SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004.

For the transition period from _______________ to __________________.

Commission file number: 000-50802

RADIATION THERAPY SERVICES, INC.

(239) 931-7275
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

     As of August 2, 2004, we had outstanding 22,448,314 shares of Common Stock, par value $0.0001 per share.

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Table of Contents

RADIATION THERAPY SERVICES, INC.
Form 10-Q

INDEX

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PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

RADIATION THERAPY SERVICES, INC.
AND SUBSIDIARIES

See accompanying notes.

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RADIATION THERAPY SERVICES, INC.
AND SUBSIDIARIES

See accompanying notes.

4

RADIATION THERAPY SERVICES, INC.
AND SUBSIDIARIES

See accompanying notes.

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RADIATION THERAPY SERVICES, INC.
AND SUBSIDIARIES

1. ORGANIZATION

     Radiation Therapy Services, Inc. and its consolidated subsidiaries (the Company) develops and operates radiation therapy centers that provide radiation treatment to cancer patients in Alabama, Delaware, Florida, Kentucky, Maryland, Nevada, New York, and North Carolina.

2. BASIS OF PRESENTATION

     The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles, for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included. All such adjustments are considered to be of a normal recurring nature. Quarterly results of operations are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

     In December 2003, the Financial Accounting Standards Board revised Interpretation No. 46R (FIN No. 46R), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which requires that companies consolidate variable interest entities if they are the primary beneficiaries of the activities of those entities. Companies are generally required to apply FIN No. 46R immediately for all variable interest entities created after January 31, 2003 and by the end of the first quarter 2004 for all other entities for which it is the primary beneficiary. We provide administrative services for a fee to certain radiation oncology practices in certain states with laws that prohibit business corporations from providing, or holding themselves out as providers of, medical care. Fees are based upon the estimated costs of the services performed plus a profit margin. We operated in these states providing administrative services for a fee to radiation oncology practices pursuant to long-term management agreements ranging from 20 to 25 years. Pursuant to the administrative services agreements, the radiation oncology practices are each solely responsible for all aspects of the practice of medicine and patient care as defined by their respective state. We provide administrative and other support services.

     During 2003, we determined that these radiation oncology practices are variable interest entities as defined by FIN No. 46R, and that we have a variable interest in each of these practices through our administrative services agreements. We also determined that through our variable interests in these practices, we would absorb a majority of the net losses, if any occur.

     Based on these determinations, we included the radiation oncology practices in our interim consolidated financial statements as of and for the periods ended June 30, 2004 and restated prior periods to conform to the current period presentation. The result of the consolidation is an increase in revenue and a corresponding increase in expenses and minority interest, thereby resulting in no impact on net income, earnings per share or cash flows. All significant intercompany accounts and transactions within the Company have been eliminated.

     These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2003 and the notes thereto contained in our prospectus filed with the SEC on June 21, 2004.

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     For the three months and six months ended June 30, 2004, we had a change in estimate of approximately $1.2 million and $2.1 million, respectively, related to a reimbursement policy change by a significant commercial payor to reimburse for services not previously covered, the impact was an increase to our net patient service revenue for the respective periods.

     The cost of revenues for each of the periods presented for the three months ended June 30, 2004 and 2003 are approximately $23.0 million and $20.3 million, respectively. The cost of revenues for the six months ended June 30, 2004 and 2003 are approximately $45.4 million and $38.9 million, respectively.

3. PRO FORMA STATEMENTS OF INCOME DATA

     Effective June 15, 2004, the Company elected, by the consent of the shareholders, to revoke its status as an S corporation and become subject to taxation as a C corporation. The Company is now subject to federal and state income taxes at prevailing corporate rates. The impact of this change resulted in an income tax expense of approximately $17.6 million during the quarter. Pro forma net income and pro forma net income per share are based on the assumption that the Company was a C corporation at the beginning of each period presented, and provides for income taxes utilizing an effective rate of 40.0%.

4. PUBLIC OFFERING OF COMMON STOCK AND RECAPITALIZATION

     On June 23, 2004, the Company successfully completed an initial public offering of 5.5 million shares of common stock at a price of $13.00 per share. Of the shares offered, 4.0 million shares were sold by the Company and 1.5 million were offered by selling shareholders. In addition, the underwriters for the Company exercised their over-allotment option by purchasing an additional 825,000 shares at $13.00 per share from selling shareholders. Of the net proceeds to the Company of approximately $47.1 million, approximately $44.1 million was used to repay outstanding indebtedness under our senior secured credit facility, approximately $2.8 million was used to repay outstanding indebtedness to certain of our directors, officers and related parties and the remaining estimated balance of $0.2 million was used to pay pre-offering costs.

