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Alliance Healthcare Services
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
FDUS Fidus Investment 0
OCSI Oaktree Strategic Income 0
VETS Pet DRx 0
RCG Renn Fund 0
NTG Natco Group 0
MCC Medley Capital 0
BCSF Bain Capital Specialty Finance 0
FLAG Flag Financial 0
HCAP Harvest Capital Credit 0
PFLT Pennantpark Floating Rate Capital 0
AIQ 2017-06-30
Part I-Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 aiq-ex311_8.htm
EX-31.2 aiq-ex312_9.htm
EX-32.1 aiq-ex321_6.htm
EX-32.2 aiq-ex322_7.htm

Alliance Healthcare Services Earnings 2017-06-30

AIQ 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 aiq-10q_20170630.htm 10-Q aiq-10q_20170630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: June 30, 2017

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)

 

18201 Von Karman Avenue

Suite 600

Irvine, California 92612

(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      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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 24, 2017, there were 10,831,300 shares of common stock outstanding.

 

 

 


ALLIANCE HEALTHCARE SERVICES, INC.

FORM 10-Q

June 30, 2017

Index

 

 

 

Page

PART I—FINANCIAL INFORMATION

 

1

Item 1—Financial Statements:

 

1

Condensed Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016

 

1

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

2

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (Unaudited)

 

3

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

5

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

 

25

Item 3—Quantitative and Qualitative Disclosures about Market Risk

 

40

Item 4—Controls and Procedures

 

40

PART II—OTHER INFORMATION

 

41

Item 1—Legal Proceedings

 

41

Item 1A—Risk Factors

 

41

Item 6—Exhibits

 

42

SIGNATURES

 

43

 

 

 


PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share amounts)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(unaudited)

 

 

(audited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,653

 

 

$

22,241

 

Accounts receivable, net of allowance for doubtful accounts of $4,022 in 2017 and

   $4,008 in 2016

 

 

80,922

 

 

 

77,496

 

Prepaid expenses

 

 

8,823

 

 

 

9,568

 

Other current assets

 

 

4,456

 

 

 

3,853

 

Total current assets

 

 

116,854

 

 

 

113,158

 

Plant, property and equipment, net

 

 

205,058

 

 

 

204,814

 

Goodwill

 

 

120,773

 

 

 

119,130

 

Other intangible assets, net

 

 

193,060

 

 

 

198,977

 

Other assets

 

 

18,006

 

 

 

23,785

 

Total assets

 

$

653,751

 

 

$

659,864

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

21,681

 

 

$

28,185

 

Accrued compensation and related expenses

 

 

20,247

 

 

 

24,895

 

Accrued interest payable

 

 

3,316

 

 

 

3,308

 

Current portion of long-term debt

 

 

33,270

 

 

 

17,298

 

Current portion of obligations under capital leases

 

 

4,125

 

 

 

3,354

 

Other accrued liabilities

 

 

34,681

 

 

 

29,323

 

Total current liabilities

 

 

117,320

 

 

 

106,363

 

Long-term debt, net of current portion

 

 

490,668

 

 

 

515,407

 

Obligations under capital leases, net of current portion

 

 

13,941

 

 

 

12,686

 

Deferred income taxes

 

 

27,966

 

 

 

25,818

 

Other liabilities

 

 

12,800

 

 

 

9,093

 

Total liabilities

 

 

662,695

 

 

 

669,367

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

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

   and outstanding

 

 

 

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 10,989,273 and

   10,970,937 issued in 2017 and 2016, respectively; 10,831,300 and

   10,812,964 outstanding in 2017 and 2016, respectively

 

 

110

 

 

 

110

 

Treasury stock, at cost - 157,973 shares in 2017 and 2016

 

 

(3,138

)

 

 

(3,138

)

Additional paid-in capital

 

 

61,963

 

 

 

61,353

 

Accumulated comprehensive income

 

 

33

 

 

 

10

 

Accumulated deficit

 

 

(198,825

)

 

 

(197,900

)

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

 

 

(139,857

)

 

 

(139,565

)

Noncontrolling interest

 

 

130,913

 

 

 

130,062

 

Total stockholders’ deficit

 

 

(8,944

)

 

 

(9,503

)

Total liabilities and stockholders’ deficit

 

$

653,751

 

 

$

659,864

 

 

See accompanying notes.

