Note 3 - Acquisitions

9 Months Ended

Sep. 30, 2012

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 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)           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 $8,000 and $529,000 were incurred in the three and nine months ended September 30, 2011, respectively and none of which were incurred in the three and nine months ended September 30, 2012, and are reported in SGA expenses in the Company’s accompanying Consolidated Statements of Operations.  The MES acquisition broadened the Company’s product portfolio and customer base and increased the Company’s market share in the U.S.

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

	Preliminary purchase price allocation December 31, 2011			Adjustments/ reclassifications			Final purchase price allocation September 30, 2012
Building, equipment and leasehold improvements	$	1,800		$	—		$	1,800
Customer relationships		38,190			—			38,190
Tradename		17,426			—			17,426
Covenants not to compete		511			—			511
Technology		762			—			762
Goodwill		159,988			2,048			162,036
Net deferred tax liability associated with step-up in book basis		(18,244	)		693			(17,551	)
Assets acquired and liabilities assumed, net		14,581			(2,741	)		11,840
Totals	$	215,014		$	—		$	215,014

In the first quarter of 2012, the Company finalized the purchase price allocation with limited adjustments to the purchase price. The goodwill and $54.6 million of other intangible assets resulting from the MES acquisition are not expected to be deductible for tax purposes.

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 $646,000, of which $12,000 and $655,000 were incurred in the three and nine months ended September 30, 2011, respectively and none of which were incurred in the three and nine months ended September 30, 2012, and are reported in SGA expenses in the Company’s accompanying Consolidated Statements of Operations.  The Premex acquisition increased the Company’s market share in the U.K. and broadened the Company’s product portfolio and customer base in the U.K.

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

	Preliminary purchase price allocation December 31, 2011		Adjustments/ reclassifications			Final purchase price allocation September 30, 2012
Equipment and leasehold improvements	$	650	$	—		$	650
Customer relationships		32,886		—			32,886
Tradename		10,602		—			10,602
Covenants not to compete		109		—			109
Technology		2,356		—			2,356
Goodwill		28,131		3,686			31,817
Net deferred tax asset (liability) associated with step-up in book basis		603		(3,695	)		(3,092	)
Assets acquired and liabilities assumed, net		33,019		9			33,028
Totals	$	108,356	$	—		$	108,356

In the second quarter of 2012, the Company finalized the purchase price allocation with limited adjustments to the purchase price. The goodwill and other intangible assets resulting from the Premex acquisition are expected to be deductible for tax purposes.

Other 2011 Acquisitions

Additionally, in 2011, the Company completed the following individually insignificant acquisitions with an aggregate purchase price of $44.6 million, comprised of $43.2 million cash consideration less cash acquired of $564,000, and 214,926 shares of the Company’s common stock with an estimated fair value of $2.0 million. In conjunction with the other 2011 acquisitions, the Company incurred transaction costs of $643,000 of which $81,000 and $186,000 were incurred in the three and nine months ended September 30, 2011, respectively.  The Company incurred transaction costs of $3,000 and $38,000 in the three and nine months ended September 30, 2012.  These amounts are reported in SGA expenses in the Company’s accompanying Consolidated Statements 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
National IME Centres Inc.	100% of the outstanding common stock	February 18, 2011
MLS Group of Companies, Inc.	100% of the outstanding common stock	September 28, 2011
Medicolegal Services, Inc.	Substantially all of the assets and assumed certain liabilities	September 28, 2011
North York Rehabilitation Centre Inc.	Substantially all of the assets and assumed certain liabilities	October 3, 2011
Capital Vocational Specialists Inc.	Substantially all of the assets and assumed certain liabilities	October 3, 2011
Matrix Health Management Inc.	Substantially all of the assets and assumed certain liabilities	October 24, 2011
Bronshvag	Substantially all of the assets and assumed certain liabilities	October 27, 2011

