RadNet Inc (RDNT) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the RadNet Inc. second-quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided that time for you to queue up for questions. I would like to remind everyone that today's conference is being recorded and would now like to turn the conference over to Mr. John Mills of ICR.

Thank you, Joshua. Good morning, ladies and gentlemen, and thank you for joining us today to discuss RadNet's second-quarter 2007 earnings results. On the call today for the Company are Dr. Howard Berger, Chairman and Chief Executive Officer of RadNet, and Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet.

Before we begin, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undo reliance should not be placed upon them. For more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to RadNet's recent 10-K for the twelve-month period ended October 31, 2006, form 10-KT for the two-month transition period ended December 31, 2006, and 10-Qs for the three-month period ended March 31, 2007 and June 30, 2007 filed with the SEC.

With that, I would like to turn the call over to Dr. Howard Berger.

Thank you, John. Good morning, everyone, and thank you for joining us today. On today's call, Mark Stolper and I plan to provide a brief overview of RadNet's business, the industry in which we operate, highlights from our second-quarter 2007 results, and some insight into our future growth opportunities. After our prepared remarks, we'll open the call for your questions.

First I would like to thank all of you for your interest in RadNet and for dedicating a portion of your day to participate in a conference call this morning. We began hosting these earnings calls last quarter, which was our first completed quarter since the acquisition of Radiologix. The acquisition was a transforming event for our company, both in the sense of our establishing a multi-state footprint as well as providing us with a capital structure that affords us the liquidity we require for further expansion.

One of the things we will discuss throughout this call is our belief that we as a company and the imaging industry as a whole can benefit from further consolidation. We hope this morning to demonstrate this to you when we review the success of the Radiologix integration and our overall financial and operational performance in the quarter. We intend to communicate to you why we believe that this is an attractive industry in which to operate and one that should continue to be an exciting area for equity and debt investors alike.

By way of background for some of you who might be new to our story, RadNet is a leading owner and operator of freestanding diagnostic imaging centers. We operate 138 outpatient centers, 131 of which are in California, Maryland, or New York. We have built this business over several decades and have fine-tuned many of our skills in California, the state in which we began.

We have a multi-modality approach to our business, which means that the vast majority of our centers provide a combination of imaging exams, from some of the more routine studies such as x-ray, ultrasound, and mammography to the more advanced testing such as MRI, CT, and PET/CT scanning.

Our growth strategy is focused on building regionally concentrated networks of centers. We believe that there exists strong advantages to operating regional clusters, which include efficiencies in management, a lower-cost structure, and greater contracting leverage with our payers, the majority of whom are insurance companies. Furthermore, we contract with a limited number of established professional radiology groups who provide all of the interpretative services within our centers. Many of these groups have national reputation and have been fixtures in the communities for decades. It is our goal to be the most significant, high-quality provider of outpatient imaging in all of the markets in which we operate.

Lately we've received a number of questions regarding the reimbursement climate for imaging. On the first-quarter earnings call, we discussed the Deficit Reduction Act in detail, which went into effect on January 1 of this year and resulted, for the most part, in lower reimbursement for Medicare business as it relates to MRI, CT, and PET/CT exams.

On that earnings call, I shared my somewhat controversial views about the DRA being beneficial to both the long-term prospects of our industry and more specifically to our company's future. Our sector of healthcare is one of the last major areas within healthcare to remain a cottage and highly-fragmented industry. Other sectors of healthcare services have experienced the benefits of consolidation, including cost efficiencies, convenience for patients, more organized integration of regional and national networks, and improved consistency of patient care.

RadNet's performance this quarter, which Mark will highlight shortly, demonstrates our ability to navigate effectively in a challenged reimbursement environments such as the one created by the DRA. We have capitalized on favorable trends from the DRA including little to no new competition in our markets, decreased capital spending by our competitors, and the existence of attractive, accretive consolidation opportunities.

Recently, in addition to the DRA, there have been two proposed reimbursement changes that are being contemplated. The first relates to Medicare's 2008 proposal for the hospital outpatient prospective payment system, or HOPPS. The proposal would increase payment rates for Medicare, MRI, and CT modalities and would bundle the cost of contrast media into these payments. The effect would likely be a net decrease to reimbursement for these modalities.

Additionally, Medicare is reevaluating, updating its geographic practice cost indices, or GPCIs, and creating new methodologies for calculating practice expense relative value units. In contrast, these changes could be neutral to slightly positive for imaging players.

The second reimbursement proposal is part of the reauthorization of the State Children's Health Insurance programs, or SCHIP. Changes to Medicare diagnostic and imaging reimbursement are part of the SCHIP bill approved by the House of Representatives. The Senate passed its own version of SCHIP, which did not include any reimbursement costs for imaging. Because the House and Senate bills differ substantially, the bills will be reevaluated in September after the Senate completes its recess.

