the Company for each forward date. The loss on each forward date was then present valued at LIBOR plus a credit spread of 4.5%. Mid-market pricing is used as a practical expedient for fair value measurements. ASC 825 states that the fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty's creditworthiness when in an asset position and the Company's creditworthiness when in a liability position has also been factored
18
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
5. Fair Value of Financial Instruments (Continued)
into the fair value measurement of the derivative instruments. For additional information please see Note 9 of the Notes to the Condensed Consolidated Financial Statements.
6. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill are as follows:
Balance at December 31, 2008 |
$ | 193,430 | ||
Goodwill acquired during the period |
378 | |||
Adjustments to goodwill during the period |
435 | |||
Balance at September 30, 2009 |
$ | 194,243 | ||
Intangible assets consisted of the following:
|
December 31, 2008 | September 30, 2009 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Carrying Amount |
Accumulated Amortization |
Intangible Assets, net |
Gross Carrying Amount |
Accumulated Amortization |
Intangible Assets, net |
||||||||||||||
Amortizing intangible assets: |
||||||||||||||||||||
Customer contracts |
$ | 89,853 | $ | (33,818 | ) | $ | 56,035 | $ | 89,708 | $ | (39,752 | ) | $ | 49,956 | ||||||
Other |
14,364 | (5,708 | ) | 8,656 | 16,319 | (8,032 | ) | 8,287 | ||||||||||||
Total amortizing intangible assets |
$ | 104,217 | $ | (39,526 | ) | $ | 64,691 | $ | 106,027 | $ | (47,784 | ) | $ | 58,243 | ||||||
Intangible assets not subject to amortization |
46,029 | 44,563 | ||||||||||||||||||
Total other intangible assets |
$ | 110,720 | $ | 102,806 | ||||||||||||||||
The Company reviews the recoverability of the carrying value of goodwill on an annual basis or more frequently when an event occurs or circumstances change to indicate an impairment of these assets has possibly occurred. Goodwill is allocated to the Company's various reporting units which represent the Company's geographical regions. The Company compares the fair value of the reporting unit to its carrying amount to determine if there is potential impairment.
The Company uses a weighted average useful life of 13 years to amortize customer contracts. Other intangible assets subject to amortization are estimated to have a weighted average useful life of four years. Amortization expense for intangible assets subject to amortization was $2,470 and $2,721 for the quarters ended September 30, 2008 and 2009, respectively, and $6,215 and $8,258 for the nine months ended September 30, 2008 and 2009, respectively. The intangible assets not subject to
19
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
6. Goodwill and Intangible Assets (Continued)
amortization represent certificates of need and regulatory authority rights which have indefinite useful lives.
Estimated annual amortization expense for each of the fiscal years ending December 31, is presented below:
2009 |
$ | 10,958 | ||
2010 |
10,909 | |||
2011 |
10,307 | |||
2012 |
8,697 | |||
2013 |
5,933 |
7. Other Accrued Liabilities
Other accrued liabilities consisted of the following:
|
December 31, 2008 |
September 30, 2009 |
|||||
---|---|---|---|---|---|---|---|
Accrued systems rental and maintenance costs |
$ | 2,223 | $ | 1,914 | |||
Accrued site rental fees |
1,244 | 1,074 | |||||
Accrued property and sales taxes payable |
14,867 | 16,001 | |||||
Accrued self-insurance expense |
7,380 | 7,448 | |||||
Accrued equipment payments |
4,483 | 1,574 | |||||
Other accrued expenses |
8,249 | 6,818 | |||||
Total |
$ | 38,446 | $ | 34,829 | |||
8. Long-Term Debt and Senior Subordinated Credit Facility
Long-term debt consisted of the following:
|
December 31, 2008 |
September 30, 2009 |
|||||
---|---|---|---|---|---|---|---|
Term loan facility |
$ | 351,600 | $ | 351,600 | |||
Senior subordinated notes |
300,000 | 300,000 | |||||
Discount on senior subordinated notes of 8.5% |
(10,504 | ) | (8,799 | ) | |||
Equipment debt |
21,466 | 21,925 | |||||
Long-term debt, including current portion |
662,562 | 664,726 | |||||
Less current portion |
7,743 | 6,670 | |||||
Long-term debt |
$ | 654,819 | $ | 658,056 | |||
20
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
9. Derivatives
