aiq-10q_20160630.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 the Quarterly Period Ended: June 30, 2016

Commission File Number: 001-16609

 

ALLIANCE HEALTHCARE SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

33-0239910

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification Number)

 

100 Bayview Circle

Suite 400

Newport Beach, California 92660

(Address of Principal Executive Office) (Zip Code)

(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  x    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  x    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

x

 

 

 

 

 

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  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 1, 2016, there were 10,738,551 shares of common stock, par value $.01 per share, outstanding.

 

 

 

 


 

ALLIANCE HEALTHCARE SERVICES, INC.

FORM 10-Q

June 30, 2016

Index

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

3

Item 1—Financial Statements:

 

3

Condensed Consolidated Balance Sheets

 

3

as of June 30, 2016 (Unaudited) and December 31, 2015

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

 

4

for the Three and Six Months ended June 30, 2016 and 2015 (Unaudited)

 

 

Condensed Consolidated Statements of Cash Flows

 

5

for the Six Months ended June 30, 2016 and 2015 (Unaudited)

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6

Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

32

Item 3—Quantitative and Qualitative Disclosures about Market Risk

 

45

Item 4—Controls and Procedures

 

46

PART II—OTHER INFORMATION

 

47

Item 1—Legal Proceedings

 

47

Item 1A—Risk Factors

 

47

Item 6—Exhibits

 

48

SIGNATURES

 

51

 

 

2


 

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,319

 

 

$

38,070

 

Accounts receivable, net of allowance for doubtful accounts of $4,376 in 2016 and

   $5,461 in 2015

 

 

73,514

 

 

 

73,208

 

Prepaid expenses

 

 

13,191

 

 

 

13,463

 

Other receivables

 

 

2,532

 

 

 

3,206

 

Total current assets

 

 

113,556

 

 

 

127,947

 

Plant, property and equipment, net

 

 

204,447

 

 

 

177,188

 

Goodwill

 

 

106,129

 

 

 

102,782

 

Other intangible assets, net

 

 

164,587

 

 

 

162,923

 

Other assets

 

 

25,858

 

 

 

32,820

 

Total assets

 

$

614,577

 

 

$

603,660

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

24,973

 

 

$

20,796

 

Accrued compensation and related expenses

 

 

22,753

 

 

 

19,933

 

Accrued interest payable

 

 

3,253

 

 

 

3,323

 

Current portion of long-term debt

 

 

19,174

 

 

 

17,732

 

Current portion of obligations under capital leases

 

 

2,606

 

 

 

2,674

 

Other accrued liabilities

 

 

34,783

 

 

 

36,453

 

Total current liabilities

 

 

107,542

 

 

 

100,911

 

Long-term debt, net of current portion and deferred financing costs

 

 

509,800

 

 

 

540,353

 

Obligations under capital leases, net of current portion

 

 

11,524

 

 

 

10,332

 

Deferred income taxes

 

 

23,960

 

 

 

23,020

 

Other liabilities

 

 

7,149

 

 

 

6,664

 

Total liabilities

 

 

659,975

 

 

 

681,280

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 1,000,000 shares authorized and no shares issued

   and outstanding

 

 

 

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 10,896,524

   and 10,774,857 issued in 2016 and 2015, respectively; 10,738,551

   and 10,616,884 outstanding in 2016 and 2015, respectively

 

 

109

 

 

 

108

 

Treasury stock, at cost - 157,973 shares in 2016 and 2015

 

 

(3,138

)

 

 

(3,138

)

Additional paid-in capital

 

 

60,635

 

 

 

29,297

 

Accumulated comprehensive loss

 

 

(465

)

 

 

(511

)

Accumulated deficit

 

 

(197,124

)

 

 

(198,393

)

Total stockholders’ deficit attributable to Alliance HealthCare Services, Inc.

 

 

(139,983

)

 

 

(172,637

)

Noncontrolling interest

 

 

94,585

 

 

 

95,017

 

Total stockholders’ deficit

 

 

(45,398

)

 

 

(77,620

)

Total liabilities and stockholders’ deficit

 

$

614,577

 

 

$

603,660

 

 

See accompanying notes.

 

 

3


 

ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands, except per share amounts)

 

 

 

Quarter Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

125,317

 

 

$

118,504

 

 

$

249,041

 

 

$

227,933

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues, excluding depreciation and amortization

 

 

69,939

 

 

 

67,485

 

 

 

140,853

 

 

 

129,371

 

Selling, general and administrative expenses

 

 

23,175

 

 

 

20,800

 

 

 

48,440

 

 

 

41,755

 

Transaction costs

 

 

431

 

 

 

1,113

 

 

 

848

 

 

 

1,532

 

Shareholder transaction costs

 

 

1,498

 

 

 

 

 

 

2,507

 

 

 

 

Severance and related costs

 

 

708

 

 

 

195

 

 

 

2,424

 

 

 

454

 

Impairment charges

 

 

 

 

 

6,670

 

 

 

 

 

 

6,746

 

Depreciation expense

 

 

13,730

 

 

 

12,072

 

 

 

26,778

 

 

 

23,705

 

Amortization expense

 

 

2,494

 

 

 

2,495

 

 

 

4,937

 

 

 

4,530

 

Interest expense and other, net

 

