AIQ-6.30.2015-10Q
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, 2015
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  ý    No  ¨
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  ý    No  ¨
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
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
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 7, 2015, there were 10,750,624 shares of common stock, par value $.01 per share, outstanding.




ALLIANCE HEALTHCARE SERVICES, INC.
FORM 10-Q
June 30, 2015
Index
 
 
Page
 
 
as of December 31, 2014 and June 30, 2015 (Unaudited)
 
for the Quarter and Six Months ended June 30, 2014 and 2015 (Unaudited)
 
for the Quarter and Six Months ended June 30, 2014 and 2015 (Unaudited)
 
 
Item 4— Mine Safety Disclosures


2


PART I—FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

ALLIANCE HEALTHCARE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
 
December 31,
2014
 
June 30,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
33,033

 
$
43,399

Accounts receivable, net of allowance for doubtful accounts of $4,055 in 2014 and $3,700 in 2015
62,503

 
66,466

Deferred income taxes
16,834

 
16,834

Prepaid expenses
12,527

 
13,271

Other receivables
5,686

 
2,809

Total current assets
130,583

 
142,779

Equipment, at cost
827,638

 
851,783

Less accumulated depreciation
(678,291
)
 
(685,200
)
Equipment, net
149,347

 
166,583

Goodwill
63,864

 
86,475

Other intangible assets, net
115,930

 
129,611

Deferred financing costs, net
8,119

 
7,454

Other assets
33,042

 
33,514

Total assets
$
500,885

 
$
566,416

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
12,109

 
$
15,158

Accrued compensation and related expenses
19,808

 
21,295

Accrued interest payable
3,154

 
3,123

Income taxes payable

 
149

Other accrued liabilities
26,542

 
30,471

Current portion of long-term debt
15,512

 
22,484

Total current liabilities
77,125

 
92,680

Long-term debt, net of current portion
491,777

 
520,664

Other liabilities
6,623

 
6,502

Deferred income taxes
36,840

 
36,143

Total liabilities
612,365

 
655,989

Commitments and contingencies (Note 12)

 

Stockholders’ deficit:
 
 
 
Common stock
107

 
107

Treasury stock
(3,138
)
 
(3,138
)
Additional paid-in capital
27,653

 
28,415

Accumulated comprehensive loss
(351
)
 
(492
)
Accumulated deficit
(194,091
)
 
(194,301
)
Total stockholders’ deficit attributable to Alliance HealthCare Services, Inc.
(169,820
)
 
(169,409
)
Noncontrolling interest
58,340

 
79,836

Total stockholders’ deficit
(111,480
)
 
(89,573
)
Total liabilities and stockholders’ deficit
$
500,885

 
$
566,416

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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Revenues
$
111,238

 
$
118,504

 
$
216,603

 
$
227,933

Costs and expenses:
 
 

 
 
 
 
Cost of revenues, excluding depreciation and amortization
59,627

 
67,485

 
116,567

 
129,371

Selling, general and administrative expenses
19,384

 
20,800

 
38,123

 
41,755

Transaction costs
937

 
1,113

 
939

 
1,532

Severance and related costs
1,727

 
195

 
1,860

 
454

Impairment charges
236

 
6,670

 
236

 
6,746

Depreciation expense
14,274

 
12,072

 
30,069

 
23,705

Amortization expense
1,957

 
2,495

 
3,909

 
4,530

Interest expense and other, net
6,124

 
6,904

 
12,362

 
12,922

Other (income) expense, net
(408
)
 
486

 
(331
)
 
127

Total costs and expenses
103,858

 
118,220

 
203,734

 
221,142

Income before income taxes, earnings from unconsolidated investees, and noncontrolling interest
7,380

 
284

 
12,869

 
6,791

Income tax expense (benefit)
1,802

 
(1,366
)
 
3,309

 
206

Earnings from unconsolidated investees
(1,242
)
 
(1,292
)
 
(2,240
)
 
(2,455
)
Net income
6,820

 
2,942

 
11,800

 
9,040

Less: Net income attributable to noncontrolling interest
(4,036
)
 
(4,903
)
 
(7,085
)
 
(9,250
)
Net income (loss) attributable to Alliance HealthCare Services, Inc.
$
2,784

 
$
(1,961
)
 
$
4,715

 
$
(210
)
Comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Net income (loss) attributable to Alliance HealthCare Services, Inc.
$
2,784

 
$
(1,961
)
 
$
4,715

 
$
(210
)
Unrealized loss on hedging transactions, net of taxes
(235
)
 
(13
)
 
(215
)
 
(141
)
Comprehensive income (loss), net of taxes
$
2,549

 
$
(1,974
)
 
$
4,500

 
$
(351
)
Income (loss) per common share attributable to Alliance HealthCare Services, Inc.:
 
 
 
 
 
 
 
Basic
$
0.26

 
$
(0.18
)
 
$
0.44

 
$
(0.02
)
Diluted
$
0.26

 
$
(0.18
)
 
$
0.43

 
$
(0.02
)
Weighted-average number of shares of common stock and common stock equivalents:
 
 
 
 
 
 
 
Basic
10,671

 
10,715

 
10,669

 
10,714

Diluted
10,854

 
10,836

 
10,872

 
10,839

See accompanying notes.


4


ALLIANCE HEALTHCARE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
 
Six Months Ended
 
June 30,
Operating activities:
2014
 
2015
Net income
$
11,800

 
$
9,040

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for doubtful accounts
1,146

 
1,054

Share-based payment
710

 
819

Depreciation and amortization
33,978

 
28,235

Amortization of deferred financing costs
948

 
2,098

Accretion of discount on long-term debt
222

 
232

Adjustment of derivatives to fair value
355

 
98

Distributions greater than undistributed earnings from investees
224

 
189

Deferred income taxes
(2,655
)
 
(697
)
Gain on sale of assets
(185
)
 
(406
)
Impairment charges
236

 
6,746

Excess tax benefit from share-based payment arrangements
(515
)
 
5

Changes in operating assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable
(1,566
)
 
(577
)
Prepaid expenses
1,109

 
(1,499
)
Other receivables
62

 
(242
)
Other assets
(26
)
 
534

Accounts payable
(2,485
)
 
627

Accrued compensation and related expenses
(3,473
)
 
340

Accrued interest payable
1,465

 
(31
)
Income taxes payable
6

 
131

Other accrued liabilities
1,488

 
964

Net cash provided by operating activities
42,844

 
47,660

Investing activities:
 
 
 
Equipment purchases
(13,256
)
 
(26,382
)
Decrease in deposits on equipment
(3,628
)
 
(9,935
)
Acquisitions, net of cash received
(1,529
)
 
(24,061
)
Proceeds from sale of assets
570

 
520

Net cash used in investing activities
(17,843
)
 
(59,858
)
Financing activities:
 
 
 
Proceeds from equipment debt

 
15,691

Principal payments on equipment debt
(5,450
)
 
(4,639
)
Proceeds from term loan facility

 
29,850

Principal payments on term loan facility
(2,450
)
 
(7,351
)
Principal payments on revolving loan facility
(32,000
)
 
(28,000
)
Proceeds from revolving loan facility
18,000

 
26,000

Payments of debt issuance costs

 
(654
)
Noncontrolling interest in subsidiaries
(6,573
)
 
(8,353
)
Equity purchase of noncontrolling interest
(691
)
 

Excess tax benefit from share-based payment arrangements
515

 
(5
)
Proceeds from shared-based payment arrangements
403

 
25

Purchase of treasury stock
(140
)
 

Net cash (used in) provided by financing activities
(28,386
)
 
22,564

Net (decrease) increase in cash and cash equivalents
(3,385
)
 
10,366

Cash and cash equivalents, beginning of period
34,702

 
33,033

Cash and cash equivalents, end of period
$
31,317

 
$
43,399


5


ALLIANCE HEALTHCARE SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(in thousands)
 
 
Six Months Ended
 
June 30,
 
2014
 
2015
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
9,877

 
$
11,110

Income taxes paid, net of refunds
4,991

 
(146
)
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Capital lease obligations related to the purchase of equipment
$

 
$
1,294

Comprehensive loss from hedging transactions, net of taxes
(215
)
 
(141
)
Equipment purchases in accounts payable
666

 
2,477

Noncontrolling interest assumed in connection with acquisitions (Note 2)

 
20,598

Adjustment to equity of noncontrolling interest
1,700

 

Extinguishment of note receivable (Note 2)

 
3,071

See accompanying notes.