The Company accounts for derivative instruments and hedging activities in accordance with the provisions of ASC 815 [formerly SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")] as amended and interpreted. Management generally designates derivatives in a hedge relationship with the identified exposure on the date the Company enters into a derivative contract, as disclosed below. The Company only executes derivative instruments that are economic hedges of exposures that can qualify in hedge relationships under ASC 815. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. In this documentation, the Company specifically identifies the firm commitment or forecasted transaction that has been designated as a hedged item and states how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally assesses effectiveness of its hedging relationships, both at the hedge inception and on an ongoing basis, then measures and records ineffectiveness. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting change in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated or exercised, (iii) because it is probable that the forecasted transaction will not occur, or (iv) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. The Company's derivatives are recorded on the balance sheet at their fair value. For additional information please see Note 5 of the Notes to the Condensed Consolidated Financial Statements. For derivatives accounted for as cash flow hedges, any effective unrealized gains or losses on fair value are included in comprehensive income (loss), net of tax, and any ineffective gains or losses are recognized in income immediately. Amounts recorded in comprehensive income (loss) are reclassified to earnings when the hedged item impacts earnings.
Cash Flow Hedges
Interest Rate Cash Flow Hedges
The Company has entered into multiple interest rate swap agreements to hedge the future cash interest payments on portions of its variable rate bank debt. For the nine months ended September 30, 2008 and 2009, the Company had interest rate swap agreements to hedge approximately $185,438 and $242,250 of its variable rate bank debt, respectively, or 28.3% and 36.5% of total debt, respectively. Over the next twelve months, the Company expects to reclassify $4,650 from accumulated other comprehensive loss to interest expense and other, net.
In the first quarter of 2005, the Company entered into multiple interest rate collar agreements for its variable rate bank debt. The total underlying notional amount of the debt was $178,000. Under these arrangements the Company purchased a cap on the interest rate of 4.00% and sold a floor of 2.25%. The Company paid a net purchase price of $1,462 for these collars. These agreements were two and three years in length and matured at various dates between January 2007 and January 2008. The Company designated these collars as cash flow hedges of variable future cash flows associated with its long-term debt and effective gains or losses were reclassified to interest expense and other, net when the hedged interest was accrued.
21
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
9. Derivatives (Continued)
In the first quarter of 2008, the Company entered into two interest rate swap agreements in accordance with Company policy in order to avoid unplanned volatility in the income statement due to changes in the LIBOR interest rate environment. The swap agreements, with a total notional amount of $185,438, were designated as cash flow hedges of future cash interest payments associated with a portion of the Company's variable rate bank debt (the "2008 swaps"). These agreements are three years in length and mature in January 2011. Under the terms of these agreements, the Company receives three-month LIBOR and pays a fixed rate of 3.15%. The net effect of the hedges is to record interest expense at a fixed rate of 5.65%, as the underlying debt incurs interest based on three-month LIBOR plus 2.50%. The Company will record effective changes in the fair value of the swaps through comprehensive income (loss) and reclassify gains or losses to interest expense and other, net when the hedged interest is accrued.
On September 15, 2008, Lehman Brothers Holdings, Inc. ("LHI") filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. On October 6, 2008, Lehman Commercial Paper, Inc. ("LCPI") filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. One of the Company's 2008 swaps with a notional amount of $92,719 was with LCPI (the "Lehman Swap"). As of September 12, 2008, hedge accounting was terminated and all further changes in the fair market value of this swap were recorded in interest expense and other, net. Comprehensive income (loss) related to effective unrealized gains or losses on the fair value of the swap through September 12, 2008 will remain in accumulated comprehensive income (loss) on the balance sheet and will be amortized into interest expense and other, net through 2011 as the underlying interest payments are recognized in earnings. The swap was valued using the income approach with observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single discounted present amount.
