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UV6418 Rev. May 20, 2014

This case was prepared by Alex Droznik (MBA ’11) and Susan Chaplinsky, Professor of Business Administration. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2011 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.

RADNET, INC.: FINANCING AN ACQUISITION

In July 2006, Mark Stolper, CFO of RadNet, Inc., finally hung up the phone—it had been a long conversation. RadNet was in the process of making the largest acquisition in the company’s 25-year history. The acquisition of Radiologix would make the combined firms the largest private diagnostic imaging provider in the United States. At the moment, the pressing issue was the financing for the acquisition. Stolper had been working for weeks with a team of capital market professionals at GE Capital, a commercial lender catering to health care companies, and with merger and acquisition (M&A) bankers at Jefferies, a Wall Street investment bank. Each had proposed somewhat different financing arrangements for the acquisition. For some time, RadNet had been highly leveraged from debt taken on to purchase the necessary imaging equipment to support its growth.1 The board of directors had hired Stolper in 2003 in large part to supervise a restructuring process to improve RadNet’s financial position. At the time, he had found a company with “too much debt, and the wrong kind of debt.”2 In the interim, he took several steps to refinance and renegotiate the terms of existing debt to improve the company’s financial footing and help the company grow out of its debt burden. He viewed the Radiologix acquisition as a potentially transformative opportunity that would spur growth and further enhance the company’s operating flexibility and long-term financial stability.

Reasoning through the proposed financing arrangements went beyond the issues of price

and availability to include how the arrangements might affect operating flexibility, repayment ease, and even the composition of the firm’s investors. The phone call was his final consultation with GE Capital and Jefferies; the next day, he would need to make his recommendation to RadNet’s board about the acquisition financing.

1 Magnetic resonance imaging (MRI), positron emission tomography (PET), and computed tomography (CT)

machines typically cost between several hundred thousand dollars to over one million dollars, depending on the technological sophistication of the machine.

2 Case writer interview with Mark Stolper, May, 11, 2011. All subsequent quotations derive from this interview unless otherwise indicated.

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RadNet: Acquirer Overview

RadNet, Inc., headquartered in Los Angeles, was the owner and operator of 62 outpatient diagnostic imaging facilities in California. RadNet organized its facilities into regional networks in markets that had both high-density and expanding populations as well as attractive payor diversity.3 The company made use of advanced information technology (IT) facilities to coordinate and integrate its activities within regions. It offered the full breadth of diagnostic imaging services to its patients: MRI, PET, CT, nuclear medicine, mammography, ultrasound, diagnostic radiology, X-ray, and fluoroscopy (Exhibit 1). Its strategy was to be a one-stop shop for all imaging needs of the referring physician community.

RadNet’s outpatient facilities were located outside of hospital settings and allowed

patients to have their scans done and analyzed in a more comfortable setting. Patients who chose to use RadNet’s services typically valued the convenience and efficiency of a privately held stand-alone imaging facility. Due to legal prohibitions on the corporate practice of medicine in the state of California, RadNet did not directly employ radiologists. Instead, the company partnered with professional radiology practices to provide medical services in its facilities, including the supervision and interpretation of diagnostic imaging scans. RadNet made the imaging facility and the medical equipment available for use by the radiology practice, and the practice was responsible for staffing the facility with qualified personnel. In addition, RadNet provided a full range of administrative services, including clerical personnel, bookkeeping and accounting services, billing and collection, maintenance of medical records, and marketing activities.

The company was founded in 1981 by its current CEO and chairman, Howard Berger,

MD. Through a combination of strategic acquisitions and organic growth, RadNet had become one of the largest for-profit diagnostic imaging providers in the country. For the last 12 months (LTM) ending March 31, 2006, RadNet had generated $147.4 million in revenue and $34.0 million in EBITDA (Exhibit 2). Due to the company’s high leverage and concerns over the regulatory environment that clouded reimbursement rates in the industry, RadNet’s stock had traded at a low price for several years (Exhibit 3). Stolper described the stock as an “orphan stock” not followed by industry analysts who could help foster investor interest and awareness of the company. Radiologix: Target Overview

Radiologix, a health care company based in Dallas, Texas, was a provider of diagnostic imaging services through the ownership and operation of outpatient centers. Unlike RadNet, which operated only in one state, Radiologix was more geographically diversified; it had

3 In the case of RadNet, as a health care services provider, payor diversity mainly meant a mix between

government health care reimbursement programs, such as Medicare and Medicaid, various commercial insurance companies, and patients willing to pay “out of pocket” in cash.

