The liabilities of the consolidated VIE are obligations of the VIE and the creditors have no recourse to USMD
Holdings, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
Note 1
Description of Business and Basis of Presentation
Description of Business:
USMD Holdings, Inc. (USMD or the Company) is an early-stage physician-led integrated health system. An integrated
health system is considered early-stage when it has not yet established all the components necessary to be considered a fully integrated health system. Through its subsidiaries and affiliates, the Company provides healthcare services to patients and
management and operational services to hospitals and other healthcare service providers. The Company provides healthcare services to patients in physician clinics, hospitals and other healthcare facilities, including cancer treatment centers and
anatomical pathology and clinical laboratories. A wholly owned subsidiary of the Company is the sole member of a Texas Certified Non-Profit Health Organization that owns and operates a multi-specialty physician group practice (USMD Physician
Services) in the Dallas-Fort Worth, Texas metropolitan area.
Through other wholly owned subsidiaries, the Company provides
management and operational services to two general acute care hospitals in the Dallas-Fort Worth, Texas metropolitan area and provides management and/or operational services to three cancer treatment centers in three states. Of these managed
entities, the Company has noncontrolling ownership interests in the two hospitals and one cancer treatment center. In addition, the Company wholly owns and operates one Independent Diagnostic Testing Facility (IDTF), two clinical
laboratories, one anatomical pathology laboratory and one cancer treatment center in the Dallas-Fort Worth, Texas metropolitan area.
On
December 18, 2015, as part of the Companys strategic plan to build a fully integrated physician-led health system, the Company sold its lithotripsy services (Lithotripsy Services) business (see Note 3). The sale included the
management services business as well as controlling and noncontrolling interests in the Companys lithotripsy service provider entities. A noncontrolling interest in one lithotripsy service provider entity was retained. In its existing form,
the lithotripsy business was not a core component of an integrated health system and, therefore, was not aligned with the strategic objectives of the Company.
Basis of Presentation:
The consolidated
financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). The consolidated financial statements include the accounts of the Company, entities
controlled by the Company through its direct or indirect ownership of a majority interest and any other entities in which the Company has a controlling financial interest. The Company consolidates VIEs where the Company is the primary beneficiary.
The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly impact the VIEs economic performance and the obligation to absorb losses or the right to receive benefits that could
potentially be significant to the VIE. The Company consolidates entities in which it or its wholly owned subsidiary is the general partner or managing member and the limited partners or managing members, respectively, do not have sufficient rights
to overcome the presumption of the Companys control. The Company eliminates all significant intercompany accounts and transactions in consolidation. Certain prior year amounts have been reclassified to conform to current year presentation.
The Company uses the equity method to account for investments in entities it or its wholly owned subsidiaries do not control, but over
which it or its wholly owned subsidiaries have the ability to exercise significant influence. The Company does not consolidate equity method investments, but rather measures them at their initial cost and subsequently adjusts their carrying values
through income for the Companys respective share of earnings or losses during the period.
44
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Note 2 Summary of Significant Accounting Policies and Pronouncements
Revenue Recognition
Patient Service
Revenue:
The Company records patient service revenue at the time healthcare services are provided based upon estimated amounts due from third-party payers and patients. Amounts the Company receives for patient services paid by patients and
third-party payers such as managed care health plans and commercial payers, governmental programs, such as Medicare and Medicaid, and other payers are generally less than the Companys customary charges. Patient service revenue is recorded net
of these contractual allowances and discounts. The estimation of contractual allowances on charges posted for the period involve payer-specific estimates of net patient service revenue based on the most significant contractual reimbursement
methodologies. However, the calculations do not take into consideration all contract provisions that may limit reimbursement, but provide an estimate of net realizable value. Revenue is adjusted when the parties (insurer and patient/guarantor)
obligated under the contract have tendered payment on the claim. Historically, these payment adjustments have not been material.
To
provide for patients accounts receivable that could become uncollectible in the future, the Company establishes an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value.
Accordingly, the net patient service revenue and accounts receivable reported in the Companys accompanying consolidated financial statements are recorded at the net amount expected to be received.
Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on the Companys financial statements. Compliance
with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs.
Capitated Revenue:
The Companys consolidated VIE, WNI-DFW, Inc. (WNI-DFW), earns capitated revenue (fixed payment per
member per month) by contracting with an entity that operates a health services company that contracts directly with a health plan. Capitated revenue is prepaid monthly to WNI-DFW based on the number of Medicare Advantage members of that network
electing WNI-DFW primary care physicians as their healthcare provider. Capitated revenue is reported as revenue in the month in which members are entitled to receive healthcare. Capitated revenue pertaining to Medicare enrollees is subject to
possible retroactive premium risk adjustments based on their individual acuity. Due to lack of sufficient data to project the amount of such retroactive adjustments, the Company records any corresponding retroactive revenues in the year of receipt.
Management and Other Services Revenue:
The Company earns management services revenue through the provision of management services
to its managed entities. Management fee revenues are generally recognized based on a defined percentage of cash collections or adjusted net revenues of the managed entities. These terms and percentages are contractually defined and the Company
recognizes revenue when the contractual terms are met. The Company may also provide certain managed entities with operational and finance support services. Revenue from these services is recognized as the services are provided and contractual terms
are met.
Lithotripsy Services Revenue:
Prior to the sale of the Lithotripsy Services business, the Company provided lithotripsy
services to hospitals and other medical facilities. Lithotripsy services revenue is comprised of the revenue of consolidated lithotripsy entities that the Company controls or wholly owns. Lithotripsy services revenue is recognized as services are
provided and reported based on actual contract price or estimated net realizable amounts.
Physician Recruitment Agreements:
In
order to meet the hospitals needs, hospitals enter into physician recruitment agreements with physicians and/or group practices that employ them under which hospitals agree to contribute to the compensation of physicians who are recruited to
their service area. Several hospitals have entered into such agreements with USMD Physician Services and/or physicians that are employed by that entity or its wholly owned subsidiaries. Under such agreements, the hospital will typically provide
the physician with a guaranteed income during an initial guarantee period, generally one year. Amounts paid by a hospital under such agreements are subject to repayment and repayment is secured by a note payable to the hospital with repayment terms
generally beginning in the month following the end of the guarantee period. Principal and interest payments are due monthly over a defined commitment period, generally three years, and the obligation to make monthly installment payments is forgiven
on the due date provided no events of default have occurred. Events of default are typically defined as, but not limited to, failure of the physician to maintain a practice in the service area of the hospital as established in the agreement or
entering into competing agreements. Upon an event of default, amounts not previously forgiven are due to the hospital in accordance with the terms of the note and, typically, the payment of future installment note payments can be accelerated.
45
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
USMD Physician Services records physician recruitment agreement payments received from
hospitals for the benefit of employed physicians as deferred revenue and recognizes associated patient service revenue on a straight-line basis over the term of the commitment period. Upon an event of default, amounts due are reclassified to
notes payable; however, historically, such amounts have not been material to the Companys consolidated financial statements. For the years ended December 31, 2015 and 2014, the Company recognized $0.3 million and $0.7 million,
respectively, of patient service revenue associated with physician recruitment agreements. At December 31, 2015 and 2014, the Company has on the consolidated balance sheet $0.2 million and $0.3 million, respectively, of deferred revenue
associated with physician recruitment agreements included in other current liabilities and $0.1 million and $0.3 million, respectively, of deferred revenue associated with physician recruitment agreements included in other long-term liabilities.
Concentrations and Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. Deposits held with financial institutions often exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
Accounts receivable are stated at net realizable value. The Company grants credit without requiring collateral from its non-patient customers,
primarily area healthcare facilities. The Company grants credit without requiring collateral from its patients, most of whom are area residents and are insured under third-party payer agreements. The credit risk for non-governmental accounts
receivable is limited due to the number of insurance companies and other payers that provide payment and reimbursement for patient services. Collection risks principally relate to self-pay patient accounts, including patient accounts for which the
primary insurance payer has paid but patient responsibility amounts (generally deductibles, coinsurance and copayments) remain outstanding. The mix of gross patient and customer accounts receivable is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Government-related programs
|
|
|
46
|
%
|
|
|
33
|
%
|
Managed care and commercial payers
|
|
|
51
|
|
|
|
54
|
|
Self-pay
|
|
|
3
|
|
|
|
4
|
|
Customer
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on managements assessment of the collectibility of patient and customer accounts. The
Company regularly reviews this allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances and current economic conditions that may affect a patients or customers ability to
pay. Uncollectible accounts are written off once collection efforts are exhausted. At December 31, 2015 and 2014, the allowance for doubtful accounts was 11.2% and 7.8%, respectively, of gross accounts receivable. A summary of the
Companys accounts receivable allowance for doubtful accounts activity is as follows (in thousands):
46
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Year
|
|
|
Provision
for
Doubtful
Accounts
Related to
Patient
Service
Revenue
|
|
|
Provision
for
Doubtful
Accounts
|
|
|
Write-
offs
|
|
|
Balance at
End of Year
|
|
For the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
$
|
2,100
|
|
|
|
5,649
|
|
|
|
(89
|
)
|
|
|
(4,740
|
)
|
|
$
|
2,920
|
|
2014
|
|
$
|
1,758
|
|
|
|
3,492
|
|
|
|
183
|
|
|
|
(3,333
|
)
|
|
$
|
2,100
|
|
If actual results are not consistent with the Companys assumptions and judgments, it may be exposed to
changes in the allowance for doubtful accounts that could be material. Changes in general economic conditions or payer mix, or trends in federal governmental and private employer healthcare coverage could affect the estimate of the allowance for
doubtful accounts, collection of accounts receivable, or financial position, results of operations and cash flows of the Company.
Cash and Cash
Equivalents
Cash equivalents include highly liquid investments with maturities of three months or less when purchased. Cash and cash
equivalents consist primarily of bank deposit accounts.
Restricted Cash
Restricted cash includes cash that is legally restricted for withdrawal or usage. Restrictions may include legally restricted deposits held as
compensating balances or funds held in escrow.
Inventories
Inventories consist primarily of pharmacy and medical supplies and are stated at lower of cost or market on a first-in, first-out basis.
Property and Equipment, Net
Property and
equipment are recorded at cost less accumulated depreciation. Expenditures that increase capacities or extend useful lives are capitalized while routine maintenance and repairs are charged to operating expense as incurred. Leased property meeting
certain criteria is capitalized and the present value of the related lease payments is recorded as a liability. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. Leasehold improvements and
capitalized lease assets are amortized over the respective lease term used in determining the lease classification or the estimated useful life of the asset, whichever is shorter. When property is sold, retired or otherwise disposed of, the cost and
related accumulated depreciation are eliminated from the respective accounts and the resulting gain or loss is included in the consolidated statement of operations. The useful lives of assets acquired in business combinations are estimated based on
the condition of the asset at its acquisition date and its normal useful life. Estimated useful lives of assets are as follows at December 31, 2015:
|
|
|
Building
|
|
40 years
|
Leasehold improvements
|
|
1-15 years
|
Furniture and equipment
|
|
2-15 years
|
Software
|
|
1-5 years
|
47
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Impairment of Long-Lived Assets and Finite-Lived Intangible Assets
Long-lived assets include property and equipment and equity investments in nonconsolidated affiliates. The Company evaluates its long-lived
assets and identifiable acquired intangible assets with finite useful lives for possible impairment whenever circumstances indicate that the carrying value of the asset, or related group of assets, may not be recoverable from estimated future
undiscounted cash flows. When evaluating long-lived assets for impairment, the Company compares the carrying value of the asset to the assets estimated fair value. An impairment loss is recognized when the carrying value of the asset or group
of assets exceeds the respective fair value. Fair value of assets is estimated based on appraisals, established market values of comparable assets or internal estimates of undiscounted future cash flows. The Companys estimates of future cash
flows are based on assumptions and projections it believes to be reasonable and supportable. No impairment charges were recorded during the years ended December 31, 2015 or 2014. The Company amortizes the cost of intangible assets with finite
useful lives over their respective estimated useful lives to their estimated residual value. At December 31, 2015, none of the Companys finite-lived intangible assets had an estimated residual value.
Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase price and related costs over the fair value of net tangible and identifiable intangible assets
acquired in business combinations. Goodwill and indefinite-lived intangible assets are not subject to amortization but are tested for impairment on an annual basis, or more frequently if circumstances indicate a potential impairment. Such
circumstances may include (1) a significant adverse change in legal factors or the business climate, (2) an adverse action or assessment by a regulator, or (3) other adverse changes in the assessment of future operations of a
reporting unit.
Goodwill is tested for impairment at a reporting unit level, which for the Company is one level below the operating
segment level. The impairment test for goodwill uses a two-step approach. Step one compares the fair value of the reporting unit to which goodwill is assigned to its carrying value. If the carrying value of a reporting unit exceeds its estimated
fair value, a potential impairment is indicated and step two is performed. Step two compares the carrying value of the reporting units goodwill to its implied fair value. In calculating the implied fair value of reporting unit goodwill, the
fair value of the reporting unit is allocated to all of the other assets and liabilities, including unrecognized intangible assets, of that reporting unit based on their fair values, similar to the allocation that occurs in a business combination.
The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, an impairment charge is recognized
in an amount equal to that excess. If the implied fair value of goodwill exceeds the carrying value, goodwill is not impaired.