During the first quarter of 2009, the Company replaced the Lehman Swap with an interest rate swap agreement which has a notional amount of $92,719 that has been designated as a cash flow hedge of variable future cash flows associated with a portion of the Company's long-term debt. Under the terms of this agreement, which matures in January 2011, the Company receives three-month LIBOR and pays a fixed rate of 3.15%. The net effect of the hedge is to record interest expense at a fixed rate of 5.65%, as the debt incurs interest based on three-month LIBOR plus 2.50%. The Company will record effective changes in the fair value of the swap through comprehensive income (loss) and reclassify those gains or losses to interest expense and other, net when the hedged interest is accrued.
During the first quarter of 2009, the Company entered into an additional interest rate swap agreement which has a notional amount of $56,813 that has been designated as a cash flow hedge of future interest payments associated with a portion of the Company's variable rate bank debt. Under the terms of this agreement, which matures in November 2011, the Company receives three-month LIBOR and pays a fixed rate of 2.07%. The net effect of the hedge is to record interest expense at a fixed rate of 4.57%, as the underlying debt incurs interest based on three-month LIBOR plus 2.50%. The Company will record effective changes in the fair value of the swap through comprehensive income (loss) and reclassify gains or losses to interest expense and other, net when the hedged interest is accrued.
22
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
9. Derivatives (Continued)
Diesel Fuel Cash Flow Hedges
The Company is exposed to market fluctuations in diesel fuel prices related to its mobile fleet. During the first quarter of 2009, the Company entered into a diesel fuel swap agreement which has a notional quantity of 1,008,000 gallons, or 84,000 gallons per month, to hedge future cash payments associated with the Company purchasing diesel fuel for its mobile fleet. Under the terms of this agreement, which matures in February 2010, the Company receives the Department of Energy published monthly average price per gallon and pays a fixed rate of two dollars and sixty-three cents per gallon. The Company designated this swap as a cash flow hedge of future cash flows associated with its diesel fuel payments. The swap was designated in a cash flow relationship in the month following execution. The loss from trade date to designation date was recorded in other (income) and expense, net. Post-designation the Company records effective changes in the fair value of the swap through comprehensive income (loss) and reclassifies gains or losses to fuel expense (included in cost of revenues, excluding depreciation and amortization) when the underlying fuel is purchased.
Quantitative information about the Company's derivatives' impact on performance and operations is provided below:
|
Asset Derivatives as of September 30, 2009 |
||||||
---|---|---|---|---|---|---|---|
|
Balance Sheet Location |
Fair Value | |||||
Derivatives designated as hedging instruments under ASC 815 |
|||||||
Diesel fuel swaps |
Other assets | $ | 59 |
|
Liability Derivatives as of September 30, 2009 |
||||||
---|---|---|---|---|---|---|---|
|
Balance Sheet Location |
Fair Value | |||||
Derivatives designated as hedging instruments under ASC 815 |
|||||||
Interest rate swaps |
Other liabilities | $ | 6,449 |
23
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
9. Derivatives (Continued)
The Effect of Designated Derivative Instruments on the Statement of Operations
For the Quarter Ended September 30, 2009
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) |
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest rate swaps |
$ | (1,977 | ) | Interest expense and other, net | $ | (1,158 | ) | Interest expense and other, net | $ | (7 | ) | |||
Diesel fuel swaps |
(67 |
) |
Fuel expense (included in Costs of revenues, excluding depreciation and amortization) |
9 |
Other (income) and expense, net |
|
||||||||
Total |
$ | (2,044 | ) | $ | (1,149 | ) | $ | (7 | ) | |||||
The Effect of Non-Designated Derivative Instruments on the Statement of Operations
For the Quarter Ended September 30, 2009
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Location of Gain (Loss) Recognized in Income on Derivatives |
Amount of Gain (Loss) Recognized in Income on Derivatives |
|||||
---|---|---|---|---|---|---|---|
Interest rate swaps | Interest expense and other, net | $ | 218 | ||||
Diesel fuel swaps | Other (income) and expense, net | 92 | |||||
Total | $ | 310 | |||||
24
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
9. Derivatives (Continued)