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69 centers, most of which were located in Maryland, California, and New York. The mix of service offerings and the overall business model were a close match to RadNet. But Radiologix’s outpatient centers were largely located outside RadNet’s geographic reach, thereby minimizing the threat of business cannibalization and providing an opportunity for growth outside California.

For the LTM period ending March 31, 2006, Radiologix had generated $255.5 million in

revenue and $45.4 million in EBITDA (Exhibit 2). Although Radiologix was a profitable business, the company was thought to have excess corporate overhead and lax control over capital expenditures (CAPEX) and operating expenses. For RadNet’s management, generally known in the industry for its ability to run a tight ship, the acquisition was an opportunity to cut costs and improve operating margins. Diagnostic Imaging Industry

Diagnostic imaging involved the use of noninvasive procedures to generate representations of internal anatomy and function that could be recorded on film or digitized for display on a video monitor. Diagnostic imaging procedures facilitated the early diagnosis and treatment of diseases and disorders and could reduce unnecessary invasive procedures, often minimizing the cost and amount of care for patients.

In 2006, the size of the national diagnostic imaging market was estimated to be

$100 billion and was projected to grow at a compound annual growth rate of 10% for advanced imaging procedures such as MRI and PET/CT.4 The main growth driver for demand in diagnostic imaging services was the rapid increase in the aging population of the United States. According to the U.S. Census Bureau, the population group between 55 to 64 years of age was expected to increase 73% from 2000 to 2020, and the group 65 years old or greater was expected to increase 54% over the same period. Because diagnostic imaging use tended to increase with age, an aging population was expected to generate more demand for diagnostic imaging procedures. Other positive trends in the industry included the emergence of new, cost-effective imaging technology applications, wider physician and payor acceptance of the use of imaging diagnostics, and greater consumer awareness of preventative diagnostic screening. Reimbursement in Diagnostic Imaging

On the negative side, as part of the Deficit Reduction Act of 2005 (which was signed into law in February 2006), the U.S. Congress cut reimbursement rates for imaging procedures for the government-sponsored Medicare program. Since late 2001, low interest rates and easy access to capital had allowed many small health care providers to purchase expensive imaging equipment, such as MRI and PET/CT scanners. These providers sought to take advantage of generous government reimbursement rates by overutilizing medical equipment, often by having patients

4 Bear Stearns, High Yield Healthcare Update, April 2006.

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have expensive, but not always medically necessary MRI and PET/CT scans. Recognizing the problem, but unable to identify the “good” imaging providers from the “bad” ones, Congress cut Medicare reimbursement rates across the board. As a result of the cuts in reimbursement, RadNet’s stock price dropped 50% in late 2005, and combined net revenue was expected to be $15 million lower in 2007. Although the cuts were significant, a major benefit of the merger was that the cuts would be largely offset by cost savings resulting from the combination.

To offset some of uncertainly over reimbursements, RadNet was increasingly making use of “capitated contracts.” Under these arrangements, a company would buy insurance for its employees on a per-member, per-month (PMPM) basis (e.g., $200 million). A health maintenance organization (HMO) then capitated a portion of its enrollment for all medical care on a PMPM basis (e.g., $50 million). The HMO, in turn, sub-capitated, say $4 million, to RadNet on a PMPM basis all of its radiological services. Under these contracts, RadNet received $4 million per month from the HMO with minimal billing and collection costs and, in return, assumed the financial risk of higher utilization.5 As of March 2006, the company had 27 capitated contracts that represented 14% of combined company revenues (Exhibit 5).

Acquisition Rationale

The acquisition of Radiologix was believed to be advantageous to RadNet for a number of reasons, summarized in Table 1.

Table 1. Rationale for RadNet–Radiologix combination.