1

 


ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

$

137,261

 

 

$

125,317

 

 

$

267,197

 

 

$

249,041

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues, excluding depreciation and amortization

 

 

78,154

 

 

 

69,939

 

 

 

153,203

 

 

 

140,853

 

Selling, general and administrative expenses

 

 

22,003

 

 

 

23,175

 

 

 

45,538

 

 

 

48,440

 

Transaction costs

 

 

152

 

 

 

431

 

 

 

314

 

 

 

848

 

Shareholder transaction costs

 

 

2,523

 

 

 

1,498

 

 

 

3,392

 

 

 

2,507

 

Severance and related costs

 

 

389

 

 

 

708

 

 

 

1,023

 

 

 

2,424

 

Impairment charges

 

 

1,085

 

 

 

 

 

 

1,085

 

 

 

 

Depreciation expense

 

 

13,783

 

 

 

13,730

 

 

 

27,856

 

 

 

26,778

 

Amortization expense

 

 

3,274

 

 

 

2,494

 

 

 

6,549

 

 

 

4,937

 

Interest expense, net

 

 

8,937

 

 

 

8,872

 

 

 

17,637

 

 

 

16,367

 

Other income, net

 

 

(394

)

 

 

(3,546

)

 

 

(877

)

 

 

(4,334

)

Total costs and expenses

 

 

129,906

 

 

 

117,301

 

 

 

255,720

 

 

 

238,820

 

Income before income taxes, earnings from unconsolidated

   investees, and noncontrolling interest

 

 

7,355

 

 

 

8,016

 

 

 

11,477

 

 

 

10,221

 

Income tax expense

 

 

2,379

 

 

 

2,221

 

 

 

2,376

 

 

 

1,275

 

Earnings from unconsolidated investees

 

 

(367

)

 

 

(393

)

 

 

(703

)

 

 

(645

)

Net income

 

 

5,343

 

 

 

6,188

 

 

 

9,804

 

 

 

9,591

 

Less: Net income attributable to noncontrolling interest

 

 

(5,654

)

 

 

(3,729

)

 

 

(10,729

)

 

 

(8,322

)

Net (loss) income attributable to Alliance HealthCare Services, Inc.

 

$

(311

)

 

$

2,459

 

 

$

(925

)

 

$

1,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income, net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

5,343

 

 

$

6,188

 

 

$

9,804

 

 

$

9,591

 

Unrealized (loss) gain on hedging transactions, net of taxes of $0,

   $0, $0 and $0

 

 

(19

)

 

 

84

 

 

 

(6

)

 

 

46

 

Reclassification adjustment for losses realized and included in net

   loss, net of taxes of $0, $0, $0 and $0

 

 

10

 

 

 

 

 

 

29

 

 

 

 

Total comprehensive income, net of taxes

 

 

5,334

 

 

 

6,272

 

 

 

9,827

 

 

 

9,637

 

Comprehensive income attributable to noncontrolling interest

 

 

(5,654

)

 

 

(3,729

)

 

 

(10,729

)

 

 

(8,322

)

Comprehensive (loss) income attributable to Alliance HealthCare

   Services, Inc.

 

$

(320

)

 

$

2,543

 

 

$

(902

)

 

$

1,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per common share attributable to Alliance HealthCare

   Services, Inc.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

 

$

0.23

 

 

$

(0.08

)

 

$

0.12

 

Diluted

 

$

(0.03

)

 

$

0.23

 

 

$

(0.08

)

 

$

0.12

 

Weighted average number of shares of common stock and common

   stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

10,989

 

 

 

10,882

 

 

 

10,981

 

 

 

10,771

 

Diluted

 

 

10,989

 

 

 

10,893

 

 

 

10,981

 

 

 

10,796

 

 

 

 

 

See accompanying notes.