 

8,872

 

 

 

6,904

 

 

 

16,367

 

 

 

12,922

 

Other (income) and expense, net

 

 

(3,546

)

 

 

486

 

 

 

(4,334

)

 

 

127

 

Total costs and expenses

 

 

117,301

 

 

 

118,220

 

 

 

238,820

 

 

 

221,142

 

Income before income taxes, earnings from unconsolidated

   investees, and noncontrolling interest

 

 

8,016

 

 

 

284

 

 

 

10,221

 

 

 

6,791

 

Income tax expense (benefit)

 

 

2,221

 

 

 

(1,366

)

 

 

1,275

 

 

 

206

 

Earnings from unconsolidated investees

 

 

(393

)

 

 

(1,292

)

 

 

(645

)

 

 

(2,455

)

Net income

 

 

6,188

 

 

 

2,942

 

 

 

9,591

 

 

 

9,040

 

Less: Net income attributable to noncontrolling interest

 

 

(3,729

)

 

 

(4,903

)

 

 

(8,322

)

 

 

(9,250

)

Net income (loss) attributable to Alliance HealthCare

   Services, Inc.

 

$

2,459

 

 

$

(1,961

)

 

$

1,269

 

 

$

(210

)

Comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Alliance HealthCare

   Services, Inc.

 

$

2,459

 

 

$

(1,961

)

 

$

1,269

 

 

$

(210

)

Unrealized gain (loss) on hedging transactions, net of taxes

 

 

84

 

 

 

(13

)

 

 

46

 

 

 

(141

)

Comprehensive income (loss), net of taxes:

 

$

2,543

 

 

$

(1,974

)

 

$

1,315

 

 

$

(351

)

Income (loss) per common share attributable to Alliance

   HealthCare Services, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

 

$

(0.18

)

 

$

0.12

 

 

$

(0.02

)

Diluted

 

$

0.23

 

 

$

(0.18

)

 

$

0.12

 

 

$

(0.02

)

Weighted-average number of shares of common stock and

   common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,882

 

 

 

10,715

 

 

 

10,771

 

 

 

10,714

 

Diluted

 

 

10,893

 

 

 

10,836

 

 

 

10,796

 

 

 

10,839

 

 

See accompanying notes.

 

 

4


 

ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

9,591

 

 

$

9,040

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

1,356

 

 

 

1,054

 

Share-based payment

 

 

1,780

 

 

 

819

 

Depreciation and amortization

 

 

31,715

 

 

 

28,235

 

Amortization of deferred financing costs

 

 

3,312

 

 

 

2,098

 

Accretion of discount on long-term debt

 

 

254

 

 

 

232

 

Adjustment of derivatives to fair value

 

 

(45

)

 

 

98

 

Distributions  more than undistributed earnings from investees

 

 

107

 

 

 

189

 

Deferred income taxes

 

 

940

 

 

 

(697

)

Gain on sale of assets

 

 

(169

)

 

 

(406

)

Changes in fair value of contingent consideration related to acquisitions

 

 

(3,640

)

 

 

 

Impairment charges

 

 

 

 

 

6,746

 

Excess tax benefit from share-based payment arrangements

 

 

436

 

 

 

5

 

Changes in operating assets and liabilities, net of the effects of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,389

)

 

 

(577

)

Prepaid expenses

 

 

(119

)

 

 

(1,499

)

Other receivables

 

 

674

 

 

 

(242

)

Other assets

 

 

4,240

 

 

 

534

 

Accounts payable

 

 

2,578

 

 

 

627

 

Accrued compensation and related expenses

 

 

2,820

 

 

 

340

 

Accrued interest payable

 

 

(70

)

 

 

(31

)

Income taxes payable

 

 

(36

)

 

 

131

 

Other accrued liabilities

 

 

3,614

 

 

 

964

 

Net cash provided by operating activities

 

 

57,949

 

 

 

47,660

 

Investing activities:

 

 

 

 

 

 

 

 

Equipment purchases

 

 

(33,975

)

 

 

(26,382

)

Increase in deposits on equipment

 

 

(13,847

)

 

 

(9,935

)

Acquisitions, net of cash received

 

 

(6,659

)

 

 

(24,061

)

Proceeds from sale of assets

 

 

370

 

 

 

520

 

Net cash used in investing activities

 

 

(54,111

)

 

 

(59,858

)

Financing activities:

 

 

 

 

 

 

 

 

Principal payments on equipment debt and capital lease obligations

 

 

(8,035

)

 

 

(4,639

)

Proceeds from equipment debt

 

 

4,809

 

 

 

15,691

 

Principal payments on term loan facility

 

 

(2,600

)

 

 

(7,351

)

Proceeds from term loan facility

 

 

 

 

 

29,850

 

Principal payments on revolving loan facility

 

 

(24,000

)

 

 

(28,000

)

Proceeds from revolving loan facility

 

 

21,000

 

 

 

26,000

 

Payments of debt issuance costs and deferred financing costs

 

 

(25,059

)

 

 

(654

)

Noncontrolling interest in subsidiaries

 

 

(11,703

)

 

 

(8,353

)

Excess tax benefit from share-based payment arrangements

 

 

(436

)

 

 

(5

)

Issuance of common stock

 

 