 Strong relationships with radiology groups  Dominant position in California market  Access to capital markets  Culture of fiscal control

 Expertise in operating on a national level  Excellent assets  Advanced IT systems

 Geographic and revenue diversification  Enhanced leverage with commercial payors  Advanced technology infrastructure  Superior management depth

Source: RadNet-Radiologix Offering Memorandum, July 2006.

5 Capitated contracts typically had two- or three-year maturities with an automatic renewal. Contracts typically

included annual revenue adjustments or built-in escalators tied to actual utilization.

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These reasons are described in greater detail below:

 Greater geographic diversification. As a stand-alone company, RadNet had presence only in the state of California, primarily in Southern California. Acquisition of Radiologix would expand the company’s geographic reach into Northern California, New York, and Maryland, and would allow for greater revenue diversification (Exhibit 4).

 Enhanced leverage with commercial payors. Economies of scale would allow RadNet to more effectively negotiate reimbursement rates with commercial insurers, which accounted for the majority of the company’s payor mix (Exhibit 5). Going forward, the company expected increased purchasing power for key medical equipment from its suppliers.

 Ability to achieve significant cost synergies. Integration between the two companies would eliminate duplicate departments and functions, rationalize and consolidate corporate offices, and centralize purchasing to one location. RadNet management expected the integration process to result in approximately $11.0 million of annual cost savings (Exhibit 6). In addition, the RadNet management team planned to rein in Radiologix’s excessive CAPEX spending on new medical imaging equipment and expensive IT systems.

 Improved access to capital markets. With the consummation of the acquisition, RadNet would be a larger company with a stronger credit profile and be better positioned to attract a larger following in both the debt and equity capital markets.

Financing the Acquisition

The acquisition was structured as a cash and stock merger through which Radiologix shareholders would receive in aggregate $43.0 million in cash and 22.6 million RadNet shares (a one-for-one share exchange). Based on RadNet’s closing share price at the time of the announcement ($1.75), the total value paid to Radiologix shareholders was $82.6 million, and the total purchase price was $107.0 million inclusive of fees and expenses.6 The size of the acquisition would trigger repayment requirements on the outstanding debt, and as a result, the merger financing would also have to provide for repayment of existing debt (Exhibit 7). The use of funding proceeds is shown in Table 2.

6 When the acquisition was completed, Radiologix shareholders would hold approximately 35% (22.6 million

shares) of the total outstanding common shares (64.3 million) in the combined firm. Radiologix’s share price at the time of the merger announcement was $2.25.

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Table 2. Use of funding proceeds (in millions of dollars).

Cash equity purchase price for Radiologix (outside of share exchange) $43.0 Refinance RadNet revolver 2.5 Refinancing of RadNet first-lien and second-lien term loans and convertible subordinated debt 162.1 Refinancing of Radiologix senior notes and convertible debt 170.3 Legal and banking fees 24.4 Total uses $402.3

Source: Created by case writer. The firm expected to use $39.8 million of existing cash to finance the merger, and the

rest—some $363.0 million—would have to be funded with either debt or equity. Although this amount of debt financing would be costly to raise, debt was still the preferred option over equity. Because of RadNet’s low stock price, it did not seem feasible (or advisable) to attempt a sizable equity issue.7 Furthermore, the U.S. syndicated loan market provided upwards of $1 trillion in financing annually to issuers with a diverse set of needs. Exhibit 8 details key market segments within the corporate syndicated loan market.

If RadNet were to raise $363.0 million in debt, it expected to receive an issuer rating of B

from Standard & Poor’s and B3 from Moody’s, two major credit-rating agencies. Although these were non-investment-grade ratings, Stolper’s bankers believed that the demand in the high-yield (HY) and corporate loan market was strong enough to fund the entire transaction with long-term debt. Consistent with a more favorable borrowing environment, spreads on HY bonds had averaged around 350 basis points (bps) in June 2006, down considerably from spreads in the 2002–03 period (Exhibit 9).

Although Stolper had reached the decision to fund the acquisition with debt, important

decisions remained as to the size and type of debt facilities that would be used.