     On May 28, 2004 the Board of Directors declared a 1.83 for 1 forward common stock split for shareholders of record on that date. In addition, the Board of Directors approved an increase in the Company’s common stock to 75,000,000 shares, $0.0001 par value, and 10,000,000 shares of preferred stock, $0.0001 par value. All stock related data in the condensed consolidated financial statements reflect the stock split for all periods presented.

5. Stock Based Compensation

     We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and related interpretation. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure requires pro forma disclosure of net income and earnings per share for the effect of compensation had the fair value of accounting for stock options been adopted. For purposes of this disclosure, the fair value of each option grant has been calculated using the Black-Scholes valuation model.

     We follow SFAS 123 and EITF Issue No. 96-18, Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods and Services, for our stock option grants to other individuals. As such, we measure compensation expense as the services vest and recognize the expense ratably over the service period. Prior to vesting, we recognize expense using the fair value of the option at the end of the reporting period. Additional expense due to increases in the value of our options prior to the vesting date will be recognized in the period of the option value increase.

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For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over their vesting periods. Our pro forma information is as follows (in thousands, except per share data):

6. EARNINGS PER SHARE

     Diluted earnings per common and common share equivalents have been computed by dividing net income by the weighted average common and common share equivalents outstanding during the six-month period. The weighted average common and common equivalent shares outstanding have been adjusted to include the number of shares that would have been outstanding if vested “in the money” stock options had been exercised, at the average market price for the period, with the proceeds being used to buy back shares (i.e., the treasury stock method). For the second quarter earnings per common and common share equivalents, the common share equivalents were anti-dilutive and therefore have been excluded in the calculation. Basic earnings per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. The following is a reconciliation of the denominator of basic and diluted earnings per share (EPS) computations shown on the face of the accompanying interim consolidated financial statements (in thousands, except per share data):

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7. STOCK OPTION PLAN AND DEFERRED COMPENSATION

     In April 2004, our Board of Directors adopted the 2004 Stock Incentive Plan under which the Company has authorized the issuance of equity-based awards for up to 2,000,000 shares of common stock to provide additional incentive to employees, officers, directors and consultants. In addition to the shares reserved for issuance under our 2004 stock incentive plan, such plan also includes (i) 1,107,862 shares that were reserved but unissued under our 1997 stock option plan (“the 1997 Plan”) that was terminated contemporaneously with the consummation of our initial public offering, (ii) shares subject to grants under the 1997 Plan that may again become available as a result of the termination of options or the repurchase of shares issued under the 1997 Plan, and (iii) annual increases in the number of shares available for issuance under the 2004 stock incentive plan on the first day of each fiscal year beginning with our fiscal year beginning in 2005 and ending after our fiscal year beginning in 2014, equal to the lesser of:

•

5% of the outstanding shares of common stock on the first day of our fiscal year;

•

1,000,000 shares; or

•

an amount our board may determine.

     Pursuant to the plan, the Company can grant either incentive or non-qualified stock options. Options to purchase common stock under the 2004 Option Plan have been granted to Company employees at the fair market value of the underlying shares on the date of grant.

     Options generally are granted at fair market value of the common stock at the date of grant, are exercisable in installments beginning one year from the date of grant, vest on average over three to five years and expire ten years after the date of grant.

     In June 2004, options were granted to consultants to provide services for healthcare reimbursement efforts and to an independent contractor to provide advice with respect to business opportunities in the state of New York. As a result of this transaction, we were required to record consulting fee expense of approximately $19,000. In future periods, we will measure consulting fee expense as the services vest and recognize the expense ratably over the service period. Prior to vesting, we recognize expense using the fair value of the option at the end of the reporting period. Additional expense due to increases in the value of our options prior to the vesting date will be recognized in the period of the option value increase.

     At June 30, 2004, we had approximately 1,360,000 options available for grant and approximately 2,560,000 options outstanding.

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8. COMPREHENSIVE INCOME

     Comprehensive income consists of two components, net income and other comprehensive income / loss. Other comprehensive income / loss refers to revenue, expenses, gains and losses that under accounting principles generally accepted in the United States are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income / loss is composed of unrealized gains / losses on an interest rate swap agreement accounted for as a cash flow hedge. The impact of the unrealized gain / loss was a decrease to shareholders’ equity on a cumulative basis by $37,000 as of December 31, 2003 and an increase to shareholders’ equity of $36,000 for the six months ended June 30, 2004.