To test
impairment of acquired indefinite-lived intangible assets (trade names), the fair values are estimated and compared to their carrying values. The Company estimates the fair value of these intangible assets based on an income approach relief
from royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including
estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. The Company recognizes an impairment loss when the estimated fair value of the intangible asset is less than its
carrying value.
The Company performs its annual impairment tests of goodwill and indefinite-lived intangible assets as of
December 31.
Electronic Health Record Incentive Income
The American Recovery and Reinvestment Act of 2009 (ARRA) provides for incentive payments under the Medicare program for certain
hospitals and physician practices that demonstrate meaningful use of certified electronic health record (EHR) technology. These provisions of ARRA are intended to promote the adoption and meaningful use of interoperable health
information technology and qualified EHR technology. The Company accounts for Medicare EHR incentive payments in accordance with ASC 450-30, Gain Contingencies. The Company recognizes a gain for EHR incentive payments when its
participating physicians have demonstrated meaningful use of certified EHR technology for the applicable period. Once the physicians have demonstrated meaningful use of certified EHR technology for the applicable period, no further contingencies
exist as related to the Medicare EHR incentives for physicians. However, individual payment amounts are subject to audit by the administrative contractor and the auditors final determination of amounts earned could differ from amounts
recorded. For the years ended December 31, 2015 and 2014, the Company recognized $0.0 million and $1.2 million of EHR incentive income, which is included in other operating expenses on the consolidated statements of operations.
48
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Share-Based Payments
Share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their
estimated grant-date fair value. Share-based payments are generally amortized on a straight-line basis over the requisite service period; however, where the portion of the grant-date value of the award that is vested exceeds straight-line
amortization, the vested portion is recognized.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. The Companys policy is to record interest and penalties related to income tax matters, net of any applicable related income tax benefit, as a component of income tax
expense.
Items required by tax regulations to be included in the tax return may differ from the items reflected in the financial
statements. As a result, the effective tax rate reflected in the financial statements may be different than the actual rate applied on the tax return. Some of these differences are permanent such as expenses that are not deductible in the
Companys tax return, and some differences are temporary, reversing over time, such as valuation reserves. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax
deduction or credit in future years for which the Company has already recorded the tax benefit in the Companys income statement. Deferred tax liabilities generally represent tax expense recognized in the Companys financial statements for
which payment has been deferred, or expenditures for which the Company has already taken a deduction in the Companys tax return but have not yet been recognized in the Companys financial statements.
The application of GAAP requires the Company to evaluate the recoverability of the Companys deferred tax assets and establish a
valuation allowance if necessary to reduce the Companys deferred tax assets to an amount that is more likely than not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the
amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company may consider many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital;
(3) taxable income in prior carryback years as well as projected taxable earnings exclusive of reversing temporary differences and carryforwards; (4) the length of time that carryovers can be utilized in the various taxing jurisdictions;
(5) any unique tax rules that would impact the utilization of the deferred tax assets; and (6) any tax planning strategies that the Company would employ to avoid a tax benefit from expiring unused. Although realization is not assured,
management believes it is more likely than not that the deferred tax assets will be realized. Deferred tax assets are reduced by a valuation allowance when, based on all available evidence, both positive and negative, and the weight of that evidence
to the extent such evidence can be objectively verified, management determines it is more likely than not that all or a portion of the deferred tax assets will not be realized.
GAAP prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain
tax positions that a company has taken or expects to take on tax returns. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition. The Company
determines whether it is more likely than not, based upon the technical merits, that a tax position will be sustained on audit, including resolution of related appeals or litigation processes. If the tax position does not meet the more likely than
not recognition threshold, the benefit of that position is not recognized in the financial statements. The second step is measurement. The Company measures the tax position as the largest amount of benefit that is greater than 50 percent likely of
being realized upon ultimate resolution with a taxing authority that has full knowledge of all relevant information. This measurement considers the amounts and probabilities of the outcomes that could be realized upon the ultimate settlement using
the facts, circumstances, and information available at the reporting date. Tax benefits associated with an uncertain tax position are derecognized in the period in which the more likely than not recognition threshold is no longer satisfied.
The determination and evaluation of the Companys provision for income taxes and analysis of uncertain tax positions requires significant
judgment and knowledge of federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets.
While the Company believes it has adequately provided for its income tax receivables or liabilities and deferred tax assets or liabilities in accordance with applicable income tax guidance, adverse determinations by taxing authorities or changes in
tax laws and regulations could have a material adverse effect on the Companys consolidated financial condition, results of operations or cash flows.
49
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
The Companys liability for income taxes includes the liability for unrecognized tax
benefits, including interest and penalties that relate to tax years still subject to review by the Internal Revenue Service or other taxing jurisdictions. Audit periods remain open for review until the statute of limitations has passed. Generally,
for tax years that produce net operating losses, capital losses or tax credit carryforwards (tax attributes), the statute of limitations does not close, to the extent of these tax attributes, until the expiration of the statute of
limitations for the tax year in which they are fully utilized. The completion of review or the expiration of the statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.
Fair Value Measurements
Fair value is
the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Companys market assumptions. Preference is given to observable
inputs. The basis for these assumptions establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
|
|
Level 1
Observable inputs such as quoted prices in active markets;
|
|
|
|
Level 2
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
|
Level 3
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Assets and liabilities measured at fair value are based on one or more of three valuation techniques. The three valuation techniques are as
follows:
|
|
|
Market approach
Prices and other market-related information involving identical or comparable assets or liabilities;
|
|
|
|
Cost approach
Amount that would be required to replace the service capacity of an asset (i.e., replacement cost); and
|
|
|
|
Income approach
Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option pricing models and lattice models).
|
Investments in Nonconsolidated Affiliates
Investments in entities the Company does not control but in which the Company has the ability to exercise significant influence over the
operating and financial policies of the investee are accounted for under the equity method of accounting. Equity method investments are recorded at original cost and adjusted periodically to recognize the Companys proportionate share of the
investees net income or loss after the date of investment, additional contributions made, dividends or distributions received, and impairment losses resulting from adjustments to net realizable value. The Company records equity method losses
in excess of the carrying amount of an investment when the Company guarantees obligations or is otherwise committed to provide further financial support to the affiliate.
The Company regularly monitors and evaluates the fair value of its equity method investments. If events and circumstances indicate that a
decline in the fair value of these assets has occurred and is other than temporary, the Company will adjust investments in nonconsolidated affiliates in the consolidated balance sheet. The Companys equity investments do not have a readily
determinable fair value as none of them are publicly traded. The fair values of the Companys private equity investments are primarily determined by discounting the estimated future cash flows of each entity. These cash flow estimates include
assumptions on growth rates, discount rates and terminal values (Level 3 fair value measurement).
Noncontrolling Interests in Subsidiaries
The Companys consolidated financial statements include all assets, liabilities, revenues, expenses and cash flows of less-than-100%-owned
affiliates that the Company controls. Accordingly, the Company has recorded noncontrolling interests in the earnings and equity of such entities. The Company records adjustments to noncontrolling interests for the allocable portion of income or loss
to which the noncontrolling interests holders are entitled based upon the portion of the subsidiaries they own. Contributions from and distributions to holders of noncontrolling interests are adjusted to the respective noncontrolling interests
holders balance. At December 31, 2015, the Company consolidated the assets, liabilities, revenues and expenses of one VIE in which it has a controlling financial interest. At December 31, 2014, the Company consolidated the assets,
liabilities, revenues and expenses of 18 less-than-100%-owned lithotripsy entities that it controls and one VIE in which it has a controlling financial interest.
50
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Segment Reporting
GAAP defines operating segments as components of an enterprise about which discrete 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. The Companys CODM is the Chief Executive Officer. The CODM assesses performance and allocates resources at
the integrated health system level. Accordingly, the Company has one operating segment for segment reporting purposes.
Advertising Expense
The Company expenses all advertising costs when incurred. For the years ended December 31, 2015 and 2014, the Company incurred advertising
expense of $0.6 million and $0.4 million, respectively. Advertising expense is included in other operating expenses in the accompanying consolidated statements of operations.
Use of Estimates
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include net patient service revenue, the allowance for doubtful accounts, incurred but not reported (IBNR) medical claims,
certain assumptions used in valuations and impairment analyses, depreciable lives of assets, fair value of stock options, the income tax provision and contingency and litigation reserves. While management believes current estimates are reasonable
and appropriate, the Company cannot predict future events and their effects with certainty; accordingly, the Companys accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Companys
consolidated financial statements will change as new events occur, as better data becomes available, as additional information is obtained, and as facts and circumstances change. The Company evaluates and updates assumptions and estimates on an
ongoing basis and may employ outside experts to assist in evaluations, as considered necessary. Actual results could differ materially from estimates.
Recently Issued or Adopted Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). Among other provisions
and in addition to expanded disclosures, ASU 2014-08 changes the definition of what components of an entity qualify for discontinued operations treatment and reporting from a reportable segment, operating segment, reporting unit, subsidiary or asset
group to only those components of an entity that represent a strategic shift that has, or will have, a major effect on an entitys operations and financial results. Additionally, ASU 2014-08 requires disclosure about a disposal of an
individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements, including the pretax profit or loss attributable to the component of an entity for the period in which it is
disposed or is classified as held for sale. This disclosure is required for all of the same periods that are presented in the entitys results of operations for the period. The provisions of ASU 2014-08 are effective prospectively for all
disposals or classifications as held for sale of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years. The Company adopted ASU 2014-08 effective January 1,
2015. The Company applied ASU 2014-08 when considering whether the sale of its Lithotripsy Services business was a discontinued operation.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
(ASU 2015-02). ASU 2015-02 changes the analysis that a company must perform to determine whether it should consolidate certain legal entities. All legal entities are subject to reevaluation under the updated guidance. ASU 2015-02
eliminates the presumption that a general partner should consolidate a limited partnership, eliminates the consolidation model specific to limited partnerships, modifies the evaluation of whether limited partnerships and similar legal entities are
VIEs or voting interest entities and affects the evaluation of fee arrangements in the VIE primary beneficiary determination. ASU 2015-02 is effective for reporting periods beginning after December 15, 2015 and for interim periods within the
fiscal year. The Company adopted ASU 2015-02 effective January 1, 2016. As a result of the adoption of ASU 2015-02, certain limited partnerships and limited liability companies in which the Company has investments in are now considered to be
VIEs. The Company has evaluated the entities under ASU 2015-02 and concluded that it does not have a controlling financial interest in the entities and, therefore, does not consolidate the entities. However, beginning with the Companys
Quarterly Report on Form 10-Q for the period ending March 31, 2016, the Company will make additional VIE disclosures associated with these entities.
51
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
In April 2015, the FASB issued ASU No. 2015-03, Interest Imputation of
Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to adoption of this amendment, debt issuance costs were required to be presented in the balance sheet as a deferred charge (an asset). ASU 2015-03 is
effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The provisions of ASU 2015-03 must be applied on a retrospective basis. The Company adopted ASU 2015-03
effective January 1, 2016. Adoption of this guidance did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments (ASU 2015-16). ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust its financial statements for changes to provisional amounts that are identified during the
measurement-period following the consummation of a business combination. Instead, ASU 2015-16 requires these types of adjustments to be made during the reporting period in which they are identified and would require additional disclosure or separate
presentation of the portion of the adjustment that would have been recorded in the previously reported periods as if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective prospectively for
fiscal years beginning after December 15, 2015, including interim periods within those years. The Company adopted ASU 2015-16 effective January 1, 2016. Adoption of this guidance did not have an impact on the Companys consolidated
financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 requires deferred tax assets and liabilities to be netted and presented as a single noncurrent amount in the balance sheet, rather than separating them into
current and noncurrent amounts. ASU 2015-17 is effective for or annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for all entities as of the beginning of an interim or
annual reporting period.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU
2016-02). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a
lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and
uncertainty of cash flows arising from leases. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. At adoption, this
update will be applied using a modified retrospective approach. Management is currently evaluating the impact that adoption of ASU 2016-02 will have on the Companys consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU-2014-09). ASU 2014-09
requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 provides a
single principles-based, five-step model to be applied to all contracts with customers. The five steps are to identify the contract(s) with the customer, identify the performance obligations in the contact, determine the transaction price, allocate
the transaction price to the performance obligations in the contract and recognize revenue when each performance obligation is satisfied. The provisions of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or
retrospectively with the cumulative effect of the update recognized at the date of the initial application along with additional disclosures. On August 14, 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU
2014-09 by one year and permits early adoption on a limited basis. As a result of the deferral, ASU 2014-09 will be effective for the Company beginning January 1, 2018. Early adoption is permitted beginning January 1, 2017. Management is
evaluating the impact that adoption of ASU 2014-09 will have on the Companys consolidated financial statements.
Note 3 Sale of
Lithotripsy Services Business
On December 18, 2015, in line with the Companys strategic plan to build an integrated
physician-led health system, the Company sold its Lithotripsy Services business. The Lithotripsy Services business was engaged in the formation, promotion and management of partnerships and other entities that provide the technical portion of
lithotripsy procedures to hospitals, surgery centers, physician practices and other healthcare facilities. At the time of the sale, the Lithotripsy Services business provided management and/or operational services to 21 lithotripsy service providers
located primarily in the South Central United States. Of those managed entities, the Lithotripsy Services business had minority ownership interests in 19 of the lithotripsy service providers. In addition, the Lithotripsy Services business wholly
owned and operated two lithotripsy service providers in North Texas. The sale included the management
52
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
services business as well as controlling and noncontrolling interests in the Companys lithotripsy service provider entities. The Company retained a noncontrolling interest in one
lithotripsy service provider entity. Except as noted in the preceding sentence, all ownership interests in and held by the Company were sold. As a result of the sale, the Company no longer provides management or operational services to or serves as
the general partner of any lithotripsy service provider. In its existing form, the Lithotripsy Services business was not a core component of an integrated health system and, therefore, was not aligned with the strategic objectives of the Company.