1

 

 

 

 

Proceeds from exercise of stock options

 

 

614

 

 

 

25

 

Settlement of contingent consideration related to acquisitions

 

 

(810

)

 

 

 

Proceeds from shareholder transaction

 

 

28,630

 

 

 

 

Net cash (used in) provided by financing activities

 

 

(17,589

)

 

 

22,564

 

Net (decrease) increase in cash and cash equivalents

 

 

(13,751

)

 

 

10,366

 

Cash and cash equivalents, beginning of period

 

 

38,070

 

 

 

33,033

 

Cash and cash equivalents, end of period

 

$

24,319

 

 

$

43,399

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

12,957

 

 

$

11,110

 

Income taxes refunded, net of payments

 

 

(92

)

 

 

(146

)

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Capital lease obligations related to the purchase of equipment

 

 

1,499

 

 

$

1,294

 

Equipment purchases in accounts payable and accrued equipment

 

 

352

 

 

 

2,477

 

Noncontrolling interest assumed in connection with acquisitions (Note 3)

 

 

2,948

 

 

 

20,598

 

Fair value of contingent consideration related to acquisitions (Note 3)

 

 

420

 

 

 

 

Extinguishment of note receivable

 

 

 

 

 

3,071

 

 

See accompanying notes.

 

 

5


 

ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2016

(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” or “Alliance”) 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 (“GAAP”) 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 three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015.

Principles of Consolidation The accompanying unaudited condensed consolidated financial statements of the Company include the assets, liabilities, revenues and expenses of all subsidiaries over which the Company exercises control. Intercompany transactions have been eliminated. The Company evaluates participating rights in its assessment of control in determining consolidation of joint venture partners. The Company records noncontrolling interest related to its consolidated subsidiaries that are not wholly owned. Investments in non-consolidated investees over which it exercises significant influence but does not control are accounted for under the equity method.

Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP 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.

Critical Accounting Policies

Information with respect to the Company’s critical accounting policies which management believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the 2015 Form 10-K/A. Management believes that there have been no significant changes during the three and six months ended June 30, 2016 in the Company’s critical accounting policies from those disclosed in Item 7 of the 2015 Form 10-K/A.

 

 

2. Recent Accounting Pronouncements

Revenue Recognition In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” — to clarify and converge the revenue recognition principles under U.S. GAAP and International Financial Reporting Standards and to develop guidance that would streamline and enhance revenue recognition requirements while also providing a more robust framework for addressing revenue issues. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. Key provisions of the ASU involve a 5-step model specific to recognizing revenue derived from customer contracts. In addition, ASU 2014-09 provides implementation guidance on several other important topics, including the accounting for certain revenue-related costs. The Company is currently assessing the impacts this guidance may have on its consolidated financial statements and disclosures as well as the transition method it will use to adopt the guidance. The Company is considering the impacts of the new guidance on its ability to recognize revenue for certain contracts. In addition, the Company will be required to capitalize costs to acquire new contracts, whereas currently, the Company expenses those costs as incurred. In August 2015, the FASB issued an amendment to provide a one year deferral of the effective date to annual reporting periods beginning on or after December 15, 2017, as well as an option to early adopt the standard for annual periods beginning on or after December 15, 2016. The Company does not plan to early adopt the standard.

6


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

Going Concern In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40)”. Under U.S. GAAP, a going concern is presumed unless and until an entity’s liquidation becomes imminent. When an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, “Presentation of Financial Statements—Liquidation Basis of Accounting.” However, there may be conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, even if liquidation is not imminent. In those situations, financial statements should continue to be prepared under the going concern basis of accounting. ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to determine whether to disclose information about relevant conditions and events. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is assessing the impact, if any, that the adoption of ASU 2014-15 may have on the Company's consolidated financial statements.

Simplifying the Presentation of Debt Issuance Costs In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Cost” that changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires entities to present such costs in the balance sheet as a direct reduction to the related debt liability rather than as a deferred cost (i.e., an asset) as required by current guidance. In August 2015, the FASB issued clarifying authoritative guidance for debt issuance costs incurred in connection with line-of-credit arrangements. The guidance states that an entity should defer and present these debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. ASU 2015-03 does not change the recognition or measurement of debt issuance costs and is effective for fiscal years beginning after December 15, 2015. The guidance is required to be applied retrospectively to all prior periods presented. As of December 31, 2015, the Company had $6,594 in deferred financing costs, net that was reclassified to offset long-term debt, net of current portion. The adoption of the guidance did not have a material impact on the Company's consolidated financial statements.

Balance Sheet Classification of Deferred Taxes In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which will require entities to present deferred tax assets (“DTAs”) and deferred tax liabilities (“DTLs”) as noncurrent in a classified balance sheet. The ASU simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet. The adoption of ASU 2015-17 is effective for publicly traded business entities for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early adoption is permitted. The Company has elected to early adopt this guidance and applied it retrospectively to periods presented in the consolidated financial statements. As of December 31, 2015, the Company had $6,496 in DTAs that was reclassified to long-term DTLs. The adoption of ASU No. 2015-17 did not have a material impact on the Company’s consolidated financial statements.

