RadNet Inc (RDNT) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to RadNet Inc. First Quarter 2008 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 at 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. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining us today to discuss RadNet's first quarter 2008 earnings results. On the call today from the Company are Dr. Howard Berger, Chairman and Chief Executive Officer of RadNet, and Mark Stolper, Executive Vice President and Chief Financial Officer.

Before we begin today, we'd 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, undue reliance should not be placed upon them.

For a 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 12-month period ended October 31st, 2006, Form 10-K-T for the 2-month transition period ended December 31st, 2006, Form 10-K for the 12-month period ended December 31st, 2007, and 10-Qs for the 3-month period ended March 31st, 2007, June 30th, 2007, and September 30th, 2007, filed with the SEC.

And with that, I'd 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 you with highlights from our first quarter 2008 results, reaffirm our financial guidance for full-year 2008, and discuss in more detail some of our recently announced initiatives and discuss their future contributions to our Company's growth. After our prepared remarks, we will open the call for your questions. I'd like to thank all of you for your interest in our Company and for dedicating a portion of your day to participate in our conference call this morning.

We are pleased with our progress in the first quarter of 2008 not only because the financial results reflect increasing volumes, revenue, and EBITDA from the prior year's quarter, but also because of our completion of a number of key operational accomplishments. I believe our operational accomplishments will set the stage for significant improvement in our financial performance during the rest of the 2008 fiscal year.

During this quarter among other things, we substantially completed the installation and transition of our Maryland operations to full digital imaging and particularly digital mammography. We completed the construction of our second interventional radiology and imaging center. This facility located in Rancho Mirage, California, opened for business during the first week in May. It complements our portfolio of multi-modality services in the Palm Springs/Palm Desert market, a market where we already have six other imaging centers and where we have substantial backlogs in all modalities. We replaced two centers that we acquired as part of Radiologix acquisition in Yonkers, New York, and Pleasanton, California. These centers opened for business in April and May and we are encouraged by the opportunities we are seeing in these markets. We completed the acquisition of the Papastavros Group of imaging centers in the middle of March. We also invested in Papastavros during a transition to digital mammography which will be completed prior to the end of this quarter. We acquired the Rolling Oaks Imaging Centers in Westlake/Thousand Oaks, California in February. We expanded two newly restructured joint ventures with Carroll County, and St. Joseph's hospitals in Maryland and we have installed five additional MR systems within our existing network of centers on the east coast.

We have a dynamic business and we believe the accomplishments which I have just listed have brought us to what I would like to call an inflection point. I believe these initiatives will create a catalyst for future growth, similar to that which was created through our acquisition of Radiologix in October of 2006. I use the term inflection point because I believe we have reached a moment in time when we are poised for significant financial growth and improvement.

Why do I say this? I say this for two reasons. First, we have yet to see the financial contributions from many of the endeavors I have just described. All of these acquisitions and initiatives should contribute materially to our second quarter and subsequent quarters. Second, during this quarter and even going back to the fourth quarter of last year, many of these investments were associated with not merely investments in capital equipment, but also took the form of additional expenses we incurred related to operating personnel, modifying field level operations, and protocols and reshaping the regional operations. We believe these additional expenses, although impacting our profitability and margins in the fourth quarter of last year and the first quarter of this year, are expenditures which will drive the company's performance in the coming months.

These expenses include expenses incurred in the training of our operations personnel and radiologist partners and through creating new operating protocols related to our digital mammography transition; additional legal and other accounting expenses and consulting expenses related to the completion of our acquisitions and business expansion; and expenses that we were unable to capitalize relating to our building the new interventional centers in Rancho Mirage and the replacement centers in Yonkers and Pleasanton, California.

Thus the inflection point is a point when our financial results should reflect both the contribution of our recent initiatives and the elimination of the associated upfront expenses of completing these initiatives.

In addition to absorbing some of these expenses associated with our growth initiatives, the first quarter results also reflected some seasonality we felt in January. Our January results were negatively impacted by both the undesirable timing of the New Year's holiday this year and several days of bad weather on the east coast. We have observed significant improvement in our volumes in February and March. The momentum of which has continued rather dramatically into the second quarter. Furthermore, we are seeing more opportunities than ever to continue to grow the Company. We are being contacted almost daily about new acquisition opportunities and continue to see many of the smaller "mom and pop" operators struggling to compete.

The DRA continues to have a dramatic impact on the health and landscape of our industry. We believe that we are well positioned for the remainder of 2008 to take advantage of this changing landscape.

At this time, I'd like to turn the call over to Mark Stolper, our Executive Vice President and Chief Financial Officer, to discuss some of the highlights of our first quarter performance. When he is finished, I will conclude our prepared remarks with some of my thoughts about what the remainder of 2008 may have in store for RadNet.