The Effect of Designated Derivative Instruments on the Statement of Operations
For the Nine Months Ended September 30, 2009
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) |
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Interest rate swaps |
$ | (4,302 | ) | Interest expense and other, net | $ | (2,552 | ) | Interest expense and other, net | $ | (25 | ) | |||
Diesel fuel swaps |
26 |
Fuel expense (included in Costs of revenues, excluding depreciation and amortization) |
(26 |
) |
Other (income) and expense, net |
(8 |
) |
|||||||
Total |
$ | (4,276 | ) | $ | (2,578 | ) | $ | (33 | ) | |||||
The Effect of Non-Designated Derivative Instruments on the Statement of Operations
For the Nine Months Ended September 30, 2009
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Location of Gain (Loss) Recognized in Income on Derivatives |
Amount of Gain (Loss) Recognized in Income on Derivatives |
|||||
---|---|---|---|---|---|---|---|
Interest rate swaps |
Interest expense and other, net | $ | 1,225 | ||||
Diesel fuel swaps |
Other (income) and expense, net | 46 | |||||
Total |
$ | 1,271 | |||||
10. Income Taxes
For the quarter and nine months ended September 30, 2009, the Company recorded a provision for income taxes of $2,053 and $8,269, or 40.5% and 41.8% of the Company's pretax income, respectively. For the quarter and nine months ended September 30, 2008, the Company recorded a provision for income taxes of $4,165 and $10,998, or 39.7% and 42.5% of the Company's pretax income, respectively. The Company's effective tax rates were higher than the federal statutory rates primarily as a result of state income taxes and permanent non-deductible tax items, including share-based payment, unrecognized tax benefits and other permanent differences.
25
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
10. Income Taxes (Continued)
As of September 30, 2009, the Company has provided a liability for $1,617 for unrecognized tax benefits related to various federal and state income tax matters. This entire amount would reduce the Company's effective income tax rate if recognized.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2009, the Company had approximately $208 in accrued interest and penalties which is included as a component of the $1,617 unrecognized tax benefit noted above.
The Company is subject to U.S. federal income tax as well as income tax of multiple state tax jurisdictions. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2006 through 2008. The Company's state income tax returns are open to audit under the statute of limitations for the years ended December 31, 2004 through 2008. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next 12 months.
11. Earnings Per Common Share
Effective January 1, 2009, the Company adopted ASC 260 [formerly FSP 03-6-1]. ASC 260 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in ASC 260. ASC 260 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The Company granted and expects to continue to grant restricted stock awards to its officers and non-employee directors that contain non-forfeitable rights to dividend. Such awards are considered participating securities under ASC 260. As such, the Company is required to include these awards in the calculation of the Company's basic earnings per share and will need to calculate basic earnings per share using the two-class method. Restricted stock awards have previously been included in the Company's dilutive earnings per share calculation using the treasury stock method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company has historically not paid and does not expect to pay dividends in the foreseeable future; however, the Company must still allocate undistributed earnings between common shareholders and participating securities based on the contractual rights of each security, as if all the earnings for the period have been distributed. Since the adoption of ASC 260 is to be applied retrospectively, the earnings per share for prior periods will be recalculated to conform to the current year presentation. The weighted-average number of shares used in the basic earnings per share calculation for the quarter and nine months ended September 30, 2008 has been recalculated using the two-class method to conform to the current year presentation.
Basic net income per share is computed utilizing the two-class method and is calculated based on weighted-average number of common shares outstanding during the periods presented, excluding
26
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
11. Earnings Per Common Share (Continued)
nonvested restricted stock units which do not contain nonforfeitable rights to dividend and dividend equivalents.