First tranche: Senior debt

Because senior (or first-lien) debt holders were paid first in the event of bankruptcy, senior debt typically had the lowest interest cost. Commercial banks, the main providers of senior debt, evaluated both the creditworthiness of a given company and the existing market conditions before deciding what leverage ratio (usually based on a multiple of EBITDA) constituted a “cutoff” point for lending. In the first six months of 2006, leverage multiples for “down the fairway” senior secured (first-lien) debt for health care companies had ranged from 2.1× to 4.3× EBITDA, with spreads running from 150 bps to 350 bps over London Interbank Offered Rate (LIBOR) (Exhibit 10). Because of its lower interest cost, companies ordinarily attempted to “max out” the use of senior debt before resorting to other forms of financing.

7 At the time of the acquisition, RadNet’s stock was traded on the Over-the-Counter Bulletin Board. Typically, these stocks had low trading volume and low ownership by institutional investors.

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GE Capital would underwrite 100% of the senior debt and then try to syndicate the majority of that debt to other lenders. The acquirer of a public company usually insisted on a fully underwritten commitment to reduce the chances of the board accepting an offer that later failed due to lack of financing. In theory, if the syndication failed, GE Capital would be legally obligated to provide the required funding. In a typical failed syndication, however, the bank was entitled to increase the interest rate on the senior debt to compensate for a larger-than-expected hold amount. Stolper wanted to finance the acquisition to the greatest extent possible with senior debt, without risking a failed syndication and the prospect of higher interest payments.

Second tranche: Public versus private debt

Because of the size of the Radiologix acquisition, more than one type of debt financing

would likely be needed. Here, Stolper’s advisers differed in their recommendations about the second tranche of debt. The investment bankers at Jefferies urged RadNet to tap the public debt markets and raise HY bonds. They argued that the public HY market provided the most liquidity and therefore the best price. The team at GE Capital countered that private debt in the form of second-lien debt (SLD) should be used instead.8 SLD was a form of secured debt that had, since 2003, become popular in the market. Before 2003, less than $1 billion of SLD loans had been raised, but by 2005, the volume of SLD loans had risen to $16.3 billion and had already surpassed that mark by mid-2006. Depending on the quality of the collateral, in recent months, the spreads on SLD were running from around 400 bps to 800 bps over LIBOR (Exhibit 10). GE Capital feared a modest-size public offering would not attract sufficient investor attention in a market more accustomed to larger issuances by better-known companies. To support its claim, GE Capital noted that in recent years, the average HY issue had been roughly $300 million.9 Because this would be a first-time public debt issue for RadNet, it risked the transaction failing due to a lack of investor interest. On the other hand, if RadNet needed to come back to the market again, GE Capital acknowledged that having an established investor base would be an advantage.

Beyond pricing and availability, the public- versus private-debt decision subsumed

several other important considerations.

8 SLD was secured by the same assets as bank debt but legally only had a second-priority lien on those assets.

As a result, SLD was often “secured” in name only and for all practical purposes was subordinated to bank debt. As a private instrument, a company did not have to register with the U.S. Securities and Exchange Commission to issue SLD, which saved time and costs.

9 The average size of HY fixed-rate issues from 2000 to June 2006 by U.S. firms comes from the Thomson Reuters Security Data Corporation’s Global New Issues Database.

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Strictness of debt covenants: Senior debt obligation contained debt covenants or certain credit metrics (e.g., debt-to-EBITDA, interest-coverage, or fixed-charge-coverage ratios) that a company had to maintain until the obligation matured. For this reason, these covenants were known as “maintenance covenants.” Failure to meet a covenant could result in a technical default, restructuring of the debt, or even eventual bankruptcy of the company. In general, lenders sought to keep the credit metrics close to the original company’s financial projections to prevent capital expenditures, acquisitions, or other large outlays from interfering with debt service. Maintenance covenants required a lender to monitor the company’s performance on a regular basis and therefore provided early warning of potential problems.