Thank you Howard and thank you all for participating in our first quarter conference call. I'm now going to briefly review our first 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 first quarter performance.

In my discussion, I will use the term adjusted EBITDA, which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations and adjusted for losses or gains on the disposal of equipment, debt extinguishments and non-cash equity compensation. Adjusted EBITDA includes equity and earnings in unconsolidated operations and subtracts minority interests in subsidiaries and is adjusted for non-cash, extraordinary and one-time events taking place during the period. With that said, I'd now like to review our first quarter 2008 results.

For the quarter ended March 31st, 2008, RadNet reported revenue of $114.7 million. Revenue increased 8.4% from $105.8 million from the same quarter in 2007. Adjusted EBITDA during the first quarter of 2008 was $22.1 million. Adjusted EBITDA increased 8.5% from $20.3 million from the same quarter in 2007.

Overall we performed 699,742 total procedures in the first quarter of 2008 as compared to 671,652 total procedures for the same period in 2007. This is an overall increase of 4.2%. MRI procedures increased 3.3%. CT procedures decreased 1.6%. PET/CT procedures increased 33.1%. And routine imaging procedures, which includes X-ray, ultrasound, mammography and all other exams, increased 4.8%.

On a same-center basis, which measures sites only if they were open for the full periods in both 2008 and 2007, MRI procedures increased 3.4%; CT procedures decreased 4.1%; PET/CT procedures increased 32.7%; and routine imaging procedures, this includes X-ray, ultrasound, mammography, and all other exams increased 2.4%.

Net loss for the first quarter of 2008 was $5.5 million or $0.15 per share compared to a net loss of $5.6 million or $0.16 per share reported for the same quarter of 2007. Affecting 2008 net income were certain non-cash and one-time, non-recurring items including the following; $951,000 of non-cash loss on the fair value of interest rate hedges related to the company's current credit facilities; $700,000 one-time expense related to a payment to settle a business dispute; $532,000 of non-cash, deferred financing expense related to the amortization of financing fees paid as part of our $405 million credit facilities drawn down in November of 2006 in connection with the Radiologix acquisition and the incremental term loans and revolving credit facility arranged in both August 2007 and February 2008; $454,000 of non-cash employee stock compensation expense related from the vesting of certain options and warrants; and approximately $400,000 bonus compensation paid to some of our physician groups as assistance in our transition to digital mammography.

With regards to some specific income statement accounts, interest expense for the first quarter of 2008 was approximately $13.6 million. This again was negatively impacted by the $532,000 of non-cash amortization of fees and $951,000 from the non-cash loss related to the mark-to-market of the interest rate hedge, both of which I touched upon earlier.

Interest expense was higher in general as compared to the same period last year due to increased debt predominantly from the two GE incremental term loans closed in August 2007 and February 2008, which we have substantially used to fund several recent acquisitions including Papastavros and InSight as well as fund our digital mammography program and certain center expansions.

For the first quarter of 2008, bad debt expense was $6.5 million or 5.6% of revenue. This is down from $7.6 million or 7.1% of revenue for the same quarter last year. Bad debt expense has decreased as a percentage of revenue partly as a result of the growing of our imaging center revenue. This growth deludes the contribution of the billings from hospital procedures interpreted by certain of our physician partners, for which we receive a management fee. Hospital settings, as we discussed in the last call, regularly have bad debt expense that far exceeds that of freestanding imaging centers.

With regards to our balance sheet, as of March 31st, 2008, we had $468.2 million of net debt which was net of approximately $8 million cash balance. At March 31st, 2008, we had a balance of $12.4 million drawn down on our $55 million revolving line of credit. Since December 31st, 2007, accounts receivables increased approximately $9.7 million resulting from increased business, acquisitions and the credentialing of new physician staffing. We had working capital of $25.2 million at March 31st, 2008, as compared to $23.2 million as of March 31st, 2007.

During the first quarter, we entered into capital leases of $12.1 million and repaid $4.4 million of notes and leases payable. We had cash, capital expenditures net of asset dispositions of $9.5 million during the first quarter of 2008.

We are reaffirming our 2008 guidance as follows. Revenue, our guidance range is for 2008 $470 million to $500 million. For adjusted EBITDA, our guidance is $100 million to $115 million. For capital expenditures, our guidance range is from $15 million to $20 million of maintenance capital expenditures plus growth capital expenditures of up to an additional $25 million. Our guidance range for cash, interest expense is $46 to $52 million for 2008.

Although we did not break out our guidance by quarter, as we said on the last conference call and also reflective of our first quarter 2008 revenue and EBITDA, we expect revenue and EBITDA will increase as the year progresses. This should be the result of the contributions from acquired operations and initiatives in progress that will come online throughout 2008.