6

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(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 (“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 quarter and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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, 2014.
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.
2. Transactions
 
Restructuring Plan
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. During the six months ended June 30, 2014, the Company recorded $2,455 related to restructuring charges, of which the Company recorded $1,640 in selling, general and administrative expenses and $815 in cost of revenues, excluding depreciation and amortization. The Company also recorded $1,860 in severance and related costs, primarily as a result of the departure of one of its executive officers during the second quarter of 2014.

Acquisition of The Pain Center of Arizona
On February 17, 2015, the Company purchased approximately 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 60.0% membership interest in TPC by the Company, and a 50.0% 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 $23,630 in cash, net of $691 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.


7

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


The following table summarizes recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date:
Cash received
$
691

Accounts receivable, net
4,440

Equipment, net
3,346

Other assets
416

Goodwill
22,611

Identifiable intangible assets
24,600

Debt
(2,781
)
Other liabilities
(3,532
)
Noncontrolling interest
(20,598
)
Total consideration
$
29,193


As a result of this acquisition, the Company recorded goodwill of $22,611. 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 all 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 $20,598 as of the acquisition date. To estimate the fair value of noncontrolling interest, the Company used the implied fair value based on the Company's ownership percentage. The results for the quarter and six months ended June 30, 2015 included $8,167 and $12,023 of revenue, respectively, and $20 and $291 of net income, respectively, generated by TPC. The historical results of operations of the business acquired during the six months ended June 30, 2015 are not material, and accordingly, pro forma financial information is not presented.

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 12-month period following the transaction date. The fair value of these contingent consideration arrangements of $1,800 was estimated using probability-adjusted performance estimates as of June 30, 2015.
3. 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 2,205,000 shares have become available for grant. As of June 30, 2015, a total of 477,060 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 are typically time-based and vest in equal tranches over three or four years, subject to continued service. During the year ended December 31, 2014 and the six months ended June 30, 2015 there were no options in which vesting was accelerated. Prior to January 1, 2008, stock options granted under the 1999 Equity Plan to employees were all time-vesting options which had 5% vesting in the first year, 20% vesting in the second year and 25% vesting in years three through five.
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-

8

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


Scholes option pricing model using the assumptions noted in the table below. In addition, forfeitures are estimated when recognizing compensation expense and the estimate of forfeitures is 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 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,
 
2014
 
2015
Risk free interest rate
1.83
%
 
1.65
%
Expected dividend yield
%
 
%
Expected stock price volatility
66.3
%
 
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.
 
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 January 1, 2015
633,898

 
$
21.39

 
 
 
 
Granted
83,514

 
23.91

 
 
 
 
Exercised
(2,515
)
 
10.12

 
 
 
 
Canceled
(28,117
)
 
55.81

 
 
 
 
Outstanding at June 30, 2015
686,780

 
$
20.35

 
6.02
 
$
3,482

Vested and expected to vest in the future at June 30, 2015
662,238

 
$
20.18

 
5.94
 
$
3,476

Exercisable at June 30, 2015
488,809

 
$
18.14

 
5.17
 
$
3,393

The weighted average grant date fair value of options granted during the six months ended June 30, 2014 and 2015 was $17.56 per share and $14.25 per share, respectively. Total stock options exercised was 2,515 during the six months ended June 30, 2015. There were 67,657 options exercised during the six months ended June 30, 2014.
The following table summarizes the Company’s unvested stock option activity:
 
Shares
 
Weighted-Average
Grant-Date
Fair Value
Unvested at January 1, 2015
197,899

 
$
12.13

Granted
83,514

 
14.25

Vested
(78,825
)
 
6.08

Canceled
(4,617
)
 
15.35

Unvested at June 30, 2015
197,971

 
$
15.40


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Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


At June 30, 2015, the total unrecognized fair value share-based payment related to unvested stock options granted to employees was $2,046, which is expected to be recognized over a remaining weighted-average period of 2.07 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 consolidated statements of operations and comprehensive income. The total fair value of shares vested during the six months ended June 30, 2014 and 2015 was $469 and $479, respectively.
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 2012, awards to certain employees either cliff vested after one year, or vest annually in 33.3% increments over three years. During 2013, awards to certain employees vested immediately upon the date of grant, or cliff vested after one year provided that the employee remained continuously employed through the issuance date. The Company grants restricted stock awards to non-employee directors of the Company who are unaffiliated with Oaktree Capital Management, LLC (“Oaktree”) and MTS Health Investors, LLC (“MTS”) (“unaffiliated directors”). These awards to unaffiliated directors cliff vest after one year based on the unaffiliated directors’ continued service with the Company through that date.
For the six months ended June 30, 2014 and 2015, the Company recorded share-based payment related to stock awards of $245 and $344, respectively. There were no shares of restricted stock granted during the six months ended June 30, 2014.
Restricted stock units ("RSUs") totaling 25,000 were granted to the Company's Chief Executive Officer in the third quarter of 2014, 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.
The following table summarizes the Company’s restricted stock activity: 
 
Shares
 
Weighted-Average
Grant-Date
Fair Value
Unvested at January 1, 2015
32,959

 
$
20.99

Granted to employees

 

Granted to non-employee directors

 

Vested

 

Canceled

 

Unvested at June 30, 2015
32,959

 
$
20.99

At June 30, 2015, there is no unrecognized fair value share-based payment expense related to restricted stock awards granted to employees. At June 30, 2015, the total unrecognized fair value share-based payment expense related to the restricted stock awards granted to unaffiliated directors was $345, which is expected to be recognized over a remaining weighted-average period of 0.50 years.

Directors' Compensation Program
In 2014 and 2015, under the compensation program for non-employee directors, non-employee directors earn an annual fee of $40 for their services as directors. In addition, each unaffiliated director received a restricted stock unit award on December 31 for the number of shares of our Common Stock having a value equal to $140, using the average share price of our Common Stock over the 15-day period preceding the grant date. These restricted stock unit awards

10

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


vest on the first anniversary of their respective date of grant contingent upon the unaffiliated director's continued service to the Company through that date. In addition to the annual fee for all non-employee directors, each affiliated director receives additional annual cash compensation of $140, paid in one annual installment, for serving on the Board during 2014 and 2015.
Beginning October 1, 2013, during the 24-month period following his resignation as the Company's CEO, the Chairman of the Board, Mr. Buckelew, is granted restricted stock units having a value equal to $138 as compensation for each service period of one year. Also during 2014, non-employee directors who served as members of our Audit Committee received an additional $15, and the non-employee director who served as Chairman of our Audit Committee received an additional $30. In 2014, non-employee directors who served as members of our Nominating Committee and Compensation Committee received an additional $5. In 2014, non-employee directors were reimbursed for travel expenses related to their Board service.
4. Recent Accounting Pronouncements
Revenue Recognition In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU number 2014-09, “Revenue from Contracts with Customers (Topic 606)" — to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS 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 adoption of ASU 2014-09 is effective for publicly traded business entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is not permitted. On April 29, 2015, the FASB proposed a one-year deferral for the effective date of the new standard. The Company is assessing the impact, if any, that the adoption of ASU 2014-09 may have on the Company's results of operations, cash flows, or financial position.

Going Concern In August 2014, the FASB issued ASU number 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 results of operations, cash flows, or financial position.
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 sheets approximate fair value due to the short-term maturity or variable rates of these instruments.
Debt The carrying amount of fixed and variable-rate borrowings at June 30, 2015 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.

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ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


The estimated fair values of the Company’s financial instruments are as follows:
 
 
December 31, 2014
 
June 30, 2015
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Cash and cash equivalents
$
33,033

 
$
33,033

 
$
43,399

 
$
43,399

Fixed-rate debt
13,015

 
13,878

 
24,154

 
23,774

Variable-rate debt
494,274

 
494,354

 
518,994

 
518,122

Contingent consideration related to acquisition

 

 
1,800

 
1,800

Derivative instruments - asset position
228

 
228

 
11

 
11

Derivative instruments - liability position
46

 
46

 
41

 
41

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 generally accepted accounting principles 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, that are corroborated by market data.
 
 
 
 
Level 3
Unobservable inputs that are not corroborated by market data.
None of the Company’s instruments have transferred from one level to another.
 
