EX-99.1 2 radnet_8k-ex9901.txt EXHIBIT 99.1 RADNET, INC. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The unaudited pro forma condensed combined financial statements are based on the historical consolidated statements of RadNet after giving effect to the merger with Radiologix, borrowings used to finance the merger and the assumptions and adjustments described in the attached notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined statement of operations is prepared using the historical consolidated statements of operations of RadNet for the year ended October 31, 2005 and the nine months ended July 31, 2006 and the historical consolidated statements of operations of Radiologix for the year ended December 31, 2005 and the nine months ended June 30, 2006 as if the merger and borrowings to finance the merger occurred on November 1, 2004. The unaudited pro forma condensed combined balance sheet is presented as if the merger and borrowings used to finance the merger occurred on July 31, 2006 and combines the unaudited condensed balance sheets of RadNet as of July 31, 2006 and Radiologix as of June 30, 2006. The allocation of purchase price used in the unaudited pro forma condensed combined financial statements is based upon estimates. The estimates and assumptions are subject to change upon the finalization of the valuation of Radiologix's assets and liabilities. The unaudited pro forma condensed combined financial statements do not include the effects of any anticipated operating efficiencies or cost savings upon the merger. The unaudited pro forma condensed combined financial statements are for illustrative purposes only, and are not necessarily indicative of the consolidated, and should not be taken as representative of the future consolidated results of operations or financial position of RadNet. The pro forma adjustments are based on preliminary information available at the time of the preparation of this document. Estimated valuation of stock-based compensation included in the unaudited pro forma condensed combined financial statement for the year ended October 31, 2005 for RadNet and the year ended December 31, 2005 for Radiologix, and the first quarter of the nine months ended June 30, 2006 for Radiologix do not include the impact of SFAS No. 123 (revised 2004) Share-Based Payment ("SFAS No. 123R"). GE Healthcare Financial Services provided us with $405.0 million of senior debt financing, which includes a $45.0 million revolving credit facility for working capital and general corporate purposes. The remaining $360.0 million funded the cash purchase price of Radiologix and refinanced substantially all of the existing debt of RadNet and Radiologix. The unaudited pro forma condensed combined financial statements and the accompanying notes are based upon the respective historical consolidated financial statements of RadNet and Radiologix and should be read in conjunction with the historical consolidated financial statements and accompanying notes of RadNet and Radiologix included in this filing. EXHIBIT 99.1 RADNET, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET JULY 31, 2006 (in thousands) RadNet Radiologix Pro Forma Pro Forma July 31, 2006 June 30, 2006 Adjustments Combined ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 2 $ 43,671 $ (43,180) A $ 493 Restricted cash -- 5,750 (5,750) A -- Accounts receivable, net of allowances 24,299 41,237 -- 65,536 Unbilled receivables and other receivables 1,035 -- -- 1,035 Due from affiliates -- 704 -- 704 Federal and state income tax receivables -- 6,101 -- 6,101 Other current assets 3,533 4,643 -- 8,176 ------------ ------------ ------------ ------------ Total current assets 28,869 102,106 (48,930) 82,045 Long-term assets: Property and equipment, net 62,836 68,610 14,020 B 145,466 Accounts receivable, net of allowances 1,379 -- -- 1,379 Investments in joint ventures -- 9,113 -- 9,113 Goodwill 23,099 -- 43,034 C 66,133 Other intangible assets, net -- 52,384 7,725 D 60,109 Deferred financing costs, net 5,198 4,117 340 E 9,655 Other assets 5,219 824 (1,075) F 4,968 ------------ ------------ ------------ ------------ Total long-term assets 97,731 135,048 64,044 296,823 ------------ ------------ ------------ ------------ Total assets $ 126,600 $ 237,154 $ 15,114 $ 378,868 ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Cash disbursements in transit $ 5,748 $ -- $ -- $ 5,748 Accounts payable and other accrued expenses 20,962 8,777 (3,760) G 25,979 Accrued physician retention -- 8,115 -- 8,115 Accrued salaries and benefits -- 7,767 3,403 H 11,170 Accrued interest -- 683 357 I 1,040 Accrued restructuring charges -- -- 314 J 314 Current maturities of term loan B -- -- 2,250 K 2,250 Current maturities of notes payable 867 -- (860) K 7 Current maturities of capital lease obligations 1,849 33 -- 1,882 Other current liabilities -- 682 -- 682 ------------ ------------ ------------ ------------ Total current liabilities 29,426 26,057 1,704 57,187 Long-term liabilities: Subordinated bond debentures 16,147 -- (16,147) K -- Line of credit 6,868 -- (6,425) K 443 Term loan B-long term -- -- 222,750 K 222,750 Second lien credit facility-long term -- -- 135,000 K 135,000 Long-term debt, net of current portion 145,154 158,270 (303,356) K 68 Convertible debt -- 11,980 (11,980) K -- Capital lease obligations, net of current portion 3,552 45 -- 3,597 Deferred revenue -- 6,290 (6,290) L -- Other liabilities 22 1,372 -- 1,394 ------------ ------------ ------------ ------------ Total long-term liabilities 171,743 177,957 13,552 363,252 Commitments and contingencies -- -- -- -- Minority interests in consolidated subsidiaries -- 1,145 -- 1,145 Stockholders' equity (74,569) 31,995 (142) M (42,716) ------------ ------------ ------------ ------------ Total liabilites and stockholders' equity $ 126,600 $ 237,154 $ 15,114 $ 378,868 ============ ============ ============ ============ RADNET, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS For the Nine Months Ended July 31, 2006 (in thousands, except per share data) For the Nine For the Nine Months Months Ended Ended July 31, 2006 June 30, 2006 Pro Forma Pro Forma RadNet Radiologix (1) Adjustments Combined ------------- ------------- ------------- ------------- Service fee revenue $ 118,462 $ 192,366 $ (307) N $ 310,521 Cost of operations: Cost of services 88,701 121,308 12,667 O 222,676 Equipment leases -- 11,095 174 P 11,269 Provision for doubtful accounts 4,739 16,273 -- 21,012 Depreciation and amortization 12,175 18,021 1,374 Q 31,570 Loss (gain) on disposal of equipment, net 210 -- -- 210 ------------- ------------- ------------- ------------- Gross profit 12,637 25,669 (14,522) 23,784 Severance and other related costs -- 670 -- 670 Corporate general and administrative -- 12,841 (12,841) S -- Impairment of goodwill, intangible and long-lived assets -- 2,241 -- 2,241 Interest expense, net, including amortization of deferred financing costs 14,386 13,296 2,099 T 29,781 Loss (gain) on debt extinguishment 2,097 -- -- 2,097 Other expense (income), net 788 -- -- 788 ------------- ------------- ------------- ------------- Income (loss) before equity in earnings of unconsolidated affiliates, minority interests in consolidated subsidiaries, income taxes and discontinued operations (4,634) (3,379) (3,780) (11,793) Equity in earnings of unconsolidated affiliates 61 3,110 -- 3,171 Minority interests in income of consolidated subsidiaries -- (523) -- (523) ------------- ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS (4,573) (792) (3,780) (9,145) Income tax expense -- 388 -- 388 ------------- ------------- ------------- ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS $ (4,573) $ (1,180) $ (3,780) $ (9,533) ============= ============= ============= ============= INCOME (LOSS) PER COMMON SHARE: Income (loss) from continuing operations--basic $ (0.11) $ (0.05) $ (0.15) Income (loss) from continuing operations--diluted $ (0.11) $ (0.05) $ (0.15) ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 41,663,841 22,242,417 379,505 M 64,285,763 Diluted 41,663,841 22,242,417 379,505 M 64,285,763 -------------------------- (1) The financial statements of Radiologix, Inc. for the interim period were derived by adding the three months ended December 31, 2005, to Radiologix's six months ended June 30, 2006. The nine months ended June 30, 2006, includes the three-month period ended December 31, 2005, which also was included in the pro forma income statement for the year ended December 31, 2005. Summarized operating information about the duplicated quarter is as follows: Service fee revenue $ 62,120 Cost of operations: Cost of services 40,060 Equipment leases 3,453 Provision for doubtful accounts 5,386 Depreciation and amortization 5,997 ------------- Gross profit 7,224 Severance and other related costs 670 Corporate general and administrative 3,677 Impairment of goodwill, intangible and long-lived assets 2,241 Interest expense, net, including amortization of deferred financing costs 4,493 ------------- Income (loss) before equity in earnings of unconsolidated affiliates, minority interests in consolidated subsidiaries, income taxes and discontinued operations (3,857) Equity in earnings of unconsolidated affiliates 1,040 Minority interests in income of consolidated subsidiaries (145) ------------- INCOME (LOSS) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS (2,962) Income tax expense 218 ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS $ (3,180) ============= INCOME (LOSS) PER COMMON SHARE: Income (loss) from continuing operations--basic (0.14) Income (loss) from continuing operations--diluted (0.14) ============= WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 22,242,417 Diluted 22,242,417 ============= RADNET, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS For the Twelve Months Ended October 31, 2005 (in thousands, except per share data) For the Twelve For the Twelve Months Months Ended Ended October 31, 2005 December 31, 2005 Pro Forma Pro Forma RadNet Radiologix Adjustments Combined ------------ ------------ ------------ ------------ Service fee revenue $ 145,573 $ 251,440 $ (409) N $ 396,604 Cost of operations: Cost of services 109,012 160,898 16,687 O 286,597 Equipment leases -- 13,035 166 P 13,201 Provision for doubtful accounts 4,929 19,033 -- 23,962 Depreciation and amortization 17,101 23,430 1,834 Q 42,365 Loss (gain) on disposal of equipment, net 696 -- 19 R 715 ------------ ------------ ------------ ------------ Gross profit 13,835 35,044 (19,115) 29,764 Corporate general and administrative -- 16,872 (16,872) -- Impairment of goodwill, intangible and long-lived assets -- 2,241 -- S 2,241 Interest expense, net, including amortization of deferred financing costs 17,493 18,295 3,926 T 39,714 Loss (gain) on debt extinguishment -- -- -- -- Other expense (income), net (523) 670 -- 147 ------------ ------------ ------------ ------------ Income (loss) before equity in earnings of unconsolidated affiliates, minority interests in consolidated subsidiaries, income taxes and discontinued operations (3,135) (3,034) (6,169) (12,338) Equity in earnings of unconsolidated affiliates -- 3,928 -- 3,928 Minority interests in income of consolidated subsidiaries -- (632) -- (632) ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES FROM CONTINUING OPERATIONS (3,135) 262 (6,169) (9,042) Income tax expense -- 662 -- 662 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS $ (3,135) $ (400) $ (6,169) $ (9,704) ============ ============ ============ ============ INCOME (LOSS) PER COMMON SHARE: Income (loss) from continuing operations--basic $ (0.08) $ (0.02) $ (0.15) Income (loss) from continuing operations--diluted $ (0.08) $ (0.02) $ (0.15) WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 41,207,909 22,067,445 554,477 63,829,831 Diluted 41,207,909 22,067,445 554,477 63,829,831 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRO FORMA PRESENTATION On July 6, 2006, RadNet, Inc. and Radiologix, Inc. entered into a definitive agreement under which RadNet would merge with and into Radiologix in a business combination to be accounted for using the purchase method. The combined unaudited pro forma historical financial statements assume the issuance of 22,621,922 shares of RadNet common stock and $42,950,000 in cash. The average market price per share of RadNet common stock of $1.74 is based on the average closing price for June 28, 2006 through July 13, 2006. The estimated purchase price and the allocation of the estimated purchase price discussed below are preliminary based on management's best estimate because the proposed merger has not yet been completed and the final valuation has not been completed. The final allocation of the purchase price will be based on Radiologix's assets and liabilities on the closing date. The following notes to the unaudited pro forma condensed consolidated financial statements give effect to the Radiologix merger as if it had occurred, for balance sheet purposes, on July 31, 2006 and, for statement of operations purposes, on November 1, 2004. The preliminary estimated total purchase price of the merger is as follows: (in thousands) -------------- Value of stock given by RadNet to Radiologix $ 39,400* Cash 42,950 Estimated transaction fees and expenses 15,208** ------------ Total Purchase Price $ 97,558 ============ (*) Calculated as 22,621,922 shares multiplied by $1.74 (average closing price for June 28, 2006 to July 13, 2006). (**) Includes $8,274,000 in assumed liabilities of Radiologix, including $3,210,000 in merger and acquisition fees and $5,064,000 in bond prepayment penalties. Under the purchase method of accounting, the total estimated purchase price as shown above is allocated to Radiologix's net tangible and intangible assets based on their estimated fair values as of the date of the completion of the merger. The preliminary allocation of the pro forma purchase price is as follows: (in thousands) -------------- Current assets $ 102,106 Property and equipment, net 82,630 Identifiable intangible assets 59,034 Goodwill 43,034 Investments in joint ventures 9,113 Other assets 824 Current liabilities (26,057) Accrued restructuring charges (314) Long-term liabilities (171,667) Minority interests in consolidated subsidiaries (1,145) ---------- Total purchase price $ 97,558 ========== We have estimated the fair value of tangible assets acquired and liabilities assumed. Some of these estimates are subject to change, particularly those estimates relating to the valuation of property and equipment and identifiable intangible assets. The allocation of the purchase price is preliminary and based upon management's best estimate because the proposed