Diluted net income per share is computed using the weighted-average number of common and common equivalent shares outstanding during the periods utilizing the two-class method for stock options, nonvested restricted stock and nonvested restricted stock units. Potentially dilutive securities are not considered in the calculation of net loss per share as their impact would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands, except per share amounts):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | 2008 | 2009 | |||||||||||
Numerator: |
|||||||||||||||
Net income attributable to Alliance |
|||||||||||||||
HealthCare Services, Inc. |
$ | 6,331 | $ | 3,022 | $ | 14,865 | $ | 11,517 | |||||||
Denominator: |
|||||||||||||||
Denominator for basic earnings per shareweighted-average shares |
51,072 | 51,765 | 51,037 | 51,691 | |||||||||||
Effect of dilutive securities: |
|||||||||||||||
Employee stock options |
1,001 | 249 | 908 | 466 | |||||||||||
Denominator for diluted earnings per shareadjusted weighted-average shares |
52,073 | 52,014 | 51,945 | 52,157 | |||||||||||
Earnings per common share attributable to Alliance HealthCare Services, Inc.: |
|||||||||||||||
Basic |
$ | 0.12 | $ | 0.06 | $ | 0.29 | $ | 0.22 | |||||||
Diluted |
$ | 0.12 | $ | 0.06 | $ | 0.29 | $ | 0.22 | |||||||
Stock options excluded from the computation of diluted per share amounts: |
|||||||||||||||
Weighted-average shares for which the exercise price exceeds average market price of common stock |
383 | 2,530 | 458 | 2,220 | |||||||||||
Average exercise price per share that exceeds average market price of common stock |
$ | 12.39 | $ | 8.57 | $ | 11.96 | $ | 8.89 | |||||||
12. Commitments and Contingencies
The Company has applied the disclosure provisions of ASC 460, "Guarantees" (formerly FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others") to its agreements that contain guarantee or
27
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
12. Commitments and Contingencies (Continued)
indemnification clauses. These disclosure provisions expand those required by ASC 440, "Commitments," and ASC 450, "Contingencies" (formerly FASB Statement No. 5, "Accounting for Contingencies"), by requiring a guarantor to disclose certain types of guarantees, even if the likelihood of requiring the guarantor's performance is remote. The following is a description of arrangements in which the Company is the guarantor or indemnifies a party.
In the normal course of business, the Company has made certain guarantees and indemnities, under which it may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions. The Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against losses arising from certain events as defined within the particular contract, which may include, for example, litigation or claims arising from a breach of representations or covenants. In addition, the Company has entered into indemnification agreements with its executive officers and directors and the Company's bylaws contain similar indemnification obligations. Under these arrangements, the Company is obligated to indemnify, to the fullest extent permitted under applicable law, its current or former officers and directors for various amounts incurred with respect to actions, suits or proceedings in which they were made, or threatened to be made, a party as a result of acting as an officer or director.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made related to these indemnifications have been immaterial. At September 30, 2009, the Company has determined that no liability is necessary related to these guarantees and indemnities.
In connection with the Company's acquisition of MOS, LLC in the third quarter of 2008, Alliance subsequently identified a Medicare billing practice related to a portion of MOS, LLC's retail billing operations that raised compliance issues under Medicare reimbursement guidelines. The practice was in place prior to the acquisition and was discontinued when Alliance became aware of it. In accordance with its corporate compliance program, Alliance has entered into discussions with representatives of the federal government to advise them of the issue and seek guidance on appropriate next steps. The discussions are ongoing and no resolution has yet been reached. Although the government may seek repayment and penalties relating to the billing practice, the Company does not expect that such repayment and penalties, if imposed on the Company, would have a material impact on the Company's results of operations, cash flows or financial position because the Company believes the amounts it would owe will be substantially or fully off-set by recoveries under the indemnification provisions of the MOS, LLC acquisition purchase agreement.
The Company from time to time is involved in routine litigation and regulatory matters incidental to the conduct of its business. The Company believes that resolution of such matters will not have a material adverse effect on its consolidated results of operations or financial position.