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, 2014:
 
 
Total
 
Quoted market
prices in active
markets (Level 1)
 
Significant other
observable  inputs
(Level 2)
 
Significant
unobservable
inputs (Level 3)
Cash and cash equivalents
$
33,033

 
$
33,033

 
$

 
$

Interest rate contracts - asset position
228

 
 
 
228

 
 
Interest rate contracts - liability position
46

 

 
46

 

 
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, 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
$
43,399

 
$
43,399

 
$

 
$

Contingent consideration related to acquisition
1,800

 

 

 
1,800

Interest rate contracts - asset position
11

 

 
11

 

Interest rate contracts - liability position
41

 

 
41

 

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

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ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


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 please see Note 9 of the Notes to the Condensed Consolidated Financial Statements.
The Company purchased TPC in February 2015 and recorded the related goodwill and intangible assets at their fair value which was estimated using the income approach and unobservable level 3 inputs. The fair value of noncontrolling interest related to the transaction was estimated using the implied fair value based on the Company's ownership percentage. For additional information please see Note 2 of the Notes to the Condensed Consolidated Financial Statements.
During the quarter ended June 30, 2015, the Company recorded a non-cash charge to write off $6.7 million of intangible assets not subject to amortization in its Radiation Oncology division. For additional information please see Note 6 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 January 1, 2014
$
56,975

Goodwill acquired during the period
6,889

Impairment charges

Adjustments to goodwill during the period

Balance at December 31, 2014
63,864

Goodwill acquired during the period
22,611

Impairment charges

Adjustments to goodwill during the period

Balance at June 30, 2015
$
86,475

Gross goodwill
$
260,719

Accumulated impairment charges
(174,244
)
Balance at June 30, 2015
$
86,475

 
Intangible assets consisted of the following: 
 
December 31, 2014
 
June 30, 2015
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Intangible
Assets, net
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Intangible
Assets, net
Amortizing intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer contracts
$
162,089

 
$
(93,617
)
 
$
68,472

 
$
175,864

 
$
(97,485
)
 
$
78,379

Other
26,241

 
(21,758
)
 
4,483

 
37,341

 
(22,414
)
 
14,927

Total amortizing intangible assets
$
188,330

 
$
(115,375
)
 
$
72,955

 
$
213,205

 
$
(119,899
)
 
$
93,306

Intangible assets not subject to amortization
 
 
 
 
42,975

 
 
 
 
 
36,305

Total other intangible assets
 
 
 
 
$
115,930

 
 
 
 
 
$
129,611

In 2015, the Company intends to perform an annual impairment test in the fourth quarter for goodwill and indefinite life intangible assets based on the financial information as of September 30, absent of other events occurring or changes in

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ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company compares the fair value of its reporting units to its carrying amount to determine if there is potential impairment. The fair value of the reporting unit is determined by an income approach and a market capitalization approach. Significant management judgment is required in the forecasts of future operating results that are used in the income approach. The estimates that the Company has used are consistent with the plans and estimates that it uses to manage its business. The Company bases its fair value estimates on forecasted revenue and operating costs which include a number of factors including, but not limited to, securing new customers, retention of existing customers, growth in imaging and radiation oncology revenues and the impact of continued cost savings initiatives. However, it is possible that plans and estimates may change.
During the quarter ended June 30, 2015, the Company implemented a plan to start the process to close a radiation therapy center and, as a result, recorded a non-cash charge to write off $6.7 million of intangible assets not subject to amortization associated with that center in its Radiation Oncology division. The Company concluded that no other events occurred or circumstances changed relating to any other of its intangible assets during the quarter ended June 30, 2015 and will perform its annual impairment test for goodwill and other intangibles assets during the fourth quarter of 2015, as described above.
The Company uses the estimated useful life to amortize customer contracts, which is a weighted-average of 15 years. Other intangible assets subject to amortization are estimated to have a weighted-average useful life of six years. Amortization expense for intangible assets subject to amortization was $1,957 and $2,495 for the quarters ended June 30, 2014 and 2015, respectively, and $3,909 and $4,530 for the six months ended June 30, 2014 and 2015, respectively. The intangible assets not subject to 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: 
2015
$
8,875

2016
7,930

2017
7,491

2018
7,131

2019
6,647

Thereafter
59,756

7. Other Accrued Liabilities
Other accrued liabilities consisted of the following: 
 
December 31, 2014
 
June 30, 2015
Accrued systems rental and maintenance costs
$
1,586

 
$
2,457

Accrued site rental fees
992

 
940

Accrued property and sales taxes payable
9,276

 
9,973

Accrued self-insurance expense
2,276

 
2,657

Deferred gain on sale of equipment
312

 
312

Other accrued expenses
12,100

 
14,132

Total
$
26,542

 
$
30,471


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ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


8. Long-Term Debt and Senior Subordinated Credit Facility
Long-term debt consisted of the following:
 
December 31,
2014
 
June 30, 2015
Term loan facility
$
482,825

 
$
505,474

Discount on term loan facility
(2,156
)
 
(2,074
)
Revolving credit facility
2,000

 

Equipment debt
24,620

 
39,748

Long-term debt, including current portion
507,289

 
543,148

Less current portion
15,512

 
22,484

Long-term debt
$
491,777

 
$
520,664

Senior Secured Term Loan Refinancing
On June 3, 2013, the Company replaced its existing credit facility with a new senior secured credit agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the other lenders party thereto (the “Credit Agreement”). The Credit Agreement consists of (i) a $340,000, six-year term loan facility, (ii) a $50,000, five-year revolving loan facility, including a $20,000 sublimit for letters of credit, (iii) uncommitted incremental loan facilities of $100,000 of revolving or term loans, plus an additional amount if the Company's pro forma leverage ratio is less than or equal to 3.25, subject to receipt of lender commitments and satisfaction of specified conditions, and (iv) an $80,000 delayed draw term loan facility, which was required to be drawn within thirty days of June 3, 2013 and used for the redemption of $190,000 in aggregate principal amount of the Company's 8% Senior Notes.
On July 3, 2013 the delayed draw term loan facility was utilized, of which the proceeds were used to redeem $80,000 in aggregate principal amount of the Company's outstanding 8% Senior Notes that were originally issued in December 2009 as a cash tender offer for any and all of its outstanding 7.25% Notes originally issued in December of 2004. The delayed draw term loan facility converted into, and matched the terms of, the new $340,000 term loan facility.
Borrowings under the Credit Agreement bear interest through maturity at a variable rate based upon, at the Company's option, either the London interbank offered rate ("LIBOR") or the base rate (which is the highest of the administrative agent’s prime rate, one-half of 1.00% in excess of the overnight federal funds rate, and 1.00% in excess of the one-month LIBOR rate), plus, in each case, an applicable margin. With respect to the term loan facilities, the applicable margin for LIBOR loans is 3.25% per annum, and with respect to the revolving loan facilities, the applicable margin for LIBOR loans ranges, based on the applicable leverage ratio, from 3.00% to 3.25% per annum, in each case, with a LIBOR floor of 1.00%. The applicable margin for base rate loans under the term loan facilities is 2.25% per annum and under the revolving loan facility ranges, based on the applicable leverage ratio, from 2.00% to 2.25% per annum. Prior to the refinancing of the term loan facilities, the applicable margin for base rate loans was 4.25% per annum and the applicable margin for revolving loans was 5.25% per annum, with a LIBOR floor of 2.00%. The Company is required to pay a commitment fee which ranges, based on the applicable leverage ratio, from 0.375% to 0.50% per annum on the undrawn portion available under the revolving loan facility and variable per annum fees with respect to outstanding letters of credit.
During the first five and three-quarter years after the closing date, and including the full amount of the delayed draw term loan facility, the Company was required to make quarterly amortization payments of the term loans in the amount of $1,050. The Company is also required to make mandatory prepayments of term loans under the Credit Agreement, subject to specified exceptions, from excess cash flow (as defined in the Credit Agreement), and with the proceeds of asset sales, debt issuances and specified other events.
Obligations under the Credit Agreement are guaranteed by substantially all the Company's direct and indirect domestic subsidiaries. The obligations under the Credit Agreement and the guarantees are secured by a lien on substantially all tangible and intangible property, and by a pledge of all of the shares of stock and limited liability company interests of the Company's direct and indirect domestic subsidiaries, of which the Company now owns or later acquires more than a 50% interest, subject to limited exceptions.
In addition to other covenants, the Credit Agreement places limits on the ability of the Company and its subsidiaries to declare dividends or redeem or repurchase capital stock, prepay, redeem or purchase debt, incur liens and engage in sale-

15

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ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


leaseback transactions, make loans and investments, incur additional indebtedness, amend or otherwise alter debt and other material agreements, engage in mergers, acquisitions and asset sales, transact with affiliates and alter the business conducted by the Company and its subsidiaries.
The Credit Agreement also contains a leverage ratio covenant requiring the Company to maintain a maximum ratio of consolidated total debt to consolidated adjusted EBITDA that ranges from 4.95 to 1.00 to 4.30 to 1.00. For the quarter ended June 30, 2015, the Credit Agreement required a maximum leverage ratio of not more than 4.85 to 1.00. The Credit Agreement eliminated the interest coverage ratio covenant which the Company was subject to maintain prior to the refinancing. Failure to comply with the covenants in the Credit Agreement could permit the lenders under the Credit Agreement to declare all amounts borrowed under the Credit Agreement, together with accrued interest and fees, to be immediately due and payable, and to terminate all commitments under the Credit Agreement.