President Bush has publicly stated that he would veto both SCHIP bills as currently drafted. Regardless, the House bill, if passed, would put a cap on the sustainable growth rate, SGR, physician payment, would modify the utilization rate assumption used in the Medicare reimbursement formula, add a further cut to an existing contiguous body part reimbursement reduction, impose accreditation standards on imaging centers, and create stricter billing requirements for imaging centers deemed independent diagnostic testing facilities, or IDTFs.

At this time, it is uncertain as to the probability of either the CMS proposals or SCHIP bills or any derivative thereof going into effect. It is also not possible at this time to quantify any impact to us based on these proposals. Each proposal could have both positive and negative implications for us and the industry.

Regardless of the speculative nature of these proposals, we have -- are likely to accomplish with the DRA. We're prepared to absorb their impact and capitalize on further consolidation growth opportunities that could result from their implementation. Our scale, flexible capital structure, lower operating costs, and most importantly, our experienced management team uniquely positioned us to capitalize on opportunities resulting from the distress these proposed changes might cause to less-attractively-positioned operators.

Our operational acumen and experience stems for having built our business in California. California has historically been one of the most competitive imaging markets and we have endured because of this competitive landscape and unusually high penetration of managed care, some of the lowest reimbursement rates in the country. We believe that the experience of building our business in California has allowed us to hone the necessary skills to be effective on a national scale in a similarly uncertain reimbursement climate. Regardless of reimbursement in the long run, we believe our industry will benefit from fewer, more efficient operators.

At this time, I would like to turn over the call to Mark Stolper, our Chief Financial Officer, to discuss some of the highlights of our second-quarter performance. When he is finished, I will conclude our prepared remarks with some discussion about my observations regarding the state of our industry today and how certain industry dynamics might present opportunities for RadNet in near future.

Thank you, Howard. Thank you all for participating in our second-quarter conference call. I am now going to briefly review our second-quarter performance and attempt to highlight what I believe to be some material items. I will also attempt to give some further explanation of certain items in our financial statements, as well as provide some insights into some of the metrics that drove our second-quarter performance.

In my discussion, I will use the term EBITDA, which is a non-GAAP financial measure. The Company defines EBITDA as earnings before interest, taxes, depreciation, and amortization, each from continuing operations and adjusted for losses or gains on disposal of equipment, debt extinguishment, and non-cash equity compensation. EBITDA includes equity earnings in unconsolidated operations and subtracts minority interest in subsidiaries and is adjusted for non-cash or extraordinary and one-time events taking place during the period.

For the second quarter of fiscal 2007, RadNet reported revenue of $107 million. Revenue increased 1.5% from $105.5 million, which would have been the second-quarter revenues of the same period of 2006 if the RadNet/Radiologix combination had occurred prior to April 1, 2006.

In the second fiscal quarter of 2007, we reported EBITDA of $22.2 million. EBITDA increased 12.9% from $19.7 million over the same pro forma period of 2006. It is important to note that revenue and EBITDA for the second quarter of 2007 is reflective of the full impact of the Deficit Reduction Act Medicare reimbursement cuts, whereas 2006 pro forma results to which I am comparing them do not include these reimbursement cuts.

Although we did not publicly quantify the negative impact of the DRA on this second quarter, we did previously released on July 7, 2006 our estimated impact for 2007 of the DRA and the contiguous body part scanning cut of between $16 million and $17 million. We remain comfortable with the 2000 full-year estimate for the DRA.

I mentioned the DRA to highlight the following points When compared 2006, a period not subject to the DRA, our 2007 results of increased revenue and EBITDA illustrate that we have substantially improved operating performance. This has been achieved through increasing scan volumes at our centers and lowering operating costs.

Many of you might remember that we issued guidance for 2007 of $400 million of revenue and $85 million of EBITDA, which assumed an add-back for the achievement of $11 million of identified cost savings from the Radiologix acquisition. Our second-quarter performance demonstrates that we are significantly ahead of our plan. We are therefore very pleased with our revenue and EBITDA performance.

Overall, we performed 671,717 total procedures in the second quarter of 2007, as compared to 636,252 total procedures in the same pro forma period of 2006. This is an overall increase of 5.6%. On the same quarter-over-prior-year's pro forma quarter basis, MRI procedures increased 7.7%, CT procedures increased 5.1%. PET/CT procedures increased 22%. Routine imaging procedures -- this includes x-ray, ultrasound, mammography, and all other exams -- increased 5.2%. We attribute this growth in procedures to our strong relationships with our referring community, our expertise on network contracting and capitation, and effective center-level marketing.