With regards to our liquidity and capital resources, in February 2008, GE arranged for us an incremental $75 million as part of our existing credit facilities. The incremental facility consisted of an additional $35 million as part of our second lean term loan and $40 million of additional capacity under our existing revolving line of credit. The incremental facility was used to fund the acquisitions of Papastavros Imaging, a portion of our digital mammography initiative, our InSight acquisition and for working capital.

With the recent increased size of our credit facilities, which we completed in one of the most challenging credit markets in recent history, we believe that our capital structure provides us sufficient flexibility to effectively execute our growth plans in the near term. Additionally, the difficult credit market has significantly impacted the access to capital of our competitors especially the smaller operators. We believe this will result in further opportunities for us in the future.

During the quarter, we substantially improved our controls over two areas of accounting that resulted in our making non-cash accrual adjustments to our 2007 financial statements and caused us to file our 2007 10-K during the extension SEC filing period. With respect to insuring the collectability of accounts receivable, we formed a revenue committee which includes the participation of Dr. Berger, myself, our Director of Reimbursement Operations, and other financial personnel. The committee meets every month to review the collection statistics applied to monthly and year-to-date gross charges as well as review the collectability of outstanding accounts receivable balances as of the end of each month. The committee reviewed and analyzed collection run out statistics and compared cash collections to historical data and trends during the three months ended March 31st, 2008. We believe that the implementation of our revenue committee enhanced our controls and improved our ability to accurately value our accounts receivable balances.

With respect to the valuation of our incurred but not reported reserve associated with medical malpractice policy, we established the practice of engaging a third-party actuary to assist us in determining our IBNR as of the end of each quarter. We use this consultant in determining our IBNR reserve as of March 31st, 2008.

I'd like now to turn the call back to Dr. Berger, who will discuss his views with respect to 2008 and make some closing remarks.

Thank you Mark. We remain very optimistic and enthusiastic about RadNet's future. We have accomplished a great deal in a short period of time. Our focus in the second quarter will be on maximizing the benefits from our recent initiatives and investments. In an industry which requires further consolidation, RadNet will continue to evaluate other opportunities which are available to further our growth during the latter half of 2008.

During 2008, we will look to expand our breast oncology operation, Breastlink, to other markets outside of Orange County, California. We remain convinced that providing an efficient and comprehensive continuum of care to women with breast cancer ranging from diagnosis to treatment is a model that can and should be replicated in other markets. In the very brief time since we announced Breastlink, we have received an outpouring of support within the Orange County, California committee and neighboring areas. We think that Breastlink might be one of the most important initiatives we have within RadNet at this time.

Additionally, as the year progresses we will continue to look for ways to optimize our capital structure. We have noted significant improvements in the credit markets over recent weeks. We remain interested in ways in which we can lower our cost of capital, provide capital for expansion and increase our operating and financial flexibility. We continue to dialog with GE and other financial advisors regarding capital opportunities.

Operator, we are now ready for the question and answer portion of the call.

Thank you. [OPERATOR INSTRUCTIONS] And we'll take our first question from Brian Tanquilut with Jefferies & Company. Please go ahead.

Thank you. Good morning guys.

Morning Brian.

Howard, I guess the first question. It seems like you're very excited about all these initiatives that you did in Q1. If you can just walk us through maybe more or give us more details on Breastlink and what that will entail to roll that out and the investments required to do that? As well as the digital mammo now that it's completed in Maryland, if you can give us just sort of a description on what that entailed in terms of-- at an operational level?

Okay, well let me discuss the Breastlink portion of that first. The Breastlink initiative was primarily conceived of a need within women's healthcare and management of breast cancer whereby the process of both diagnosing and then ultimately defining the treatment for breast cancer can often be a very lengthy and exhausting process for women. What we have done with our first initiative of this in Orange County is to bring together the three primary professionals that are responsible for bringing this disease under proper diagnosis and treatment, namely imaging, surgical and oncologic professional services. By doing this all under one roof, literally and figuratively, we believe we can dramatically shorten the amount of time that from screening mammography to the determination of the actual treatment condensing that into perhaps as little as a one-week period. This will both help from a mental as well as a treatment standpoint to provide the best possible outcome.

But the primary driver of this is the ability to incorporate all of this in a continuum of services that starts with imaging and then relies on imaging to best diagnosis and determine the most appropriate treatment. In the last several years, it has been rather obvious to people in the treatment of breast cancer that imaging is essential to that process. The development of sophisticated breast MRI procedures, PET/CT scanning, biopsy capabilities under ultrasound, MRI, and stereotactic guidance, the ability to do digital mammography itself, which has better resolution and detail, all have helped to provide earlier and earlier diagnosis. It should also not be overlooked that there now are specific gene typings that have been identified that put certain women with breast cancer or who will ultimately get breast cancer at very high risk. And the effectiveness of being able to diagnosis this early on through breast MRI scanning and PET/CT scanning is critical to the best possible outcome.

