| Commitments and Contingencies | Note 12 – Commitments and Contingencies
Financial Guarantees
As of March 31, 2016, 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 $24.3 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
Company’s 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 28 to 146 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.
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 $ 940
2017 846
2018 845
2019 846
2020 741
Thereafter 78
Total $ 4,296
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 three months ended March 31, 2016, the
Company recognized an aggregate gain on the sale of $68,000, which
is recorded in other gain on the Company’s 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. An order confirming the final judgment was entered
by the court on March 31, 2016. The Company will not recognize
any award amount until it is determined to be realizable.
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 was 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 building’s estimated 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 March 31, 2016, the Company has recorded a $4.4
million financing obligation in other long-term liabilities in the
accompanying condensed 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 March 31, 2016, future minimum rent payments under the
build-to-suit lease are as follows (in thousands):
2016 $ 328
2017 447
2018 461
2019 475
2020 489
Thereafter 2,816
Total $ 5,016
Operating Lease Commitments
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.
Future minimum rental commitments under non-cancelable operating
leases are as follows (in thousands):
April through December 2016 $ 11,074
2017 13,085
2018 11,665
2019 10,449
2020 9,037
Thereafter 35,067
Total $ 90,377 |