 

 

2

 


ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

9,804

 

 

$

9,591

 

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

 

 

 

 

 

 

 

 

Provision for doubtful accounts

 

 

1,167

 

 

 

1,356

 

Share-based payment

 

 

684

 

 

 

1,780

 

Depreciation and amortization

 

 

34,405

 

 

 

31,715

 

Amortization of deferred financing costs

 

 

4,924

 

 

 

3,312

 

Accretion of discount on long-term debt

 

 

263

 

 

 

254

 

Adjustment of derivatives to fair value

 

 

(11

)

 

 

(45

)

Distributions from unconsolidated investees

 

 

523

 

 

 

752

 

Earnings from unconsolidated investees

 

 

(703

)

 

 

(645

)

Deferred income taxes

 

 

2,148

 

 

 

940

 

Gain on sale of assets, net

 

 

(664

)

 

 

(169

)

Impairment charges

 

 

1,085

 

 

 

 

Changes in fair value of contingent consideration related to acquisitions

 

 

150

 

 

 

(3,640

)

Excess tax benefit from share-based payment arrangements

 

 

 

 

 

436

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,054

)

 

 

(1,389

)

Prepaid expenses

 

 

851

 

 

 

(119

)

Other current assets

 

 

(227

)

 

 

674

 

Other assets

 

 

68

 

 

 

4,240

 

Accounts payable

 

 

(4,583

)

 

 

2,578

 

Accrued compensation and related expenses

 

 

(4,708

)

 

 

2,820

 

Accrued interest payable

 

 

8

 

 

 

(70

)

Income taxes payable

 

 

50

 

 

 

(36

)

Other accrued liabilities

 

 

8,281

 

 

 

3,614

 

Net cash provided by operating activities

 

 

49,461

 

 

 

57,949

 

Investing activities:

 

 

 

 

 

 

 

 

Equipment purchases

 

 

(11,205

)

 

 

(33,975

)

Increase in deposits on equipment

 

 

(8,004

)

 

 

(13,847

)

Acquisitions, net of cash received

 

 

(2,022

)

 

 

(6,659

)

Proceeds from sale of assets

 

 

971

 

 

 

370

 

Net cash used in investing activities

 

 

(20,260

)

 

 

(54,111

)

Financing activities:

 

 

 

 

 

 

 

 

Principal payments on equipment debt and capital lease obligations

 

 

(8,141

)

 

 

(8,035

)

Proceeds from equipment debt

 

 

2,154

 

 

 

4,809

 

Principal payments on term loan facility

 

 

(2,600

)

 

 

(2,600

)

Principal payments on revolving loan facility

 

 

(20,000

)

 

 

(24,000

)

Proceeds from revolving loan facility

 

 

13,500

 

 

 

21,000

 

Principal payment on note payable

 

 

(2,954

)

 

 

 

Payments of debt issuance costs and deferred financing costs

 

 

(288

)

 

 

(25,059

)

Distributions to noncontrolling interest in subsidiaries

 

 

(11,351

)

 

 

(11,703

)

Contributions from noncontrolling interest in subsidiaries

 

 

985

 

 

 

 

Payments for employee share-based compensation payroll taxes

 

 

(74

)

 

 

 

Excess tax benefit from share-based payment arrangements

 

 

 

 

 

(436

)

Issuance of common stock

 

 

 

 

 

1

 

Proceeds from exercise of stock options

 

 

 

 

 

614

 

Settlement of contingent consideration related to acquisitions

 

 

(20

)

 

 

(810

)

Proceeds from shareholder transaction

 

 

 

 

 

28,630

 

Net cash used in financing activities

 

 

(28,789

)

 

 

(17,589

)

Net increase (decrease) in cash and cash equivalents

 

 

412

 

 

 

(13,751

)

Cash and cash equivalents, beginning of period

 

 

22,241

 

 

 

38,070

 

Cash and cash equivalents, end of period

 

$

22,653

 

 

$

24,319

 

 

See accompanying notes.