So, in our primary center in Orange County, this was driven because of the relationship with the individuals in the surgical and the oncology areas who have now become part of our professional group, all both desirous and willing to work together to create this effective outcome. Our goal is to try to leverage this same model primarily at those centers where we have extensive mammography capabilities already. There is an additional five regions in Southern California plus at least two or three regions that we've already identified on the east coast where we think that this model could be very effective and necessary for continuing the benefits primarily to the breast cancer patients.

So once we've incorporated this particular first initiative in Orange County in a way that gives us not only the ability to do this under one roof but effectively transition us into the management of oncology services itself which is something new to the Company but which we feel we can and are rapidly getting our hands around in dealing with issues of chemotherapy and other forms of diagnosis and treatment. We will be able to roll this out and we have some early plans for this which will primarily focus initially in our Palm Springs market and in the Ventura and San Fernando markets where we have very extensive resources for doing mammography, MRI, and the full spectrum of services here.

Going back to digital mammography, the first quarter and end of the fourth quarter of 2007 were challenging for the company because of the rapidity and expediency with which we felt the need to implement digital mammography primarily on the east coast. That initiative wound up having us put into operation almost 40 digital mammography systems. As I've mentioned before on previous calls, the reimbursement increase for this is approximately 60% of what we would get paid for analog mammography plus it gives us additional throughput and volume resources, which we are beginning to already tap into because of backlogs that we have in many of our markets and which should also increase revenue disproportionate to what the growth in mammography has been prior to the implementation of digital mammography.

So the first quarter in particular was challenging given the fact that when you introduce digital mammography, you have to go ahead and train all of the personnel, not only the technologists but the physicians to learn the new protocols and methods in which you now go from film screen handling of the images to the monitor and computer handling of images. This generally results in a slowdown of our business because of the need to make it very effective in the educational process, but which once it's finished, then allows us to accelerate our volumes both to normal levels as well as the increasing levels that we've seen.

In the Maryland market, where we did or will do I should say this year about 250,000 mammograms, the response from the community, our referring physicians and our radiologists has been overwhelmingly positive. The market is very rapidly adopting digital mammography as a state-of-the-art requirement for people that are going to continue to involve themselves in this part of their radiology and imaging practices. And perhaps most importantly, it is a way for us to access the one modality where we have less competition and the greatest demand.

So the overall process of going to digital mammography and then ultimately ratcheting up the leverage that we get with that to get into breast cancer disease management not only as we've done it in Orange County but potentially in other relationships that we might want to pursue with some of our current and future hospital partners represents what we believe to be a very dynamic opportunity for enhancing revenues growth in RadNet for the long-term future.

Thanks for that great answer Howard. Mark, just a question. There's been some concern about Medi-Cal and obviously they're looking to cut physician payment rates by about 10%. What's your exposure there?

Sure, Brian. Medi-Cal, which is for everyone on the call, the California portion of our Medicaid book of business, is roughly about 1% of the overall net revenue of the company. The early discussions I've heard about the cut is somewhere in the 10% reimbursement range Brian. Is that consistent with what you've heard?

That's about right, yes.

Yes, so the cut for us in exposure that we have to Medi-Cal and to this cut is fairly nominal for the company to absorb.

And then the cut that they're proposing that's only going to be on the professional reimbursement rate?

I'm not entirely clear on that Brian.

Okay.

I mean if it were-- if that were true, then the cut would be about 20% of what I just said, meaning that the physician component on average relative to the overall reimbursement, the physician component as opposed to the technical book component averages roughly 20%.

Okay and then, we've had-- we've heard a lot of chatter about the RBM's being active in Rochester. If you can just give us some comment on that one?

Yes, back in October of 2007, the largest carrier in the Rochester market or insurer I should say Excellus, which is the Blue Cross provider I believe, maybe Blue Cross and Blue Shield, up in that market engaged CareCore in a pilot project to implement radiology utilization management. That did have an impact going into late 2007's fourth quarter and the beginning of the first quarter in terms of reduction of our MR and CT volumes. We being the largest outpatient provider in the Rochester market along with other hospital organizations as well as the physician community expressed our displeasure and concern about the quality of care that was being impacted by the pilot project initiated with CareCore. And at this point, I'm happy to report that we believe that the project has essentially been curtailed at this point in time and may be eliminated altogether. I think this is an example where in a very-- in a small but significant market to us the providers of all levels, not only imaging but physicians, recognized that there was not the need for this kind of introduction of oversight and management.

One of the things that distinguishes Rochester perhaps from some of the other markets is that we don't believe that the overutilization that is seen in other markets is part of the Rochester landscape because there is not the physician self referral issue. Rochester somewhat uniquely has regulations in place that prevent individual physicians or other imaging providers from putting equipment in without getting approval of the various local agencies there to insure reimbursement. Therefore, we don't see in the Rochester market very much in the way of imaging equipment into private physician imaging offices which we believe has been the primary driver of the overutilization that is now generally recognized in our community or in our industry I should say over the past perhaps five to ten years.