Leases In February 2016, the FASB issued ASU 2016-02, “Leases,” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU supersedes the current guidance. The primary difference between current guidance and ASU 2015-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 also requires an entity to separate the lease components from the nonlease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. Only the lease components must be accounted for in accordance with this guidance. ASU 2016-02 is effective for publicly traded business entities for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted. The Company is assessing the impact, if any, that the adoption of ASU 2016-02 may have on the Company's consolidated financial statements.

Share-Based Payments In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718),” which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic traded entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance, which is part of the FASB’s simplification initiative, also contains two practical expedients under which nonpublic entities can use the simplified method to estimate the expected term of an award and make a one-time election to switch from fair value measurement to intrinsic value measurement for liability-classified awards. ASU 2016-09 is effective for public business entities for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted. The Company is assessing the impact, if any, that the adoption of ASU 2016-09 may have on the Company's consolidated financial statements.

 

7


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

3. Acquisitions and Transactions

Acquisitions have been recorded using the acquisition method of accounting and, accordingly, results of their operations have been included in the Company’s consolidated financial statements since the effective date of each respective acquisition.

Thai Hot Transaction

On September 16, 2015, Fujian Thai Hot Investment Co., Ltd. (“Thai Hot”) agreed to purchase approximately 5,537,945 shares of Company common stock from funds managed by Oaktree Capital Management, L.P. (“Oaktree”) and MTS Health Investors, LLC (“MTS”), and Larry C. Buckelew (together, the “Selling Stockholders”) for approximately $102.5 million or $18.50 per share (the “Thai Hot Transaction”). In connection with the Thai Hot Transaction, Thai Hot and the Selling Stockholders agreed to bear a specified portion of the following Company expenses related to the Thai Hot Transaction: (i) 100% of the fees and expenses incurred by the Company in connection with the amendment or waiver of its credit agreement, and (ii) all reasonable and documented fees and expenses incurred by the Company in connection with the Thai Hot Transaction in excess of $1 million. In addition, subject to the approval of the Board or an authorized special committee of the Board, Thai Hot agreed to fund a new management incentive arrangement which involves the issuance of $1.5 million in cash-based awards to the Company’s management. The expenses associated with the cash-based awards will be recognized by the Company over the required service period of the awards. The Company accounted for reimbursements received prior to the Thai Hot Transaction close from the Selling Stockholders of $15,343 as capital contributions, and reimbursements received subsequent to the Thai Hot Transaction close from Thai Hot of $13,500 as capital contributions.

The Thai Hot Transaction closed on March 29, 2016.  As a result of the Thai Hot Transaction, Thai Hot, through a wholly owned subsidiary, owns an aggregate of approximately 51.5% of the outstanding shares of common stock of the Company.  The Company has not agreed to pay any management fees to Thai Hot for any financial advisory services to the Company.

2016 Acquisition

American Health Centers, Inc.

On April 22, 2016, the Company, through its Radiology Division, acquired the mobile business practice of American Health Centers, Inc., a provider of fixed and mobile radiology and nuclear medicine services in New Hampshire and Vermont. The Company acquired eight mobile radiology sites, and five mobile nuclear medicine sites, effective May 19, 2016. The combined cash purchase price consisted of $4,209. The Company financed this acquisition using the revolving line of credit. For additional information, see Note 8 – Long-Term Debt and Senior Subordinated Credit Facility of the Notes to Condensed Consolidated Financial Statements.

The following table summarizes recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Equipment, net

 

$

2,354

 

Goodwill

 

 

335

 

Identifiable intangible assets

 

 

1,940

 

Total consideration

 

$

4,629

 

8


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

As a result of this acquisition, the Company recorded goodwill of $335, which largely represents intangible assets that do not qualify for separate recognition, including existing patients and the solid record of patient care in the local community. In addition, the Company recorded intangible assets of $1,940, of which $1,600 was assigned to customer contracts, which is being amortized over 15 years, and $340 was assigned to a non-competition agreement, which is being amortized over five years. A portion of the recorded goodwill and intangible assets is being amortized over 15 years for tax purposes. The Company recorded the intangible assets at fair value at the acquisition date, which was estimated using the income approach. The results for the three and six months ended June 30, 2016 included $637 of net revenue and $269 of net income before income taxes.

The values assigned to the various assets and liabilities acquired in this transaction are preliminary and may be subject to adjustment as the calculation of their respective fair values could be subject to change.

The agreement includes contingent consideration arrangements, which are based on performance of the 18-month period following the transaction date. The fair value of these contingent consideration arrangements of $420 was estimated using management’s estimates as of the acquisition date and as of June 30, 2016.

2015 Acquisitions

Pacific Cancer Institute, Inc.

On December 31, 2015, the Company, through its Oncology Division, acquired a 95% controlling interest in the Pacific Cancer Institute, Inc. (“PCI”), a state-of-the-art radiation therapy and SRS center located in Maui, Hawaii. The purchase price consisted of $11,013 in cash, net of holdback liabilities. The Company financed this acquisition using the revolving line of credit. For additional information, see Note 8 – Long-Term Debt and Senior Subordinated Credit Facility of the Notes to Condensed Consolidated Financial Statements

As a result of this acquisition, the Company recorded goodwill of $6,505, which largely represents intangible assets that do not qualify for separate recognition, including existing patients and the solid record of patient care in the local community. In addition, the Company recorded intangible assets of $8,800, of which $1,800 was assigned to physician referral network, $5,400 was assigned to Certificates of Need (“CONs”), $650 was assigned to non-solicitation and non-competition agreements and $950 was assigned to trademarks, which are being amortized over five to 15 years. The Company recorded the intangible assets at fair value at the acquisition date, which was estimated using the income approach. A portion of the recorded goodwill and intangible assets is being amortized over 15 years for tax purposes. The results for the three and six months ended June 30, 2016 included $1,280 and $2,714 of net revenue, respectively, and $22 and $219 of net income, respectively, generated by PCI.