3

 


ALLIANCE HEALTHCARE SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)

(in thousands)

 

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

12,561

 

 

$

12,957

 

Income taxes paid (refunded), net

 

 

47

 

 

 

(92

)

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Capital lease obligations related to the purchase of equipment

 

 

3,442

 

 

 

1,499

 

Changes in equipment purchases in accounts payable and accrued equipment

 

 

(1,446

)

 

 

352

 

Note payable assumed in connection with acquisition

 

 

2,954

 

 

 

 

Noncontrolling interest assumed in connection with acquisitions

 

 

488

 

 

 

2,948

 

Fair value of contingent consideration related to acquisitions

 

 

 

 

 

420

 

 

 

 

See accompanying notes.

 

 

 

4

 


 

ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(Unaudited)

 

 

1. Basis of Presentation, Principles of Consolidation, and Use of Estimates

Basis of Presentation The accompanying condensed consolidated financial statements have been prepared by Alliance HealthCare Services, Inc. (the “Company” or “Alliance”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The accompanying 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, 2016.

For a complete summary of the Company’s significant accounting policies, refer to Note 2, “Summary of Significant Accounting Policies,” in Part IV, Item 15 of the Company’s 2016 Form 10-K, filed with the SEC on March 10, 2017. There have been no material changes to the Company’s significant accounting policies during the six months ended June 30, 2017.

Pending Transaction On April 10, 2017, the Company entered into an agreement and plan of merger (the “Merger Agreement”) by and among Tahoe Investment Group Co., Ltd., an entity organized under the laws of the People’s Republic of China (“Tahoe”), THAIHOT Investment Company Limited, an exempted company incorporated under the laws of the Cayman Islands and indirect wholly-owned subsidiary of Tahoe (“THAIHOT”), THAIHOT Investment Company US Limited, a Delaware corporation and indirect wholly-owned subsidiary of Tahoe (“Parent”) and Alliance Healthcare Services Merger Sub Limited, a Delaware corporation and wholly-owned subsidiary of Parent (“Sub” and together with Tahoe, THAIHOT and Parent, the “Purchaser Parties”) providing for the merger of Sub with and into Alliance (the “Merger”), with Alliance surviving the Merger as a wholly-owned subsidiary of Parent. Under the Merger Agreement, the Purchaser Parties will acquire all of the Company’s outstanding common stock that is not beneficially owned by the Purchaser Parties or owned by the Company as treasury shares for $13.25 per share. The Merger is subject to approval by Alliance’s stockholders, including a non-waiveable condition requiring approval by the holders of a majority of the outstanding shares of Alliance common stock that are not beneficially owned by the Purchaser Parties or certain senior executive officers of the Company, as well as certain other customary closing conditions. The Company’s board of directors, acting on the unanimous recommendation of a special committee, comprised solely of independent and disinterested directors of the Company who are not affiliated with Tahoe or management of the Company (the “Special Committee”), approved the Merger Agreement and the transactions contemplated by the Merger Agreement and resolved to recommend that the Company’s stockholders adopt the Merger Agreement and the transactions contemplated by the Merger Agreement. The Special Committee exclusively negotiated the terms of the Merger Agreement with Tahoe, with the assistance of independent financial and legal advisors. The Company will hold a meeting of stockholders for the purpose of voting on the adoption of the Merger Agreement on August 15, 2017. If completed, the Merger will result in the Company becoming a privately-held company and Alliance’s common stock would no longer be listed on the NASDAQ.

 

At the effective time of the Merger, each issued and outstanding share of common stock, other than shares owned by Alliance as treasury stock, shares beneficially owned by the Purchaser Parties, and shares owned by holders of common stock who shall neither have voted in favor of the Merger nor consented thereto in writing and who shall have properly and validly perfected, and not effectively withdrawn or lost, their statutory appraisal rights under Delaware law (such shares of common stock “dissenting shares”), will be converted into the right to receive $13.25 in cash per share, without interest and subject to any withholding taxes (the “Merger Consideration”). Under the terms of the Merger Agreement, each in-the-money stock option, whether or not exercisable or vested, will be converted into the right to receive the excess of the Merger Consideration over the option exercise price. Restricted stock units (“RSUs”) that are not subject to accelerated vesting in accordance with their terms will be converted into the right to receive restricted cash awards equal to the Merger Consideration multiplied by the number of shares underlying the RSUs and shall continue to be subject to the same vesting and payment conditions and schedules applicable to such RSUs. The Purchaser Parties have informed Alliance that they intend to fund the payment of the aggregate Merger Consideration from cash on hand. The Merger is not subject to a financing condition.

