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Note 3 - Acquisitions

6 Months Ended

Jun. 30, 2011

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

(3) Acquisitions

ExamWorks operates in a highly fragmented industry and has completed numerous acquisitions since July 14, 2008. A key component of ExamWorks’ acquisition strategy is growth through acquisitions that expand its geographic coverage, provide new or complementary lines of business, expand its portfolio of services and that increase its market share.

The Company has accounted for all business combinations using the purchase method to record a new cost basis for the assets acquired and liabilities assumed. The Company recorded, based on a preliminary purchase price allocation, intangible assets representing customer relationships, tradenames, covenants not to compete, and technology and the excess of purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed and the separately recognized intangible assets has been recorded as goodwill in the accompanying consolidated financial statements. The goodwill is attributable to synergies achieved through the streamlining of operations combined with improved margins attainable through increased market presence. The results of operations are reflected in the consolidated financial statements of the Company from the date of acquisition.

(a) 2010 Acquisitions

Metro Medical Acquisition

On March 26, 2010, ExamWorks acquired substantially all of the assets and assumed certain liabilities of Metro Medical Services, LLC (“Metro Medical”) for aggregate consideration of $13.5 million, comprised of $13.0 million cash consideration less cash acquired of $722,000 and 589,930 shares of the Company’s common stock with an estimated fair value of $1.3 million. In conjunction with the Metro Medical acquisition, the Company incurred transaction costs of $101,000 which were reported in selling, general and administrative expenses in the Company’s 2010 consolidated statement of operations. The Metro Medical acquisition enabled the Company to further expand its operations in the northeastern region of the United States.

The final allocation of consideration for the Metro Medical acquisition is summarized as follows (in thousands):

	Preliminary				Final
	purchase price				Purchase price
	allocation		Adjustments/		allocation
	December 31, 2010		reclassifications		June 30, 2011
Equipment and leasehold improvements	$	186	$	—	$	186
Customer relationships		4,715		—		4,715
Tradename		1,458		—		1,458
Covenants not to compete		66		—		66
Technology		100		—		100
Goodwill		5,601		—		5,601
Deferred tax asset associated with step-up in book basis		680		—		680
Assets acquired and liabilities assumed, net		682		—		682
Totals	$	13,488	$	-	$	13,488

In 2011, the Company finalized the purchase price allocation with no adjustments to the purchase price. The goodwill and other intangible assets resulting from the Metro Medical acquisition are expected to be deductible for tax purposes.

Direct IME Acquisition

On June 30, 2010, ExamWorks acquired substantially all of the assets and assumed certain liabilities of Direct IME, a partnership (“Direct IME”), for aggregate consideration of $13.6 million, comprised of $11.9 million cash consideration less cash acquired of $50,000, 507,606 shares of the Company’s common stock with an estimated fair value of $1.4 million and $351,000 of contingent consideration. The acquisition agreement contains a clawback provision whereby certain revenue and profitability targets must be met for a period of two years. The Company expects Direct IME to achieve the targeted levels. Additionally, the acquisition agreement contains contingent consideration in the form of an earnout provision based upon the achievement of certain revenue and profitability targets. Any contingent consideration is payable at the end of a two-year period. The fair value of the contingent consideration will be adjusted quarterly based primarily on variations in the expected performance of the acquired businesses with the change being recorded as selling, general and administrative ("SGA") expenses in the accompanying consolidated statements of operations. The Company recorded additional contingent consideration of $5,000 during the six months ended June 30, 2011, resulting primarily from the change in the expected value of the earnout. As of June 30, 2011, the range of outcomes and the assumptions used to develop the estimate have not changed. In conjunction with the Direct IME acquisition, the Company incurred transaction costs of $194,000 which were reported in selling, general and administrative expenses in the Company’s 2010 consolidated statement of operations. The Direct IME acquisition enabled the Company to expand operations into the Canadian market.

The final allocation of consideration for the Direct IME acquisition is summarized as follows (in thousands):

	Preliminary				Final
	purchase price				Purchase price
	allocation		Adjustments/		allocation
	December 31, 2010		reclassifications		June 30, 2011
Equipment and leasehold improvements	$	34	$	—	$	34
Customer relationships		5,416		—		5,416
Tradename		720		—		720
Covenants not to compete		33		—		33
Technology		48		—		48
Goodwill		5,708		—		5,708
Deferred tax asset associated with step-up in book basis		815		—		815
Assets acquired and liabilities assumed, net		855		—		855
Totals	$	13,629	$	-	$	13,629

In 2011, the Company finalized the purchase price allocation with no adjustments to the purchase price. The goodwill and other intangible assets resulting from the Direct IME acquisition are expected to be deductible for tax purposes.