The agreement includes contingent consideration arrangements, which are based on performance of the 12-month period following the transaction date. The fair value of these contingent consideration arrangements of $200 was estimated using management’s estimates as of June 30, 2016.

The values assigned to the various assets and liabilities acquired in this transaction are preliminary and may be subject to adjustment as the calculation of their respective fair values could be subject to change.

AHIP-Florida, LLC

On October 14, 2015, the Company, through its Interventional Division, acquired a 60% controlling interest in PRC Associates, LLC, (“PRC”), a premier provider of interventional pain management healthcare with eight locations in Central Florida and the Palm Coast. The purchase price consisted of $15,014 in cash, net of $264 cash acquired. The Company financed this acquisition using the revolving line of credit. The purchase agreement includes a mandatory redemption provision allowing the noncontrolling interest holder to sell 10% of its noncontrolling interest to Alliance after the closing date.

9


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

As a result of this acquisition, the Company recorded goodwill of $8,234, which largely represents intangible assets that do not qualify for separate recognition, such as prominent leadership and the solid record of patient care programs that set national standards for quality coordinated care in pain management. In addition, the Company recorded intangible assets of $15,600, of which $12,100 was assigned to physician referral network, $1,800 was assigned to non-solicitation and non-competition agreements and $1,700 was assigned to trademarks, which are being amortized over five to 15 years. The Company recorded the intangible assets at fair value at the acquisition date, which was estimated using the income approach. A portion of the recorded goodwill and intangible assets is being amortized over 15 years for tax purposes. The results for the three and six months ended June 30, 2016 included $3,150 and $6,597 of net revenue, respectively, and $204 and $746 of net income, respectively, generated by PRC.

The agreement includes contingent consideration arrangements, which are based on performance of the 12-month period following the transaction date. The fair value of these contingent consideration arrangements of $950 was estimated using management’s estimates as of June 30, 2016.

The values assigned to the various assets and liabilities acquired in this transaction are preliminary and may be subject to adjustment as the calculation of their respective fair values could be subject to change.

Alliance-HNI, LLC and Subsidiaries

On August 1, 2015, the Company obtained through its Radiology Division an additional 15.5% interest in its previously non-consolidated investment, Alliance-HNI, LLC (“AHNI”) through a step acquisition. Prior to August 1, 2015, the Company held a noncontrolling interest in AHNI, pursuant to its acquisition of Medical Consultants Imaging, Co. (“MCIC”), which held a 50% interest in a joint venture that was subsequently renamed AHNI.

Prior to the step acquisition on August 1, 2015, AHNI had three subsidiaries: Alliance-HNI Leasing Co. (“AHNIL”), Alliance-HNV PET/CT Services, LLC (“AHNVPS”), and Alliance-HNV PET/CT Leasing, LLC (“AHNVPL”). AHNI held a 98% interest in AHNIL, which AHNI consolidated, a 53.4% interest in AHNVPS, and effectively, a 53.3% interest in AHNVPL through its ownership in AHNVPS, both of which AHNI did not consolidate. In addition to the Company's original 50% investment in AHNI, it also had a 46.6% direct interest in AHNVPS prior to the step acquisition and, accordingly, the Company has historically consolidated AHNVPS and AHNVPL.

On August 1, 2015, the Company contributed its 46.6% interest in HNVPS and its rights to certain assets to AHNI in exchange for an additional 15.5% interest in AHNI. After the transaction the Company holds a 65.5% interest in AHNI which, in turn, holds all of the outstanding interest in AHNVPS. As a result of gaining a controlling interest in AHNI, the Company began consolidating AHNI effective August 1, 2015.

Pursuant to ASC 805, “Business Combinations,” the transaction is considered a step acquisition and the Company was required to remeasure its previously held equity interest in AHNI at its acquisition-date fair value and recognize any resulting gain or loss. AHNVPS assets that the Company was in control of before and after the acquisition were maintained at their carrying amounts immediately before the acquisition date and no gain or loss or resulting goodwill was recognized on these assets.

The fair value of the consideration transferred was based on the net book value of the assets transferred by the Company to AHNI at the acquisition date because the Company had control of those assets before and after the transaction. The Company recorded goodwill of $2,988, which largely represents intangible assets that do not qualify for separate recognition. In addition, the Company recorded intangible assets of $13,700. The intangible assets consist primarily of physician referral networks, trademarks, and CONs, a portion of which are being amortized over 15 years.

The values assigned to the various assets and liabilities acquired in this transaction are preliminary and may be subject to adjustment as the calculation of their respective fair values could be subject to change.