The Lithotripsy Services business was sold for $19.8 million in cash subject to working capital and other adjustments and before purchase
price adjustments for indebtedness and transaction costs. The Company received proceeds of $9.3 million after adjustments for indebtedness, transaction costs and amounts placed into escrow. At December 31, 2015, $3.0 million remains in escrow
to satisfy indemnification obligations, which is recorded as restricted cash on the Companys consolidated balance sheet. The Company anticipates resolving working capital true-ups in April 2016. The Company recorded a gain on sale of the
Lithotripsy Services business of $11.8 million, which is recorded in other gain (loss), net on the consolidated statement of operations, less income tax of $4.1 million. For the years ended December 31, 2015 and 2014, the pre-tax profit of the
Lithotripsy Services business was $14.9 million and $15.5 million, respectively, inclusive of amounts attributable to noncontrolling interests. For the years ended December 31, 2015 and 2014, the pre-tax profit of the Lithotripsy Services
business attributable to USMD Holdings, Inc. was $3.8 million and $4.4 million, respectively.
Included in the sale of the Lithotripsy
Services business was the sale of a controlling interest in one previously wholly owned, consolidated lithotripsy partnership. The Company retained a limited partnership interest in this partnership. As a result of the sale, the Company
deconsolidated the partnership and began accounting for its remaining investment using the equity method. The Company recorded a non-cash gain on deconsolidation of the partnership of $6.3 million, less income tax of $2.2 million, related to the
remeasurement of the retained investment to its fair value at the date of sale of the controlling interest. The pre-tax gain is included in other gain (loss), net on the consolidated statement of operations. Effective on the date of deconsolidation,
as an equity method investee, the partnership will be considered a related party. Except for its limited partner interest, the Company has no continuing involvement with the partnership. The partnership does provide lithotripsy services to two
equity method investees of the Company.
Note 4 Variable Interest Entity
The Company is an equal co-member of a Texas non-profit corporation that has been approved by the Texas Medical Board as a Certified Non-Profit
Health Organization (WNI-DFW). WNI-DFW has a contractual arrangement to manage patient care by providing or arranging for the provision of all the necessary healthcare services for a health plans given Medicare Advantage patient population in
the North Texas area served by WNI-DFW. Pursuant to the arrangement, WNI-DFW receives a fixed fee per patient under what is typically known as a risk contract. Risk contracting, or full risk capitation, refers to a model in which an
entity receives from the third party payer a fixed payment per member per month for a defined patient population, and the entity is then responsible for arranging and/or providing all of the healthcare services required by that patient population.
The entity accomplishes this by managing patient care and by contracting with healthcare providers to provide needed healthcare services for the patient population. In such a model, the contracting entity is then responsible for incurring or paying
for the cost of healthcare services required by that patient population. The entity generates a net surplus if the cost of all healthcare services provided to the patient population is less than the payments received from the third party payer and
it generates a net deficit if the cost of such services is higher than the payments received. WNI-DFW commenced operations on June 1, 2013.
The Company evaluated whether it has a variable interest in WNI-DFW, whether WNI-DFW is a VIE and whether the Company has a controlling
financial interest in WNI-DFW. The Company concluded that it has variable interests in WNI-DFW on the basis of its capital contribution to WNI-DFW and because WNI-DFW has entered into a Primary Care Physician Agreement (PCP Agreement)
with USMD Physician Services. WNI-DFWs equity at risk, as defined by GAAP, is considered to be insufficient to finance its activities without additional support, and, therefore, WNI-DFW is considered a VIE.
In order to determine whether the Company has a controlling financial interest in WNI-DFW and, thus, is WNI-DFWs primary beneficiary,
the Company considered whether it has i) the power to direct the activities of WNI-DFW that most significantly impact its economic performance and ii) the obligation to absorb losses of WNI-DFW that could potentially be significant to it or the
right to receive benefits from WNI-DFW that could potentially be significant to it. The Company concluded that the members, the board of directors and the executive management team of WNI-DFW are structured in a way that neither member nor its
designee has the individual power to direct the activities of WNI-DFW that most significantly impact its economic performance. Management considered whether the various service and support agreements between WNI-DFW and its members (or their
affiliates) provide either variable interest party with this power and concluded that the PCP Agreement between USMD Physician Services and WNI-DFW does provide to USMD Physician Services the power to direct such activities. Under the PCP Agreement,
USMD Physician Services is responsible for providing many services related to the growth of the patient population of WNI-DFW, the management of that populations healthcare
53
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
needs, and the provision of required healthcare services to those patients. The Company has concluded that the success or failure of USMD Physician Services in conducting these activities will
most significantly impact the economic performance of WNI-DFW. In addition, the Companys variable interests in WNI-DFW obligate the Company to absorb deficits and provide it with the right to receive benefits that could potentially be
significant to WNI-DFW. As a result of this analysis, the Company concluded that it is the primary beneficiary of WNI-DFW and therefore consolidates the balance sheets, results of operations and cash flows of WNI-DFW. The Company performs a
qualitative assessment of WNI-DFW on an ongoing basis to determine if it continues to be the primary beneficiary.
The following table
summarizes the carrying amount of the assets and liabilities of WNI-DFW included in the Companys consolidated balance sheets (after elimination of intercompany transactions and balances) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,254
|
|
|
$
|
10,169
|
|
Accounts receivable
|
|
|
2,353
|
|
|
|
1,150
|
|
Prepaid expenses
|
|
|
22
|
|
|
|
61
|
|
Deferred tax asset
|
|
|
4,568
|
|
|
|
3,850
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
20,197
|
|
|
$
|
15,230
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,517
|
|
|
$
|
3,517
|
|
Other accrued liabilities
|
|
|
14,141
|
|
|
|
11,506
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
16,658
|
|
|
$
|
15,023
|
|
|
|
|
|
|
|
|
|
|
The assets of WNI-DFW can only be used to settle obligations of WNI-DFW. The creditors of WNI-DFW have no
recourse to the general credit of the Company. Upon notification from WNI-DFW, the Company is contractually obligated to fund certain cash requirements of WNI-DFW. Pursuant to such a notification, in January 2014, the Company advanced WNI-DFW
$0.7 million. The results of operations and cash flows of WNI-DFW are included in the Companys consolidated financial statements. For the years ended December 31, 2015 and 2014, WNI-DFW contributed capitated revenue of
$95.8 million and $66.5 million, respectively, and income before provision for income taxes of $13.2 million and $7.0 million, respectively (after elimination of intercompany transactions).
Estimated Medical Claims Liability
In
connection with the operations of WNI-DFW, the Company makes estimates related to IBNR medical claims of WNI-DFW. The patient population to which WNI-DFW provides health services has limited medical claims activity from which claims-based actuarial
judgments can be made. In addition, the full population is relatively small for precise actuarial determinations. Therefore, in addition to calculating IBNR claims using an actuarial estimate based on historical medical claims activity, management
includes an adjustment factor based on broader patient populations deemed to be similar in risk profile to the WNI-DFW managed patient population. If actual results are not consistent with the Companys estimate, the Company may be exposed to
variances in medical services and supplies expense that may be material. At December 31, 2015 and 2014, the Company has recorded IBNR claims payable of $13.8 million and $11.4 million, respectively, which is included in other accrued
liabilities.
Note 5 Business Combinations
Effective October 1, 2015, the Company acquired certain assets of a five-physician general surgery practice and the physicians became
employees of the Company. As consideration for the acquired practice, the Company paid $57,000 in cash and agreed to either issue to the former owners of the acquired practice the number of shares of the Companys common stock equal to $200,000
divided by the closing price of the stock on the date of issuance of the common stock or pay the former owners $200,000. At December 31, 2015, this amount is recorded in other accrued liabilities on the Companys consolidated balance
sheet. The physicians entered into employment agreements with the Company and these agreements include covenants not to compete. The Company recorded noncompete agreement intangible assets totaling $84,000 with an amortization period of
ten years and a $44,000 trade name intangible asset with an amortization period of 44 months.
54
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
In February, March and August, 2014, the Company acquired four small physician practices, and
the physicians became employees or contractors of the Company. As consideration for the acquired practices, the Company paid $104,000 in cash and issued to the former owners of the acquired practices 12,385 shares of the Companys common stock
with an estimated fair value of $167,000. The physicians entered into employment agreements with the Company and these agreements include covenants not to compete. The Company recorded noncompete agreement intangible assets totaling $20,536 with a
weighted-average amortization period of 3.1 years.
The following table summarizes the estimated fair values of assets acquired at
the business combination dates. No liabilities were assumed in the transactions.
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Inventories
|
|
$
|
|
|
|
$
|
38,022
|
|
Property and equipment
|
|
|
115,947
|
|
|
|
212,565
|
|
Other assets noncurrent
|
|
|
12,613
|
|
|
|
|
|
Identifiable intangible assets noncompete agreements
|
|
|
84,245
|
|
|
|
20,536
|
|
Identifiable intangible assets trade name
|
|
|
44,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
$
|
256,805
|
|
|
$
|
271,123
|
|
|
|
|
|
|
|
|
|
|
Note 6 Investments in Nonconsolidated Affiliates
The net carrying values and ownership percentages of nonconsolidated affiliates accounted for under the equity method are as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Carrying
Value
|
|
|
Ownership
Percentage
|
|
|
Carrying
Value
|
|
|
Ownership
Percentage
|
|
USMD Hospital at Arlington, L.P.
|
|
$
|
51,872
|
|
|
|
46.40%
|
|
|
$
|
49,518
|
|
|
|
46.40%
|
|
USMD Hospital at Fort Worth, L.P.
|
|
|
10,277
|
|
|
|
30.88%
|
|
|
|
9,956
|
|
|
|
30.88%
|
|
Other
|
|
|
6,702
|
|
|
|
10%-60%
|
|
|
|
306
|
|
|
|
4%-34%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,851
|
|
|
|
|
|
|
$
|
59,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the sale of the Lithotripsy Services business, USMD retained a 60% noncontrolling limited
partner interest in one previously wholly owned lithotripsy partnership. That partnership was deconsolidated at the sale date and the equity method investment was recorded at its $6.6 million estimated fair value.
Other
At December 31, 2015, the
carrying values of the Companys investments in USMD Hospital at Arlington, L.P. (USMD Arlington) and USMD Hospital at Fort Worth, L.P. (USMD Fort Worth) are greater than the Companys equity in the underlying net
assets of the hospitals by $40.9 million due to recording ownership interests at fair value in connection with the acquisition of hospital partnership interests in September 2013, the business combination on August 31, 2012 and deconsolidation
of the hospitals from the Companys consolidated financial statements in March 2010, net of impairment.
Summarized combined
financial information for the Companys nonconsolidated affiliates accounted for under the equity method is included in the table that follows (in thousands). For entities that were accounted for under the equity method during 2015 and were
sold prior to December 31, 2015, summarized financial information is not included in the 2015 data.