So this had more of an unintended impact in the quality and the expediency with which the physicians in that community and the providers principally us and a couple of the larger hospitals were capable of delivering to the community. And there was a substantial pushback which we believe has been successfully challenged at this point in time.

Last question Howard. What are we seeing in terms of the equipment market? I know GE has talked about how weak that business has been for them. What are you seeing out there right now?

Well what we see for ourselves is diametrically opposite from what we hear and see elsewhere. To the extent that you could get information from the major equipment vendors about what their sales are into the outpatient, non-hospital affiliated imaging providers, it would not at all surprise us to see that the drop off in purchasing is well beyond 50% from the same time last year. It is clear as we survey the landscape and field the numerous requests that we get about acquisition opportunities that the outpatient market has substantially pulled back in their purchasing and which I believe represents further opportunity for consolidation in this market.

We have been aggressive in this first quarter with our digital mammography initiative as well as some new MRI scanners and PET/CT scanners that have gone into place. So I don't think anybody can look at our activity and feel that it is a benchmark for the rest of the industry. The rest of the industry I think is in even greater chaos and turmoil now than it was earlier this year and at the end of last year. And I think GE's results as well as results that have been reported from Siemens and other manufacturers amplify this. And I don't see this changing dramatically here for at least another two quarters or maybe even two to three years.

So does it say that prices for these machines have come down or that there's a secondary market out there?

I think there's a very aggressive secondary market, which we are taking advantage of. And I think that the pricing in general for what-- for people who are in the market to purchase equipment has substantially softened and we are taking advantage of this.

Also the larger we get in RadNet, the better that we can move assets around within our organization and maximize the useful life of this equipment. So we're not always buying new equipment or any equipment at all. Sometimes it's just moving equipment from some centers that we look to upgrade and then utilizing that equipment in other operations. We will talk perhaps more about that after our second quarter results with initiatives for example that are currently underway in our new Delaware market.

Okay, thank you.

Thank you. We'll take our next question from Rob Mains with Morgan Keegan. Please go ahead.

Good morning. Mark thanks for the same-store numbers. You have the overall same-store procedure growth?

Yes. Overall same-store procedures, which includes both the advanced imaging and the routine imaging, was 2.4%.

Okay. Any particular reason for this slowdown in CT?

Rob, I'll take that question. I think the slowdown in CT was the result of perhaps two or three events. First off, many of you may have seen some of the information that had come out in a couple of articles in the medical literature about X-ray dose exposure from CT scanning. I think that that did have a bit of a chilling effect on a number of refers and patients. While I believe that article is overstating the issue, nonetheless I believe that there were a number of people who began to question the need for CT scanning as extensively as it's being done. We of course don't feel that way but we did feel I think some initial impact from that number one. Number two, at least in the Rochester market where we do a lot of CT scanning, the CareCore impact in the end of the fourth quarter and into the first quarter did have some impact in that market, which is a very high volume one for us. And thirdly I think just in general the beginning of the year given that CT scanning is a little bit more used for acute medical problems versus MRI scanning which tends to be used more as an elective procedure for less acute, tends to be little bit less at the beginning of the year given issues surrounding deductibles and just people perhaps putting off some of that a little longer than they have. I expect that volumes in the second quarter will be more consistent with the growth rates that we're seeing with the other modalities.

Got you. And then also Mark if I look at the same-store numbers, kind of similar to the overall even though you added some equipment, are like Yonkers and Pleasanton, are those included in same stores?

We did keep Yonkers and Pleasanton in the same-store results, which essentially hurts us a little bit because they were fully obviously operational in Q1 of 2007 and because of the replacement of those centers in 2008, the contribution of those centers in the Q1 2008 were much less.

Could you describe the replacement? Bigger, smaller? Better equipment? What sort of the rationale behind them and what you've accomplished?

Yes, I'll take that one Rob. Both of these centers were centers that had long suffered from under investing and that in order to keep competitive in those markets really needed to have substantial upgrades. It was determined by the Company that in both instances we were unable to do the upgrading of those centers in their current facilities. So we aggressively looked for new locations in those same markets that I'm talking about, relatively close distances, a mile or two away, where we could begin the process of transitioning not just the upgrade of the equipment but essentially building up brand new centers.

So in both cases, the centers were probably doubled in size and virtually every piece of equipment was replaced to accommodate what we anticipate would be substantially greater volumes that we are likely to be the beneficiaries of both because we have newer equipment and better facilities. And that there was business we believe not necessarily being directed to both of those centers due to the equipment as well as the facilities themselves being less attractive. So we would expect in the subsequent quarters here to benefit significantly in volume in both of these locations.