10


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

The Pain Center of Arizona

On February 17, 2015, the Company purchased approximately a 59% membership interest in The Pain Center of Arizona (“TPC”), a comprehensive full-time pain management medical practice with 12 locations within the state of Arizona. The acquisition took place in two stages: a purchase of a 60% membership interest in TPC by the Company, and a 50% membership interest in Medical Practice Innovations, Inc. (“MPI”), followed by a transfer of MPI assets to TPC. The MPI transaction diluted the ownership interests of TPC, with the Company retaining approximately 59% membership interest in TPC. The purchase price consisted of $24,087 in cash, net of $234 cash acquired, and net of extinguishment of $3,071 of related-party notes receivable. The Company financed this acquisition using the revolving line of credit.

As a result of this acquisition, the Company recorded goodwill of $22,566, which largely represents intangible assets that do not qualify for separate recognition, such as prominent leadership and the solid record of patient care programs that set national standards for quality coordinated care in pain management. In addition, the Company recorded intangible assets of $24,600, of which $13,500 was assigned to physician referral network and $11,100 was assigned to trademarks, which are being amortized over 20 years. The Company recorded the intangible assets at fair value at the acquisition date, which was estimated using the income approach. A portion of the recorded goodwill and intangible assets is being amortized over 15 years for tax purposes. The fair value of noncontrolling interest related to this transaction was estimated to be $20,598 as of the acquisition date using the implied fair value based on the Company's ownership percentage. The results for the three and six months ended June 30, 2016 included $7,961 and $15,793 of net revenue, respectively, and $417 and $1,056 of net loss, respectively, generated by TPC. The results for the three and six months ended June 30, 2015 included $8,167 and $12,023 of net revenue, respectively, and $20 and $291 of net income, respectively, generated by TPC.

The agreement includes contingent consideration arrangements, which are based on performance of the 12-month period following the transaction date. The fair value of these contingent consideration arrangements of $960 at June 30, 2016, of which $150 remained in other accrued liabilities on the consolidated balance sheets, was calculated using achieved performance estimates.

Pro Forma Impact of Acquisitions

The following table provides unaudited pro forma revenues and results of operations for the three and six months ended June 30, 2016 and 2015, as if the acquisitions had occurred on January 1, 2015. The pro forma results were prepared from financial information obtained from the sellers of the businesses, as well as information obtained during the due diligence process associated with the acquisitions. The unaudited pro forma results reflect certain adjustments related to the acquisitions, such as increased depreciation and amortization expense resulting from the stepped-up basis to fair value of assets acquired and adjustments to reflect the Company’s borrowing and tax rates. The pro forma operating results do not include any anticipated synergies related to combining the businesses. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made as of January 1, 2015 or of results that may occur in the future.

 

 

 

Quarter Ended June 30,

 

 

Six Months Ended June 30,

 

(In thousands, except per share amounts)

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

125,496

 

 

$

126,116

 

 

$

249,856

 

 

$

246,766

 

Net income (loss) attributable to Alliance HealthCare

   Services, Inc.

 

 

2,533

 

 

 

(978

)

 

 

1,612

 

 

 

1,477

 

Basic earnings (loss) per share

 

 

0.23

 

 

 

(0.09

)

 

 

0.15

 

 

 

0.14

 

Diluted earnings (loss) per share

 

 

0.23

 

 

 

(0.09

)

 

 

0.15

 

 

 

0.14

 

 

Restructuring Plan

During the six months ended June 30, 2016, the Company recorded $1,351 related to restructuring charges, of which the Company recorded $598 in Selling, general and administrative expenses, and $753 and in Cost of revenues, excluding depreciation and amortization. The Company also recorded $2,424 in Severance and related costs during the six months ended June 30, 2016. During the six months ended June 30, 2015, the Company recorded $491 related to restructuring charges, of which the Company recorded $95 in Selling, general and administrative expenses, and $396 in Cost of revenues, excluding depreciation and amortization. The Company also recorded $454 in Severance and related costs during the six months ended June 30, 2015.

11


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

4. Share-Based Payment

The Company has adopted ASC 718, “Compensation—Stock Compensation,” and has elected to follow the alternative transition method as described in ASC 718 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 (as amended and restated, the “1999 Equity Plan”) pursuant to which options and awards with respect to a total of 3,005,000 shares have become available for grant. As of June 30, 2016, a total of 1,091,795 shares remained available for grant under the 1999 Equity Plan. Options are granted with exercise prices equal to the fair value of the Company’s common stock at the date of grant. All options have 10-year terms. Options granted after January 1, 2008 were typically time based and vest in equal tranches over three or four years. During the first quarter of 2016, 71,057 options were accelerated due to a change in control in connection with the closing of the Thai Hot Transaction. There were no options in which vesting was accelerated during 2015.

The Company uses 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 using the assumptions presented 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 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 following weighted average assumptions were used in the estimated grant date fair value calculations for stock option awards:

 

 

 

Six months ended June 30,

 

 

 

2016

 

 

2015

 

Risk free interest rate

 

 

1.53

%

 

 

1.65

%

Expected dividend yield

 

 

%

 

 

%

Expected stock price volatility

 

 

66.5

%

 

 

65.2

%

Average expected life (in years)

 

 

6.00

 

 

 

6.00

 

 

The Company calculates its stock price volatility and average expected life based on its own historical data. The risk free interest rates are based on the United States Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option or award.