Net income for the second quarter was $1.3 million, or $0.04 per share, compared to a net loss of $0.5 million, or negative $0.03 per share, reported in the same period last year. Affecting the second-quarter net income were certain non-cash expenses and onetime non-recurring items including the following -- $382,000 of non-cash employee stock compensation expense resulting from the vesting of certain options and warrants; $247,000 of one-time severance expense associated with the announced cost savings during the Radiologix integration; $461,000 of non-cash deferred financing fee expense related to the amortization of financing fees paid as part of our $405 million credit facilities drawn down in November 2006; and a $695,000 gain on the fair market value of an interest rate hedge related to the Company's GE credit facilities.

With regards to some specific income statement accounts, interest expense for the quarter was approximately $9.9 million. This was negatively impacted by $461,000 of non-cash amortization of financing fees and benefited by $695,000 from a gain related to the mark-to-market of an interest rate hedge, both of which I touched upon earlier.

Bad debt expense increased as a percentage of our net revenue because of the addition of Radiologix. As we discussed on the last quarter's conference call, the bad debt percentage of our Radiologix subsidiary is higher than that of the rest of RadNet because it performs, on behalf of its physician partners, substantial billings from hospital operations, for which it receives a management fee.

Hospital settings regularly have bad debt expense that far exceeds that of freestanding imaging centers. It is important to note that the bad debt percentage of Radiologix and RadNet, excluding the Radiologix subsidiary, did not change materially as compared with itself over the same period last year.

With regards to our balance sheet, as of June 30, 2007, we had $384.3 million of debt and we were undrawn on our $45 million revolving line of credit. Since December 31, 2006, receivables increased approximately $8.6 million resulting from the increased business and the credentialing of new physician staffing several of our Northern California facilities. We had working capital of $38.1 million at June 30, 2007, compared to $31.2 million at December 31, 2006.

During the quarter we entered into capital leases of $4.8 million and repaid $2.3 million of notes and leases payable. We had cash capital expenditures of $7.3 million during the quarter. During the first six months of this year, we entered into capital leases of $9 million and repaid $3.7 million of notes and leases payable. We had cash capital expenditures of $12.1 million during the first six months of this year.

During the quarter, per our adoption of staff accounting bulletin number 108, or SAB-108, we recorded a $3.4 million cumulative effect adjustment to retained earnings and an offsetting amount to long-term deferred rents as of January 1, 2007. The adjustment related to our determination that in prior period's we should have expensed on a straight-line basis certain lease rate escalation clauses in lieu of expensing them according to the actual payments we made. In addition, we recognized an additional $697,000 of facility rent expense for the first six months ended June 30, 2007.

In June, we divested a non-core center in Duluth, Minnesota to a local multicenter operator for $1.3 million. This was the only facility that we operated in Minnesota. This divestiture is consistent with our previously-stated strategy of market concentration and geographic density. We continue to be interested in being the largest player in the markets in which we operate. Upon this divestiture, we have only seven facilities of our 138 centers that are outside California, Maryland, and New York, RadNet's core markets.

On January 2 -- on July 2, subsequent to the quarter, we completed our previously-announced acquisition of Borg Imaging Group in Rochester, New York. Founded in 1983, Borg Imaging Group was a leading provider of outpatient imaging in Rochester. The acquisition included six facilities, five of which are multi-modality, offering a combination of MRI, CT, x-ray, mammography, fluoroscopy, and ultrasound. After combining the Borg centers with RadNet's existing Rochester area centers, RadNet has 11 facilities in Rochester and is the clear outpatient imaging leader in that market. In conjunction with this transaction, the Borg and IDE professional groups merged their practices, creating a powerful, well-respected, and entrenched radiology force in that market.

Although we did not announced any further acquisitions during the second quarter, the acquisition climate remains attractive. We remained interested in pursuing other opportunities within our core markets. Without commenting on specific acquisitions or the timing of any prospects, we continue to see the pace and the number of opportunities increase. Continued pressure on smaller operators stemming from competition and the reimbursement changes resulting from the Deficit Reduction Act are what we believe are creating many of these opportunities.

We reiterate that we are seeking to acquire acquisitions on an accretive basis at multiples of EBITDA between three and five times. We seek opportunities where we believe there are significant cost savings that we can impart to the target through our cost structure and management, which, once integrated, ultimately lower the acquisition multiples that we paid.

During our last call, we announced that we were evaluating our options to lower our debt cost of capital. On July 5, we announced that we were seeking to refinance our credit facilities with the assistance of GE. This was an opportunistic financing intended to capitalize on what we believed were strong market conditions at the time. In the following weeks, the debt capital markets deteriorated in an unprecedented and historic manner. As a result, on August 10, we announced that we were deferring that financing.