5

 


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

The Merger Agreement contains certain termination rights for both Alliance and Parent, and further provides that upon the termination of the Merger Agreement under certain circumstances, Alliance will be required to pay Parent an expense reimbursement amount equal to $1.5 million in immediately available funds or Parent will be required to pay Alliance an expense reimbursement amount equal to $4.5 million in immediately available funds (as applicable). Subject to certain limitations, either Alliance or Parent may terminate the Merger Agreement if the Merger is not consummated by December 15, 2017 (the “Termination Date”); provided that the Company may extend the Termination Date for a single additional 60-day period under certain circumstances.

In connection with the Merger, the Special Committee waived the standstill provisions of the Governance, Voting and Standstill Agreement, dated March 29, 2016, by and among Alliance, THAIHOT and Tahoe solely for the purpose of permitting the Purchaser Parties to enter into the Merger Agreement, perform the Purchaser Parties’ obligations thereunder, and consummate the contemplated transactions.

Upon closing of the Merger, Alliance is expected to remain headquartered in Southern California. Alliance’s executive management team is expected to remain in place. All of Alliance’s divisions within the United States are expected to continue unaffected.

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

Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

2. Recent Accounting Pronouncements

Revenue Recognition In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” to clarify and converge the revenue recognition principles under GAAP and International Financial Reporting Standards and to develop guidance that would streamline and enhance revenue recognition requirements while also providing a more robust framework for addressing revenue issues. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. Key provisions of the ASU involve a 5-step model specific to recognizing revenue derived from customer contracts. In addition, ASU 2014-09 provides implementation guidance on several other important topics, including the accounting for certain revenue-related costs. The Company will be required to capitalize costs to acquire new contracts, whereas currently, the Company expenses those costs as incurred. In August 2015, the FASB issued an amendment to provide a one-year deferral of the effective date to annual reporting periods beginning on or after December 15, 2017 for publicly traded business entities. Early adoption of the standard for annual reporting periods beginning on or after December 15, 2016 is permitted. As a publicly traded business entity, ASU 2014-09 will be effective for the Company beginning on January 1, 2018. The Company is currently working through an adoption plan, including identifying its revenue streams and completing a preliminary analysis of how it currently accounts for revenue transactions compared to the revenue accounting required under the new standard. The Company intends to complete its adoption plan in 2017. This plan will include a review of transactions supporting each revenue stream to determine the impact of accounting treatment under Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” and the completion of a rollout plan for implementation of the new standard with affected functions in its organization. Because of the nature of the work that remains, at this time the Company is unable to reasonably estimate the impact of adoption on its consolidated financial statements. 

6

 


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

Leases In February 2016, the FASB issued ASU 2016-02, “Leases,” to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU supersedes the current guidance. The primary difference between current guidance and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 also requires an entity to separate the lease components from the non-lease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. Only the lease components must be accounted for in accordance with this guidance. ASU 2016-02 is effective for publicly traded business entities for annual reporting periods beginning after December 15, 2018, including interim reporting periods within that reporting period. Early adoption is permitted. ASU 2016-02 will be effective for the Company beginning on January 1, 2019. The Company is assessing the impact, if any, that the adoption of ASU 2016-02 may have on its consolidated financial statements.

