Exhibit 99.4
Emergency Radiology
Services, LLC
Unaudited Financial Statements as of and for the Six
Months Ended June 30, 2007 and 2006
EMERGENCY RADIOLOGY SERVICES, LLC
UNAUDITED BALANCE SHEETS
AS OF JUNE 30, 2007 AND 2006
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| | | 2007 | | | 2006 | |
ASSETS | | | | | | | | |
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CURRENT ASSETS: | | | | | | | | |
Accounts receivable, net of allowance for doubtful accounts of $13,000 and $6,500 at June 30, 2007 and 2006, respectively | | $ | 136,466 | | | $ | 237,002 | |
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Total current assets | | | 136,466 | | | | 237,002 | |
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PROPERTY AND EQUIPMENT: | | | | | | | | |
Furniture, fixtures, and equipment | | | 91,731 | | | | 50,563 | |
Less accumulated depreciation | | | (16,425 | ) | | | (6,401 | ) |
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Net property and equipment | | | 75,306 | | | | 44,162 | |
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TOTAL | | $ | 211,772 | | | $ | 281,164 | |
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LIABILITIES AND MEMBERS’ EQUITY | | | | | | | | |
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CURRENT LIABILITIES: | | | | | | | | |
Accounts payable | | $ | 3,272 | | | $ | 2,475 | |
Accrued expenses | | | 47,068 | | | | 38,780 | |
Due to related parties | | | 104,432 | | | | 182,909 | |
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Total current liabilities | | | 154,772 | | | | 224,164 | |
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CONTINGENCIES (Note 3) | | | | | | | | |
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MEMBER’S EQUITY | | | 57,000 | | | | 57,000 | |
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TOTAL | | $ | 211,772 | | | $ | 281,164 | |
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See notes to financial statements.
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EMERGENCY RADIOLOGY SERVICES, LLC
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2007 AND 2006
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| | | 2007 | | 2006 |
REVENUES | | $ | 582,099 | | $ | 474,267 |
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OPERATING EXPENSES: | | | | | | |
Selling, general, and administrative | | | 576,099 | | | 470,267 |
Depreciation | | | 6,000 | | | 4,000 |
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Total operating expenses | | | 582,099 | | | 474,267 |
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INCOME FROM OPERATIONS | | | — | | | — |
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NET INCOME | | $ | — | | $ | — |
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See notes to financial statements.
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EMERGENCY RADIOLOGY SERVICES, LLC
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
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| | | 2007 | | | 2006 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Net income | | $ | — | | | $ | — | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation | | | 6,000 | | | | 4,000 | |
Changes on operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | 61,765 | | | | (81,261 | ) |
Accounts payable | | | 1,068 | | | | 1,659 | |
Accrued expenses | | | 3,741 | | | | 8,620 | |
Due to related parties | | | (68,602 | ) | | | 78,255 | |
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Net cash provided by operating activities | | | 3,972 | | | | 11,273 | |
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CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Purchase of property and equipment | | | (3,972 | ) | | | (11,273 | ) |
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Net cash used in investing activities | | | (3,972 | ) | | | (11,273 | ) |
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NET CASH FLOWS FROM FINANCING ACTIVITIES: | | | — | | | | — | |
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NET INCREASE IN CASH EQUIVALENTS | | | — | | | | — | |
CASH AND CASH EQUIVALENTS — Beginning of period | | | — | | | | — | |
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CASH AND CASH EQUIVALENTS — End of period | | $ | — | | | $ | — | |
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See notes to financial statements.
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EMERGENCY RADIOLOGY SERVICES, LLC
NOTES TO UNAUDITED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
Background— Emergency Radiology Services, LLC, a Minnesota Limited Liability Company (the “Company”), commenced operations in 2004. It is an arranger of on-demand teleradiology remote consultation and interpretation radiology services 24 hours a day, 7 days a week. The Company provides on-call radiology services for night, weekend, daytime, holiday, vacation backup, retirement transition, or full on-demand coverage to meet customer’s unique needs. The Company’s general offices are located in St. Paul, MN. The Company has a single reporting segment and reporting unit structure.
The Company utilizes services from certain affiliated companies. Midwest Radiology, LLLP (MWR) is the sole member of the Company and provides radiology services at imaging centers throughout Minnesota. MWR is also the sole member of Midwest Physicians Services, LLC (MPS). MPS provides management, billing, and other administrative services to the Company. St. Paul Radiology, P.A. (SPR) is also an affiliated company in that SPR is a 0.5% general partner in MWR with the remaining 99.5% limited partners being the group of individual radiologists. SPR is owned 100% by the group of individual radiologists. The radiologists, who are employed by SPR, provide the professional interpretations performed by the Company.
Effective December 28, 2006, a new company, SPR Holdings, LLC, was formed. Effective January 2, 2007, the equity held by MWR was effectively transferred to this new entity as a result of the dissolution of MWR. Concurrently, the operations of MWR were assumed by another newly formed company, Midwest Radiology, LLC, with no ownership interest in ERS. This change in ownership has no effect on the accompanying financial statements.
Basis of Presentation— The accompanying financial statements represent the results of operations, financial position, and cash flows of the Company. The financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and include all accounts of the Company.
Use of Estimates— The preparation of the Company’s financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivables— Accounts receivable represent receivables for arranging radiology services and are recorded at the contractually allowed amount and are non-interest-bearing. An allowance for doubtful accounts is maintained and represents the Company’s best estimate of probable losses on its receivables. The allowance is provided at such time that management believes reasonable doubt exists that such balances will be collected within a reasonable period of time. The allowance is based on the Company’s historical experience and the period an account is outstanding. As of June 30, 2007 and 2006, the Company had reserved approximately $13,000 and $6,500, respectively, for doubtful accounts based on its estimate of the collectibility of outstanding receivables as of those date.