If RadNet chose SLD, it would be required to maintain a second set of covenants. It was

customary in the industry for SLD covenants to be set wider and therefore be less restrictive than first-lien debt (FLD) covenants. This practice ensured that senior lenders would be the “first to know” of problems and could seek to renegotiate at that point. Should both the FLD and SLD covenants be triggered, however, it would indicate more serious financial difficulty and require negotiations with both the bank and SLD holders, whose interests might diverge. Exhibit 11 contains performance projections and the proposed FLD and SLD covenants offered by GE Capital.

By contrast, HY bonds typically had fewer and less-restrictive “incurrence” covenants.

Many HY bonds simply prohibited the issuance of additional debt beyond a certain amount or the issuance of debt at a higher priority, but did not otherwise require tracking of company performance against preestablished metrics. Jefferies argued that HY debt would mitigate concerns over covenant violations and provide more operating flexibility to support RadNet’s growth.

Ease of prepayment: Typically, bank debt was less costly to prepay than were bonds. If

interest rates declined in the near future, RadNet would want an opportunity to refinance its debt at more attractive rates. SLD allowed prepayment before maturity with minimal penalties. On the other hand, HY bonds typically had non-call provisions lasting several years that prevented companies from prepaying early.10 Another difference between the two forms of debt concerned the maturity or tenor of the obligations. Typically, HY debt had a longer maturity (6 to 12 years) compared with SLD (4 to 7 years). Compared with the typically heavier amortization on senior debt, both instruments required minimal amortization and were expected to be refinanced at a later date.

Fixed- versus floating-rate interest: HY debt was a fixed-rate obligation, whereas SLD

was a floating-rate obligation typically benchmarked to a U.S. Treasury rate or LIBOR. Following the recession that ensued after the September 11, 2001, terrorist attacks, the U.S. Federal Reserve sharply reduced interest rates to spur the economy. Beginning in 2004, the Fed

10 Often prepayment penalties on SLD were 2% during the first year, 1% during the second year, and 0%

thereafter. Non-call provisions on HY bonds could be for four- or five-year periods, and although there were ways to prepay before this, it was considerably more expensive for the issuer.

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began to reverse this policy and short-term interest rates had risen sharply thereafter (Exhibit 12). GE Capital was concerned about the impact of rising rates on RadNet’s ability to service its debt. Due to its capital intensity, the business had high operating leverage such that a relatively small decrease in top-line revenues could lead to larger decreases in operating income. GE insisted that 50% of the SLD be hedged with interest-rate swaps. If rates continued to rise, RadNet’s interest expense would be capped; but if rates fell, the company would not benefit from reduced interest on the swapped debt. Depending on the tenor of the swaps, RadNet would incur some additional cost to fix its interest-rate exposure. For his part, Stolper was not sure what weight the floating-rate nature of SLD should be given in his overall decision. Composition of Investor Base

The composition of the investor base, or who owned RadNet’s debt, could affect the ease of renegotiation or control if the firm ran into difficulties. Waivers or amendment to specific terms of the debt required either a majority or supermajority vote of the lenders, depending upon the terms being contemplated. As mentioned, GE Capital would underwrite 100% of the debt facilities but only retain a small percentage of offered securities on its balance sheet. The rest would be sold to institutional investors through an organized syndication process. GE Capital planned to sell part of the debt to regional commercial banks, likely familiar with RadNet, and the remainder to collateralized loan obligation funds (CLOs), a relatively new type of investor. Unlike banks, CLOs did not seek a relationship with the company in which they were investing and were primarily focused on the overall return on investment. CLOs tended to agree with decisions made on their behalf by the administrative agent, which, in this case, was GE Capital.11

If Stolper chose to raise SLD, a larger portion of the issue would likely be placed with

hedge funds compared to HY bonds, which were typically placed with a broader mix of institutional investors. Unlike banks or CLOs, hedge fund managers were known to buy specific tranches of debt within a company’s capital structure to have a “say” in negotiations regarding any future financings of the company.12 To the extent that investors’ interests were aligned, a few investors holding large blocks of RadNet debt could potentially expedite matters if restructuring was required. On the other hand, a few influential investors could also present “hold-out” problems if some were more intent on gaining control of the company going forward. GE Capital had warned Stolper that, in the past, some bank clients had trouble negotiating with their hedge fund investors.