55
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Current assets
|
|
$
|
32,760
|
|
|
$
|
33,298
|
|
Noncurrent assets
|
|
$
|
92,844
|
|
|
$
|
78,835
|
|
Current liabilities
|
|
$
|
17,449
|
|
|
$
|
16,885
|
|
Noncurrent liabilities
|
|
$
|
57,146
|
|
|
$
|
48,839
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Revenue
|
|
$
|
129,747
|
|
|
$
|
143,952
|
|
Operating income
|
|
$
|
28,397
|
|
|
$
|
35,807
|
|
Income from continuing operations
|
|
$
|
25,955
|
|
|
$
|
32,074
|
|
Net income
|
|
$
|
25,955
|
|
|
$
|
32,074
|
|
At December 31, 2015 and 2014, USMD Arlington and USMD Forth Worth were significant equity investees, as
that term is defined by SEC Regulation S-X Rule 8-03(b)(3). Financial information for USMD Arlington and USMD Forth Worth is included in the summarized information above and is as follows individually (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USMD Arlington
|
|
|
USMD Fort Worth
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Current assets
|
|
$
|
24,536
|
|
|
$
|
22,853
|
|
|
$
|
6,116
|
|
|
$
|
6,828
|
|
Noncurrent assets
|
|
$
|
74,211
|
|
|
$
|
54,992
|
|
|
$
|
16,821
|
|
|
$
|
16,812
|
|
Current liabilities
|
|
$
|
12,507
|
|
|
$
|
9,698
|
|
|
$
|
3,839
|
|
|
$
|
4,068
|
|
Noncurrent liabilities
|
|
$
|
48,123
|
|
|
$
|
35,309
|
|
|
$
|
7,513
|
|
|
$
|
9,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
Revenue
|
|
$
|
99,167
|
|
|
$
|
93,486
|
|
|
$
|
24,499
|
|
|
$
|
36,634
|
|
Operating income
|
|
$
|
22,287
|
|
|
$
|
21,878
|
|
|
$
|
2,672
|
|
|
$
|
8,721
|
|
Income from continuing operations
|
|
$
|
20,183
|
|
|
$
|
19,301
|
|
|
$
|
2,045
|
|
|
$
|
7,953
|
|
Net income
|
|
$
|
20,183
|
|
|
$
|
19,301
|
|
|
$
|
2,045
|
|
|
$
|
7,953
|
|
56
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Note 7 Patient Service Revenue
The Companys patient service revenue by payer is summarized in the table that follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Ratio of Net
Patient
Service
Revenue
|
|
|
Amount
|
|
|
Ratio of Net
Patient
Service
Revenue
|
|
Medicare
|
|
$
|
59,472
|
|
|
|
31.7
|
%
|
|
$
|
56,091
|
|
|
|
30.5
|
%
|
Medicaid
|
|
|
497
|
|
|
|
0.3
|
|
|
|
1,346
|
|
|
|
0.7
|
|
Managed care and commercial payers
|
|
|
128,861
|
|
|
|
68.8
|
|
|
|
126,362
|
|
|
|
68.7
|
|
Self-pay
|
|
|
4,200
|
|
|
|
2.2
|
|
|
|
3,625
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient service revenue before provision for doubtful accounts
|
|
|
193,030
|
|
|
|
103.0
|
|
|
|
187,424
|
|
|
|
101.9
|
|
Patient service revenue provision for doubtful accounts
|
|
|
(5,649
|
)
|
|
|
(3.0
|
)
|
|
|
(3,492
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue
|
|
$
|
187,381
|
|
|
|
100.0
|
%
|
|
$
|
183,932
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8 Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Building under build-to-suit lease
|
|
$
|
4,371
|
|
|
$
|
|
|
Leasehold improvements
|
|
|
16,710
|
|
|
|
12,925
|
|
Furniture and equipment
|
|
|
21,799
|
|
|
|
23,764
|
|
Software
|
|
|
4,790
|
|
|
|
3,426
|
|
|
|
|
|
|
|
|
|
|
Gross property and equipment
|
|
|
47,670
|
|
|
|
40,115
|
|
Less: accumulated depreciation and amortization
|
|
|
(18,689
|
)
|
|
|
(19,319
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
28,981
|
|
|
$
|
20,796
|
|
|
|
|
|
|
|
|
|
|
The building value of $4.4 million in the above table represents the estimated fair market value of a building
under a build-to-suit lease of which the Company is the deemed owner for accounting purposes only. See Note 17Commitments and Contingencies.
For the years ended December 31, 2015 and 2014, property and equipment depreciation and amortization expense was $7.1 million and $5.8
million, respectively.
Assets recorded under capital lease arrangements included in property and equipment consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Furniture and equipment
|
|
$
|
7,819
|
|
|
$
|
3,419
|
|
Less: accumulated amortization
|
|
|
(691
|
)
|
|
|
(1,183
|
)
|
|
|
|
|
|
|
|
|
|
Net assets recorded under capital leases
|
|
$
|
7,128
|
|
|
$
|
2,236
|
|
|
|
|
|
|
|
|
|
|
Amortization expense pertaining to property and equipment under capital lease arrangements is included with
depreciation and amortization expense in the consolidated statements of operations.
57
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Note 9 Goodwill and Other Intangible Assets
Goodwill
The following
table sets forth the goodwill activity for each of the Companys reporting units during the years ended December 31, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physician
and
Ancillary
Services
|
|
|
Cancer
Treatment
Services
|
|
|
Lithotripsy
Services
|
|
|
Total
|
|
Balance at January 1, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
60,418
|
|
|
$
|
54,330
|
|
|
$
|
6,837
|
|
|
$
|
121,585
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
(3,409
|
)
|
|
|
(3,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,418
|
|
|
|
54,330
|
|
|
|
3,428
|
|
|
|
118,176
|
|
Impairment charge
|
|
|
|
|
|
|
(20,340
|
)
|
|
|
|
|
|
|
(20,340
|
)
|
Balance at December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
60,418
|
|
|
|
54,330
|
|
|
|
6,837
|
|
|
|
121,585
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(20,340
|
)
|
|
|
(3,409
|
)
|
|
|
(23,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,418
|
|
|
|
33,990
|
|
|
|
3,428
|
|
|
|
97,836
|
|
Sale of Lithotripsy Services business
|
|
|
|
|
|
|
|
|
|
|
(3,428
|
)
|
|
|
(3,428
|
)
|
Error correction - see below
|
|
|
(4,552
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,552
|
)
|
Balance at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
55,866
|
|
|
|
54,330
|
|
|
|
|
|
|
|
110,196
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(20,340
|
)
|
|
|
|
|
|
|
(20,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,866
|
|
|
$
|
33,990
|
|
|
$
|
|
|
|
$
|
89,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Companys sale of its Lithotripsy Services business, Lithotripsy Services
reporting unit goodwill was reduced by $3.4 million. Subsequent to the sale of the Lithotripsy Services business, the Company no longer provides management or operational services to or serves as the general partner of any lithotripsy service
provider and no longer has a Lithotripsy Services reporting unit.
In accounting for the sale of the Lithotripsy Services business, the
Company identified an error in accounting for its August 31, 2012 business combination. As a result of the error, beginning August 31, 2012, goodwill and noncurrent deferred tax liability were overstated by $4.6 million. The Company
corrected the error on the December 31, 2015 balance sheet by reducing goodwill and noncurrent deferred tax liability by $4.6 million. Due to the nature of the error, there was no impact to the 2015 or prior years statements of
operations, stockholders equity and cash flows. The Company concluded that the error was not material to the Companys current or prior years consolidated financial statements.
As a result of the Companys 2015 annual goodwill impairment testing, the Company determined there was no goodwill impairment in 2015.
During the Companys 2014 annual goodwill impairment review, step one of the analysis indicated that the carrying value of the
Cancer Treatment Services reporting unit exceeded its estimated fair value. As a result, in order to determine the implied fair value of the reporting units goodwill, management performed the second step of the impairment analysis. The second
step analysis indicated that the carrying value of the Cancer Treatment Services reporting unit was in excess of its implied fair value. Accordingly, the Company recorded goodwill impairment of $20.3 million, which was the amount by which the
carrying value of the Cancer Treatment Services reporting units goodwill exceeded its implied fair value. The impairment of goodwill is primarily the result of a reduction in the near-term and long-term projected operating results and cash
flows utilized in assessing goodwill for impairment. The reduction in forecast amounts is primarily related to delays in the Companys ability to execute its strategic plan commensurate with its past forecasts exacerbated by a decrease in
actual results of the reporting unit in 2014.
In performing its impairment analyses, the Company relied primarily on an income approach,
specifically a discounted cash flow analysis, which includes assumptions for, among other factors, discount rates, cash flow projections, growth rates and terminal value rates, all of which require significant judgment (see Note 12). The Company
updates specific assumptions at the date of each impairment test to incorporate current industry and Company-specific risk factors from the perspective of a market participant.
58
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Acquired Intangible Assets
The components of amortizable intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Management agreements
|
|
$
|
5,246
|
|
|
$
|
(931
|
)
|
|
$
|
4,315
|
|
|
$
|
5,246
|
|
|
$
|
(738
|
)
|
|
$
|
4,508
|
|
Trade names
|
|
|
11,212
|
|
|
|
(9,374
|
)
|
|
|
1,838
|
|
|
|
11,168
|
|
|
|
(8,845
|
)
|
|
|
2,323
|
|
Customer relationships
|
|
|
767
|
|
|
|
(767
|
)
|
|
|
|
|
|
|
767
|
|
|
|
(596
|
)
|
|
|
171
|
|
Noncompete agreements
|
|
|
12,632
|
|
|
|
(4,193
|
)
|
|
|
8,439
|
|
|
|
12,547
|
|
|
|
(2,936
|
)
|
|
|
9,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,857
|
|
|
$
|
(15,265
|
)
|
|
$
|
14,592
|
|
|
$
|
29,728
|
|
|
$
|
(13,115
|
)
|
|
$
|
16,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2015 and 2014, aggregate amortization expense of acquired intangible
asset totaled $2.2 million and $2.0 million (excluding the $8.4 million impairment loss discussed below), respectively. The weighted average period before the next renewal period for management agreements is 25.9 years.
Total estimated amortization expense for the Companys acquired intangible assets during the next five years is as follows (in
thousands):
|
|
|
|
|
2016
|
|
$
|
1,994
|
|
2017
|
|
$
|
1,993
|
|
2018
|
|
$
|
1,992
|
|
2019
|
|
$
|
1,679
|
|
2020
|
|
$
|
1,423
|
|
In May 2014, the Company introduced a unified brand USMD Health System that will reinforce its
physician-led integrated health system message. Over time, the Company will replace the historical brands of acquired companies with the USMD Health System brand. Prior to introduction of the new brand, the Company had on its balance sheet
indefinite- and finite-lived intangible assets representing the trade names of acquired companies with carrying values of $10.7 million and $0.3 million, respectively. As a result of the branding initiative, management concluded that the
indefinite-lived trade names were now finite-lived assets. In connection with this change, the Company performed, with the assistance of valuation experts, an impairment test of the carrying value of the trade names to determine whether any
impairment existed. The Company concluded that the estimated fair value of the trade names was less than the associated carrying value and that an impairment write-down was required. As a result of this determination, the Company recorded a trade
name impairment loss of $8.4 million, which is included in depreciation and amortization on the Companys consolidated statement of operations for the year ended December 31, 2014. The estimated fair values of the trade names were
calculated using an income approach relief from royalty method, which assumes that in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of the trade name asset (see Note 12). The new
$2.6 million carrying value of the trade names is being amortized on a straight line basis over the five year estimated useful life of the trade names. The actual useful life of the trade names will vary dependent upon certain factors including the
availability of funding to execute the branding initiative.
59
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Note 10 Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Accrued payables
|
|
$
|
4,502
|
|
|
$
|
3,246
|
|
Accrued bonus
|
|
|
1,949
|
|
|
|
2,000
|
|
Other accrued liabilities
|
|
|
757
|
|
|
|
1,078
|
|
IBNR claims payable
|
|
|
13,845
|
|
|
|
11,379
|
|
Income taxes payable
|
|
|
335
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,388
|
|
|
$
|
18,373
|
|
|
|
|
|
|
|
|
|
|
Note 11 Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
USMD Holdings, Inc.
|
|
|
|
|
|
|
|
|
Credit Agreement:
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
6,750
|
|
|
$
|
7,500
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
USMD Arlington related party advance, net of unamortized discount of $223 at December 31,
2015
|
|
|
14,777
|
|
|
|
|
|
Convertible subordinated notes due 2019, net of unamortized discount of $2,356 and $2,978 at
December 31, 2015 and 2014, respectively
|
|
|
21,986
|
|
|
|
21,364
|
|
Convertible subordinated notes due 2020 (including $700 related party notes)
|
|
|
5,050
|
|
|
|
|
|
Subordinated related party notes payable
|
|
|
|
|
|
|
3,831
|
|
Other loans payable
|
|
|
908
|
|
|
|
212
|
|
Capital lease obligations
|
|
|
7,535
|
|
|
|
1,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,006
|
|
|
|
33,939
|
|
Consolidated lithotripsy entities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
|
|
|
|
1,228
|
|
Capital lease obligations
|
|
|
|
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,522
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt and capital lease obligations
|
|
|
57,006
|
|
|
|
36,461
|
|
Less: current portion
|
|
|
(8,681
|
)
|
|
|
(3,323
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations, less current portion
|
|
$
|
48,325
|
|
|
$
|
33,138
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement
On December 22, 2014, the Company and its wholly owned subsidiaries entered into an amendment to its credit agreement (as amended, the
Credit Agreement) with Southwest Bank as sole lender and administrative agent (Administrative Agent). The Credit Agreement governs a $6.75 million term loan (Term Loan) and a $10.0 million revolving credit
facility (the Revolver). The Companys obligations under the Credit Agreement are secured by substantially all of the assets of the Company and its wholly owned subsidiaries, subject to certain exceptions.
The maturity date of the Term Loan is December 21, 2016 and it bears interest at a fixed rate of 1.80%.
The Credit Agreement requires the Company to maintain full cash collateralization of the $6.75 million Term Loan, which is presented as restricted cash on the Companys consolidated balance sheet. The cash held as collateral is held in a
segregated account with the Administrative Agent and is governed by a deposit account control agreement executed in connection with a previous amendment to the Credit Agreement. The account bears interest at a rate of 0.55% per annum. The
Company does not have the right to withdraw funds from such account without the prior written consent of the Administrative Agent. The Company may, however, prepay the Term Loan at any time, in whole or in part, with the cash held in the segregated
account. Once the Term Loan was fully cash collateralized, the Company was no longer required to make scheduled principal payments on the Term Loan and the outstanding principal balance of the Term Loan is due and payable at maturity. Proceeds from
borrowings under the Term Loan were used to repay in full other lenders previously party to the Term Loan.
60
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
The maturity date of the Revolver is December 21, 2016. Interest on amounts outstanding
under the Revolver is due monthly and accrues, at the Companys option, at the 30-Day London Interbank Offered Rate (LIBOR) plus 3.50%, or the U.S. prime rate plus 0.50%, with a floor of 4.00% in either case. An unused commitment
fee is payable quarterly on the undrawn portion of the Revolver at a rate of 0.50% per annum. Proceeds from borrowings under the Revolver are available to finance the working capital needs of the Company and its wholly owned subsidiaries and to
finance up to $1.5 million of capital expenditures each year.