On October 11, 2013, the Company entered into an amendment to the Credit Agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the other lenders party thereto (the “First Amendment”). Pursuant to the First Amendment, the Company raised $70,000 in incremental term loan commitments to repurchase the remaining Notes. On December 2, 2013, the Company borrowed $70,000 of incremental term loans, and with such proceeds plus borrowings under its revolving line of credit and cash on hand, completed the redemption of all of its outstanding Notes on December 4, 2013.

On June 19, 2015, the Company entered into a second amendment to the Credit Agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the other lenders party thereto (the “Second Amendment”). Pursuant to the Second Amendment, the Company raised the remaining $30,000 in incremental term loan commitments. The funds were used to repay all outstanding borrowings under the Company's revolving credit facility, pay fees and expenses related to the Second Amendment, and general corporate purposes. The Second Amendment did not impact the borrowing capacity on the revolving credit facility which remained at $50,000.

The initial portion of the incremental term loan was funded at 99.0% of principal amount under the First Amendment and the remainder was funded at 99.5% of principal under the Second Amendment. The incremental term loan has all of the same terms as the existing term loan facilities and will mature in June 2019. Interest on the incremental term loan is calculated, at the Company's option, at a base rate plus a 2.25% margin or LIBOR plus a 3.25% margin, subject to a 1.00% LIBOR floor.
As of June 30, 2015, there was $505,474 outstanding under the term loan facility, which included the draw term facility and the incremental term facility, and $0 borrowings were outstanding under the revolving credit facility. As of June 30, 2015, the Company’s ratio of consolidated total debt to consolidated adjusted EBITDA calculated pursuant to the Credit Agreement was 3.98 to 1.00.
The quarterly amortization payments of all term loans under the credit facility for the first five and three-quarter years was initially established at $1,050. The quarterly amortization payment was increased to $1,225 in December 2013 pursuant to the First Amendment and subsequently increased to $1,300 in June 2015 pursuant to the Second Amendment.
During the six months ended June 30, 2015, the increase in the Company's current portion of long-term debt was primarily due to borrowings for equipment expenditures for its Radiation Oncology division's joint venture with the Medical University of South Carolina ("MUSC"). Debt related to MUSC was funded through a line of credit exclusive of the Company's revolving line of credit, and will be converted to term notes as phases of the project are completed.
9. Derivatives
The Company accounts for derivative instruments and hedging activities in accordance with the provisions of ASC 815, “Derivatives and Hedging.” 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 has only executed 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

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ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


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 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 and cap agreements to hedge the future cash interest payments on portions of its variable rate bank debt. For the six months ended June 30, 2014 and 2015, the Company had interest rate swap and cap agreements to hedge approximately $258,500 and $257,075 of its variable rate bank debt, respectively, or 50.9% and 47.3% of total debt, respectively. Over the next twelve months, the Company expects to reclassify $351 from accumulated comprehensive loss to interest expense and other, net.
In the first quarter of 2010, the Company entered into three interest rate cap agreements, in accordance with Company policy, to avoid unplanned volatility in the income statement due to changes in the LIBOR interest rate environment. The interest rate cap agreements matured in February 2014, had a total notional amount of $150,000, and were de-designated as cash flow hedges associated with the Company’s variable rate bank debt in the fourth quarter of 2013.
 
In the second quarter of 2011, the Company acquired two interest rate swap agreements (the “USR Swaps”) as part of the acquisition of US Radiosurgery, LLC ("USR"). One of the USR Swaps, which matures in October 2015, had a notional amount of $349 as of June 30, 2015. Under the terms of this agreement, the Company receives one-month LIBOR and pays a fixed rate of 5.71%. The net effect of the hedge is to record interest expense at a fixed rate of 8.71%, as the underlying debt incurred interest based on one-month LIBOR plus 3.00%. The other USR Swap matured in April 2014. As a result of the acquisition of USR, the USR Swap was de-designated, hedge accounting was terminated and all further changes in the fair market value of the swap is being recorded in interest expense and other, net.

In the fourth quarter of 2012, the Company entered into an interest rate swap agreement in connection with equipment financing. The swap, which matures in December 2017, had a notional amount of $2,717 as of June 30, 2015. Under the terms of this agreement, the Company receives one-month LIBOR plus 2.50% and pays a fixed rate of 3.75%. The net effect of the hedge is to convert interest expense to a fixed rate of 3.75%, as the underlying debt incurred interest based on one-month LIBOR plus 2.50%.

In the first quarter of 2013, the Company entered into an interest rate swap agreement in connection with equipment financing. The swap, which matures in April 2018, had a notional amount of $2,491 as of June 30, 2015. Under the terms of this agreement, the Company receives one-month LIBOR plus 2.00% and pays a fixed rate of 2.873%. The net effect of the hedge is to convert interest expense to a fixed rate of 2.873%, as the underlying debt incurred interest based on one-month LIBOR plus 2.00%.

In the fourth quarter of 2013, the Company entered into five interest rate cap agreements ("2013 Caps"), in accordance with Company policy, to avoid unplanned volatility in the income statement due to changes in the LIBOR interest rate environment. The 2013 Caps, which mature in December 2016, had a notional amount of $250,000 and were designated as cash flow hedges of future cash interest payments associated with a portion of the Company’s variable rate bank debt. Under these arrangements, the Company has purchased a cap on LIBOR at 2.50%. The Company paid $815 to enter into the caps, which is being amortized through interest expense and other, net over the life of the agreements.
In the fourth quarter of 2014, the Company entered into an interest rate swap agreement in connection with equipment financing. The swap, which matures in November 2019, had a notional amount of $1,519 as of June 30, 2015. Under the terms of this agreement, the Company receives one-month LIBOR and pays a fixed rate of 1.34%. The net effect of the hedge is to convert interest expense to a fixed rate of 1.34%, as the underlying debt incurred interest based on one-month LIBOR.


17

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


The Effect of Designated Derivative Instruments on the Statement of Operations
For the Quarter Ended June 30, 2014
Derivatives in 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 contracts
$
(375
)
 
Interest expense and other, net
 
$
8

 
Interest expense and other, net
 
$


The Effect of Designated Derivative Instruments on the Statement of Operations
For the Six Months Ended June 30, 2014
Derivatives in 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 contracts
$
(478
)
 
Interest expense and other, net
 
$
(126
)
 
Interest expense and other, net
 
$
(2
)


The Effect of Designated Derivative Instruments on the Statement of Operations
For the Quarter Ended June 30, 2015
Derivatives in 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 contracts
$
(19
)
 
Interest expense and other, net
 
$
5

 
Interest expense and other, net
 
$



The Effect of Designated Derivative Instruments on the Statement of Operations
For the Six Months Ended June 30, 2015
Derivatives in 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 contracts
$
(208
)
 
Interest expense and other, net
 
$
16

 
Interest expense and other, net
 
$
1


The Effect of Non-Designated Derivative Instruments on the Statements of Operations for the quarter and six months ended June 30, 2014 and 2015 was immaterial.

18

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


10. Income Taxes
For the quarter and six months ended June 30, 2014, the Company recorded income tax expense of $1,802 and $3,309, or 39.3% and 41.2%, of the Company’s pretax income. For the quarter and six months ended June 30, 2015, the Company recorded income tax (benefit) expense of $(1,366) and $206, or 41.0% and (5,725.0)%, of the Company’s pretax income. The Company’s effective tax rate for the quarter and six months ended June 30, 2015 differed from the federal statutory rate principally as a result of discrete tax benefit shortfalls of $204 from share based payments, which also resulted in an income tax expense of $206 relative to a net loss of $210 and a corresponding minimal amount of pretax loss for the six month period.
As of June 30, 2015, the Company has provided a liability for $301 of unrecognized tax benefits related to various federal and state income tax matters. The tax-effected amount that would reduce the Company’s effective income tax rate if recognized is $256.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2015, the Company had approximately $16 in accrued interest and penalties related to unrecognized tax benefits.
The Company is subject to United States 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, 2011 through 2014. The Company’s and its subsidiaries’ state income tax returns are open to audit under the applicable statutes of limitations for the years ended December 31, 2010 through 2014. 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
Basic net income per share is computed utilizing the two-class method and is calculated based on the weighted-average number of common shares outstanding during the periods presented, excluding 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.
 