11 The administrative agent was the bank that monitored and managed a company’s debt obligations after the

primary syndication had been completed. It was almost always the bank that led the original syndication of the deal. 12 Hedge funds often sought to strategically purchase large blocks of debt that might lead to control of the

reorganization process. In a typical bankruptcy scenario, equity holders of the business were eliminated and debt holders received new equity (and therefore control) in the entity formed from the bankruptcy proceedings.

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Conclusion

If Stolper chose SLD, GE Capital—the firm’s primary commercial lender—would also place the SLD. If he went with HY debt, Jefferies—the firm’s investment bank—would float the bonds. “I couldn’t help but notice,” he said, “that despite all the other issues at hand, their advice seemed to follow their fees.” With these issues in mind, Stolper needed to finalize his financing plan for the acquisition—how large should the first tranche of FLD be? For the balance, which would it be: HY debt or SLD? He hoped the financing would successfully close the Radiologix acquisition and leave room for long-term growth.

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Exhibit 1

RADNET, INC.: FINANCING AN ACQUISITION

Diagnostic Imaging Services Provided by RadNet

Source: RadNet-Radiologix Offering Memorandum, July 2006.

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Exhibit 2

RADNET, INC.: FINANCING AN ACQUISITION

RadNet and Radiologix Historical Performance (in millions of dollars)

LTM PF 2004 2005 3/31/2006

RadNet $137.3 $145.6 $147.4 Radiologix1 251.3 251.4 255.5 Total Revenues $388.6 $397.0 $402.9

% growth 1.6% 2.2% N/A RadNet $27.5 $31.8 $33.9 Radiologix1 38.3 44.8 45.4 Acquisition-related cost savings 0.0 0.0 11.0 Total EBITDA $65.8 $76.6 $90.3

% margin 16.9% 19.3% 22.4% RadNet $3.3 $4.0 $3.0 Radiologix 10.4 11.6 10.0 Total Maintenance CAPEX $13.7 $15.6 $13.0 RadNet $3.8 $4.8 $8.0 Radiologix 27.6 31.7 8.2 Total Growth CAPEX $31.4 $36.5 $16.2 Radiologix IT CAPEX2 $2.0 $7.3 $6.8 Total CAPEX $47.1 $59.4 $36.0

1 Excludes discontinued operations and various one-time charges. 2 IT system fully implemented by the time of acquisition. No further significant IT-related expenses.

Data source: RadNet-Radiologix Offering Memorandum, July 2006.

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Exhibit 3

RADNET, INC.: FINANCING AN ACQUISITION

RadNet’s Historical Stock-Price Performance

Data source: Yahoo! Finance.

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Exhibit 4

RADNET, INC.: FINANCING AN ACQUISITION

RadNet’s Map of Operations after Radiologix Acquisition

JV = Joint venture. Source: RadNet-Radiologix Offering Memorandum, July 2006.

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Exhibit 5

RADNET, INC.: FINANCING AN ACQUISITION

Pro Forma Payor Mix for Combined Company (for LTM period revenues ended March 31, 2006)

Data source: RadNet-Radiologix Offering Memorandum, July 2006.

Medicaid 3%

Medicare 22%

Insurance 51%

Capitated Contracts

14%

Private Pay & Other 10%

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Exhibit 6

RADNET, INC.: FINANCING AN ACQUISITION

Summary of Expected Post-Integration Cost Savings (in millions of dollars)

California Regional Overhead Savings Corporate

Overhead Savings Valley

Radiology Pacific

Imaging Total

Regional Total Cost

Saving 1. Accounting/Treasury $0.8 $0.8 2. Bonus Program 0.5 0.5 3. Business Development 0.5 0.5 4. Corporate Communications 0.6 0.6 5. Facilities 0.3 0.3 6. Human Resources 1.2 0.2 0.2 0.4 1.5 7. Information Technology 1.1 1.1 8. Legal 0.5 0.5 9. Materials Management 0.5 0.5 10. Management 0.7 0.5 1.2 1.2 11. Marketing 0.2 0.2 0.2 12. Nondepartment Technical 0.1 0.1 0.1 13. Physician Advisory Board 0.1 0.1 14. Reimbursement Operations 0.3 0.8 0.6 1.4 1.8 15. REWARD 0.6 0.0 0.6 16. Risk Management 0.1 0.0 0.1 17. Transcription 0.2 0.2 0.4 0.4 Total $7.3 $2.0 $1.7 $3.7 $11.0

Data source: RadNet-Radiologix Offering Memorandum, July 2006.