Got you. When did the new locations open please?

The new location in Yonkers opened up at the end of April, the last week of April. The new location in Pleasanton is opening up I believe very close to the end of May here.

Okay. And then just a couple of others. First of all, digital mammography did I hear you right that you get a 60% higher payment?

Yes, digital mammography using film screen averages about $80 for reimbursement right now. That jumps up to about $130 when you implement digital mammography.

Okay. Then the last question, just generally, you touched on the situation in Rochester, could you describe sort of where managed care and private insurance pricing is in general for you?

Yes, we're very comfortable with our pricing. We have not seen any significant efforts on the part of payers to lower reimbursement. It's really I think more of an effort like we saw in Rochester to control utilization. And several of them, which have made public announcements that they've attempted to implement some management for radiology utilization will probably be more of their focus I believe rather than that associated with trying to lower reimbursement.

That being said, again, I would like to remind everybody that part of the RadNet strategy of being multi-modality and in trying to be in geographic markets where we have dense assets should be providing us opportunities to meet with our larger payers and have a better voice in determining what the reimbursement will be going into the future. So while we are not seeing any pressure today of any consequence on the downside on reimbursement, we hope that that trend may actually turn positive for us, which it already has begun in a couple smaller situations in other markets that where we have that kind of density and negotiating leverage.

So in aggregate you're saying pricing is kind of flattish right now?

Yes, yes.

Great. That's all I needed. Thanks.

Okay.

Thank you. And we'll take our next question from Darren Lehrich with Deutsche Bank. Please go ahead.

Thanks. Good morning. I just wanted to follow up on the last question regarding pricing. Can you Mark give us the same-store revenue? I think you gave us the scanned numbers on a same-store basis but do you have anything to say about same-store revenue?

Yes Darren. Because pricing was essentially flat year over year the same-store sales revenue is appreciably the same as the same-store sales volumes.

Okay, so about 2.5%?

Correct.

Okay. And can you talk a little bit about the Baltimore market? I know you've announced a restructuring of one of the joint ventures there. And just remind us in the second quarter and going forward what kind of impact that may have to consolidate revenue? I just to make sure we're thinking about that situation in the context of the revenue you'll be reporting on a consolidated basis.

Darren, I'll take that one. Both-- two of the three largest joint ventures that we have in the Maryland market, one was St. Joseph's Hospital in Towson and Carroll County Hospital in Carroll County were restructured in the December period of 2007. In the case of Carroll County, we actually owned 25% of the joint venture and we bought up our interest of 40%. That center was already unconsolidated in the way we've reported our results. So we-- in the EBITDA and in the income section, there is no contribution from a revenue standpoint for that center. The opposite is true really of St. Joseph's in Towson where we owned 75% of that joint venture and the hospital bought up to a 51% ownership. And we now own 49%. However, through that process we increased our management contract-- actually we increased our management contract in both ventures. In the case of St. Joseph, it went from a consolidated, so our revenues in 2007 included the revenues from the joint venture. And then we showed the minority interest participation to an unconsolidated. So prior to 2008, we were generating about $5 million of revenue, which is no longer there. So that would be about $1.25 million roughly speaking.

In both joint ventures though while we either increased or lowered our percentage and we're now a minority partner in both, we increased our management contract substantially-- generally from about 5% in one case to close to 11% all in and in the other from about 9% to 12. But more importantly, in the case of St. Joseph's, we dramatically expanded the operations to include not only MRI and CT, which is what existed prior to 2008 but now the hospital's PET/CT scanning, which had just gotten into expansion of their routine imaging and particularly digital mammography which has almost doubled the amount of mammography we're now doing there as well as having ultrasound and all routine imaging as part of the joint venture.

So what will be happening in that case while we have eliminated $5 million approximately of revenue prior to it moving to an unconsolidated, the revenue from that center is now dramatically increasing and we expect the results from both of these joint ventures to have significant impacts in the 2008 results, which we began to see in the first quarter and which should accelerate dramatically through the remainder of the year.

Okay that's helpful, refreshing me there. And then just stepping back and thinking about just management fees overall, Mark can you just give us an idea of what they were in the first quarter here? I know there's other elements to that besides management fees from ventures like this, but just help us understand what that management fee stream is right now on a quarterly basis?

On a quarterly basis, if we eliminate the management fees from the joint venture Darren, is that what you're talking about?

Yes I mean including those however you want to discuss it, but I know you've got the RadNet Management subsidiary as well. But I just want to get a sense for what those fees are?

Yes the management fees for the Company besides those that come from management fee related to the joint ventures generally run about $1.5 million a quarter. That's we call our corporate revenue outside of the joint venture management fee. Of that, about half of it comes from RadNet Managed Imaging Services, approximately $750,000 a quarter for the oversight of the currently the old Nydic Imaging Centers as well as some other smaller opportunities that we have.