Instead, GE agreed to arrange for us an incremental $35 million as part of our existing credit facilities. The incremental facility will consist of an additional $25 million as part of our first lien term loan be and $10 million of additional capacity under our existing revolving line of credit. The incremental facility will be used to fund certain identified strategic initiatives and for general corporate purposes.

Although we are disappointed we could not complete the original financing transaction, we are very pleased that we will have additional capital to pursue opportunities that we have before us. We believe that our current capital structure provides us the financial flexibility and access to capital to effectively execute our growth plans. Furthermore, given our financial performance, we strongly believe that will be able to refinance our credit facilities at a lower cost sometime in the future when the debt markets recover.

Last item that I will discuss is our progress on achieving the cost savings we had previously announced from the integration of Radiologix. By the end of the third quarter, we believe that we will have affected the vast majority of those savings associated with achieving the $11 million of synergies previously announced.

I would like now to turn the call back to Dr. Berger, who will talk about his observations regarding the state of the industry today and how certain industry dynamics might present opportunities for RadNet in the near future.

Thank you, Mark. I will reiterate today what I touched on the last conference call by saying that I cannot remember a time in which I've been more enthusiastic about the future growth prospects and opportunities that I believe lie ahead for our company.

Reimbursement uncertainty and market disruption breed opportunity. Despite historical cycles of reimbursement, one thing has remained true throughout my more than 30 years in the imaging business. That is, the imaging industry grows every year in size. What we do is essential to the effective delivery of medical care in this country and is becoming ever more important.

Technology continues to drive new applications for imaging. There is greater physician and consumer awareness of what we do than ever before. Early detection and intervention in the disease processes and preventive medicine are things that are pervasive in all areas of medicine. These trends will continue and so will the importance of imaging in our healthcare delivery system.

Earlier this week it was announced that another outpatient imaging player primarily located in the Southeast United States called MedQuest, MQ Associates Inc., will be purchased by a not-for-profit healthcare system called Novant Health. The purchase price was between nine and 10 times EBITDA, supported by what many believed to be significant and unique operating synergies. Although I do not believe the valuation of this transaction represents a new paradigm in valuation metrics for most local and regional players, this transaction does validate the potential value of scale regionally-concentrated imaging companies in today's healthcare system -- delivery system have.

On our last earnings conference call, I discussed some other positive trends from which the Company stands to benefit in the future. There has been a heightened awareness with respect to some of the abuses that have occurred in our industry for sometime, specifically what we call physician self-referral and block leasing arrangements. We continue to see movements by private payers, state medical boards, and CMS to either prohibit reimbursement in these settings or in some cases, such as Maryland, makes physician self-referral an infraction the could result in a doctor's losing his or her medical license. We believe these abuses should be curtailed or contained in the future, which could benefit our company and the industry substantially.

In summary, we plan to grow in a systematic and disciplined manner, focused both on driving internal growth and through acquisition. We feel we have created a platform and infrastructure that can support a substantial internal growth and further acquisitions. We have a deep and talented senior management team and we have strong relationships with our radiology physician partners who, in cooperation with them, help to build our regions and grow our business on a daily basis.

That concludes our prepared remarks. Operator, we are now ready for the question-and-answer portion of the call.

(OPERATOR INSTRUCTIONS) Arthur Henderson, Jefferies & Co.

Very nice quarter. I know you did a lot of good work this quarter. A couple of things. Sequentially, your numbers looked really strong. I am just wondering as we get into the back half of the year, is there an increased seasonal factor that we need to think about? As I recall, there are a lot fewer work days in Q3. How should we be thinking about the sequential progression of your numbers?

It's Howard Berger. I think that you bring up a good point. While I do not generally believe that seasonality is a major factor in our business -- when people get sick, they need healthcare regardless of the temperature outside -- but we cannot ignore the fact that in the third quarter there is not only one less operating day, workday than we had in the second quarter, there is certainly a substantial amount of vacation time. This year, in a somewhat unique manner, July 4 fell on Wednesday, which unfortunately is probably the worst day of the week for us to have a holiday occur, given that it gives people and opportunity to take both the beginning and end of the week and combine it into a longer weekend period. The effect of that is to decrease referrals during that period of time.

Aside from that, I do not think that there is a lot of seasonality in our business. In the fourth quarter, of course, we have the holidays toward the end of the year, which also tend to slow down the referral patterns. But that being said, we expect to see continued growth and demand in the procedural volume, which may have some effect of offsetting that, but I think your question is well taken and I think there are certain comparisons between quarters of the prior year that become far more important when you get into the latter half of this year, because generally speaking, a quarter-over-quarter comparison is more relevant than sequential growth -- not just growth, but sequential comparisons.