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Exhibit 7

RADNET, INC.: FINANCING AN ACQUISITION

Historical Balance Sheet (in millions of dollars)

1 $2.5 million under existing revolver was expected to be retired. The $2.5 million would be replaced by the same amount of borrowing under a new five-year, $45 million revolving- credit facility that was negotiated as part of the merger financing.

Data sources: EDGAR Filing Primedex Health Systems Form 424B3, October 18, 2006, and case writer simplifications.

RadNet Radiologix July 30, 2006 June 30, 2006

As s e ts Cash and cash equivalents 0.0 43.7 Restricted cash - 5.8 Accounts receivable 25.7 41.2 Other current assets 3.2 11.4

Total current assets 28.9 102.1

Property and equipment, net 62.8 68.6 Goodwill 23.1 - Other intangible assets, net - 52.4 Other assets 11.8 14.1

Total as s e ts 126.6 237.2

Liabilitie s and s tockholde rs ’ e quity Accounts payable 26.7 8.8 Accrued expenses 1.8 16.6 Other current liabilities - 0.7

Total current liabilities 28.6 26.1

Existing debt refinanced in merger:

Line of credit (revolver) 1

6.9 FL term loan (due March 2011, LIBOR + 400) 86.0 SL term loan (due March 2012, LIBOR + 700) 60.0 Convertible subordinated debt (due June 2008, 10.5%) 16.1 Senior notes (due December 2008, 10.5%) - 158.3 Convertible subordinated debt (due July 2009, 8%) - 12.0

Capitalized lease obligations 5.4 0.1 Other long-term liabilities 0.0 8.8

Total long-term liabilities 174.5 179.2 Stockholders’ equity (76.4) 32.0

Total liabilitie s and s tockholde rs ’ e quity 126.6 237.2

Weighted average shares outstanding (in millions) Basic 41.7 22.6 Diluted 41.7 22.6

For the exclusive use of E. Norman, 2015.

This document is authorized for use only by Elton Norman in FINC 6290 Spring 2 2015 Financial Strategies taught by J haischer, Webster University from March 2015 to September 2015.

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For the exclusive use of E. Norman, 2015.

This document is authorized for use only by Elton Norman in FINC 6290 Spring 2 2015 Financial Strategies taught by J haischer, Webster University from March 2015 to September 2015.

-19- UV6418

Exhibit 9

RADNET, INC.: FINANCING AN ACQUISITION

Yield on High-Yield Debt versus U.S. Treasuries

Notes: ML HY is the yield on Merrill Lynch High Yield Master II Index.

US 10Y is the yield on Barclays U.S. Treasury Bellwether 10-year Index. Data source: Datastream.

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ld (

% )

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≈350 bps

For the exclusive use of E. Norman, 2015.

This document is authorized for use only by Elton Norman in FINC 6290 Spring 2 2015 Financial Strategies taught by J haischer, Webster University from March 2015 to September 2015.

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For the exclusive use of E. Norman, 2015.

This document is authorized for use only by Elton Norman in FINC 6290 Spring 2 2015 Financial Strategies taught by J haischer, Webster University from March 2015 to September 2015.

-21- UV6418

Exhibit 11

RADNET, INC.: FINANCING AN ACQUISITION

Projected Performance and First-Lien and Second-Lien Covenant Clearance (in millions of dollars)

1 RadNet was projected to pay no income taxes as a result of significant net operating losses accumulated on the company’s balance sheet. 2 Includes minority interest and interest income. 3 Excess FCF was typically “swept” or used to pay down outstanding debt, which helped delever a company. Actual percentage FCF Sweep was typically determined by negotiations with lenders. 4 FCC was defined as EBITDA less Maintenance and Growth CAPEX divided by Interest Expense. Data source: Projections were estimated by case writers from publicly available information.