Okay that's great. And then Howard I guess we heard you comment here about the expectation that you'd return to some acquisitions in the second half. I guess just in the interim can you give us some commentary about how you are thinking about maybe waiting on some deals that might look attractive at this point while you continue to absorb the things that you've acquired over the last 12 months? And that probably is a little bit of a balancing act, but give us a sense for how we ought to be thinking about you basically delaying some acquisitions perhaps as you absorb some of these things?

Yes I don't know if we're delaying the acquisitions that we are evaluating as much as just trying to determine appropriate timing and pricing for them. I believe that once we get past the second quarter here, some of the numerous-- there's probably at least a dozen different transactions that are in various stages of valuation here. And just given the timing that we need to complete our due diligence, to try to negotiate these deals and ultimately absorb them pushes them into the third and fourth quarter of this year. But all of these are opportunities that we're looking at in our current markets. And I believe consistent with information that I've talked about before in terms of acquisition multiples of three to five are still very much consistent with what we see those opportunities to be. If anything, we see perhaps those multiples in many of these cases being driven down more towards the lower end of that range rather the higher. But we will continue to be diligent and look for these opportunistic ways of growing the company's revenue and also and perhaps more importantly, helping to solidify our presence in these markets to enable us to better push back on reimbursement opportunities.

Okay great. And just last thing for me here, Mark I know you alluded to this in your prepared remarks but just in terms of thinking about a more optimal capital structure, can you help us at least just frame what kinds of things you're looking at, at the moment?

Sure. I mean I think everything is on the table at this point. I mean we're having dialogue with both GE as well as other advisors as to opportunities to potentially lower the cost of capital on the credit side. And that could be anything from similar types of structures that we have today, meaning in the private credit markets to looking at public debt such as high-yield bonds which that market has come back very favorably recently. So I think we're looking at all alternatives at this point. And we're going to be evaluating them over the next couple of quarters and you probably will hear more from us in the coming months.

Great. Thanks guys.

Thank you.

And again we'll take our next question from Gary Goldstein with Mithra Research. Please go ahead.

First of all guys congratulations on the quarter. It was a good quarter. We've been getting some questions and I wanted to I guess continue just a little bit on the breast disease management initiative. When you guys find a center, what are you guys looking at as far as replication goes? How easily will you be able to replicate this? And are you guys pursuing further acquisitions in this area?

I'll answer that question Gary. The way that you replicate this is to really base the opportunity around the imaging portion of this. I can't emphasize that enough. When you look at surgeons that specialize in breast cancer and when you look at oncologists that specialize in this, they are both very challenged today because of reimbursement issues, particularly on the oncology side which has had a dramatic effect on their practices due to the changes in reimbursement on chemotherapy.

As a result, many of these practitioners are having challenges trying to manage their practices and optimize their income in ways that they never had the need to before. But what really drives the process is for us to look at areas where we either currently have substantial imaging resources particularly with mammography and then complement those either with the existing practitioners that-- those practices that we've already absorbed or adding to those practices by keeping this under one roof if you will or one professional group. So we first would look at where do we have the substantial imaging resources and volumes that will continue to drive the detection and treatment of the diagnosis and treatment of breast cancer rather than look at it in how do we-- do we have a oncology practice that we'd like to acquire but where we don't have the imaging resources to benefit from incorporating that practice there.

So to the extent that if you went to our website and you saw those centers where we more aggressively market mammography and women's health services, of which there's, as I've mentioned before about a half a dozen just in Southern California, those are the places where we would look to try to incorporate the other professional activities underneath the banner of Breastlink that we have now done for this first project.

So I really want to emphasize that the driver for us in this is not to get into practice management for cancer specialists and practice management for surgeons, it's to really bring their practices into the realm of our very-- of our larger and more substantial imaging centers and those that are driven very much by mammography into this comprehensive model. So I think-- I'm glad you've asked the question because I think it's important for people to recognize that imaging is like it is in so many other of the specialties out there, whether you talk about orthopedics, neurology, cardiology, even kidney are very much becoming more and more dependent on imaging. It just so happens that breast cancer is now very paramount with its need to have imaging closely related to it and where we believe we can leverage up at those centers by incorporating these other specialties into our existing operations.

Right, so taking a look from 20,000 feet, this represents a gigantic opportunity. Am I wrong in that?

Well I don't think you're wrong in that. The extent to which we go into it-- I will give you some statistics which are fairly well publicized in the oncology literature.

Would appreciate it.