19

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


The following table sets forth the computation of basic and diluted earnings per share: 
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to Alliance HealthCare Services, Inc.
$
2,784

 
$
(1,961
)
 
$
4,715

 
$
(210
)
Denominator:
 
 
 
 
 
 
 
Weighted-average shares-basic
10,671

 
10,715

 
10,669

 
10,714

Effect of dilutive securities:
 
 
 
 
 
 
 
Employee stock options
183

 
121

 
203

 
125

Weighted-average shares-diluted
10,854

 
10,836

 
10,872

 
10,839

Income (loss) per common share attributable to Alliance HealthCare Services, Inc.:
 
 
 
 
 
 
 
Basic
$
0.26

 
$
(0.18
)
 
$
0.44

 
$
(0.02
)
Diluted
$
0.26

 
$
(0.18
)
 
$
0.43

 
$
(0.02
)
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
132

 
394

 
134

 
335

Average exercise price per share that exceeds average market price of common stock
$
44.22

 
$
30.15

 
$
44.25

 
$
31.57

12. Commitments and Contingencies
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 June 30, 2015, the Company has determined that no liability is necessary related to these guarantees and indemnities.
On June 14, 2013, Alliance Oncology, LLC, a subsidiary of the Company, filed a complaint against Harvard Vanguard Medical Associates, Inc. (“HVMA”) in the United States District Court for the District of Massachusetts, including several claims seeking damages resulting from HVMA’s early termination of a long-term services agreement between the two companies. HVMA filed an answer to Alliance Oncology’s complaint on August 27, 2013. Without specifying its alleged damages, HVMA also asserted several counterclaims in its answer. The Company filed its answer to HVMA’s counterclaims on October 4, 2013, and intends to vigorously defend against the claims asserted. The Company has not recorded an expense related to any potential damages in connection with this matter because any potential loss is not probable or reasonably estimable at this time.

20

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


On February 10, 2015, Alliance Oncology was served with a lawsuit in the United States District Court for the Western District of Missouri by Dr. Barry Michael Driver. The Plaintiff is an employed Physician at Alliance Oncology’s Joplin, Missouri, Radiation Therapy Cancer Treatment Center. The Plaintiff alleges Alliance Oncology breached his employment agreement by failing to pay him in accordance with the terms of the contract. Alliance Oncology disputes Dr. Driver’s interpretation of the employment agreement and asserts Dr. Driver was paid appropriately. On or about July 14, 2015, the District Court granted Alliance Oncology’s Motion to Dismiss and dismissed three of the four Counts contained within Plaintiff’s Complaint. Alliance Oncology is currently in the process of preparing its Answer to the remaining Count, and also engaged in settlement discussions with Dr. Driver, who remains a current employee at this time.
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, financial position, or cash flows.
13. Related-Party Transactions
On April 16, 2007, Oaktree and MTS purchased 4,900,301 shares of the Company’s common stock. 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 June 30, 2015, Oaktree and MTS owned in the aggregate approximately 50.7% 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.
Revenues from management agreements with unconsolidated equity investees were $2,241 and $2,209 during the quarters ended June 30, 2014 and 2015, respectively. Revenues from management agreements with unconsolidated equity investees were $4,562 and $4,587 during the six months ended June 30, 2014 and 2015, respectively. The Company provides services as part of its ongoing operations for and on behalf of the unconsolidated equity investees, which are included in the management agreement revenue, who reimburse the Company for the actual amount of the expenses incurred. The Company records the expenses as cost of revenues and the reimbursement as revenues in its condensed consolidated statements of operations and comprehensive income (loss). For the quarters ended June 30, 2014 and 2015, the amounts of the revenues and expenses were $1,783 and $1,782, respectively. For the six months ended June 30, 2014 and 2015, the amounts of the revenues and expenses were $3,687 and $3,729, respectively.
On June 3, 2013, the Company replaced its existing credit facility with a new senior secured credit agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the other lenders party thereto (the “Credit Agreement”). Of the other lenders, Oaktree funded approximately $40,476 of the $340,000 six-year term loan facility. In addition, as of July 3, 2013, Oaktree funded approximately $9,524 of the $80,000 delayed draw.
On December 2, 2013, the Company borrowed $70,000 of the incremental term loans from its current lenders under its Credit Agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent. The Company used the proceeds from the transaction plus borrowings under its revolving line of credit and cash on hand to complete the redemption of all its outstanding Notes on December 4, 2013. Oaktree funded $10,000 of the $70,000 incremental term loan.
14. Investments in Unconsolidated Investees
The Company has direct ownership in three unconsolidated investees at June 30, 2015. The Company owns between 15% and 50% of these investees, and provides management services under agreements with 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.
During 2014, in accordance with ASC 323, “Investments—Equity Method and Joint Ventures,” the Company wrote off its remaining investment in one of its unconsolidated investees that was originally acquired in 2011. The impairment charge totaled $236 and is related to the closure of one cancer center in the second quarter of 2014 due to the expiration of one of its non-compete agreements with the affiliated oncology physician. Impairment charges related to this event were taken in 2013 for a physicians' referral network, trademarks, and professional services agreement, which were all written down to zero value.

21

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


Set forth below are certain financial data for Alliance-HNI, LLC and Subsidiaries, one of the Company’s unconsolidated investees as of:
 
December 31, 2014
 
June 30, 2015
Balance Sheet Data:
 
 
 
Current assets
$
4,721

 
$
4,319

Noncurrent assets
9,257

 
8,605

Current liabilities
2,773

 
2,513

Noncurrent liabilities
3,272

 
2,657

 
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Operating Results:
 
 
 
 
 
 
 
Revenues
$
4,225

 
$
4,237

 
$
8,331

 
$
8,401

Expenses
2,266

 
2,201

 
4,821

 
4,605

Net income
1,959

 
2,036

 
3,510

 
3,796

Earnings from unconsolidated investee
979

 
1,018

 
1,755

 
1,898

Set forth below are certain financial data for the aggregate of the Company’s unconsolidated investees, including Alliance-HNI, LLC and Subsidiaries as of:
 
December 31, 2014
 
June 30, 2015
Balance Sheet Data:
 
 
 
Current assets
$
8,687

 
$
6,992

Noncurrent assets
10,108

 
9,182

Current liabilities
3,760

 
3,477

Noncurrent liabilities
3,395

 
2,693

 
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Combined Operating Results:
 
 
 
 
 
 
 
Revenues
$
6,765

 
$
6,469

 
$
13,196

 
$
13,106

Expenses
3,210

 
2,920

 
6,745

 
6,256

Net income
3,555

 
3,549

 
6,451

 
6,850

Earnings from unconsolidated investees
1,242

 
1,292

 
2,240

 
2,455


22

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


15. Stockholders’ Deficit
The following table summarizes consolidated stockholders’ deficit, including noncontrolling interest.
 
 
 
 
 
 
 
 
 
 
Additional
 
Accumulated
 
 
 
Stockholders’ Equity (Deficit)
Attributable to
 
Total
 
Common Stock
 
Treasury Stock
 
Paid-In
 
Comprehensive
 
Accumulated
 
Alliance HealthCare
 
Noncontrolling
 
Stockholders’
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Deficit
 
Services, Inc.
 
Interest
 
Deficit
Balance at January 1, 2015
10,713,658

 
$
107

 
(157,973
)
 
$
(3,138
)
 
$
27,653

 
$
(351
)
 
$
(194,091
)
 
$
(169,820
)
 
$
58,340

 
$
(111,480
)
Exercise of stock options
2,515

 

 

 

 
25

 

 

 
25

 

 
25

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

Share-based payment

 

 

 

 
819

 

 

 
819

 

 
819

Share-based payment income tax benefit

 

 

 

 
(82
)
 

 

 
(82
)
 

 
(82
)
Unrealized loss on hedging transaction, net of tax

 

 

 

 

 
(141
)
 

 
(141
)
 

 
(141
)
Net investments in subsidiaries

 

 

 

 

 

 

 

 
12,246

 
12,246

Net income (loss)

 

 

 

 

 

 
(210
)
 
(210
)
 
9,250

 
9,040

Balance at June 30, 2015
10,716,173

 
$
107

 
(157,973
)
 
$
(3,138
)
 
$
28,415

 
$
(492
)
 
$
(194,301
)
 
$
(169,409
)
 
$
79,836

 
$
(89,573
)

 

23

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


16. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. In accordance with ASC 280, “Segment Reporting,” and based on the nature of the financial information that is received by the CODM, the Company operates in three operating segments, of which two are reportable segments, Radiology and Radiation Oncology, based on similar economic and other characteristics.
The Radiology segment is comprised of diagnostic imaging services including MRI, PET/CT and other imaging services. The Radiation Oncology segment is comprised of radiation oncology services. All intercompany revenues, expenses, payables and receivables are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segment’s performance is evaluated based on Revenue, Segment Income and Net Income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 of the Notes to the Consolidated Financial Statements on Form 10-K for the year ended December 31, 2014. Additionally, the Company does not consider its wholesale revenue and retail revenue sources to constitute separate operating segments as discrete financial information does not exist and is not provided to the CODM.
The following table summarizes the Company’s revenue by segment:
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Revenue
 