12


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

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, 2015

 

 

646,290

 

 

$

19.91

 

 

 

 

 

 

 

 

 

Granted

 

 

200,388

 

 

 

7.16

 

 

 

 

 

 

 

 

 

Exercised

 

 

(121,667

)

 

 

5.05

 

 

 

 

 

 

 

 

 

Canceled

 

 

(27,431

)

 

 

19.15

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2016

 

 

697,580

 

 

 

18.83

 

 

 

6.56

 

 

$

35

 

Vested and expected to vest in the future at June 30, 2016

 

 

655,280

 

 

 

19.53

 

 

 

6.36

 

 

$

35

 

Vested and exercisable at June 30, 2016

 

 

452,021

 

 

 

22.81

 

 

 

5.11

 

 

$

35

 

 

The following table summarizes the Company’s unvested stock option activity:

 

 

 

Shares

 

 

Weighted-

Average

Grant-Date

Fair Value

 

Unvested at December 31, 2015

 

 

158,671

 

 

$

15.01

 

Granted

 

 

200,388

 

 

 

4.32

 

Vested

 

 

(107,613

)

 

 

14.01

 

Canceled

 

 

(5,887

)

 

 

7.81

 

Unvested at June 30, 2016

 

 

245,559

 

 

$

6.90

 

 

Cash proceeds, along with fair value disclosures related to grants, exercises, and vesting options, are as follows:

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Proceeds from stock options exercised

 

$

129

 

 

$

19

 

 

$

614

 

 

$

25

 

Intrinsic value of stock options exercised (1)

 

 

21

 

 

 

9

 

 

 

1,386

 

 

 

25

 

Weighted-average fair value of options granted (per share)

 

N. A.

 

 

N. A.

 

 

 

4.32

 

 

 

14.25

 

Total fair value of shares vested during the period

 

 

 

 

 

107

 

 

 

1,508

 

 

 

479

 

 

(1)

The intrinsic value of stock options exercised is the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant.

For the three months ended June 30, 2016 and 2015, the Company recorded share-based payment related to stock options of $174 and $257, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded share-based payment related to stock options of $1,406 and $475, respectively. At June 30, 2016, the total unrecognized fair value share-based payment related to unvested stock options granted to employees was $992, which is expected to be recognized over a remaining weighted-average period of 2.1 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 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

13


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

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 stock awards (collectively referred to as “stock awards”). During the six months ended June 30, 2016, 85,206 restricted stock units were granted to employees. There were no stock awards granted to employees during the six months ended June 30, 2015. For the three months ended June 30, 2016 and 2015, the Company recorded share-based payment related to stock awards of $205 and $172, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded share-based payment related to stock awards of $837 and $344, respectively.

In the third quarter of 2014, 25,000 restricted stock units (“RSU”) were granted to executive management, which vest based upon achieving certain market performance conditions. Specifically, the Company's closing stock price per common share must equal or exceed a value of $40.00 per share for 10 consecutive days between the dates of January 1, 2015 and April 21, 2017. If these conditions are not achieved before April 21, 2017, these RSUs will expire. In accordance with ASC 718, expense related to restricted stock units that vest based on achieving a market condition should not be recognized until the derived vesting period has been met, and at such time the derived vesting period becomes the requisite service period. Since the market condition has not been met, and is currently not probable of being met based on the current market condition, the Company has not recognized any expense related to these RSUs. These RSUs contain provisions that vesting may be accelerated under a change in control of the Company. The RSU Award provided that in the event of a change in control, the unvested portion of the award will convert into the right to receive a cash amount (the “Cash Right”) equal to the number of unvested restricted stock units multiplied by the per share consideration received by the holders of the Company’s Common Stock in the change in control and the Cash Right shall vest on the six month anniversary of the consummation of the change in control subject to the executive’s continued service through such date; provided, that in the event the executive is terminated without “cause” or for “good reason” (each as defined in the executive’s Employment Agreement) the Cash Right shall vest in full on the date of such termination (the “Cash Right Conversion”). The Thai Hot Transaction constituted a change in control under the terms of the RSU Award agreement and for purposes of the Cash Right Conversion, the Special Committee approved that the per share consideration received by the holders of the Company’s Common Stock upon the consummation of the Thai Hot Transaction was $18.50 per share. The monetary value of the Cash Right of $463 is included as accrued compensation and related expenses on the Company’s Condensed Consolidated Balance Sheets. For additional information on the Thai Hot Transaction, see Note 3 – Acquisitions and Transactions of the Notes to Condensed Consolidated Financial Statements.

The following table summarizes the Company’s restricted stock activity:

 

 

 

Shares

 

 

Weighted-

Average

Grant-Date

Fair Value

 

Unvested at December 31, 2015

 

 

74,413

 

 

$

9.18

 

Granted to employees

 

 

85,206

 

 

 

6.93

 

Vested

 

 

 

 

 

 

Canceled

 

 

 

 

 

 

Unvested at June 30, 2016

 

 

159,619

 

 

$

7.98

 

 

At June 30, 2016 and 2015, the total unrecognized fair value share-based payment related to stock awards granted to unaffiliated directors was $331 and $345, respectively, which is expected to be recognized over a remaining weighted-average period of 0.50 year. At June 30, 2016, unrecognized fair value share-based payments related to stock awards granted to employees was $426, which is expected to be recognized over a remaining weighted-average period of 2.7 years. At June 30, 2015, there were no unrecognized fair value share-based payments related to stock awards granted to employees.