9. ACQUISITIONS

     On June 23, 2004 we acquired the assets of Devoto Construction, Inc., which was owned by certain of our directors and officers for approximately $3,528,000 with the issuance of 271,385 shares of our common stock. Devoto Construction, Inc. performs remodeling and real property improvements at our medical facilities and specializes in the construction of radiation medical facilities. The purchase of Devoto Construction, Inc. was a strategic fit for us as we continue to expand our operations into new markets. The purchase price was allocated to net tangible assets of $4,000, an intangible asset of $35,000 amortized over 7 years and goodwill of $3,489,000. The results of operations have been included in the financial statements since the date of acquisition.

10. INCOME TAXES

     Effective June 15, 2004, the Company elected, by the consent of the shareholders, to revoke its status as an S corporation and become subject to taxation as a C corporation. Under the S corporation provisions of the Internal Revenue Code, the individual shareholders included their pro rata portion of the Company’s taxable income in their personal income tax returns. Accordingly, through June 14, 2004, the Company was not subject to federal and certain state corporate income taxes. The Company is now subject to federal and state income taxes at prevailing corporate rates. The impact of this change resulted in an income tax expense of approximately $17.6 million for the three months and six months ended June 30, 2004.

     The Company provides for income taxes using the liability method in accordance with Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. Deferred income taxes arise from the temporary differences in the recognition of income and expenses for tax purposes. Deferred tax assets and liabilities are comprised of the following at June 30, 2004:

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     Significant components of the income tax provision for the three month and six month periods ended June 30, 2004 are as follows:

11. RECENT ACCOUNTING PRONOUNCEMENTS

     In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments and hedging activities. SFAS No. 149 was effective for contracts entered into or modified after June 30, 2003. The implementation of SFAS No. 149 had no impact on our consolidated financial statements for 2003 and we do not expect it to have a material effect on our future results of operations or financial position.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity-type instruments, must now be accounted for as liabilities. The financial instruments effected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. The provisions of SFAS No. 150 are applicable to our financial statements beginning in 2005. The implementation of SFAS No. 150 is not expected to have a material effect on our future results of operations or financial position.

     In December 2003, the Financial Accounting Standards Board issued revised Interpretation No. 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which requires that companies consolidate variable interest entities if they are the primary beneficiaries of the activities of those entities. Companies are generally required to apply FIN No. 46R immediately for all variable interest entities created after January 31, 2003 and by the end of the first quarter 2004 for all other entities for which it is the primary beneficiary. We provide administrative services to certain professional corporations in states with laws that prohibit business corporations from providing, or holding themselves out as providers of, medical care. During 2003, we determined that the professional corporations are variable interest entities as defined by FIN No. 46R, and we have a variable interest in each of the practices through our administrative services agreements. Based on these determinations, we consolidated the radiation oncology practices in our consolidated financial statements as of and for the year ended December 31, 2003 and have restated prior periods to conform to the current period presentation. All periods presented reflect the retroactive restatement of our financial position and operations in accordance with FIN No. 46R.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited interim financial statements and related notes included elsewhere in this 10-Q. This section of the 10-Q contains forward-looking statements that involve substantial risks and uncertainties, such as statements about our plans, objectives, expectations and intentions. We use words such as “expect”, “anticipate”, “plan”, “believe”, “seek”, “estimate”, “intend”, “future” and similar expressions to identify forward-looking statements. In particular, statements that we make in this section relating to the sufficiency of anticipated sources of capital to meet our cash requirements are forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including as a result of some of the factors described below and in the section titled “Risk Factors”. You should place no undue reliance on these forward-looking statements, which apply on and as of the date of this 10-Q.

Overview

We own, operate and manage treatment centers focused exclusively on providing radiation treatment alternatives ranging from conventional external beam radiation to newer, technologically-advanced options. We believe we are the largest company in the United States focused exclusively on providing radiation therapy. We opened our first radiation treatment center in 1983 and currently provide radiation therapy services in 52 treatment centers. Our treatment centers are clustered into 17 regional networks in eight states, including Alabama, Delaware, Florida, Kentucky, Maryland, Nevada, New York and North Carolina. Of these 52 treatment centers, 20 treatment centers were internally developed, 22 were acquired and 10 involve hospital-based treatment centers.

     For the three months and six months ended June 30, 2004, our total revenues grew by 13.7% and 18.9%, respectively while our pro forma net income grew by 15.0% and 17.6%, respectively over the same periods of the prior year. For the three months and six months ended June 30, 2004, we had total revenues of $42.1 million and $85.1 million, respectively . Pro forma net income gives effect to taxes as if we had been taxed as a C corporation for all periods presented.

     The Company’s business is seasonal. The first quarter of the year is the strongest due to the influx of seasonal residents seeking treatment at the Company’s centers in warmer geographic regional networks. The third quarter is traditionally the slowest, due to vacations, patients postponing radiation treatments during the summer months and the departure of seasonal residents.