That's fair. I appreciate your comments on sort of the reimbursement outlook, but strangely, if there were to be some sort of reduction in reimbursement, in sort of a perverse manner isn't that a good thing for you guys from an acquisition standpoint? We are already -- I think industry is already kind of on its heels with the DRA cuts. If there were some additional reductions, wouldn't that just make the market even better for you?

I believe so. I think that the same factors that drove the consolidation and merger of RadNet and Radiologix last year, which really was DRA, will continue to peck away at the small operators that really do not have the ability to lower their cost structure. We are already seeing that as a result of DRA and as the anticipation of further potential reimbursement cuts are recognized by other operators out there that may feel that it is better to throw their hat in the ring at this point rather than even later.

So I think a very positive standpoint, this is all good for the industry. I think while it represents a substantial pressure within the industry, I cannot emphasize enough how important it is for consolidation in this industry to occur. I think that the long-term prospects of what that prevents -- the opportunities that it provides for the industry as a whole will outweigh any of the short-term issues that we might all be faced with reimbursement.

Like I say, I think this has happened in many other areas of healthcare and I think this was just a matter of time that it is happening now in imaging, but I believe that it ultimately is the best thing that could happen both for patients, radiologist, and the healthcare industry as a whole.

Okay, that's helpful. I know, Mark, you went over this to some degree about your debt refinancing and I appreciate your decision to discontinue that with the credit markets being where they are, but could you just go over what dry powder you have available? It does not sound like you're going to be constrained in anyway from making acquisitions that you want to do, but if you to just kind of tell me what kind of dry powder you still have under your existing debt structure?

Sure, as you know we have a $45 million revolving credit facility that we can draw down for working capital purposes, general corporate purposes, or acquisitions. We currently are undrawn on that $45 million revolving credit facility. We also have the ability out of our substantial free cash flow to use that for acquisitions and other sort of business development expansions that we may see ahead of us. As evidenced by this $35 million add-on to the first lien, we have in our first lien/second lien syndicated loan structure a pretty flexible ability to go back to our existing lenders, who have all been very, very supportive of the Company, to add incremental dollars to that facility if we had something of scale coming down the pike.

If I'm reading this right, you basically have million $80 million, is that right? $45 million on the revolver and another $35 million on top of that, is the right way of looking at?

That is correct.

Okay, then one last question and I will jump back in the queue. When you look at this MedQuest transaction, this multiple, do you -- I know I should probably be directing this question to Novant, but I am just curious if this multiple that is paid is going to make people have unreasonable expectations for what their businesses are worth, because if things are going to sort of three and five times EBITDA -- of course, MedQuest is a bigger entity, I understand that, but it seems to me to be an extraordinary multiple and maybe not one that is necessarily reflective of what is out there and what is being paid in the industry today. Howard, can you make any sort of comment on that at all?

Yes, I think is unusual, but not necessarily something that I think we ultimately as an industry should not have our sights set on. Multiples of nine to ten times in the healthcare industry are not all unusual. What has somewhat created a dilemma within imaging are, one, the lack of success of anybody over the last several years really effectively showing good performance and management in a larger scale business, and number two, the substantial amount of capital expenditure that needs to continue to be put into our industry.

I think once the benefits of these assets are truly appreciated, I think it will be -- it might be less uncommon, let me put it that way, for us to see these kind of multiples for larger scale operators. For, I think, the smaller operator that still is challenged by reimbursement and has no operating scale, I see no reason why the three to five times multiple range should change. We would not be a buyer unless it was an extremely strategic opportunity for above that level, because I think within our credit facility and just in general with how we think we can effectively deploy capital, either for acquisitions or internal growth, we need to keep a very focused discipline on that kind of return on investment.

So while I see this as a very positive event more from the standpoint of people finally realizing that these assets are very difficult to replace, maybe even more so now than they ever have been given reimbursement challenges and an entrenched, well-established, fixed-standing diagnostic imaging center operator that can create scale and leverage like we have, I think truly can aspire to these kind of multiples. But I do not see it filtering down to the smaller operator.

Okay, makes perfect sense. Thanks very much. Great quarter.

Mark Arnold, Piper Jaffray.

I think that answered a couple of my questions. I want to stay on that -- the MedQuest acquisition for just a second. Here you have a single-state, not-for-profit health system buying a multiregional imaging provider. I guess I am curious -- this is the first really public example of the not-for-profit hospital getting involved in buying imaging centers. A lot of these not-for-profits may have different or I would even classify less-than-rational valuation -- they rationalize these valuations that you will do differently than you would. Are you concerned at all that this is an example that we might see repeated elsewhere, where you'll see local not-for-profit hospitals competing to buy facilities, freestanding facilities in your core markets?