The Credit Agreement requires the Company to meet a senior leverage ratio
of no greater than 1.00:1.00 in order to borrow funds under the Revolver and to pay down the borrowings under the Revolver in the event its senior leverage ratio exceeds 1.00:1.00. Beginning on September 30, 2016, the Credit Agreement requires
the Company to maintain a fixed charge coverage ratio of at least 1.25:1.00. Both covenants are calculated on a rolling four quarter basis. However, not more than once during any period of four consecutive fiscal quarters, the Company is permitted
to maintain compliance with its financial covenants if the fixed charge coverage ratio is at least 1.00:1.00 and the senior leverage ratio is no greater than 1.25:1.00. Under the Credit Agreement, if the Term Loan is fully cash collateralized and
there are no borrowings under the Revolver, the fixed charge coverage ratio will not be tested in any fiscal quarter ending on or after September 30, 2016, and the senior leverage ratio will not be tested in any fiscal quarter ending on or
after September 30, 2015. The Credit Agreement contains a number of covenants that, among other things, limit or restrict the ability of the Company and its wholly owned subsidiaries to dispose of assets, incur additional indebtedness, make
dividend and other restricted payments, create liens securing other indebtedness and enter into restrictive agreements. As of December 31, 2015, the Company was in compliance with the financial covenant requirements of the Credit Agreement. The
Credit Agreement allows for a maximum amount of capital expenditures of $6.0 million in 2016.
In 2014, an amendment to the Credit
Agreement restructured the Term Loan and Revolver. The Company analyzed the amendment to the Credit Agreement and resulting restructuring under the debt modification and extinguishment accounting guidance (ASC 470-50). The Company recognized a loss
on debt extinguishment of $171,000 related to the write-off of unamortized deferred debt issuance costs.
USMD Arlington Related Party Advance
On September 18, 2015, the Company and the other partners of USMD Arlington amended the partnership agreement of USMD Arlington to allow
for a one-time special distribution from USMD Arlington to the Company. USMD Arlington financed the special distribution with the proceeds of new debt issued by USMD Arlington in the original principal amount of $15,000,000, which USMD Arlington
borrowed specifically for the purpose of funding the special distribution. The Company received proceeds from the special distribution of $14.8 million, net of lender fees. The Company has determined that the special distribution is, in substance, a
debt arrangement (the Advance).
The Advance accrues interest that is payable to USMD Arlington at the 30-Day LIBOR plus a
margin of 2.85% (3.27% at December 31, 2015). In addition, the Company is required to pay the limited partners of USMD Arlington a pre-determined quarterly financing fee equal to 3.22% per annum of the scheduled outstanding balance at the
end of each month. To the extent available, principal and interest payments due on the Advance will be withheld monthly from USMD Arlington distributions otherwise due to the Company. If distributions to the Company withheld by USMD Arlington for
any three month period ending in February, May, August or November during the debt term are less than principal and interest payments due for that three month period, the Company will make payments in amounts equal to the difference between amounts
withheld from distributions and amounts due for that three month period. Subject to the preceding terms, principal payments of $312,500 are due monthly beginning December 31, 2016 and the debt matures November 28, 2020. If the Company
fails to make payments due under the terms of the Advance, the Companys ownership interest in USMD Arlington may be reduced and the ownership interest of the limited partners of USMD Arlington may be proportionally increased.
Convertible Subordinated Notes Due 2020
On April 29, 2015, the Company issued convertible subordinated notes due 2020 in the aggregate principal amount of $1.55 million (the
2020-11 Convertible Notes) to certain investors in a private unregistered offering. The 2020-11 Convertible Notes mature on November 1, 2020 and bear interest at a fixed rate of 7.25% per annum. Interest payments are due and
payable monthly, in cash or in shares of common stock as the Company elects, on the last day of each month commencing on May 31, 2015. Principal is due in full at maturity. The Company may prepay the 2020-11 Convertible Notes, in whole or in
part, at any time after April 29, 2016 without penalty.
61
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Each noteholder will have the right at any time after April 29, 2016, prior to the payment in full of the 2020-11 Convertible Note, to convert all or any part of the unpaid principal balance
of the 2020-11 Convertible Note into shares of common stock of the Company at the rate of one share of common stock for each $10.61 of principal. The conversion rate will be appropriately adjusted for stock splits, mergers or other fundamental
corporate transactions. The conversion option has no cash settlement provisions. The 2020-11 Convertible Notes are convertible into 146,086 common shares of the Company at a conversion price of $10.61 per share. Three members of the Companys
Board of Directors hold 2020-11 Convertible Notes totaling $0.7 million.
Effective March 13, 2015, the Company issued convertible
subordinated notes due 2020 in the aggregate principal amount of $3.5 million (the 2020-09 Convertible Notes) to certain investors in a private unregistered offering. The 2020-09 Convertible Notes mature on September 1, 2020 and
bear interest at a fixed rate of 7.75% per annum. Interest payments are due and payable monthly, in cash or in shares of common stock as the Company elects, on the last day of each month commencing on April 30, 2015. Principal is due in
full upon maturity. The Company may prepay the 2020-09 Convertible Notes, in whole or in part, at any time after March 13, 2016 without penalty. Each noteholder has the right at any time after March 13, 2016, prior to the payment in full
of the 2020-09 Convertible Note, to convert all or any part of the unpaid principal balance of the 2020-09 Convertible Note into shares of common stock of the Company at the rate of one share of common stock for each $11.10 of principal. The
conversion price will be appropriately adjusted for stock splits, mergers or other fundamental corporate transactions. The conversion option has no cash settlement provisions. The 2020-09 Convertible Notes are convertible into 315,315 common shares
of the Company at a conversion price of $11.10 per share.
The indebtedness represented by the convertible subordinated notes due in 2020
is expressly subordinate to all senior indebtedness of the Company currently outstanding or incurred in the future, which includes indebtedness in connection with its Credit Agreement. The Company evaluated the conversion options embedded in the
convertible subordinated notes due in 2020 and concluded that the options do not meet the criteria for bifurcation and separate accounting as a derivative as they are indexed to the Companys own stock and, if freestanding, would be classified
in stockholders equity. Specifically, the variables affecting any adjustment to the conversion price would be inputs to the fair value of a fixed-for-fixed option on equity shares, or are otherwise designed to maintain the economic position of
both parties before and after the event that precipitates an adjustment of the conversion price (i.e. merger).
Convertible Subordinated Notes Due 2019
Effective September 1, 2013, the Company issued convertible subordinated notes due 2019 in the aggregate principal amount of
$24.3 million (the 2019-03 Convertible Notes) to certain limited partners of USMD Arlington to acquire their limited partnership interests in USMD Arlington. The 2019-03 Convertible Notes bear interest at a fixed rate of 5.00% per
annum and mature on March 1, 2019. Interest payments are due and payable on the last day of each month and the principal is due upon maturity. The Company may prepay the 2019-03 Convertible Notes, in whole or in part, at any time after
September 1, 2014 without penalty. Each noteholder has the right at any time after September 1, 2014 to convert all or any part of the unpaid principal balance of its 2019-03 Convertible Note into shares of common stock of the Company at
the rate of one share of common stock for each $23.37 of principal. The conversion price will be appropriately adjusted for stock splits, mergers or other fundamental corporate transactions. The conversion option has no cash settlement provisions.
The 2019-03 Convertible Notes are convertible into 1,041,577 common shares of the Company at a conversion price of $23.37 per share and have an effective interest rate of 8.50%. The indebtedness represented by the 2019-03 Convertible Notes is
expressly subordinate to all senior indebtedness of the Company currently outstanding or incurred in the future, which includes its indebtedness under the Credit Agreement.
The Company evaluated the embedded conversion option and concluded that it does not meet the criteria for bifurcation and separate accounting
as a derivative as it is indexed to the Companys own stock and, if freestanding, would be classified in stockholders equity. Specifically, the variables affecting any adjustment to the conversion price would be inputs to the fair value
of a fixed-for-fixed option on equity shares, or are otherwise designed to maintain the economic position of both parties before and after the event that precipitates an adjustment of the conversion price (i.e. merger).
At the date of execution of the 2019-03 Convertible Notes (the commitment date), the conversion price was less than the fair value of shares
of the Companys common stock. The Company recognized the intrinsic value of the conversion options in-the-money portion as a $3.7 million beneficial conversion discount to the debt with an offsetting entry to additional paid-in capital.
The beneficial conversion discount is being accreted to the 2019-03 Convertible Notes using the effective interest method until the notes mature on March 1, 2019. At December 31, 2015, the unamortized discount of $2.4 million has a
remaining amortizable life of 38 months. For the year ended December 31, 2015, the Company recognized interest expense related to the 2019-03 Convertible Notes of $1.8 million, comprised of $1.2 million related to the contractual interest rate
and $0.6 million related to discount accretion. For the year ended December 31, 2014, the Company recognized interest expense related to the 2019-03 Convertible Notes of $1.8 million, comprised of $1.2 million related to the contractual
interest rate and $0.6 million related to discount accretion.
62
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Other Loans Payable
Effective August 31, 2015, the Company entered into an arrangement to finance $490,000 of its annual directors and officers insurance
policy. The loan bears interest at a fixed rate of 3.53% and principal and interest payments are due monthly in eleven equal installments of $45,000 beginning September 30, 2015 until maturity in July 31, 2016.
In connection with the master lease arrangement described below, the Company financed $351,000 of training and implementation services
purchased from the equipment vendor. The financing arrangements were effective August 4, 2015 and have terms ranging from 44 to 66 months. Beginning March 2016, the financing arrangement requires aggregate minimum monthly payments of $8,000,
which will reduce beginning in 2019 as the shorter term arrangements are paid off. The financing arrangements bear interest at fixed rates with a weighted average of 5.0%. From inception to the first payment date, interest charges will be added to
the loan balance.
In 2014, concurrent with a capital lease of medical equipment for the Companys IDTF at USMD Arlington, the
Company financed $157,000 of training and implementation services purchased from the equipment vendor. In July 2015, concurrent with additions to the capital lease, $52,000 of additional services was added to the loan. The financing arrangement
requires 25 quarterly principal and interest payments of $11,000 beginning September 30, 2015. The financing arrangements bear interest at fixed rates with a weighted average of 6.4%. From inception to the first payment date, interest charges
were added to the loan balance.
Long-Term Debt Maturities
Maturities of the Companys long-term debt at December 31, 2015, excluding unamortized debt discounts, are as follows for the years
indicated (in thousands):
|
|
|
|
|
2016
|
|
$
|
7,195
|
|
2017
|
|
|
3,866
|
|
2018
|
|
|
3,871
|
|
2019
|
|
|
28,192
|
|
2020
|
|
|
8,890
|
|
Thereafter
|
|
|
36
|
|
|
|
|
|
|
Total
|
|
$
|
52,050
|
|
|
|
|
|
|
Capital Lease Obligations
In connection with establishment of the Companys IDTF at USMD Arlington, the Company entered into a master leasing arrangement with the
financing subsidiary of an equipment vendor. Under this arrangement, the Company has entered into twelve capital leases for medical systems totaling $5.9 million. The leases have terms of 66, 60, 55 and 44 months. Beginning in early 2016, the
66 month leases require minimum monthly payments of $63,000, the 60 month leases require minimum monthly payments of $5,000, the 55 month lease requires minimum monthly payments of $11,000 and the 44 month leases require minimum
monthly payments of $58,000. Effective with delivery and acceptance, the equipment leases commenced in August and September 2015. From lease commencement to the first payment date, interest will be added to the capital lease balances.
In October 2015, the Company entered into three capital leases to finance the acquisition of furniture and medical equipment totaling
$246,000. The leases required 60 monthly payments of $5,000 beginning in November 2015.
In July 2015, the Company entered into a capital
lease to finance the acquisition of electronic health record software licenses totaling $1.0 million. The lease required an initial payment of $87,000 on July 7, 2015 followed by 35 monthly payments of $27,000 beginning August 7, 2015.
In 2014, in connection with establishment of the Companys IDTF at USMD Arlington, the Company entered into a capital lease to
finance the purchase of medical equipment totaling $0.6 million. In July 2015, the Company added $0.1 million of equipment to the capital lease. Payments are variable subject to a defined per-use minimum. Beginning September 30, 2015, the lease
requires 25 minimum quarterly payments of $35,000. From lease inception to the first payment date, interest was added to the capital lease balance.
63
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
The future minimum lease payments required under the capital leases and the present value of
the net minimum lease payments as of December 31, 2015 are as follows for the years indicated (in thousands):
|
|
|
|
|
2016
|
|
$
|
1,842
|
|
2017
|
|
|
2,150
|
|
2018
|
|
|
1,990
|
|
2019
|
|
|
1,320
|
|
2020
|
|
|
999
|
|
Thereafter
|
|
|
169
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
8,470
|
|
Less: amount representing interest
|
|
|
(935
|
)
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
7,535
|
|
Less: current portion of capital lease obligations
|
|
|
(1,486
|
)
|
|
|
|
|
|
Capital lease obligations, less current portion
|
|
$
|
6,049
|
|
|
|
|
|
|
Impact to Long-Term Debt and Capital Lease Obligations due to Sale of Lithotripsy Services Business
Effective January 1, 2007, the Company acquired the remaining 59.4% of partnership interests in U.S. Lithotripsy L.P. it did not own in
exchange for cash and notes payable (the Subordinated Related Party Notes). The Subordinated Related Party Notes were held by two individuals who are current members of the Companys Board of Directors, one of which is the Chief
Executive Officer of the Company. In connection with the sale of the Lithotripsy Services business, the remaining $3.2 million aggregate balance of the Subordinated Related Party Notes was paid in full.