Verity Acquisition

On August 6, 2010, ExamWorks acquired substantially all of the assets and assumed certain liabilities of Verity Medical, Inc. (“Verity Medical”), for cash consideration of $14.0 million. In conjunction with the Verity Medical acquisition, the Company incurred transaction costs of $138,000 which were reported in selling, general and administrative expenses in the Company’s 2010 consolidated statement of operations. The Verity Medical acquisition enabled the Company to further expand its operations in the midwestern region of the United States.

The final allocation of consideration for the Verity Medical acquisition is summarized as follows (in thousands):

	Preliminary					Final
	purchase price					Purchase price
	allocation		Adjustments/			allocation
	December 31, 2010		reclassifications			June 30, 2011
Equipment and leasehold improvements	$	46	$	—		$	46
Customer relationships		6,063		—			6,063
Tradename		1,036		—			1,036
Covenants not to compete		51		—			51
Technology		83		—			83
Goodwill		6,160		22			6,182
Deferred tax asset associated with step-up in book basis		12		—			12
Assets acquired and liabilities assumed, net		540		(22	)		518
Totals	$	13,991	$	-		$	13,991

In 2011, the Company finalized the purchase price allocation with no adjustments to the purchase price. The goodwill and other intangible assets resulting from the Verity Medical acquisition are expected to be deductible for tax purposes.

UK Independent Medical Acquisition

On September 7, 2010, ExamWorks acquired 100% of the outstanding share capital of UK Independent Medical Services Limited (“UKIM”) for aggregate consideration of $16.0 million, comprised of $14.5 million cash consideration and 253,003 shares of the Company’s common stock with an estimated fair value of $1.5 million. In conjunction with the UKIM acquisition, the Company incurred transaction costs of $447,000 which were reported in selling, general and administrative expenses in the Company’s 2010 consolidated statement of operations. The UKIM acquisition enabled the Company to expand operations into the U.K. market.

The preliminary allocation of consideration for the UKIM acquisition is summarized as follows (in thousands)

	Preliminary					Preliminary
	purchase price					Purchase price
	allocation		Adjustments/			allocation
	December 31, 2010		reclassifications			June 30, 2011
Equipment and leasehold improvements	$	152	$	—		$	152
Customer relationships		3,238		—			3,238
Tradename		1,704		—			1,704
Covenants not to compete		107		—			107
Technology		5		—			5
Goodwill		2,895		720			3,615
Deferred tax asset associated with step-up in book basis		1,163		—			1,163
Assets acquired and liabilities assumed, net		6,358		(347	)		6,011
Totals	$	15,622	$	373		$	15,995

In 2011, the Company recorded an adjustment to working capital resulting in an increase to total consideration paid of $373,000. The goodwill and other intangible assets resulting from the UKIM acquisition are expected to be deductible for U.S. federal income tax purposes. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

Other 2010 Acquisitions

Additionally, in 2010, the Company completed the following individually insignificant acquisitions, as defined in SEC Regulation S-X Rule 3-05, with an aggregate purchase price of $70.3 million, comprised of $62.8 million cash consideration less cash acquired of $1.0 million, 1,685,312 shares of the Company’s common stock with an estimated fair value of $5.9 million, $1.7 million of seller debt in the form of subordinated unsecured notes payable, and $786,000 of contingent consideration. A portion of this debt may be settled, at the election of the seller, with 135,282 shares of the Company’s common stock. In conjunction with the other 2010 acquisitions, the Company incurred transaction costs of $1.2 million, which were reported in selling, general and administrative expenses in the Company’s 2010 consolidated statement of operations. These acquisitions expanded the geographic coverage and, to a lesser extent, enhanced the service offering of the Company.

Company name	Form of acquisition	Date of acquisition
American Medical Bill Review, Inc.	Substantially all of the assets and assumed certain liabilities	March 15, 2010
Medical Evaluations, Inc.	Substantially all of the assets and assumed certain liabilities	March 15, 2010
401 Diagnostics, Inc.	Substantially all of the assets and assumed certain liabilities	June 30, 2010
Independent Medical Services Corporation	Substantially all of the assets and assumed certain liabilities	June 30, 2010
Network Medical Review Company Ltd.	100% of the outstanding common stock	June 30, 2010
SOMA Medical Assessments Inc.	Substantially all of the assets and assumed certain liabilities	June 30, 2010
Exigere Corporation	100% of the outstanding common stock	August 6, 2010
Health Cost Management, LLC	Substantially all of the assets and assumed certain liabilities	September 1, 2010
BME Gateway	Substantially all of the assets and assumed certain liabilities	October 1, 2010
Royal Medical Consultants, Inc.	Substantially all of the assets and assumed certain liabilities	December 20, 2010

The preliminary allocation of consideration for these acquisitions is summarized as follows (in thousands):