I would say no. I do not know much about this particular transaction or what the motivation was for Novant to buy these assets. In the markets that we tend to operate in, we either see hospital systems or chains that look at outpatient imaging, for example in California, more as cost center rather than a profit center and that would be very unlikely in my opinion to make this kind of a leap, whether they are for profit or not-for-profit. I guess in California we also have non-for-profit because they're just unprofitable, so I do not see a lot of that going on in this market.

In other markets that we are in, for example like Maryland, we tend to partner with hospital systems, many of which are non-for-profit, particularly Ascension and Catholic Healthcare Initiatives, and their focus is really for partnering with people like ourselves that have the expertise to run outpatient imaging that they readily admit they do not have.

So I think this might have been a very opportunistic acquisition for a company that is located in the South/Southeast, where you have a lot of COM issues and maybe that was the only way that they could expand some of the reach that they needed for their patients. They may -- many of these nonprofit entities have for-profit arms, so I think we get caught in a little bit of that dilemma of wordsmithing of what some of these entities are really capable of doing outside of their primary structure of nonprofitability. I would venture to guess, even though I do not know more of the specifics of this particular transaction, that it did go into some arm of Novant that in fact is a for-profit entity and sweeps some of that into their corporate structure of nonprofitability.

So I do think we should necessarily get caught up in the fact that they are not-for-profit. I think it is more a matter of looking that this industry is going to consolidate and I think I would focus on that as being really the driver here more than maybe some unique specifics of why this particular company, meaning Novant, looked at this. I believe that in the bigger picture here, this is more appropriately evaluating the assets. I also think we have to take a look at the MedQuest side of this, which was a company that was leveraged at seven times their EBITDA and where a multiple that was greater than seven was the only way that they could effectively divest themselves of these assets without taking a loss on the equity side.

Then as it relates to your core markets, you really have three of them. I guess I view those three markets as fairly consolidated relative to most of the rest of the country, particularly Maryland and I guess now maybe after your Borg acquisition in New York. How much opportunity do you have to continue to do tuck-ins in those core markets? And given your revolver capacity, to what extent do you have the ability to really go in and open a new core market here in the near to medium-term?

Think I can answer that question in two ways. First of all, I think both markets still that we are in -- not both, but three markets, New York, Maryland, and California, we still represent less than 50% of the total market availability both in terms of the number of centers, but more importantly, the amount of imaging business in those markets. That is particularly true in New York, where our presence really is only in two small markets, meaning Rochester and Rockland County. So New York is a pretty big state and there's, I think, a lot of opportunity that will continue to be looked at and will come our way, more so perhaps in New York than other markets.

But we also should not necessarily focus in Maryland just as a state. We really look at Maryland as part of a mid-Atlantic strategy that I believe there are expansion opportunities that would still really be considered part of a market, just a larger market than in Maryland. You can take a map out and probably get some sense of what I am talking about, but that market we believe has huge expansion opportunities. And in California I believe the case is the same. We have 80 markets out of what is estimated to be close to 500 in the California market, so again, I think we have a long way to go within our core markets.

In regards to our credit facility and our dry powder, if you will, or our opportunity to expand, I think one of the strengths of the Company really is the current capital structure that we have and our rather unique relationship with GE. One of the things that I said in our first earnings call and I will repeat now is this is an extremely flexible capital structure and I think the fact that we had to defer the financing for our restructuring should not be looked at as a commentary on the Company, but more the credit markets.

What we have done, which is what we expected to do when opportunities presented themselves and which GE has now switched their attention to is arranging for us, is add-on facilities or add-on credit to our existing facilities, which we believe as long as we can continue to perform will be available For this company on almost any level. So we cannot necessarily look at what our dry powder is today. If the right opportunity comes along, I believe our partners in our credit facilities will be very bold and anxious for us to take advantage of an effective business plan and performance.

Okay, then just one other thing. On the recovery cost, you talked about the HOPPS proposal and the SCHIP bill. You did not talk about the physician fee schedule proposal and I guess I've got a couple questions there. You did mention block leasing. Can you remind me, Howard, do you participate in any block leasing arrangements in any of your facilities right now?

Categorically, no. I will not enter into those under any circumstances.

Okay, then the second piece, some of the IDTF restrictions that were included in the physician fee schedule proposal would require IDTFs that share space and staffing with ASCs, for example, to not share space anymore. I know you have at least a few where you have ASCs and imaging centers co-located. Do you have -- I guess first of all, how many centers would that effect? Then secondly, do you guys have a plan with how -- if those restrictions are part of the final rule coming out this fall, do you guys have a plan of how you would comply with them?