merger has not yet been completed and the final valuation has not been completed. The final allocation of the purchase price will be based upon Radiologix's assets and liabilities on the closing date and the allocation of the purchase price will be reviewed by an external valuation expert. CASH, MARKETABLE SECURITIES, INVESTMENTS AND OTHER ASSETS: RadNet valued cash, marketable securities, investments and other assets at their respective carrying amounts as RadNet believes that these amounts approximate their current fair values or the fair values. IDENTIFIABLE INTANGIBLE ASSETS. RadNet expects identifiable intangible assets acquired to include management service agreements. Management service agreements represent the underlying relationships and agreements with certain professional radiology groups. Identifiable intangible assets consist of: ESTIMATED ESTIMATED AMORTIZATION ANNUAL (IN THOUSANDS) FAIR VALUE PERIOD AMORTIZATION -------------- ---------- ------ ------------ Management service agreements $ 59,034 25 years $ 2,361 RadNet has determined the preliminary fair value of intangible assets with limited discussions with Radiologix management and a review of certain transaction-related documents prepared by Radiologix management. Estimated useful lives for the intangible assets were based on the average contract terms, which are greater than the amortization period that will be used for management contracts. Intangible assets are being amortized using the straight-line method, considering the pattern in which the economic benefits of the intangible assets are consumed. GOODWILL. Approximately $43,034,000 has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. In accordance with SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, goodwill will not be amortized but instead will be tested for impairment at least annually. In the event that the management of the combined company determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. 2. PRO FORMA ADJUSTMENTS The following is a brief description of the preliminary adjustments which may change as additional information is obtained. These adjustments are based on management's best estimate. In addition, these adjustments include reclassifications to conform the financial statement presentation of Radiologix with RadNet. (IN THOUSANDS) -------------- (A) To record the cash portion of the purchase price: Cash $ 42,950 Estimated transaction fees and expenses 15,208 ------------ $ 58,158 Less: Increase in cash from borrowings (see Note K) 9,228 Use of restricted cash - Radiologix 5,750 ------------ $ 43,180 ============ (B) Adjustments to property and equipment, net: To record the estimated fair market value adjustment to net property and equipment $ 14,020 ============ (C) Adjustments to goodwill: To record the preliminary purchase price allocation to goodwill as though the acquisition had occurred on July 31, 2006: Total purchase price $ 97,558 Net assets of Radiologix: Book equity of Radiologix $ 31,995 Fair market value adjustment to property and equipment 14,020 Increase in other intangible assets 6,650 Elimination of deferred financing costs (4,117) Accrued restructuring charges (314) Elimination of deferred revenue 6,290 ------------ Adjusted net assets $ 54,524 ------------ Goodwill $ 43,034 ============ (D) Adjustments to other intangible assets: To reclass RadNet intangible asset trade name from other assets $ 1,075 To eliminate Radiologix historical intangible assets (52,384) To record the preliminary purchase price allocation to other intangible assets as though the acquisition had occurred on July 31, 2006 59,034 ------------ $ 7,725 ============ (E) Adjustments to deferred financing costs: To eliminate Radiologix historical net deferred financing costs due to refinancing of this debt $ (4,117) To write-off RadNet historical deferred financing charges and and loan fees (5,198) To record the estimated deferred financing costs 9,655 ------------ $ 340 ============ (F) Adjustments to other assets: To reclass RadNet other asset trade name to intangible assets $ (1,075) ============ (G) Adjustments to accounts payable and other accrued expenses: To reclass RadNet accrued salaries and benefits $ (3,403) To reclass RadNet accrued interest (357) ------------ $ (3,760) ============ (H) To reclass RadNet accrued salaries and benefits $ 3,403 ============ (I) To reclass RadNet accrued interest $ 357 ============ (J) To record restructuring charges related to severance for certain employees of Radiologix. $ 314 ============ (K) To record payments to be made from the proceeds of the new indebtedness: Sources: -------- Term loan B--current $ 2,250 Line of credit 443 Term loan B--long-term 222,750 Second lien credit facility 135,000 ------------ Total sources $ 360,443 Uses: ----- Current maturities of notes payable--RadNet $ 860 Subordinated bond debentures--RadNet 16,147 Line