Share-based Payments In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718),” which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for publicly traded business entities for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company adopted ASU 2016-09 on January 1, 2017. As required by the standard, $0.2 million of tax deficiencies recognized on stock-based compensation expense were reflected in the Company’s condensed consolidated statements of operations and comprehensive income (loss) as a component of “Income tax expense” rather than “Additional paid-in capital” on a prospective basis during the six months ended June 30, 2017. At January 1, 2017, the Company had no previously unrecognized excess tax benefits, the cumulative effect of which would be required by the standard to be recorded as an adjustment to accumulated deficit. The Company also elected to prospectively apply the change in presentation of excess tax benefits wherein excess tax benefits recognized on stock-based compensation expense were classified as operating activities in our condensed consolidated statements of cash flows for the six months ended June 30, 2017. Presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to all periods presented as such cash flows have historically been presented as financing activities. Further, the Company did not elect an accounting policy change to record forfeitures as they occur and thus continues to estimate forfeitures at each period.

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which is intended to reduce diversity in the classification of transactions related to debt prepayment or debt extinguishment costs, zero-coupon debt instruments settlement, contingent consideration payments made after a business combination, insurance claims settlement and corporate-owned life insurance settlement, distributions from equity method investments and beneficial interests in securitization transactions. This guidance is effective for publicly traded business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. ASU 2016-15 will be effective for the Company beginning on January 1, 2018. The Company is assessing the impact, if any, that the adoption of ASU 2016-15 may have on its consolidated financial statements.

Income Taxes In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This amendment is intended to improve accounting for the income tax consequences of intra-entity transfers of assets other than inventory. In accordance with this guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU will be effective for the Company beginning on January 1, 2018. Early adoption is permitted. The Company is assessing the impact, if any, that the adoption of ASU 2016-16 may have on its consolidated financial statements.

Statement of Cash Flows: Restricted Cash In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which provides amendments to current guidance to address the classifications and presentation of changes in restricted cash in the statement of cash flows. ASU 2016-18 will be effective for the Company beginning on January 1, 2018. Early adoption is permitted. The Company does not anticipate that the adoption of ASU 2016-18 will have a material impact on its consolidated financial statements.

7

 


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

Business Combinations In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within that year. The amendments in ASU 2017-01 should be applied prospectively on or after the effective date. Early adoption is permitted. ASU 2017-01 will be effective for the Company beginning on January 1, 2018. The Company is assessing the impact, if any, that the adoption of ASU 2017-01 may have on its consolidated financial statements.

Accounting Changes and Error Corrections In January 2017, the FASB issued ASU No. 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.” The new guidance is intended to provide clarity in relation to the disclosure of the impact that ASU 2014-09 and ASU 2016-02 will have on the Company’s financial statements when adopted. The effective date for this guidance is the same as the effective dates for ASU 2014-09 and ASU 2016-02. The Company is currently evaluating the effect that the adoption of ASU 2017-03 will have on its consolidated financial statements.

Intangibles – Goodwill and Other In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment,” which eliminates the second step from the goodwill impairment test and instead requires an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. The amendments in ASU 2017-04 are effective for public business entities for annual or interim goodwill impairment tests in annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early-adopted ASU 2017-04 on a prospective basis during the six months ended June 30, 2017. The adoption did not have any impact on the Company’s consolidated financial statements.

Share-based Payments – Modification Accounting In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,” which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The amendments in ASU 2017-09 are effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted. ASU 2017-09 will be effective for the Company beginning on January 1, 2018. The Company’s adoption of ASU 2017-09 will not have a material impact on its consolidated financial statements.

3. Acquisitions and Transactions

Tahoe Transaction

On September 16, 2015, Tahoe agreed to purchase approximately 5,537,945 shares of the Company’s common stock from funds managed by Oaktree Capital Management, L.P. (“Oaktree”) and MTS Health Investors, LLC (“MTS”), and Larry C. Buckelew (together, the “Selling Stockholders”) for approximately $102.5 million, or $18.50 per share (the “Tahoe Transaction”). In connection with the Tahoe Transaction, Tahoe and the Selling Stockholders agreed to bear a specified portion of the following Company expenses related to the Tahoe Transaction: (i) 100% of the fees and expenses incurred by the Company in connection with the amendment or waiver of its credit agreement, and (ii) all reasonable and documented fees and expenses incurred by the Company in connection with the Tahoe Transaction in excess of $1.0 million. In addition, following approval of an authorized special committee of the board of directors, Tahoe funded a new management incentive arrangement which involved the issuance of $1.5 million in cash-based awards to the Company’s management. The expenses associated with the cash-based awards were recognized by the Company over the required service period of the awards. The Company received reimbursements of $15.3 million, which were net of taxes of $0.2 million, prior to the Tahoe Transaction close from the Selling Stockholders. These reimbursements were accounted for as capital contributions from the Selling Stockholders. The Company accounted for reimbursements of $13.5 million received subsequent to the Tahoe Transaction close from Tahoe as capital contributions. Costs that are a direct result of the Tahoe Transaction are included in “Shareholder transaction costs” in the Company’s consolidated statements of operations and comprehensive income (loss).