First of all, we really only operate one ASC and that is in our Beverly Hills location and we could easily just convert that back into the medical group or radiology performance. So that could be done on an overnight basis. We really do not operate in any other ASCs and one of the directions that we have taken the Company with the new center that opened up earlier this year in Encino, California for an ambulatory outpatient interventional radiology practice is not an ASC. It is being run under our Beverley radiology physician group model and is only billing out the procedures that we perform under radiology CPT codes. We have opened up a second one of those under one of our groups up in the Rochester area.

So we do not look at the IDTF issue impacting this Company at all. In fact, I think it could help us because it will make it more difficult for some of these other mixed models to work, number one. Number two, why they're going to separating out the global bill into a professional and a technical component if you continue to be an IDTF is beyond me, but nonetheless, it is part of some of the illogic that I see coming from state and federal regulators. That can only help us also, because all of our facilities can be billed under the physician practice model and we do not need to use the IDTF at all.

Last question is that the change in the physician fee schedule will probably not impact us to any extent at all because remember, there's two fee schedules out there, one, the physician fee schedule and then the HOPPS method. To the extent of the physicians the schedule may lower reimbursement, it will not lower below HOPPS and current law under the DRA requires Medicare to pay the lower of the two. So I do not really see any impact of any substance at all or consequence at all from the physician fee model change.

All right, great. Thanks, great quarter.

Vishal Sharma, Thomas Weisel.

My first question is is there any time constraint on utilization of this additional $25 million acquisition facility (inaudible) on the first lien?

Yes, $10 million of the $25 million being added to the term loan B is designated for acquisitions and I believe we have 120 days to perform the acquisitions. That money is being held in escrow and would be brought down at that point in time. If we did not perform the acquisitions, we would still draw down the money and just pay down our partly our term loan B, which can be paid down without penalty.

All right, and in terms of Borg Imaging, I guess Borg Imaging is going to start contributing in the third quarter and you were already touching at an EBITDA run rate of $22 million a quarter, which is comfortably high above your $85 million. So should Borg Imaging contribution add further to that number or was it all included in the $85 million?

The $85 million from last year did not include any acquisitions and only was what we were forecasting better than a year ago would be the Company's projected performance then along with the DRA impact and the $11 million worth of cost savings. So the forecasted $85 million did not take into account any acquisitions or other expansions internally that we are continuing to pursue.

Okay, and going back to your competitive landscape, I know that MedQuest's transaction there was also another transaction HealthSouth just closed very recently. Do you have any comments on as to the metrics of HealthSouth's transaction?

Yes, we are not privy to HealthSouth numbers other than what we hear in the marketplace and our understanding of that transaction was that that transaction was not valued off any EBITDA multiple because of special circumstances that that company has today and performance issues. So I think that was an opportunity that Gores, which is the private equity firm that bought it, saw as a turnaround and really bought assets and bought into a perspective opportunity.

Okay, and did you participate in the bidding process either for HealthSouth or the MedQuest opportunity?

We can't publicly comment on whether we participated in the bidding process.

Okay. Was there anything unusual in the diluted number of shares, share count this quarter? I know in the previous quarter because of the antidilutive effect, you may not have improved, but was there anything outside of that in this quarter?

No, as you know, Vishal, when a company has losses, its fully diluted share number is by definition the same as its basic share number, because you do not show an antidilution issue. So this is -- we turned a profit this quarter, so using the treasury method, all options and warrants under the treasury method were now included in our share count, which added roughly I think it was about three million shares.

Right, but nothing outside unusual in that number?

Correct.

Okay, thank you very much.

Wade King, Sirius Advisors.

First question, please, thanks for the detail on the procedure growth numbers in the quarter. Can you refresh our memory, what were the comparable growth numbers for the March quarter and could you provide perspective on where you think the different procedure category growth rates to trend through the end of the year?

This is Howard Berger. I will answer the second part of that. Mark will comment on the first part of your question. We see continued growth in our core centers. There is a lot of reasons for people to be comfortable that growth in the advanced imaging, MR, CT, and PET/CT will continue along the levels that we have seen here for the first couple of quarters.

I think the focus to a large part also will be on our routine imaging, where we expect to see growth as we transition more and more of our centers into digital mammography, which is a very aggressive program that we are now undertaking and which should increase -- should have impact on both increasing volumes for mammograms, because we have greater throughput, as well as improved reimbursement. That is also part of a larger strategy to reach out and be more involved in breast disease management, which we believe will continue to attract more visits to our centers for doing routine mammography and other procedures.

So we are very comfortable that the growth rates that we have seen should continue, but it is not going to continue without effective marketing and continued commitment on our part for capital investment in some upgrading of equipment and expansion of existing centers.

Mark, you might want to comment, to the extent that you have it, about first quarter volumes.