But approximately 1 out of every 8 women will develop breast cancer. And approximately 5 out of every 100 screening mammograms that we do will ultimately get detected to have breast cancer. Well if for example I were to take Maryland where we will do 250,000 mammograms, that means that if you multiply 5 times 250, that operation currently will detect somewhere between 1,200 and maybe 1,500 breast cancers by itself. Putting it in perspective, we believe that we do in Maryland approximately a third to maybe as much as 40% of all the mammography in the state of Maryland. So by being able to perhaps carry this initiative into a more comprehensive approach to breast cancer, you can begin to see the opportunities that this represents for us in somewhat of a unique way. While oncology in general does have imaging as a critical part of it, it's nowhere near the level that is now required when you deal with breast cancer.

And I appreciate that. And approximately how many other centers are being upgraded just if we could stick with mammography for a second, how many other centers are being upgraded to digital mammography? And as a second part, did I understand correctly that you guys expect to have all the Papastavros centers upgraded by the end of June?

Yes. The answer to the second question, we already I believe have half of the systems already transitioned from analog to digital mammography in the four major Papastavros centers. The other two will be done before the end of this quarter. And just in general Gary to answer your question, we expect that 100% of all the mammography done in RadNet centers will be digital by the end of this year. We're currently probably at 75 or 80% of that number now.

Okay. And I'm sorry did I miss the Cap Ex for the Q? Did I miss that?

Yes and let me just get you the numbers here.

And thanks Howard.

While Mark's looking for that Gary, let me amplify on one perspective here. In this particular initiative in Orange County, the group on the oncology side whose practice we absorbed is seeing 600 to 700 cancers-- new breast cancers a year. All of those patients will ultimately get their imaging and follow-up examinations within the RadNet network as we begin to transition their practice. We were seeing very little if any of that prior to the acquisition. More importantly the surgeon whose practice we brought underneath our professional umbrella sees approximately 200 to 250 new breast cancers a year. And the Breastlink practice was not seeing any of those cancers from that surgeon. So we now have a comprehensive approach to this where all of the imaging, all the new breast cancers and all the required surgical procedures will be done for approximately 1,000 new cancers that will be detected over the next 12 months from the integration of these three practices. And--

So this certainly could be huge?

Well we're very excited about this to say the least. And I think I can't emphasize enough how important this initiative is to develop other revenue lines and to incorporate I think opportunities within imaging that didn't exist prior to us getting this initiative off the ground. And I think you'll be hearing a lot more about this both with the current initiative as well as other things that we're doing to expand this opportunity through the upcoming quarters.

That's great. And what kind of backlogs were you guys experiencing in Maryland? And has it been similar in Delaware, mammography I'm talking about?

Yes, in Maryland it was more prominent than it is in Delaware but it wasn't unusual for us to have centers with two and three-month backlogs. Not all of them so I don't want that to be necessarily taken beyond but right now we're able to access those backlogs and that's one of the reasons why part of our model at least in certain of the centers in Maryland we believe we can triple our-- what had been our standard growth in mammography. Mammography had been growing at about 5% annually in the Maryland market. We believe in many of our centers, not necessarily all of them, but in many of those centers that growth may be as much as 15% this year.

Gary, to answer your question on Cap Ex during the quarter, our net cash Cap Ex for the quarter was $9.5 million. We also entered into capital leases, meaning financed Cap Ex of $12.1 million during the quarter, a substantial portion of which were the-- of the cash Cap Ex were for the Hologic digital mammography machines.

Appreciate it very much. Great quarter guys.

Thank you.

Thank you. And we'll take our final question from Gary Lieberman with Stanford Group. Please go ahead.

Thank you. This is [Ryan Halstead] in for Gary Lieberman. Just one question. I was hoping you could maybe give some detail on your operating expenses? If I exclude the employee stock compensation, looks like it increased year over year as a percent of revenue? Any detail or any commentary on that would be helpful? Thanks.

Sure. It did increase and when we file our Q later today you'll see a table in there that breaks out the portion of the increases. The majority of the increase in the operating expenses is a result of a larger base of business, meaning the salaries of employees related to the additional centers that we acquired. G&A did go up a little bit as we continue to build our infrastructure to manage a greater portion-- a larger book of business. However I don't see that continuing to increase substantially as we add additional revenue to the company. So you'll get a pretty detailed table in the Q today.

Great. Thanks.

Thank you. That concludes our question and answer session. At this time, I'd like to turn the call back over to Dr. Howard Berger for any additional or closing remarks. Please go ahead.

Again, thank you all for spending a portion of your day listening to the RadNet earnings call. I hope we've been able to impart information about not only this quarter but more importantly the future quarters that are ahead of us. As I said before, we remain very enthusiastic about the company's opportunity and we eagerly look forward to the next earnings call we'll have which we'll be able to talk about the second quarter results and give you perhaps even greater insight into all the investments and initiatives which the company has undertaken here over the last six months.

Thank you.

Thank you. That concludes today's conference. We appreciate your participation. You may now disconnect.