28
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
13. Related-Party Transactions
On April 16, 2007, Oaktree and MTS purchased 24,501,505 shares of the Company's common stock from a fund managed by an affiliate of Kohlberg Kravis Roberts & Co ("KKR"). Upon completion of the transaction, Oaktree and MTS owned in the aggregate approximately 49.7% of the outstanding shares of common stock of the Company. At September 30, 2009, Oaktree and MTS owned in the aggregate approximately 47.2% of the outstanding shares of common stock of the Company. The Company does not pay management fees to Oaktree and MTS for their financial advisory services to the Company.
Revenue from management agreements with unconsolidated equity investees was $4,283 and $3,315 for the quarters ended September 30, 2008 and 2009, respectively. Revenue from management agreements with unconsolidated equity investees was $13,406 and $11,483 for the nine months ended September 30, 2008 and 2009, respectively. The Company provides services as part of its ongoing operations for and on behalf of the unconsolidated equity investees, which is included in the management agreement revenue, who reimburse the Company for the actual amount of the expenses incurred. The Company records the expenses as costs of revenues and the reimbursement as revenue in its consolidated statements of operations. For the quarters ended September 30, 2008 and 2009, the amounts of the revenues and expenses were $3,458 and $2,507, respectively. For the nine months ended September 30, 2008 and 2009, the amounts of the revenues and expenses were $10,983 and $8,979, respectively.
14. Investments in Unconsolidated Investees
The Company has direct ownership in six unconsolidated investees at September 30, 2009. The Company owns between 33.3% and 50% of these investees, and provides management services under agreements with four of these investees, expiring at various dates through 2025. All of these investees are accounted for under the equity method since the Company does not exercise control over the operations of these investees.
Set forth below is certain unaudited financial data for Alliance-HNI, LLC and its subsidiaries, one of the Company's unconsolidated investees:
|
December 31, 2008 |
September 30, 2009 |
|||||
---|---|---|---|---|---|---|---|
Balance Sheet Data: |
|||||||
Current assets |
$ | 6,466 | $ | 4,506 | |||
Noncurrent assets |
14,199 | 15,479 | |||||
Current liabilites |
4,833 | 4,329 | |||||
Noncurrent liabilites |
5,704 | 5,462 |
29
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)
14. Investments in Unconsolidated Investees (Continued)
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | 2008 | 2009 | |||||||||
Combined Operating Results: |
|||||||||||||
Revenues |
$ | 7,076 | $ | 5,466 | $ | 20,718 | $ | 17,130 | |||||
Expenses |
4,659 | 3,697 | 14,085 | 12,303 | |||||||||
Net income |
2,417 | 1,749 | 6,633 | 4,827 | |||||||||
Earnings from unconsolidated investees |
1,180 | 873 | 3,288 | 2,091 |
Set forth below is certain unaudited financial data for the aggregate of the Company's unconsolidated investees, including Alliance-HNI, LLC and its subsidiaries:
|
December 31, 2008 |
September 30, 2009 |
|||||
---|---|---|---|---|---|---|---|
Balance Sheet Data: |
|||||||
Current assets |
$ | 9,599 | $ | 8,545 | |||
Noncurrent assets |
19,881 | 23,879 | |||||
Current liabilites |
7,219 | 5,823 | |||||
Noncurrent liabilites |
8,450 | 7,206 |
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2008 | 2009 | 2008 | 2009 | |||||||||
Combined Operating Results: |
|||||||||||||
Revenues |
$ | 9,297 | $ | 8,176 | $ | 28,117 | $ | 24,668 | |||||
Expenses |
6,653 | 5,661 | 20,920 | 18,942 | |||||||||
Net income |
2,644 | 2,515 | 7,197 | 5,726 | |||||||||
Earnings from unconsolidated investees |
1,235 | 1,259 | 3,549 | 2,678 |
30
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
(Unaudited)
(Dollars in thousands, except per share amounts)