 
 
 
 
 
 
Radiology
$
87,297

 
$
84,994

 
$
171,935

 
$
166,381

Radiation Oncology
23,941

 
25,330

 
44,668

 
49,516

Corporate / Other

 
8,180

 

 
12,036

Total
$
111,238

 
$
118,504

 
$
216,603

 
$
227,933

The following are components of revenue:
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Revenue
 
 
 
 
 
 
 
MRI
$
45,637

 
$
45,249

 
$
89,822

 
$
88,136

PET/CT
34,178

 
32,594

 
67,547

 
64,144

Radiation Oncology
23,941

 
25,330

 
44,668

 
49,516

Other radiology
7,482

 
7,151

 
14,566

 
14,101

Corporate / Other

 
8,180

 

 
12,036

Total
$
111,238

 
$
118,504

 
$
216,603

 
$
227,933

 
Segment income represents net income before income taxes; interest expense and other, net; amortization expense; depreciation expense; share-based payment; severance and related costs; noncontrolling interest in subsidiaries; restructuring charges; transaction costs; impairment charges, loss on extinguishment of debt, other nonrecurring charges, and non-cash charges. Segment income is the most frequently used measure of each segment’s performance by the CODM and is commonly used in setting performance goals.


24

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


The following table summarizes the Company’s segment income (loss):
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Segment income (loss)
 
 
 
 
 
 
 
Radiology
$
33,248

 
$
28,419

 
$
64,257

 
$
54,793

Radiation Oncology
11,167

 
12,581

 
20,490

 
24,344

Corporate / Other
(7,746
)
 
(6,985
)
 
(15,126
)
 
(15,006
)
Total
$
36,669

 
$
34,015

 
$
69,621

 
$
64,131

The reconciliation of net income (loss) to total segment income is shown below:
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Net income (loss) attributable to Alliance HealthCare Services, Inc.
$
2,784

 
$
(1,961
)
 
$
4,715

 
$
(210
)
Income tax expense (benefit)
1,802

 
(1,366
)
 
3,309

 
206

Interest expense and other, net
6,124

 
6,904

 
12,362

 
12,922

Amortization expense
1,957

 
2,495

 
3,909

 
4,530

Depreciation expense
14,274

 
12,072

 
30,069

 
23,705

Share-based payment (included in selling, general and administrative expenses)
376

 
430

 
710

 
819

Severance and related costs
1,727

 
195

 
1,860

 
454

Noncontrolling interest in subsidiaries
4,036

 
4,903

 
7,085

 
9,250

Restructuring charges (Note 2)
1,563

 
236

 
2,455

 
491

Transaction costs
937

 
1,113

 
939

 
1,532

Impairment charges
236

 
6,670

 
236

 
6,746

Legal settlements
822

 
1,543

 
1,621

 
2,903

Other non-cash charges (included in other income and expense, net)
31

 
781

 
351

 
783

Total segment income
$
36,669

 
$
34,015

 
$
69,621

 
$
64,131

Net income (loss) for the Radiology and Radiation Oncology segments does not include charges for interest expense, net of interest income, income taxes or certain selling, general and administrative expenses. These costs are charged against the Corporate / Other segment. The following table summarizes the Company’s net income (loss) by segment:
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Net income (loss)
 
 
 
 
 
 
 
Radiology
$
20,623

 
$
17,937

 
$
37,817

 
$
34,934

Radiation Oncology
4,642

 
(1,629
)
 
8,068

 
3,395

Corporate / Other
(22,481
)
 
(18,269
)
 
(41,170
)
 
(38,539
)
Total
$
2,784

 
$
(1,961
)
 
$
4,715

 
$
(210
)
 

25

Table of Contents
ALLIANCE HEALTHCARE SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)
June 30, 2015
(Unaudited)
(Dollars in thousands, except per share amounts)


The following table summarizes the Company’s identifiable assets by segment:
 
As of December 31, 2014
 
As of June 30, 2015
Identifiable assets
 
 
 
Radiology
$
229,141

 
$
238,810

Radiation Oncology
182,880

 
180,990

Corporate / Other
88,864

 
146,616

Total
$
500,885

 
$
566,416

 
The following table summarizes the Company’s goodwill by segment:
 
Radiology
 
Radiation
Oncology
 
Corporate
/ Other
 
Total
Balance at January 1, 2014
$
42,166

 
$
14,809

 
$

 
$
56,975

Goodwill acquired during the period

 
6,889

 

 
6,889

Impairment charges

 

 

 

Adjustments to goodwill during the period

 

 

 

Balance at December 31, 2014
$
42,166

 
$
21,698

 
$

 
$
63,864

Goodwill acquired during the period

 

 
22,611

 
22,611

Impairment charges

 

 

 

Adjustments to goodwill during the period

 

 

 

Balance at June 30, 2015
$
42,166

 
$
21,698

 
$
22,611

 
$
86,475

 
 
 
 
 
 
 
 
Gross goodwill
$
196,508

 
$
41,600

 
$
22,611

 
$
260,719

Accumulated impairment charges
(154,342
)
 
(19,902
)
 

 
(174,244
)
Balance at June 30, 2015
$
42,166

 
$
21,698

 
$
22,611

 
$
86,475

The following table summarizes the cash used for capital expenditures for the Radiology, Radiation Oncology and Corporate segments:
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Cash used for capital expenditures
 
 
 
 
 
 
 
Radiology
$
4,761

 
$
5,865

 
$
6,828

 
$
12,695

Radiation Oncology
19

 
3,022

 
19

 
3,757

Corporate / Other
2,741

 
2,806

 
6,409

 
2,806

 
 
 
 
 
 
 
 


26



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading national provider of advanced outpatient diagnostic imaging and radiation therapy services, based upon annual revenue and number of imaging systems deployed and radiation oncology centers operated. Our principal sources of revenue are derived from providing magnetic resonance imaging (“MRI”), positron emission tomography/computed tomography (“PET/CT”) through our Imaging division and radiation oncology services through our Radiation Oncology division. Unless the context otherwise requires, the words “we,” “us,” “our,” “Company” or “Alliance” as used in this Quarterly Report on Form 10-Q refer to Alliance HealthCare Services, Inc. and our direct and indirect subsidiaries. We provide imaging and therapeutic services primarily to hospitals and other healthcare providers on a shared-service and full-time service basis. We also provide services through fixed-site imaging centers, primarily to hospitals or health systems. Our imaging services normally include the use of our imaging systems, technologists to operate the systems, equipment maintenance and upgrades and management of day-to-day shared-service and fixed-site diagnostic imaging operations. We also provide non scan-based services, which include only the use of our imaging systems under a short-term contract. We have leveraged our leadership in MRI, PET/CT and radiology services to expand into radiation oncology, including stereotactic radiosurgery. We operate our radiation oncology business through our wholly owned subsidiary, Alliance Oncology, LLC, which we sometimes refer to as our Radiation Oncology division. This division includes a wide range of services for cancer patients covering initial consultation, preparation for treatment, simulation of treatment, actual radiation oncology delivery, therapy management and follow-up care. Our services include the use of our linear accelerators or stereotactic radiosurgery systems, therapists to operate those systems, administrative staff, equipment maintenance and upgrades, and management of day-to-day operations. In addition, we acquired a 59% ownership interest in The Pain Center of Arizona ("TPC") in the first quarter of 2015, including TPC’s affiliated billing and collection company. TPC provides expert medical diagnosis and treatment of people with chronic pain disorders at its 12 locations within the state. This acquisition advances our strategic expansion into adjacent segments of healthcare services as interventional pain management is the largest segment within the interventional therapeutic services space.
Key Aspects of Our Business
MRI, PET/CT and radiation oncology services generated 38%, 28% and 21% of our revenue, respectively, for the six months ended June 30, 2015 and 41%, 31% and 21% of our revenue, respectively, for the six months ended June 30, 2014. Our remaining revenue was comprised of other modality diagnostic imaging services revenue, primarily computed tomography (“CT”), management contract revenue, and interventional services revenue. We operated 518 diagnostic imaging and radiation oncology systems, including 256 MRI systems (of which 19 are operating leases) and 125 PET/CT systems (of which 9 are operating leases) and served over 1,000 clients in 44 states at June 30, 2015. We operated 118 fixed-site imaging centers (one in an unconsolidated joint venture), which constitute systems installed in hospitals or other medical buildings on or near hospital campuses, including modular buildings, systems installed inside medical groups’ offices, parked mobile systems, and free-standing fixed-site imaging centers, which include systems installed in medical office buildings, ambulatory surgical centers, or other retail space at June 30, 2015. Of the 118 fixed-site imaging centers (including one unconsolidated joint venture), 84 were MRI fixed-site imaging centers, 19 were PET/CT fixed-site imaging centers, and 15 were other modality fixed-site imaging centers. We also operated 32 radiation oncology centers and stereotactic radiosurgery facilities (including one radiation oncology center as an unconsolidated joint venture) at June 30, 2015.
Revenues from fixed-site imaging centers and radiation oncology centers can be structured as either “wholesale” or “retail” revenues. We generated approximately 78% and 83% of our revenues for the six months ended June 30, 2015 and 2014, respectively, by providing services to hospitals and other healthcare providers, which we refer to as "wholesale" revenues. We typically generate our wholesale revenues from contracts that require our clients to pay us based on the number of scans we perform on patients on our clients’ behalf, although some pay us a flat fee for a period of time regardless of the number of scans we perform. Wholesale payments are due to us independent of our clients’ receipt of retail reimbursement from third-party payors, although receipt of reimbursement from third-party payors may affect demand for our services. We typically deliver our services for a set number of days per week through exclusive, long-term contracts with hospitals and other healthcare providers. The initial terms of these contracts average approximately three years in length for mobile services and approximately five to 10 years in length for fixed-site arrangements. Our contracts for radiation oncology services average approximately 10 to 20 years in length. These contracts often contain automatic renewal provisions and certain contracts have cancellation clauses if the hospital or other healthcare provider purchases its own system. We price our contracts based on the type of system used, the scan volume, and the number of ancillary services provided. Competitive pressures also affect our pricing.