	Preliminary						Preliminary
	purchase price						Purchase price
	allocation			Adjustments/			allocation
	December 31, 2010			reclassifications			June 30, 2011
Equipment and leasehold improvements	$	792		$	—		$	792
Customer relationships		24,814			—			24,814
Tradename		5,984			—			5,984
Covenants not to compete		242			—			242
Technology		1,219			—			1,219
Goodwill		37,513			162			37,675
Net deferred tax liability associated with step-up in book basis		(2,540	)		—			(2,540	)
Assets acquired and liabilities assumed, net		2,294			(232	)		2,062
Totals	$	70,318		$	(70	)	$	70,248

In 2011, the Company recorded an adjustment to working capital resulting in a decrease to total consideration paid of $70,000. The Company expects to make further adjustments to the purchase price allocation of certain acquisitions, excluding those completed on June 30, 2010 and prior which are considered final as of June 30, 2011, principally resulting from working capital and tax related adjustments, in accordance with the purchase agreements. One of the acquisition agreements contains a clawback provision whereby certain revenue and profitability targets must be met for a period of two years. The Company expects this acquisition to achieve the targeted levels. Additionally, this acquisition agreement contains contingent consideration in the form of an earnout provision based upon the achievement of certain revenue and profitability targets. At the date of acquisition, the Company recorded $536,000 as the estimate of the fair value of the contingent consideration related to this acquisition. Any contingent consideration is payable at the end of a two-year period. The fair value of the contingent consideration will be adjusted quarterly based primarily on variations in the expected performance of the acquired businesses with the change being recorded as SGA expenses in the accompanying consolidated statements of operations. The Company recorded a reduction in contingent consideration of $580,000 during the six months ended June 30, 2011, resulting primarily from the change in the expected value of the earnout. As of June 30, 2011, the range of outcomes and the assumptions used to develop the estimate have not changed. Goodwill of $23.9 million and other intangible assets of $21.7 million are expected to be deductible for tax purposes.

The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date.

(b) 2011 Acquisitions

MES Group Acquisition

On February 28, 2011, the Company completed the acquisition of 100% of the outstanding stock of MES Group, Inc. (“MES”) for aggregate consideration of $215.0 million, comprised of $175.0 million cash consideration, 1,424,501 shares of Company common stock with a fair value of $30.0 million (using a value of $21.07 per share, the closing price of the Company’s common stock on February 28, 2011), and $10.0 million of assumed indebtedness under MES’ credit facility, which was paid off at closing. In conjunction with the MES acquisition, the Company incurred transaction costs of $2.0 million, of which $82,000 and $521,000 were incurred in the three and six months ended June 30, 2011 and are reported in selling, general and administrative expenses in the Company’s accompanying 2011 consolidated statement of operations. The MES acquisition broadens the Company’s product portfolio, customer base and increases the Company’s market share in the U.S.

The preliminary allocation of consideration for the MES acquisition is summarized as follows (in thousands):

	Preliminary						Preliminary
	purchase price						purchase price
	allocation			Adjustments/			allocation
	March 31, 2011			reclassifications			June 30, 2011
Building, equipment and leasehold improvements	$	1,800		$	—		$	1,800
Customer relationships		37,003			1,187			38,190
Tradename		16,805			621			17,426
Covenants not to compete		511			—			511
Technology		762			—			762
Goodwill		160,540			(1,603	)		158,937
Net deferred tax liability associated with step-up in book basis		(18,316	)		(464	)		(18,780	)
Assets acquired and liabilities assumed, net		15,909			259			16,168
Totals	$	215,014		$	—		$	215,014

The goodwill and other intangible assets resulting from the MES acquisition are not expected to be deductible for tax purposes. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. As the adjustments to the preliminary purchase price allocation are not deemed material to the consolidated financial statements, the Company has not reflected the adjustments retroactively as of the acquisition date. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. The MES acquisition contributed $37.0 million in revenues and $3.2 million in operating income for the three months ended June 30, 2011. The MES acquisition contributed $50.2 million in revenues and $4.4 million in operating income for the six months ended June 30, 2011.

Premex Group Acquisition

On May 10, 2011, the Company completed the acquisition of 100% of the outstanding share capital of Premex Group Limited (“Premex”) for $108.4 million. The Company paid total consideration consisting of $66.5 million in cash, 661,610 shares of Company common stock with a fair value of approximately $15.1 million (using a value of $22.85 per share, the closing price of the Company’s common stock on May 10, 2011) and $26.8 million of assumed indebtedness under Premex’s receivables facility which was paid off at closing. In conjunction with the Premex acquisition, the Company incurred transaction costs of $652,000, of which $615,000 and $643,000 were incurred in the three and six months ended June 30, 2011 and are reported in selling, general and administrative expenses in the Company’s accompanying 2011 consolidated statement of operations. The Premex acquisition increases the Company’s market share in the U.K. and broadens the Company’s product portfolio and customer base in the U.K.