RADNET: FINANCIAL PROJECTIONS LTM PF 3/31/06A 2006P 2007P 2008P 2009P 2010P 2011P 2012P Busine s s Mode l As sumptions (BASE CAS

Revenues $402.9 $398.8 $410.8 $423.1 $435.8 $448.9 $462.3 $476.2 Revenue Growth Rate 3.0% % growth 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% EBITDA Margin 20.0%

Cost Savings $11.0 EBITDA $79.3 $79.8 $82.15 $84.6 $87.2 $89.8 $92.5 $95.2 Year 2006P Growth CAPEX $17.0

% margin 19.7% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Plus: Cost savings $11.0 $11.0 $11.0 $11.0 $11.0 $11.0 $11.0 $11.0 Financing As sumptions Adjuste d EBITDA $90.3 $90.8 $93.2 $95.6 $98.2 $100.8 $103.5 $106.2 FL term loan pricing 3.50%

SL term loan pricing 7.50% Cash interest (38.1) (36.7) (34.7) (32.8) (30.5) (27.9) (25.0)

Cash taxes 1

0.0 0.0 0.0 0.0 0.0 0.0 0.0 July 2006 1-Year LIBOR 5.59% Maintenance CAPEX (15.0) (15.0) (15.0) (15.0) (15.0) (15.0) (15.0) “All-in” FL term loan pricing 9.09% Growth CAPEX (17.0) (17.5) (18.0) (18.6) (19.1) (19.7) (20.3) “All-in” SL term loan pricing 13.09% Severance costs (0.3) (2.3) 0.0 0.0 0.0 0.0 0.0 Changes in working capital (0.6) 3.2 (2.9) (2.3) (2.1) (2.3) (2.4)

Other 2

1.2 3.9 3.9 3.9 3.9 3.9 3.9

Fre e Cash Flow (FCF) $20.9 $28.7 $28.8 $33.4 $37.9 $42.5 $47.4

Exce ss FCF Swe e p 3

$15.7 $21.6 $21.6 $25.1 $28.5 $31.8 $35.6 FCF Sweep 3

75.0%

Balance She e t FL term loan $225.0 $209.3 $187.7 $166.1 $141.0 $112.6 $80.8 $45.2 SL term loan $135.0 $135.0 $135.0 $135.0 $135.0 $135.0 $135.0 $135.0 Total De bt $360.0 $344.3 $322.7 $301.1 $276.0 $247.6 $215.8 $180.2

RADNET: FINANCIAL COVENANTS 2006P 2007P 2008P 2009P 2010P 2011P 2012P

FL Cove nants

MIN Fixed Charge Coverage (FCC) 4

1.20× 1.15× 1.20× 1.25× 1.25× 1.25× 1.25× MAX Bank Debt/EBITDA 2.85× 3.15× 2.80× 2.50× 2.25× 2.00× 2.00× MAX Total Debt/EBITDA 4.35× 5.00× 4.50× 4.00× 3.50× 3.00× 2.50×

SL Cove nants MIN FCC 1.10× 1.05× 1.10× 1.15× 1.15× 1.15× 1.15× MAX Bank Debt/EBITDA 3.05× 3.40× 3.05× 2.75× 2.50× 2.25× 2.25× MAX Total Debt/EBITDA 4.60× 5.25× 4.75× 4.25× 3.75× 3.25× 2.75×

For the exclusive use of E. Norman, 2015.

This document is authorized for use only by Elton Norman in FINC 6290 Spring 2 2015 Financial Strategies taught by J haischer, Webster University from March 2015 to September 2015.

-22- UV6418

Exhibit 12

RADNET, INC.: FINANCING AN ACQUISITION

Historical U.S. Treasury Interest Rates

Data source: St. Louis Federal Reserve, ALFRED database.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06

Y ie

ld t

o m

a tu

ri ty

( %

)

10YR 1YR 3M

For the exclusive use of E. Norman, 2015.

This document is authorized for use only by Elton Norman in FINC 6290 Spring 2 2015 Financial Strategies taught by J haischer, Webster University from March 2015 to September 2015.