27


We generated approximately 22% and 17% of our revenues for the six months ended June 30, 2015 and 2014, respectively, by providing services directly to patients from our sites located at or near hospitals or other healthcare provider facilities, which we refer to as "retail" revenues. We generate our revenue from these sites from direct billings to patients or their third-party payors, including Medicare, and we record this revenue net of contractual discounts and other arrangements for providing services at discounted prices. We typically receive a higher price per scan or treatment under retail billing than we do under wholesale billing.
Factors Affecting our Results of Operations
Scan and treatment volume
The principal components of our cost of revenues include compensation paid to technologists, therapists, drivers and other clinical staff; system maintenance costs; insurance; medical supplies; system transportation; technologists’ travel costs; and interventional services. Because a majority of these expenses are fixed, increased revenues as a result of higher scan and treatment volumes per system significantly improves our margins while lower scan and treatment volumes result in lower margins.
Selling, general and administrative expenses
The principal components of selling, general and administrative expenses are sales and marketing costs, corporate overhead costs, provision for doubtful accounts, and share-based payment.
Noncontrolling interest and earnings
We record noncontrolling interest and earnings from unconsolidated investees related to our consolidated and unconsolidated subsidiaries, respectively. These subsidiaries primarily provide shared-service and fixed-site diagnostic imaging and radiation therapy services.
Third-party payor reimbursement rates and policies
Our revenues, whether for wholesale or retail arrangements, are dependent directly or indirectly on third-party payor reimbursement policies, including Medicare. Please see Item 1, Business-Reimbursement in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for a more detailed explanation of how we bill and receive payment for our services.
With respect to our retail business, for services for which we bill Medicare directly, we are paid under the Medicare Physician Fee Schedule, which is updated on an annual basis. Under the prior Medicare statutory formula known as the Sustainable Growth Rate (“SGR”) formula, payments under the Physician Fee Schedule would have decreased for the past several years if Congress had failed to intervene. In the past, when the application of the statutory formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. For 2013, the Centers for Medicare & Medicaid Services ("CMS") projected an aggregate rate reduction of 26.5% from 2012 payment rates if Congress had failed to intervene. This reduction was delayed by the enactment of the ATRA on January 2, 2013, which allowed for the continuation of 2012 physician payment rates by adopting a 0% update through December 31, 2013.
For 2014, CMS estimated that the statutory formula would result in a 20.1% reduction in physician payment rates if Congress had failed to intervene. On December 26, 2013, President Obama signed into law the Bipartisan Budget Act of 2013 (“2013 Budget Act”), which replaced the payment reduction scheduled to take effect on January 1, 2014, with a 0.5% increase in physician payment rates for the period beginning January 1, 2014, and ending on March 31, 2014. On April 1, 2014, the physician payment rates enacted under the 2013 Budget Act were extended through December 31, 2014 and a 0% update from 2014 payment rates was enacted for the period beginning January 1, 2014 and ending on March 31, 2015, under the Protecting Access to Medicare Act of 2014 (“PAMA”).
President Obama signed the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) on April 16, 2015, which repealed and replaced the SGR formula for Medicare payment adjustments to physicians. MACRA provides a solution to the annual interim legislative updates that had previously been necessary to delay or prevent significant reductions to payments under the Physician Fee Schedule. MACRA extended existing payment rates under PAMA through June 30, 2015, with a 0.5% update for July 1, 2015, through December 31, 2015 and for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. In addition, MACRA requires the establishment of the Merit-Based Incentive Payment System (“MIPS”), beginning in 2019, under which physicians may receive performance-based payment incentives or payment reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities, and meaningful use of electronic health records. MACRA also requires CMS, beginning in 2019, to provide incentive payments for physicians and other eligible professionals that participate in alternative payment models, such as accountable care

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organizations, that emphasize quality and value over the traditional volume-based fee-for-service model. MACRA is still new and the manner in which it will be implemented is not certain, but at this time, we do not believe that this law will have a material effect on our future retail revenues.
Also with respect to our retail business, for services furnished on or after July 1, 2010, CMS began implementing a 50% reduction in reimbursement for multiple images on contiguous body parts, as mandated by the PPACA. Beginning January 1, 2011, CMS applied the same reduction to certain CT and CT angiography, MRI and MR angiography, and ultrasound services furnished to the same patient in the same session, regardless of the imaging modality, and not limited to contiguous body areas. CMS projected that this expanded policy would reduce payment for 20% more services than the prior multiple procedure payment reduction policy, and would primarily reduce payments for radiology services and to freestanding diagnostic imaging centers, such as our retail business. For 2012, CMS extended this policy to the physician reviews of these imaging services by implementing a 25% multiple procedure reduction to the professional payments to the specialties of radiology and interventional radiology. In addition, beginning in 2013, CMS expanded the 25% multiple-procedure reduction policy to certain other nuclear medicine and cardiovascular diagnostic procedures. At this time, we do not believe that these multiple procedure payment reductions will have a material effect on our future retail revenues.
Other recent legislative and regulatory updates to the Physician Fee Schedule included reduced payment rates for certain diagnostic services using equipment costing more than $1 million through revisions to usage assumptions from the previous 50% usage rate to a 90% usage rate. This change began in 2010 with a planned four-year phase-in period for MRI and CT scans, but not for radiation therapy and other therapeutic equipment. The PPACA superseded CMS's assumed usage rate for such equipment and, beginning on January 1, 2011, CMS instituted a 75% usage rate. Also in 2011, CMS expanded the list of services to which the higher equipment usage rate assumption applies to include certain diagnostic CTA and MRA procedures using similar CT and MRI scanners that cost more than $1 million. Through enactment of the ATRA, Congress increased the usage rate assumption from 75% to 90% for fee schedules to be developed for 2014 and subsequent years. In the proposed Physician Fee Schedule for 2016, CMS proposed to increase the usage rate assumption for linear accelerators used in many radiation oncology treatments from 50% to 70%, which, if adopted, would be responsible in part for a projected 9% aggregate payment reduction to radiation therapy centers in 2016. We currently estimate that neither the usage assumptions for MRI and CT scans under the ATRA, nor the proposed usage rate assumption for linear accelerators, if adopted, will have a material adverse effect on our future retail revenues.
Effective January 1, 2011, CMS made further adjustments to the Physician Fee Schedule so that specialties that have a higher proportion of the payment rate attributable to operating expenses such as equipment and supplies, which include radiation oncology, will experience an increase in aggregate payments. In addition, as a result of adjustments to codes identified to be misvalued, radiation oncology specialties and suppliers providing the technical component of diagnostic tests are among the entities that will experience decreases in aggregate payment. Some of these changes are being transitioned over time; for 2013, CMS estimated aggregate payment reductions of 7% in radiation oncology, 3% in radiology, 3% in nuclear medicine, 7% for suppliers providing the technical component of diagnostic tests and 9% for radiation therapy centers. A portion of the payment reduction to radiation oncology and radiation therapy centers stemmed from revisions to the operating expenses and procedure time allotted to perform Intensity Modulated Radiation Therapy ("IMRT") and Stereotactic Body Radiotherapy ("SBRT"). CMS is also undertaking a review of procedure times allotted to other radiation oncology treatments. At this time, we do not believe that these regulatory changes will have a material effect on our future retail revenues.
In the Physician Fee Schedule for 2014, CMS made additional revisions to the formula it uses to account for physician time and practice expenses when calculating updates to the Physician Fee Schedule. CMS's revisions include changes to the Medicare Economic Index formula, which have the effect of redistributing some practice expense payment to the physician time component. This policy change, combined with the 90% usage rate assumption described above and various other adjustments for the 2014 Physician Fee Schedule, were projected to result in an aggregate payment increase of 1% in radiation oncology, no change to payments for nuclear medicine, and aggregate payment reductions of 2% in radiology, 11% for suppliers providing the technical component of diagnostic tests, and 1% for radiation therapy centers. In the Physician Fee Schedule for 2015, CMS adopted changes to payment policies that are projected to result in an aggregate payment increase of 1% for radiation therapy centers; no aggregate payment change for providers of nuclear medicine and aggregate payment reductions of 1% in radiology, and 2% for suppliers providing the technical component of diagnostic tests. At this time, we do not believe that the final 2014 or 2015 regulatory changes will have a material effect on our retail revenues.
In addition to annual updates to the Physician Fee Schedule, as indicated above, CMS also publishes regulatory changes to the hospital outpatient prospective payment system (“HOPPS”) on an annual basis. These payments are bundled amounts received by our hospital clients for hospital outpatient services related to MRI scans, PET scans, PET/CT scans and SRS treatments. Recent adjustments to the HOPPS payments for these procedures have not had a material adverse effect on our revenue and earnings in 2011, 2012, 2013, 2014 or the first six months of 2015.