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

	Preliminary purchase price allocation December 31, 2011			Adjustments/ reclassifications			Preliminary purchase price allocation September 30, 2012
Equipment and leasehold improvements	$	213		$	—		$	213
Customer relationships		18,577			—			18,577
Tradename		2,989			—			2,989
Covenants not to compete		197			—			197
Technology		334			—			334
Goodwill		21,500			(1,751	)		19,749
Net deferred tax liability associated with step-up in book basis		(356	)		50			(306	)
Assets acquired and liabilities assumed, net		2,598			202			2, 800
Totals	$	46,052		$	(1,499	)	$	44,553

In 2012, the Company recorded adjustments to working capital resulting in a reduction of total consideration paid of $1.5 million. Goodwill of $18.2 million and other intangible assets of $20.8 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. The Company may make further adjustments to the purchase price allocation of certain acquisitions, excluding those completed on or prior to September 30, 2011 which are considered final as of September 30, 2012. 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)           2012 Acquisitions

In 2012, the Company completed the following individually insignificant acquisitions with an aggregate purchase price of $95.9 million, comprised of $96.9 million cash consideration less cash acquired of $1.1 million, and 6,190 shares of the Company’s common stock with an estimated fair value of $85,000. In conjunction with these 2012 acquisitions, the Company incurred transaction costs of $1.2 million of which $780,000 and $1.2 million were incurred in the three and nine months ended September 30, 2012, respectively.  These amounts are reported in SGA expenses in the Company’s accompanying Consolidated Statements 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
Makos Health Associates	Substantially all of the assets and assumed certain liabilities	July 12, 2012
MedHealth Holdings Pty Limited	100% of the outstanding common stock	August 31, 2012

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

	Preliminary purchase price allocation September 30, 2012
Equipment and leasehold improvements	$	750
Customer relationships		38,192
Tradename		10,821
Covenants not to compete		483
Technology		396
Goodwill		45,103
Assets acquired and liabilities assumed, net		141
Totals	$	95,886

The goodwill and other intangible assets resulting from the 2012 acquisitions 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. The 2012 acquisitions contributed $5.5 million in revenues and $108,000 in operating income for the three and nine months ended September 30, 2012.

(c)            Pro forma Financial Information

The unaudited pro forma results of operations for the three and nine months ended September 30, 2011 assumes that the 2011 acquisitions were completed on January 1, 2010. The unaudited pro forma results of operations for the three and nine months ended September 30, 2012 assumes that the 2012 acquisitions were completed on January 1, 2011.

For the three months ended September 30, 2011 and 2012, the pro forma results include adjustments to reflect additional interest expense of $2.8 million and $1.1 million, respectively, associated with the funding of the acquisitions assuming that acquisition related debt was incurred on January 1, 2010 for 2011 acquisitions and January 1, 2011 for 2012 acquisitions. In addition, incremental depreciation and amortization expense was recorded as if the acquisitions had occurred on January 1, 2010 for 2011 acquisitions and January 1, 2011 for 2012 acquisitions and amounted to $4.0 million and $1.6 million for the three months ended September 30, 2011 and 2012, respectively. Finally, adjustments of $2.4 million and $2.0 million were made to SGA expenses for the three months ended September 30, 2011 and 2012, 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 nine months ended September 30, 2011 and 2012, the pro forma results include adjustments to reflect additional interest expense of $11.4 million and $3.9 million, respectively associated with the funding of the acquisitions assuming that acquisition related debt was incurred on January 1, 2010 for 2011 acquisitions and January 1, 2011 for 2012 acquisitions. In addition, incremental depreciation and amortization expense was recorded as if the acquisitions had occurred on January 1, 2010 for 2011 acquisitions and January 1, 2011 for 2012 acquisitions and amounted to $17.4 million and $6.6 million for the nine months ended September 30, 2011 and 2012, respectively. Finally, adjustments of $12.6 million and $1.5 million were made to SGA expenses for the nine months ended September 30, 2011 and 2012, 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 September 30,								Nine months ended September 30,
	2011				2012				2011				2012
	(In thousands, except per share data)
Pro forma revenues		$	132,896			$	141,360			$	404,724			$	421,481
Pro forma net loss			(3,895	)			(4,174	)			(6,289	)			(14,979	)
Pro forma loss per share:
Basic and diluted		$	(0.11	)		$	(0.12	)		$	(0.18	)		$	(0.44	)

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.