8

 


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

The Tahoe Transaction closed on March 29, 2016. Tahoe, through a wholly-owned subsidiary, owned an aggregate of approximately 51% of the Company’s outstanding shares of common stock as of June 30, 2017. The Company has not agreed to pay any management fees to Tahoe for any financial advisory services provided to the Company.

On April 10, 2017, the Company entered into a Merger Agreement with Tahoe, pursuant to which Tahoe will acquire all of the Company’s outstanding common stock that is not beneficially owned by Tahoe or owned by the Company as treasury shares. See Note 1 for details.

Pro Forma Impact of Acquisition

The following table provides pro forma revenues and results of operations as if the May 2016 acquisition of American Health Centers, Inc. had occurred at the beginning of the year prior to its acquisition date. The pro forma results were prepared from financial information obtained from the seller of the businesses, as well as information obtained during the due diligence process associated with the acquisition. The pro forma results reflect certain adjustments related to the acquisition, such as increased depreciation and amortization expense resulting from the stepped-up basis to fair value of assets acquired and adjustments to reflect the Company’s borrowing and tax rates. The pro forma operating results do not include any anticipated synergies related to combining the businesses. Accordingly, such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of the beginning of the respective periods or of results that may occur in the future.

 

(in thousands, except per share amounts)

 

Three Months Ended June 30, 2016

 

 

Six Months Ended June 30, 2016

 

Revenues

 

$

125,496

 

 

$

249,856

 

Net income attributable to Alliance HealthCare Services, Inc.

 

 

2,533

 

 

 

1,612

 

Basic earnings per share

 

 

0.23

 

 

 

0.15

 

Diluted earnings per share

 

 

0.23

 

 

 

0.15

 

Restructuring Plan

From time to time, the Company’s management implements individually immaterial restructuring plans, including the closure or consolidation of certain sites as a result of the loss of certain customers. The impact of the charges resulting from restructuring plans are summarized below:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(in thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of revenues, excluding depreciation and amortization

 

$

468

 

 

$

553

 

 

$

545

 

 

$

753

 

Selling, general and administrative expenses

 

 

74

 

 

 

567

 

 

 

93

 

 

 

598

 

Other expense, net

 

 

 

 

 

 

 

 

119

 

 

 

 

Total restructuring charges

 

$

542

 

 

$

1,120

 

 

$

757

 

 

$

1,351

 

The restructuring plans, under which costs were incurred during the three and six months ended June 30, 2017 and 2016, were adopted at varying times, beginning in 2009, and are expected to be completed by the first quarter of 2021.

4. Share-Based Payment

Stock Option Plans and Awards

In November 1999, the Company adopted an employee stock option plan (as amended and restated, the “1999 Equity Plan”) pursuant to which options and awards with respect to a total of 3,005,000 shares have become available for grant. As of June 30, 2017, a total of 995,439 shares remained available for grant under the 1999 Equity Plan.