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Beginning on April 1, 2013, the ATRA required CMS to equalize the HOPPS payment associated with Cobalt 60-based SRS treatments to the payment amount for the less-expensive, linac-based SRS treatment. In the final HOPPS rule for 2014, CMS equalized payments for the treatments by establishing a single new payment level derived from CMS claims data for both treatments, which resulted in a payment increase for linac-based treatments and a payment decrease for Cobalt 60-based treatments beginning January 1, 2014. In addition, beginning in 2014, CMS utilized newly-available data to revise its estimate of hospitals' costs of providing CT and MRI services, which are used to calculate Medicare payments to hospitals for these services. The use of such data could result in payment reductions for CT and MRI procedures performed in the outpatient departments of our hospital clients. At this time, we do not believe that these changes will have a material adverse effect on our future revenues; however, we cannot predict the effect of future rate reductions on our future revenues or business.
Over the past few years, the growth rate of PET/CT and MRI industry wide scan volumes has slowed in part due to weak hospital volumes as reported by several investor-owned hospital companies, additional patient-related cost-sharing programs and an increasing trend of third-party payors intensifying their utilization management efforts, for example, through benefit managers who require prior authorizations to control the growth rate of imaging services generally. We expect that these trends will continue. One recent initiative to potentially reduce utilization of certain imaging services is the Medicare Imaging Demonstration, which is a two-year demonstration project designed to collect data regarding physician use of advanced diagnostic imaging services, quantify rates of appropriate, uncertain, and inappropriate advanced diagnostic image ordering in the Medicare program, and to determine whether exposing physicians to guidelines at the time of the order is associated with more appropriate ordering and an attendant change in utilization. This information would be used to determine the appropriateness of services by developing medical specialty guidelines for advanced imaging procedures within three designated modalities (MRI, CT and nuclear medicine). On February 2, 2011, CMS announced that it selected five participants for the demonstration project. The data collection portion of the demonstration concluded on April 1, 2012, and the 18-month intervention portion of the demonstration then went into effect, during which time the appropriateness of a physician's order for diagnostic imaging services was considered at the time the order was entered into the decision support systems being tested. The demonstration concluded on September 30, 2013, and a report to Congress summarizing the results of the demonstration was published March 30, 2015. The report stated that exposing ordering physicians to appropriateness guidelines for advanced diagnostic imaging over the course of two years had nearly no effect on utilization for physicians and the report contained no recommendations for legislation or administrative action.
The PAMA requires CMS, in conjunction with medical specialty societies, to adopt appropriate use criteria (“AUC”) for certain advanced diagnostic imaging services by November 15, 2015. Beginning in 2017, CMS must establish a program that promotes the use of AUC by requiring physicians who order and furnish advanced diagnostic imaging services to consult and report compliance with the AUC. Advanced imaging services ordered by certain physicians who do not adhere to the AUC will be subject to prior authorization for applicable imaging services provided to Medicare beneficiaries beginning in 2020.
We cannot predict the full impact of the PPACA and other recent and future legislative enactments on our business. The reform law substantially changed the way health care is financed by both governmental and private insurers. Although certain provisions may negatively affect payment rates for certain imaging services, the PPACA also extended coverage to an estimated 24 million previously uninsured people, which may result in an increase in the demand for our services.
Other legislative changes have been proposed and adopted since the PPACA was enacted, which also may impact our business. On August 2, 2011, the President signed into law the Budget Control Act of 2011 (“BCA”), which, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve its targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation's automatic reduction to several government programs. These reductions include aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which were scheduled to go into effect on January 2, 2013. The enactment of the ATRA delayed the imposition of the automatic cuts until March 1, 2013. On March 1, 2013, the President signed an executive order implementing the automatic budget reductions. Pursuant to that order, payments to Medicare providers for services furnished on or after April 1, 2013 were reduced by 2%. The impact to our revenue related to this 2% reduction was approximately $0.4 million in 2014 and is anticipated to be $0.4 million in 2015. The 2013 Budget Act extended the 2% reduction in payments to Medicare providers by another two years (through 2023), and subsequent legislation extended the cuts through 2024. Unless Congress acts to repeal or revise the automatic budget cuts enacted by the BCA, this payment reduction will continue. The PAMA also included a new quality incentive payment policy that, beginning January 1, 2016, will reduce Medicare payments for certain CT services paid under the Physician Fee Schedule or HOPPS that are furnished using equipment that does not meet certain dose optimization and management standards. The full effect of the PPACA, BCA, ATRA, PAMA and MACRA on our business is uncertain, and it is not clear whether other legislative changes will be adopted or how those changes would affect the demand for our services.
Payments to us by third-party payors depend substantially upon each payor's coverage and reimbursement policies. Third-party payors may impose limits on coverage or reimbursement for diagnostic imaging services, including denying

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reimbursement for tests that do not follow recommended diagnostic procedures. Coverage policies also may be expanded to reflect emerging technologies. Because unfavorable coverage and reimbursement policies have and may continue to constrict the profit margins of the hospitals and clinics we bill directly, we have and may continue to need to lower our fees to retain existing clients and attract new ones. If coverage is limited or reimbursement rates are inadequate, a healthcare provider might find it financially unattractive to own diagnostic imaging or radiation oncology systems, yet beneficial to purchase our services. It is possible that third-party coverage and reimbursement policies will affect the need or prices for our services in the future, which could significantly affect our financial performance and our ability to conduct our business.
Seasonality
We experience seasonality in the revenues and margins generated for our services. First and fourth quarter revenues are typically lower than those from the second and third quarters. First quarter revenue is affected primarily by fewer calendar days and inclement weather, typically resulting in fewer patients being scanned or treated during the period. Fourth quarter revenues are affected by holiday and client and patient vacation schedules, resulting in fewer scans or treatments during the period. The variability in margins is higher than the variability in revenues due to the fixed nature of our costs. We also experience fluctuations in our revenues and margins due to acquisition activity and general economic conditions, including recession or economic slowdown.
Results of Operations
The following table shows our consolidated statements of operations as a percentage of revenues for each of the quarters and six months ended June 30:
 
Quarter Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues, excluding depreciation and amortization
53.6

 
56.9

 
53.8

 
56.8

Selling, general and administrative expenses
17.4

 
17.6

 
17.6

 
18.3

Transaction costs
0.8

 
0.9

 
0.4

 
0.7

Severance and related costs
1.6

 
0.2

 
0.9

 
0.2

Impairment charges
0.2

 
5.6

 
0.1

 
3.0

Depreciation expense
12.8

 
10.2

 
13.9

 
10.4

Amortization expense
1.8

 
2.1

 
1.8

 
2.0

Interest expense and other, net
5.5

 
5.8

 
5.7

 
5.7

Other (income) and expense, net
(0.4
)
 
0.5

 
(0.2
)