The Companys lithotripsy entities historically entered into financing arrangements to acquire lithotripsy and transportation equipment.
In May 2015, prior to the sale of Lithotripsy Services, one of the Companys consolidated lithotripsy entities acquired equipment totaling $0.5 million and executed a note payable to finance the full amount of the purchased equipment. Notes
payable and capital lease obligations totaling $1.2 million and $1.2 million, respectively, were sold with the Lithotripsy Services business.
Note 12
Fair Value of Financial Instruments
Fair Value of Financial Instruments
Financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings and long-term
debt. The carrying value of financial instruments with a short-term or variable-rate nature approximates fair value and are not presented in the table below. The carrying value and estimated fair value of the Companys financial instruments
that may not approximate fair value are set forth in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Term Loan
|
|
$
|
6,750
|
|
|
$
|
6,750
|
|
|
$
|
7,500
|
|
|
$
|
7,500
|
|
Convertible subordinated notes due 2019
|
|
$
|
21,986
|
|
|
$
|
17,805
|
|
|
$
|
21,364
|
|
|
$
|
19,857
|
|
Convertible subordinated notes due 2020
|
|
$
|
5,050
|
|
|
$
|
4,307
|
|
|
$
|
|
|
|
$
|
|
|
Other loans payable
|
|
$
|
908
|
|
|
$
|
898
|
|
|
$
|
212
|
|
|
$
|
213
|
|
At December 31, 2015, the carrying value of the Companys Term Loan approximates fair value due to
recent amendment of the debt and its short-term nature. At December 31, 2014, the carrying value of the Companys Term Loan approximates fair value due to recent issuance of the fixed rate debt. No events have occurred subsequent to
issuance and amendment of the Term Loan to substantially impact the estimated borrowing rate applicable to the Term Loan.
The Company
estimates the fair value of the convertible subordinated notes as the sum of the independently estimated fair values of the debt host instrument and embedded conversion option (Level 3 fair value measurement). The Company calculates the present
value of future principal and interest payments of the debt host using estimated borrowing rates for similar subordinated debt or debt for
64
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
which the Company could use to retire the existing debt. The convertible subordinated notes due 2020 issued in 2015 have effective interest rates that are higher than the effective interest rates
of the convertible subordinated notes due 2019. Consequently, the estimated borrowing rate used in the calculation of 2015 fair value was increased commensurate with the borrowing rate of the convertible subordinated notes due 2020. The fair value
of the embedded conversion option is valued using a Black-Scholes option pricing model. Quoted market prices are not available for the convertible subordinated notes.
The Company estimates current borrowing rates for its other loans payable by adjusting the discount factor of the obligations at the balance
sheet date by the variance in borrowing rates between the issuance dates and balance sheet date (Level 2 fair value measurement). If the creditworthiness of the Company has significantly changed from the debt issuance date, management estimates the
applicable borrowing rate based on the current facts and circumstances. Quoted market prices are not available for the Companys long-term debt.
Financial Instruments Measured at Fair Value on a Nonrecurring Basis
The Company measures certain financial and nonfinancial assets, including property and equipment, goodwill, intangible assets other than
goodwill and investments in nonconsolidated affiliates, at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances. Generally, assets are
recorded at fair value on a nonrecurring basis as a result of impairment charges or similar adjustments made to the carrying value of the applicable assets.
Investment in Nonconsolidated Affiliate
In connection with the sale of the Lithotripsy Services business, the Company sold a 40% interest in a previously wholly owned, consolidated
lithotripsy partnership. The Company ceased to have a controlling interest in the partnership and it was deconsolidated and recorded as an investment in nonconsolidated affiliate at its $6.6 million estimated fair value. The fair value is based on
the value ascribed to the partnership interests sold with the Lithotripsy Services business (Level 2 fair value measurement). In addition, in determining the sale price, management, with the assistance of valuation experts, utilized both a market
approach and an income approach (Level 3 fair value measurement). The market approach utilized primarily the guideline company and merger and acquisition methodologies, both based on earnings before interest, taxes, depreciation and amortization
multiple estimates of between 5.0x and 7.3x. The income approach utilized a discounted cash flow methodology. The cash flow model the Company used to estimate the fair value of the partnership investment involves several assumptions, most
significantly, a discount rate of 15.0% and a projected revenue growth rate of 3.0%.
Goodwill
As a result of its 2014 goodwill impairment review, the Company recorded goodwill impairment of $20.3 million in its Cancer Treatment Services
reporting unit. In estimating the fair value of the reporting unit in connection with the impairment testing, management made estimates and judgments about future cash flows and market valuations using a combination of income and market approaches.
The valuation of goodwill is considered a Level 3 fair value measurement under the fair value measurement hierarchy, which means that the valuation of assets and liabilities reflect managements own judgments regarding the assumptions market
participants would use in determining the fair value of the assets and liabilities.
In performing its impairment analyses, the Company
relied primarily on an income approach, specifically a discounted cash flow analysis. Under the discounted cash flow method, cash flows beyond discrete forecasts were estimated using a terminal growth rate, which considered the long-term earnings
growth rates specific to the respective reporting units. The estimated future cash flows were discounted to present value using a discount rate that was the value-weighted average of the reporting units estimated cost of equity and debt
derived using both known and estimated market metrics, and was adjusted to reflect risk factors that considered both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method reflected the
structure in place at the time of valuation, which is consistent with the market participant perspective.
Trade Names
In connection with the Companys branding initiative announced in May 2014, certain acquired trade names with a carrying value of $11.0
million were written down to their estimated fair value of $2.6 million, resulting in an impairment loss of $8.4 million. Fair value was estimated using an income approach relief from royalty method, which assumes that in lieu of ownership, a
third party would be willing to pay a royalty in order to exploit the related benefits of the trade name asset (Level 3 fair value measurement). The cash flow model the Company used to estimate the fair value of the trade names involves several
assumptions, most significantly, projected revenue growth rates, a pre-tax royalty rate of 1.0% declining to 0.1% over the estimated five year life of the asset and a discount rate of 17%.
65
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Note 13 Deferred Compensation Plans
Upon consummation of the August 31, 2012 business combination, the Company adopted a nonqualified deferred compensation savings plan (the
Savings Plan) previously managed and held by an acquired entity. The Savings Plan is unfunded and was maintained primarily for the purpose of providing deferred compensation benefits to participating employees. The Savings Plan is
intended to comply with the requirements of Section 409A of the Internal Revenue Code and applicable provisions of the Employee Retirement Income Security Act (ERISA). Once the business combination occurred, the plan participant
accounts were effectively frozen; no additional contributions can be made. When a participant terminates employment for any reason, that participant is entitled to begin receiving their accrued benefit. Distributions are made in five equal annual
installments beginning in the January following the participants termination. The Savings Plan accounts are not held in a trust for the exclusive benefit of the participants and, therefore, remain subject to the claims of the Companys
creditors. Savings Plan account balances may be used to guarantee the Companys debt or as otherwise deemed necessary by the Companys management. At December 31, 2015, the Companys deferred compensation obligation under the
Savings Plan totaled $4.5 million with $0.2 million included in other current liabilities and $4.3 million included in deferred compensation payable in the accompanying consolidated balance sheet.
Note 14 Income Taxes
Significant
components of the provision (benefit) for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
697
|
|
|
$
|
2,908
|
|
State
|
|
|
150
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
Total current income tax provision
|
|
|
847
|
|
|
|
3,148
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(765
|
)
|
|
|
(8,692
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax benefit
|
|
|
(765
|
)
|
|
|
(8,692
|
)
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
82
|
|
|
$
|
(5,544
|
)
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Companys effective tax rate from operations to the U.S. federal income tax rate
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
|
1.2
|
|
|
|
(0.6
|
)
|
Net income attributable to noncontrolling interests
|
|
|
(41.7
|
)
|
|
|
11.7
|
|
Goodwill amortization
|
|
|
(10.4
|
)
|
|
|
0.8
|
|
Impairment of goodwill
|
|
|
|
|
|
|
(25.0
|
)
|
Unrecognized tax benefit
|
|
|
5.3
|
|
|
|
(1.5
|
)
|
Other
|
|
|
11.6
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
Effective tax rate for income (loss) from operations
|
|
|
1.0
|
%
|
|
|
19.5
|
%
|
|
|
|
|
|
|
|
|
|
66
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
The tax effects of cumulative temporary differences that give rise to significant components
of deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
1,458
|
|
|
$
|
617
|
|
Deferred revenue
|
|
|
43
|
|
|
|
114
|
|
Share-based payment expense
|
|
|
1,549
|
|
|
|
1,252
|
|
Deferred compensation
|
|
|
1,589
|
|
|
|
1,642
|
|
Other compensation
|
|
|
991
|
|
|
|
1,630
|
|
Allowance for doubtful accounts
|
|
|
1,022
|
|
|
|
680
|
|
IBNR medical claims liability
|
|
|
4,568
|
|
|
|
3,850
|
|
Facilitative acquisition costs
|
|
|
|
|
|
|
385
|
|
Intangible assets
|
|
|
380
|
|
|
|
397
|
|
Other
|
|
|
1,832
|
|
|
|
645
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
13,432
|
|
|
|
11,212
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Partnership investments
|
|
|
(11,231
|
)
|
|
|
(14,778
|
)
|
Property and equipment
|
|
|
(4,388
|
)
|
|
|
(3,544
|
)
|
Tax impact of beneficial conversion feature of debt
|
|
|
(824
|
)
|
|
|
(1,042
|
)
|
Intangible assets
|
|
|
(5,107
|
)
|
|
|
(5,815
|
)
|
Unrecognized tax benefit
|
|
|
(568
|
)
|
|
|
|
|
Other
|
|
|
(252
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(22,370
|
)
|
|
|
(25,466
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(8,938
|
)
|
|
$
|
(14,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Current deferred tax assets
|
|
$
|
6,581
|
|
|
$
|
6,160
|
|
Current deferred tax liabilities
|
|
|
(238
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets
|
|
|
6,343
|
|
|
|
5,873
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets
|
|
|
6,851
|
|
|
|
5,052
|
|
Noncurrent deferred tax liabilities
|
|
|
(22,132
|
)
|
|
|
(25,179
|
)
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax liabilities
|
|
|
(15,281
|
)
|
|
|
(20,127
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(8,938
|
)
|
|
$
|
(14,254
|
)
|
|
|
|
|
|
|
|
|
|
The Company has recorded a liability for an unrecognized tax benefit related to a position taken on one of its
2014 and 2013 income tax returns. If recognized, the entire amount of the unrecognized tax benefit would favorably impact the effective tax rate that is reported in future periods. As of December 31, 2015 and 2014, the Company had $568,000 and
$142,000, respectively, of total unrecognized tax benefits, including accrued interest and penalties, which is included in current deferred tax assets in the accompanying consolidated balance sheet. The Company anticipates that the total
unrecognized tax benefit will increase $426,000 within the next twelve months due to an increase in the balance underlying the tax position. No other uncertain tax positions were noted during the Companys evaluation of uncertain tax positions,
which was performed for the tax years that remain subject to examination by major tax jurisdictions as of December 31, 2015, which includes the tax years 2012 through 2015.
Although realization is not assured, the Company believes that the realization of the recognized deferred tax
assets of $13.4 million at December 31, 2015 is more likely than not based upon the projected future reversals of existing taxable temporary differences, the potential to carryback a portion of its deferred tax net operating losses and, for one
tax-paying component of the Company, the availability of viable tax strategies that could be implemented to positively impact taxable income in order to realize the recorded deferred tax asset. The Company has significant deferred tax liabilities
related to finite-lived intangible assets that will reverse at a rate similar to the reversal of its significant deferred tax assets, such that, even if the Company fails to generate future positive cumulative book taxable income, it will generate
sufficient taxable income to realize the benefit of its deferred tax assets. Management considered the magnitude and duration of recent taxable losses and profitability and concluded that, although management expects future taxable income in 2016
and following years, due to the cumulative taxable loss incurred over the three years ended December 31, 2015, management could not conclude that future taxable income alone would support not having a valuation allowance.
At December 31, 2015, the Company had available unused net operating loss carryforwards of $4.2 million that may be available to reduce
future income tax liabilities. These loss carryforwards expire in 2031.
67
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Note 15 Share-Based Payment
Pursuant to the USMD Holdings, Inc. 2010 Equity Compensation Plan (the Equity Compensation Plan), the Company may issue up to
2.5 million equity awards to employees, nonemployee directors and nonemployee service providers in the form of stock options, stock and stock appreciation rights. Stock options may be granted with a contractual life of up to ten years. At
December 31, 2015, the Company had 0.3 million shares available for grant under the Equity Compensation Plan.