9

 


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

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

 

 

Six Months Ended June 30,

 

 

 

2016

 

Risk free interest rate

 

 

1.53

%

Expected dividend yield

 

 

%

Expected stock price volatility

 

 

66.5

%

Average expected life (in years)

 

 

6.0

 

Weighted average fair value on grant date

 

$

4.32

 

 

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

(dollars in thousands, except per share amounts)

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted Average

Remaining Contractual

Term (in years)

 

 

Aggregate

Intrinsic

Value (1)

 

Outstanding at December 31, 2016

 

 

650,969

 

 

$

18.51

 

 

 

 

 

 

 

 

 

Canceled/forfeited

 

 

(43,980

)

 

 

33.04

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2017

 

 

606,989

 

 

$

17.46

 

 

 

6.2

 

 

$

2,067

 

Vested and expected to vest in the future at June 30, 2017

 

 

581,911

 

 

$

17.90

 

 

 

6.1

 

 

$

1,914

 

Vested and exercisable at June 30, 2017

 

 

485,752

 

 

$

20.02

 

 

 

5.5

 

 

$

1,326

 

 

(1)

Represents the difference between the exercise price and the value of the Company’s stock at fiscal quarter-end.

 

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

(dollars in thousands, except per share amounts)

 

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Aggregate Unrecognized Compensation

 

 

Weighted Average

Period Over

Which Expected

to be Recognized

(in years)

 

 

Total Fair Value

 

Unvested at December 31, 2016

 

 

187,804

 

 

$

4.33

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested

 

 

(62,303

)

 

 

4.33

 

 

 

 

 

 

 

 

 

 

$

270

 

Forfeited

 

 

(4,264

)

 

 

4.18

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested at June 30, 2017

 

 

121,237

 

 

$

4.33

 

 

$

358

 

 

 

1.7

 

 

 

 

 

 

Stock Awards

The 1999 Equity Plan permits the award of restricted stock, RSUs, stock bonus awards and performance-based stock awards (collectively referred to as “stock awards”).

The following table summarizes the Company’s RSU activity:

 

(dollars in thousands, except per share amounts)

 

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Aggregate Unrecognized Compensation

 

 

Weighted Average

Period Over Which

Expected to be

Recognized

(in years)

 

Unvested at December 31, 2016

 

 

167,853

 

 

$

8.37

 

 

 

 

 

 

 

 

 

Vested

 

 

(25,690

)

 

 

6.93

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(2,573

)

 

 

6.93

 

 

 

 

 

 

 

 

 

Unvested at June 30, 2017

 

 

139,590

 

 

$

8.66

 

 

$

668

 

 

 

0.9

 

10

 


ALLIANCE HEALTHCARE SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS––(Continued)

June 30, 2017

(Unaudited)

 

Share-based Compensation Expense

The following table summarizes pre-tax share-based compensation expense included within “Selling, general and administrative expenses” in the condensed consolidated statements of operations and comprehensive income (loss):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

(in thousands)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Share-based compensation expense

 

$

303

 

 

$

379

 

 

$

684

 

 

$

2,243

 

(1)

 

 

(1)

Decrease in share-based compensation expense during the six months ended June 30, 2017, compared to the six months ended June 30, 2016, was primarily due to additional expense recognized related to a change in control in connection with the Tahoe Transaction in March 2016 (see Note 3). This includes cash paid of $463 related to market performance RSUs, granted to executive management, which vested upon a change in control of the Company under the terms of the RSU award agreement.

 

 

5. Fair Value of Financial Instruments

Instruments Measured at Fair Value on a Recurring Basis

The following table summarizes the valuation of the Company’s financial instruments that are reported at fair value on a recurring basis:

 

 

 

Fair Value as of June 30, 2017

 

 

Fair Value as of December 31, 2016

 

(in thousands)

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts - asset position

 

$

52

 

 

$

 

 

$

52

 

 

$

 

 

$

55

 

 

$

 

 

$

55

 

 

$

 

Total financial assets

 

$

52

 

 

$

 

 

$

52

 

 

$

 

 

$

55

 

 

$

 

 

$

55

 

 

$

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration related to

   acquisitions

 

$

685

 

 

$

 

 

$

 

 

$

685

 

 

$

555

 

 

$

 

 

$

 

 

$

555

 

Mandatorily redeemable noncontrolling

   interest

 

 

2,386

 

 

 

 

 

 

 

 

 

2,386

 

 

 

2,386