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Revenue Recognition and Presentation— Revenue is recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. Revenue is derived from subscription fees, preliminary exam interpretation fees, and fees related to arranging final exam interpretations primarily for affiliates of related parties (see Note 2). Service revenue is recognized in the month when the service is complete.
Subscription fee revenue consists primarily of flat monthly fees charged to hospitals for making the remote teleradiology service available. Preliminary exam fee revenue earned by the Company consists of fees negotiated with the various hospitals for preliminary radiological interpretations (“preliminary reads”), net of fees paid to SPR, an affiliate, that performs the preliminary reads. See Note 2 discussing the arrangement with SPR related to preliminary reads. Final radiological interpretations (“final reads”), are also performed by the radiologists at SPR and will be billed directly by SPR or an SPR affiliate to the patient or the patient’s insurer under terms negotiated by SPR with the insurers, as under current legal regulations final reads may only be billed by a licensed physician, physician group, or hospital. The Company receives a fee from SPR for the services it provides to arrange the final reads and that fee is reported as revenue in the accompanying statements of operations.
Property and Equipment— Property and equipment are stated at cost. Depreciation is provided using straight-line method over the estimated useful lives of each asset. Furniture, fixtures, and equipment useful lives range from five to seven years.
Expenditures for maintenance, repairs, and minor renewals and betterments that do not improve or extend the life of the respective assets are charged to operating expense as incurred. All other expenditures for renewals and betterments are capitalized. Upon sale or retirement of depreciable assets, the related cost and accumulated depreciation are removed from the records and any gain or loss is reflected in operating expenses.
Income Taxes— The Company is a limited liability company and as such is not subject to federal or state income tax. Rather, the members are subject to federal income taxation based on their respective allocation of the Company’s net taxable income or loss on a cash basis. Accordingly, the Company does not record any current or deferred assets, liabilities, or expenses related to income taxes.
| 2. | RELATED-PARTY TRANSACTIONS |
The Company has entered into an agreement with MPS to provide management, billing, and other administrative services to the Company. The services are provided for a set monthly fee and the contract is immediately cancelable upon mutual written agreement by either party. Total amounts paid for such services were $60,000 and $48,000 for the six months ended June 30, 2007 and 2006, respectively.
Effective September 1, 2005, the Company began leasing space and equipment from MWR. The lease is immediately cancelable upon thirty-day written notice by either party. The total amount paid under this agreement for the six months ended June 30, 2007 and 2006 was $38,700 and $12,000, respectively.
Additionally, MWR, SPR, and MPS have agreed to provide certain staff to perform management, clerical, and marketing services for the Company. Total amounts paid related to these services were approximately $400,000 and $375,000 for the six months ended June 30, 2007 and 2006, respectively. These expenses are included within selling, general, and administrative expenses on the accompanying statement of operations.
In April 2007, the Company entered into a professional services agreement with SPR, retroactive to the beginning of the Company’s operations in 2004, to receive as compensation for preliminary reads
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revenue after expenses incurred. The Company received compensation of approximately $45,000 and $245,000 for the six months ended June 30, 2007 and 2006, respectively, which is included in revenues in the accompanying statements of operations. The Company believes this compensation is a reasonable fair value for the services provided by SPR for preliminary reads.
The Company receives 21 percent of the professional fees collected by SPR for the services SPR’s employees provide on an outsourced basis to the Company to arrange the final radiologist reads. This fee is included in revenues in the accompanying statements of operations.
The Company owed $105,000 and $180,000 at June 30, 2007 and 2006, respectively, to affiliated companies related to the above-noted transactions. The Company has included the activity related to the management agreement within the operating section of the statement of cash flows. Management believes that the activities presented as related party are representative of operating activities. This payable is funded through the receipt of the accounts receivable balances and there is no interest charged.
If the Company’s cash flows are not adequate to cover operating expenses, SPR will reduce or eliminate the professional services fee in order to ensure that the Company’s operating cash flow needs are met.
The Company’s results of operations may not be indicative of those that would result from transactions among unrelated parties.
Leases — As described in Note 2, the Company leases office space and equipment under an operating lease with an affiliate, Midwest Radiology, LLC. Total expense for the six months ended June 30, 2007 and 2006 was $38,700 and $12,000, respectively. The lease is cancelable upon thirty-day notice. Accordingly, there are no future minimum lease commitments.
Effective January 1, 2007, the Company increased the total office space leased from approximately 1,100 square feet to approximately 3,000 square.
Litigation — From time to time the Company is involved in various legal proceedings which are in the ordinary course of business. Management does not believe the outcome of any proceedings will have a material effect on the financial position or results of operations of the Company.
On July 16, 2007, the Company entered into a purchase agreement with an unrelated party, NightHawk Radiology Holdings, Inc. (“NightHawk”) to sell all of the outstanding equity interests of the Company and MPS. In accordance with the terms of the purchase agreement, the owners of the Company and MPS received an aggregate consideration of (i) $62.5 million in cash and (ii) a warrant to purchase NightHawk common shares that was issued to St. Paul Radiology. $57.5 million of the cash portion of the purchase price was paid to SPR Holdings at closing and the remaining $5 million was placed into an escrow account to serve as a source of funds to satisfy the indemnification obligations of SPR Holdings under the purchase agreement.
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