 

 

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 of cash and cash equivalents approximate fair value due to the short-term maturity or variable rates of these instruments.

14


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

Debt The carrying amounts of variable-rate borrowings at June 30, 2016 and December 31, 2015 approximate fair value estimates based on current market rates and credit spreads for similar debt instruments.

Contingent consideration The carrying amounts of contingent consideration related to acquisitions at June 30, 2016 and December 31, 2015 approximate fair value using probability-adjusted or achieved performance estimates.

Mandatorily redeemable noncontrolling interest The carrying amount of mandatorily redeemable noncontrolling interest related to the PRC acquisition at June 30, 2016 and December 31, 2015 approximates fair value using the estimated implied fair value based on the Company's ownership percentage. Further discussion of the mandatorily redeemable noncontrolling interest is disclosed in Note 3 – Acquisitions and Transactions of the Notes to Condensed Consolidated Financial Statements.

Derivative instruments Fair value of derivative instruments 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:

 

 

 

June 30, 2016

 

 

December 31, 2015

 

 

 

Carrying

Value

 

 

Fair

Value

 

 

Carrying

Value

 

 

Fair

Value

 

Cash and cash equivalents

 

$

24,319

 

 

$

24,319

 

 

$

38,070

 

 

$

38,070

 

Fixed-rate capital leases and debt

 

 

40,116

 

 

 

39,242

 

 

 

40,667

 

 

 

40,262

 

Variable-rate debt

 

 

532,007

 

 

 

531,254

 

 

 

537,018

 

 

 

538,520

 

Contingent consideration related to acquisition

 

 

1,720

 

 

 

1,720

 

 

 

5,750

 

 

 

5,750

 

Mandatorily redeemable noncontrolling interest

 

 

2,386

 

 

 

2,386

 

 

 

2,386

 

 

 

2,386

 

Derivative instruments - asset position

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - liability position

 

 

205

 

 

 

205

 

 

 

86

 

 

 

86

 

 

ASC 820, “Fair Value Measurement,” applies to all assets and liabilities that are being measured and reported at fair value on a recurring basis. ASC 820 requires disclosure that establishes a framework for measuring fair value in GAAP 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, including identical securities in inactive markets or similar securities in active markets, which are corroborated by market data.

 

Level 3

Unobservable inputs that are not corroborated by market data.

The Company’s fixed and variable-rate debt represent level 2 liabilities not measured at fair value on a recurring basis. None of the Company’s instruments has transferred from one level to another.

15


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

The following table summarizes the valuation of the Company’s financial instruments that are reported at fair value on a recurring basis by the above ASC 820 pricing levels as of June 30, 2016:

 

 

 

Total

 

 

Quoted market

prices in active

markets (Level 1)

 

 

Significant other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs (Level 3)

 

Cash and cash equivalents

 

$

24,319

 

 

$

24,319

 

 

$

 

 

$

 

Contingent consideration related to acquisition

 

 

1,720

 

 

 

 

 

 

 

 

 

1,720

 

Mandatorily redeemable noncontrolling interest

 

 

2,386

 

 

 

 

 

 

 

 

 

2,386

 

Interest rate contracts - asset position

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts - liability position

 

 

205

 

 

 

 

 

 

205

 

 

 

 

 

The following table summarizes the valuation of the Company’s financial instruments that are reported at fair value on a recurring basis by the above ASC 820 pricing levels as of December 31, 2015:

 

 

 

Total

 

 

Quoted market

prices in active

markets (Level 1)

 

 

Significant other

observable

inputs

(Level 2)

 

 

Significant

unobservable

inputs (Level 3)

 

Cash and cash equivalents

 

$

38,070

 

 

$

38,070

 

 

$

 

 

$

 

Contingent consideration related to acquisition

 

 

5,750

 

 

 

 

 

 

 

 

 

5,750

 

Mandatorily redeemable noncontrolling interest

 

 

2,386

 

 

 

 

 

 

 

 

 

2,386

 

Interest rate contracts - asset position

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts - liability position

 

 

86

 

 

 

 

 

 

86

 

 

 

 

 

The Company’s derivative instruments are primarily pay-fixed, receive-variable interest rate swaps and caps based on the 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 and cap 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 and implied volatilities for options). ASC 820 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 and the Company’s creditworthiness has also been factored into the fair value measurement of the derivative instruments. For additional information see Note 9 - Derivatives of the Notes to Condensed Consolidated Financial Statements.

 

 

16


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2016

(Unaudited)

(Dollars in thousands, except per share amounts)

 

6. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill are as follows:

 

Balance at December 31, 2014

 

$

63,864

 

Goodwill acquired during the period

 

 

38,918

 

Impairment charges

 

 

 

Adjustments to goodwill during the period

 

 

 

Balance at December 31, 2015

 

 

102,782

 

Goodwill acquired during the period

 

 

2,379

 

Impairment charges

 

 

 

Adjus