of credit--RadNet 6,868 Long-term debt--RadNet 145,086 Long-term debt--Radiologix 158,270 Convertible debt--Radiologix 11,980 Deferred financing fees (see Note E) 9,655 RadNet fees and expenses (see Note M) 2,349 ------------ Total uses $ 351,215 Increase in cash (see Note A) $ 9,228 ============ (L) To eliminate Radiologix deferred revenue $ (6,290) ============ (M) Adjustments to stockholders' equity: To eliminate Radiologix historical stockholders' equity and weighted shares outstanding as part of the purchase transaction $ (31,995) To record the issuance of 22,621,922 shares of RadNet stock at an average market price of $1.74 per share to acquire Radiologix 39,400 To write-off RadNet historical deferred financing charges and loan fees (5,198) To record RadNet fees and expenses (2,349) ------------ $ (142) ============ NINE MONTHS ENDED YEAR ENDED JULY 31, 2006 OCTOBER 31, 2005 ------------- ---------------- (IN THOUSANDS) (N) To eliminate Radiologix deferred revenue amortization $ (307) $ (409) ============= ============= NINE MONTHS ENDED YEAR ENDED JULY 31, 2006 OCTOBER 31, 2005 ------------- ------------- (IN THOUSANDS) (O) To reclass Radiologix corporate overhead as cost of services $ 12,841 $ 16,872 To reclass RadNet equipment rental from cost of services (174) (166) To reclass Radiologix losses from sale or disposal of assets from cost of services -- (19) ------------- ------------- $ 12,667 $ 16,687 ============= ============= NINE MONTHS ENDED YEAR ENDED JULY 31, 2006 OCTOBER 31, 2005 ------------- ------------- (IN THOUSANDS) (P) To reclass RadNet equipment rental from cost of services $ 174 $ 166 ============= ============= NINE MONTHS ENDED YEAR ENDED JULY 31, 2006 OCTOBER 31, 2005 ------------- ------------- (IN THOUSANDS) (Q) To record additional depreciation on property and equipment revaluation as a result of the purchase price allocation $ 2,103 $ 2,804 To eliminate Radiologix amortization expense on historical intangible assets related to management service agreements (2,500) (3,331) To add amortization of identifiable intangible assets recorded as a result of purchase price allocation 1,771 2,361 ------------- ------------- $ 1,374 $ 1,834 ============= ============= NINE MONTHS ENDED YEAR ENDED JULY 31, 2006 OCTOBER 31, 2005 ------------- ------------- (IN THOUSANDS) (R) To reclass Radiologix losses from sale or disposal of assets from cost of services $ -- $ 19 ============= ============= NINE MONTHS ENDED YEAR ENDED JULY 31, 2006 OCTOBER 31, 2005 ------------- ------------- (IN THOUSANDS) (S) To reclass Radiologix corporate overhead as cost of services $ (12,841) $ (16,872) ============= ============= NINE MONTHS ENDED YEAR ENDED JULY 31, 2006 OCTOBER 31, 2005 ------------- ------------- (IN THOUSANDS) (T) To eliminate Radiologix interest income with use of cash as part of the purchase transaction $ 1,247 $ 1,128 To reverse interest expense related to historical notes, leases, bonds and lines of credit with new financing related to the purchase transaction: For Radiologix (13,432) (17,908) For RadNet (13,292) (15,871) To add interest expense related to new financing related to the purchase transaction (1) 28,380 37,840 To reverse interest expense related to historical deferred financing charges and loan fees with new financing related to the purchase transaction: For Radiologix (1,237) (1,650) For RadNet (710) (1,137) To add interest expense related to new financing transaction fees (2) 1,143 1,524 ------------- ------------- $ 2,099 $ 3,926 ============= ============= ________________ (1) Assume a first lien six-year, 1% principal payment per year, note payable of $225 million at LIBOR + 3.5%, or an estimated 9.0%, a second lien seven-year, interest-only note payable of $135 million at LIBOR + 7.5%, or an estimated 13.0%, and an estimated line of credit draw of $0.4 million. The interest expense calculation presented above uses the actual LIBOR rates for the periods presented to determine the interest rate applied to the borrowings under the Term Loan B, the Second Lien Credit Facility and the line of credit. If the LIBOR rate increases or decreases, the effect on interest expense would be as follows: EFFECT ON INTEREST EXPENSE LIBOR RATE NINE MONTHS YEAR ENDED INCREASE/DECREASE JULY 31, 2006 OCTOBER 31, 2005 ----------------- ------------- ---------------- (IN THOUSANDS) 0.25% $ 676 $ 901 0.50% 1,352 1,802 0.75% 2,027 2,703 1.00% 2,703 3,604 __________________ (2) Estimated financing fees of $9.3 million for the RadNet acquisition of Radiologix amortized over the weighted-average financing period of approximately 76 months, or approximately $127,000 per month. The pro forma statements of income contain no adjustment of the RadNet net deferred financing costs of $5,198,000 as of July 31, 2006, and debt prepayment penalties of $2,349,000 that will be expensed upon refinancing the existing debt of RadNet.