Sure, Wade, our first quarter volumes were significantly greater than the first quarter of the prior year pro forma numbers. They were up about 3.6%. In MRIs we were up over 5.4%, CT we were up 1.5%, PET/CT we were up over 22%. And then the second part of your question was second quarter relative to first quarter this year and we were slightly up in the second quarter relative to our first quarter volumes.

And the comparable figure, Mark, please, on the routine imaging side, the growth rate in the first quarter?

I believe it was slightly over -- this is from memory -- slightly over 3% on the routine side.

Okay, thank you. Looking ahead, will you be providing, given if there is such an opportunity for growth on the digital mammo side in the East Coast, of course, in contrast to the West -- the California market, where you already have a strong presence there, will you be breaking out digital mammo growth according to, if you will, same-store sites as opposed to areas of, for example, in the east where you were not doing any digital mammo at all prior?

I think that is a great question and it is something I had not necessarily contemplated, but I think is something we certainly can do. The rollout of this, given the magnitude that we are undertaking, we will probably have this done in a very measured way. I think we can start looking at some of those metrics and talking about it perhaps not for the company as a whole, but on a case-by-case basis, either by region or maybe even drilling down to specific centers that we could look at the impact of when digital mammo has been fully implemented, both from the standpoint of volume and revenue. I believe will be doing that internally and how much of that we make public I think is open to question at this point.

Just clarify, once again, so relative to the first quarter overall procedure growth rate of 3.6% -- and that is pro forma taking into account the Radiologix acquisition -- you actually had an acceleration of procedures to 5.6% in the second quarter. Is that correct?

Could you repeat that? I am not sure --

Overall 5.6% growth rate on procedural line?

Over the second quarter of last year.

Right, so your growth rate in terms of overall procedure volume actually accelerated from close to 3.5 to over 5.5%. Is that correct?

Yes, it's relative to last year. That is correct.

Thank you, just second question please. Thanks for the detail on the GE refinancing structure. What do you estimate the cost savings to be for the Company if in fact the credit markets settle down and you do have a chance once again to pursue the refinancing plan that you had originally intended? What do you think the interest rate -- the interest cost savings would be for the Company on an annualized basis?

If I could answer that with high degree of accuracy, I would be in a different line of business. The credit markets are in such turmoil right now I think is a matter of time until they settle down. Hopefully, shorter rather than later. We had previously announced that when we launched the deal back in early July, we were looking at about a $5.5 million interest cost savings. I believe that they will settle down. I believe there is still an opportunity for us to do refinancing, whether that is in 60 to 90 days or six to nine months, I cannot be certain. But the other part of the issue here is what is going to happen with the credit markets fundamentally that may change the whole dynamics in the way money is being lent in the future, both in terms of covenants as well as what the cost of that money is, is highly uncertain at this point in time. So while I believe there is a savings that we should be able to achieve, I think all bets are off right now as to what the magnitude that might be.

Parenthetically, and again, in a somewhat perverse way, this may actually play into the companies benefit because I believe that the whole strain right now in the credit markets will ripple through all aspects of borrowing, including other smaller providers as well as maybe some other regional operators that may have difficulty not gaining access to capital, but the cost of capital may go up tremendously. So I believe our structure will allow us to take advantage of that dynamic, as well, and as unfortunate as it is that we came out just a little bit too late in our deal. In the long-run, I think it will continue to benefit the Company and help consolidation.

Howard, given your comment about MedQuest being leveraged seven times EBITDA, do you think that the average mom-and-pop groups in your markets that are opportunities for consolidation are leveraged to a comparable degree and that, once again, maybe squeezed by the current credit environment and give you opportunity?

I don't believe any of the smaller operators are. I believe MedQuest is a somewhat unique situation and that really drove them to that leverage. The smaller operators generally -- it is harder to gauge their real leverage because remember, these are physician radiology practices and to the extent that they have debt and that that debt is a little bit more burdensome, they just make less money off of their practice for their own take-home.

So I have not seen a lot of the deals that we're looking at unusually highly leveraged, so when people -- if we're looking at multiples of three to five times, we're looking at those deals, you can be sure that that is not less than what those companies are leveraged at because -- and except in I think some very unusual circumstances, nobody is going to pay us to take a center off their hands.

All right, thank you.

At this time, we have no additional questions. At this time, I would like to turn the call back over to Dr. Howard Berger for any additional or closing comments.

Thank you all again for participating. We look forward to the next earnings call and I think given, again, so many market dynamics that occurred, all of which we discussed here, I think the opportunities and enthusiasm which I know you share with us will hopefully have us looking at some similarly good results in the third quarter and a lot of reasons to have discussions about the future.

Thank you. That does conclude this conference. You may now disconnect your lines and thank you for participating.