The fair value of
stock option awards on the date of grant is estimated using the Black-Scholes option pricing model, which requires the Company to make certain predictive assumptions. The risk-free interest rate is based on the implied yield of U.S. Treasury
zero-coupon securities that correspond to the expected life of the award. As a recently formed public entity with a small public float and limited trading of its common shares on the NASDAQ Capital Market, it was not practicable for the Company to
estimate the volatility of its common shares; therefore, management estimated volatility based on the historical volatilities of a small group of companies considered as close to comparable to the Company as available and an industry index, all
equally weighted, over the expected life of the option. Management concluded that this group is more characteristic of the Companys business than a broad industry index. The expected life of awards granted represents the period of time that
the awards are expected to be outstanding based on the simplified method, which is allowed for companies that cannot reasonably estimate the expected life of options based on its historical award exercise experience. The Company does not
expect to pay dividends on its common stock. Due to the nature of the grants, the company estimated zero option forfeitures. Share-based payment expense is recorded only for those awards that are expected to vest. Weighted-average assumptions used
in the Black-Scholes option pricing model for stock options granted were as follows:
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2015
|
|
2014
|
Risk-free interest rate
|
|
1.80%
|
|
1.87%
|
Expected volatility of common stock
|
|
37.0%
|
|
42.1%
|
Expected life of options
|
|
6.2 years
|
|
5.8 years
|
Dividend yield
|
|
0.00%
|
|
0.00%
|
The Black-Scholes option pricing model was developed for estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. The Companys options do not have
the characteristics of exchange traded options and, therefore, the option valuation models do not necessarily provide a reliable measure of the fair value of stock options. A summary of stock option activity for the year ended December 31, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number
of Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding as of December 31, 2014
|
|
|
872,312
|
|
|
$
|
21.54
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
|
8.21
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
(75,096
|
)
|
|
|
21.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2015
|
|
|
897,216
|
|
|
$
|
20.03
|
|
|
|
5.53
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2015
|
|
|
580,578
|
|
|
$
|
21.56
|
|
|
|
5.10
|
|
|
$
|
|
|
Exercisable at December 31, 2015
|
|
|
441,509
|
|
|
$
|
22.22
|
|
|
|
4.82
|
|
|
$
|
|
|
The weighted-average grant-date fair value of stock options granted during the years ended December 31,
2015 and 2014 was $3.03 and $5.57 per option, respectively. The fair value of stock options vested and share-based payment expense recognized for the years ended December 31, 2015 and 2014 was $1.0 million and $1.3 million, respectively, and is
included in salaries, wages and employee benefits. At December 31, 2015, the total unrecognized compensation cost related to nonvested share-based payment awards was $2.0 million, which is expected to be recognized over a remaining
weighted-average period of 2.6 years.
68
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
In addition to stock options described above, the Company has outstanding options to purchase
68,982 shares of its common stock. These stock options were granted as consideration in the August 31, 2012 business combination and have an exercise price of $24.84 per share. The options are fully vested and have a remaining contractual term
of 1.7 years. These stock options have no aggregate intrinsic value.
Payments in Common Stock
2015 Activity
During 2015, for
services rendered as members of the Companys Board of Directors, the Company elected to compensate directors in common stock of the Company in lieu of cash. Beginning with the second quarter of 2015, grant dates occur on the last day of each
quarter for services rendered during that quarter. Previously, shares were granted on the last day of each month. Shares granted are fully vested, non-forfeitable and granted pursuant to the Equity Compensation Plan. For their services as directors
during the year ended December 31, 2015, the Company granted to members of its Board of Directors an aggregate 74,572 shares of its common stock. The grant date fair value of the shares was $640,000, which is included in other operating
expenses on the Companys statement of operations. On February 20, 2015, in payment of Board of Directors compensation earned August 1, 2014 through December 31, 2014, the Company issued to members of the Companys
Board of Directors 30,724 previously granted shares of its common stock with an aggregate grant date fair value of $273,000. On October 6 and December 11, 2015, in payment of Board of Directors compensation earned January 1,
2015 through September 30, 2015, the Company issued to members of the Companys Board of Directors an aggregate 53,050 previously granted shares of its common stock with an aggregate grant date fair value of $478,000.
During the year ended December 31, 2015, in payment of certain 2014 compensation due to employed physicians, the Company granted and
issued 228,551 shares of its common stock to those physicians. The shares had a grant date fair value of $2.0 million and were issued pursuant to the Equity Compensation Plan. In addition, in payment of compensation deferred by certain physicians
between January 1 and September 30, 2015, the Company granted and issued 672,043 shares of its common stock to those physicians. The shares had a grant date fair value of $5.4 million and were issued pursuant to the Equity Compensation
Plan.
Pursuant to the Equity Compensation Plan, on March 4, 2015, in payment of certain compensation accrued at December 31,
2014, the Company granted 40,311 shares of its common stock to certain executives and members of senior management. The shares had a grant date fair value of $549,000 and were issued on March 6, 2015.
Certain consultants to the Company have agreed to be partially compensated in common stock for services rendered. Shares granted are fully
vested and non-forfeitable. Pursuant to the Equity Compensation Plan, during the year ended December 31, 2015, the Company granted to the consultants 15,103 shares of its common stock with a grant date fair value of $122,629. On
November 24, 2015, the Company issued to one of the consultants 9,623 previously granted shares of its common stock with an aggregate grant date fair value of $73,000.
2014 Activity
During 2014, for
services rendered as members of the Companys Board of Directors, the Company elected to compensate directors in common stock of the Company in lieu of cash. Grant dates occurred on the last day of each month and shares granted are fully vested
and non-forfeitable. Pursuant to the Equity Compensation Plan, during the year ended December 31, 2014, the Company granted to members of its Board of Directors an aggregate 60,324 shares of its common stock. The grant date fair value of the
shares was $646,000, which is included in other operating expenses on the Companys statement of operations. During the year ended December 31, 2014, in payment of the Board of Directors compensation earned January 1, 2014
through July 31, 2014, the Company issued 29,600 previously granted shares of its common stock with an aggregate grant date fair value of $373,000.
Pursuant to the Equity Compensation Plan, on March 5 and 6, 2014, the Company issued an aggregate 14,958 shares of its common stock with
a grant date fair value of $243,000 to a member of senior management and members of the Companys Board of Directors. The shares were issued in payment of certain compensation accrued at December 31, 2013.
A consultant to the Company has agreed to be partially compensated in common stock for services rendered. Grant dates occur on the last day of
each month and shares granted are fully vested and non-forfeitable. Pursuant to the Equity Compensation Plan, during the year ended December 31, 2014, the Company granted to the consultant 4,842 shares of common stock with a grant date fair
value of $52,000. During the year ended December 31, 2014, the Company issued to the consultant 2,853 of those shares with a grant date fair value of $34,000.
69
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Of the shares of common stock described as issued above, 19,501 shares have not been
registered under the Securities Act of 1933, as amended, and may not be transferred without an effective registration statement or pursuant to an appropriate exemption from such act.
Salary Deferral Plan
On May 5,
2014, USMDs Board of Directors approved and established the Salary Deferral Plan (the Deferral Plan). On July 18, 2014, the holder of a majority of USMDs outstanding voting stock approved the Deferral Plan by written
consent in lieu of a special meeting. The Company mailed an information statement on Schedule 14C to shareholders on or about July 22, 2014 informing the shareholders of the creation of the Deferral Plan. The Deferral Plan went into effect on
August 11, 2014, 20 days after the information statement was mailed as required by law. The Deferral Plan permits the Company to defer the payment of a predetermined portion of a participants base salary each calendar quarter. The plan
administrator will decide after the end of each quarter whether deferred amounts, if any, will be paid in the form of cash, shares of common stock or a combination of both. Any shares of common stock issued under the Deferral Plan will be issued
from the shares of common stock authorized for issuance under the Equity Compensation Plan, as amended.
On March 5, 2015, in payment
of salaries deferred in 2014 under the Deferral Plan, the Company issued 15,700 shares of its common stock to certain executives and members of senior management. The shares had a grant date fair value of $150,000 and were issued pursuant to the
Equity Compensation Plan.
During the year ended December 31, 2015, pursuant to the Deferral Plan, the Company granted and issued
102,578 shares of its common stock. The grant date fair value of the shares was $840,000, which is included in salaries, wages and employee benefits on the Companys statement of operations. The shares were granted in payment of salary amounts
deferred during the first, second and third quarters of 2015.
Registration of Common Shares
On July 14, 2014, USMD filed a registration statement on Form S-8 to register with the SEC approximately 1.7 million shares of USMD
common stock available for issuance under the Equity Compensation Plan and the Deferral Plan. The registration statement became effective upon filing.
Note 16 Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to the Companys stockholders by the
weighted-average number of common shares outstanding during the period, including fully vested common shares that have been granted, but not yet issued. Diluted earnings (loss) per share is based on the weighted-average number of common shares
outstanding plus the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Securities that are potentially dilutive to common shares include outstanding stock options and the convertible
subordinated notes. Potential common shares are excluded from the computation of diluted earnings per common share when the effect would be antidilutive.
Dilutive potential common shares related to stock options are calculated in accordance with the treasury stock method, which assumes that
proceeds from the exercise of stock options are used to purchase common shares at the average market price during the period. Proceeds from the exercise of stock options include the amount the employee must pay for exercising stock options, the
amount of compensation cost for future services that the Company has not yet recognized and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible. The number of shares remaining represents
the potentially dilutive effect of the securities. Stock options are only dilutive to the extent that the average market price of common stock during the period exceeds the exercise price of the options.
Dilutive common shares related to the convertible subordinated notes are calculated in accordance with the if-converted method. Under the
if-converted method, if dilutive, net income (loss) attributable to the Companys stockholders is adjusted to add back the amount of after-tax interest charges recognized in the period, including any deemed interest from a beneficial conversion
feature, and the convertible subordinated notes are assumed to have been converted with the resulting common shares added to weighted average shares outstanding. These securities are only dilutive to the extent that the after-tax interest charges
per common share exceed basic earnings per share.
70
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
The following table presents a reconciliation of the numerators and denominators of basic and
diluted earnings (loss) per share and the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to USMD Holdings, Inc. basic
|
|
$
|
(1,616
|
)
|
|
$
|
(32,400
|
)
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
Interest on convertible notes, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to USMD Holdings, Inc. diluted
|
|
$
|
(1,616
|
)
|
|
$
|
(32,400
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
10,551
|
|
|
|
10,168
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2019
|
|
|
|
|
|
|
|
|
Convertible subordinated notes due 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding assuming dilution
|
|
|
10,551
|
|
|
|
10,168
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to USMD Holdings, Inc.:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.15
|
)
|
|
$
|
(3.19
|
)
|
Diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(3.19
|
)
|
The following table presents the potential shares excluded from the diluted earnings per share calculation
because the effect of including these potential shares would be antidilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Stock options
|
|
|
906
|
|
|
|
941
|
|
Convertible subordinated notes due 2019
|
|
|
1,042
|
|
|
|
1,042
|
|
Convertible subordinated notes due 2020
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,409
|
|
|
|
1,983
|
|
|
|
|
|
|
|
|
|
|
Note 17 Commitments and Contingencies
Financial Guarantees
As of
December 31, 2015, the Company had issued guarantees to third parties of the indebtedness and other obligations of certain of its current and one former nonconsolidated investees. Should the investees fail to pay the obligations due, the
Company could be required to make payments totaling an aggregate of $24.6 million. The guarantees provide for recourse against the investee; however, generally, if the Company was required to perform under the guarantees, recovery of any amount from
investees would be unlikely. Included in the guarantee amount above is the Companys guarantee of 46.4% of the obligations of USMD Arlington that were incurred to finance the Advance to the Company. If the Company was required to perform under
that guarantee or record a liability for that guarantee, its obligations under the Advance would likely decrease by an equal amount. The remaining terms of these guarantees range from 31 to 149 months. The Company records a liability for performance
under financial guarantees when, upon review of available financial information of the nonconsolidated affiliate and in consideration of pertinent factors, management determines that it is probable it will have to perform under the respective
guarantee and the liability is reasonably estimable. The Company has not recorded a liability for these guarantees, as it believes it is not probable that it will have to perform under these agreements.
71
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Purchase Commitments
In connection with arrangements to lease equipment for the new IDTF at USMD Arlington, the Company entered into service and maintenance
agreements for the equipment. Future minimum payments due under these service agreements are as follows (in thousands):
|
|
|
|
|
2016
|
|
$
|
966
|
|
2017
|
|
|
846
|
|
2018
|
|
|
845
|
|
2019
|
|
|
846
|
|
2020
|
|
|
741
|
|
Thereafter
|
|
|
78
|
|
|
|
|
|
|
Total
|
|
$
|
4,322
|
|
|
|
|
|
|
Gain Contingency Sale of Interest in Equity Method Investee
Effective January 31, 2015, a subsidiary of the Company sold for $1.6 million its interest in a cancer treatment center that it accounted
for under the equity method of accounting. The investment had a carrying value of $159,000. The interest was sold to the other owner of the cancer treatment center. The buyer issued a promissory note to the Company for the $1.6 million sale price;
however, the Company concluded that only $159,000 of the note was reasonably assured of collection and recorded a note receivable in that amount. Upon collection of the $159,000 note receivable, the Company began recognizing gain on the sale as
additional payments are received. For the year ended December 31, 2015, the Company recognized an aggregate gain on the sale of $252,000, which is recorded in other gain (loss), net on the Companys consolidated statement of operations.
The Company had provided management services to the cancer treatment center under a long term contract and the contract was terminated with the sale of its ownership interest.