The preliminary allocation of consideration for the Premex acquisition is summarized as follows (in thousands):

	Preliminary
	purchase price
	allocation
	June 30, 2011
Building, equipment and leasehold improvements	$	650
Customer relationships		32,886
Tradename		10,602
Covenants not to compete		109
Technology		2,356
Goodwill		25,689
Deferred tax asset associated with step-up in book basis		744
Assets acquired and liabilities assumed, net		35,321
Total	$	108,357

The goodwill and other intangible assets resulting from the Premex acquisition are expected to be deductible for tax purposes. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. The Premex acquisition contributed $13.6 million in revenues and $919,000 in operating income for the three and six months ended June 30, 2011.

Other 2011 Acquisition

On February 18, 2011, the Company acquired 100% of the outstanding common stock of National IME (“National IME”) for $2.5 million, comprised of $2.3 million cash consideration and 11,927 shares of the Company’s common stock with a fair value of $250,000 (using a value of $21.33 per share, the closing price of the Company’s common stock on February 18, 2011). In conjunction with the National IME acquisition, the Company incurred transaction costs of $147,000, of which $102,000 and $106,000 were incurred in the three and six months ended June 30, 2011 and are reported in selling, general and administrative expenses in the Company’s accompanying 2011 consolidated statement of operations. The National IME acquisition increased the Company’s presence in the Canadian market.

The preliminary allocation of consideration for the National IME acquisition is summarized as follows (in thousands):

	Preliminary					Preliminary
	purchase price					purchase price
	allocation			Adjustments/		allocation
	March 31, 2011			reclassifications		June 30, 2011
Customer relationships	$	1,060		$	—	$	1,060
Tradename		254			—		254
Goodwill		1,576			—		1,576
Net deferred tax liability associated with step-up in book basis		(356	)		—		(356	)
Assets acquired and liabilities assumed, net		(5	)		—		(5	)
Totals	$	2,529		$	-	$	2,529

The goodwill and other intangible assets resulting from the National IME acquisition are not expected to be deductible for tax purposes. The Company believes that information gathered to date provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed but the Company is waiting for additional information necessary to finalize those fair values. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. The Company expects to complete the purchase price allocation as soon as practicable but no later than one year from the acquisition date. The National IME acquisition contributed $640,000 in revenues and $68,000 in operating income for the three months ended June 30, 2011. The National IME acquisition contributed $860,000 in revenues and $92,000 in operating income for the six months ended June 30, 2011.

The unaudited pro forma results of operations for the three and six months ended June 30, 2010 and June 30, 2011 assumes that the 2010 and 2011 acquisitions were completed on January 1, 2010.

For the three months ended June 30, 2010 and June 30, 2011, the pro forma results include adjustments to reflect additional interest expense of $4.4 million and $387,000, respectively, associated with the funding of the acquisitions assuming that acquisition related debt was incurred on January 1, 2010. In addition, incremental depreciation and amortization expense was recorded as if the acquisitions had occurred on January 1, 2010 and amounted to $7.9 million and $1.1 million for the three months ended June 30, 2010 and 2011, respectively. Finally, adjustments of $5.8 million and $4.4 million were made to selling, general and administrative expenses for the three months ended June 30, 2010 and 2011, respectively, principally related to certain salary and other personal expenses attributable to the previous owners of the acquired businesses. These adjustments represent contractual reductions and are considered to be non-recurring and are not expected to have a continuing impact on the operations of the Company.

For the six months ended June 30, 2010 and June 30, 2011, the pro forma results include adjustments to reflect additional interest expense of $9.0 million and $2.7 million, respectively, associated with the funding of the acquisitions assuming that acquisition related debt was incurred on January 1, 2010. In addition, incremental depreciation and amortization expense was recorded as if the acquisitions had occurred on January 1, 2010 and amounted to $16.7 million and $5.4 million for the six months ended June 30, 2010 and 2011, respectively. Finally, adjustments of $12.6 million and $8.7 million were made to selling, general and administrative expenses for the six months ended June 30, 2010 and 2011, respectively, principally related to certain salary and other personal expenses attributable to the previous owners of the acquired businesses. These adjustments represent contractual reductions and are considered to be non-recurring and are not expected to have a continuing impact on the operations of the Company.

	Three months ended				Six months ended
	June 30,				June 30,
	2010		2011		2010		2011
Pro forma revenues	$	113,860	$	115,656	$	222,264	$	227,132
Pro forma net income		1,034		838		1,092		723

Pro forma income per share:
Basic and diluted	$	0.03	$	0.02	$	0.03	$	0.02

The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions been effective as of January 1 of the respective years or of future operations of the Company.