Litigation
The Company is from time to
time subject to litigation and related claims and arbitration matters arising in the ordinary course of business, including claims relating to contracts and financial obligations, partnership or joint venture entity disputes and, with respect to
USMD Physician Services, claims arising from the provision of professional medical services to patients. In some cases, plaintiffs may seek damages, including punitive damages that may not be covered by insurance. In other cases, claims may not be
covered by insurance at all. The Company maintains professional and general liability insurance through commercial insurance carriers for claims and in amounts that the Company believes to be sufficient for its operations, although, potentially,
some claims may exceed the scope and amount of coverage in effect. The Company expenses as incurred legal costs associated with litigation or other loss contingencies.
The Company accrues for a contingent loss when it is both probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. Significant judgment is required in both the determination of the probability of a loss and the determination as to whether a loss is reasonably estimable. These determinations are updated at least quarterly and are adjusted to
reflect the effects of negotiations, settlements, rulings, advice of legal counsel and technical experts and other information and events pertaining to a particular matter. To the extent there is a reasonable possibility that probable losses could
exceed amounts already accrued, if any, and the additional loss or range of loss is estimable, management discloses the additional loss or range of loss. For matters where the Company has evaluated that a loss is not probable, but is reasonably
possible, the Company will disclose an estimate of the possible loss or range of loss or make a statement that such an estimate cannot be made.
For lawsuits and claims where the Company can reasonably estimate a range of loss, the Company estimates a reasonably possible range of loss
of $0.2 million to $0.8 million. In the remaining lawsuits and the potential claims, the parties are in the early stages of discovery and/or the plaintiffs have not made specific demands for damages. Due to these circumstances, the Company is unable
to estimate a reasonably possible range of loss related to these lawsuits and claims. The Company is insured against the claims described above and believes based on the facts known to date that any damage award related to such claims would be
recoverable from its insurer.
The Company is subject to various additional claims and legal proceedings that have arisen in the ordinary
course of its business activities. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the
Company.
Arbitration Judgment
On February 16, 2016, an arbitrator awarded the Company $1.1 million including damages, fees and interest to date. The award will continue
to accrue interest until paid. The arbitration hearing stemmed from the early termination of a long-term contract by an entity to which the Company was providing management services. Though the Company believes the award is binding, the Company
cannot begin execution proceedings until it has been accepted by a court with jurisdiction and has been a reduced to a final, non-appealable judgment. The Company will not recognize any award amount until it is determined to be realizable.
72
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Resolution Agreement
On October 26, 2012, a subsidiary of the Company entered into a Mediation Settlement Agreement with an entity to which the subsidiary had
provided management services under a long term contract. The entity agreed to pay the Company the sum of $650,000 to settle certain claims between the Company and the entity arising from the entitys early termination of the contract. The
Mediation Settlement Agreement required the entity to pay the Company $100,000 in November 2012 and to make 55 monthly payments of $10,000 on the first day of each month beginning December 2012. The Company concluded that collection of the
settlement amount was not reasonably assured and recorded the gain as amounts were collected. Effective April 11, 2014, the Company and the entity entered into a Lump Sum Settlement Agreement, whereby for one lump sum payment of $342,500
received and recorded by the Company on April 18, 2014, all outstanding liabilities due under the Mediation Settlement Agreement were deemed to be fully paid and satisfied.
Financial Advisory Commitment
The
Company has in place with an investment banking firm a financial advisory services agreement, as amended, (FAS Agreement). Under the FAS Agreement, the Company may be obligated to compensate the firm in cash for certain financial
transactions, depending on the transaction type and size, in amounts generally equal to the greater of a minimum $1.0 million to $3.0 million, a percentage of the potential transaction value, or a fee to be determined in the future based on
prevailing market rates for the services provided, subject to the review and restrictions imposed by the Financial Industry Regulatory Authority as further defined in the FAS Agreement. If the Company enters into a qualifying financial transaction
during a one year to thirty month period subsequent to termination of the FAS Agreement, depending on the transaction type and size, the investment banking firm may be entitled to compensation under the terms of the FAS Agreement. The FAS Agreement
remains in effect until terminated by either party. Pursuant to the FAS Agreement, $3.0 million of proceeds from the sale of the Lithotripsy Services business was paid to the investment banking firm. In connection with the fee for the sale of the
Lithotripsy Services business, the FAS Agreement was amended to provide for a future credit of up to $1.0 million to be applied against fees incurred in future transactions. Except as noted above, the Company has not closed any transaction for which
compensation is due or was paid to the investment banking firm.
Build-to-Suit Lease
For build-to-suit lease arrangements, the Company evaluates lease terms to assess whether, for accounting purposes, it should be the owner of
the construction project. Under build-to-suit lease arrangements, to the extent the Company is involved in the construction of structural improvements or takes construction risk prior to commencement of a lease, the Company establishes assets and
liabilities for the estimated construction costs of the shell facility. Improvements to the facility during the construction project are capitalized, and, to the extent funded by a tenant improvement allowance, the facility financing obligation is
increased. Upon occupancy of facilities under build-to-suit leases, the Company assesses whether these arrangements qualify for sales recognition under the sale-leaseback accounting guidance. If the Company continues to be the deemed owner for
accounting purposes, the facilities are accounted for as financing obligations. Payments the Company makes under leases in which it is considered the owner of the facility are allocated to land rental expense, based on the relative values of the
land and building at the commencement of construction, reductions of the facility financing obligation and interest expense recognized on the outstanding obligation. To the extent gross future payments do not equal the recorded liability, the
liability is settled upon return of the facility to the lessor. Any difference between the book value of the assets and remaining facility obligation are recorded in other income (expense), net.
The Company has entered into an arrangement to lease the majority of medical office building space in a shell facility that was under
construction at the date of lease inception. In addition to its normal tenant improvements, the Company is required to install the heating, ventilation and cooling equipment and systems for its leased portion of the building. Additionally, the
Company was at risk for any construction cost overruns associated with these specific structural and tenant improvements. As a result, the Company concluded that for accounting purposes, it was the deemed owner of the building during the
construction period. The landlord incurred an estimated $4.4 million of construction costs and the Company incurred $0.1 million for tenant improvements. During construction, the Company recorded these amounts as construction in progress, with a
corresponding build-to-suit construction financing obligation. Upon completion of the construction of the facility in December 2015, the Company evaluated derecognition of the asset and liability under the provisions for sale-leaseback transactions.
The Company concluded that it had forms of continuing economic involvement in the facility, and therefore did not comply with the provisions for sale-leaseback accounting. Instead, the lease will be accounted for as a financing obligation and lease
payments will be attributed to (1) a reduction of the principal financing obligation; (2) imputed interest expense; and (3) land lease expense representing an imputed cost to lease the underlying land of the facility, which is
considered an operating lease. In addition, the Company recorded the underlying building asset and will depreciate it over the buildings estimated
73
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
useful life of 40 years. At the conclusion of the lease term, the Company would de-recognize both the net book values of the asset and financing obligation. At December 31, 2015, the Company
has recorded a $4.3 million financing obligation in other long-term liabilities in the accompanying consolidated balance sheet.
Under the
lease, after a five month rent abatement, the Company is required to pay an initial base rent of $36,000 per month, increasing 3% per year, as well as all its share of building operating expenses. The lease term expires March 31, 2026 and
the Company has an option to extend the lease term for two consecutive terms of five years each.
At December 31, 2015, future
minimum rent payments under the build-to-suit lease are as follows (in thousands):
|
|
|
|
|
2016
|
|
$
|
364
|
|
2017
|
|
|
447
|
|
2018
|
|
|
461
|
|
2019
|
|
|
475
|
|
2020
|
|
|
489
|
|
Thereafter
|
|
|
2,816
|
|
|
|
|
|
|
Total
|
|
$
|
5,052
|
|
|
|
|
|
|
Operating Lease Commitments
The Company leases certain medical and corporate office space and medical and office equipment under non-cancelable operating lease agreements
expiring at various dates through 2028. The facility leases generally include renewal options with terms to be negotiated at the time of renewal and also generally require the lessee to pay all executory costs such as maintenance and insurance.
Facility leases may or may not contain provisions for future rent increases, rent free periods or periods in which rent payments are reduced (abated). Total rental payments due over the lease term are charged to rent expense using the straight-line
method over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent.
As part of its current initiatives, the Company has begun consolidating certain physician clinics into newly leased, larger clinic locations
that more effectively centralize and align physicians and ancillary services. In connection with this initiative, the Company has entered into new leases and renewed existing leases of medical office building space. Generally, the Company enters
into leases for existing medical office building space or for space in a completed building shell and then constructs normal tenant improvements to meet its needs, subject to landlord approval. The leases provide for tenant improvement allowances to
fund the design and construction of the tenant improvements. The Company records improvements to the leased space as leasehold improvements, including the improvements financed by the landlord. Tenant improvement allowances financed by the landlord
are also recorded to deferred rent and amortized as a reduction to rent expense over the term of the lease beginning at the asset in-service date. For the year ended December 31, 2015, the Company has recorded non-cash tenant improvement
allowances of $1.7 million.
Future minimum cash lease payments under non-cancelable operating leases with an initial or remaining lease
term in excess of one year are as follows for the years indicated (in thousands):
|
|
|
|
|
2016
|
|
$
|
14,334
|
|
2017
|
|
|
12,642
|
|
2018
|
|
|
11,612
|
|
2019
|
|
|
10,386
|
|
2020
|
|
|
9,022
|
|
Thereafter
|
|
|
35,028
|
|
|
|
|
|
|
Total
|
|
$
|
93,024
|
|
|
|
|
|
|
Aggregate future minimum rentals to be received under non-cancelable subleases as of December 31, 2015
were $1.0 million.
74
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Note 18 Related Party Transactions
The Company provides management, clinical and support services to various nonconsolidated affiliates in which it has limited partnership or
ownership interests. Management and other services revenue and accounts receivable from these entities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management and
Other Services
Revenue
|
|
|
Accounts
Receivable
|
|
|
|
Years Ended
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
USMD Arlington
|
|
$
|
11,053
|
|
|
$
|
10,619
|
|
|
$
|
967
|
|
|
$
|
472
|
|
USMD Fort Worth
|
|
|
3,333
|
|
|
|
3,840
|
|
|
|
383
|
|
|
|
300
|
|
Other equity method investees
|
|
|
1,354
|
|
|
|
1,818
|
|
|
|
50
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,740
|
|
|
$
|
16,277
|
|
|
$
|
1,400
|
|
|
$
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One previously consolidated lithotripsy entity that was a component of the sale of the Lithotripsy Services
business historically provided lithotripsy services to USMD Arlington and USMD Fort Worth. For both years ended December 31, 2015 and 2014, the Company recognized lithotripsy revenues from USMD Arlington and USMD Fort Worth totaling $2.2
million.
The Company leases space from USMD Arlington for certain of its physicians and its Arlington-based cancer treatment center. For
the years ended December 31, 2015 and 2014, the Company recorded rent expense related to USMD Arlington totaling $1.8 million and $1.9 million, respectively.
WNI-DFW, the Companys consolidated VIE that operates under a population health management model, records medical services expense for
its patients that are treated at USMD Arlington and USMD Fort Worth. Medical services expense incurred by WNI-DFW with these entities and its related accounts payable are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Services
Expense
|
|
|
Accounts
Payable
|
|
|
|
Years Ended
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
USMD Arlington
|
|
$
|
1,757
|
|
|
$
|
853
|
|
|
$
|
198
|
|
|
$
|
162
|
|
USMD Fort Worth
|
|
|
430
|
|
|
|
232
|
|
|
|
66
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,187
|
|
|
$
|
1,085
|
|
|
$
|
264
|
|
|
$
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 19 Employee Benefit Plans
The Company provides a 401(k) defined contribution plan for all eligible employees. Beginning January 1, 2014, the Company provides
participants a safe harbor non-elective contribution. The non-elective contribution is 3% of annual compensation and is provided to all eligible employees. The non-elective contributions have a two-year vesting period. The Companys
contributions to the plan totaled $2.9 million and $3.2 million in 2015 and 2014, respectively.
Note 20 One-Time Termination Benefits
In September 2014, in order to improve flexibility in the revenue cycle process, the Company entered into an arrangement to outsource the
majority of its revenue cycle function to an external provider. Employees were first advised of the outsourcing in September; however, an approved termination benefit plan was not yet in place. During the fourth quarter of 2014, the Company approved
a termination plan and notified the 75 impacted employees of the plan and its benefits. The Company recognized severance expense of $0.5 million related to this termination, which is included in salaries, wages and employee benefits on the
accompanying consolidated statement of operations. As of December 31, 2014, all impacted employees were terminated and paid in full.
75
USMD HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2015
Note 21 Subsequent Events
Share-Based Payment
On February 5,
2016, as consideration for the physician practice acquired on October 1, 2015, the Company issued 26,666 shares of its common stock to the sellers. The shares had a grant date fair value of $200,000.
On February 1, 2016, in payment of Board of Directors compensation earned October 1, 2015 through December 31, 2015, the
Company issued to members of the Companys Board of Directors 21,522 previously granted shares of its common stock with an aggregate grant date fair value of $161,000.
On March 13, 2016, in payment of certain compensation due to a member of senior management and a consultant, the Company granted and
issued 4,447 shares of its common stock and issued 6,613 previously granted shares of its common stock. The shares had an aggregate grant date fair value of $110,000.
Payments out of Escrow Related to the Sale of the Lithotripsy Services Business
On March 6, 2016, the Company received $1.0 million of proceeds from escrowed funds related to the sale of the Lithotripsy Services
business. At that date, $2.0 million remains in escrow.
76